XNYS:WRB WR Berkley Corp Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

XNYS:WRB (WR Berkley Corp): Fair Value Estimate
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q
(Mark one)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2012
or
o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the Transition Period from                      to                     .
Commission File Number 1-15202

W. R. BERKLEY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
22-1867895
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
 
475 Steamboat Road, Greenwich, Connecticut
 
06830
(Address of principal executive offices)
 
(Zip Code)
 
(203) 629-3000
 
 
(Registrant’s telephone number, including area code)
 
 
 
 
 
None
 
Former name, former address and former fiscal year, if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ     No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ     No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
 
 
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o     No þ
Number of shares of common stock, $.20 par value, outstanding as of April 30, 2012: 138,325,721
 



TABLE OF CONTENTS



Part I — FINANCIAL INFORMATION
Item 1.
Financial Statements
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
 
March 31,
2012
 
December 31,
2011
Assets
 
 
 
Investments:
 
 
 
Fixed maturity securities
$
11,554,209

 
$
11,312,037

Equity securities available for sale
489,220

 
443,439

Arbitrage trading account
344,892

 
397,312

Investment funds
679,689

 
680,638

Loans receivable
357,121

 
263,187

Real estate
355,254

 
342,905

Total investments
13,780,385

 
13,439,518

Cash and cash equivalents
1,082,407

 
911,742

Premiums and fees receivable
1,307,237

 
1,206,204

Due from reinsurers
1,242,270

 
1,215,679

Accrued investment income
132,745

 
133,776

Prepaid reinsurance premiums
274,706

 
258,271

Deferred policy acquisition costs
377,600

 
364,937

Real estate, furniture and equipment
268,229

 
262,275

Goodwill
90,172

 
90,172

Trading account receivables from brokers and clearing organizations
382,479

 
318,240

Current federal and foreign income taxes

 
9,670

Other assets
195,402

 
193,389

Total assets
$
19,133,632

 
$
18,403,873

Liabilities and Equity
 
 
 
Liabilities:
 
 
 
Reserves for losses and loss expenses
$
9,394,152

 
$
9,337,134

Unearned premiums
2,311,187

 
2,189,575

Due to reinsurers
268,288

 
241,204

Trading account securities sold but not yet purchased
71,386

 
62,514

Current federal and foreign income taxes
53,046

 

Deferred federal and foreign income taxes
1,701

 
2,835

Other liabilities
801,855

 
866,229

Junior subordinated debentures
243,050

 
242,997

Senior notes and other debt
1,853,512

 
1,500,503

Total liabilities
14,998,177

 
14,442,991

Equity:
 
 
 
Preferred stock, par value $.10 per share:
 
 
 
Authorized 5,000,000 shares; issued and outstanding - none

 

Common stock, par value $.20 per share:
 
 
 
Authorized 500,000,000 shares, issued and outstanding, net of treasury shares, 138,274,272 and 137,520,019 shares, respectively
47,024

 
47,024

Additional paid-in capital
938,417

 
941,109

Retained earnings
4,615,439

 
4,491,162

Accumulated other comprehensive income
393,259

 
354,851

Treasury stock, at cost, 96,843,646 and 97,597,899 shares, respectively
(1,867,223
)
 
(1,880,790
)
Total stockholders’ equity
4,126,916

 
3,953,356

Noncontrolling interests
8,539

 
7,526

Total equity
4,135,455

 
3,960,882

Total liabilities and equity
$
19,133,632

 
$
18,403,873


See accompanying notes to interim consolidated financial statements.


1



W. R. BERKLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands, except per share data)
 
For the Three Months Ended
 
March 31,
 
2012
 
2011
REVENUES:
 
 
 
Net premiums written
$
1,203,526

 
$
1,083,303

Change in net unearned premiums
(103,875
)
 
(100,806
)
Net premiums earned
1,099,651

 
982,497

Net investment income
157,619

 
146,126

Insurance service fees
23,877

 
22,173

Net investment gains:
 
 
 
Net realized gains on investment sales
43,477

 
29,284

Change in valuation allowance, net of other-than-temporary impairments
4,014

 

Net investment gains
47,491

 
29,284

Revenues from wholly-owned investees
49,675

 
53,887

Other income
392

 
384

Total revenues
1,378,705

 
1,234,351

OPERATING COSTS AND EXPENSES:
 
 
 
Losses and loss expenses
679,472

 
607,095

Other operating costs and expenses
431,779

 
386,129

Expenses from wholly-owned investees
51,330

 
53,816

Interest expense
28,821

 
28,117

Total operating costs and expenses
1,191,402

 
1,075,157

Income before income taxes
187,303

 
159,194

Income tax expense
(52,071
)
 
(43,599
)
Net income before noncontrolling interests
135,232

 
115,595

Noncontrolling interests
86

 
(5
)
Net income to common stockholders
$
135,318

 
$
115,590

NET INCOME PER SHARE:
 
 
 
Basic
$
0.98

 
$
0.82

Diluted
0.94

 
0.78


See accompanying notes to interim consolidated financial statements.





