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EVEREST GROUP, LTD. - Quarter Report: 2009 September (Form 10-Q)

group10q3q2009.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED:
SEPTEMBER 30, 2009
 
Commission file number:
1-15731

EVEREST RE GROUP, LTD.
(Exact name of registrant as specified in its charter)
 
Bermuda
 
98-0365432
(State or other jurisdiction of
incorporation or organization)
 
 
(I.R.S. Employer
Identification No.)
Wessex House – 2nd Floor
45 Reid Street
PO Box HM 845
Hamilton HM DX, Bermuda
441-295-0006

(Address, including zip code, and telephone number, including area code,
of registrant’s principal executive office)


Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES
X
 
NO
 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or shorter period that the registrant was required to submit and post such files).

YES
   
NO
 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
X
 
Accelerated filer
 
 
Non-accelerated filer
   
 
Smaller reporting company
 
(Do not check if smaller reporting company)
   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES
   
NO
X

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

   
Number of Shares Outstanding
 
Class
 
At November 1, 2009
 
Common Shares, $0.01 par value
    60,382,170  

 
 

 

EVEREST RE GROUP, LTD

Table of Contents
Form 10-Q


Page
PART I

FINANCIAL INFORMATION

Item 1.
Financial Statements
 
     
   
 
1
     
   
 
2
     
   
 
3
     
   
 
4
     
 
5
     
Item 2.
 
 
27
     
Item 3.
56
     
Item 4.
57
     

PART II

OTHER INFORMATION

Item 1.
57
     
Item 1A.
57
     
Item 2.
58
     
Item 3.
58
     
Item 4.
58
     
Item 5.
58
     
Item 6.
59
     
 
 

PART I

ITEM 1.  FINANCIAL STATEMENTS

EVEREST RE GROUP, LTD.
CONSOLIDATED BALANCE SHEETS

 
   
September 30,
 
December 31,
(Dollars in thousands, except par value per share)
 
2009
 
2008
   
(unaudited)
     
ASSETS:
           
Fixed maturities - available for sale, at market value
  $ 12,637,625     $ 10,759,612  
    (amortized cost: 2009, $12,175,370; 2008, $10,932,076)
               
Fixed maturities - available for sale, at fair value
    52,815       43,090  
Equity securities - available for sale, at market value (cost: 2009, $14,244; 2008, $14,915)
    16,572       16,900  
Equity securities - available for sale, at fair value
    158,456       119,829  
Short-term investments
    1,340,481       1,889,799  
Other invested assets (cost: 2009, $644,320; 2008, $687,265)
    642,025       679,356  
Cash
    265,075       205,694  
       Total investments and cash
    15,113,049       13,714,280  
Accrued investment income
    149,193       149,215  
Premiums receivable
    979,127       908,110  
Reinsurance receivables
    625,138       657,169  
Funds held by reinsureds
    382,062       331,817  
Deferred acquisition costs
    367,663       354,992  
Prepaid reinsurance premiums
    104,356       79,379  
Deferred tax asset
    245,471       442,367  
Federal income taxes recoverable
    44,810       32,295  
Other assets
    118,022       176,966  
TOTAL ASSETS
  $ 18,128,891     $ 16,846,590  
                 
LIABILITIES:
               
Reserve for losses and loss adjustment expenses
  $ 8,889,681     $ 8,840,660  
Future policy benefit reserve
    66,153       66,172  
Unearned premium reserve
    1,467,392       1,335,511  
Funds held under reinsurance treaties
    89,859       83,431  
Losses in the course of payment
    47,219       45,654  
Commission reserves
    41,877       52,460  
Other net payable to reinsurers
    51,676       51,138  
8.75% Senior notes due 3/15/2010
    199,931       199,821  
5.4% Senior notes due 10/15/2014
    249,759       249,728  
6.6% Long term notes due 5/1/2067
    238,347       399,643  
Junior subordinated debt securities payable
    329,897       329,897  
Accrued interest on debt and borrowings
    12,821       11,217  
Equity index put option liability
    61,022       60,552  
Unsettled securities payable
    157,305       1,476  
Other liabilities
    141,000       158,875  
       Total liabilities
    12,043,939       11,886,235  
                 
Commitments and contingencies (Note 8)
               
                 
SHAREHOLDERS' EQUITY:
               
Preferred shares, par value: $0.01; 50 million shares authorized;
               
    no shares issued and outstanding
    -       -  
Common shares, par value: $0.01; 200 million shares authorized; (2009) 65.8 million and
               
    (2008) 65.6 million issued
    658       656  
Additional paid-in capital
    1,836,342       1,824,552  
Accumulated other comprehensive income (loss), net of deferred income tax expense
               
    of $117.9 million at 2009 and tax benefit of $16.5 million at 2008
    332,564       (291,851 )
Treasury shares, at cost; 5.4 million shares (2009) and 4.2 million shares (2008)
    (482,824 )     (392,329 )
Retained earnings
    4,398,212       3,819,327  
       Total shareholders' equity
    6,084,952       4,960,355  
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
  $ 18,128,891     $ 16,846,590  
                 
The accompanying notes are an integral part of the consolidated financial statements.
               
