W R Berkley : BERKLEY W R CORP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

Overview

W. R. Berkley Corporation is an insurance holding company that is among the
largest commercial lines writers in the United States and operates worldwide in
two business segments of the property and casualty business: Insurance and
Reinsurance & 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 and enterprise risk
management, and actuarial, financial and corporate legal staff support. The
Company's primary sources of revenues and earnings are its insurance operations
and its investments.
An important part of our strategy is to form new operating units to capitalize
on various business opportunities. Over the years, the Company has formed
numerous new operating units that are focused on important parts of the economy
in the U.S., including healthcare, cyber security, energy and agriculture, and
on growing international markets, including the Asia-Pacific region, South
America and Mexico.
The profitability of the Company's insurance business is affected primarily by
the adequacy of premium rates. The ultimate adequacy of premium rates is not
known with certainty at the time an insurance policy is issued because premiums
are determined before claims are reported. The ultimate adequacy of premium
rates is affected mainly by the severity and frequency of claims, which are
influenced by many factors, including natural and other disasters, regulatory
measures and court decisions that define and change the extent of coverage and
the effects of economic or social 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.
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 1 in the financial
statements for further information on the accounting guidance and impact of its
adoption on the Company's results and financial position.
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 year ended December 31, 2020, the Company recorded
approximately $171 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.
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.
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.
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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.

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Critical Accounting Estimates
The following presents a discussion of accounting policies and estimates
relating to reserves for losses and loss expenses, assumed reinsurance premiums
and other-than-temporary impairments of investments. Management believes these
policies and estimates are the most critical to its operations and require the
most difficult, subjective and complex judgments.
Reserves for Losses and Loss Expenses. To recognize liabilities for unpaid
losses, either known or unknown, insurers establish reserves, which is a balance
sheet account representing estimates of future amounts needed to pay claims and
related expenses with respect to insured events which have occurred. Estimates
and assumptions relating to reserves for losses and loss expenses are based on
complex and subjective judgments, often including the interplay of specific
uncertainties with related accounting and actuarial measurements. Such estimates
are also susceptible to change as significant periods of time may elapse between
the occurrence of an insured loss, the report of the loss to the insurer, the
ultimate determination of the cost of the loss and the insurer's payment of that
loss.
In general, when a claim is reported, claims personnel establish a "case
reserve" for the estimated amount of the ultimate payment based upon known
information about the claim at that time. The estimate represents an informed
judgment based on general reserving practices and reflects the experience and
knowledge of the claims personnel regarding the nature and value of the specific
type of claim. Reserves are also established on an aggregate basis to provide
for losses incurred but not reported ("IBNR") to the insurer, potential
inadequacy of case reserves and the estimated expenses of settling claims,
including legal and other fees and general expenses of administrating the claims
adjustment process. Reserves are established based upon the then current legal
interpretation of coverage provided.
In examining reserve adequacy, several factors are considered in estimating the
ultimate economic value of losses. These factors include, among other things,
historical data, legal developments, changes in social attitudes and economic
conditions, including the effects of inflation. The actuarial process relies on
the basic assumption that past experience, adjusted judgmentally for the effects
of current developments and anticipated trends, is an appropriate basis for
predicting future outcomes. Reserve amounts are based on management's informed
estimates and judgments using currently available data. As additional experience
and other data become available and are reviewed, these estimates and judgments
may be revised. This may result in reserve increases or decreases that would be
reflected in our results in periods in which such estimates and assumptions are
changed.
Reserves do not represent a certain calculation of liability. Rather, reserves
represent an estimate of what management expects the ultimate settlement and
claim administration will cost. While the methods for establishing reserves are
well tested over time, the major assumptions about anticipated loss emergence
patterns are subject to uncertainty. These estimates, which generally involve
actuarial projections, are based on management's assessment of facts and
circumstances then known, as well as estimates of trends in claims severity and
frequency, judicial theories of liability and other factors, including the
actions of third parties which are beyond the Company's control. These variables
are affected by external and internal events, such as inflation and economic
volatility, judicial and litigation trends, reinsurance coverage, legislative
changes and claim handling and reserving practices, which make it more difficult
to accurately predict claim costs. The inherent uncertainties of estimating
reserves are greater for certain types of liabilities where long periods of time
elapse before a definitive determination of liability is made. Because setting
reserves is inherently uncertain, the Company cannot provide assurance that its
current reserves will prove adequate in light of subsequent events.
Loss reserves included in the Company's financial statements represent
management's best estimates based upon an actuarially derived point estimate and
other considerations. The Company uses a variety of actuarial techniques and
methods to derive an actuarial point estimate for each operating unit. These
methods include paid loss development, incurred loss development, paid and
incurred Bornhuetter-Ferguson methods and frequency and severity methods. In
circumstances where one actuarial method is considered more credible than the
others, that method is used to set the point estimate. For example, the paid
loss and incurred loss development methods rely on historical paid and incurred
loss data. For new lines of business, where there is insufficient history of
paid and incurred claims data, or in circumstances where there have been
significant changes in claim practices, the paid and incurred loss development
methods would be less credible than other actuarial methods. The actuarial point
estimate may also be based on a judgmental weighting of estimates produced from
each of the methods considered. Industry loss experience is used to supplement
the Company's own data in selecting "tail factors" and in areas where the
Company's own data is limited. The actuarial data is analyzed by line of
business, coverage and accident or policy year, as appropriate, for each
operating unit.
The establishment of the actuarially derived loss reserve point estimate also
includes consideration of qualitative factors that may affect the ultimate
losses. These qualitative considerations include, among others, the impact of
re-underwriting initiatives, changes in the mix of business, changes in
distribution sources and changes in policy terms and conditions. Examples of
changes in terms and conditions that can have a significant impact on reserve
levels are the use of aggregate policy limits, the expansion of coverage
exclusions, whether or not defense costs are within policy limits, and changes
in deductibles and attachment points.
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The key assumptions used to arrive at the best estimate of loss reserves are the
expected loss ratios, rate of loss cost inflation, and reported and paid loss
emergence patterns. Expected loss ratios represent management's expectation of
losses at the time the business is priced and written, before any actual claims
experience has emerged. This expectation is a significant determinant of the
estimate of loss reserves for recently written business where there is little
paid or incurred loss data to consider. Expected loss ratios are generally
derived from historical loss ratios adjusted for the impact of rate changes,
loss cost trends and known changes in the type of risks underwritten. Expected
loss ratios are estimated for each key line of business within each operating
unit. Expected loss cost inflation is particularly important for the long-tail
lines, such as excess casualty, and claims with a high medical component, such
as workers' compensation. Reported and paid loss emergence patterns are used to
project current reported or paid loss amounts to their ultimate settlement
value. Loss development factors are based on the historical emergence patterns
of paid and incurred losses, and are derived from the Company's own experience
and industry data. The paid loss emergence pattern is also significant to excess
and assumed workers' compensation reserves because those reserves are discounted
to their estimated present value based upon such estimated payout patterns.
Management believes the estimates and assumptions it makes in the reserving
process provide the best estimate of the ultimate cost of settling claims and
related expenses with respect to insured events which have occurred; however,
different assumptions and variables could lead to significantly different
reserve estimates.
Loss frequency and severity are measures of loss activity that are considered in
determining the key assumptions described in our discussion of loss and loss
expense reserves, including expected loss ratios, rate of loss cost inflation
and reported and paid loss emergence patterns. Loss frequency is a measure of
the number of claims per unit of insured exposure, and loss severity is a
measure of the average size of claims. Factors affecting loss frequency include
the effectiveness of loss controls and safety programs and changes in economic
activity or weather patterns. Factors affecting loss severity include changes in
policy limits, retentions, rate of inflation and judicial interpretations.
Another factor affecting estimates of loss frequency and severity is the loss
reporting lag, which is the period of time between the occurrence of a loss and
the date the loss is reported to the Company. The length of the loss reporting
lag affects our ability to accurately predict loss frequency (loss frequencies
are more predictable for lines with short reporting lags) as well as the amount
of reserves needed for incurred but not reported losses (less IBNR is required
for lines with short reporting lags). As a result, loss reserves for lines with
short reporting lags are likely to have less variation from initial loss
estimates. For lines with short reporting lags, which include commercial
automobile, primary workers' compensation, other liability (claims-made) and
property business, the key assumption is the loss emergence pattern used to
project ultimate loss estimates from known losses paid or reported to date. For
lines of business with long reporting lags, which include other liability
(occurrence), products liability, excess workers' compensation and liability
reinsurance, the key assumption is the expected loss ratio since there is often
little paid or incurred loss data to consider. Historically, the Company has
experienced less variation from its initial loss estimates for lines of
businesses with short reporting lags than for lines of business with long
reporting lags.
The key assumptions used in calculating the most recent estimate of the loss
reserves are reviewed each quarter and adjusted, to the extent necessary, to
reflect the latest reported loss data, current trends and other factors
observed. If the actual level of loss frequency and severity are higher or lower
than expected, the ultimate losses will be different than management's estimate.
The following table reflects the impact of changes (which could be favorable or
unfavorable) in frequency and severity, relative to our assumptions, on our loss
estimate for claims occurring in 2020:
(In thousands)                Frequency (+/-)
Severity (+/-)        1%            5%             10%
1%                $ 89,102      $ 268,193      $ 492,056
5%                 268,193        454,376        687,105
10%                492,056        687,105        930,917