2


W. R. BERKLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(Dollars in thousands)
 
For the Three Months Ended
 
March 31,
 
2012
 
2011
Net income before noncontrolling interests
$
135,232

 
$
115,595

Other comprehensive income (loss):
 
 
 
Change in unrealized foreign exchange gains
15,583

 
10,860

Unrealized holding gains (losses) on investment securities arising during the period, net of taxes
53,106

 
(6,217
)
Reclassification adjustment for net investment losses included in net income, net of taxes
(31,082
)
 
(18,790
)
Change in unrecognized pension obligation, net of taxes
824

 
704

Other comprehensive income (loss)
38,431

 
(13,443
)
Comprehensive income
173,663

 
102,152

Comprehensive income to the noncontrolling interest
63

 
51

Comprehensive income to common stockholders
$
173,726

 
$
102,203


See accompanying notes to interim consolidated financial statements.

3


W. R. BERKLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(Dollars in thousands)
 
For the Three Months Ended
 
March 31,
 
2012
 
2011
COMMON STOCK:
 
 
 
Beginning and end of period
$
47,024

 
$
47,024

ADDITIONAL PAID-IN CAPITAL:
 
 
 
Beginning of period
$
941,109

 
$
935,099

Stock options exercised and restricted stock units issued, net of tax
(10,139
)
 
(15,977
)
Restricted stock units expensed
7,447

 
6,468

End of period
$
938,417

 
$
925,590

RETAINED EARNINGS:
 
 
 
Beginning of period
$
4,491,162

 
$
4,143,207

Net income to common stockholders
135,318

 
115,590

Dividends
(11,041
)
 
(9,913
)
End of period
$
4,615,439

 
$
4,248,884

ACCUMULATED OTHER COMPREHENSIVE INCOME:
 
 
 
Unrealized investment gains (losses):
 
 
 
Beginning of period
$
430,419

 
$
334,747

Unrealized gains (losses) on securities not other-than-temporarily impaired
20,868

 
(25,110
)
Unrealized gains on other-than-temporarily impaired securities
1,133

 
159

End of period
452,420

 
309,796

Currency translation adjustments:
 
 
 
Beginning of period
(61,239
)
 
(42,488
)
Net change in period
15,583

 
10,860

End of period
(45,656
)
 
(31,628
)
Net pension asset:
 
 
 
Beginning of period
(14,329
)
 
(15,696
)
Net change in period
824

 
704

End of period
(13,505
)
 
(14,992
)
Total accumulated other comprehensive income
$
393,259

 
$
263,176

TREASURY STOCK:
 
 
 
Beginning of period
$
(1,880,790
)
 
$
(1,750,494
)
Stock exercised/vested
20,099

 
28,533

Stock repurchased
(6,532
)
 
(23,303
)
End of period
$
(1,867,223
)
 
$
(1,745,264
)
NONCONTROLLING INTERESTS:
 
 
 
Beginning of period
$
7,526

 
$
6,980

Contributions
1,076

 
264

Net income (loss)
(86
)
 
5

Other comprehensive income (loss), net of tax
23

 
(56
)
End of period
$
8,539

 
$
7,193

See accompanying notes to interim consolidated financial statements.

4


W. R. BERKLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
 
For the Three Months Ended
 
March 31,
 
2012
 
2011
CASH FROM (USED IN) OPERATING ACTIVITIES:
 
 
 
Net income to common stockholders
$
135,318

 
$
115,590

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Net investment gains
(47,491
)
 
(29,284
)
Depreciation and amortization
22,212

 
22,079

Noncontrolling interests
(86
)
 
5

Investment funds
(27,624
)
 
(15,812
)
Stock incentive plans
7,447

 
6,468

Change in:
 
 
 
Arbitrage trading account
(2,946
)
 
(6,532
)
Premiums and fees receivable
(97,077
)
 
(88,106
)
Reinsurance accounts
(16,857
)
 
(142,848
)
Deferred policy acquisition costs
(11,483
)
 
(21,333
)
Deferred income taxes
(13,600
)
 
(9
)
Reserves for losses and loss expenses
47,443

 
143,704

Unearned premiums
115,434

 
152,731

Other liabilities
(36,928
)
 
(81,210
)
Net cash from (used in) operating activities
73,762

 
55,443

CASH FROM (USED IN) INVESTING ACTIVITIES:
 
 
 
Proceeds from sale of fixed maturity securities
295,134

 
395,115

Proceeds from sale of equity securities
32,575

 
63,232

Distributions from (contributions to) investment funds
24,744

 
(79,410
)
Proceeds from maturities and prepayments of fixed maturity securities
408,647

 
407,780

Purchase of fixed maturity securities
(872,588
)
 
(835,804
)
Purchase of equity securities
(68,652
)
 
(24,694
)
Real estate purchased
(5,611
)
 
