Company Quick10K Filing
Quick10K
Berkley W R
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$76.89 122 $9,380
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
8-K 2019-01-29 Earnings, Exhibits
8-K 2018-10-23 Earnings, Exhibits
8-K 2018-07-24 Earnings, Exhibits
8-K 2018-05-31 Officers, Shareholder Vote
8-K 2018-04-24 Earnings, Exhibits
8-K 2018-04-03 Other Events, Exhibits
8-K 2018-03-26 Enter Agreement, Exhibits
8-K 2018-03-19 Enter Agreement, Exhibits
8-K 2018-01-30 Earnings, Exhibits
CNA CNA Financial
RDN Radian Group
SIGI Selective Insurance Group
RLI RLI
NAVG Navigators Group
JRVR James River Group Holdings
MBI MBIA
HCI HCI Group
AFH Atlas Financial Holdings
UNAM Unico American
WRB 2018-09-30
Part I - Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-10.1 wrb930201810qex101.htm
EX-10.2 wrb930201810qex102.htm
EX-31.1 wrb930201810qex311.htm
EX-31.2 wrb930201810qex312.htm
EX-32.1 wrb930201810qex321.htm

Berkley W R Earnings 2018-09-30

WRB 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 wrb930201810q.htm 10-Q 3Q18 Document


 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q
(Mark one)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2018
or
o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the Transition Period from                      to                     .
Commission File Number 1-15202

W. R. BERKLEY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
22-1867895
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
 
475 Steamboat Road, Greenwich, Connecticut
 
06830
(Address of principal executive offices)
 
(Zip Code)
 
(203) 629-3000
 
 
(Registrant’s telephone number, including area code)
 
 
 
 
 
None
 
Former name, former address and former fiscal year, if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ     No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ     No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 þ
 
 
Accelerated filer o
Non-accelerated filer o
 
 
Smaller reporting company o
 
 
 
Emerging growth company o
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o     No þ
Number of shares of common stock, $.20 par value, outstanding as of November 5, 2018: 122,124,243
 




TABLE OF CONTENTS




Part I — FINANCIAL INFORMATION
Item 1.     Financial Statements

W. R. BERKLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
 
September 30,
2018
 
December 31,
2017
 
(Unaudited)
 
(Audited)
Assets
 
 
 
Investments:
 
 
 
Fixed maturity securities
$
13,572,402

 
$
13,551,250

Real estate
1,917,250

 
1,469,601

Investment funds
1,251,748

 
1,155,677

Arbitrage trading account
678,321

 
617,649

Equity securities
325,254

 
576,647

Loans receivable
96,590

 
79,684

Total investments
17,841,565

 
17,450,508

Cash and cash equivalents
819,366

 
950,471

Premiums and fees receivable
1,872,460

 
1,773,844

Due from reinsurers
1,859,917

 
1,783,200

Deferred policy acquisition costs
513,092

 
507,549

Prepaid reinsurance premiums
497,285

 
472,009

Trading account receivables from brokers and clearing organizations
191,394

 
189,280

Property, furniture and equipment
424,754

 
422,960

Goodwill
171,095

 
178,945

Accrued investment income
148,646

 
136,597

Federal and foreign income taxes
37,196

 

Other assets
478,879

 
434,554

Total assets
$
24,855,649

 
$
24,299,917

 
 
 
 
Liabilities and Equity
 
 
 
Liabilities:
 
 
 
Reserves for losses and loss expenses
$
11,872,162

 
$
11,670,408

Unearned premiums
3,454,955

 
3,290,180

Due to reinsurers
231,197

 
246,460

Trading account securities sold but not yet purchased
112,355

 
64,358

Federal and foreign income taxes

 
98,091

Other liabilities
1,008,145

 
981,987

Senior notes and other debt
1,790,498

 
1,769,052

Subordinated debentures
907,304

 
728,218

Total liabilities
19,376,616

 
18,848,754

Equity:
 
 
 
Common stock, par value $.20 per share:
 
 
 
Authorized 500,000,000 shares, issued and outstanding, net of treasury shares, 122,117,763 and 121,514,852 shares, respectively
47,024

 
47,024

Additional paid-in capital
1,058,074

 
1,048,283

Retained earnings
7,505,706

 
6,956,882

Accumulated other comprehensive (loss) income
(474,938
)
 
68,541

Treasury stock, at cost, 113,000,155 and 113,603,066 shares, respectively
(2,698,018
)
 
(2,709,386
)
Total stockholders’ equity
5,437,848

 
5,411,344

Noncontrolling interests
41,185

 
39,819

Total equity
5,479,033

 
5,451,163

Total liabilities and equity
$
24,855,649

 
$
24,299,917

See accompanying notes to interim consolidated financial statements.

