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EVEREST GROUP, LTD. - Quarter Report: 2010 September (Form 10-Q)

group10q3q10.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, 2010
 
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 Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES
X
 
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, 2010
Common Shares, $0.01 par value
54,982,512

 
 

 

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.
 
 
28
     
Item 3.
57
     
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 and share amounts in thousands, except par value per share)
 
2010
 
2009
   
(unaudited)
     
ASSETS:
           
Fixed maturities - available for sale, at market value
  $ 13,569,817     $ 13,005,949  
    (amortized cost: 2010, $12,830,837; 2009, $12,614,742)
               
Fixed maturities - available for sale, at fair value
    116,376       50,528  
Equity securities - available for sale, at market value (cost: 2010, $14,077; 2009, $13,970)
    17,218       16,301  
Equity securities - available for sale, at fair value
    415,944       380,025  
Short-term investments
    590,169       673,131  
Other invested assets (cost: 2010, $577,239; 2009, $546,158)
    576,827       545,284  
Cash
    201,140       247,598  
       Total investments and cash
    15,487,491       14,918,816  
Accrued investment income
    145,905       158,886  
Premiums receivable
    901,544       978,847  
Reinsurance receivables
    693,737       636,375  
Funds held by reinsureds
    399,842       379,864  
Deferred acquisition costs
    393,042       362,346  
Prepaid reinsurance premiums
    137,136       108,029  
Deferred tax asset
    104,780       174,170  
Federal income taxes recoverable
    96,174       144,903  
Other assets
    190,260       139,076  
TOTAL ASSETS
  $ 18,549,911     $ 18,001,312  
                 
LIABILITIES:
               
Reserve for losses and loss adjustment expenses
  $ 9,331,987     $ 8,937,858  
Future policy benefit reserve
    63,747       64,536  
Unearned premium reserve
    1,532,143       1,415,402  
Funds held under reinsurance treaties
    97,082       91,893  
Commission reserves
    38,181       55,579  
Other net payable to reinsurers
    63,796       53,014  
Revolving credit borrowings
    83,000       -  
8.75% Senior notes due 3/15/2010
    -       199,970  
5.4% Senior notes due 10/15/2014
    249,801       249,769  
6.6% Long term notes due 5/1/2067
    238,350       238,348  
Junior subordinated debt securities payable
    329,897       329,897  
Accrued interest on debt and borrowings
    12,129       9,885  
Equity index put option liability
    77,150       57,349  
Other liabilities
    151,028       196,090  
       Total liabilities
    12,268,291       11,899,590  
                 
Commitments and contingencies (Note 8)
               
                 
SHAREHOLDERS' EQUITY:
               
Preferred shares, par value: $0.01; 50,000 shares authorized;
               
    no shares issued and outstanding
    -       -  
Common shares, par value: $0.01; 200,000 shares authorized; (2010) 66,022
               
    and (2009) 65,841 outstanding before treasury shares
    660       658  
Additional paid-in capital
    1,858,557       1,845,181  
Accumulated other comprehensive income (loss), net of deferred income tax expense
               
    (benefit) of $144,680 at 2010 and $101,014 at 2009
    559,591       272,038  
Treasury shares, at cost; 10,999 shares (2010) and 6,523 shares (2009)
    (929,766 )     (582,926 )
Retained earnings (deficit)
    4,792,578       4,566,771  
       Total shareholders' equity
    6,281,620       6,101,722  
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
  $ 18,549,911     $ 18,001,312  
                 
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)
 
2010
   
2009
   
2010
   
2009
 
   
(unaudited)
   
(unaudited)
 
REVENUES:
                       
Premiums earned
  $ 997,265     $ 975,380     $ 2,914,466     $ 2,864,578  
Net investment income
    141,368       165,387       468,598       401,350  
Net realized capital gains (losses):
                               