(58,098
)
Change in loans receivable
(93,934
)
 
4,809

Net additions to real estate, furniture and equipment
(15,055
)
 
(11,884
)
Change in balances due to security brokers
16,146

 
74,986

Payment for business purchased, net of cash acquired

 
(11,060
)
Net cash from (used in) investing activities
(278,594
)
 
(75,028
)
CASH FROM (USED IN) FINANCING ACTIVITIES:
 
 
 
Net proceeds from issuance of debt
354,315

 

Net proceeds from stock options exercised
3,428

 
13,217

Repayment of debt
(1,684
)
 
(3,672
)
Cash dividends to common stockholders

 
(9,911
)
Purchase of common treasury shares

 
(23,303
)
Other, net
10,446

 
15,703

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

 
(7,966
)
Net impact on cash due to change in foreign exchange rates
8,992

 
14,750

Net change in cash and cash equivalents
170,665

 
(12,801
)
Cash and cash equivalents at beginning of year
911,742

 
642,952

Cash and cash equivalents at end of period
$
1,082,407

 
$
630,151

See accompanying notes to interim consolidated financial statements.

5


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

(1) General
The accompanying unaudited consolidated financial statements of W. R. Berkley Corporation and its subsidiaries (the “Company”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all the information and notes required by GAAP for annual financial statements. The unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring items, which are necessary to present fairly the Company’s financial position and results of operations on a basis consistent with the prior audited consolidated financial statements. Operating results for interim periods are not necessarily indicative of the results that may be expected for the year. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements requires the use of management estimates. For further information related to a description of areas of judgment and estimates and other information necessary to understand the Company’s financial position and results of operations, refer to the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. Reclassifications have been made in the 2011 financial statements as originally reported to conform to the presentation of the 2012 financial statements.
The income tax provision has been computed based on the Company’s estimated annual effective tax rate. The effective tax rate for the quarter differs from the federal income tax rate of 35% principally because of tax-exempt investment income.

(2) Per Share Data
The Company presents both basic and diluted net income per share (“EPS”) amounts. Basic EPS is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS is based upon the weighted average number of common and common equivalent shares outstanding during the period and is calculated using the treasury stock method for stock incentive plans. Common equivalent shares are excluded from the computation in periods in which they have an anti-dilutive effect. Stock options for which the exercise price exceeds the average market price over the period have an anti-dilutive effect on EPS and, accordingly, are excluded from the calculation.
The weighted average number of common shares used in the computation of basic and diluted earnings per share was as follows (amounts in thousands):
 
 
For the Three Months Ended
 
 
March 31,
 
 
2012
 
2011
Basic
 
137,814

 
141,177

Diluted
 
143,411

 
147,425



(3) Recent Accounting Pronouncements
In October 2010, the Financial Accounting Standards Board (" FASB") issued guidance regarding the treatment of costs associated with acquiring or renewing insurance contracts. This guidance modified the definition of the types of costs that can be capitalized and specifies that the costs must be directly related to the successful acquisition of a new or renewed insurance contract. The Company adopted this guidance effective January 1, 2012 and retrospectively adjusted its previously issued financial statements.


6


A summary of the impact of the adoption of this new guidance is shown below (dollars in thousands except per share amounts):
 
Previously Reported
As Adjusted
At December 31, 2011:
 
 
Deferred policy acquisition costs
$
448,795

$
364,937

Deferred tax liability
31,623

2,835

Stockholders' equity
4,008,426

3,953,356

 
 
 
For the three months ended March 31, 2011:
 
Other operating costs and expenses
$
384,831

$
386,129

Income before income taxes
160,492

159,194

Federal and foreign income taxes
(44,000
)
(43,599
)
Net income
116,487

115,590

 
 
 
Basic net income per share
$
0.83

$
0.82

Diluted net income per share
0.79

0.78

The impact of applying this guidance retrospectively was a reduction in stockholders' equity of $51 million as of December 31, 2010.

In May 2011, the FASB issued guidance related to measuring and disclosing fair values. The Company's adoption of the updated guidance effective January 1, 2012 resulted in a change in the presentation of the Company's consolidated financial statements but did not have any impact on the Company's results of operations, financial position or liquidity.
 
In June 2011, the FASB issued guidance relating to the presentation of the components of net income and other comprehensive income. The Company's adoption of the updated guidance effective January 1, 2012 resulted in a change in the presentation of the Company's consolidated financial statements but did not have any impact on the Company's results of operations, financial position or liquidity.

All recently issued but not yet effective accounting and reporting guidance is either not applicable to the Company or is not expected to have a material impact on the Company.


(4) Statements of Cash Flow
Interest payments were $45,358,000 and $44,927,000 and income taxes paid were $3,249,000 and $7,330,000 in the three months ended March 31, 2012 and 2011, respectively.