 


EVEREST RE GROUP, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)


   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(Dollars in thousands, except per share amounts)
 
2009
   
2008
   
2009
   
2008
 
   
(unaudited)
   
(unaudited)
 
REVENUES:
                       
Premiums earned
  $ 975,380     $ 931,859     $ 2,864,578     $ 2,785,927  
Net investment income
    165,387       164,478       401,350       490,527  
Net realized capital gains (losses):
                               
Other-than-temporary impairments on fixed maturity securities
    -       (153,435 )     (13,210 )     (159,935 )
Other-than-temporary impairments on fixed maturity securities
                               
transferred to other comprehensive income
    -       -       -       -  
Other net realized capital gains (losses)
    31,063       (139,930 )     2,598       (301,379 )
Total net realized capital gains (losses)
    31,063       (293,365 )     (10,612 )     (461,314 )
Realized gain on debt repurchase
    -       -       78,271       -  
Net derivative (expense) income
    (2,118 )     14,943       (470 )     13,228  
Other expense
    (13,204 )     (8,243 )     (15,995 )     (23,570 )
Total revenues
    1,156,508       809,672       3,317,122       2,804,798  
                                 
CLAIMS AND EXPENSES:
                               
Incurred losses and loss adjustment expenses
    587,247       813,668       1,723,937       1,963,760  
Commission, brokerage, taxes and fees
    229,257       218,045       684,509       689,905  
Other underwriting expenses
    48,937       40,335       134,409       120,307  
Interest, fees and bond issue cost amortization expense
    17,376       19,795       54,634       59,376  
Total claims and expenses
    882,817       1,091,843       2,597,489       2,833,348  
                                 
INCOME (LOSS) BEFORE TAXES
    273,691       (282,171 )     719,633       (28,550 )
Income tax expense (benefit)
    45,073       (49,044 )     109,871       (26,383 )
                                 
NET INCOME (LOSS)
  $ 228,618     $ (233,127 )   $ 609,762     $ (2,167 )
Other comprehensive income (loss), net of tax
    376,448       (248,664 )     681,727       (421,714 )
                                 
COMPREHENSIVE INCOME (LOSS)
  $ 605,066     $ (481,791 )   $ 1,291,489     $ (423,881 )
                                 
EARNINGS PER COMMON SHARE:
                               
Basic
  $ 3.76     $ (3.79 )   $ 9.97     $ (0.04 )
Diluted
  $ 3.75     $ (3.79 )   $ 9.94     $ (0.04 )
Dividends declared
  $ 0.48     $ 0.48     $ 1.44     $ 1.44  
                                 
The accompanying notes are an integral part of the consolidated financial statements.
                         



EVEREST RE GROUP, LTD.
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS’ EQUITY


   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(Dollars in thousands, except per share amounts)
 
2009
   
2008
   
2009
   
2008
 
   
(unaudited)
   
(unaudited)
 
COMMON SHARES (shares outstanding):
                       
Balance, beginning of period
    60,852,944       61,643,803       61,414,027       62,863,845  
Issued during the period, net
    36,647       66,278       183,464       176,536  
Treasury shares acquired
    (491,731 )     (302,000 )     (1,199,631 )     (1,632,300 )
Balance, end of period
    60,397,860       61,408,081       60,397,860       61,408,081  
                                 
COMMON SHARES (par value):
                               
Balance, beginning of period
  $ 657     $ 655     $ 656     $ 654  
Issued during the period, net
    1       1       2       2  
Balance, end of period
    658       656       658       656  
                                 
ADDITIONAL PAID-IN CAPITAL:
                               
Balance, beginning of period
    1,831,695       1,816,174       1,824,552       1,805,844  
Share-based compensation plans
    4,647       5,195       11,753       15,431  
Other
    -       37       37       131  
Balance, end of period
    1,836,342       1,821,406       1,836,342       1,821,406  
                                 
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS),
                         
NET OF DEFERRED INCOME TAXES:
                               
Balance, beginning of period
    (43,884 )     (9,895 )     (291,851 )     163,155  
Cumulative adjustment of initial adoption (1), net of tax
    -       -       (57,312 )     -  
Net increase (decrease) during the period
    376,448       (248,664 )     681,727       (421,714 )
Balance, end of period
    332,564       (258,559 )     332,564       (258,559 )
                                 
RETAINED EARNINGS:
                               