Other-than-temporary impairments on fixed maturity securities
    (2,892 )     -       (2,892 )     (13,210 )
Other-than-temporary impairments on fixed maturity securities
                         
transferred to other comprehensive income (loss)
    -       -       -       -  
Other net realized capital gains (losses)
    41,187       31,063       72,212       2,598  
Total net realized capital gains (losses)
    38,295       31,063       69,320       (10,612 )
Realized gain on debt repurchase
    -       -       -       78,271  
Net derivative gain (loss)
    (552 )     (2,118 )     (19,802 )     (470 )
Other income (expense)
    1,714       (13,204 )     14,851       (15,995 )
Total revenues
    1,178,090       1,156,508       3,447,433       3,317,122  
                                 
CLAIMS AND EXPENSES:
                               
Incurred losses and loss adjustment expenses
    674,787       587,247       2,225,591       1,723,937  
Commission, brokerage, taxes and fees
    237,473       229,257       686,628       684,509  
Other underwriting expenses
    44,337       44,504       125,028       121,829  
Corporate expenses
    3,917       4,433       12,379       12,580  
Interest, fees and bond issue cost amortization expense
    13,138       17,376       42,796       54,634  
Total claims and expenses
    973,652       882,817       3,092,422       2,597,489  
                                 
INCOME (LOSS) BEFORE TAXES
    204,438       273,691       355,011       719,633  
Income tax expense (benefit)
    30,238       45,073       46,790       109,871  
                                 
NET INCOME (LOSS)
  $ 174,200     $ 228,618     $ 308,221     $ 609,762  
Other comprehensive income (loss), net of tax
    192,725       376,448       287,553       681,727  
                                 
COMPREHENSIVE INCOME (LOSS)
  $ 366,925     $ 605,066     $ 595,774     $ 1,291,489  
                                 
EARNINGS PER COMMON SHARE:
                               
Basic
  $ 3.12     $ 3.76     $ 5.35     $ 9.97  
Diluted
    3.11       3.75       5.33       9.94  
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 share and dividends per share amounts)
 
2010
   
2009
   
2010
   
2009
 
   
(unaudited)
   
(unaudited)
 
COMMON SHARES (shares outstanding):
                       
Balance, beginning of period
    56,242,019       60,852,944       59,317,741       61,414,027  
Issued during the period, net
    14,177       36,647       181,253       183,464  
Treasury shares acquired
    (1,233,667 )     (491,731 )     (4,476,465 )     (1,199,631 )
Balance, end of period
    55,022,529       60,397,860       55,022,529       60,397,860  
                                 
COMMON SHARES (par value):
                               
Balance, beginning of period
  $ 660     $ 657     $ 658     $ 656  
Issued during the period, net
    -       1       2       2  
Balance, end of period
    660       658       660       658  
                                 
ADDITIONAL PAID-IN CAPITAL:
                               
Balance, beginning of period
    1,853,158       1,831,695       1,845,181       1,824,552  
Share-based compensation plans
    5,399       4,647       13,376       11,753  
Other
    -       -       -       37  
Balance, end of period
    1,858,557       1,836,342       1,858,557       1,836,342  
                                 
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS),
                         
NET OF DEFERRED INCOME TAXES:
                               
Balance, beginning of period
    366,866       (43,884 )     272,038       (291,851 )
Cumulative adjustment of initial adoption(1), net of tax
    -       -       -       (57,312 )
Net increase (decrease) during the period
    192,725       376,448       287,553       681,727  
Balance, end of period
    559,591       332,564       559,591       332,564  
                                 
RETAINED EARNINGS (DEFICIT):
                               
Balance, beginning of period
    4,644,952       4,198,694       4,566,771       3,819,327  
Cumulative adjustment of initial adoption(1), net of tax
    -       -       -       57,312  
Net income (loss)
    174,200       228,618       308,221       609,762  
Dividends declared ($0.48 per quarter and $1.44 year-to-date
                               
per share in 2010 and 2009)
    (26,574 )     (29,100 )     (82,414 )     (88,189 )
Balance, end of period
    4,792,578       4,398,212       4,792,578       4,398,212  
                                 
TREASURY SHARES AT COST:
                               
Balance, beginning of period
    (830,037 )     (441,747 )     (582,926 )     (392,329 )
Purchase of treasury shares
    (99,729 )     (41,077 )     (346,840 )     (90,495 )
Balance, end of period
    (929,766 )     (482,824 )     (929,766 )     (482,824 )
                                 