1




W. R. BERKLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data)
 
For the Three Months
Ended September 30,
 
For the Nine Months
Ended September 30,
 
 
 
2018
 
2017
 
2018
 
2017
REVENUES:
 
 
 
 
 
 
 
Net premiums written
$
1,624,214

 
$
1,571,183

 
$
4,913,656

 
$
4,782,272

Change in net unearned premiums
(20,729
)
 
10,317

 
(161,709
)
 
(62,028
)
Net premiums earned
1,603,485

 
1,581,500

 
4,751,947

 
4,720,244

Net investment income
186,124

 
142,479

 
514,419

 
426,601

Net realized and unrealized gains on investments
22,334

 
183,959

 
140,429

 
276,760

Revenues from non-insurance businesses
95,168

 
89,786

 
242,037

 
225,033

Insurance service fees
30,782

 
33,612

 
91,175

 
100,475

Other income
9

 
6

 
59

 
695

Total revenues
1,937,902

 
2,031,342

 
5,740,066

 
5,749,808

OPERATING COSTS AND EXPENSES:
 
 
 
 
 
 
 
Losses and loss expenses
1,017,720

 
1,081,174

 
2,954,575

 
3,025,475

Other operating costs and expenses
577,648

 
600,822

 
1,781,230

 
1,821,155

Expenses from non-insurance businesses
93,463

 
86,412

 
238,198

 
221,389

Interest expense
39,848

 
36,821

 
116,608

 
110,419

Total operating costs and expenses
1,728,679

 
1,805,229

 
5,090,611

 
5,178,438

Income before income taxes
209,223

 
226,113

 
649,455

 
571,370

Income tax expense
(44,780
)
 
(63,295
)
 
(136,661
)
 
(174,305
)
Net income before noncontrolling interests
164,443

 
162,818

 
512,794

 
397,065

Noncontrolling interests
(2,523
)
 
(764
)
 
(4,402
)
 
(2,560
)
Net income to common stockholders
$
161,920

 
$
162,054

 
$
508,392

 
$
394,505

 
 
 
 
 
 
 
 
NET INCOME PER SHARE:
 
 
 
 
 
 
 
Basic
$
1.28

 
$
1.29

 
$
4.02

 
$
3.17

Diluted
$
1.26

 
$
1.26

 
$
3.96

 
$
3.05


See accompanying notes to interim consolidated financial statements.






2



W. R. BERKLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In thousands)
 
For the Three Months
Ended September 30,
 
For the Nine Months
Ended September 30,
 
 
 
2018
 
2017
 
2018
 
2017
Net income before noncontrolling interests
$
164,443

 
$
162,818

 
$
512,794

 
$
397,065

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Change in unrealized currency translation adjustments
15,686

 
28,592

 
(75,970
)
 
71,574

Change in unrealized investment (losses) gains, net of taxes
(94,842
)
 
(8,168
)
 
(253,056
)
 
26,598

Other comprehensive (loss) income
(79,156
)
 
20,424

 
(329,026
)
 
98,172

Comprehensive income
85,287

 
183,242

 
183,768

 
495,237

Noncontrolling interests
(2,463
)
 
(731
)
 
(4,316
)
 
(2,541
)
Comprehensive income to common stockholders
$
82,824

 
$
182,511

 
$
179,452

 
$
492,696


See accompanying notes to interim consolidated financial statements.

3



W. R. BERKLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(In thousands)
 
For the Nine Months
Ended September 30,
 
 
2018

2017
COMMON STOCK:
 
 
 
Beginning and end of period
$
47,024

 
$
47,024

ADDITIONAL PAID-IN CAPITAL:
 
 
 
Beginning of period
$
1,048,283

 
$
1,037,446

Restricted stock units issued
(16,690
)
 
(27,047
)
Restricted stock units expensed
26,481

 
30,176

End of period
$
1,058,074

 
$
1,040,575

RETAINED EARNINGS:
 
 
 
Beginning of period
$
6,956,882

 
$
6,595,987

Cumulative effect adjustment resulting from changes in accounting principles
215,939

 

Net income to common stockholders
508,392

 
394,505

Dividends
(175,507
)
 
(110,430
)
End of period
$
7,505,706

 
$
6,880,062

ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME:
 
 
 
Unrealized investment (losses) gains:
 
 
 
Beginning of period
$
375,421

 
$
427,154

Cumulative effect adjustment resulting from changes in accounting principles
(214,539
)
 

Change in unrealized (losses) gains on securities not other-than-temporarily impaired
(252,974
)
 
25,712

Change in unrealized gains on other-than-temporarily impaired securities
4

 
905

End of period
(92,088
)
 
453,771

Currency translation adjustments:
 
 
 
Beginning of period
(306,880
)
 
(371,586
)
Net change in period
(75,970
)
 
71,574

End of period
(382,850
)
 
(300,012
)
Total accumulated other comprehensive (loss) income
$
(474,938
)
 
$
153,759

TREASURY STOCK:
 
 
 
Beginning of period
$
(2,709,386
)
 
$
(2,688,817
)
Stock exercised/vested
17,478

 
25,584

Stock repurchased
(6,799
)
 
(28,378
)
Stock issued
689

 
727

End of period
$
(2,698,018
)
 
$
(2,690,884
)
NONCONTROLLING INTERESTS:
 
 
 
Beginning of period
$
39,819

 
$
33,926

(Distributions) contributions
(2,950
)
 
3,646

Net income
4,402

 
2,560

Other comprehensive income (loss), net of tax
(86
)
 
(19
)
End of period
$
41,185

 
$
40,113

See accompanying notes to interim consolidated financial statements.

