WRB 10-Q Quarterly Report Sept. 30, 2020 | Alphaminr
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WRB 10-Q Quarter ended Sept. 30, 2020

Balance Sheet
Cash Flow
Income Statement
Debt
BERKLEY W R CORP
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q
(Mark one)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2020
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 CORP ORATION
(Exact name of registrant as specified in its charter)
Delaware 22-1867895
(State or other jurisdiction of
incorporation or organization) 		(I.R.S. Employer 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 .
Securities registered pursuant to Section 12(b) of the Act:
Title Trading Symbol Name
Common Stock, par value $.20 per share WRB New York Stock Exchange
5.90% Subordinated Debentures due 2056 WRB-PC New York Stock Exchange
5.75% Subordinated Debentures due 2056 WRB-PD New York Stock Exchange
5.70% Subordinated Debentures due 2058 WRB-PE New York Stock Exchange
5.10% Subordinated Debentures due 2059 WRB-PF New York Stock Exchange
4.25% Subordinated Debentures due 2060 WRB-PG New York Stock Exchange
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 ☐
1

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 ☒ 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
☒
Accelerated filer ☐
Non-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 Exchange Act). Yes ☐ No ☒
Number of shares of common stock, $.20 par value, outstanding as of October 28, 2020: 178,220,903
2

TABLE OF CONTENTS
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT
3

Part I — FINANCIAL INFORMATION
Item 1 . Financial Statements
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 30,
2020 		December 31,
2019
(Unaudited) (Audited)
Assets
Investments:
Fixed maturity securities (amortized cost of $ 13,536,264 and $ 13,976,647 ; allowance for expected credit losses of $ 2,567 at September 30, 2020 )
$ 13,893,046 $ 14,180,961
Real estate 2,106,474 2,105,950
Investment funds 1,163,707 1,213,535
Arbitrage trading account 595,727 400,809
Equity securities 435,303 480,620
Loans receivable (net of allowance for expected credit losses of $ 5,843 at September 30, 2020 )
84,771 91,799
Total investments 18,279,028 18,473,674
Cash and cash equivalents 2,571,447 1,023,710
Premiums and fees receivable (net of allowance for expected credit losses of $ 23,033 at September 30, 2020 )
2,162,192 1,997,186
Due from reinsurers (net of allowance for expected credit losses of $ 7,741 at September 30, 2020 )
2,323,833 2,133,683
Deferred policy acquisition costs 560,739 517,364
Prepaid reinsurance premiums 626,229 567,595
Trading account receivables from brokers and clearing organizations 252,223 423,543
Property, furniture and equipment 410,228 422,091
Goodwill 169,652 169,652
Accrued investment income 128,370 138,789
Federal and foreign income taxes 30,069 —
Other assets 698,360 762,743
Total assets $ 28,212,370 $ 26,630,030
Liabilities and Equity
Liabilities:
Reserves for losses and loss expenses $ 13,459,359 $ 12,583,249
Unearned premiums 4,054,471 3,656,507
Due to reinsurers 406,844 360,314
Trading account securities sold but not yet purchased 19,254 36,143
Federal and foreign income taxes — 4,308
Other liabilities 1,159,957 1,244,888
Senior notes and other debt 1,629,077 1,427,575
Subordinated debentures 1,443,736 1,198,704
Total liabilities 22,172,698 20,511,688
Equity:
Preferred stock, par value $ 0.10 per share:
Authorized 5,000,000 shares; issued and outstanding - none
— —
Common stock, par value $ 0.20 per share:
Authorized 750,000,000 shares, issued and outstanding, net of treasury shares, 178,217,537 and 183,411,907 shares, respectively
70,535 70,535
Additional paid-in capital 1,064,719 1,056,042
Retained earnings 8,057,556 7,932,372
Accumulated other comprehensive loss ( 170,886 ) ( 257,299 )
Treasury stock, at cost, 174,458,963 and 169,264,857 shares, respectively
( 3,026,812 ) ( 2,726,711 )
Total stockholders’ equity 5,995,112 6,074,939
Noncontrolling interests 44,560 43,403
Total equity 6,039,672 6,118,342
Total liabilities and equity $ 28,212,370 $ 26,630,030
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,
2020 2019 2020 2019
REVENUES:
Net premiums written $ 1,879,316 $ 1,749,906 $ 5,464,980 $ 5,202,971
Change in net unearned premiums ( 130,395 ) ( 73,096 ) ( 347,727 ) ( 286,464 )
Net premiums earned 1,748,921 1,676,810 5,117,253 4,916,507
Net investment income 142,650 161,692 402,844 508,279
Net investment gains (losses):
Net realized and unrealized (losses) gains on investments ( 7,772 ) 1,465 ( 89,404 ) 143,691
Change in allowance for expected credit losses on investments 46,750 — 29,093 —
Net investment gains (losses) 38,978 1,465 ( 60,311 ) 143,691
Revenues from non-insurance businesses 87,495 101,880 256,966 283,005
Insurance service fees 21,635 23,681 67,256 71,440
Other income 140 188 2,446 3,200
Total revenues 2,039,819 1,965,716 5,786,454 5,926,122
OPERATING COSTS AND EXPENSES:
Losses and loss expenses 1,114,632 1,041,471 3,357,011 3,058,950
Other operating costs and expenses 593,969 581,045 1,753,142 1,760,961
Expenses from non-insurance businesses 85,036 101,743 256,032 280,141
Interest expense 39,768 38,475 114,874 119,913
Total operating costs and expenses 1,833,405 1,762,734 5,481,059 5,219,965
Income before income taxes 206,414 202,982 305,395 706,157
Income tax expense ( 54,048 ) ( 37,831 ) ( 84,900 ) ( 141,965 )
Net income before noncontrolling interests 152,366 165,151 220,495 564,192
Noncontrolling interests ( 688 ) 57 ( 1,975 ) ( 1,554 )
Net income to common stockholders $ 151,678 $ 165,208 $ 218,520 $ 562,638
NET INCOME PER SHARE:
Basic $ 0.82 $ 0.87 $ 1.17 $ 2.95
Diluted $ 0.81 $ 0.85 $ 1.15 $ 2.91

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,
2020 2019 2020 2019
Net income before noncontrolling interests $ 152,366 $ 165,151 $ 220,495 $ 564,192
Other comprehensive income (loss):
Change in unrealized currency translation adjustments 40,194 ( 36,682 ) ( 36,553 ) ( 31,414 )
Change in unrealized investment gains (losses), net of taxes 38,273 ( 24,745 ) 98,016 219,679
Other comprehensive income (loss) 78,467 ( 61,427 ) 61,463 188,265
Comprehensive income 230,833 103,724 281,958 752,457
Noncontrolling interests ( 685 ) ( 66 ) ( 1,973 ) ( 1,659 )
Comprehensive income to common stockholders $ 230,148 $ 103,658 $ 279,985 $ 750,798

See accompanying notes to interim consolidated financial statements.
3

W. R. BERKLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(In thousands, except per share data)
For the Three Months
Ended September 30, 		For the Nine Months
Ended September 30,
2020 2019 2020 2019
COMMON STOCK:
Beginning and end of period $ 70,535 $ 70,535 $ 70,535 $ 70,535
ADDITIONAL PAID-IN CAPITAL:
Beginning of period $ 1,076,043 $ 1,058,416 $ 1,056,042 $ 1,039,633
Restricted stock units issued ( 23,387 ) ( 28,155 ) ( 26,773 ) ( 30,659 )
Restricted stock units expensed 12,063 15,187 35,450 36,474
End of period $ 1,064,719 $ 1,045,448 $ 1,064,719 $ 1,045,448
RETAINED EARNINGS:
Beginning of period $ 7,927,280 $ 7,826,015 $ 7,932,372 $ 7,558,619
Cumulative effect adjustment resulting from changes in accounting principles — — ( 30,514 ) —
Net income to common stockholders 151,678 165,208 218,520 562,638
Dividends ( $ 0.12 , $ 0.11 , $ 0.35 and $ 0.82 per share, respectively )
( 21,402 ) ( 20,204 ) ( 62,822 ) ( 150,238 )
End of period $ 8,057,556 $ 7,971,019 $ 8,057,556 $ 7,971,019
ACCUMULATED OTHER COMPREHENSIVE LOSS:
Unrealized investment gains (losses):
Beginning of period $ 209,210 $ 152,915 $ 124,514 $ ( 91,491 )
Cumulative effect adjustment resulting from changes in accounting principles — — 24,952 —
Change in unrealized gains (losses) on securities without an allowance for expected credit losses 35,111 ( 25,005 ) 77,537 219,388
Change in unrealized gains on securities with an allowance for expected credit losses 3,159 383 20,477 396
End of period 247,480 128,293 247,480 128,293
Currency translation adjustments:
Beginning of period ( 458,560 ) ( 413,711 ) ( 381,813 ) ( 418,979 )
Net change in period 40,194 ( 36,682 ) ( 36,553 ) ( 31,414 )
End of period ( 418,366 ) ( 450,393 ) ( 418,366 ) ( 450,393 )
Total accumulated other comprehensive loss $ ( 170,886 ) $ ( 322,100 ) $ ( 170,886 ) $ ( 322,100 )
TREASURY STOCK:
Beginning of period $ ( 3,023,392 ) $ ( 2,717,410 ) $ ( 2,726,711 ) $ ( 2,720,466 )
Stock exercised/vested 9,537 8,804 11,758 11,860
Stock repurchased ( 12,957 ) — ( 311,859 ) —
End of period $ ( 3,026,812 ) $ ( 2,708,606 ) $ ( 3,026,812 ) $ ( 2,708,606 )
NONCONTROLLING INTERESTS:
Beginning of period $ 44,275 $ 43,318 $ 43,403 $ 41,947
Distributions ( 400 ) ( 237 ) ( 816 ) ( 459 )
Net income 688 ( 57 ) 1,975 1,554
Other comprehensive (loss) income, net of tax ( 3 ) 123 ( 2 ) 105
End of period $ 44,560 $ 43,147 $ 44,560 $ 43,147
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,
2020 2019
CASH FROM OPERATING ACTIVITIES:
Net income to common stockholders $ 218,520 $ 562,638
Adjustments to reconcile net income to net cash from operating activities:
Net investment losses (gains) 60,311 ( 143,691 )
Depreciation and amortization 96,195 42,007
Noncontrolling interests 1,975 1,554
Investment funds ( 1,260 ) ( 77,284 )
Stock incentive plans 37,842 38,440
Change in:
Arbitrage trading account ( 40,487 ) ( 20,422 )
Premiums and fees receivable ( 175,636 ) ( 206,867 )
Reinsurance accounts ( 204,396 ) ( 116,359 )
Deferred policy acquisition costs ( 43,955 ) ( 30,537 )
Income taxes ( 56,955 ) ( 16,449 )
Reserves for losses and loss expenses 879,277 443,454
Unearned premiums 407,227 336,664
Other ( 41,713 ) ( 18,104 )
Net cash from operating activities 1,136,945 795,044
CASH FROM (USED IN) INVESTING ACTIVITIES:
Proceeds from sale of fixed maturity securities 3,525,926 1,341,688
Proceeds from sale of equity securities 66,850 40,709
Distributions from investment funds 83,935 187,321
Proceeds from maturities and prepayments of fixed maturity securities 2,876,642 2,278,264
Purchase of fixed maturity securities ( 6,074,429 ) ( 3,853,108 )
Purchase of equity securities ( 77,840 ) ( 66,305 )
Real estate purchased ( 42,405 ) ( 176,538 )
Change in loans receivable 1,202 3,156
Net purchases of property, furniture and equipment ( 31,047 ) ( 1,802 )
Change in balances due to security brokers 36,561 54,620
Other 65 45
Net cash from (used in) investing activities 365,460 ( 191,950 )
CASH FROM (USED IN) FINANCING ACTIVITIES:
Repayment of senior notes and other debt ( 302,453 ) ( 448,409 )
Net proceeds from issuance of debt 747,399 —
Cash dividends to common stockholders ( 62,822 ) ( 130,035 )
Purchase of common treasury shares ( 311,859 ) —
Other, net ( 18,465 ) ( 20,750 )
Net cash from (used in) financing activities 51,800 ( 599,194 )
Net impact on cash due to change in foreign exchange rates ( 6,468 ) ( 8,952 )
Net change in cash and cash equivalents 1,547,737 ( 5,052 )
Cash and cash equivalents at beginning of year 1,023,710 817,602
Cash and cash equivalents at end of period $ 2,571,447 $ 812,550
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 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, 2019.
The income tax provision has been computed based on the Company’s estimated annual effective tax rate. The effective income tax rate differs from the federal income tax rate of 21 % principally because the utilization of losses in certain foreign jurisdictions was limited, which was partially offset by tax-exempt investment income and tax benefits related to equity-based compensation.

(2) Per Share Data
The Company presents both basic and diluted net income per share (“EPS”) amounts. Basic EPS is calculated by dividing net income by the weighted average number of common shares outstanding during the period (including 7,575,168 and 7,389,781 common shares held in a grantor trust as of September 30, 2020 and 2019, 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) 2020 2019 2020 2019
Basic 185,765 190,862 187,338 190,593
Diluted 187,717 193,589 189,515 193,557


(3) Recent Accounting Pronouncements and Accounting Policies
Recently adopted accounting pronouncements:
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses, which amended the accounting guidance for credit losses on financial instruments. The updated guidance amended the then current other-than-temporary impairment model for available for sale debt securities by requiring the recognition of impairments relating to expected 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, such as reinsurance recoverables. The updated guidance was effective for reporting periods beginning after December 15, 2019.
The adoption of this guidance on January 1, 2020 resulted in the recognition of an allowance for expected credit losses in connection with operating assets (premiums and fees receivable and due from reinsurers) of $ 5.7 million (net of tax) and a corresponding cumulative effect adjustment that decreased common stockholders' equity. Certain investments (primarily fixed
6

maturity securities available for sale) established an allowance for expected credit loss of $ 24.8 million (net of tax), with a cumulative effect adjustment decreasing retained earnings by $ 24.8 million (net of tax) and increasing accumulated other comprehensive (loss) income ("AOCI") by $ 25.0 million (net of tax), resulting in $ 0.2 million net impact to total common stockholders' equity.
All other accounting and reporting standards that have become effective in 2020 were either not applicable to the Company or their adoption did not have a material impact on the Company.
Accounting and reporting standards that are not yet effective:
All recently issued but not yet effective accounting and reporting standards are either not applicable to the Company or are not expected to have a material impact on the Company.
Accounting policies:
The following accounting policies have been updated to reflect the Company's adoption of Financial Instruments - Credit Losses as described above.
Revenue recognition (related to premiums and fees receivable)
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. Premiums and fees receivable are reported net of an allowance for expected credit losses with the allowance being estimated based on current and future expected conditions, historical loss data and specific identification of collectability concerns where applicable. Changes in the allowance are reported within other operating costs and expenses.
Reinsurance ceded (related to due from reinsurers)
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 an allowance for expected credit losses for estimated uncollectible reinsurance. The allowance is estimated based on the composition of the recoverable balance, considering reinsurer credit ratings, collateral received from financial institutions and funds withheld arrangements, length of collection periods, probability of default methodology, and specific identification of collectability concerns. Changes in the allowance are reported within losses and loss expenses.
Investments
For available for sale securities in an unrealized loss position where the Company intends to sell, or it is more likely than not that it will be required to sell the security before recovery in value, the amortized cost basis is written down to fair value through net investment gains (losses). For available for sale securities in an unrealized loss position where the Company does not intend to sell, or it is more likely than not that it will not be required to sell the security before recovery in value, the Company evaluates whether the decline in fair value has resulted from credit losses or all other factors (non-credit factors). In making this assessment, the Company considers the extent to which fair value is less than amortized cost, changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, an allowance for expected credit losses is recorded for the credit loss through net investment gains (losses), limited by the amount that the fair value is less than the amortized cost basis. The allowance is adjusted for any change in expected credit losses and subsequent recoveries through net investment gains (losses). The impairment related to non-credit factors is recognized in other comprehensive income.
For financial assets carried at amortized cost, which includes held to maturity securities and loans receivable, the Company estimates an allowance for expected credit losses based on relevant information about past events, including historical loss experience, current conditions and forecasts that affect the expected collectability of the amortized cost of the financial asset. The allowance for expected credit losses is presented as a reduction to amortized cost of the financial asset in the consolidated balance sheet and changes to the estimate for expected credit losses are recognized through net investment gains (losses).
The Company’s credit assessment of allowance for expected credit losses uses a third party model for available for sale and held to maturity securities, as well as loans receivable. The allowance for expected credit losses is generally based on
7

the performance of the underlying collateral under various economic and default scenarios that 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. A discounted cash flow analysis is used to ascertain the amount of the allowance for expected credit losses, if any. In general, the model reverts to the rating-level long-term average marginal default rates based on 10 years of historical data, beyond the forecast period. For other inputs, the model in most cases reverts to the baseline long-term assumptions linearly over 5 years beyond the forecast period. The long-term assumptions are based on the historical averages.
The Company reports accrued investment income separately from fixed maturity securities, and has elected not to measure an allowance for expected credit losses for accrued investment income. Accrued investment income is written off through net investment income at the time the issuer of the bond defaults or is expected to default on payments.