TOTAL SHAREHOLDERS' EQUITY, END OF PERIOD
  $ 6,281,620     $ 6,084,952     $ 6,281,620     $ 6,084,952  
                                 
 (1) The cumulative adjustment to accumulated other comprehensive income (loss), net of deferred income taxes, and retained earnings (deficit), represents the effect of initially                            
       adopting new guidance for other-than-temporary impairments of debt securities.                                
                                 
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)
 
2010
   
2009
   
2010
   
2009
 
   
(unaudited)
   
(unaudited)
 
CASH FLOWS FROM OPERATING ACTIVITIES:
                       
Net income (loss)
  $ 174,200     $ 228,618     $ 308,221     $ 609,762  
Adjustments to reconcile net income to net cash provided by operating activities:
                         
Decrease (increase) in premiums receivable
    76,794       10,974       71,659       (48,369 )
Decrease (increase) in funds held by reinsureds, net
    (10,024 )     7,458       (23,609 )     (23,327 )
Decrease (increase) in reinsurance receivables
    (17,392 )     34,620       (79,683 )     78,435  
Decrease (increase) in deferred tax asset
    29,324       5,771       24,260       59,989  
Increase (decrease) in reserve for losses and loss adjustment expenses
    8,642       26,614       458,032       (152,544 )
Increase (decrease) in future policy benefit reserve
    (220 )     (1,168 )     (789 )     (20 )
Increase (decrease) in unearned premiums
    106,215       103,568       119,472       114,033  
Change in equity adjustments in limited partnerships
    1,026       (23,512 )     (31,229 )     29,964  
Change in other assets and liabilities, net
    (52,160 )     (56,631 )     (34,584 )     (24,819 )
Non-cash compensation expense
    4,799       3,534       11,929       10,290  
Amortization of bond premium (accrual of bond discount)
    14,850       5,912       36,189       12,793  
Amortization of underwriting discount on senior notes
    12       48       65       142  
Realized gain on debt repurchase
    -       -       -       (78,271 )
Net realized capital (gains) losses
    (38,295 )     (31,063 )     (69,320 )     10,612  
Net cash provided by (used in) operating activities
    297,771       314,743       790,613       598,670  
                                 
CASH FLOWS FROM INVESTING ACTIVITIES:
                               
Proceeds from fixed maturities matured/called - available for sale, at market value
    424,326       364,585       1,207,491       924,998  
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
    122,884       109,963       846,346       239,621  
Proceeds from fixed maturities sold - available for sale, at fair value
    10,689       4,010       19,301       12,012  
Proceeds from equity securities sold - available for sale, at market value
    3       23,067       715       24,143  
Proceeds from equity securities sold - available for sale, at fair value
    14,899       11,309       87,641       23,548  
Distributions from other invested assets
    21,154       27,280       51,514       50,591  
Cost of fixed maturities acquired - available for sale, at market value
    (366,121 )     (840,561 )     (2,327,744 )     (2,203,804 )
Cost of fixed maturities acquired - available for sale, at fair value
    (56,938 )     (2,548 )     (80,618 )     (19,101 )
Cost of equity securities acquired - available for sale, at market value
    (857 )     -       (2,283 )     -  
Cost of equity securities acquired - available for sale, at fair value
    (23,927 )     (12,948 )     (104,344 )     (32,247 )
Cost of other invested assets acquired
    (16,019 )     (11,882 )     (53,097 )     (36,624 )
Net change in short-term investments
    (208,162 )     (229,898 )     83,735       561,164  
Net change in unsettled securities transactions
    (22,855 )     104,102       (34,050 )     157,430  
Net cash provided by (used in) investing activities
    (100,924 )     (453,521 )     (305,393 )     (292,699 )
                                 
CASH FLOWS FROM FINANCING ACTIVITIES:
                               
Common shares issued during the period, net
    600       1,114       1,449       1,502  
Purchase of treasury shares
    (99,729 )     (41,077 )     (346,840 )     (90,495 )
Revolving credit borrowings
    (50,000 )     -       83,000       -  
Net cost of debt repurchase
    -       -       -       (83,026 )
Net cost of senior notes maturing
    -       -       (200,000 )     -  
Dividends paid to shareholders
    (26,574 )     (29,100 )     (82,414 )     (88,189 )
Net cash provided by (used in) financing activities
    (175,703 )     (69,063 )     (544,805 )     (260,208 )
                                 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
    (11,457 )     616       13,127       13,618  
                                 