4



W. R. BERKLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
 
For the Nine Months
Ended September 30,
 
 
2018
 
2017
CASH FROM OPERATING ACTIVITIES:
 
 
 
Net income to common stockholders
$
508,392

 
$
394,505

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Net realized and unrealized gains on investments
(140,429
)
 
(276,760
)
Depreciation and amortization
76,541

 
78,137

Noncontrolling interests
4,402

 
2,560

Investment funds
(94,075
)
 
(51,907
)
Stock incentive plans
28,528

 
31,883

Change in:
 
 
 
Arbitrage trading account
(14,795
)
 
(2,835
)
Premiums and fees receivable
(107,347
)
 
(112,420
)
Reinsurance accounts
(114,298
)
 
(42,319
)
Deferred policy acquisition costs
(7,466
)
 
4,483

Income taxes
(99,945
)
 
(15,451
)
Reserves for losses and loss expenses
230,112

 
422,657

Unearned premiums
176,736

 
121,583

Other
(103,832
)
 
(32,258
)
Net cash from operating activities
342,524

 
521,858

CASH USED IN INVESTING ACTIVITIES:
 
 
 
Proceeds from sale of fixed maturity securities
2,841,642

 
3,081,619

Proceeds from sale of equity securities
449,388

 
137,062

(Contributions to) distributions from investment funds
(3,505
)
 
265,371

Proceeds from maturities and prepayments of fixed maturity securities
1,957,724

 
2,860,678

Purchase of fixed maturity securities
(5,187,501
)
 
(6,530,466
)
Purchase of equity securities
(87,059
)
 
(17,049
)
Real estate purchased
(454,410
)
 
(159,006
)
Change in loans receivable
(14,345
)
 
32,574

Net additions to property, furniture and equipment
(35,582
)
 
(74,268
)
Change in balances due to security brokers
5,601

 
39,978

Cash received in connection with business disposition
8,664

 

Payment for business purchased net of cash acquired
(6,637
)
 
(70,570
)
Other
(443
)
 

Net cash used in investing activities
(526,463
)
 
(434,077
)
CASH FROM (USED IN) FINANCING ACTIVITIES:
 
 
 
Repayment of senior notes and other debt
(23
)
 
(1,788
)
Net proceeds from issuance of debt
198,905

 

Cash dividends to common stockholders
(96,131
)
 
(93,371
)
Purchase of common treasury shares
(6,799
)
 
(28,378
)
Other, net
(4,238
)
 
(3,835
)
Net cash from (used in) financing activities
91,714

 
(127,372
)
Net impact on cash due to change in foreign exchange rates
(38,880
)
 
18,303

Net change in cash and cash equivalents
(131,105
)
 
(21,288
)
Cash and cash equivalents at beginning of year
950,471

 
795,285

Cash and cash equivalents at end of period
$
819,366

 
$
773,997

See accompanying notes to interim consolidated financial statements.

5




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

(1) General
The unaudited consolidated financial statements, which include the accounts of W. R. Berkley Corporation and its subsidiaries (the “Company”) have been prepared on the basis of U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all the information and notes required by GAAP for annual financial statements. The unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring items, which are necessary to present fairly the Company’s financial position and results of operations on a basis consistent with the prior audited consolidated financial statements. Operating results for interim periods are not necessarily indicative of the results that may be expected for the year. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the revenues and expenses reflected during the reporting period. For further information related to a description of areas of judgment and estimates and other information necessary to understand the Company’s financial position and results of operations, refer to the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. Reclassifications have been made in the 2017 financial statements as originally reported to conform to the presentation of the 2018 financial statements.
The income tax provision has been computed based on the Company’s estimated annual effective tax rate. The effective tax rate for the quarter differs from the federal income tax rate of 21% principally because of tax-exempt investment income, as well as tax on income from foreign jurisdictions with different tax rates.

(2) Per Share Data
The Company presents both basic and diluted net income per share (“EPS”) amounts. Basic EPS is calculated by dividing net income by the weighted average number of common shares outstanding during the period (including 4,847,303 and 4,087,731 common shares held in a grantor trust as of September 30, 2018 and 2017, respectively). The common shares held in the grantor trust are for delivery upon settlement of vested but mandatorily deferred restricted stock units ("RSUs"). Shares held by the grantor trust do not affect diluted shares outstanding since the shares deliverable under vested RSUs were already included in diluted shares outstanding. Diluted EPS is based upon the weighted average number of basic and common equivalent shares outstanding during the period and is calculated using the treasury stock method for stock incentive plans. Common equivalent shares are excluded from the computation in periods in which they have an anti-dilutive effect.
The weighted average number of common shares used in the computation of basic and diluted earnings per share was as follows:
 
For the Three Months
Ended September 30,
 
For the Nine Months
Ended September 30,
 
 
(In thousands)
2018
 
2017
 
2018
 
2017
Basic
126,827

 
125,818

 
126,575

 
124,363

Diluted
128,561

 
128,944

 
128,404

 
129,289


(3) 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.


