W. R. Berkley
Annual Report 2018

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1 1 0 2 2 8 4 9 b e _ c v r Always do right. This will gratify some people and astonish the rest. —Mark Twain— W. R. BERKLEY CORPORATION 475 Steamboat Road Greenwich, CT 06830 203.629.3000 www.berkley.com @WRBerkleyCorp ©Copyright 2019 W. R. Berkley Corporation. All rights reserved. 1022849be_cvr 1 W. R. BERKLEY CORPORATION 2018 ANNUAL REPORT W . R . B E R K L E Y C O R P O R A T I O N 2 0 1 8 A N N U A L R E P O R T | 1 1022849be_cvr 1022849be_cvr.indd Custom V C M Y K r v c _ e b 9 4 8 2 2 0 1 1 4/22/19 6:27 PM 1 1 0 2 2 8 4 9 b e _ c v r 2 The culture of our Company CONTENTS FINANCIAL HIGHLIGHTS OUR BUSINESS LETTER TO OUR SHAREHOLDERS 02 06 SEGMENT OVERVIEW INVESTMENTS FORM 10-K 14 16 09 17 OPERATING UNITS BOARD OF DIRECTORS & OFFICERS CORPORATE INFORMATION 141 150 IBC 1 1022849be_cvr2 C M Y K ANNUAL MEETING The Annual Meeting of Stockholders of W. R. Berkley Corporation will be held at 1:00 p.m. on June 6, 2019 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 EQ Shareowner Services 1110 Centre Pointe Curve, Suite 101 Mendota Heights, Minnesota 55120-4100 Tel: (800) 468 9716 www.shareowneronline.com WEBSITE For additional information, including press releases, visit our website at: www.berkley.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 2018 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 2019 W. R. Berkley Corporation. All rights reserved. 1022849be_cvr2 1 2 r v c _ e b 9 4 8 2 2 0 1 1 1022849beFrontLarge 1 emphasizes that everything we do 1 1 0 2 2 8 4 9 b e F r o n t L a r g e The culture of a successful business enterprise requires many things. Among the most important elements is a committed workforce—people who share a vision, not just for the business’s operating objectives, but for how it serves its clients and where it fits into society. The Company and its employees are committed to helping society as a whole. Our charitable activities focus on health, education and, in general, assisting others. We believe that at times, the experience of giving back may benefit the donor as much as the recipient. This annual report shows some examples of the not-for-profit activities that our Company and our employees support. For inclusion here, we have only been able to select a few of the many organizations that we give our time and money to, but many others are shown in our online highlights at: highlights.wrberkley.com/2018charities. We hope all of the shareholders of W. R. Berkley Corporation are proud of the good the many members of our team do every day in support of their communities in which they live. W. R. BERKLEY CORPORATION | 2018 ANNUAL REPORT 01 e g r a L t n o r F e b 9 4 8 2 2 0 1 1 1 1022849be Front Large 1022849be_Front Large.indd 1 4/17/19 5:34 PM C Y K 8.250 in x 12.000 in Select 04.17.2019 17:39PM 1022849be Bill Robson 1022849be Front Large amoore file://sanjfs5.sa1.com/Sandy/1022849be 1022849beFrontLarge 2 and every person who participates and every person who participates 2 1 0 2 2 8 4 9 b e F r o n t L a r g e 2018 FINANCIAL HIGHLIGHTS 2018 FINANCIAL HIGHLIGHTS By taking advantage of challenging opportunities and bringing By taking advantage of challenging opportunities and bringing together talented people and capital, we feel confident we will together talented people and capital, we feel confident we will be able to continue to deliver outstanding returns. be able to continue to deliver outstanding returns. COMBINED RATIO COMBINED RATIO Averaged 94.7% over the past 5 years. Averaged 94.7% over the past 5 years. TOTAL REVENUES TOTAL REVENUES Increased 20% over the past 5 years. Increased 20% over the past 5 years. 95.3% 95.3% RETURN ON STOCKHOLDERS' EQUITY RETURN ON STOCKHOLDERS' EQUITY Averaged 12.4% over the past 5 years. Averaged 12.4% over the past 5 years. 11.8% 11.8% $7.7B $7.7B TOTAL RETURN TOTAL RETURN Growth in stock price plus dividends outpaced Growth in stock price plus dividends outpaced the -4.4% S&P 500® total return in 2018. the -4.4% S&P 500® total return. 6.2% 6.2% e g r a L t n o r F e b 9 4 8 2 2 0 1 2 02 W. R. BERKLEY CORPORATION | 2018 ANNUAL REPORT 2 1022849be Front Large 1022849be_Front_Large.indd 2 4/22/19 8:49 PM C Y K 8.250 in x 12.000 in Select 04.22.2019 20:51PM 1022849be Bill Robson druggiero 1022849be Front Large file://sanjfs5.sa1.com/Sandy/1022849be 1022849beFrontSmall 1 1 1 0 2 2 8 4 9 b e F r o n t S m a l l ACCESS TO HIGHER EDUCATION l l a m S t n o r F e b 9 4 8 2 2 0 1 1 1 1022849be Front Small 1022849be_Front Small.indd 1 4/18/19 12:25 PM C M Y K 7.750 in x 10.250 in Select 04.18.2019 12:37PM 1022849be Bill Robson jhartman 1022849be Front Small file://sanjfs5.sa1.com/Sandy/1022849be 1022849beFrontSmall 2 2 1 0 2 2 8 4 9 b e F r o n t S m a l l 20+ EVENTS More than 20 events were held throughout the year to support fundraising and build awareness for the work of Kidsʼ Chance. Berkley and its member companies are proud supporters of Kidsʼ Chance of America and its local state chapters. Kidsʼ Chance provides educational opportunities and scholarships for the children of workers seriously injured or killed on the job. Team members from many of our Berkley companies, including Key Risk, Berkley Net, Berkley Industrial Comp, Berkley Accident & Health and Berkley Mid-Atlantic Group, serve as board representatives for local chapters and host fundraising events from bake sales to game shows, chili contests to penny wars, annual golf tournaments to run/walks, a wine tasting event, and even an attempt at karaoke. Kidsʼ Chance believes that by investing in our children’s future, we can provide them with the tools and opportunities to be successful in the workplace, so that they can make a difference in their own and in other peopleʼs lives—and so do we! Being able to watch them earn their degree and start their adult lives is amazing. — Kimberly H., Senior Claims Representative (South Carolina), Key Risk Nothing is more rewarding than receiving a letter from a child/ scholarship recipient who says, ‘I could not have attended school without the support of Kidsʼ Chance of Virginia.’ — John B., Senior Vice President - Claims, Berkley Net l l a m S t n o r F e b 9 4 8 2 2 0 1 2 2 1022849be Front Small 1022849be_Front_Small.indd 2 4/24/19 3:53 PM M Y K 7.750 in x 10.250 in Select 04.24.2019 16:02PM 1022849be Bill Robson 1022849be Front Small tbujak file://sanjfs5.sa1.com/Sandy/1022849be 1022849beFrontLarge 3 is important to our enterprise, and 3 1 0 2 2 8 4 9 b e F r o n t L a r g e At-a-Glance TOTAL REVENUES (dollars in billions) 7.7 7.7 7.7 7.1 7.2 INVESTMENTS Market Value (dollars in billions) 15.6 15.4 16.6 17.5 17.7 14 15 16 17 2018 14 15 16 17 2018 RESERVES FOR LOSSES AND LOSS EXPENSES (dollars in billions) 10.4 10.7 11.2 11.7 12.0 COMMON STOCKHOLDERS' EQUITY* (dollars in billions) 5.4 5.4 5.0 4.6 4.6 14 15 16 17 2018 14 15 16 17 2018 * Net of $1.3 billion in special dividends and shares repurchased from 2014-2018 W. R. BERKLEY CORPORATION | 2018 ANNUAL REPORT 03 3 1022849be Front Large 1022849be_Front Large.indd 3 4/17/19 5:34 PM C Y K 8.250 in x 12.000 in Select 04.17.2019 17:39PM 1022849be Bill Robson 1022849be Front Large amoore file://sanjfs5.sa1.com/Sandy/1022849be e g r a L t n o r F e b 9 4 8 2 2 0 1 3 1022849beFrontLarge 4 that always doing the right thing 4 1 0 2 2 8 4 9 b e F r o n t L a r g e Selected Financial Data In thousands, except per share data Years ended December 31, 2014 2015 2016 2017 2018 Total revenues Net premiums written Net investment income Net realized and unrealized gains on investments* 254,852 Insurance service fees 117,443 Net income to common stockholders 648,884 503,694 $7,128,928 $7,206,457 $7,654,184 $7,684,764 $7,691,651 5,996,947 6,189,515 6,423,913 6,260,508 6,433,227 600,885 512,645 125,663 139,440 564,163 285,119 138,944 601,916 575,788 674,235 335,858 154,488 134,729 117,757 549,094 649,749 NET INCOME PER COMMON SHARE Basic Diluted 3.38 3.24 2.71 2.58 3.27 3.12 2.93 2.84 3.37 3.33 Return on common stockholders’ equity 15.0% 11.0% 13.1% 10.9% 11.8% AT YEAR END Total assets Total investments $21,716,691 $21,730,967 $23,364,844 $24,299,917 $24,926,845 15,591,824 15,351,467 16,649,792 17,450,508 17,723,089 Reserves for losses and loss expenses 10,369,701 10,669,150 11,197,195 11,670,408 11,966,448 Common stockholders’ equity 4,589,945 4,600,246 5,047,208 5,411,343 5,437,851 Common shares outstanding 190,124 184,962 Common stockholders’ equity per share 24.14 24.87 181,791 27.76 182,272 182,994 29.69 29.72 Per share data and common shares outstanding have been adjusted for the 3-for-2 common stock split effected on April 2, 2019. * For 2018, includes net realized gains on investment sales of $480 million, reduced by a change in unrealized gains on equity securities of $320 million. The inclusion of change in unrealized gains on equity securities within net income commenced January 1, 2018 due to our adoption of ASU 2016-01. 04 W. R. BERKLEY CORPORATION | 2018 ANNUAL REPORT 4 1022849be Front Large 1022849be_Front_Large.indd 4 4/23/19 3:33 PM C Y K 8.250 in x 12.000 in Select 04.23.2019 15:38PM 1022849be Bill Robson 1022849be Front Large amoore file://sanjfs5.sa1.com/Sandy/1022849be e g r a L t n o r F e b 9 4 8 2 2 0 1 4 1022849beFrontSmall 3 3 1 0 2 2 8 4 9 b e F r o n t S m a l l BUILDING HOPE l l a m S t n o r F e b 9 4 8 2 2 0 1 3 3 1022849be Front Small 1022849be_Front Small.indd 3 4/18/19 12:25 PM C M Y K 7.750 in x 10.250 in Select 04.18.2019 12:37PM 1022849be Bill Robson jhartman 1022849be Front Small file://sanjfs5.sa1.com/Sandy/1022849be 1022849beFrontSmall 4 4 1 0 2 2 8 4 9 b e F r o n t S m a l l 3 HOUSES 3 HOUSES Constructing hope with 3 houses, 1 office space and 1 community improvement day. Constructing hope with 3 houses, 1 office space and 1 Community improvement day. Building homes for those in need offers Building homes for those in need offers ways for everyone to participate. ways for everyone to participate. Berkley team members at a number of our operating units, including Berkley Industrial Berkley team members at a number of our operating units, including Berkley Industrial Comp and Berkley One, partnered with Habitat for Humanity and spent time organizing, Comp and Berkley One, partnered with Habitat for Humanity and spent time organizing, building homes, painting office space and helping out with community improvements building homes, painting office space and helping out with community improvements across the country. across the country. Nothing feels as good as Nothing feels as good as giving to others who need it. giving to others who need it. Uniting together to help Uniting together to help others brings us closer as others brings us closer as colleagues, sets the stage colleagues, sets the stage for our culture and enriches for our culture and enriches our communities. our communities. — Frances B., Inside Sales Manager, Berkley One — Frances B., Inside Sales Manager, Berkley One l l a m S t n o r F e b 9 4 8 2 2 0 1 4 4 1022849be Front Small 1022849be_Front Small.indd 4 4/22/19 7:11 PM C M Y K 7.750 in x 10.250 in Select 04.22.2019 19:40PM 1022849be Bill Robson druggiero 1022849be Front Small file://sanjfs5.sa1.com/Sandy/1022849be 1022849beFrontLarge 5 is the cornerstone of our success 5 1 0 2 2 8 4 9 b e F r o n t L a r g e Relative Stock Price Performance vs. the S&P 500® CUMULATIVE GROWTH: ■ W. R. Berkley Corporation 24,573% ■ S&P 500® 2,470% 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 W. R. BERKLEY CORPORATION | 2018 ANNUAL REPORT 05 e g r a L t n o r F e b 9 4 8 2 2 0 1 5 5 1022849be Front Large 1022849be_Front Large.indd 5 4/17/19 5:34 PM C Y K 343 8.250 in x 12.000 in Select 04.17.2019 17:39PM 1022849be Bill Robson 1022849be Front Large amoore file://sanjfs5.sa1.com/Sandy/1022849be 1022849beFrontLarge 6 Our values and principles are 6 1 0 2 2 8 4 9 b e F r o n t L a r g e OUR BUSINESS Today, as yesterday and tomorrow, the combined expertise of underwriting, risk management, claims handling and investing will deliver outstanding risk-adjusted returns. Insurance The Insurance units underwrite predominately commercial insurance business, including excess and surplus lines and admitted lines, and specialty personal lines, throughout the United States, as well as insurance business in the United Kingdom, Continental Europe, South America, Canada, Scandinavia, Australia, Asia and Mexico. 2018 RESULTS Total revenues were: $6.5B Pre-tax income was: $856M Reinsurance The Reinsurance 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. 2018 RESULTS Total revenues were: Pre-tax income was: $601M $62M e g r a L t n o r F e b 9 4 8 2 2 0 1 6 06 W. R. BERKLEY CORPORATION | 2018 ANNUAL REPORT 6 1022849be Front Large 1022849be_Front Large.indd 6 4/17/19 5:34 PM C Y K 8.250 in x 12.000 in Select 04.17.2019 17:39PM 1022849be Bill Robson 1022849be Front Large amoore file://sanjfs5.sa1.com/Sandy/1022849be 1022849beFrontSmall 5 5 1 0 2 2 8 4 9 b e F r o n t S m a l l THE SPIRIT OF GENEROSITY l l a m S t n o r F e b 9 4 8 2 2 0 1 5 5 1022849be Front Small 1022849be_Front Small.indd 5 4/18/19 12:25 PM C M Y K 7.750 in x 10.250 in Select 04.18.2019 12:37PM 1022849be Bill Robson jhartman 1022849be Front Small file://sanjfs5.sa1.com/Sandy/1022849be 1022849beFrontSmall 6 6 1 0 2 2 8 4 9 b e F r o n t S m a l l 230 GINGERBREAD HOUSES 230 GINGERBREAD HOUSES Over the past 15 years, our employees have created 230 gingerbread houses and raised Over the past 15 years, our employees have created 230 gingerbread houses and raised more than $2.3 million for over 100 different charitable organizations. more than $2.3 million for over 100 different charitable organizations. Berkley employees spread holiday Berkley employees spread holiday cheer with Gingerbread House Auction. cheer with Gingerbread House Auction More than four decades ago, our employees gathered to celebrate the holidays and More than four decades ago, our employees gathered to celebrate the holidays and enjoy the success of our Company. It was a wonderful event, but something was lacking. enjoy the success of our Company. It was a wonderful event, but something was lacking. From that moment forward, we determined that the best way to enjoy our success was to From that moment forward, we determined that the best way to enjoy our success was to give back to the community. So, we set about creating a “gingerbread house auction” that give back to the community. So, we set about creating a “gingerbread house auction” that would enable our employees to raise money for the charities that meant the most to them. would enable our employees to raise money for the charities that meant the most to them. Now, each year our employees create beautiful works of edible art to be auctioned off Now, each year our employees create beautiful works of edible art to be auctioned off to the highest bidder at our annual holiday party. The bidder represents a coalition of to the highest bidder at our annual holiday party. The bidder represents a coalition of employees who have banded together to raise money for a particular charity and the employees who have banned together to raise money for a particular charity and the funds raised are matched by the W. R. Berkley Corporation Charitable Foundation. funds raised are matched by the W. R. Berkley Corporation Charitable Foundation. The gingerbread houses are then donated to local hospitals, and other community The gingerbread houses are then donated to local hospitals, and other community service-based organizations to spread holiday cheer throughout the community. service-based organizations to spread holiday cheer throughout the community. Our holiday party is a special Our holiday party is a special event, because it focuses on event, because it focuses on whatʼs really important and whatʼs really important and captures the true meaning captures the true meaning of the season—giving. of the season—giving. — Nina T., Senior Communications Specialist, — Nina T., Senior Communications Specialist, W. R. Berkley Corporation W. R. Berkley Corporation l l a m S t n o r F e b 9 4 8 2 2 0 1 6 6 1022849be Front Small 1022849be_Front_Small.indd 6 4/24/19 3:53 PM C M K 7.750 in x 10.250 in Select 04.24.2019 16:02PM 1022849be Bill Robson 1022849be Front Small tbujak file://sanjfs5.sa1.com/Sandy/1022849be 1022849beFrontLarge 7 demonstrated every day at each of 7 1 0 2 2 8 4 9 b e F r o n t L a r g e Our Company W. R. Berkley Corporation, founded in 1967, is one of the nation’s premier commercial lines property casualty insurance providers. Each of the Berkley Companies, or operating units, within Berkley 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 ARE WE DIFFERENT RISK-ADJUSTED RETURNS RESPONSIBLE FINANCIAL PRACTICES Management company-wide is focused on Risk exposures are managed proactively. A strong obtaining the best potential returns with a real balance sheet, including a high-quality investment understanding of the amount of risk being portfolio, ensures ample resources to grow the assumed. Superior risk-adjusted returns are business profitably whenever there are opportunities generated over the insurance cycle. ACCOUNTABILITY to do so. TRANSPARENCY The business is operated with an ownership Consistent and objective standards are used to perspective and a clear sense of fiduciary measure performance—and, the same standards responsibility to shareholders. are used regardless of the environment. 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 53 operating units, 46 were developed internally and seven were acquired. W. R. BERKLEY CORPORATION | 2018 ANNUAL REPORT 07 e g r a L t n o r F e b 9 4 8 2 2 0 1 7 7 1022849be Front Large 1022849be_Front Large.indd 7 4/17/19 5:34 PM C Y K 343 8.250 in x 12.000 in Select 04.17.2019 17:39PM 1022849be Bill Robson 1022849be Front Large amoore file://sanjfs5.sa1.com/Sandy/1022849be 1022849beFrontLarge 8 8 1 0 2 2 8 4 9 b e F r o n t L a r g e our operating units in the way we 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 In S&P 500® with Dividends Included Relative Results Year 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Average Annual Gain — 1974–2018 Overall Gain — 1973–2018 Overall gain 1973–2018 with dividends compounded = 66,327% ■ W. R. Berkley Corporation ■ S&P 500® (1) 50.0% 12.5% 29.6% 28.6% 24.4% 18.2% 9.4% 14.5% -9.0% -11.6% -16.9% 59.6% 106.8% 23.5% 22.5% 13.2% 7.8% 20.8% 13.5% 16.7% -10.8% 34.5% 7.9% 15.9% 1.9% -18.1% 17.1% 7.6% 31.2% 26.7% 25.6% 21.9% 30.1% 16.3% -4.1% 23.3% 15.4% 12.2% 14.8% 4.8% 14.8% 4.3% 15.7% 10.6% 4.8% 16.9% 60,675% 66,000% 44,000% 22,000% 0% (2) -26.4% 37.2% 23.6% -7.4% 6.4% 18.2% 32.3% -5.0% 21.4% 22.4% 6.1% 31.6% 18.6% 5.1% 16.6% 31.7% -3.1% 30.5% 7.6% 10.1% 1.3% 37.6% 23.0% 33.4% 28.6% 21.0% -9.1% -11.9% -22.1% 28.7% 10.9% 4.9% 15.8% 5.5% -37.0% 26.5% 15.1% 2.1% 16.0% 32.4% 13.7% 1.4% 12.0% 21.8% -4.4% 12.1% 9,448% (1)-(2) 76.4% -24.7% 6.0% 36.0% 18.0% 0.0% -22.9% 19.5% -30.4% -34.0% -23.0% 28.0% 88.2% 18.4% 5.9% -18.5% 10.9% -9.7% 5.9% 6.6% -12.1% -3.1% -15.1% -17.5% -26.7% -39.1% 26.2% 19.5% 53.3% -2.0% 14.7% 17.0% 14.3% 10.8% 32.9% -3.2% 0.3% 10.1% -1.2% -27.6% 1.1% 3.0% 3.7% -11.2% 9.2% 4.8% 66,327% 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 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. 08 W. R. BERKLEY CORPORATION | 2018 ANNUAL REPORT 8 1022849be Front Large 1022849be_Front Large.indd 8 4/17/19 5:34 PM C Y K 8.250 in x 12.000 in Select 04.17.2019 17:39PM 1022849be Bill Robson 1022849be Front Large amoore file://sanjfs5.sa1.com/Sandy/1022849be e g r a L t n o r F e b 9 4 8 2 2 0 1 8 1022849beFrontSmall 7 7 1 0 2 2 8 4 9 b e F r o n t S m a l l PRESERVING THE ECOSYSTEM l l a m S t n o r F e b 9 4 8 2 2 0 1 7 7 1022849be Front Small 1022849be_Front Small.indd 7 4/18/19 12:26 PM C M Y K 7.750 in x 10.250 in Select 04.18.2019 12:37PM 1022849be Bill Robson jhartman 1022849be Front Small file://sanjfs5.sa1.com/Sandy/1022849be 1022849beFrontSmall 8 8 1 0 2 2 8 4 9 b e F r o n t S m a l l 2.5 MILES OF CLEAN UP 2.5 MILES OF CLEAN UP Seven employee volunteers aided the Friends of the Creeks effort to clean up 2.5 miles Seven employee volunteers aided the Friends of the Creeks effort to clean up 2.5 miles of creek channels in Walnut Creek. of creek channels in Walnut Creek. Associates at Preferred Employers Associates at Preferred Employers participated in creek restoration work in participated in creek restoration work in Walnut Creek. Walnut Creek. Friends of the Creeks is an advocate for creek-friendly policies and projects that not only Friends of the Creeks is an advocate for creek-friendly policies and projects that not only enhance the natural ecosystem functions of the corridor of wetlands adjacent to Walnut enhance the natural ecosystem functions of the corridor of wetlands adjacent to Walnut Creek, but also create enjoyable amenities. Our Walnut Creek team joined together for Creek, but also create enjoyable amenities. Our Walnut Creek team joined together for some rewarding work, camaraderie and a brief talk about creek ecology; donating their some rewarding work, camaraderie and a brief talk about creek ecology; donating their time to help rebuild creek structures, restorate habitats and raise awareness, while creating time to help rebuild creek structures, restore habitats and raise awareness, while creating enjoyable amenities for the public. enjoyable amenities for the public. The event was not just a way The event was not just a way to give back to the community to give back to the community in a small way, but it was really in a small way, but it was really nice to have the camaraderie nice to have the camaraderie with my co-workers and with my co-workers and learn something about our learn something about our local environment. local environment. Remember that the happiest Remember that the happiest people are not those getting people are not those getting more, but those giving more. more, but those giving more. — Claudia H., Major Case Claims Examiner, — Claudia H., Major Case Clams Examiner, — Martha D., Claims Litigation Specialist, — Martha D., Claims Litigation Specialist, Preferred Employers Preferred Employees Preferred Employers Preferred Employees l l a m S t n o r F e b 9 4 8 2 2 0 1 8 8 1022849be Front Small 1022849be_Front_Small.indd 8 4/24/19 3:53 PM 343 7.750 in x 10.250 in Select 04.24.2019 16:02PM 1022849be Bill Robson 1022849be Front Small tbujak file://sanjfs5.sa1.com/Sandy/1022849be 1022849be_FrontLarge_pg9 1 conduct our business, engage with TO OUR SHAREHOLDERS, 1 1 0 2 2 8 4 9 b e _ F r o n t L a r g e _ p g 9  (left to right) W. Robert Berkley, Jr., President and Chief Executive Officer and William R. Berkley, Executive Chairman Once again, 2018 was a year of strong performance for the Company. In an environment filled with uncertainty and volatility, we achieved more than satisfactory results. While we are not immune to the impact of catastrophe losses, we again demonstrated our ability to manage volatility. We are acutely conscious of this imperative in both our underwriting and investing activities, and remain focused on delivering superior risk-adjusted returns. Given the low interest rate environment and this desire to manage risk, several years ago we made the decision to shorten the duration while maintaining the quality of our investment portfolio. And although the vast majority of our assets are still invested in bonds, we also further expanded our allocation of funds to alternative asset classes. These decisions enabled us to improve our investment returns, while mitigating the W. R. BERKLEY CORPORATION | 2018 ANNUAL REPORT 09 9 g p _ e g r a L t n o r F _ e b 9 4 8 2 2 0 1 1 1 1022849be_Front Large_pg9 1022849be_Front Large.indd 9 4/18/19 12:32 PM C M Y K 8.250 in x 12.000 in Select 04.18.2019 12:38PM 1022849be Bill Robson jhartman 1022849be_Front Large_pg9 file://sanjfs5.sa1.com/Sandy/1022849be 1022849beFrontLarge 10 our team members and give back to 1 0 1 0 2 2 8 4 9 b e F r o n t L a r g e impact of mark-to-market on our balance sheet and grow book value per share. Capital management is also of paramount importance and a key component of optimizing risk-adjusted returns. We have and will continue to actively manage our capital through share buybacks and special dividends, always being mindful of maintaining the appropriate amount of capital employed in our business. Our first responsibility is to our shareholders; however, we exist as part of a greater society and have always believed in being supportive of the communities that we are a part of, focusing on doing the right thing. In the long run, we do this because our enterprise and all its stakeholders benefit. We manage our business with a long-term perspective that has increasingly become a differentiator when compared to how many other public companies are managed today. This perspective comes about, in part, because all of our senior managers are substantial shareholders, as are our directors, and the vast majority of our employees own our stock. While we are conscious of short-term results, we are unwilling to compromise our future. We manage the business for long-term investors who want to be our partners. This approach is not just embraced by our senior management and our Board, but is reflective of the culture and values of our more than 7,000 employees. They have a long-term time horizon and understand that our model of starting businesses rather than buying companies may come at a short-term cost, but it is what builds our future. We are always willing to invest a dollar today if we are confident in our ability to generate We are always willing to invest a dollar today if we are confident in our ability to generate an appropriate future benefit to shareholders. an appropriate future benefit to shareholders. We are willing to invest in assets that may not reflect well on reported earnings, but fit in well with the overall goal of creating value. Every decision we make is viewed with that long-term perspective and a focus on strong risk-adjusted returns. When managing an enterprise for the long term, our perspective must be a little different. The management skills required are not only those of expertise in a particular area, but there must be a true understanding of the entire industry. Overall economic information and an awareness of the global competitive environment are also required if we are to make good decisions. In a world that is changing at an ever-increasing pace, we embrace that change—proactively attempting to anticipate and adapt rather than react and catch up. Our decentralized structure allows for the inclusion and empowerment of all team members, at every level of our enterprise, who have specialized knowledge of and local proximity to our customers. This allows innovation and the best new ideas to flourish. Our decision-making is, therefore, not solely focused on actuarial data, but encompasses changing customer behavior with 10 W. R. BERKLEY CORPORATION | 2018 ANNUAL REPORT e g r a L t n o r F e b 9 4 8 2 2 0 1 0 1 10 1022849be Front Large 1022849be_Front Large.indd 10 4/22/19 7:10 PM C Y K 343 8.250 in x 12.000 in Select 04.22.2019 19:40PM 1022849be Bill Robson druggiero 1022849be Front Large file://sanjfs5.sa1.com/Sandy/1022849be 1022849beFrontLarge 11 our communities. We exist as part of 1 1 1 0 2 2 8 4 9 b e F r o n t L a r g e greater visibility and knowledge, allowing us to be more customer-centric. The long-term decisions we make today often require more information and complex judgements, and they lay the foundation, not just for tomorrow, but for years in the future. From an operating point of view, we have examined our business carefully. We are leveraging the benefits of our structure and considering what things we can do to create greater efficiency. Proximity to our customers continues to be our competitive advantage. The result has allowed us to make changes that enable our staff to focus on value-added activities rather than routine processes. In this way, we can maintain our decentralized approach from our customers’ point of view, but take advantage of efficiencies from an administrative point of view. These actions have lowered our expense ratio and improved information systems connectivity. We have worked hard to keep our customer-centric flexibility while at the same time obtaining better data to drive more efficiency, and, simultaneously, improving underwriting. We are achieving better outcomes for the Company with more satisfied customers. In examining our risk bearing side of the business, we look at each line of business separately. In today’s world of technology, measurement takes place not just by line of business but, in fact, by segment and sub-segment of each line of business. We need to be sure to differentiate what is happening at each micro-section of each line of business, so that we can react in a more focused and prompt manner when issues arise and be better able to take advantage of opportunities. We are just beginning to see opportunities in parts of the reinsurance marketplace that, for the prior several years, were extremely competitive and required a reduction in the amount of business we wrote. At the same time, opportunities in areas of commercial transportation seem to have been getting more and more attractive, offering improving returns. We see a changing marketplace in workers’ compensation, which has been extremely attractive for the past several years, but is now facing a more competitive current environment. Change is constant; staying ahead of the curve requires a continuous focus on data and trends. The pace of change is increasing and the ability of competition to respond is more evident. 12% 2018 RETURN ON STOCKHOLDERS' EQUITY 36% FIVE YEAR GROWTH IN BOOK VALUE PER SHARE W. R. BERKLEY CORPORATION | 2018 ANNUAL REPORT 11 11 1022849be Front Large 1022849be_Front Large.indd 11 4/17/19 5:34 PM C Y K 8.250 in x 12.000 in Select 04.17.2019 17:39PM 1022849be Bill Robson 1022849be Front Large amoore file://sanjfs5.sa1.com/Sandy/1022849be e g r a L t n o r F e b 9 4 8 2 2 0 1 1 1 1022849beFrontLarge 12 a greater society and have always 1 2 1 0 2 2 8 4 9 b e F r o n t L a r g e Expertise in each line of business by each geographic locale is necessary to make decisions, not based on what happened yesterday, nor based on what is happening at the moment, but based on our expectations for the next year or two or three. We think that gives us a competitive advantage because our outstanding people rooted in the local communities have a real perspective on each line of business. We look ahead and see tremendous opportunities. At the same time, there are areas where we will have to cut back. Again, the long- term view allows us to make decisions that are different than what many others might elect to do. Deciding not to grow in some lines of business or in some geographic areas may well be a good decision. Disciplined behavior has been one of our core tenets since our inception. New opportunities are constantly presenting themselves. This is a cornerstone of our business model. We expect substantial premiums from our new units. Berkley One and our cyber business both are beginning to grow, as are other new startups that began over the past several years. At the same time, we continue to be disciplined by cutting back on those areas that do not offer satisfactory returns. Measuring performance is a constant process; it requires patience and discipline. In the investment world, there has rarely been more uncertainty. The global economy is slowing down, and much of the world has negative interest rates. Governments have increasing deficits that, in theory, should lead to increasing rates of inflation. This increasing potential inflation is something we currently do not see in most of the world’s capital markets, including in the United States. In spite of the fact that the United States has a trillion dollar deficit, we have not seen a concomitant rise in interest rates as one would have expected. Eventually, these deficits have to be funded. Currently, the deficit is being funded by money coming into the United States from overseas because the U.S. has higher interest rates than much of the rest of the world. If and when that changes, it is likely inflation will return and, in all likelihood, reduce the real value of our currency. We will have to fund our national deficits and begin to rebalance the economic realities of rapid inflation and higher interest rates. In the meantime, we are faced with the prospect of relatively modest fixed-income returns and 43 YEARS OF CONSECUTIVE DIVIDEND PAYMENTS 53OPERATING UNITS 12 W. R. BERKLEY CORPORATION | 2018 ANNUAL REPORT 12 1022849be Front Large 1022849be_Front Large.indd 12 4/22/19 7:10 PM C Y K 8.250 in x 12.000 in Select 04.22.2019 19:40PM 1022849be Bill Robson druggiero 1022849be Front Large file://sanjfs5.sa1.com/Sandy/1022849be e g r a L t n o r F e b 9 4 8 2 2 0 1 2 1 1022849beFrontLarge 13 believed in being supportive of 1 3 1 0 2 2 8 4 9 b e F r o n t L a r g e In a world that is changing at an ever-increasing pace, we embrace that change— proactively attempting to anticipate and adapt rather than react and catch up. uncertain equity markets. We continue to search for non-traditional ways to invest our money. This includes our own private equity fund and direct real estate opportunities. These alternatives have resulted in excellent, though bumpy, returns in recent years. Our business continues to be focused on the optimization of risk-adjusted returns. We seek consistency with intense management focus on unforeseen risks and risks that cannot be forecast. We test every decision for the volatility it brings to our business and the potential rewards it can deliver. Today, a lot of attention in the property casualty business is being focused on Insuretech. Although we selectively invest in these opportunities, we believe they are tools that enable the industry to better adapt to a changing world, and that the fundamentals of managing an insurance company remain unchanged. While there may be better ways to execute each step of the insurance process, we continue to focus on delivering consistent returns to our shareholders and delivering client-centric services. There continue to be positive trends in our business, including opportunities to develop further efficiencies as well as expand our business overall. Our management seeks out opportunities that will give us acceptable returns to justify the commitment of capital, and we believe that over the next several years, we will be able to attain returns in line with our goal of 15%. Our return over the past 45 years as a public company has been extraordinary. It has come about because of the commitment of our employees, our terrific agents and brokers who have joined with us, and the loyalty of our customers as well as guidance provided by our Board of Directors. We anticipate the future being even brighter. William R. Berkley Executive Chairman W. Robert Berkley, Jr. President and Chief Executive Officer W. R. BERKLEY CORPORATION | 2018 ANNUAL REPORT 13 e g r a L t n o r F e b 9 4 8 2 2 0 1 3 1 13 1022849be Front Large 1022849be_Front Large.indd 13 4/17/19 5:34 PM C Y K 343 8.250 in x 12.000 in Select 04.17.2019 17:39PM 1022849be Bill Robson 1022849be Front Large amoore file://sanjfs5.sa1.com/Sandy/1022849be 1022849beFrontLarge 14 the communities that we are part of, 1 4 1 0 2 2 8 4 9 b e F r o n t L a r g e SEGMENT OVERVIEW Each of our business segments—Insurance and Reinsurance —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. e g r a L t n o r F e b 9 4 8 2 2 0 1 4 1 14 W. R. BERKLEY CORPORATION | 2018 ANNUAL REPORT 14 1022849be Front Large 1022849be_Front Large.indd 14 4/17/19 5:34 PM C Y K 8.250 in x 12.000 in Select 04.17.2019 17:39PM 1022849be Bill Robson 1022849be Front Large amoore file://sanjfs5.sa1.com/Sandy/1022849be 1022849beFrontSmall 9 9 1 0 2 2 8 4 9 b e F r o n t S m a l l MEETING THE NEEDS OF CHILDREN AND FAMILIES l l a m S t n o r F e b 9 4 8 2 2 0 1 9 9 1022849be Front Small 1022849be_Front Small.indd 9 4/18/19 12:26 PM C M Y K 7.750 in x 10.250 in Select 04.18.2019 12:37PM 1022849be Bill Robson jhartman 1022849be Front Small file://sanjfs5.sa1.com/Sandy/1022849be 1022849beFrontSmall 10 1 0 1 0 2 2 8 4 9 b e F r o n t S m a l l $1.5 MILLION RAISED 21 years ago, the chief strategy and innovation officer at Berkley Re Solutions and Berkley Program Specialists founded a golf outing that has raised over $1.5 million for Channel 3 Kids Camp, which provides year-round recreational and educational programs to children and teens from Connecticut and throughout New England. Helping families and children is a major theme at our Berkley Companies. Support for families at Berkley takes a variety of forms, from supporting local chapters of national efforts like Cradles to Crayons or the Human Race, to volunteering and fundraising for causes closer to home such as foster care foundations, childrenʼs shelters, teen centers and “adopting” families to provide them with gifts and groceries, handing out warm coats to children or hosting a personal-care items fundraiser for the homeless. In keeping with that theme, team members at Continental Western Group build and deliver beds, mattresses, sheets, pillows, stuffed animals and other items to families in need through a local chapter of Sleep in Heavenly Peace. I think my favorite thing about participating in the Human Race is the energy and excitement that surrounds the event. Everyone participating is there because of a special cause that they support. Itʼs not only a great way for us as a company to give back to our community, but itʼs also a fun way to interact with our insured organizations on a personal level. — Jake R., Director of Marketing and Distribution, Berkley Human Services l l a m S t n o r F e b 9 4 8 2 2 0 1 0 1 10 1022849be Front Small 1022849be_Front Small.indd 10 4/18/19 12:26 PM C M Y K 7.750 in x 10.250 in Select 04.18.2019 12:37PM 1022849be Bill Robson jhartman 1022849be Front Small file://sanjfs5.sa1.com/Sandy/1022849be 1022849be_Front_Large_p15 1 because in the long run, our enterprise 1 1 0 2 2 8 4 9 b e _ F r o n t _ L a r g e _ p 1 5 2018 Segment Data 2018 NET PREMIUMS WRITTEN BY MAJOR LINE OF BUSINESS (in percent) $6.0B 33% INSURANCE 9% 13% 20% 25% REINSURANCE $480M 27% 73% ■ Other Liability ■ Short-tail Lines ■ Professional Liability ■ Workers' Compensation ■ Commercial Automobile ■ Casualty ■ Property 2018 ASSETS AND NET RESERVES (dollars in billions) INSURANCE $19.6ASSETS $8.7RESERVES REINSURANCE $3.0ASSETS $1.5RESERVES 5 1 p _ e g r a L _ t n o r F _ e b 9 4 8 2 2 0 1 1 W. R. BERKLEY CORPORATION | 2018 ANNUAL REPORT 15 1 1022849be_Front_Large_p15 1022849be_Front_Large.indd 15 4/23/19 4:34 PM C Y K 343 8.250 in x 12.000 in Select 04.23.2019 16:36PM 1022849be Bill Robson 1022849be_Front_Large_p15 tmurray file://sanjfs5.sa1.com/Sandy/1022849be 1022849beFrontLarge 16 1 6 1 0 2 2 8 4 9 b e F r o n t L a r g e and all its stakeholders benefit — William R. Berkley INVESTMENTS Over the past few years, we have shortened the duration of our fixed-maturity portfolio to 2.8 years to manage the yield curve as well as the impact of potential inflation. These changes limited the impact of mark-to-market on our portfolio and enabled us to take advantage of rising interest rates in 2018. In addition, we have allocated a portion of our portfolio to investments designed to generate capital gains. As investment income is an important component of our economic model, we will continue to position our portfolio to take advantage of opportunities to improve returns. INVESTMENT DATA INVESTMENT DATA (dollars in millions) (dollars in millions) 2017 2017 2018 2018 CASH AND INVESTED ASSETS CASH AND INVESTED ASSETS Invested assets Invested assets 17, 451 17, 451 17,723 17,723 Cash and cash equivalents Cash and cash equivalents 950 950 818 818 TOTAL TOTAL Net investment income Net Investment Income Net realized and unrealized Net realized and unrealized gains on investments* gains on investments* 18,401 18,401 18,541 18,541 576 576 674 674 336 336 154 154 * Includes change in unrealized gains on equity securities in 2018 * Includes change in unrealized gains on equity securities in 2018 due to adoption of ASU-2016-01. due to adoption of ASU-2016-01. BREAKDOWN OF FIXED MATURITY SECURITIES (including cash) (in percent) 5% 6% 6% 11% 28% 17% 27% ■ Corporate Bonds ■ State and Municipal Bonds ■ Asset-backed Securities ■ Mortgage-backed Securities ■ Foreign Bonds ■ Cash and Cash Equivalents ■ U.S. Government and Government Agency Bonds 16 W. R. BERKLEY CORPORATION | 2018 ANNUAL REPORT e g r a L t n o r F e b 9 4 8 2 2 0 1 6 1 16 1022849be Front Large 1022849be_Front Large.indd 16 4/22/19 7:10 PM C Y K 343 8.250 in x 12.000 in Select 04.22.2019 19:40PM 1022849be Bill Robson druggiero 1022849be Front Large file://sanjfs5.sa1.com/Sandy/1022849be 1022849beFrontSmall 11 1 1 1 0 2 2 8 4 9 b e F r o n t S m a l l ENHANCING PATIENT ACCOMMODATIONS l l a m S t n o r F e b 9 4 8 2 2 0 1 1 1 11 1022849be Front Small 1022849be_Front_Small.indd 11 4/23/19 3:17 PM C M Y K 7.750 in x 10.250 in Select 04.23.2019 15:21PM 1022849be Bill Robson 1022849be Front Small amoore file://sanjfs5.sa1.com/Sandy/1022849be 1022849beFrontSmall 12 1 2 1 0 2 2 8 4 9 b e F r o n t S m a l l 300+ HOURS Over 300 hours spent on 4 projects for Hope Lodge in St. Louis. Berkley Med organized into four teams to spruce up temporary lodging for cancer patients undergoing treatment. The American Cancer Societyʼs Hope Lodge in St. Louis provides a free home away from home for cancer patients and their caregivers. Opened in 1995, the facility—which provides a supportive environment to its residents during treatment—was in need of a little TLC. The Berkley Med teams improved the look and décor of guest rooms to make them feel more like home; enhanced the patio and other outdoor spaces with new furniture, plantings and landscaping to make them more inviting and relaxing; and replaced the artwork throughout the facility with more contemporary and inspiring pieces. I truly appreciate being part of an organization that sets aside time for the whole company to be actively engaged in the community during our Volunteer Week. Cancer has touched my life in many ways, so our time spent at Hope Lodge over the past two years has been very rewarding. While itʼs been fun digging in the dirt to transform the gardens and creating new art to liven up the guest rooms, the best part has been having the chance to engage with the patients and caregivers and build relationships with the lodge staff. — Debbie E., Business Process Manager, Berkley Med l l a m S t n o r F e b 9 4 8 2 2 0 1 2 1 12 1022849be Front Small 1022849be_Front Small.indd 12 4/18/19 12:26 PM C Y K 7.750 in x 10.250 in Select 04.18.2019 12:37PM 1022849be Bill Robson jhartman 1022849be Front Small file://sanjfs5.sa1.com/Sandy/1022849be 1022849be 10K 1 1 1 0 2 2 8 4 9 b e 1 0 K W. R. BERKLEY CORPORATION 2018 FINANCIAL INFORMATION FORM 10-K K 0 1 e b 9 4 8 2 2 0 1 1 4/17/19 6:52 PM 1 1022849be 10K 1022849be_10K.indd 1 K 8.250 in x 12.000 in Select 04.17.2019 19:12PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be 2 1 0 2 2 8 4 9 b e 1 0 K 1022849be 10K 2 Blank Page K 0 1 e b 9 4 8 2 2 0 1 2 4/17/19 6:52 PM 2 1022849be 10K 1022849be_10K.indd 2 zblankpage 8.250 in x 12.000 in Select 04.17.2019 19:12PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be 1022849be 10K 3 3 1 0 2 2 8 4 9 b e 1 0 K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K (Mark One) [x] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2018 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 (State or other jurisdiction of incorporation or organization) 475 Steamboat Road, Greenwich, CT (Address of principal executive offices) 22-1867895 (I.R.S. Employer Identification Number) 06830 (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 5.625% Subordinated Debentures due 2053 5.9% Subordinated Debentures due 2056 5.75% Subordinated Debentures due 2056 5.70% Subordinated Debentures due 2058 New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange 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 No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. Large accelerated filer Non-accelerated filer Accelerated filer Smaller reporting company Emerging growth company If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No 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 $7,014,828,524. Number of shares of common stock, $.20 par value, outstanding as of February 19, 2019: 122,013,621 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, 2018, are incorporated herein by reference in Part III. 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 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 Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes 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 Form 10-K or any amendment to this Form 10-K. No No K 0 1 e b 9 4 8 2 2 0 1 3 4/17/19 6:52 PM 3 1022849be 10K 1022849be_10K.indd 3 K 8.250 in x 12.000 in Select 04.17.2019 19:12PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K (Mark One) [x] OF 1934 ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2018 OR 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 (State or other jurisdiction of incorporation or organization) 475 Steamboat Road, Greenwich, CT (Address of principal executive offices) 22-1867895 (I.R.S. Employer Identification Number) 06830 (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 5.625% Subordinated Debentures due 2053 5.9% Subordinated Debentures due 2056 5.75% Subordinated Debentures due 2056 5.70% Subordinated Debentures due 2058 New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange 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 No Yes No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. 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 No Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes 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 Form 10-K or any amendment to this Form 10-K. 1022849be 10K 4 4 1 0 2 2 8 4 9 b e 1 0 K Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. Large accelerated filer Non-accelerated filer Accelerated filer Smaller reporting company Emerging growth company If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No 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 $7,014,828,524. Number of shares of common stock, $.20 par value, outstanding as of February 19, 2019: 122,013,621 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, 2018, are incorporated herein by reference in Part III. K 0 1 e b 9 4 8 2 2 0 1 4 4/17/19 6:52 PM 4 1022849be 10K 1022849be_10K.indd 4 K 8.250 in x 12.000 in Select 04.17.2019 19:12PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be 1022849be 10K 5 5 1 0 2 2 8 4 9 b e 1 0 K SAFE HARBOR STATEMENT ITEM ITEM ITEM ITEM ITEM ITEM PART I 1. BUSINESS 1A. RISK FACTORS 1B. UNRESOLVED STAFF COMMENTS 2. 3. PROPERTIES LEGAL PROCEEDINGS 4. MINE SAFETY DISCLOSURES PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER ITEM ITEM ITEM ITEM ITEM ITEM ITEM ITEM ITEM ITEM ITEM ITEM ITEM ITEM EX-21 EX-23 EX-31.1 EX-31.2 EX-32.1 EX-101 EX-101 EX-101 EX-101 EX-101 EX-101 PURCHASES OF EQUITY SECURITIES 6. SELECTED FINANCIAL DATA 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 8. 9. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 9A. CONTROLS AND PROCEDURES 9B. OTHER INFORMATION PART III 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 11. EXECUTIVE COMPENSATION 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 14. PRINCIPAL ACCOUNTING FEES AND SERVICES PART IV 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 16. FORM 10-K SUMMARY LIST OF COMPANIES AND SUBSIDIARIES CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(a) /15d-14(a) CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13a-14(a) /15d-14(a) 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 INSTANCE DOCUMENT SCHEMA DOCUMENT CALCULATION LINKBASE DOCUMENT LABELS LINKBASE DOCUMENT PRESENTATION LINKBASE DOCUMENT DEFINITION LINKBASE DOCUMENT 5 1022849be 10K 1022849be_10K.indd 5 K 8.250 in x 12.000 in Select 04.17.2019 19:12PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be Page 1 18 27 27 27 27 28 30 31 54 55 104 104 106 107 107 107 107 107 108 112 K 0 1 e b 9 4 8 2 2 0 1 5 4/17/19 6:52 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 2019 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; the impact of climate change, which may increase the frequency and severity of catastrophe events; 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 (including those associated with the United Kingdom's withdrawal from the European Union, or "Brexit") relating to our international operations; our ability to attract and retain key personnel and qualified employees; continued availability of capital and financing; the success of our new ventures or acquisitions and the availability of other opportunities; the availability of reinsurance; our retention under the Terrorism Risk Insurance Program Reauthorization Act of 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 cyber security issues; the effectiveness of our controls to ensure compliance with guidelines, policies and legal and regulatory standards; and other risks detailed in this Form 10-K and from time to time in our other filings with the Securities and Exchange Commission (“SEC”). 6 1 0 2 2 8 4 9 b e 1 0 K Page 1 18 27 27 27 27 28 30 31 54 55 104 104 106 107 107 107 107 107 108 112 ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL SAFE HARBOR STATEMENT PART I 1. BUSINESS 1A. RISK FACTORS 1B. UNRESOLVED STAFF COMMENTS PROPERTIES LEGAL PROCEEDINGS 4. MINE SAFETY DISCLOSURES PART II PURCHASES OF EQUITY SECURITIES 6. SELECTED FINANCIAL DATA 2. 3. 8. 9. DISCLOSURE 9A. CONTROLS AND PROCEDURES 9B. OTHER INFORMATION PART III 11. EXECUTIVE COMPENSATION STOCKHOLDER MATTERS ITEM ITEM ITEM ITEM ITEM ITEM ITEM ITEM ITEM ITEM ITEM ITEM ITEM ITEM ITEM ITEM ITEM ITEM ITEM ITEM EX-21 EX-23 EX-31.1 EX-31.2 EX-32.1 EX-101 EX-101 EX-101 EX-101 EX-101 EX-101 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 14. PRINCIPAL ACCOUNTING FEES AND SERVICES PART IV 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 16. FORM 10-K SUMMARY LIST OF COMPANIES AND SUBSIDIARIES CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(a) /15d-14(a) CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13a-14(a) /15d-14(a) 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 INSTANCE DOCUMENT SCHEMA DOCUMENT CALCULATION LINKBASE DOCUMENT LABELS LINKBASE DOCUMENT PRESENTATION LINKBASE DOCUMENT DEFINITION LINKBASE DOCUMENT 1022849be 10K 6 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 2019 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; the impact of climate change, which may increase the frequency and severity of catastrophe events; 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 (including those associated with the United Kingdom's withdrawal from the European Union, or "Brexit") relating to our international operations; our ability to attract and retain key personnel and qualified employees; continued availability of capital and financing; the success of our new ventures or acquisitions and the availability of other opportunities; the availability of reinsurance; our retention under the Terrorism Risk Insurance Program Reauthorization Act of 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 cyber security issues; the effectiveness of our controls to ensure compliance with guidelines, policies and legal and regulatory standards; and other risks detailed in this Form 10-K and from time to time in our other filings with the Securities and Exchange Commission (“SEC”). K 0 1 e b 9 4 8 2 2 0 1 6 6 1022849be 10K 1022849be_10K.indd 6 4/17/19 6:52 PM K 8.250 in x 12.000 in Select 04.17.2019 19:12PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be 1022849be 10K 7 7 1 0 2 2 8 4 9 b e 1 0 K 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 2019 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. PART I ITEM 1. BUSINESS W. R. Berkley Corporation is an insurance holding company that is among the largest commercial lines writers in the United States and operates worldwide in two segments of the property casualty insurance business: • • Insurance - predominantly commercial insurance business, including excess and surplus lines, admitted lines and specialty personal lines throughout the United States, as well as insurance business in the United Kingdom, Continental Europe, South America, Canada, Mexico, Scandinavia, Asia and Australia. Reinsurance - reinsurance business on a facultative and treaty basis, primarily in the United States, United Kingdom, Continental Europe, Australia, the Asia-Pacific region and South Africa. Our two reporting segments are composed of individual operating units that serve a market defined by geography, products, services or industry served. Each of our operating units is positioned close to its customer base and participates in a niche market requiring specialized knowledge about a territory, product or industry served. This strategy of decentralized operations allows each of our units to identify and respond quickly and effectively to changing market conditions and specific 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. 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 right talent and expertise are found to lead a business. Of our 53 operating units, 46 have been organized and developed internally and seven have been added through acquisition. 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: (In thousands) Net premiums written: Insurance Reinsurance Total Percentage of net premiums written: Insurance Reinsurance Total 2018 2017 2016 2015 2014 Year Ended December 31, $ 5,952,861 $ 5,715,871 $ 5,743,620 $ 5,555,437 $ 5,302,436 480,366 544,637 680,293 634,078 694,511 $ 6,433,227 $ 6,260,508 $ 6,423,913 $ 6,189,515 $ 5,996,947 2018 2017 2016 2015 2014 Year Ended December 31, 92.5% 7.5 100.0% 91.3% 8.7 100.0% 89.4% 10.6 100.0% 89.8% 10.2 100.0% 88.4% 11.6 100.0% Thirty-two of our insurance company subsidiaries are rated by A.M. Best Company, Inc. ("A.M. Best") and have ratings of A+ (Superior) (the second highest rating out of 15 possible ratings). 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 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 subsidiaries are therefore subject to change. Our twenty-five 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). Our Moody's ratings are A1 for Berkley Insurance Company, Berkley Regional Insurance Company and Admiral Insurance Company (the sixth highest rating out of twenty-one possible ratings). K 0 1 e b 9 4 8 2 2 0 1 7 4/17/19 6:52 PM 1 7 1022849be 10K 1022849be_10K.indd 7 K 8.250 in x 12.000 in Select 04.17.2019 19:12PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be 8 1 0 2 2 8 4 9 b e 1 0 K PART I ITEM 1. BUSINESS 1022849be 10K 8 W. R. Berkley Corporation is an insurance holding company that is among the largest commercial lines writers in the United States and operates worldwide in two segments of the property casualty insurance business: • • Insurance - predominantly commercial insurance business, including excess and surplus lines, admitted lines and specialty personal lines throughout the United States, as well as insurance business in the United Kingdom, Continental Europe, South America, Canada, Mexico, Scandinavia, Asia and Australia. Reinsurance - reinsurance business on a facultative and treaty basis, primarily in the United States, United Kingdom, Continental Europe, Australia, the Asia-Pacific region and South Africa. Our two reporting segments are composed of individual operating units that serve a market defined by geography, products, services or industry served. Each of our operating units is positioned close to its customer base and participates in a niche market requiring specialized knowledge about a territory, product or industry served. This strategy of decentralized operations allows each of our units to identify and respond quickly and effectively to changing market conditions and specific 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. 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 right talent and expertise are found to lead a business. Of our 53 operating units, 46 have been organized and developed internally and seven have been added through acquisition. 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: (In thousands) Net premiums written: Insurance Reinsurance Total Percentage of net premiums written: Insurance Reinsurance Total 2018 2017 2016 2015 2014 Year Ended December 31, $ 5,952,861 $ 5,715,871 $ 5,743,620 $ 5,555,437 $ 5,302,436 480,366 544,637 680,293 634,078 694,511 $ 6,433,227 $ 6,260,508 $ 6,423,913 $ 6,189,515 $ 5,996,947 2018 2017 2016 2015 2014 Year Ended December 31, 92.5% 7.5 100.0% 91.3% 8.7 100.0% 89.4% 10.6 100.0% 89.8% 10.2 100.0% 88.4% 11.6 100.0% Thirty-two of our insurance company subsidiaries are rated by A.M. Best Company, Inc. ("A.M. Best") and have ratings of A+ (Superior) (the second highest rating out of 15 possible ratings). 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 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 subsidiaries are therefore subject to change. Our twenty-five 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). Our Moody's ratings are A1 for Berkley Insurance Company, Berkley Regional Insurance Company and Admiral Insurance Company (the sixth highest rating out of twenty-one possible ratings). 1 8 1022849be 10K 1022849be_10K.indd 8 K 8.250 in x 12.000 in Select 04.17.2019 19:12PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 8 4/17/19 6:52 PM 1022849be 10K 9 9 1 0 2 2 8 4 9 b e 1 0 K 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. The operating units are identified by us for descriptive purposes only and are not legal entities. Unless otherwise indicated, all references in this Form 10-K to “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 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. 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. The Berkley Construction Professional division provides both project specific and annual policies for owners and contractors. The Accountants division insures mainly mid-sized CPA firms. Our U.S.-based operating units predominantly underwrite commercial insurance business primarily throughout the United Berkley Aspire provides excess and surplus lines coverage on a national basis to small to medium-sized insureds with low States, although many units offer coverage globally, focusing on the following general areas: Excess & Surplus Lines: A number of our operating units are dedicated to the U.S. 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. 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 Berkley member company agents. 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 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, life sciences and travel. Industry Specialty: Certain other operating units focus on providing specialty coverages to customers within a particular Berkley Custom Insurance focuses on the excess casualty insurance market and offers umbrella liability, pollution 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 in the U.S., as well as internationally. 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 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 in the U.S. and offer products internationally. Independent agents and brokers are the primary means of distribution. Regional: Certain operating units offer standard insurance products and services focused on meeting the specific needs of Berkley Europe is comprised of specialist operating units offering a focused range of insurance products to markets in a geographically 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 reflect local economies. They are organized geographically in order to provide them with the flexibility to adapt quickly to local market conditions and customer needs. In addition, through our non-U.S. insurance operating units, we write business in more than 60 countries worldwide, with branches or offices in 26 locations outside the United States, including the United Kingdom, Continental Europe, South America, Canada, Mexico, 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 professionals with expertise in local markets and knowledge of regional environments. In addition to providing insurance products, certain operating units also provide a wide variety of fee-based services, Berkley Healthcare provides customized, comprehensive management and professional liability solutions for the full including claims, administrative and consulting services. Operating units comprising the Insurance 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 industries such as construction, lumber, fishing and transportation. 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 Group specializes in mono-line workers’ compensation coverage for mining and mining Uruguay. related and high hazard industries in select 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. 2 K 0 1 e b 9 4 8 2 2 0 1 9 9 1022849be 10K 1022849be_10K.indd 9 4/17/19 6:52 PM K 8.250 in x 12.000 in Select 04.17.2019 19:12PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be liability, excess liability, construction wrap-ups and completed operations coverages to wholesalers, retailers, manufacturers, insurance companies, financial institutions and construction companies. Berkley Cyber Risk Solutions focuses on insurance and risk management products that respond to the changing cyber security vulnerabilities of organizations around the world. It offers specialty commercial cyber insurance coverages on a worldwide basis to clients of all sizes. Berkley Entertainment underwrites property casualty insurance products, both on an admitted and non-admitted basis, for clients in the entertainment industry and sports-related organizations. Berkley Environmental underwrites specialty insurance products for environmental customers such as contractors, consultants and owners of sites and facilities. Continental Europe and Nordic countries. Berkley FinSecure serves the insurance needs of companies in the financial services industry. It offers a comprehensive range of property, casualty, professional liability, and specialty lines insurance products. Its Berkley crime division provides crime-related insurance products for commercial organizations, financial institutions and governmental entities. Berkley Fire & Marine offers a broad range of preferred inland marine and related property risks and services to customers throughout the United States. 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. spectrum of healthcare providers. Berkley Human Services provides property casualty insurance coverages to human services organizations, including nonprofit and for-profit organizations, public schools, sports and recreational organizations, and 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 risks. Berkley Insurance Asia underwrites specialty commercial insurance coverages to clients in North Asia and Southeast Asia through offices in Hong Kong, Singapore and Shanghai. Berkley Insurance Australia underwrites general insurance business in Australia, including professional indemnity insurance for companies of all sizes. Berkley Latinoamérica is a leading provider of property, casualty, automobile, surety, group life and workers' compensation products and services in its operating territories of Argentina, Brazil, the Caribbean, Colombia, Mexico and Berkley Life Sciences offers a comprehensive spectrum of property, casualty, and specialty products such as professional and management liability to the life sciences industry on a global basis, including both primary and excess liability coverages. It serves pharmaceutical and biotech companies, medical device companies, dietary supplement companies, medical and research related software developers, contract research and manufacturing organizations, research institutions and organizations, and other related businesses. 3 1022849be 10K 10 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. The operating units are identified by us for descriptive purposes only and are not legal entities. Unless otherwise indicated, all references in this Form 10-K to “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 1 0 1 0 2 2 8 4 9 b e 1 0 K 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. 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. The Berkley Construction Professional division provides both project specific and annual policies for owners and contractors. The Accountants division insures mainly mid-sized CPA firms. Our U.S.-based operating units predominantly underwrite commercial insurance business primarily throughout the United Berkley Aspire provides excess and surplus lines coverage on a national basis to small to medium-sized insureds with low States, although many units offer coverage globally, focusing on the following general areas: Excess & Surplus Lines: A number of our operating units are dedicated to the U.S. 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. 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 Berkley member company agents. 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 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, life sciences and travel. Industry Specialty: Certain other operating units focus on providing specialty coverages to customers within a particular Berkley Custom Insurance focuses on the excess casualty insurance market and offers umbrella liability, pollution 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 in the U.S., as well as internationally. 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 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 in the U.S. and offer products internationally. Independent agents and brokers are the primary means of distribution. liability, excess liability, construction wrap-ups and completed operations coverages to wholesalers, retailers, manufacturers, insurance companies, financial institutions and construction companies. Berkley Cyber Risk Solutions focuses on insurance and risk management products that respond to the changing cyber security vulnerabilities of organizations around the world. It offers specialty commercial cyber insurance coverages on a worldwide basis to clients of all sizes. Berkley Entertainment underwrites property casualty insurance products, both on an admitted and non-admitted basis, for clients in the entertainment industry and sports-related organizations. Berkley Environmental underwrites specialty insurance products for environmental customers such as contractors, consultants and owners of sites and facilities. Regional: Certain operating units offer standard insurance products and services focused on meeting the specific needs of Berkley Europe is comprised of specialist operating units offering a focused range of insurance products to markets in a geographically 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 reflect local economies. They are organized geographically in order to provide them with the flexibility to adapt quickly to local market conditions and customer needs. In addition, through our non-U.S. insurance operating units, we write business in more than 60 countries worldwide, with branches or offices in 26 locations outside the United States, including the United Kingdom, Continental Europe, South America, Canada, Mexico, 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 professionals with expertise in local markets and knowledge of regional environments. Continental Europe and Nordic countries. Berkley FinSecure serves the insurance needs of companies in the financial services industry. It offers a comprehensive range of property, casualty, professional liability, and specialty lines insurance products. Its Berkley crime division provides crime-related insurance products for commercial organizations, financial institutions and governmental entities. Berkley Fire & Marine offers a broad range of preferred inland marine and related property risks and services to customers throughout the United States. 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. In addition to providing insurance products, certain operating units also provide a wide variety of fee-based services, Berkley Healthcare provides customized, comprehensive management and professional liability solutions for the full including claims, administrative and consulting services. Operating units comprising the Insurance 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 industries such as construction, lumber, fishing and transportation. 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, spectrum of healthcare providers. Berkley Human Services provides property casualty insurance coverages to human services organizations, including nonprofit and for-profit organizations, public schools, sports and recreational organizations, and 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 risks. Berkley Insurance Asia underwrites specialty commercial insurance coverages to clients in North Asia and Southeast Asia through offices in Hong Kong, Singapore and Shanghai. Berkley Insurance Australia underwrites general insurance business in Australia, including professional indemnity professional liability, property, and excess and umbrella coverage. Admiral's professional liability and program operations insurance for companies of all sizes. include special coverages for technology, ambulatory surgery centers, chiropractors and concierge physicians. Its products are distributed exclusively by wholesale brokers. American Mining Insurance Group specializes in mono-line workers’ compensation coverage for mining and mining related and high hazard industries in select 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 Latinoamérica is a leading provider of property, casualty, automobile, surety, group life and workers' compensation products and services in its operating territories of Argentina, Brazil, the Caribbean, Colombia, Mexico and Uruguay. Berkley Life Sciences offers a comprehensive spectrum of property, casualty, and specialty products such as professional and management liability to the life sciences industry on a global basis, including both primary and excess liability coverages. It serves pharmaceutical and biotech companies, medical device companies, dietary supplement companies, medical and research related software developers, contract research and manufacturing organizations, research institutions and organizations, and other related businesses. 2 3 K 0 1 e b 9 4 8 2 2 0 1 0 1 10 1022849be 10K 1022849be_10K.indd 10 4/17/19 6:52 PM K 8.250 in x 12.000 in Select 04.17.2019 19:12PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be 1022849be 10K 11 1 1 1 0 2 2 8 4 9 b e 1 0 K Berkley Luxury Group provides commercial package insurance programs for high-end cooperative, condominium, and Continental Western Group is a Midwest regional property and casualty insurance operation based in Des Moines, Iowa, 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. 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 Berkley member insurance companies. Berkley Net Underwriters also manages Berkley's assigned risk servicing carrier operations. Berkley North Pacific provides local underwriting, claims and risk management services for businesses in the Northwest. 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, restaurants and manufacturing. 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 all sizes 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 One provides a customizable suite of personal lines insurance solutions including home, condo/co-op, auto, liability and collectibles. Berkley One targets high net worth individuals and families with sophisticated risk management needs. Berkley Professional Liability specializes in professional liability insurance for publicly-traded and private entities on a worldwide basis. Its liability coverages include directors and officers, errors and omissions, fiduciary, employment practices, and sponsored insurance agents' errors and omissions. Berkley Transactional, a division of Berkley Professional Liability, underwrites a full suite of transactional insurance products, including representations and warranties insurance, tax opinion insurance and contingency liability insurance. Berkley Program Specialists is a program management company offering both admitted and non-admitted insurance support on a nationwide basis for commercial casualty and property 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. 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 and public entities. 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. Intrepid Direct offers business coverages to franchise restaurants and auto repair garages on a direct basis. Key Risk is a premier provider of workers' compensation insurance. It focuses on middle market accounts in several niches that appreciate expertise and exceptional service. The unit operates two business units; one focused on middle market accounts located primarily in the mid-Atlantic and southeastern United States and one focused on national temporary staffing and United States Longshoreman & Harbor Act (USL&H) specialty programs. Its products are distributed by a select group of independent retail agents and wholesale brokers located through the United States. 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 and large deductible policies. 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. 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. 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. 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. 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. W / R / B Underwriting provides a broad range of leading insurance products to the Lloyd's marketplace, with a concentration in specialist classes of business including property, professional indemnity, crisis management, personal accident and asset protection. Berkley Risk provides at-risk and alternative risk insurance program management services for a broad range of groups and individuals including public entity pools, professional associations, captives and self-insured clients. As a third party administrator, it manages workers’ compensation, liability and property claims nationwide. Berkley Select specializes in underwriting professional liability insurance on a surplus lines basis for law firms and accounting firms through a limited number of brokers. It also offers executive and professional liability products, including directors and officers liability, errors and omissions, and employment practices liability, to small to middle market privately held and not for profit customers on both an admitted and surplus lines basis. Berkley Southeast offers a wide array of commercial lines products in six southeastern states: Alabama, Georgia, Mississippi, North Carolina, South Carolina and Tennessee, specializing in small to mid-sized accounts. 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 21 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 is a national provider of primary commercial insurance products and services to the transportation industry. It underwrites on an admitted basis in all 50 states and the District of Columbia. 4 11 1022849be 10K 1022849be_10K.indd 11 4/17/19 6:52 PM K 8.250 in x 12.000 in Select 04.17.2019 19:12PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 1 1 5 1022849be 10K 12 1 2 1 0 2 2 8 4 9 b e 1 0 K Berkley Luxury Group provides commercial 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. 