8

(4) Consolidated Statements of Comprehensive Income

The following table presents the components of the changes in accumulated other comprehensive (loss) income ("AOCI"):
(In thousands) Unrealized Investment Gains (Losses) Currency Translation Adjustments Accumulated Other Comprehensive
(Loss) Income
As of and for the nine months ended September 30, 2020
Changes in AOCI
Beginning of period $ 124,514 $ ( 381,813 ) $ ( 257,299 )
Cumulative effect adjustment resulting from changes in accounting principles 24,952 — 24,952
Restated beginning of period 149,466 ( 381,813 ) ( 232,347 )
Other comprehensive income (loss) before reclassifications 76,474 ( 36,553 ) 39,921
Amounts reclassified from AOCI 21,542 — 21,542
Other comprehensive income (loss) 98,016 ( 36,553 ) 61,463
Unrealized investment gain related to noncontrolling interest ( 2 ) — ( 2 )
End of period $ 247,480 $ ( 418,366 ) $ ( 170,886 )
Amounts reclassified from AOCI
Pre-tax $ 27,268 (1) $ — $ 27,268
Tax effect ( 5,726 ) (2) — ( 5,726 )
After-tax amounts reclassified $ 21,542 $ — $ 21,542
Other comprehensive income (loss)
Pre-tax $ 111,756 $ ( 36,553 ) $ 75,203
Tax effect ( 13,740 ) — ( 13,740 )
Other comprehensive income (loss) $ 98,016 $ ( 36,553 ) $ 61,463
As of and for the three months ended September 30, 2020
Changes in AOCI
Beginning of period $ 209,210 $ ( 458,560 ) $ ( 249,350 )
Other comprehensive income before reclassifications 39,488 40,194 79,682
Amounts reclassified from AOCI ( 1,215 ) — ( 1,215 )
Other comprehensive income 38,273 40,194 78,467
Unrealized investment gain related to noncontrolling interest ( 3 ) — ( 3 )
Ending balance $ 247,480 $ ( 418,366 ) $ ( 170,886 )
Amounts reclassified from AOCI
Pre-tax $ ( 1,538 ) (1) $ — $ ( 1,538 )
Tax effect 323 (2) — 323
After-tax amounts reclassified $ ( 1,215 ) $ — $ ( 1,215 )
Other comprehensive income
Pre-tax $ 48,980 $ 40,194 $ 89,174
Tax effect ( 10,707 ) — ( 10,707 )
Other comprehensive income $ 38,273 $ 40,194 $ 78,467
9

As of and for the nine months ended September 30, 2019
Changes in AOCI
Beginning of period $ ( 91,491 ) $ ( 418,979 ) $ ( 510,470 )
Other comprehensive income (loss) before reclassifications 218,592 ( 31,414 ) 187,178
Amounts reclassified from AOCI 1,087 — 1,087
Other comprehensive income (loss) 219,679 ( 31,414 ) 188,265
Unrealized investment loss related to noncontrolling interest 105 — 105
End of period $ 128,293 $ ( 450,393 ) $ ( 322,100 )
Amounts reclassified from AOCI
Pre-tax $ 1,376 (1) $ — $ 1,376
Tax effect ( 289 ) (2) — ( 289 )
After-tax amounts reclassified $ 1,087 $ — $ 1,087
Other comprehensive income (loss)
Pre-tax $ 287,739 $ ( 31,414 ) $ 256,325
Tax effect ( 68,060 ) — ( 68,060 )
Other comprehensive income (loss) $ 219,679 $ ( 31,414 ) $ 188,265
As of and for the three months ended September 30, 2019
Changes in AOCI
Beginning of period $ 152,915 $ ( 413,711 ) $ ( 260,796 )
Other comprehensive loss before reclassifications ( 27,023 ) ( 36,682 ) ( 63,705 )
Amounts reclassified from AOCI 2,278 — 2,278
Other comprehensive loss ( 24,745 ) ( 36,682 ) ( 61,427 )
Unrealized investment loss related to noncontrolling interest 123 — 123
Ending balance $ 128,293 $ ( 450,393 ) $ ( 322,100 )
Amounts reclassified from AOCI
Pre-tax $ 2,884 (1) $ — $ 2,884
Tax effect ( 606 ) (2) — ( 606 )
After-tax amounts reclassified $ 2,278 $ — $ 2,278
Other comprehensive loss
Pre-tax $ ( 28,592 ) $ ( 36,682 ) $ ( 65,274 )
Tax effect 3,847 — 3,847
Other comprehensive loss $ ( 24,745 ) $ ( 36,682 ) $ ( 61,427 )
____________
(1) Net investment gains (losses) in the consolidated statements of income.
(2) Income tax expense in the consolidated statements of income.


(5) Statements of Cash Flows
Interest payments were $ 126,932,000 and $ 145,930,000 for the nine months ended September 30, 2020 and 2019, respectively. Income taxes paid were $ 96,000,000 and $ 127,282,000 for the nine months ended September 30, 2020 and 2019, respectively.


10

(6) Investments in Fixed Maturity Securities
At September 30, 2020 and December 31, 2019, investments in fixed maturity securities were as follows:
(In thousands) Amortized
Cost 		Allowance for Expected Credit Losses (1) Gross Unrealized Fair
Value 		Carrying
Value
Gains Losses
September 30, 2020
Held to maturity:
State and municipal $ 66,532 $ ( 871 ) $ 13,406 $ — $ 79,067 $ 65,661
Residential mortgage-backed 6,856 — 1,109 — 7,965 6,856
Total held to maturity 73,388 ( 871 ) 14,515 — 87,032 72,517
Available for sale:
U.S. government and government agency 676,493 — 21,080 ( 141 ) 697,432 697,432
State and municipal:
Special revenue 2,195,851 — 93,278 ( 2,455 ) 2,286,674 2,286,674
State general obligation 356,321 — 31,586 — 387,907 387,907
Pre-refunded 257,570 — 22,521 ( 149 ) 279,942 279,942
Corporate backed 223,508 — 9,641 ( 549 ) 232,600 232,600
Local general obligation 396,831 — 41,975 ( 534 ) 438,272 438,272
Total state and municipal 3,430,081 — 199,001 ( 3,687 ) 3,625,395 3,625,395
Mortgage-backed securities:
Residential 848,878 — 29,989 ( 2,513 ) 876,354 876,354
Commercial 199,217 — 7,168 ( 360 ) 206,025 206,025
Total mortgage-backed securities 1,048,095 — 37,157 ( 2,873 ) 1,082,379 1,082,379
Asset-backed 3,347,867 — 11,665 ( 53,093 ) 3,306,439 3,306,439
Corporate:
Industrial 2,240,914 ( 606 ) 104,694 ( 18,404 ) 2,326,598 2,326,598
Financial 1,471,997 — 55,706 ( 3,067 ) 1,524,636 1,524,636
Utilities 325,809 — 30,270 ( 460 ) 355,619 355,619
Other 32,262 — 445 ( 20 ) 32,687 32,687
Total corporate 4,070,982 ( 606 ) 191,115 ( 21,951 ) 4,239,540 4,239,540
Foreign government 889,358 ( 1,090 ) 26,626 ( 45,550 ) 869,344 869,344
Total available for sale 13,462,876 ( 1,696 ) 486,644 ( 127,295 ) 13,820,529 13,820,529
Total investments in fixed maturity securities $ 13,536,264 $ ( 2,567 ) $ 501,159 $ ( 127,295 ) $ 13,907,561 $ 13,893,046
____________
(1) Represents the amount of impairment that has resulted from credit-related factors. The change in the allowance for expected credit losses, excluding the cumulative effect adjustment resulting from changes in accounting principles, is recognized in the consolidated statements of income. Amount excludes unrealized losses relating to non-credit factors.
11

(In thousands) Amortized
Cost 		Gross Unrealized Fair
Value 		Carrying
Value
Gains Losses
December 31, 2019
Held to maturity:
State and municipal $ 70,312 $ 13,000 $ — $ 83,312 $ 70,312
Residential mortgage-backed 8,371 994 — 9,365 8,371
Total held to maturity 78,683 13,994 — 92,677 78,683
Available for sale:
U.S. government and government agency 775,157 13,249 ( 1,475 ) 786,931 786,931
State and municipal:
Special revenue 2,343,209 64,586 ( 4,152 ) 2,403,643 2,403,643
State general obligation 359,298 22,074 ( 97 ) 381,275 381,275
Pre-refunded 364,571 20,342 ( 128 ) 384,785 384,785
Corporate backed 255,230 7,232 ( 903 ) 261,559 261,559
Local general obligation 432,333 32,684 ( 647 ) 464,370 464,370
Total state and municipal 3,754,641 146,918 ( 5,927 ) 3,895,632 3,895,632
Mortgage-backed securities:
Residential 1,298,145 23,230 ( 5,155 ) 1,316,220 1,316,220
Commercial 304,506 5,214 ( 346 ) 309,374 309,374
Total mortgage-backed securities 1,602,651 28,444 ( 5,501 ) 1,625,594 1,625,594
Asset-backed 2,802,588 9,532 ( 21,490 ) 2,790,630 2,790,630
Corporate:
Industrial 2,260,073 72,900 ( 3,800 ) 2,329,173 2,329,173
Financial 1,447,589 37,681 ( 4,118 ) 1,481,152 1,481,152
Utilities 325,762 15,281 ( 402 ) 340,641 340,641
Other 5,219 230 — 5,449 5,449
Total corporate 4,038,643 126,092 ( 8,320 ) 4,156,415 4,156,415
Foreign government 924,284 16,465 ( 93,673 ) 847,076 847,076
Total available for sale 13,897,964 340,700 ( 136,386 ) 14,102,278 14,102,278
Total investments in fixed maturity securities $ 13,976,647 $ 354,694 $ ( 136,386 ) $ 14,194,955 $ 14,180,961

The following table presents the rollforward of the allowance for expected credit losses for held to maturity securities for the nine months ended September 30, 2020:
State and Municipal
(In thousands)
Allowance for expected credit losses at January 1, 2020 $ —
Cumulative effect adjustment resulting from changes in accounting principles 69
Provision for expected credit losses 802
Allowance for expected credit losses at September 30, 2020
$ 871

The following table presents the rollforward of the allowance for expected credit losses for held to maturity securities for the three months ended September 30, 2020:
State and Municipal
(In thousands)
Allowance for expected credit losses at July 1, 2020 $ 948
Provision for expected credit losses ( 77 )
Allowance for expected credit losses at September 30, 2020
$ 871



12

The following table presents the rollforward of the allowance for expected credit losses for available for sale securities for the nine months ended September 30, 2020:
Foreign Government Corporate Total
(In thousands)
Allowance for expected credit losses at January 1, 2020 $ — $ — $ —
Cumulative effect adjustment resulting from changes in accounting principles 35,645 — 35,645
Expected credit losses on securities for which credit losses were not previously recorded 12,494 7,058 19,552
Expected credit losses on securities for which credit losses were previously recorded 295 ( 3,767 ) ( 3,472 )
Reduction due to disposals ( 47,344 ) ( 2,685 ) ( 50,029 )
Allowance for expected credit losses at September 30, 2020
$ 1,090 $ 606 $ 1,696
The following table presents the rollforward of the allowance for expected credit losses for available for sale securities for the three months ended September 30, 2020:
Foreign Government Corporate Total
(In thousands)
Allowance for expected credit losses at July 1, 2020 $ 44,769 $ 724 $ 45,493
Expected credit losses on securities for which credit losses were not previously recorded — 261 261
Expected credit losses on securities for which credit losses were previously recorded ( 252 ) ( 9 ) ( 261 )
Reduction due to disposals ( 43,427 ) ( 370 ) ( 43,797 )
Allowance for expected credit losses at September 30, 2020
$ 1,090 $ 606 $ 1,696
During the three and nine months ended September 30, 2020, the Company decreased the allowance for expected credit losses utilizing its credit loss assessment process and inputs used in its credit loss model, primarily due to the disposition of securities which previously had an allowance recorded.
The amortized cost and fair value of fixed maturity securities at September 30, 2020, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because certain issuers may have the right to call or prepay obligations.
(In thousands) Amortized
Cost (1) 		Fair
Value
Due in one year or less $ 1,372,865 $ 1,364,023
Due after one year through five years 5,200,384 5,376,126
Due after five years through ten years 3,313,415 3,461,879
Due after ten years 2,593,778 2,615,189
Mortgage-backed securities 1,054,951 1,090,344
Total $ 13,535,393 $ 13,907,561
________________
(1) Amortized cost is reduced by the allowance for expected credit losses of $ 871 thousand related to held to maturity securities.
At September 30, 2020 and December 31, 2019, there were no investments that exceeded 10% of common stockholders' equity, other than investments in United States government and government agency securities.