6



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 will be effective for reporting periods beginning after December 15, 2018, and is 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 have become 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 will require 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 is currently evaluating the impact that the adoption of this guidance will have on its results of operations, financial position and liquidity.

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.



7



(4) Consolidated Statement of Comprehensive Income

The following table presents the components of the changes in accumulated other comprehensive (loss) income ("AOCI"):
(In thousands)
Unrealized Investment
Gains (Losses)
 
Currency Translation Adjustments
 
Accumulated Other Comprehensive
(Loss) Income
As of and for the nine months ended September 30, 2018
 
 
 
 
Changes in AOCI
 
 
 
 
Beginning of period
$
375,421

 
$
(306,880
)
 
$
68,541

Cumulative effect adjustment resulting from changes in accounting principles
(214,539
)
 

 
(214,539
)
Restated beginning of period
160,882

 
(306,880
)
 
(145,998
)
Other comprehensive loss before reclassifications
(242,944
)
 
(75,970
)
 
(318,914
)
Amounts reclassified from AOCI
(10,112
)
 

 
(10,112
)
Other comprehensive loss
(253,056
)
 
(75,970
)
 
(329,026
)
Unrealized investment loss related to noncontrolling interest
86

 

 
86

End of period
$
(92,088
)
 
$
(382,850
)
 
$
(474,938
)
Amounts reclassified from AOCI
 
 
 
 
 
Pre-tax
$
(12,800
)
(1)
$

 
$
(12,800
)
Tax effect
2,688

(2)

 
2,688

After-tax amounts reclassified
$
(10,112
)
 
$

 
$
(10,112
)
Other comprehensive loss
 
 
 
 
 
Pre-tax
$
(298,164
)
 
$
(75,970
)
 
$
(374,134
)
Tax effect
45,108

 

 
45,108

Other comprehensive loss
$
(253,056
)
 
$
(75,970
)
 
$
(329,026
)
As of and for the three months ended September 30, 2018
 
 
 
 
Changes in AOCI
 
 
 
 
Beginning of period
$
2,694

 
$
(398,536
)
 
$
(395,842
)
Other comprehensive loss before reclassifications
(95,312
)
 
15,686

 
(79,626
)
Amounts reclassified from AOCI
470

 

 
470

Other comprehensive loss
(94,842
)
 
15,686

 
(79,156
)
Unrealized investment loss related to noncontrolling interest
60

 

 
60

End of period
$
(92,088
)
 
$
(382,850
)
 
$
(474,938
)
Amounts reclassified from AOCI
 
 
 
 
 
Pre-tax
$
595

(1)
$

 
$
595

Tax effect
(125
)
(2)

 
(125
)
After-tax amounts reclassified
$
470

 
$

 
$
470

Other comprehensive loss
 
 
 
 
 
Pre-tax
$
(96,828
)
 
$
15,686

 
$
(81,142
)
Tax effect
1,986

 

 
1,986

Other comprehensive loss
$
(94,842
)
 
$
15,686

 
$
(79,156
)
_________________________
(1) Net realized and unrealized gains on investments in the consolidated statements of income.
(2) Income tax expense in the consolidated statements of income.

8



(In thousands)
Unrealized Investment Gains (Losses)
 
           Currency Translation Adjustments
 
Accumulated Other Comprehensive (Loss) Income
As of and for the nine months ended September 30, 2017
 
 
 
 
Changes in AOCI
 
 
 
 
Beginning of period
$
427,154

 
$
(371,586
)
 
$
55,568

Other comprehensive income before reclassifications
109,277

 
71,574

 
180,851

Amounts reclassified from AOCI
(82,679
)
 

 
(82,679
)
Other comprehensive income
26,598

 
71,574

 
98,172

Unrealized investment gain related to noncontrolling interest
19

 

 
19

End of period
$
453,771

 
$
(300,012
)
 
$
153,759

Amounts reclassified from AOCI
 
 
 
 

Pre-tax
$
(127,198
)
(1)
$

 
$
(127,198
)
Tax effect
44,519

(2)

 
44,519

After-tax amounts reclassified
$
(82,679
)
 
$

 
$
(82,679
)
Other comprehensive income
 
 
 
 

Pre-tax
$
50,148

 
$
71,574

 
$
121,722

Tax effect
(23,550
)
 

 
(23,550
)
Other comprehensive income
$
26,598

 
$
71,574

 
$
98,172

As of and for the three months ended September 30, 2017
 
 
 
 
Changes in AOCI
 
 
 