Net increase (decrease) in cash
    9,687       (207,225 )     (46,458 )     59,381  
Cash, beginning of period
    191,453       472,300       247,598       205,694  
Cash, end of period
  $ 201,140     $ 265,075     $ 201,140     $ 265,075  
                                 
SUPPLEMENTAL CASH FLOW INFORMATION
                               
Cash transactions:
                               
Income taxes paid (recovered)
  $ (877 )   $ 2,983     $ (36,715 )   $ 70,762  
Interest paid
    5,660       14,194       40,021       52,318  
                                 
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, 2010 and 2009

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 (“Holdings Ireland”).

2.  BASIS OF PRESENTATION

The unaudited consolidated financial statements of the Company for the three and nine months ended September 30, 2010 and 2009 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, 2009 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, 2010 and 2009 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, 2009, 2008 and 2007 included in the Company’s most recent Form 10-K filing.

All intercompany accounts and transactions have been eliminated.

Certain reclassifications and format changes have been made to prior years’ amounts to conform to the 2010 presentation.

Financial Accounting Standards Board Accounting Codification

Financial Accounting Standards Board Launched Accounting Codification.  In June 2009, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance establishing the FASB Accounting Standards CodificationTM (“Codification”) as the single source of authoritative U.S. GAAP recognized by the FASB to be applied by non-governmental 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 no longer 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. The Company’s adoption of this guidance impacts the way the Company references U.S. GAAP accounting standards in the financial statements and Notes to Consolidated Financial Statements.



Application of Recently Issued Accounting Standard Changes

Subsequent Events. In May 2009, the FASB issued authoritative guidance for subsequent events, which was later modified in February 2010, that addresses the accounting for and disclosure of subsequent events not addressed in other applicable U.S. GAAP.  The Company implemented the new disclosure requirement beginning with the second quarter of 2009 and included it in the Notes to Consolidated Interim Financial Statements.

Improving Disclosures About Fair Value Measurements.  In January 2010, the FASB amended the authoritative guidance for disclosures on fair value measurements.  Effective for interim and annual reporting periods beginning after December 15, 2009, the guidance requires a new separate disclosure for:  significant transfers in and out of Level 1 and 2 and the reasons for the transfers; and provided clarification on existing disclosures to include:  fair value measurement disclosures by class of assets and liabilities and disclosure on valuation techniques and inputs used to measure fair value that fall in either Level 2 or Level 3.  Effective for interim and annual reporting periods beginning after December 15, 2010, the guidance requires another new separate disclosure in regards to Level 3 fair value measurements in that, the period activity will present separately information about purchases, sales, issuances and settlements.  Comparative disclosures shall be required only for periods ending after initial adoption.  The Company implemented the first part of this guidance effective January 1, 2010.

Interim Disclosures About Fair Value of Financial Instruments.  In April 2009, the FASB revised the authoritative guidance for disclosures about fair value of financial instruments. This new guidance 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 adopted this disclosure beginning with the second quarter of 2009 and included it in the Notes to Consolidated Interim Financial Statements.

Other-Than-Temporary Impairments on Investment Securities.  In April 2009, the FASB revised the authoritative guidance for the recognition and presentation of other-than-temporary impairments. This new guidance 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 this guidance effective April 1, 2009.  Upon adoption the Company recognized a cumulative-effect adjustment increase in retained earnings (deficit) and decrease in accumulated other comprehensive income (loss) as follows:
 
(Dollars in thousands)
     
Cumulative-effect adjustment, gross
  $ 65,658  
Tax
    (8,346 )
Cumulative-effect adjustment, net
  $ 57,312  
 
Measurement of Fair Value in Inactive Markets.  In April 2009, the FASB revised the authoritative guidance for fair value measurements and disclosures, which 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.