Our net reserves for losses and loss expenses of approximately $11.6 billion as
of December 31, 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 22%, of the Company's net loss reserves as of
December 31, 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
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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.
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Following is a summary of the Company's reserves for losses and loss expenses by business segment as of December 31, 2020 and 2019:

(In thousands)                                     2020              2019
Insurance                                     $  9,034,969      $  8,193,381
Reinsurance & Monoline Excess                    2,585,424         2,504,617
Net reserves for losses and loss expenses       11,620,393        10,697,998
Ceded reserves for losses and loss expenses      2,164,037         1,885,251
Gross reserves for losses and loss expenses   $ 13,784,430      $ 12,583,249

Following is a summary of the Company's net reserves for losses and loss expenses by major line of business as of December 31, 2020 and 2019:

                                          Reported Case       Incurred But
(In thousands)                               Reserves         Not Reported         Total
December 31, 2020
Other liability                          $    1,534,514      $  2,864,760      $  4,399,274
Workers' compensation (1)                       977,035           873,072         1,850,107
Professional liability                          414,104           875,163         1,289,267
Commercial automobile                           442,975           398,688           841,663
Short-tail lines (2)                            295,313           359,345           654,658
Total Insurance                               3,663,941         5,371,028         9,034,969

Reinsurance & Monoline Excess (1) (3) 1,442,099 1,143,325

      2,585,424
Total                                    $    5,106,040      $  6,514,353      $ 11,620,393
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 excess and assumed workers' compensation business are net of an
aggregate net discount of $483 million and $530 million as of December 31, 2020
and 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 expenses on a quarterly
basis. Changes in estimates of prior year losses are reported when such changes
are made. The changes in prior year loss reserve estimates are generally the
result of ongoing analysis of recent loss development trends. Original estimates
are increased or decreased as additional information becomes known regarding
individual claims and aggregate claim trends.
Certain of the Company's insurance and reinsurance contracts are retrospectively
rated, whereby the Company collects more or less premiums based on the level of
loss activity. For those contracts, changes in loss and loss expenses for prior
years may be fully or partially offset by additional or return premiums.
Net prior year development (i.e, the sum of prior year reserve changes and prior
year earned premiums changes) for each of the last three years ended
December 31, are as follows:
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(In thousands)                              2020          2019           

2018

Increase in prior year loss reserves     $   (627)     $ (34,079)     $ (6,831)
Increase in prior year earned premiums     16,807         53,511        45,638
Net favorable prior year development     $ 16,180      $  19,432      $ 38,807