7


(5) Investments in Fixed Maturity Securities
At March 31, 2012 and December 31, 2011, investments in fixed maturity securities were as follows:
 
(Dollars in thousands)
Amortized
Cost
 
Gross Unrealized
 
Fair
Value
 
Carrying
Value
Gains
 
Losses
 
March 31, 2012
 
 
 
 
 
 
 
 
 
Held to maturity:
 
 
 
 
 
 
 
 
 
State and municipal
$
75,473

 
$
12,129

 
$

 
$
87,602

 
$
75,473

Residential mortgage-backed
35,223

 
5,757

 

 
40,980

 
35,223

Corporate
4,996

 
645

 

 
5,641

 
4,996

Total held to maturity
115,692

 
18,531

 

 
134,223

 
115,692

Available for sale:
 
 
 
 
 
 
 
 
 
U.S. government and government agency
951,785

 
74,897

 
(420
)
 
1,026,262

 
1,026,262

State and municipal
4,971,415

 
308,993

 
(18,600
)
 
5,261,808

 
5,261,808

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
Residential (1)
1,380,703

 
55,984

 
(11,365
)
 
1,425,322

 
1,425,322

Commercial
103,852

 
6,185

 
(1,185
)
 
108,852

 
108,852

Corporate
2,487,439

 
146,865

 
(24,024
)
 
2,610,280

 
2,610,280

Foreign
963,007

 
44,260

 
(1,274
)
 
1,005,993

 
1,005,993

Total available for sale
10,858,201

 
637,184

 
(56,868
)
 
11,438,517

 
11,438,517

Total investments in fixed maturity securities
$
10,973,893

 
$
655,715

 
$
(56,868
)
 
$
11,572,740

 
$
11,554,209

December 31, 2011
 
 
 
 
 
 
 
 
 
Held to maturity:
 
 
 
 
 
 
 
 
 
State and municipal
$
74,354

 
$
12,546

 
$

 
$
86,900

 
$
74,354

Residential mortgage-backed
35,759

 
5,610

 

 
41,369

 
35,759

Corporate
4,996

 
717

 

 
5,713

 
4,996

Total held to maturity
115,109

 
18,873

 

 
133,982

 
115,109

Available for sale:
 
 
 
 
 
 
 
 
 
U.S. government and government agency
906,924

 
69,920

 
(351
)
 
976,493

 
976,493

State and municipal
5,031,275

 
308,345

 
(16,550
)
 
5,323,070

 
5,323,070

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
Residential (1)
1,416,427

 
75,635

 
(15,894
)
 
1,476,168

 
1,476,168

Commercial
105,383

 
4,054

 
(1,018
)
 
108,419

 
108,419

Corporate
2,328,200

 
132,311

 
(36,087
)
 
2,424,424

 
2,424,424

Foreign
850,838

 
42,165

 
(4,649
)
 
888,354

 
888,354

Total available for sale
10,639,047

 
632,430

 
(74,549
)
 
11,196,928

 
11,196,928

Total investments in fixed maturity securities
$
10,754,156

 
$
651,303

 
$
(74,549
)
 
$
11,330,910

 
$
11,312,037

___________
(1)
Gross unrealized losses for residential mortgage-backed securities include $5,926,000 and $7,668,000 as of March 31, 2012 and December 31, 2011, respectively, related to the non-credit portion of other-than-temporary impairments (“OTTI”) recognized in other comprehensive income.


8


The amortized cost and fair value of fixed maturity securities at March 31, 2012, 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.
 
(Dollars in thousands)
Amortized
Cost
 
Fair Value
Due in one year or less
$
746,923

 
$
757,854

Due after one year through five years
3,193,375

 
3,352,319

Due after five years through ten years
2,586,044

 
2,798,238

Due after ten years
2,927,773

 
3,089,175

Mortgage-backed securities
1,519,778

 
1,575,154

Total
$
10,973,893

 
$
11,572,740

At March 31, 2012, there were no investments, other than investments in United States government and government agency securities, which exceeded 10% of common stockholders’ equity.

(6) Investments in Equity Securities Available for Sale
At March 31, 2012 and December 31, 2011, investments in equity securities available for sale were as follows:
 
(Dollars in thousands)
Cost
 
Gross Unrealized
 
Fair
Value
 
Carrying
Value
Gains
 
Losses
 
March 31, 2012
 
 
 
 
 
 
 
 
 
Common stocks
$
253,900

 
$
112,072

 
$
(735
)
 
$
365,237

 
$
365,237

Preferred stocks
122,679

 
8,027

 
(6,723
)
 
123,983

 
123,983

Total
$
376,579

 
$
120,099

 
$
(7,458
)
 
$
489,220

 
$
489,220

December 31, 2011
 
 
 
 
 
 
 
 
 
Common stocks
$
209,210

 
$
113,660

 
$
(2,888
)
 
$
319,982

 
$
319,982

Preferred stocks
133,183

 
5,139

 
(14,865
)
 
123,457

 
123,457

Total
$
342,393

 
$
118,799

 
$
(17,753
)
 
$
443,439

 
$
443,439


(7) Arbitrage Trading Account
At March 31, 2012 and December 31, 2011, the fair value and carrying value of the arbitrage trading account were $345 million and $397 million, respectively. The primary focus of the trading account is merger arbitrage. Merger arbitrage is the business of investing in the securities of publicly held companies which are the targets in announced tender offers and mergers. Arbitrage investing differs from other types of investing in its focus on transactions and events believed likely to bring about a change in value over a relatively short time period (usually four months or less). The Company believes that this makes arbitrage investments less vulnerable to changes in general financial market conditions.