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 Berkley member insurance companies. Berkley Net Underwriters also manages Berkley's assigned risk servicing carrier operations. Berkley North Pacific provides local underwriting, claims and risk management services for businesses in the Northwest. 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, restaurants and manufacturing. 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 all sizes 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 One provides a customizable suite of personal lines insurance solutions including home, condo/co-op, auto, liability and collectibles. Berkley One targets high net worth individuals and families with sophisticated risk management needs. Berkley Professional Liability specializes in professional liability insurance for publicly-traded and private entities on a worldwide basis. Its liability coverages include directors and officers, errors and omissions, fiduciary, employment practices, and sponsored insurance agents' errors and omissions. Berkley Transactional, a division of Berkley Professional Liability, underwrites a full suite of transactional insurance products, including representations and warranties insurance, tax opinion insurance and contingency liability insurance. Berkley Program Specialists is a program management company offering both admitted and non-admitted insurance 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 and public entities. 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. Intrepid Direct offers business coverages to franchise restaurants and auto repair garages on a direct basis. Key Risk is a premier provider of workers' compensation insurance. It focuses on middle market accounts in several niches that appreciate expertise and exceptional service. The unit operates two business units; one focused on middle market accounts located primarily in the mid-Atlantic and southeastern United States and one focused on national temporary staffing and United States Longshoreman & Harbor Act (USL&H) specialty programs. Its products are distributed by a select group of independent retail agents and wholesale brokers located through the United States. 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 and large deductible policies. 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. 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. 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. 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. support on a nationwide basis for commercial casualty and property program administrators with specialized insurance expertise. Verus Underwriting Managers offers general liability, professional liability and property coverages for small to mid-sized 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. commercial risks in the excess and surplus lines insurance market through a select group of appointed wholesale brokers and agents. 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. W / R / B Underwriting provides a broad range of leading insurance products to the Lloyd's marketplace, with a concentration in specialist classes of business including property, professional indemnity, crisis management, personal accident and asset protection. Berkley Risk provides at-risk and alternative risk insurance program management services for a broad range of groups and individuals including public entity pools, professional associations, captives and self-insured clients. As a third party administrator, it manages workers’ compensation, liability and property claims nationwide. Berkley Select specializes in underwriting professional liability insurance on a surplus lines basis for law firms and accounting firms through a limited number of brokers. It also offers executive and professional liability products, including directors and officers liability, errors and omissions, and employment practices liability, to small to middle market privately held and not for profit customers on both an admitted and surplus lines basis. Berkley Southeast offers a wide array of commercial lines products in six southeastern states: Alabama, Georgia, Mississippi, North Carolina, South Carolina and Tennessee, specializing in small to mid-sized accounts. 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 21 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 is a national provider of primary commercial insurance products and services to the transportation industry. It underwrites on an admitted basis in all 50 states and the District of Columbia. 4 5 12 1022849be 10K 1022849be_10K.indd 12 K 8.250 in x 12.000 in Select 04.17.2019 19:12PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 2 1 4/17/19 6:52 PM 1 3 1 0 2 2 8 4 9 b e 1 0 K Vela Insurance Services Verus Underwriting Managers W/R/B Underwriting Other Total 2.6 0.9 3.4 1.1 3.0 0.9 3.1 2.0 3.9 0.9 4.0 1.9 3.3 0.8 5.5 2.2 3.2 0.8 7.2 0.9 100.0% 100.0% 100.0% 100.0% 100.0% The following table sets forth percentages of gross premiums written, by line, by our Insurance operations: Other liability Short-tail lines (1) Workers' compensation Professional liability Commercial auto Total ___________________ Year Ended December 31, 2018 31.6% 22.9 22.6 11.7 11.2 2017 30.6% 22.8 24.6 11.0 11.0 2016 30.9% 23.1 25.1 10.5 10.4 2015 28.9% 24.3 25.5 10.0 11.3 2014 28.3% 25.9 24.2 9.9 11.7 100.0% 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 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 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, Melbourne, Sydney, Beijing, 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 Solutions 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. It also provides its customers with turnkey products such as cyber, employment practices liability insurance ("EPLI"), and liquor liability insurance to help enhance their clients' product offerings, along with 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. 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. 1022849be 10K 13 The following table sets forth the percentage of gross premiums written by each Insurance operating unit: Acadia Insurance Admiral Insurance American Mining Insurance Group Berkley Accident and Health Berkley Agribusiness Risk Specialists Berkley Alliance Managers Berkley Aspire Berkley Canada Berkley Custom Insurance Berkley Cyber Risk Solutions Berkley Entertainment Berkley Environmental Berkley Europe Berkley FinSecure Berkley Fire & Marine Berkley Global Product Recall Management Berkley Healthcare Berkley Human Services Berkley Insurance Asia Berkley Insurance Australia Berkley Latinoamérica Berkley Life Sciences Berkley Luxury Group Berkley Medical Excess Berkley Mid-Atlantic Group Berkley Net Underwriters Berkley North Pacific Berkley Offshore Underwriting Managers Berkley Oil & Gas Berkley One Berkley Professional Liability Berkley Program Specialists Berkley Public Entity Berkley Risk Berkley Select Berkley Southeast Berkley Surety Berkley Technology Underwriters Carolina Casualty Continental Western Group Gemini Transportation Intrepid Direct Key Risk Midwest Employers Casualty Nautilus Insurance Group Preferred Employers Insurance Union Standard Year Ended December 31, 2018 6.5% 2017 6.8% 2016 6.8% 2015 6.7% 2014 7.2% 5.7 0.9 5.6 1.2 2.5 0.3 1.0 2.6 0.2 2.5 5.0 1.9 0.9 0.6 0.5 0.3 0.7 0.4 1.1 4.1 0.8 1.4 0.9 1.2 4.9 1.2 1.1 3.5 0.2 1.8 1.1 0.4 0.2 3.1 2.0 1.3 0.7 0.5 3.4 2.3 0.3 2.8 2.5 4.9 2.4 2.6 6 5.7 0.8 4.7 1.2 1.9 0.3 0.9 2.5 0.1 2.1 4.7 1.7 1.0 0.5 0.3 0.2 0.6 0.2 1.0 4.8 0.8 1.3 0.9 1.1 6.7 1.5 1.1 2.7 — 1.6 1.2 0.5 0.2 3.4 1.9 1.2 0.7 0.4 3.8 2.1 0.1 2.7 2.5 5.1 2.8 2.7 5.5 0.7 4.4 1.1 1.5 0.3 0.8 2.7 — 2.0 4.1 1.7 0.9 0.4 0.2 0.2 0.7 — 1.0 4.2 0.8 1.3 0.8 1.2 8.0 1.5 1.1 2.8 — 1.5 1.2 0.5 0.2 3.9 2.0 1.2 0.6 0.6 4.0 1.8 — 2.6 2.3 5.0 2.6 2.6 4.9 0.8 3.7 0.9 0.7 0.3 0.6 2.9 — 1.9 3.8 1.9 1.0 0.3 — — 0.6 — 0.8 4.7 0.8 1.3 0.9 1.8 4.0 1.7 1.4 3.2 — 1.7 1.2 0.4 4.0 4.0 2.3 1.2 0.5 1.2 4.0 1.1 — 2.9 2.3 4.7 2.5 2.6 5.3 0.7 2.9 0.9 0.1 0.4 0.5 2.4 — 1.8 3.5 2.4 0.7 0.2 — — 0.6 — 1.3 4.6 0.9 1.3 0.8 2.4 3.7 1.6 1.7 3.5 — 1.8 1.2 0.4 3.9 4.0 2.5 1.2 0.4 1.8 3.9 0.9 — 3.0 2.3 4.7 2.1 2.7 13 1022849be 10K 1022849be_10K.indd 13 K 8.250 in x 12.000 in Select 04.17.2019 19:12PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 3 1 4/17/19 6:52 PM 7 The following table sets forth the percentage of gross premiums written by each Insurance operating unit: Year Ended December 31, 2018 6.5% 2017 6.8% 2016 6.8% 2015 6.7% 2014 7.2% 1 4 1 0 2 2 8 4 9 b e 1 0 K Berkley Global Product Recall Management Acadia Insurance Admiral Insurance American Mining Insurance Group Berkley Accident and Health Berkley Agribusiness Risk Specialists Berkley Alliance Managers Berkley Aspire Berkley Canada Berkley Custom Insurance Berkley Cyber Risk Solutions Berkley Entertainment Berkley Environmental Berkley Europe Berkley FinSecure Berkley Fire & Marine Berkley Healthcare Berkley Human Services Berkley Insurance Asia Berkley Insurance Australia Berkley Latinoamérica Berkley Life Sciences Berkley Luxury Group Berkley Medical Excess Berkley Mid-Atlantic Group Berkley Net Underwriters Berkley North Pacific Berkley Oil & Gas Berkley One Berkley Professional Liability Berkley Program Specialists Berkley Public Entity Berkley Risk Berkley Select Berkley Southeast Berkley Surety Berkley Technology Underwriters Carolina Casualty Continental Western Group Gemini Transportation Intrepid Direct Key Risk Midwest Employers Casualty Nautilus Insurance Group Preferred Employers Insurance Union Standard Berkley Offshore Underwriting Managers 5.7 0.9 5.6 1.2 2.5 0.3 1.0 2.6 0.2 2.5 5.0 1.9 0.9 0.6 0.5 0.3 0.7 0.4 1.1 4.1 0.8 1.4 0.9 1.2 4.9 1.2 1.1 3.5 0.2 1.8 1.1 0.4 0.2 3.1 2.0 1.3 0.7 0.5 3.4 2.3 0.3 2.8 2.5 4.9 2.4 2.6 6 5.7 0.8 4.7 1.2 1.9 0.3 0.9 2.5 0.1 2.1 4.7 1.7 1.0 0.5 0.3 0.2 0.6 0.2 1.0 4.8 0.8 1.3 0.9 1.1 6.7 1.5 1.1 2.7 — 1.6 1.2 0.5 0.2 3.4 1.9 1.2 0.7 0.4 3.8 2.1 0.1 2.7 2.5 5.1 2.8 2.7 5.5 0.7 4.4 1.1 1.5 0.3 0.8 2.7 — 2.0 4.1 1.7 0.9 0.4 0.2 0.2 0.7 — 1.0 4.2 0.8 1.3 0.8 1.2 8.0 1.5 1.1 2.8 — 1.5 1.2 0.5 0.2 3.9 2.0 1.2 0.6 0.6 4.0 1.8 — 2.6 2.3 5.0 2.6 2.6 4.9 0.8 3.7 0.9 0.7 0.3 0.6 2.9 — 1.9 3.8 1.9 1.0 0.3 — — 0.6 — 0.8 4.7 0.8 1.3 0.9 1.8 4.0 1.7 1.4 3.2 — 1.7 1.2 0.4 4.0 4.0 2.3 1.2 0.5 1.2 4.0 1.1 — 2.9 2.3 4.7 2.5 2.6 5.3 0.7 2.9 0.9 0.1 0.4 0.5 2.4 — 1.8 3.5 2.4 0.7 0.2 — — 0.6 — 1.3 4.6 0.9 1.3 0.8 2.4 3.7 1.6 1.7 3.5 — 1.8 1.2 0.4 3.9 4.0 2.5 1.2 0.4 1.8 3.9 0.9 — 3.0 2.3 4.7 2.1 2.7 1022849be 10K 14 Vela Insurance Services Verus Underwriting Managers W/R/B Underwriting Other Total 2.6 0.9 3.4 1.1 3.0 0.9 3.1 2.0 3.9 0.9 4.0 1.9 3.3 0.8 5.5 2.2 3.2 0.8 7.2 0.9 100.0% 100.0% 100.0% 100.0% 100.0% The following table sets forth percentages of gross premiums written, by line, by our Insurance operations: Other liability Short-tail lines (1) Workers' compensation Professional liability Commercial auto Total Year Ended December 31, 2018 31.6% 22.9 22.6 11.7 11.2 2017 30.6% 22.8 24.6 11.0 11.0 2016 30.9% 23.1 25.1 10.5 10.4 2015 28.9% 24.3 25.5 10.0 11.3 2014 28.3% 25.9 24.2 9.9 11.7 100.0% 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 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 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, Melbourne, Sydney, Beijing, 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 Solutions 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. It also provides its customers with turnkey products such as cyber, employment practices liability insurance ("EPLI"), and liquor liability insurance to help enhance their clients' product offerings, along with 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. 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. 7 14 1022849be 10K 1022849be_10K.indd 14 K 8.250 in x 12.000 in Select 04.17.2019 19:12PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 4 1 4/17/19 6:52 PM 1022849be 10K 15 1 5 1 0 2 2 8 4 9 b e 1 0 K The following table sets forth the percentages of gross premiums written by each Reinsurance operating unit: Berkley Re America Berkley Re Asia Pacific Berkley Re Solutions Berkley Re UK Lloyd's Syndicate 2791 Participation Other Total Year Ended December 31, 2018 2017 2016 2015 2014 42.0% 14.8 14.1 22.2 6.8 0.1 100.0% 52.0% 12.8 15.8 12.6 5.5 1.3 100.0% 64.0% 9.2 10.8 10.0 4.4 1.6 100.0% 60.3% 8.0 10.1 15.4 5.2 1.0 100.0% 56.2% 6.7 10.4 19.9 5.3 1.5 100.0% The following table sets forth the percentages of gross premiums written, by line, by our Reinsurance operations: Casualty Property Total Results by Segment Year Ended December 31, 2018 2017 2016 2015 2014 70.2% 29.8 66.9% 33.1 58.7% 41.3 65.1% 34.9 100.0% 100.0% 100.0% 100.0% 65.5% 34.5 100.0% Summary financial information about our segments is presented on a GAAP basis in the following table: 2018 2017 2016 2015 2014 Year Ended December 31, (In thousands) Insurance Revenue 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 Loss ratio Expense ratio Combined ratio Reinsurance Loss ratio Expense ratio Combined ratio Total Loss ratio Expense ratio Combined ratio Investments Investment results, before income taxes, were as follows: 2018 2017 2016 2015 2014 Year Ended December 31, 61.8% 32.5 94.3% 68.7% 37.7 62.4% 32.9 95.3% 61.6% 32.9 94.5% 80.2% 37.4 63.4% 33.3 96.7% 61.0% 32.5 93.5% 61.6% 39.0 61.1% 33.2 94.3% 106.4% 117.6% 100.6% 60.8% 32.6 93.4% 58.2% 38.4 96.6% 60.5% 33.2 93.7% 60.8% 32.8 93.6% 60.5% 34.6 95.1% 60.8% 33.0 93.8% $ 6,456,441 $ 6,229,485 $ 6,148,210 $ 5,876,454 $ 5,586,230 Year Ended December 31, Income before income taxes 856,011 756,153 799,139 748,515 786,723 Reinsurance Revenue Income (loss) before income taxes Other(1) Revenue (Loss) income before income taxes Total Revenue 600,815 62,144 696,122 (15,276) 777,123 98,277 745,325 122,930 837,901 155,042 634,395 (106,061) 759,157 31,893 728,851 (978) 584,678 (139,415) 704,797 10,431 $ 7,691,651 $ 7,684,764 $ 7,654,184 $ 7,206,457 $ 7,128,928 Income before income taxes $ 812,094 $ 772,770 $ 896,438 $ 732,030 $ 952,196 _______________________________________ (1) Represents corporate revenues, corporate expenses, net investment gains and losses, and revenues and expenses from non- insurance businesses that are consolidated for financial reporting purposes. 8 15 1022849be 10K 1022849be_10K.indd 15 K 8.250 in x 12.000 in Select 04.17.2019 19:12PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 5 1 4/17/19 6:52 PM (In thousands) 2018 2017 2016 2015 2014 Average investments, at cost (1) $ 18,392,297 $ 17,530,590 $ 16,730,964 $ 15,970,931 $ 15,560,335 Net investment income (1) $ 674,235 575,788 564,163 512,645 600,885 Percent earned on average investments (1) 3.7% 3.3% 3.4% 3.2% 3.9% Net realized and unrealized gains on investments (2) $ 154,488 Change in unrealized investment (losses) gains (3) $ (302,737) 335,858 (69,425) 267,005 371,715 92,324 (192,186) 254,852 72,889 $ $ $ $ $ $ $ $ $ $ $ $ _______________________________________ (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 prior to 2018. The inclusion of change in unrealized gains on equity securities within net income commenced January 1, 2018 due to our adoption of ASU 2016-01. For the twelve months ended December 31, 2018, includes net realized gains on investment sales of $480 million reduced by a change in unrealized gains on equity securities of $320 million. (3) Represents the change in unrealized investment (losses) gains for available for sale securities. Effective January 1, 2018, the Company adopted new accounting guidance that requires all equity investments with readily determinable fair values (subject to certain exceptions) to be measured at fair value with changes in the fair value recognized in net income. As a result of this guidance, the Company recorded a cumulative effect adjustment of $291 million that increased retained earnings and decreased accumulated other comprehensive income ("AOCI"), resulting in no net impact to total stockholders' equity. 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 Year Ended December 31, 2018 2017 2016 2015 2014 3.0% 2.0 3.0% 2.4 3.0% 2.4 3.0% 2.1 3.2% 2.1 9 The following table sets forth the percentages of gross premiums written by each Reinsurance operating unit: 1 6 1 0 2 2 8 4 9 b e 1 0 K Year Ended December 31, 2018 2017 2016 2015 2014 42.0% 52.0% 64.0% 60.3% 56.2% 14.8 14.1 22.2 6.8 0.1 12.8 15.8 12.6 5.5 1.3 9.2 10.8 10.0 4.4 1.6 8.0 10.1 15.4 5.2 1.0 6.7 10.4 19.9 5.3 1.5 100.0% 100.0% 100.0% 100.0% 100.0% Year Ended December 31, 2018 2017 2016 2015 2014 70.2% 29.8 66.9% 33.1 58.7% 41.3 65.1% 34.9 100.0% 100.0% 100.0% 100.0% 65.5% 34.5 100.0% Berkley Re America Berkley Re Asia Pacific Berkley Re Solutions Berkley Re UK Lloyd's Syndicate 2791 Participation Other Total Casualty Property Total (In thousands) Insurance Revenue Reinsurance Revenue Other(1) Revenue Total Revenue The following table sets forth the percentages of gross premiums written, by line, by our Reinsurance operations: Results by Segment Summary financial information about our segments is presented on a GAAP basis in the following table: 2018 2017 2016 2015 2014 Year Ended December 31, Income before income taxes 856,011 756,153 799,139 748,515 786,723 $ 6,456,441 $ 6,229,485 $ 6,148,210 $ 5,876,454 $ 5,586,230 Income (loss) before income taxes 600,815 62,144 696,122 (15,276) 777,123 98,277 745,325 122,930 837,901 155,042 (Loss) income before income taxes 634,395 (106,061) 759,157 31,893 728,851 584,678 (978) (139,415) 704,797 10,431 Income before income taxes $ 812,094 $ 772,770 $ 896,438 $ 732,030 $ 952,196 _______________________________________ (1) Represents corporate revenues, corporate expenses, net investment gains and losses, and revenues and expenses from non- insurance businesses that are consolidated for financial reporting purposes. $ 7,691,651 $ 7,684,764 $ 7,654,184 $ 7,206,457 $ 7,128,928 1022849be 10K 16 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 Loss ratio Expense ratio Combined ratio Reinsurance Loss ratio Expense ratio Combined ratio Total Loss ratio Expense ratio Combined ratio Investments 2018 2017 2016 2015 2014 Year Ended December 31, 61.8% 32.5 94.3% 68.7% 37.7 61.6% 32.9 94.5% 80.2% 37.4 61.0% 32.5 93.5% 61.6% 39.0 106.4% 117.6% 100.6% 62.4% 32.9 95.3% 63.4% 33.3 96.7% 61.1% 33.2 94.3% 60.8% 32.6 93.4% 58.2% 38.4 96.6% 60.5% 33.2 93.7% 60.8% 32.8 93.6% 60.5% 34.6 95.1% 60.8% 33.0 93.8% Investment results, before income taxes, were as follows: Year Ended December 31, (In thousands) 2018 2017 2016 2015 2014 Average investments, at cost (1) $ 18,392,297 $ 17,530,590 $ 16,730,964 $ 15,970,931 $ 15,560,335 Net investment income (1) Percent earned on average investments (1) $ 674,235 3.7% Net realized and unrealized gains on investments (2) $ 154,488 Change in unrealized investment (losses) gains (3) $ (302,737) $ $ $ 575,788 3.3% 335,858 (69,425) $ $ $ 564,163 3.4% 267,005 371,715 $ $ $ 512,645 3.2% 92,324 (192,186) $ $ $ 600,885 3.9% 254,852 72,889 _______________________________________ (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 prior to 2018. The inclusion of change in unrealized gains on equity securities within net income commenced January 1, 2018 due to our adoption of ASU 2016-01. For the twelve months ended December 31, 2018, includes net realized gains on investment sales of $480 million reduced by a change in unrealized gains on equity securities of $320 million. (3) Represents the change in unrealized investment (losses) gains for available for sale securities. Effective January 1, 2018, the Company adopted new accounting guidance that requires all equity investments with readily determinable fair values (subject to certain exceptions) to be measured at fair value with changes in the fair value recognized in net income. As a result of this guidance, the Company recorded a cumulative effect adjustment of $291 million that increased retained earnings and decreased accumulated other comprehensive income ("AOCI"), resulting in no net impact to total stockholders' equity. 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 Year Ended December 31, 2018 3.0% 2.0 2017 3.0% 2.4 2016 3.0% 2.4 2015 3.0% 2.1 2014 3.2% 2.1 8 9 16 1022849be 10K 1022849be_10K.indd 16 K 8.250 in x 12.000 in Select 04.17.2019 19:12PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 6 1 4/17/19 6:52 PM 1 7 1 0 2 2 8 4 9 b e 1 0 K 1022849be 10K 17 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 Total Year Ended December 31, 2018 2017 2016 2015 2014 6.9% 5.0% 7.9% 5.8% 7.0% 34.3 22.3 24.7 11.8 37.2 24.8 23.3 9.7 39.6 24.6 18.8 9.1 33.6 30.5 20.3 9.8 32.4 29.8 20.4 10.4 100.0% 100.0% 100.0% 100.0% 100.0% At December 31, 2018, the fixed maturity portfolio had an effective duration of 2.8 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 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. 10 17 1022849be 10K 1022849be_10K.indd 17 4/17/19 6:52 PM K 8.250 in x 12.000 in Select 04.17.2019 19:12PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be The Company discounts its liabilities for certain workers’ compensation reserves. The amount of workers’ compensation reserves that were discounted was $1,793 million and $1,855 million at December 31, 2018 and 2017, respectively. The aggregate net discount for those reserves, after reflecting the effects of ceded reinsurance, was $563 million and $591 million at December 31, 2018 and 2017, respectively. At December 31, 2018, discount rates by year ranged from 2.0% to 6.5%, with a weighted average discount rate of 3.8%. Substantially all discounted workers’ compensation reserves (97% of total discounted reserves at December 31, 2018) are excess workers’ compensation reserves. In order to properly match loss expenses with income earned on investment securities supporting the liabilities, reserves for excess workers’ compensation business are discounted using risk-free discount rates determined by reference to the U.S. Treasury yield curve. These rates are determined annually based on the weighted average rate for the period. Once established, no adjustments are made to the discount rate for that period, and any increases or decreases in loss reserves in subsequent years are discounted at the same rate, without regard to when any such adjustments are recognized. The expected loss and loss expense payout patterns subject to discounting are derived from the Company’s loss payout experience. The Company also discounts reserves for certain other long-duration workers’ compensation reserves (representing approximately 3% of total discounted reserves at December 31, 2018), including reserves for quota share reinsurance and reserves related to losses regarding occupational lung disease. These reserves are discounted at statutory rates 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 on policies written before adoption of the absolute exclusion was $28 million at December 31, 2018 and $30 million at December 31, 2017. The estimation of these liabilities is subject to significantly greater than normal variation and uncertainty because it is difficult to make an actuarial estimate of these liabilities due to the absence of a generally accepted actuarial methodology for these exposures and the potential effect of significant unresolved legal matters, including coverage issues, as well as the cost of litigating the legal issues. Additionally, the determination of ultimate damages and the final allocation of such damages to financially responsible parties are highly uncertain. K 0 1 e b 9 4 8 2 2 0 1 7 1 11 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 8 1 0 2 2 8 4 9 b e 1 0 K Year Ended December 31, 2018 2017 2016 2015 2014 6.9% 5.0% 7.9% 5.8% 7.0% 34.3 22.3 24.7 11.8 37.2 24.8 23.3 9.7 39.6 24.6 18.8 9.1 33.6 30.5 20.3 9.8 32.4 29.8 20.4 10.4 100.0% 100.0% 100.0% 100.0% 100.0% 1 year or less Over 1 year through 5 years Over 5 years through 10 years Over 10 years Mortgage-backed securities Total equivalents. Loss and Loss Expense Reserves At December 31, 2018, the fixed maturity portfolio had an effective duration of 2.8 years, including cash and cash 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 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. 10 1022849be 10K 18 The Company discounts its liabilities for certain workers’ compensation reserves. The amount of workers’ compensation reserves that were discounted was $1,793 million and $1,855 million at December 31, 2018 and 2017, respectively. The aggregate net discount for those reserves, after reflecting the effects of ceded reinsurance, was $563 million and $591 million at December 31, 2018 and 2017, respectively. At December 31, 2018, discount rates by year ranged from 2.0% to 6.5%, with a weighted average discount rate of 3.8%. Substantially all discounted workers’ compensation reserves (97% of total discounted reserves at December 31, 2018) are excess workers’ compensation reserves. In order to properly match loss expenses with income earned on investment securities supporting the liabilities, reserves for excess workers’ compensation business are discounted using risk-free discount rates determined by reference to the U.S. Treasury yield curve. These rates are determined annually based on the weighted average rate for the period. Once established, no adjustments are made to the discount rate for that period, and any increases or decreases in loss reserves in subsequent years are discounted at the same rate, without regard to when any such adjustments are recognized. The expected loss and loss expense payout patterns subject to discounting are derived from the Company’s loss payout experience. The Company also discounts reserves for certain other long-duration workers’ compensation reserves (representing approximately 3% of total discounted reserves at December 31, 2018), including reserves for quota share reinsurance and reserves related to losses regarding occupational lung disease. These reserves are discounted at statutory rates 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 on policies written before adoption of the absolute exclusion was $28 million at December 31, 2018 and $30 million at December 31, 2017. The estimation of these liabilities is subject to significantly greater than normal variation and uncertainty because it is difficult to make an actuarial estimate of these liabilities due to the absence of a generally accepted actuarial methodology for these exposures and the potential effect of significant unresolved legal matters, including coverage issues, as well as the cost of litigating the legal issues. Additionally, the determination of ultimate damages and the final allocation of such damages to financially responsible parties are highly uncertain. 11 18 1022849be 10K 1022849be_10K.indd 18 K 8.250 in x 12.000 in Select 04.17.2019 19:12PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 8 1 4/17/19 6:52 PM 1022849be 10K 19 1 9 1 0 2 2 8 4 9 b e 1 0 K 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) Increase (decrease) in estimates for claims occurring in prior years (2) Loss reserve discount amortization 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 2018 $ 10,056,914 2017 $ 9,590,265 $ 2016 9,244,872 3,926,489 6,831 41,382 3,963,543 (5,165) 43,970 3,974,702 4,002,348 964,808 2,700,077 3,664,885 (117,848) 10,248,883 1,027,405 2,562,550 3,589,955 54,256 10,056,914 1,717,565 1,613,494 3,826,620 (29,904) 49,084 3,845,800 1,052,452 2,401,722 3,454,174 (46,233) 9,590,265 1,606,930 $ 11,966,448 $ 11,670,408 $ 11,197,195 Net change in premiums and losses occurring in prior years: (Increase) 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 $ $ (6,831) $ 45,638 38,807 $ 5,165 32,162 37,327 $ $ 29,904 29,000 58,904 ____________________________________ (1) Claims occurring during the current year are net of loss reserve discounts of $24,381,000, $22,064,000 and $18,929,000 in 2018, 2017 and 2016, respectively. (2) The increase (decrease) in estimates for claims occurring in prior years is net of loss reserve discount. On an undiscounted basis, the estimates for claims occurring in prior years decreased by $3,738,000 in 2018, $32,132,000 in 2017 and $59,175,000 in 2016, respectively. (3) For certain retrospectively rated insurance polices and reinsurance agreements, changes in loss and loss expenses for prior years are offset by additional or return premiums. Also, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and note 13, Reserves for Losses and Loss Expenses included in our audited consolidated financial statements for further information regarding the changes in estimates for claims occurring in prior years. A reconciliation between the reserves as of December 31, 2018 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 $ 9,819,932 479,939 (50,988) 1,717,565 Gross reserves reported in the consolidated GAAP financial statements $ 11,966,448 _________________________ (1) For statutory purposes, the Company discounts its workers’ compensation reinsurance reserves at 3.3% as prescribed or 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. 12 19 1022849be 10K 1022849be_10K.indd 19 K 8.250 in x 12.000 in Select 04.17.2019 19:12PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 9 1 4/17/19 6:52 PM 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 they do business. Our U.S. insurance subsidiaries are subject to varying degrees of regulation and supervision in the jurisdictions in which 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 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, 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. Approximately half the 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. International standard setters, such as the International Association of Insurance Supervisors (“IAIS”), are developing capital standards for international groups, and U.S. insurance regulators are currently working on U.S. group capital standards for insurance groups. In 2019, the IAIS expects to conduct the final round of field testing of the insurance capital standard for internationally active insurance groups. The U.S. group capital calculation is expected to incorporate existing risk-based capital standards. The National Association of Insurance Commissioners (“NAIC”) intends to enter the next phase of development by field testing the calculation tool in early 2019 using year-end 2018 data. 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. Most states have adopted the NAIC's Risk Management and Own Risk and Solvency Assessment Model Act (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 13 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) Increase (decrease) in estimates for claims occurring in prior years (2) Loss reserve discount amortization 2018 2017 2016 $ 10,056,914 $ 9,590,265 $ 9,244,872 3,926,489 3,963,543 3,826,620 6,831 41,382 (5,165) 43,970 (29,904) 49,084 3,974,702 4,002,348 3,845,800 964,808 2,700,077 3,664,885 (117,848) 1,027,405 2,562,550 3,589,955 54,256 10,248,883 10,056,914 1,717,565 1,613,494 1,052,452 2,401,722 3,454,174 (46,233) 9,590,265 1,606,930 $ 11,966,448 $ 11,670,408 $ 11,197,195 Net payments for claims: Total 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 Net change in premiums and losses occurring in prior years: (Increase) 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 $ $ (6,831) $ 45,638 38,807 $ 5,165 32,162 37,327 $ $ 29,904 29,000 58,904 (1) Claims occurring during the current year are net of loss reserve discounts of $24,381,000, $22,064,000 and $18,929,000 in ____________________________________ 2018, 2017 and 2016, respectively. (2) The increase (decrease) in estimates for claims occurring in prior years is net of loss reserve discount. On an undiscounted basis, the estimates for claims occurring in prior years decreased by $3,738,000 in 2018, $32,132,000 in 2017 and (3) For certain retrospectively rated insurance polices and reinsurance agreements, changes in loss and loss expenses for prior $59,175,000 in 2016, respectively. years are offset by additional or return premiums. Also, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and note 13, Reserves for Losses and Loss Expenses included in our audited consolidated financial statements for further information regarding the changes in estimates for claims occurring in prior years. A reconciliation between the reserves as of December 31, 2018 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) Reserves for non-U.S. companies Loss reserve discounting (1) Ceded reserves _________________________ Net reserves reported in U.S. regulatory filings on a SAP basis $ 9,819,932 479,939 (50,988) 1,717,565 Gross reserves reported in the consolidated GAAP financial statements $ 11,966,448 (1) For statutory purposes, the Company discounts its workers’ compensation reinsurance reserves at 3.3% as prescribed or 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. 1022849be 10K 20 2 0 1 0 2 2 8 4 9 b e 1 0 K 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 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, 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. Approximately half the 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. International standard setters, such as the International Association of Insurance Supervisors (“IAIS”), are developing capital standards for international groups, and U.S. insurance regulators are currently working on U.S. group capital standards for insurance groups. In 2019, the IAIS expects to conduct the final round of field testing of the insurance capital standard for internationally active insurance groups. The U.S. group capital calculation is expected to incorporate existing risk-based capital standards. The National Association of Insurance Commissioners (“NAIC”) intends to enter the next phase of development by field testing the calculation tool in early 2019 using year-end 2018 data. 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. Most states have adopted the NAIC's Risk Management and Own Risk and Solvency Assessment Model Act (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 12 13 20 1022849be 10K 1022849be_10K.indd 20 K 8.250 in x 12.000 in Select 04.17.2019 19:12PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 0 2 4/17/19 6:52 PM 1022849be 10K 21 2 1 1 0 2 2 8 4 9 b e 1 0 K • provide a confidential high-level ORSA Summary Report annually to the Commissioner of Insurance of the State of Delaware (our lead state commissioner). Cybersecurity Regulations. New York’s cybersecurity regulation for financial services institutions that are authorized by the New York State Department of Financial Services ("Part 500"), including our insurance subsidiaries licensed in New York, became effective on March 1, 2017. The regulation, which is being implemented in stages, requires these entities to establish and maintain a cybersecurity program designed to protect consumers’ private data and the confidentiality, integrity and availability of the licensee’s information systems. On October 24, 2017, the NAIC adopted the Insurance Data Security Model Law (the “Cybersecurity Model Law”), which establishes standards for data security, the investigation of cybersecurity events involving unauthorized access to, or the misuse of, certain nonpublic information, and reporting to insurance commissioners. The Cybersecurity Model Law imposes significant new regulatory burdens intended to protect the confidentiality, integrity and availability of information systems. Its implementation will be based on adoption by state legislatures. To date, the Cybersecurity Model Law has only been adopted in South Carolina. Importantly, a drafting note in the Cybersecurity Model Law states that a licensee’s compliance with the New York cybersecurity regulation is intended to constitute compliance with the Cybersecurity Model Law. We made the initial certifications as required by Part 500 for licensed entities. Finally, privacy and data security legislation has become an issue in many states and localities over the last 12 months. For example, in 2018 California enacted the California Consumer Privacy Act (“CCPA”), which broadly regulates the sale of California residents’ personal information and grants California residents certain rights to, among other things, access and delete data about them in certain circumstances. CCPA goes into effect on January 1, 2020, and compliance with the CCPA may increase the cost of providing our services in California. Other states have considered - and may adopt - similar proposals. We cannot predict the impact, if any, that any proposed or future cybersecurity regulations 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, 2018. 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 insolvent 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 Post-Assessment Property and Liability Insurance Guaranty Association Model 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. 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. 14 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 82% 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, which began in 2017. The insurer's deductible is based on 20% of earned premium for the prior year for covered lines of commercial property and casualty insurance. Based on our 2018 earned premiums, our aggregate deductible under TRIPRA during 2019 will be approximately $969 million. The federal program will not pay losses for certified acts unless such losses exceed $180 million industry-wide for calendar year 2019. This threshold will increase to $200 million on a pro-rata basis over five years which began 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. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) 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. In May 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (“Economic Growth Act”) was signed into law. Among other things, the Economic Growth Act addresses the roles played by federal regulators at international insurance standard-setting forums. It directs the Director of the FIO and the Board of Governors of the Federal Reserve to support increased transparency at international standard-setting regulatory forums (e.g., the IAIS). These federal regulations also instruct the FIO and the Federal Reserve to achieve consensus positions with the states through the NAIC prior to taking a position on any insurance proposal by a global insurance regulatory forum. 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”). In January 2017, the U.S. Department of Treasury and the U.S. Trade Representative announced the completion of Covered Agreement negotiations with the European Union (“EU”). The Covered Agreement addresses three areas of prudential supervision: reinsurance, group supervision and the exchange of information between the U.S. and EU. In September 2017, the U.S. and EU signed the Covered Agreement. Each party has begun the process of completing its internal requirements and procedures (such as amending or promulgating appropriate statutes and regulations) in order for the Covered Agreement to enter into force. Under the Covered Agreement, reinsurance collateral requirements will no longer apply to qualifying EU reinsurers that sell reinsurance to the U.S. market, and U.S. reinsurers operating in the EU market will no longer be subject to “local presence” requirements. The Covered Agreement establishes group supervision practices that apply only to U.S. and EU insurance groups operating in both territories. For 15 K 0 1 e b 9 4 8 2 2 0 1 1 2 21 1022849be 10K 1022849be_10K.indd 21 4/17/19 6:52 PM K 8.250 in x 12.000 in Select 04.17.2019 19:12PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be 2 2 1 0 2 2 8 4 9 b e 1 0 K • provide a confidential high-level ORSA Summary Report annually to the Commissioner of Insurance of the State of Delaware (our lead state commissioner). Cybersecurity Regulations. New York’s cybersecurity regulation for financial services institutions that are authorized by the New York State Department of Financial Services ("Part 500"), including our insurance subsidiaries licensed in New York, became effective on March 1, 2017. The regulation, which is being implemented in stages, requires these entities to establish and maintain a cybersecurity program designed to protect consumers’ private data and the confidentiality, integrity and availability of the licensee’s information systems. On October 24, 2017, the NAIC adopted the Insurance Data Security Model Law (the “Cybersecurity Model Law”), which establishes standards for data security, the investigation of cybersecurity events involving unauthorized access to, or the misuse of, certain nonpublic information, and reporting to insurance commissioners. The Cybersecurity Model Law imposes significant new regulatory burdens intended to protect the confidentiality, integrity and availability of information systems. Its implementation will be based on adoption by state legislatures. To date, the Cybersecurity Model Law has only been adopted in South Carolina. Importantly, a drafting note in the Cybersecurity Model Law states that a licensee’s compliance with the New York cybersecurity regulation is intended to constitute compliance with the Cybersecurity Model Law. We made the initial certifications as required by Part 500 for licensed entities. Finally, privacy and data security legislation has become an issue in many states and localities over the last 12 months. For example, in 2018 California enacted the California Consumer Privacy Act (“CCPA”), which broadly regulates the sale of California residents’ personal information and grants California residents certain rights to, among other things, access and delete data about them in certain circumstances. CCPA goes into effect on January 1, 2020, and compliance with the CCPA may increase the cost of providing our services in California. Other states have considered - and may adopt - similar proposals. We cannot predict the impact, if any, that any proposed or future cybersecurity regulations 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, 2018. 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 insolvent 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 Post-Assessment Property and Liability Insurance Guaranty Association Model 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. Dividends. We receive funds from our insurance company subsidiaries in the form of dividends and management fees for 1022849be 10K 22 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 82% 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, which began in 2017. The insurer's deductible is based on 20% of earned premium for the prior year for covered lines of commercial property and casualty insurance. Based on our 2018 earned premiums, our aggregate deductible under TRIPRA during 2019 will be approximately $969 million. The federal program will not pay losses for certified acts unless such losses exceed $180 million industry-wide for calendar year 2019. This threshold will increase to $200 million on a pro-rata basis over five years which began 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. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) 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. In May 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (“Economic Growth Act”) was signed into law. Among other things, the Economic Growth Act addresses the roles played by federal regulators at international insurance standard-setting forums. It directs the Director of the FIO and the Board of Governors of the Federal Reserve to support increased transparency at international standard-setting regulatory forums (e.g., the IAIS). These federal regulations also instruct the FIO and the Federal Reserve to achieve consensus positions with the states through the NAIC prior to taking a position on any insurance proposal by a global insurance regulatory forum. 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”). In January 2017, the U.S. Department of Treasury and the U.S. Trade Representative announced the completion of Covered Agreement negotiations with the European Union (“EU”). certain management services. Annual dividends in excess of maximum amounts prescribed by state statutes may not be paid The Covered Agreement addresses three areas of prudential supervision: reinsurance, group supervision and the exchange 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. of information between the U.S. and EU. In September 2017, the U.S. and EU signed the Covered Agreement. Each party has begun the process of completing its internal requirements and procedures (such as amending or promulgating appropriate statutes and regulations) in order for the Covered Agreement to enter into force. Under the Covered Agreement, reinsurance collateral requirements will no longer apply to qualifying EU reinsurers that sell reinsurance to the U.S. market, and U.S. reinsurers operating in the EU market will no longer be subject to “local presence” requirements. The Covered Agreement establishes group supervision practices that apply only to U.S. and EU insurance groups operating in both territories. For 14 15 K 0 1 e b 9 4 8 2 2 0 1 2 2 22 1022849be 10K 1022849be_10K.indd 22 4/17/19 6:52 PM K 8.250 in x 12.000 in Select 04.17.2019 19:12PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be 1022849be 10K 23 2 3 1 0 2 2 8 4 9 b e 1 0 K instance, the Covered Agreement provides that U.S. insurance groups with operations in the EU will be supervised at the worldwide level only by U.S. insurance regulators, and precludes EU insurance supervisors from exercising solvency and capital requirements over the worldwide operations of U.S. insurers. U.S. states have five years from the date of signature to remove reinsurance collateral requirements for EU reinsurers that meet certain standards (such as minimum capital and solvency ratios and claims payment standards), while EU member states have two years to revise their “local presence” laws. Under the Dodd-Frank Act, the FIO has preemption authority over state insurance laws that conflict with the Covered Agreement. Accordingly, the NAIC is working on proposed amendments to the NAIC’s Credit for Reinsurance Model Law in order to satisfy the substantive and timing requirements of the Covered Agreement. Additionally, in late December 2018, the U.S. Department of the Treasury and the Office of the U.S. Trade Representative entered into a covered agreement with the U.K., which will extend the benefits of the Covered Agreement to the U.K. after Brexit. We cannot currently predict the impact of these changes to the law or whether any other covered agreements will be successfully adopted, and cannot currently estimate the impact of these changes to the law and any such adopted covered agreements on our business, financial condition or operating results. 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, 2018, there are no longer any non-bank financial firms, including insurance groups, designated as systemically significant. In November 2017, the U.S. Department of Treasury issued a report recommending certain changes to FSOC’s process for designating non-bank financial companies as systemically significant in order to make the designation process more rigorous, clear and transparent. To date, the FSOC has not updated its rules to reflect these recommendations. 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, its implementing regulations and potential amendments to the Dodd-Frank Act on the U.S. insurance industry are 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 important non-bank financial companies. International Regulation Our insurance subsidiaries based in the United Kingdom are regulated by the Prudential Regulation Authority ("PRA") and/or 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. Certain of our U.K. subsidiaries are authorized by the PRA to effect and carry out contracts of insurance (which includes reinsurance) in the U.K. and are regulated by both the PRA and the FCA for prudential and conduct of business matters respectively. Our Lloyd's managing agency is 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. Our insurance subsidiary based in Liechtenstein is regulated by the Financial Market Authority of Liechtenstein, which has regulatory tools analogous to those of the U.K. regulators noted above. Additionally, U.K. and Liechtenstein laws and regulations also impact us as “controllers” of our European-regulated subsidiaries, whereby we are required to notify the appropriate authorities about significant events relating to such 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 annual reports regarding their controllers. The PRA/FCA's Senior Managers and Certification Regime and analogous regulation in Liechtenstein further provide regulatory frameworks for standards of fitness and propriety, conduct and accountability for individuals in positions of responsibility at insurers. In addition, certain employees are individually registered at Lloyd's. An insurance company with authorization to write insurance business in the U.K. may currently provide cross-border services in the other member states of the European Economic Area (“EEA”), a group including member states of the European Union (“EU”) in addition to Switzerland, Norway, Liechtenstein and Iceland. These rights may be restricted or modified depending on the United Kingdom’s planned withdrawal from the EU and/or EEA-See below “Risks Relating To Our Business- The United Kingdom leaving the EU could adversely affect our business” for more information. 16 Our insurance business throughout the EU and EEA is subject to "Solvency II", an insurance regulatory regime governing, among other things, capital adequacy and risk management which 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 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. The Covered Agreement also prohibits any EU supervisor from exercising group-wide supervision at any level above the highest company organized in the country of that supervisor. We must also comply with the recently enacted EU General Data Protection Regulation (“GDPR”), which took effect in May 2018. The regulation’s goal is to impose increased individual rights and protections for all personal data located in or originating from the EU. GDPR is extraterritorial in that it applies to all businesses in the EU and any business outside the EU that process EU personal data of individuals in the EU. Moreover, there are significant fines associated with non-compliance. In particular, as the European member states reframe their national legislation to prepare for and harmonize with the GDPR, we will need to monitor our compliance with all relevant member states' laws and regulations, including where permitted derogations from the GDPR are introduced. The introduction of the GDPR, and any resultant changes in EU member states’ national laws and regulations, may increase our compliance obligations and may necessitate the review and implementation of policies and processes relating to our collection and use of data, and may require us to change our business practices regarding these matters. Our international operations are also subject to varying degrees of regulation in Mexico, Australia and Canada and in certain other countries in Europe, South America, and Southeast Asia. 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 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 operating units can gain a competitive advantage by responding quickly to changing market conditions. Our operating units establish their own pricing practices based upon a Company-wide philosophy to price products with the intent of making an underwriting profit. Competition for the Insurance business within the United States 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 operations compete internationally 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 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. Employees As of January 31, 2019, we employed 7,448 individuals. Of this number, our subsidiaries employed 7,310 persons and the remaining persons were employed at the parent company. K 0 1 e b 9 4 8 2 2 0 1 3 2 17 23 1022849be 10K 1022849be_10K.indd 23 4/17/19 6:52 PM K 8.250 in x 12.000 in Select 04.17.2019 19:12PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be 2 4 1 0 2 2 8 4 9 b e 1 0 K instance, the Covered Agreement provides that U.S. insurance groups with operations in the EU will be supervised at the worldwide level only by U.S. insurance regulators, and precludes EU insurance supervisors from exercising solvency and capital requirements over the worldwide operations of U.S. insurers. U.S. states have five years from the date of signature to remove reinsurance collateral requirements for EU reinsurers that meet certain standards (such as minimum capital and solvency ratios and claims payment standards), while EU member states have two years to revise their “local presence” laws. Under the Dodd-Frank Act, the FIO has preemption authority over state insurance laws that conflict with the Covered Agreement. Accordingly, the NAIC is working on proposed amendments to the NAIC’s Credit for Reinsurance Model Law in order to satisfy the substantive and timing requirements of the Covered Agreement. Additionally, in late December 2018, the U.S. Department of the Treasury and the Office of the U.S. Trade Representative entered into a covered agreement with the U.K., which will extend the benefits of the Covered Agreement to the U.K. after Brexit. We cannot currently predict the impact of these changes to the law or whether any other covered agreements will be successfully adopted, and cannot currently estimate the impact of these changes to the law and any such adopted covered agreements on our business, financial condition or operating results. 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, 2018, there are no longer any non-bank financial firms, including insurance groups, designated as systemically significant. In November 2017, the U.S. Department of Treasury issued a report recommending certain changes to FSOC’s process for designating non-bank financial companies as systemically significant in order to make the designation process more rigorous, clear and transparent. To date, the FSOC has not updated its rules to reflect these recommendations. 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, its implementing regulations and potential amendments to the Dodd-Frank Act on the U.S. insurance industry are 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 important non-bank financial companies. International Regulation Our insurance subsidiaries based in the United Kingdom are regulated by the Prudential Regulation Authority ("PRA") and/or 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. Certain of our U.K. subsidiaries are authorized by the PRA to effect and carry out contracts of insurance (which includes reinsurance) in the U.K. and are regulated by both the PRA and the FCA for prudential and conduct of business matters respectively. Our Lloyd's managing agency is 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. Our insurance subsidiary based in Liechtenstein is regulated by the Financial Market Authority of Liechtenstein, which has regulatory tools analogous to those of the U.K. regulators noted above. Additionally, U.K. and Liechtenstein laws and regulations also impact us as “controllers” of our European-regulated subsidiaries, whereby we are required to notify the appropriate authorities about significant events relating to such 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 annual reports regarding their controllers. The PRA/FCA's Senior Managers and Certification Regime and analogous regulation in Liechtenstein further provide regulatory frameworks for standards of fitness and propriety, conduct and accountability for individuals in positions of responsibility at insurers. In addition, certain employees are individually registered at Lloyd's. 1022849be 10K 24 Our insurance business throughout the EU and EEA is subject to "Solvency II", an insurance regulatory regime governing, among other things, capital adequacy and risk management which 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 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. The Covered Agreement also prohibits any EU supervisor from exercising group-wide supervision at any level above the highest company organized in the country of that supervisor. We must also comply with the recently enacted EU General Data Protection Regulation (“GDPR”), which took effect in May 2018. The regulation’s goal is to impose increased individual rights and protections for all personal data located in or originating from the EU. GDPR is extraterritorial in that it applies to all businesses in the EU and any business outside the EU that process EU personal data of individuals in the EU. Moreover, there are significant fines associated with non-compliance. In particular, as the European member states reframe their national legislation to prepare for and harmonize with the GDPR, we will need to monitor our compliance with all relevant member states' laws and regulations, including where permitted derogations from the GDPR are introduced. The introduction of the GDPR, and any resultant changes in EU member states’ national laws and regulations, may increase our compliance obligations and may necessitate the review and implementation of policies and processes relating to our collection and use of data, and may require us to change our business practices regarding these matters. Our international operations are also subject to varying degrees of regulation in Mexico, Australia and Canada and in certain other countries in Europe, South America, and Southeast Asia. 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 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 operating units can gain a competitive advantage by responding quickly to changing market conditions. Our operating units establish their own pricing practices based upon a Company-wide philosophy to price products with the intent of making an underwriting profit. Competition for the Insurance business within the United States 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 operations compete internationally 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 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. An insurance company with authorization to write insurance business in the U.K. may currently provide cross-border Employees services in the other member states of the European Economic Area (“EEA”), a group including member states of the European As of January 31, 2019, we employed 7,448 individuals. Of this number, our subsidiaries employed 7,310 persons and the Union (“EU”) in addition to Switzerland, Norway, Liechtenstein and Iceland. These rights may be restricted or modified remaining persons were employed at the parent company. depending on the United Kingdom’s planned withdrawal from the EU and/or EEA-See below “Risks Relating To Our Business- The United Kingdom leaving the EU could adversely affect our business” for more information. 16 17 24 1022849be 10K 1022849be_10K.indd 24 K 8.250 in x 12.000 in Select 04.17.2019 19:12PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 4 2 4/17/19 6:52 PM 1022849be 10K 25 2 5 1 0 2 2 8 4 9 b e 1 0 K Other Information about the Company's Business ITEM 1A. RISK FACTORS 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 operating units develop new coverages or enter lines of business to meet the needs of insureds. 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 Seasonal weather variations and other events affect the severity and frequency of losses sustained by the insurance and reinsurance operating units. Although the effect on our business of catastrophes such as tornadoes, hurricanes, hailstorms, wildfires, 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. currently consider immaterial. Risks Relating to Our Industry We have no customer that accounts for 10 percent or more of our consolidated revenues. industry. 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 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. 18 25 1022849be 10K 1022849be_10K.indd 25 K 8.250 in x 12.000 in Select 04.17.2019 19:12PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 5 2 4/17/19 6:52 PM Our results may fluctuate as a result of many factors, including cyclical changes in the insurance and reinsurance 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 significant competition in our business, as a result of new entrants and capital providers, as well as existing insurers seeking to gain market share. As a result, premium rates have increased at a modest pace for certain lines of business, while they have decreased in others. 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 or near 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 pressured 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 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. Over the past several years, increased supply has led to significant competition in our business. Our E&S 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 declined in more recent years before beginning to modestly accelerate again. 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, pressure on pricing and policy terms and conditions. In recent years, various types of 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 or access to third-party 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. In addition, technology companies or other third parties have created, and may in the future create, technology- enabled business models, processes, platforms or alternate distribution channels that may adversely impact our competitive position. This intense competition could cause the supply and/or demand for insurance or reinsurance to change, which affect our ability to price our products at attractive rates and retain existing business or write new products at adequate rates or on terms 19 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 operating units develop new coverages or enter 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 operating units. Although the effect on our business of catastrophes such as tornadoes, hurricanes, hailstorms, wildfires, 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. 2 6 1 0 2 2 8 4 9 b e 1 0 K 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 We have no customer that accounts for 10 percent or more of our consolidated revenues. industry. 1022849be 10K 26 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 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. 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 significant competition in our business, as a result of new entrants and capital providers, as well as existing insurers seeking to gain market share. As a result, premium rates have increased at a modest pace for certain lines of business, while they have decreased in others. 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 or near 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 pressured 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 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. Over the past several years, increased supply has led to significant competition in our business. Our E&S 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 declined in more recent years before beginning to modestly accelerate again. 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, pressure on pricing and policy terms and conditions. In recent years, various types of 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 or access to third-party 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. In addition, technology companies or other third parties have created, and may in the future create, technology- enabled business models, processes, platforms or alternate distribution channels that may adversely impact our competitive position. This intense competition could cause the supply and/or demand for insurance or reinsurance to change, which affect our ability to price our products at attractive rates and retain existing business or write new products at adequate rates or on terms 18 19 26 1022849be 10K 1022849be_10K.indd 26 4/17/19 6:52 PM K 8.250 in x 12.000 in Select 04.17.2019 19:12PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 6 2 1022849be 10K 27 2 7 1 0 2 2 8 4 9 b e 1 0 K 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. 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 Our actual claims losses may exceed our reserves for claims, which may require us to establish additional reserves. results of operations, liquidity and financial condition. Catastrophe losses have had a significant impact on our results. For Our gross reserves for losses and loss expenses were approximately $12.0 billion as of December 31, 2018. 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 2018 earned premiums, our aggregate deductible under TRIPRA during 2019 is approximately $969 million. TRIPRA is 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 a greater propensity to grant claimants more favorable amounts 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; social inflation trends, including higher and more frequent claims, more favorable judgments and legislated increases; • medical developments that link health issues to particular causes, resulting in liability claims; and • • claims relating to unanticipated consequences of current or new technologies, including cyber security related risks; and claims relating to potentially changing climate conditions; and increased claims due to third party funding of litigation. 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. 20 that we write. business. • • • • • • • K 0 1 e b 9 4 8 2 2 0 1 7 2 27 1022849be 10K 1022849be_10K.indd 27 4/17/19 6:52 PM K 8.250 in x 12.000 in Select 04.17.2019 19:12PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be example, catastrophe losses net of reinsurance recoveries were $105 million in 2018, $184 million in 2017, and $105 million in 2016. 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, cyber events 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 increase the frequency and severity of catastrophic events and thereby adversely affect our financial condition and results. Over the past several years, changing weather patterns and climatic conditions, such as global warming, appear to have contributed to the unpredictability, frequency and severity of natural disasters and created additional uncertainty as to future trends and exposures. There is a growing scientific consensus that global warming and other climate change are increasing the frequency and severity of catastrophic weather events, such as hurricanes, tornadoes, windstorms, floods and other natural disasters. Such changes make it more difficult for us to predict and model catastrophic events, reducing our ability to accurately price our exposure to such events and mitigate our risks. Any increase in the frequency or severity of natural disasters may adversely affect our financial condition and results. 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 82% 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 currently in effect through December 31, 2020. In addition, the coverage provided under TRIPRA does not apply to reinsurance We are subject to extensive governmental regulation, which increases our costs and could restrict the conduct of our 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: 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 business internationally is also generally subject to a similar regulatory scheme in each of the jurisdictions where we conduct operations outside the United States. 21 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 $12.0 billion as of December 31, 2018. 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 a greater propensity to grant claimants more favorable amounts and the impact of new theories of liability; claims-handling and other practices; increases; plaintiffs targeting property and casualty insurers, including us, in purported class action litigation relating to social inflation trends, including higher and more frequent claims, more favorable judgments and legislated • medical developments that link health issues to particular causes, resulting in liability claims; and claims relating to unanticipated consequences of current or new technologies, including cyber security related risks; and claims relating to potentially changing climate conditions; and increased claims due to third party funding of litigation. 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 • • • • • In addition, the potential passage of new legislation designed to expand the right to sue, to remove limitations on the policies are issued. 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. 2 8 1 0 2 2 8 4 9 b e 1 0 K 1022849be 10K 28 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 net of reinsurance recoveries were $105 million in 2018, $184 million in 2017, and $105 million in 2016. 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, cyber events 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 increase the frequency and severity of catastrophic events and thereby adversely affect our financial condition and results. Over the past several years, changing weather patterns and climatic conditions, such as global warming, appear to have contributed to the unpredictability, frequency and severity of natural disasters and created additional uncertainty as to future trends and exposures. There is a growing scientific consensus that global warming and other climate change are increasing the frequency and severity of catastrophic weather events, such as hurricanes, tornadoes, windstorms, floods and other natural disasters. Such changes make it more difficult for us to predict and model catastrophic events, reducing our ability to accurately price our exposure to such events and mitigate our risks. Any increase in the frequency or severity of natural disasters may adversely affect our financial condition and results. 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 82% 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 2018 earned premiums, our aggregate deductible under TRIPRA during 2019 is approximately $969 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: • • • • • • • 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. recovery, to extend the statutes of limitations or otherwise to repeal or weaken tort reforms could have an adverse impact on our State insurance departments conduct periodic examinations of the affairs of insurance companies and require the filing 20 21 of annual and other reports relating to the financial condition of insurance companies, holding company issues and other matters. Our Insurance business internationally is also generally subject to a similar regulatory scheme in each of the jurisdictions where we conduct operations outside the United States. 28 1022849be 10K 1022849be_10K.indd 28 K 8.250 in x 12.000 in Select 04.17.2019 19:12PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 8 2 4/17/19 6:53 PM 1022849be 10K 29 2 9 1 0 2 2 8 4 9 b e 1 0 K Federal financial services modernization legislation and legislative and regulatory initiatives taken or which may be taken in response to conditions in the financial markets, global insurance supervision and other factors may lead to additional federal regulation of the insurance industry in the coming years. The Dodd-Frank Act 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 insurer's material financial distress or failure. The potential impact of the Dodd-Frank Act, as amended by the recent Economic Growth 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. 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 various proposals relating to the creation of an optional federal charter and repeal of the insurance company antitrust exemption from the McCarran-Ferguson Act. We may be subject to potentially increased federal oversight as a financial institution. In addition, the current administration and the volatile political environment may increase the chance of other federal legislative and regulatory changes that could affect us in ways we cannot predict. With respect to international measures, Solvency II, the EU regime concerning the capital adequacy, risk management knowledgeable about our business. If the quality of our underwriting team and other personnel decreases, we may be unable to 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 as the Solvency II regime evolves over time, we may be required to utilize a significant amount of resources to ensure compliance. In addition, despite the 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 does not deem the insurance regulatory regimes of the jurisdictions outside the EU in which we have insurance or reinsurance companies domiciled to be "equivalent" to Solvency II. If our compliance with Solvency II or any other regulatory regime is challenged, we may be subject to monetary or other penalties. In addition, in order to ensure compliance with applicable regulatory requirements or as a result of any investigation, including remediation efforts, we could be required to incur significant expenses and undertake additional work, which in turn may divert resources from our business. 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. 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, Mexico, 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 assets are subject to fluctuations in non-U.S. securities and currency markets, counterparties is unable to honor its obligations, we are exposed to the credit risk of the banks that issued the letters of credit. 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. The United Kingdom leaving the EU could adversely affect our business. The 2016 U.K. referendum on its membership in the EU resulted in a majority of U.K. voters voting in favor of the U.K. Certain of our insurance company subsidiaries are rated by A.M. Best, Standard & Poor's and Moody's. Our ratings are subject leaving the EU (“Brexit”). On March 29, 2017, the U.K. government formally notified the European Council of the U.K.’s intention to withdraw from the EU. The member withdrawal provisions in the EU treaty provide that the U.K. and the EU will negotiate a withdrawal agreement by March 29, 2019 (unless such deadline is extended by unanimous vote of the EU member 22 29 1022849be 10K 1022849be_10K.indd 29 K 8.250 in x 12.000 in Select 04.17.2019 19:12PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 9 2 4/17/19 6:53 PM states). As part of the sequenced approach to the talks set out by the EU, sufficient progress needs to be made on the withdrawal arrangements before any talks on a future trade deal between the EU and the U.K. can begin. In November 2018, the U.K. and EU announced agreement on a draft text of a withdrawal agreement, which would include the application of transitional provisions under which EU law would broadly remain in force in the U.K. until the end of 2020. However, there is uncertainty as to whether the withdrawal agreement, which is subject to approval of the U.K. Parliament and has been rejected in its current form, will actually be entered. In the absence of such an agreement, there would be no transitional provisions and a "hard" Brexit would occur on March 29, 2019, unless the U.K. Government were to revoke its withdrawal notice or if the two year period to reach agreement were extended. Depending on the terms of the withdrawal, the U.K. could lose access to the single EU market and to free trade deals with several countries that already have agreements with the EU. Such a decline in trade could affect the attractiveness of the U.K. and impact our U.K. business. We also face risks associated with the potential uncertainty and consequences related to Brexit, including with respect to volatility in financial markets, exchange rates and interest rates. These uncertainties could increase the volatility of, or reduce, our investment results in particular periods or over time. Brexit could adversely affect European or worldwide political, regulatory, economic or market conditions and could contribute to instability in political institutions and regulatory agencies. Brexit could also lead to legal uncertainty and differing laws and regulations between the U.K. and the EU. Any of these potential effects, and others we cannot anticipate, could adversely affect our results of operations or financial condition. 