13

(7) Investments in Equity Securities
At September 30, 2020 and December 31, 2019, investments in equity securities were as follows:
(In thousands) Cost Gross Unrealized Fair
Value 		Carrying
Value
Gains Losses
September 30, 2020
Common stocks $ 184,196 $ 8,042 $ ( 31,380 ) $ 160,858 $ 160,858
Preferred stocks 177,444 100,004 ( 3,003 ) 274,445 274,445
Total $ 361,640 $ 108,046 $ ( 34,383 ) $ 435,303 $ 435,303
December 31, 2019
Common stocks $ 175,928 $ 16,967 $ ( 26,090 ) $ 166,805 $ 166,805
Preferred stocks 169,171 148,243 ( 3,599 ) 313,815 313,815
Total $ 345,099 $ 165,210 $ ( 29,689 ) $ 480,620 $ 480,620


(8) Arbitrage Trading Account
At September 30, 2020 and December 31, 2019, the fair and carrying values of the arbitrage trading account were $ 596 million and $ 401 million, respectively. The primary focus of the trading account is merger arbitrage. Merger arbitrage is the business of investing in the securities of publicly held companies which are the targets in announced tender offers and mergers. Arbitrage investing differs from other types of investing in its focus on transactions and events believed likely to bring about a change in value over a relatively short time period (usually four months or less).
The Company uses put options and call options in order to mitigate the impact of potential changes in market conditions on the merger arbitrage trading account. These options are reported at fair value. As of September 30, 2020, the fair value of long option contracts outstanding was $ 73 thousand (notional amount of $ 6.4 million) and the fair value of short option contracts outstanding was $ 77 thousand (notional amount of $ 11.4 million). Other than with respect to the use of these trading account securities, the Company does not make use of derivatives.


(9) Net Investment Income
Net investment income consisted of the following:
For the Three Months
Ended September 30, 		For the Nine Months
Ended September 30,
(In thousands) 2020 2019 2020 2019
Investment income earned on:
Fixed maturity securities, including cash and cash equivalents and loans receivable $ 97,080 $ 125,957 $ 330,941 $ 386,978
Investment funds 18,235 19,033 1,260 77,284
Arbitrage trading account 19,543 8,400 51,985 26,184
Real estate
7,666 7,987 18,807 17,468
Equity securities
1,907 1,392 6,194 3,984
Gross investment income 144,430 162,769 409,187 511,898
Investment expense ( 1,780 ) ( 1,077 ) ( 6,343 ) ( 3,619 )
Net investment income $ 142,650 $ 161,692 $ 402,844 $ 508,279


14

(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 $ 136 million as of September 30, 2020.
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) 2020 2019 2020 2019
Real estate $ 312,181 $ 412,275 $ 2,140 $ 17,279
Financial services 351,695 280,705 3,303 36,516
Energy 136,250 156,869 ( 13,689 ) ( 10,342 )
Transportation 144,265 147,034 ( 3,521 ) 12,222
Other funds 219,316 216,652 13,027 21,609
Total $ 1,163,707 $ 1,213,535 $ 1,260 $ 77,284
The Company's share of the earnings or losses from investment funds is generally reported on a one-quarter lag in order to facilitate the timely completion of the Company's consolidated financial statements.

(11) Real Estate
Investment in real estate represents directly owned property held for investment, as follows:
Carrying Value
September 30, December 31,
(In thousands) 2020 2019
Properties in operation $ 1,651,343 $ 1,351,249
Properties under development 455,131 754,701
Total $ 2,106,474 $ 2,105,950

As of September 30, 2020, properties in operation included a long-term ground lease in Washington, D.C., two office complexes in New York City, office buildings in West Palm Beach and Palm Beach, Florida, an office building in London, and the completed portion of a mixed-use project in Washington D.C.. Properties in operation are net of accumulated depreciation and amortization of $ 78,113,000 and $ 59,832,000 as of September 30, 2020 and December 31, 2019, respectively. Related depreciation expense was $ 19,818,000 and $ 8,871,000 for the nine months ended September 30, 2020 and 2019, respectively. Future minimum rental income expected on operating leases relating to properties in operation is $ 19,629,625 in 2020, $ 82,022,840 in 2021, $ 83,544,465 in 2022, $ 77,429,542 in 2023, $ 74,828,766 in 2024, $ 71,126,366 in 2025 and $ 672,867,459 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, which is reflected within senior notes and other debt on the Company's consolidated balance sheet.
A mixed-use project in Washington, D.C. has been under development in 2020 and 2019, with the completed portion reported in properties in operation as of September 30, 2020.
15

(12) Loans Receivable

At September 30, 2020 and December 31, 2019, l oans receivable were as follows:
(In thousands) September 30,
2020 		December 31,
2019
Amortized cost (net of allowance for expected credit losses):
Real estate loans $ 52,089 $ 58,541
Commercial loans 32,682 33,258
Total $ 84,771 $ 91,799
Fair value:
Real estate loans $ 53,848 $ 59,853
Commercial loans 32,682 34,760
Total $ 86,530 $ 94,613
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.
Loans receivable in non-accrual status were both $ 0.2 million as of September 30, 2020 and December 31, 2019.

The following table presents the rollforward of the allowance for expected credit losses for loans receivable for the nine months ended September 30, 2020:
Real Estate Loans Commercial Loans Total
(In thousands)
Allowance for expected credit losses at January 1, 2020 $ 1,502 $ 644 $ 2,146
Cumulative effect adjustment resulting from changes in accounting principles ( 905 ) 548 ( 357 )
Provision for expected credit losses 1,162 2,892 4,054
Allowance for expected credit losses at September 30, 2020
$ 1,759 $ 4,084 $ 5,843
The following table presents the rollforward of the allowance for expected credit losses for loans receivable for the three months ended September 30, 2020:
Real Estate Loans Commercial Loans Total
(In thousands)
Allowance for expected credit losses at July 1, 2020 $ 4,318 $ 4,401 $ 8,719
Provision for expected credit losses ( 2,559 ) ( 317 ) ( 2,876 )
Allowance for expected credit losses at September 30, 2020
$ 1,759 $ 4,084 $ 5,843
The Company monitors the performance of its loans receivable and assesses the ability of the borrower to pay principal and interest based upon loan structure, underlying property values, cash flow and related financial and operating performance of the property and market conditions.
In evaluating the real estate loans, the Company considers their credit quality indicators, including loan to value ratios, which compare the outstanding loan amount to the estimated value of the property, the borrower’s financial condition and performance with respect to loan terms, the position in the capital structure, the overall leverage in the capital structure and other market conditions.

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(13) Net Investment Gains (Losses)
Net investment gains (losses) were as follows:
For the Three Months
Ended September 30, 		For the Nine Months
Ended September 30,
(In thousands) 2020 2019 2020 2019
Net investment gains (losses):
Fixed maturity securities:
Gains $ 3,811 $ 2,100 $ 23,586 $ 10,503
Losses ( 39,162 ) ( 4,984 ) ( 53,243 ) ( 11,879 )
Equity securities (1):
Net realized (losses) gains on investment sales ( 176 ) ( 11 ) 5,551 23,328
Change in unrealized gains (losses) 30,693 4,226 ( 61,859 ) 115,722
Investment funds 203 ( 456 ) 31,299 ( 398 )
Real estate 3,841 417 ( 3,983 ) 6,184
Loans receivable — — — ( 970 )
Other ( 6,982 ) 173 ( 30,755 ) 1,201
Net realized and unrealized (losses) gains on investments in earnings before allowance for expected credit losses ( 7,772 ) 1,465 ( 89,404 ) 143,691
Change in allowance for expected credit losses on investments (2):
Fixed maturity securities 43,874 — 33,147 —
Loans receivable 2,876 — ( 4,054 ) —
Change in allowance for expected credit losses on investments 46,750 — 29,093 —
Net investment gains (losses) 38,978 1,465 ( 60,311 ) 143,691
Income tax (expense) benefit ( 8,855 ) ( 308 ) 13,622 ( 30,175 )
After-tax net investment gains (losses) $ 30,123 $ 1,157 $ ( 46,689 ) $ 113,516
Change in unrealized investment gains (losses) on available for sale securities:
Fixed maturity securities without allowance for expected credit losses $ 46,164 $ ( 12,178 ) $ 89,363 $ 308,945
Fixed maturity securities with allowance for expected credit losses 5,036 384 30,027 396
Investment funds ( 198 ) ( 2,689 ) ( 3,632 ) 4,863
Other ( 2,022 ) ( 14,109 ) ( 4,002 ) ( 26,465 )
Total change in unrealized investment gains (losses) 48,980 ( 28,592 ) 111,756 287,739
Income tax (expense) benefit ( 10,707 ) 3,847 ( 13,740 ) ( 68,060 )
Noncontrolling interests ( 3 ) 123 ( 2 ) 105
After-tax change in unrealized investment gains (losses) of available for sale securities $ 38,270 $ ( 24,622 ) $ 98,014 $ 219,784
______________________
(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 (losses) 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) The inclusion of the allowance for expected credit losses on investments commenced January 1, 2020 due to the adoption of ASU 2016-13. See Note 3 for more details.


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(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, 2020 and December 31, 2019 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, 2020
U.S. government and government agency $ 115,161 $ 141 $ 18 $ — $ 115,179 $ 141
State and municipal 204,907 2,809 24,290 878 229,197 3,687
Mortgage-backed securities 116,958 2,673 28,578 200 145,536 2,873
Asset-backed securities 1,443,178 15,094 665,759 37,999 2,108,937 53,093
Corporate 636,250 19,158 40,224 2,793 676,474 21,951
Foreign government 127,441 25,088 5,706 20,462 133,147 45,550
Fixed maturity securities $ 2,643,895 $ 64,963 $ 764,575 $ 62,332 $ 3,408,470 $ 127,295
December 31, 2019
U.S. government and government agency $ 83,837 $ 618 $ 53,089 $ 857 $ 136,926 $ 1,475
State and municipal 365,184 4,245 127,210 1,682 492,394 5,927
Mortgage-backed securities 301,358 2,281 180,148 3,220 481,506 5,501
Asset-backed securities 755,259 2,307 774,508 19,183 1,529,767 21,490
Corporate 307,367 3,148 121,470 5,172 428,837 8,320
Foreign government 164,536 32,028 107,266 61,645 271,802 93,673
Fixed maturity securities $ 1,977,541 $ 44,627 $ 1,363,691 $ 91,759 $ 3,341,232 $ 136,386
Substantially all of the securities in an unrealized loss position are rated investment grade, except for the securities in the foreign government classification. In general, fair value in all classifications were affected by market disruptions caused by COVID-19. A significant amount of the unrealized loss on foreign government securities is the result of changes in currency exchange rates.
A summary of the Company’s non-investment grade fixed maturity securities that were in an unrealized loss position at September 30, 2020 is presented in the table below:
($ in thousands) Number of
Securities 		Aggregate
Fair Value 		Gross
Unrealized Loss
Foreign government 22 $ 91,413 $ 45,247
Corporate 13 28,816 6,343
Mortgage-backed securities 8 1,659 34
Total 43 $ 121,888 $ 51,624
For fixed maturity securities that management does not intend to sell or to be required to sell, the portion of the decline in value that is considered to be due to credit factors is recognized in earnings, and the portion of the decline in value that is considered to be due to non-credit factors is recognized in other comprehensive income.
The Company has evaluated its fixed maturity securities in an unrealized loss position and believes the unrealized losses are due primarily to temporary market and sector-related factors rather than to issuer-specific factors. None of these securities are delinquent or in default under financial covenants. Based on its assessment of these issuers, the Company expects them to continue to meet their contractual payment obligations as they become due.

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(15) Fair Value Measurements
The Company’s fixed maturity available for sale securities, equity securities and its arbitrage trading account securities are carried at fair value. Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” The Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, as follows:
Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 - Quoted prices for similar assets or valuations based on inputs that are observable.
Level 3 - Estimates of fair value based on internal pricing methodologies using unobservable inputs. Unobservable inputs are only used to measure fair value to the extent that observable inputs are not available.
Substantially all of the Company’s fixed maturity securities were priced by independent pricing services. The prices provided by the independent pricing services are estimated based on observable market data in active markets utilizing pricing models and processes, which may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, sector groupings, matrix pricing and reference data. The pricing services may prioritize inputs differently on any given day for any security based on market conditions, and not all inputs are available for each security evaluation on any given day. The pricing services used by the Company have indicated that they will only produce an estimate of fair value if objectively verifiable information is available. The determination of whether markets are active or inactive is based upon the volume and level of activity for a particular asset class. The Company reviews the prices provided by pricing services for reasonableness and periodically performs independent price tests of a sample of securities to ensure proper valuation.
If prices from independent pricing services are not available for fixed maturity securities, the Company estimates the fair value. For Level 2 securities, the Company utilizes pricing models and processes which may include benchmark yields, sector groupings, matrix pricing, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, bids, offers and reference data. Where broker quotes are used, the Company generally requests two or more quotes and sets a price within the range of quotes received based on its assessment of the credibility of the quote and its own evaluation of the security. The Company generally does not adjust quotes received from brokers. For securities traded only in private negotiations, the Company determines fair value based primarily on the cost of such securities, which is adjusted to reflect prices of recent placements of securities of the same issuer, financial projections, credit quality and business developments of the issuer and other relevant information.
For Level 3 securities, the Company generally uses a discounted cash flow model to estimate the fair value of fixed maturity securities. The cash flow models are based upon assumptions as to prevailing credit spreads, interest rate and interest rate volatility, time to maturity and subordination levels. Projected cash flows are discounted at rates that are adjusted to reflect illiquidity, where appropriate.
19

The following tables present the assets and liabilities measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019 by level:
(In thousands) Total Level 1 Level 2 Level 3
September 30, 2020
Assets:
Fixed maturity securities available for sale:
U.S. government and government agency $ 697,432 $ — $ 697,432 $ —
State and municipal 3,625,395 — 3,625,395 —
Mortgage-backed securities 1,082,379 — 1,082,379 —
Asset-backed securities 3,306,439 — 3,306,439 —
Corporate 4,239,540 — 4,239,540 —
Foreign government 869,344 — 869,344 —
Total fixed maturity securities available for sale 13,820,529 — 13,820,529 —
Equity securities:
Common stocks 160,858 152,508 — 8,350
Preferred stocks 274,445 — 265,117 9,328
Total equity securities 435,303 152,508 265,117 17,678
Arbitrage trading account 595,727 307,915 287,812 —
Total $ 14,851,559 $ 460,423 $ 14,373,458 $ 17,678
Liabilities:
Trading account securities sold but not yet purchased $ 19,254 $ 19,254 $ — $ —
December 31, 2019
Assets:
Fixed maturity securities available for sale:
U.S. government and government agency $ 786,931 $ — $ 786,931 $ —
State and municipal 3,895,632 — 3,895,632 —
Mortgage-backed securities 1,625,594 — 1,625,594 —
Asset-backed securities 2,790,630 — 2,790,630 —
Corporate 4,156,415 — 4,156,415 —
Foreign government 847,076 — 847,076 —
Total fixed maturity securities available for sale 14,102,278 — 14,102,278 —
Equity securities:
Common stocks 166,805 157,752 — 9,053
Preferred stocks 313,815 — 307,310 6,505
Total equity securities 480,620 157,752 307,310 15,558
Arbitrage trading account 400,809 381,061 19,748 —
Total $ 14,983,707 $ 538,813 $ 14,429,336 $ 15,558
Liabilities:
Trading account securities sold but not yet purchased $ 36,143 $ 36,143 $ — $ —

20

The following tables summarize changes in Level 3 assets and liabilities for the nine months ended September 30, 2020 and for the year ended December 31, 2019:
Gains (Losses) Included in:
(In thousands) Beginning
Balance 		Earnings (Losses) Other
Comprehensive
Income 		Impairments Purchases (Sales) Paydowns / Maturities Transfers In / (Out) Ending
Balance
Nine Months Ended September 30, 2020
Assets:
Equity securities:
Common stocks $ 9,053 $ 363 $ — $ — $ — $ ( 1,066 ) $ — $ — $ 8,350
Preferred stocks 6,505 ( 177 ) — — 3,000 — — — 9,328
Total $ 15,558 $ 186 $ — $ — $ 3,000 $ ( 1,066 ) $ — $ — $ 17,678
Year Ended
December 31, 2019
Assets:
Fixed maturities securities available for sale:
Asset-backed securities $ 99 $ ( 26 ) $ 61 $ — $ — $ ( 134 ) $ — $ — $ —
Total 99 ( 26 ) 61 — — ( 134 ) — — —
Equity securities:
Common stocks 8,596 2,005 — — ( 1,548 ) — — 9,053
Preferred stocks 3,945 ( 42 ) — — 2,602 — — — 6,505
Total 12,541 1,963 — — 2,602 ( 1,548 ) — — 15,558
Arbitrage trading account 17,308 ( 8,731 ) — — 14,767 ( 38,233 ) — 14,889 —
Total $ 29,948 $ ( 6,794 ) $ 61 $ — $ 17,369 $ ( 39,915 ) $ — $ 14,889 $ 15,558
Liabilities:
Trading account securities sold but not yet purchased $ 793 $ 133 $ — $ — $ 7,609 $ ( 8,535 ) $ — $ — $ —
For the nine months ended September 30, 2020, there were no securities transferred into or out of Level 3. For the year ended December 31, 2019, there were two common stocks transferred into Level 3 in the arbitrage trading account where publicly traded prices were no longer available, and both were sold by year end.