9




(8) Net Investment Income
Net investment income consists of the following:
 
 
For the Three Months Ended
 
March 31,
(Dollars in thousands)
2012
 
2011
Investment income earned on:
 
 
 
Fixed maturity securities, including cash and cash equivalents, loans receivable and real estate
$
119,288

 
$
120,941

Investment funds
27,623

 
16,387

Arbitrage trading account and funds
6,481

 
5,215

Equity securities available for sale
3,150

 
3,264

Real estate
2,176

 
1,172

Gross investment income
158,718

 
146,979

 
 
 
 
Investment expense
(1,099
)
 
(853
)
Net investment income
$
157,619

 
$
146,126


(9) Investment Funds
Investment funds consist of the following:
 
Carrying Value
as of
 
Income (Losses)
from Investment Funds
 
March 31,
 
December 31
 
For the Three Months Ended March 31,
(Dollars in thousands)
2012
 
2011
 
2012
 
2011
Real estate
$
377,854

 
$
373,413

 
$
8,655

 
$
3,492

Energy
110,330

 
98,974

 
17,938

 
13,359

Arbitrage
59,778

 
58,008

 
1,770

 
1,880

Other
131,727

 
150,243

 
(740
)
 
(2,344
)
Total
$
679,689

 
$
680,638

 
$
27,623


$
16,387



(10) Real Estate

Real estate is directly owned property held for investment. At March 31, 2012, real estate consists of two office buildings in London, including one in operation and one under development, and a long-term ground lease in Washington D.C. Future minimum rental income expected on operating leases relating to real estate held for investment is $1,421,000 in 2012, $1,464,000 in 2013, $1,508,000 in 2014, $1,553,000 in 2015, $1,600,000 in 2016 and $331,476,000 thereafter.



10


(11) Loans Receivable
Loans receivable are as follows (dollars in thousands):
 
 
 
 
 
March 31, 2012
 
December 31, 2011
Total loans receivable, at cost
$
357,121

 
$
263,187

 
 
 
 
Valuation allowance:
 
 
 
  Specific
$
10,465

 
$
19,041

  General
2,444

 
764

  Total
$
10,465

 
$
19,805

 
 
 
 
Impaired loans:
 
 
 
  With a specific valuation allowance, at cost
$
12,693

 
$
29,702

  Without a valuation allowance, at cost
30,357

 
30,357

  Unpaid principal balance
53,048

 
93,922

 
 
 
 
For the Three Months Ended March 31,
2012
 
2011
 Decrease in valuation allowance
$
6,896

 
$

  Loans receivable charged off
85

 


Loans receivable in non-accrual status were $13 million and $30 million at March 31, 2012 and December 31, 2011, respectively. If these loans had been current, additional interest income of $0.2 million and $0.1 million would have been recognized in accordance with their original terms for the three months ended March 31, 2012 and 2011, respectively.
The Company monitors the performance of its loans receivable and assesses the ability of the borrower to pay principal and interest based upon loan structure, underlying property values, cash flow and related financial and operating performance of the property and market conditions. Loans receivable with a potential for default are further assessed using discounted cash flow analysis and comparable cost and sales methodologies, if appropriate.
The Company's seven largest loans receivable, which have an aggregate amortized cost of $225 million and an aggregate fair value of $208 million at March 31, 2012, are secured by commercial real estate located primarily in New York City, California, Hawaii and Boston. These loans earn interest at floating LIBOR-based interest rates and have maturities (inclusive of extension options) through March 2016. As part of the evaluation process, the Company reviews certain credit quality indicators for these loans. The Company utilizes an internal risk rating system to assign a risk to each of its commercial loans. The loan rating system takes into consideration credit quality indicators including loan to value ratios, which compare the outstanding loan amount to the estimated value of the property, the borrower's financial condition and performance with respect to loan terms, the Company's position in the capital structure, and the overall leverage in the capital structure. Based on this rating system, two loans with an aggregate cost basis of $41 million were considered to be impaired at March 31, 2012. For each of these loans, a determination was made as to the amount of loss in the event of a default and whether the loss is probable. The results of the determination were considered in connection with the valuation allowance noted above. An additional credit quality indicator is the debt service coverage ratio, which compares a property's net operating income to the borrower's principal and interest payments. At March 31, 2012, each of the seven largest loans referred to above had a debt service coverage ratio greater than 3.0, except one that is lower due to a recent and temporary rate abatement.