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, 2010
 
   
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
  $ 392,468     $ 24,939     $ (277 )   $ 417,130  
Obligations of U.S. states and political subdivisions
    3,405,935       220,320       (4,202 )     3,622,053  
Corporate securities
    2,911,613       223,155       (10,464 )     3,124,304  
Asset-backed securities
    250,264       10,729       (430 )     260,563  
Mortgage-backed securities
                               
Commercial
    466,839       26,459       (12,946 )     480,352  
Agency residential
    2,181,753       96,987       (1,009 )     2,277,731  
Non-agency residential
    124,246       1,510       (5,556 )     120,200  
Foreign government securities
    1,551,131       102,105       (14,981 )     1,638,255  
Foreign corporate securities
    1,546,588       99,113       (16,472 )     1,629,229  
Total fixed maturity securities
  $ 12,830,837     $ 805,317     $ (66,337 )   $ 13,569,817  
Equity securities
  $ 14,077     $ 3,144     $ (3 )   $ 17,218  

 
   
At December 31, 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
  $ 339,839     $ 17,879     $ (3,565 )   $ 354,153  
Obligations of U.S. states and political subdivisions
    3,694,267       183,848       (24,256 )     3,853,859  
Corporate securities
    2,421,875       107,749       (32,963 )     2,496,661  
Asset-backed securities
    310,429       7,713       (4,413 )     313,729  
Mortgage-backed securities
                               
Commercial
    475,204       5,172       (37,758 )     442,618  
Agency residential
    2,310,826       61,481       (3,863 )     2,368,444  
Non-agency residential
    177,500       238       (17,117 )     160,621  
Foreign government securities
    1,507,385       100,243       (16,875 )     1,590,753  
Foreign corporate securities
    1,377,417       72,442       (24,748 )     1,425,111  
Total fixed maturity securities
  $ 12,614,742     $ 556,765     $ (165,558 )   $ 13,005,949  
Equity securities
  $ 13,970     $ 2,333     $ (2 )   $ 16,301  
 
In accordance with FASB guidance, the Company reclassified the non-credit portion of other-than-temporary impairments from retained earnings (deficit) into accumulated other comprehensive income (loss), on April 1, 2009.  The table below presents the pre-tax cumulative unrealized appreciation (depreciation) on those corporate securities, for the periods indicated:
 
(Dollars in thousands)
 
At September 30, 2010
 
At December 31, 2009
Pre-tax cumulative unrealized appreciation (depreciation)
  $ 2,266     $ (6,088 )



The amortized cost and market value of fixed maturity securities are shown in the following table by contractual maturity.  Mortgage-backed securities are generally more likely to be prepaid than other fixed maturity securities. 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, 2010
   
At December 31, 2009
 
   
Amortized
   
Market
   
Amortized
   
Market
 
(Dollars in thousands)
 
Cost
   
Value
   
Cost
   
Value
 
Fixed maturity securities – available for sale
                       
    Due in one year or less
  $ 681,431     $ 693,299     $ 621,706     $ 652,483  
    Due after one year through five years
    3,715,052       3,923,432       3,017,731       3,151,819  
    Due after five years through ten years
    2,536,225       2,746,567       2,530,830       2,634,709  
    Due after ten years
    2,875,027       3,067,673       3,170,516       3,281,526  
Asset-backed securities
    250,264       260,563       310,429       313,729  
Mortgage-backed securities
                               
Commercial
    466,839       480,352       475,204       442,618  
Agency residential
    2,181,753       2,277,731       2,310,826       2,368,444  
Non-agency residential
    124,246       120,200       177,500       160,621  
Total fixed maturity securities
  $ 12,830,837     $ 13,569,817     $ 12,614,742     $ 13,005,949  
 
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)
 
2010
   
2009
   
2010
   
2009
 
Increase (decrease) during the period between the market value and cost
                       
of investments carried at market value, and deferred taxes thereon:
                       