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 President and CEO, Executive Chairman, senior executive officers, presidents of our operating units, experienced underwriters and other skilled employees who are maintain our current competitive position in the specialized markets in which we operate, and be unable to expand our operations into new products and 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, 2018, the amount due from our reinsurers was approximately $1,932 million, including amounts due from state funds and industry pools where it was intended that we would bear no risk. Certain of these amounts 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 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. to periodic review, and we cannot assure you that we will be able to retain our current or any future ratings. 23 3 0 1 0 2 2 8 4 9 b e 1 0 K Federal financial services modernization legislation and legislative and regulatory initiatives taken or which may be taken in response to conditions in the financial markets, global insurance supervision and other factors may lead to additional federal regulation of the insurance industry in the coming years. The Dodd-Frank Act 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 insurer's material financial distress or failure. The potential impact of the Dodd-Frank Act, as amended by the recent Economic Growth 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. 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 various proposals relating to the creation of an optional federal charter and repeal of the insurance company antitrust exemption from the McCarran-Ferguson Act. We may be subject to potentially increased federal oversight as a financial institution. In addition, the current administration and the volatile political environment may increase the chance of other federal legislative and regulatory changes that could affect us in ways we cannot predict. With respect to international measures, Solvency II, the EU regime 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 as the Solvency II regime evolves over time, we may be required to utilize a significant amount of resources to ensure compliance. In addition, despite the 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 does not deem the insurance regulatory regimes of the jurisdictions outside the EU in which we have insurance or reinsurance companies domiciled to be "equivalent" to Solvency II. If our compliance with Solvency II or any other regulatory regime is challenged, we may be subject to monetary or other penalties. In addition, in order to ensure compliance with applicable regulatory requirements or as a result of any investigation, including remediation efforts, we could be required to incur significant expenses and undertake additional work, which in turn may divert resources from our business. 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. Risks Relating to Our Business credit risk. Our international operations expose us to investment, political and economic risks, including foreign currency and Our expanding international operations in the United Kingdom, Continental Europe, South America, Canada, Mexico, 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 assets 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. The United Kingdom leaving the EU could adversely affect our business. The 2016 U.K. referendum on its membership in the EU resulted in a majority of U.K. voters voting in favor of the U.K. leaving the EU (“Brexit”). On March 29, 2017, the U.K. government formally notified the European Council of the U.K.’s intention to withdraw from the EU. The member withdrawal provisions in the EU treaty provide that the U.K. and the EU will negotiate a withdrawal agreement by March 29, 2019 (unless such deadline is extended by unanimous vote of the EU member 1022849be 10K 30 states). As part of the sequenced approach to the talks set out by the EU, sufficient progress needs to be made on the withdrawal arrangements before any talks on a future trade deal between the EU and the U.K. can begin. In November 2018, the U.K. and EU announced agreement on a draft text of a withdrawal agreement, which would include the application of transitional provisions under which EU law would broadly remain in force in the U.K. until the end of 2020. However, there is uncertainty as to whether the withdrawal agreement, which is subject to approval of the U.K. Parliament and has been rejected in its current form, will actually be entered. In the absence of such an agreement, there would be no transitional provisions and a "hard" Brexit would occur on March 29, 2019, unless the U.K. Government were to revoke its withdrawal notice or if the two year period to reach agreement were extended. Depending on the terms of the withdrawal, the U.K. could lose access to the single EU market and to free trade deals with several countries that already have agreements with the EU. Such a decline in trade could affect the attractiveness of the U.K. and impact our U.K. business. We also face risks associated with the potential uncertainty and consequences related to Brexit, including with respect to volatility in financial markets, exchange rates and interest rates. These uncertainties could increase the volatility of, or reduce, our investment results in particular periods or over time. Brexit could adversely affect European or worldwide political, regulatory, economic or market conditions and could contribute to instability in political institutions and regulatory agencies. Brexit could also lead to legal uncertainty and differing laws and regulations between the U.K. and the EU. Any of these potential effects, and others we cannot anticipate, could adversely affect our results of operations or financial condition. 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 President and CEO, Executive Chairman, 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 products and 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, 2018, the amount due from our reinsurers was approximately $1,932 million, including amounts due from state funds and industry pools where it was intended that we would bear no risk. Certain of these amounts 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. 22 23 K 0 1 e b 9 4 8 2 2 0 1 0 3 30 1022849be 10K 1022849be_10K.indd 30 4/17/19 6:53 PM K 8.250 in x 12.000 in Select 04.17.2019 19:12PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be 1022849be 10K 31 3 1 1 0 2 2 8 4 9 b e 1 0 K If our ratings are reduced from their current levels by A.M. Best, Standard & Poor's or Moody's, our competitive position vendors, could result in significant monetary and reputational damages. These increased risks, and expanding regulatory 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. 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. standards are not effective. 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 repealing the corporate alternative minimum tax, limiting the deductibility of business interest expense, introducing a base 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. Our electronic transmission of personal, confidential and proprietary information to third parties with whom we have business relationships and 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, our vendors and third parties could still suffer data breaches that could result in the exposure of sensitive data and the infiltration of our computer systems. Our failure to protect sensitive personal and our proprietary information, whether owing to breaches of our own systems or those of our 24 K 0 1 e b 9 4 8 2 2 0 1 1 3 31 1022849be 10K 1022849be_10K.indd 31 4/17/19 6:53 PM K 8.250 in x 12.000 in Select 04.17.2019 19:12PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be 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. We could be adversely affected if our controls to ensure compliance with guidelines, policies and legal and regulatory 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. We could be adversely affected by recent and future changes in U.S. Federal income tax laws. Tax legislation commonly referred to as the Tax Cuts and Jobs Act, which was signed into law on December 22, 2017, fundamentally overhauled the U.S. tax system by, among other things, reducing the U.S. corporate income tax rate to 21%, erosion and anti-avoidance tax aimed at cross-border deductible payments to related foreign persons, moving closer to a territorial system of taxing earnings generated through foreign subsidiaries and imposing a one-time deemed repatriation tax on certain post-1986 undistributed earnings of foreign subsidiaries. In the context of the taxation of U.S. property/casualty insurance companies such as the Company, the Act also modifies the loss reserve discounting rules and the proration rules that apply to reduce reserve deductions to reflect the lower corporate income tax rate. Although we believe that the changes introduced by the Act should generally benefit us, we are unable to predict the ultimate impact of the Act and its implementing regulations. In addition, it is possible that other legislation could be introduced and enacted by the current Congress or future Congresses that could have an adverse impact on us. New regulations or pronouncements interpreting or clarifying provisions of the Act may be forthcoming. We cannot predict if, when or in what form such regulations or pronouncements may be provided, whether such guidance will have a retroactive effect or their potential impact on us. 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, 2018, our investment in fixed maturity securities was approximately $13.6 billion, or 73.5% 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 (5.2%); state and municipal securities (28.9%); corporate securities (30.3%); asset-backed securities (17.9%); mortgage-backed securities (11.8%) and foreign government (5.9%). 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 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. Many states and municipalities operate 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 25 3 2 1 0 2 2 8 4 9 b e 1 0 K 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. 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. Our electronic transmission of personal, confidential and proprietary information to third parties with whom we have business relationships and 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, our vendors and third parties could still suffer data breaches that could result in the exposure of sensitive data and the infiltration of our computer systems. Our failure to protect sensitive personal and our proprietary information, whether owing to breaches of our own systems or those of our 1022849be 10K 32 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. 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. We could be adversely affected by recent and future changes in U.S. Federal income tax laws. Tax legislation commonly referred to as the Tax Cuts and Jobs Act, which was signed into law on December 22, 2017, fundamentally overhauled the U.S. tax system by, among other things, reducing the U.S. corporate income tax rate to 21%, repealing the corporate alternative minimum tax, limiting the deductibility of business interest expense, introducing a base erosion and anti-avoidance tax aimed at cross-border deductible payments to related foreign persons, moving closer to a territorial system of taxing earnings generated through foreign subsidiaries and imposing a one-time deemed repatriation tax on certain post-1986 undistributed earnings of foreign subsidiaries. In the context of the taxation of U.S. property/casualty insurance companies such as the Company, the Act also modifies the loss reserve discounting rules and the proration rules that apply to reduce reserve deductions to reflect the lower corporate income tax rate. Although we believe that the changes introduced by the Act should generally benefit us, we are unable to predict the ultimate impact of the Act and its implementing regulations. In addition, it is possible that other legislation could be introduced and enacted by the current Congress or future Congresses that could have an adverse impact on us. New regulations or pronouncements interpreting or clarifying provisions of the Act may be forthcoming. We cannot predict if, when or in what form such regulations or pronouncements may be provided, whether such guidance will have a retroactive effect or their potential impact on us. 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, 2018, our investment in fixed maturity securities was approximately $13.6 billion, or 73.5% 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 (5.2%); state and municipal securities (28.9%); corporate securities (30.3%); asset-backed securities (17.9%); mortgage-backed securities (11.8%) and foreign government (5.9%). 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 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. Many states and municipalities operate 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 24 25 K 0 1 e b 9 4 8 2 2 0 1 2 3 32 1022849be 10K 1022849be_10K.indd 32 4/17/19 6:53 PM K 8.250 in x 12.000 in Select 04.17.2019 19:12PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be 3 3 1 0 2 2 8 4 9 b e 1 0 K 1022849be 10K 33 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 continued low inflation, actions by the Federal Reserve, 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, liquidity and financial condition. 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, 2018, our investment in these assets was approximately $4.1 billion, or 22.1%, of our investment portfolio, including cash and cash equivalents. Merger and arbitrage trading securities were $452.6 million, or 2.4% of our investment portfolio, including cash and cash equivalents at December 31, 2018. 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 $2.7 billion, or 14.4% of our investment portfolio, including cash and cash equivalents, at December 31, 2018. We also invest in aviation and rail equipment funds, credit-related funds 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 2019, the maximum amount of dividends that can be paid without regulatory approval is approximately $1.1 billion. 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 or any parent company of such insurer. Indirect ownership includes ownership of the shares of our common stock. Thus, the insurance regulatory authorities of the states in which our insurance subsidiaries 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. 26 33 1022849be 10K 1022849be_10K.indd 33 4/17/19 6:53 PM K 8.250 in x 12.000 in Select 04.17.2019 19:12PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be These provisions can also 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. • • • 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: created directorships; our classified board of directors and the ability of our board to increase its size and to appoint directors to fill newly 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 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 2,921,406 were leased. W. R. Berkley and its subsidiaries own or lease office buildings or office space suitable to conduct their operations. At December 31, 2018, the Company had aggregate office space of 4,074,969 square feet, of which 1,153,563 were owned and Rental expense for the Company's operations was approximately $45,778,000, $52,925,000 and $47,453,000 for 2018, 2017 and 2016, respectively. Future minimum lease payments, without provision for sublease income, are $46,592,000 in 2019, $43,504,000 in 2020 and $180,126,000 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. K 0 1 e b 9 4 8 2 2 0 1 3 3 27 3 4 1 0 2 2 8 4 9 b e 1 0 K 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 continued low inflation, actions by the Federal Reserve, 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, liquidity and financial condition. 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, 2018, our investment in these assets was approximately $4.1 billion, or 22.1%, of our investment portfolio, including cash and cash equivalents. Merger and arbitrage trading securities were $452.6 million, or 2.4% of our investment portfolio, including cash and cash equivalents at December 31, 2018. 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 $2.7 billion, or 14.4% of our investment portfolio, including cash and cash equivalents, at December 31, 2018. We also invest in aviation and rail equipment funds, credit-related funds 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. markets and the global economy. These investments are subject to significant volatility as a result of the conditions in the financial and commodity 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 2019, the maximum amount of dividends that can be paid without regulatory approval is approximately $1.1 billion. 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 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 shares. 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 or any parent company of such insurer. Indirect ownership includes ownership of the shares of our common stock. Thus, the insurance regulatory authorities of the states in which our insurance subsidiaries 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. 1022849be 10K 34 These provisions can also 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; • • 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, 2018, the Company had aggregate office space of 4,074,969 square feet, of which 1,153,563 were owned and 2,921,406 were leased. Rental expense for the Company's operations was approximately $45,778,000, $52,925,000 and $47,453,000 for 2018, 2017 and 2016, respectively. Future minimum lease payments, without provision for sublease income, are $46,592,000 in 2019, $43,504,000 in 2020 and $180,126,000 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. 26 27 34 1022849be 10K 1022849be_10K.indd 34 K 8.250 in x 12.000 in Select 04.17.2019 19:12PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 4 3 4/17/19 6:53 PM 1022849be 10K 35 3 5 1 0 2 2 8 4 9 b e 1 0 K PART II The chart below shows a comparison of 5 year cumulative total return. 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”. In 2018, the Board declared regular quarterly cash dividends of $0.14 per share in first quarter, and $0.15 per share in each of the remaining three quarters, plus three additional special dividends of $0.50 per share each. Subject to availability, the Board currently expects to continue such regular quarterly cash dividends. The approximate number of record holders of the common stock on February 19, 2019 was 323. Comparison of 5 Year Cumulative Total Return Assumes initial investment of $100 on January 1, 2014, with dividends reinvested. The S&P 500® Property and Casualty Insurance Index consists of Allstate Corporation, Chubb, Ltd., Cincinnati Financial Corporation, Progressive Corporation, and The Travelers Companies, Inc. W. R. Berkley Corporation S&P 500 Index - Total Returns 2013 2014 2015 2016 2017 2018 Cum $ 100.00 121.61 131.05 163.48 180.12 188.43 Cum $ 100.00 113.69 115.26 129.05 157.22 150.32 S&P 500 Property and Casualty Insurance Index Cum $ 100.00 115.74 126.77 146.68 179.52 171.10 Set forth below is a summary of the shares repurchased by the Company during the fourth quarter of 2018 and the remaining number of shares authorized for purchase by the Company during such period. October 2018 November 2018 December 2018 Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares that may yet be Purchased Under the Plans or Programs — — 256,600 — — 69.96 — — 256,600 9,167,997 9,167,997 8,911,397 29 28 35 1022849be 10K 1022849be_10K.indd 35 K 8.250 in x 12.000 in Select 04.17.2019 19:12PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 5 3 4/17/19 6:53 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”. In 2018, the Board declared regular quarterly cash dividends of $0.14 per share in first quarter, and $0.15 per share in each of the remaining three quarters, plus three additional special dividends of $0.50 per share each. Subject to availability, the Board currently expects to continue such regular quarterly cash dividends. The approximate number of record holders of the common stock on February 19, 2019 was 323. 1022849be 10K 36 3 6 1 0 2 2 8 4 9 b e 1 0 K The chart below shows a comparison of 5 year cumulative total return. Comparison of 5 Year Cumulative Total Return Assumes initial investment of $100 on January 1, 2014, with dividends reinvested. The S&P 500® Property and Casualty Insurance Index consists of Allstate Corporation, Chubb, Ltd., Cincinnati Financial Corporation, Progressive Corporation, and The Travelers Companies, Inc. W. R. Berkley Corporation S&P 500 Index - Total Returns 2013 2014 2015 2016 2017 2018 Cum $ 100.00 121.61 131.05 163.48 180.12 188.43 Cum $ 100.00 113.69 115.26 129.05 157.22 150.32 S&P 500 Property and Casualty Insurance Index Cum $ 100.00 115.74 126.77 146.68 179.52 171.10 Set forth below is a summary of the shares repurchased by the Company during the fourth quarter of 2018 and the remaining number of shares authorized for purchase by the Company during such period. October 2018 November 2018 December 2018 Total Number of Shares Purchased — — 256,600 Average Price Paid per Share — — 69.96 Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares that may yet be Purchased Under the Plans or Programs — — 256,600 9,167,997 9,167,997 8,911,397 28 29 36 1022849be 10K 1022849be_10K.indd 36 K 8.250 in x 12.000 in Select 04.17.2019 19:12PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 6 3 4/17/19 6:53 PM 3 7 1 0 2 2 8 4 9 b e 1 0 K ITEM 6. SELECTED FINANCIAL DATA ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 1022849be 10K 37 (In thousands, except per share data) Net premiums written Net premiums earned Net investment income Net realized and unrealized gains on investments Revenues from non-insurance businesses Insurance service fees 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: Year Ended December 31, $ $ 2018 6,433,227 6,371,505 674,235 2017 6,260,508 6,311,419 575,788 154,488 372,985 117,757 335,858 326,165 134,729 2016 $ 6,423,913 $ 6,293,348 564,163 267,005 390,348 138,944 $ 2015 6,189,515 6,040,609 512,645 2014 5,996,947 5,744,418 600,885 92,324 421,102 139,440 254,852 410,022 117,443 7,691,651 7,684,764 7,654,184 7,206,457 7,128,928 157,185 812,094 (163,028) (8,317) 640,749 5.06 5.00 44.57 2.09 147,297 772,770 (219,433) (4,243) 549,094 4.40 4.26 44.53 1.55 140,896 896,438 (292,953) (1,569) 601,916 4.91 4.68 41.65 1.51 130,946 732,030 (227,923) (413) 503,694 4.06 3.87 37.31 0.47 128,174 952,196 (302,593) (719) 648,884 5.07 4.86 36.21 1.43 Basic Diluted Investments Total assets 126,699 128,264 124,843 129,018 122,651 128,553 124,040 130,189 127,874 133,652 $ 17,723,089 $ 17,450,508 $ 16,649,792 $ 15,351,467 $ 15,591,824 24,895,977 24,299,917 23,364,844 21,730,967 21,716,691 Reserves for losses and loss expenses 11,966,448 11,670,408 11,197,195 10,669,150 10,369,701 Senior notes and other debt Subordinated debentures 1,882,028 1,769,052 1,760,595 907,491 728,218 727,630 Common stockholders’ equity 5,437,851 5,411,344 5,047,208 1,844,621 340,320 4,600,246 2,115,527 340,060 4,589,945 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 worldwide in two business segments of the property and casualty business: Insurance and Reinsurance. 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. The Company's 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, cyber security, energy and agriculture, and on growing international markets, including the Asia-Pacific region, South America and Mexico. 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 capital employed in the industry, and the industry’s willingness to deploy that capital. 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 have been at low levels for an extended period, although recently interest rates have increased. The Company also 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. Through the second quarter of 2018, the Company used the Argentine peso (“ARS”) as its functional currency for its business in Argentina and translated the financial statements of its Argentine operations into U.S. dollars ("USD"). Exchange rate movements through the second quarter of 2018 between the ARS and USD had been recorded as a currency translation gain or loss, which is a component of AOCI. Based on recent ARS inflation rate movements, the Company concluded that, effective July 1, 2018, the Argentine economy is considered highly inflationary under GAAP. This conclusion required the Company to change the functional currency of its Argentine operations to USD commencing July 1, 2018, and accordingly, the Company recognized foreign exchange gains and losses in earnings for any transactions in the Argentine operations that are not USD denominated. and financial position. issued on April 2, 2019. Effective January 1, 2018, the Company adopted new accounting standards including ASU 2014-09, Revenue from Customers, ASU 2016-01, Financial Instruments and ASU 2018-02, Reporting Comprehensive Income. Refer to Note 1 in the financial statements for further information on the accounting guidance and impact of its adoption on the Company's results On February 21, 2019, the Company announced that its Board of Directors approved a 3-for-2 common stock split to be paid in the form of a stock dividend to holders of record on March 14, 2019. The additional shares are expected to be 30 37 1022849be 10K 1022849be_10K.indd 37 K 8.250 in x 12.000 in Select 04.17.2019 19:12PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 7 3 4/17/19 6:53 PM 31 3 8 1 0 2 2 8 4 9 b e 1 0 K ITEM 6. SELECTED FINANCIAL DATA (In thousands, except per share data) 2018 2017 2016 2015 2014 Net premiums written Net premiums earned Net investment income $ 6,433,227 $ 6,260,508 $ 6,423,913 $ 6,189,515 $ 5,996,947 6,371,505 6,311,419 6,293,348 674,235 575,788 564,163 6,040,609 512,645 5,744,418 600,885 Year Ended December 31, Net realized and unrealized gains on investments Revenues from non-insurance businesses Insurance service fees 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: 7,691,651 7,684,764 7,654,184 7,206,457 7,128,928 154,488 372,985 117,757 157,185 812,094 (163,028) (8,317) 640,749 5.06 5.00 44.57 2.09 335,858 326,165 134,729 147,297 772,770 267,005 390,348 138,944 140,896 896,438 92,324 421,102 139,440 130,946 732,030 254,852 410,022 117,443 128,174 952,196 (219,433) (292,953) (227,923) (302,593) (4,243) 549,094 (1,569) 601,916 (413) 503,694 (719) 648,884 4.40 4.26 44.53 1.55 4.91 4.68 41.65 1.51 4.06 3.87 37.31 0.47 5.07 4.86 36.21 1.43 Basic Diluted Investments Total assets 126,699 128,264 124,843 129,018 122,651 128,553 124,040 130,189 127,874 133,652 $ 17,723,089 $ 17,450,508 $ 16,649,792 $ 15,351,467 $ 15,591,824 24,895,977 24,299,917 23,364,844 21,730,967 21,716,691 Reserves for losses and loss expenses 11,966,448 11,670,408 11,197,195 10,669,150 10,369,701 Senior notes and other debt Subordinated debentures 1,882,028 1,769,052 1,760,595 907,491 728,218 727,630 Common stockholders’ equity 5,437,851 5,411,344 5,047,208 1,844,621 340,320 4,600,246 2,115,527 340,060 4,589,945 1022849be 10K 38 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 worldwide in two business segments of the property and casualty business: Insurance and Reinsurance. 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. The Company's 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, cyber security, energy and agriculture, and on growing international markets, including the Asia-Pacific region, South America and Mexico. 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 capital employed in the industry, and the industry’s willingness to deploy that capital. 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 have been at low levels for an extended period, although recently interest rates have increased. The Company also 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. Through the second quarter of 2018, the Company used the Argentine peso (“ARS”) as its functional currency for its business in Argentina and translated the financial statements of its Argentine operations into U.S. dollars ("USD"). Exchange rate movements through the second quarter of 2018 between the ARS and USD had been recorded as a currency translation gain or loss, which is a component of AOCI. Based on recent ARS inflation rate movements, the Company concluded that, effective July 1, 2018, the Argentine economy is considered highly inflationary under GAAP. This conclusion required the Company to change the functional currency of its Argentine operations to USD commencing July 1, 2018, and accordingly, the Company recognized foreign exchange gains and losses in earnings for any transactions in the Argentine operations that are not USD denominated. Effective January 1, 2018, the Company adopted new accounting standards including ASU 2014-09, Revenue from Customers, ASU 2016-01, Financial Instruments and ASU 2018-02, Reporting Comprehensive Income. Refer to Note 1 in the financial statements for further information on the accounting guidance and impact of its adoption on the Company's results and financial position. On February 21, 2019, the Company announced that its Board of Directors approved a 3-for-2 common stock split to be paid in the form of a stock dividend to holders of record on March 14, 2019. The additional shares are expected to be issued on April 2, 2019. 30 31 38 1022849be 10K 1022849be_10K.indd 38 K 8.250 in x 12.000 in Select 04.17.2019 19:12PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 8 3 4/17/19 6:53 PM 1022849be 10K 39 3 9 1 0 2 2 8 4 9 b e 1 0 K 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 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 2018: (In thousands) Severity (+/-) 1% 5% 10% Frequency (+/-) 1% 5% 10% $ 78,922 $ 237,553 $ 237,553 435,840 402,465 608,606 435,840 608,606 824,563 Our net reserves for losses and loss expenses of approximately $10.2 billion as of December 31, 2018 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 $1.6 billion, or 15%, of the Company’s net loss reserves as of December 31, 2018 relate to the Reinsurance 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. K 0 1 e b 9 4 8 2 2 0 1 9 3 33 39 1022849be 10K 1022849be_10K.indd 39 4/17/19 6:53 PM K 8.250 in x 12.000 in Select 04.17.2019 19:12PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be 4 0 1 0 2 2 8 4 9 b e 1 0 K 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. 1022849be 10K 40 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 2018: (In thousands) Severity (+/-) 1% 5% 10% 1% Frequency (+/-) 5% $ 78,922 $ 237,553 $ 237,553 435,840 402,465 608,606 10% 435,840 608,606 824,563 Our net reserves for losses and loss expenses of approximately $10.2 billion as of December 31, 2018 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 $1.6 billion, or 15%, of the Company’s net loss reserves as of December 31, 2018 relate to the Reinsurance 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. 32 33 40 1022849be 10K 1022849be_10K.indd 40 K 8.250 in x 12.000 in Select 04.17.2019 19:12PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 0 4 4/17/19 6:53 PM 1022849be 10K 41 4 1 1 0 2 2 8 4 9 b e 1 0 K 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. 34 41 1022849be 10K 1022849be_10K.indd 41 K 8.250 in x 12.000 in Select 04.17.2019 19:12PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 1 4 4/17/19 6:53 PM Following is a summary of the Company’s reserves for losses and loss expenses by business segment as of December 31, Following is a summary of the Company’s net reserves for losses and loss expenses by major line of business as of 2018 and 2017: (In thousands) Insurance Reinsurance Net reserves for losses and loss expenses Ceded reserves for losses and loss expenses Gross reserves for losses and loss expenses December 31, 2018 and 2017: (In thousands) December 31, 2018 Other liability Workers’ compensation (1) Professional liability Commercial automobile Short-tail lines (2) Total Insurance Reinsurance (1) Total December 31, 2017 Other liability Workers’ compensation (1) Professional liability Commercial automobile Short-tail lines (2) Total Insurance Reinsurance (1) Total ____________________ 2018 2017 $ 8,675,042 $ 8,341,622 1,573,841 10,248,883 1,717,565 1,715,292 10,056,914 1,613,494 $ 11,966,448 $ 11,670,408 Reported Case Reserves Incurred But Not Reported Total $ 1,307,068 $ 2,359,978 $ 1,570,200 1,262,627 $ $ $ $ $ $ 306,018 365,253 294,122 3,842,661 872,068 4,714,729 1,261,957 1,543,379 295,269 364,900 297,777 3,763,282 919,497 659,595 290,218 259,963 4,832,381 701,773 5,534,154 2,189,596 1,242,501 618,107 269,942 258,194 4,578,340 795,795 3,667,046 2,832,827 965,613 655,471 554,085 8,675,042 1,573,841 10,248,883 3,451,553 2,785,880 913,376 634,842 555,971 8,341,622 1,715,292 $ 4,682,779 $ 5,374,135 $ 10,056,914 (1) Reserves for excess and assumed workers’ compensation business are net of an aggregate net discount of $563 million and $591 million as of December 31, 2018 and 2017, 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. 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 last three years ended December 31, are as follows: (In thousands) (Increase) decrease in prior year loss reserves Increase in prior year earned premiums Net favorable prior year development 2018 2017 2016 $ $ (6,831) $ 5,165 45,638 32,162 38,807 $ 37,327 $ $ 29,904 29,000 58,904 35 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. 4 2 1 0 2 2 8 4 9 b e 1 0 K 1022849be 10K 42 Following is a summary of the Company’s reserves for losses and loss expenses by business segment as of December 31, 2018 and 2017: (In thousands) Insurance Reinsurance Net reserves for losses and loss expenses Ceded reserves for losses and loss expenses Gross reserves for losses and loss expenses 2018 2017 $ 8,675,042 $ 8,341,622 1,573,841 10,248,883 1,717,565 1,715,292 10,056,914 1,613,494 $ 11,966,448 $ 11,670,408 Following is a summary of the Company’s net reserves for losses and loss expenses by major line of business as of December 31, 2018 and 2017: (In thousands) December 31, 2018 Other liability Workers’ compensation (1) Professional liability Commercial automobile Short-tail lines (2) Total Insurance Reinsurance (1) Total December 31, 2017 Other liability Workers’ compensation (1) Professional liability Commercial automobile Short-tail lines (2) Total Insurance Reinsurance (1) Total Reported Case Reserves Incurred But Not Reported Total $ $ $ $ 1,307,068 1,570,200 306,018 365,253 294,122 3,842,661 872,068 4,714,729 1,261,957 1,543,379 295,269 364,900 297,777 3,763,282 919,497 4,682,779 $ $ $ $ 2,359,978 1,262,627 659,595 290,218 259,963 4,832,381 701,773 5,534,154 2,189,596 1,242,501 618,107 269,942 258,194 4,578,340 795,795 5,374,135 $ $ $ $ 3,667,046 2,832,827 965,613 655,471 554,085 8,675,042 1,573,841 10,248,883 3,451,553 2,785,880 913,376 634,842 555,971 8,341,622 1,715,292 10,056,914 ____________________ (1) Reserves for excess and assumed workers’ compensation business are net of an aggregate net discount of $563 million and $591 million as of December 31, 2018 and 2017, 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. 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 last three years ended December 31, are as follows: (In thousands) (Increase) decrease in prior year loss reserves Increase in prior year earned premiums Net favorable prior year development 2018 2017 2016 $ $ (6,831) $ 45,638 5,165 32,162 38,807 $ 37,327 $ $ 29,904 29,000 58,904 34 35 K 0 1 e b 9 4 8 2 2 0 1 2 4 42 1022849be 10K 1022849be_10K.indd 42 4/17/19 6:53 PM K 8.250 in x 12.000 in Select 04.17.2019 19:12PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be 1022849be 10K 43 4 3 1 0 2 2 8 4 9 b e 1 0 K Favorable prior year development (net of additional and return premiums) was $39 million in 2018. Insurance - Reserves for the Insurance segment developed favorably by $43 million in 2018. The favorable development was primarily attributable to workers' compensation business, partially offset by unfavorable development for professional liability business. For medical professional liability business, unfavorable development was primarily related to a class of business that has been discontinued. The adverse development for that business stemmed mainly from accident years 2010 through 2015. Reinsurance - Reserves for the Reinsurance segment developed favorably by $6 million in 2016. The favorable development was primarily related to direct facultative reinsurance business and to accident years 2008 through 2014. For workers' compensation, the favorable development was spread across many accident years, including 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 $1,793 million and $1,855 million at December 31, 2018 and December 31, 2017, respectively. The aggregate net discount for those reserves, after reflecting the effects of ceded reinsurance, was $563 million and $591 million at December 31, 2018 and 2017, respectively. At December 31, 2018, discount rates by year ranged from 2.0% to 6.5%, with a weighted average discount rate of 3.8%. Substantially all discounted workers’ compensation reserves (97% of total discounted reserves at December 31, 2018) are excess workers’ compensation reserves. In order to properly match loss expenses with income earned on investment securities supporting the liabilities, reserves for excess workers’ compensation business are discounted using risk-free discount rates determined by reference to the U.S. Treasury yield curve. These rates are determined annually based on the weighted average rate for the period. Once established, no adjustments are made to the discount rate for that period, and any increases or decreases in loss reserves in subsequent years are discounted at the same rate, without regard to when any such adjustments are recognized. The expected loss and loss expense payout patterns subject to discounting are derived from the Company’s loss payout experience. The Company also discounts reserves for certain other long-duration workers’ compensation reserves (representing approximately 3% of total discounted reserves at December 31, 2018), including reserves for quota share reinsurance and reserves related to losses regarding occupational lung disease. These reserves are discounted at statutory rates prescribed or permitted by the Department of Insurance of the State of Delaware. 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 $41 million and $56 million at December 31, 2018 and 2017, 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. The Company classifies its fixed maturity securities by credit rating, primarily based on ratings assigned by credit rating agencies. For purposes of classifying securities with different ratings, the Company uses the average of the credit ratings assigned, unless in limited situations the Company's own analysis indicates an internal 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. 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 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. but was most significant in accident years 2015 through 2017. The favorable workers' compensation development reflects a continuation during 2018 of the benign loss cost trends experienced during recent years, particularly the favorable claim frequency trends (i.e., number of reported claims per unit of exposure). The long term trend of declining workers' compensation frequency can be attributable to improved workplace safety. Loss severity trends were also aided by our continued investment in claims handling initiatives such as medical case management services and vendor savings through usage of preferred provider networks. Reported workers' compensation losses in 2018 continued to be better than our expectations at most of our operating units, and were below the assumptions underlying our previous reserve estimates. For professional liability business, adverse development was primarily related to unexpected large directors and officers (“D&O”) liability losses at one of our U.S. operating units, as well as lawyers professional liability losses at another operating unit. The adverse development stemmed primarily from accident years 2015 and 2016, and was driven by a higher frequency of large losses than we had experienced in previous years. Reinsurance - Reserves for the Reinsurance segment developed unfavorably by $4 million in 2018. The unfavorable development was primarily due to U.S. casualty facultative business from accident years 2009 and prior related to construction projects, and was largely offset by favorable development on assumed excess of loss workers' compensation business. Favorable prior year development (net of additional and return premiums) was $37 million in 2017. Insurance - Reserves for the Insurance segment developed favorably by $68 million in 2017. The favorable development was primarily attributable to workers' compensation business, and was partially offset by unfavorable development for professional liability business. For workers' compensation, the favorable development was related to both primary and excess business and was spread across many accident years, including those prior to 2008, but was most significant in accident years 2014 through 2016. The favorable workers' compensation development reflects a continuation during 2017 of the generally benign loss cost trends experienced in recent years, particularly the favorable claim frequency trends (i.e. number of reported claims per unit of exposure). Reported workers' compensation losses in 2017 continued to be better than our expectations at most of our operating units, and were below the assumptions underlying our previous reserve estimates. The favorable severity trends were also impacted by our continued investment in medical case management services and the higher usage of preferred provider networks. The long term trend of declining workers' compensation frequency can be attributed to improved workplace safety. For professional liability business, adverse development was primarily related to unexpected large D&O liability losses at one of our U.S. operating units, and large professional indemnity and D&O losses in the U.K. The adverse development stemmed mainly from accident years 2013 through 2016 in the U.S. and 2011 through 2016 in the U.K. Reinsurance - Reserves for the Reinsurance segment developed unfavorably by $31 million in 2017. This adverse development was due to reserve strengthening associated with claims impacted by the change in the Ogden discount rate in the U.K., as well as adverse development on the U.S. facultative casualty excess of loss business. The Ogden rate is the discount rate used to calculate lump-sum bodily injury payouts in the U.K., and was reduced by the U.K. Ministry of Justice from +2.5% to -0.75% in 2017; the adverse development mostly related to U.K. motor bodily injury claims which we reinsured on an excess of loss basis in accident years 2012 through 2016. The adverse development on U.S. facultative casualty business was due to construction related risks in accident years 2008 and prior. Favorable prior year development (net of additional and return premiums) was $59 million in 2016. security). Insurance - Reserves for the Insurance segment developed favorably by $53 million in 2016. The favorable development was primarily related to workers' compensation business, and was partially offset by unfavorable development for medical professional liability business. For workers' compensation, the favorable development was related to both primary and excess business and to many accident years, including those prior to 2007. During 2016, reported workers' compensation losses continued to be better than our expectations at most of our operating units. Loss frequency and severity trends continued to be better than the assumptions underlying our previous reserve estimates. Loss severity trends also benefited from our continued investment in medical case management services and from our preferred provider networks. The long term trend of declining workers' compensation frequency can be attributed to improved workplace safety. 36 43 1022849be 10K 1022849be_10K.indd 43 4/17/19 6:53 PM K 8.250 in x 12.000 in Select 04.17.2019 19:12PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 3 4 37 Favorable prior year development (net of additional and return premiums) was $39 million in 2018. Insurance - Reserves for the Insurance segment developed favorably by $43 million in 2018. The favorable development was primarily attributable to workers' compensation business, partially offset by unfavorable development for professional liability business. but was most significant in accident years 2015 through 2017. The favorable workers' compensation development reflects a continuation during 2018 of the benign loss cost trends experienced during recent years, particularly the favorable claim frequency trends (i.e., number of reported claims per unit of exposure). The long term trend of declining workers' compensation frequency can be attributable to improved workplace safety. Loss severity trends were also aided by our continued investment in claims handling initiatives such as medical case management services and vendor savings through usage of preferred provider networks. Reported workers' compensation losses in 2018 continued to be better than our expectations at most of our operating units, and were below the assumptions underlying our previous reserve estimates. For professional liability business, adverse development was primarily related to unexpected large directors and officers (“D&O”) liability losses at one of our U.S. operating units, as well as lawyers professional liability losses at another operating unit. The adverse development stemmed primarily from accident years 2015 and 2016, and was driven by a higher frequency of large losses than we had experienced in previous years. Reinsurance - Reserves for the Reinsurance segment developed unfavorably by $4 million in 2018. The unfavorable development was primarily due to U.S. casualty facultative business from accident years 2009 and prior related to construction projects, and was largely offset by favorable development on assumed excess of loss workers' compensation business. Favorable prior year development (net of additional and return premiums) was $37 million in 2017. Insurance - Reserves for the Insurance segment developed favorably by $68 million in 2017. The favorable development was primarily attributable to workers' compensation business, and was partially offset by unfavorable development for professional liability business. For workers' compensation, the favorable development was related to both primary and excess business and was spread across many accident years, including those prior to 2008, but was most significant in accident years 2014 through 2016. The favorable workers' compensation development reflects a continuation during 2017 of the generally benign loss cost trends experienced in recent years, particularly the favorable claim frequency trends (i.e. number of reported claims per unit of exposure). Reported workers' compensation losses in 2017 continued to be better than our expectations at most of our operating units, and were below the assumptions underlying our previous reserve estimates. The favorable severity trends were also impacted by our continued investment in medical case management services and the higher usage of preferred provider networks. The long term trend of declining workers' compensation frequency can be attributed to improved workplace safety. For professional liability business, adverse development was primarily related to unexpected large D&O liability losses at one of our U.S. operating units, and large professional indemnity and D&O losses in the U.K. The adverse development stemmed mainly from accident years 2013 through 2016 in the U.S. and 2011 through 2016 in the U.K. Reinsurance - Reserves for the Reinsurance segment developed unfavorably by $31 million in 2017. This adverse development was due to reserve strengthening associated with claims impacted by the change in the Ogden discount rate in the U.K., as well as adverse development on the U.S. facultative casualty excess of loss business. The Ogden rate is the discount rate used to calculate lump-sum bodily injury payouts in the U.K., and was reduced by the U.K. Ministry of Justice from +2.5% to -0.75% in 2017; the adverse development mostly related to U.K. motor bodily injury claims which we reinsured on an excess of loss basis in accident years 2012 through 2016. The adverse development on U.S. facultative casualty business was due to construction related risks in accident years 2008 and prior. Favorable prior year development (net of additional and return premiums) was $59 million in 2016. Insurance - Reserves for the Insurance segment developed favorably by $53 million in 2016. The favorable development was primarily related to workers' compensation business, and was partially offset by unfavorable development for medical professional liability business. For workers' compensation, the favorable development was related to both primary and excess business and to many accident years, including those prior to 2007. During 2016, reported workers' compensation losses continued to be better than our expectations at most of our operating units. Loss frequency and severity trends continued to be better than the assumptions underlying our previous reserve estimates. Loss severity trends also benefited from our continued investment in medical case management services and from our preferred provider networks. The long term trend of declining workers' compensation frequency can be attributed to improved workplace safety. 1022849be 10K 44 4 4 1 0 2 2 8 4 9 b e 1 0 K For medical professional liability business, unfavorable development was primarily related to a class of business that has been discontinued. The adverse development for that business stemmed mainly from accident years 2010 through 2015. Reinsurance - Reserves for the Reinsurance segment developed favorably by $6 million in 2016. The favorable development was primarily related to direct facultative reinsurance business and to accident years 2008 through 2014. For workers' compensation, the favorable development was spread across many accident years, including 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 $1,793 million and $1,855 million at December 31, 2018 and December 31, 2017, respectively. The aggregate net discount for those reserves, after reflecting the effects of ceded reinsurance, was $563 million and $591 million at December 31, 2018 and 2017, respectively. At December 31, 2018, discount rates by year ranged from 2.0% to 6.5%, with a weighted average discount rate of 3.8%. Substantially all discounted workers’ compensation reserves (97% of total discounted reserves at December 31, 2018) are excess workers’ compensation reserves. In order to properly match loss expenses with income earned on investment securities supporting the liabilities, reserves for excess workers’ compensation business are discounted using risk-free discount rates determined by reference to the U.S. Treasury yield curve. These rates are determined annually based on the weighted average rate for the period. Once established, no adjustments are made to the discount rate for that period, and any increases or decreases in loss reserves in subsequent years are discounted at the same rate, without regard to when any such adjustments are recognized. The expected loss and loss expense payout patterns subject to discounting are derived from the Company’s loss payout experience. The Company also discounts reserves for certain other long-duration workers’ compensation reserves (representing approximately 3% of total discounted reserves at December 31, 2018), including reserves for quota share reinsurance and reserves related to losses regarding occupational lung disease. These reserves are discounted at statutory rates prescribed or permitted by the Department of Insurance of the State of Delaware. 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 $41 million and $56 million at December 31, 2018 and 2017, 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. The Company classifies its fixed maturity securities by credit rating, primarily based on ratings assigned by credit rating agencies. For purposes of classifying securities with different ratings, the Company uses the average of the credit ratings assigned, unless in limited situations the Company's own analysis indicates an internal 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. 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). 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. 36 37 44 1022849be 10K 1022849be_10K.indd 44 K 8.250 in x 12.000 in Select 04.17.2019 19:12PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 4 4 4/17/19 6:53 PM 1022849be 10K 45 4 5 1 0 2 2 8 4 9 b e 1 0 K 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. The following table provides a summary of fixed maturity securities in an unrealized loss position as of December 31, which may include benchmark curves, benchmarking of like securities, sector groupings and matrix pricing. Market inputs used 2018: ($ 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 Total Number of Securities Aggregate Fair Value Unrealized Loss 1,068 $ 7,823,120 $ 201,258 6 4 1,078 $ 14,553 23,837 7,861,510 $ 6,435 7,870 215,563 A summary of the Company’s non-investment grade fixed maturity securities that were in an unrealized loss position at December 31, 2018 is presented in the table below. ($ in thousands) Foreign government Corporate Asset-backed securities Mortgage-backed securities Total Number of Securities Aggregate Fair Value Unrealized Loss 13 13 5 5 36 $ $ 140,854 120,078 14,662 8,741 284,335 $ $ 21,411 13,111 2,593 69 37,184 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 delinquent or in default under financial covenants. Based on its assessment of these issuers, the Company expects them to continue to meet their contractual payment obligations as they become due and does not consider any of these securities to be OTTI. For the year ended December 31, 2018, OTTI for fixed maturity securities recognized in earnings were $5.7 million. For the year ended December 31, 2017, there were no OTTI for fixed maturity securities. Loans Receivable – The Company monitors the performance of its loans receivable, including current market conditions valuation and to verify our understanding of how securities are priced. As of December 31, 2018, the Company did not make 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 $3 million for both December 31, 2018 and 2017. 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 available for sale securities, equity securities, 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 38 Level 2. Level 3. K 0 1 e b 9 4 8 2 2 0 1 5 4 45 1022849be 10K 1022849be_10K.indd 45 4/17/19 6:53 PM K 8.250 in x 12.000 in Select 04.17.2019 19:12PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be 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 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. The following is a summary of pricing sources for the Company's fixed maturity securities available for sale as of December 31, 2018: (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 $ 13,351,637 98.7% 34,304 142,137 99 0.3 1.0 — $ 13,528,177 100.0% 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 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 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 39 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 The following table provides a summary of fixed maturity securities in an unrealized loss position as of December 31, 4 6 1 0 2 2 8 4 9 b e 1 0 K impairment. 2018: ($ 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 Total ($ in thousands) Foreign government Corporate Asset-backed securities Mortgage-backed securities Total Number of Securities Aggregate Fair Value Unrealized Loss 1,068 $ 7,823,120 $ 201,258 14,553 23,837 6,435 7,870 1,078 $ 7,861,510 $ 215,563 Number of Securities Aggregate Fair Value Unrealized Loss $ 140,854 $ 120,078 14,662 8,741 36 $ 284,335 $ 21,411 13,111 2,593 69 37,184 6 4 13 13 5 5 A summary of the Company’s non-investment grade fixed maturity securities that were in an unrealized loss position at December 31, 2018 is presented in the table below. 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 delinquent or in default under financial covenants. Based on its assessment of these issuers, the Company expects them to continue to meet their contractual payment obligations as they become due and does not consider any of these securities to be OTTI. For the year ended December 31, 2018, OTTI for fixed maturity securities recognized in earnings were $5.7 million. For the year ended December 31, 2017, there were no OTTI for fixed maturity securities. 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 $3 million for both December 31, 2018 and 2017. 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 available for sale securities, equity securities, 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 1022849be 10K 46 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. The following is a summary of pricing sources for the Company's fixed maturity securities available for sale as of December 31, 2018: (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 $ $ 13,351,637 34,304 142,137 99 13,528,177 98.7% 0.3 1.0 — 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, 2018, 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. 38 39 K 0 1 e b 9 4 8 2 2 0 1 6 4 46 1022849be 10K 1022849be_10K.indd 46 4/17/19 6:53 PM K 8.250 in x 12.000 in Select 04.17.2019 19:12PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be 1022849be 10K 47 4 7 1 0 2 2 8 4 9 b e 1 0 K Results of Operations for the Years Ended December 31, 2018 and 2017 A summary of gross premiums written in 2018 compared with 2017 by line of business within each business segment 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, 2018 and 2017. 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. follows: • Insurance gross premiums increased 4% to $7,157 million in 2018 from $6,870 million in 2017. Gross premiums increased $156 million (7%) for other liability, $87 million (12%) for professional liability, $64 million (4%) for short-tail lines and $54 million (7%) for commercial auto, and decreased $74 million (4%) for workers' compensation. • Reinsurance gross premiums decreased 10% to $545 million in 2018 from $607 million in 2017. Gross premiums written decreased $38 million (19%) for property lines and decreased $24 million (6%) for casualty lines. 2018 2017 Net premiums written were $6,433 million in 2018, an increase of 3% from $6,261 million in 2017. Ceded reinsurance premiums as a percentage of gross written premiums were 17% and 16% in 2018 and 2017, respectively. (In thousands) Insurance Gross premiums written Net premiums written Net premiums earned Loss ratio Expense ratio GAAP combined ratio Reinsurance 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 $ $ $ $ $ $ 7,157,370 5,952,861 5,864,981 61.8% 32.5 94.3 545,124 480,366 506,524 68.7% 37.7 106.4 7,702,494 6,433,227 6,371,505 62.4% 32.9 95.3 6,869,831 5,715,871 5,706,443 61.6% 32.9 94.5 607,132 544,637 604,976 80.2% 37.4 117.6 7,476,963 6,260,508 6,311,419 63.4% 33.3 96.7 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, 2018 and 2017. (In thousands, except per share data) Net income to common stockholders Weighted average diluted shares Net income per diluted share 2018 2017 640,749 128,264 5.00 $ $ 549,094 129,018 4.26 $ $ The Company reported net income of $641 million in 2018 compared to $549 million in 2017. The 17% increase in net income was primarily due to an after-tax increase in net investment income of $79 million, mainly driven by growth in the fixed maturity security portfolio, higher interest rates and an increase in investment funds, an after-tax increase in underwriting income of $72 million, a $34 million increase in after-tax foreign currency gains, an after-tax increase in non-insurance businesses of $6 million, and a $60 million decrease in tax expense primarily due to the reduction of the federal corporate tax rate from 35% to 21%, partially offset by a decrease in after-tax net investment gains of $145 million, an after-tax increase in interest expense of $8 million, an after-tax reduction in insurance service fee income of $4 million, and an after-tax increase in corporate expenses of $2 million. The number of weighted average diluted shares decreased slightly primarily due to share repurchases. Premiums. Gross premiums written were $7,702 million in 2018, an increase of 3% from $7,477 million in 2017. The increase was due to an increase in the Insurance segment of $287 million, partially offset by a decrease in the Reinsurance segment of $62 million. Approximately 78% of policies expiring in 2018 were renewed and 79% of policies expiring in 2017 were renewed. Average renewal premium rates (adjusted for change in exposures) increased 2.5% in 2018, 0.9% in 2017 and 0.3% in 2016. 40 47 1022849be 10K 1022849be_10K.indd 47 4/17/19 6:53 PM K 8.250 in x 12.000 in Select 04.17.2019 19:12PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be Premiums earned increased 1% to $6,372 million in 2018 from $6,311 million in 2017. 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 2018 are related to business written during both 2018 and 2017. Audit premiums were $192 million in 2018 compared with $172 million in 2017. Net Investment Income. Following is a summary of net investment income for the years ended December 31, 2018 and 2017: (In thousands) Fixed maturity securities, including cash and cash equivalents and loans receivable Investment funds Arbitrage trading account Real estate Equity securities Gross investment income Investment expenses Total Amount Average Annualized Yield 2018 2017 2018 2017 $ 519,269 $ 473,101 3.6% 3.3% 109,349 28,157 18,591 3,230 678,596 (4,361) 68,169 19,145 19,975 2,350 582,740 (6,952) 8.8 4.7 1.0 1.4 3.7 — 5.7 3.6 1.5 1.1 3.3 — $ 674,235 $ 575,788 3.7% 3.3% Net investment income increased 17% to $674 million in 2018 from $576 million in 2017 primarily due to an increase in income from fixed maturity securities of $46 million, a $41 million increase in investment funds, a $9 million increase in arbitrage trading account and a decrease in investment expenses of $2 million, partially offset by a decrease in real estate of $1 million. Investment funds are reported on a one quarter lag. The average annualized yield for fixed maturity securities was 3.6% in 2018 and 3.3% in 2017; accordingly, the increase in fixed maturity securities income was mainly the result of a larger investment portfolio and higher interest rates. The effective duration of the fixed maturity portfolio was 2.8 years at December 31, 2018, down from 3.0 years at December 31, 2017. The Company has maintained a shortened duration of its fixed maturity security portfolio. This has reduced the potential impact of mark-to-market adjustments on the portfolio and positioned the Company to take advantage of rising interest rates. Average invested assets, at cost (including cash and cash equivalents), were $18.4 billion in 2018 and $17.5 billion in 2017. Insurance Service Fees. The Company earns fees from an insurance distribution business, a third-party administrator, and as a servicing carrier of workers' compensation assigned risk plans for certain states. Insurance service fees were $118 million in 2018 and $135 million in 2017. The decrease is primarily due to the sale of a third party administration business in third quarter of 2018. Net Realized and Unrealized Gains on Investments. The Company buys and sells securities and other investment assets on a regular basis in order to maximize its total return on investments. Decisions to sell securities and other investment assets are based on management’s view of the underlying fundamentals of specific investments as well as management’s expectations regarding interest rates, credit spreads, currency values and general economic conditions. Effective January 1, 2018, the Company adopted new accounting guidance that requires all equity investments with readily determinable fair values to be measured at fair value with changes in the fair value recognized through net income (other than those equity securities accounted for under the equity method of accounting or those that result in consolidation of the investee). Net realized and unrealized gains on investments were $154 million in 2018 compared with $336 million in 2017. In 2018, the gains reflected net realized gains on investment sales of $480 million reduced by a change in unrealized gains on equity securities of $320 41 K 0 1 e b 9 4 8 2 2 0 1 7 4 Results of Operations for the Years Ended December 31, 2018 and 2017 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, 2018 and 2017. 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. 4 8 1 0 2 2 8 4 9 b e 1 0 K A summary of gross premiums written in 2018 compared with 2017 by line of business within each business segment follows: • Insurance gross premiums increased 4% to $7,157 million in 2018 from $6,870 million in 2017. Gross premiums increased $156 million (7%) for other liability, $87 million (12%) for professional liability, $64 million (4%) for short-tail lines and $54 million (7%) for commercial auto, and decreased $74 million (4%) for workers' compensation. • Reinsurance gross premiums decreased 10% to $545 million in 2018 from $607 million in 2017. Gross premiums written decreased $38 million (19%) for property lines and decreased $24 million (6%) for casualty lines. 2018 2017 Net premiums written were $6,433 million in 2018, an increase of 3% from $6,261 million in 2017. Ceded reinsurance premiums as a percentage of gross written premiums were 17% and 16% in 2018 and 2017, respectively. 1022849be 10K 48 $ $ $ $ $ 7,157,370 5,952,861 5,864,981 6,869,831 5,715,871 5,706,443 61.8% 32.5 94.3 545,124 480,366 506,524 68.7% 37.7 106.4 $ $ $ 61.6% 32.9 94.5 607,132 544,637 604,976 80.2% 37.4 117.6 7,702,494 6,433,227 6,371,505 7,476,963 6,260,508 6,311,419 62.4% 32.9 95.3 63.4% 33.3 96.7 2018 2017 640,749 128,264 5.00 $ $ 549,094 129,018 4.26 Premiums earned increased 1% to $6,372 million in 2018 from $6,311 million in 2017. 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 2018 are related to business written during both 2018 and 2017. Audit premiums were $192 million in 2018 compared with $172 million in 2017. Net Investment Income. Following is a summary of net investment income for the years ended December 31, 2018 and 2017: (In thousands) Fixed maturity securities, including cash and cash equivalents and loans receivable Investment funds Arbitrage trading account Real estate Equity securities Gross investment income Investment expenses Total Amount 2018 2017 Average Annualized Yield 2018 2017 $ 519,269 $ 473,101 109,349 28,157 18,591 3,230 678,596 (4,361) 674,235 $ 68,169 19,145 19,975 2,350 582,740 (6,952) 575,788 $ 3.6% 8.8 4.7 1.0 1.4 3.7 — 3.7% 3.3% 5.7 3.6 1.5 1.1 3.3 — 3.3% Net investment income increased 17% to $674 million in 2018 from $576 million in 2017 primarily due to an increase in income from fixed maturity securities of $46 million, a $41 million increase in investment funds, a $9 million increase in arbitrage trading account and a decrease in investment expenses of $2 million, partially offset by a decrease in real estate of $1 million. Investment funds are reported on a one quarter lag. The average annualized yield for fixed maturity securities was 3.6% in 2018 and 3.3% in 2017; accordingly, the increase in fixed maturity securities income was mainly the result of a larger investment portfolio and higher interest rates. The effective duration of the fixed maturity portfolio was 2.8 years at December 31, 2018, down from 3.0 years at December 31, 2017. The Company has maintained a shortened duration of its fixed maturity security portfolio. This has reduced the potential impact of mark-to-market adjustments on the portfolio and positioned the Company to take advantage of rising interest rates. Average invested assets, at cost (including cash and cash equivalents), were $18.4 billion in 2018 and $17.5 billion in 2017. Insurance Service Fees. The Company earns fees from an insurance distribution business, a third-party administrator, and as a servicing carrier of workers' compensation assigned risk plans for certain states. Insurance service fees were $118 million in 2018 and $135 million in 2017. The decrease is primarily due to the sale of a third party administration business in third quarter of 2018. Net Realized and Unrealized Gains on Investments. The Company buys and sells securities and other investment assets on a regular basis in order to maximize its total return on investments. Decisions to sell securities and other investment assets are based on management’s view of the underlying fundamentals of specific investments as well as management’s expectations regarding interest rates, credit spreads, currency values and general economic conditions. Effective January 1, 2018, the Company adopted new accounting guidance that requires all equity investments with readily determinable fair values to be measured at fair value with changes in the fair value recognized through net income (other than those equity securities accounted for under the equity method of accounting or those that result in consolidation of the investee). Net realized and unrealized gains on investments were $154 million in 2018 compared with $336 million in 2017. In 2018, the gains reflected net realized gains on investment sales of $480 million reduced by a change in unrealized gains on equity securities of $320 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, 2018 and 2017. The Company reported net income of $641 million in 2018 compared to $549 million in 2017. The 17% increase in net income was primarily due to an after-tax increase in net investment income of $79 million, mainly driven by growth in the fixed maturity security portfolio, higher interest rates and an increase in investment funds, an after-tax increase in underwriting income of $72 million, a $34 million increase in after-tax foreign currency gains, an after-tax increase in non-insurance businesses of $6 million, and a $60 million decrease in tax expense primarily due to the reduction of the federal corporate tax rate from 35% to 21%, partially offset by a decrease in after-tax net investment gains of $145 million, an after-tax increase in interest expense of $8 million, an after-tax reduction in insurance service fee income of $4 million, and an after-tax increase in corporate expenses of $2 million. The number of weighted average diluted shares decreased slightly primarily due to share repurchases. were renewed. 2016. Premiums. Gross premiums written were $7,702 million in 2018, an increase of 3% from $7,477 million in 2017. The increase was due to an increase in the Insurance segment of $287 million, partially offset by a decrease in the Reinsurance segment of $62 million. Approximately 78% of policies expiring in 2018 were renewed and 79% of policies expiring in 2017 Average renewal premium rates (adjusted for change in exposures) increased 2.5% in 2018, 0.9% in 2017 and 0.3% in (In thousands) Insurance Gross premiums written Net premiums written Net premiums earned Loss ratio Expense ratio GAAP combined ratio Reinsurance 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 (In thousands, except per share data) Net income to common stockholders Weighted average diluted shares Net income per diluted share 40 41 K 0 1 e b 9 4 8 2 2 0 1 8 4 48 1022849be 10K 1022849be_10K.indd 48 4/17/19 6:53 PM K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be 4 9 1 0 2 2 8 4 9 b e 1 0 K 1022849be 10K 49 million as well as $6 million in OTTI. In 2017, realized gains were primarily related to the sale of an investment in an office building located in Washington, D.C. and the sale of shares of a publicly traded common stock. Other-Than-Temporary Impairments. The cost of securities is adjusted when appropriate to include a provision for a decline in value that is considered to be other-than-temporary. In 2018, there was $6 million other-than-temporary impairments. There was no other-than-temporary impairments in 2017. Revenues from Non-Insurance Businesses. Revenues from non-insurance businesses were derived from businesses engaged in the distribution of promotional merchandise, world-wide textile solutions, and 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 non-insurance businesses increased to $373 million in 2018 from $326 million in 2017, primarily due to the purchase of a business in the second half of 2018 and revenues from a textile business purchased in March 2017. Losses and Loss Expenses. Losses and loss expenses decreased to $3,975 million in 2018 from $4,002 million in 2017. The consolidated loss ratio was 62.4% in 2018 and 63.4% in 2017. Catastrophe losses, net of reinsurance recoveries and reinstatement premiums, were $105 million in 2018 compared with $184 million in 2017. The more significant 2017 catastrophe losses largely related to hurricanes Harvey, Irma, and Maria, along with two earthquakes in Mexico. Favorable prior year reserve development (net of premium offsets) was $39 million in 2018 compared with $37 million in 2017. The loss ratio excluding catastrophe losses and prior year reserve development increased 0.2 points to 61.3% in 2018 from 61.1% in 2017. A summary of loss ratios in 2018 compared with 2017 by business segment follows: • • Insurance - The loss ratio of 61.8% in 2018 was 0.2 points higher than the loss ratio of 61.6% in 2017. Catastrophe losses were $76 million in 2018 compared with $107 million in 2017. Favorable prior year reserve development was $43 million in 2018 compared with $68 million in 2017. The loss ratio excluding catastrophe losses and prior year reserve development increased 0.3 points to 61.2% in 2018 from 60.9% in 2017. Reinsurance - The loss ratio of 68.7% in 2018 was 11.5 points lower than the loss ratio of 80.2% in 2017. Catastrophe losses were $29 million in 2018 compared with $77 million in 2017. Adverse prior year reserve development was $4 million in 2018 compared with adverse prior year reserve development $31 million in 2017. Adverse prior year development in 2017 was largely due to the impact of the change in Ogden discount rate in the U.K. and adverse development related to the U.S. facultative excess of loss business. The loss ratio excluding catastrophe losses and prior year reserve development decreased 0.2 points to 62.1% in 2018 from 62.3% in 2017. Other Operating Costs and Expenses. Following is a summary of other operating costs and expenses: (In thousands) Policy acquisition and insurance operating expenses Insurance service expenses Net foreign currency (gains) losses Other costs and expenses Total 2018 2,098,881 118,357 (27,067) 193,050 2,383,221 $ $ 2017 2,101,024 129,776 15,267 190,865 2,436,932 $ $ Policy acquisition and insurance operating expenses are comprised of commissions paid to agents and brokers, premium taxes and other assessments and internal underwriting costs. Policy acquisition and insurance operating expenses remained flat and net premiums earned increased 1% from 2017. The expense ratio (policy acquisition and insurance operating expenses expressed as a percentage of premiums earned) was 32.9% in 2018 and 33.3% in 2017. Service expenses, which represent the costs associated with the fee-based businesses, decreased 9% to $118 million in 2018 from $130 million in 2017. The decrease is primarily due to the sale of a third party administration business in third quarter of 2018. Net foreign currency (gains) losses result from transactions denominated in a currency other than an operating unit’s functional currency. Net foreign currency gains were $27 million in 2018 compared to losses of $15 million in 2017, resulting from the strengthening U.S. dollar and the change of functional currency for the Company's Argentine operations to the U.S. dollar as of July 1, 2018. The Argentine economy was determined to be highly inflationary under GAAP requiring the change in functional currency beginning with the third quarter of 2018. 