Beginning of period
$
461,906

 
$
(328,604
)
 
$
133,302

Other comprehensive income before reclassifications
19,968

 
28,592

 
48,560

Amounts reclassified from AOCI
(28,136
)
 

 
(28,136
)
Other comprehensive income
(8,168
)
 
28,592

 
20,424

Unrealized investment gain related to noncontrolling interest
33

 

 
33

End of period
$
453,771

 
$
(300,012
)
 
$
153,759

Amounts reclassified from AOCI
 
 
 
 

Pre-tax
$
(43,286
)
(1)
$

 
$
(43,286
)
Tax effect
15,150

(2)

 
15,150

After-tax amounts reclassified
$
(28,136
)
 
$

 
$
(28,136
)
Other comprehensive income
 
 
 
 

Pre-tax
$
(8,563
)
 
$
28,592

 
$
20,029

Tax effect
395

 

 
395

Other comprehensive income
$
(8,168
)
 
$
28,592

 
$
20,424

_________________________
(1) Net realized and unrealized gains on investments in the consolidated statements of income.
(2) Income tax expense in the consolidated statements of income.



9



(5) Statements of Cash Flow
Interest payments were $137,789,000 and $134,291,000 and income taxes paid were $173,000,000 and $182,487,000 in the nine months ended September 30, 2018 and 2017, respectively.

(6) Investments in Fixed Maturity Securities
At September 30, 2018 and December 31, 2017, investments in fixed maturity securities were as follows:
 
(In thousands)
Amortized
Cost
 
Gross Unrealized
 
Fair
Value
 
Carrying
Value
Gains
 
Losses
 
September 30, 2018
 
 
 
 
 
 
 
 
 
Held to maturity:
 
 
 
 
 
 
 
 
 
State and municipal
$
67,513

 
$
11,081

 
$

 
$
78,594

 
$
67,513

Residential mortgage-backed
11,276

 
1,171

 

 
12,447

 
11,276

Total held to maturity
78,789

 
12,252

 

 
91,041

 
78,789

Available for sale:
 
 
 
 
 
 
 
 
 
U.S. government and government agency
490,679

 
4,258

 
(7,895
)
 
487,042

 
487,042

State and municipal:
 
 
 
 
 
 
 
 
 
Special revenue
2,486,490

 
23,982

 
(32,046
)
 
2,478,426

 
2,478,426

State general obligation
380,200

 
8,917

 
(2,742
)
 
386,375

 
386,375

Pre-refunded
427,429

 
15,213

 
(55
)
 
442,587

 
442,587

Corporate backed
294,243

 
4,833

 
(2,596
)
 
296,480

 
296,480

Local general obligation
403,879

 
13,988

 
(3,841
)
 
414,026

 
414,026

Total state and municipal
3,992,241

 
66,933

 
(41,280
)
 
4,017,894

 
4,017,894

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
Residential (1)
1,237,787

 
4,400

 
(33,896
)
 
1,208,291

 
1,208,291

Commercial
345,826

 
670

 
(6,565
)
 
339,931

 
339,931

Total mortgage-backed securities
1,583,613

 
5,070

 
(40,461
)
 
1,548,222

 
1,548,222

Asset-backed
2,556,499

 
10,753

 
(17,378
)
 
2,549,874

 
2,549,874

Corporate:
 
 
 
 
 
 
 
 
 
Industrial
2,303,206

 
16,555

 
(41,783
)
 
2,277,978

 
2,277,978

Financial
1,436,530

 
16,786

 
(21,688
)
 
1,431,628

 
1,431,628

Utilities
303,260

 
2,222

 
(6,010
)
 
299,472

 
299,472

Other
56,474

 
6

 
(389
)
 
56,091

 
56,091

Total corporate
4,099,470

 
35,569

 
(69,870
)
 
4,065,169

 
4,065,169

Foreign
838,834

 
10,427

 
(23,849
)
 
825,412

 
825,412

Total available for sale
13,561,336

 
133,010

 
(200,733
)
 
13,493,613

 
13,493,613

Total investments in fixed maturity securities
$
13,640,125

 
$
145,262

 
$
(200,733
)
 
$
13,584,654

 
$
13,572,402


10



(In thousands)
Amortized
Cost
 
Gross Unrealized
 
Fair
Value
 
Carrying
Value
Gains
 
Losses
December 31, 2017
 
 
 
 
 
 
 
 
 
Held to maturity:
 
 
 
 
 
 
 
 
 
State and municipal
$
65,882

 
$
14,499

 
$

 
$
80,381

 
$
65,882

Residential mortgage-backed
13,450

 
1,227

 

 
14,677

 
13,450

Total held to maturity
79,332

 
15,726

 

 
95,058

 
79,332

Available for sale:
 
 
 
 
 
 
 
 
 
U.S. government and government agency
372,748

 
8,824

 
(3,832
)
 
377,740

 
377,740

State and municipal:
 
 
 
 
 
 
 
 
 
Special revenue
2,663,245

 
53,512

 
(10,027
)
 