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, 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 contingency and
event cancellation, workers' compensation, 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 year ended December 31, 2020, the Company recognized losses for
COVID-19-related claims activity, net of reinsurance, of approximately $171
million, of which $161 million related to the Insurance segment and $10 million
related to the Reinsurance & Monoline Excess segment. Such $171 million of
COVID-19-related losses included $95 million of reported losses and $76 million
of IBNR.
Favorable prior year development (net of additional and return premiums) was $16
million in 2020.
Insurance - Reserves for the Insurance segment developed favorably by $24
million in 2020 (net of additional and return premiums). Continuing the pattern
seen in recent years, the overall favorable development in 2020 resulted from
more significant favorable development on workers' compensation business, which
was partially offset by unfavorable development on professional liability,
including excess professional liability.
For workers' compensation, the favorable development was spread across almost
all prior accident years, including prior to 2011, but was most significant in
accident years 2016 through 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 (i.e.,
number of reported claims per unit of exposure). The long term trend of
declining workers' compensation frequency can be attributable to improved
workplace safety. Loss severity trends were also aided by our continued
investment in claims handling initiatives such as medical case management
services and vendor savings through usage of preferred provider networks and
pharmacy benefit managers. Reported workers' compensation losses in 2020
continued to be below our expectations at most of our operating units, and were
below the assumptions underlying our initial loss ratio picks and our previous
reserve estimates for most prior accident years.
For professional liability business, unfavorable development was driven mainly
by large losses reported in the directors and officers ("D&O"), lawyers
professional and excess hospital professional liability lines of business. For
these lines of
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business, we continue to see an increase in the number of large losses reported
and a lengthening of the reporting "tail" beyond historical levels. We believe a
contributing cause is rising social inflation in the form of, for example,
higher jury awards on cases that go to trial, and the corresponding higher
demands from plaintiffs and higher values required to reach settlement on cases
that do not go to trial. The unfavorable development for professional liability
affected mainly accident years 2016 through 2018.
Reinsurance & Monoline Excess - Reserves for the Reinsurance & Monoline Excess
segment developed unfavorably by $8 million in 2020. The unfavorable development
in the segment was driven by non-proportional assumed liability business written
in both the U.S. and U.K., and was partially offset by favorable development on
excess workers' compensation business. The unfavorable non-proportional assumed
liability development was concentrated in accident years 2014 through 2018, and
related primarily to accounts insuring construction projects and professional
liability exposures.
Favorable prior year development (net of additional and return premiums) was $19
million in 2019.
Insurance - Reserves for the Insurance segment developed favorably by $21
million in 2019 (net of additional and return premiums). This overall favorable
development resulted from more significant favorable development on workers'
compensation business, which was partially offset by unfavorable development on
professional liability and general liability business.
For workers' compensation, the favorable development was spread across many
accident years, including prior to 2010, but was most significant in accident
years 2014 through 2018, and particularly 2017 and 2018. The favorable workers'
compensation development reflects a continuation during 2019 of the benign loss
cost trends experienced during recent years, particularly the favorable claim
frequency trends (i.e., number of reported claims per unit of exposure). The
long term trend of declining workers' compensation frequency can be attributable
to improved workplace safety. Loss severity trends were also aided by our
continued investment in claims handling initiatives such as medical case
management services and vendor savings through usage of preferred provider
networks and pharmacy benefit managers. Our initial loss ratio "picks" for this
line of business over the past few accident years have contemplated an increase
in loss cost trends and reflect decreasing premium rates in the marketplace;
reported workers' compensation losses in 2019 continued to be below our
expectations at most of our operating units, and were below the assumptions
underlying our initial loss ratio picks and our previous reserve estimates.
For professional liability business, the unfavorable development was driven
mainly by an increase in the number of large losses reported in the lawyers
professional liability and directors and officers ("D&O") liability lines of
business. Many of the lawyers large losses involved claims made against insured
law firms relating to work performed on matters stemming from the 2008 financial
crisis. These claims affected mainly accident years 2013 through 2016. In
addition, for both of these lines of business, we have seen evidence of social
inflation in the form of higher jury awards on cases that go to trial, and
corresponding higher demands from plaintiffs and higher values required to reach
settlement on cases that do not go to trial. The unfavorable development for D&O
affected mainly accident years 2014 through 2017.
For general liability business, most of the unfavorable development emanated
from our excess and surplus lines (E&S) businesses, and was driven by an
increase in the number of large losses reported. Many of these large losses were
from construction and contracting classes of business, which have also been
impacted by social inflation. The general liability unfavorable development
impacted mainly accident years 2015 through 2018.
Reinsurance & Monoline Excess - Reserves for the Reinsurance & Monoline Excess
segment developed unfavorably by $2 million in 2019. The unfavorable development
in the segment was driven by non-proportional assumed liability business in both
the U.S. and U.K., and was largely offset by favorable development on excess
workers' compensation business. The unfavorable non-proportional assumed
liability development was concentrated in accident years 2015 through 2018, and
included an adjustment for the Ogden discount rate in the U.K.
Favorable prior year development (net of additional and return premiums) was $39
million in 2018.
Insurance - Reserves for the Insurance segment developed favorably by $19
million in 2018. The favorable development was primarily attributable to
workers' compensation business, and was partially offset by unfavorable
development for professional liability business.
For workers' compensation, the favorable development was spread across many
accident years, but was most significant in accident years 2015 through 2017.
The favorable workers' compensation development reflects a continuation during
2018 of the benign loss cost trends experienced during recent years,
particularly the favorable claim frequency trends (i.e., number of reported
claims per unit of exposure). The long term trend of declining workers'
compensation frequency can be attributable to improved workplace safety. Loss
severity trends were also aided by our continued investment in claims handling
initiatives such as medical case management services and vendor savings through
usage of preferred provider networks. Reported
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workers' compensation losses in 2018 continued to be below our expectations at
most of our operating units, and were below the assumptions underlying our
previous reserve estimates.
For professional liability business, adverse development was primarily related
to unexpected large directors and officers ("D&O") liability losses at one of
our U.S. operating units, as well as lawyers professional liability losses at
another operating unit. The adverse development stemmed primarily from accident
years 2015 and 2016, and was driven by a higher frequency of large losses than
we had experienced in previous years.
Reinsurance & Monoline Excess - Reserves for the Reinsurance & Monoline Excess
segment developed favorably by $20 million in 2018. The favorable development
was primarily due to excess workers' compensation business, and was spread
across many accident years, including years prior to 2009. This favorable excess
workers' compensation development was partially offset by unfavorable
development on U.S. casualty facultative assumed business from accident years
2009 and prior related to construction projects.
Reserve Discount. The Company discounts its liabilities for certain workers'
compensation reserves. The amount of workers' compensation reserves that were
discounted was $1,655 million and $1,731 million at December 31, 2020 and 2019,
respectively. The aggregate net discount for those reserves, after reflecting
the effects of ceded reinsurance, was $483 million and $530 million at
December 31, 2020 and 2019, respectively. At December 31, 2020, discount rates
by year ranged from 0.7% to 6.5%, with a weighted average discount rate of 3.6%.
Substantially all discounted workers' compensation reserves (97% of total
discounted reserves at December 31, 2020) are excess workers' compensation
reserves. In order to properly match loss expenses with income earned on
investment securities supporting the liabilities, reserves for excess workers'
compensation business are discounted using risk-free discount rates determined
by reference to the U.S. Treasury yield curve. These rates are determined
annually based on the weighted average rate for the period. Once established, no
adjustments are made to the discount rate for that period, and any increases or
decreases in loss reserves in subsequent years are discounted at the same rate,
without regard to when any such adjustments are recognized. The expected loss
and loss expense payout patterns subject to discounting are derived from the
Company's loss payout experience.
The Company also discounts reserves for certain other long-duration workers'
compensation reserves (representing approximately 3% of total discounted
reserves at December 31, 2020), including reserves for quota share reinsurance
and reserves related to losses regarding occupational lung disease. These
reserves are discounted at statutory rates prescribed or permitted by the
Department of Insurance of the State of Delaware.
Assumed Reinsurance Premiums. The Company estimates the amount of assumed
reinsurance premiums that it will receive under treaty reinsurance agreements at
the inception of the contracts. These premium estimates are revised as the
actual amount of assumed premiums is reported to the Company by the ceding
companies. As estimates of assumed premiums are made or revised, the related
amount of earned premiums, commissions and incurred losses associated with those
premiums are recorded. Estimated assumed premiums receivable were approximately
$44 million and $43 million at December 31, 2020 and 2019, respectively. The
assumed premium estimates are based upon terms set forth in reinsurance
agreements, information received from ceding companies during the underwriting
and negotiation of agreements, reports received from ceding companies and
discussions and correspondence with reinsurance intermediaries. The Company also
considers its own view of market conditions, economic trends and experience with
similar lines of business. These premium estimates represent management's best
estimate of the ultimate amount of premiums to be received under its assumed
reinsurance agreements.
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)
.
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  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-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 December 31, 2020 is presented in the
table below.