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(16) Reserves for Loss and Loss Expenses
The Company's reserves for losses and loss expenses are comprised of case reserves and incurred but not reported liabilities ("IBNR"). When a claim is reported, a case reserve is established for the estimated ultimate payment based upon known information about the claim. As more information about the claim becomes available over time, case reserves are adjusted up or down as appropriate. Reserves are also established on an aggregate basis to provide for IBNR liabilities and expected loss reserve development on reported claims.
Loss reserves included in the Company’s financial statements represent management’s best estimates based upon an actuarially derived point estimate and other considerations. The Company uses a variety of actuarial techniques and methods to derive an actuarial point estimate for each operating unit. These methods include paid loss development, incurred loss development, paid and incurred Bornhuetter-Ferguson methods and frequency and severity methods. In circumstances where one actuarial method is considered more credible than the others, that method is used to set the point estimate. The actuarial point estimate may also be based on a judgmental weighting of estimates produced from each of the methods considered. Industry loss experience is used to supplement the Company’s own data in selecting “tail factors” in areas where the Company’s own data is limited. The actuarial data is analyzed by line of business, coverage and accident or policy year, as appropriate, for each operating unit.
The establishment of the actuarially derived loss reserve point estimate also includes consideration of qualitative factors that may affect the ultimate losses. These qualitative considerations include, among others, the impact of re-underwriting initiatives, changes in the mix of business, changes in distribution sources and changes in policy terms and conditions.
The key assumptions used to arrive at the best estimate of loss reserves are the expected loss ratios, rate of loss cost inflation, and reported and paid loss emergence patterns. Expected loss ratios represent management’s expectation of losses at the time the business is priced and written, before any actual claims experience has emerged. This expectation is a significant determinant of the estimate of loss reserves for recently written business where there is little paid or incurred loss data to consider. Expected loss ratios are generally derived from historical loss ratios adjusted for the impact of rate changes, loss cost trends and known changes in the type of risks underwritten. Expected loss ratios are estimated for each key line of business within each operating unit. Expected loss cost inflation is particularly important for the long-tail lines, such as excess casualty, and claims with a high medical component, such as workers’ compensation. Reported and paid loss emergence patterns are used to project current reported or paid loss amounts to their ultimate settlement value. Loss development factors are based on the historical emergence patterns of paid and incurred losses, and are derived from the Company’s own experience and industry data. The paid loss emergence pattern is also significant to excess and assumed workers’ compensation reserves because those reserves are discounted to their estimated present value based upon such estimated payout patterns.
Loss frequency and severity are measures of loss activity that are considered in determining the key assumptions described in our discussion of loss and loss expense reserves, including expected loss ratios, rate of loss cost inflation and reported and paid loss emergence patterns. Loss frequency is a measure of the number of claims per unit of insured exposure, and loss severity is a measure of the average size of claims. Factors affecting loss frequency include the effectiveness of loss controls and safety programs and changes in economic activity or weather patterns. Factors affecting loss severity include changes in policy limits, retentions, rate of inflation and judicial interpretations.
Another factor affecting estimates of loss frequency and severity is the loss reporting lag, which is the period of time between the occurrence of a loss and the date the loss is reported to the Company. The length of the loss reporting lag affects our ability to accurately predict loss frequency (loss frequencies are more predictable for lines with short reporting lags) as well as the amount of reserves needed for incurred but not reported losses (less IBNR is required for lines with short reporting lags). As a result, loss reserves for lines with short reporting lags are likely to have less variation from initial loss estimates. For lines with short reporting lags, which include commercial automobile, primary workers’ compensation, other liability (claims-made) and property business, the key assumption is the loss emergence pattern used to project ultimate loss estimates from known losses paid or reported to date. For lines of business with long reporting lags, which include other liability (occurrence), products liability, excess workers’ compensation and liability reinsurance, the key assumption is the expected loss ratio since there is often little paid or incurred loss data to consider. Historically, the Company has experienced less variation from its initial loss estimates for lines of businesses with short reporting lags than for lines of business with long reporting lags.
The key assumptions used in calculating the most recent estimate of the loss reserves are reviewed each quarter and adjusted, to the extent necessary, to reflect the latest reported loss data, current trends and other factors observed.
22

The table below provides a reconciliation of the beginning and ending reserve balances:
September 30,
(In thousands) 2020 2019
Net reserves at beginning of period $ 10,697,998 $ 10,248,883
Cumulative effect adjustment resulting from changes in accounting principles 5,927 —
Restated net reserves at beginning of period 10,703,925 10,248,883
Net provision for losses and loss expenses:
Claims occurring during the current year (1) 3,328,827 3,007,364
Increase in estimates for claims occurring in prior years (2) (3) 849 22,340
Loss reserve discount accretion 27,335 29,246
Total 3,357,011 3,058,950
Net payments for claims:
Current year 570,924 767,945
Prior years 2,077,945 1,907,979
Total 2,648,869 2,675,924
Foreign currency translation ( 21,003 ) ( 49,455 )
Net reserves at end of period 11,391,064 10,582,454
Ceded reserves at end of period 2,068,295 1,814,501
Gross reserves at end of period $ 13,459,359 $ 12,396,955
_______________________________________
(1) Claims occurring during the current year are net of loss reserve discounts of $ 8 million and $ 15 million for the nine months ended September 30, 2020 and 2019, respectively.
(2) The change in estimates for claims occurring in prior years is net of loss reserve discount. On an undiscounted basis, the estimates for claims occurring in prior years decreased by $ 19 million and increased by $ 12 million for the nine months ended September 30, 2020 and 2019, respectively.
(3) For certain retrospectively rated insurance policies and reinsurance agreements, reserve development is offset by additional or return premiums. Favorable development, net of additional and return premiums, was $ 12 million and $ 17 million for the nine months ended September 30, 2020 and 2019, respectively.
The ongoing COVID-19 global pandemic has impacted, and will likely continue to impact, the Company’s results through its effect on claim frequency and severity. Loss cost trends have been impacted and will likely be further impacted by COVID-19-related claims in certain lines of business, as well as by other effects of COVID-19 associated with economic conditions, inflation, and social distancing and work from home rules, for example. Although it is still too early to determine the net impact, it appears that the losses incurred due to COVID-19-related claims are being offset, to a certain extent, by lower claim frequency in certain lines of our businesses, including commercial auto, workers’ compensation, and other liability. However, given the continuing nature of the pandemic, the impact of COVID-19 could ultimately increase or decrease overall loss cost trends and is likely to have differing impacts on the Company's different lines of business.
Most of the COVID-19-related claims reported to the Company to date involve certain short-tailed lines of business, including contingency and event cancellation, business interruption, and film production delay. The Company expects additional claims to be reported for these lines of business. The Company has also received COVID-19-related claims for longer-tailed casualty lines of business such as workers’ compensation and other liability; however, the estimated incurred loss impact for these reported claims appears to be modest at this time. Given the continuing uncertainty regarding the pandemic's pervasiveness and the time needed to develop widespread treatments and vaccines, and the related economic impacts, the future impact that the pandemic may have on claim frequency and severity remains uncertain at this time. In workers’ compensation, for example, nearly two-thirds of the states have enacted rules, legislation or administrative orders creating a presumption that certain “essential” workers who contract COVID-19 did so through the course of their employment. Several other states are considering similar actions, including varying the definition of “essential” workers. While the ultimate impact of these presumptions are unknown at this time, the Company believes that such state actions will likely increase workers’ compensation claims with respect to workers deemed “essential,” although this impact may be partially offset by lower workers’ compensation claim frequency with respect to non-essential workers.
The Company has estimated the potential COVID-19 impact to its workers’ compensation, contingency and event cancellation, and other lines of business under a number of possible scenarios; however, due to COVID-19’s evolving impact and the still limited amount of available data, there remains a high degree of uncertainty around the Company’s COVID-19 reserves. In addition, several states (and international jurisdictions), through regulation, legislation and/or judicial action, continue to seek to expand policy coverage terms beyond the policy’s intended coverage, including, for example, but not
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limited to, property coverages, where there are attempts to extend business interruption coverage where there is no physical damage or loss to property, and attempts to disregard policy exclusions for communicable disease. Accordingly, losses arising from these actions, and the other factors described above, could exceed the Company’s reserves established for those related policies.
For the nine months ended September 30, 2020, the Company has recognized losses for COVID-19-related claims activity, net of reinsurance, of approximately $ 143 million, of which $ 121 million relates to the Insurance segment and $ 22 million relates to the Reinsurance & Monoline Excess segment. Of the $ 143 million of COVID-19-related losses, $ 69 million are reported losses and $ 74 million is booked as IBNR.
During the nine months ended September 30, 2020, favorable prior year development (net of additional and return premiums) of $ 12 million included $ 19 million of favorable development for the Insurance segment, partially offset by $ 7 million of adverse development for the Reinsurance & Monoline Excess segment.
The overall favorable development for the Insurance segment was primarily attributable to favorable development on workers’ compensation business, partially offset by adverse development on professional liability business. The favorable workers’ compensation development was spread across many prior accident years, including prior to 2010, but was especially significant in accident year 2019. The favorable workers’ compensation development reflects a continuation of the benign loss cost trends experienced during recent years, particularly the favorable claim frequency trends. Our ongoing workers’ compensation claims management efforts, including active medical case management and use of networks and specialty vendors to control medical and pharmaceutical benefit costs, have also added to the favorable workers’ compensation prior year development. The adverse professional liability development was mainly concentrated in accident years 2016 through 2018 and was largely driven by higher than expected large losses being reported in the directors and officers and lawyers professional liability lines of business.
The adverse development for the Reinsurance & Monoline Excess segment was mainly driven by non-proportional reinsurance assumed liability business written in the U.K. for accident years 2016 through 2018, partially offset by favorable development on excess workers’ compensation business. The adverse development was driven by a greater than expected number of reported large losses.
During the nine months ended September 30, 2019, favorable prior year development (net of additional and return premiums) of $ 17 million included $ 18 million of favorable development for the Insurance segment, partially offset by $ 1 million of adverse development for the Reinsurance & Monoline Excess segment.
The overall favorable development for the Insurance segment was primarily attributable to favorable development on workers’ compensation business, partially offset by adverse development on general liability, professional liability, and commercial auto liability business. The favorable workers’ compensation development was mainly attributable to accident years 2014 through 2018, and reflects a continuation 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 adverse general liability development was mainly related to accident years 2015 through 2017 and was driven by a higher than expected number of large losses being reported in the period. The adverse professional liability development was mainly from accident years 2013 through 2016 and was driven by an increased frequency of large losses relating to lawyers professional and directors and officers liability. The adverse commercial auto liability development was primarily related to accident years 2015 through 2018 (with most in 2018), and was driven by a higher than expected number of large losses.

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(17) Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments:
September 30, 2020 December 31, 2019
(In thousands) Carrying Value Fair Value Carrying Value Fair Value
Assets:
Fixed maturity securities $ 13,893,046 $ 13,907,561 $ 14,180,961 $ 14,194,955
Equity securities 435,303 435,303 480,620 480,620
Arbitrage trading account 595,727 595,727 400,809 400,809
Loans receivable 84,771 86,530 91,799 94,613
Cash and cash equivalents 2,571,447 2,571,447 1,023,710 1,023,710
Trading account receivables from brokers and clearing organizations 252,223 252,223 423,543 423,543
Liabilities:
Due to broker 58,893 58,893 27,116 27,116
Trading account securities sold but not yet purchased 19,254 19,254 36,143 36,143
Subordinated debentures 1,443,736 1,530,810 1,198,704 1,274,088
Senior notes and other debt 1,629,077 1,898,483 1,427,575 1,582,290
The estimated fair values of the Company’s fixed maturity securities, equity securities and arbitrage trading account securities are based on various valuation techniques that rely on fair value measurements as described in Note 15. The fair value of loans receivable are estimated by using current institutional purchaser yield requirements for loans with similar credit characteristics, which is considered a Level 2 input. The fair value of the senior notes and other debt and the subordinated debentures is based on spreads for similar securities, which is considered a Level 2 input.
In October 2020, the Company redeemed $ 350 million aggregate principal amount of 5.625 % subordinated debentures due 2053.