Balance, beginning of period
    4,198,694       4,127,991       3,819,327       3,956,701  
Cumulative adjustment of initial adoption (1), net of tax
    -       -       57,312       -  
Net income (loss)
    228,618       (233,127 )     609,762       (2,167 )
Dividends declared ($0.48 per quarter and $1.44 year-to-date
                               
per share in 2009 and 2008)
    (29,100 )     (29,463 )     (88,189 )     (89,133 )
Balance, end of period
    4,398,212       3,865,401       4,398,212       3,865,401  
                                 
TREASURY SHARES AT COST:
                               
Balance, beginning of period
    (441,747 )     (367,322 )     (392,329 )     (241,584 )
Purchase of treasury shares
    (41,077 )     (25,006 )     (90,495 )     (150,744 )
Balance, end of period
    (482,824 )     (392,328 )     (482,824 )     (392,328 )
                                 
TOTAL SHAREHOLDERS' EQUITY, END OF PERIOD
  $ 6,084,952     $ 5,036,576     $ 6,084,952     $ 5,036,576  
                                 
(1)    The cumulative adjustment to accumulated other comprehensive income (loss), net of deferred income taxes and retained earnings represents the effect of initially adopting ASC 320-10-65-1
 
        (FASB Staff Position No. FAS 115-2 and FAS 124-2, "Recognition and Presentation of Other-Than-Temporary Impairments").
                 
                                 
The accompanying notes are an integral part of the consolidated financial statements.
                         



EVEREST RE GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS


   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(Dollars in thousands)
 
2009
   
2008
   
2009
   
2008
 
   
(unaudited)
   
(unaudited)
 
CASH FLOWS FROM OPERATING ACTIVITIES:
                       
Net income (loss)
  $ 228,618     $ (233,127 )   $ 609,762     $ (2,167 )
Adjustments to reconcile net income to net cash provided by operating activities:
                               
       Decrease (increase) in premiums receivable
    10,974       9,685       (48,369 )     23,195  
       Increase in funds held by reinsureds, net
    7,458       (7,133 )     (23,327 )     (33,500 )
       Decrease (increase) in reinsurance receivables
    34,620       (25,938 )     78,435       (12,877 )
       Decrease (increase) in deferred tax asset
    5,771       59,187       59,989       (31,615 )
       Increase (decrease) in reserve for losses and loss adjustment expenses
    26,614       291,530       (152,544 )     357,606  
       Decrease in future policy benefit reserve
    (1,168 )     (3,972 )     (20 )     (11,524 )
       Increase (decrease) in unearned premiums
    103,568       17,019       114,033       (137,396 )
       Change in equity adjustments in limited partnerships
    (23,512 )     21,051       29,964       5,453  
       Change in other assets and liabilities, net
    (56,631 )     (54,159 )     (24,819 )     (33,827 )
       Non-cash compensation expense
    3,534       2,941       10,290       13,511  
       Amortization of bond premium
    5,912       4,905       12,793       9,381  
       Amortization of underwriting discount on senior notes
    48       45       142       133  
       Realized gain on debt repurchase
    -       -       (78,271 )     -  
       Net realized capital (gains) losses
    (31,063 )     293,365       10,612       461,314  
Net cash provided by operating activities
    314,743       375,399       598,670       607,687  
                                 
CASH FLOWS FROM INVESTING ACTIVITIES:
                               
Proceeds from fixed maturities matured/called - available for sale, at market value
    364,585       154,577       924,998       701,138  
Proceeds from fixed maturities matured/called - available for sale, at fair value
    -       -       5,570       -  
Proceeds from fixed maturities sold - available for sale, at market value
    109,963       95,500       239,621       225,447  
Proceeds from fixed maturities sold - available for sale, at fair value
    4,010       -       12,012       -  
Proceeds from equity securities sold - available for sale, at market value
    23,067       -       24,143       -  
Proceeds from equity securities sold - available for sale, at fair value
    11,309       345,063       23,548       674,297  
Distributions from other invested assets
    27,280       52,045       50,591       65,926  
Cost of fixed maturities acquired - available for sale, at market value
    (840,561 )     (582,558 )     (2,203,804 )     (2,435,862 )
Cost of fixed maturities acquired - available for sale, at fair value
    (2,548 )     (11,444 )     (19,101 )     (11,444 )
Cost of equity securities acquired - available for sale, at market value
    -       (16 )     -       (456 )
Cost of equity securities acquired - available for sale, at fair value
    (12,948 )     (181,408 )     (32,247 )     (330,789 )
Cost of other invested assets acquired
    (11,882 )     (176,333 )     (36,624 )     (224,432 )
Net change in short-term securities
    (229,898 )     55,779       561,164       1,019,830  
Net change in unsettled securities transactions
    104,102       (52,820 )     157,430       (58,562 )
Net cash used in investing activities
    (453,521 )     (301,615 )     (292,699 )     (374,907 )
                                 