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 and new business ventures. Other costs and expenses increased to $193 million in 2018 from $191 million in 2017. 42 49 1022849be 10K 1022849be_10K.indd 49 4/17/19 6:53 PM K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be Expenses from Non-Insurance Businesses. Expenses from non-insurance businesses represent costs associated with businesses engaged in the distribution of promotional merchandise, world-wide textile solutions, and 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 non-insurance businesses were $364 million in 2018 compared to $325 million in 2017. The increase mainly relates to a new business purchased in the second half of 2018 as well as the textile business purchased in March 2017. Interest Expense. Interest expense was $157 million in 2018 compared with $147 million in 2017. In March 2018, the Company issued $175 million aggregate principal amount of 5.70% subordinated debentures due 2058, and in April 2018, the Company issued another $10 million principal amount of such debentures. Additionally in 2018, the Company issued subsidiary debt of $116 million, which was primarily attributable to a non-recourse mortgage loan on a real estate property in Florida. rate from 35% to 21%. Income Taxes. The effective income tax rate was 20% in 2018 compared to 28% in 2017. The decrease in the effective tax rate in 2018 from 2017 was primarily due to the Tax Cuts and Jobs Act of 2017, which reduced the federal corporate tax The Company has not provided U.S. deferred income taxes on the undistributed earnings of approximately $70 million of its non-U.S. subsidiaries since these earnings are intended to be permanently reinvested in the non-U.S. subsidiaries. In the future, if such earnings were distributed the Company projects that the incremental tax, if any, will be immaterial. K 0 1 e b 9 4 8 2 2 0 1 9 4 43 million as well as $6 million in OTTI. In 2017, realized gains were primarily related to the sale of an investment in an office building located in Washington, D.C. and the sale of shares of a publicly traded common stock. Other-Than-Temporary Impairments. The cost of securities is adjusted when appropriate to include a provision for a decline in value that is considered to be other-than-temporary. In 2018, there was $6 million other-than-temporary impairments. There was no other-than-temporary impairments in 2017. Revenues from Non-Insurance Businesses. Revenues from non-insurance businesses were derived from businesses engaged in the distribution of promotional merchandise, world-wide textile solutions, and 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 non-insurance businesses increased to $373 million in 2018 from $326 million in 2017, primarily due to the purchase of a business in the second half of 2018 and revenues from a textile business purchased in March 2017. Losses and Loss Expenses. Losses and loss expenses decreased to $3,975 million in 2018 from $4,002 million in 2017. The consolidated loss ratio was 62.4% in 2018 and 63.4% in 2017. Catastrophe losses, net of reinsurance recoveries and reinstatement premiums, were $105 million in 2018 compared with $184 million in 2017. The more significant 2017 catastrophe losses largely related to hurricanes Harvey, Irma, and Maria, along with two earthquakes in Mexico. Favorable prior year reserve development (net of premium offsets) was $39 million in 2018 compared with $37 million in 2017. The loss ratio excluding catastrophe losses and prior year reserve development increased 0.2 points to 61.3% in 2018 from 61.1% in 2017. A summary of loss ratios in 2018 compared with 2017 by business segment follows: • Insurance - The loss ratio of 61.8% in 2018 was 0.2 points higher than the loss ratio of 61.6% in 2017. Catastrophe losses were $76 million in 2018 compared with $107 million in 2017. Favorable prior year reserve development was $43 million in 2018 compared with $68 million in 2017. The loss ratio excluding catastrophe losses and prior year reserve development increased 0.3 points to 61.2% in 2018 from 60.9% in 2017. • Reinsurance - The loss ratio of 68.7% in 2018 was 11.5 points lower than the loss ratio of 80.2% in 2017. Catastrophe losses were $29 million in 2018 compared with $77 million in 2017. Adverse prior year reserve development was $4 million in 2018 compared with adverse prior year reserve development $31 million in 2017. Adverse prior year development in 2017 was largely due to the impact of the change in Ogden discount rate in the U.K. and adverse development related to the U.S. facultative excess of loss business. The loss ratio excluding catastrophe losses and prior year reserve development decreased 0.2 points to 62.1% in 2018 from 62.3% in 2017. Other Operating Costs and Expenses. Following is a summary of other operating costs and expenses: (In thousands) Policy acquisition and insurance operating expenses Insurance service expenses Net foreign currency (gains) losses Other costs and expenses Total 2018 2017 $ 2,098,881 $ 2,101,024 118,357 (27,067) 193,050 129,776 15,267 190,865 $ 2,383,221 $ 2,436,932 Policy acquisition and insurance operating expenses are comprised of commissions paid to agents and brokers, premium taxes and other assessments and internal underwriting costs. Policy acquisition and insurance operating expenses remained flat and net premiums earned increased 1% from 2017. The expense ratio (policy acquisition and insurance operating expenses expressed as a percentage of premiums earned) was 32.9% in 2018 and 33.3% in 2017. Service expenses, which represent the costs associated with the fee-based businesses, decreased 9% to $118 million in 2018 from $130 million in 2017. The decrease is primarily due to the sale of a third party administration business in third quarter of 2018. Net foreign currency (gains) losses result from transactions denominated in a currency other than an operating unit’s functional currency. Net foreign currency gains were $27 million in 2018 compared to losses of $15 million in 2017, resulting from the strengthening U.S. dollar and the change of functional currency for the Company's Argentine operations to the U.S. dollar as of July 1, 2018. The Argentine economy was determined to be highly inflationary under GAAP requiring the change in functional currency beginning with the third quarter of 2018. 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 and new business ventures. Other costs and expenses increased to $193 million in 2018 from $191 million in 2017. 1022849be 10K 50 5 0 1 0 2 2 8 4 9 b e 1 0 K Expenses from Non-Insurance Businesses. Expenses from non-insurance businesses represent costs associated with businesses engaged in the distribution of promotional merchandise, world-wide textile solutions, and 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 non-insurance businesses were $364 million in 2018 compared to $325 million in 2017. The increase mainly relates to a new business purchased in the second half of 2018 as well as the textile business purchased in March 2017. Interest Expense. Interest expense was $157 million in 2018 compared with $147 million in 2017. In March 2018, the Company issued $175 million aggregate principal amount of 5.70% subordinated debentures due 2058, and in April 2018, the Company issued another $10 million principal amount of such debentures. Additionally in 2018, the Company issued subsidiary debt of $116 million, which was primarily attributable to a non-recourse mortgage loan on a real estate property in Florida. Income Taxes. The effective income tax rate was 20% in 2018 compared to 28% in 2017. The decrease in the effective tax rate in 2018 from 2017 was primarily due to the Tax Cuts and Jobs Act of 2017, which reduced the federal corporate tax rate from 35% to 21%. The Company has not provided U.S. deferred income taxes on the undistributed earnings of approximately $70 million of its non-U.S. subsidiaries since these earnings are intended to be permanently reinvested in the non-U.S. subsidiaries. In the future, if such earnings were distributed the Company projects that the incremental tax, if any, will be immaterial. 42 43 50 1022849be 10K 1022849be_10K.indd 50 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 0 5 4/17/19 6:53 PM 1022849be 10K 51 5 1 1 0 2 2 8 4 9 b e 1 0 K Results of Operations for the Years Ended December 31, 2017 and 2016 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, 2017 and 2016. 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 Gross premiums written Net premiums written Net premiums earned Loss ratio Expense ratio GAAP combined ratio Reinsurance 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 $ $ $ 2017 2016 $ $ $ 6,869,831 5,715,871 5,706,443 61.6% 32.9 94.5 607,132 544,637 604,976 80.2% 37.4 117.6 7,476,963 6,260,508 6,311,419 63.4% 33.3 96.7 6,795,506 5,743,620 5,618,842 61.0% 32.5 93.5 748,195 680,293 674,506 61.6% 39.0 100.6 7,543,701 6,423,913 6,293,348 61.1% 33.2 94.3 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, 2017 and 2016. (In thousands, except per share data) Net income to common stockholders Weighted average diluted shares Net income per diluted share 2017 2016 549,094 129,018 4.26 $ $ 601,916 128,553 4.68 $ $ The Company reported net income of $549 million in 2017 compared to $602 million in 2016. The 9% decrease in net income was primarily due to a decrease in after-tax underwriting income of $98 million (mainly driven by increased catastrophe losses from hurricanes Harvey, Irma, and Maria, two earthquakes in Mexico, and wildfires in California), an after- tax increase of $18 million in net foreign currency losses, an after-tax decrease in income from non-insurance businesses of $9 million, an increase in after-tax interest expense of $4 million, and an increase in after-tax other expenses of $7 million, partially offset by an increase in after-tax net investment gains of $45 million, a net benefit from tax reform of $21 million, an increase in after-tax net investment income of $8 million, an after-tax increase of $3 million in service fee income and an increase in income from other various sources of $6 million. The number of weighted average diluted shares remained relatively unchanged for 2017 and 2016. Premiums. Gross premiums written were $7,477 million in 2017, a decrease of 1% from $7,544 million in 2016. The decrease was due to a decrease in the Reinsurance segment of $141 million, partially offset by an increase in the Insurance segment of $74 million. Approximately 79% of policies expiring in 2017 were renewed and 77% of policies expiring in 2016 were renewed. 44 51 1022849be 10K 1022849be_10K.indd 51 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 1 5 4/17/19 6:53 PM Average renewal premium rates (adjusted for change in exposures) increased 0.9% in 2017, 0.3% in 2016 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 2017 compared with 2016 by line of business within each business segment follows: • Insurance gross premiums increased 1% to $6,870 million in 2017 from $6,796 million in 2016. Gross premiums increased $40 million (6%) for commercial auto, $37 million (5%) for professional liability, $6 million (less than 1%) for other liability, and $4 million (less than 1%) for short-tail lines, partially offset by a decrease of $13 million (1%) for workers' compensation. • Reinsurance gross premiums decreased 19% to $607 million in 2017 from $748 million in 2016. Gross premiums written decreased $108 million (35%) for property lines and decreased $33 million (7%) for casualty lines. Net premiums written were $6,261 million in 2017, a decrease of 3% from $6,424 million in 2016. Ceded reinsurance premiums as a percentage of gross written premiums were 16% in 2017 and 15% in 2016. Premiums earned increased less than 1% to $6,311 million in 2017 from $6,293 million in 2016. 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 2017 are related to business written during both 2017 and 2016. Audit premiums were $172 million in 2017 compared with $156 million in 2016. Net Investment Income. Following is a summary of net investment income for the years ended December 31, 2017 and 2016: (In thousands) Fixed maturity securities, including cash and cash equivalents and loans receivable Investment funds Real estate Arbitrage trading account Equity securities available for sale Gross investment income Investment expenses Total Amount Average Annualized Yield 2017 2016 2017 2016 $ 473,101 $ 444,247 3.3% 3.2% 68,169 19,975 19,145 2,350 99,301 7,054 18,693 4,028 582,740 (6,952) 573,323 (9,160) 5.7 1.5 3.6 1.1 3.3 — 8.1 0.7 4.8 2.1 3.4 — $ 575,788 $ 564,163 3.3% 3.4% Net investment income increased 2% to $576 million in 2017 from $564 million in 2016 primarily due to an increase in income from fixed maturity securities of $29 million, as well as real estate of $13 million and a decrease in investment expenses of $2 million, partially offset by a decrease in investment funds of $31 million. Investment funds are reported on a one quarter lag. The average annualized yield for fixed maturity securities was 3.3% in 2017 and 3.2% in 2016; accordingly the increase in fixed maturity securities income was mainly the result of a larger investment portfolio. The effective duration of the fixed maturity portfolio was 3.0 years at December 31, 2017, down from 3.1 years at December 31, 2016. Average invested assets, at cost (including cash and cash equivalents), were $17.5 billion in 2017 and $16.7 billion in 2016. Insurance Service Fees. The Company earns fees from an insurance distribution business, a third-party administrator, and as a servicing carrier of workers' compensation assigned risk plans for certain states. Insurance service fees were $135 million in 2017 and $139 million in 2016. Net Realized Gains on Investment Sales. The Company buys and sells securities and other investment assets on a regular basis in order to maximize its total return on investments. Decisions to sell securities and other investment assets are based on management’s view of the underlying fundamentals of specific investments as well as management’s expectations regarding interest rates, credit spreads, currency values and general economic conditions. Net realized gains on investment sales were $336 million in 2017 compared with $285 million in 2016. In 2017, realized gains were primarily related to the sale of an investment in an office building located in Washington, D.C. and the sale of some shares of a publicly traded common stock. In 2016, realized gains were primarily related to the sale of Aero Precision Industries and the sale of some shares of a publicly traded common stock. 45 Results of Operations for the Years Ended December 31, 2017 and 2016 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, 2017 and 2016. 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. 5 2 1 0 2 2 8 4 9 b e 1 0 K (In thousands) Insurance Gross premiums written Net premiums written Net premiums earned Loss ratio Expense ratio GAAP combined ratio Reinsurance 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 (In thousands, except per share data) Net income to common stockholders Weighted average diluted shares Net income per diluted share 2017 2016 6,869,831 5,715,871 5,706,443 6,795,506 5,743,620 5,618,842 61.6% 32.9 94.5 607,132 544,637 604,976 80.2% 37.4 117.6 $ $ $ 61.0% 32.5 93.5 748,195 680,293 674,506 61.6% 39.0 100.6 7,476,963 6,260,508 6,311,419 7,543,701 6,423,913 6,293,348 63.4% 33.3 96.7 61.1% 33.2 94.3 2017 2016 549,094 129,018 4.26 $ $ 601,916 128,553 4.68 $ $ $ $ $ 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, 2017 and 2016. The Company reported net income of $549 million in 2017 compared to $602 million in 2016. The 9% decrease in net income was primarily due to a decrease in after-tax underwriting income of $98 million (mainly driven by increased catastrophe losses from hurricanes Harvey, Irma, and Maria, two earthquakes in Mexico, and wildfires in California), an after- tax increase of $18 million in net foreign currency losses, an after-tax decrease in income from non-insurance businesses of $9 million, an increase in after-tax interest expense of $4 million, and an increase in after-tax other expenses of $7 million, partially offset by an increase in after-tax net investment gains of $45 million, a net benefit from tax reform of $21 million, an increase in after-tax net investment income of $8 million, an after-tax increase of $3 million in service fee income and an increase in income from other various sources of $6 million. The number of weighted average diluted shares remained relatively unchanged for 2017 and 2016. Premiums. Gross premiums written were $7,477 million in 2017, a decrease of 1% from $7,544 million in 2016. The decrease was due to a decrease in the Reinsurance segment of $141 million, partially offset by an increase in the Insurance segment of $74 million. Approximately 79% of policies expiring in 2017 were renewed and 77% of policies expiring in 2016 were renewed. 1022849be 10K 52 Average renewal premium rates (adjusted for change in exposures) increased 0.9% in 2017, 0.3% in 2016 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 2017 compared with 2016 by line of business within each business segment follows: • Insurance gross premiums increased 1% to $6,870 million in 2017 from $6,796 million in 2016. Gross premiums increased $40 million (6%) for commercial auto, $37 million (5%) for professional liability, $6 million (less than 1%) for other liability, and $4 million (less than 1%) for short-tail lines, partially offset by a decrease of $13 million (1%) for workers' compensation. • Reinsurance gross premiums decreased 19% to $607 million in 2017 from $748 million in 2016. Gross premiums written decreased $108 million (35%) for property lines and decreased $33 million (7%) for casualty lines. Net premiums written were $6,261 million in 2017, a decrease of 3% from $6,424 million in 2016. Ceded reinsurance premiums as a percentage of gross written premiums were 16% in 2017 and 15% in 2016. Premiums earned increased less than 1% to $6,311 million in 2017 from $6,293 million in 2016. 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 2017 are related to business written during both 2017 and 2016. Audit premiums were $172 million in 2017 compared with $156 million in 2016. Net Investment Income. Following is a summary of net investment income for the years ended December 31, 2017 and 2016: (In thousands) Fixed maturity securities, including cash and cash equivalents and loans receivable Investment funds Real estate Arbitrage trading account Equity securities available for sale Gross investment income Investment expenses Total Amount 2017 2016 Average Annualized Yield 2017 2016 $ 473,101 $ 444,247 68,169 19,975 19,145 2,350 582,740 (6,952) 575,788 $ 99,301 7,054 18,693 4,028 573,323 (9,160) 564,163 $ 3.3% 5.7 1.5 3.6 1.1 3.3 — 3.3% 3.2% 8.1 0.7 4.8 2.1 3.4 — 3.4% Net investment income increased 2% to $576 million in 2017 from $564 million in 2016 primarily due to an increase in income from fixed maturity securities of $29 million, as well as real estate of $13 million and a decrease in investment expenses of $2 million, partially offset by a decrease in investment funds of $31 million. Investment funds are reported on a one quarter lag. The average annualized yield for fixed maturity securities was 3.3% in 2017 and 3.2% in 2016; accordingly the increase in fixed maturity securities income was mainly the result of a larger investment portfolio. The effective duration of the fixed maturity portfolio was 3.0 years at December 31, 2017, down from 3.1 years at December 31, 2016. Average invested assets, at cost (including cash and cash equivalents), were $17.5 billion in 2017 and $16.7 billion in 2016. Insurance Service Fees. The Company earns fees from an insurance distribution business, a third-party administrator, and as a servicing carrier of workers' compensation assigned risk plans for certain states. Insurance service fees were $135 million in 2017 and $139 million in 2016. Net Realized Gains on Investment Sales. The Company buys and sells securities and other investment assets on a regular basis in order to maximize its total return on investments. Decisions to sell securities and other investment assets are based on management’s view of the underlying fundamentals of specific investments as well as management’s expectations regarding interest rates, credit spreads, currency values and general economic conditions. Net realized gains on investment sales were $336 million in 2017 compared with $285 million in 2016. In 2017, realized gains were primarily related to the sale of an investment in an office building located in Washington, D.C. and the sale of some shares of a publicly traded common stock. In 2016, realized gains were primarily related to the sale of Aero Precision Industries and the sale of some shares of a publicly traded common stock. 44 45 52 1022849be 10K 1022849be_10K.indd 52 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 2 5 4/17/19 6:53 PM Expenses from Non-Insurance Businesses. Expenses from non-insurance businesses represent costs associated with businesses engaged in the distribution of promotional merchandise, world-wide textile solutions, and 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 non-insurance businesses were $325 million in 2017 compared to $375 million in 2016. The decline mainly relates to the sale of Aero Precision Industries in August 2016, partially offset by expenses from the textile business purchased in March 2017. Interest Expense. Interest expense was $147 million in 2017 compared with $141 million in 2016. During 2016, the Company repaid $83 million of debt mainly in connection with the sale of Aero Precision Industries. In February 2016, the company issued $110 million of 5.9% subordinated debentures maturing in 2056, and in May 2016, the Company issued $290 million of 5.75% subordinated debentures maturing in 2056. During 2017, one of the Company's non-insurance subsidiaries issued $7 million of debt. Income Taxes. The effective income tax rate was 28% in 2017 compared to 33% in 2016. The lower tax rate in 2017 was due, in part, to tax reform (the Tax Cuts and Jobs Act of 2017) as well as the new requirement under U.S. GAAP in 2017 to recognize tax benefits for stock compensation in income tax expense. The effective income tax rate differs from the federal income tax rate of 35% primarily because of tax-exempt investment income and previously mentioned additional 2017 tax impacts. 5 3 1 0 2 2 8 4 9 b e 1 0 K 1022849be 10K 53 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 2017 as compared to $18 million in 2016 primarily related to common stocks. Revenues from Non-Insurance Businesses. Revenues from non-insurance businesses were derived from businesses engaged in the distribution of promotional merchandise, world-wide textile solutions, and 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 non-insurance businesses decreased to $326 million in 2017 from $390 million in 2016, primarily due to the sale of Aero Precision Industries in August 2016, partially offset by revenues from the textile business purchased in March 2017. Losses and Loss Expenses. Losses and loss expenses increased to $4,002 million in 2017 from $3,846 million in 2016. The consolidated loss ratio was 63.4% in 2017 and 61.1% in 2016. Catastrophe losses, net of reinsurance recoveries and reinstatement premiums, were $184 million in 2017 compared with $105 million in 2016, an increase of 1.2 loss ratio points. Favorable prior year reserve development (net of premium offsets) was $37 million in 2017 compared with $59 million in 2016, 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 increased 0.8 points to 61.1% in 2017 from 60.3% in 2016. A summary of loss ratios in 2017 compared with 2016 by business segment follows: • Insurance - The loss ratio of 61.6% in 2017 was 0.6 points higher than the loss ratio of 61.0% in 2016. Catastrophe losses were $107 million in 2017 compared with $89 million in 2016, an increase of 0.4 loss ratio points. Favorable prior year reserve development was $68 million in 2017 compared with $53 million in 2016, a decrease of 0.3 loss ratio points. The loss ratio excluding catastrophe losses and prior year reserve development increased 0.5 points to 60.9% in 2017 from 60.4% in 2016. • Reinsurance - The loss ratio of 80.2% in 2017 was 18.6 points higher than the loss ratio of 61.6% in 2016. Catastrophe losses were $77 million in 2017 compared with $16 million in 2016, an increase of 10.3 loss ratio points. Adverse prior year reserve development was $31 million in 2017 compared with favorable prior year reserve development of $6 million in 2016, a difference of 6.0 loss ratio points. Adverse prior year development in 2017 was largely due to the impact of the change in Ogden discount rate in the U.K. and adverse development related to the U.S. facultative excess of loss business. The loss ratio excluding catastrophe losses and prior year reserve development increased 2.3 points to 62.3% in 2017 from 60.0% in 2016. Other Operating Costs and Expenses. Following is a summary of other operating costs and expenses: (In thousands) Policy acquisition and insurance operating expenses Insurance service expenses Net foreign currency losses (gains) Other costs and expenses Total 2017 2,101,024 129,776 15,267 190,865 2,436,932 $ $ 2016 2,089,203 138,908 (11,904) 179,412 2,395,619 $ $ Policy acquisition and insurance operating expenses are comprised of commissions paid to agents and brokers, premium taxes and other assessments and internal underwriting costs. Policy acquisition and insurance operating expenses increased less than 1% compared with the increase in net premiums earned of less than 1%. The expense ratio (policy acquisition and insurance operating expenses expressed as a percentage of premiums earned) was 33.3% in 2017 and 33.2% in 2016. Insurance service expenses, which represent the costs associated with the fee-based businesses, decreased 7% to $130 million from $139 million in 2016. Net foreign currency (gains) losses result from transactions denominated in a currency other than an operating unit’s functional currency. Net foreign currency losses were $15 million in 2017 compared to gains of $12 million in 2016. 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 and new business ventures. Other costs and expenses increased to $191 million in 2017 from $179 million in 2016 primarily because of startup costs for new business ventures. 46 53 1022849be 10K 1022849be_10K.indd 53 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 3 5 4/17/19 6:53 PM 47 1022849be 10K 54 5 4 1 0 2 2 8 4 9 b e 1 0 K Expenses from Non-Insurance Businesses. Expenses from non-insurance businesses represent costs associated with businesses engaged in the distribution of promotional merchandise, world-wide textile solutions, and 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 non-insurance businesses were $325 million in 2017 compared to $375 million in 2016. The decline mainly relates to the sale of Aero Precision Industries in August 2016, partially offset by expenses from the textile business purchased in March 2017. Interest Expense. Interest expense was $147 million in 2017 compared with $141 million in 2016. During 2016, the Company repaid $83 million of debt mainly in connection with the sale of Aero Precision Industries. In February 2016, the company issued $110 million of 5.9% subordinated debentures maturing in 2056, and in May 2016, the Company issued $290 million of 5.75% subordinated debentures maturing in 2056. During 2017, one of the Company's non-insurance subsidiaries issued $7 million of debt. Income Taxes. The effective income tax rate was 28% in 2017 compared to 33% in 2016. The lower tax rate in 2017 was due, in part, to tax reform (the Tax Cuts and Jobs Act of 2017) as well as the new requirement under U.S. GAAP in 2017 to recognize tax benefits for stock compensation in income tax expense. The effective income tax rate differs from the federal income tax rate of 35% primarily because of tax-exempt investment income and previously mentioned additional 2017 tax impacts. 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 2017 as compared to $18 million in 2016 primarily related to common stocks. Revenues from Non-Insurance Businesses. Revenues from non-insurance businesses were derived from businesses engaged in the distribution of promotional merchandise, world-wide textile solutions, and 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 non-insurance businesses decreased to $326 million in 2017 from $390 million in 2016, primarily due to the sale of Aero Precision Industries in August 2016, partially offset by revenues from the textile business purchased in March 2017. Losses and Loss Expenses. Losses and loss expenses increased to $4,002 million in 2017 from $3,846 million in 2016. The consolidated loss ratio was 63.4% in 2017 and 61.1% in 2016. Catastrophe losses, net of reinsurance recoveries and reinstatement premiums, were $184 million in 2017 compared with $105 million in 2016, an increase of 1.2 loss ratio points. Favorable prior year reserve development (net of premium offsets) was $37 million in 2017 compared with $59 million in 2016, 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 increased 0.8 points to 61.1% in 2017 from 60.3% in 2016. A summary of loss ratios in 2017 compared with 2016 by business segment follows: • Insurance - The loss ratio of 61.6% in 2017 was 0.6 points higher than the loss ratio of 61.0% in 2016. Catastrophe losses were $107 million in 2017 compared with $89 million in 2016, an increase of 0.4 loss ratio points. Favorable prior year reserve development was $68 million in 2017 compared with $53 million in 2016, a decrease of 0.3 loss ratio points. The loss ratio excluding catastrophe losses and prior year reserve development increased 0.5 points to 60.9% in 2017 from 60.4% in 2016. • Reinsurance - The loss ratio of 80.2% in 2017 was 18.6 points higher than the loss ratio of 61.6% in 2016. Catastrophe losses were $77 million in 2017 compared with $16 million in 2016, an increase of 10.3 loss ratio points. Adverse prior year reserve development was $31 million in 2017 compared with favorable prior year reserve development of $6 million in 2016, a difference of 6.0 loss ratio points. Adverse prior year development in 2017 was largely due to the impact of the change in Ogden discount rate in the U.K. and adverse development related to the U.S. facultative excess of loss business. The loss ratio excluding catastrophe losses and prior year reserve development increased 2.3 points to 62.3% in 2017 from 60.0% in 2016. Other Operating Costs and Expenses. Following is a summary of other operating costs and expenses: (In thousands) Policy acquisition and insurance operating expenses Insurance service expenses Net foreign currency losses (gains) Other costs and expenses Total 2017 2016 $ 2,101,024 $ 2,089,203 129,776 15,267 190,865 138,908 (11,904) 179,412 $ 2,436,932 $ 2,395,619 Policy acquisition and insurance operating expenses are comprised of commissions paid to agents and brokers, premium taxes and other assessments and internal underwriting costs. Policy acquisition and insurance operating expenses increased less than 1% compared with the increase in net premiums earned of less than 1%. The expense ratio (policy acquisition and insurance operating expenses expressed as a percentage of premiums earned) was 33.3% in 2017 and 33.2% in 2016. Insurance service expenses, which represent the costs associated with the fee-based businesses, decreased 7% to $130 million from $139 million in 2016. Net foreign currency (gains) losses result from transactions denominated in a currency other than an operating unit’s functional currency. Net foreign currency losses were $15 million in 2017 compared to gains of $12 million in 2016. 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 and new business ventures. Other costs and expenses increased to $191 million in 2017 from $179 million in 2016 primarily because of startup costs for new business ventures. 46 47 54 1022849be 10K 1022849be_10K.indd 54 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 4 5 4/17/19 6:53 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. Equity Securities. Equity securities primarily represent investments in common and preferred stocks in companies with potential growth opportunities in different sectors, mainly in the financial institutions sector. Investment Funds. At December 31, 2018, the carrying value of investment funds was $1,333 million, including investments in real estate funds of $642 million, energy funds of $75 million, and other funds of $616 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, 2018, real estate properties in operation included a long-term ground lease in Washington D.C., a hotel in Memphis, Tennessee, two office complexes in New York City, office buildings in West Palm Beach and Palm Beach, Florida, and an office building in London. In addition, there is a mixed-use project in Washington D.C. under development. The Company expects to fund further development costs for the project 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 $95 million and an aggregate fair value of $97 million at December 31, 2018. The amortized cost of loans receivable is net of a valuation allowance of $3 million as of December 31, 2018. Loans receivable include real estate loans of $62 million that are secured by commercial real estate located primarily in New York. 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 $33 million that are secured by business assets and have fixed interest rates and varying maturities not exceeding 10 years. 1022849be 10K 55 5 5 1 0 2 2 8 4 9 b e 1 0 K Investments As part of its investment strategy, the Company establishes a level of cash and highly liquid short-term and intermediate- term securities that, combined with expected cash flow, it believes is adequate to meet its payment obligations. Due to the low fixed maturity investment returns, the Company invests in equity securities, merger arbitrage securities, investment funds, private equity, loans and real estate related assets. The Company's investments in investment funds and its other alternative investments have experienced, and the Company expects to continue to experience, greater fluctuations in investment income. The Company also attempts to maintain an appropriate relationship between the effective duration of the investment portfolio and the approximate duration of its liabilities (i.e., policy claims and debt obligations). The effective duration of the investment portfolio was 2.8 years and 3.0 years at December 31, 2018 and 2017, respectively. The Company’s investment portfolio and investment-related assets as of December 31, 2018 were as follows: ($ in thousands) Fixed maturity securities: U.S. government and government agencies State and municipal: Special revenue Pre-refunded (1) Local general obligation State general obligation Corporate backed Total state and municipal Mortgage-backed securities: Agency Commercial Residential-Prime 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 Real estate Investment funds Cash and cash equivalents Arbitrage trading account Loans receivable Carrying Value Percent of Total $ 702,240 3.8% 2,425,868 430,169 425,337 384,706 274,409 3,940,489 920,496 342,666 303,229 38,899 1,605,290 2,438,747 2,257,821 1,463,922 329,175 60,393 4,111,311 808,735 13,606,812 180,814 98,192 279,006 1,957,092 1,332,818 817,602 452,548 94,813 18,540,691 13.1 2.3 2.3 2.1 1.5 21.3 5.0 1.8 1.6 0.2 8.6 13.2 12.2 7.9 1.8 0.3 22.2 4.4 73.5 1.0 0.5 1.5 10.5 7.2 4.4 2.4 0.5 100.0% Total investments $ ______________ (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 K 0 1 e b 9 4 8 2 2 0 1 5 5 49 55 1022849be 10K 1022849be_10K.indd 55 4/17/19 6:53 PM K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be 5 6 1 0 2 2 8 4 9 b e 1 0 K 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 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 2.8 years and 3.0 years at December 31, 2018 and 2017, respectively. The Company’s investment portfolio and investment-related assets as of December 31, 2018 were as follows: Carrying Value Percent of Total U.S. government and government agencies $ 702,240 3.8% 1022849be 10K 56 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. Equity Securities. Equity securities primarily represent investments in common and preferred stocks in companies with potential growth opportunities in different sectors, mainly in the financial institutions sector. Investment Funds. At December 31, 2018, the carrying value of investment funds was $1,333 million, including investments in real estate funds of $642 million, energy funds of $75 million, and other funds of $616 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, 2018, real estate properties in operation included a long-term ground lease in Washington D.C., a hotel in Memphis, Tennessee, two office complexes in New York City, office buildings in West Palm Beach and Palm Beach, Florida, and an office building in London. In addition, there is a mixed-use project in Washington D.C. under development. The Company expects to fund further development costs for the project 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 $95 million and an aggregate fair value of $97 million at December 31, 2018. The amortized cost of loans receivable is net of a valuation allowance of $3 million as of December 31, 2018. Loans receivable include real estate loans of $62 million that are secured by commercial real estate located primarily in New York. 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 $33 million that are secured by business assets and have fixed interest rates and varying maturities not exceeding 10 years. (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. $ 18,540,691 100.0% 48 49 56 1022849be 10K 1022849be_10K.indd 56 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 6 5 4/17/19 6:53 PM ($ in thousands) Fixed maturity securities: State and municipal: Special revenue Pre-refunded (1) Local general obligation State general obligation Corporate backed Total state and municipal Mortgage-backed securities: Agency Commercial Residential-Prime 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 Real estate Investment funds Cash and cash equivalents Arbitrage trading account Loans receivable Total investments ______________ government agency securities. 2,425,868 430,169 425,337 384,706 274,409 3,940,489 920,496 342,666 303,229 38,899 1,605,290 2,438,747 2,257,821 1,463,922 329,175 60,393 4,111,311 808,735 13,606,812 180,814 98,192 279,006 1,957,092 1,332,818 817,602 452,548 94,813 13.1 2.3 2.3 2.1 1.5 21.3 5.0 1.8 1.6 0.2 8.6 13.2 12.2 7.9 1.8 0.3 22.2 4.4 73.5 10.5 1.0 0.5 1.5 7.2 4.4 2.4 0.5 1022849be 10K 57 5 7 1 0 2 2 8 4 9 b e 1 0 K Liquidity and Capital Resources Reinsurance Cash Flow. Cash flow provided from operating activities decreased to $620 million in 2018 from $711 million in 2017, primarily due to the timing of loss and loss expense payments, certain long-term incentive plan payments and payments to tax authorities. 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 targets an average 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 78% invested in cash, cash equivalents and marketable fixed maturity securities as of December 31, 2018. 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. 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 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, 2019: The Company’s property per risk reinsurance generally covers losses between $2.5 million and $60 million. The Company’s catastrophe excess of loss reinsurance program provides protection for net losses between $15 million and $395 million for the majority of business written by its U.S. Insurance segment operating units and Lloyd's Syndicate, excluding offshore energy. The Company’s catastrophe reinsurance agreements are subject to certain limits, exclusions and reinstatement premiums. Debt. At December 31, 2018, the Company had senior notes, subordinated debentures and other debt outstanding with a • Casualty reinsurance treaties - The Company purchases casualty reinsurance to reduce its exposure to large individual carrying value of $2,790 million and a face amount of $2,826 million. The maturities of the outstanding debt are $447 million in 2019, $315 million in 2020, $427 million in 2022, $102 million in 2028, $250 million in 2037, $350 million in 2044, $350 million in 2053, $400 million in 2056 and $185 million in 2058. In March 2018, the Company issued $175 million aggregate principal amount of 5.70% subordinated debentures due 2058, and in April 2018, the Company issued another $10 million principal amount of such debentures. Additionally in 2018, the Company issued subsidiary debt of $116 million, which was primarily attributable to a non-recourse mortgage loan on a real estate property in Florida. Equity. The Company repurchased 357,600, 731,003 and 2,395,892 shares of its common stock in 2018, 2017 and 2016, respectively. The aggregate cost of the repurchases was $25 million in 2018, $48 million in 2017 and $132 million in 2016. In 2018, the Board declared regular quarterly cash dividends of $0.14 per share in first quarter, and $0.15 per share in each of the remaining three quarters, plus three additional special dividends of $0.50 per share each. At December 31, 2018, total common stockholders’ equity was $5.4 billion, common shares outstanding were 121,995,760 and stockholders’ equity per outstanding share was $44.57. 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 (casualty catastrophe) in effect as of January 1, 2019 provides protection for losses between $5 million and $75 million from single events with claims involving two or more insurable interests or for systemic events involving multiple insureds and/or policy years. The treaty also covers casualty contingency losses in excess of $1.5 million and up to $101.5 million. For losses involving two or more claimants for primary workers’ compensation business, coverage is generally in place for losses between $5 million and $270 million. For excess workers’ compensation business, such coverage is generally in place for losses Facultative reinsurance - The Company also purchases facultative reinsurance on certain individual policies or risks that between $25 million and $545 million. are in excess of treaty reinsurance capacity. supplement the above programs. • • Other reinsurance - Depending on the operating unit, the Company purchases specific additional reinsurance to Total Capital. Total capitalization (equity, debt and subordinated debentures) was $8.2 billion at December 31, 2018. The The Company places a number of its casualty treaties on a “risk attaching” basis. Under risk attaching treaties, all claims percentage of the Company’s capital attributable to senior notes, subordinated debentures and other debt was 34% at December 31, 2018 and 32% at December 31, 2017. 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, 2018, the Company had a gross deferred tax asset (net of valuation allowance) of $370 million (which primarily relates to loss and loss expense reserves and unearned premium reserves) and a gross deferred tax liability of $334 million (which primarily relates to deferred policy acquisition costs and investment funds). 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. 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. The casualty catastrophe treaty highlighted above was purchased on a claims made basis. 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 these reinsurance coverages, unexpired policies would not be protected, though we frequently have the option to purchase run-off coverage in our treaties. Following is a summary of earned premiums and loss and loss expenses ceded to reinsurers for each of the three years ended December 31, 2018: (In thousands) Earned premiums Losses and loss expenses Year Ended December 31, 2018 2017 2016 $ 1,236,049 $ 1,161,936 $ 1,099,462 829,742 601,769 707,336 Ceded earned premiums increased 6.4% in 2018 to $1,236 million. The ceded losses and loss expenses ratio increased 15 points to 67% in 2018 from 52% in 2017. 50 57 1022849be 10K 1022849be_10K.indd 57 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 7 5 4/17/19 6:53 PM 51 1022849be 10K 58 5 8 1 0 2 2 8 4 9 b e 1 0 K Liquidity and Capital Resources Cash Flow. Cash flow provided from operating activities decreased to $620 million in 2018 from $711 million in 2017, primarily due to the timing of loss and loss expense payments, certain long-term incentive plan payments and payments to tax authorities. 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 targets an average 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 78% invested in cash, cash equivalents and marketable fixed maturity securities as of December 31, 2018. 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, 2018, the Company had senior notes, subordinated debentures and other debt outstanding with a carrying value of $2,790 million and a face amount of $2,826 million. The maturities of the outstanding debt are $447 million in 2019, $315 million in 2020, $427 million in 2022, $102 million in 2028, $250 million in 2037, $350 million in 2044, $350 million in 2053, $400 million in 2056 and $185 million in 2058. In March 2018, the Company issued $175 million aggregate principal amount of 5.70% subordinated debentures due 2058, and in April 2018, the Company issued another $10 million principal amount of such debentures. Additionally in 2018, the Company issued subsidiary debt of $116 million, which was primarily attributable to a non-recourse mortgage loan on a real estate property in Florida. Equity. The Company repurchased 357,600, 731,003 and 2,395,892 shares of its common stock in 2018, 2017 and 2016, respectively. The aggregate cost of the repurchases was $25 million in 2018, $48 million in 2017 and $132 million in 2016. In 2018, the Board declared regular quarterly cash dividends of $0.14 per share in first quarter, and $0.15 per share in each of the remaining three quarters, plus three additional special dividends of $0.50 per share each. At December 31, 2018, total common stockholders’ equity was $5.4 billion, common shares outstanding were 121,995,760 and stockholders’ equity per outstanding share was $44.57. 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 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, 2019: The Company’s property per risk reinsurance generally covers losses between $2.5 million and $60 million. The Company’s catastrophe excess of loss reinsurance program provides protection for net losses between $15 million and $395 million for the majority of business written by its U.S. Insurance segment operating units and Lloyd's Syndicate, excluding offshore energy. 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 (casualty catastrophe) in effect as of January 1, 2019 provides protection for losses between $5 million and $75 million from single events with claims involving two or more insurable interests or for systemic events involving multiple insureds and/or policy years. The treaty also covers casualty contingency losses in excess of $1.5 million and up to $101.5 million. For losses involving two or more claimants for primary workers’ compensation business, coverage is generally in place for losses between $5 million and $270 million. For excess workers’ compensation business, such coverage is generally in place for losses between $25 million and $545 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. Total Capital. Total capitalization (equity, debt and subordinated debentures) was $8.2 billion at December 31, 2018. The The Company places a number of its casualty treaties on a “risk attaching” basis. Under risk attaching treaties, all claims percentage of the Company’s capital attributable to senior notes, subordinated debentures and other debt was 34% at December 31, 2018 and 32% at December 31, 2017. 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, 2018, the Company had a gross deferred tax asset (net of valuation allowance) of $370 million (which primarily relates to loss and loss expense reserves and unearned premium reserves) and a gross deferred tax liability of $334 million (which primarily relates to deferred policy acquisition costs and investment funds). 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 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. The casualty catastrophe treaty highlighted above was purchased on a claims made basis. 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 these reinsurance coverages, unexpired policies would not be protected, though we frequently have the option to purchase run-off coverage in our treaties. Following is a summary of earned premiums and loss and loss expenses ceded to reinsurers for each of the three years ended and the prospects for future operations, management anticipates that it is more likely than not that future taxable income will be December 31, 2018: sufficient for the realization of this asset. (In thousands) Earned premiums Losses and loss expenses Year Ended December 31, 2017 $ 1,161,936 2016 $ 1,099,462 2018 $ 1,236,049 829,742 601,769 707,336 Ceded earned premiums increased 6.4% in 2018 to $1,236 million. The ceded losses and loss expenses ratio increased 15 points to 67% in 2018 from 52% in 2017. 50 51 58 1022849be 10K 1022849be_10K.indd 58 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 8 5 4/17/19 6:53 PM 5 9 1 0 2 2 8 4 9 b e 1 0 K 1022849be 10K 59 The following table presents the credit quality of amounts due from reinsurers as of December 31, 2018. Amounts due from Contractual Obligations reinsurers are net of reserves for uncollectible reinsurance of $1 million in the aggregate. (In thousands) Reinsurer Amounts due in excess of $20 million: Rating (1) Amount Lloyd’s of London Munich Re Alleghany Group Swiss Re Partner Re Berkshire Hathaway Axis Capital Hannover Re Group Everest Re Korean Re Renaissance Re Liberty Mutual Qatar Re Chubb Limited Arch Capital Group Other reinsurers: Rated A- or better Secured (2) All Others Subtotal Residual markets pools (3) Total _________________ A+ AA- A+ AA- A+ AA+ A+ AA- A+ A A+ A A AA A+ $ $ 215,370 164,131 150,438 150,280 103,837 87,314 85,377 77,351 62,113 52,746 39,944 32,118 27,731 24,628 21,260 161,251 109,143 18,911 1,583,943 348,348 1,932,291 (1) S&P rating, or if not rated by S&P, A.M. Best rating. (2) Secured by letters of credit or other forms of collateral. (3) 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. Following is a summary of the Company's contractual obligations as of December 31, 2018: (In thousands) Estimated Payments By Periods Gross reserves for losses Operating lease obligations Purchase obligations Subordinated debentures Debt maturities Interest payments Other long-term liabilities Total 2019 2020 2021 2022 2023 Thereafter $ 3,137,565 $ 2,154,391 $ 1,609,899 $ 1,161,065 $ 848,536 $ 3,637,803 46,592 87,976 — 447,433 155,391 3,617 43,504 46,676 — 315,461 124,616 3,317 39,061 39,191 — — 108,491 2,972 34,444 39,200 — 426,503 105,163 2,627 30,881 37,869 — — 85,647 2,362 75,740 — 935,000 701,750 2,253,250 26,608 $ 3,878,574 $ 2,687,965 $ 1,799,614 $ 1,769,002 $ 1,005,295 $ 7,630,151 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, 2018. 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, 2018, the Company had commitments to invest up to $270.2 million and $253.4 million in certain investment funds and real estate construction projects, respectively. 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 were $3 million as of December 31, 2018. The Company has made certain guarantees to state regulators that the statutory capital of certain subsidiaries will be maintained above certain minimum levels. Off-Balance Sheet Arrangements 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. 52 59 1022849be 10K 1022849be_10K.indd 59 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 9 5 4/17/19 6:53 PM 53 The following table presents the credit quality of amounts due from reinsurers as of December 31, 2018. 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: Rating (1) Amount $ 6 0 1 0 2 2 8 4 9 b e 1 0 K Lloyd’s of London Munich Re Alleghany Group Swiss Re Partner Re Berkshire Hathaway Axis Capital Hannover Re Group Everest Re Korean Re Renaissance Re Liberty Mutual Qatar Re Chubb Limited Arch Capital Group Other reinsurers: Rated A- or better Secured (2) All Others Subtotal Total Residual markets pools (3) _________________ A+ AA- A+ AA- A+ AA+ A+ AA- A+ A A+ A A AA A+ 215,370 164,131 150,438 150,280 103,837 87,314 85,377 77,351 62,113 52,746 39,944 32,118 27,731 24,628 21,260 161,251 109,143 18,911 1,583,943 348,348 $ 1,932,291 (1) S&P rating, or if not rated by S&P, A.M. Best rating. (2) Secured by letters of credit or other forms of collateral. (3) 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. 1022849be 10K 60 Contractual Obligations Following is a summary of the Company's contractual obligations as of December 31, 2018: (In thousands) Estimated Payments By Periods Gross reserves for losses Operating lease obligations Purchase obligations Subordinated debentures Debt maturities Interest payments Other long-term liabilities Total $ $ 2019 3,137,565 46,592 87,976 — 447,433 155,391 3,617 3,878,574 2020 $ 2,154,391 43,504 46,676 — 315,461 124,616 3,317 $ 2,687,965 2021 $ 1,609,899 39,061 39,191 — — 108,491 2,972 $ 1,799,614 2022 $ 1,161,065 34,444 39,200 — 426,503 105,163 2,627 $ 1,769,002 $ 2023 848,536 30,881 37,869 — — 85,647 2,362 $ 1,005,295 Thereafter $ 3,637,803 75,740 — 935,000 701,750 2,253,250 26,608 $ 7,630,151 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, 2018. 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, 2018, the Company had commitments to invest up to $270.2 million and $253.4 million in certain investment funds and real estate construction projects, respectively. 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 were $3 million as of December 31, 2018. The Company has made certain guarantees to state regulators that the statutory capital of certain subsidiaries will be maintained above certain minimum levels. Off-Balance Sheet Arrangements 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. 52 53 60 1022849be 10K 1022849be_10K.indd 60 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 0 6 4/17/19 6:53 PM 6 1 1 0 2 2 8 4 9 b e 1 0 K ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 1022849be 10K 61 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors W. R. Berkley Corporation: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of W. R. Berkley Corporation and Subsidiaries (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three year period ended December 31, 2018, and the related notes and financial statement schedules II to VI (collectively, the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 22, 2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Change in Accounting Principle adoption of ASU 2016-01, Financial Instruments. Basis for Opinion As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for equity investments measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee) effective January 1, 2018 due to the These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. 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 2.8 years and 3.0 years at December 31, 2018 and 2017, 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, 2018: ($ in thousands) State and municipal Mortgage-backed securities Corporate U.S. government and government agencies Foreign government Loans receivable Asset-backed securities Cash and cash equivalents Total Effective Duration (Years) 3.7 3.7 3.4 2.7 2.1 1.0 1.0 — 2.8 Fair Value 3,952,038 1,606,549 4,111,311 702,240 808,735 97,073 2,438,747 817,602 14,534,295 $ $ 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, 2018 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 $13,284,688 13,689,482 14,101,454 14,534,295 14,912,897 15,291,638 15,449,791 Change in Fair Value $ (1,249,608) (844,814) (432,842) — 378,601 757,342 915,495 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. We have served as the Company’s auditor since 1972. New York, New York February 22, 2019 /S/ KPMG LLP 54 61 1022849be 10K 1022849be_10K.indd 61 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 1 6 4/17/19 6:53 PM 55 6 2 1 0 2 2 8 4 9 b e 1 0 K 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 2.8 years and 3.0 years at December 31, 2018 and 2017, 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, 2018: U.S. government and government agencies ($ in thousands) State and municipal Mortgage-backed securities Corporate Foreign government Loans receivable Asset-backed securities Cash and cash equivalents Total (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 Effective Duration (Years) 3.7 3.7 3.4 2.7 2.1 1.0 1.0 — 2.8 Fair Value $ 3,952,038 1,606,549 4,111,311 702,240 808,735 97,073 2,438,747 817,602 $ 14,534,295 Estimated Fair Value Change in Fair Value $13,284,688 $ (1,249,608) 13,689,482 14,101,454 14,534,295 14,912,897 15,291,638 15,449,791 (844,814) (432,842) — 378,601 757,342 915,495 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, 2018 would be as follows: 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. 1022849be 10K 62 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors W. R. Berkley Corporation: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of W. R. Berkley Corporation and Subsidiaries (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three year period ended December 31, 2018, and the related notes and financial statement schedules II to VI (collectively, the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 22, 2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Change in Accounting Principle As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for equity investments measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee) effective January 1, 2018 due to the adoption of ASU 2016-01, Financial Instruments. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. We have served as the Company’s auditor since 1972. New York, New York February 22, 2019 /S/ KPMG LLP 54 55 62 1022849be 10K 1022849be_10K.indd 62 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 2 6 4/17/19 6:53 PM 6 3 1 0 2 2 8 4 9 b e 1 0 K W. R. BERKLEY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME 1022849be 10K 63 (In thousands, except per share data) REVENUES: Net premiums written Change in net unearned premiums Net premiums earned Net investment income Net realized and unrealized gains on investments: Net realized and unrealized gains before OTTI Other-than-temporary impairments ("OTTI") Net realized and unrealized gains on investments Revenues from non-insurance businesses Insurance service fees Other income Total revenues OPERATING COSTS AND EXPENSES: Losses and loss expenses Other operating costs and expenses Expenses from non-insurance businesses 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 Year Ended December 31, 2017 2016 2018 $ 6,433,227 (61,722) 6,371,505 674,235 160,175 (5,687) 154,488 372,985 117,757 681 $ 6,260,508 $ 50,911 6,311,419 575,788 335,858 — 335,858 326,165 134,729 805 6,423,913 (130,565) 6,293,348 564,163 285,119 (18,114) 267,005 390,348 138,944 376 7,691,651 7,684,764 7,654,184 3,974,702 2,383,221 364,449 157,185 4,002,348 2,436,932 325,417 147,297 3,845,800 2,395,619 375,431 140,896 6,879,557 6,911,994 6,757,746 812,094 (163,028) 649,066 (8,317) 640,749 5.06 5.00 $ $ $ 772,770 (219,433) 553,337 (4,243) 549,094 4.40 4.26 $ $ $ 896,438 (292,953) 603,485 (1,569) 601,916 4.91 4.68 $ $ $ See accompanying notes to consolidated financial statements. 56 63 1022849be 10K 1022849be_10K.indd 63 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 3 6 4/17/19 6:53 PM W. R. BERKLEY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME 6 4 1 0 2 2 8 4 9 b e 1 0 K W. R. BERKLEY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 1022849be 10K 64 (In thousands, except per share data) REVENUES: Net premiums written Net premiums earned Net investment income Change in net unearned premiums Net realized and unrealized gains on investments: Net realized and unrealized gains before OTTI Other-than-temporary impairments ("OTTI") Net realized and unrealized gains on investments Revenues from non-insurance businesses Insurance service fees Other income Total revenues OPERATING COSTS AND EXPENSES: Losses and loss expenses Other operating costs and expenses Expenses from non-insurance businesses 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 Year Ended December 31, 2018 2017 2016 $ 6,433,227 $ 6,260,508 $ 6,423,913 (61,722) 6,371,505 674,235 50,911 6,311,419 575,788 (130,565) 6,293,348 564,163 160,175 (5,687) 154,488 372,985 117,757 681 335,858 — 335,858 326,165 134,729 805 3,974,702 2,383,221 364,449 157,185 4,002,348 2,436,932 325,417 147,297 7,691,651 7,684,764 7,654,184 6,879,557 6,911,994 6,757,746 812,094 (163,028) 649,066 (8,317) 640,749 $ $ $ 5.06 5.00 772,770 (219,433) 553,337 (4,243) 549,094 $ $ $ 4.40 4.26 $ $ $ 285,119 (18,114) 267,005 390,348 138,944 376 3,845,800 2,395,619 375,431 140,896 896,438 (292,953) 603,485 (1,569) 601,916 4.91 4.68 See accompanying notes to consolidated financial statements. Year Ended December 31, 2017 2016 2018 $ 649,066 $ 553,337 $ 603,485 (In thousands) Net income before noncontrolling interests Other comprehensive (loss) gain: Change in unrealized translation adjustments Change in unrealized investment (losses) gains, net of taxes Other comprehensive (loss) gain Comprehensive income Comprehensive income to the noncontrolling interest Comprehensive income to common stockholders $ (112,099) (252,327) (364,426) 284,640 (8,271) 276,369 $ 64,706 (51,752) 12,954 566,291 (4,262) 562,029 $ (124,193) 246,518 122,325 725,810 (1,510) 724,300 See accompanying notes to consolidated financial statements. 56 57 64 1022849be 10K 1022849be_10K.indd 64 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 4 6 4/17/19 6:53 PM 6 5 1 0 2 2 8 4 9 b e 1 0 K CONSOLIDATED BALANCE SHEETS W. R. BERKLEY CORPORATION AND SUBSIDIARIES W. R. BERKLEY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY 1022849be 10K 65 (In thousands, except share data) Assets Investments: Fixed maturity securities Investment funds Real estate Arbitrage trading account Equity securities Loans receivable 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 Deferred federal and foreign income taxes Other assets Total assets Liabilities and Equity Liabilities: Reserves for losses and loss expenses Unearned premiums Due to reinsurers Trading account securities sold but not yet purchased Current federal and foreign income taxes 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, 121,995,760 and 121,514,852 shares, respectively Additional paid-in capital Retained earnings Accumulated other comprehensive (loss) income Treasury stock, at cost, 113,122,158 and 113,603,066 shares, respectively Total common stockholders’ equity Noncontrolling interests Total equity Total liabilities and equity See accompanying notes to consolidated financial statements. 58 December 31, 2018 2017 $ $ $ 13,606,812 1,332,818 1,957,092 452,548 279,006 94,813 17,723,089 817,602 1,807,762 1,932,291 497,629 498,880 347,228 416,372 173,037 144,481 703 35,490 501,413 24,895,977 11,966,448 3,359,991 256,917 38,120 — — 1,005,184 1,882,028 907,491 19,416,179 13,551,250 1,155,677 1,469,601 617,649 576,647 79,684 17,450,508 950,471 1,773,844 1,783,200 507,549 472,009 189,280 422,960 178,945 136,597 — — 434,554 24,299,917 11,670,408 3,290,180 246,460 64,358 11,327 86,764 981,987 1,769,052 728,218 18,848,754 — — 47,024 1,063,144 7,558,619 (510,470) (2,720,466) 5,437,851 41,947 5,479,798 24,895,977 $ 47,024 1,048,283 6,956,882 68,541 (2,709,386) 5,411,344 39,819 5,451,163 24,299,917 $ $ $ $ Year Ended December 31, 2018 2017 2016 47,024 47,024 47,024 1,048,283 1,037,446 1,005,455 (19,547) 34,408 (27,959) 38,796 (3,594) 35,585 1,063,144 1,048,283 1,037,446 $ $ $ $ $ $ $ $ 6,956,882 6,595,987 6,178,070 215,939 640,749 (254,951) — 549,094 (188,199) — 601,916 (183,999) $ 7,558,619 $ 6,956,882 $ 6,595,987 $ 375,421 $ 427,154 $ 180,695 (214,539) (252,241) (132) (91,491) (306,880) (112,099) (418,979) — (52,628) 895 375,421 (371,586) 64,706 (306,880) — 246,872 (413) 427,154 (247,393) (124,193) (371,586) (2,709,386) $ (2,688,817) $ (2,563,605) 12,981 689 (24,750) 26,511 727 (47,807) 6,495 685 (132,392) (2,720,466) $ (2,709,386) $ (2,688,817) 39,819 $ 33,926 $ 32,962 (6,143) 8,317 (46) 1,631 4,243 19 (546) 1,569 (59) 41,947 $ 39,819 $ 33,926 $ $ $ $ $ $ $ $ $ (In thousands) COMMON STOCK: Beginning and end of period ADDITIONAL PAID IN CAPITAL: Beginning of period Restricted stock units issued Restricted stock units expensed End of period RETAINED EARNINGS: Beginning of period Cumulative effect adjustment resulting from changes in accounting principles Net income to common stockholders Dividends End of period ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME: Unrealized investment (losses) gains: Beginning of period Cumulative effect adjustment resulting from changes in accounting principles Unrealized (losses) gains on securities not other-than-temporarily impaired Unrealized (losses) gains on other-than-temporarily impaired securities End of period Currency translation adjustments: Beginning of period Net change in period End of period Total accumulated other comprehensive (loss) income (510,470) $ 68,541 $ 55,568 TREASURY STOCK: Beginning of period Stock exercised/vested Stock issued Stock repurchased End of period NONCONTROLLING INTERESTS: Beginning of period (Distributions) contributions Net income Other comprehensive (loss) income, net of tax End of period See accompanying notes to consolidated financial statements. K 0 1 e b 9 4 8 2 2 0 1 5 6 59 65 1022849be 10K 1022849be_10K.indd 65 4/17/19 6:53 PM K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be CONSOLIDATED BALANCE SHEETS W. R. BERKLEY CORPORATION AND SUBSIDIARIES 6 6 1 0 2 2 8 4 9 b e 1 0 K (In thousands, except share data) Assets Investments: Fixed maturity securities Investment funds Real estate Arbitrage trading account Equity securities Loans receivable 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 Deferred federal and foreign income taxes Other assets Total assets Liabilities and Equity Liabilities: Unearned premiums Due to reinsurers Reserves for losses and loss expenses Trading account securities sold but not yet purchased Current federal and foreign income taxes 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: Common stock, par value $.20 per share: December 31, 2018 2017 $ 13,606,812 $ 13,551,250 1,332,818 1,957,092 452,548 279,006 94,813 17,723,089 817,602 1,807,762 1,932,291 497,629 498,880 347,228 416,372 173,037 144,481 703 35,490 501,413 11,966,448 $ 3,359,991 256,917 38,120 — — 1,005,184 1,882,028 907,491 19,416,179 1,155,677 1,469,601 617,649 576,647 79,684 17,450,508 950,471 1,773,844 1,783,200 507,549 472,009 189,280 422,960 178,945 136,597 — — 434,554 11,670,408 3,290,180 246,460 64,358 11,327 86,764 981,987 1,769,052 728,218 18,848,754 24,895,977 $ 24,299,917 $ $ Authorized 5,000,000 shares; issued and outstanding — none — — Authorized 500,000,000 shares, issued and outstanding, net of treasury shares, 121,995,760 and 121,514,852 shares, respectively Additional paid-in capital Retained earnings Accumulated other comprehensive (loss) income Treasury stock, at cost, 113,122,158 and 113,603,066 shares, respectively Total common stockholders’ equity Noncontrolling interests Total equity Total liabilities and equity See accompanying notes to consolidated financial statements. 47,024 1,063,144 7,558,619 (510,470) (2,720,466) 5,437,851 41,947 5,479,798 $ 24,895,977 $ 47,024 1,048,283 6,956,882 68,541 (2,709,386) 5,411,344 39,819 5,451,163 24,299,917 1022849be 10K 66 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 Restricted stock units issued Restricted stock units expensed End of period RETAINED EARNINGS: Beginning of period Cumulative effect adjustment resulting from changes in accounting principles Net income to common stockholders Dividends End of period ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME: Unrealized investment (losses) gains: Beginning of period Cumulative effect adjustment resulting from changes in accounting principles Unrealized (losses) gains on securities not other-than-temporarily impaired Unrealized (losses) gains on other-than-temporarily impaired securities End of period Currency translation adjustments: Beginning of period Net change in period End of period Total accumulated other comprehensive (loss) income TREASURY STOCK: Beginning of period Stock exercised/vested Stock issued Stock repurchased End of period NONCONTROLLING INTERESTS: Beginning of period (Distributions) contributions Net income Other comprehensive (loss) income, net of tax End of period Year Ended December 31, 2017 2016 2018 $ $ $ $ $ $ $ $ 47,024 1,048,283 (19,547) 34,408 1,063,144 6,956,882 215,939 640,749 (254,951) $ $ $ $ 47,024 1,037,446 (27,959) 38,796 1,048,283 6,595,987 — 549,094 (188,199) 47,024 1,005,455 (3,594) 35,585 1,037,446 6,178,070 — 601,916 (183,999) $ 7,558,619 $ 6,956,882 $ 6,595,987 $ 375,421 $ 427,154 $ 180,695 (214,539) (252,241) (132) (91,491) (306,880) (112,099) (418,979) — (52,628) 895 375,421 (371,586) 64,706 (306,880) — 246,872 (413) 427,154 (247,393) (124,193) (371,586) (510,470) $ 68,541 $ 55,568 (2,709,386) $ (2,688,817) $ (2,563,605) 12,981 689 (24,750) 26,511 727 (47,807) 6,495 685 (132,392) (2,720,466) $ (2,709,386) $ (2,688,817) 39,819 $ 33,926 $ 32,962 (6,143) 8,317 (46) 1,631 4,243 19 (546) 1,569 (59) 41,947 $ 39,819 $ 33,926 $ $ $ $ $ See accompanying notes to consolidated financial statements. 58 59 66 1022849be 10K 1022849be_10K.indd 66 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 6 6 4/17/19 6:53 PM 1022849be 10K 67 6 7 1 0 2 2 8 4 9 b e 1 0 K W. R. BERKLEY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS W. R. BERKLEY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018, 2017 and 2016 (In thousands) CASH FROM OPERATING ACTIVITIES: Net income to common stockholders Adjustments to reconcile net income to net cash from operating activities: Net realized and unrealized gains on investments 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 (Contributions) distributions from investment funds Proceeds from maturities and prepayments of fixed maturity securities Purchase of fixed maturity securities Purchase of equity securities Real estate purchased Change in loans receivable Net additions to property, furniture and equipment Change in balances due from security brokers Cash received in connection with business disposition 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 Repayment of senior notes and other debt Cash dividends to common stockholders Purchase of common treasury shares Other, net Net cash used in financing activities Net impact on cash due to change in foreign exchange rates Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Year Ended December 31, 2017 2016 2018 $ 640,749 $ 549,094 $ 601,916 (1) Summary of Significant Accounting Policies (A) Principles of consolidation and basis of presentation (154,488) 131,108 8,317 (109,349) 36,591 (19,093) (43,813) (165,287) 7,788 (11,950) (74,761) 339,015 84,142 (48,770) 620,199 3,525,149 497,989 (79,635) 2,676,455 (6,677,753) (85,610) (514,064) (13,204) (49,860) 4,262 8,664 (6,637) (714,244) (335,858) 112,956 4,243 (69,333) 40,490 (4,896) (67,752) (66,542) 30,343 25,859 (16,893) 438,530 4,160 66,482 710,883 4,035,162 195,270 247,404 3,556,744 (7,940,957) (27,522) (236,039) 27,135 (115,719) (4,372) — (70,570) (333,464) 294,562 (4,524) (254,951) (24,750) (17,740) (7,403) (31,421) (132,869) 950,471 817,602 $ 6,983 (20) (188,199) (47,807) (6,043) (235,086) 12,853 155,186 795,285 950,471 $ $ (267,005) 86,051 1,569 (99,301) 37,174 (10,633) (60,403) (235,455) (25,912) 42,632 9,012 572,196 149,683 46,852 848,376 2,440,310 143,042 142,601 2,189,365 (5,541,202) (202,736) (299,123) 166,327 (50,829) 20,992 250,216 (53,451) (794,488) 388,769 (75,487) (183,999) (132,392) (3,823) (6,932) (15,302) 31,654 763,631 795,285 See accompanying notes to consolidated financial statements. pronouncements.) 60 67 1022849be 10K 1022849be_10K.indd 67 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 7 6 4/17/19 6:53 PM The consolidated financial statements, which include the accounts of W. R. Berkley Corporation and its subsidiaries (the "Company"), have been prepared on the basis of U.S. generally accepted accounting principles ("GAAP"). All significant intercompany transactions and balances have been eliminated. Reclassifications have been made in the 2017 and 2016 financial statements to conform to the presentation of the 2018 financial statements. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the revenues and expenses reflected during the reporting period. The most significant items on our balance sheet that involve a greater degree of accounting estimates that are subject to change in the future are the valuation of investments, other-than-temporary impairments, loss and loss expense reserves and premium estimates. Actual results could differ from those estimates. (B) Revenue recognition Insurance premiums are recognized as written at the inception of the policy. Reinsurance premiums are estimated based upon information received from ceding companies, and subsequent differences from such estimates are recorded in the period they are determined. Insurance and reinsurance premiums are primarily earned on a pro rata basis over the policy term. Fees for services are earned over the period that the services are provided. Audit premiums are recognized when they are reliably determinable. The change in accruals for earned but unbilled audit premiums (decreased) increased net premiums written and premiums earned by $(4) million, $8 million and $8 million in 2018, 2017 and 2016, respectively. Revenues from non-insurance businesses are derived from businesses engaged in the distribution of promotional merchandise, world-wide textile solutions, and aircraft services provided to the general, commercial and military aviation markets. These aircraft services include (i) the distribution, manufacturing, repair and overhaul of aircraft parts and components, (ii) the sale of new and used aircraft, and (iii) avionics, fuel, maintenance, storage and charter services. Revenue is recognized upon the shipment of products and parts, the delivery of aircraft, the delivery of fuel, and over the completion period of services. Insurance service fee revenue represents servicing fees for program administration and claims management services provided by the Company, including workers' compensation assigned risk plans, as well as insurance brokerage and risk management services. Fees for program administration, claims management and risk management services are primarily recognized ratably over the related contract period for which the underlying services are rendered. Commissions for insurance brokerage are generally recognized when the underlying insurance policy is effective. Cash equivalents consist of funds invested in money market accounts and investments with an effective maturity of three (C) Cash and cash equivalents months or less when purchased. (D) Investments Fixed maturity securities classified as available for sale are carried at estimated fair value, with unrealized gains and losses, net of applicable income taxes, excluded from earnings and reported as a component of comprehensive income and a separate component of stockholders' equity. Fixed maturity securities that the Company has the positive intent and ability to hold to maturity are classified as held to maturity and reported at amortized cost. Investment income from fixed maturity securities is recognized based on the constant effective yield method. Premiums and discounts on mortgage-backed securities are adjusted for the effects of actual and anticipated prepayments on a retrospective basis. Equity securities with readily determinable fair values are measured at fair value, with changes in the fair value recognized in net income within net realized and unrealized gains on investments. (See (Q) Recent accounting 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 61 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 realized and unrealized gains on investments Depreciation and amortization Year Ended December 31, 2018 2017 2016 $ 640,749 $ 549,094 $ 601,916 6 8 1 0 2 2 8 4 9 b e 1 0 K Proceeds from maturities and prepayments of fixed maturity securities 2,676,455 3,556,744 2,189,365 3,525,149 4,035,162 2,440,310 497,989 (79,635) 195,270 247,404 143,042 142,601 (6,677,753) (7,940,957) (5,541,202) 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 (Contributions) distributions from investment funds Purchase of fixed maturity securities Purchase of equity securities Real estate purchased Change in loans receivable Net additions to property, furniture and equipment Change in balances due from security brokers Cash received in connection with business disposition 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 Repayment of senior notes and other debt Cash dividends to common stockholders Purchase of common treasury shares Other, net Net cash used in financing activities Net impact on cash due to change in foreign exchange rates Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year (154,488) 131,108 8,317 (109,349) 36,591 (19,093) (43,813) (165,287) 7,788 (11,950) (74,761) 339,015 84,142 (48,770) 620,199 (85,610) (514,064) (13,204) (49,860) 4,262 8,664 (6,637) (714,244) 294,562 (4,524) (254,951) (24,750) (17,740) (7,403) (31,421) (132,869) 950,471 (335,858) 112,956 4,243 (69,333) 40,490 (4,896) (67,752) (66,542) 30,343 25,859 (16,893) 438,530 4,160 66,482 710,883 (27,522) (236,039) 27,135 (115,719) (4,372) — (70,570) (333,464) 6,983 (20) (188,199) (47,807) (6,043) (235,086) 12,853 155,186 795,285 (267,005) 86,051 1,569 (99,301) 37,174 (10,633) (60,403) (235,455) (25,912) 42,632 9,012 572,196 149,683 46,852 848,376 (202,736) (299,123) 166,327 (50,829) 20,992 250,216 (53,451) (794,488) 388,769 (75,487) (183,999) (132,392) (3,823) (6,932) (15,302) 31,654 763,631 795,285 See accompanying notes to consolidated financial statements. $ 817,602 $ 950,471 $ 1022849be 10K 68 W. R. BERKLEY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018, 2017 and 2016 (1) Summary of Significant Accounting Policies (A) Principles of consolidation and basis of presentation The consolidated financial statements, which include the accounts of W. R. Berkley Corporation and its subsidiaries (the "Company"), have been prepared on the basis of U.S. generally accepted accounting principles ("GAAP"). All significant intercompany transactions and balances have been eliminated. Reclassifications have been made in the 2017 and 2016 financial statements to conform to the presentation of the 2018 financial statements. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the revenues and expenses reflected during the reporting period. The most significant items on our balance sheet that involve a greater degree of accounting estimates that are subject to change in the future are the valuation of investments, other-than-temporary impairments, loss and loss expense reserves and premium estimates. Actual results could differ from those estimates. (B) Revenue recognition Insurance premiums are recognized as written at the inception of the policy. Reinsurance premiums are estimated based upon information received from ceding companies, and subsequent differences from such estimates are recorded in the period they are determined. Insurance and reinsurance premiums are primarily earned on a pro rata basis over the policy term. Fees for services are earned over the period that the services are provided. Audit premiums are recognized when they are reliably determinable. The change in accruals for earned but unbilled audit premiums (decreased) increased net premiums written and premiums earned by $(4) million, $8 million and $8 million in 2018, 2017 and 2016, respectively. Revenues from non-insurance businesses are derived from businesses engaged in the distribution of promotional merchandise, world-wide textile solutions, and aircraft services provided to the general, commercial and military aviation markets. These aircraft services include (i) the distribution, manufacturing, repair and overhaul of aircraft parts and components, (ii) the sale of new and used aircraft, and (iii) avionics, fuel, maintenance, storage and charter services. Revenue is recognized upon the shipment of products and parts, the delivery of aircraft, the delivery of fuel, and over the completion period of services. Insurance service fee revenue represents servicing fees for program administration and claims management services provided by the Company, including workers' compensation assigned risk plans, as well as insurance brokerage and risk management services. Fees for program administration, claims management and risk management services are primarily recognized ratably over the related contract period for which the underlying services are rendered. Commissions for insurance brokerage are generally recognized when the underlying insurance policy is effective. (C) Cash and cash equivalents Cash equivalents consist of funds invested in money market accounts and investments with an effective maturity of three months or less when purchased. (D) Investments Fixed maturity securities classified as available for sale are carried at estimated fair value, with unrealized gains and losses, net of applicable income taxes, excluded from earnings and reported as a component of comprehensive income and a separate component of stockholders' equity. Fixed maturity securities that the Company has the positive intent and ability to hold to maturity are classified as held to maturity and reported at amortized cost. Investment income from fixed maturity securities is recognized based on the constant effective yield method. Premiums and discounts on mortgage-backed securities are adjusted for the effects of actual and anticipated prepayments on a retrospective basis. Equity securities with readily determinable fair values are measured at fair value, with changes in the fair value recognized in net income within net realized and unrealized gains on investments. (See (Q) Recent accounting pronouncements.) Fixed maturity securities that the Company purchased with the intent to sell in the near-term are classified as trading account securities and are reported at estimated fair value. Realized and unrealized gains and losses from trading activity are reported as net investment income and are recorded at the trade date. Short sales and short call options are presented as trading 60 61 K 0 1 e b 9 4 8 2 2 0 1 8 6 68 1022849be 10K 1022849be_10K.indd 68 4/17/19 6:53 PM K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be 1022849be 10K 69 6 9 1 0 2 2 8 4 9 b e 1 0 K 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. (E) Per share data Investment funds are carried under the equity method of accounting. The Company's share of the earnings or losses of dividing net income by weighted average number of common shares outstanding during the year (including 4,926,521 common investment funds is primarily reported on a one-quarter lag in order to facilitate the timely completion of the Company's consolidated financial statements. Loans receivable primarily represent commercial real estate mortgage loans and bank loans and are carried at amortized cost. The Company monitors the performance of its loans receivable and establishes an allowance for loan losses for loans where the Company determines it is probable that the contractual terms will not be met, with a corresponding charge to earnings. For loans that are evaluated individually and deemed to be impaired, the Company establishes a specific allowance based on a discounted cash flow analysis and comparable cost and sales methodologies, if appropriate. Individual loans that are not considered impaired and smaller-balance homogeneous loans are evaluated collectively and a general allowance is established if it is considered probable that a loss has been incurred. The accrual of interest on loans receivable is discontinued if the loan is 90 days past due based on the contractual terms of the loan unless the loan is adequately secured and in process of collection. In general, loans are placed on non-accrual status or charged off at an earlier date if collection of principal or interest is considered doubtful. Interest on these loans is accounted for on a cash basis until qualifying for return to accrual status. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” Fair value of investments is determined based on a fair value hierarchy that prioritizes the use of observable inputs over the use of unobservable inputs and requires the use of observable inputs when available. (See Note 12 of the Notes to Consolidated Financial Statements.) Realized gains or losses represent the difference between the cost of securities sold and the proceeds realized upon sale and are recorded at the trade date. The Company uses primarily the first-in, first-out method to determine the cost of securities sold. The cost of securities is adjusted where appropriate to include a provision for a decline in value which is considered to be other than temporary. An other-than-temporary decline is considered to occur in investments where there has been a sustained reduction in fair value and where the Company does not expect to recover the cost basis of the investment prior to the time of sale or maturity. For fixed maturity securities that the Company intends to sell or, more likely than not, would be required to sell, a decline in value below amortized cost is considered to be an other-than-temporary impairment (“OTTI”). The amount of OTTI is equal to the difference between amortized cost and fair value at the balance sheet date. For fixed maturity securities that the Company does not intend to sell or believes that it is more likely than not it would not be required to sell, a decline in value below amortized cost is considered to be an OTTI if the Company does not expect to recover the entire amortized cost basis of a security (i.e., the present value of cash flows expected to be collected is less than the amortized cost basis of the security). The portion of the decline in value considered to be a credit loss (i.e., the difference between the present value of cash flows expected to be collected and the amortized cost basis of the security) is recognized in earnings. The portion of the decline in value not considered to be a credit loss (i.e., the difference in the present value of cash flows expected to be collected and the fair value of the security) is recognized in other comprehensive income. Impairment assessments for structured securities, including mortgage-backed securities and asset-backed securities, collateralized debt obligations and corporate debt, are generally evaluated based on the performance of the underlying collateral under various economic and default scenarios that may involve subjective judgments and estimates by management. Modeling these securities involves various factors, such as projected default rates, the nature and realizable value of the collateral, if any, the ability of the issuer to make scheduled payments, historical performance and other relevant economic and performance factors. If an OTTI determination is made, a discounted cash flow analysis is used to ascertain the amount of the credit impairment. Real estate held for investment purposes is initially recorded at the purchase price, which is generally fair value, and is subsequently reported at cost less accumulated depreciation. Real estate taxes, interest and other costs incurred during development and construction are capitalized. Buildings are depreciated on a straight-line basis over the estimated useful lives of the building. Minimum rental income is recognized on a straight-line basis over the lease term. Income and expenses from real estate are reported as net investment income. The carrying value of real estate is reviewed for impairment and an impairment loss is recognized if the estimated undiscounted cash flows from the use and disposition of the property are less than the carrying value of the property. 62 69 1022849be 10K 1022849be_10K.indd 69 4/17/19 6:53 PM K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 9 6 63 The Company presents both basic and diluted net income per share (“EPS”) amounts. Basic EPS is calculated by shares held in a grantor trust). The common shares held in the grantor trust are for delivery upon settlement of vested but mandatorily deferred restricted stock units ("RSUs"). Shares held by the grantor trust do not affect diluted shares outstanding since the shares deliverable under vested RSUs were already included in diluted shares outstanding. Diluted EPS is based upon the weighted average number of basic and common equivalent shares outstanding during the year and is calculated using the treasury stock method for stock incentive plans. Common equivalent shares are excluded from the computation in periods in which they have an anti-dilutive effect. (F) Deferred policy acquisition costs Acquisition costs associated with the successful acquisition of new and renewed insurance and reinsurance contracts are deferred and amortized ratably over the terms of the related contracts. Ceding commissions received on reinsurance contracts are netted against acquisition costs and are recognized ratably over the life of the contract. Deferred policy acquisition costs are presented net of unearned ceding commissions. Deferred policy acquisition costs are comprised primarily of commissions, as well as employment-related underwriting costs and premium taxes. Deferred policy acquisition costs are reviewed to determine if they are recoverable from future income and, if not, are charged to expense. The recoverability of deferred policy acquisition costs is evaluated separately by each of our operating companies. Future investment income is taken into account in measuring the recoverability of deferred policy acquisition costs. (G) Reserves for losses and loss expenses Reserves for losses and loss expenses are an accumulation of amounts determined on the basis of (1) evaluation of claims for business written directly by the Company; (2) estimates received from other companies for reinsurance assumed by the Company; and (3) estimates for losses incurred but not reported (based on Company and industry experience). These estimates are periodically reviewed and, as experience develops and new information becomes known, the reserves are adjusted as necessary. Such adjustments are reflected in the statements of income in the period in which they are determined. The Company discounts its reserves for excess and assumed workers' compensation claims using a risk-free or statutory rate. (See Note 13 of Notes to Consolidated Financial Statements.) 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. (H) Reinsurance ceded (I) Deposit accounting Contracts that do not meet the risk transfer requirements of GAAP are accounted for using the deposit accounting method. Under this method, an asset or liability is recognized at the inception of the contract based on consideration paid or received. The amount of the deposit asset or liability is adjusted at subsequent reporting dates using the interest method with a corresponding credit or charge to interest income or expense. Deposit liabilities for assumed reinsurance contracts were $45 million and $47 million at December 31, 2018 and 2017, respectively. (J) Federal and foreign income taxes The Company files a consolidated income tax return in the U.S. and foreign tax returns in countries where it has overseas operations. The Company's method of accounting for income taxes is the asset and liability method. Under this method, deferred tax assets and liabilities are measured using tax rates currently in effect or expected to apply in the years in which those temporary differences are expected to reverse. Interest and penalties, if any, are reported as income tax expense. The Company believes there are no tax positions that would require disclosure under GAAP. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that all or a portion of the deferred tax assets will not be realized. securities sold but not yet purchased. Unsettled trades and the net margin balances held by the clearing broker are presented as a trading account receivable from brokers and clearing organizations. Investment funds are carried under the equity method of accounting. The Company's share of the earnings or losses of investment funds is primarily reported on a one-quarter lag in order to facilitate the timely completion of the Company's consolidated financial statements. Loans receivable primarily represent commercial real estate mortgage loans and bank loans and are carried at amortized cost. The Company monitors the performance of its loans receivable and establishes an allowance for loan losses for loans where the Company determines it is probable that the contractual terms will not be met, with a corresponding charge to earnings. For loans that are evaluated individually and deemed to be impaired, the Company establishes a specific allowance based on a discounted cash flow analysis and comparable cost and sales methodologies, if appropriate. Individual loans that are not considered impaired and smaller-balance homogeneous loans are evaluated collectively and a general allowance is established if it is considered probable that a loss has been incurred. The accrual of interest on loans receivable is discontinued if the loan is 90 days past due based on the contractual terms of the loan unless the loan is adequately secured and in process of collection. In general, loans are placed on non-accrual status or charged off at an earlier date if collection of principal or interest is considered doubtful. Interest on these loans is accounted for on a cash basis until qualifying for return to accrual status. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” Fair value of investments is determined based on a fair value inputs when available. (See Note 12 of the Notes to Consolidated Financial Statements.) Realized gains or losses represent the difference between the cost of securities sold and the proceeds realized upon sale and are recorded at the trade date. The Company uses primarily the first-in, first-out method to determine the cost of securities sold. time of sale or maturity. 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 For fixed maturity securities that the Company intends to sell or, more likely than not, would be required to sell, a decline in value below amortized cost is considered to be an other-than-temporary impairment (“OTTI”). The amount of OTTI is equal to the difference between amortized cost and fair value at the balance sheet date. For fixed maturity securities that the Company does not intend to sell or believes that it is more likely than not it would not be required to sell, a decline in value below amortized cost is considered to be an OTTI if the Company does not expect to recover the entire amortized cost basis of a security (i.e., the present value of cash flows expected to be collected is less than the amortized cost basis of the security). The portion of the decline in value considered to be a credit loss (i.e., the difference between the present value of cash flows expected to be collected and the amortized cost basis of the security) is recognized in earnings. The portion of the decline in value not considered to be a credit loss (i.e., the difference in the present value of cash flows expected to be collected and the fair value of the security) is recognized in other comprehensive income. Impairment assessments for structured securities, including mortgage-backed securities and asset-backed securities, collateralized debt obligations and corporate debt, are generally evaluated based on the performance of the underlying collateral under various economic and default scenarios that may involve subjective judgments and estimates by management. Modeling these securities involves various factors, such as projected default rates, the nature and realizable value of the collateral, if any, the ability of the issuer to make scheduled payments, historical performance and other relevant economic and performance factors. If an OTTI determination is made, a discounted cash flow analysis is used to ascertain the amount of the credit impairment. Real estate held for investment purposes is initially recorded at the purchase price, which is generally fair value, and is subsequently reported at cost less accumulated depreciation. Real estate taxes, interest and other costs incurred during development and construction are capitalized. Buildings are depreciated on a straight-line basis over the estimated useful lives of the building. Minimum rental income is recognized on a straight-line basis over the lease term. Income and expenses from real estate are reported as net investment income. The carrying value of real estate is reviewed for impairment and an impairment loss is recognized if the estimated undiscounted cash flows from the use and disposition of the property are less than the carrying value of the property. 1022849be 10K 70 7 0 1 0 2 2 8 4 9 b e 1 0 K (E) Per share data The Company presents both basic and diluted net income per share (“EPS”) amounts. Basic EPS is calculated by dividing net income by weighted average number of common shares outstanding during the year (including 4,926,521 common shares held in a grantor trust). The common shares held in the grantor trust are for delivery upon settlement of vested but mandatorily deferred restricted stock units ("RSUs"). Shares held by the grantor trust do not affect diluted shares outstanding since the shares deliverable under vested RSUs were already included in diluted shares outstanding. Diluted EPS is based upon the weighted average number of basic and common equivalent shares outstanding during the year and is calculated using the treasury stock method for stock incentive plans. Common equivalent shares are excluded from the computation in periods in which they have an anti-dilutive effect. (F) Deferred policy acquisition costs Acquisition costs associated with the successful acquisition of new and renewed insurance and reinsurance contracts are deferred and amortized ratably over the terms of the related contracts. Ceding commissions received on reinsurance contracts are netted against acquisition costs and are recognized ratably over the life of the contract. Deferred policy acquisition costs are presented net of unearned ceding commissions. Deferred policy acquisition costs are comprised primarily of commissions, as well as employment-related underwriting costs and premium taxes. Deferred policy acquisition costs are reviewed to determine if they are recoverable from future income and, if not, are charged to expense. The recoverability of deferred policy acquisition costs is evaluated separately by each of our operating companies. Future investment income is taken into account in measuring the recoverability of deferred policy acquisition costs. hierarchy that prioritizes the use of observable inputs over the use of unobservable inputs and requires the use of observable (G) Reserves for losses and loss expenses Reserves for losses and loss expenses are an accumulation of amounts determined on the basis of (1) evaluation of claims for business written directly by the Company; (2) estimates received from other companies for reinsurance assumed by the Company; and (3) estimates for losses incurred but not reported (based on Company and industry experience). These estimates are periodically reviewed and, as experience develops and new information becomes known, the reserves are adjusted as necessary. Such adjustments are reflected in the statements of income in the period in which they are determined. The Company discounts its reserves for excess and assumed workers' compensation claims using a risk-free or statutory rate. (See Note 13 of Notes to Consolidated Financial Statements.) (H) Reinsurance ceded The unearned portion of premiums ceded to reinsurers is reported as prepaid reinsurance premiums and earned ratably over the policy term. The estimated amounts of reinsurance recoverable on unpaid losses are reported as due from reinsurers. To the extent any reinsurer does not meet its obligations under reinsurance agreements, the Company must discharge its liability. Amounts due from reinsurers are reflected net of funds held where the right of offset is present. The Company has provided reserves for estimated uncollectible reinsurance. (I) Deposit accounting Contracts that do not meet the risk transfer requirements of GAAP are accounted for using the deposit accounting method. Under this method, an asset or liability is recognized at the inception of the contract based on consideration paid or received. The amount of the deposit asset or liability is adjusted at subsequent reporting dates using the interest method with a corresponding credit or charge to interest income or expense. Deposit liabilities for assumed reinsurance contracts were $45 million and $47 million at December 31, 2018 and 2017, respectively. (J) Federal and foreign income taxes The Company files a consolidated income tax return in the U.S. and foreign tax returns in countries where it has overseas operations. The Company's method of accounting for income taxes is the asset and liability method. Under this method, deferred tax assets and liabilities are measured using tax rates currently in effect or expected to apply in the years in which those temporary differences are expected to reverse. Interest and penalties, if any, are reported as income tax expense. The Company believes there are no tax positions that would require disclosure under GAAP. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that all or a portion of the deferred tax assets will not be realized. 62 63 70 1022849be 10K 1022849be_10K.indd 70 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 0 7 4/17/19 6:53 PM 1022849be 10K 71 7 1 1 0 2 2 8 4 9 b e 1 0 K (K) Foreign currency Gains and losses resulting from foreign currency transactions (transactions denominated in a currency other than the entity's functional currency) are reported on the statements of income as other operating costs and expenses. Unrealized gains or losses resulting from translating the results of non-U.S. dollar denominated operations are reported in accumulated other comprehensive income. Revenues and expenses denominated in currencies other than U.S. dollars are generally translated at the weighted average exchange rate during the year. Assets and liabilities are translated at the rate of exchange in effect at the balance sheet date. (L) Property, furniture and equipment Property, furniture and equipment are carried at cost less accumulated depreciation. Depreciation is calculated using the estimated useful lives of the respective assets. Depreciation expense was $54 million, $50 million and $47 million for 2018, 2017 and 2016, respectively. (M) Comprehensive income Comprehensive income encompasses all changes in stockholders' equity (except those arising from transactions with stockholders) and includes net income, net unrealized holding gains or losses on available for sale securities and unrealized foreign currency translation adjustments. (N) Goodwill and other intangible assets Goodwill and other intangible assets are tested for impairment on an annual basis and at interim periods where circumstances require. The Company's impairment test as of December 31, 2018 indicated that there were no material impairment losses related to goodwill and other intangible assets. Intangible assets of $104 million and $107 million are included in other assets as of December 31, 2018 and 2017, respectively. (O) Restricted stock units The costs resulting from all share-based payment transactions with employees are recognized in the consolidated financial statements using a fair-value-based measurement method. Compensation cost is recognized for financial reporting purposes over the period in which the employee is required to provide service in exchange for the award (generally the vesting period). (P) Statements of cash flows Interest payments were $155 million, $145 million and $137 million in 2018, 2017 and 2016, respectively. Income taxes paid were $186 million, $207 million and $232 million in 2018, 2017 and 2016, respectively. Other non-cash items include unrealized investment gains and losses. (See Note 10 of Notes to Consolidated Financial Statements.) (Q) Recent accounting pronouncements Recently adopted accounting pronouncements: In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, Revenue from Customers. ASU 2014-09 clarifies the principles for recognizing revenue. While insurance contracts are not within the scope of this updated guidance, the Company’s insurance service fee revenue and non-insurance business revenue are subject to this updated guidance. The updated guidance requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services. The updated guidance, as amended by ASU 2015-14, was effective for public business entities for annual and interim reporting periods beginning after December 15, 2017. The Company adopted this guidance on January 1, 2018 on a prospective basis. The impact of applying this guidance prospectively was a cumulative effect adjustment that increased retained earnings, a component of stockholders' equity, by $1 million after-tax. In January 2016, the FASB issued ASU 2016-01, Financial Instruments. ASU 2016-01 amends the accounting guidance for financial instruments to require all equity investments with readily determinable fair values to be measured at fair value with changes in the fair value recognized in net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). The updated guidance was effective for public business entities for annual reporting periods beginning after December 15, 2017 and interim periods within those years. The Company adopted this updated guidance on January 1, 2018 on a prospective basis. The impact of applying this guidance prospectively was a cumulative effect adjustment that increased retained earnings and decreased accumulated other comprehensive income ("AOCI") by offsetting amounts of $291 million, resulting in no net impact to total stockholders' equity. Following the adoption, the Company reports changes in fair value related to equity securities within net realized and unrealized gains on investments. In February 2018, the FASB issued ASU 2018-02, Reporting Comprehensive Income, which amends previous guidance to allow a reclassification to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). The amount of the reclassification includes the effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts and related valuation allowances, if any, at the date of the enactment of the Tax Act related to items in AOCI. The updated guidance was effective for reporting periods beginning after December 15, 2018, and was eligible for early adoption. The Company adopted this updated guidance on January 1, 2018. The impact of applying this guidance was a cumulative effect adjustment that decreased retained earnings and increased AOCI by offsetting amounts of $76 million, resulting in no net impact to total stockholders' equity. All other accounting and reporting standards that became effective in 2018 were either not applicable to the Company or their adoption did not have a material impact on the Company. Accounting and reporting standards that are not yet effective: In February 2016, the FASB issued ASU 2016-02, Leases, which amends the accounting and disclosure guidance for leases. This guidance retains the two classifications of a lease, as either an operating or finance lease, both of which will require lessees to recognize a right-of-use asset and a lease liability for leases with terms of more than 12 months. The right-of- use asset and the lease liability will be determined based upon the present value of cash flows. Finance leases will reflect the financial arrangement by recognizing interest expense on the lease liability separately from the amortization expense of the right-of-use asset. Operating leases will recognize lease expense (with no separate recognition of interest expense) on a straight-line basis over the term of the lease. The accounting by lessors is not significantly changed by the updated guidance. The updated guidance is effective for reporting periods beginning after December 15, 2018, and can be adopted prospectively or requires that the earliest comparative period presented include the measurement and recognition of existing leases with an adjustment to equity as if the updated guidance had always been applied. The Company will adopt the new guidance prospectively as of January 1, 2019. The Company does not expect the adoption of this guidance will have a material impact on its results of operations, financial position and liquidity. The adoption of this guidance will result in the recognition of an offsetting right-of-use asset and lease liability which will be less than 1% of total assets and approximately 1% of total liabilities. In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, which amends the accounting guidance for credit losses on financial instruments. The updated guidance amends the current other-than-temporary impairment model for available-for-sale debt securities by requiring the recognition of impairments relating to credit losses through an allowance account and limits the amount of credit loss to the difference between a security’s amortized cost basis and its fair value. This guidance also applies a new current expected credit loss model for determining credit-related impairments for financial instruments measured at amortized cost. The updated guidance is effective for reporting periods beginning after December 15, 2019. The Company will not be able to determine the impact the adoption of this guidance will have on its results of operations, financial position or liquidity until the year the guidance becomes effective. All other recently issued but not yet effective accounting and reporting standards are either not applicable to the Company or are not expected to have a material impact on the Company. 64 71 1022849be 10K 1022849be_10K.indd 71 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 1 7 4/17/19 6:53 PM 65 7 2 1 0 2 2 8 4 9 b e 1 0 K (K) Foreign currency Gains and losses resulting from foreign currency transactions (transactions denominated in a currency other than the entity's functional currency) are reported on the statements of income as other operating costs and expenses. Unrealized gains or losses resulting from translating the results of non-U.S. dollar denominated operations are reported in accumulated other comprehensive income. Revenues and expenses denominated in currencies other than U.S. dollars are generally translated at the weighted average exchange rate during the year. Assets and liabilities are translated at the rate of exchange in effect at the balance sheet date. (L) Property, furniture and equipment 2017 and 2016, respectively. (M) Comprehensive income foreign currency translation adjustments. (N) Goodwill and other intangible assets (O) Restricted stock units period). (P) Statements of cash flows Property, furniture and equipment are carried at cost less accumulated depreciation. Depreciation is calculated using the estimated useful lives of the respective assets. Depreciation expense was $54 million, $50 million and $47 million for 2018, Comprehensive income encompasses all changes in stockholders' equity (except those arising from transactions with stockholders) and includes net income, net unrealized holding gains or losses on available for sale securities and unrealized Goodwill and other intangible assets are tested for impairment on an annual basis and at interim periods where circumstances require. The Company's impairment test as of December 31, 2018 indicated that there were no material impairment losses related to goodwill and other intangible assets. Intangible assets of $104 million and $107 million are included in other assets as of December 31, 2018 and 2017, respectively. 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 Interest payments were $155 million, $145 million and $137 million in 2018, 2017 and 2016, respectively. Income taxes paid were $186 million, $207 million and $232 million in 2018, 2017 and 2016, respectively. Other non-cash items include unrealized investment gains and losses. (See Note 10 of Notes to Consolidated Financial Statements.) (Q) Recent accounting pronouncements Recently adopted accounting pronouncements: In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, Revenue from Customers. ASU 2014-09 clarifies the principles for recognizing revenue. While insurance contracts are not within the scope of this updated guidance, the Company’s insurance service fee revenue and non-insurance business revenue are subject to this updated guidance. The updated guidance requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services. The updated guidance, as amended by ASU 2015-14, was effective for public business entities for annual and interim reporting periods beginning after December 15, 2017. The Company adopted this guidance on January 1, 2018 on a prospective basis. The impact of applying this guidance prospectively was a cumulative effect adjustment that increased retained earnings, a component of stockholders' equity, by $1 million after-tax. 1022849be 10K 72 In January 2016, the FASB issued ASU 2016-01, Financial Instruments. ASU 2016-01 amends the accounting guidance for financial instruments to require all equity investments with readily determinable fair values to be measured at fair value with changes in the fair value recognized in net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). The updated guidance was effective for public business entities for annual reporting periods beginning after December 15, 2017 and interim periods within those years. The Company adopted this updated guidance on January 1, 2018 on a prospective basis. The impact of applying this guidance prospectively was a cumulative effect adjustment that increased retained earnings and decreased accumulated other comprehensive income ("AOCI") by offsetting amounts of $291 million, resulting in no net impact to total stockholders' equity. Following the adoption, the Company reports changes in fair value related to equity securities within net realized and unrealized gains on investments. In February 2018, the FASB issued ASU 2018-02, Reporting Comprehensive Income, which amends previous guidance to allow a reclassification to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). The amount of the reclassification includes the effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts and related valuation allowances, if any, at the date of the enactment of the Tax Act related to items in AOCI. The updated guidance was effective for reporting periods beginning after December 15, 2018, and was eligible for early adoption. The Company adopted this updated guidance on January 1, 2018. The impact of applying this guidance was a cumulative effect adjustment that decreased retained earnings and increased AOCI by offsetting amounts of $76 million, resulting in no net impact to total stockholders' equity. All other accounting and reporting standards that became effective in 2018 were either not applicable to the Company or their adoption did not have a material impact on the Company. Accounting and reporting standards that are not yet effective: In February 2016, the FASB issued ASU 2016-02, Leases, which amends the accounting and disclosure guidance for leases. This guidance retains the two classifications of a lease, as either an operating or finance lease, both of which will require lessees to recognize a right-of-use asset and a lease liability for leases with terms of more than 12 months. The right-of- use asset and the lease liability will be determined based upon the present value of cash flows. Finance leases will reflect the financial arrangement by recognizing interest expense on the lease liability separately from the amortization expense of the right-of-use asset. Operating leases will recognize lease expense (with no separate recognition of interest expense) on a straight-line basis over the term of the lease. The accounting by lessors is not significantly changed by the updated guidance. The updated guidance is effective for reporting periods beginning after December 15, 2018, and can be adopted prospectively or requires that the earliest comparative period presented include the measurement and recognition of existing leases with an adjustment to equity as if the updated guidance had always been applied. The Company will adopt the new guidance prospectively as of January 1, 2019. The Company does not expect the adoption of this guidance will have a material impact on its results of operations, financial position and liquidity. The adoption of this guidance will result in the recognition of an offsetting right-of-use asset and lease liability which will be less than 1% of total assets and approximately 1% of total liabilities. In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, which amends the accounting guidance for credit losses on financial instruments. The updated guidance amends the current other-than-temporary impairment model for available-for-sale debt securities by requiring the recognition of impairments relating to credit losses through an allowance account and limits the amount of credit loss to the difference between a security’s amortized cost basis and its fair value. This guidance also applies a new current expected credit loss model for determining credit-related impairments for financial instruments measured at amortized cost. The updated guidance is effective for reporting periods beginning after December 15, 2019. The Company will not be able to determine the impact the adoption of this guidance will have on its results of operations, financial position or liquidity until the year the guidance becomes effective. All other recently issued but not yet effective accounting and reporting standards are either not applicable to the Company or are not expected to have a material impact on the Company. 64 65 72 1022849be 10K 1022849be_10K.indd 72 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 2 7 4/17/19 6:53 PM 1022849be 10K 73 7 3 1 0 2 2 8 4 9 b e 1 0 K (2) Consolidated Statement of Comprehensive (Loss) Income The following tables present the components of the changes in accumulated other comprehensive (loss) income ("AOCI") as of and for the years ended December 31, 2018 and 2017: (3) Investments in Fixed Maturity Securities At December 31, 2018 and 2017, investments in fixed maturity securities were as follows: (In thousands) December 31, 2018 Changes in AOCI Beginning of period Cumulative effect adjustment resulting from changes in accounting principles Restated beginning of period Other comprehensive loss before reclassifications Amounts reclassified from AOCI Other comprehensive loss Unrealized investment loss related to non-controlling interest Ending balance Amounts reclassified from AOCI Pre-tax Tax effect After-tax amounts reclassified Other comprehensive loss Pre-tax Tax effect Other comprehensive loss Unrealized investment (losses) gains Currency translation adjustments Accumulated other comprehensive (loss) income $ 375,421 $ (306,880) $ 68,541 (214,539) 160,882 (246,535) (5,792) (252,327) (46) (91,491) — (306,880) (112,099) — (112,099) — $ (418,979) $ (7,332) (1) $ 1,540 (2) (5,792) $ (302,737) 50,410 (252,327) $ $ — $ — — $ (112,099) $ — (112,099) $ (214,539) (145,998) (358,634) (5,792) (364,426) (46) (510,470) (7,332) 1,540 (5,792) (414,836) 50,410 (364,426) $ $ $ $ $ Amortized Cost Gross Unrealized Gains Losses Fair Value Carrying Value $ $ 11,549 $ — $ — — $ 79,440 12,003 91,443 67,891 10,744 78,635 U.S. government and government agency 697,931 9,219 (4,910) 702,240 702,240 (In thousands) December 31, 2018 Held to maturity: State and municipal Residential mortgage-backed Total held to maturity Available for sale: 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 government 67,891 10,744 78,635 2,396,089 335,626 408,141 272,440 403,219 3,815,515 1,264,376 345,070 1,609,446 2,462,303 2,295,778 1,502,427 330,326 60,238 4,188,769 822,093 13,596,057 1,259 12,808 30,507 11,951 16,568 4,319 18,350 81,695 7,729 1,304 9,033 10,131 15,355 7,178 2,997 322 25,852 11,753 147,683 160,491 (24,612) 3,872,598 3,872,598 (19,790) (1,103) (30) (2,350) (1,339) (20,225) (3,708) (23,933) (33,687) (53,312) (45,683) (4,148) (167) (103,310) (25,111) 2,406,806 2,406,806 346,474 424,679 274,409 420,230 346,474 424,679 274,409 420,230 1,251,880 342,666 1,594,546 2,438,747 2,257,821 1,463,922 329,175 60,393 4,111,311 808,735 1,251,880 342,666 1,594,546 2,438,747 2,257,821 1,463,922 329,175 60,393 4,111,311 808,735 Total available for sale (215,563) 13,528,177 13,528,177 Total investments in fixed maturity securities $ 13,674,692 $ $ (215,563) $ 13,619,620 $ 13,606,812 Unrealized investment gains (losses) Currency translation adjustments Accumulated other comprehensive income (loss) (In thousands) December 31, 2017 Changes in AOCI Beginning of period $ 427,154 $ (371,586) $ Other comprehensive income before reclassifications Amounts reclassified from AOCI Other comprehensive (loss) income 63,567 (115,319) (51,752) $ $ 19 375,421 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) _______________ (1) Net realized and unrealized gains on investments in the consolidated statements of income. (2) Income tax expense in the consolidated statements of income. (177,414) (1) $ 62,095 (2) (69,425) 17,673 (51,752) (115,319) $ $ $ $ $ $ $ 64,706 — 64,706 — (306,880) $ — $ — — $ 64,706 — 64,706 $ $ 66 73 1022849be 10K 1022849be_10K.indd 73 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be 55,568 128,273 (115,319) 12,954 19 68,541 (177,414) 62,095 (115,319) (4,719) 17,673 12,954 K 0 1 e b 9 4 8 2 2 0 1 3 7 4/17/19 6:53 PM 67 1022849be 10K 74 (3) Investments in Fixed Maturity Securities At December 31, 2018 and 2017, investments in fixed maturity securities were as follows: (In thousands) December 31, 2018 Held to maturity: State and municipal Residential mortgage-backed 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 government Total available for sale Total investments in fixed maturity securities Amortized Cost Gross Unrealized Gains Losses Fair Value Carrying Value $ $ 67,891 10,744 78,635 $ 11,549 1,259 12,808 — $ — — $ 79,440 12,003 91,443 67,891 10,744 78,635 697,931 9,219 (4,910) 702,240 702,240 2,396,089 335,626 408,141 272,440 403,219 3,815,515 1,264,376 345,070 1,609,446 2,462,303 2,295,778 1,502,427 330,326 60,238 4,188,769 822,093 13,596,057 $ 13,674,692 $ 30,507 11,951 16,568 4,319 18,350 81,695 7,729 1,304 9,033 10,131 15,355 7,178 2,997 322 25,852 11,753 147,683 160,491 (19,790) (1,103) (30) (2,350) (1,339) (24,612) (20,225) (3,708) (23,933) (33,687) 2,406,806 346,474 424,679 274,409 420,230 3,872,598 1,251,880 342,666 1,594,546 2,438,747 2,406,806 346,474 424,679 274,409 420,230 3,872,598 1,251,880 342,666 1,594,546 2,438,747 (53,312) 2,257,821 (45,683) 1,463,922 (4,148) 329,175 (167) 60,393 (103,310) 4,111,311 (25,111) 808,735 (215,563) 13,528,177 (215,563) $ 13,619,620 2,257,821 1,463,922 329,175 60,393 4,111,311 808,735 13,528,177 $ 13,606,812 $ 7 4 1 0 2 2 8 4 9 b e 1 0 K (2) Consolidated Statement of Comprehensive (Loss) Income The following tables present the components of the changes in accumulated other comprehensive (loss) income ("AOCI") as of and for the years ended December 31, 2018 and 2017: (In thousands) December 31, 2018 Changes in AOCI Beginning of period Cumulative effect adjustment resulting from changes in accounting principles Restated beginning of period Other comprehensive loss before reclassifications Unrealized investment loss related to non-controlling Amounts reclassified from AOCI Other comprehensive loss interest Ending balance Amounts reclassified from AOCI Pre-tax Tax effect Pre-tax Tax effect After-tax amounts reclassified Other comprehensive loss Other comprehensive loss (In thousands) December 31, 2017 Changes in AOCI Beginning of period Other comprehensive income before reclassifications Amounts reclassified from AOCI Other comprehensive (loss) income Unrealized investment gain related to non-controlling Amounts reclassified from AOCI interest Ending balance Pre-tax Tax effect Pre-tax Tax effect _______________ After-tax amounts reclassified Other comprehensive income (loss) Other comprehensive income (loss) $ $ $ $ $ $ $ $ $ $ $ Unrealized investment (losses) gains Currency translation adjustments Accumulated other comprehensive (loss) income $ 375,421 $ (306,880) $ 68,541 (91,491) $ (418,979) $ (214,539) 160,882 (246,535) (5,792) (252,327) (46) (7,332) (1) $ 1,540 (2) (5,792) (302,737) 50,410 (252,327) 427,154 63,567 (115,319) (51,752) 19 375,421 (177,414) (1) $ 62,095 (2) (115,319) (69,425) 17,673 (51,752) $ $ $ $ $ $ $ $ (306,880) (112,099) (112,099) — — — — $ — — $ (112,099) $ — (112,099) $ (371,586) $ 64,706 64,706 — — (306,880) $ — $ — — $ 64,706 — 64,706 $ $ (214,539) (145,998) (358,634) (5,792) (364,426) (46) (510,470) (7,332) 1,540 (5,792) (414,836) 50,410 (364,426) 55,568 128,273 (115,319) 12,954 19 68,541 (177,414) 62,095 (115,319) (4,719) 17,673 12,954 Unrealized investment gains (losses) Currency translation adjustments Accumulated other comprehensive income (loss) (1) Net realized and unrealized gains on investments in the consolidated statements of income. (2) Income tax expense in the consolidated statements of income. 66 67 74 1022849be 10K 1022849be_10K.indd 74 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 4 7 4/17/19 6:53 PM 7 5 1 0 2 2 8 4 9 b e 1 0 K 1022849be 10K 75 (In thousands) December 31, 2017 Held to maturity: State and municipal Residential mortgage-backed 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 government Total available for sale Total investments in fixed maturity securities Amortized Cost Gross Unrealized Gains Losses Fair Value Carrying Value $ $ 65,882 13,450 79,332 $ 14,499 1,227 15,726 — $ — — $ 80,381 14,677 95,058 65,882 13,450 79,332 372,748 8,824 (3,832) 377,740 377,740 2,663,245 439,358 436,241 375,268 417,955 4,332,067 1,043,629 261,652 1,305,281 2,111,132 2,574,400 1,402,161 284,886 40,560 4,302,007 819,345 13,242,580 $ 13,321,912 $ 53,512 16,087 22,701 10,059 23,242 125,601 9,304 1,521 10,825 11,024 52,210 37,744 11,316 5 101,275 32,018 289,567 305,293 (10,027) (711) (9) (860) (967) (12,574) (13,547) (2,628) (16,175) (10,612) 2,706,730 454,734 458,933 384,467 440,230 4,445,094 1,039,386 260,545 1,299,931 2,111,544 2,706,730 454,734 458,933 384,467 440,230 4,445,094 1,039,386 260,545 1,299,931 2,111,544 (7,718) 2,618,892 (5,138) 1,434,767 (1,248) 294,954 (66) 40,499 (14,170) 4,389,112 (2,866) 848,497 (60,229) 13,471,918 (60,229) $ 13,566,976 2,618,892 1,434,767 294,954 40,499 4,389,112 848,497 13,471,918 $ 13,551,250 $ ____________________ (1) Gross unrealized (losses) gains for mortgage-backed securities include ($55,090) and $76,467 as of December 31, 2018 and 2017, respectively, related to the non-credit portion of OTTI recognized in other comprehensive income. The amortized cost and fair value of fixed maturity securities at December 31, 2018, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because certain issuers may have the right to call or prepay obligations. (In thousands) 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 $ 935,354 4,666,934 3,037,450 3,414,764 1,620,190 $ 13,674,692 Fair Value $ 935,894 4,669,502 3,045,868 3,361,807 1,606,549 $ 13,619,620 At December 31, 2018 and 2017, there were no investments, other than investments in United States government and government agency securities, which exceeded 10% of common stockholders’ equity. At December 31, 2018, investments with a carrying value of $1,700 million were on deposit in custodial or trust accounts, of which $1,332 million was on deposit with insurance regulators, $328 million was on deposit in support of the Company’s underwriting activities at Lloyd’s, $37 million was on deposit as security for reinsurance clients and $3 million was on deposit as security for letters of credit issued in support of the Company’s reinsurance operations. 68 75 1022849be 10K 1022849be_10K.indd 75 4/17/19 6:53 PM K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be (4) Investments in Equity Securities At December 31, 2018 and 2017, investments in equity securities were as follows: (In thousands) December 31, 2018 Common stocks Preferred stocks Total December 31, 2017 Common stocks Preferred stocks Total Cost Gross Unrealized (1) Gains Losses Fair Value Carrying Value $ 113,576 $ 4,335 $ (19,719) $ 98,192 $ 98,192 115,201 72,364 (6,751) 180,814 180,814 $ 228,777 $ 76,699 $ (26,470) $ 279,006 $ 279,006 $ 81,855 $ 272,309 $ (1,960) $ 352,204 $ 352,204 124,150 102,890 (2,597) 224,443 224,443 $ 206,005 $ 375,199 $ (4,557) $ 576,647 $ 576,647 (1) Effective January 1, 2018, the Company adopted new accounting guidance that requires all equity investments with readily determinable fair values (subject to certain exceptions) to be measured at fair value, with changes in the fair value recognized through net income within net realized and unrealized gains on investments. Refer to Note 1 for additional information. (5) Arbitrage Trading Account At December 31, 2018 and 2017, the fair value and carrying value of the arbitrage trading account were $453 million and $618 million, respectively. The primary focus of the trading account is merger arbitrage. Merger arbitrage is the business of investing in the securities of publicly held companies which are the targets in announced tender offers and mergers. Arbitrage investing differs from other types of investing in its focus on transactions and events believed likely to bring about a change in value over a relatively short time period (usually four months or less). The Company uses put options, call options and swap contracts in order to mitigate the impact of potential changes in market conditions on the merger arbitrage trading account. These options and contracts are reported at fair value. As of December 31, 2018, the fair value of long option contracts outstanding was $37 thousand (notional amount of $18.4 million) and the fair value of short option contracts outstanding was $58 thousand (notional amount of $11.6 million). Other than with respect to the use of these trading account securities, the Company does not make use of derivatives. (6) Net Investment Income Net investment income consists of the following: Fixed maturity securities, including cash and cash equivalents and loans (In thousands) Investment income earned on: receivable Investment funds Arbitrage trading account Real estate Equity securities Gross investment income Investment expense Net investment income 2018 2017 2016 $ 519,269 $ 473,101 $ 444,247 109,349 28,157 18,591 3,230 68,169 19,145 19,975 2,350 99,301 18,693 7,054 4,028 678,596 582,740 573,323 (4,361) (6,952) (9,160) $ 674,235 $ 575,788 $ 564,163 K 0 1 e b 9 4 8 2 2 0 1 5 7 69 Amortized Cost Gross Unrealized Gains Losses Fair Value Carrying Value $ $ 14,499 $ — $ — — $ 80,381 14,677 95,058 65,882 13,450 79,332 U.S. government and government agency 372,748 8,824 (3,832) 377,740 377,740 65,882 13,450 79,332 2,663,245 439,358 436,241 375,268 417,955 1,043,629 261,652 1,305,281 2,111,132 2,574,400 1,402,161 284,886 40,560 4,302,007 819,345 13,242,580 1,227 15,726 53,512 16,087 22,701 10,059 23,242 9,304 1,521 10,825 11,024 52,210 37,744 11,316 5 101,275 32,018 289,567 305,293 (In thousands) December 31, 2017 Held to maturity: State and municipal Residential mortgage-backed Total held to maturity Available for sale: 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 government ____________________ 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 (10,027) 2,706,730 2,706,730 (711) (9) (860) (967) 454,734 458,933 384,467 440,230 (13,547) (2,628) (16,175) (10,612) (7,718) (5,138) (1,248) (66) (14,170) (2,866) (60,229) 1,039,386 260,545 1,299,931 2,111,544 2,618,892 1,434,767 294,954 40,499 4,389,112 848,497 454,734 458,933 384,467 440,230 1,039,386 260,545 1,299,931 2,111,544 2,618,892 1,434,767 294,954 40,499 4,389,112 848,497 Amortized Cost Fair Value $ 935,354 $ 935,894 4,666,934 3,037,450 3,414,764 1,620,190 4,669,502 3,045,868 3,361,807 1,606,549 $ 13,674,692 $ 13,619,620 Total available for sale 13,471,918 13,471,918 (1) Gross unrealized (losses) gains for mortgage-backed securities include ($55,090) and $76,467 as of December 31, 2018 and 2017, respectively, related to the non-credit portion of OTTI recognized in other comprehensive income. The amortized cost and fair value of fixed maturity securities at December 31, 2018, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because certain issuers may have the right to call or prepay 1022849be 10K 76 7 6 1 0 2 2 8 4 9 b e 1 0 K (4) Investments in Equity Securities At December 31, 2018 and 2017, investments in equity securities were as follows: (In thousands) December 31, 2018 Common stocks Preferred stocks Total December 31, 2017 Common stocks Preferred stocks Total Cost Gross Unrealized (1) Losses Gains Fair Value Carrying Value $ 113,576 $ 4,335 115,201 72,364 $ (19,719) $ (6,751) 98,192 $ 98,192 180,814 180,814 $ 228,777 $ 76,699 $ (26,470) $ 279,006 $ 279,006 $ 81,855 $ 272,309 $ 124,150 102,890 (1,960) $ 352,204 (2,597) 224,443 $ 352,204 224,443 $ 206,005 $ 375,199 $ (4,557) $ 576,647 $ 576,647 4,332,067 125,601 (12,574) 4,445,094 4,445,094 (1) Effective January 1, 2018, the Company adopted new accounting guidance that requires all equity investments with readily determinable fair values (subject to certain exceptions) to be measured at fair value, with changes in the fair value recognized through net income within net realized and unrealized gains on investments. Refer to Note 1 for additional information. (5) Arbitrage Trading Account At December 31, 2018 and 2017, the fair value and carrying value of the arbitrage trading account were $453 million and $618 million, respectively. The primary focus of the trading account is merger arbitrage. Merger arbitrage is the business of investing in the securities of publicly held companies which are the targets in announced tender offers and mergers. Arbitrage investing differs from other types of investing in its focus on transactions and events believed likely to bring about a change in value over a relatively short time period (usually four months or less). The Company uses put options, call options and swap contracts in order to mitigate the impact of potential changes in market conditions on the merger arbitrage trading account. These options and contracts are reported at fair value. As of December 31, 2018, the fair value of long option contracts outstanding was $37 thousand (notional amount of $18.4 million) and the fair value of short option contracts outstanding was $58 thousand (notional amount of $11.6 million). Other than with respect to the use of these trading account securities, the Company does not make use of derivatives. Total investments in fixed maturity securities $ 13,321,912 $ $ (60,229) $ 13,566,976 $ 13,551,250 (6) Net Investment Income Net investment income consists of the following: (In thousands) Investment income earned on: Fixed maturity securities, including cash and cash equivalents and loans receivable Investment funds Arbitrage trading account Real estate Equity securities Gross investment income Investment expense Net investment income 2018 2017 2016 $ 519,269 $ 473,101 $ 444,247 109,349 28,157 18,591 3,230 678,596 (4,361) 674,235 $ 68,169 19,145 19,975 2,350 99,301 18,693 7,054 4,028 582,740 (6,952) 575,788 $ 573,323 (9,160) 564,163 $ At December 31, 2018 and 2017, there were no investments, other than investments in United States government and government agency securities, which exceeded 10% of common stockholders’ equity. At December 31, 2018, investments with a carrying value of $1,700 million were on deposit in custodial or trust accounts, of which $1,332 million was on deposit with insurance regulators, $328 million was on deposit in support of the Company’s underwriting activities at Lloyd’s, $37 million was on deposit as security for reinsurance clients and $3 million was on deposit as security for letters of credit issued in support of the Company’s reinsurance operations. 68 69 76 1022849be 10K 1022849be_10K.indd 76 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 6 7 4/17/19 6:53 PM (9) Loans Receivable Loans receivable are as follows: Amortized cost (net of valuation allowance): (In thousands) Real estate loans Commercial loans Total Fair value: Real estate loans Commercial loans Total Valuation allowance: Specific General Total As of December 31, 2018 2017 62,289 32,524 94,813 63,047 34,026 97,073 1,200 2,183 3,383 $ $ $ $ $ $ 66,057 13,627 79,684 66,917 15,130 82,047 1,200 2,183 3,383 For the Year Ended December 31, 2018 2017 — $ (14) $ $ $ $ $ $ $ Increase (decrease) in valuation allowance Loans receivable in non-accrual status were $1.2 million and $4.3 million as of December 31, 2018 and 2017, respectively. The Company monitors the performance of its loans receivable and assesses the ability of the borrower to pay principal and interest based upon loan structure, underlying property values, cash flow and related financial and operating performance of the property and market conditions. Loans receivable with a potential for default are further assessed using discounted cash flow analysis and comparable cost and sales methodologies, if appropriate. The real estate loans are secured by commercial real estate primarily located in New York. These loans generally earn interest at floating LIBOR-based interest rates and have maturities (inclusive of extension options) through August 2025. The commercial loans are with small business owners who have secured the related financing with the assets of the business. Commercial loans generally earn interest on a fixed basis and have varying maturities not exceeding 10 years. In evaluating the real estate loans, the Company considers their credit quality indicators, including loan to value ratios, which compare the outstanding loan amount to the estimated value of the property, the borrower’s financial condition and performance with respect to loan terms, the position in the capital structure, the overall leverage in the capital structure and other market conditions. Based on these considerations, none of the real estate loans were considered to be impaired at December 31, 2018, and accordingly, the Company determined that a specific valuation allowance was not required. 1022849be 10K 77 7 7 1 0 2 2 8 4 9 b e 1 0 K (7) Investment Funds The Company evaluates whether it is an investor in a variable interest entity ("VIE"). Such entities do not have sufficient equity at risk to finance their activities without additional subordinated financial support, or the equity investors, as a group, do not have the characteristics of a controlling financial interest (primary beneficiary). The Company determines whether it is the primary beneficiary of an entity subject to consolidation based on a qualitative assessment of the VIE's capital structure, contractual terms, nature of the VIE's operations and purpose, and the Company's relative exposure to the related risks of the VIE on the date it becomes initially involved in the VIE and on an ongoing basis. The Company is not the primary beneficiary in any of its investment funds, and accordingly, carries its interests in investments funds under the equity method of accounting. The Company’s maximum exposure to loss with respect to these investments is limited to the carrying amount reported on the Company’s consolidated balance sheet and its unfunded commitments of $270.2 million as of December 31, 2018. Investment funds consist of the following: (In thousands) Real estate Energy Other funds Total Carrying Value as of December 31, 2017 2018 606,995 642,137 $ $ Income (Losses) 2017 2018 $ 61,453 $ 75,213 615,468 82,882 465,800 645 47,251 $ 45,068 (15,764) 38,865 2016 50,415 19,747 29,139 $ 1,332,818 $ 1,155,677 $ 109,349 $ 68,169 $ 99,301 The Company's share of the earnings or losses of investment funds is primarily reported on a one-quarter lag in order to facilitate the timely completion of the Company's consolidated financial statements. (8) Real Estate Investment in real estate represents directly owned property held for investment, as follows: (In thousands) Properties in operation Properties under development Total As of December 31, 2018 1,279,584 677,508 1,957,092 $ $ 2017 451,691 1,017,910 1,469,601 $ $ In 2018, properties in operation included a long-term ground lease in Washington, D.C., a hotel in Memphis, Tennessee, two office complexes in New York City, office buildings in West Palm Beach and Palm Beach, Florida, and an office building in London, U.K. The office building in London, previously under development, transferred to properties in operation in 2018. Properties in operation are net of accumulated depreciation and amortization of $44,340,000 and $25,646,000 as of December 31, 2018 and 2017, respectively. Related depreciation expense was $20,644,000 and $9,212,000 for the years ended December 31, 2018 and 2017, respectively. Future minimum rental income expected on operating leases relating to properties in operation is $61,458,048 in 2019, $62,141,471 in 2020, $61,325,176 in 2021, $61,077,419 in 2022, $54,362,011 in 2023 and $584,592,072 thereafter. The Company borrowed $101,750,000 through a non-recourse loan secured by the West Palm Beach office building in 2018. The loan matures in November 2028 and carries a fixed interest rate of 4.21%. The carrying value does not reflect the outstanding financing, but rather is reflected in subsidiary debt referenced in Note 15, Indebtedness. A mixed-use project in Washington, D.C. has been under development in 2017 and 2018. 70 77 1022849be 10K 1022849be_10K.indd 77 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 7 7 4/17/19 6:53 PM 71 (7) Investment Funds The Company evaluates whether it is an investor in a variable interest entity ("VIE"). Such entities do not have sufficient equity at risk to finance their activities without additional subordinated financial support, or the equity investors, as a group, do not have the characteristics of a controlling financial interest (primary beneficiary). The Company determines whether it is the primary beneficiary of an entity subject to consolidation based on a qualitative assessment of the VIE's capital structure, contractual terms, nature of the VIE's operations and purpose, and the Company's relative exposure to the related risks of the VIE on the date it becomes initially involved in the VIE and on an ongoing basis. The Company is not the primary beneficiary in any of its investment funds, and accordingly, carries its interests in investments funds under the equity method of accounting. The Company’s maximum exposure to loss with respect to these investments is limited to the carrying amount reported on the Company’s consolidated balance sheet and its unfunded commitments of $270.2 million as of December 31, 2018. Investment funds consist of the following: Carrying Value as of December 31, 2018 2017 Income (Losses) 2018 2017 2016 $ 642,137 $ 606,995 $ 61,453 $ 45,068 $ 75,213 615,468 82,882 465,800 645 47,251 (15,764) 38,865 50,415 19,747 29,139 $ 1,332,818 $ 1,155,677 $ 109,349 $ 68,169 $ 99,301 The Company's share of the earnings or losses of investment funds is primarily reported on a one-quarter lag in order to facilitate the timely completion of the Company's consolidated financial statements. As of December 31, 2018 1,279,584 677,508 1,957,092 $ $ 2017 451,691 1,017,910 1,469,601 $ $ In 2018, properties in operation included a long-term ground lease in Washington, D.C., a hotel in Memphis, Tennessee, two office complexes in New York City, office buildings in West Palm Beach and Palm Beach, Florida, and an office building in London, U.K. The office building in London, previously under development, transferred to properties in operation in 2018. Properties in operation are net of accumulated depreciation and amortization of $44,340,000 and $25,646,000 as of December 31, 2018 and 2017, respectively. Related depreciation expense was $20,644,000 and $9,212,000 for the years ended December 31, 2018 and 2017, respectively. Future minimum rental income expected on operating leases relating to properties in operation is $61,458,048 in 2019, $62,141,471 in 2020, $61,325,176 in 2021, $61,077,419 in 2022, $54,362,011 in 2023 and $584,592,072 thereafter. The Company borrowed $101,750,000 through a non-recourse loan secured by the West Palm Beach office building in 2018. The loan matures in November 2028 and carries a fixed interest rate of 4.21%. The carrying value does not reflect the outstanding financing, but rather is reflected in subsidiary debt referenced in Note 15, Indebtedness. A mixed-use project in Washington, D.C. has been under development in 2017 and 2018. (In thousands) Real estate Energy Other funds Total (8) Real Estate (In thousands) Properties in operation Properties under development Total 7 8 1 0 2 2 8 4 9 b e 1 0 K (9) Loans Receivable Loans receivable are as follows: (In thousands) Amortized cost (net of valuation allowance): Real estate loans Commercial loans Total Fair value: Real estate loans Commercial loans Total Valuation allowance: Specific General Total Investment in real estate represents directly owned property held for investment, as follows: Increase (decrease) in valuation allowance 1022849be 10K 78 As of December 31, 2018 2017 62,289 32,524 94,813 63,047 34,026 97,073 1,200 2,183 3,383 $ $ $ $ $ $ 66,057 13,627 79,684 66,917 15,130 82,047 1,200 2,183 3,383 $ $ $ $ $ $ For the Year Ended December 31, 2018 2017 $ — $ (14) Loans receivable in non-accrual status were $1.2 million and $4.3 million as of December 31, 2018 and 2017, respectively. The Company monitors the performance of its loans receivable and assesses the ability of the borrower to pay principal and interest based upon loan structure, underlying property values, cash flow and related financial and operating performance of the property and market conditions. Loans receivable with a potential for default are further assessed using discounted cash flow analysis and comparable cost and sales methodologies, if appropriate. The real estate loans are secured by commercial real estate primarily located in New York. These loans generally earn interest at floating LIBOR-based interest rates and have maturities (inclusive of extension options) through August 2025. The commercial loans are with small business owners who have secured the related financing with the assets of the business. Commercial loans generally earn interest on a fixed basis and have varying maturities not exceeding 10 years. In evaluating the real estate loans, the Company considers their credit quality indicators, including loan to value ratios, which compare the outstanding loan amount to the estimated value of the property, the borrower’s financial condition and performance with respect to loan terms, the position in the capital structure, the overall leverage in the capital structure and other market conditions. Based on these considerations, none of the real estate loans were considered to be impaired at December 31, 2018, and accordingly, the Company determined that a specific valuation allowance was not required. 