(18) Premiums and Reinsurance Related Information
The following is a summary of insurance and reinsurance financial information:
For the Three Months
Ended September 30, 		For the Nine Months
Ended September 30,
(In thousands) 2020 2019 2020 2019
Written premiums:
Direct $ 2,018,530 $ 1,853,881 $ 5,875,379 $ 5,566,728
Assumed 244,015 239,169 750,784 662,412
Ceded ( 383,229 ) ( 343,144 ) ( 1,161,183 ) ( 1,026,169 )
Total net premiums written $ 1,879,316 $ 1,749,906 $ 5,464,980 $ 5,202,971
Earned premiums:
Direct $ 1,877,234 $ 1,797,726 $ 5,511,791 $ 5,294,773
Assumed 237,815 209,094 699,025 595,946
Ceded ( 366,128 ) ( 330,010 ) ( 1,093,563 ) ( 974,212 )
Total net premiums earned $ 1,748,921 $ 1,676,810 $ 5,117,253 $ 4,916,507
Ceded losses and loss expenses incurred $ 209,706 $ 172,009 $ 677,761 $ 584,323
Ceded commissions earned $ 89,104 $ 76,001 $ 255,742 $ 220,110
The following table presents the rollforward of the allowance for expected credit losses for premiums and fees receivable for the nine months ended September 30, 2020:
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(In thousands)
Allowance for expected credit losses at January 1, 2020 $ 19,823
Cumulative effect adjustment resulting from changes in accounting principles 1,270
Provision for expected credit losses 1,940
Allowance for expected credit losses at September 30, 2020
$ 23,033
The following table presents the rollforward of the allowance for expected credit losses for premiums and fees receivable for the three months ended September 30, 2020:
(In thousands)
Allowance for expected credit losses at July 1, 2020 $ 22,106
Provision for expected credit losses 927
Allowance for expected credit losses at September 30, 2020
$ 23,033
The Company reinsures a portion of its insurance exposures in order to reduce its net liability on individual risks and catastrophe losses. The Company also cedes premiums to state assigned risk plans and captive insurance companies. Estimated amounts due from reinsurers are reported net of an allowance for expected credit losses. The following table presents the rollforward of the allowance for expected credit losses associated with due from reinsurers for the nine months ended September 30, 2020:
(In thousands)
Allowance for expected credit losses at January 1, 2020 $ 690
Cumulative effect adjustment resulting from changes in accounting principles 5,927
Provision for expected credit losses 1,124
Allowance for expected credit losses at September 30, 2020
$ 7,741
The following table presents the rollforward of the allowance for expected credit losses associated with due from reinsurers for the three months ended September 30, 2020:
(In thousands)
Allowance for expected credit losses at July 1, 2020 $ 7,175
Provision for expected credit losses 566
Allowance for expected credit losses at September 30, 2020
$ 7,741


(19) Restricted Stock Units
Pursuant to its stock incentive plan, the Company may issue restricted stock units ("RSUs") to employees of the Company and its subsidiaries. The RSUs generally vest three to five years from the award date and are subject to other vesting and forfeiture provisions contained in the award agreement. RSUs are expensed pro-ratably over the vesting period. RSU expenses were $ 35 million and $ 36 million for the nine months ended September 30, 2020 and 2019, respectively. A summary of RSUs issued in the nine months ended September 30, 2020 and 2019 follows:
($ in thousands)
Units Fair Value
2020 953,519 $ 59,683
2019 839,263 $ 59,435

(20) Litigation and Contingent Liabilities
In the ordinary course of business, the Company is subject to disputes, litigation and arbitration arising from its insurance and reinsurance businesses. These matters are generally related to insurance and reinsurance claims and are considered in the establishment of loss and loss expense reserves. In addition, the Company may also become involved in legal actions which seek extra-contractual damages, punitive damages or penalties, including claims alleging bad faith in handling of insurance claims. The Company expects its ultimate liability with respect to such matters will not be material to its financial
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condition. However, adverse outcomes on such matters are possible, from time to time, and could be material to the Company’s results of operations in any particular financial reporting period.

(21) Leases
Lessees are required to recognize a right-of-use asset and a lease liability for leases with terms of more than 12 months on the balance sheet. All leases disclosed within this footnote are classified as operating leases. Recognized right-of-use asset and lease liability are reported within other assets and other liabilities, respectively, in the consolidated balance sheet. Lease expense is reported in other operating costs and expenses in the consolidated statement of income and accounted for on a straight-line basis over the lease term.
To determine the discount rate used to calculate present value of future minimum lease payments, the Company uses its incremental borrowing rate during the lease commencement period in line with the respective lease duration. In certain cases, the Company has the option to renew the lease. Lease renewal future payments are included in the present value of the future minimum lease payments when the Company determines it is reasonably certain to renew.
The main leases entered into by the Company are for office space used by the Company’s operating units across the world. Additionally, the Company, to a lesser extent, has equipment leases mainly for office equipment. Further information relating to operating lease expense and other operating lease information are as follows:
For the Three Months Ended
September 30, 		For the Nine Months Ended September 30,
(In thousands) 2020 2019 2020 2019
Leases:
Lease cost $ 11,016 $ 10,734 $ 33,130 $ 32,969
Cash paid for amounts included in the measurement of lease liabilities reported in operating cash flows $ 11,560 $ 11,241 $ 33,869 $ 34,030
Right-of-use assets obtained in exchange for new lease liabilities $ 1,344 $ 23,211 $ 5,639 $ 31,095

As of September 30,
($ in thousands) 2020 2019
Right-of-use assets $ 172,473 $ 194,553
Lease liabilities $ 211,808 $ 226,291
Weighted-average remaining lease term 6.7 years 7.2 years
Weighted-average discount rate 5.93 % 5.97 %
Contractual maturities of the Company’s future minimum lease payments are as follows:
(In thousands) September 30, 2020
Contractual Maturities:
2020 $ 12,162
2021 46,835
2022 41,637
2023 37,737
2024 31,439
Thereafter 78,806
Total undiscounted future minimum lease payments 248,616
Less: Discount impact ( 36,808 )
Total lease liability $ 211,808


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(22) Business Segments
The Company’s reportable segments include the following two business segments, plus a corporate segment:
• Insurance - predominantly commercial insurance business, including excess and surplus lines, admitted lines and specialty personal lines throughout the United States, as well as insurance business in the United Kingdom, Continental Europe, South America, Canada, Mexico, Scandinavia, Asia and Australia.
• Reinsurance & Monoline Excess - reinsurance business on a facultative and treaty basis, primarily in the United States, the United Kingdom, Continental Europe, Australia, the Asia-Pacific Region and South Africa, as well as operations that solely retain risk on an excess basis.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Income tax expense and benefits are calculated based upon the Company's overall effective tax rate.
Summary financial information about the Company's reporting segments is presented in the following tables. Income (loss) before income taxes by segment includes allocated investment income. Identifiable assets by segment are those assets used in or allocated to the operation of each segment.
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Revenues
(In thousands) Earned
Premiums (1) 		Investment
Income 		Other Total (2) Pre-Tax Income (Loss) Net Income (Loss) to Common Stockholders
Three months ended September 30, 2020
Insurance $ 1,531,093 $ 87,828 $ 9,463 $ 1,628,384 $ 178,971 $ 130,266
Reinsurance & Monoline Excess 217,828 40,306 — 258,134 61,532 49,070
Corporate, other and eliminations (3) — 14,516 99,807 114,323 ( 73,067 ) ( 57,781 )
Net investment gains — — 38,978 38,978 38,978 30,123
Total $ 1,748,921 $ 142,650 $ 148,248 $ 2,039,819 $ 206,414 $ 151,678
Three months ended September 30, 2019
Insurance $ 1,493,854 $ 99,628 $ 11,611 $ 1,605,093 $ 202,390 $ 162,994
Reinsurance & Monoline Excess 182,956 43,768 — 226,724 46,863 38,240
Corporate, other and eliminations (3) — 18,296 114,138 132,434 ( 47,736 ) ( 37,184 )
Net investment gains — — 1,465 1,465 1,465 1,158
Total $ 1,676,810 $ 161,692 $ 127,214 $ 1,965,716 $ 202,982 $ 165,208
Nine months ended September 30, 2020
Insurance $ 4,481,092 $ 255,392 $ 25,953 $ 4,762,437 $ 431,464 $ 315,733
Reinsurance & Monoline Excess 636,161 101,477 — 737,638 110,611 88,947
Corporate, other and eliminations (3) — 45,975 300,715 346,690 ( 176,369 ) ( 139,471 )
Net investment losses — — ( 60,311 ) ( 60,311 ) ( 60,311 ) ( 46,689 )
Total $ 5,117,253 $ 402,844 $ 266,357 $ 5,786,454 $ 305,395 $ 218,520
Nine months ended September 30, 2019
Insurance $ 4,396,071 $ 332,072 $ 38,542 $ 4,766,685 $ 612,777 $ 488,228
Reinsurance & Monoline Excess 520,436 127,791 — 648,227 144,353 115,630
Corporate, other and eliminations (3) — 48,416 319,103 367,519 ( 194,664 ) ( 154,736 )
Net investment gains — — 143,691 143,691 143,691 113,516
Total $ 4,916,507 $ 508,279 $ 501,336 $ 5,926,122 $ 706,157 $ 562,638
_________________
(1) Certain amounts included in earned premiums of each segment are related to inter-segment transactions.
(2) Revenues for Insurance from foreign countries for the three months ended September 30, 2020 and 2019 were $ 183 million and $ 185 million, respectively, and for the nine months ended September 30, 2020 and 2019 were $ 500 million and $ 535 million, respectively. Revenues for Reinsurance & Monoline Excess from foreign countries for the three months ended September 30, 2020 and 2019 were $ 77 million and $ 65 million, respectively, and for the nine months ended September 30, 2020 and 2019 were $ 212 million and $ 186 million, respectively.
(3) Corporate, other and eliminations represent corporate revenues and expenses that are not allocated to business segments .
Identifiable Assets
(In thousands) September 30,
2020 		December 31,
2019
Insurance $ 21,060,144 $ 20,005,802
Reinsurance & Monoline Excess 4,697,249 4,710,819
Corporate, other and eliminations 2,454,977 1,913,409
Consolidated $ 28,212,370 $ 26,630,030

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Net premiums earned by major line of business are as follows:
For the Three Months
Ended September 30, 		For the Nine Months
Ended September 30,
(In thousands) 2020 2019 2020 2019
Insurance:
Other liability $ 561,595 $ 527,253 $ 1,653,189 $ 1,523,534
Short-tail lines (1) 326,019 310,423 917,466 905,365
Workers' compensation 271,802 321,872 852,101 979,059
Commercial automobile 203,047 191,136 583,024 560,340
Professional liability 168,630 143,170 475,312 427,773
Total Insurance 1,531,093 1,493,854 4,481,092 4,396,071
Reinsurance & Monoline Excess:
Casualty reinsurance 130,186 106,532 383,375 292,471
Monoline excess (2) 43,577 40,639 126,800 119,020
Property reinsurance 44,065 35,785 125,986 108,945
Total Reinsurance & Monoline Excess 217,828 182,956 636,161 520,436
Total $ 1,748,921 $ 1,676,810 $ 5,117,253 $ 4,916,507
______________
(1) Short-tail lines include commercial multi-peril (non-liability), inland marine, accident and health, fidelity and surety, boiler and machinery and other lines.
(2) Monoline excess includes operations that solely retain risk on an excess basis.

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SAFE HARBOR STATEMENT
This is a “Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995. Any forward-looking statements contained herein, including statements related to our outlook for the industry and for our performance for the year 2020 and beyond, are based upon the Company’s historical performance and on current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. They are subject to various risks and uncertainties, including but not limited to: the ongoing COVID-19 pandemic, including the related impact on the U.S. and global economies; 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, including claims for cybersecurity related risks; natural and man-made catastrophic losses, including as a result of terrorist activities, epidemics or pandemics, such as COVID-19; 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 the conditions in the financial markets and the global economy, and the potential effect of legislative, regulatory, accounting or other initiatives taken in response, on our results and financial condition; foreign currency and political risks (including those associated with the United Kingdom's withdrawal from the European Union, or "Brexit") relating to our international operations; our ability to attract and retain key personnel and qualified employees; continued availability of capital and financing; the success of our new ventures or acquisitions and the availability of other opportunities; the availability of reinsurance; our retention under the Terrorism Risk Insurance Program Reauthorization Act of 2019; the ability or willingness of our reinsurers to pay reinsurance recoverables owed to us; other legislative and regulatory developments, including those related to business practices in the insurance industry; credit risk related to our policyholders, independent agents and brokers; changes in the ratings assigned to us or our insurance company subsidiaries by rating agencies; the availability of dividends from our insurance company subsidiaries; potential difficulties with technology and/or cyber security issues; the effectiveness of our controls to ensure compliance with guidelines, policies and legal and regulatory standards; and other risks detailed from time to time in the Company’s filings with the Securities and Exchange Commission.

These risks and uncertainties could cause our actual results for the year 2020 and beyond to differ materially from those expressed in any forward-looking statement we make. Any projections of growth in our revenues would not necessarily result in commensurate levels of earnings. Our future financial performance is dependent upon factors discussed in our Annual Report on Form 10-K, elsewhere in this Form 10-Q and our other SEC filings. Forward-looking statements speak only as of the date on which they are made. Except to the extent required by applicable laws, the Company does not undertake any obligation to update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.
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Item 2 . 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 segments of the property and casualty business: Insurance and Reinsurance & Monoline Excess. 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, 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 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. A portion of the Company’s fixed maturity securities include investments in collateralized loan obligations with exposure to a diverse group of industries. As of September 30, 2020, approximately 97% of the Company’s collateralized loan obligation portfolio has an average rating of “AA” or higher. As a result, the Company believes that its collateralized loan obligation portfolio is well-positioned despite the current market environment.
The Company also 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's share of the earnings or losses from investment funds is generally reported on a one-quarter lag in order to facilitate the timely completion of the Company's consolidated financial statements.
Effective January 1, 2020, the Company adopted new accounting standard ASU 2016-13 Financial Instruments - Credit Losses. Refer to Note 3 in the financial statements for further information on the accounting guidance and impact of its adoption on the Company's results and financial position.
The ongoing COVID-19 pandemic, including the related impact on the U.S. and global economies, has materially and adversely affected our results of operations. For the nine months ended September 30, 2020, the Company recorded approximately $143 million for COVID-19-related losses, net of reinsurance, and reinstatement premiums of approximately $18 million. The ultimate impact of COVID-19 on the economy and on the Company’s results of operations, financial position and liquidity is uncertain and not within the Company’s control. The scope, duration and magnitude of the direct and indirect effects of COVID-19 continue to evolve in ways that are difficult or impossible to anticipate. In addition, because COVID-19 did not begin to affect the Company's operations and financial position until late in the first quarter of 2020, its impact on the Company’s first nine months of 2020 is not necessarily indicative of its impact for the remainder of 2020 or beyond. Despite the effects of COVID-19 to date, the Company’s financial position and liquidity improved commencing in the second quarter.
The impact of the COVID-19 pandemic on our results of operations, financial position and liquidity is expected to include, among others:
Adverse Legislative and Regulatory Action . Legislative and regulatory initiatives taken or that may be taken in response to COVID-19, such as those that seek to retroactively mandate or provide a presumption of coverage for losses which our insurance policies would not otherwise cover and were not priced to cover, may adversely affect us, particularly in our workers’ compensation and property coverages businesses.
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Claim Losses Related to COVID-19 May Exceed Reserves . Given the great uncertainties associated with COVID-19 and its impact and the limited information upon which our current assumptions and assessments have been made, our reserves and underlying estimated level of claim losses and costs arising from COVID-19 may materially change.
Claim Losses and Adjustment Expenses May Increase . As the effects of COVID-19 on industry practices and economic, legal, judicial, social and other environmental conditions continue to evolve, unexpected and unintended issues related to claims and coverages may emerge (including in the area of property coverages where physical damage requirements and communicable disease exclusions are currently being challenged).
Reinsurance . Reinsurers may dispute the applicability of reinsurance to COVID-19 related losses (including the application of reinsurance reinstatements) and, as a result, our reinsurers may refuse to pay reinsurance recoverables related thereto or they may not pay them on a timely basis. In addition, we may be unable to renew our current reinsurance coverages or purchase new coverages with respect to certain exposures under our policies, including COVID-19-related exposures.
Premium Volumes May Be Negatively Impacted . Reduced economic activity relating to the COVID-19 pandemic will likely decrease demand for our insurance products and services. In addition, we may alter our view on the insurance coverages that are appropriate to offer in various jurisdictions, which could further negatively impact our premium volumes.
Investments . Further disruptions in global financial markets due to the continuing impact of COVID-19 could cause us to incur additional unrealized and/or realized investment losses, including impairments in our fixed income portfolio and other investments.
Credit Risk . As credit risk is generally a function of the economy, we face greater credit risk from our policyholders, independent agents and brokers in connection with the payment and remittance of premiums as a result of the economic conditions caused by COVID-19. Similarly, our credit risk related to the reimbursement of deductibles from policyholders and in connection with reinsurance recoverables has increased.
Operational Disruptions and Costs . Our operations could be disrupted if key members of our senior management or a significant percentage of our workforce or the workforce of our agents, brokers, suppliers or other third party service providers are unable to continue to work because of illness, government directives or otherwise. In response to the COVID-19 pandemic, we have implemented remote working policies which have resulted in disruptions to our business routines, heightened risk to cybersecurity attacks and data security incidents and a greater dependency on internet and telecommunication access and capabilities.