Fixed maturity securities
  $ 193,182     $ 428,617     $ 339,419     $ 700,376  
Fixed maturity securities, cumulative other-than-temporary impairment adjustment
    2,269       -       8,354       (65,658 )
Equity securities
    542       448       810       343  
Other invested assets
    (33 )     3,387       462       5,614  
Change in unrealized appreciation (depreciation), pre-tax
    195,960       432,452       349,045       640,675  
Deferred tax benefit (expense)
    (31,162 )     (88,942 )     (35,520 )     (130,628 )
Deferred tax benefit (expense), cumulative other-than-temporary impairment adjustment
    (134 )     -       (1,038 )     8,346  
Change in unrealized appreciation (depreciation),
                               
net of deferred taxes, included in shareholders’ equity
  $ 164,664     $ 343,510     $ 312,487     $ 518,393  
 
The Company frequently reviews its fixed maturity securities 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 (loss).  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 that 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 (loss).  The fair value adjustment that is non-credit related is recorded as a component of other comprehensive income (loss), net of tax, and is included in accumulated other comprehensive income (loss) 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 and equity securities, by security type and contractual maturity, 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 of Unrealized Loss at September 30, 2010 By Security Type
 
   
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
  $ 4,243     $ (97 )   $ 3,466     $ (180 )   $ 7,709     $ (277 )
Obligations of U.S. states and political subdivisions
    13,460       (34 )     102,649       (4,168 )     116,109       (4,202 )
Corporate securities
    102,390       (1,362 )     87,690       (9,102 )     190,080       (10,464 )
Asset-backed securities
    -       (58 )     6,534       (372 )     6,534       (430 )
Mortgage-backed securities
                                               
Commercial
    1,549       (19 )     67,354       (12,927 )     68,903       (12,946 )
Agency residential
    203,115       (775 )     638       (234 )     203,753       (1,009 )
Non-agency residential
    -       -       69,490       (5,556 )     69,490       (5,556 )
Foreign government securities
    119,662       (4,762 )     148,957       (10,219 )     268,619       (14,981 )
Foreign corporate securities
    94,695       (2,387 )     144,131       (14,085 )     238,826       (16,472 )
Total fixed maturity securities
  $ 539,114     $ (9,494 )   $ 630,909     $ (56,843 )   $ 1,170,023     $ (66,337 )
Equity securities
    -       -       12       (3 )     12       (3 )
Total
  $ 539,114     $ (9,494 )   $ 630,921     $ (56,846 )   $ 1,170,035     $ (66,340 )

 
   
Duration of Unrealized Loss at September 30, 2010 By Maturity
 
   
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
  $ 24,186     $ (1,033 )   $ 57,646     $ (6,459 )   $ 81,832     $ (7,492 )
Due in one year through five years
    154,929       (3,523 )     158,034       (11,016 )     312,963       (14,539 )
Due in five years through ten years
    123,554       (3,774 )     100,372       (7,133 )     223,926       (10,907 )
Due after ten years
    31,781       (312 )     170,841       (13,146 )     202,622       (13,458 )
Asset-backed securities
    -       (58 )     6,534       (372 )     6,534       (430 )
Mortgage-backed securities
    204,664       (794 )     137,482       (18,717 )     342,146       (19,511 )
Total fixed maturity securities
  $ 539,114     $ (9,494 )   $ 630,909     $ (56,843 )   $ 1,170,023     $ (66,337 )


The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at September 30, 2010 were $1,170,035 thousand and $66,340 thousand, respectively.  There were no unrealized losses on a single security that exceeded 0.04% of the market value of the fixed maturity securities at September 30, 2010.  In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector.  The $9,494 thousand 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 foreign government and domestic and foreign corporate securities.  Of these unrealized losses, $8,605 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating organization.  The $56,846 thousand of unrealized losses related to fixed maturity and equity securities in an unrealized loss position for more than one year related primarily to highly rated domestic and foreign corporate, mortgage-backed, foreign government and municipal securities.  Of these unrealized losses, $38,103 thousand related to securities that were rated investment grade by at least one nationally recognized statistical rating organization.  The non-investment


grade securities with unrealized losses were mainly comprised of corporate and commercial mortgage-backed securities.  The gross unrealized depreciation greater than 12 months for mortgage-backed securities included $1,027 thousand related to sub-prime and alt-A loans.  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 December 31, 2009, 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 that 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 and equity securities, by security type and contractual maturity, in each case subdivided according to length of time that individual securities had been in a continuous unrealized loss position for the period indicated:
 