11


  


(12) Realized and Unrealized Investment Gains (Losses)
Realized and unrealized investment gains (losses) are as follows:
 
  
For the Three Months Ended
 
March 31,
(Dollars in thousands)
2012
 
2011
Realized investment gains:
 
 
 
Fixed maturity securities:
 
 
 
Gains
$
14,955

 
$
5,880

Losses
(543
)
 
(1,493
)
Equity securities available for sale
26,238

 
23,932

Other
1,517

 

Sales of investment funds
1,310

 
965

Change in valuation allowance, net of other-than -temporary impairments (1)
4,014

 

Total net investment gains before income taxes
47,491

 
29,284

Income tax expense
(16,409
)
 
(10,494
)
Total net investment gains
$
31,082

 
$
18,790

Change in unrealized gains (losses) of available for sale securities:
 
 
 
Fixed maturity securities
$
19,422

 
$
(29,287
)
Less non-credit portion of OTTI recognized in other comprehensive income
1,743

 
244

Equity securities available for sale
11,595

 
(12,385
)
Investment funds
1,677

 
3,374

Total change in unrealized gains (losses) before income taxes and noncontrolling interests
34,437

 
(38,054
)
Income tax expense (benefit)
(12,413
)
 
13,047

Noncontrolling interests
(23
)
 
56

Total change in net unrealized gains
$
22,001

 
$
(24,951
)
                                   
____________
(1) Represents reduction of valuation allowance of $7 million, net of other-than-temporary-impairment of $3 million.

12




(13) Securities in an Unrealized Loss Position
The following table summarizes all securities in an unrealized loss position at March 31, 2012 and December 31, 2011 by the length of time those securities have been continuously in an unrealized loss position: 
  
Less Than 12 Months
 
12 Months or Greater
 
Total
(Dollars in thousands)
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
March 31, 2012
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
$
37,262

 
$
420

 
$

 
$

 
$
37,262

 
$
420

State and municipal
157,870

 
4,768

 
163,499

 
13,832

 
321,369

 
18,600

Mortgage-backed securities
211,782

 
1,736

 
90,061

 
10,814

 
301,843

 
12,550

Corporate
294,902

 
2,138

 
110,709

 
21,886

 
405,611

 
24,024

Foreign
186,669

 
1,230

 
8,336

 
44

 
195,005

 
1,274

Fixed maturity securities
888,485

 
10,292

 
372,605

 
46,576

 
1,261,090

 
56,868

Common stocks
47,310

 
735

 

 

 
47,310

 
735

Preferred stocks
26,116

 
79

 
39,395

 
6,644

 
65,511

 
6,723

Equity securities
73,426

 
814

 
39,395

 
6,644

 
112,821

 
7,458

Total
$
961,911

 
$
11,106

 
$
412,000

 
$
53,220

 
$
1,373,911

 
$
64,326

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2011
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
$
24,668

 
$
169

 
$
4,800

 
$
182

 
$
29,468

 
$
351

State and municipal
131,417

 
827

 
183,205

 
15,723

 
314,622

 
16,550

Mortgage-backed securities
172,729

 
2,439

 
94,243

 
14,473

 
266,972

 
16,912

Corporate
341,764

 
8,327

 
125,654

 
27,760

 
467,418

 
36,087

Foreign
197,560

 
4,078

 
7,159

 
571

 
204,719

 
4,649

Fixed maturity securities
868,138

 
15,840

 
415,061

 
58,709

 
1,283,199

 
74,549

Common stocks
47,098

 
2,888

 

 

 
47,098

 
2,888

Preferred stocks
23,782

 
125

 
45,314

 
14,740

 
69,096

 
14,865

Equity securities
70,880

 
3,013

 
45,314

 
14,740

 
116,194

 
17,753

Total
$
939,018

 
$
18,853

 
$
460,375

 
$
73,449

 
$
1,399,393

 
$
92,302

Fixed Maturity Securities – A summary of the Company’s non-investment grade fixed maturity securities that were in an unrealized loss position at March 31, 2012 is presented in the table below.  
(Dollars in thousands)
Number of
Securities
 
Aggregate
Fair Value
 
Gross
Unrealized
Loss
Unrealized loss less than $5 million:
 
 
 
 
 
Mortgage-backed securities
14

 
$
84,813

 
$
4,241

Corporate
6

 
11,763

 
2,619

State and municipal
4

 
32,835

 
3,667

Foreign
1

 
1,219

 
22

Unrealized loss $5 million or more:
 
 
 
 
 
Mortgage-backed securitiy (1)
1

 
17,251

 
5,571

Total
26

 
$
147,881

 
$
16,120

_______________
(1) This investment is a residential mortgage-backed security that was evaluated based on the performance of the underlying collateral under various economic and default scenarios. The security has met its contractual obligations and the Company expects that it will continue to meet those contractual payment obligations as they become due. Based on this evaluation, the Company does not consider the investment to be OTTI.