Critical Accounting Estimates
The following presents a discussion of accounting policies and estimates relating to reserves for losses and loss expenses, assumed premiums and allowance for expected credit losses on 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
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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 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 reserves are well tested over time, some of 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.
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 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
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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 2019:
(In thousands) Frequency (+/-)
Severity (+/-) 1% 5% 10%
1% $ 81,566 $ 245,508 $ 450,437
5% 245,508 415,944 628,988
10% 450,437 628,988 852,178
Our net reserves for losses and loss expenses of approximately $11.4 billion as of September 30, 2020 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 $2.6 billion, or 23%, of the Company’s net loss reserves as of September 30, 2020 relate to the Reinsurance & Monoline Excess segment. There is a higher degree of uncertainty and greater variability regarding estimates of excess workers' compensation and assumed reinsurance loss reserves. In the case of excess workers’ compensation, our policies generally attach at $1 million or higher. The claims which reach our layer therefore tend to involve the most serious injuries and many remain open for the lifetime of the claimant, which extends the claim settlement tail. These claims also occur less frequently but tend to be larger than primary claims, which increases claim variability. In the case of assumed reinsurance our loss reserve 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 also extended. Management considers the impact of delayed reporting and the extended tail in its selection of loss development factors for these lines of business.
Information received from ceding companies is used to set initial expected loss ratios, to establish case reserves and to estimate reserves for incurred but not reported losses on assumed reinsurance business. This information, which is generally provided through reinsurance intermediaries, is gathered through the underwriting process and from periodic claim reports and other correspondence with ceding companies. The Company performs underwriting and claim audits of selected ceding companies to determine the accuracy and completeness of information provided to the Company. The information received from the ceding companies is supplemented by the Company’s own loss development experience with similar lines of business as well as industry loss trends and loss development benchmarks.
Following is a summary of the Company’s reserves for losses and loss expenses by business segment:
(In thousands) September 30,
2020 		December 31,
2019
Insurance $ 8,800,434 $ 8,193,381
Reinsurance & Monoline Excess 2,590,630 2,504,617
Net reserves for losses and loss expenses 11,391,064 10,697,998
Ceded reserves for losses and loss expenses 2,068,295 1,885,251
Gross reserves for losses and loss expenses $ 13,459,359 $ 12,583,249

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Following is a summary of the Company’s net reserves for losses and loss expenses by major line of business:
(In thousands) Reported Case
Reserves 		Incurred But
Not Reported 		Total
September 30, 2020
Other liability $ 1,495,595 $ 2,754,905 $ 4,250,500
Workers’ compensation (1) 956,982 905,652 1,862,634
Professional liability 417,451 824,648 1,242,099
Commercial automobile 427,154 355,200 782,354
Short-tail lines (2) 303,236 359,611 662,847
Total Insurance 3,600,418 5,200,016 8,800,434
Reinsurance & Monoline Excess (1) (3) 1,454,609 1,136,021 2,590,630
Total $ 5,055,027 $ 6,336,037 $ 11,391,064
December 31, 2019
Other liability $ 1,421,378 $ 2,522,957 $ 3,944,335
Workers’ compensation (1) 918,619 964,102 1,882,721
Professional liability 399,411 713,433 1,112,844
Commercial automobile 412,036 300,339 712,375
Short-tail lines (2) 271,192 269,914 541,106
Total Insurance 3,422,636 4,770,745 8,193,381
Reinsurance & Monoline Excess (1) (3) 1,469,363 1,035,254 2,504,617
Total $ 4,891,999 $ 5,805,999 $ 10,697,998
___________
(1) Reserves for workers’ compensation and Reinsurance & Monoline Excess are net of an aggregate net discount of $490 million and $530 million as of September 30, 2020 and December 31, 2019, 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.
(3) Reinsurance & Monoline Excess includes property and casualty reinsurance, as well as operations that solely retain risk on an excess basis.
The Company evaluates reserves for losses and loss adjustment 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 adjustment 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 the nine months ended September 30, 2020 and 2019 are as follows:
(In thousands) 2020 2019
Net increase in prior year loss reserves $ (849) $ (22,340)
Increase in prior year earned premiums 12,869 39,567
Net favorable prior year development $ 12,020 $ 17,227
The ongoing COVID-19 global pandemic has impacted, and will likely continue to impact, the Company’s results through its effect on claim frequency and severity. Loss cost trends have been impacted and will likely be further impacted by COVID-19-related claims in certain lines of business, as well as by other effects of COVID-19 associated with economic conditions, inflation, and social distancing and work from home rules, for example. Although it is still too early to determine the net impact, it appears that the losses incurred due to COVID-19-related claims are being offset, to a certain extent, by lower claim frequency in certain lines of our businesses, including commercial auto, workers’ compensation, and other
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liability. However, given the continuing nature of the pandemic, the impact of COVID-19 could ultimately increase or decrease overall loss cost trends and is likely to have differing impacts on the Company's different lines of business.
Most of the COVID-19-related claims reported to the Company to date involve certain short-tailed lines of business, including contingency and event cancellation, business interruption, and film production delay. The Company expects additional claims to be reported for these lines of business. The Company has also received COVID-19-related claims for longer-tailed casualty lines of business such as workers’ compensation and other liability; however, the estimated incurred loss impact for these reported claims appears to be modest at this time. Given the continuing uncertainty regarding the pandemic's pervasiveness and the time needed to develop widespread treatments and vaccines, and the related economic impacts, the future impact that the pandemic may have on claim frequency and severity remains uncertain at this time. In workers’ compensation, for example, nearly two-thirds of the states have enacted rules, legislation or administrative orders creating a presumption that certain “essential” workers who contract COVID-19 did so through the course of their employment. Several other states are considering similar actions, including varying the definition of “essential” workers. While the ultimate impact of these presumptions are unknown at this time, the Company believes that such state actions will likely increase workers’ compensation claims with respect to workers deemed “essential,” although this impact may be partially offset by lower workers’ compensation claim frequency with respect to non-essential workers.
The Company has estimated the potential COVID-19 impact to its workers’ compensation, contingency and event cancellation, and other lines of business under a number of possible scenarios; however, due to COVID-19’s evolving impact and the still limited amount of available data, there remains a high degree of uncertainty around the Company’s COVID-19 reserves. In addition, several states (and international jurisdictions), through regulation, legislation and/or judicial action, continue to seek to expand policy coverage terms beyond the policy’s intended coverage, including, for example, but not limited to, property coverages, where there are attempts to extend business interruption coverage where there is no physical damage or loss to property, and attempts to disregard policy exclusions for communicable disease. Accordingly, losses arising from these actions, and the other factors described above, could exceed the Company’s reserves established for those related policies.
For the nine months ended September 30, 2020, the Company has recognized losses for COVID-19-related claims activity, net of reinsurance, of approximately $143 million, of which $121 million relates to the Insurance segment and $22 million relates to the Reinsurance & Monoline Excess segment. Of the $143 million of COVID-19-related losses, $69 million are reported losses and $74 million is booked as IBNR.
During the nine months ended September 30, 2020, favorable prior year development (net of additional and return premiums) of $12 million included $19 million of favorable development for the Insurance segment, partially offset by $7 million of adverse development for the Reinsurance & Monoline Excess segment.
The overall favorable development for the Insurance segment was primarily attributable to favorable development on workers’ compensation business, partially offset by adverse development on professional liability business. The favorable workers’ compensation development was spread across many prior accident years, including prior to 2010, but was especially significant in accident year 2019. The favorable workers’ compensation development reflects a continuation of the benign loss cost trends experienced during recent years, particularly the favorable claim frequency trends. Our ongoing workers’ compensation claims management efforts, including active medical case management and use of networks and specialty vendors to control medical and pharmaceutical benefit costs, have also added to the favorable workers’ compensation prior year development. The adverse professional liability development was mainly concentrated in accident years 2016 through 2018 and was largely driven by higher than expected large losses being reported in the directors and officers and lawyers professional liability lines of business.
The adverse development for the Reinsurance & Monoline Excess segment was mainly driven by non-proportional reinsurance assumed liability business written in the U.K. for accident years 2016 through 2018, partially offset by favorable development on excess workers’ compensation business. The adverse development was driven by a greater than expected number of reported large losses.
During the nine months ended September 30, 2019, favorable prior year development (net of additional and return premiums) of $17 million included $18 million of favorable development for the Insurance segment, offset by $1 million of adverse development for the Reinsurance & Monoline Excess segment. The overall favorable development for the Insurance segment was primarily attributable to favorable development on workers’ compensation business, partially offset by adverse development on general liability, professional liability, and commercial auto liability business. The favorable workers’ compensation development was mainly attributable to accident years 2014 through 2018, and reflects a continuation 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 adverse general liability development was mainly related to accident years 2015 through 2017 and was driven by a higher than expected number of large losses being reported in the period. The adverse professional liability development was mainly from accident years 2013 through 2016 and was driven by an increased
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frequency of large losses relating to lawyers professional and directors and officers liability. The adverse commercial auto liability development was primarily related to accident years 2015 through 2018 (with most in 2018), and was driven by a higher than expected number of large losses.
Reserve Discount . The Company discounts its liabilities for certain workers’ compensation reserves. The amount of workers’ compensation reserves that were discounted was $1,650 million and $1,731 million at September 30, 2020 and December 31, 2019, respectively. The aggregate net discount for those reserves, after reflecting the effects of ceded reinsurance, was $490 million and $530 million at September 30, 2020 and December 31, 2019, respectively. At September 30, 2020, discount rates by year ranged from 0.7% to 6.5%, with a weighted average discount rate of 3.6%.
Substantially all of the workers’ compensation discount (97% of total discounted reserves at September 30, 2020) relates to 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 September 30, 2020), including reserves for quota share reinsurance and reserves related to losses regarding occupational lung disease. These reserves are discounted at statutory rates permitted by the Department of Insurance of the State of Delaware.
Assumed Reinsurance Premiums . The Company estimates the amount of assumed reinsurance premiums that it will receive under treaty reinsurance agreements at the inception of the contracts. These premium estimates are revised as the actual amount of assumed premiums is reported to the Company by the ceding companies. As estimates of assumed premiums are made or revised, the related amount of earned premiums, commissions and incurred losses associated with those premiums are recorded. Estimated assumed premiums receivable were approximately $44 million at September 30, 2020 and $43 million at December 31, 2019. 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.
Allowance for Expected Credit Losses on Investments .
Fixed Maturity Securities – For fixed maturity securities in an unrealized loss position where the Company intends to sell, or it is more likely than not that it will be required to sell the security before recovery in value, the amortized cost basis is written down to fair value through net investment gains (losses). For fixed maturity securities in an unrealized loss position where the Company does not intend to sell, or it is more likely than not that it will not be required to sell the security before recovery in value, the Company evaluates whether the decline in fair value has resulted from credit losses or all other factors (non-credit factors). In making this assessment, the Company considers the extent to which fair value is less than amortized cost, changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, an allowance for expected credit losses is recorded for the credit loss through net investment gains (losses), limited by the amount that the fair value is less than the amortized cost basis. Effective January 1, 2020, the allowance is adjusted for any change in expected credit losses and subsequent recoveries through net investment gains (losses). The impairment related to non-credit factors is recognized in other comprehensive income (loss) .
The Company’s credit assessment of allowance for expected credit losses uses a third party model for available for sale and held to maturity securities, as well as loans receivable. The allowance for expected credit losses is generally based on the performance of the underlying collateral under various economic and default scenarios that 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. A discounted cash flow analysis is used to ascertain the amount of the allowance for expected credit losses, if any. In general, the model reverts to the rating-level long-term average marginal default rates based on 10 years of historical data, beyond the forecast period. For other inputs, the model in most cases reverts to the baseline long-
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term assumptions linearly over 5 years beyond the forecast period. The long-term assumptions are based on the historical averages.
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.
A summary of the Company’s non-investment grade fixed maturity securities that were in an unrealized loss position at September 30, 2020 is presented in the table below:
($ in thousands) Number of
Securities 		Aggregate
Fair Value 		Gross Unrealized Loss
Foreign government 22 $ 91,413 $ 45,247
Corporate 13 28,816 6,343
Mortgage-backed securities 8 1,659 34
Total 43 $ 121,888 $ 51,624
As of September 30, 2020, the Company has recorded an allowance for expected credit losses on fixed maturity securities of $3 million. The Company has evaluated the remaining 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.
Loans Receivable – For loans receivable, the Company estimates an allowance for expected credit losses based on relevant information about past events, including historical loss experience, current conditions and forecasts that affect the expected collectability of the amortized cost of the financial asset. The allowance for expected credit losses is presented as a reduction to amortized cost of the financial asset in the consolidated balance sheet and changes to the estimate for expected credit losses are recognized through net investment gains (losses). Loans receivable are reported net of an allowance for expected credit losses of $6 million and $2 million as of September 30, 2020 and December 31, 2019, respectively.
Fair Value Measurements . The Company’s fixed maturity available for sale securities, equity securities, and its arbitrage trading account securities are carried at fair value. Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” The Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for similar assets in active markets. Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs may only be used to measure fair value to the extent that observable inputs are not available. The fair value of the vast majority of the Company’s portfolio is based on observable data (other than quoted prices) and, accordingly, is classified as Level 2.
In classifying particular financial securities in the fair value hierarchy, the Company uses its judgment to determine whether the market for a security is active and whether significant pricing inputs are observable. The Company determines the existence of an active market by assessing whether transactions occur with sufficient frequency and volume to provide reliable pricing information. The Company determines whether inputs are observable based on the use of such information by pricing services and external investment managers, the uninterrupted availability of such inputs, the need to make significant adjustments to such inputs and the volatility of such inputs over time. If the market for a security is determined to be inactive or if significant inputs used to price a security are determined to be unobservable, the security is categorized in Level 3 of the fair value hierarchy.
Because many fixed maturity securities do not trade on a daily basis, the Company utilizes pricing models and processes which may include benchmark curves, benchmarking of like securities, sector groupings and matrix pricing. Market inputs used to evaluate securities include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. Quoted prices are often unavailable for recently issued securities that are infrequently traded or securities that are only traded in private transactions. For publicly traded securities for which quoted prices are unavailable, the Company determines fair value based on independent broker quotations and other observable market data. For securities traded only in private negotiations, the Company determines fair value based primarily on the cost of such securities, which is adjusted to reflect prices of recent placements of securities of the same issuer, financial data, projections and business developments of the issuer and other relevant information.
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The following is a summary of pricing sources for the Company's fixed maturity securities available for sale as of September 30, 2020:
($ in thousands) Carrying
Value 		Percent
of Total
Pricing source:
Independent pricing services $ 13,638,784 98.7 %
Syndicate manager 42,383 0.3
Directly by the Company based on:
Observable data 139,362 1.0
Total $ 13,820,529 100.0 %
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 September 30, 2020, 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.


