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

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

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

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

	Consolidated Balance Sheets September 30, 2010 (unaudited) and
	December 31, 2009	1

	Consolidated Statements of Operations and Comprehensive Income (Loss) for the
	three and nine months ended September 30, 2010 and 2009 (unaudited)	2

	Consolidated Statements of Changes in Shareholders’ Equity for the three
	and nine months ended September 30, 2010 and 2009 (unaudited)	3

	Consolidated Statements of Cash Flows for the three and nine months ended
	September 30, 2010 and 2009 (unaudited)	4

	Notes to Consolidated Interim Financial Statements (unaudited)	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and
	Results of Operation	28

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	57

Item 4.	Controls and Procedures	57

PART II

OTHER INFORMATION

Item 1.	Legal Proceedings	57

Item 1A.	Risk Factors	57

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	58

Item 3.	Defaults Upon Senior Securities	58

Item 4.	Reserved	58

Item 5.	Other Information	58

Item 6.	Exhibits	59

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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.

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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.

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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.

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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.

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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.

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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.

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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	)

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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.

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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

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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.

	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	)

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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.

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