CASH FLOWS FROM FINANCING ACTIVITIES:
                               
Common shares issued during the period, net
    1,114       2,292       1,502       2,053  
Purchase of treasury shares
    (41,077 )     (25,006 )     (90,495 )     (150,744 )
Net cost of debt repurchase
    -       -       (83,026 )     -  
Dividends paid to shareholders
    (29,100 )     (29,463 )     (88,189 )     (89,133 )
Net cash used in financing activities
    (69,063 )     (52,177 )     (260,208 )     (237,824 )
                                 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
    616       (23,855 )     13,618       (21,893 )
                                 
Net (decrease) increase in cash
    (207,225 )     (2,248 )     59,381       (26,937 )
Cash, beginning of period
    472,300       225,878       205,694       250,567  
Cash, end of period
  $ 265,075     $ 223,630     $ 265,075     $ 223,630  
                                 
SUPPLEMENTAL CASH FLOW INFORMATION
                               
Cash transactions:
                               
    Income taxes paid (recovered)
  $ 2,983     $ (97,418 )   $ 70,762     $ 3,286  
    Interest paid
  $ 14,194     $ 13,937     $ 52,318     $ 53,004  
                                 
The accompanying notes are an integral part of the consolidated financial statements.
                               



NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Nine Months Ended September 30, 2009 and 2008

1.  General

Everest Re Group, Ltd. (“Group”), a Bermuda company, through its subsidiaries, principally provides reinsurance and insurance in the U.S., Bermuda and international markets.  As used in this document, “Company” means Group and its subsidiaries.  On December 30, 2008, Group contributed Everest Reinsurance Holdings, Inc. and its subsidiaries (“Holdings”) to its recently established Irish holding company, Everest Underwriting Group (Ireland), Limited.

2.  Basis of Presentation

The unaudited consolidated financial statements of the Company for the three and nine months ended September 30, 2009 and 2008 include all adjustments, consisting of normal recurring accruals, which, in the opinion of management, are necessary for a fair statement of the results on an interim basis.  Certain financial information, which is normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), has been omitted since it is not required for interim reporting purposes. The December 31, 2008 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.  The results for the three and nine months ended September 30, 2009 and 2008 are not necessarily indicative of the results for a full year.  These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the years ended December 31, 2008, 2007 and 2006 included in the Company’s most recent Form 10-K filing.

Financial Accounting Standards Board Launched Accounting Codification

The Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 168, “The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles”. This guidance establishes the FASB Accounting Standards CodificationTM (“Codification” or “ASC”) as the single source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The Codification supersedes all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative.

Following the Codification, the FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, the FASB will issue Accounting Standards Updates, which will serve to update the Codification, provide background information about the guidance and provide the basis for conclusions on the changes to the Codification.

GAAP is not intended to be changed as a result of the FASB’s Codification, but it will change the way the guidance is organized and presented. As a result, these changes will have a significant impact on how companies reference GAAP in their financial statements and in the accounting policies for financial statements issued for interim and annual periods ending after September 15, 2009.

Application of Recently Issued Accounting Standard Changes

Additional Disclosures for Derivative Instruments. On January 1, 2009, the Company adopted the additional disclosure requirements of ASC 815-10-65-1 (FASB No. 161 “Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133”).  The standard requires enhanced


disclosures on derivative instruments and hedged items. No comparative information for periods prior to the effective date is required. ASC 815-10-65-1 had no impact on how the Company accounts for these items.

Revisions to Earnings per Share Calculation. ASC 260-10-45 to 66 (FASB Staff Position (“FSP”) Emerging Issues Task Force 03-6-1 “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities”) requires unvested share-based payment awards that contain non-forfeitable rights to dividends be considered as a separate class of common stock and included in the earnings per share calculation using the two-class method. The Company’s restricted share awards meet this definition and are therefore included in the basic earnings per share calculation. All prior period earnings per share data presented have been adjusted retrospectively.

Measurement of Fair Value in Inactive Markets. ASC 820-10-65-4 (FSP No. FAS 157-4 “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS 157-4”) reaffirms that fair value is 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 under current market conditions. It also reaffirms the need to use judgment in determining if a formerly active market has become inactive and in determining fair values when the market has become inactive. There was no impact to the Company’s financial statements upon adoption.

Other-Than-Temporary Impairments on Investment Securities. ASC 320-10-65-1 (FSP No. FAS 115-2 and FAS 124-2 “Recognition and Presentation of Other-Than-Temporary Impairments”) amends the recognition guidance for other-than-temporary impairments of debt securities and expands the financial statement disclosures for other-than-temporary impairments on debt and equity securities. For available for sale debt securities that the Company has no intent to sell and more likely than not will not be required to sell prior to recovery, only the credit loss component of the impairment would be recognized in earnings, while the rest of the fair value loss would be recognized in accumulated other comprehensive income.  The Company adopted ASC 320-10-65-1 guidance effective April 1, 2009.  Upon adoption the Company recognized a $57.3 million cumulative-effect adjustment from retained earnings, net of $8.3 million of tax.