                                Number of        Aggregate       Unrealized
($ in thousands)                Securities       Fair Value         Loss
Foreign government                  18          $   75,555      $    44,310
Corporate                           11              26,617            3,025

Mortgage-backed securities           7               1,393               31

Total                               36          $  103,565      $    47,366


As of December 31, 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 $5 million and $2 million as of December 31, 2020 and
December 31, 2019, respectively.
Fair Value Measurements. The Company's fixed maturity available for sale
securities, equity securities, and its trading account securities are carried at
fair value. Fair value is defined as "the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date". The Company utilizes a fair value
hierarchy that prioritizes the inputs to valuation techniques used to measure
fair value into three broad levels. Level 1 inputs are quoted prices
(unadjusted) in active markets for identical assets or liabilities that the
reporting entity has the ability to access at the measurement date. Level 2
inputs are inputs other than quoted prices included within Level 1 that are
observable for similar assets in active markets. Level 3 inputs are unobservable
inputs for the asset or liability. Unobservable inputs may only be used to
measure fair value to the extent that observable inputs are not available. The
fair value of the vast majority of the Company's portfolio is based on
observable data (other than quoted prices) and, accordingly, is classified as
Level 2.
In classifying particular financial securities in the fair value hierarchy, the
Company uses its judgment to determine whether the market for a security is
active and whether significant pricing inputs are observable. The Company
determines the 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.
                                       42

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Because many fixed maturity securities do not trade on a daily basis, the
Company utilizes pricing models and processes which may include benchmark
curves, benchmarking of like securities, sector groupings and matrix pricing.
Market inputs used to evaluate securities include benchmark yields, reported
trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark
securities, bids, offers and reference data. Quoted prices are often unavailable
for recently issued securities that are infrequently traded or securities that
are only traded in private transactions. For publicly traded securities for
which quoted prices are unavailable, the Company determines fair value based on
independent broker quotations and other observable market data. For securities
traded only in private negotiations, the Company determines fair value based
primarily on the cost of such securities, which is adjusted to reflect prices of
recent placements of securities of the same issuer, financial data, projections
and business developments of the issuer and other relevant information.
The following is a summary of pricing sources for the Company's fixed maturity
securities available for sale as of December 31, 2020:

                                       Carrying        Percent
(In thousands)                          Value          of Total

Pricing source: Independent pricing services $ 13,910,209 98.7 % Syndicate manager

                         44,612          0.3
Directly by the Company based on:
Observable data                          130,774          0.9
Cash flow model                            1,000          0.1
Total                               $ 14,086,595        100.0  %


Independent pricing services - Substantially all of the Company's fixed maturity
securities available for sale were priced by independent pricing services
(generally one U.S. pricing service plus additional pricing services with
respect to a limited number of foreign securities held by the Company). The
prices provided by the independent pricing services are generally based on
observable market data in active markets (e.g., broker quotes and prices
observed for comparable securities). The determination of whether markets are
active or inactive is based upon the volume and level of activity for a
particular asset class. The Company reviews the prices provided by pricing
services for reasonableness based upon current trading levels for similar
securities. If the prices appear unusual to the Company, they are re-examined
and the value is either confirmed or revised. In addition, the Company
periodically performs independent price tests of a sample of securities to
ensure proper valuation and to verify our understanding of how securities are
priced. As of December 31, 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 Years Ended December 31, 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 net
premiums earned), expense ratios (underwriting expenses expressed as a
percentage of net premiums earned) and GAAP combined ratios (sum of loss ratio
and expense ratio) for each of our business segments for the years ended
December 31, 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           $ 7,837,496       $ 7,398,573
Net premiums written               6,347,101         6,086,009
Net premiums earned                6,067,669         5,919,819
Loss ratio                              64.9  %           62.4  %
Expense ratio                           30.3              31.1
GAAP combined ratio                     95.2              93.5
Reinsurance & Monoline Excess
Gross premiums written           $ 1,010,151       $   863,646
Net premiums written                 915,336           777,490
Net premiums earned                  863,174           713,469
Loss ratio                              61.3  %           61.5  %
Expense ratio                           31.8              35.0
GAAP combined ratio                     93.1              96.5
Consolidated
Gross premiums written           $ 8,847,647       $ 8,262,219
Net premiums written               7,262,437         6,863,499
Net premiums earned                6,930,843         6,633,288
Loss ratio                              64.5  %           62.3  %
Expense ratio                           30.4              31.5
GAAP combined ratio                     94.9              93.8



Net Income to Common Stockholders. The following table presents the Company's
net income to common stockholders and net income per diluted share for the years
ended December 31, 2020 and 2019.
(In thousands, except per share data)        2020           2019