70 71 78 1022849be 10K 1022849be_10K.indd 78 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 8 7 4/17/19 6:53 PM 1022849be 10K 79 7 9 1 0 2 2 8 4 9 b e 1 0 K (10) Net Realized and Unrealized Gains (Losses) on Investments Net realized and unrealized gains (losses) on investments are as follows: (In thousands) 2018 2017 2016 Net realized and unrealized gains (losses) on investments in earnings Fixed maturity securities: Gains Losses Equity securities (1): Net realized gains on investment sales Change in unrealized gains Investment funds (2) Real estate Loans receivable Other (3) Net realized and unrealized gains on investments in earnings before OTTI Other-than-temporary impairments (4) $ 26,752 $ 28,217 $ 72,215 (13,733) (5,342) (6,434) 435,150 154,539 14,201 (320,413) — (212) 125,423 27,816 2,838 1,977 160,175 (5,687) 12,880 — 20,141 335,858 — — 58,861 7,757 — 138,519 285,119 (18,114) 267,005 Net realized and unrealized gains on investments in earnings 154,488 335,858 Income tax expense (32,442) (117,550) (93,452) After-tax net realized and unrealized gains on investments in earnings $ 122,046 $ 218,308 $ 173,553 Change in unrealized investment (losses) gains of available for sales securities: Fixed maturity securities Previously impaired fixed maturity securities Equity securities available for sale (5) Investment funds Total change in unrealized investment (losses) gains Income tax benefit (expense) Noncontrolling interests $ (297,084) $ (2,192) $ (107,094) (132) — 895 451 (77,971) 465,727 (5,521) 9,843 12,631 (302,737) (69,425) 371,715 50,410 17,673 (125,315) (46) 19 59 After-tax change in unrealized investment (losses) gains of available for sale securities $ (252,373) $ (51,733) $ 246,459 ____________________ (1) The net realized gains or losses on investment sales represent the total gains or losses from the purchase dates of the equity securities. The change in unrealized gains consists of two components: (i) the reversal of the gain or loss recognized in previous periods on equity securities sold and (ii) the change in unrealized gain or loss resulting from mark-to-market adjustments on equity securities still held. (2) Investment funds includes a gain of $124 million from the sale of an investment in an office building located in Washington, D.C. for the year ended December 31, 2017. (3) Other includes a gain of $135 million from the sale of Aero Precision Industries and certain related aviation services business for the year ended December 31, 2016. (4) For the year ended December 31, 2018, OTTI related to fixed maturity securities was $6 million. There were no OTTI for the year ended December 31, 2017. For the year ended December 31, 2016, OTTI related to equity securities was $18 million. (5) Effective January 1, 2018, the Company adopted new accounting guidance that requires all equity investments with readily determinable fair values (subject to certain exceptions) to be measured at fair value with changes in the fair value recognized in net income. The Company recorded an adjustment of $291 million to opening AOCI net of tax as a result of this guidance. Refer to Note 1 for further information. 72 79 1022849be 10K 1022849be_10K.indd 79 4/17/19 6:53 PM K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be (11) Securities in an Unrealized Loss Position The following tables summarize all fixed maturity securities in an unrealized loss position at December 31, 2018 and 2017 by the length of time those securities have been continuously in an unrealized loss position. U.S. government and government agency $ 195,359 $ 933 $ 130,815 $ 3,977 $ 326,174 $ Less Than 12 Months 12 Months or Greater Total Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses 701,700 334,063 1,687,665 1,730,513 246,273 6,874 2,911 28,965 54,181 24,197 744,905 712,595 342,855 954,763 80,004 17,738 21,022 1,446,605 1,046,658 4,722 2,030,520 49,129 2,685,276 914 326,277 Fixed maturity securities $ 4,895,573 $ 118,061 $ 2,965,937 $ 97,502 $ 7,861,510 $ 215,563 U.S. government and government agency $ 92,167 $ 1,491 $ 72,055 $ 2,341 $ 164,222 $ 735,972 480,435 1,127,309 1,103,747 244,139 5,944 5,110 8,298 8,224 2,615 345,755 373,956 167,412 170,858 25,824 6,630 1,081,727 11,065 854,391 2,314 5,946 251 1,294,721 1,274,605 269,963 Fixed maturity securities $ 3,783,769 $ 31,682 $ 1,155,860 $ 28,547 $ 4,939,629 $ 60,229 Fixed Maturity Securities — A summary of the Company’s non-investment grade fixed maturity securities that were in an unrealized loss position at December 31, 2018 is presented in the table below: 4,910 24,612 23,933 33,687 103,310 25,111 3,832 12,574 16,175 10,612 14,170 2,866 (In thousands) December 31, 2018 State and municipal Mortgage-backed securities Asset-backed securities Corporate Foreign government December 31, 2017 State and municipal Mortgage-backed securities Asset-backed securities Corporate Foreign government ($ in thousands) Foreign government Corporate Asset-backed securities Mortgage-backed securities Total Number of Securities Aggregate Fair Value $ 140,854 $ 13 13 5 5 120,078 14,662 8,741 Gross Unrealized Loss 21,411 13,111 2,593 69 36 $ 284,335 $ 37,184 For OTTI of fixed maturity securities that management does not intend to sell or, more likely than not, would not be required to sell, the portion of the decline in value considered to be due to credit factors is recognized in earnings and the portion of the decline in value considered to be due to non-credit factors is recognized in other comprehensive income. For the year ended December 31, 2018, OTTI recognized in earnings for fixed maturity securities was $6 million. For the year ended December 31, 2017, there were no OTTI on fixed maturity securities. The Company has evaluated its fixed maturity securities in an unrealized loss position and believes the unrealized losses are due primarily to temporary market and sector-related factors rather than to issuer-specific factors. None of these securities are delinquent or in default on financial covenants. Based on its assessment of these issuers, the Company expects them to continue to meet their contractual payment obligations as they become due and does not consider any of these securities to be OTTI. K 0 1 e b 9 4 8 2 2 0 1 9 7 73 Fixed maturity securities: Gains Losses Equity securities (1): Net realized gains on investment sales Change in unrealized gains Investment funds (2) Real estate Loans receivable Other (3) $ 26,752 $ 28,217 $ 72,215 (13,733) (5,342) (6,434) 435,150 154,539 14,201 (320,413) — (212) 125,423 27,816 2,838 1,977 160,175 (5,687) 12,880 — 20,141 335,858 — — 58,861 7,757 — 138,519 285,119 (18,114) 267,005 Income tax expense (32,442) (117,550) (93,452) After-tax net realized and unrealized gains on investments in earnings $ 122,046 $ 218,308 $ 173,553 Change in unrealized investment (losses) gains of available for sales securities: Fixed maturity securities Previously impaired fixed maturity securities Equity securities available for sale (5) Investment funds Total change in unrealized investment (losses) gains Income tax benefit (expense) Noncontrolling interests securities ____________________ After-tax change in unrealized investment (losses) gains of available for sale $ (297,084) $ (2,192) $ (107,094) (132) — 895 451 (77,971) 465,727 (5,521) 9,843 12,631 (302,737) (69,425) 371,715 50,410 17,673 (125,315) (46) 19 59 $ (252,373) $ (51,733) $ 246,459 (1) The net realized gains or losses on investment sales represent the total gains or losses from the purchase dates of the equity securities. The change in unrealized gains consists of two components: (i) the reversal of the gain or loss recognized in previous periods on equity securities sold and (ii) the change in unrealized gain or loss resulting from mark-to-market adjustments on equity securities still held. (2) Investment funds includes a gain of $124 million from the sale of an investment in an office building located in Washington, D.C. for the year ended December 31, 2017. (3) Other includes a gain of $135 million from the sale of Aero Precision Industries and certain related aviation services business for the year ended December 31, 2016. (4) For the year ended December 31, 2018, OTTI related to fixed maturity securities was $6 million. There were no OTTI for the year ended December 31, 2017. For the year ended December 31, 2016, OTTI related to equity securities was $18 million. (5) Effective January 1, 2018, the Company adopted new accounting guidance that requires all equity investments with readily determinable fair values (subject to certain exceptions) to be measured at fair value with changes in the fair value recognized in net income. The Company recorded an adjustment of $291 million to opening AOCI net of tax as a result of this guidance. Refer to Note 1 for further information. (10) Net Realized and Unrealized Gains (Losses) on Investments Net realized and unrealized gains (losses) on investments are as follows: (In thousands) 2018 2017 2016 Net realized and unrealized gains (losses) on investments in earnings 8 0 1 0 2 2 8 4 9 b e 1 0 K 1022849be 10K 80 (11) Securities in an Unrealized Loss Position The following tables summarize all fixed maturity securities in an unrealized loss position at December 31, 2018 and 2017 by the length of time those securities have been continuously in an unrealized loss position. (In thousands) December 31, 2018 Less Than 12 Months Gross Unrealized Losses Fair Value 12 Months or Greater Gross Unrealized Losses Fair Value Total Fair Value Gross Unrealized Losses U.S. government and government agency $ 195,359 $ 933 $ 130,815 $ 3,977 $ 326,174 $ State and municipal Mortgage-backed securities Asset-backed securities Corporate Foreign government 701,700 334,063 1,687,665 1,730,513 246,273 6,874 2,911 28,965 54,181 24,197 744,905 712,595 342,855 954,763 80,004 17,738 21,022 1,446,605 1,046,658 4,722 2,030,520 49,129 2,685,276 914 326,277 4,910 24,612 23,933 33,687 103,310 25,111 Fixed maturity securities $ 4,895,573 $ 118,061 $ 2,965,937 $ 97,502 $ 7,861,510 $ 215,563 Net realized and unrealized gains on investments in earnings before OTTI Other-than-temporary impairments (4) December 31, 2017 Net realized and unrealized gains on investments in earnings 154,488 335,858 U.S. government and government agency $ 92,167 $ 1,491 $ 72,055 $ 2,341 $ 164,222 $ State and municipal Mortgage-backed securities Asset-backed securities Corporate Foreign government 735,972 480,435 1,127,309 1,103,747 244,139 5,944 5,110 8,298 8,224 2,615 345,755 373,956 167,412 170,858 25,824 6,630 1,081,727 11,065 854,391 2,314 5,946 251 1,294,721 1,274,605 269,963 3,832 12,574 16,175 10,612 14,170 2,866 Fixed maturity securities $ 3,783,769 $ 31,682 $ 1,155,860 $ 28,547 $ 4,939,629 $ 60,229 Fixed Maturity Securities — A summary of the Company’s non-investment grade fixed maturity securities that were in an unrealized loss position at December 31, 2018 is presented in the table below: ($ in thousands) Foreign government Corporate Asset-backed securities Mortgage-backed securities Total Number of Securities 13 13 5 5 Aggregate Fair Value 140,854 $ 120,078 14,662 8,741 Gross Unrealized Loss $ 21,411 13,111 2,593 69 36 $ 284,335 $ 37,184 For OTTI of fixed maturity securities that management does not intend to sell or, more likely than not, would not be required to sell, the portion of the decline in value considered to be due to credit factors is recognized in earnings and the portion of the decline in value considered to be due to non-credit factors is recognized in other comprehensive income. For the year ended December 31, 2018, OTTI recognized in earnings for fixed maturity securities was $6 million. For the year ended December 31, 2017, there were no OTTI on fixed maturity securities. The Company has evaluated its fixed maturity securities in an unrealized loss position and believes the unrealized losses are due primarily to temporary market and sector-related factors rather than to issuer-specific factors. None of these securities are delinquent or in default on financial covenants. Based on its assessment of these issuers, the Company expects them to continue to meet their contractual payment obligations as they become due and does not consider any of these securities to be OTTI. 72 73 80 1022849be 10K 1022849be_10K.indd 80 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 0 8 4/17/19 6:53 PM 8 1 1 0 2 2 8 4 9 b e 1 0 K (12) Fair Value Measurements The following tables present the assets and liabilities measured at fair value as of December 31, 2018 and 2017 by level: 1022849be 10K 81 The Company’s fixed maturity and equity securities classified as available for sale and its trading account securities are carried at fair value. Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date”. The Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, as follows: Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Level 2 - Quoted prices for similar assets or valuations based on inputs that are observable. Level 3 - Estimates of fair value based on internal pricing methodologies using unobservable inputs. Unobservable inputs are only used to measure fair value to the extent that observable inputs are not available. Substantially all of the Company’s fixed maturity securities were priced by independent pricing services. The prices provided by the independent pricing services are estimated based on observable market data in active markets utilizing pricing models and processes, which may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, sector groupings, matrix pricing and reference data. The pricing services may prioritize inputs differently on any given day for any security based on market conditions, and not all inputs are available for each security evaluation on any given day. The pricing services used by the Company have indicated that they will only produce an estimate of fair value if objectively verifiable information is available. The determination of whether markets are active or inactive is based upon the volume and level of activity for a particular asset class. The Company reviews the prices provided by pricing services for reasonableness and periodically performs independent price tests of a sample of securities to ensure proper valuation. If prices from independent pricing services are not available for fixed maturity securities, the Company estimates the fair value. For Level 2 securities, the Company utilizes pricing models and processes which may include benchmark yields, sector groupings, matrix pricing, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, bids, offers and reference data. Where broker quotes are used, the Company generally requests two or more quotes and sets a price within the range of quotes received based on its assessment of the credibility of the quote and its own evaluation of the security. The Company generally does not adjust quotes received from brokers. For securities traded only in private negotiations, the Company determines fair value based primarily on the cost of such securities, which is adjusted to reflect prices of recent placements of securities of the same issuer, financial projections, credit quality and business developments of the issuer and other relevant information. For Level 3 securities, the Company generally uses a discounted cash flow model to estimate the fair value of fixed maturity securities. The cash flow models are based upon assumptions as to prevailing credit spreads, interest rate and interest rate volatility, time to maturity and subordination levels. Projected cash flows are discounted at rates that are adjusted to reflect illiquidity, where appropriate. (In thousands) December 31, 2018 Assets: Fixed maturity securities available for sale: U.S. government and government agency Total Level 1 Level 2 Level 3 $ 702,240 $ — $ 702,240 $ Trading account securities sold but not yet purchased $ 38,120 37,327 $ — $ 793 $ 14,259,731 442,931 $ 13,786,852 $ Total fixed maturity securities available for sale State and municipal Mortgage-backed securities Asset-backed securities Corporate Foreign government Equity securities: Common stocks Preferred stocks Total equity securities Arbitrage trading account Total Liabilities: State and municipal Mortgage-backed securities Asset-backed securities Corporate Foreign government Equity securities: Common stocks Preferred stocks Total equity securities Arbitrage trading account Total Liabilities: December 31, 2017 Assets: Fixed maturity securities available for sale: U.S. government and government agency Total fixed maturity securities available for sale — — — — — — — — — — — — — 89,596 — 89,596 353,335 342,834 342,834 471,420 3,872,598 1,594,546 2,438,648 4,111,311 808,735 13,528,078 — 176,869 176,869 81,905 4,445,094 1,299,931 2,111,372 4,389,112 848,497 13,471,746 — 213,600 213,600 146,229 3,872,598 1,594,546 2,438,747 4,111,311 808,735 13,528,177 98,192 180,814 279,006 452,548 4,445,094 1,299,931 2,111,544 4,389,112 848,497 13,471,918 352,204 224,443 576,647 617,649 $ $ $ $ $ 377,740 $ — $ 377,740 $ — — — 99 — — 99 8,596 3,945 12,541 17,308 29,948 — — — 172 — — 172 9,370 10,843 20,213 — Trading account securities sold but not yet purchased $ 64,358 64,358 $ — $ — $ 14,666,214 814,254 $ 13,831,575 $ 20,385 74 81 1022849be 10K 1022849be_10K.indd 81 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 1 8 4/17/19 6:53 PM 75 (12) Fair Value Measurements The Company’s fixed maturity and equity securities classified as available for sale and its trading account securities are carried at fair value. Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date”. The Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, as follows: Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Level 2 - Quoted prices for similar assets or valuations based on inputs that are observable. Level 3 - Estimates of fair value based on internal pricing methodologies using unobservable inputs. Unobservable inputs are only used to measure fair value to the extent that observable inputs are not available. Substantially all of the Company’s fixed maturity securities were priced by independent pricing services. The prices provided by the independent pricing services are estimated based on observable market data in active markets utilizing pricing models and processes, which may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, sector groupings, matrix pricing and reference data. The pricing services may prioritize inputs differently on any given day for any security based on market conditions, and not all inputs are available for each security evaluation on any given day. The pricing services used by the Company have indicated that they will only produce an estimate of fair value if objectively verifiable information is available. The determination of whether markets are active or inactive is based upon the volume and level of activity for a particular asset class. The Company reviews the prices provided by pricing services for reasonableness and periodically performs independent price tests of a sample of securities to ensure proper valuation. information. 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 For Level 3 securities, the Company generally uses a discounted cash flow model to estimate the fair value of fixed maturity securities. The cash flow models are based upon assumptions as to prevailing credit spreads, interest rate and interest rate volatility, time to maturity and subordination levels. Projected cash flows are discounted at rates that are adjusted to reflect illiquidity, where appropriate. If prices from independent pricing services are not available for fixed maturity securities, the Company estimates the fair Trading account securities sold but not yet purchased $ 38,120 37,327 $ — $ 793 8 2 1 0 2 2 8 4 9 b e 1 0 K The following tables present the assets and liabilities measured at fair value as of December 31, 2018 and 2017 by level: 1022849be 10K 82 Total Level 1 Level 2 Level 3 (In thousands) December 31, 2018 Assets: Fixed maturity securities available for sale: U.S. government and government agency State and municipal Mortgage-backed securities Asset-backed securities Corporate Foreign government Total fixed maturity securities available for sale Equity securities: Common stocks Preferred stocks Total equity securities Arbitrage trading account Total Liabilities: December 31, 2017 Assets: Fixed maturity securities available for sale: U.S. government and government agency State and municipal Mortgage-backed securities Asset-backed securities Corporate Foreign government Total fixed maturity securities available for sale Equity securities: Common stocks Preferred stocks Total equity securities Arbitrage trading account Total Liabilities: $ 702,240 $ — $ 702,240 $ 3,872,598 1,594,546 2,438,747 4,111,311 808,735 13,528,177 98,192 180,814 279,006 452,548 $ 14,259,731 $ $ — — — — — — 89,596 — 89,596 353,335 3,872,598 1,594,546 2,438,648 4,111,311 808,735 13,528,078 — 176,869 176,869 81,905 442,931 $ 13,786,852 $ $ 377,740 $ — $ 377,740 $ 4,445,094 1,299,931 2,111,544 4,389,112 848,497 13,471,918 352,204 224,443 576,647 617,649 $ 14,666,214 — — — — — — 342,834 — 342,834 471,420 4,445,094 1,299,931 2,111,372 4,389,112 848,497 13,471,746 — 213,600 213,600 146,229 $ $ 814,254 $ 13,831,575 $ 20,385 64,358 $ — $ — — — — 99 — — 99 8,596 3,945 12,541 17,308 29,948 — — — 172 — — 172 9,370 10,843 20,213 — Trading account securities sold but not yet purchased $ 64,358 74 75 82 1022849be 10K 1022849be_10K.indd 82 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 2 8 4/17/19 6:53 PM 8 3 1 0 2 2 8 4 9 b e 1 0 K The following tables summarize changes in Level 3 assets and liabilities for the years ended December 31, 2018 and 2017: (13) Reserves for Losses and Loss Expenses 1022849be 10K 83 Beginning Balance Earnings (Losses) Other Comprehensive Income (Losses) Impairments Purchases Sales Paydowns/ Maturities Transfers In / Out Ending Balance Gains (Losses) Included in: (In thousands) Year ended December 31, 2018 Assets: Fixed maturity securities available for sale: Asset-backed securities $ $ 172 172 (2) $ (2) Total Equity securities: Common stocks Preferred stocks Total Arbitrage trading account Total 9,370 10,843 20,213 — $ 20,385 (548) 100 (448) (6) (456) $ $ 46 46 — — — 46 $ $ — $ — — $ — (117) $ (117) — $ — $ — — 99 99 — — — — 11,523 — — $ 11,523 (227) (6,998) — (7,225) (11) $ (7,353) $ — 1 — — — 1 5,802 — — $ 5,803 8,596 3,945 12,541 17,308 $ 29,948 Year ended December 31, 2017 Assets: Fixed maturity securities available for sale: Asset-backed securities $ Total Equity securities: Common stocks Preferred stocks Total Arbitrage trading account Total $ 183 183 8,754 3,662 12,416 — $ 12,599 $ 3 3 — 8 8 8 19 $ $ $ 34 34 — $ — — $ — (48) $ (48) — $ — $ — — 172 172 616 — 616 — 650 $ — — — 7,173 — 7,173 — — — $ 7,173 $ — — — (8) (56) $ — — 9,370 — — 10,843 — — 20,213 — — — — $ — $ 20,385 For the year ended December 31, 2018, one common stock in the arbitrage trading account was transferred into Level 3 and one common stock was transferred out of Level 3. In the case of the transfer into Level 3, a publicly traded price was no longer available and in the case of the transfer out, a publicly traded price became available. For the year ended December 31, 2017, there were no transfers in or out of Level 3. 76 83 1022849be 10K 1022849be_10K.indd 83 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 3 8 4/17/19 6:53 PM The Company's reserves for losses and loss expenses are comprised of case reserves and incurred but not reported liabilities (IBNR). When a claim is reported, a case reserve is established for the estimated ultimate payment based upon known information about the claim. As more information about the claim becomes available over time, case reserves are adjusted up or down as appropriate. Reserves are also established on an aggregate basis to provide for IBNR liabilities and expected loss reserve development on reported claims. Loss reserves included in the Company’s financial statements represent management’s best estimates based upon an actuarially derived point estimate and other considerations. The Company uses a variety of actuarial techniques and methods to derive an actuarial point estimate for each operating unit. These methods include paid loss development, incurred loss development, paid and incurred Bornhuetter-Ferguson methods and frequency and severity methods. In circumstances where one actuarial method is considered more credible than the others, that method is used to set the point estimate. The actuarial point estimate may also be based on a judgmental weighting of estimates produced from each of the methods considered. Industry loss experience is used to supplement the Company’s own data in selecting “tail factors” in areas where the Company’s own data is limited. The actuarial data is analyzed by line of business, coverage and accident or policy year, as appropriate, for each operating unit. The establishment of the actuarially derived loss reserve point estimate also includes consideration of qualitative factors that may affect the ultimate losses. These qualitative considerations include, among others, the impact of re-underwriting initiatives, changes in the mix of business, changes in distribution sources and changes in policy terms and conditions. The key assumptions used to arrive at the best estimate of loss reserves are the expected loss ratios, rate of loss cost inflation, and reported and paid loss emergence patterns. Expected loss ratios represent management’s expectation of losses at the time the business is priced and written, before any actual claims experience has emerged. This expectation is a significant determinant of the estimate of loss reserves for recently written business where there is little paid or incurred loss data to consider. Expected loss ratios are generally derived from historical loss ratios adjusted for the impact of rate changes, loss cost trends and known changes in the type of risks underwritten. Expected loss ratios are estimated for each key line of business within each operating unit. Expected loss cost inflation is particularly important for the long-tail lines, such as excess casualty, and claims with a high medical component, such as workers’ compensation. Reported and paid loss emergence patterns are used to project current reported or paid loss amounts to their ultimate settlement value. Loss development factors are based on the historical emergence patterns of paid and incurred losses, and are derived from the Company’s own experience and industry data. The paid loss emergence pattern is also significant to excess and assumed workers’ compensation reserves because those reserves are discounted to their estimated present value based upon such estimated payout patterns. Loss frequency and severity are measures of loss activity that are considered in determining the key assumptions described in our discussion of loss and loss expense reserves, including expected loss ratios, rate of loss cost inflation and reported and paid loss emergence patterns. Loss frequency is a measure of the number of claims per unit of insured exposure, and loss severity is a measure of the average size of claims. Factors affecting loss frequency include the effectiveness of loss controls and safety programs and changes in economic activity or weather patterns. Factors affecting loss severity include changes in policy limits, retentions, rate of inflation and judicial interpretations. Another factor affecting estimates of loss frequency and severity is the loss reporting lag, which is the period of time between the occurrence of a loss and the date the loss is reported to the Company. The length of the loss reporting lag affects our ability to accurately predict loss frequency (loss frequencies are more predictable for lines with short reporting lags) as well as the amount of reserves needed for incurred but not reported losses (less IBNR is required for lines with short reporting lags). As a result, loss reserves for lines with short reporting lags are likely to have less variation from initial loss estimates. For lines with short reporting lags, which include commercial automobile, primary workers’ compensation, other liability (claims-made) and property business, the key assumption is the loss emergence pattern used to project ultimate loss estimates from known losses paid or reported to date. For lines of business with long reporting lags, which include other liability (occurrence), products liability, excess workers’ compensation and liability reinsurance, the key assumption is the expected loss ratio since there is often little paid or incurred loss data to consider. Historically, the Company has experienced less variation from its initial loss estimates for lines of businesses with short reporting lags than for lines of business with long reporting lags. The key assumptions used in calculating the most recent estimate of the loss reserves are reviewed each quarter and adjusted, to the extent necessary, to reflect the latest reported loss data, current trends and other factors observed. A claim may be defined as an event, as a claimant (number of parties claiming damages from an event) or by exposure type (e.g., an event may give rise to two parties, each claiming loss for bodily injury and property damage). The most commonly used claim count method is by event. Most of the Company's operating units use the number of events to define and quantify the number of claims. However, in certain lines of business, where it is common for multiple parties to claim 77 8 4 1 0 2 2 8 4 9 b e 1 0 K The following tables summarize changes in Level 3 assets and liabilities for the years ended December 31, 2018 and 2017: Beginning Balance Earnings (Losses) Impairments Purchases Sales Paydowns/ Maturities Transfers In / Out Ending Balance Gains (Losses) Included in: Other Comprehensive Income (Losses) Asset-backed securities $ $ (2) $ $ — $ — $ (117) $ — $ — $ (In thousands) Year ended December 31, 2018 Assets: Fixed maturity securities available for sale: Total Equity securities: Common stocks Preferred stocks Arbitrage trading account Total Total Year ended December 31, 2017 Assets: Fixed maturity securities available for sale: Total Equity securities: Common stocks Preferred stocks Arbitrage trading account Total Total 172 172 9,370 10,843 20,213 — (2) (548) 100 (448) (6) $ 183 183 8,754 3,662 12,416 — — 3 3 8 8 8 $ 20,385 $ (456) $ $ — $ 11,523 $ (7,353) $ — $ 5,803 $ 29,948 46 46 — — — 46 $ 34 34 616 — 616 — 650 — — — — — — — — — — — — (117) (227) (6,998) — (7,225) 11,523 (11) — — 7,173 7,173 — (48) — — — (8) — 1 — 1 5,802 99 99 8,596 3,945 12,541 17,308 172 172 — — — 9,370 — 10,843 — 20,213 — — — — — — — — — — — Asset-backed securities $ $ — $ — $ (48) $ — $ — $ $ 12,599 $ 19 $ $ — $ 7,173 $ (56) $ — $ — $ 20,385 For the year ended December 31, 2018, one common stock in the arbitrage trading account was transferred into Level 3 and one common stock was transferred out of Level 3. In the case of the transfer into Level 3, a publicly traded price was no longer available and in the case of the transfer out, a publicly traded price became available. For the year ended December 31, 2017, there were no transfers in or out of Level 3. 1022849be 10K 84 (13) Reserves for Losses and Loss Expenses The Company's reserves for losses and loss expenses are comprised of case reserves and incurred but not reported liabilities (IBNR). When a claim is reported, a case reserve is established for the estimated ultimate payment based upon known information about the claim. As more information about the claim becomes available over time, case reserves are adjusted up or down as appropriate. Reserves are also established on an aggregate basis to provide for IBNR liabilities and expected loss reserve development on reported claims. Loss reserves included in the Company’s financial statements represent management’s best estimates based upon an actuarially derived point estimate and other considerations. The Company uses a variety of actuarial techniques and methods to derive an actuarial point estimate for each operating unit. These methods include paid loss development, incurred loss development, paid and incurred Bornhuetter-Ferguson methods and frequency and severity methods. In circumstances where one actuarial method is considered more credible than the others, that method is used to set the point estimate. The actuarial point estimate may also be based on a judgmental weighting of estimates produced from each of the methods considered. Industry loss experience is used to supplement the Company’s own data in selecting “tail factors” in areas where the Company’s own data is limited. The actuarial data is analyzed by line of business, coverage and accident or policy year, as appropriate, for each operating unit. The establishment of the actuarially derived loss reserve point estimate also includes consideration of qualitative factors that may affect the ultimate losses. These qualitative considerations include, among others, the impact of re-underwriting initiatives, changes in the mix of business, changes in distribution sources and changes in policy terms and conditions. The key assumptions used to arrive at the best estimate of loss reserves are the expected loss ratios, rate of loss cost inflation, and reported and paid loss emergence patterns. Expected loss ratios represent management’s expectation of losses at the time the business is priced and written, before any actual claims experience has emerged. This expectation is a significant determinant of the estimate of loss reserves for recently written business where there is little paid or incurred loss data to consider. Expected loss ratios are generally derived from historical loss ratios adjusted for the impact of rate changes, loss cost trends and known changes in the type of risks underwritten. Expected loss ratios are estimated for each key line of business within each operating unit. Expected loss cost inflation is particularly important for the long-tail lines, such as excess casualty, and claims with a high medical component, such as workers’ compensation. Reported and paid loss emergence patterns are used to project current reported or paid loss amounts to their ultimate settlement value. Loss development factors are based on the historical emergence patterns of paid and incurred losses, and are derived from the Company’s own experience and industry data. The paid loss emergence pattern is also significant to excess and assumed workers’ compensation reserves because those reserves are discounted to their estimated present value based upon such estimated payout patterns. Loss frequency and severity are measures of loss activity that are considered in determining the key assumptions described in our discussion of loss and loss expense reserves, including expected loss ratios, rate of loss cost inflation and reported and paid loss emergence patterns. Loss frequency is a measure of the number of claims per unit of insured exposure, and loss severity is a measure of the average size of claims. Factors affecting loss frequency include the effectiveness of loss controls and safety programs and changes in economic activity or weather patterns. Factors affecting loss severity include changes in policy limits, retentions, rate of inflation and judicial interpretations. Another factor affecting estimates of loss frequency and severity is the loss reporting lag, which is the period of time between the occurrence of a loss and the date the loss is reported to the Company. The length of the loss reporting lag affects our ability to accurately predict loss frequency (loss frequencies are more predictable for lines with short reporting lags) as well as the amount of reserves needed for incurred but not reported losses (less IBNR is required for lines with short reporting lags). As a result, loss reserves for lines with short reporting lags are likely to have less variation from initial loss estimates. For lines with short reporting lags, which include commercial automobile, primary workers’ compensation, other liability (claims-made) and property business, the key assumption is the loss emergence pattern used to project ultimate loss estimates from known losses paid or reported to date. For lines of business with long reporting lags, which include other liability (occurrence), products liability, excess workers’ compensation and liability reinsurance, the key assumption is the expected loss ratio since there is often little paid or incurred loss data to consider. Historically, the Company has experienced less variation from its initial loss estimates for lines of businesses with short reporting lags than for lines of business with long reporting lags. The key assumptions used in calculating the most recent estimate of the loss reserves are reviewed each quarter and adjusted, to the extent necessary, to reflect the latest reported loss data, current trends and other factors observed. A claim may be defined as an event, as a claimant (number of parties claiming damages from an event) or by exposure type (e.g., an event may give rise to two parties, each claiming loss for bodily injury and property damage). The most commonly used claim count method is by event. Most of the Company's operating units use the number of events to define and quantify the number of claims. However, in certain lines of business, where it is common for multiple parties to claim 76 77 84 1022849be 10K 1022849be_10K.indd 84 4/17/19 6:53 PM K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 4 8 1022849be 10K 85 8 5 1 0 2 2 8 4 9 b e 1 0 K damages arising from a single event, an operating unit may quantify claims on the basis of the number of separate parties involved in an event. This may be the case with businesses writing substantial automobile or transportation exposure. Claim counts for assumed reinsurance will vary based on whether the business is written on a facultative or treaty basis. Further variability as respects treaty claim counts may be reflective of the nature of the treaty, line of business coverage, and type of participation such as quota share or excess of loss contracts. Accordingly, the claim counts have been excluded from the below Reinsurance segment tables due to this variability. The claim count information set forth in the tables presented below may not provide an accurate reflection of ultimate loss payouts by product line. The following tables present undiscounted incurred and paid claims development as of December 31, 2018, net of reinsurance, as well as cumulative claim frequency and the total of incurred but not reported liabilities (IBNR). The information about incurred and paid claims development for the years ended December 31, 2009 to 2017 is presented as supplementary information. To enhance the comparability of the loss development data, the Company has removed the impact of foreign exchange rate movements by using the December 31, 2018 exchange rate for all periods. Beginning with accident year 2012, the Company's U.K. and European insurance business is included in the Insurance segment's tables for Other Liability, Professional Liability, Commercial Automobile and Short-Tail Lines. Prior to 2012, the actuarial analysis for its U.K. and European insurance business was performed on an underwriting year basis and accident year data is not available for those years. 78 85 1022849be 10K 1022849be_10K.indd 85 4/17/19 6:53 PM K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be Insurance Other Liability (In thousands) Accident Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total Accident Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total K 0 1 e b 9 4 8 2 2 0 1 5 8 As of December 31, 2018 Cumulative Number of Reported Claims 23 23 24 24 26 26 26 25 23 18 Loss and Loss Expenses Incurred, Net of Reinsurance For the Year Ended December 31, Unaudited — 951,041 986,792 961,289 964,415 217,570 — — — — 1,018,454 1,011,368 1,019,749 375,609 — — — 1,067,376 1,100,243 567,982 — — 1,104,518 837,548 $ 8,326,367 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 IBNR $ 689,634 $ 656,788 $ 624,991 $ 599,235 $ 589,659 $ 561,784 $ 557,661 $ 553,058 $ 546,746 $ 542,568 $ 18,690 — 612,210 615,797 592,117 590,818 577,679 574,780 573,532 571,305 566,695 26,658 — 665,035 673,730 660,023 659,026 653,864 649,055 645,123 634,264 30,381 — 693,447 702,342 703,118 709,026 713,266 723,610 718,166 47,001 — 751,544 792,464 784,906 784,342 805,288 811,592 78,784 — 847,207 848,947 847,008 851,503 864,157 128,856 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — Cumulative Paid Claims and Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, Unaudited 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 $ 44,801 $ 122,850 $ 214,498 $ 311,979 $ 385,068 $ 429,128 $ 470,830 $ 486,893 $ 500,953 $ 510,474 45,193 128,946 248,698 336,243 417,166 461,442 491,104 508,359 48,825 142,713 266,780 379,845 470,849 524,314 556,110 58,108 158,869 299,842 417,686 513,644 580,750 63,868 189,936 332,871 473,933 589,564 79,078 191,394 338,961 481,039 — — — — 82,829 210,940 382,498 — — — 69,620 209,212 — — 80,174 — 525,016 575,194 622,687 650,428 595,024 538,502 390,552 256,448 87,075 $ 4,751,400 Reserves for loss and loss adjustment expenses before 2009, net of reinsurance 121,405 Reserves for loss and loss adjustment expenses, net of reinsurance $ 3,696,372 79 damages arising from a single event, an operating unit may quantify claims on the basis of the number of separate parties involved in an event. This may be the case with businesses writing substantial automobile or transportation exposure. Claim counts for assumed reinsurance will vary based on whether the business is written on a facultative or treaty basis. Further variability as respects treaty claim counts may be reflective of the nature of the treaty, line of business coverage, and type of participation such as quota share or excess of loss contracts. Accordingly, the claim counts have been excluded from the below Reinsurance segment tables due to this variability. The claim count information set forth in the tables presented below may not provide an accurate reflection of ultimate loss payouts by product line. The following tables present undiscounted incurred and paid claims development as of December 31, 2018, net of reinsurance, as well as cumulative claim frequency and the total of incurred but not reported liabilities (IBNR). The information about incurred and paid claims development for the years ended December 31, 2009 to 2017 is presented as supplementary information. To enhance the comparability of the loss development data, the Company has removed the impact of foreign exchange rate movements by using the December 31, 2018 exchange rate for all periods. Beginning with accident year 2012, the Company's U.K. and European insurance business is included in the Insurance segment's tables for Other Liability, Professional Liability, Commercial Automobile and Short-Tail Lines. Prior to 2012, the actuarial analysis for its U.K. and European insurance business was performed on an underwriting year basis and accident year data is not available for those years. 1022849be 10K 86 8 6 1 0 2 2 8 4 9 b e 1 0 K Insurance Other Liability (In thousands) Loss and Loss Expenses Incurred, Net of Reinsurance For the Year Ended December 31, Unaudited As of December 31, 2018 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 IBNR Cumulative Number of Reported Claims $ 689,634 $ 656,788 $ 624,991 $ 599,235 $ 589,659 $ 561,784 $ 557,661 $ 553,058 $ 546,746 $ 542,568 $ 18,690 — 612,210 615,797 592,117 590,818 577,679 574,780 573,532 571,305 566,695 26,658 — — — — — — — — — 665,035 673,730 660,023 659,026 653,864 649,055 645,123 634,264 30,381 — — — — — — — — 693,447 702,342 703,118 709,026 713,266 723,610 718,166 47,001 — — — — — — — 751,544 792,464 784,906 784,342 805,288 811,592 78,784 — — — — — — 847,207 848,947 847,008 851,503 864,157 128,856 — — — — — 951,041 986,792 961,289 964,415 217,570 — — — — 1,018,454 1,011,368 1,019,749 375,609 — — — 1,067,376 1,100,243 567,982 — — 1,104,518 837,548 $ 8,326,367 23 23 24 24 26 26 26 25 23 18 Cumulative Paid Claims and Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, Unaudited 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 $ 44,801 $ 122,850 $ 214,498 $ 311,979 $ 385,068 $ 429,128 $ 470,830 $ 486,893 $ 500,953 $ 510,474 — — — — — — — — — 45,193 128,946 248,698 336,243 417,166 461,442 491,104 508,359 — — — — — — — — 48,825 142,713 266,780 379,845 470,849 524,314 556,110 — — — — — — — 58,108 158,869 299,842 417,686 513,644 580,750 — — — — — — 63,868 189,936 332,871 473,933 589,564 — — — — — 79,078 191,394 338,961 481,039 — — — — 82,829 210,940 382,498 — — — 69,620 209,212 — — 80,174 — 525,016 575,194 622,687 650,428 595,024 538,502 390,552 256,448 87,075 $ 4,751,400 Reserves for loss and loss adjustment expenses before 2009, net of reinsurance 121,405 Reserves for loss and loss adjustment expenses, net of reinsurance $ 3,696,372 Accident Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total Accident Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total 78 79 86 1022849be 10K 1022849be_10K.indd 86 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 6 8 4/17/19 6:53 PM 8 7 1 0 2 2 8 4 9 b e 1 0 K Primary Workers' Compensation (In thousands) Loss and Loss Expenses Incurred, Net of Reinsurance For the Year Ended December 31, Unaudited 1022849be 10K 87 Excess Workers' Compensation (In thousands) As of December 31, 2018 Loss and Loss Expenses Incurred, Net of Reinsurance For the Year Ended December 31, Unaudited Accident Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total Accident Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 IBNR Cumulative Number of Reported Claims $ 327,537 $ 332,303 $ 326,766 $ 386,870 $ 392,158 $ 394,303 $ 392,287 $ 395,288 $ 398,994 $ 401,431 $ 10,693 — 358,734 361,808 409,237 418,315 426,622 429,952 429,762 427,698 424,374 13,958 — — — — — — — — — 419,364 442,550 454,797 470,026 472,087 474,076 475,729 471,471 17,942 — — — — — — — — 499,752 499,882 503,956 503,863 509,167 512,707 508,169 26,626 — — — — — — — 551,342 547,295 546,995 543,238 547,000 542,274 35,177 — — — — — — 639,436 637,307 627,767 617,242 615,435 57,455 — — — — — 712,800 690,525 650,997 641,169 83,941 — — — — 702,716 696,339 684,700 117,425 — — — 762,093 733,505 191,034 — — 778,964 359,337 $ 5,801,492 43 45 46 48 53 57 58 57 57 53 Cumulative Paid Claims and Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, Unaudited 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 $ 93,647 $ 197,736 $ 257,972 $ 297,079 $ 317,796 $ 333,793 $ 344,771 $ 352,516 $ 360,289 $ 364,712 — 107,742 214,034 279,226 317,986 344,631 362,078 374,013 382,665 — — — — — — — — — 106,157 234,694 307,873 355,909 385,759 408,304 420,945 — — — — — — — — 114,998 253,781 339,560 387,368 419,588 437,196 — — — — — — — 117,502 277,538 363,028 414,160 447,894 — — — — — — 148,405 319,743 412,611 471,235 — — — — — 139,320 323,744 421,734 — — — — 142,998 338,835 — — — 153,456 — — 388,405 428,811 451,991 466,580 503,915 477,541 446,072 362,299 171,006 $ 4,061,332 Reserves for loss and loss adjustment expenses before 2009, net of reinsurance 170,897 Reserves for loss and loss adjustment expenses, net of reinsurance $ 1,911,057 As of December 31, 2018 Cumulative Number of Reported Claims 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 IBNR $ 168,762 $ 153,766 $ 153,912 $ 148,223 $ 148,189 $ 138,765 $ 142,768 $ 134,716 $ 129,249 $ 130,790 $ 21,734 — 135,639 123,497 120,272 118,712 100,331 104,732 100,065 94,986 95,374 14,497 88,650 93,993 98,051 87,064 85,299 83,850 78,246 74,109 17,280 72,366 73,230 71,780 73,653 72,441 67,878 69,361 16,293 63,995 48,493 46,025 42,419 38,551 35,120 16,473 63,465 57,558 49,478 45,758 41,671 18,448 — — — — — — — — — — — — — — — 69,977 57,897 50,099 45,115 25,425 — — — 72,657 70,281 71,404 37,500 — — 76,701 80,508 42,652 — 77,820 46,840 $ 721,272 1 1 1 1 1 1 — — 1 1 Accident Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total Accident Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — Cumulative Paid Claims and Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, Unaudited 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 $ 5,060 $ 8,402 $ 11,037 $ 14,138 $ 20,729 $ 25,272 $ 29,150 $ 33,573 $ 37,817 $ 41,243 2,867 4,003 2,593 5,571 4,848 1,127 — — — — — — 8,701 6,395 6,097 647 — — — — — 9,084 11,699 14,261 18,821 12,104 15,684 18,638 20,164 9,480 11,167 13,234 15,738 630 358 — — — — 2,158 1,729 2,069 — — — 3,008 3,354 2,481 2,498 — — 3,396 4,175 3,272 4,783 6,282 — 22,355 21,463 17,982 4,418 5,808 4,099 5,573 12,810 6,141 $ 141,892 Reserves for loss and loss adjustment expenses before 2009, net of reinsurance 740,877 Reserves for loss and loss adjustment expenses, net of reinsurance $ 1,320,257 80 87 1022849be 10K 1022849be_10K.indd 87 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 7 8 4/17/19 6:53 PM 81 Primary Workers' Compensation (In thousands) As of December 31, 2018 Cumulative Number of Reported Claims 43 45 46 48 53 57 58 57 57 53 — 639,436 637,307 627,767 617,242 615,435 57,455 — — — — — 712,800 690,525 650,997 641,169 83,941 — — — — 702,716 696,339 684,700 117,425 — — — 762,093 733,505 191,034 — — 778,964 359,337 $ 5,801,492 Loss and Loss Expenses Incurred, Net of Reinsurance For the Year Ended December 31, Unaudited Accident Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 IBNR $ 327,537 $ 332,303 $ 326,766 $ 386,870 $ 392,158 $ 394,303 $ 392,287 $ 395,288 $ 398,994 $ 401,431 $ 10,693 — 358,734 361,808 409,237 418,315 426,622 429,952 429,762 427,698 424,374 13,958 — 419,364 442,550 454,797 470,026 472,087 474,076 475,729 471,471 17,942 — 499,752 499,882 503,956 503,863 509,167 512,707 508,169 26,626 — 551,342 547,295 546,995 543,238 547,000 542,274 35,177 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — Cumulative Paid Claims and Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, Unaudited Accident Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 $ 93,647 $ 197,736 $ 257,972 $ 297,079 $ 317,796 $ 333,793 $ 344,771 $ 352,516 $ 360,289 $ 364,712 — 107,742 214,034 279,226 317,986 344,631 362,078 374,013 382,665 — 106,157 234,694 307,873 355,909 385,759 408,304 420,945 — 114,998 253,781 339,560 387,368 419,588 437,196 — 117,502 277,538 363,028 414,160 447,894 — 148,405 319,743 412,611 471,235 — — — — — 139,320 323,744 421,734 — — — — 142,998 338,835 — — — 153,456 — — 388,405 428,811 451,991 466,580 503,915 477,541 446,072 362,299 171,006 $ 4,061,332 Reserves for loss and loss adjustment expenses before 2009, net of reinsurance 170,897 Reserves for loss and loss adjustment expenses, net of reinsurance $ 1,911,057 1022849be 10K 88 8 8 1 0 2 2 8 4 9 b e 1 0 K Excess Workers' Compensation (In thousands) Loss and Loss Expenses Incurred, Net of Reinsurance For the Year Ended December 31, Unaudited As of December 31, 2018 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 IBNR Cumulative Number of Reported Claims $ 168,762 $ 153,766 $ 153,912 $ 148,223 $ 148,189 $ 138,765 $ 142,768 $ 134,716 $ 129,249 $ 130,790 $ 21,734 — 135,639 123,497 120,272 118,712 100,331 104,732 100,065 94,986 95,374 14,497 — — — — — — — — — — — — — — — — 88,650 93,993 98,051 87,064 85,299 83,850 78,246 74,109 17,280 — — — — — — — 72,366 73,230 71,780 73,653 72,441 67,878 69,361 16,293 — 63,995 48,493 46,025 42,419 38,551 35,120 16,473 — — — — — — — — — — 63,465 57,558 49,478 45,758 41,671 18,448 — — — — 69,977 57,897 50,099 45,115 25,425 — — — 72,657 70,281 71,404 37,500 — — 76,701 80,508 42,652 — 77,820 46,840 $ 721,272 1 1 1 1 1 1 — — 1 1 Cumulative Paid Claims and Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, Unaudited 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 $ 5,060 $ 8,402 $ 11,037 $ 14,138 $ 20,729 $ 25,272 $ 29,150 $ 33,573 $ 37,817 $ 41,243 — — — — — — — — — 2,867 — — — — — — — — 4,003 2,593 — — — — — — — 5,571 4,848 1,127 — — — — — — 8,701 6,395 6,097 647 — — — — — 9,084 11,699 14,261 18,821 12,104 15,684 18,638 20,164 9,480 11,167 13,234 15,738 630 358 — — — — 2,158 1,729 2,069 — — — 3,008 3,354 2,481 2,498 — — 3,396 4,175 3,272 4,783 6,282 — 22,355 21,463 17,982 4,418 5,808 4,099 5,573 12,810 6,141 $ 141,892 Reserves for loss and loss adjustment expenses before 2009, net of reinsurance 740,877 Reserves for loss and loss adjustment expenses, net of reinsurance $ 1,320,257 Accident Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total Accident Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total 80 81 88 1022849be 10K 1022849be_10K.indd 88 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 8 8 4/17/19 6:53 PM 1022849be 10K 89 8 9 1 0 2 2 8 4 9 b e 1 0 K Professional Liability (In thousands) Commercial Automobile (In thousands) $ 134,784 $ 139,091 $ 145,515 $ 148,899 $ 147,994 $ 150,452 $ 150,783 $ 153,492 $ 152,711 $ 157,451 $ 1,087 — 147,649 165,755 179,383 177,957 176,723 172,585 174,883 177,844 — 179,875 165,233 186,918 190,096 177,128 173,545 176,865 — 238,233 241,944 264,808 250,457 238,704 245,076 182,818 175,963 243,893 1,807 3,185 9,507 — — — — — — — 269,280 247,320 242,792 248,974 270,449 279,092 15,395 — — — — — — 253,284 246,668 259,964 243,936 239,555 19,315 — — — — — 259,569 258,251 274,950 276,406 47,934 — — — — 310,678 324,979 361,929 90,872 — — — 333,803 333,194 178,091 — — 335,751 260,095 $ 2,586,052 — — — — — — — — — — — — — — — Loss and Loss Expenses Incurred, Net of Reinsurance For the Year Ended December 31, Unaudited As of December 31, 2018 Loss and Loss Expenses Incurred, Net of Reinsurance For the Year Ended December 31, Unaudited 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 IBNR Cumulative Number of Reported Claims Accident Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 IBNR 3 4 4 7 7 8 9 10 9 9 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total $ 362,302 $ 345,139 $ 340,967 $ 335,851 $ 337,915 $ 336,855 $ 334,652 $ 335,089 $ 334,977 $ 334,926 $ — 310,591 320,098 330,190 328,854 332,716 331,581 330,552 330,263 — 312,224 320,898 328,269 331,694 341,362 341,162 342,052 — 314,073 326,585 342,379 355,433 364,175 364,437 — 326,789 348,513 368,318 376,569 366,976 — 363,308 384,692 418,215 416,194 329,942 343,524 366,662 366,565 413,697 398 372 1,232 1,539 3,013 6,431 — — — — — 389,101 417,403 423,601 431,857 18,247 — — — — 431,633 431,680 443,030 35,867 — — — 430,352 428,601 70,289 — — 442,862 145,744 $ 3,901,666 As of December 31, 2018 Cumulative Number of Reported Claims 39 37 37 40 42 45 50 49 44 39 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — Cumulative Paid Claims and Claim Adjustment Expenses, Net of Reinsurance Cumulative Paid Claims and Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, Unaudited 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 $ 12,604 $ 52,583 $ 85,902 $ 117,683 $ 127,728 $ 138,876 $ 143,950 $ 144,713 $ 147,599 $ 151,499 — — — — — — — — — 14,832 58,916 108,566 129,757 144,474 160,598 165,018 171,330 — — — — — — — — 18,779 62,442 103,097 134,608 150,840 159,014 167,286 — — — — — — — 21,875 87,008 128,281 159,183 190,295 214,315 — — — — — — 24,232 64,030 119,552 177,343 206,655 — — — — — 19,545 83,856 138,753 176,181 — — — — 20,478 85,561 139,952 — — — 28,702 102,853 — — 36,733 — 178,879 168,874 223,424 248,520 199,245 187,767 202,131 96,814 28,307 $ 1,685,460 For the Year Ended December 31, Unaudited 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 $ 136,433 $ 209,553 $ 257,326 $ 291,925 $ 312,902 $ 328,843 $ 331,482 $ 333,143 $ 333,605 $ 333,677 — 136,029 208,790 263,639 295,347 313,253 324,963 326,770 327,206 — 135,350 211,756 262,659 296,332 321,786 333,949 338,283 — 136,844 215,078 273,277 312,178 344,428 355,740 — 142,480 218,005 266,694 322,141 343,274 — 155,065 237,118 328,156 365,424 — — — — — 159,679 265,396 325,369 — — — — 185,045 280,146 — — — 180,627 — — 327,829 340,319 360,799 353,159 394,147 370,450 342,214 267,469 180,213 $ 3,270,276 Accident Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total Reserves for loss and loss adjustment expenses before 2009, net of reinsurance 4,198 Reserves for loss and loss adjustment expenses before 2009, net of reinsurance 2,482 Reserves for loss and loss adjustment expenses, net of reinsurance $ 904,790 Reserves for loss and loss adjustment expenses, net of reinsurance $ 633,872 Accident Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total Accident Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total 82 89 1022849be 10K 1022849be_10K.indd 89 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 9 8 4/17/19 6:53 PM 83 9 0 1 0 2 2 8 4 9 b e 1 0 K 1022849be 10K 90 Professional Liability (In thousands) Commercial Automobile (In thousands) Loss and Loss Expenses Incurred, Net of Reinsurance For the Year Ended December 31, Unaudited As of December 31, 2018 Loss and Loss Expenses Incurred, Net of Reinsurance For the Year Ended December 31, Unaudited As of December 31, 2018 Accident Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 IBNR Cumulative Number of Reported Claims Accident Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 IBNR Cumulative Number of Reported Claims — 259,569 258,251 274,950 276,406 47,934 — — — — 310,678 324,979 361,929 90,872 — — — 333,803 333,194 178,091 — — 335,751 260,095 $ 2,586,052 $ 134,784 $ 139,091 $ 145,515 $ 148,899 $ 147,994 $ 150,452 $ 150,783 $ 153,492 $ 152,711 $ 157,451 $ 1,087 — 147,649 165,755 179,383 177,957 176,723 172,585 174,883 177,844 — 179,875 165,233 186,918 190,096 177,128 173,545 176,865 — 238,233 241,944 264,808 250,457 238,704 245,076 182,818 175,963 243,893 1,807 3,185 9,507 — 269,280 247,320 242,792 248,974 270,449 279,092 15,395 — 253,284 246,668 259,964 243,936 239,555 19,315 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — For the Year Ended December 31, Unaudited Accident Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 $ 12,604 $ 52,583 $ 85,902 $ 117,683 $ 127,728 $ 138,876 $ 143,950 $ 144,713 $ 147,599 $ 151,499 14,832 58,916 108,566 129,757 144,474 160,598 165,018 171,330 18,779 62,442 103,097 134,608 150,840 159,014 167,286 21,875 87,008 128,281 159,183 190,295 214,315 24,232 64,030 119,552 177,343 206,655 19,545 83,856 138,753 176,181 — — — — 20,478 85,561 139,952 — — — 28,702 102,853 — — 36,733 — 178,879 168,874 223,424 248,520 199,245 187,767 202,131 96,814 28,307 $ 1,685,460 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total 3 4 4 7 7 8 9 10 9 9 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total $ 362,302 $ 345,139 $ 340,967 $ 335,851 $ 337,915 $ 336,855 $ 334,652 $ 335,089 $ 334,977 $ 334,926 $ — 310,591 320,098 330,190 328,854 332,716 331,581 330,552 330,263 — 312,224 320,898 328,269 331,694 341,362 341,162 342,052 — 314,073 326,585 342,379 355,433 364,175 364,437 — 326,789 348,513 368,318 376,569 366,976 — 363,308 384,692 418,215 416,194 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 389,101 417,403 423,601 431,857 18,247 — — — — 431,633 431,680 443,030 35,867 — — — 430,352 428,601 70,289 — — 442,862 145,744 $ 3,901,666 329,942 343,524 366,662 366,565 413,697 398 372 1,232 1,539 3,013 6,431 Cumulative Paid Claims and Claim Adjustment Expenses, Net of Reinsurance Cumulative Paid Claims and Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, Unaudited Accident Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 $ 136,433 $ 209,553 $ 257,326 $ 291,925 $ 312,902 $ 328,843 $ 331,482 $ 333,143 $ 333,605 $ 333,677 — 136,029 208,790 263,639 295,347 313,253 324,963 326,770 327,206 — — — — — — — — — 135,350 211,756 262,659 296,332 321,786 333,949 338,283 — — — — — — — — 136,844 215,078 273,277 312,178 344,428 355,740 — — — — — — — 142,480 218,005 266,694 322,141 343,274 — — — — — — 155,065 237,118 328,156 365,424 — — — — — 159,679 265,396 325,369 — — — — 185,045 280,146 — — — 180,627 — — 327,829 340,319 360,799 353,159 394,147 370,450 342,214 267,469 180,213 $ 3,270,276 Reserves for loss and loss adjustment expenses before 2009, net of reinsurance 4,198 Reserves for loss and loss adjustment expenses before 2009, net of reinsurance 2,482 Reserves for loss and loss adjustment expenses, net of reinsurance $ 904,790 Reserves for loss and loss adjustment expenses, net of reinsurance $ 633,872 82 83 90 1022849be 10K 1022849be_10K.indd 90 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be 39 37 37 40 42 45 50 49 44 39 K 0 1 e b 9 4 8 2 2 0 1 0 9 4/17/19 6:53 PM 9 1 1 0 2 2 8 4 9 b e 1 0 K Short-tail lines (In thousands) Loss and Loss Expenses Incurred, Net of Reinsurance For the Year Ended December 31, Unaudited 1022849be 10K 91 Reinsurance Casualty (In thousands) As of December 31, 2018 Accident Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total Accident Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 IBNR Cumulative Number of Reported Claims $ 346,870 $ 335,921 $ 326,440 $ 318,111 $ 318,349 $ 314,290 $ 314,117 $ 314,010 $ 316,220 $ 317,098 $ — 385,541 370,291 358,373 355,916 346,226 346,719 346,885 346,463 — 478,556 471,555 463,006 459,814 457,011 450,115 449,320 — 526,312 535,500 535,885 531,729 507,646 506,705 — 572,103 583,603 575,582 553,621 552,137 — 701,335 709,832 664,303 663,282 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 743,872 731,468 727,677 726,606 15,079 — — — — 771,416 774,514 761,891 20,857 — — — 750,786 752,193 34,275 — — 759,340 161,107 $ 5,836,156 346,172 451,211 508,565 548,730 664,350 550 833 1,093 3,083 5,740 6,562 Cumulative Paid Claims and Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, Unaudited 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 $ 212,521 $ 291,338 $ 304,634 $ 306,020 $ 309,916 $ 310,428 $ 311,079 $ 311,357 $ 311,655 $ 315,966 — 245,036 325,156 337,686 346,768 340,210 342,918 344,102 345,085 — — — — — — — — — 303,012 417,701 436,585 440,777 445,073 446,745 447,342 — — — — — — — — 281,456 453,157 503,364 513,733 498,506 499,446 — — — — — — — 312,945 486,692 534,939 531,386 538,158 — — — — — — 371,194 596,829 613,621 633,020 — — — — — 396,086 612,335 667,846 — — — — 416,144 669,029 — — — 444,407 — — 345,106 450,155 503,738 539,443 648,373 689,875 710,618 688,821 415,206 $ 5,307,301 Reserves for loss and loss adjustment expenses before 2009, net of reinsurance 2,362 Reserves for loss and loss adjustment expenses, net of reinsurance $ 531,217 84 91 1022849be 10K 1022849be_10K.indd 91 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be 17,086 18,428 21,264 25,536 33,269 49,301 30,511 62,140 122,752 184,317 Loss and Loss Expenses Incurred, Net of Reinsurance For the Year Ended December 31, Unaudited As of December 31, 2018 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 IBNR $ 334,804 $ 328,321 $ 327,236 $ 309,228 $ 301,495 $ 293,275 $ 282,411 $ 288,115 $ 281,592 $ 279,372 $ — 290,285 298,300 288,141 276,234 265,771 254,550 251,308 249,062 — 290,635 309,621 304,409 299,628 306,911 303,867 295,576 — 331,603 335,661 331,006 324,014 332,932 335,636 — 319,159 270,221 273,528 283,580 292,447 — 320,250 320,176 319,855 331,836 — — — — — 259,609 232,203 231,020 — — — — 241,282 253,450 — — — 231,826 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — Cumulative Paid Claims and Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, Unaudited 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 $ 21,332 $ 53,636 $ 85,761 $ 124,030 $ 155,124 $ 181,946 $ 196,775 $ 211,143 $ 221,141 $ 228,990 17,964 45,626 77,191 106,381 129,041 149,322 165,027 180,544 17,876 52,365 97,702 134,285 168,244 191,864 207,692 22,390 62,198 111,928 151,635 186,483 219,106 28,920 63,849 109,202 143,268 177,101 21,306 69,134 116,266 155,764 — — — — — — — — — 17,865 48,593 91,548 — — — 19,923 61,930 — — 16,493 — Reserves for loss and loss adjustment expenses before 2009, net of reinsurance 369,801 Reserves for loss and loss adjustment expenses, net of reinsurance $ 1,512,999 248,145 292,162 333,889 298,061 326,251 253,264 246,235 221,820 221,945 $ 2,721,144 190,295 220,011 240,926 204,820 198,993 141,834 100,587 40,338 11,152 $ 1,577,946 Accident Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total Accident Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total 85 18 19 21 25 26 30 32 34 38 36 K 0 1 e b 9 4 8 2 2 0 1 1 9 4/17/19 6:53 PM 1022849be 10K 92 Short-tail lines (In thousands) 9 2 1 0 2 2 8 4 9 b e 1 0 K Reinsurance Casualty (In thousands) Loss and Loss Expenses Incurred, Net of Reinsurance For the Year Ended December 31, Unaudited Accident Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 IBNR $ 346,870 $ 335,921 $ 326,440 $ 318,111 $ 318,349 $ 314,290 $ 314,117 $ 314,010 $ 316,220 $ 317,098 $ — 385,541 370,291 358,373 355,916 346,226 346,719 346,885 346,463 — 478,556 471,555 463,006 459,814 457,011 450,115 449,320 — 526,312 535,500 535,885 531,729 507,646 506,705 — 572,103 583,603 575,582 553,621 552,137 — 701,335 709,832 664,303 663,282 346,172 451,211 508,565 548,730 664,350 550 833 1,093 3,083 5,740 6,562 — — — — — 743,872 731,468 727,677 726,606 15,079 — — — — 771,416 774,514 761,891 20,857 — — — 750,786 752,193 34,275 — — 759,340 161,107 $ 5,836,156 As of December 31, 2018 Cumulative Number of Reported Claims 18 19 21 25 26 30 32 34 38 36 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — Cumulative Paid Claims and Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, Unaudited Accident Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 $ 212,521 $ 291,338 $ 304,634 $ 306,020 $ 309,916 $ 310,428 $ 311,079 $ 311,357 $ 311,655 $ 315,966 — 245,036 325,156 337,686 346,768 340,210 342,918 344,102 345,085 — 303,012 417,701 436,585 440,777 445,073 446,745 447,342 — 281,456 453,157 503,364 513,733 498,506 499,446 — 312,945 486,692 534,939 531,386 538,158 — 371,194 596,829 613,621 633,020 — — — — — 396,086 612,335 667,846 — — — — 416,144 669,029 — — — 444,407 — — 345,106 450,155 503,738 539,443 648,373 689,875 710,618 688,821 415,206 $ 5,307,301 Reserves for loss and loss adjustment expenses before 2009, net of reinsurance 2,362 Reserves for loss and loss adjustment expenses, net of reinsurance $ 531,217 Accident Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total Accident Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total Loss and Loss Expenses Incurred, Net of Reinsurance For the Year Ended December 31, Unaudited As of December 31, 2018 17,086 18,428 21,264 25,536 33,269 49,301 30,511 62,140 122,752 184,317 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 IBNR $ 334,804 $ 328,321 $ 327,236 $ 309,228 $ 301,495 $ 293,275 $ 282,411 $ 288,115 $ 281,592 $ 279,372 $ — 290,285 298,300 288,141 276,234 265,771 254,550 251,308 249,062 — — — — — — — — — 290,635 309,621 304,409 299,628 306,911 303,867 295,576 — — — — — — — — 331,603 335,661 331,006 324,014 332,932 335,636 — — — — — — — 319,159 270,221 273,528 283,580 292,447 — — — — — — 320,250 320,176 319,855 331,836 — — — — — 259,609 232,203 231,020 — — — — 241,282 253,450 — — — 231,826 — — 248,145 292,162 333,889 298,061 326,251 253,264 246,235 221,820 221,945 $ 2,721,144 Cumulative Paid Claims and Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, Unaudited 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 $ 21,332 $ 53,636 $ 85,761 $ 124,030 $ 155,124 $ 181,946 $ 196,775 $ 211,143 $ 221,141 $ 228,990 — — — — — — — — — 17,964 45,626 77,191 106,381 129,041 149,322 165,027 180,544 — — — — — — — — 17,876 52,365 97,702 134,285 168,244 191,864 207,692 — — — — — — — 22,390 62,198 111,928 151,635 186,483 219,106 — — — — — — 28,920 63,849 109,202 143,268 177,101 — — — — — 21,306 69,134 116,266 155,764 — — — — 17,865 48,593 91,548 — — — 19,923 61,930 — — 16,493 — 190,295 220,011 240,926 204,820 198,993 141,834 100,587 40,338 11,152 $ 1,577,946 Reserves for loss and loss adjustment expenses before 2009, net of reinsurance 369,801 Reserves for loss and loss adjustment expenses, net of reinsurance $ 1,512,999 84 85 92 1022849be 10K 1022849be_10K.indd 92 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 2 9 4/17/19 6:53 PM 1022849be 10K 93 9 3 1 0 2 2 8 4 9 b e 1 0 K Property (In thousands) Loss and Loss Expenses Incurred, Net of Reinsurance For the Year Ended December 31, Unaudited As of December 31, 2018 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 IBNR $ 48,029 $ 43,193 $ 42,352 $ 38,711 $ 38,124 $ 37,505 $ 36,913 $ 36,263 $ 35,293 $ 35,763 $ 58,576 55,647 52,561 51,448 51,500 50,971 50,871 50,699 95,217 87,970 85,118 86,544 85,006 84,739 84,471 — 103,744 94,720 86,426 85,451 83,925 83,938 50,932 84,882 84,875 Accident Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total Accident Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 141,298 112,590 114,063 111,915 112,555 111,876 — — — — — — 112,987 96,668 97,363 100,148 — — — — — 127,039 117,582 131,777 — — — — 167,989 174,562 — — — 206,604 — — 99,410 130,452 181,858 200,535 108,281 $ 1,088,864 Cumulative Paid Claims and Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, Unaudited 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 $ 9,766 $ 21,945 $ 28,226 $ 29,444 $ 31,248 $ 31,238 $ 32,540 $ 34,759 $ 34,027 $ 23,654 37,739 42,413 43,898 44,824 46,419 49,048 49,303 31,478 58,875 73,359 76,010 78,577 81,780 82,322 15,675 51,774 64,238 70,672 77,540 79,099 35,158 50,053 83,401 81,808 — — — — — — — — — — — — — 36,609 74,602 92,646 101,553 104,333 106,051 — — — — — 38,919 67,000 82,329 88,507 — — — — 53,498 89,228 109,187 — — — 78,969 133,653 — — 72,157 — 91,646 118,686 157,622 141,458 34,125 $ 900,008 Reserves for loss and loss adjustment expenses before 2009, net of reinsurance 776 Reserves for loss and loss adjustment expenses, net of reinsurance $ 189,632 86 93 1022849be 10K 1022849be_10K.indd 93 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be — 201 314 626 1,192 1,739 4,367 11,130 24,102 40,135 K 0 1 e b 9 4 8 2 2 0 1 3 9 4/17/19 6:53 PM Property (In thousands) The reconciliation of the net incurred and paid claims development tables to the reserves for loss and loss adjustment expenses in the consolidated balance sheet is as follows: 9 4 1 0 2 2 8 4 9 b e 1 0 K 1022849be 10K 94 Loss and Loss Expenses Incurred, Net of Reinsurance For the Year Ended December 31, Unaudited Accident Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 IBNR $ 48,029 $ 43,193 $ 42,352 $ 38,711 $ 38,124 $ 37,505 $ 36,913 $ 36,263 $ 35,293 $ 35,763 $ 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total 58,576 55,647 52,561 51,448 51,500 50,971 50,871 50,699 95,217 87,970 85,118 86,544 85,006 84,739 84,471 — 103,744 94,720 86,426 85,451 83,925 83,938 — 141,298 112,590 114,063 111,915 112,555 111,876 — 112,987 96,668 97,363 100,148 — 127,039 117,582 131,777 — — — — 167,989 174,562 — — — 206,604 — — $ 1,088,864 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — Cumulative Paid Claims and Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, Unaudited Accident Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 $ 9,766 $ 21,945 $ 28,226 $ 29,444 $ 31,248 $ 31,238 $ 32,540 $ 34,759 $ 34,027 $ 23,654 37,739 42,413 43,898 44,824 46,419 49,048 49,303 31,478 58,875 73,359 76,010 78,577 81,780 82,322 15,675 51,774 64,238 70,672 77,540 79,099 36,609 74,602 92,646 101,553 104,333 106,051 38,919 67,000 82,329 88,507 — — — — 53,498 89,228 109,187 — — — 78,969 133,653 — — 72,157 — Reserves for loss and loss adjustment expenses before 2009, net of reinsurance 776 Reserves for loss and loss adjustment expenses, net of reinsurance $ 189,632 $ 900,008 50,932 84,882 84,875 99,410 130,452 181,858 200,535 108,281 35,158 50,053 83,401 81,808 91,646 118,686 157,622 141,458 34,125 As of December 31, 2018 (In thousands) Undiscounted reserves for loss and loss expenses, net of reinsurance: Other liability Primary workers' compensation Excess workers' compensation Professional liability Commercial automobile Short-tail lines Other Insurance Casualty Property Reinsurance Total undiscounted reserves for loss and loss expenses, net of reinsurance (In thousands) Due from reinsurers on unpaid claims: — 201 314 626 1,192 1,739 4,367 11,130 24,102 40,135 Other liability Primary workers' compensation Excess workers' compensation Professional liability Commercial automobile Short-tail lines Other Insurance Casualty Property Reinsurance $ $ $ December 31, 2018 3,696,372 1,911,057 1,320,257 904,790 633,872 531,217 111,779 9,109,344 1,512,999 189,632 1,702,631 10,811,975 December 31, 2018 451,073 374,805 37,405 344,958 15,405 293,376 34,260 1,551,282 116,782 49,501 166,283 Total due from reinsurers on unpaid claims $ 1,717,565 86 87 94 1022849be 10K 1022849be_10K.indd 94 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 4 9 4/17/19 6:53 PM 9 5 1 0 2 2 8 4 9 b e 1 0 K (In thousands) Loss reserve discount: Other liability Primary workers' compensation Excess workers' compensation Professional liability Commercial automobile Short-tail lines Other Insurance Casualty Property Reinsurance Total loss reserve discount Total gross reserves for loss and loss expenses 1022849be 10K 95 December 31, 2018 $ $ $ — — (434,302) — — — — (434,302) (128,790) — (128,790) (563,092) 11,966,448 The following is supplementary information regarding average historical claims duration as of December 31, 2018: Insurance Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance Years 1 2 3 4 5 6 7 8 9 10 Other liability 8.0% 14.4% 18.4% 16.8% 13.8% 8.2% 5.9% 3.0% 2.8% 1.8% Primary workers' compensation Excess workers' compensation Professional liability Commercial automobile 8.7% 22.7% 22.3% 16.6% 9.4% 9.1% 3.5% 1.6% 4.3% 2.5% 39.7% 21.6% 15.6% 10.7% Short-tail lines 59.6% 29.8% 5.8% 1.6% 6.8% 0.1% 3.5% 0.3% 1.0% 0.4% 0.4% 0.3% 0.2% —% —% 1.4% Reinsurance Years Casualty Property Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance 1 7.2% 35.3% 2 12.5% 32.3% 3 14.6% 14.8% 4 5 6 7 8 9 10 13.3% 11.2% 5.5% 3.9% 9.0% 2.0% 5.9% 3.2% 5.2% 2.7% 3.8% —% 2.8% 3.2% The table below provides a reconciliation of the beginning and ending reserve balances: (In thousands) Net reserves at beginning of year Net provision for losses and loss expenses: Claims occurring during the current year (1) Increase (decrease) in estimates for claims occurring in prior years (2) Loss reserve discount accretion 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 2018 2017 2016 $ 10,056,914 $ 9,590,265 $ 9,244,872 3,926,489 3,963,543 3,826,620 6,831 41,382 (5,165) 43,970 (29,904) 49,084 3,974,702 4,002,348 3,845,800 964,808 2,700,077 3,664,885 (117,848) 10,248,883 1,717,565 1,027,405 2,562,550 3,589,955 54,256 10,056,914 1,613,494 1,052,452 2,401,722 3,454,174 (46,233) 9,590,265 1,606,930 $ 11,966,448 $ 11,670,408 $ 11,197,195 _______________________________________ (1) Claims occurring during the current year are net of loss reserve discounts of $24,381,000, $22,064,000 and $18,929,000 in 2018, (2) The increase (decrease) in estimates for claims occurring in prior years is net of loss reserve discount. On an undiscounted basis, the estimates for claims occurring in prior years decreased by $3,738,000, $32,132,000 and $59,175,000 in 2018, 2017 and 2016, 2017, and 2016, respectively. respectively. Insurance - Reserves for the Insurance segment developed favorably by $43 million in 2018. The favorable development was primarily attributable to workers' compensation business, partially offset by unfavorable development for professional liability business. For workers' compensation, the favorable development was spread across many accident years, including prior to 2009, but was most significant in accident years 2015 through 2017. The favorable workers' compensation development reflects a continuation during 2018 of the benign loss cost trends experienced during recent years, particularly the favorable claim frequency trends (i.e., number of reported claims per unit of exposure). The long term trend of declining workers' compensation frequency can be attributable to improved workplace safety. Loss severity trends were also aided by our continued investment in claims handling initiatives such as medical case management services and vendor savings through usage of preferred provider networks. Reported workers' compensation losses in 2018 continued to be better than our expectations at most of our operating units, and were below the assumptions underlying our previous reserve estimates. For professional liability business, adverse development was primarily related to unexpected large directors and officers (“D&O”) liability losses at one of our U.S. operating units, as well as lawyers professional liability losses at another operating unit. The adverse development stemmed primarily from accident years 2015 and 2016, and was driven by a higher frequency of large losses than we had experienced in previous years. Reinsurance - Reserves for the Reinsurance segment developed unfavorably by $4 million in 2018. The unfavorable development was primarily due to U.S. casualty facultative business from accident years 2009 and prior related to construction projects, and was largely offset by favorable development on assumed excess of loss workers compensation business. 