Interim Disclosures about Fair Value of Financial Instruments. ASC 825-10-65-1 (FSP FAS 107-1 and FSP APB 28-1 “Interim Disclosures about Fair Value of Financial Instruments”) requires quarterly disclosures on the qualitative and quantitative information about the fair value of all financial instruments including methods and significant assumptions used to estimate fair value during the period. These disclosures were previously only done annually. The Company included these disclosures in the second quarter 2009 Notes to Consolidated Interim Financial Statements.

Subsequent Events Disclosures. ASC 855-10-50 (FAS 165 “Subsequent Events”) requires a disclosure as to the date through which subsequent events have been evaluated as well as whether that date is the date the financial statements were issued. The Company included this disclosure in its second quarter 2009 Notes to Consolidated Interim Financial Statements.

Future Accounting Standard Changes

Fair Value Disclosures about Pension Plan Assets. ASC 715-20-65-2 (FSP FAS 132(R)-1 “Employers’ Disclosures about Postretirement Benefit Plan Assets”) requires that information about plan assets be disclosed, on an annual basis, based on the fair value disclosure requirements of ASC 820-10. The Company will be required to separate plan assets into the three fair value hierarchy levels and provide a roll forward of the changes in fair value of plan assets classified as Level 3 in the 2009 annual consolidated financial statements. These disclosures have no effect on the Company’s accounting for plan benefits and obligations.


3.  Investments

The amortized cost, market value and gross unrealized appreciation and depreciation of available for sale, fixed maturity and equity security investments, carried at market value, are as follows for the periods indicated:

   
At September 30, 2009
 
   
Amortized
   
Unrealized
   
Unrealized
   
Market
 
(Dollars in thousands)
 
Cost
   
Appreciation
   
Depreciation
   
Value
 
Fixed maturity securities  - available for sale
                       
U.S. Treasury securities and obligations of
                       
U.S. government agencies and corporations
  $ 337,184     $ 20,109     $ (1,677 )   $ 355,616  
Obligations of U.S. states and political subdivisions
    3,747,780       231,278       (12,632 )     3,966,426  
Corporate securities
    2,331,007       111,093       (46,339 )     2,395,761  
Asset-backed securities
    309,288       9,176       (6,327 )     312,137  
Mortgage-backed securities
                               
Commercial
    475,911       5,359       (49,610 )     431,660  
Agency residential
    2,015,323       68,626       (457 )     2,083,492  
Non-agency residential
    188,646       284       (28,204 )     160,726  
Foreign government securities
    1,500,230       112,474       (7,933 )     1,604,771  
Foreign corporate securities
    1,270,001       73,431       (16,396 )     1,327,036  
Total fixed maturity securities
  $ 12,175,370     $ 631,830     $ (169,575 )   $ 12,637,625  
Equity securities
  $ 14,244     $ 2,330     $ (2 )   $ 16,572  

   
At December 31, 2008
 
   
Amortized
   
Unrealized
   
Unrealized
   
Market
 
(Dollars in thousands)
 
Cost
   
Appreciation
   
Depreciation
   
Value
 
Fixed maturity securities  - available for sale
                       
U.S. Treasury securities and obligations of
                       
U.S. government agencies and corporations
  $ 354,195     $ 55,186     $ (663 )   $ 408,718  
Obligations of U.S. states and political subdivisions
    3,846,754       113,885       (164,921 )     3,795,718  
Corporate securities
    2,408,978       60,898       (198,479 )     2,271,397  
Asset-backed securities
    281,808       654       (29,213 )     253,249  
Mortgage-backed securities
                               
Commercial
    440,833       -       (90,108 )     350,725  
Agency residential
    1,334,042       26,331       (502 )     1,359,871  
Non-agency residential
    213,484       -       (45,688 )     167,796  
Foreign government securities
    1,087,731       117,973       (23,598 )     1,182,106  
Foreign corporate securities
    964,251       56,813       (51,032 )     970,032  
Total fixed maturity securities
  $ 10,932,076     $ 431,740     $ (604,204 )   $ 10,759,612  
Equity securities
  $ 14,915     $ 1,985     $ -     $ 16,900  

In accordance with ASC 320-10-65-1, the Company reclassified previously other-than-temporary impairments from retained earnings into accumulated other comprehensive income.  The pre-tax amount of the reclassification was $65.7 million with $65.4 million related to corporate securities and $0.3 million related to foreign corporate securities.  At September 30, 2009, the cumulative unrealized depreciation on these securities had improved and the remaining unrealized depreciation for the corporate securities was $13.0 million and the foreign corporate securities were in an unrealized appreciation position at September 30, 2009.