13


For OTTI of fixed maturity securities that management does not intend to sell or, more likely than not, would not be required to sell, the portion of the decline in value considered to be due to credit factors is recognized in earnings and the portion of the decline in value considered to be due to non-credit factors is recognized in other comprehensive income. For the three months ended March 31, 2012 and 2011, there were no changes in the portion of impairments recognized in earnings for those securities that have been impaired due to both credit factors and non-credit factors.
 
The Company has evaluated its fixed maturity securities in an unrealized loss position and believes the unrealized losses are due primarily to temporary market and sector-related factors rather than to issuer-specific factors. None of these securities are delinquent or in default under financial covenants. Based on its assessment of these issuers, the Company expects them to continue to meet their contractual payment obligations as they become due and does not consider any of these securities to be OTTI.

(14) Fair Value Measurements
The Company’s fixed maturity and equity securities available for sale and its trading account securities are carried at fair value. Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” The Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for similar assets in active markets. Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs may only be used to measure fair value to the extent that observable inputs are not available.
Because many fixed maturity securities do not trade on a daily basis, the Company utilizes pricing models and processes which may include benchmark curves, benchmarking of like securities, sector groupings and matrix pricing. Market inputs used to evaluate securities include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. Quoted prices are often unavailable for recently issued securities, securities that are infrequently traded or securities that are only traded in private transactions. For publicly traded securities for which quoted prices are unavailable, the Company determines fair value based on independent broker quotations and other observable market data. For securities traded only in private negotiations, the Company determines fair value based primarily on the cost of such securities, which is adjusted to reflect prices of recent placements of securities of the same issuer, financial projections, credit quality and business developments of the issuer and other relevant information.
Preferred Stocks – At March 31, 2012, there were five preferred stocks in an unrealized loss position, with an aggregate fair value of $66 million and a gross unrealized loss of $7 million. Two of those preferred stocks with an aggregate fair value of $17 million and a gross unrealized loss of $4 million were rated non-investment grade. Based upon management’s view of the underlying value of these securities, the Company does not consider these preferred stocks to be OTTI.
Common Stocks – At March 31, 2012, the Company owned five common stocks in an unrealized loss position with an aggregate fair value of $47 million and an aggregate unrealized loss of $0.7 million. The Company does not consider these common stocks to be OTTI.



14


The following tables present the assets and liabilities measured at fair value, on a recurring basis, as of March 31, 2012 and December 31, 2011 by Level:
 
(Dollars in thousands)
Total
 
Level 1
 
Level 2
 
Level 3
March 31, 2012
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Fixed maturity securities available for sale:
 
 
 
 
 
 
 
U.S. government and agency
$
1,026,262

 
$

 
$
1,026,262

 
$

State and municipal
5,261,808

 

 
5,261,808

 

Mortgage-backed securities
1,534,174

 

 
1,534,174

 

Corporate
2,610,280

 

 
2,544,459

 
65,821

Foreign
1,005,993

 

 
1,005,993

 

Total fixed maturity securities available for sale
11,438,517

 

 
11,372,696

 
65,821

Equity securities available for sale:
 
 
 
 
 
 
 
Common stocks
365,237

 
363,828

 

 
1,409

Preferred stocks
123,983

 

 
120,802

 
3,181

Total equity securities available for sale
489,220

 
363,828

 
120,802

 
4,590

Arbitrage trading account
344,892

 
179,400

 
164,818

 
674

Total
$
12,272,629

 
$
543,228

 
$
11,658,316

 
$
71,085

Liabilities:
 
 
 
 
 
 
 
Securities sold but not yet purchased
$
71,386

 
$
62,924

 
$
8,421

 
$
41

December 31, 2011
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Fixed maturity securities available for sale:
 
 
 
 
 
 
 
U.S. government and agency
$
976,493

 
$

 
$
976,493

 
$

State and municipal
5,323,070

 

 
5,323,070

 

Mortgage-backed securities
1,584,587

 

 
1,584,587

 

Corporate
2,424,424

 

 
2,356,596

 
67,828

Foreign
888,354

 

 
888,354

 

Total fixed maturity securities available for sale
11,196,928

 

 
11,129,100

 
67,828

Equity securities available for sale:
 
 
 
 
 
 
 
Common stocks
319,982

 
318,423

 

 
1,559

Preferred stocks
123,457

 

 
111,154

 
12,303

Total equity securities available for sale
443,439

 
318,423

 
111,154

 
13,862

Arbitrage trading account
397,312

 
208,516

 
187,945

 
851

Total
$
12,037,679

 
$
526,939

 
$
11,428,199

 
$
82,541

Liabilities:
 
 
 
 
 
 
 
Securities sold but not yet purchased
$
62,514

 
$
62,493

 
$

 
$
21

There were no significant transfers between Levels 1 and 2 during the three months ended March 31, 2012 or during the year ended December 31, 2011.