22.5% 27.6% 15.6% 9.4% 5.9% 4.0% 2.8% 1.9% 1.6% 1.1% 3.8% 3.3% 2.7% 3.1% 3.0% 3.3% 2.7% 3.3% 3.5% 2.6% Favorable prior year development (net of additional and return premiums) was $39 million in 2018. 88 95 1022849be 10K 1022849be_10K.indd 95 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 5 9 4/17/19 6:53 PM 89 December 31, 2018 $ $ $ — — — — — — — (434,302) (128,790) (128,790) (563,092) 11,966,448 (In thousands) Loss reserve discount: Other liability Primary workers' compensation Excess workers' compensation Professional liability Commercial automobile Short-tail lines Other Insurance Casualty Property Reinsurance Total loss reserve discount Total gross reserves for loss and loss expenses The following is supplementary information regarding average historical claims duration as of December 31, 2018: Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance Years 1 2 3 4 5 6 7 8 9 10 Other liability 8.0% 14.4% 18.4% 16.8% 13.8% 8.2% 5.9% 3.0% 2.8% 1.8% 22.5% 27.6% 15.6% 9.4% 5.9% 4.0% 2.8% 1.9% 1.6% 1.1% 8.7% 22.7% 22.3% 16.6% 9.4% 9.1% 3.5% 1.6% 4.3% 2.5% 39.7% 21.6% 15.6% 10.7% Short-tail lines 59.6% 29.8% 5.8% 1.6% 6.8% 0.1% 3.5% 0.3% 1.0% 0.4% 0.4% 0.3% 0.2% —% —% 1.4% Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance 1 7.2% 35.3% 2 12.5% 32.3% 3 14.6% 14.8% 4 5 6 7 8 9 10 13.3% 11.2% 5.5% 3.9% 9.0% 2.0% 5.9% 3.2% 5.2% 2.7% 3.8% —% 2.8% 3.2% Insurance Primary workers' compensation Excess workers' compensation Professional liability Commercial automobile Reinsurance Years Casualty Property 1022849be 10K 96 9 6 1 0 2 2 8 4 9 b e 1 0 K The table below provides a reconciliation of the beginning and ending reserve balances: (In thousands) Net reserves at beginning of year 2018 2017 2016 $ 10,056,914 $ 9,590,265 $ 9,244,872 (434,302) Net provision for losses and loss expenses: Claims occurring during the current year (1) Increase (decrease) in estimates for claims occurring in prior years (2) Loss reserve discount accretion 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 3,926,489 3,963,543 3,826,620 6,831 41,382 (5,165) 43,970 (29,904) 49,084 3,974,702 4,002,348 3,845,800 964,808 2,700,077 3,664,885 (117,848) 10,248,883 1,717,565 1,027,405 2,562,550 3,589,955 54,256 10,056,914 1,613,494 1,052,452 2,401,722 3,454,174 (46,233) 9,590,265 1,606,930 $ 11,966,448 $ 11,670,408 $ 11,197,195 _______________________________________ (1) Claims occurring during the current year are net of loss reserve discounts of $24,381,000, $22,064,000 and $18,929,000 in 2018, 2017, and 2016, respectively. (2) The increase (decrease) in estimates for claims occurring in prior years is net of loss reserve discount. On an undiscounted basis, the estimates for claims occurring in prior years decreased by $3,738,000, $32,132,000 and $59,175,000 in 2018, 2017 and 2016, respectively. 3.8% 3.3% 2.7% 3.1% 3.0% 3.3% 2.7% 3.3% 3.5% 2.6% Favorable prior year development (net of additional and return premiums) was $39 million in 2018. Insurance - Reserves for the Insurance segment developed favorably by $43 million in 2018. The favorable development was primarily attributable to workers' compensation business, partially offset by unfavorable development for professional liability business. For workers' compensation, the favorable development was spread across many accident years, including prior to 2009, but was most significant in accident years 2015 through 2017. The favorable workers' compensation development reflects a continuation during 2018 of the benign loss cost trends experienced during recent years, particularly the favorable claim frequency trends (i.e., number of reported claims per unit of exposure). The long term trend of declining workers' compensation frequency can be attributable to improved workplace safety. Loss severity trends were also aided by our continued investment in claims handling initiatives such as medical case management services and vendor savings through usage of preferred provider networks. Reported workers' compensation losses in 2018 continued to be better than our expectations at most of our operating units, and were below the assumptions underlying our previous reserve estimates. For professional liability business, adverse development was primarily related to unexpected large directors and officers (“D&O”) liability losses at one of our U.S. operating units, as well as lawyers professional liability losses at another operating unit. The adverse development stemmed primarily from accident years 2015 and 2016, and was driven by a higher frequency of large losses than we had experienced in previous years. Reinsurance - Reserves for the Reinsurance segment developed unfavorably by $4 million in 2018. The unfavorable development was primarily due to U.S. casualty facultative business from accident years 2009 and prior related to construction projects, and was largely offset by favorable development on assumed excess of loss workers compensation business. 88 89 96 1022849be 10K 1022849be_10K.indd 96 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 6 9 4/17/19 6:53 PM 9 7 1 0 2 2 8 4 9 b e 1 0 K 1022849be 10K 97 Favorable prior year development (net of additional and return premiums) was $37 million in 2017. Insurance - Reserves for the Insurance segment developed favorably by $68 million in 2017. The favorable development was primarily attributable to workers' compensation business, and was partially offset by unfavorable development for professional liability business. For workers' compensation, the favorable development was related to both primary and excess business and was spread across many accident years, including those prior to 2008, but was most significant in accident years 2014 through 2016. The favorable workers' compensation development reflects a continuation during 2017 of the generally benign loss cost trends experienced in recent years, particularly the favorable claim frequency trends (i.e. number of reported claims per unit of exposure). Reported workers' compensation losses in 2017 continued to be better than our expectations at most of our operating units, and were below the assumptions underlying our previous reserve estimates. The favorable severity trends were also impacted by our continued investment in medical case management services and the higher usage of preferred provider networks. The long term trend of declining workers' compensation frequency can be attributed to improved workplace safety. For professional liability business, adverse development was primarily related to unexpected large D&O liability losses at one of our U.S. operating units, and large professional indemnity and D&O losses in the U.K. The adverse development stemmed mainly from accident years 2013 through 2016 in the U.S. and 2011 through 2016 in the U.K. Reinsurance - Reserves for the Reinsurance segment developed unfavorably by $31 million in 2017. This adverse development was due to reserve strengthening associated with claims impacted by the change in the Ogden discount rate in the U.K., as well as adverse development on the U.S. facultative casualty excess of loss business. The Ogden rate is the discount rate used to calculate lump-sum bodily injury payouts in the U.K., and was reduced by the U.K. Ministry of Justice from +2.5% to -0.75% in 2017; the adverse development mostly related to U.K. motor bodily injury claims which we reinsured on an excess of loss basis in accident years 2012 through 2016. The adverse development on U.S. facultative casualty business was due to construction related risks in accident years 2008 and prior. Favorable prior year development (net of additional and return premiums) was $59 million in 2016. Insurance - Reserves for the Insurance segment developed favorably by $53 million in 2016. The favorable development was primarily related to workers' compensation business, and was partially offset by unfavorable development for medical professional liability business. For workers' compensation, the favorable development was related to both primary and excess business and to many accident years, including those prior to 2007. During 2016, reported workers' compensation losses continued to be better than our expectations at most of our operating units. Loss frequency and severity trends continued to be better than the assumptions underlying our previous reserve estimates. Loss severity trends also benefited from our continued investment in medical case management services and from our preferred provider networks. The long term trend of declining workers' compensation frequency can be attributed to improved workplace safety. For medical professional liability business, unfavorable development was primarily related to a class of business that has been discontinued. The adverse development for that business stemmed mainly from accident years 2010 through 2015. Reinsurance - Reserves for the Reinsurance segment developed favorably by $6 million in 2016. The favorable development was primarily related to direct facultative reinsurance business and to accident years 2008 through 2014. Environmental and Asbestos — To date, known environmental and asbestos claims have not had a material impact on the Company’s operations, because its subsidiaries generally did not insure large industrial companies that are subject to significant environmental or asbestos exposures prior to 1986 when an absolute exclusion was incorporated into standard policy language. The Company’s net reserves for losses and loss expenses relating to asbestos and environmental claims on policies written before adoption of the absolute exclusion was $28 million at December 31, 2018 and $30 million at December 31, 2017. The estimation of these liabilities is subject to significantly greater than normal variation and uncertainty because it is difficult to make an actuarial estimate of these liabilities due to the absence of a generally accepted actuarial methodology for these exposures and the potential effect of significant unresolved legal matters, including coverage issues, as well as the cost of litigating the legal issues. Additionally, the determination of ultimate damages and the final allocation of such damages to financially responsible parties are highly uncertain. Discounting — The Company discounts its liabilities for certain workers’ compensation reserves. The amount of workers’ compensation reserves that were discounted was $1,793 million and $1,855 million at December 31, 2018 and 2017, respectively. The aggregate net discount for those reserves, after reflecting the effects of ceded reinsurance, was $563 million and $591 million at 90 97 1022849be 10K 1022849be_10K.indd 97 4/17/19 6:53 PM K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be December 31, 2018 and 2017, respectively. At December 31, 2018, discount rates by year ranged from 2.0% to 6.5%, with a weighted average discount rate of 3.8%. Substantially all discounted workers’ compensation reserves (97% of total discounted reserves at December 31, 2018) are excess workers’ compensation reserves. In order to properly match loss expenses with income earned on investment securities supporting the liabilities, reserves for excess workers’ compensation business are discounted using risk-free discount rates determined by reference to the U.S. Treasury yield curve. These rates are determined annually based on the weighted average rate for the period. Once established, no adjustments are made to the discount rate for that period, and any increases or decreases in loss reserves in subsequent years are discounted at the same rate, without regard to when any such adjustments are recognized. The expected loss and loss expense payout patterns subject to discounting are derived from the Company’s loss payout experience. The Company also discounts reserves for certain other long-duration workers’ compensation reserves (representing approximately 3% of total discounted reserves at December 31, 2018), including reserves for quota share reinsurance and reserves related to losses regarding occupational lung disease. These reserves are discounted at statutory rates prescribed or permitted by the Department of Insurance of the State of Delaware. K 0 1 e b 9 4 8 2 2 0 1 7 9 91 Favorable prior year development (net of additional and return premiums) was $37 million in 2017. Insurance - Reserves for the Insurance segment developed favorably by $68 million in 2017. The favorable development was 9 8 1 0 2 2 8 4 9 b e 1 0 K December 31, 2018 and 2017, respectively. At December 31, 2018, discount rates by year ranged from 2.0% to 6.5%, with a weighted average discount rate of 3.8%. primarily attributable to workers' compensation business, and was partially offset by unfavorable development for professional Substantially all discounted workers’ compensation reserves (97% of total discounted reserves at December 31, 2018) are 1022849be 10K 98 excess workers’ compensation reserves. In order to properly match loss expenses with income earned on investment securities supporting the liabilities, reserves for excess workers’ compensation business are discounted using risk-free discount rates determined by reference to the U.S. Treasury yield curve. These rates are determined annually based on the weighted average rate for the period. Once established, no adjustments are made to the discount rate for that period, and any increases or decreases in loss reserves in subsequent years are discounted at the same rate, without regard to when any such adjustments are recognized. The expected loss and loss expense payout patterns subject to discounting are derived from the Company’s loss payout experience. The Company also discounts reserves for certain other long-duration workers’ compensation reserves (representing approximately 3% of total discounted reserves at December 31, 2018), including reserves for quota share reinsurance and reserves related to losses regarding occupational lung disease. These reserves are discounted at statutory rates prescribed or permitted by the Department of Insurance of the State of Delaware. liability business. For workers' compensation, the favorable development was related to both primary and excess business and was spread across many accident years, including those prior to 2008, but was most significant in accident years 2014 through 2016. The favorable workers' compensation development reflects a continuation during 2017 of the generally benign loss cost trends experienced in recent years, particularly the favorable claim frequency trends (i.e. number of reported claims per unit of exposure). Reported workers' compensation losses in 2017 continued to be better than our expectations at most of our operating units, and were below the assumptions underlying our previous reserve estimates. The favorable severity trends were also impacted by our continued investment in medical case management services and the higher usage of preferred provider networks. The long term trend of declining workers' compensation frequency can be attributed to improved workplace safety. For professional liability business, adverse development was primarily related to unexpected large D&O liability losses at one of our U.S. operating units, and large professional indemnity and D&O losses in the U.K. The adverse development stemmed mainly from accident years 2013 through 2016 in the U.S. and 2011 through 2016 in the U.K. Reinsurance - Reserves for the Reinsurance segment developed unfavorably by $31 million in 2017. This adverse development was due to reserve strengthening associated with claims impacted by the change in the Ogden discount rate in the U.K., as well as adverse development on the U.S. facultative casualty excess of loss business. The Ogden rate is the discount rate used to calculate lump-sum bodily injury payouts in the U.K., and was reduced by the U.K. Ministry of Justice from +2.5% to -0.75% in 2017; the adverse development mostly related to U.K. motor bodily injury claims which we reinsured on an excess of loss basis in accident years 2012 through 2016. The adverse development on U.S. facultative casualty business was due to construction related risks in accident years 2008 and prior. Favorable prior year development (net of additional and return premiums) was $59 million in 2016. Insurance - Reserves for the Insurance segment developed favorably by $53 million in 2016. The favorable development was primarily related to workers' compensation business, and was partially offset by unfavorable development for medical professional liability business. For workers' compensation, the favorable development was related to both primary and excess business and to many accident years, including those prior to 2007. During 2016, reported workers' compensation losses continued to be better than our expectations at most of our operating units. Loss frequency and severity trends continued to be better than the assumptions underlying our previous reserve estimates. Loss severity trends also benefited from our continued investment in medical case management services and from our preferred provider networks. The long term trend of declining workers' compensation frequency can be attributed to improved workplace safety. For medical professional liability business, unfavorable development was primarily related to a class of business that has been discontinued. The adverse development for that business stemmed mainly from accident years 2010 through 2015. Reinsurance - Reserves for the Reinsurance segment developed favorably by $6 million in 2016. The favorable development was primarily related to direct facultative reinsurance business and to accident years 2008 through 2014. Environmental and Asbestos — To date, known environmental and asbestos claims have not had a material impact on the Company’s operations, because its subsidiaries generally did not insure large industrial companies that are subject to significant environmental or asbestos exposures prior to 1986 when an absolute exclusion was incorporated into standard policy language. The Company’s net reserves for losses and loss expenses relating to asbestos and environmental claims on policies written before adoption of the absolute exclusion was $28 million at December 31, 2018 and $30 million at December 31, 2017. The estimation of these liabilities is subject to significantly greater than normal variation and uncertainty because it is difficult to make an actuarial estimate of these liabilities due to the absence of a generally accepted actuarial methodology for these exposures and the potential effect of significant unresolved legal matters, including coverage issues, as well as the cost of litigating the legal issues. Additionally, the determination of ultimate damages and the final allocation of such damages to financially responsible parties are highly uncertain. Discounting — The Company discounts its liabilities for certain workers’ compensation reserves. The amount of workers’ compensation reserves that were discounted was $1,793 million and $1,855 million at December 31, 2018 and 2017, respectively. The aggregate net discount for those reserves, after reflecting the effects of ceded reinsurance, was $563 million and $591 million at 90 91 98 1022849be 10K 1022849be_10K.indd 98 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 8 9 4/17/19 6:53 PM 9 9 1 0 2 2 8 4 9 b e 1 0 K (14) Reinsurance The following table presents the amounts due from reinsurers as of December 31, 2018: 1022849be 10K 99 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 2018 2017 2016 $ 6,973,216 $ 6,726,029 $ 6,647,600 729,278 (1,269,267) $ 6,433,227 750,934 (1,216,455) $ 6,260,508 896,101 (1,119,788) $ 6,423,913 $ 6,851,795 $ 6,661,046 $ 6,492,240 755,759 (1,236,049) $ 6,371,505 812,309 (1,161,936) $ 6,311,419 900,570 (1,099,462) $ 6,293,348 $ $ 829,742 268,037 $ $ 601,769 241,983 $ $ 707,336 201,957 The Company reinsures a portion of its exposures principally to reduce its net liability on individual risks and to protect against catastrophic losses. Estimated amounts due from reinsurers are reported net of reserves for uncollectible reinsurance of $946,965, $1,010,000 and $1,049,000 as of December 31, 2018, 2017 and 2016, respectively. (In thousands) Lloyd’s of London Munich Re Alleghany Group Swiss Re Partner Re Berkshire Hathaway Axis Capital Hannover Re Group Everest Re Korean Re Renaissance Re Liberty Mutual Qatar Re GRP Chubb Limited Arch Capital Group Other reinsurers less than $20,000 Subtotal Total Residual market pools $ 215,370 164,131 150,438 150,280 103,837 87,314 85,377 77,351 62,113 52,746 39,944 32,118 27,731 24,628 21,260 289,305 1,583,943 348,348 $ 1,932,291 92 99 1022849be 10K 1022849be_10K.indd 99 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 9 9 4/17/19 6:53 PM 93 (14) Reinsurance The Company reinsures a portion of its insurance exposures in order to reduce its net liability on individual risks and catastrophe losses. Reinsurance coverage and retentions vary depending on the line of business, location of the risk and nature of loss. The Company’s reinsurance purchases include the following: property reinsurance treaties that reduce exposure to large individual property losses and catastrophe events; casualty reinsurance treaties that reduce its exposure to large individual casualty losses, workers’ compensation catastrophe losses and casualty losses involving multiple claimants or insureds; and facultative reinsurance that reduces exposure on individual policies or risks for losses that exceed treaty reinsurance capacity. Depending on the operating unit, the Company purchases specific additional reinsurance to supplement the above programs. The following is a summary of reinsurance financial information: (In thousands) Written premiums: Direct Assumed Ceded Earned premiums: Direct Assumed Ceded Total net written premiums Total net earned premiums Ceded losses and loss expenses incurred Ceded commission earned 2018 2017 2016 $ 6,973,216 $ 6,726,029 $ 6,647,600 729,278 750,934 896,101 (1,269,267) (1,216,455) (1,119,788) $ 6,433,227 $ 6,260,508 $ 6,423,913 $ 6,851,795 $ 6,661,046 $ 6,492,240 755,759 812,309 900,570 (1,236,049) (1,161,936) (1,099,462) $ 6,371,505 $ 6,311,419 $ 6,293,348 $ $ 829,742 268,037 $ $ 601,769 241,983 $ $ 707,336 201,957 The Company reinsures a portion of its exposures principally to reduce its net liability on individual risks and to protect against catastrophic losses. Estimated amounts due from reinsurers are reported net of reserves for uncollectible reinsurance of $946,965, $1,010,000 and $1,049,000 as of December 31, 2018, 2017 and 2016, respectively. 1 0 0 1 0 2 2 8 4 9 b e 1 0 K The following table presents the amounts due from reinsurers as of December 31, 2018: (In thousands) Lloyd’s of London Munich Re Alleghany Group Swiss Re Partner Re Berkshire Hathaway Axis Capital Hannover Re Group Everest Re Korean Re Renaissance Re Liberty Mutual Qatar Re GRP Chubb Limited Arch Capital Group Other reinsurers less than $20,000 Subtotal Residual market pools Total 92 93 100 1022849be 10K 1022849be_10K.indd 100 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be 1022849be 10K 100 $ 215,370 164,131 150,438 150,280 103,837 87,314 85,377 77,351 62,113 52,746 39,944 32,118 27,731 24,628 21,260 289,305 1,583,943 348,348 $ 1,932,291 K 0 1 e b 9 4 8 2 2 0 1 0 0 1 4/17/19 6:53 PM 1022849be 10K 101 1 0 1 1 0 2 2 8 4 9 b e 1 0 K (15) Indebtedness (16) Income Taxes Indebtedness consisted of the following as of December 31, 2018 (the difference between the face value and the carrying Income tax expense (benefit) consists of: value is unamortized discount and debt issuance costs): (In thousands) Senior notes due on: August 15, 2019 September 15, 2019 September 15, 2020 January 1, 2022 March 15, 2022 February 15, 2037 August 1, 2044 Subsidiary debt (1) (2) Total senior notes and other debt Subordinated debentures due on: April 30, 2053 March 1, 2056 June 1, 2056 March 30, 2058 Interest Rate Face Value 2018 2017 Carrying Value 6.15% 7.375% 5.375% 8.7% 4.625% 6.25% 4.75% Various $ 140,651 $ 140,568 $ 300,000 300,000 76,503 350,000 250,000 350,000 123,992 299,816 299,420 76,273 348,670 248,006 345,283 123,992 140,434 299,562 299,083 76,210 348,252 247,896 345,099 12,516 $ 1,891,146 $ 1,882,028 $ 1,769,052 5.625% $ 350,000 $ 341,097 $ 5.9% 5.75% 5.70% 110,000 290,000 185,000 106,159 281,551 178,684 340,838 106,055 281,325 — Total subordinated debentures $ 935,000 $ 907,491 $ 728,218 ________________ (1) Subsidiary debt is due as follows: $7 million in 2019, $15 million in 2020, and $102 million in 2028. (2) Includes non-recourse loan in the amount of $102 million secured by an office building. See Note 8, Real Estate, for more details. (In thousands) December 31, 2018 Domestic Foreign Total expense (benefit) December 31, 2017 Domestic Foreign Total expense (benefit) December 31, 2016 Domestic Foreign Total expense (In thousands) Computed “expected” tax expense Tax-exempt investment income Change in valuation allowance Impact of foreign tax rates State and local taxes Impact of change in U.S. tax rate Other, net Total expense Current Expense (Benefit) Deferred Expense (Benefit) Total $ $ $ $ $ $ 188,712 13,963 202,675 225,694 8,803 234,497 259,539 23,634 283,173 $ $ $ $ $ $ (63,134) $ 125,578 23,487 37,450 (39,647) $ 163,028 (27,601) $ 198,093 12,537 21,340 (15,064) $ 219,433 3,355 6,425 9,780 $ $ 262,894 30,059 292,953 2018 2017 2016 $ 170,540 $ 270,470 $ 313,753 (18,833) 18,576 7,683 3,901 (10,950) (7,889) (37,209) 11,161 3,508 1,644 (30,531) 390 (37,379) 1,420 1,984 7,748 — 5,427 $ 163,028 $ 219,433 $ 292,953 Income before income taxes from domestic operations was $755 million, $797 million and $837 million for the years ended December 31, 2018, 2017 and 2016, respectively. Income (loss) before income taxes from foreign operations was $57 million, ($25) million and $59 million for the years ended December 31, 2018, 2017 and 2016, respectively. A reconciliation of the income tax expense and the amounts computed by applying the Federal and foreign income tax rate of 21% for 2018 and 35% for 2017 and 2016 to pre-tax income are as follows: 94 101 1022849be 10K 1022849be_10K.indd 101 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 1 0 1 4/17/19 6:53 PM 95 (15) Indebtedness value is unamortized discount and debt issuance costs): (In thousands) Senior notes due on: August 15, 2019 September 15, 2019 September 15, 2020 January 1, 2022 March 15, 2022 February 15, 2037 August 1, 2044 Subsidiary debt (1) (2) Total senior notes and other debt Subordinated debentures due on: April 30, 2053 March 1, 2056 June 1, 2056 March 30, 2058 Total subordinated debentures ________________ details. Interest Rate Face Value 2018 2017 Carrying Value 6.15% 7.375% 5.375% 8.7% 4.625% 6.25% 4.75% Various 5.9% 5.75% 5.70% $ 140,651 $ 140,568 $ 300,000 300,000 76,503 350,000 250,000 350,000 123,992 299,816 299,420 76,273 348,670 248,006 345,283 123,992 $ 1,891,146 $ 1,882,028 $ 1,769,052 5.625% $ 350,000 $ 341,097 $ 110,000 290,000 185,000 106,159 281,551 178,684 $ 935,000 $ 907,491 $ 728,218 140,434 299,562 299,083 76,210 348,252 247,896 345,099 12,516 340,838 106,055 281,325 — (1) Subsidiary debt is due as follows: $7 million in 2019, $15 million in 2020, and $102 million in 2028. (2) Includes non-recourse loan in the amount of $102 million secured by an office building. See Note 8, Real Estate, for more Indebtedness consisted of the following as of December 31, 2018 (the difference between the face value and the carrying Income tax expense (benefit) consists of: 1 0 2 1 0 2 2 8 4 9 b e 1 0 K (16) Income Taxes (In thousands) December 31, 2018 Domestic Foreign Total expense (benefit) December 31, 2017 Domestic Foreign Total expense (benefit) December 31, 2016 Domestic Foreign Total expense 1022849be 10K 102 Current Expense (Benefit) Deferred Expense (Benefit) Total $ $ $ $ $ $ 188,712 13,963 202,675 225,694 8,803 234,497 259,539 23,634 283,173 $ $ $ $ $ $ (63,134) $ 23,487 (39,647) $ 125,578 37,450 163,028 (27,601) $ 12,537 (15,064) $ 198,093 21,340 219,433 3,355 6,425 9,780 $ $ 262,894 30,059 292,953 Income before income taxes from domestic operations was $755 million, $797 million and $837 million for the years ended December 31, 2018, 2017 and 2016, respectively. Income (loss) before income taxes from foreign operations was $57 million, ($25) million and $59 million for the years ended December 31, 2018, 2017 and 2016, respectively. A reconciliation of the income tax expense and the amounts computed by applying the Federal and foreign income tax rate of 21% for 2018 and 35% for 2017 and 2016 to pre-tax income are as follows: (In thousands) Computed “expected” tax expense Tax-exempt investment income Change in valuation allowance Impact of foreign tax rates State and local taxes Impact of change in U.S. tax rate Other, net Total expense 2018 170,540 (18,833) 18,576 7,683 3,901 (10,950) (7,889) 163,028 $ $ $ 2017 270,470 (37,209) 11,161 3,508 1,644 (30,531) 390 $ 2016 313,753 (37,379) 1,420 1,984 7,748 — 5,427 $ 219,433 $ 292,953 94 95 102 1022849be 10K 1022849be_10K.indd 102 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 2 0 1 4/17/19 6:53 PM 1 0 3 1 0 2 2 8 4 9 b e 1 0 K At December 31, 2018 and 2017, the tax effects of differences that give rise to significant portions of the deferred tax asset (17) Dividends from Subsidiaries and Statutory Financial Information 1022849be 10K 103 and deferred tax liability are as follows: (In thousands) Deferred tax asset: Loss reserve discounting Unearned premiums Net operating losses Other-than-temporary impairments Employee compensation plans Other Gross deferred tax asset Less valuation allowance Deferred tax asset Deferred tax liability: Amortization of intangibles Loss reserve discounting - transition rule Deferred policy acquisition costs Unrealized investment gains Property, furniture and equipment Investment funds Other Deferred tax liability Net deferred tax (asset) liability 2018 2017 $ 130,513 $ 70,206 112,190 110,854 37,463 9,910 56,027 58,809 404,912 (35,195) 369,717 13,641 41,088 99,293 35,430 39,239 51,712 53,824 33,043 8,204 59,037 49,346 330,690 (16,619) 314,071 12,826 — 100,020 151,162 31,865 41,104 63,858 334,227 (35,490) $ 400,835 86,764 $ The Company had a current tax receivable of $0.7 million and a payable of $11.3 million at December 31, 2018 and 2017, respectively. At December 31, 2018, the Company had foreign net operating loss carryforwards of $8.8 million that expire beginning in 2027, and an additional $181.0 million that have no expiration date. At December 31, 2018, the Company had a valuation allowance of $35.2 million, as compared to $16.6 million at December 31, 2017. The Company has provided a valuation allowance against the utilization of foreign tax credits and the future net operating loss carryforward benefits of certain foreign operations. The statute of limitations has closed for the Company’s U.S. Federal tax returns through December 31, 2013. The realization of the deferred tax asset is dependent upon the Company’s ability to generate sufficient taxable income in future periods. Based on historical results and the prospects for future current operations, management anticipates that it is more likely than not that future taxable income will be sufficient for the realization of this asset. The Tax Cuts and Jobs Act of 2017 (the "Tax Act") was enacted on December 22, 2017. The Tax Act provides for a reduction of the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. In 2018, the Company reported a net tax rate reduction benefit in the amount of $11.0 million. Additionally, the U.S. tax law requires insurance reserves to be discounted for tax purposes. The Tax Act modified this computation. At the end of 2018, the IRS issued revised discount factors to be applied to the 2017 reserves. This increased the beginning of year 2018 deferred tax asset for loss reserve discounting by $47 million. Under the related transition rule, a deferred tax liability was established which will be included in taxable income over eight years beginning in 2018. The Tax Act included a global intangible low-taxed income tax ("GILTI"). The Company has made an accounting policy election to treat any GILTI taxes as a current period expense when incurred (the "period cost method"). The 2018 tax provision includes a GILTI tax of $2.8 million as a current tax expense. The Company has not provided U.S. deferred income taxes on the undistributed earnings of approximately $70 million of its non-U.S. subsidiaries since these earnings are intended to be permanently reinvested in the non-U.S. subsidiaries. In the future, if such earnings were distributed the Company projects that the incremental tax, if any, will be immaterial. 96 103 1022849be 10K 1022849be_10K.indd 103 4/17/19 6:53 PM K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be The Company’s insurance subsidiaries are restricted by law as to the amount of dividends they may pay without the approval of regulatory authorities. The Company’s lead insurer, Berkley Insurance Company ("BIC"), directly or indirectly owns all of the Company’s other insurance companies. During 2019, the maximum amount of dividends that can be paid by BIC without such approval is approximately $1.1 billion. BIC’s combined net income and statutory capital and surplus, as determined in accordance with statutory accounting practices (SAP), are as follows: (In thousands) Net income Statutory capital and surplus 2018 2017 2016 $ 1,099,953 $ 698,862 $ 702,830 $ 5,587,930 $ 5,479,603 $ 5,493,044 The significant variances between SAP and GAAP are that for statutory purposes bonds are carried at amortized cost, unrealized gains and losses on equity securities are recorded in surplus, acquisition costs are charged to income as incurred, deferred Federal income taxes are subject to limitations, excess and assumed workers’ compensation reserves are discounted at different discount rates and certain assets designated as “non-admitted assets” are charged against surplus. The Commissioner of Insurance of the State of Delaware has allowed BIC to discount non-tabular workers' compensation loss reserves, which is a permitted practice that differs from SAP. The effect of using this permitted practice was an increase to BIC’s statutory capital and surplus by $282 million at December 31, 2018. The National Association of Insurance Commissioners (“NAIC”) has risk-based capital (“RBC”) requirements that require insurance companies to calculate and report information under a risk-based formula which measures statutory capital and surplus needs based on a regulatory definition of risk in a company’s mix of products and its balance sheet. This guidance is used to calculate two capital measurements: Total Adjusted Capital and RBC Authorized Control Level. Total Adjusted Capital is equal to the Company’s statutory capital and surplus excluding capital and surplus derived from the use of permitted practices that differ from statutory accounting practices. RBC Authorized Control Level is the capital level used by regulatory authorities to determine whether remedial action is required. Generally, no remedial action is required if Total Adjusted Capital is 200% or more of the RBC Authorized Control Level. At December 31, 2018, BIC’s Total Adjusted Capital of $5.306 billion was 384% of its RBC Authorized Control Level. See Note 3, Investments in Fixed Maturity Securities, for a description of assets held on deposit as security. K 0 1 e b 9 4 8 2 2 0 1 3 0 1 97 At December 31, 2018 and 2017, the tax effects of differences that give rise to significant portions of the deferred tax asset and deferred tax liability are as follows: (In thousands) Deferred tax asset: Loss reserve discounting Unearned premiums Net operating losses Other-than-temporary impairments Employee compensation plans Other Gross deferred tax asset Less valuation allowance Deferred tax asset Deferred tax liability: Amortization of intangibles Loss reserve discounting - transition rule Deferred policy acquisition costs Unrealized investment gains Property, furniture and equipment Investment funds Other Deferred tax liability Net deferred tax (asset) liability The Company had a current tax receivable of $0.7 million and a payable of $11.3 million at December 31, 2018 and 2017, respectively. At December 31, 2018, the Company had foreign net operating loss carryforwards of $8.8 million that expire beginning in 2027, and an additional $181.0 million that have no expiration date. At December 31, 2018, the Company had a valuation allowance of $35.2 million, as compared to $16.6 million at December 31, 2017. The Company has provided a valuation allowance against the utilization of foreign tax credits and the future net operating loss carryforward benefits of certain foreign operations. The statute of limitations has closed for the Company’s U.S. Federal tax returns through December 31, 2013. The realization of the deferred tax asset is dependent upon the Company’s ability to generate sufficient taxable income in future periods. Based on historical results and the prospects for future current operations, management anticipates that it is more likely than not that future taxable income will be sufficient for the realization of this asset. The Tax Cuts and Jobs Act of 2017 (the "Tax Act") was enacted on December 22, 2017. The Tax Act provides for a reduction of the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. In 2018, the Company reported a net tax rate reduction benefit in the amount of $11.0 million. Additionally, the U.S. tax law requires insurance reserves to be discounted for tax purposes. The Tax Act modified this computation. At the end of 2018, the IRS issued revised discount factors to be applied to the 2017 reserves. This increased the beginning of year 2018 deferred tax asset for loss reserve discounting by $47 million. Under the related transition rule, a deferred tax liability was established which will be included in taxable income over eight years beginning in 2018. The Tax Act included a global intangible low-taxed income tax ("GILTI"). The Company has made an accounting policy election to treat any GILTI taxes as a current period expense when incurred (the "period cost method"). The 2018 tax provision includes a GILTI tax of $2.8 million as a current tax expense. The Company has not provided U.S. deferred income taxes on the undistributed earnings of approximately $70 million of its non-U.S. subsidiaries since these earnings are intended to be permanently reinvested in the non-U.S. subsidiaries. In the future, if such earnings were distributed the Company projects that the incremental tax, if any, will be immaterial. 1 0 4 1 0 2 2 8 4 9 b e 1 0 K 2018 2017 $ 130,513 $ 70,206 112,190 110,854 37,463 9,910 56,027 58,809 404,912 (35,195) 369,717 13,641 41,088 99,293 35,430 39,239 51,712 53,824 33,043 8,204 59,037 49,346 330,690 (16,619) 314,071 12,826 — 100,020 151,162 31,865 41,104 63,858 334,227 400,835 $ (35,490) $ 86,764 1022849be 10K 104 (17) Dividends from Subsidiaries and Statutory Financial Information The Company’s insurance subsidiaries are restricted by law as to the amount of dividends they may pay without the approval of regulatory authorities. The Company’s lead insurer, Berkley Insurance Company ("BIC"), directly or indirectly owns all of the Company’s other insurance companies. During 2019, the maximum amount of dividends that can be paid by BIC without such approval is approximately $1.1 billion. BIC’s combined net income and statutory capital and surplus, as determined in accordance with statutory accounting practices (SAP), are as follows: (In thousands) Net income Statutory capital and surplus 2018 $ 1,099,953 $ 5,587,930 2017 698,862 $ $ 5,479,603 2016 702,830 $ $ 5,493,044 The significant variances between SAP and GAAP are that for statutory purposes bonds are carried at amortized cost, unrealized gains and losses on equity securities are recorded in surplus, acquisition costs are charged to income as incurred, deferred Federal income taxes are subject to limitations, excess and assumed workers’ compensation reserves are discounted at different discount rates and certain assets designated as “non-admitted assets” are charged against surplus. The Commissioner of Insurance of the State of Delaware has allowed BIC to discount non-tabular workers' compensation loss reserves, which is a permitted practice that differs from SAP. The effect of using this permitted practice was an increase to BIC’s statutory capital and surplus by $282 million at December 31, 2018. The National Association of Insurance Commissioners (“NAIC”) has risk-based capital (“RBC”) requirements that require insurance companies to calculate and report information under a risk-based formula which measures statutory capital and surplus needs based on a regulatory definition of risk in a company’s mix of products and its balance sheet. This guidance is used to calculate two capital measurements: Total Adjusted Capital and RBC Authorized Control Level. Total Adjusted Capital is equal to the Company’s statutory capital and surplus excluding capital and surplus derived from the use of permitted practices that differ from statutory accounting practices. RBC Authorized Control Level is the capital level used by regulatory authorities to determine whether remedial action is required. Generally, no remedial action is required if Total Adjusted Capital is 200% or more of the RBC Authorized Control Level. At December 31, 2018, BIC’s Total Adjusted Capital of $5.306 billion was 384% of its RBC Authorized Control Level. See Note 3, Investments in Fixed Maturity Securities, for a description of assets held on deposit as security. 96 97 104 1022849be 10K 1022849be_10K.indd 104 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 4 0 1 4/17/19 6:53 PM 1022849be 10K 105 1 0 5 1 0 2 2 8 4 9 b e 1 0 K (18) Common Stockholders’ Equity (20) Lease Obligations The weighted average number of shares used in the computation of net income per share was as follows: The Company and its subsidiaries use office space and equipment under leases expiring at various dates. These leases are Basic Diluted 2018 126,698,927 2017 124,843,240 2016 122,650,997 128,263,558 129,017,613 128,552,838 considered operating leases for financial reporting purposes. Some of these leases have options to extend the length of the leases and contain clauses for cost of living, operating expense and real estate tax adjustments. Future minimum lease payments, without provision for sublease income, are: $46,592,000 in 2019; $43,504,000 in 2020; $39,061,000 in 2021; $34,444,000 in 2022, $30,881,000 in 2023 and $75,740,000 thereafter. Rental expense was $45,778,000, $52,925,000, and $47,453,000 for 2018, 2017, and 2016 respectively. Treasury shares have been excluded from average outstanding shares from the date of acquisition. The weighted average number of basic shares outstanding includes the impact of 4,926,521 common shares held in a grantor trust. The common shares held in the grantor trust are for delivery upon settlement of vested but mandatorily deferred restricted stock units ("RSUs"). Shares held by the grantor trust do not affect diluted shares outstanding since shares deliverable under vested RSUs were already included in diluted shares outstanding. The difference in calculating basic and diluted net income per share is attributable entirely to the dilutive effect of stock-based compensation plans. Changes in shares of common stock outstanding, net of treasury shares, are presented below. Shares of common stock issued and outstanding do not include shares related to unissued restricted stock units (including shares held in the grantor trust). Balance, beginning of year Shares issued Shares repurchased Balance, end of year 2018 121,514,852 838,508 (357,600) 121,995,760 2017 121,193,599 1,052,256 (731,003) 121,514,852 2016 123,307,837 281,654 (2,395,892) 121,193,599 The amount of dividends paid is dependent upon factors such as the receipt of dividends from our subsidiaries, our results of operations, cash flow, financial condition and business needs, the capital and surplus requirements of our subsidiaries, and applicable insurance regulations that limit the amount of dividends that may be paid by our regulated insurance subsidiaries. (21) Commitments, Litigation and Contingent Liabilities In the ordinary course of business, the Company is subject to disputes, litigation and arbitration arising from its insurance and reinsurance businesses. These matters are generally related to insurance and reinsurance claims and are considered in the establishment of loss and loss expense reserves. In addition, the Company may also become involved in legal actions which seek extra-contractual damages, punitive damages or penalties, including claims alleging bad faith in handling of insurance claims. The Company expects its ultimate liability with respect to such matters will not be material to its financial condition. However, adverse outcomes on such matters are possible, from time to time, and could be material to the Company’s results of operations in any particular financial reporting period. At December 31, 2018, the Company had commitments to invest up to $270.2 million and $253.4 million in certain investment funds and real estate construction projects, respectively. (22) Stock Incentive Plan Pursuant to the Company's stock incentive plan, the Company may issue restricted stock units ("RSUs") to employees of the Company and its subsidiaries. The RSUs generally vest three to five years from the award date and are subject to other vesting and forfeiture provisions contained in the award agreement. The following table summarizes RSU information for the three years ended December 31, 2018: (19) Fair Value of Financial Instruments The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments as of December 31, 2018 and 2017: RSUs granted and unvested at beginning of period: (In thousands) Assets: 2018 2017 Carrying Value Fair Value Carrying Value Fair Value Fixed maturity securities Equity securities Arbitrage trading account Loans receivable Cash and cash equivalents Trading accounts receivable from brokers and clearing organizations $ 13,606,812 279,006 452,548 94,813 817,602 347,228 $ 13,619,620 279,006 452,548 97,073 817,602 347,228 $ 13,551,250 576,647 617,649 79,684 950,471 189,280 $ 13,566,976 576,647 617,649 82,047 950,471 189,280 Liabilities: Due to broker Trading account securities sold but not yet purchased Subordinated debentures Senior notes and other debt 20,144 38,120 907,491 1,882,028 20,144 38,120 840,002 1,968,996 15,920 64,358 728,218 1,769,052 15,920 64,358 769,060 1,945,313 The estimated fair values of the Company’s fixed maturity securities, equity securities available for sale and arbitrage trading account securities are based on various valuation techniques that rely on fair value measurements as described in Note 12 above. The fair value of loans receivable is estimated by using current institutional purchaser yield requirements for loans with similar credit characteristics, which is considered a Level 2 input. The fair value of the senior notes and other debt and the subordinated debentures is based on spreads for similar securities, which is considered a Level 2 input. 98 105 1022849be 10K 1022849be_10K.indd 105 4/17/19 6:53 PM K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 5 0 1 99 Upon vesting, shares of the Company’s common stock equal to the number of vested RSUs are issued or deferred to a later date, depending on the terms of the specific award agreement. As of December 31, 2018, 4,709,318 RSUs had been deferred. RSUs that have not yet vested and vested RSUs that have been deferred are not considered to be issued and outstanding shares. The fair value of RSUs at the date of grant are recorded as unearned compensation, a component of stockholders’ equity, and expensed over the vesting period. Following is a summary of changes in unearned compensation for the three years ended Granted Vested Canceled RSUs granted and unvested at end of period: December 31, 2018: (In thousands) RSUs expensed RSUs forfeitures Unearned compensation at beginning of year RSUs granted, net of cancellations Unearned compensation at end of year 2018 2017 2016 3,477,981 4,862,098 4,158,325 760,032 855,984 1,000,559 (600,169) (1,993,507) (77,250) (263,411) (246,594) (219,536) 3,374,433 3,477,981 4,862,098 2018 2017 2016 $ 122,910 $ 115,965 $ 103,538 52,204 (34,408) (11,037) 52,897 (38,796) (7,156) 52,697 (35,585) (4,685) $ 129,669 $ 122,910 $ 115,965 (18) Common Stockholders’ Equity Basic Diluted Treasury shares have been excluded from average outstanding shares from the date of acquisition. The weighted average number of basic shares outstanding includes the impact of 4,926,521 common shares held in a grantor trust. The common shares held in the grantor trust are for delivery upon settlement of vested but mandatorily deferred restricted stock units ("RSUs"). Shares held by the grantor trust do not affect diluted shares outstanding since shares deliverable under vested RSUs were already included in diluted shares outstanding. The difference in calculating basic and diluted net income per share is attributable entirely to the dilutive effect of stock-based compensation plans. Changes in shares of common stock outstanding, net of treasury shares, are presented below. Shares of common stock issued and outstanding do not include shares related to unissued restricted stock units (including shares held in the grantor trust). Balance, beginning of year Shares issued Shares repurchased Balance, end of year 2018 2017 2016 121,514,852 121,193,599 123,307,837 838,508 1,052,256 281,654 (357,600) (731,003) (2,395,892) 121,995,760 121,514,852 121,193,599 The amount of dividends paid is dependent upon factors such as the receipt of dividends from our subsidiaries, our results of operations, cash flow, financial condition and business needs, the capital and surplus requirements of our subsidiaries, and applicable insurance regulations that limit the amount of dividends that may be paid by our regulated insurance subsidiaries. (19) Fair Value of Financial Instruments December 31, 2018 and 2017: (In thousands) Assets: Fixed maturity securities Equity securities Arbitrage trading account Loans receivable Cash and cash equivalents Trading accounts receivable from brokers and clearing organizations Liabilities: Due to broker Trading account securities sold but not yet purchased Subordinated debentures Senior notes and other debt 2018 2017 Carrying Value Fair Value Fair Value Carrying Value $ 13,606,812 $ 13,619,620 $ 13,551,250 $ 13,566,976 279,006 452,548 94,813 817,602 347,228 20,144 38,120 907,491 279,006 452,548 97,073 817,602 347,228 20,144 38,120 840,002 576,647 617,649 79,684 950,471 189,280 15,920 64,358 728,218 576,647 617,649 82,047 950,471 189,280 15,920 64,358 769,060 1,882,028 1,968,996 1,769,052 1,945,313 The estimated fair values of the Company’s fixed maturity securities, equity securities available for sale and arbitrage trading account securities are based on various valuation techniques that rely on fair value measurements as described in Note 12 above. The fair value of loans receivable is estimated by using current institutional purchaser yield requirements for loans with similar credit characteristics, which is considered a Level 2 input. The fair value of the senior notes and other debt and the subordinated debentures is based on spreads for similar securities, which is considered a Level 2 input. 1 0 6 1 0 2 2 8 4 9 b e 1 0 K (20) Lease Obligations 1022849be 10K 106 The weighted average number of shares used in the computation of net income per share was as follows: The Company and its subsidiaries use office space and equipment under leases expiring at various dates. These leases are 2018 2017 2016 126,698,927 124,843,240 122,650,997 128,263,558 129,017,613 128,552,838 considered operating leases for financial reporting purposes. Some of these leases have options to extend the length of the leases and contain clauses for cost of living, operating expense and real estate tax adjustments. Future minimum lease payments, without provision for sublease income, are: $46,592,000 in 2019; $43,504,000 in 2020; $39,061,000 in 2021; $34,444,000 in 2022, $30,881,000 in 2023 and $75,740,000 thereafter. Rental expense was $45,778,000, $52,925,000, and $47,453,000 for 2018, 2017, and 2016 respectively. (21) Commitments, Litigation and Contingent Liabilities In the ordinary course of business, the Company is subject to disputes, litigation and arbitration arising from its insurance and reinsurance businesses. These matters are generally related to insurance and reinsurance claims and are considered in the establishment of loss and loss expense reserves. In addition, the Company may also become involved in legal actions which seek extra-contractual damages, punitive damages or penalties, including claims alleging bad faith in handling of insurance claims. The Company expects its ultimate liability with respect to such matters will not be material to its financial condition. However, adverse outcomes on such matters are possible, from time to time, and could be material to the Company’s results of operations in any particular financial reporting period. At December 31, 2018, the Company had commitments to invest up to $270.2 million and $253.4 million in certain investment funds and real estate construction projects, respectively. (22) Stock Incentive Plan Pursuant to the Company's stock incentive plan, the Company may issue restricted stock units ("RSUs") to employees of the Company and its subsidiaries. The RSUs generally vest three to five years from the award date and are subject to other vesting and forfeiture provisions contained in the award agreement. The following table summarizes RSU information for the three years ended December 31, 2018: The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments as of RSUs granted and unvested at beginning of period: Granted Vested Canceled RSUs granted and unvested at end of period: 2018 3,477,981 760,032 (600,169) (263,411) 3,374,433 2017 4,862,098 855,984 (1,993,507) (246,594) 3,477,981 2016 4,158,325 1,000,559 (77,250) (219,536) 4,862,098 Upon vesting, shares of the Company’s common stock equal to the number of vested RSUs are issued or deferred to a later date, depending on the terms of the specific award agreement. As of December 31, 2018, 4,709,318 RSUs had been deferred. RSUs that have not yet vested and vested RSUs that have been deferred are not considered to be issued and outstanding shares. The fair value of RSUs at the date of grant are recorded as unearned compensation, a component of stockholders’ equity, and expensed over the vesting period. Following is a summary of changes in unearned compensation for the three years ended December 31, 2018: (In thousands) Unearned compensation at beginning of year RSUs granted, net of cancellations RSUs expensed RSUs forfeitures Unearned compensation at end of year 2018 122,910 52,204 (34,408) (11,037) 129,669 $ $ 2017 115,965 52,897 (38,796) (7,156) 122,910 $ $ 2016 103,538 52,697 (35,585) (4,685) 115,965 $ $ 98 99 106 1022849be 10K 1022849be_10K.indd 106 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 6 0 1 4/17/19 6:53 PM 1022849be 10K 107 1 0 7 1 0 2 2 8 4 9 b e 1 0 K (23) Compensation Plans (25) Industry Segments The Company and its subsidiaries have profit sharing plans in which substantially all employees participate. The plans The Company’s reportable segments include the following two business segments, plus a corporate segment: provide for minimum annual contributions of 5% of eligible compensation; contributions above the minimum are discretionary and vary with each participating subsidiary’s profitability. Employees become eligible to participate in the plan on the first day of the calendar quarter following the first full calendar quarter after the employee's date of hire provided the employee has completed 250 hours of service during the calendar quarter. The plans provide that 40% of the contributions vest immediately and that the remaining 60% vest at varying percentages based upon years of service. Profit sharing expense was $42 million, $42 million and $39 million in 2018, 2017 and 2016, respectively. • Insurance - predominantly commercial insurance business, including excess and surplus lines, admitted lines and specialty personal lines throughout the United States, as well as insurance business in the United Kingdom, Continental Europe, South America, Canada, Mexico, Scandinavia, Asia and Australia. • Reinsurance - reinsurance business on a facultative and treaty basis, primarily in the United States, United Kingdom, Continental Europe, Australia, the Asia-Pacific region and South Africa. The Company has a long-term incentive compensation plan ("LTIP") that provides for compensation to key executives The accounting policies of the segments are the same as those described in the summary of significant accounting policies. based on the growth in the Company's book value per share over a five year period. Income tax expense and benefits are calculated based upon the Company’s overall effective tax rate. The following table summarizes the outstanding LTIP awards as of December 31, 2018: 2014 grant 2015 grant 2016 grant 2017 grant 2018 grant Units Outstanding Maximum Value Inception to date earned through December 31, 2018 on outstanding units 181,750 $ 18,175,000 $ 194,750 217,500 223,250 222,750 19,475,000 21,750,000 22,325,000 22,750,000 15,328,795 15,272,295 12,371,400 7,822,680 4,316,895 The following table summarizes the LTIP expense for each of the three years ended December 31, 2018: (In thousands) 2011 grant 2013 grant 2014 grant 2015 grant 2016 grant 2017 grant 2018 grant Total (24) Supplemental Financial Statement Data Other operating costs and expenses consist of the following: (In thousands) Amortization of deferred policy acquisition costs Insurance operating expenses Insurance service expenses Net foreign currency (gains) losses Other costs and expenses Total 100 2018 2017 2016 $ — $ — $ (1,124) 3,227 5,170 5,148 4,700 7,667 3,167 3,667 3,601 3,162 (82) 8,918 3,503 4,072 4,002 — 4,317 21,438 $ — 21,264 $ — 20,413 $ 2018 915,246 2017 $ 1,111,489 2016 $ 1,155,954 $ 1,183,635 118,357 (27,067) 193,050 989,535 129,776 15,267 190,865 933,249 138,908 (11,904) 179,412 $ 2,383,221 $ 2,436,932 $ 2,395,619 107 1022849be 10K 1022849be_10K.indd 107 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 7 0 1 4/17/19 6:53 PM 101 Summary financial information about the Company’s reporting segments is presented in the following table. Income before income taxes by segment includes allocated investment income. Identifiable assets by segment are those assets used in or allocated to the operation of each segment. Year ended December 31, 2018 (In thousands) Insurance Reinsurance Corporate, other and eliminations (2) Net investment gains Consolidated Year ended December 31, 2017 Insurance Reinsurance Corporate, other and eliminations (2) Net investment gains Consolidated Year ended December 31, 2016 Insurance Reinsurance Corporate, other and eliminations (2) Net investment gains Consolidated Revenues Earned Premiums Investment Income Other Total (1) $ 5,864,981 $ 518,733 $ 72,727 $ 6,456,441 $ 856,011 $ 682,028 506,524 — — 94,291 61,211 — — 418,696 154,488 600,815 479,907 154,488 $ 6,371,505 $ 674,235 $ 645,911 $ 7,691,651 $ 812,094 $ Net Income (Loss) to Common Stockholders Pre-Tax Income (Loss) 62,144 50,144 (260,549) (213,469) 154,488 122,046 640,749 $ 5,706,443 $ 436,178 $ 86,864 $ 6,229,485 $ 756,153 $ 535,186 604,976 — — 91,146 48,464 — — 374,835 335,858 696,122 423,299 335,858 (15,276) (303,965) 335,858 (5,131) (199,269) 218,308 $ 6,311,419 $ 575,788 $ 797,557 $ 7,684,764 $ 772,770 $ 549,094 $ 5,618,842 $ 431,489 $ 97,879 $ 6,148,210 $ 799,139 $ 534,613 674,506 — — 102,617 30,057 — — 431,789 267,005 777,123 461,846 267,005 98,277 68,400 (267,983) (174,650) 267,005 173,553 $ 6,293,348 $ 564,163 $ 796,673 $ 7,654,184 $ 896,438 $ 601,916 (23) Compensation Plans provide for minimum annual contributions of 5% of eligible compensation; contributions above the minimum are discretionary and vary with each participating subsidiary’s profitability. Employees become eligible to participate in the plan on the first day of the calendar quarter following the first full calendar quarter after the employee's date of hire provided the employee has completed 250 hours of service during the calendar quarter. The plans provide that 40% of the contributions vest immediately and that the remaining 60% vest at varying percentages based upon years of service. Profit sharing expense was $42 million, $42 million and $39 million in 2018, 2017 and 2016, respectively. The following table summarizes the outstanding LTIP awards as of December 31, 2018: Units Outstanding Maximum Value 181,750 $ 18,175,000 $ 194,750 217,500 223,250 222,750 19,475,000 21,750,000 22,325,000 22,750,000 Inception to date earned through December 31, 2018 on outstanding units 15,328,795 15,272,295 12,371,400 7,822,680 4,316,895 The following table summarizes the LTIP expense for each of the three years ended December 31, 2018: 2014 grant 2015 grant 2016 grant 2017 grant 2018 grant (In thousands) 2011 grant 2013 grant 2014 grant 2015 grant 2016 grant 2017 grant 2018 grant Total 2018 2017 2016 $ — $ — $ (82) (1,124) 3,227 5,170 5,148 4,700 4,317 7,667 3,167 3,667 3,601 3,162 — 8,918 3,503 4,072 4,002 — — $ 21,438 $ 21,264 $ 20,413 2018 2017 2016 $ 915,246 $ 1,111,489 $ 1,155,954 1,183,635 118,357 (27,067) 193,050 989,535 129,776 15,267 190,865 933,249 138,908 (11,904) 179,412 $ 2,383,221 $ 2,436,932 $ 2,395,619 (24) Supplemental Financial Statement Data Other operating costs and expenses consist of the following: (In thousands) Amortization of deferred policy acquisition costs Insurance operating expenses Insurance service expenses Net foreign currency (gains) losses Other costs and expenses Total 1 0 8 1 0 2 2 8 4 9 b e 1 0 K (25) Industry Segments 1022849be 10K 108 The Company and its subsidiaries have profit sharing plans in which substantially all employees participate. The plans The Company’s reportable segments include the following two business segments, plus a corporate segment: • Insurance - predominantly commercial insurance business, including excess and surplus lines, admitted lines and specialty personal lines throughout the United States, as well as insurance business in the United Kingdom, Continental Europe, South America, Canada, Mexico, Scandinavia, Asia and Australia. • Reinsurance - reinsurance business on a facultative and treaty basis, primarily in the United States, United Kingdom, Continental Europe, Australia, the Asia-Pacific region and South Africa. The Company has a long-term incentive compensation plan ("LTIP") that provides for compensation to key executives The accounting policies of the segments are the same as those described in the summary of significant accounting policies. based on the growth in the Company's book value per share over a five year period. Income tax expense and benefits are calculated based upon the Company’s overall effective tax rate. Summary financial information about the Company’s reporting segments is presented in the following table. Income before income taxes by segment includes allocated investment income. Identifiable assets by segment are those assets used in or allocated to the operation of each segment. (In thousands) Year ended December 31, 2018 Insurance Reinsurance Corporate, other and eliminations (2) Net investment gains Consolidated Year ended December 31, 2017 Insurance Reinsurance Corporate, other and eliminations (2) Net investment gains Revenues Earned Premiums Investment Income Other Total (1) Net Income (Loss) to Common Stockholders Pre-Tax Income (Loss) $ 5,864,981 506,524 — — $ 6,371,505 $ $ 518,733 94,291 61,211 — 674,235 $ $ 72,727 — $ 6,456,441 600,815 418,696 154,488 645,911 479,907 154,488 $ 7,691,651 $ $ 856,011 62,144 (260,549) 154,488 812,094 $ 5,706,443 $ 436,178 $ 86,864 $ 6,229,485 $ 604,976 — — 91,146 48,464 — — 374,835 335,858 696,122 423,299 335,858 756,153 (15,276) (303,965) 335,858 $ $ $ 682,028 50,144 (213,469) 122,046 640,749 535,186 (5,131) (199,269) 218,308 Consolidated $ 6,311,419 $ 575,788 $ 797,557 $ 7,684,764 $ 772,770 $ 549,094 Year ended December 31, 2016 Insurance Reinsurance Corporate, other and eliminations (2) Net investment gains $ 5,618,842 $ 431,489 $ 97,879 $ 6,148,210 $ 799,139 $ 534,613 674,506 — — 102,617 30,057 — — 431,789 267,005 777,123 461,846 267,005 98,277 (267,983) 267,005 68,400 (174,650) 173,553 Consolidated $ 6,293,348 $ 564,163 $ 796,673 $ 7,654,184 $ 896,438 $ 601,916 100 101 108 1022849be 10K 1022849be_10K.indd 108 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 8 0 1 4/17/19 6:53 PM 1022849be 10K 109 1 0 9 1 0 2 2 8 4 9 b e 1 0 K Identifiable Assets (In thousands) Insurance Reinsurance Corporate, other and eliminations (2) Consolidated December 31, 2018 2017 $ 19,634,329 $ 19,263,193 2,951,115 2,310,533 3,169,731 1,866,993 $ 24,895,977 $ 24,299,917 _______________________________________ (1) Revenues for Insurance includes $714.2 million, $688.2 million and $733.3 million in 2018, 2017 and 2016, respectively, from foreign countries. Revenues for Reinsurance includes $228.1 million, $201.3 million and $200.5 million in 2018, 2017 and 2016, respectively, from foreign countries. (2) Corporate, other and eliminations represent corporate revenues and expenses and other items that are not allocated to business segments. Net premiums earned by major line of business are as follows: (In thousands) Insurance Other liability Workers' compensation Short-tail lines Commercial automobile Professional liability Total Insurance Reinsurance Casualty Property Total Reinsurance Total 2018 2017 2016 $ 1,912,071 $ 1,843,826 $ 1,761,748 1,489,805 1,481,507 1,402,611 1,184,755 1,149,977 1,237,917 722,236 556,114 685,263 545,870 684,626 531,940 5,864,981 5,706,443 5,618,842 362,886 143,638 506,524 377,650 227,326 604,976 405,470 269,036 674,506 $ 6,371,505 $ 6,311,419 $ 6,293,348 (26) Quarterly Financial Information (Unaudited) The following is a summary of quarterly financial data: (In thousands, except per share data) Three months ended Net income per share (1) Revenues Net income Basic (2) Diluted Revenues Net income Basic (2) Diluted Net income per share (1) March 31 June 30 September 30 December 31 $ 1,891,247 $ 1,910,916 $ 1,937,902 $ 1,951,586 166,397 180,075 161,920 132,357 1.32 1.30 1.28 1.26 1.04 1.03 2018 1.42 1.40 2017 $ 1,870,418 $ 1,848,049 $ 2,031,342 $ 1,934,956 123,447 109,004 162,054 154,589 1.01 0.96 0.87 0.85 1.29 1.26 1.22 1.21 Three months ended March 31 June 30 September 30 December 31 _______________________________________ (1) Net income per share (“EPS”) in each quarter is computed using the weighted-average number of shares outstanding during that quarter, while EPS for the full year is computed using the weighted-average number of shares outstanding during the year. Thus, the sum of the four quarters EPS does not necessarily equal the full-year EPS. (2) Basic shares outstanding includes shares held in a grantor trust. (27) Subsequent Event issued on April 2, 2019. On February 21, 2019, the Company announced that its Board of Directors approved a 3-for-2 common stock split to be paid in the form of a stock dividend to holders of record on March 14, 2019. The additional shares are expected to be 102 109 1022849be 10K 1022849be_10K.indd 109 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 9 0 1 4/17/19 6:53 PM 103 1 1 0 1 0 2 2 8 4 9 b e 1 0 K December 31, 2018 2017 $ 19,634,329 $ 19,263,193 2,951,115 2,310,533 3,169,731 1,866,993 $ 24,895,977 $ 24,299,917 Identifiable Assets (In thousands) Insurance Reinsurance Consolidated Corporate, other and eliminations (2) _______________________________________ (1) Revenues for Insurance includes $714.2 million, $688.2 million and $733.3 million in 2018, 2017 and 2016, respectively, from foreign countries. Revenues for Reinsurance includes $228.1 million, $201.3 million and $200.5 million in 2018, 2017 and 2016, respectively, from foreign countries. (2) Corporate, other and eliminations represent corporate revenues and expenses and other items that are not allocated to Net premiums earned by major line of business are as follows: business segments. (In thousands) Insurance Other liability Workers' compensation Short-tail lines Commercial automobile Professional liability Total Insurance Reinsurance Casualty Property Total Total Reinsurance 2018 2017 2016 $ 1,912,071 $ 1,843,826 $ 1,761,748 1,489,805 1,481,507 1,402,611 1,184,755 1,149,977 1,237,917 722,236 556,114 685,263 545,870 684,626 531,940 5,864,981 5,706,443 5,618,842 362,886 143,638 506,524 377,650 227,326 604,976 405,470 269,036 674,506 $ 6,371,505 $ 6,311,419 $ 6,293,348 1022849be 10K 110 (26) 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 (2) Diluted Three months ended Revenues Net income Net income per share (1) Basic (2) Diluted 2018 March 31 June 30 September 30 December 31 $ 1,891,247 $ 1,910,916 $ 1,937,902 $ 1,951,586 166,397 180,075 161,920 132,357 1.32 1.30 1.42 1.40 2017 1.28 1.26 1.04 1.03 March 31 June 30 September 30 December 31 $ 1,870,418 $ 1,848,049 $ 2,031,342 $ 1,934,956 123,447 109,004 162,054 154,589 1.01 0.96 0.87 0.85 1.29 1.26 1.22 1.21 _______________________________________ (1) Net income per share (“EPS”) in each quarter is computed using the weighted-average number of shares outstanding during that quarter, while EPS for the full year is computed using the weighted-average number of shares outstanding during the year. Thus, the sum of the four quarters EPS does not necessarily equal the full-year EPS. (2) Basic shares outstanding includes shares held in a grantor trust. (27) Subsequent Event On February 21, 2019, the Company announced that its Board of Directors approved a 3-for-2 common stock split to be paid in the form of a stock dividend to holders of record on March 14, 2019. The additional shares are expected to be issued on April 2, 2019. 102 103 110 1022849be 10K 1022849be_10K.indd 110 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 0 1 1 4/17/19 6:53 PM 1022849be 10K 111 1 1 1 1 0 2 2 8 4 9 b e 1 0 K ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 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, 2018, there have been no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. 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, 2018. Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors W. R. Berkley Corporation: Opinion on Internal Control Over Financial Reporting We have audited W. R. Berkley Corporation and Subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes and financial statement schedules II to VI (collectively, the "consolidated financial statements”), and our report dated February 22, 2019 expressed an unqualified opinion on those consolidated financial statements. Basis for Opinion The Company’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 Managements’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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. 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 of internal control over financial reporting 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. Definition and Limitations of 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 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. 104 New York, New York February 22, 2019 K 0 1 e b 9 4 8 2 2 0 1 1 1 1 /S/ KPMG LLP 105 111 1022849be 10K 1022849be_10K.indd 111 4/17/19 6:53 PM K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be 1 1 2 1 0 2 2 8 4 9 b e 1 0 K ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 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 During the quarter ended December 31, 2018, there have been no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial forms. reporting. 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, 2018. 104 1022849be 10K 112 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors W. R. Berkley Corporation: Opinion on Internal Control Over Financial Reporting We have audited W. R. Berkley Corporation and Subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes and financial statement schedules II to VI (collectively, the "consolidated financial statements”), and our report dated February 22, 2019 expressed an unqualified opinion on those consolidated financial statements. Basis for Opinion The Company’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 Managements’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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. 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 of internal control over financial reporting 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. Definition and Limitations of 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 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. /S/ KPMG LLP 105 New York, New York February 22, 2019 112 1022849be 10K 1022849be_10K.indd 112 K 0 1 e b 9 4 8 2 2 0 1 2 1 1 4/17/19 6:53 PM K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be 1022849be 10K 113 1 1 3 1 0 2 2 8 4 9 b e 1 0 K ITEM 9B. OTHER INFORMATION None. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 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, 2018, 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, 2018, 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, 2018, and which is incorporated herein by reference. 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, 2018, and which is incorporated herein by reference. 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, 2018, and which is incorporated herein by reference. (b) Security ownership of management (c) Changes in control (d) Equity compensation plan information 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, 2018, 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, 2018, 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, 2018, and which is incorporated herein by reference. 106 113 1022849be 10K 1022849be_10K.indd 113 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 3 1 1 4/17/19 6:53 PM 107 ITEM 9B. OTHER INFORMATION None. 1 1 4 1 0 2 2 8 4 9 b e 1 0 K 1022849be 10K 114 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 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, 2018, 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, 2018, 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, 2018, 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, 2018, 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, 2018, and which is incorporated herein by reference. (d) Equity compensation plan information 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, 2018, 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, 2018, 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, 2018, and which is incorporated herein by reference. 106 107 114 1022849be 10K 1022849be_10K.indd 114 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 4 1 1 4/17/19 6:53 PM 1022849be 10K 115 1 1 5 1 0 2 2 8 4 9 b e 1 0 K PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Index to Financial Statements 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. Index to Financial Statement 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 Page 114 118 119 120 121 108 115 1022849be 10K 1022849be_10K.indd 115 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 5 1 1 4/17/19 6:53 PM (b) Exhibits Number EXHIBITS (3.1) 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). (3.2) 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). (3.3) 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) 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). (4.2) (4.3) (4.4) (4.5) (4.6) (4.7) 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). (4.9) 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). 