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Results of Operations for the Nine Months Ended September 30, 2020 and 2019
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 premiums earned), expense ratios (underwriting expenses expressed as a percentage of premiums earned) and GAAP combined ratios (sum of loss ratio and expense ratio) for each of our business segments for the nine months ended September 30, 2020 and 2019. 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) 2020 2019
Insurance:
Gross premiums written $ 5,841,328 $ 5,565,862
Net premiums written 4,754,791 4,601,077
Net premiums earned 4,481,092 4,396,071
Loss ratio 65.5 % 62.3 %
Expense ratio 30.6 % 31.3 %
GAAP combined ratio 96.1 % 93.6 %
Reinsurance & Monoline Excess:
Gross premiums written $ 784,835 $ 663,279
Net premiums written 710,189 601,894
Net premiums earned 636,161 520,436
Loss ratio 66.5 % 61.6 %
Expense ratio 32.1 % 35.2 %
GAAP combined ratio 98.6 % 96.8 %
Consolidated:
Gross premiums written $ 6,626,163 $ 6,229,141
Net premiums written 5,464,980 5,202,971
Net premiums earned 5,117,253 4,916,507
Loss ratio 65.6 % 62.2 %
Expense ratio 30.8 % 31.7 %
GAAP combined ratio 96.4 % 93.9 %
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 nine months ended September 30, 2020 and 2019:
(In thousands, except per share data) 2020 2019
Net income to common stockholders $ 218,520 $ 562,638
Weighted average diluted shares 189,515 193,557
Net income per diluted share $ 1.15 $ 2.91
The Company reported net income to common stockholders of $219 million in 2020 compared to $563 million in 2019. The $344 million decrease in net income was primarily due to an after-tax decrease in net investment gains of $161 million (primarily resulting from disruption in global financial markets related to COVID-19), an after-tax decrease in underwriting income of $88 million primarily from COVID-19-related losses and other catastrophe losses, an after-tax decrease in net investment income of $83 million primarily due to less income from investment funds, reduced investment yields in fixed maturity securities and repositioning a larger portion of the investment portfolio to cash and cash equivalents, an increase in tax expense of $27 million due to a change in the effective tax rate, an after-tax decrease in foreign currency gains of $4 million, an after-tax decrease in profits from non-insurance businesses of $2 million, and an after-tax decrease in other income of $1 million, partially offset by an after-tax decrease in corporate expenses of $11 million, an after-tax increase in profit from insurance service businesses of $7 million and an after-tax decrease in interest expense of $4 million. The number of weighted average diluted shares decreased by approximately 4 million for 2020 compared to 2019 mainly reflecting shares repurchased in 2020.

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Premiums . Gross premiums written were $6,626 million in 2020, an increase of 6% from $6,229 million in 2019. The increase was due to a $275 million increase in the Insurance segment and a $122 million increase in the Reinsurance & Monoline Excess segment. Approximately 79.0% of premiums expiring in 2020 were renewed, and 79.9% of premiums expiring in 2019 were renewed.
Average renewal premium rates for insurance and facultative reinsurance increased 10.7% in 2020 when adjusted for changes in exposures, and increased 13.0% excluding workers' compensation.
A summary of gross premiums written in 2020 compared with 2019 by line of business within each business segment follows:
• Insurance - gross premiums increased 5% to $5,841 million in 2020 from $5,566 million in 2019. Gross premiums increased $195 million (10%) for other liability, $121 million (17%) for professional liability, $79 million (6%) for short-tail lines, and $34 million (5%) for commercial auto, and decreased $153 million (15%) for workers' compensation.
• Reinsurance & Monoline Excess - gross premiums increased 18% to $785 million in 2020 from $663 million in 2019. Gross premiums increased $79 million (22%) for casualty reinsurance, $27 million (19%) for property reinsurance and $16 million (10%) for monoline excess.
Net premiums written were $5,465 million in 2020, an increase of 5% from $5,203 million in 2019. Ceded reinsurance premiums as a percentage of gross written premiums were 18% in 2020 and 16% in 2019. The cession rate increased primarily because of reinstatement premiums associated with COVID-19 related claims activity.
Premiums earned increased 4% to $5,117 million in 2020 from $4,917 million in 2019. 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 2020 are related to business written during both 2020 and 2019. Audit premiums were $111 million in 2020 compared with $149 million in 2019.
Net Investment Income . Following is a summary of net investment income for the nine months ended September 30, 2020 and 2019:
Amount Average Annualized
Yield
($ in thousands) 2020 2019 2020 2019
Fixed maturity securities, including cash and cash equivalents and loans receivable $ 330,941 $ 386,978 2.9 % 3.5 %
Investment funds 1,260 77,284 0.1 7.5
Arbitrage trading account 51,985 26,184 12.4 8.0
Real estate 18,807 17,468 1.2 1.1
Equity securities 6,194 3,984 2.4 2.1
Gross investment income 409,187 511,898 2.8 3.6
Investment expenses (6,343) (3,619) — —
Total $ 402,844 $ 508,279 2.7 % 3.5 %
Net investment income decreased 21% to $403 million in 2020 from $508 million in 2019 due primarily to a $76 million decrease in income from investment funds (as a result of the impact of the disruption in global financial markets associated with COVID-19 during 2020), a $56 million decrease in income from fixed maturity securities mainly driven by lower investment yields and repositioning a larger portion of the investment portfolio to cash and cash equivalents, and a $2 million increase in investment expense, partially offset by a $26 million increase from the arbitrage trading account, a $1 million increase in real estate and a $2 million increase from equity securities. The Company shortened the duration of its fixed maturity security portfolio, thereby reducing the potential impact of mark-to-market on the portfolio and positioning the Company to react quickly to changes in the current interest rate environment. Average invested assets, at cost (including cash and cash equivalents), were $19.8 billion in 2020 and $19.1 billion in 2019.
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 decreased to $67 million in 2020 from $71 million in 2019. The decrease is primarily due to a reduction of assigned risk plan business.
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Net Realized and Unrealized Gains (Losses) 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. Net realized and unrealized losses on investments were $89 million in 2020 compared with net gains of $144 million in 2019. The losses of $89 million in 2020 reflect net realized losses on investments of $27 million and an increase in unrealized losses on equity securities of $62 million driven by the disruption in global financial markets associated with COVID-19 during the first nine months of 2020. In 2019, the gains of $144 million reflected net realized gains on investment sales of $28 million and an increase in unrealized gains on equity securities of $116 million.
Change in Allowance for Expected Credit Losses on Investments. Effective January 1, 2020, the Company adopted accounting guidance for credit losses on financial instruments. The cumulative effective adjustment from the change in accounting principle was $25 million after-tax, which decreased opening retained earnings and increased AOCI. Based on credit factors, the allowance for expected credit losses is increased or decreased depending on the percentage of unrealized
loss relative to amortized cost by security, changes in rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. For the nine months ended September 30, 2020, the pre-tax change in allowance for expected credit losses on investments decreased by $29 million ($23 million after-tax), which is reflected in net investment gains (losses), primarily due to disposition of securities which previously had an allowance recorded.
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 were $257 million in 2020 and $283 million in 2019. The decrease mainly relates to a reduction in revenues from the aviation-related businesses impacted by COVID-19.
Losses and Loss Expenses . Losses and loss expenses increased to $3,357 million in 2020 from $3,059 million in 2019. The consolidated loss ratio was 65.6% in 2020 and 62.2% in 2019. Catastrophe losses, net of reinsurance recoveries, were $297 million (including losses of approximately $143 million related to COVID-19) in 2020 and $70 million in 2019. Favorable prior year reserve development (net of premium offsets) was $12 million in 2020 and $17 million in 2019. The loss ratio excluding catastrophe losses and prior year reserve development was 60.0% in 2020 and 61.2% in 2019.
A summary of loss ratios in 2020 compared with 2019 by business segment follows:
• Insurance - The loss ratio was 65.5% in 2020 and 62.3% in 2019. Catastrophe losses were $245 million in 2020 compared with $54 million in 2019. The Company reflected a best estimate (net of reinsurance) based upon available information for COVID-19-related losses of approximately $121 million, which was included in catastrophe losses and primarily related to contingency and event cancellation coverage, workers’ compensation and short-tail lines. Favorable prior year reserve development was $19 million in 2020 and $18 million in 2019. The loss ratio excluding catastrophe losses and prior year reserve development decreased 1.1 points to 60.4% in 2020 from 61.5% in 2019.
• Reinsurance & Monoline Excess - The loss ratio was 66.5% in 2020 and 61.6% in 2019. Catastrophe losses were $53 million in 2020 compared with $16 million in 2019. The Company reflected a best estimate (net of reinsurance) based upon available information for COVID-19-related losses of approximately $22 million, which was included in catastrophe losses and primarily related to excess workers’ compensation and short-tail lines. Adverse prior year reserve development was $7 million in 2020 and $1 million in 2019. The loss ratio excluding catastrophe losses and prior year reserve development decreased 1.1 points to 57.2% in 2020 from 58.3% in 2019.
Other Operating Costs and Expenses. Following is a summary of other operating costs and expenses:
($ in thousands) 2020 2019
Policy acquisition and insurance operating expenses $ 1,574,507 $ 1,560,350
Insurance service expenses 64,029 77,513
Net foreign currency gains (23,845) (29,084)
Other costs and expenses 138,451 152,182
Total $ 1,753,142 $ 1,760,961
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 1% and net premiums earned increased 4% from 2019. The expense ratio (underwriting expenses expressed as a
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percentage of premiums earned) was 30.8% in 2020 and 31.7% in 2019. The improvement is primarily attributable to higher net premiums earned and lower travel and entertainment expenses due to the global pandemic. However, to the extent our net premiums earned decrease, due to the impact of the COVID-19 pandemic or otherwise, our expense ratio would be expected to increase.
Service expenses, which represent the costs associated with the fee-based businesses, decreased to $64 million in 2020 from $78 million in 2019. The decrease is primarily due to a reduction of assigned risk plan business.
Net foreign currency gains result from transactions denominated in a currency other than a company's operating functional currency. Net foreign currency gains were $24 million in 2020 compared to gains of $29 million in 2019, mainly resulting from the continued strengthening of the U.S. dollar in relation to the Argentine peso and U.K sterling in 2020.
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 decreased to $138 million in 2020 from $152 million in 2019, primarily due to a reduction in non-recurring performance-based compensation costs which occurred in 2019.
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 $256 million in 2020 compared to $280 million in 2019. The decrease mainly relates to a reduction of aviation-related business impacted by COVID-19 in 2020.
Interest Expense . Interest expense was $115 million in 2020 compared with $120 million in 2019. During 2019, the Company repaid at maturity $489 million aggregate principal amount of senior notes and other debt. In December 2019, the Company issued $300 million aggregate principal amount of 5.10% subordinated debentures due 2059. In May 2020, the Company issued $300 million aggregate principal amount of 4.00% senior notes due 2050. In September 2020, the Company issued an additional $170 million aggregate principal amount of 4.00% senior notes due 2050 and issued $250 million aggregate principal amount of 4.25% subordinated debentures due 2060 and repaid $300 million aggregate principal amount of 5.375% senior notes at maturity. Accordingly, the timing of the debt repayments in 2019 and 2020 and issuances in 2019 and 2020 led to the decrease in interest expense for the nine months ended September 30, 2020 compared to 2019. In October 2020, the Company redeemed $350 million aggregate principal amount of 5.625% subordinated debentures due 2053, which we expect will lead to a debt extinguishment charge of pre-tax $8 million in the fourth quarter.
Income Taxes. The effective income tax rate was 27.8% in 2020 and 20.1% in 2019. The effective income tax rate differs from the federal income tax rate of 21% principally because the utilization of losses in certain foreign jurisdictions was limited, which was partially offset by tax-exempt investment income and tax benefits related to equity-based compensation.
The Company has not provided U.S. deferred income taxes on the undistributed earnings of approximately $107 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.




