Net income to common stockholders $ 530,670 $ 681,944 Weighted average diluted shares

             188,763        193,521
Net income per diluted share              $    2.81      $    3.52


The Company reported net income of $531 million in 2020 compared to $682 million
in 2019. The $151 million decrease in net income was primarily due to an
after-tax decrease in net investment income of $47 million mainly due to reduced
investment yields in fixed maturity securities and repositioning a larger
portion of the investment portfolio to cash and cash equivalents, an after-tax
decrease in underwriting income of $46 million resulted from COVID-19-related
losses and other catastrophe losses, a $39 million increase in tax expense due
to change in effective tax rate, a $23 million decrease in after-tax foreign
currency gains as the U.S. dollar weakened against a wide spectrum of
currencies, a decrease in after-tax net investment gains of $13 million, a $6
million debt extinguishment expense on debt redeemed in 2020 and an after-tax
decrease in other income of $1 million, partially offset by an after-tax
reduction in corporate expenses of $12 million, an after-tax increase in
insurance service fee income of $9 million, an after-tax reduction of $2 million
from interest expense, and an after-tax increase in income from non-insurance
businesses of $1 million. The number of weighted average diluted shares
decreased by approximately 5 million for 2020 compared to 2019, mainly
reflecting shares repurchased in 2020.
Premiums. Gross premiums written were $8,848 million in 2020, an increase of 7%
from $8,262 million in 2019. The increase was due to the growth in the Insurance
segment of $439 million and $147 million in the Reinsurance & Monoline Excess
segment. Approximately 79% of premiums expiring in 2020 were renewed, and 80% of
premiums expiring in 2019 were renewed.
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Average renewal premium rates for insurance and facultative reinsurance
increased 11.3% in 2020 and 4.8% in 2019, when adjusted for changes in
exposures. Average renewal premium rates for insurance and facultative
reinsurance excluding workers' compensation increased 13.6% in 2020 and 6.9% in
2019, when adjusted for changes in exposures.
A summary of gross premiums written in 2020 compared with 2019 by line of
business within each business segment follows:
•Insurance gross premiums increased 6% to $7,837 million in 2020 from $7,398
million in 2019. Gross premiums increased $270 million (11%) for other
liability, $196 million (20%) for professional liability, and $92 million (5%)
for short-tail lines and $74 million (9%) for commercial auto, and decreased
$193 million (15%) for workers' compensation.
•Reinsurance & Monoline Excess gross premiums increased 17% to $1,010 million in
2020 from $864 million in 2019. Gross premiums written increased $105 million
(22%) for casualty lines, $27 million (14%) for property lines, and $14 million
(7%) for monoline excess.
Net premiums written were $7,262 million in 2020, an increase of 6% from $6,863
million in 2019. Ceded reinsurance premiums as a percentage of gross written
premiums were 18% in 2020 and 17% in 2019.
Premiums earned increased 4% to $6,931 million in 2020 from $6,633 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 $128 million in
2020 compared with $199 million in 2019.
Net Investment Income. Following is a summary of net investment income for the
years ended December 31, 2020 and 2019:
                                                                                                    Average Annualized
                                                             Amount                                        Yield
(In thousands)                                       2020               2019                     2020                      2019
Fixed maturity securities, including cash and
cash equivalents and loans receivable            $ 426,563          $ 517,925                             2.7  %              3.4  %
Investment funds                                    54,253             69,194                             4.5                 5.2
Arbitrage trading account                           77,931             34,585                            14.6                 7.8
Real estate                                         24,027             24,218                             1.2                 1.2
Equity securities                                   10,172              5,439                             2.7                 2.0
Gross investment income                            592,946            651,361                             3.0                 3.4
Investment expenses                                 (9,125)            (5,747)                              -                   -
Total                                            $ 583,821          $ 645,614                             2.9  %              3.4  %


Net investment income decreased 10% to $584 million in 2020 from $646 million in
2019 primarily due to a $92 million decrease in income from fixed maturity
securities driven by lower investment yields and repositioning a larger portion
of the investment portfolio to cash and cash equivalents, a $15 million decrease
in income from investment funds and an increase in investment expenses of $3
million, partially offset by a $43 million increase in arbitrage trading account
and a $5 million increase in equity securities. Investment funds are reported on
a one quarter lag. The average annualized yield for fixed maturity securities
was 2.7% in 2020 and 3.4% in 2019. The effective duration of the fixed maturity
portfolio was 2.4 years at December 31, 2020 and 2.8 years at December 31, 2019.
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 $20.0 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 were
$89 million in 2020 and $93 million in 2019. The decrease was primarily due to a
reduction of assigned risk plan business.
Net Realized and Unrealized Gains on Investments. The Company buys and sells
securities and other investment assets on a regular basis in order to maximize
its total return on investments. Decisions to sell securities and other
investment assets are based on management's view of the underlying fundamentals
of specific investments as well as management's expectations regarding interest
rates, credit spreads, currency values and general economic conditions. Net
realized and unrealized gains on investments were $74 million in 2020 compared
with $121 million in 2019. In 2020, the gains reflected net realized gains on
investment of $99 million, including the sale of a building for a gain of $105
million, and decreased by a change in unrealized
                                       45

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losses on equity securities of $25 million. In 2019, the gains reflected net
realized gains on investment sales of $36 million and increased by a change in
unrealized gains on equity securities of $85 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 effect 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 year ended December 31, 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).
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 $390 million
in 2020 and $407 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 $4,469 million
in 2020 from $4,131 million in 2019. The consolidated loss ratio was 64.5% in
2020 and 62.3% in 2019. Catastrophe losses, net of reinsurance recoveries, were
$340 million (including losses of approximately $171 million related to
COVID-19) in 2020 compared with $90 million in 2019. Favorable prior year
reserve development (net of premium offsets) was $16 million in 2020 compared
with $19 million in 2019. The loss ratio excluding catastrophe losses and prior
year reserve development decreased 1.4 points to 59.8% in 2020 from 61.2% in
2019.
A summary of loss ratios in 2020 compared with 2019 by business segment follows:
•Insurance - The loss ratio of 64.9% in 2020 was 2.5 points higher than the loss
ratio of 62.4% in 2019. Catastrophe losses were $307 million in 2020 compared
with $68 million in 2019. The Company reflected a best estimate (net of
reinsurance) based upon available information for COVID-19-related losses of
approximately $161 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
$24 million in 2020 compared with $21 million in 2019. The loss ratio excluding
catastrophe losses and prior year reserve development decreased 1.4 points to
60.2% in 2020 from 61.6% in 2019.
•Reinsurance & Monoline Excess - The loss ratio of 61.3% in 2020 was 0.2 points
lower than the loss ratio of 61.5% in 2019. Catastrophe losses were $33 million
in 2020 compared with $22 million in 2019. The Company reflected a best estimate
(net of reinsurance) based upon available information for COVID-19-related
losses of approximately $10 million, which was included in catastrophe losses
and primarily related to excess workers' compensation and short-tail lines.
Adverse prior year reserve development was $8 million in 2020 compared with
adverse prior year reserve development of $2 million in 2019. The loss ratio
excluding catastrophe losses and prior year reserve development decreased 1.5
points to 56.6% in 2020 from 58.1% 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 $ 2,111,013 $ 2,090,301 Insurance service expenses