2,706,730

 
2,706,730

State general obligation
439,358

 
16,087

 
(711
)
 
454,734

 
454,734

Pre-refunded
436,241

 
22,701

 
(9
)
 
458,933

 
458,933

Corporate backed
375,268

 
10,059

 
(860
)
 
384,467

 
384,467

Local general obligation
417,955

 
23,242

 
(967
)
 
440,230

 
440,230

Total state and municipal
4,332,067

 
125,601

 
(12,574
)
 
4,445,094

 
4,445,094

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
Residential (1)
1,043,629

 
9,304

 
(13,547
)
 
1,039,386

 
1,039,386

Commercial
261,652

 
1,521

 
(2,628
)
 
260,545

 
260,545

Total mortgage-backed securities
1,305,281

 
10,825

 
(16,175
)
 
1,299,931

 
1,299,931

Asset-backed
2,111,132

 
11,024

 
(10,612
)
 
2,111,544

 
2,111,544

Corporate:
 
 
 
 
 
 
 
 
 
Industrial
2,574,400

 
52,210

 
(7,718
)
 
2,618,892

 
2,618,892

Financial
1,402,161

 
37,744

 
(5,138
)
 
1,434,767

 
1,434,767

Utilities
284,886

 
11,316

 
(1,248
)
 
294,954

 
294,954

Other
40,560

 
5

 
(66
)
 
40,499

 
40,499

Total corporate
4,302,007

 
101,275

 
(14,170
)
 
4,389,112

 
4,389,112

Foreign
819,345

 
32,018

 
(2,866
)
 
848,497

 
848,497

Total available for sale
13,242,580

 
289,567

 
(60,229
)
 
13,471,918

 
13,471,918

Total investments in fixed maturity securities
$
13,321,912


$
305,293

 
$
(60,229
)
 
$
13,566,976

 
$
13,551,250

____________
(1) Gross unrealized gains for residential mortgage-backed securities include $81,006 and $76,467 as of September 30, 2018 and December 31, 2017, respectively, related to securities with the non-credit portion of other-than-temporary impairments (“OTTI”) recognized in accumulated other comprehensive income.

The amortized cost and fair value of fixed maturity securities at September 30, 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)
Amortized
Cost
 
Fair
Value
Due in one year or less
$
948,532

 
$
948,471

Due after one year through five years
4,526,907

 
4,523,008

Due after five years through ten years
2,958,685

 
2,959,406

Due after ten years
3,611,112

 
3,593,100

Mortgage-backed securities
1,594,889

 
1,560,669

Total
$
13,640,125

 
$
13,584,654

At September 30, 2018 and December 31, 2017, there were no investments that exceeded 10% of common stockholders' equity, other than investments in United States government and government agency securities.



11



(7) Investments in Equity Securities
At September 30, 2018 and December 31, 2017, investments in equity securities were as follows:
 
(In thousands)
Cost
 
Gross Unrealized (1)
 
Fair
Value
 
Carrying
Value
Gains
 
Losses
 
September 30, 2018
 
 
 
 
 
 
 
 
 
Common stocks
$
117,880

 
$
56,869

 
$
(7,811
)
 
$
166,938

 
$
166,938

Preferred stocks
117,101

 
44,262

 
(3,047
)
 
158,316

 
158,316

Total
$
234,981

 
$
101,131

 
$
(10,858
)
 
$
325,254

 
$
325,254

December 31, 2017
 
 
 
 
 
 
 
 
 
Common stocks
$
81,855

 
$
272,309

 
$
(1,960
)
 
$
352,204

 
$
352,204

Preferred stocks
124,150

 
102,890

 
(2,597
)
 
224,443

 
224,443

Total
$
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. Refer to Note 3 for additional information.


(8) Arbitrage Trading Account
At September 30, 2018 and December 31, 2017, the fair and carrying values of the arbitrage trading account were $678 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 September 30, 2018, the fair value of long option contracts outstanding was $89 thousand (notional amount of $16.4 million) and the fair value of short option contracts outstanding was $278 thousand (notional amount of $28.8 million). Other than with respect to the use of these trading account securities, the Company does not make use of derivatives.


(9) Net Investment Income
Net investment income consists of the following: 
 
For the Three Months
Ended September 30,
 
For the Nine Months
Ended September 30,
 
 
(In thousands)
2018
 
2017
 
2018
 
2017
Investment income earned on:
 
 
 
 
 
 
 
Fixed maturity securities, including cash and cash equivalents and loans receivable
$
131,836

 
$
118,834

 
$
384,748

 
$
347,976

Investment funds
41,005

 
15,200

 
94,075

 
50,744

Arbitrage trading account
7,632

 
4,418

 
21,156

 
16,235

Real estate
5,597

 
5,042

 
15,339

 
14,894

Equity securities
1,004

 
604

 
2,208

 
1,845

Gross investment income
187,074

 
144,098

 
517,526

 
431,694

Investment expense
(950
)
 