109 PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Index to Financial Statements 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. Index to Financial Statement 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 1 1 6 1 0 2 2 8 4 9 b e 1 0 K Page 114 118 119 120 121 1022849be 10K 116 (b) Exhibits EXHIBITS Number (3.1) (3.2) (3.3) (3.4) (4.1) (4.2) (4.3) (4.4) (4.5) (4.6) (4.7) (4.8) (4.9) 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). 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). 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). 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). 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). 108 109 116 1022849be 10K 1022849be_10K.indd 116 4/17/19 6:53 PM K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 6 1 1 1 1 7 1 0 2 2 8 4 9 b e 1 0 K (4.10) (4.11) (4.12) (4.13) (4.14) 1022849be 10K 117 Subordinated Indenture, dated as of March 1, 2016, 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 March 1, 2016). (10.10) W. R. Berkley Corporation Deferred Compensation Plan for Officers as amended and restated November 2, 2016 (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 November 7, 2018). First Supplemental Indenture, dated as of March 1, 2016, between the Company and The Bank of New York Mellon, as Trustee, relating to $110,000,000 principal amount of the Company's 5.9% Subordinated Debentures due 2056, 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 March 1, 2016). Second Supplemental Indenture, dated as of May 25, 2016, between the Company and The Bank of New York Mellon, as Trustee, relating to $290,000,000 principal amount of the Company's 5.75% Subordinated Debentures due 2056, 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 25, 2016). Subordinated Indenture, dated as of March 26, 2018, 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 March 26, 2018). First Supplemental Indenture, dated as of March 26, 2018, between the Company and The Bank of New York Mellon, as Trustee, relating to $175,000,000 principal amount of the Company’s 5.7% Subordinated Debentures due 2058, 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 March 26, 2018). (4.15) 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 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). (10.2) W. R. Berkley Corporation 2018 Stock Incentive Plan (incorporated by reference to Annex A of the Company’s 2018 Proxy Statement (File No. 1-15202) filed with the Commission on April 19, 2018). (10.3) (10.4) (10.5) (10.6) (10.7) 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). 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). 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). 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). 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) W. R. Berkley Corporation Deferred Compensation Plan for Officers as amended and restated November 2, 2016 (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 November 7, 2018). (21) List of the Company’s subsidiaries. (23) Consent of Independent Registered Public Accounting Firm. (10.9) 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). 110 117 1022849be 10K 1022849be_10K.indd 117 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 7 1 1 4/17/19 6:53 PM (10.11) 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). (10.12) W. R. Berkley Corporation Amended and Restated Annual Incentive Compensation Plan (incorporated by reference to Annex A of the Company's 2016 Proxy Statement (File No. 1-15202) filed with the Commission on April 15, 2016). (10.13) 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). (10.14) 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). (10.15) Form of 2018 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 7, 2018). (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) Form of 2016 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 10, 2016). (10.18) 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). (10.19) Form of 2018 Performance-Based Restricted Stock Unit Agreement Under the W. R. Berkley Corporation 2018 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, 2018). (10.20) 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). (10.21) 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). (10.22) Form of 2017 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 8, 2017). (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). (31.1) Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/ 15d-14(a). 111 1 1 8 1 0 2 2 8 4 9 b e 1 0 K (4.10) Subordinated Indenture, dated as of March 1, 2016, 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 March 1, 2016). (4.11) First Supplemental Indenture, dated as of March 1, 2016, between the Company and The Bank of New York Mellon, as Trustee, relating to $110,000,000 principal amount of the Company's 5.9% Subordinated Debentures due 2056, 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 March 1, 2016). (4.12) Second Supplemental Indenture, dated as of May 25, 2016, between the Company and The Bank of New York Mellon, as Trustee, relating to $290,000,000 principal amount of the Company's 5.75% Subordinated Debentures due 2056, 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 25, 2016). (4.13) Subordinated Indenture, dated as of March 26, 2018, 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 March 26, 2018). (4.14) First Supplemental Indenture, dated as of March 26, 2018, between the Company and The Bank of New York Mellon, as Trustee, relating to $175,000,000 principal amount of the Company’s 5.7% Subordinated Debentures due 2058, 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 March 26, 2018). (4.15) 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 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). (10.2) W. R. Berkley Corporation 2018 Stock Incentive Plan (incorporated by reference to Annex A of the Company’s 2018 Proxy Statement (File No. 1-15202) filed with the Commission on April 19, 2018). (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). 1022849be 10K 118 (10.10) W. R. Berkley Corporation Deferred Compensation Plan for Officers as amended and restated November 2, 2016 (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 November 7, 2018). (10.11) 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). (10.12) W. R. Berkley Corporation Amended and Restated Annual Incentive Compensation Plan (incorporated by reference to Annex A of the Company's 2016 Proxy Statement (File No. 1-15202) filed with the Commission on April 15, 2016). (10.13) 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). (10.14) 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). (10.15) Form of 2018 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 7, 2018). (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) Form of 2016 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 10, 2016). (10.18) 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). (10.19) Form of 2018 Performance-Based Restricted Stock Unit Agreement Under the W. R. Berkley Corporation 2018 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, 2018). (10.20) 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). (10.21) 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). (10.22) Form of 2017 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 8, 2017). (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). (10.8) W. R. Berkley Corporation Deferred Compensation Plan for Officers as amended and restated November 2, 2016 (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 November 7, 2018). (21) List of the Company’s subsidiaries. (23) Consent of Independent Registered Public Accounting Firm. (10.9) 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). (31.1) Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/ 15d-14(a). 110 111 118 1022849be 10K 1022849be_10K.indd 118 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 8 1 1 4/17/19 6:53 PM 1022849be 10K 119 1 1 9 1 0 2 2 8 4 9 b e 1 0 K (31.2) Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/ 15d-14(a). SIGNATURES (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. 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. ITEM 16. FORM 10-K Summary None. 112 119 1022849be 10K 1022849be_10K.indd 119 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 9 1 1 4/17/19 6:53 PM W. R. BERKLEY CORPORATION By /s/ W. Robert Berkley, Jr. W. Robert Berkley, Jr., President and Chief Executive Officer February 22, 2019 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, 2019 /s/ W. Robert Berkley, Jr. W. Robert Berkley, Jr. President, Chief Executive Officer February 22, 2019 and Director (Principal executive officer) /s/ Christopher L. Augostini Christopher L. Augostini Director February 22, 2019 /s/ Ronald E. Blaylock Ronald E. Blaylock /s/ Mark E. Brockbank Mark E. Brockbank /s/ Mary C. Farrell Mary C. Farrell /s/ María Luisa Ferré María Luisa Ferré /s/ Jack H. Nusbaum Jack H. Nusbaum /s/ Leigh A. Pusey Leigh Ann Pusey /s/ Mark L. Shapiro Mark L. Shapiro /s/ Richard M. Baio Richard M. Baio Director February 22, 2019 Director February 22, 2019 Director February 22, 2019 Director February 22, 2019 Director February 22, 2019 Director February 22, 2019 Director February 22, 2019 Senior Vice President, February 22, 2019 Chief Financial Officer and Treasurer (Principal financial officer and principal accounting officer) 113 (32.1) Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as this report to be signed on its behalf by the undersigned, thereunto duly authorized. adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 1 2 0 1 0 2 2 8 4 9 b e 1 0 K Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused SIGNATURES 1022849be 10K 120 W. R. BERKLEY CORPORATION By /s/ W. Robert Berkley, Jr. W. Robert Berkley, Jr., President and Chief Executive Officer February 22, 2019 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 (31.2) Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/ 15d-14(a). ITEM 16. FORM 10-K Summary None. /s/ William R. Berkley William R. Berkley Executive Chairman of the Board of Directors February 22, 2019 /s/ W. Robert Berkley, Jr. W. Robert Berkley, Jr. President, Chief Executive Officer and Director (Principal executive officer) February 22, 2019 /s/ Christopher L. Augostini Christopher L. Augostini Director February 22, 2019 /s/ Ronald E. Blaylock Ronald E. Blaylock /s/ Mark E. Brockbank Mark E. Brockbank /s/ Mary C. Farrell Mary C. Farrell /s/ María Luisa Ferré María Luisa Ferré /s/ Jack H. Nusbaum Jack H. Nusbaum /s/ Leigh A. Pusey Leigh Ann Pusey /s/ Mark L. Shapiro Mark L. Shapiro /s/ Richard M. Baio Richard M. Baio Director February 22, 2019 Director February 22, 2019 Director February 22, 2019 Director February 22, 2019 Director February 22, 2019 Director February 22, 2019 Director February 22, 2019 Senior Vice President, Chief Financial Officer and Treasurer (Principal financial officer and principal accounting officer) February 22, 2019 112 113 120 1022849be 10K 1022849be_10K.indd 120 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 0 2 1 4/17/19 6:53 PM 1 2 1 1 0 2 2 8 4 9 b e 1 0 K 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 $1,317,058 and $1,059,834 at December 31, 2018 and 2017, respectively) Loans receivable Equity securities, at fair value (cost $3,430 in 2018 and 2017) Investment in subsidiaries Current federal income taxes Deferred 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 Current federal income taxes 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 $5,068,139 and $5,073,268 at December 31, 2018 and 2017, respectively) Accumulated other comprehensive income Treasury stock, at cost Total stockholders’ equity Total liabilities and stockholders’ equity ________________ 1022849be 10K 121 Schedule II Schedule II, Continued W. R. Berkley Corporation Condensed Financial Information of Registrant, Continued Statements of Income (Parent Company) December 31, 2018 2017 $ 83,950 $ 45,062 1,307,347 1,052,240 51,544 3,430 53,019 3,430 6,786,999 7,140,108 9,068 66,995 13,391 12,340 — — 14,421 10,819 (In thousands) Management fees and investment income including dividends from subsidiaries of $639,477, $694,462 and $700,664 for the years ended December 31, 2018, 2017 and 2016, respectively Net investment (losses) gains Other income Total revenues Operating costs and expense Interest expense Income before federal income taxes Federal income taxes: Federal income taxes provided by subsidiaries on a separate return basis 409,439 115,597 327,520 $ 8,335,064 $ 8,319,099 Federal income tax expense on a consolidated return basis (113,138) (195,261) (246,389) $ 116,125 $ 232,756 Equity in undistributed net (loss) income of subsidiaries Net expense (benefit) Income before undistributed equity in net income of subsidiaries 115,562 — — 907,491 1,758,035 2,897,213 — 47,024 1,063,144 128,002 10,486 51,757 728,218 1,756,536 2,907,755 — 47,024 1,048,283 7,558,619 (510,470) (2,720,466) 5,437,851 6,956,882 68,541 (2,709,386) 5,411,344 $ 8,335,064 $ 8,319,099 Year Ended December 31, 2018 2017 2016 $ 697,687 $ 738,923 $ 726,742 (1,685) 530 696,532 191,873 155,082 349,577 (4,286) 805 735,442 182,145 146,929 406,368 909 376 728,027 171,967 139,216 416,844 296,301 645,878 (5,129) (79,664) 326,704 222,390 81,131 497,975 103,941 $ 640,749 $ 549,094 $ 601,916 Net income ________________ See Report of Independent Registered Public Accounting Firm and note to condensed financial statements. See Report of Independent Registered Public Accounting Firm and note to condensed financial statements. 114 121 1022849be 10K 1022849be_10K.indd 121 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 1 2 1 4/17/19 6:53 PM 115 W. R. Berkley Corporation Condensed Financial Information of Registrant Balance Sheets (Parent Company) 1 2 2 1 0 2 2 8 4 9 b e 1 0 K Schedule II 1022849be 10K 122 Schedule II, Continued W. R. Berkley Corporation Condensed Financial Information of Registrant, Continued Statements of Income (Parent Company) 1,307,347 1,052,240 Net investment (losses) gains (In thousands) Management fees and investment income including dividends from subsidiaries of $639,477, $694,462 and $700,664 for the years ended December 31, 2018, 2017 and 2016, respectively $ Other income Total revenues Operating costs and expense Interest expense Income before federal income taxes Federal income taxes: Year Ended December 31, 2018 2017 2016 $ 697,687 (1,685) 530 696,532 191,873 155,082 349,577 738,923 (4,286) 805 735,442 182,145 146,929 406,368 $ 726,742 909 376 728,027 171,967 139,216 416,844 $ 8,335,064 $ 8,319,099 Federal income tax expense on a consolidated return basis Federal income taxes provided by subsidiaries on a separate return basis $ 116,125 $ 232,756 Equity in undistributed net (loss) income of subsidiaries Net expense (benefit) Income before undistributed equity in net income of subsidiaries Net income ________________ 409,439 (113,138) 296,301 645,878 (5,129) 640,749 $ 115,597 (195,261) (79,664) 326,704 222,390 327,520 (246,389) 81,131 497,975 103,941 $ 549,094 $ 601,916 See Report of Independent Registered Public Accounting Firm and note to condensed financial statements. Fixed maturity securities available for sale at fair value (cost $1,317,058 and $1,059,834 at December 31, 2018 and 2017, respectively) Equity securities, at fair value (cost $3,430 in 2018 and 2017) Property, furniture and equipment at cost, less accumulated depreciation (In thousands) Assets: Cash and cash equivalents Loans receivable Investment in subsidiaries Current federal income taxes Deferred federal income taxes Other assets Total assets Liabilities and stockholders’ equity Liabilities: Due to subsidiaries Other liabilities Current federal income taxes 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 $5,068,139 and $5,073,268 at December 31, 2018 and 2017, respectively) Accumulated other comprehensive income Treasury stock, at cost Total stockholders’ equity Total liabilities and stockholders’ equity ________________ See Report of Independent Registered Public Accounting Firm and note to condensed financial statements. December 31, 2018 2017 $ 83,950 $ 45,062 6,786,999 7,140,108 51,544 3,430 9,068 66,995 13,391 12,340 53,019 3,430 — — 14,421 10,819 115,562 — — 907,491 1,758,035 2,897,213 128,002 10,486 51,757 728,218 1,756,536 2,907,755 — 47,024 — 47,024 1,063,144 1,048,283 7,558,619 6,956,882 (510,470) 68,541 (2,720,466) (2,709,386) 5,437,851 5,411,344 $ 8,335,064 $ 8,319,099 114 115 122 1022849be 10K 1022849be_10K.indd 122 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 2 2 1 4/17/19 6:53 PM 1 2 3 1 0 2 2 8 4 9 b e 1 0 K 1022849be 10K 123 Schedule II, Continued W. R. Berkley Corporation Condensed Financial Information of Registrant, Continued Statements of Cash Flows (Parent Company) (In thousands) Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash from operating activities: Net investment losses 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 operating activities Cash used in investing activities: Proceeds from sales of fixed maturity securities Proceeds from maturities and prepayments of fixed maturity securities Cost of purchases of fixed maturity securities Change in loans receivable Investments in and advances to subsidiaries, net Net additions to real estate, furniture & equipment Net cash used in investing activities Cash (used in) from financing activities: Net proceeds from issuance of senior notes Repayment of senior notes Purchase of common treasury shares Cash dividends to common stockholders Net cash (used in) from 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 ________________ Year Ended December 31, 2018 2017 2016 $ 640,749 $ 549,094 $ 601,916 1,685 9,441 5,129 282,084 (409,439) 28,531 (77,415) 1,348 109,016 (2,870) 588,259 4,286 2,039 (222,390) 98,313 (115,597) 38,075 2,711 (877) 18,661 (2,818) 371,497 3,649 2,744 (103,941) 414,386 (327,520) 37,174 44,839 1,772 (88,282) (2,743) 583,994 668,447 255,528 (1,188,821) 1,475 (184,597) (264) (448,232) 849,330 316,611 (1,329,379) (29,600) (21,139) (1,055) (215,232) 373,252 210,904 (1,285,101) (23,419) 11,471 (3,042) (715,935) 178,562 — (24,750) (254,951) (101,139) 38,888 45,062 83,950 — — (47,807) (188,199) (236,006) (79,741) 124,803 45,062 386,830 (9,353) (132,392) (183,999) 61,086 (70,855) 195,658 $ 124,803 $ $ See Report of Independent Registered Public Accounting Firm and note to condensed financial statements. 116 123 1022849be 10K 1022849be_10K.indd 123 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 3 2 1 4/17/19 6:53 PM Schedule II, Continued 1 2 4 1 0 2 2 8 4 9 b e 1 0 K 1022849be 10K 124 W. R. Berkley Corporation Condensed Financial Information of Registrant, Continued December 31, 2018 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 2017 and 2016 financial statements as originally reported to conform them to the presentation of the 2018 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. W. R. Berkley Corporation Condensed Financial Information of Registrant, Continued Statements of Cash Flows (Parent Company) Federal income taxes provided by subsidiaries on a separate return basis (409,439) (115,597) (327,520) Cash flows from operating activities: (In thousands) Net income Adjustments to reconcile net income to net cash from operating activities: Net investment losses Depreciation and amortization Equity in undistributed earnings of subsidiaries Tax payments received from subsidiaries Proceeds from sales of fixed maturity securities Proceeds from maturities and prepayments of fixed maturity securities Stock incentive plans Change in: Federal income taxes Other assets Other liabilities Accrued investment income Net cash from operating activities Cash used in investing activities: Cost of purchases of fixed maturity securities Change in loans receivable Investments in and advances to subsidiaries, net Net additions to real estate, furniture & equipment Net cash used in investing activities Cash (used in) from financing activities: Net proceeds from issuance of senior notes Repayment of senior notes Purchase of common treasury shares Cash dividends to common stockholders Net cash (used in) from 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 ________________ Year Ended December 31, 2018 2017 2016 $ 640,749 $ 549,094 $ 601,916 1,685 9,441 5,129 4,286 2,039 3,649 2,744 (222,390) (103,941) 282,084 98,313 414,386 28,531 38,075 37,174 (77,415) 1,348 109,016 (2,870) 588,259 2,711 (877) 18,661 (2,818) 371,497 44,839 1,772 (88,282) (2,743) 583,994 668,447 255,528 849,330 316,611 373,252 210,904 (1,188,821) (1,329,379) (1,285,101) 1,475 (184,597) (264) (29,600) (21,139) (1,055) (23,419) 11,471 (3,042) (448,232) (215,232) (715,935) 178,562 — (24,750) (254,951) (101,139) 38,888 45,062 — — (47,807) (188,199) (236,006) (79,741) 124,803 386,830 (9,353) (132,392) (183,999) 61,086 (70,855) 195,658 $ 83,950 $ 45,062 $ 124,803 See Report of Independent Registered Public Accounting Firm and note to condensed financial statements. 116 117 124 1022849be 10K 1022849be_10K.indd 124 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 4 2 1 4/17/19 6:53 PM 1 2 5 1 0 2 2 8 4 9 b e 1 0 K I I I e l u d e h c S t e N s i m u m e r P r e h t O g n i t a r e p O s t s o C d n a n e t t i r W s e s n e p x E n o i t a z i t r o m A f o d e r r e f e D y c i l o P n o i t i s i u q c A t s o C d n a s s o L s s o L s e s n e p x E t e N t n e m t s e v n I e m o c n I t e N s i m u m e r P d e n r a E d e n r a e n U s i m u m e r P r o f e v r e s e R d n a s e s s o L s s o L s e s n e p x E d e r r e f e D y c i l o P n o i t i s i u q c A t s o C s e i r a i d i s b u S d n a n o i t a r o p r o C y e l k r e B . R W . n o i t a m r o f n I e c n a r u s n I y r a t n e m e l p p u S 6 1 0 2 d n a 7 1 0 2 , 8 1 0 2 , 1 3 r e b m e c e D 1 6 8 , 2 5 9 , 5 $ 8 2 3 , 2 6 1 , 1 $ 8 7 1 , 1 1 8 $ 4 2 9 , 6 2 6 , 3 $ 3 3 7 , 8 1 5 $ 1 8 9 , 4 6 8 , 5 $ 8 1 0 , 1 3 1 , 3 $ 4 2 3 , 6 2 2 , 0 1 $ 5 4 9 , 9 3 4 $ — 6 6 3 , 0 8 4 6 2 8 , 6 8 1 2 8 , 8 1 2 — — 8 6 0 , 4 0 1 8 7 7 , 7 4 3 1 9 2 , 4 9 1 1 2 , 1 6 7 2 2 , 3 3 4 , 6 $ 5 7 9 , 7 6 4 , 1 $ 6 4 2 , 5 1 9 1 7 8 , 5 1 7 , 5 $ 5 4 5 , 6 2 0 , 1 $ 3 9 7 , 9 2 9 $ $ 2 0 7 , 4 7 9 , 3 $ 5 3 2 , 4 7 6 6 9 9 , 6 1 5 , 3 $ 8 7 1 , 6 3 4 — 7 3 6 , 4 4 5 9 4 3 , 4 4 9 4 5 , 4 5 2 — — 6 9 6 , 1 8 1 2 5 3 , 5 8 4 6 4 1 , 1 9 4 6 4 , 8 4 8 0 5 , 0 6 2 , 6 $ 3 4 4 , 5 2 3 , 1 $ 9 8 4 , 1 1 1 , 1 $ 8 4 3 , 2 0 0 , 4 $ 8 8 7 , 5 7 5 0 2 6 , 3 4 7 , 5 $ 8 5 8 , 4 5 9 $ 4 6 0 , 4 6 9 $ 9 3 1 , 0 3 4 , 3 $ 9 8 4 , 1 3 4 — 3 9 2 , 0 8 6 5 0 3 , 1 7 2 0 5 , 3 1 2 — — 0 9 8 , 1 9 1 1 6 6 , 5 1 4 7 5 0 , 0 3 7 1 6 , 2 0 1 4 2 5 , 6 0 5 3 7 9 , 8 2 2 4 2 1 , 0 4 7 , 1 4 8 6 , 7 5 $ $ $ $ 5 0 5 , 1 7 3 , 6 $ 1 9 9 , 9 5 3 , 3 $ 8 4 4 , 6 6 9 , 1 1 $ 9 2 6 , 7 9 4 — — — — 6 7 9 , 4 0 6 7 3 8 , 0 5 2 0 5 1 , 0 5 8 , 1 2 8 5 , 1 7 3 4 4 , 6 0 7 , 5 $ 3 4 3 , 9 3 0 , 3 $ 8 5 2 , 0 2 8 , 9 $ 7 6 9 , 5 3 4 9 1 4 , 1 1 3 , 6 $ 0 8 1 , 0 9 2 , 3 $ 8 0 4 , 0 7 6 , 1 1 $ 9 4 5 , 7 0 5 6 0 5 , 4 7 6 0 4 2 , 8 0 3 5 8 9 , 1 5 7 , 1 3 7 5 , 5 9 2 4 8 , 8 1 6 , 5 $ 0 6 0 , 5 7 9 , 2 $ 0 1 2 , 5 4 4 , 9 $ 7 1 3 , 2 4 4 $ $ $ $ s t n e m t s u j d a d n a e t a r o p r o C 7 1 0 2 , 1 3 r e b m e c e D l a t o T e c n a r u s n i e R e c n a r u s n I 6 1 0 2 , 1 3 r e b m e c e D l a t o T e c n a r u s n i e R e c n a r u s n I — — — — s t n e m t s u j d a d n a e t a r o p r o C — — — — s t n e m t s u j d a d n a e t a r o p r o C 3 1 9 , 3 2 4 , 6 $ 5 6 6 , 9 3 2 , 1 $ 4 5 9 , 5 5 1 , 1 $ 0 0 8 , 5 4 8 , 3 $ 3 6 1 , 4 6 5 $ 8 4 3 , 3 9 2 , 6 $ 0 0 3 , 3 8 2 , 3 $ 5 9 1 , 7 9 1 , 1 1 $ 0 9 8 , 7 3 5 $ l a t o T . m r i F g n i t n u o c c A c i l b u P d e r e t s i g e R t n e d n e p e d n I f o t r o p e R e e S _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 8 1 0 2 , 1 3 r e b m e c e D ) s d n a s u o h t n I ( e c n a r u s n i e R e c n a r u s n I 125 1022849be 10K 1022849be_10K.indd 125 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be 1022849be 10K 125 W. R. Berkley Corporation and Subsidiaries Reinsurance Years ended December 31, 2018, 2017 and 2016 Schedule IV Premiums Written Direct Amount Ceded to Other Companies Assumed from Other Companies Net Amount Percentage of Amount Assumed to Net $ 6,959,830 $ 1,204,509 197,540 $ 5,952,861 13,386 64,758 531,738 480,366 $ 6,973,216 $ 1,269,267 729,278 $ 6,433,227 $ 6,707,916 $ 1,153,960 161,915 $ 5,715,871 18,113 62,495 589,019 544,637 $ 6,726,029 $ 1,216,455 750,934 $ 6,260,508 $ 6,634,540 $ 1,051,887 160,967 $ 5,743,620 13,060 67,901 735,134 680,293 $ 6,647,600 $ 1,119,788 896,101 $ 6,423,913 $ $ $ $ $ $ 3.3% 110.7% 11.3% 2.8% 108.1% 12.0% 2.8% 108.1% 13.9% (In thousands, other than percentages) Year ended December 31, 2018 Year ended December 31, 2017 Year ended December 31, 2016 Insurance Reinsurance Total Insurance Reinsurance Total Insurance Reinsurance Total ___________________________ See Report of Independent Registered Public Accounting Firm. 8 1 1 K 0 1 e b 9 4 8 2 2 0 1 5 2 1 4/17/19 6:53 PM 119 I I I e l u d e h c S s e i r a i d i s b u S d n a n o i t a r o p r o C y e l k r e B . R . W n o i t a m r o f n I e c n a r u s n I y r a t n e m e l p p u S 6 1 0 2 d n a 7 1 0 2 , 8 1 0 2 , 1 3 r e b m e c e D t e N s m u i m e r P n e t t i r W r e h t O g n i t a r e p O s t s o C d n a s e s n e p x E n o i t a z i t r o m A f o d e r r e f e D y c i l o P n o i t i s i u q c A t s o C d n a s s o L s s o L s e s n e p x E t e N t n e m t s e v n I e m o c n I t e N s m u i m e r P d e n r a E d e n r a e n U s m u i m e r P r o f e v r e s e R d n a s e s s o L s s o L s e s n e p x E d e r r e f e D y c i l o P n o i t i s i u q c A t s o C $ $ $ $ $ $ 7 2 2 , 3 3 4 , 6 $ 5 7 9 , 7 6 4 , 1 $ 6 4 2 , 5 1 9 2 0 7 , 4 7 9 , 3 $ 5 3 2 , 4 7 6 5 0 5 , 1 7 3 , 6 $ 1 9 9 , 9 5 3 , 3 $ 8 4 4 , 6 6 9 , 1 1 $ 9 2 6 , 7 9 4 1 6 8 , 2 5 9 , 5 $ 8 2 3 , 2 6 1 , 1 $ 8 7 1 , 1 1 8 $ 4 2 9 , 6 2 6 , 3 $ 3 3 7 , 8 1 5 $ 1 8 9 , 4 6 8 , 5 $ 8 1 0 , 1 3 1 , 3 $ 4 2 3 , 6 2 2 , 0 1 $ 5 4 9 , 9 3 4 $ — 6 6 3 , 0 8 4 6 2 8 , 6 8 1 2 8 , 8 1 2 — — 8 6 0 , 4 0 1 8 7 7 , 7 4 3 1 9 2 , 4 9 1 1 2 , 1 6 4 2 5 , 6 0 5 3 7 9 , 8 2 2 4 2 1 , 0 4 7 , 1 4 8 6 , 7 5 — — — — s t n e m t s u j d a d n a e t a r o p r o C 8 0 5 , 0 6 2 , 6 $ 3 4 4 , 5 2 3 , 1 $ 9 8 4 , 1 1 1 , 1 $ 8 4 3 , 2 0 0 , 4 $ 8 8 7 , 5 7 5 9 1 4 , 1 1 3 , 6 $ 0 8 1 , 0 9 2 , 3 $ 8 0 4 , 0 7 6 , 1 1 $ 9 4 5 , 7 0 5 1 7 8 , 5 1 7 , 5 $ 5 4 5 , 6 2 0 , 1 $ 3 9 7 , 9 2 9 6 9 9 , 6 1 5 , 3 $ 8 7 1 , 6 3 4 3 4 4 , 6 0 7 , 5 $ 3 4 3 , 9 3 0 , 3 $ 8 5 2 , 0 2 8 , 9 $ 7 6 9 , 5 3 4 — 7 3 6 , 4 4 5 9 4 3 , 4 4 9 4 5 , 4 5 2 — — 6 9 6 , 1 8 1 2 5 3 , 5 8 4 6 4 1 , 1 9 4 6 4 , 8 4 6 7 9 , 4 0 6 7 3 8 , 0 5 2 0 5 1 , 0 5 8 , 1 2 8 5 , 1 7 — — — — s t n e m t s u j d a d n a e t a r o p r o C 0 2 6 , 3 4 7 , 5 $ 8 5 8 , 4 5 9 $ 4 6 0 , 4 6 9 $ 9 3 1 , 0 3 4 , 3 $ 9 8 4 , 1 3 4 2 4 8 , 8 1 6 , 5 $ 0 6 0 , 5 7 9 , 2 $ 0 1 2 , 5 4 4 , 9 $ 7 1 3 , 2 4 4 — 3 9 2 , 0 8 6 5 0 3 , 1 7 2 0 5 , 3 1 2 — — 0 9 8 , 1 9 1 1 6 6 , 5 1 4 7 5 0 , 0 3 7 1 6 , 2 0 1 6 0 5 , 4 7 6 0 4 2 , 8 0 3 5 8 9 , 1 5 7 , 1 3 7 5 , 5 9 — — — — s t n e m t s u j d a d n a e t a r o p r o C 3 1 9 , 3 2 4 , 6 $ 5 6 6 , 9 3 2 , 1 $ 4 5 9 , 5 5 1 , 1 $ 0 0 8 , 5 4 8 , 3 $ 3 6 1 , 4 6 5 $ 8 4 3 , 3 9 2 , 6 $ 0 0 3 , 3 8 2 , 3 $ 5 9 1 , 7 9 1 , 1 1 $ 0 9 8 , 7 3 5 $ l a t o T $ $ $ $ 8 1 0 2 , 1 3 r e b m e c e D ) s d n a s u o h t n I ( e c n a r u s n i e R e c n a r u s n I 7 1 0 2 , 1 3 r e b m e c e D l a t o T e c n a r u s n i e R e c n a r u s n I 6 1 0 2 , 1 3 r e b m e c e D l a t o T e c n a r u s n i e R e c n a r u s n I . m r i F g n i t n u o c c A c i l b u P d e r e t s i g e R t n e d n e p e d n I f o t r o p e R e e S _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 1022849be 10K 126 Schedule IV W. R. Berkley Corporation and Subsidiaries Reinsurance Years ended December 31, 2018, 2017 and 2016 (In thousands, other than percentages) Year ended December 31, 2018 Insurance Reinsurance Total Year ended December 31, 2017 Insurance Reinsurance Total Year ended December 31, 2016 Insurance Reinsurance Total Premiums Written Direct Amount Ceded to Other Companies Assumed from Other Companies Net Amount Percentage of Amount Assumed to Net $ 6,959,830 $ 1,204,509 13,386 64,758 $ 6,973,216 $ 1,269,267 $ 6,707,916 $ 1,153,960 18,113 62,495 $ 6,726,029 $ 1,216,455 $ 6,634,540 $ 1,051,887 13,060 67,901 $ 6,647,600 $ 1,119,788 $ $ $ $ $ $ 197,540 $ 5,952,861 531,738 480,366 729,278 $ 6,433,227 161,915 $ 5,715,871 589,019 544,637 750,934 $ 6,260,508 160,967 $ 5,743,620 735,134 680,293 896,101 $ 6,423,913 3.3% 110.7% 11.3% 2.8% 108.1% 12.0% 2.8% 108.1% 13.9% ___________________________ See Report of Independent Registered Public Accounting Firm. 1 2 6 1 0 2 2 8 4 9 b e 1 0 K 8 1 1 119 126 1022849be 10K 1022849be_10K.indd 126 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 6 2 1 4/17/19 6:53 PM 1022849be 10K 127 1 2 7 1 0 2 2 8 4 9 b e 1 0 K W. R. Berkley Corporation and Subsidiaries Valuation and Qualifying Accounts Years ended December 31, 2018, 2017 and 2016 W. R. Berkley Corporation and Subsidiaries Supplementary Information Concerning Property-Casualty Insurance Operations Years Ended December 31, 2018, 2017 and 2016 Schedule V Schedule VI (In thousands) Year ended December 31, 2018 Premiums and fees receivable Due from reinsurers Deferred federal and foreign income taxes Loan loss reserves Total Year ended December 31, 2017 Premiums and fees receivable Due from reinsurers Deferred federal and foreign income taxes Loan loss reserves Total Year ended December 31, 2016 Premiums and fees receivable Due from reinsurers Deferred federal and foreign income taxes Loan loss reserves Total _______________________ See Report of Independent Registered Public Accounting Firm. Opening Balance Additions- Charged to Expense Deduction- Amounts Written Off Ending Balance $ 39,926 $ 6,985 $ $ $ $ $ 1,010 16,619 3,383 60,938 26,569 1,049 5,457 3,397 36,472 22,524 1,020 4,037 2,094 $ $ $ $ 65 18,772 — 25,822 20,720 (29) 12,663 (14) 33,340 10,006 20 1,420 1,303 $ $ $ $ $ 29,675 $ 12,749 $ (7,817) $ (128) (196) — (8,141) $ (7,363) $ (10) (1,501) — (8,874) $ (5,961) $ 9 — — (5,952) $ 39,093 947 35,195 3,383 78,618 39,926 1,010 16,619 3,383 60,938 26,569 1,049 5,457 3,397 36,472 (In thousands) Deferred policy acquisition costs Reserves for losses and loss expenses Unearned premiums 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 ___________________ See Report of Independent Registered Public Accounting Firm. 2018 2017 2016 $ 497,629 $ 507,549 $ 537,890 11,966,448 11,670,408 11,197,195 3,359,991 6,371,505 674,235 3,290,180 6,311,419 575,788 3,283,300 6,293,348 564,163 3,926,489 3,963,543 3,826,620 6,831 41,382 915,246 3,664,885 6,433,227 (5,165) 43,970 1,111,489 3,589,955 6,260,508 (29,904) 49,084 1,155,954 3,454,174 6,423,913 120 127 1022849be 10K 1022849be_10K.indd 127 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 7 2 1 4/17/19 6:53 PM 121 1 2 8 1 0 2 2 8 4 9 b e 1 0 K Schedule V W. R. Berkley Corporation and Subsidiaries Valuation and Qualifying Accounts Years ended December 31, 2018, 2017 and 2016 Deferred federal and foreign income taxes (In thousands) Year ended December 31, 2018 Premiums and fees receivable Due from reinsurers Loan loss reserves Total Year ended December 31, 2017 Premiums and fees receivable Due from reinsurers Loan loss reserves Total Year ended December 31, 2016 Premiums and fees receivable Due from reinsurers Deferred federal and foreign income taxes Deferred federal and foreign income taxes Loan loss reserves Total _______________________ See Report of Independent Registered Public Accounting Firm. Opening Balance Additions- Charged to Expense Deduction- Amounts Written Off Ending Balance $ 39,926 $ 6,985 $ (7,817) $ 39,093 18,772 65 — (128) (196) — 947 35,195 3,383 25,822 (8,141) $ 78,618 26,569 20,720 (7,363) $ 39,926 (29) 12,663 (14) (10) (1,501) — 1,010 16,619 3,383 36,472 33,340 (8,874) $ 60,938 $ $ $ $ 1,010 16,619 3,383 60,938 1,049 5,457 3,397 1,020 4,037 2,094 $ $ $ $ 22,524 10,006 (5,961) $ 26,569 20 1,420 1,303 9 — — 1,049 5,457 3,397 $ 29,675 $ 12,749 $ (5,952) $ 36,472 $ $ $ $ 1022849be 10K 128 Schedule VI W. R. Berkley Corporation and Subsidiaries Supplementary Information Concerning Property-Casualty Insurance Operations Years Ended December 31, 2018, 2017 and 2016 (In thousands) Deferred policy acquisition costs Reserves for losses and loss expenses Unearned premiums 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 ___________________ See Report of Independent Registered Public Accounting Firm. $ 2018 497,629 11,966,448 $ 2017 507,549 11,670,408 $ 2016 537,890 11,197,195 3,359,991 6,371,505 674,235 3,926,489 6,831 41,382 915,246 3,664,885 6,433,227 3,290,180 6,311,419 575,788 3,283,300 6,293,348 564,163 3,963,543 (5,165) 43,970 1,111,489 3,589,955 6,260,508 3,826,620 (29,904) 49,084 1,155,954 3,454,174 6,423,913 120 121 128 1022849be 10K 1022849be_10K.indd 128 K 8.250 in x 12.000 in Select 04.17.2019 19:13PM 1022849be Bill Robson 1022849be 10K amoore file://sanjfs5.sa1.com/Sandy/1022849be K 0 1 e b 9 4 8 2 2 0 1 8 2 1 4/17/19 6:53 PM 1022849beBackSmall 1 SERVING THOSE WHO SERVED 1 1 0 2 2 8 4 9 b e B a c k S m a l l l l a m S k c a B e b 9 4 8 2 2 0 1 1 1 1022849be Back Small 1022849be_Back Small.indd 1 4/18/19 12:19 PM C M Y K 7.750 in x 10.250 in Select 04.18.2019 12:38PM 1022849be Bill Robson jhartman 1022849be Back Small file://sanjfs5.sa1.com/Sandy/1022849be 1022849beBackSmall 2 2 1 0 2 2 8 4 9 b e B a c k S m a l l 320 MILES WALKED 320 MILES WALKED Dave from Berkley Industrial Comp completed the 320-mile Pennsylvania Hero Walk Dave from Berkley Industrial Comp completed the 320-mile Pennsylvania Hero Walk to benefit veterans. to benefit veterans. Berkley salutes the millions of men and Berkley salutes the millions of men and women who have proudly served our women who have proudly served our country though a variety of fundraising country though a variety of fundraising and service activities. and service activities. In addition to Daveʼs epic trek, a group from Union Standard spent the day cleaning In addition to Daveʼs epic trek, a group from Union Standard spent the day cleaning headstones and performing ground maintenance at the Dallas-Fort Worth National headstones and performing ground maintenance at the Dallas-Fort Worth National Cemetery, which is the sixth National Cemetery to be built in Texas to meet the needs of Cemetery, which is the sixth National Cemetery to be built in Texas to meet the needs of veterans and their families. Berkley One hosted a Smooch Your Pooch photo challenge for veterans and their families. Berkley One hosted a Smooch Your Pooch photo challenge for employees across the country to pose with their dogs to raise money for K9s for Warriors, employees across the country to pose with their dogs to raise money for K9s for Warriors, which helps pair veterans with service dogs. which helps pair veterans with service dogs. It was humbling and such an honor to participate in the veteransʼ It was humbling and such an honor to participate in the veteransʼ cemetery event. The weather was cold, wet and dismal, yet it couldnʼt cemetery event. The weather was cold, wet and dismal, yet it couldnʼt compare to the hardships faced by those resting in this cemetery. We compare to the hardships faced by those resting in this cemetery. We owe our freedom to men and women such as these, and this event owe our freedom to men and women such as these, and this event allowed me to reflect on their sacrifice. allowed me to reflect on their sacrifice. — Richard P., Director Premium Audit, Union Standard Insurance Group — Richard P., Director Premiun Audit, Union Standard Insurance Group l l a m S k c a B e b 9 4 8 2 2 0 1 2 2 1022849be Back Small 1022849be_Back Small.indd 2 4/22/19 7:07 PM C M Y K 7.750 in x 10.250 in Select 04.22.2019 19:39PM 1022849be Bill Robson druggiero 1022849be Back Small file://sanjfs5.sa1.com/Sandy/1022849be 1022849beBackLarge 1 1 1 0 2 2 8 4 9 b e B a c k L a r g e OPERATING UNITS BERKLEY INSURANCE COMPANY 475 Steamboat Road Greenwich, Connecticut 06830 Tel: (203) 542 3800 William R. Berkley, Chairman W. Robert Berkley, Jr., President and Chief Executive Officer Insurance ACADIA INSURANCE GROUP One Acadia Commons Westbrook, Maine 04092 Tel: (800) 773 4300 www.acadiainsurance.com Douglas M. Nelson, President Albany, New York Bedford, New Hampshire Colchester, Vermont Marlborough, Massachusetts Rocky Hill, Connecticut Syracuse, New York Tel: (800) 773 4300 Tel: (800) 224 8850 Tel: (800) 224 8847 Tel: (888) 665 1170 Tel: (866) 382 0036 Tel: (866) 811 7722 ADMIRAL INSURANCE GROUP 1000 Howard Boulevard, Suite 300 P. O. Box 5430 Mount Laurel, New Jersey 08054 Tel: (856) 429 9200 www.admiralins.com Curtis E. Fletcher, President and Chief Executive Officer Atlanta, Georgia Austin, Texas Chicago, Illinois Seattle, Washington Tel: (770) 476 1561 Tel: (512) 795 0766 Tel: (312) 368 1107 Tel: (206) 467 6511 BERKLEY ACCIDENT AND HEALTH 2445 Kuser Road, Suite 201 Hamilton Square, New Jersey 08690 Tel: (609) 584 6990 www.berkleyah.com Brad N. Nieland, President and Chief Executive Officer Atlanta, Georgia Charlotte, North Carolina Tel: (678) 387 1824 Tel: (980) 214 1353 Chicago, Illinois Cleveland, Ohio Dallas, Texas Denver, Colorado Hamilton Square, New Jersey Hartford, Connecticut Kansas City, Kansas Marlborough, Massachusetts Minneapolis, Minnesota Philadelphia, Pennsylvania San Francisco, California Seattle, Washington Tel: (312) 368 1115 Tel: (440) 728 1805 Tel: (972) 849 7406 Tel: (303) 667 5198 Tel: (973) 616 0685 Tel: (860) 380 1190 Tel: (913) 515 7374 Tel: (508) 573 6102 Tel: (303) 667 5198 Tel: (908) 415 2711 Tel: (480) 529 6787 Tel: (425) 401 4246 BERKLEY ACCIDENT & HEALTH SPECIAL RISK DIVISION 757 Third Avenue, 10th Floor New York, New York 10017 Tel: (212) 822 3333 Susan M. Clarke, President BERKLEY AGRIBUSINESS 11201 Douglas Avenue Urbandale, Iowa 50322 Tel: (866) 382 7314 www.berkleyag.com Michael Ekiss, President BERKLEY ALLIANCE MANAGERS 30 South Pearl Street, 6th Floor Albany, New York 12207 Tel: (518) 407 0088 Stephen L. Porcelli, President BERKLEY CONSTRUCTION PROFESSIONAL Tel: (405) 805 6635 www.berkleycp.com BERKLEY DESIGN PROFESSIONAL Tel: (405) 805 6635 www.berkleydp.com BERKLEY SERVICE PROFESSIONALS BERKLEY MANAGERS INSURANCE SERVICES, LLC Tel: (405) 805 6635 www.berkleysp.com W. R. BERKLEY CORPORATION | 2018 ANNUAL REPORT 141 e g r a L k c a B e b 9 4 8 2 2 0 1 1 1 1022849be Back Large 1022849be_Back Large.indd 141 4/17/19 4:53 PM C Y K 343 8.250 in x 12.000 in Select 04.17.2019 17:25PM 1022849be Bill Robson 1022849be Back Large amoore file://sanjfs5.sa1.com/Sandy/1022849be 1022849beBackLarge 2 2 1 0 2 2 8 4 9 b e B a c k L a r g e Tel: (603) 935 6630 Tel: (704) 759 7049 Tel: (804) 237 5273 Tel: (770) 570 3699 Tel: (207) 874 1630 Tel: (866) 412 7742 BERKLEY ASPIRE 14902 North 73rd Street Scottsdale, Arizona 85260 Tel: (480) 444 5950 www.berkleyaspire.com Miklos F. Kallo, President Berlin, New Hampshire Charlotte, North Carolina Glen Allen, Virginia Lawrenceville, Georgia Portland, Maine Scottsdale, Arizona 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 Andrew Steen, President BERKLEY CUSTOM INSURANCE Three Stamford Plaza 301 Tresser Boulevard, 8th Floor Stamford, Connecticut 06901 Tel: (203) 658 1500 www.berkleycustom.com Michael P. Fujii, President and Chief Executive Officer BERKLEY CUSTOM INSURANCE SERVICES, LLC Los Angeles, California Tel: (213) 417 5431 BXM INSURANCE SERVICES, INC. Chicago, Illinois Los Angeles, California Tel: (312) 605 4655 Tel: (213) 417 5431 BERKLEY CYBER RISK SOLUTIONS 412 Mount Kemble Avenue, Suite G50 Morristown, New Jersey 07960 Tel: (973) 775 7494 www.berkleycyberrisk.com Tracey Vispoli, President BERKLEY ENTERTAINMENT 600 Las Colinas Boulevard, Suite 1400 Irving, Texas 75039 Tel: (972) 819 8980 www.berkleyentertainment.com Cindy Broschart, President BERKLEY ENVIRONMENTAL 101 Hudson Street, Suite 2550 Jersey City, New Jersey 07302 Tel: (201) 748 3100 www.berkleyenvironmental.com Kenneth J. Berger, President Atlanta, Georgia Boston, Massachusetts Chicago, Illinois Philadelphia, Pennsylvania Irving, Texas Jersey City, New Jersey Tel: (404) 443 2117 Tel: (857) 265 7479 Tel: (312) 980 3660 Tel: (215) 533 7360 Tel: (972) 819 8863 Tel: (201) 748 3047 BERKLEY MANAGERS INSURANCE SERVICES, LLC Walnut Creek, California Tel: (925)472 8210 BERKLEY FINSECURE 849 Fairmount Avenue, Suite 301 Towson, Maryland 21286 Tel: (866) 539 3995 www.berkleyfinsecure.com 757 Third Avenue, 10th Floor New York, New York 10017 Tel: (866) 539 3995 BERKLEY CRIME 29 South Main Street, 3rd Floor West Hartford, Connecticut 06107 Tel: (844) 44 CRIME www.berkleycrime.com Michael G. Connor, President e g r a L k c a B e b 9 4 8 2 2 0 1 2 142 W. R. BERKLEY CORPORATION | 2018 ANNUAL REPORT 2 1022849be Back Large 1022849be_Back Large.indd 142 4/17/19 4:53 PM C Y K 343 8.250 in x 12.000 in Select 04.17.2019 17:25PM 1022849be Bill Robson 1022849be Back Large amoore file://sanjfs5.sa1.com/Sandy/1022849be 1022849be_Back_Small_3 1 1 1 0 2 2 8 4 9 b e _ B a c k _ S m a l l _ 3 RELIEF IN THE AFTERMATH OF DISASTERS 3 _ l l a m S _ k c a B _ e b 9 4 8 2 2 0 1 1 1 1022849be_Back_Small_3 1022849be_Back_Small.indd 3 4/24/19 11:34 AM C M Y K 7.750 in x 10.250 in Select 04.24.2019 11:35AM 1022849be Bill Robson amizutani 1022849be_Back_Small_3 file://sanjfs5.sa1.com/Sandy/1022849be 1022849beBackSmall 4 4 1 0 2 2 8 4 9 b e B a c k S m a l l $160 BILLION of economic impact from catastrophe-related damages in 2018. When disasters strike, our people go beyond the business. Each year, natural disasters affect millions of people across the globe, and Berkley team members do what they can to help others pick up the pieces. Through company-wide disaster relief fundraising efforts that are matched by the W. R. Berkley Corporation Foundation, operating unit-specific fundraisers and supply collections, and individuals lending a helping hand, the spirit of our people brings relief to those affected. Over the past 2 years, we have contributed more than $1 million to various worldwide relief organizations. I am so proud to be part of the Berkley team, a compassionate and generous community of people who support the global community in times of crisis and throughout the year. — Carol L., Senior Vice President, Human Resources, W. R. Berkley Corporation l l a m S k c a B e b 9 4 8 2 2 0 1 4 4 1022849be Back Small 1022849be_Back Small.indd 4 4/18/19 12:19 PM C M Y K 7.750 in x 10.250 in Select 04.18.2019 12:38PM 1022849be Bill Robson jhartman 1022849be Back Small file://sanjfs5.sa1.com/Sandy/1022849be 1022849beBackLarge 3 3 1 0 2 2 8 4 9 b e B a c k L a r g e BERKLEY FIRE & MARINE UNDERWRITERS 425 North Martingale Road, Suite 1520 Schaumburg, Illinois 60173 Tel: (847) 466 9371 www.berkleymarine.com John T. Geary, President BERKLEY GLOBAL PRODUCT RECALL MANAGEMENT 80 Broad Street, Suite 3200 New York, New York 10004 Tel: (212) 413 2499 Louis Lubrano, President Dallas, Texas London, England Tel: (972) 552 6100 Tel: 44 (0) 20 7088 1900 BERKLEY MANAGERS INSURANCE SERVICES, LLC Los Angeles, California San Francisco, California Tel: (213) 372 1727 Tel: (415) 417 5950 BERKLEY HEALTHCARE 757 Third Avenue, 10th Floor New York, New York 10017 Tel: (212) 822 3369 www.berkleyhealthcare.com www.berkleyhpl.com Gregg A. Piltch, President West Hartford, Connecticut Chicago, Illinois St. Louis, Missouri Tel: (860) 380 4920 Tel: (312) 469 6986 Tel: (314) 523 3686 BERKLEY HEALTHCARE PROFESSIONAL INSURANCE SERVICES, LLC Sebastopol, California Los Angeles, California Tel: (707) 829 4740 Tel: (213) 787 2125 BERKLEY HUMAN SERVICES 222 South Ninth Street, Suite 2700 Minneapolis, Minnesota 55402 Tel: (612) 766 3100 www.berkleyhumanservices.com Roger M. Nulton, President BERKLEY INDUSTRIAL COMP 3490 Independence Drive Birmingham, Alabama 35209 Tel: (205) 870 3535 www.berkindcomp.com Chandler F. Cox, Jr., President and Chief Executive Officer Las Vegas, Nevada Lexington, Kentucky Tel: (702) 754 5800 Tel: (859) 971 1955 BERKLEY INSURANCE ASIA www.berkleyasia.com Room 4407, 44/F Hopewell Centre 183 Queen’s Road East Wan Chai, Hong Kong Tel: (852) 3708 5000 18 Cross Street Unit 07-01, China Square Central Singapore 048423 Tel: (65) 6902 0601 30th Floor, Shanghai Tower No. 501 Middle Yincheng Road Pudong, Shanghai 200120 Tel: 86 (0) 21 6162 8122 Shasi Nair, Chief Executive Officer BERKLEY INSURANCE AUSTRALIA Level 7, 321 Kent Street Sydney NSW 2000, Australia Tel: 61 (2) 9275 8500 www.berkleyinaus.com.au Tony Wheatley, Chief Executive Officer Adelaide SA, Australia Brisbane QLD, Australia Melbourne VIC, Australia Perth WA, Australia Tel: 61 (8) 8470 9020 Tel: 61 (7) 3220 9900 Tel: 61 (3) 8622 2000 Tel: 61 (8) 6488 0900 W. R. BERKLEY CORPORATION | 2018 ANNUAL REPORT 143 e g r a L k c a B e b 9 4 8 2 2 0 1 3 3 1022849be Back Large 1022849be_Back Large.indd 143 4/17/19 4:53 PM C Y K 343 8.250 in x 12.000 in Select 04.17.2019 17:25PM 1022849be Bill Robson 1022849be Back Large amoore file://sanjfs5.sa1.com/Sandy/1022849be 1022849beBackLarge 4 4 1 0 2 2 8 4 9 b e B a c k L a r g e BERKLEY INTERNATIONAL LATINOAMÉRICA BERKLEY INTERNATIONAL SEGUROS S.A. BERKLEY INTERNATIONAL ASEGURADORA DE RIESGOS DEL TRABAJO S.A. BERKLEY ARGENTINA DE REASEGUROS S.A. Carlos Pellegrini 1023, Piso 8 C1009ABU Buenos Aires, Argentina Tel: 54 (11) 4378 8100 www.berkley.com.ar Bartolomé Mitre 699 S2000COM Rosario, Argentina Tel: 54 (34) 1 410 4200 Eduardo I. Llobet, President and Chief Executive Officer BERKLEY INTERNATIONAL DO BRASIL SEGUROS S.A. Avenida Presidente Juscelino Kubitschek, 1455 15º andar - cj. 151 Vila Nova Conceição 04543-011 São Paulo, Brazil Tel: 55 (11) 3848 8622 www.berkley.com.br José Marcelino Risden, President and Chief Executive Officer BERKLEY INTERNATIONAL FIANZAS MÉXICO, S.A. DE C.V. Avenida Santa Fe 505 Piso 17, Oficina 1702 Cruz Manca, Cuajimalpa de Morelos, 05349, México Tel: 52 (55) 1037 5300 www.berkleymex.com Guillermo Espinosa Barragan, President and Chief Executive Officer BERKLEY INTERNATIONAL PUERTO RICO, LLC Atrium Office Center 530 Avenida de la Constitución San Juan, Puerto Rico 00901 Tel: (787) 289 7846 Eduardo I. Llobet, President BERKLEY INTERNATIONAL SEGUROS COLOMBIA S.A. Carrera 7 # 71 – 21 Torre B, Oficina 1002 110231 Bogotá, Colombia Tel: 57 (1) 357 2727 www.berkley.com.co Sylvia Luz Rincón, President and Chief Executive Officer BERKLEY INTERNATIONAL SEGUROS MÉXICO, S.A. DE C.V. Avenida Santa Fe 505 Piso 17, Oficina 1702 Cruz Manca, Cuajimalpa de Morelos, 05349, México Tel: 52 (55) 1037 5300 www.berkleymex.com Javier García Ortíz de Zárate, President and Chief Executive Officer BERKLEY INTERNATIONAL SEGUROS S.A. (URUGUAY) Rincón 391, Piso 5 11100 Montevideo, Uruguay Tel: (598) 2916 6998 www.berkley.com.uy Eduardo I. Llobet, 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 Edificio Semana 110231 Bogotá, Colombia Tel: 57 (1) 744 4015 Jaime Aramburo, Director REPRESENTATIVE OFFICE IN MEXICO Avenida Santa Fe 505 Piso 17, Oficina 1702 Cruz Manca, Cuajimalpa de Morelos, 05349, México Tel: 52 (55) 1037 5300 www.berkleymex.com Hiram García, Director e g r a L k c a B e b 9 4 8 2 2 0 1 4 144 W. R. BERKLEY CORPORATION | 2018 ANNUAL REPORT 4 1022849be Back Large 1022849be_Back Large.indd 144 4/17/19 4:53 PM C Y K 343 8.250 in x 12.000 in Select 04.17.2019 17:25PM 1022849be Bill Robson 1022849be Back Large amoore file://sanjfs5.sa1.com/Sandy/1022849be 5 1 0 2 2 8 4 9 b e B a c k S m a l l 1022849beBackSmall 5 A HOME ON THE ROAD TO RECOVERY l l a m S k c a B e b 9 4 8 2 2 0 1 5 5 1022849be Back Small 1022849be_Back Small.indd 5 4/18/19 12:19 PM C M Y K 7.750 in x 10.250 in Select 04.18.2019 12:38PM 1022849be Bill Robson jhartman 1022849be Back Small file://sanjfs5.sa1.com/Sandy/1022849be 1022849beBackSmall 6 6 1 0 2 2 8 4 9 b e B a c k S m a l l 10-RESIDENT TRANSITIONAL HOME Employees at Intrepid Direct are raising funds to build a home for women recovering from drug and alcohol addiction. To honor the memory of a friend and former colleague who was dedicated to helping others, business leaders took pies to the face at a fundraiser dedicated to making the dream of Emilyʼs House a reality. Emilyʼs House is a planned 10-resident transitional home sponsored by Healing House in Kansas City, Missouri, focused on helping women recover from drug and alcohol addiction. Each year, Healing House provides help and healing to nearly 300 men and women in addiction recovery who are trying to transition back into society. Construction on Emilyʼs House is underway and once itʼs completed, employees plan to volunteer whatever services are needed. Our entire organization, whether they knew Emily personally or not, came together to support a cause that was so near and dear to the hearts of many employees and of Emilyʼs family. Iʼm grateful for the opportunity to contribute. Itʼs comforting for everyone to know that Emilyʼs spirit will live on in the help and hope that Emilyʼs House will offer 10 women at a time. — Jacci Z., Claims Specialist, Intrepid Direct l l a m S k c a B e b 9 4 8 2 2 0 1 6 6 1022849be Back Small 1022849be_Back Small.indd 6 4/18/19 12:19 PM C M Y K 7.750 in x 10.250 in Select 04.18.2019 12:38PM 1022849be Bill Robson jhartman 1022849be Back Small file://sanjfs5.sa1.com/Sandy/1022849be 1022849beBackLarge 5 5 1 0 2 2 8 4 9 b e B a c k L a r g e BERKLEY LIFE SCIENCES 200 PrincetonSouth Corporate Center, Suite 250 Ewing, New Jersey 08628 Tel: (609) 844 7800 www.berkleyls.com Emily J. Urban, President Naperville, Illinois Tel: (630) 210 0369 BERKLEY LS INSURANCE SOLUTIONS, LLC Walnut Creek, California BERKLEY MID-ATLANTIC GROUP 4820 Lake Brook Drive, Suite 300 Glen Allen, Virginia 23060 Tel: (804) 285 2700 www.wrbmag.com John F. Kearns, President 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 BERKLEY LUXURY GROUP 301 Route 17 North, Suite 900 Rutherford, New Jersey 07070 Tel: (201) 518 2500 www.berkleyluxurygroup.com William J. Johnston, President Chicago, Illinois Tel: (312) 881 1456 BERKLEY FINE DINING SPECIALISTS Tel: (800) 504 7012 www.berkleyfinedining.com BERKLEY LUXURY REAL ESTATE SPECIALISTS Tel: (800) 504 7012 www.berkleyluxuryrealestate.com BERKLEY MEDICAL EXCESS UNDERWRITERS 16305 Swingley Ridge Road, Suite 450 Chesterfield, Missouri 63017 Tel: (800) 523 3815 www.berkleymed.com Collin J. Suttie, President BERKLEY MANAGERS INSURANCE SERVICES, LLC San Diego, California Tel: (858) 812 2935 BERKLEY MEDICAL MANAGEMENT SOLUTIONS 10851 Mastin Boulevard, Suite 200 Overland Park, Kansas 66210 Tel: (855) 444 2667 www.berkleymms.com Eric-Jason Smith, Chief Operating Officer Boston, Massachusetts Greensboro, North Carolina Tel: (855) 444 2667 Tel: (855) 444 2667 BERKLEY NET UNDERWRITERS 9301 Innovation Drive, Suite 200 Manassas, Virginia 20110 Tel: (877) 497 2637 www.berkleynet.com Brian P. Douglas, President BERKLEY NORTH PACIFIC GROUP 13920 SE Eastgate Way, Suite 120 Bellevue, Washington 98005 Tel: (877) 316 9038 www.berkleynpac.com Gary Gudex, President Meridian, Idaho 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 Level 13, 52 Lime Street London EC3M 7AF, United Kingdom Tel: 44 (0) 20 3943 1400 R. Christian Walker, Executive Vice President W. R. BERKLEY CORPORATION | 2018 ANNUAL REPORT 145 e g r a L k c a B e b 9 4 8 2 2 0 1 5 5 1022849be Back Large 1022849be_Back Large.indd 145 4/17/19 4:53 PM C Y K 343 8.250 in x 12.000 in Select 04.17.2019 17:25PM 1022849be Bill Robson 1022849be Back Large amoore file://sanjfs5.sa1.com/Sandy/1022849be 1022849beBackLarge 6 6 1 0 2 2 8 4 9 b e B a c k L a r g e BERKLEY PUBLIC ENTITY 30 South 17th Street, Suite 820 Philadelphia, Pennsylvania 19103 Tel: (215) 553 7384 www.berkleypublicentity.com Scott R. Barraclough, Chief Executive Officer Morristown, New Jersey Tel: (973) 355 8238 BERKLEY RISK 222 South Ninth Street, Suite 2700 Minneapolis, Minnesota 55402 Tel: (612) 766 3000 www.berkleyrisk.com John M. Goodwin, President Council Bluffs, Iowa Denver, Colorado Nashville, Tennessee Scottsdale, Arizona St. Paul, Minnesota Tel: (800) 832 0137 Tel: (303) 357 2600 Tel: (615) 493 7746 Tel: (602) 996 8810 Tel: (651) 281 1200 BERKLEY SELECT 233 South Wacker Drive, Suite 3900 Chicago, Illinois 60606 Tel: (312) 800 6200 www.berkleyselect.com Diane L. Cummings, Interim 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 Lawrenceville, Georgia Meridian, Mississippi Nashville, Tennessee Tel: (855) 610 4545 Tel: (855) 610 4545 Tel: (855) 610 4545 Tel: (855) 610 4545 Tel: (855) 610 4545 BERKLEY OIL & GAS 2107 CityWest Boulevard, 8th Floor Houston, Texas 77042 Tel: (877) 972 2264 www.berkleyoil-gas.com Carol A. Randall, President BERKLEY RENEWABLE ENERGY www.berkleyrenewable.com BERKLEY ONE 412 Mount Kemble Avenue, Suite G50 Morristown, New Jersey 07960 Tel: (203) 542 3301 www.berkleyone.com Kathleen M. Tierney, 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, United Kingdom Schaumburg, Illinois Toronto, Ontario Tel: 44 (0) 20 7088 1916 Tel: (630) 237 3650 Tel: (416) 304 1178 BERKLEY TRANSACTIONAL 412 Mount Kemble Avenue, Suite G50 Morristown, New Jersey 07960 Tel: (973) 775 7499 www.berkleytransactional.com Randolph Hein, President BERKLEY PROGRAM SPECIALISTS 1250 East Diehl Road, Suite 200 Naperville, Illinois 60563 Tel: (630) 210 0360 www.berkley-ps.com Gregory A. Douglas, President BERKLEY EQUINE & CATTLE DIVISION 3655 North Point Parkway, Suite 625 Alpharetta, Georgia 30005 Tel: (866) 298 5525 www.berkleyequine.com 146 W. R. BERKLEY CORPORATION | 2018 ANNUAL REPORT e g r a L k c a B e b 9 4 8 2 2 0 1 6 6 1022849be Back Large 1022849be_Back Large.indd 146 4/17/19 4:53 PM C Y K 343 8.250 in x 12.000 in Select 04.17.2019 17:25PM 1022849be Bill Robson 1022849be Back Large amoore file://sanjfs5.sa1.com/Sandy/1022849be 1022849beBackSmall 7 7 1 0 2 2 8 4 9 b e B a c k S m a l l OPPORTUNITIES FOR SPECIAL NEEDS INDIVIDUALS l l a m S k c a B e b 9 4 8 2 2 0 1 7 7 1022849be Back Small 1022849be_Back Small.indd 7 4/18/19 12:19 PM C M Y K 7.750 in x 10.250 in Select 04.18.2019 12:38PM 1022849be Bill Robson jhartman 1022849be Back Small file://sanjfs5.sa1.com/Sandy/1022849be 1022849beBackSmall 8 8 1 0 2 2 8 4 9 b e B a c k S m a l l 16 PEOPLE 16 people attended a 5-hour workshop designed to help those with intellectual disabilities. Berkley España dedicated their time to helping children and young adults with intellectual disabilities develop skills that will enable them to function at their highest level. Fundación Prodis is a non-profit organization whose mission is to improve family, school, work and social integration of children and young adults with intellectual disabilities. The Berkley España team visited the facilities and participated in a workshop where they taught children how to make a notebook as part of their method for reading and writing skills. They are currently providing a work opportunity for a young woman who helps with electronic policy filing, mail, recording invoice data and many other tasks. Berkley España will also host a workshop that will teach Prodis students about insurance. As a gift, attendees will receive a personal accident policy for a year. I am absolutely delighted to work with Paula. It has been a fantastic learning opportunity for me to discover new ways of mentoring, where I need to take into account not just her personality, but also her disability—or should I say, her possibilities! I am looking forward to continuing to work with her and to having her as my friend. — Sandra O., Head of Underwriting Services, Berkley España l l a m S k c a B e b 9 4 8 2 2 0 1 8 8 1022849be Back Small 1022849be_Back Small.indd 8 4/18/19 12:19 PM C M Y K 7.750 in x 10.250 in Select 04.18.2019 12:38PM 1022849be Bill Robson jhartman 1022849be Back Small file://sanjfs5.sa1.com/Sandy/1022849be 7 1 0 2 2 8 4 9 b e B a c k L a r g e BERKLEY SURETY 412 Mount Kemble Avenue, Suite 310N Morristown, New Jersey 07960 Tel: (973) 775 5024 www.berkleysurety.com Andrew M. Tuma, President Atlanta, Georgia Blue Bell, Pennsylvania Centennial, Colorado Charlotte, North Carolina Dallas, Texas Danvers, Massachusetts Fulton, Maryland Houston, Texas Morristown, New Jersey Naperville, Illinois Nashville, Tennessee New York, New York Orlando, Florida San Francisco, California Santa Ana, California Seattle, Washington Tampa, Florida Toronto, Ontario Urbandale, Iowa Westbrook, Maine Tel: (678) 624 1818 Tel: (973) 775 5096 Tel: (303) 357 2620 Tel: (704) 759 7065 Tel: (972) 385 1140 Tel: (978) 539 3303 Tel: (973) 775 5078 Tel: (832) 308 6893 Tel: (973) 775 5021 Tel: (630) 210 0454 Tel: (615) 514 8077 Tel: (212) 882 6390 Tel: (407) 867 4595 Tel: (415) 216 0877 Tel: (657) 356 2888 Tel: (206) 830 2565 Tel: (813) 392 5962 Tel: (416) 594 4817 Tel: (800) 456 5486 Tel: (207) 874 1640 BERKLEY TECHNOLOGY UNDERWRITERS 222 South Ninth Street, Suite 2550 Minneapolis, Minnesota 55402 Tel: (612) 344 4550 www.berkley-tech.com Matthew A. Mueller, President Dallas, Texas Irvine, California New York, New York San Francisco, California Tel: (972) 719 2445 Tel: (714) 215 9322 Tel: (516) 987 5901 Tel: (415) 216 2202 CAROLINA CASUALTY 5011 Gate Parkway Building 200, Suite 200 Jacksonville, Florida 32256 Tel: (904) 363 0900 www.carolinacas.com David A. Dunn, President 1022849beBackLarge 7 CONTINENTAL WESTERN GROUP 11201 Douglas Avenue Urbandale, Iowa 50322 Tel: (515) 473 3500 www.cwgins.com Michael A. Lex, President Denver, Colorado Lincoln, Nebraska Luverne, Minnesota Tel: (800) 533 9013 Tel: (800) 456 7688 Tel: (800) 533 0303 GEMINI TRANSPORTATION UNDERWRITERS 99 Summer Street, Suite 1800 Boston, Massachusetts 02110 Tel: (617) 310 8200 www.geminiunderwriters.com David R. Lockhart, President INTREPID DIRECT INSURANCE 7400 College Boulevard, Suite 350 Overland Park, Kansas 66210 Tel: (877) 249 7181 www.intrepiddirect.com Bill Strout, President KEY RISK INSURANCE 7823 National Service Road Greensboro, North Carolina 27409 Tel: (800) 942 0225 www.keyrisk.com Robert W. Standen, President MIDWEST EMPLOYERS CASUALTY 14755 North Outer Forty Drive, Suite 300 Chesterfield, Missouri 63017 Tel: (636) 449 7000 www.mecasualty.com Timothy F. Galvin, President W. R. BERKLEY CORPORATION | 2018 ANNUAL REPORT 147 e g r a L k c a B e b 9 4 8 2 2 0 1 7 7 1022849be Back Large 1022849be_Back Large.indd 147 4/17/19 4:53 PM C Y K 8.250 in x 12.000 in Select 04.17.2019 17:25PM 1022849be Bill Robson 1022849be Back Large amoore file://sanjfs5.sa1.com/Sandy/1022849be 1022849beBackLarge 8 8 1 0 2 2 8 4 9 b e B a c k L a r g e VERUS UNDERWRITING MANAGERS 4820 Lake Brook Drive, Suite 200 Glen Allen, Virginia 23060 Tel: (804) 525 1360 www.verusins.com Dale H. Pilkington, President W. R. BERKLEY EUROPEAN HOLDINGS AG Genferstrasse 23 8002 Zürich, Switzerland Mark Talbot, Managing Director W. R. BERKLEY EUROPE AG Städtle 35A, P.O. Box 835 9490 Vaduz, Liechtenstein Tel: 423 237 27 41 Hans-Peter Naef, General Manager Henrik Ibsens Gate 100 0255 Oslo, Norway Tel: 47 (23) 27 24 00 Birger Jarlsgatan 22 114 34 Stockholm, Sweden Tel: 46 (8) 410 337 00 Kaiser-Wilhelm-Ring 27-29 50672 Cologne, Germany Tel: 49 (0) 221 99386-0 Werner-Eckert-Strasse 14 81829 Munich, Germany Tel: 49 (0) 89 262042 801 Paseo de la Castellana, 141-Planta 18 28046 Madrid, Spain Tel: 34 (91) 449 2646 Gran Via de les Corts Catalanes 632 Escalera C, 2o 1a 08007 Barcelona, Spain Tel: 34 (0) 93 481 4729 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 PREFERRED EMPLOYERS INSURANCE 9797 Aero Drive, Suite 200 San Diego, California 92123 Tel: (888) 472 9001 www.peiwc.com Steven A. Gallacher, President 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 Albuquerque, New Mexico Dallas, Texas Little Rock, Arkansas Oklahoma City, Oklahoma Phoenix, Arizona San Antonio, Texas Tel: (480) 281 3949 Tel: (972) 719 2431 Tel: (501) 707 6543 Tel: (501) 707 6543 Tel: (480) 281 3949 Tel: (972) 719 2431 VELA INSURANCE SERVICES 311 South Wacker Drive, Suite 3600 Chicago, Illinois 60606 Tel: (312) 553 4413 www.vela-ins.com Arthur G. Davis, President Atlanta, Georgia Chicago, Illinois Omaha, Nebraska Minneapolis, Minnesota Tel: (678) 987 1701 Tel: (312) 553 4413 Tel: (402) 492 8352 Tel: (612) 766 3000 VELA INSURANCE SERVICES, LLC Los Angeles, California Solvang, California Walnut Creek, California Tel: (213) 417 5452 Tel: (805) 693 0839 Tel: (925) 472 8220 148 W. R. BERKLEY CORPORATION | 2018 ANNUAL REPORT e g r a L k c a B e b 9 4 8 2 2 0 1 8 8 1022849be Back Large 1022849be_Back Large.indd 148 4/17/19 4:53 PM C Y K 343 8.250 in x 12.000 in Select 04.17.2019 17:25PM 1022849be Bill Robson 1022849be Back Large amoore file://sanjfs5.sa1.com/Sandy/1022849be 9 1 0 2 2 8 4 9 b e B a c k S m a l l 1022849beBackSmall 9 COMBATTING HUNGER l l a m S k c a B e b 9 4 8 2 2 0 1 9 9 1022849be Back Small 1022849be_Back Small.indd 9 4/18/19 12:19 PM C M Y K 7.750 in x 10.250 in Select 04.18.2019 12:38PM 1022849be Bill Robson jhartman 1022849be Back Small file://sanjfs5.sa1.com/Sandy/1022849be 1022849beBackSmall 10 1 0 1 0 2 2 8 4 9 b e B a c k S m a l l 128,000 MEALS 708 boxes and bags, 7,000 pounds, 2,787 items and 128,000 meals. While each Berkley company may count their donations differently, together we served thousands of hungry people in 2018. Berkley team members support organizations that feed the hungry in their own backyards and across the globe. Throughout our Company, we are doing our part to combat world hunger. Some contribute by preparing, delivering or serving meals to the people in our own communities through organizations like Meals on Wheels, The Banquet in South Dakota, Feed More in Virginia and Meals From the Heartland in Iowa. Many collect and donate to local food banks in Alabama, the Greater Boston Food Bank, the Foothills Food Bank in Arizona, Operation Food Search in St. Louis or the New Hampshire Food Bank. Still others provide meals for starving families in developing nations through organizations like Feed My Starving Children. The various volunteer events and food drives provide opportunities for our people to make a real difference in the lives of others, often while bonding with co-workers and local business partners. Volunteering with Feed More, our local foodbank and community kitchen, is rewarding and has afforded us the opportunity to help our community, raise awareness of Verus Underwriting Managers and strengthen our relationships with our clients. — Sean W., Assistant Vice President of Marketing, Verus Underwriting Managers l l a m S k c a B e b 9 4 8 2 2 0 1 0 1 10 1022849be Back Small 1022849be_Back Small.indd 10 4/18/19 12:19 PM K 7.750 in x 10.250 in Select 04.18.2019 12:38PM 1022849be Bill Robson jhartman 1022849be Back Small file://sanjfs5.sa1.com/Sandy/1022849be 1022849beBackLarge 9 9 1 0 2 2 8 4 9 b e B a c k L a r g e W/R/B UNDERWRITING W. R. BERKLEY SYNDICATE MANAGEMENT LIMITED SYNDICATE 1967 AT LLOYD’S W. R. BERKLEY UK LIMITED Level 14, 52 Lime Street London EC3M 7AF, United Kingdom Tel: 44 (0) 20 7088 1900 www.wrbunderwriting.com Alastair Blades, President and Chief Executive Officer BERKLEY ASSET PROTECTION 757 Third Avenue, 10th Floor New York, New York 10017 Tel: (212) 497 3700 www.berkleyassetpro.com Joseph P. Dowd, President Reinsurance BERKLEY RE www.berkleyre.com BERKLEY RE AMERICA Three Stamford Plaza 301 Tresser Boulevard, 7th Floor Stamford, Connecticut 06901 Tel: (203) 905 4444 Robert C. Hewitt, Acting President BERKLEY RE AUSTRALIA Level 7, 321 Kent 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 6, 114 William Street Melbourne VIC 3000, Australia Tel: 61 (3) 9607 8404 Tony Piper, Chief Executive Officer, Australia and New Zealand BERKLEY RE BEIJING Room 4901, China World Tower B No. 1 Jian Guo Men Wai Avenue Beijing 100004, China Tel: (86) 108 526 4826 BERKLEY RE HONG KONG Room 4407, 44/F Hopewell Centre 183 Queen’s Road East Wan Chai, Hong Kong Tel: (852) 3120 7000 BERKLEY RE SINGAPORE 18 Cross Street Unit 09-04, China Square Central Singapore 048423 Tel: (65) 6671 2070 Glen Riddell, Chief Executive Officer, Asia BERKLEY RE SOLUTIONS Three Stamford Plaza 301 Tresser Boulevard, 9th Floor Stamford, Connecticut 06901 Tel: (800) 974 5714 www.berkleyre.com/solutions Gregory A. Douglas, President Dublin, Ohio Johns Creek, Georgia Lakewood, Ohio Philadelphia, Pennsylvania Walnut Creek, California Tel: (800) 606 8360 Tel: (800) 348 4229 Tel: (800) 606 8360 Tel: (800) 519 6341 Tel: (800) 970 2550 BERKLEY RE UK LIMITED Level 17, 52 Lime Street London EC3M 7AF, United Kingdom Tel: 44 (0) 20 7398 1000 Richard Fothergill, Chief Executive Officer W. R. BERKLEY CORPORATION | 2018 ANNUAL REPORT 149 e g r a L k c a B e b 9 4 8 2 2 0 1 9 9 1022849be Back Large 1022849be_Back Large.indd 149 4/17/19 4:53 PM C Y K 343 8.250 in x 12.000 in Select 04.17.2019 17:25PM 1022849be Bill Robson 1022849be Back Large amoore file://sanjfs5.sa1.com/Sandy/1022849be 1 1 0 2 2 8 4 9 b e _ B a c k _ L a r g e _ p 1 5 0 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 Terrence M. Walker, 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; Berkley Casualty 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 Fianzas México, S.A. de C.V.; Berkley International Seguros Colombia S.A.; Berkley International Seguros México, S.A. de C.V.; 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 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.; Intrepid Insurance Company; 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. 150 W. R. BERKLEY CORPORATION | 2018 ANNUAL REPORT 1022849be_Back_Large_p150 1 Directors William R. Berkley Executive Chairman W. Robert Berkley, Jr. President and Chief Executive Officer Christopher L. Augostini Executive Vice President - Business Emory University Ronald E. Blaylock Managing Partner GenNx360 Capital Partners Mark E. Brockbank Retired Chief Executive Officer XL Brockbank Ltd. Mary C. Farrell President, The Howard Gilman Foundation Retired Managing Director, Chief Investment Strategist UBS Wealth Management USA María Luisa Ferré President and Chief Executive Officer FRG, Inc. Jack H. Nusbaum Senior Partner Willkie Farr & Gallagher LLP Leigh Ann Pusey Senior Vice President, Corporate Affairs and Communications, Eli Lilly and Company Mark L. Shapiro Private Investor 0 5 1 p _ e g r a L _ k c a B _ e b 9 4 8 2 2 0 1 1 1 1022849be_Back_Large_p150 1022849be_Back_Large.indd 150 4/23/19 5:00 PM C Y K 8.250 in x 12.000 in Select 04.23.2019 17:02PM 1022849be Bill Robson 1022849be_Back_Large_p150 tmurray file://sanjfs5.sa1.com/Sandy/1022849be 1 1 1 0 2 2 8 4 9 b e B a c k S m a l l 1022849beBackSmall 11 FUNDING THE CURE l l a m S k c a B e b 9 4 8 2 2 0 1 1 1 11 1022849be Back Small 1022849be_Back Small.indd 11 4/18/19 12:19 PM C M Y K 7.750 in x 10.250 in Select 04.18.2019 12:38PM 1022849be Bill Robson jhartman 1022849be Back Small file://sanjfs5.sa1.com/Sandy/1022849be 1022849beBackSmall 12 1 2 1 0 2 2 8 4 9 b e B a c k S m a l l FINISHED IN3RD PLACE FINISHED IN3RD PLACE Along with her colleagues, Berkley Canadaʼs marketing director participated in the CIBC Along with her colleagues, Berkley Canadaʼs marketing director participated in the CIBC Run for the Cure. Of the 12 Berkley employees who ran, she finished the race in 3rd place Run for the Cure. Of the 12 Berkley employees who ran, she finished the race in 3rd place while five months pregnant and pushing her toddler son in a stroller. while five months pregnant and pushing her toddler son in a stroller. Berkley Canada employees ran for Berkley Canada employees ran for the cure. the cure. The CIBC Run for the Cure, which has partnered with the Canadian Cancer Society (CCS), The CIBC Run for the Cure, which has partnered with the Canadian Cancer Society (CCS), is a 5k or 1k run/walk to help raise vital funds for breast cancer. It takes place in 56 locations is a 5k or 1k run/walk to help raise vital funds for breast cancer. It takes place in 56 locations across Canada and has become the largest single-day volunteer event in support of breast across Canada and has become the largest single-day volunteer event in Canada to support breast cancer. Several Berkley Canada employees participated in the Toronto run, which took cancer. Several Berkley Canada employees participated in the Toronto run, which took place place in September. For those who did not participate in the actual race, Berkley Canada held in September. For those who did not participate in the actual race, Berkley Canada held a 50/50 drawing, and donated the proceeds to the Canadian Breast Cancer Foundation. a 50/50 drawing, and donated the proceeds to the Canadian Breast Cancer Foundation. The CIBC Run for the Cure event was a great way to show our The CIBC Run for the Cure event was a great way to show our support for one of our colleagues who was diagnosed with breast support for one of our colleagues who was diagnosed with breast cancer earlier in the year. It was nice to see how many people cancer earlier in the year. It was nice to see how many people rallied behind her, whether through donations, walking or raffles. rallied behind her, whether through donations, walking or raffles. Their support is a reflection of the amazing people who work here. Their support is a reflection of the amazing people who work here. — Daniela F., Specialty Lines Complex Claims Director, Berkley Canada — Daniela F., Specialty Lines Complex Claims Director, Berkley Canada l l a m S k c a B e b 9 4 8 2 2 0 1 2 1 12 1022849be Back Small 1022849be_Back Small.indd 12 4/22/19 7:07 PM M K 7.750 in x 10.250 in Select 04.22.2019 19:39PM 1022849be Bill Robson druggiero 1022849be Back Small file://sanjfs5.sa1.com/Sandy/1022849be 1022849beBackLarge 11 1 1 1 0 2 2 8 4 9 b e B a c k L a r g e Officers William R. Berkley Executive Chairman W. Robert Berkley, Jr. President and Chief Executive Officer Richard M. Baio Executive Vice President – Chief Financial Officer and Treasurer Ira S. Lederman Executive Vice President – Secretary Lucille T. Sgaglione Executive Vice President James G. Shiel Executive Vice President – Investments Philip S. Welt Executive Vice President – General Counsel James P. Bronner Executive Vice President James B. Gilbert Executive Vice President John K. Goldwater Executive Vice President Jeffrey M. Hafter Executive Vice President Robert C. Hewitt Executive Vice President Michael J. Maloney Executive Vice President William M. Rohde, Jr. Executive Vice President Kenneth P. Sroka Executive Vice President Robert D. Stone Executive Vice President Joseph L. Sullivan Executive Vice President Kathleen M. Tierney Executive Vice President Jared E. Abbey Senior Vice President – Corporate Strategy and Development Kevin H. Ebers Senior Vice President – Business Shared Services Melissa M. Emmendorfer Senior Vice President – Insurance Risk Management Michele L. Fleckenstein Senior Vice President – Underwriting and Analytics Paul J. Hancock Senior Vice President – Chief Corporate Actuary Gillian James Senior Vice President – Enterprise Risk Management Peter L. Kamford Senior Vice President Carol J. LaPunzina Senior Vice President – Human Resources Edward F. Linekin Senior Vice President – Investments A. Scott Mansolillo Senior Vice President – Chief Compliance Officer Mir Mazhar Senior Vice President – Chief Project Officer Nelson Tavares Senior Vice President – Claims Steven W. Taylor Senior Vice President Terrence M. Walker Senior Vice President – Chief Information Officer Richard K. Altorelli Vice President – Investment Controller Thomas P. Boyle Vice President – Corporate Actuarial Trish Conway Vice President – Enterprise Risk Management Denise L. Davies Vice President – Internal Audit W. R. BERKLEY CORPORATION | 2018 ANNUAL REPORT 151 e g r a L k c a B e b 9 4 8 2 2 0 1 1 1 11 1022849be Back Large 1022849be_Back Large.indd 151 4/22/19 7:05 PM C Y K 8.250 in x 12.000 in Select 04.22.2019 19:36PM 1022849be Bill Robson druggiero 1022849be Back Large file://sanjfs5.sa1.com/Sandy/1022849be 1022849beBackLarge 12 1 2 1 0 2 2 8 4 9 b e B a c k L a r g e Officers (continued) Dana R. Frantz Vice President – Corporate Actuary Jo-Marie St. Martin Vice President – Federal Government Relations Laura Goodall Vice President – Insurance Risk Management Keith D. Wilson Vice President – Chief Information Security Officer Karen A. Horvath Vice President – External Financial Communications Justin R. Woytowich Vice President – Finance Andrea C. Kanefsky Vice President – Corporate Controller Joan E. Kapfer Vice President Nicholas R. Lang Vice President – Investments Thomas L. Lee Vice President Jonathan M. Levine Vice President – Chief Marketing Officer John M. Littzi Vice President – Senior Counsel James T. McGrath Vice President – Investments Scott J. McBurney Vice President – Insurance Risk Management Alistair D. Macpherson Vice President – Actuary Steven J. Malawer Vice President – Senior Counsel Jane B. Parker Vice President – Senior Counsel 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 Tatiana Connolly Assistant Vice President – Counsel Adam Coppola Assistant Vice President and Director of Operations – Investments Liana M. Fairchild Assistant Vice President – Corporate Actuary Arthur Gurevitch Assistant Vice President – Analytics David D. Hudson Assistant Vice President – Corporate Data Manager Neil R. Keenan Assistant Vice President – Counsel Naomi B. Kinderman Assistant Vice President – Counsel Suzette A. Lemson Assistant Vice President – Office of the Chairman Jamie L. Martin Assistant Vice President – Finance Robert C. Melillo Assistant Vice President – Investments Nancy Micale Assistant Vice President – Human Resources Bryan V. Spero Assistant Vice President – Corporate Actuary Pasquale Tomaino Assistant Vice President – Reinsurance Accounting Tracey M. Vizzo Assistant Vice President – Risk Management Bruce I. Weiser Assistant Vice President – Counsel e g r a L k c a B e b 9 4 8 2 2 0 1 2 1 152 W. R. BERKLEY CORPORATION | 2018 ANNUAL REPORT 12 1022849be Back Large 1022849be_Back Large.indd 152 4/17/19 4:53 PM C Y K 8.250 in x 12.000 in Select 04.17.2019 17:26PM 1022849be Bill Robson 1022849be Back Large amoore file://sanjfs5.sa1.com/Sandy/1022849be 1 1 0 2 2 8 4 9 b e _ c v r 2 The culture of our Company CONTENTS FINANCIAL HIGHLIGHTS OUR BUSINESS LETTER TO OUR SHAREHOLDERS SEGMENT OVERVIEW INVESTMENTS FORM 10-K 02 14 141 06 16 150 09 17 IBC OPERATING UNITS BOARD OF DIRECTORS & OFFICERS CORPORATE INFORMATION 1 1022849be_cvr2 C M Y K ANNUAL MEETING The Annual Meeting of Stockholders of W. R. Berkley Corporation will be held at 1:00 p.m. on June 6, 2019 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 EQ Shareowner Services 1110 Centre Pointe Curve, Suite 101 Mendota Heights, Minnesota 55120-4100 Tel: (800) 468 9716 www.shareowneronline.com WEBSITE For additional information, including press releases, visit our website at: www.berkley.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 2018 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 2019 W. R. Berkley Corporation. All rights reserved. 1022849be_cvr2 1 2 r v c _ e b 9 4 8 2 2 0 1 1 1 1 0 2 2 8 4 9 b e _ c v r Always do right. This will gratify some people and astonish the rest. —Mark Twain— W. R. BERKLEY CORPORATION 475 Steamboat Road Greenwich, CT 06830 203.629.3000 www.berkley.com @WRBerkleyCorp ©Copyright 2019 W. R. Berkley Corporation. All rights reserved. 1022849be_cvr 1 W. R. BERKLEY CORPORATION 2018 ANNUAL REPORT W . R . B E R K L E Y C O R P O R A T I O N 2 0 1 8 A N N U A L R E P O R T | 1 1022849be_cvr 1022849be_cvr.indd Custom V C M Y K r v c _ e b 9 4 8 2 2 0 1 1 4/22/19 6:27 PM

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