                                 85,724          

101,317

Net foreign currency losses (gains)                           363          (30,715)
Debt extinguishment costs                                   8,440                -
Other costs and expenses                                  184,852          201,179
Total                                                 $ 2,390,392      $ 2,362,082


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
(policy acquisition and insurance operating expenses expressed as a percentage
of premiums earned) was 30.4% in 2020 and 31.5% 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.
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Service expenses, which represent the costs associated with the fee-based
businesses, decreased 15% to $86 million in 2020 from $101 million in 2019. The
decrease is primarily due to a reduction of assigned risk plan business.
Net foreign currency losses (gains) result from transactions denominated in a
currency other than an operating unit's functional currency. Net foreign
currency losses were $0.4 million in 2020 compared to gains of $31 million in
2019, mainly due to U.S. dollar weakening in relation to a wide spectrum of
currencies in 2020.
Debt extinguishment costs of $8 million in 2020 related to the redemption of
subordinated debentures that were due in 2053.
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 $185 million in 2020 from $201 million in 2019
primarily due to a reduction in non-recurring performance-based compensation
costs which occurred in 2019 and reduced travel-related expenses due to COVID-19
in 2020.
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 $384 million in 2020 compared to
$403 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 $151 million in 2020 compared with $153
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. In October 2020, the Company redeemed
$350 million aggregate principal amount of 5.625% subordinated debentures due
2053. Accordingly, the timing of the repayments of debt at maturity and
redemption that took place throughout 2019 and 2020 and issuances in 2019 and
2020 led to the decrease in interest expense for the year ended December 31,
2020 compared to 2019. The redemption of debentures and issuance of additional
debentures in 2021, as described below in "Liquidity and Capital Resources --
Debt," are also expected to impact interest expense in 2021.
Income Taxes. The effective income tax rate was 24.4% in 2020 and 19.8% 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. See Note 16 of the Consolidated
Financial Statements for a reconciliation of the income tax expense and the
amounts computed by applying the Federal and foreign income tax rate of 21%.
The Company has not provided U.S. deferred income taxes on the undistributed
earnings of approximately $111 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.
Results of Operations for the Years Ended December 31, 2019 and 2018
For a comparison of the Company's results of operations for the year ended
December 31, 2019 to the year ended December 31, 2018, see Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations in the
Company's Annual Report on Form 10-K for the year ended December 31, 2019, which
was filed with the Securities and Exchange Commission on February 20, 2020.




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Investments

As part of its investment strategy, the Company establishes a level of cash and
highly liquid short-term and intermediate-term securities that, combined with
expected cash flow, it believes is adequate to meet its payment obligations. Due
to the low fixed maturity investment returns, the Company invests in equity
securities, merger arbitrage securities, investment funds, private equity, loans
and real estate related assets. The Company's investments in investment funds
and its other alternative investments have experienced, and the Company expects
to continue to experience, greater fluctuations in investment income.
The Company also attempts to maintain an appropriate relationship between the
effective duration of the investment portfolio and the approximate duration of
its liabilities (i.e., policy claims and debt obligations). The effective
duration of the investment portfolio was 2.4 years at December 31, 2020 and 2.8
years at December 31, 2019. The Company's investment portfolio and
investment-related assets as of December 31, 2020 were as follows:
                                                Carrying        Percent
($ in thousands)                                 Value          of Total
Fixed maturity securities:
U.S. government and government agencies      $    603,871          2.9  %
State and municipal:
Special revenue                                 2,252,067         10.8
State general obligation                          493,147          2.4
Local general obligation                          450,624          2.2
Pre-refunded (1)                                  276,672          1.3
Corporate backed                                  214,473          1.0
Total state and municipal                       3,686,983         17.7
Mortgage-backed securities:
Agency                                            630,784          3.0
Residential-Prime                                 199,481          1.0
Commercial                                        187,717          0.9
Residential-Alt A                                   8,803            -
Total mortgage-backed securities                1,026,785          4.9
Asset-backed securities                         3,194,586         15.3
Corporate:
Industrial                                      2,564,475         12.3
Financial                                       1,575,903          7.6
Utilities                                         421,165          2.0
Other                                             110,038          0.5
Total corporate                                 4,671,581         22.4
Foreign government                                975,563          4.7
Total fixed maturity securities                14,159,369         67.9
Equity securities available for sale:
Common stocks                                     350,181          1.7
Preferred stocks                                  275,486          1.3
Total equity securities available for sale        625,667          3.0
Cash and cash equivalents                       2,372,366         11.4
Real estate                                     1,960,914          9.4
Investment funds                                1,309,430          6.3
Arbitrage trading account                         341,473          1.6
Loans receivable                                   84,913          0.4
Total investments                            $ 20,854,132        100.0  %