The amortized cost and market value of fixed maturities are shown in the following table by contractual maturity.  Mortgage-backed securities generally are more likely to be prepaid than other fixed maturities. As the stated maturity of such securities may not be indicative of actual maturities, the totals for mortgage-backed and asset-backed securities are shown separately.

   
At September 30, 2009
 
   
Amortized
   
Market
 
(Dollars in thousands)
 
Cost
   
Value
 
Fixed maturity securities – available for sale
           
    Due in one year or less
  $ 573,183     $ 594,689  
    Due after one year through five years
    2,894,035       3,032,711  
    Due after five years through ten years
    2,474,668       2,610,605  
    Due after ten years
    3,244,316       3,411,605  
Asset-backed securities
    309,288       312,137  
Mortgage-backed securities
               
Commercial
    475,911       431,660  
Agency residential
    2,015,323       2,083,492  
Non-agency residential
    188,646       160,726  
Total fixed maturity securities
  $ 12,175,370     $ 12,637,625  
 
The changes in net unrealized appreciation (depreciation) for the Company’s investments are derived from the following sources for the periods indicated:
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(Dollars in thousands)
 
2009
   
2008
   
2009
   
2008
 
Increase (decrease) during the period between the market value and cost
                       
of investments carried at market value, and deferred taxes thereon:
                       
Fixed maturity securities
  $ 428,617     $ (254,242 )   $ 700,376     $ (468,894 )
Fixed maturity securities ASC 320-10-65-1 adjustment
    -       -       (65,658 )     -  
Equity securities
    448       612       343       494  
Other invested assets
    3,387       (2,231 )     5,614       (3,122 )
Change in unrealized appreciation (depreciation), pre-tax
    432,452       (255,861 )     640,675       (471,522 )
Deferred tax (expense) benefit
    (88,942 )     65,403       (130,628 )     116,078  
Deferred tax benefit ASC 320-10-65-1 adjustment
    -       -       8,346       -  
Change in unrealized appreciation (depreciation),
                               
net of deferred taxes, included in shareholders’ equity
  $ 343,510     $ (190,458 )   $ 518,393     $ (355,444 )

The Company frequently reviews its investment portfolio for declines in market value and focuses its attention on securities whose fair value has fallen below 80% of their amortized value at the time of review.  The Company then assesses whether the decline in value is temporary or other-than-temporary.  In making its assessment, the Company evaluates the current market and interest rate environment as well as specific issuer information.  Generally, a change in a security’s value caused by a change in the market or interest rate environment does not constitute an other-than-temporary impairment, but rather a temporary decline in market value.  Temporary declines in market value are recorded as unrealized losses in accumulated other comprehensive income.  If the Company determines that the decline is other-than-temporary and the Company does not have the intent to sell the security; and it is more likely than not the Company will not have to sell the security before recovery of its cost basis, the carrying value of the investment is written down to fair value.  The fair value adjustment that is credit related is recorded in net realized capital gains (losses) in the Company’s consolidated statements of operations and comprehensive income.  The fair value adjustment that is non-credit related is recorded as a component of other comprehensive income, net of tax, and is included in accumulated other comprehensive income in the Company’s consolidated balance sheets.  The Company’s assessments are based on the issuers current and expected future financial position,


timeliness with respect to interest and/or principal payments, speed of repayments and any applicable credit enhancements or breakeven constant default rates on mortgage-backed and asset-backed securities, as well as relevant information provided by rating agencies, investment advisors and analysts.

Retrospective adjustments are employed to recalculate the values of asset-backed securities. All of the Company’s asset-backed and mortgage-backed securities have a pass-through structure. Each acquisition lot is reviewed to recalculate the effective yield. The recalculated effective yield is used to derive a book value as if the new yield were applied at the time of acquisition. Outstanding principal factors from the time of acquisition to the adjustment date are used to calculate the prepayment history for all applicable securities. Conditional prepayment rates, computed with life to date factor histories and weighted average maturities, are used in the calculation of projected and prepayments for pass-through security types.

The tables below display the aggregate market value and gross unrealized depreciation of fixed maturity securities, by security type and maturity type, in each case subdivided according to length of time that individual securities had been in a continuous unrealized loss position for the periods indicated:

 
   
Duration by security type of unrealized loss at September 30, 2009
 
   
Less than 12 months
   
Greater than 12 months
   
Total
 
         
Gross
         
Gross
         
Gross
 
         
Unrealized
         
Unrealized
         
Unrealized
 
(Dollars in thousands)
 