44




Results of Operations for the Three Months Ended September 30, 2020 and 2019
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 premiums earned), expense ratios (underwriting expenses expressed as a percentage of premiums earned) and GAAP combined ratios (sum of loss ratio and expense ratio) for each of our business segments for the three months ended September 30, 2020 and 2019. 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) 2020 2019
Insurance:
Gross premiums written $ 1,981,816 $ 1,850,012
Net premiums written 1,628,316 1,529,113
Net premiums earned 1,531,093 1,493,854
Loss ratio 64.4 % 61.8 %
Expense ratio 29.7 % 31.2 %
GAAP combined ratio 94.1 % 93.0 %
Reinsurance & Monoline Excess:
Gross premiums written $ 280,729 $ 243,038
Net premiums written 251,000 220,793
Net premiums earned 217,828 182,956
Loss ratio 59.1 % 64.6 %
Expense ratio 31.2 % 33.7 %
GAAP combined ratio 90.3 % 98.3 %
Consolidated:
Gross premiums written $ 2,262,545 $ 2,093,050
Net premiums written 1,879,316 1,749,906
Net premiums earned 1,748,921 1,676,810
Loss ratio 63.7 % 62.1 %
Expense ratio 30.0 % 31.5 %
GAAP combined ratio 93.7 % 93.6 %
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 three months ended September 30, 2020 and 2019:
(In thousands, except per share data) 2020 2019
Net income to common stockholders $ 151,678 $ 165,208
Weighted average diluted shares 187,717 193,589
Net income per diluted share $ 0.81 $ 0.85
The Company reported net income to common stockholders of $152 million in 2020 compared to $165 million in 2019. The $13 million decrease in net income was primarily due to an after-tax increase in foreign currency losses of $22 million from the weakening U.S. dollar compared to certain currencies, an increase of $15 million in tax expense due to a change in the effective tax rate, an after-tax decrease in net investment income of $15 million mainly from reduced investment yields in fixed maturity securities and repositioning a larger portion of the investment portfolio to cash and cash equivalents, and an after-tax increase in interest expense of $1 million, partially offset by an after-tax increase in net investment gains of $29 million mainly due to unrealized gains related to equity securities, an after-tax decrease in corporate expenses of $4 million, an after-tax increase in underwriting income of $3 million, an after-tax increase in profit from insurance service businesses of $2 million, and an after-tax increase in profits from non-insurance businesses of $2 million. The number of weighted average diluted shares was reduced by approximately 6 million for the three months ended September 30, 2020, mainly due to the repurchase of common shares in 2020, compared to the three months ended September 30, 2019.
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Premiums . Gross premiums written were $2,263 million in 2020, an increase of 8% from $2,093 million in 2019. The increase was due to a $132 million increase in the Insurance segment and a $38 million increase in the Reinsurance & Monoline Excess segment. Approximately 78.5% of premiums expiring in 2020 were renewed, and 79.7% of premiums expiring in 2019 were renewed.
Average renewal premium rates for insurance and facultative reinsurance increased 12.1% in 2020 when adjusted for changes in exposures, and increased 14.5% excluding workers' compensation.
A summary of gross premiums written in 2020 compared with 2019 by line of business within each business segment follows:
• Insurance - gross premiums increased 7% to $1,982 million in 2020 from $1,850 million in 2019. Gross premiums increased $69 million (11%) for other liability, $51 million (21%) for professional liability, $35 million (17%) for commercial auto, and $25 million (6%) for short-tail lines, and decreased $48 million (16%) for workers' compensation.
• Reinsurance & Monoline Excess - gross premiums increased 16% to $281 million in 2020 from $243 million in 2019. Gross premiums increased $14 million (29%) for property reinsurance, $13 million (22%) for monoline excess, and $11 million (8%) for casualty reinsurance.
Net premiums written were $1,879 million in 2020, a 7% increase from $1,750 million in 2019. Ceded reinsurance premiums as a percentage of gross written premiums were 17% in 2020 and 16% in 2019.
Premiums earned increased 4% to $1,749 million in 2020 from $1,677 million in 2019. 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 2020 are related to business written during both 2020 and 2019. Audit premiums were $27 million in 2020 and $49 million in 2019.
Net Investment Income . Following is a summary of net investment income for the three months ended September 30, 2020 and 2019:
Amount Average Annualized
Yield
($ in thousands) 2020 2019 2020 2019
Fixed maturity securities, including cash and cash equivalents and loans receivable $ 97,080 $ 125,957 2.5 % 3.4 %
Investment funds 18,235 19,033 6.2 5.7
Arbitrage trading account 19,543 8,400 13.8 7.1
Real estate 7,666 7,987 1.5 1.5
Equity securities 1,907 1,392 2.2 2.1
Gross investment income 144,430 162,769 2.9 3.4
Investment expenses (1,780) (1,077) — —
Total $ 142,650 $ 161,692 2.8 % 3.4 %
Net investment income decreased 12% to $143 million in 2020 from $162 million in 2019 due primarily to a $29 million decrease in fixed maturity securities as a result of lower investment yields and repositioning a larger portion of the investment portfolio to cash and cash equivalents and a $1 million decrease in income from investment funds, partially offset by a $11 million increase from the arbitrage trading account. The Company has maintained a shortened duration of its fixed maturity security portfolio that has reduced the potential impact of mark-to-market on the portfolio and positioned the Company to react quickly to changes in the current interest rate environment. Average invested assets, at cost (including cash and cash equivalents), were $20.3 billion in 2020 and $19.2 billion in 2019.
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 decreased to $22 million in 2020 from $24 million in 2019. The decrease is primarily due to a reduction of assigned risk plan business.
Net Realized and Unrealized Gains (Losses) 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. Net
46

realized and unrealized losses on investments were $8 million in 2020 compared with gains of $1 million in 2019. The losses of $8 million in 2020 reflected net realized losses on investments of $39 million and an increase in unrealized gains on equity securities of $31 million. In 2019, the gains of $1 million reflected net realized gains on investment sales of $3 million and an increase in unrealized gains on equity securities of $4 million.
Change in Allowance for Expected Credit Losses on Investments. Effective January 1, 2020, the Company adopted accounting guidance for credit losses on financial instruments. The cumulative effective adjustment from the change in accounting principle was $25 million after-tax, which decreased opening retained earnings and increased AOCI. Based on credit factors, the allowance for expected credit losses is increased or decreased depending on the percentage of unrealized loss relative to amortized cost by security, changes in rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. For the three months ended September 30, 2020, the pre-tax change in allowance for expected credit losses on investments decreased by $47 million ($37 million after-tax), which is reflected in net investment gains (losses), primarily due to disposition of securities which previously had an allowance recorded..
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 were $87 million in 2020 and $102 million in 2019. The decrease mainly relates to reduction in revenues from the aviation-related businesses impacted by COVID-19.
Losses and Loss Expenses . Losses and loss expenses increased to $1,115 million in 2020 from $1,041 million in 2019. The consolidated loss ratio was 63.7% in 2020 and 62.1% in 2019. Catastrophe losses, net of reinsurance recoveries, were $73 million in 2020 compared to $31 million in 2019. No additional COVID-19-related losses were recognized in the three months ended September 30, 2020. Favorable prior year reserve development (net of premium offsets) was $5 million in 2020 and $4 million in 2019. The loss ratio excluding catastrophe losses and prior year reserve development was 59.8% in 2020 and 60.4% in 2019.
A summary of loss ratios in 2020 compared with 2019 by business segment follows:
• Insurance - The loss ratio was 64.4% in 2020 and 61.8% in 2019. Catastrophe losses were $74 million in 2020 compared with $15 million in 2019. The increase in catastrophe losses was attributable to heightened hurricanes, tropical storms and U.S. wild fires on the west coast. Favorable prior year reserve development was $7 million in 2020 and $1 million in 2019. The loss ratio excluding catastrophe losses and prior year reserve development decreased 0.9 points to 60.0% in 2020 from 60.9% in 2019.
• Reinsurance & Monoline Excess - The loss ratio was 59.1% in 2020 and 64.6% in 2019. Catastrophe losses were ($1) million in 2020 compared with $16 million in 2019. The ($1) million was attributable to reclassified COVID-19 related IBNR to the Insurance segment. Adverse prior year reserve development was $2 million in 2020 compared to favorable prior year reserve development of $3 million in 2019. The loss ratio excluding catastrophe losses and prior year reserve development increased 1.6 points to 58.9% in 2020 from 57.3% in 2019.
Other Operating Costs and Expenses. Following is a summary of other operating costs and expenses:
($ in thousands) 2020 2019
Policy acquisition and insurance operating expenses $ 523,349 $ 528,399
Insurance service expenses 21,034 26,171
Net foreign currency losses (gains) 5,078 (22,590)
Other costs and expenses 44,508 49,065
Total $ 593,969 $ 581,045
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 decreased 1% and net premiums earned increased 4% from 2019. The expense ratio (underwriting expenses expressed as a percentage of premiums earned) was 30.0% in 2020 and 31.5% in 2019. The improvement is primarily attributable to higher net premiums earned and lower expenses mainly attributable to reduced travel and entertainment expenses due to the global pandemic. However, to the extent our net premiums earned decrease, due to the impact of the COVID-19 pandemic or otherwise, our expense ratio would be expected to increase.
Service expenses, which represent the costs associated with the fee-based businesses, decreased to $21 million in 2020 from $26 million in 2019. The decrease is primarily due to a reduction of assigned risk plan business.
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Net foreign currency gains (losses) result from transactions denominated in a currency other than a company's operating functional currency. Net foreign currency losses were $5 million in 2020 compared to net foreign currency gains of $23 million in 2019. The losses in 2020 mainly result from the weakening of the U.S. dollar in relation to the U.K. sterling, partially offset by the U.S. dollar strengthening to the Argentine peso.
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 decreased to $45 million in 2020 from $49 million in 2019.
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 $85 million in 2020 compared to $102 million in 2019. The decrease mainly relates to a reduction of the aviation-related businesses impacted by COVID-19 in 2020.
Interest Expense . Interest expense was $40 million in 2020 compared with $38 million in 2019. During 2019, the Company repaid at maturity $489 million aggregate principal amount of senior notes and other debt. In December 2019, the Company issued $300 million aggregate principal amount of 5.10% subordinated debentures due 2059. In May 2020, the Company issued $300 million aggregate principal amount of 4.00% senior notes due 2050. In September 2020, the Company issued an additional $170 million aggregate principal amount of 4.00% senior notes due 2050 and issued $250 million aggregate principal amount of 4.25% subordinated debentures due 2060 and repaid $300 million aggregate principal amount of 5.375% senior notes at maturity. Accordingly, the timing of the debt repayments in 2019 and 2020 and issuances in 2019 and 2020 led to the increase in interest expense for the three months ended September 30, 2020 compared to 2019. However, these refinancings of our debt at lower interest rates are expected to reduce our interest expense. In October 2020, the Company redeemed $350 million aggregate principal amount of 5.625% subordinated debentures due 2053, which we expect will lead to a debt extinguishment charge of pre-tax $8 million in the fourth quarter.
Income Taxes . The effective income tax rate was 26.2% in 2020 and 18.6% in 2019. The effective income tax rate differs from the federal income tax rate of 21% principally because the utilization of losses in certain foreign jurisdictions was limited, which was partially offset by tax-exempt investment income and tax benefits related to equity-based compensation.
The Company has not provided U.S. deferred income taxes on the undistributed earnings of approximately $107 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.








48

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 average duration of the investment portfolio and the approximate duration of its liabilities (i.e., policy claims and debt obligations). The average duration of the fixed maturity portfolio, including cash and cash equivalents, was 2.3 years at September 30, 2020 down from 2.8 years at December 31, 2019, as the Company repositioned a larger portion of its investment portfolio to cash and cash equivalents. The Company’s fixed maturity investment portfolio and investment-related assets as of September 30, 2020 were as follows:
($ in thousands) Carrying
Value 		Percent
of Total
Fixed maturity securities:
U.S. government and government agencies $ 697,432 3.3 %
State and municipal:
Special revenue 2,305,308 11.0
State general obligation 429,652 2.1
Pre-refunded 285,224 1.4
Corporate backed 232,600 1.1
Local general obligation 438,272 2.1
Total state and municipal 3,691,056 17.7
Mortgage-backed securities:
Agency 613,680 2.9
Residential-Prime 260,362 1.2
Commercial 206,025 1.0
Residential-Alt A 9,168 —
Total mortgage-backed securities 1,089,235 5.2
Asset-backed securities 3,306,439 15.9
Corporate:
Industrial 2,326,598 11.2
Financial 1,524,636 7.3
Utilities 355,619 1.7
Other 32,687 0.2
Total corporate 4,239,540 20.3
Foreign government and foreign government agencies 869,344 4.2
Total fixed maturity securities 13,893,046 66.6
Equity securities:
Preferred stocks 274,445 1.3
Common stocks 160,858 0.8
Total equity securities 435,303 2.1
Cash and cash equivalents 2,571,447 12.3
Real estate 2,106,474 10.1
Investment funds 1,163,707 5.6
Arbitrage trading account 595,727 2.9
Loans receivable 84,771 0.4
Total investments $ 20,850,475 100.0 %
________________________
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(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.
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 September 30, 2020, the carrying value of investment funds was $1,164 million, including investments in real estate funds of $312 million, financial services funds of $352 million, energy funds of $136 million, transportation funds of $144 million and other funds of $220 million. Investment funds are generally reported on a one-quarter lag.
Real Estate . Real estate is directly owned property held for investment. At September 30, 2020, real estate properties in operation included a long-term ground lease in Washington D.C., two office complexes in New York City, office buildings in West Palm Beach and Palm Beach, Florida, an office building in London, and the completed portion of a mixed-use project in Washington D.C. In addition, part of the previously mentioned mixed-use project in Washington D.C. is 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, net of allowance for expected credit losses, of $85 million and an aggregate fair value of $87 million at September 30, 2020. The amortized cost of loans receivable is net of an allowance for expected credit losses of $6 million as of September 30, 2020. Loans receivable include real estate loans of $52 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 floating LIBOR-based interest rates with varying maturities not exceeding 10 years.
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 2.3 years at September 30, 2020, down from 2.8 years at December 31, 2019.
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.

50


Liquidity and Capital Resources
Cash Flow . Cash flow provided from operating activities increased to $1,137 million in the first nine months of 2020 from $795 million in the first nine months of 2019, primarily due to an increase in premium receipts, net of reinsurance and commissions settled and the timing of loss and loss expense payments as well as tax 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 1.5 years 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 79% invested in cash, cash equivalents and marketable fixed maturity securities as of September 30, 2020. 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.
At September 30, 2020, the Company held more than $1.6 billion of cash and liquid investments at the holding company.
Debt . At September 30, 2020, the Company had senior notes, subordinated debentures and other debt outstanding with a carrying value of $3,073 million and a face amount of $3,099 million, including $300 million aggregate principal amount of its 4.00% senior notes due 2050 issued in May 2020 as well as $170 million aggregate principal amount of 4.00% senior notes due 2050 and $250 million aggregate principal amount of 4.25% subordinated debentures due 2060 issued in September 2020. The maturities of the outstanding debt are $4 million in 2021, $427 million in 2022, $11 million in 2025, $102 million in 2028, $250 million in 2037, $350 million in 2044, $470 million in 2050, $350 million in 2053 (which was redeemed in October 2020), $400 million in 2056, $185 million in 2058, $300 million in 2059 and $250 million in 2060.
Equity . At September 30, 2020, total common stockholders’ equity was $6.0 billion, common shares outstanding were 178,217,537 and stockholders’ equity per outstanding share was $33.64. During the three months ended September 30, 2020, the Company repurchased 216,764 shares of its common stock for $13 million. During the nine months ended September 30, 2020, the Company repurchased 5,820,867 shares of its common stock for $312 million. The number of common shares outstanding excludes shares held in a grantor trust established by the Company for delivery upon settlement of vested but mandatorily deferred RSUs.
Total Capital . Total capitalization (equity, debt and subordinated debentures) was $9.1 billion at September 30, 2020. The percentage of the Company’s capital attributable to senior notes, subordinated debentures and other debt was 34% at September 30, 2020 and 30% at December 31, 2019.

Item 3 . Quantitative and Qualitative Disclosure About Market Risk
Reference is made to the information under “Investments - Market Risk” under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q.

Item 4. Controls and Procedures
Disclosure Controls and Procedures. The Company’s management, including its Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-14 as of the end of the period covered by this quarterly 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 Securities Exchange Act of 1934, as amended, and the rules thereunder, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
Changes in Internal Control over Financial Reporting. During the quarter ended September 30, 2020, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
Please see Note 20 to the notes to the interim consolidated financial statements.

Item 1A. Risk Factors
There have been no material changes from the risk factors previously disclosed in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2019, other than as updated by the Company’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2020.


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Set forth below is a summary of the shares repurchased by the Company during the three months ended September 30, 2020, and the number of shares remaining authorized for purchase by the Company:
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
July 2020 — $ — — 7,493,920
August 2020 84,288 $ 60.133 84,288 7,409,632
September 2020 132,476 $ 59.548 132,476 7,277,156

Item 6. Exhibits
Number
( 10.1 )
Form of 2020 Performance-Based Restricted Stock Unit Agreement Under the W. R. Berkley Corporation 2018 Stock Incentive Plan
( 31.1 )
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/ 15d-14(a).
( 31.2 )
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/ 15d-14(a).
( 32.1 )
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
Pursuant to the requirements 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.


W. R. BERKLEY CORPORATION



Date: November 5, 2020 /s/ W. Robert Berkley, Jr.
W. Robert Berkley, Jr.
President and Chief Executive Officer
Date: November 5, 2020 /s/ Richard M. Baio
Richard M. Baio
Executive Vice President
Chief Financial Officer and Treasurer
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