  ______________
(1)Pre-refunded securities are securities for which an escrow account has been
established to fund the remaining payments of principal and interest through
maturity. Such escrow accounts are funded almost exclusively with U.S. Treasury
and U.S. government agency securities.
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
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portfolio is considered necessary to maintain an approximate matching of assets
and liabilities as well as to adjust the portfolio as a result of changes in
financial market conditions and tax considerations.
The Company's philosophy related to holding or selling fixed maturity securities
is based on its objective of maximizing total return. The key factors that
management considers in its investment decisions as to whether to hold or sell
fixed maturity securities are its view of the underlying fundamentals of
specific securities as well as its expectations regarding interest rates, credit
spreads and currency values. In a period in which management expects interest
rates to rise, the Company may sell longer duration securities in order to
mitigate the impact of an interest rate rise on the fair value of the portfolio.
Similarly, in a period in which management expects credit spreads to widen, the
Company may sell lower quality securities, and in a period in which management
expects certain foreign currencies to decline in value, the Company may sell
securities denominated in those foreign currencies. The sale of fixed maturity
securities in order to achieve the objective of maximizing total return may
result in realized gains; however, there is no reason to expect these gains to
continue in future periods.
Equity Securities. Equity securities primarily represent investments in common
and preferred stocks in companies with potential growth opportunities in
different sectors, mainly in the financial institutions sector.
Investment Funds. At December 31, 2020, the carrying value of investment funds
was $1,309 million, including investments in financial services funds of $434
million, real estate funds of $311 million, transportation funds of $190
million, energy funds of $141 million, and other funds of $233 million.
Investment funds are primarily reported on a one-quarter lag.
Real Estate. Real estate is directly owned property held for investment. At
December 31, 2020, real estate properties in operation included a long-term
ground lease in Washington D.C., an office complex 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. During
the fourth quarter of 2020, the Company sold an office complex in New York City.
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), had an amortized cost of $85 million and
an aggregate fair value of $87 million at December 31, 2020. The amortized cost
of loans receivable is net of an allowance for expected credit losses of $5
million as of December 31, 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.
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Liquidity and Capital Resources
Cash Flow. Cash flow provided from operating activities increased to $1,617
million in 2020 from $1,144 million in 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 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
maturity 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 December 31, 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.
Debt. At December 31, 2020, the Company had senior notes, subordinated
debentures and other debt outstanding with a carrying value of $2,725 million
and a face amount of $2,743 million, including $300 million aggregate principal
amount of its 4.00% senior notes due 2050 issued in May 2020 as well as an
additional $170 million aggregate principal amount of its 4.00% senior notes due
2050 and $250 million aggregate principal amount of its 4.25% subordinated
debentures due 2060 issued in September 2020. The Company redeemed $350 million
aggregate principal amount of its subordinated debentures due 2053 in October
2020. The maturities of the outstanding debt are $3 million in 2021, $427
million in 2022, $6 million in 2025, $102 million in 2028, $250 million in 2037,
$350 million in 2044, $470 million in 2050, $400 million in 2056, $185 million
in 2058, $300 million in 2059 and $250 million in 2060.
In January 2021, the Company called its $110 million aggregate principal amount
of 5.90% subordinated debentures for redemption on March 1, 2021. Additionally
in February 2021, the Company issued $300 million aggregate principal amount of
4.125% subordinated debentures due 2061.
Equity. The Company repurchased 6,363,301 and 269,072 shares of its common stock
in 2020 and 2019, respectively. The aggregate cost of the repurchases was $346
million in 2020 and $18 million in 2019. In 2020, the Board declared regular
quarterly cash dividends of $0.11 per share in the first quarter, and $0.12 per
share in each of the remaining three quarters for a total of $84 million in
aggregate dividends in 2020. At December 31, 2020, total common stockholders'
equity was $6.3 billion, common shares outstanding were 177,825,150 and
stockholders' equity per outstanding share was $35.49.
Total Capital. Total capitalization (equity, debt and subordinated debentures)
was $9.0 billion at December 31, 2020. The percentage of the Company's capital
attributable to senior notes, subordinated debentures and other debt was 30% at
December 31, 2020 and December 31, 2019.

Federal and Foreign Income Taxes
The Company files a consolidated income tax return in the U.S. and foreign tax
returns in each of the countries in which it has overseas operations. At
December 31, 2020, the Company had a gross deferred tax asset (net of valuation
allowance) of $414 million (which primarily relates to loss and loss expense
reserves and unearned premium reserves) and a gross deferred tax liability of
$427 million (which primarily relates to deferred policy acquisition costs,
unrealized investment gains and investment funds). The realization of the
deferred tax asset is dependent upon the Company's ability to generate
sufficient taxable income in future periods. Based on historical results and the
prospects for future operations, management anticipates that it is more likely
than not that future taxable income will be sufficient for the realization of
this asset.
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Reinsurance

The Company follows customary industry practice of reinsuring a portion of its
exposures in exchange for paying reinsurers a part of the premiums received on
the policies it writes. Reinsurance is purchased by the Company principally to
reduce its net liability on individual risks and to protect against catastrophic
losses. Although reinsurance does not legally discharge an insurer from its
primary liability for the full amount of the policies, it does make the assuming
reinsurer liable to the insurer to the extent of the reinsurance coverage. The
Company monitors the financial condition of its reinsurers and attempts to place
its coverages only with financially sound carriers. Reinsurance coverage and
retentions vary depending on the line of business, location of the risk and
nature of loss. The Company's reinsurance purchases include the following:
•Property reinsurance treaties - The Company purchases property reinsurance to
reduce its exposure to large individual property losses and catastrophe events.
Following is a summary of significant property reinsurance treaties in effect as
of January 1, 2021: The Company's property per risk reinsurance generally covers
losses between $2.5 million and $65 million. The Company's catastrophe excess of
loss reinsurance program provides protection for net losses between $17.5
million and $395 million for the majority of business written by its U.S.
Insurance segment operating units and Lloyd's Syndicate, excluding offshore
energy, but some perils are protected above $15 million. The Company's
catastrophe reinsurance agreements are subject to certain limits, exclusions and
reinstatement premiums.
•Casualty reinsurance treaties - The Company purchases casualty reinsurance to
reduce its exposure to large individual casualty losses, workers' compensation
catastrophe losses and casualty losses involving multiple claimants or insureds
for the majority of business written by its U.S. companies. A significant
casualty treaty (casualty catastrophe) in effect as of January 1, 2021 provides
significant protection for losses between $5 million and $75 million from single
events with claims involving two or more insurable interests or for systemic
events involving multiple insureds and/or policy years. The treaty also covers
casualty contingency losses in excess of $5 million and up to $100 million. For
losses involving two or more claimants for primary workers' compensation
business, coverage is generally in place for losses between $10 million and $270
million. For excess workers' compensation business, such coverage is generally
in place for losses between $25 million and $545 million.
•Facultative reinsurance - The Company also purchases facultative reinsurance on
certain individual policies or risks that are in excess of treaty reinsurance
capacity.
•Other reinsurance - Depending on the operating unit, the Company purchases
specific additional reinsurance to supplement the above programs.
•Effective January 1, 2021, Lifson Re will be a participant on the majority of
the Company's reinsurance placements for a 22.5% share of the placed amounts.
This pertains to all traditional treaty reinsurance/retrocessional placements
for both property and casualty business where there is more than one open market
reinsurer participating. Lifson Re has been capitalized with more than $250
million of equity from a small group of sophisticated global investors with
long-term investment horizons, including a minority participation by the
Company. Lifson Re will participate on a fully collateralized basis.
The Company places a number of its casualty treaties on a "risk attaching"
basis. Under risk attaching treaties, all claims from policies incepting during
the period of the reinsurance contract are covered even if they occur after the
expiration date of the reinsurance contract. If the Company is unable to renew
or replace its existing reinsurance coverage, protection for unexpired policies
would remain in place until their expiration. In such case, the Company could
revise its underwriting strategy for new business to reflect the absence of
reinsurance protection. The casualty catastrophe treaty highlighted above was
purchased on a losses discovered basis. Property catastrophe and workers'
compensation catastrophe reinsurance is generally placed on a "losses occurring
basis," whereby only claims occurring during the period are covered. If the
Company is unable to renew or replace these reinsurance coverages, unexpired
policies would not be protected, though we frequently have the option to
purchase run-off coverage in our treaties.
Following is a summary of earned premiums and loss and loss expenses ceded to
reinsurers for each of the three years ended December 31, 2020:
                                       Year Ended December 31,
(In thousands)                 2020             2019             2018
Earned premiums            $ 1,499,948      $ 1,328,843      $ 1,236,049
Losses and loss expenses       955,630          836,831          829,742