Market Value
   
Depreciation
   
Market Value
   
Depreciation
   
Market Value
   
Depreciation
 
Fixed maturity securities - available for sale
                                   
U.S. Treasury securities and obligations of
                                   
U.S. government agencies and corporations
  $ 83,202     $ (1,677 )   $ -     $ -     $ 83,202     $ (1,677 )
Obligations of U.S. states and political subdivisions
    15,698       (736 )     254,791       (11,896 )     270,489       (12,632 )
Corporate securities
    116,139       (13,318 )     423,993       (33,021 )     540,132       (46,339 )
Asset-backed securities
    2,618       (203 )     58,303       (6,124 )     60,921       (6,327 )
Mortgage-backed securities
                                               
Commercial
    -       -       319,335       (49,610 )     319,335       (49,610 )
Agency residential
    60,630       (435 )     4,274       (22 )     64,904       (457 )
Non-agency residential
    1       (1 )     159,349       (28,203 )     159,350       (28,204 )
Foreign government securities
    131,053       (6,553 )     46,898       (1,380 )     177,951       (7,933 )
Foreign corporate securities
    177,058       (11,038 )     116,586       (5,358 )     293,644       (16,396 )
Total fixed maturity securities
  $ 586,399     $ (33,961 )   $ 1,383,529     $ (135,614 )   $ 1,969,928     $ (169,575 )

 
   
Duration by maturity of unrealized loss at September 30, 2009
 
   
Less than 12 months
   
Greater than 12 months
   
Total
 
         
Gross
         
Gross
         
Gross
 
         
Unrealized
         
Unrealized
         
Unrealized
 
(Dollars in thousands)
 
Market Value
   
Depreciation
   
Market Value
   
Depreciation
   
Market Value
   
Depreciation
 
Fixed maturity securities
                                   
Due in one year or less
  $ 83,509     $ (7,867 )   $ 54,485     $ (846 )   $ 137,994     $ (8,713 )
Due in one year through five years
    254,768       (12,863 )     180,862       (11,485 )     435,630       (24,348 )
Due in five years through ten years
    145,700       (10,210 )     142,075       (5,031 )     287,775       (15,241 )
Due after ten years
    39,173       (2,382 )     464,846       (34,293 )     504,019       (36,675 )
Asset-backed securities
    2,618       (203 )     58,303       (6,124 )     60,921       (6,327 )
Mortgage-backed securities
    60,631       (436 )     482,958       (77,835 )     543,589       (78,271 )
Total fixed maturity securities
  $ 586,399     $ (33,961 )   $ 1,383,529     $ (135,614 )   $ 1,969,928     $ (169,575 )

The aggregate market value and gross unrealized losses related to investments in an unrealized loss position as of September 30, 2009 were $1,969.9 million and $169.6 million, respectively.  There were no unrealized losses on a single security that exceeded 0.11% of the market value of the fixed maturities at September 30, 2009.  In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector.  The $34.0 million of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for less than one year were generally comprised of highly rated government, municipal, corporate and mortgage-backed securities.  Of these unrealized losses,


$23.9 million were related to securities that were rated investment grade or better by at least one nationally recognized statistical rating organization.  The $135.6 million of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year also related primarily to highly rated government, municipal, corporate and mortgage-backed securities.  Of these unrealized losses, $102.5 million related to securities that were rated investment grade or better by at least one nationally recognized statistical rating organization.  The non-investment grade securities with unrealized losses are mainly comprised of non-credit other-than-temporary impaired securities and non-agency residential mortgage-backed securities.  In all instances, there were no projected cash flow shortfalls to recover the full book value of the investments and the related interest obligations.  The mortgage-backed securities still have excess credit coverage and are current on interest and principal payments.  Unrealized losses have decreased since year end as a result of improved conditions in the overall financial market resulting from increased liquidity and lower interest rates.

The Company, given the size of its investment portfolio and capital position, does not have the intent to sell these securities; and it is more likely than not the Company will not have to sell the security before recovery of its cost basis.  In addition, all securities currently in an unrealized loss position are current with respect to principal and interest payments.

The tables below display the aggregate market value and gross unrealized depreciation of fixed maturity securities, by security type and maturity type, in each case subdivided according to the length of time that individual securities had been in a continuous unrealized loss position for the period indicated:

 
   
Duration by security type of unrealized loss at December 31, 2008
 
   
Less than 12 months
   
Greater than 12 months
   
Total
 
         
Gross
         
Gross
         
Gross
 
         
Unrealized
         
Unrealized
         
Unrealized
 
(Dollars in thousands)
 
Market Value
   
Depreciation
   
Market Value
   
Depreciation
   
Market Value
   
Depreciation
 
Fixed maturity securities - available for sale
                                   
U.S. Treasury securities and obligations of
                                   
U.S. government agencies and corporations
  $ 5,686     $ (663 )   $ -     $ -     $ 5,686     $ (663 )
Obligations of U.S. states and political subdivisions
    1,471,807       (146,293 )     176,555       (18,628 )     1,648,362       (164,921 )
Corporate securities
    746,163       (98,335 )     781,367       (100,144 )     1,527,530       (198,479 )
Asset-backed securities
    114,873       (9,251 )     92,593       (19,962 )     207,466       (29,213 )
Mortgage-backed securities
                                               