(1,619
)
 
(3,107
)
 
(5,093
)
Net investment income
$
186,124

 
$
142,479

 
$
514,419

 
$
426,601




12



(10) Investment Funds
The Company evaluates whether it is an investor in a variable interest entity ("VIE"). Such entities do not have sufficient equity at risk to finance their activities without additional subordinated financial support, or the equity investors, as a group, do not have the characteristics of a controlling financial interest (primary beneficiary).  The Company determines whether it is the primary beneficiary of an entity subject to consolidation based on a qualitative assessment of the VIE's capital structure, contractual terms, nature of the VIE's operations and purpose, and the Company's relative exposure to the related risks of the VIE on the date it becomes initially involved in the VIE and on an ongoing basis. The Company is not the primary beneficiary in any of its investment funds, and accordingly, carries its interests in investment funds under the equity method of accounting.
    
The Company’s maximum exposure to loss with respect to these investments is limited to the carrying amount reported on the Company’s consolidated balance sheet and its unfunded commitments, which were $324 million as of September 30, 2018.
Investment funds consisted of the following:
 
Carrying Value as of
 
Income (Loss) from
Investment Funds
 
September 30,
 
December 31,
 
For the Nine Months
Ended September 30,
(In thousands)
2018
 
2017
 
2018
 
2017
Real estate
$
632,618

 
$
606,995

 
$
50,044

 
$
30,661

Energy
79,559

 
82,882

 
408

 
(12,763
)
Other funds
539,571

 
465,800

 
43,623

 
32,846

Total
$
1,251,748

 
$
1,155,677

 
$
94,075


$
50,744


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

(11) Real Estate
Investment in real estate represents directly owned property held for investment, as follows:
 
Carrying Value
 
September 30,
 
December 31,
(In thousands)
2018
 
2017
Properties in operation
$
757,573

 
$
451,691

Properties under development
1,159,677

 
1,017,910

Total
$
1,917,250

 
$
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 and office buildings in West Palm Beach and Palm Beach, Florida. Properties in operation are net of accumulated depreciation and amortization of $40,623,000 and $25,646,000 as of September 30, 2018 and December 31, 2017, respectively. Related depreciation expense was $15,175,000 and $5,382,000 for the nine months ended September 30, 2018 and 2017, respectively. Future minimum rental income expected on operating leases relating to properties in operation is $12,632,005 in 2018, $52,014,542 in 2019, $50,145,388 in 2020, $49,267,711 in 2021, $51,048,893 in 2022, $42,435,018 in 2023 and $501,089,126 thereafter.

Properties under development include an office building in London and a mixed-use project in Washington, D.C.


13



(12) Loans Receivable
Loans receivable are as follows:
(In thousands)
September 30, 2018
 
December 31, 2017
Amortized cost (net of valuation allowance):
 
 
 
Real estate loans
$
62,775

 
$
66,057

Commercial loans
33,815

 
13,627

Total
$
96,590

 
$
79,684

 
 
 
 
Fair value:
 
 
 
Real estate loans
$
63,561

 
$
66,917

Commercial loans
35,317

 
15,130

Total
$
98,878

 
$
82,047

 
 
 
 
Valuation allowance:
 
 
 
Specific
$
1,200

 
$
1,200

General
2,183

 
2,183

Total
$
3,383

 
$
3,383

 
 
 
 
 
For the Three Months Ended
September 30,
 
 
2018
 
2017
  Change in valuation allowance
$

 
$

 
 
 
 
 
For the Nine Months
Ended September 30,
 
 
2018
 
2017
  Decrease in valuation allowance
$

 
$
(14
)
Loans receivable in non-accrual status were $1.5 million and $4.3 million as of September 30, 2018 and December 31, 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 primarily earn interest on a fixed basis and have varying maturities generally 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 September 30, 2018, and accordingly, the Company determined that a specific valuation allowance was not required.


14



(13) Net Realized and Unrealized Gains (Losses) on Investments
 Net realized and unrealized gains (losses) on investments are as follows:
 
For the Three Months
Ended September 30,
 
For the Nine Months
Ended September 30,
(In thousands)
2018
 
2017
 
2018
 
2017
Net realized and unrealized gains (losses) on investments in earnings
 
 
 
 
 

 
 

Fixed maturity securities:
 
 
 
 
 

 
 

Gains
$
2,152

 
$
8,763

 
$
23,412

 
$
21,795

Losses
(2,747
)
 
(197
)
 
(10,612
)
 
(4,162
)
Equity securities (1):
 
 
 
 
 
 
 
Net realized gains on investment sales
149,562

 
34,720

 
391,305

 
109,566

Change in unrealized gains
(131,513
)
 

 
(280,370
)
 

Investment funds (2)
(30
)
 
124,228

 
(264
)
 
125,383

Real estate
4,518

 
1,956

 
12,114

 
4,892

Loans receivable
449

 

 
2,508

 

Other
(57
)
 