Ceded earned premiums increased 12.9% in 2020 to $1,500 million. The ceded losses and loss expenses ratio increased 1 point to 64% in 2020 from 63% in 2019.

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The following table presents the credit quality of amounts due from reinsurers
as of December 31, 2020. Amounts due from reinsurers are net of reserves for
uncollectible reinsurance of $1 million in the aggregate.
(In thousands)
Reinsurer                                     Rating   (1)        Amount

Amounts due in excess of $20 million:

Munich Re                                    AA-               $   275,841
Lloyd's of London                            A+                    255,184
Swiss Re                                     AA-                   182,532
Alleghany Group                              A+                    182,015
Partner Re                                   A+                    164,535
Hannover Re Group                            AA-                   129,752
Berkshire Hathaway                           AA+                   104,775
Everest Re                                   A+                    102,085
Renaissance Re                               A+                    101,014
Axis Capital                                 A+                     87,948
Liberty Mutual                               A                      66,263
Korean Re                                    A                      56,091
Fairfax Financial                            A-                     37,310
Axa Insurance                                AA-                    35,012
Validus Holdings Ltd.                        A                      29,599
Arch Capital Group                           A+                     27,739
Qatar Re                                     A                      20,321
Other reinsurers:
 Rated A- or better                                                178,473
 Secured (2)                                                       122,573
 All Others                                                         29,883
Subtotal                                                       $ 2,188,945
Residual market pools (3)                                          243,358

Allowance for expected credit losses                                (7,801)
Total                                                          $ 2,424,502

_________________

(1)S&P rating, or if not rated by S&P, A.M. Best rating.
(2)Secured by letters of credit or other forms of collateral.
(3)Many states require licensed insurers that provide workers' compensation
insurance to participate in programs that provide workers' compensation to
employers that cannot procure coverage from an insurer on a voluntary basis.
Insurers can fulfill this residual market obligation by participating in pools
where results are shared by the participating companies. The Company acts as a
servicing carrier for workers' compensation pools in certain states. As a
servicing carrier, the Company writes residual market business directly and then
cedes 100% of this business to the respective pool. As a servicing carrier, the
Company receives fee income for its services. The Company does not retain
underwriting risk, and credit risk is limited as ceded balances are jointly
shared by all the pool members.

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Contractual Obligations
Following is a summary of the Company's contractual obligations as of
December 31, 2020:
(In thousands)
Estimated Payments By Periods       2021                 2022                 2023                 2024                 2025                       

Thereafter

Gross reserves for losses $ 3,709,874 $ 2,561,830 $ 1,897,638 $ 1,371,187 $ 991,655

                   $ 

3,753,226

Operating lease obligations         47,477               41,442               37,843               31,283               22,452                        58,124
Purchase obligations               132,006               50,629               47,413               44,070               44,478                         3,534
Subordinated debentures                  -                    -                    -                    -                    -                     

1,135,000

Senior notes and other debt          2,852              426,503                    -                    -                6,385                     1,171,750
Interest payments                  120,211              105,461               97,368               97,368               97,368                     2,578,101
Other long-term liabilities          2,113                3,049                2,696                2,425                2,169                        22,986
  Total                        $ 4,014,533          $ 3,188,914          $ 2,082,958          $ 1,546,333          $ 1,164,507                   $ 8,722,721


The estimated payments for reserves for losses and loss expenses in the above
table represent the projected (undiscounted) payments for gross loss and loss
expense reserves related to losses incurred as of December 31, 2020. The
estimated payments in the above table do not consider payments for losses to be
incurred in future periods. These amounts include reserves for reported losses
and reserves for incurred but not reported losses. Estimated amounts recoverable
from reinsurers are not reflected. The estimated payments by year are based on
historical loss payment patterns.The actual payments may differ from the
estimated amounts due to changes in ultimate loss reserves and in the timing of
the settlement of those reserves. In addition, at December 31, 2020, the Company
had commitments to invest up to $124 million and $200 million in certain
investment funds and real estate construction projects, respectively. These
amounts are not included in the above table.

The Company utilizes letters of credit to back certain reinsurance payments and
obligations. Outstanding letters of credit were $4 million as of December 31,
2020. The Company has made certain guarantees to state regulators that the
statutory capital of certain subsidiaries will be maintained above certain
minimum levels.

Off-Balance Sheet Arrangements
An off-balance sheet arrangement is any transaction, agreement or other
contractual arrangement involving an unconsolidated entity under which a company
has (1) made guarantees, (2) a retained or contingent interest in transferred
assets, (3) an obligation under derivative instruments classified as equity or
(4) any obligation arising out of a material variable interest in an
unconsolidated entity that provides financing, liquidity, market risk or credit
risk support to the Company, or that engages in leasing, hedging or research and
development arrangements with the Company. The Company has no arrangements of
these types that management believes may have a material current or future
effect on our financial condition, liquidity or results of operations.
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