Commercial
    171,692       (36,451 )     179,033       (53,657 )     350,725       (90,108 )
Agency residential
    32,407       (394 )     22,182       (108 )     54,589       (502 )
Non-agency residential
    65,523       (16,565 )     101,879       (29,123 )     167,402       (45,688 )
Foreign government securities
    139,077       (18,613 )     27,164       (4,985 )     166,241       (23,598 )
Foreign corporate securities
    246,915       (26,174 )     186,916       (24,858 )     433,831       (51,032 )
Total fixed maturity securities
  $ 2,994,143     $ (352,739 )   $ 1,567,689     $ (251,465 )   $ 4,561,832     $ (604,204 )



   
Duration by maturity of unrealized loss at December 31, 2008
 
   
Less than 12 months
   
Greater than 12 months
   
Total
 
         
Gross
         
Gross
         
Gross
 
         
Unrealized
         
Unrealized
         
Unrealized
 
(Dollars in thousands)
 
Market Value
   
Depreciation
   
Market Value
   
Depreciation
   
Market Value
   
Depreciation
 
Fixed maturity securities
                                   
Due in one year or less
  $ 116,392     $ (9,948 )   $ 137,344     $ (6,636 )   $ 253,736     $ (16,584 )
Due in one year through five years
    531,986       (38,797 )     385,620       (36,183 )     917,606       (74,980 )
Due in five years through ten years
    428,670       (46,694 )     348,062       (49,378 )     776,732       (96,072 )
Due after ten years
    1,532,600       (194,639 )     300,976       (56,418 )     1,833,576       (251,057 )
Asset-backed securities
    114,873       (9,251 )     92,593       (19,962 )     207,466       (29,213 )
Mortgage-backed securities
    269,622       (53,410 )     303,094       (82,888 )     572,716       (136,298 )
Total fixed maturity securities
  $ 2,994,143     $ (352,739 )   $ 1,567,689     $ (251,465 )   $ 4,561,832     $ (604,204 )


The aggregate market value and gross unrealized losses related to investments in an unrealized loss position as of December 31, 2008 were $4,561.8 million and $604.2 million, respectively.  There were no unrealized losses on a single security that exceeded 0.25% of the market value of the fixed maturities at December 31, 2008.  In addition, there was no significant concentration of unrealized losses in any one market sector.  The $352.7 million of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for less than one year were generally comprised of highly rated government, municipal, corporate and mortgage-backed securities with the losses primarily the result of widening credit spreads from the financial markets crisis during the latter part of the year.  Of these unrealized losses, $346.6 million were related to securities that were rated investment grade or better by at least one nationally recognized statistical rating organization.  The $251.5 million of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year also related primarily to highly rated government, municipal, corporate and mortgage-backed securities and were also the result of widening credit spreads during the latter part of the year.  Of these unrealized losses, $224.5 million related to securities that were rated investment grade or better by at least one nationally recognized statistical rating organization.  The gross unrealized depreciation greater than 12 months for mortgage-backed securities includes only $4.7 million related to sub-prime and alt-A loans.

The components of net investment income are presented in the table below for the periods indicated:
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(Dollars in thousands)
 
2009
   
2008
   
2009
   
2008
 
Fixed maturity securities
  $ 145,408     $ 140,009     $ 434,363     $ 401,603  
Equity securities
    757       4,947       2,183       17,177  
Short-term investments and cash
    629       8,896       5,872       43,622  
Other invested assets
                               
Limited partnerships
    23,452       11,076       (29,227 )     31,076  
Other
    (1,332 )     275       (297 )     2,027  
Total gross investment income
    168,914       165,203       412,894       495,505  
Interest credited and other expense
    (3,527 )     (725 )     (11,544 )     (4,978 )
Total net investment income
  $ 165,387     $ 164,478     $ 401,350     $ 490,527  


The Company reports results from limited partnership investments on the equity basis of accounting with changes in value reported through net investment income.  Due to the timing of receiving financial information from these partnerships, the results are generally reported on a one month or quarter lag.  If the Company determines there has been a significant decline in value of a limited partnership during this lag period, a loss will be recorded in the period in which the Company indentifies the decline.

The Company had contractual commitments to invest up to an additional $256.8 million in limited partnerships at September 30, 2009.  These commitments will be funded when called in accordance with the partnership agreements, which have investment periods that expire, unless extended, through 2014.



The components of net realized capital gains (losses) are presented in the table below for the periods indicated:

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(Dollars in thousands)
 
2009
   
2008
   
2009
   
2008
 
Fixed maturity securities, market value:
                       
Other-than-temporary impairments
  $ -     $ (153,435 )   $ (13,210 )   $