14,489

 
2,336

 
19,286

Net realized and unrealized gains on investments in earnings before OTTI
22,334

 
183,959

 
140,429

 
276,760

Other-than-temporary impairments

 

 

 

Net realized and unrealized gains on investments in earnings
22,334

 
183,959

 
140,429

 
276,760

Income tax expense
(4,690
)
 
(64,386
)
 
(29,490
)
 
(96,866
)
After-tax net realized and unrealized gains on investments in earnings
$
17,644

 
$
119,573

 
$
110,939

 
$
179,894

Change in unrealized investment (losses) gains of available for sale securities:
 
 
 
 
 

 
 

Fixed maturity securities
$
(100,490
)
 
$
(10,627
)
 
$
(297,065
)
 
$
84,214

Previously impaired fixed maturity securities
(7
)
 
61

 
4

 
905

Equity securities available for sale (3)

 
(2,126
)
 

 
(44,812
)
Investment funds
3,669

 
4,129

 
(1,103
)
 
9,841

Total change in unrealized investment (losses) gains
(96,828
)
 
(8,563
)
 
(298,164
)
 
50,148

Income tax benefit (expense)
2,086

 
423

 
45,280

 
(23,550
)
Noncontrolling interests
60

 
5

 
86

 
19

After-tax change in unrealized investment (losses) gains of available for sale securities
$
(94,682
)
 
$
(8,135
)
 
$
(252,798
)
 
$
26,617

______________________
(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 three and nine months ended September 30, 2017.
(3) 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 3 for further information.


15



(14) Fixed Maturity Securities in an Unrealized Loss Position
The following tables summarize all fixed maturity securities in an unrealized loss position at September 30, 2018 and December 31, 2017 by the length of time those securities have been continuously in an unrealized loss position:
  
Less Than 12 Months
 
12 Months or Greater
 
Total
(In thousands)
Fair
Value
 
Gross
Unrealized Losses
 
Fair
Value
 
Gross
Unrealized Losses
 
Fair
Value
 
Gross
Unrealized Losses
September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
U.S. government and government agency
$
241,467

 
$
2,712

 
$
118,054

 
$
5,183

 
$
359,521

 
$
7,895

State and municipal
1,553,827

 
25,957

 
423,785

 
15,323

 
1,977,612

 
41,280

Mortgage-backed securities
834,782

 
15,777

 
541,015

 
24,684

 
1,375,797

 
40,461

Asset-backed securities
1,740,632

 
14,562

 
300,633

 
2,816

 
2,041,265

 
17,378

Corporate
2,045,819

 
50,487

 
369,248

 
19,383

 
2,415,067

 
69,870

Foreign government
299,444

 
21,830

 
111,195

 
2,019

 
410,639

 
23,849

Fixed maturity securities
$
6,715,971

 
$
131,325

 
$
1,863,930

 
$
69,408

 
$
8,579,901

 
$
200,733

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
U.S. government and government agency
$
92,167

 
$
1,491

 
$
72,055

 
$
2,341

 
$
164,222

 
$
3,832

State and municipal
735,972

 
5,944

 
345,755

 
6,630

 
1,081,727

 
12,574

Mortgage-backed securities
480,435

 
5,110

 
373,956

 
11,065

 
854,391

 
16,175

Asset-backed securities
1,127,309

 
8,298

 
167,412

 
2,314

 
1,294,721

 
10,612

Corporate
1,103,747

 
8,224

 
170,858

 
5,946

 
1,274,605

 
14,170

Foreign government
244,139

 
2,615

 
25,824

 
251

 
269,963

 
2,866

Fixed maturity securities
$
3,783,769

 
$
31,682

 
$
1,155,860

 
$
28,547

 
$
4,939,629

 
$
60,229

A summary of the Company’s non-investment grade fixed maturity securities that were in an unrealized loss position at September 30, 2018 is presented in the table below:
($ in thousands)
Number of
Securities
 
Aggregate
Fair Value
 
Gross
Unrealized Loss
Foreign government
20

 
$
172,462

 
$
20,688

Corporate
14

 
80,945

 
6,547

Asset-backed securities
7

 
10,930

 
156

Mortgage-backed securities
4

 
3,270

 
30

Total
45

 
$
267,607

 
$
27,421

For OTTI of fixed maturity securities that management does not intend to sell or to be required to sell, the portion of the decline in value that is considered to be due to credit factors is recognized in earnings, and the portion of the decline in value that is considered to be due to non-credit factors is recognized in other comprehensive income.
     The Company has evaluated its fixed maturity securities in an unrealized loss position and believes the unrealized losses are due primarily to temporary market and sector-related factors rather than to issuer-specific factors. None of these securities are delinquent or in default under financial covenants. Based on its assessment of these issuers, the Company expects them to continue to meet their contractual payment obligations as they become due and does not consider any of these securities to be OTTI.

(15) Fair Value Measurements
The Company’s fixed maturity securities, equity securities and arbitrage trading account securities are carried at fair value. Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” The Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, as follows:
Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

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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. Unobse