15


The following tables summarize changes in Level 3 assets and liabilities for the three months ended March 31, 2012 and for the year ended December 31, 2011:
 
  
 
 
Gains (Losses) Included in
 
 
(Dollars in thousands)
Beginning
Balance
 
Earnings
 
Other
Comprehensive
Income
 
Purchases
 
(Sales)
 
Maturities
 
Transfer in
 
Ending
Balance
For the three months ended March 31, 2012:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
$
67,828

 
$
113

 
$
1,294

 
$
74

 
$

 
$
(3,488
)
 
$

 
$
65,821

Total
67,828

 
113

 
1,294

 
74

 

 
(3,488
)
 

 
65,821

Equity securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stocks
1,559

 

 

 

 
(150
)
 

 

 
1,409

Preferred stocks
12,303

 
1,962

 
(1,751
)
 

 
(9,333
)
 

 

 
3,181

Total
13,862

 
1,962

 
(1,751
)
 

 
(9,483
)
 

 

 
4,590

Arbitrage trading account
851

 
(192
)
 





 

 
15

 
674

Total
$
82,541

 
$
1,883

 
$
(457
)
 
$
74

 
$
(9,483
)
 
$
(3,488
)
 
$
15

 
$
71,085

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities sold but not yet purchased
$
21

 
$
20

 
$

 
$

 
$

 
$

 
$

 
$
41

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the year ended December 31, 2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
$
88,063

 
$
(454
)
 
$
(870
)
 
$
15,271

 
$
(11,864
)
 
$
(22,318
)
 
$

 
$
67,828

Total
88,063

 
(454
)
 
(870
)
 
15,271

 
(11,864
)
 
(22,318
)
 

 
67,828

Equity securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stocks
1,559

 

 

 

 

 

 

 
1,559

Preferred stocks
89,446

 
28,947

 
(30,865
)
 

 
(75,225
)
 

 

 
12,303

Total
91,005

 
28,947

 
(30,865
)
 

 
(75,225
)
 

 

 
13,862

Arbitrage trading account
3,187

 
572

 

 
269

 
(3,266
)
 

 
89

 
851

Total
$
182,255

 
$
29,065

 
$
(31,735
)
 
$
15,540

 
$
(90,355
)
 
$
(22,318
)
 
$
89

 
$
82,541

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities sold but not yet purchased
$

 
$
40

 
$

 
$
67

 
$
(86
)
 
$

 
$

 
$
21

There were no significant transfers in or out of Level 3 during the three months ended March 31, 2012 or during the year ended December 31, 2011.


16


(15) Reinsurance
The following is a summary of reinsurance financial information:
  
 
For the Three Months Ended
 
 
March 31,
(Dollars in thousands)
 
2012
 
2011
Written premiums:
 
 
 
 
Direct
 
$
1,201,019

 
$
1,076,847

Assumed
 
200,507

 
193,011

Ceded
 
(198,000
)
 
(186,555
)
Total net premiums written
 
$
1,203,526

 
$
1,083,303

 
 
 
 
 
Earned premiums:
 
 
 
 
Direct
 
$
1,103,956

 
$
972,525

Assumed
 
179,518

 
161,870

Ceded
 
(183,823
)
 
(151,898
)
Total net premiums earned
 
$
1,099,651

 
$
982,497

 
 
 
 
 
Ceded losses incurred
 
$
85,277

 
$
114,825

The Company reinsures a portion of its exposures principally to reduce its net liability on individual risks and to protect against catastrophic losses. Estimated amounts due from reinsurers are reported net of reserves for uncollectible reinsurance of $3 million as of March 31, 2012 and December 31, 2011.

(16) Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments:
 
  
March 31, 2012
 
December 31, 2011
(Dollars in thousands)
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Assets:
 
 
 
 
 
 
 
Fixed maturity securities
$
11,554,209

 
$
11,572,740

 
$
11,312,037

 
$
11,330,910

Equity securities available for sale
489,220

 
489,220

 
443,439

 
443,439

Arbitrage trading account
344,892

 
344,892

 
397,312

 
397,312

Loans receivable
357,121

 
339,365

 
263,187

 
245,169

Cash and cash equivalents
1,082,407

 
1,082,407

 
911,742

 
911,742

Trading account receivables from brokers and clearing organizations
382,479

 
382,479

 
318,240

 
318,240

Due from broker

 

 
10,875

 
10,875

Liabilities:
 
 
 
 
 
 
 
Trading account securities sold but not yet purchased
71,386

 
71,386

 
62,514

 
62,514

Due to broker
5,524

 
5,524

 

 

Junior subordinated debentures
243,050

 
252,000

 
242,997

 
258,400

Senior notes and other debt
1,853,512

 
1,992,665

 
1,500,503

 
1,587,473

The estimated fair values of the Company’s fixed maturity securities, equity securities available for sale and arbitrage trading account securities are based on various valuation techniques, as described in note 14 above. 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 loans receivable are estimated by using current institutional purchaser yield require