   
Duration of Unrealized Loss at December 31, 2009 By Security Type
 
   
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
  $ 155,007     $ (3,444 )   $ 1,375     $ (121 )   $ 156,382     $ (3,565 )
Obligations of U.S. states and political subdivisions
    559       (4 )     452,018       (24,252 )     452,577       (24,256 )
Corporate securities
    170,323       (2,539 )     357,442       (30,424 )     527,765       (32,963 )
Asset-backed securities
    12,514       (87 )     47,273       (4,326 )     59,787       (4,413 )
Mortgage-backed securities
                                               
Commercial
    8,411       (135 )     294,163       (37,623 )     302,574       (37,758 )
Agency residential
    591,372       (3,541 )     6,216       (322 )     597,588       (3,863 )
Non-agency residential
    -       (1 )     153,698       (17,116 )     153,698       (17,117 )
Foreign government securities
    215,048       (3,737 )     154,225       (13,138 )     369,273       (16,875 )
Foreign corporate securities
    299,769       (7,356 )     179,550       (17,392 )     479,319       (24,748 )
Total fixed maturity securities
  $ 1,453,003     $ (20,844 )   $ 1,645,960     $ (144,714 )   $ 3,098,963     $ (165,558 )
Equity securities
    13       (2 )     -       -       13       (2 )
Total
  $ 1,453,016     $ (20,846 )   $ 1,645,960     $ (144,714 )   $ 3,098,976     $ (165,560 )
 

   
Duration of Unrealized Loss at December 31, 2009 By Maturity
 
   
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
  $ 5,777     $ (1 )   $ 74,211     $ (5,504 )   $ 79,988     $ (5,505 )
Due in one year through five years
    423,782       (6,120 )     268,321       (19,861 )     692,103       (25,981 )
Due in five years through ten years
    315,853       (6,094 )     198,398       (14,972 )     514,251       (21,066 )
Due after ten years
    95,294       (4,865 )     603,680       (44,990 )     698,974       (49,855 )
Asset-backed securities
    12,514       (87 )     47,273       (4,326 )     59,787       (4,413 )
Mortgage-backed securities
    599,783       (3,677 )     454,077       (55,061 )     1,053,860       (58,738 )
Total fixed maturity securities
  $ 1,453,003     $ (20,844 )   $ 1,645,960     $ (144,714 )   $ 3,098,963     $ (165,558 )
 


The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at December 31, 2009 were $3,098,976 thousand and $165,560 thousand, respectively.  There were no unrealized losses on a single security that exceeded 0.07% of the market value of the fixed maturity securities at December 31, 2009.  In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector.  The $20,846 thousand of unrealized losses related to fixed maturity and equity securities that have been in an unrealized loss position for less than one year were generally comprised of highly rated government, corporate and mortgage-backed securities.  Of these unrealized losses, $20,653 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating organization.  The $144,714 thousand of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year related primarily to highly rated government, municipal, corporate and mortgage-backed securities.  Of these unrealized losses, $111,340 thousand related to securities that were rated investment grade by at least one nationally recognized statistical rating organization.  The non-investment grade securities with unrealized losses are mainly comprised of corporate and commercial mortgage-backed securities.  The gross unrealized depreciation greater than 12 months for mortgage-backed securities included $3,676 thousand related to sub-prime and alt-A loans.  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 had excess credit coverage and were current on interest and principal payments.

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)
 
2010
   
2009
   
2010
   
2009
 
Fixed maturity securities
  $ 143,801     $ 145,408     $ 438,017     $ 434,363  
Equity securities
    2,763       757       8,142       2,183  
Short-term investments and cash
    364       629       (26 )     5,872  
Other invested assets
                               
Limited partnerships
    (1,108 )     23,452       30,401       (29,227 )
Other
    183       (1,332 )     885       (297 )
Total gross investment income
    146,003       168,914       477,419       412,894  
Interest debited (credited) and other expense
    (4,635 )     (3,527 )     (8,821 )     (11,544 )
Total net investment income
  $ 141,368     $ 165,387     $ 468,598     $ 401,350  
 
The Company records results from limited partnership investments on the equity method 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 $190,064 thousand in limited partnerships at September 30, 2010.  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: