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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:
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(Dollars in thousands)
 
2010
   
2009
   
2010
   
2009
 
Fixed maturity securities, market value:
                       
Other-than-temporary impairments
  $ (2,892 )   $ -     $ (2,892 )   $ (13,210 )
Gains (losses) from sales
    (2,410 )     (7,363 )     48,347       (43,644 )
Fixed maturity securities, fair value:
                               
Gains (losses) from sales
    480       172       753       401  
Gains (losses) from fair value adjustments
    3,296       5,837       3,778       7,805  
Equity securities, market value:
                               
Gains (losses) from sales
    -       8,040       111       8,087  
Equity securities, fair value:
                               
Gains (losses) from sales
    951       1,298       (48 )     6,480  
Gains (losses) from fair value adjustments
    38,872       23,075       19,264       23,448  
Short-term investments gains (losses)
    (2 )     4       7       21  
Total net realized capital gains (losses)
  $ 38,295     $ 31,063     $ 69,320     $ (10,612 )
 
The Company recorded as net realized capital gains (losses) in the consolidated statements of operations and comprehensive income (loss) both fair value re-measurements and write-downs in the value of securities deemed to be impaired on an other-than-temporary basis as displayed in the table above.  The Company had no other-than-temporary impaired securities where the impairment had both a credit and non-credit component.

The proceeds and split between gross gains and losses, from sales of fixed maturity and equity securities, 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
 
Proceeds from sales of fixed maturity securities
  $ 133,573     $ 113,973     $ 865,647     $ 251,633  
Gross gains from sales
    4,641       4,289       71,012       12,552  
Gross losses from sales
    (6,571 )     (11,480 )     (21,912 )     (55,795 )
                                 
Proceeds from sales of equity securities
  $ 14,902     $ 34,376     $ 88,356     $ 47,691  
Gross gains from sales
    1,033       9,366       4,727       15,301  
Gross losses from sales
    (82 )     (28 )     (4,664 )     (734 )

 
4.  DERIVATIVES

The Company sold seven equity index put option contracts, based on two indices, in 2001 and 2005, which are outstanding. The Company sold these equity index put options as insurance products with the intent of achieving a profit.  These equity index put option contracts meet the definition of a derivative under FASB guidance and the Company’s position in these equity index put option contracts is unhedged.  Accordingly, these equity index put option contracts are carried at fair value in the consolidated balance sheets with changes in fair value recorded in the consolidated statements of operations and comprehensive income (loss).



The Company sold six equity index put option contracts, based on the Standard & Poor’s 500 (“S&P 500”) index, for total consideration, net of commissions, of $22,530 thousand.  At September 30, 2010, fair value for these equity index put option contracts was $69,666 thousand.  These equity index put option contracts each have a single exercise date, with maturities ranging from 12 to 30 years and strike prices ranging from $1,141.21 to $1,540.63.  No amounts will be payable under these equity index put option contracts if the S&P 500 index is at, or above, the strike prices on the exercise dates, which fall between June 2017 and March 2031.  If the S&P 500 index is lower than the strike price on the applicable exercise date, the amount due would vary proportionately with the percentage by which the index is below the strike price.  Based on historical index volatilities and trends and the September 30, 2010 S&P 500 index value, the Company estimates the probability that each equity index put option contract of the S&P 500 index falling below the strike price on the exercise date to be less than 45%.  The theoretical maximum payouts under the equity index put option contracts would occur if on each of the exercise dates the S&P 500 index value were zero.  At September 30, 2010, the present value of these theoretical maximum payouts using a 6% discount factor was $265,310 thousand.

The Company sold one equity index put option contract based on the FTSE 100 index for total consideration, net of commissions, of $6,706 thousand.  At September 30, 2010, fair value for this equity index put option contract was $7,485 thousand.  This equity index put option contract has an exercise date of July 2020 and a strike price of ₤5,989.75.  No amount will be payable under this equity index put option contract if the FTSE 100 index is at, or above, the strike price on the exercise date.  If the FTSE 100 index is lower than the strike price on the exercise date, the amount due will vary proportionately with the percentage by which the index is below the strike price.  Based on historical index volatilities and trends and the September 30, 2010 FTSE 100 index value, the Company estimates the probability that the equity index put option contract of the FTSE 100 index will fall below the strike price on the exercise date to be less than 36%.  The theoretical maximum payout under the equity index put option contract would occur if on the exercise date the FTSE 100 index value was zero.  At September 30, 2010, the present value of the theoretical maximum payout using a 6% discount factor and current exchange rate was $28,500 thousand.

The fair value of the equity index put options can be found in the Company’s consolidated balance sheets as follows:


(Dollars in thousands)
               
Derivatives not designated as
 
Location of fair value
 
At
   
At
 
hedging instruments
 
in balance sheets
 
September 30, 2010
   
December 31, 2009
 
                 
Equity index put option contracts
 
Equity index put option liability
  $ 77,150     $ 57,349  
Total
      $ 77,150     $ 57,349  
 
The change in fair value of the equity index put option contracts can be found in the Company’s statement of operations and comprehensive income (loss) as follows:
 
(Dollars in thousands)
     
For the Three Months Ended
   
For the Nine Months Ended
 
Derivatives not designated as
 
Location of gain (loss) in statements of
 
September 30,
   
September 30,
 
hedging instruments
 
operations and comprehensive income (loss)
 
2010
   
2009
   
2010
   
2009
 
                             
Equity index put option contracts
 
Net derivative gain (loss)
  $ (552 )   $ (2,118 )   $ (19,802 )   $ (470 )
Total
      $ (552 )   $ (2,118 )   $ (19,802 )   $ (470 )
 
The Company’s equity index put option contracts contain provisions that require collateralization of the fair value, as calculated by the counterparty, above a specified threshold, which is based on the Company’s financial strength ratings (Moody’s Investors Service, Inc.) and/or debt ratings (Standard & Poor’s Ratings Services). The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a liability position on September 30, 2010, was $77,150 thousand for which the Company had posted collateral with a market value of $53,052 thousand.  If on September 30, 2010, the Company’s ratings were such that the collateral threshold was zero, the Company would be required to post an additional $55,000 thousand, which is an approximation of the counterparties’ fair value calculation.


5.  FAIR VALUE

The Company’s fixed maturity and equity securities are managed by third party investment asset managers.  The investment asset managers obtain prices from nationally recognized pricing services.   These services seek to utilize market data and observations in their evaluation process.  They use pricing applications that vary by asset class and incorporate available market information and when fixed maturity securities do not trade on a daily basis the services will apply available information through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing.  In addition, they use model processes, such as the Option Adjusted Spread model to develop prepayment and interest rate scenarios for securities that have prepayment features.

In limited instances where prices are not provided by pricing services or in rare instances when a manager may not agree with the pricing service, price quotes on a non-binding basis are obtained from investment brokers.  The investment asset managers do not make any changes to prices received from either the pricing services or the investment brokers.  In addition, the investment asset managers have procedures in place to review the reasonableness of the prices from the service providers and may request verification of the prices.  In addition, the Company tests the prices on a random basis to an independent pricing source.  In limited situations, where financial markets are inactive or illiquid, the Company may use its own assumptions about future cash flows and risk-adjusted discount rates to determine fair value.  The Company made no such adjustments at September 30, 2010.

Fixed maturity securities are generally categorized as Level 2, Significant Other Observable Inputs, since a particular security may not have traded but the pricing services are able to use valuation models with observable market inputs such as interest rate yield curves and prices for similar fixed maturity securities in terms of issuer, maturity and seniority.  Valuations that are derived from techniques in which one or more of the significant inputs are unobservable (including assumptions about risk) are categorized as Level 3, Significant Unobservable Inputs.  These securities include broker priced securities and valuation of less liquid securities such as commercial mortgage-backed securities and the Company’s equity index put option contracts.

Equity securities in U.S. denominated currency are categorized as Level 1, Quoted Prices in Active Markets for Identical Assets, since the securities are actively traded on an exchange and prices are based on quoted prices from the exchange.  Equity securities traded on foreign exchanges are categorized as Level 2 due to potential foreign exchange adjustments to fair or market value.

The Company sold seven equity index put option contracts which meet the definition of a derivative.  The Company’s position in these contracts is unhedged.  The Company records the change in fair value of equity index put option contracts in its consolidated statements of operations and comprehensive income (loss).

The fair value was calculated using an industry accepted option pricing model, Black-Scholes, which used the following assumptions:
 
 
At September 30, 2010
     
Contract
 
Contracts
 
based on
 
based on
 
FTSE 100
 
S & P 500 Index
 
Index
Equity index
 1,141.2
 
 5,548.6
Interest rate
2.92% to 4.58%
 
3.86%
Time to maturity
6.7 to 20.5 yrs
 
9.8 yrs
Volatility
22.5% to 24.7%
 
25.8%
 


The following table presents the fair value measurement levels for all assets and liabilities, which the Company has recorded at fair value (fair and market value) as of the period indicated:
 
         
Fair Value Measurement Using:
 
         
Quoted Prices
             
         
in Active
   
Significant
       
         
Markets for
   
Other
   
Significant
 
         
Identical
   
Observable
   
Unobservable
 
         
Assets
   
Inputs
   
Inputs
 
(Dollars in thousands)
 
September 30, 2010
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Assets:
                       
Fixed maturities, market value
                       
U.S. Treasury securities and obligations of
                       
U.S. government agencies and corporations
  $ 417,130     $ -     $ 417,130     $ -  
Obligations of U.S. States and political subdivisions
    3,622,053       -       3,622,053       -  
Corporate securities
    3,124,304       -       3,114,316       9,988  
Asset-backed securities
    260,563       -       260,034       529  
Mortgage-backed securities
                               
Commercial
    480,352       -       480,352       -  
Agency residential
    2,277,731       -       2,277,731       -  
Non-agency residential
    120,200       -       118,657       1,543  
Foreign government securities
    1,638,255       -       1,638,255       -  
Foreign corporate securities
    1,629,229       -       1,629,229       -  
Total fixed maturities, market value
    13,569,817       -       13,557,757       12,060  
                                 
Fixed maturities, fair value
    116,376       -       116,376       -  
Equity securities, market value
    17,218       17,218       -       -  
Equity securities, fair value
    415,944       415,944       -       -  
                                 
Liabilities:
                               
Equity index put option contracts
  $ 77,150     $ -     $ -     $ 77,150  
 
There were no significant transfers between Level 1 and Level 2 for the nine months ended September 30, 2010.

The following table presents the fair value measurement levels for all assets and liabilities, which the Company has recorded at fair value (fair and market value) as of the period indicated:
 
         
Fair Value Measurement Using:
 
         
Quoted Prices
             
         
in Active
   
Significant
       
         
Markets for
   
Other
   
Significant
 
         
Identical
   
Observable
   
Unobservable
 
         
Assets
   
Inputs
   
Inputs
 
(Dollars in thousands)
 
December 31, 2009
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Assets:
                       
Fixed maturities, market value
                       
U.S. Treasury securities and obligations of
                       
U.S. government agencies and corporations
  $ 354,153     $ -     $ 354,153     $ -  
Obligations of U.S. States and political subdivisions
    3,853,859       -       3,853,859       -  
Corporate securities
    2,496,661       -       2,486,761       9,900  
Asset-backed securities
    313,729       -       307,460       6,269  
Mortgage-backed securities
                               
Commercial
    442,618       -       442,618       -  
Agency residential
    2,368,444       -       2,368,444       -  
Non-agency residential
    160,621       -       159,227       1,394  
Foreign government securities
    1,590,753       -       1,590,753       -  
Foreign corporate securities
    1,425,111       -       1,425,111       -  
Total fixed maturities, market value
    13,005,949       -       12,988,386       17,563  
                                 
Fixed maturities, fair value
    50,528       -       50,528       -  
Equity securities, market value
    16,301       16,301       -       -  
Equity securities, fair value
    380,025       379,058       967       -  
                                 
Liabilities:
                               
Equity index put option contracts
  $ 57,349     $ -     $ -     $ 57,349  



The following tables present the activity under Level 3, fair value measurements using significant unobservable inputs by asset type, for the periods indicated:
 
   
By Asset
 
   
Three Months Ended September 30, 2010
   
Nine Months Ended September 30, 2010
 
   
Corporate
   
Asset-backed
   
Non-agency
         
Corporate
   
Asset-backed
   
Non-agency
       
(Dollars in thousands)
 
Securities
   
Securities
   
RMBS
   
Total
   
Securities
   
Securities
   
RMBS
   
Total
 
Beginning balance
  $ 9,950     $ 6,562     $ 1,508       18,020     $ 9,900     $ 6,268     $ 1,394     $ 17,563  
Total gains or (losses) (realized/unrealized)
                                                               
Included in earnings (or changes in net assets)
    -       (258 )     113       (145 )     (2 )     (258 )     273       13  
Included in other comprehensive income (loss)
    38       1,628       84       1,750       90       1,672       268       2,030  
Purchases, issuances and settlements
    -       (7,413 )     (162 )     (7,575 )     -       (7,154 )     (392 )     (7,546 )
Transfers in and/or (out) of Level 3
    -       10       -       10       -       -       -       -  
Ending balance
  $ 9,988     $ 529     $ 1,543     $ 12,060     $ 9,988     $ 529     $ 1,543     $ 12,060  
                                                                 
The amount of total gains or losses for the period included
                                                               
in earnings (or changes in net assets) attributable to the
                                                               
change in unrealized gains or losses relating to assets
                                                               
still held at the reporting date
  $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -  
                                                                 
(Some amounts may not reconcile due to rounding.)
                                                               
 

   
By Asset
 
   
Three Months Ended September 30, 2009
   
Nine Months Ended September 30, 2009
 
   
Corporate
 
Asset-backed
 
Non-agency
             
Corporate
 
Asset-backed
 
Non-agency
           
(Dollars in thousands)
 
Securities
 
Securities
 
RMBS
 
CMBS
 
Total
 
Securities
 
Securities
 
RMBS
 
CMBS
 
Total
Beginning balance
  $ 8,901     $ 5,124     $ 1,449     $ -     $ 15,474     $ 22,693     $ 3,409     $ 1,757     $ 265,748     $ 293,607  
Total gains or (losses) (realized/unrealized)
                                                                               
Included in earnings (or changes in net assets)
    -       -       174       -       174       (1 )     -       34       -       33  
Included in other comprehensive income (loss)
    900       479       157       -       1,536       (199 )     1,826       285       -       1,912  
Purchases, issuances and settlements
    -       -       (298 )     -       (298 )     -       -       (594 )     -       (594 )
Transfers in and/or (out) of Level 3
    (1 )     (149 )     -       -       (150 )     (12,693 )     219       -       (265,748 )     (278,222 )
Ending balance
  $ 9,800     $ 5,454     $ 1,482     $ -     $ 16,736     $ 9,800     $ 5,454     $ 1,482     $ -     $ 16,736  
                                                                                 
The amount of total gains or losses for the period included
                                                                               
in earnings (or changes in net assets) attributable to the
                                                                               
change in unrealized gains or losses relating to assets
                                                                               
still held at the reporting date
  $ -     $ -     $ -     $ -     $ -     $ -     $ (73 )   $ (743 )   $ -     $ (816 )
                                                                                 
(Some amounts may not reconcile due to rounding.)
                                                                               
 


The following table presents the activity under Level 3, fair value measurements using significant unobservable inputs for equity index put option contracts, for the periods indicated:
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(Dollars in thousands)
 
2010
   
2009
   
2010
   
2009
 
Liabilities:
                       
Balance, beginning of period
  $ 76,599     $ 58,905     $ 57,349     $ 60,552  
Total (gains) or losses (realized/unrealized)
                               
Included in earnings (or changes in net assets)
    552       2,118       19,802       470  
Included in other comprehensive income (loss)
    -       -       -       -  
Purchases, issuances and settlements
    -       -       -       -  
Transfers in and/or (out) of Level 3
    -       -       -       -  
Balance, end of period
  $ 77,150     $ 61,022     $ 77,150     $ 61,022  
                                 
The amount of total gains or losses for the period included in earnings
                               
(or changes in net assets) attributable to the change in unrealized
                               
gains or losses relating to liabilities still held at the reporting date
  $ -     $ -     $ -     $ -  
                                 
(Some amounts may not reconcile due to rounding.)
                               


6.  CAPITAL TRANSACTIONS

On December 17, 2008, the Company renewed its shelf registration statement on Form S-3ASR with the SEC, as a Well Known Seasoned Issuer.  This shelf registration statement can be used by Group to register common shares, preferred shares, debt securities, warrants, share purchase contracts and share purchase units; by Holdings to register debt securities and by Everest Re Capital Trust III (“Capital Trust III”) to register trust preferred securities.



7.  EARNINGS PER COMMON SHARE

Net income (loss) per common share has been computed as per below, based upon weighted average common basic and dilutive shares outstanding.


     
Three Months Ended
   
Nine Months Ended
 
     
September 30,
   
September 30,
 
(Dollars and shares in thousands, except per share amounts)
 
2010
   
2009
   
2010
   
2009
 
Net income (loss) per share:
                       
Numerator
                       
Net income (loss)
  $ 174,200     $ 228,618     $ 308,221     $ 609,762  
Less:  dividends declared-common shares and nonvested common shares
    (26,574 )     (29,100 )     (82,413 )     (88,189 )
Undistributed earnings
    147,627       199,518       225,808       521,574  
Percentage allocated to common shareholders (1)
    99.5 %     99.6 %     99.5 %     99.7 %
        146,841       198,756       224,717       519,764  
Add:  dividends declared-common shareholders
    26,430       28,989       81,983       87,860  
Numerator for basic and diluted earnings per common share
  $ 173,272     $ 227,745     $ 306,700     $ 607,624  
                                   
Denominator
                               
Denominator for basic earnings per weighted-average common shares
    55,526       60,495       57,369       60,966  
Effect of dilutive securities:
                               
Options
    137       225       148       164  
Denominator for diluted earnings per adjusted weighted-average common shares
    55,662       60,720       57,516       61,130  
                                   
Per common share net income (loss)
                               
Basic
  $ 3.12     $ 3.76     $ 5.35     $ 9.97  
Diluted
  $ 3.11     $ 3.75     $ 5.33     $ 9.94  
                                   
(1)
Basic weighted-average common shares outstanding
    55,526       60,495       57,369       60,966  
 
Basic weighted-average common shares outstanding and nonvested common shares expected to vest
    55,823       60,727       57,647       61,178  
 
Percentage allocated to common shareholders
    99.5 %     99.6 %     99.5 %     99.7 %
                                   
(Some amounts may not reconcile due to rounding.)
                               


The table below presents the options to purchase common shares that were outstanding, but were not included in the computation of earnings per diluted share as they were anti-dilutive, for the periods indicated:


 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2010
 
2009
 
2010
 
2009
Anti-dilutive options
 1,902,690
 
 1,587,400
 
 1,902,690
 
 1,844,710


All outstanding options expire on or between April 20, 2011 and February 24, 2020.

8.  CONTINGENCIES

In the ordinary course of business, the Company is involved in lawsuits, arbitrations and other formal and informal dispute resolution procedures, the outcomes of which will determine the Company’s rights and obligations under insurance, reinsurance and other contractual agreements.  In some disputes, the Company seeks to enforce its rights under an agreement or to collect funds owing to it.  In other matters, the Company is resisting attempts by others to collect funds or enforce alleged rights.  These disputes arise from time to time and are ultimately resolved through both informal and formal means, including negotiated resolution, arbitration and litigation.  In all such matters, the Company believes that its positions are legally and commercially reasonable. While the final outcome of these matters cannot be predicted with certainty, the Company does not believe that any of these matters, when finally resolved, will have a material adverse effect on the Company’s financial position or liquidity.  However, an adverse resolution of one or more of these items in any one quarter or fiscal year could have a material adverse effect on the Company’s results of operations in that period.


In 1993 and prior, the Company had a business arrangement with The Prudential Insurance Company of America (“The Prudential”) wherein, for a fee, the Company accepted settled claim payment obligations of certain property and casualty insurers, and, concurrently, became the owner of the annuity or assignee of the annuity proceeds funded by the property and casualty insurers specifically to fulfill these fully settled obligations.  In these circumstances, the Company would be liable if The Prudential, which has an A+ (Superior) financial strength rating from A.M. Best Company (“A.M. Best”), was unable to make the annuity payments.  The table below presents the estimated cost to replace all such annuities for which the Company was contingently liable for the periods indicated:
 
(Dollars in thousands)
 
At September 30, 2010
 
At December 31, 2009
    $ 150,614     $ 152,340  
 
Prior to its 1995 initial public offering, the Company purchased annuities from an unaffiliated life insurance company with an A+ (Superior) financial strength rating from A.M. Best to settle certain claim liabilities of the company.  Should the life insurance company become unable to make the annuity payments, the Company would be liable for those claim liabilities.  The table below presents the estimated cost to replace all such annuities for which the Company was contingently liable for the periods indicated:
 
(Dollars in thousands)
 
At September 30, 2010
 
At December 31, 2009
    $ 26,030     $ 24,568  
 
9.  OTHER COMPREHENSIVE INCOME (LOSS)

The following table presents the components of other comprehensive income (loss) in the consolidated statements of operations and comprehensive income (loss) for the periods indicated:

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(Dollars in thousands)
 
2010
   
2009
   
2010
   
2009
 
Unrealized appreciation (depreciation) ("URA(D)") on
                       
securities arising during the period
                       
URA(D) of investments - temporary
  $ 193,692     $ 418,164     $ 340,692     $ 677,587  
URA(D) of investments - non-credit OTTI
    2,269       14,288       8,354       28,746  
Tax benefit (expense) from URA(D) arising during the period
    (31,296 )     (88,942 )     (36,558 )     (130,628 )
Total URA(D) on securities arising during the period, net of tax
    164,665       343,510       312,488       575,705  
                                 
Foreign currency translation adjustments
    33,422       37,992       (19,776 )     115,385  
Tax benefit (expense) from foreign currency translation
    (5,784 )     (5,671 )     (6,425 )     (11,648 )
Net foreign currency translation adjustments
    27,638       32,321       (26,201 )     103,737  
                                 
Pension adjustments
    649       950       1,948       2,849  
Tax benefit (expense) on pension
    (227 )     (332 )     (682 )     (564 )
Net pension adjustments
    422       617       1,266       2,285  
                                 
Other comprehensive income (loss), net of tax
  $ 192,725     $ 376,448     $ 287,553     $ 681,727  



The following table presents the components of accumulated other comprehensive income (loss), net of tax, in the consolidated balance sheets for the periods indicated:
 
   
At September 30,
 
At December 31,
(Dollars in thousands)
 
2010
 
2009
URA(D) on securities, net of deferred taxes
           
Temporary
  $ 619,821     $ 314,648  
Non-credit, OTTI
    1,941       (5,374 )
Total unrealized appreciation (depreciation) on investments, net of deferred taxes
    621,762       309,274  
Foreign currency translation adjustments, net of deferred taxes
    (39,169 )     (12,968 )
Pension adjustments, net of deferred taxes
    (23,002 )     (24,268 )
Accumulated other comprehensive income (loss)
  $ 559,591     $ 272,038  
 
10.  CREDIT FACILITIES

The Company has three credit facilities for a total commitment of up to $1,300,000 thousand, providing for the issuance of letters of credit and/or unsecured revolving credit lines. The following table presents the costs incurred in connection with the three credit facilities for the periods indicated:
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(Dollars in thousands)
 
2010
   
2009
   
2010
   
2009
 
Credit facility fees incurred
  $ 531     $ 451     $ 1,562     $ 1,413  
 
The terms and outstanding amounts for each facility are discussed below:

Group Credit Facility

Effective July 27, 2007, Group, Everest Reinsurance (Bermuda), Ltd. (“Bermuda Re”) and Everest International Reinsurance, Ltd. (“Everest International”) entered into a five year, $850,000 thousand senior credit facility with a syndicate of lenders referred to as the “Group Credit Facility”.  Wachovia Bank, a subsidiary of Wells Fargo Corporation (“Wachovia Bank”) is the administrative agent for the Group Credit Facility, which consists of two tranches.  Tranche one provides up to $350,000 thousand of unsecured revolving credit for liquidity and general corporate purposes, and for the issuance of unsecured standby letters of credit.  The interest on the revolving loans shall, at the Company’s option, be either (1) the Base Rate (as defined below) or (2) an adjusted London Interbank Offered Rate (“LIBOR”) plus a margin.  The Base Rate is the higher of (a) the prime commercial lending rate established by Wachovia Bank or (b) the Federal Funds Rate plus 0.5% per annum. The amount of margin and the fees payable for the Group Credit Facility depends on Group’s senior unsecured debt rating.  Tranche two exclusively provides up to $500,000 thousand for the issuance of standby letters of credit on a collateralized basis.

The Group Credit Facility requires Group to maintain a debt to capital ratio of not greater than 0.35 to 1 and to maintain a minimum net worth.  Minimum net worth is an amount equal to the sum of $3,575,381 thousand plus 25% of consolidated net income for each of Group’s fiscal quarters, for which statements are available ending on or after January 1, 2007 and for which consolidated net income is positive, plus 25% of any increase in consolidated net worth during such period attributable to the issuance of ordinary and preferred shares, which at September 30, 2010, was $4,149,423 thousand.  As of September 30, 2010, the Company was in compliance with all Group Credit Facility covenants.

The following table summarizes the outstanding letters of credit and/or borrowings for the periods indicated:
 
(Dollars in thousands)
   
At September 30, 2010
 
At December 31, 2009
Bank
   
Commitment
   
In Use
 
Date of Expiry
 
Commitment
   
In Use
 
Date of Expiry
Wachovia Group Credit Facility
Tranche One
  $ 350,000     $ -       $ 350,000     $ -    
 
Tranche Two
    500,000       358,955  
12/31/2010
    500,000       386,548  
12/31/2010
Total Wachovia Group Credit Facility
  $ 850,000     $ 358,955       $ 850,000     $ 386,548    



Holdings Credit Facility

Effective August 23, 2006, Holdings entered into a five year, $150,000 thousand senior revolving credit facility with a syndicate of lenders referred to as the “Holdings Credit Facility”.  Citibank N.A. is the administrative agent for the Holdings Credit Facility.  The Holdings Credit Facility may be used for liquidity and general corporate purposes.  The Holdings Credit Facility provides for the borrowing of up to $150,000 thousand with interest at a rate selected by Holdings equal to either, (1) the Base Rate (as defined below) or (2) a periodic fixed rate equal to the Eurodollar Rate plus an applicable margin.  The Base Rate means a fluctuating interest rate per annum in effect from time to time to be equal to the higher of (a) the rate of interest publicly announced by Citibank as its prime rate or (b) 0.5% per annum above the Federal Funds Rate, in each case plus the applicable margin.  The amount of margin and the fees payable for the Holdings Credit Facility depends upon Holdings’ senior unsecured debt rating.

The Holdings Credit Facility requires Holdings to maintain a debt to capital ratio of not greater than 0.35 to 1 and Everest Reinsurance Company (“Everest Re”) to maintain its statutory surplus at $1,500,000 thousand plus 25% of future aggregate net income and 25% of future aggregate capital contributions after December 31, 2005, which at September 30, 2010, was $1,970,322 thousand.  As of September 30, 2010, Holdings was in compliance with all Holdings Credit Facility covenants.

The following table summarizes outstanding letters of credit and/or borrowings for the periods indicated:
 
(Dollars in thousands)
 
At September 30, 2010
 
At December 31, 2009
Bank
 
Commitment
   
In Use
 
Date of Loan
Maturity/Expiry Date
 
Commitment
   
In Use
 
Date of Loan
Maturity/Expiry Date
Citibank Holdings Credit Facility
  $ 150,000     $ 50,000  
9/01/2010
10/01/2010
  $ 150,000     $ -      
              20,000  
9/13/2010
10/13/2010
            -      
              13,000  
9/15/2010
10/15/2010
            -      
Total revolving credit borrowings
            83,000                   -      
Total letters of credit
            16,951    
12/31/2010
            27,959    
12/31/2010
                                         
Total Citibank Holdings Credit Facility
  $ 150,000     $ 99,951         $ 150,000     $ 27,959      


Bermuda Re Letter of Credit Facility

Bermuda Re has a $300,000 thousand letter of credit issuance facility with Citibank N.A. referred to as the “Bermuda Re Letter of Credit Facility”, which commitment is reconfirmed annually.  The Bermuda Re Letter of Credit Facility provides for the issuance of up to $300,000 thousand of secured letters of credit to collateralize reinsurance obligations as a non-admitted reinsurer.  The interest on drawn letters of credit shall be (A) 0.20% per annum of the principal amount of issued standard letters of credit (expiry of 15 months or less) and (B) 0.25% per annum of the principal amount of issued extended tenor letters of credit (expiry maximum of up to 60 months).  The commitment fee on undrawn credit shall be 0.10% per annum.

The following table summarizes the outstanding letters of credit for the periods indicated:
 
(Dollars in thousands)
 
At September 30, 2010
 
At December 31, 2009
 
Bank
 
Commitment
   
In Use
 
Date of Expiry
 
Commitment
   
In Use
   
Date of Expiry
 
Citibank Bilateral Letter of Credit Agreement
  $ 300,000     $ 2,291  
11/24/2010
  $ 300,000     $ 2,291    
11/24/2010
 
              63,255  
12/31/2010
            74,744    
12/31/2010
 
              36,191  
1/31/2011
            37,735    
1/31/2011
 
              310  
6/15/2011
            -     -  
              24,392  
6/30/2014
            25,432    
6/30/2013
 
              29,253  
12/31/2013
            37,089    
12/31/2013
 
              11,494  
9/30/2014
            11,984    
9/30/2014
 
              28,674  
12/31/2014
            29,896    
12/31/2014
 
Total Citibank Bilateral Agreement
  $ 300,000     $ 195,860       $ 300,000     $ 219,171        
 


11.  TRUST AGREEMENTS

Certain subsidiaries of Group, principally Bermuda Re, a Bermuda insurance company and direct subsidiary of Group, have established trust agreements, which effectively use the Company’s investments as collateral, as security for assumed losses payable to certain non-affiliated ceding companies.  At September 30, 2010, the total amount on deposit in trust accounts was $100,562 thousand.

12.  SENIOR NOTES

Holdings has completed multiple public offerings.  The table below displays Holdings’ outstanding senior notes.  Market value is based on quoted market prices.
 
               
September 30, 2010
   
December 31, 2009
 
               
Consolidated Balance
       
Consolidated Balance
     
(Dollars in thousands)
Date Issued
 
Date Due
 
Principal Amounts
 
Sheet Amount
 
Market Value
 
Sheet Amount
 
Market Value
5.40% Senior notes
10/12/2004
 
10/15/2014
  $ 250,000     $ 249,801     $ 270,000     $ 249,769     $ 256,100  
8.75% Senior notes (matured and paid on March 15, 2010)
03/14/2000
 
03/15/2010
  $ 200,000     $ -     $ -     $ 199,970     $ 200,000  
 
Interest expense incurred in connection with these senior notes is as follows for the periods indicated:
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(Dollars in thousands)
 
2010
   
2009
   
2010
   
2009
 
Interest expense incurred
  $ 3,386     $ 7,798     $ 13,833     $ 23,391  


13.  LONG TERM SUBORDINATED NOTES

The table below displays Holdings’ outstanding fixed to floating rate long term subordinated notes.  Market value is based on quoted market prices.
 
         
Maturity Date
 
September 30, 2010
   
December 31, 2009
 
     
Original
         
Consolidated Balance
       
Consolidated Balance
     
(Dollars in thousands)
Date Issued
 
Principal Amount
 
Scheduled
 
Final
 
Sheet Amount
 
Market Value
 
Sheet Amount
 
Market Value
6.6% Long term subordinated notes
04/26/2007
  $ 400,000  
05/15/2037
 
05/01/2067
  $ 238,350     $ 220,072     $ 238,348     $ 176,534  
 
During the fixed rate interest period from May 3, 2007 through May 14, 2017, interest will be at the annual rate of 6.6%, payable semi-annually in arrears on November 15 and May 15 of each year, commencing on November 15, 2007, subject to Holdings’ right to defer interest on one or more occasions for up to ten consecutive years.  During the floating rate interest period from May 15, 2017 through maturity, interest will be based on the 3 month LIBOR plus 238.5 basis points, reset quarterly, payable quarterly in arrears on February 15, May 15, August 15 and November 15 of each year, subject to Holdings’ right to defer interest on one or more occasions for up to ten consecutive years.  Deferred interest will accumulate interest at the applicable rate compounded semi-annually for periods prior to May 15, 2017, and compounded quarterly for periods from and including May 15, 2017.

Holdings can redeem the long term subordinated notes prior to May 15, 2017, in whole but not in part at the applicable redemption price, which will equal the greater of (a) 100% of the principal amount being redeemed and (b) the present value of the principal payment on May 15, 2017 and scheduled payments of interest that would have accrued from the redemption date to May 15, 2017 on the long term subordinated notes being redeemed, discounted to the redemption date on a semi-annual basis at a discount rate equal to the treasury rate plus an applicable spread of either 0.25% or 0.50%, in each case plus accrued and unpaid interest.  Holdings may redeem the long term subordinated notes on or after May 15, 2017, in whole or in part at 100% of the principal amount plus accrued and unpaid interest; however, redemption on or after the scheduled maturity date and prior to May 1, 2047 is subject to a replacement capital covenant.  This covenant is for the benefit of certain senior note holders and it mandates that Holdings receive proceeds


from the sale of another subordinated debt issue, of at least similar size, before it may redeem the subordinated notes.

On March 19, 2009, Group announced the commencement of a cash tender offer for any and all of the 6.60% fixed to floating rate long term subordinated notes.  Upon expiration of the tender offer, the Company had reduced its outstanding debt by $161,441 thousand, which resulted in a pre-tax gain on debt repurchase of $78,271 thousand.

Interest expense incurred in connection with these long term subordinated notes is as follows for the periods indicated:
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(Dollars in thousands)
 
2010
   
2009
   
2010
   
2009
 
Interest expense incurred
  $ 3,937     $ 3,937     $ 11,811     $ 14,385  
 
14.  JUNIOR SUBORDINATED DEBT SECURITIES PAYABLE

The following table displays Holdings’ outstanding junior subordinated debt securities due to Everest Re Capital Trust II (“Capital Trust II”), a wholly-owned finance subsidiary of Holdings.  Fair value is primarily based on the quoted market price of the related trust preferred securities.
 
               
September 30, 2010
   
December 31, 2009
 
               
Consolidated Balance
       
Consolidated Balance
     
(Dollars in thousands)
Date Issued
 
Date Due
 
Amount Issued
 
Sheet Amount
 
Fair Value
   
Sheet Amount
 
Fair Value
6.20% Junior subordinated debt securities
03/29/2004
 
03/29/2034
  $ 329,897     $ 329,897     $ 319,913     $ 329,897     $ 272,553  
 
Holdings may redeem the junior subordinated debt securities before their maturity at 100% of their principal amount plus accrued interest as of the date of redemption.  The securities may be redeemed, in whole or in part, on one or more occasions at any time on or after March 30, 2009; or at any time, in whole, but not in part, within 90 days of the occurrence and continuation of a determination that the Trust may become subject to tax or the Investment Company Act.

Interest expense incurred in connection with these junior subordinated debt securities is as follows for the periods indicated:
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(Dollars in thousands)
 
2010
   
2009
   
2010
   
2009
 
Interest expense incurred
  $ 5,113     $ 5,113     $ 15,340     $ 15,340  
 
Holdings considers that the mechanisms and obligations relating to the trust preferred securities, taken together, constitute a full and unconditional guarantee by Holdings of Capital Trust II’s payment obligations with respect to their trust preferred securities.

Capital Trust II will redeem all of the outstanding trust preferred securities when the junior subordinated debt securities are paid at maturity on March 29, 2034.  The Company may elect to redeem the junior subordinated debt securities, in whole or in part, at any time on or after March 30, 2009.  If such an early redemption occurs, the outstanding trust preferred securities would also be proportionately redeemed.

There are certain regulatory and contractual restrictions on the ability of Holdings’ operating subsidiaries to transfer funds to Holdings in the form of cash dividends, loans or advances.  The insurance laws of the State of Delaware, where Holdings’ direct insurance subsidiaries are domiciled, require regulatory approval before those subsidiaries can pay dividends or make loans or advances to Holdings that exceed certain statutory thresholds.  In addition, the terms of Holdings Credit Facility (discussed in Note 10) require Everest Re, Holdings’ principal insurance subsidiary, to maintain a certain statutory surplus level as measured at the end


of each fiscal year.  At December 31, 2009, $2,351,990 thousand of the $3,271,079 thousand in net assets of Holdings’ consolidated subsidiaries were subject to the foregoing regulatory restrictions.

15.  SEGMENT REPORTING

The Company, through its subsidiaries, operates in five segments:  U.S. Reinsurance, U.S. Insurance, Specialty Underwriting, International and Bermuda.  The U.S. Reinsurance operation writes property and casualty reinsurance, on both a treaty and facultative basis, through reinsurance brokers, as well as directly with ceding companies within the U.S.  The U.S. Insurance operation writes property and casualty insurance primarily through general agents, brokers and surplus lines brokers within the U.S.  The Specialty Underwriting operation writes accident and health (“A&H”), marine, aviation and surety business within the U.S. and worldwide through brokers and directly with ceding companies.  The International operation writes non-U.S. property and casualty reinsurance through Everest Re’s branches in Canada and Singapore and offices in Miami and New Jersey. The Bermuda operation provides reinsurance and insurance to worldwide property and casualty markets and reinsurance to life insurers through brokers and directly with ceding companies from its Bermuda office and reinsurance to the United Kingdom and European markets through its UK branch and the Company’s Ireland location.

These segments are managed independently, but conform with corporate guidelines with respect to pricing, risk management, control of aggregate catastrophe exposures, capital, investments and support operations.  Management generally monitors and evaluates the financial performance of these operating segments based upon their underwriting results.

Underwriting results include earned premium less losses and loss adjustment expenses (“LAE”) incurred, commission and brokerage expenses and other underwriting expenses.  Underwriting results are measured using ratios, in particular loss, commission and brokerage and other underwriting expense ratios, which, respectively, divide incurred losses, commissions and brokerage and other underwriting expenses by premiums earned.  The Company utilizes inter-affiliate reinsurance, although such reinsurance does not materially impact segment results, as business is generally reported within the segment in which the business was first produced.

The Company does not maintain separate balance sheet data for its operating segments.  Accordingly, the Company does not review and evaluate the financial results of its operating segments based upon balance sheet data.

The following tables present the underwriting results for the operating segments for the periods indicated:
 
   
Three Months Ended
   
Nine Months Ended
 
U.S. Reinsurance
 
September 30,
   
September 30,
 
(Dollars in thousands)
 
2010
   
2009
   
2010
   
2009
 
Gross written premiums
  $ 372,358     $ 345,567     $ 884,581     $ 876,049  
Net written premiums
    372,579       346,306       885,404       873,112  
                                 
Premiums earned
  $ 289,472     $ 276,696     $ 813,098     $ 835,744  
Incurred losses and LAE
    158,655       120,980       458,658       417,670  
Commission and brokerage
    70,586       53,847       198,966       189,259  
Other underwriting expenses
    8,933       9,665       26,116       25,250  
Underwriting gain (loss)
  $ 51,298     $ 92,204     $ 129,358     $ 203,565  


   
Three Months Ended
   
Nine Months Ended
 
U.S. Insurance
 
September 30,
   
September 30,
 
(Dollars in thousands)
 
2010
   
2009
   
2010
   
2009
 
Gross written premiums
  $ 211,632     $ 230,491     $ 644,810     $ 648,719  
Net written premiums
    138,426       160,499       456,943       511,994  
                                 
Premiums earned
  $ 155,770     $ 168,402     $ 472,916     $ 503,039  
Incurred losses and LAE
    125,222       130,784       355,874       367,131  
Commission and brokerage
    29,404       34,591       90,486       99,290  
Other underwriting expenses
    19,479       19,982       52,335       56,415  
Underwriting gain (loss)
  $ (18,335 )   $ (16,955 )   $ (25,779 )   $ (19,797 )



   
Three Months Ended
   
Nine Months Ended
 
Specialty Underwriting
 
September 30,
   
September 30,
 
(Dollars in thousands)
 
2010
   
2009
   
2010
   
2009
 
Gross written premiums
  $ 65,929     $ 67,615     $ 197,671     $ 183,726  
Net written premiums
    64,827       66,909       194,407       180,622  
                                 
Premiums earned
  $ 66,843     $ 66,839     $ 203,081     $ 184,889  
Incurred losses and LAE
    46,755       48,153       154,928       130,869  
Commission and brokerage
    16,284       19,340       49,882       52,835  
Other underwriting expenses
    2,143       2,383       6,501       6,227  
Underwriting gain (loss)
  $ 1,661     $ (3,037 )   $ (8,230 )   $ (5,042 )

 
   
Three Months Ended
   
Nine Months Ended
 
International
 
September 30,
   
September 30,
 
(Dollars in thousands)
 
2010
   
2009
   
2010
   
2009
 
Gross written premiums
  $ 323,741     $ 272,603     $ 906,089     $ 797,606  
Net written premiums
    319,405       270,891       901,677       794,520  
                                 
Premiums earned
  $ 301,267     $ 262,215     $ 869,831     $ 771,070  
Incurred losses and LAE
    223,360       165,370       875,077       454,249  
Commission and brokerage
    78,574       68,341       221,355       197,643  
Other underwriting expenses
    6,675       6,159       20,363       16,463  
Underwriting gain (loss)
  $ (7,342 )   $ 22,345     $ (246,964 )   $ 102,715  

 
   
Three Months Ended
   
Nine Months Ended
 
Bermuda
 
September 30,
   
September 30,
 
(Dollars in thousands)
 
2010
   
2009
   
2010
   
2009
 
Gross written premiums
  $ 189,931     $ 212,564     $ 564,968     $ 594,346  
Net written premiums
    189,988       212,649       565,017       594,498  
                                 
Premiums earned
  $ 183,913     $ 201,228     $ 555,540     $ 569,836  
Incurred losses and LAE
    120,795       121,960       381,054       354,018  
Commission and brokerage
    42,625       53,138       125,939       145,482  
Other underwriting expenses
    7,107       6,315       19,713       17,474  
Underwriting gain (loss)
  $ 13,386     $ 19,815     $ 28,834     $ 52,862  



The following table reconciles the underwriting results for the operating segments to income before taxes as reported in the consolidated statements of operations and comprehensive income (loss) for the periods indicated:
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(Dollars in thousands)
 
2010
   
2009
   
2010
   
2009
 
Underwriting gain (loss)
  $ 40,668     $ 114,372     $ (122,781 )   $ 334,303  
Net investment income
    141,368       165,387       468,598       401,350  
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 )
Corporate expenses
    (3,917 )     (4,433 )     (12,379 )     (12,580 )
Interest, fee and bond issue cost amortization expense
    (13,138 )     (17,376 )     (42,796 )     (54,634 )
Other income (expense)
    1,714       (13,204 )     14,851       (15,995 )
Income (loss) before taxes
  $ 204,438     $ 273,691     $ 355,011     $ 719,633  
 
The Company produces business in the U.S., Bermuda and internationally.  The net income deriving from and assets residing in the individual foreign countries in which the Company writes business are not identifiable in the Company’s financial records.  Based on gross written premium, the table below presents the largest country, other than the U.S., in which the Company writes business, for the periods indicated:
 
   
Three Months Ended
   
Nine Months Ended
 
(Dollars in thousands)
 
September 30, 2010
   
September 30, 2010
 
United Kingdom
  $ 157,199     $ 397,117  
 
No other country represented more than 5% of the Company’s revenues.

16.  SHARE-BASED COMPENSATION PLANS

There were no share-based compensation awards granted for the three months ended September 30, 2010.

17.  RETIREMENT BENEFITS

The Company maintains both qualified and non-qualified defined benefit pension plans and a retiree health plan for its U.S. employees employed prior to April 1, 2010.

Net periodic benefit cost for U.S. employees included the following components for the periods indicated:
 
Pension Benefits
 
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(Dollars in thousands)
 
2010
   
2009
   
2010
   
2009
 
Service cost
  $ 1,736     $ 1,504     $ 5,208     $ 4,511  
Interest cost
    1,763       1,597       5,289       4,789  
Expected return on plan assets
    (1,993 )     (1,537 )     (5,978 )     (4,609 )
Amortization of prior service cost
    12       12       37       37  
Amortization of net (income) loss
    617       915       1,850       2,747  
ASC 715 settlement charge
    -       1       2,241       805  
Net periodic benefit cost
  $ 2,135     $ 2,492     $ 8,647     $ 8,280  
                                 
Other Benefits
 
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(Dollars in thousands)
    2010       2009       2010       2009  
Service cost
  $ 254     $ 226     $ 762     $ 677  
Interest cost
    213       195       637       585  
Amortization of net (income) loss
    20       22       61       65  
Net periodic benefit cost
  $ 487     $ 443     $ 1,460     $ 1,327  
 


The Company contributions to the pension benefit plan were as follows for the periods indicated:
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(Dollars in thousands)
 
2010
   
2009
   
2010
   
2009
 
Company contributions
  $ -     $ 1,746     $ -     $ 5,237  
 
18.  RELATED-PARTY TRANSACTIONS

During the normal course of business, the Company, through its affiliates, engages in reinsurance and brokerage and commission business transactions with companies controlled by or affiliated with one or more of its outside directors.  Such transactions, individually and in the aggregate, are not material to the Company’s financial condition, results of operations and cash flows.

19.  INCOME TAXES
 
The Company uses a projected annual effective tax rate to calculate its quarterly tax expense in accordance with FASB guidance.  Under this methodology, when an interim quarter’s pre-tax income (loss) varies significantly from a full year’s income (loss) projection, the tax impact resulting from the income (loss) variance is effectively spread between the impacted quarter and the remaining quarters of the year, except for discrete items impacting an individual quarter.
 
In 2007, the Internal Revenue Service completed its examination of the Company’s consolidated U.S. tax returns for 2003 and 2004 and issued an examination report proposing various adjustments.  The Company submitted a formal protest including requests for affirmative adjustments and has been participating in the appeals process.  This appeal process may result in recognition of the Company’s related unrecognized tax benefits within the next 12 months, which will positively affect the Company’s results of operations in the period of recognition.
 
20.  SUBSEQUENT EVENTS

The Company has evaluated known recognized and non-recognized subsequent events.  The Company does not have any subsequent events to report.



ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Industry Conditions.
The worldwide reinsurance and insurance businesses are highly competitive, as well as cyclical by product and market.  As such, financial results tend to fluctuate with periods of constrained availability, high rates and strong profits followed by periods of abundant capacity, low rates and constrained profitability.  Competition in the types of reinsurance and insurance business that we underwrite is based on many factors, including the perceived overall financial strength of the reinsurer or insurer, ratings of the reinsurer or insurer by A.M. Best and/or Standard & Poor’s, underwriting expertise, the jurisdictions where the reinsurer or insurer is licensed or otherwise authorized, capacity and coverages offered, premiums charged, other terms and conditions of the reinsurance and insurance business offered, services offered, speed of claims payment and reputation and experience in lines written.  Furthermore, the market impact from these competitive factors related to reinsurance and insurance is generally not consistent across lines of business, domestic and international geographical areas and distribution channels.

We compete in the U.S., Bermuda and international reinsurance and insurance markets with numerous global competitors.  Our competitors include independent reinsurance and insurance companies, subsidiaries or affiliates of established worldwide insurance companies, reinsurance departments of certain insurance companies and domestic and international underwriting operations, including underwriting syndicates at Lloyd’s.  Some of these competitors have greater financial resources than we do and have established long term and continuing business relationships, which can be a significant competitive advantage.  In addition, the lack of strong barriers to entry into the reinsurance business and the potential for securitization of reinsurance and insurance risks through capital markets provide additional sources of potential reinsurance and insurance capacity and competition.

Starting in the latter part of 2007 and continuing into 2010, there has been a significant slowdown in the global economy, which has negatively impacted the financial resources of the industry.  Excessive availability and use of credit, particularly by individuals, led to increased defaults on sub-prime mortgages in the U.S. and elsewhere, falling values for houses and many commodities and contracting consumer spending.  The significant increase in default rates negatively impacted the value of asset-backed securities held by both foreign and domestic institutions.  The defaults have led to a corresponding increase in foreclosures, which have driven down housing values, resulting in additional losses on asset-backed securities.  During the third and fourth quarters of 2008, credit markets deteriorated dramatically, evidenced by widening credit spreads and dramatically reduced availability of credit.  Many financial institutions, including some insurance entities, experienced liquidity crises due to immediate demands for funds for withdrawals or collateral, combined with falling asset values and their inability to sell assets to meet the increased demands.  As a result, several financial institutions failed or were acquired at distressed prices, while others received loans from the U.S. government to continue operations.  The liquidity crisis significantly increased the spreads on fixed maturity securities and, at the same time, had a dramatic and negative impact on the stock markets around the world.  The combination of losses on securities from failed or impaired companies combined with the decline in values of fixed maturity and equity securities resulted in significant declines in the capital bases of most insurance and reinsurance companies.  While there was significant improvement in the financial markets during 2009 and into 2010, concerns about interest rates, deflation and sovereign debt levels have hindered financial market recoveries.  It is too early to predict the timing and extent of the impact these financial market fluctuations will have on insurance and reinsurance market conditions.

Worldwide insurance and reinsurance market conditions continued to be very competitive, particularly in the casualty lines of business.  Generally, there was ample insurance and reinsurance capacity relative to demand.  We noted, however, that in many markets and lines during 2009 and into 2010, the rates of decline have slowed, pricing in some segments was relatively flat and there was upward movement in some others, particularly property catastrophe coverage in Latin America and Australia where there have been significant losses.  Competition and its effect on rates, terms and conditions vary widely by market and coverage yet continues to be most prevalent in the U.S. casualty insurance and reinsurance markets.  The U.S. insurance markets in which we participate were extremely competitive as well.



Rates in the international markets have generally been stable and we have seen some increases, particularly for catastrophe exposed business.  We have grown our business in the Middle East, Latin America and Asia.  We are expanding our international reach with our new office in Brazil to capitalize on the recently expanded opportunity for professional reinsurers in that market and on the economic growth expected for Brazil in the future.

Overall, we believe that current marketplace conditions offer pockets of profit opportunities for us given our strong ratings, distribution system, reputation and expertise.  We continue to employ our strategy of targeting business that offers the greatest profit potential, while maintaining balance and diversification in our overall portfolio.



Financial Summary.
We monitor and evaluate our overall performance based upon financial results.  The following table displays a summary of the consolidated net income (loss), ratios and shareholders’ equity for the periods indicated.


   
Three Months Ended
 
Percentage
 
Nine Months Ended
 
Percentage
   
September 30,
 
Increase/
 
September 30,
 
Increase/
(Dollars in millions)
 
2010
 
2009
 
(Decrease)
 
2010
 
2009
 
(Decrease)
Gross written premiums
  $ 1,163.6     $ 1,128.8       3.1 %   $ 3,198.1     $ 3,100.4       3.2 %
Net written premiums
    1,085.2       1,057.3       2.6 %     3,003.4       2,954.7       1.6 %
                                                 
REVENUES:
                                               
Premiums earned
  $ 997.3     $ 975.4       2.2 %   $ 2,914.5     $ 2,864.6       1.7 %
Net investment income
    141.4       165.4       -14.5 %     468.6       401.4       16.8 %
Net realized capital gains (losses)
    38.3       31.1       23.3 %     69.3       (10.6 )  
NM
Realized gain on debt repurchase
    -       -    
NA
    -       78.3    
NA
Net derivative gain (loss)
    (0.6 )     (2.1 )     -74.0 %     (19.8 )     (0.5 )  
NM
Other income (expense)
    1.7       (13.2 )     -113.0 %     14.9       (16.0 )     -192.8 %
Total revenues
    1,178.1       1,156.5       1.9 %     3,447.4       3,317.1       3.9 %
                                                 
CLAIMS AND EXPENSES:
                                               
Incurred losses and loss adjustment expenses
    674.8       587.2       14.9 %     2,225.6       1,723.9       29.1 %
Commission, brokerage, taxes and fees
    237.5       229.3       3.6 %     686.6       684.5       0.3 %
Other underwriting expenses
    44.3       44.5       -0.4 %     125.0       121.8       2.6 %
Corporate expenses
    3.9       4.4       -11.7 %     12.4       12.6       -1.6 %
Interest, fees and bond issue cost amortization expense
    13.1       17.4       -24.4 %     42.8       54.6       -21.7 %
Total claims and expenses
    973.7       882.8       10.3 %     3,092.4       2,597.5       19.1 %
                                                 
INCOME (LOSS) BEFORE TAXES
    204.4       273.7       -25.3 %     355.0       719.6       -50.7 %
Income tax expense (benefit)
    30.2       45.1       -32.9 %     46.8       109.9       -57.4 %
NET INCOME (LOSS)
  $ 174.2     $ 228.6       -23.8 %   $ 308.2     $ 609.8       -49.5 %
                                                 
                   
Point
                 
Point
RATIOS:
                 
Change
                 
Change
Loss ratio
    67.7 %     60.2 %     7.5       76.4 %     60.2 %     16.2  
Commission and brokerage ratio
    23.8 %     23.5 %     0.3       23.6 %     23.9 %     (0.3 )
Other underwriting expense ratio
    4.4 %     4.6 %     (0.2 )     4.2 %     4.2 %     -  
Combined ratio
    95.9 %     88.3 %     7.6       104.2 %     88.3 %     15.9  
                                                 
                           
At
 
At
 
Percentage
 
                           
September 30,
 
December 31,
 
Increase/
 
(Dollars in millions, except per share amounts)
                            2010     2009  
(Decrease)
 
Balance sheet data:
                                               
Total investments and cash
                          $ 15,487.5     $ 14,918.8       3.8 %
Total assets
                            18,549.9       18,001.3       3.0 %
Loss and loss adjustment expense reserves
                            9,332.0       8,937.9       4.4 %
Total debt
                            901.0       1,018.0       -11.5 %
Total liabilities
                            12,268.3       11,899.6       3.1 %
Shareholders' equity
                            6,281.6       6,101.7       2.9 %
Book value per share
                            114.16       102.87          
                                                 
(NA, not applicable)
                                               
(NM, not meaningful)
                                               
(Some amounts may not reconcile due to rounding.)
                                               
 
Revenues.
Premiums.  Gross written premiums increased by $34.8 million, or 3.1%, for the three months ended September 30, 2010, compared to the three months ended September 30, 2009, reflecting an increase of $53.6 million in our reinsurance business, partially offset by an $18.9 million decrease in our insurance business.  Gross written premiums increased by $97.7 million, or 3.2%, for the nine months ended September 30, 2010, compared to the nine months ended September 30, 2009, reflecting a $101.6 million increase in our reinsurance business, partially offset by a $3.9 million decrease in our insurance business.  The increase in reinsurance premiums were primarily the result of increased writings in our treaty property and international treaty lines of business.  The decrease in insurance premiums were primarily the result of loss of business on terminated programs, lower premiums on a few of the existing programs and lower audit premium accruals on the workers’ compensation line of business.


Net written premiums increased $28.0 million, or 2.6%, for the three months ended September 30, 2010 compared to the three months ended September 30, 2009, and increased $48.7 million, or 1.6%, for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009.  The increase in net written premiums was less proportionately than the increase in gross written premiums as a result of increased reinsurance on the newer insurance program business as well as increased cessions on an existing insurance program.  Premiums earned increased $21.9 million, or 2.2%, for the three months ended September 30, 2010, compared to the three months ended September 30, 2009, and increased $49.9 million, or 1.7%, for the nine months ended September 30, 2010, compared to the nine months ended September 30, 2009.  The change in net premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period, whereas written premiums are recorded at the initiation of the coverage period.

Net Investment Income.  Net investment income decreased $24.0 million, or 14.5%, for the three months ended September 30, 2010, primarily as a result of net investment losses from our limited partnerships of $1.1 million compared to net investment gains of $23.5 million for the three months ended September 30, 2009.  In contrast, net investment income increased $67.2 million, or 16.8%, for the nine months ended September 30, 2010, primarily as a result of net investment gains from our limited partnerships of $30.4 million compared with net investment losses of $29.2 million for the comparable period in 2009.  Net pre-tax investment income, as a percentage of average invested assets, was 3.9% for the three months ended September 30, 2010, compared to 4.6% for the three months ended September 30, 2009 and up at 4.3% for the nine months ended September 30, 2010 compared to 3.7% for the nine months ended September 30, 2009.  The variances in these yields were primarily the result of fluctuations in our limited partnership income.

Net Realized Capital Gains (Losses).  Net realized capital gains were $38.3 million for the three months ended September 30, 2010 and were comprised of $42.2 million from gains in fair value re-measurements, which were partially offset by $2.9 million of other-than-temporary impairments and $1.0 million of net realized capital losses from sales on our fixed maturity and equity securities.  Net realized capital gains were $31.1 million for the three months ended September 30, 2009.  Of the $31.1 million, $28.9 million was from gains in fair value re-measurements and $2.3 million of net realized capital gains from sales on our fixed maturity and equity securities.

Net realized capital gains were $69.3 million for the nine months ended September 30, 2010.  Of the $69.3 million, $49.2 million was from net realized capital gains from sales on our fixed maturity and equity securities and $23.0 million of gains in fair value re-measurements, which were partially offset by $2.9 million of other-than-temporary impairments.  Net realized capital losses were $10.6 million for the nine months ended September 30, 2009 and were comprised of $28.6 million from net realized capital losses from the sale on our fixed maturity and equity securities and $13.2 million of other-than-temporary impairments, which were partially offset by $31.3 million of gains in fair value re-measurements.

Realized Gain on Debt Repurchase.  On March 19, 2009, we commenced a cash tender offer for any and all of the 6.60% fixed to floating rate long term subordinated notes due 2067.  Upon expiration of the tender offer, we had reduced our outstanding debt by $161.4 million, which resulted in a pre-tax gain on debt repurchase of $78.3 million.

Net Derivative Gain (Loss).  In 2005 and prior, we sold seven equity index put option contracts, which are outstanding.  These contracts meet the definition of a derivative in accordance with FASB guidance and as such, are fair valued each quarter with the change recorded as net derivative gain or loss in the consolidated statements of operations and comprehensive income (loss).  As a result of these adjustments in value, we recognized net derivative losses of $0.6 million and $19.8 million for the three and nine months ended September 30, 2010, respectively, and net derivative losses of $2.1 million and $0.5 million for the three and nine months ended September 30, 2009, respectively.  The change in the fair value of these equity index put option contracts is indicative of the change in the financial markets over the same periods.



Other Income (Expense).  We recorded other income of $1.7 million and $14.9 million for the three and nine months ended September 30, 2010, respectively, and other expense of $13.2 million and $16.0 million for the three and nine months ended September 30, 2009, respectively.  The changes were primarily the result of fluctuations in foreign currency exchange rates for the corresponding periods.

Claims and Expenses.
Incurred Losses and Loss Adjustment Expenses.  The following tables present our incurred losses and loss adjustment expenses (“LAE”) for the periods indicated.
 
   
Three Months Ended September 30,
   
Current
   
Ratio %/
 
Prior
   
Ratio %/
 
Total
   
Ratio %/
(Dollars in millions)
 
Year
   
Pt Change
 
Years
   
Pt Change
 
Incurred
   
Pt Change
2010
                                         
Attritional (a)
  $ 605.9       60.8 %     $ (20.8 )     -2.1 %     $ 585.1       58.7 %  
Catastrophes (b)
    91.6       9.2 %       (2.0 )     -0.2 %       89.7       9.0 %  
A&E
    -       0.0 %       -       0.0 %       -       0.0 %  
Total
  $ 697.5       69.9 %     $ (22.8 )     -2.3 %     $ 674.8       67.7 %  
                                                       
2009
                                                     
Attritional (a)
  $ 554.0       56.8 %     $ 8.7       0.9 %     $ 562.7       57.7 %  
Catastrophes
    20.1       2.1 %       4.5       0.5 %       24.5       2.5 %  
A&E
    -       0.0 %       -       0.0 %       -       0.0 %  
Total
  $ 574.1       58.9 %     $ 13.2       1.3 %     $ 587.2       60.2 %  
                                                       
Variance 2010/2009
                                                     
Attritional (a)
  $ 51.9       4.0  
pts
  $ (29.5 )     (3.0 )
pts
  $ 22.4       1.0  
pts
Catastrophes
    71.5       7.1  
pts
    (6.5 )     (0.7 )
pts
    65.2       6.5  
pts
A&E
    -       -  
pts
    -       -  
pts
    -       -  
pts
Total
  $ 123.4       11.0  
pts
  $ (36.0 )     (3.6 )
pts
  $ 87.6       7.5  
pts
 

   
Nine Months Ended September 30,
   
Current
   
Ratio %/
 
Prior
   
Ratio %/
 
Total
   
Ratio %/
(Dollars in millions)
 
Year
   
Pt Change
 
Years
   
Pt Change
 
Incurred
   
Pt Change
2010
                                         
Attritional (a)
  $ 1,741.6       59.8 %     $ (29.8 )     -1.0 %     $ 1,711.8       58.7 %  
Catastrophes (b)
    527.1       18.1 %       (13.3 )     -0.5 %       513.8       17.6 %  
A&E
    -       0.0 %       -       0.0 %       -       0.0 %  
Total
  $ 2,268.7       77.8 %     $ (43.1 )     -1.5 %     $ 2,225.6       76.4 %  
                                                       
2009
                                                     
Attritional (a)
  $ 1,625.4       56.7 %     $ 32.6       1.1 %     $ 1,658.0       57.9 %  
Catastrophes
    56.0       2.0 %       9.9       0.4 %       65.9       2.3 %  
A&E
    -       0.0 %       -       0.0 %       -       0.0 %  
Total
  $ 1,681.3       58.7 %     $ 42.6       1.5 %     $ 1,723.9       60.2 %  
                                                       
Variance 2010/2009
                                                     
Attritional (a)
  $ 116.2       3.1  
pts
  $ (62.4 )     (2.1 )
pts
  $ 53.8       0.8  
pts
Catastrophes
    471.1       16.1  
pts
    (23.2 )     (0.9 )
pts
    447.9       15.3  
pts
A&E
    -       -  
pts
    -       -  
pts
    -       -  
pts
Total
  $ 587.4       19.1  
pts
  $ (85.7 )     (3.0 )
pts
  $ 501.7       16.2  
pts
                                                       
(a)  Attritional losses exclude catastrophe and Asbestos and Environmental ("A&E").
                                   
(b)  Effective with the 2010 reporting period, a catastrophe is a property event with expected reported losses of at least $10.0 million.
                 
  All prior periods reflect a catastrophe as a property event with expected reported losses of at least $5.0 million.
                     
(Some amounts may not reconcile due to rounding.)
                                               
 
Incurred losses and LAE increased by $87.6 million, or 14.9%, for the three months ended September 30, 2010 compared to the same period in 2009.  Of the $87.6 million increase, current year catastrophe losses increased $71.5 million, or 7.1 points, period over period, primarily due to the New Zealand earthquake and the Canadian hailstorm.


Incurred losses and LAE increased by $501.7 million, or 29.1%, for the nine months ended September 30, 2010 compared to the same period in 2009.  Of the $501.7 million increase, current year catastrophe losses increased $471.1 million, or 16.1 points, period over period, primarily due to the Chilean earthquake, New Zealand earthquake, Australian hailstorms and the Canadian hailstorm.

Commission, Brokerage, Taxes and Fees.  Commission, brokerage, taxes and fees increased by $8.2 million, or 3.6%, for the three months ended September 30, 2010 compared to the same period in 2009, and by $2.1 million, or 0.3%, for the nine months ended September 30, 2010 compared to the same period in 2009.  These increases were primarily the result of the changes in the mix of business and the increase in premiums earned.

Other Underwriting Expenses.  Other underwriting expenses were $44.3 million and $44.5 million for the three months ended September 30, 2010 and 2009, respectively, and $125.0 million and $121.8 million for the nine months ended September 30, 2010 and 2009, respectively.

Corporate Expenses.  Corporate expenses, which are expenses that are not allocated to segments, were $3.9 million and $4.4 million for the three months ended September 30, 2010 and 2009, respectively, and $12.4 million and $12.6 million for the nine months ended September 30, 2010 and 2009, respectively.  These expenses were previously included as underwriting expenses and therefore included in the other underwriting expense ratio.  Effective January 1, 2010, these expenses were removed from the calculation of the other underwriting expense ratio and prior periods were recalculated to conform.

Interest, Fees and Bond Issue Cost Amortization Expense.  Interest, fees and other bond amortization expense was $13.1 million and $17.4 million for the three months ended September 30, 2010 and 2009, respectively, and $42.8 million and $54.6 million for the nine months ended September 30, 2010 and 2009, respectively.  These decreases were primarily due to the combination of the repurchase of debt in March 2009 and the maturing of debt in 2010.

Income Tax Expense (Benefit).  We had income tax expense of $30.2 million and $46.8 million for the three and nine months ended September 30, 2010, respectively, and $45.1 million and $109.9 million for the three and nine months ended September 30, 2009, respectively.  Our income tax is primarily a function of the statutory tax rates and corresponding pre-tax income in the jurisdictions where we operate, coupled with the impact from tax-preferenced investment income.  Variations in our effective tax rate generally result from changes in the relative levels of pre-tax income among jurisdictions with different tax rates.

Net Income (Loss).
Our net income was $174.2 million and $228.6 million for the three months ended September 30, 2010 and 2009, respectively, and $308.2 million and $609.8 million for the nine months ended September 30, 2010 and 2009, respectively.  These decreases were primarily driven by a few large catastrophe losses in 2010 compared to no similar catastrophe events in 2009 in addition to the other components discussed above.

Ratios.
Our combined ratio increased by 7.6 points to 95.9% for the three months ended September 30, 2010 compared to 88.3% for the three months ended September 30, 2009, and increased by 15.9 points to 104.2% for the nine months ended September 30, 2010 compared to 88.3% for the nine months ended September 30, 2009.  The loss ratio component increased 7.5 points and 16.2 points for the three and nine months ended September 30, 2010, respectively, over the same period last year, principally due to the increase in current year catastrophe losses as a result of the Chilean earthquake, New Zealand earthquake, Australian hailstorms and the Canadian hailstorm.   Both the other underwriting expense ratio component and the commission and brokerage ratio component remained relatively flat over the same periods last year.



Shareholders’ Equity.
Shareholders’ equity increased by $179.9 million to $6,281.6 million at September 30, 2010 from $6,101.7 million at December 31, 2009, principally as a result of $312.5 million of unrealized appreciation, net of tax, on investments, $308.2 million of net income and share-based compensation transactions of $13.4 million, partially offset by repurchases of 4.5 million common shares for $346.8 million, $82.4 million of shareholder dividends and $26.2 million of foreign currency translation adjustments.

Consolidated Investment Results

Net Investment Income.
Net investment income decreased by 14.5% to $141.4 million for the three months ended September 30, 2010 compared to $165.4 million for the three months ended September 30, 2009 and increased by 16.8% to $468.6 million for the nine months ended September 30, 2010 from $401.4 million for the nine months ended September 30, 2009.  The variances for the three and nine months, period over period, were primarily due to the changes in reported gains and losses from our limited partnership investments.  The losses for the nine months of 2009 included the results of 2008 fourth quarter losses from those limited partnerships that invested in non-public securities and were on a quarter reporting lag.

The following table shows the components of net investment income for the periods indicated.
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(Dollars in millions)
 
2010
   
2009
   
2010
   
2009
 
Fixed maturities
  $ 143.8     $ 145.4     $ 438.0     $ 434.4  
Equity securities
    2.7       0.8       8.1       2.2  
Short-term investments and cash
    0.4       0.6       -       5.9  
Other invested assets
                               
Limited partnerships
    (1.1 )     23.5       30.4       (29.2 )
Other
    0.2       (1.3 )     0.9       (0.3 )
Total gross investment income
    146.0       168.9       477.4       412.9  
Interest debited (credited) and other expense
    (4.6 )     (3.5 )     (8.8 )     (11.5 )
Total net investment income
  $ 141.4     $ 165.4     $ 468.6     $ 401.4  
                                 
(Some amounts may not reconcile due to rounding.)
                               
 
The following tables show a comparison of various investment yields for the periods indicated.
 
 
At
 
At
 
September 30,
 
December 31,
 
2010
 
2009
Imbedded pre-tax yield of cash and invested assets
4.1%
 
4.1%
Imbedded after-tax yield of cash and invested assets
3.7%
 
3.6%
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2010
 
2009
 
2010
 
2009
Annualized pre-tax yield on average cash and invested assets
3.9%
 
4.6%
 
4.3%
 
3.7%
Annualized after-tax yield on average cash and invested assets
3.4%
 
4.2%
 
3.8%
 
3.4%

 
Net Realized Capital Gains (Losses).
The following table presents the composition of our net realized capital gains (losses) for the periods indicated.
 
   
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Dollars in millions)
 
2010
 
2009
 
Variance
 
2010
 
2009
 
Variance
Gains (losses) from sales:
                                   
     Fixed maturity securities, market value
                                   
         Gains
  $ 4.1     $ 4.0     $ 0.1     $ 70.2     $ 12.0     $ 58.2  
         Losses
    (6.6 )     (11.4 )     4.8       (21.9 )     (55.6 )     33.7  
     Total
    (2.5 )     (7.4 )     4.9       48.3       (43.6 )     91.9  
                                                 
     Fixed maturity securities, fair value
                                               
         Gains
    0.5       0.3       0.2       0.8       0.6       0.2  
         Losses
    -       -       -       -       (0.1 )     0.1  
     Total
    0.5       0.2       0.3       0.8       0.4       0.4  
                                                 
     Equity securities, market value
                                               
         Gains
    -       8.1       (8.1 )     0.1       8.1       (8.0 )
         Losses
    -       -       -       -       -       -  
     Total
    -       8.1       (8.1 )     0.1       8.1       (8.0 )
                                                 
     Equity securities, fair value
                                               
         Gains
    1.0       1.3       (0.3 )     4.6       7.2       (2.6 )
         Losses
    (0.1 )     -       (0.1 )     (4.7 )     (0.7 )     (4.0 )
     Total
    0.9       1.3       (0.4 )     -       6.5       (6.5 )
                                                 
Total net realized capital gains (losses) from sales
                                               
         Gains
    5.6       13.8       (8.2 )     75.7       27.9       47.8  
         Losses
    (6.7 )     (11.4 )     4.7       (26.6 )     (56.4 )     29.8  
     Total
    (1.0 )     2.3       (3.4 )     49.2       (28.6 )     77.7  
                                                 
Other-than-temporary impairments:
    (2.9 )     -       (2.9 )     (2.9 )     (13.2 )     10.3  
                                                 
Gains (losses) from fair value adjustments:
                                               
     Fixed maturities, fair value
    3.3       5.8       (2.5 )     3.8       7.8       (4.0 )
     Equity securities, fair value
    38.9       23.0       15.9       19.3       23.4       (4.1 )
Total
    42.2       28.9       13.3       23.0       31.3       (8.3 )
                                                 
Total net realized capital gains (losses)
  $ 38.3     $ 31.1     $ 7.2     $ 69.3     $ (10.6 )   $ 79.9  
                                                 
(Some amounts may not reconcile due to rounding.)
                                               
 
Net realized capital gains were $38.3 million and $31.1 million for the three months ended September 30, 2010 and 2009, respectively.  We recorded $42.2 million and $28.9 million of gains due to fair value re-measurements on fixed maturity and equity securities, $2.9 million and $0.0 million of other-than-temporary impairments on fixed maturity securities and $1.0 million of net realized capital losses and $2.3 million of net realized capital gains from sales of fixed maturity and equity securities for the three months ended September 30, 2010 and 2009, respectively.

Net realized capital gains were $69.3 million and net realized capital losses were $10.6 million for the nine months ended September 30, 2010 and 2009, respectively.  We recorded $49.2 million of net realized capital gains and $28.6 million of net realized capital losses from sales of fixed maturity and equity securities, $23.0 million and $31.3 million of gains due to fair value re-measurements on fixed maturity and equity securities and $2.9 million and $13.2 million of other-than-temporary impairments on fixed maturity securities for the nine months ended September 30, 2010 and 2009, respectively.  The gains on the sales of fixed maturity securities were primarily the result of selling securities in foreign currencies, which will reduce our exposure to currency fluctuations in the future.


Segment Results.
Through our subsidiaries, we operate in five segments:  U.S. Reinsurance, U.S. Insurance, Specialty Underwriting, International and Bermuda.  The U.S. Reinsurance operation writes property and casualty reinsurance, on both a treaty and facultative basis, through reinsurance brokers, as well as directly with ceding companies within the U.S.  The U.S. Insurance operation writes property and casualty insurance primarily through general agents, brokers and surplus lines brokers within the U.S.  The Specialty Underwriting operation writes accident and health (“A&H”), marine, aviation and surety business within the U.S. and worldwide through brokers and directly with ceding companies.  The International operation writes non-U.S. property and casualty reinsurance through Everest Re’s branches in Canada and Singapore and offices in Miami and New Jersey.  The Bermuda operation provides reinsurance and insurance to worldwide property and casualty markets and reinsurance to life insurers through brokers and directly with ceding companies from its Bermuda office and reinsurance to the United Kingdom and European markets through its UK branch and the Company’s Ireland location.

These segments are managed independently, but conform with corporate guidelines with respect to pricing, risk management, control of aggregate catastrophe exposures, capital, investments and support operations.  Management generally monitors and evaluates the financial performance of these operating segments based upon their underwriting results.

Underwriting results include earned premium less losses and LAE incurred, commission and brokerage expenses and other underwriting expenses.  We measure our underwriting results using ratios, in particular loss, commission and brokerage and other underwriting expense ratios, which respectively, divide incurred losses, commissions and brokerage and other underwriting expenses by premiums earned.  We utilize inter-affiliate reinsurance, although such reinsurance does not materially impact segment results, as business is generally reported within the segment in which the business was first produced.

Our loss and LAE reserves are our best estimate of our ultimate liability for unpaid claims.  We re-evaluate our estimates on an ongoing basis, including all prior period reserves, taking into consideration all available information and, in particular, recently reported loss claim experience and trends related to prior periods.  Such re-evaluations are recorded in incurred losses in the period in which re-evaluation is made.

 
The following discusses the underwriting results for each of our segments for the periods indicated.

U.S. Reinsurance.
The following table presents the underwriting results and ratios for the U.S. Reinsurance segment for the periods indicated.
 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
(Dollars in millions)
 
2010
 
2009
 
Variance
 
% Change
 
2010
 
2009
 
Variance
 
% Change
Gross written premiums
  $ 372.4     $ 345.6     $ 26.8       7.8 %   $ 884.6     $ 876.0     $ 8.5       1.0 %
Net written premiums
    372.6       346.3       26.3       7.6 %     885.4       873.1       12.3       1.4 %
                                                                 
Premiums earned
  $ 289.5     $ 276.7     $ 12.8       4.6 %   $ 813.1     $ 835.7     $ (22.6 )     -2.7 %
Incurred losses and LAE
    158.7       121.0       37.7       31.1 %     458.7       417.7       41.0       9.8 %
Commission and brokerage
    70.6       53.8       16.7       31.1 %     199.0       189.3       9.7       5.1 %
Other underwriting expenses
    8.9       9.7       (0.7 )     -7.6 %     26.1       25.3       0.9       3.4 %
Underwriting gain (loss)
  $ 51.3     $ 92.2     $ (40.9 )     -44.4 %   $ 129.4     $ 203.6     $ (74.2 )     -36.5 %
                                                                 
                           
Point Chg
                         
Point Chg
Loss ratio
    54.8 %     43.7 %             11.1       56.4 %     50.0 %             6.4  
Commission and brokerage ratio
    24.4 %     19.5 %             4.9       24.5 %     22.6 %             1.9  
Other underwriting expense ratio
    3.1 %     3.5 %             (0.4 )     3.2 %     3.0 %             0.2  
Combined ratio
    82.3 %     66.7 %             15.6       84.1 %     75.6 %             8.5  
                                                                 
(Some amounts may not reconcile due to rounding.)
                                                               
 
Premiums. Gross written premiums increased by 7.8% to $372.4 million for the three months ended September 30, 2010 from $345.6 million for the three months ended September 30, 2009, primarily due to a $37.0 million (18.2%) increase in treaty property volume, partially offset by a $5.3 million (19.6%) decrease in the crop hail quota share treaties, $4.2 million (4.5%) decrease in U.S. treaty casualty volume and a $0.7 million (3.1%) decrease in facultative volume.  Net written premiums increased 7.6% to $372.6 million for the three months ended September 30, 2010 compared to $346.3 million for the three months ended September 30, 2009, in line with the increase in gross written premiums.  Premiums earned increased 4.6% to $289.5 million for the three months ended September 30, 2010 compared to $276.7 million for the three months ended September 30, 2009.  The change in premiums earned relative to net written premiums is the result of timing on proportional contracts where premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.

Gross written premiums increased by 1.0% to $884.6 million for the nine months ended September 30, 2010 from $876.0 million for the nine months ended September 30, 2009, primarily due to a $64.0 million (13.5%) increase in treaty property volume, partially offset by a $24.4 million (35.7%) decrease in the crop hail quota share treaties, a $17.6 million (24.6%) decrease in facultative volume and a $13.3 million (5.1%) decrease in U.S. treaty casualty volume.  Net written premiums increased 1.4% to $885.4 million for the nine months ended September 30, 2010 compared to $873.1 million for the nine months ended September 30, 2009.  Premiums earned decreased 2.7% to $813.1 million for the nine months ended September 30, 2010 compared to $835.7 million for the nine months ended September 30, 2009.  Variances for net written premiums and premiums earned for the nine months were driven by similar factors as those discussed above for the three months.



Incurred Losses and LAE. The following tables present the incurred losses and LAE for the U.S. Reinsurance segment for the periods indicated.
 
   
Three Months Ended September 30,
   
Current
   
Ratio %/
 
Prior
   
Ratio %/
 
Total
   
Ratio %/
(Dollars in millions)
 
Year
   
Pt Change
 
Years
   
Pt Change
 
Incurred
   
Pt Change
2010
                                         
Attritional
  $ 163.0       56.3 %     $ 1.1       0.4 %     $ 164.1       56.7 %  
Catastrophes
    (4.9 )     -1.7 %       (0.6 )     -0.2 %       (5.5 )     -1.9 %  
A&E
    -       0.0 %       -       0.0 %       -       0.0 %  
Total segment
  $ 158.1       54.6 %     $ 0.6       0.2 %     $ 158.7       54.8 %  
                                                       
2009
                                                     
Attritional
  $ 134.7       48.7 %     $ (16.2 )     -5.9 %     $ 118.5       42.8 %  
Catastrophes
    -       0.0 %       2.5       0.9 %       2.5       0.9 %  
A&E
    -       0.0 %       -       0.0 %       -       0.0 %  
Total segment
  $ 134.7       48.7 %     $ (13.8 )     -5.0 %     $ 121.0       43.7 %  
                                                       
Variance 2010/2009
                                                     
Attritional
  $ 28.3       7.6  
pts
  $ 17.3       6.3  
pts
  $ 45.6       13.9  
pts
Catastrophes
    (4.9 )     (1.7 )
pts
    (3.1 )     (1.1 )
pts
    (8.0 )     (2.8 )
pts
A&E
    -       -  
pts
    -       -  
pts
    -       -  
pts
Total segment
  $ 23.4       5.9  
pts
  $ 14.4       5.2  
pts
  $ 37.7       11.1  
pts
 

   
Nine Months Ended September 30,
   
Current
   
Ratio %/
 
Prior
   
Ratio %/
 
Total
   
Ratio %/
(Dollars in millions)
 
Year
   
Pt Change
 
Years
   
Pt Change
 
Incurred
   
Pt Change
2010
                                         
Attritional
  $ 433.7       53.3 %     $ 6.9       0.9 %     $ 440.7       54.2 %  
Catastrophes
    18.1       2.2 %       (0.1 )     0.0 %       18.0       2.2 %  
A&E
    -       0.0 %       -       0.0 %       -       0.0 %  
Total segment
  $ 451.8       55.6 %     $ 6.9       0.8 %     $ 458.7       56.4 %  
                                                       
2009
                                                     
Attritional
  $ 420.8       50.4 %     $ (3.7 )     -0.4 %     $ 417.1       49.9 %  
Catastrophes
    -       0.0 %       0.6       0.1 %       0.6       0.1 %  
A&E
    -       0.0 %       -       0.0 %       -       0.0 %  
Total segment
  $ 420.8       50.4 %     $ (3.1 )     -0.4 %     $ 417.7       50.0 %  
                                                       
Variance 2010/2009
                                                     
Attritional
  $ 12.9       2.9  
pts
  $ 10.6       1.3  
pts
  $ 23.6       4.3  
pts
Catastrophes
    18.1       2.2  
pts
    (0.7 )     (0.1 )
pts
    17.4       2.1  
pts
A&E
    -       -  
pts
    -       -  
pts
    -       -  
pts
Total segment
  $ 31.0       5.2  
pts
  $ 10.0       1.2  
pts
  $ 41.0       6.4  
pts
                                                       
(Some amounts may not reconcile due to rounding.)
                                               
 
Incurred losses were $37.7 million (11.1 points) higher at $158.7 million for the three months ended September 30, 2010 compared to $121.0 million for the three months ended September 30, 2009, primarily as a result of the $45.6 million increase in attritional losses due to the increase in current year treaty property expected loss ratios and a $17.3 million increase in prior year reserve development on treaty casualty business primarily due to favorable development in 2009, partially offset by an $8.0 million combined decrease in both current year and prior years catastrophe losses.

Incurred losses were $41.0 million (6.4 points) higher at $458.7 million for the nine months ended September 30, 2010 compared to $417.7 million for the nine months ended September 30, 2009, primarily as a result of the $23.6 million (4.3 points) increase in attritional losses, principally due to the increase in current year treaty property expected loss ratios, less favorable development on treaty casualty’s prior years losses and a $17.4 million (2.1 points) increase in catastrophe losses, due to the New Zealand earthquake and the Chilean earthquake.

 
Segment Expenses.  Commission and brokerage expenses increased by 31.1% to $70.6 million for the three months ended September 30, 2010 compared to $53.8 million for the three months ended September 30, 2009.  Commission and brokerage expenses increased by 5.1% to $199.0 million for the nine months ended September 30, 2010 compared to $189.3 million for the nine months ended September 30, 2009.  These increases were primarily due to an increase in commission on a large treaty property transaction and an increase in contingent commissions on treaty casualty business.

Segment other underwriting expenses for the three months ended September 30, 2010 decreased slightly to $8.9 million from $9.7 million for the three months ended September 30, 2009, and segment other underwriting expenses for the nine months ended September 30, 2010 increased slightly to $26.1 million from $25.3 million for the nine months ended September 30, 2009.

U.S. Insurance.
The following table presents the underwriting results and ratios for the U.S. Insurance segment for the periods indicated.
 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
(Dollars in millions)
 
2010
 
2009
 
Variance
 
% Change
 
2010
 
2009
 
Variance
 
% Change
Gross written premiums
  $ 211.6     $ 230.5     $ (18.9 )     -8.2 %   $ 644.8     $ 648.7     $ (3.9 )     -0.6 %
Net written premiums
    138.4       160.5       (22.1 )     -13.8 %     456.9       512.0       (55.1 )     -10.8 %
                                                                 
Premiums earned
  $ 155.8     $ 168.4     $ (12.6 )     -7.5 %   $ 472.9     $ 503.0     $ (30.1 )     -6.0 %
Incurred losses and LAE
    125.2       130.8       (5.6 )     -4.3 %     355.9       367.1       (11.3 )     -3.1 %
Commission and brokerage
    29.4       34.6       (5.2 )     -15.0 %     90.5       99.3       (8.8 )     -8.9 %
Other underwriting expenses
    19.5       20.0       (0.5 )     -2.5 %     52.3       56.4       (4.1 )     -7.2 %
Underwriting gain (loss)
  $ (18.3 )   $ (17.0 )   $ (1.4 )     8.1 %   $ (25.8 )   $ (19.8 )   $ (6.0 )     30.2 %
                                                                 
                           
Point Chg
                         
Point Chg
Loss ratio
    80.4 %     77.7 %             2.7       75.3 %     73.0 %             2.3  
Commission and brokerage ratio
    18.9 %     20.5 %             (1.6 )     19.1 %     19.7 %             (0.6 )
Other underwriting expense ratio
    12.5 %     11.9 %             0.6       11.1 %     11.2 %             (0.1 )
Combined ratio
    111.8 %     110.1 %             1.7       105.5 %     103.9 %             1.6  
                                                                 
(Some amounts may not reconcile due to rounding.)
                                                               
 
Premiums. Gross written premiums decreased by 8.2% to $211.6 million for the three months ended September 30, 2010 compared to $230.5 million for the three months ended September 30, 2009, as we continue to adjust our book of business in response to changing market conditions.  Net written premiums decreased by a larger percentage than the decline in gross written premiums due to increased cessions on the newer business and one older program.  Ceded premiums generally relate to specific reinsurance purchased and fluctuate based upon the level of premiums written in the individual reinsured programs.  Premiums earned decreased 7.5% to $155.8 million for the three months ended September 30, 2010 compared to $168.4 million for the three months ended September 30, 2009.  The change in premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.

Gross written premiums decreased by 0.6% to $644.8 million for the nine months ended September 30, 2010 compared to $648.7 million for the nine months ended September 30, 2009.  Net written premiums decreased by a larger percentage than the decline in gross written premiums due to increased cessions on some new programs and one older program.  Premiums earned decreased 6.0% to $472.9 million for the nine months ended September 30, 2010 compared to $503.0 million for the nine months ended September 30, 2009 due to timing as discussed above.
 

Incurred Losses and LAE. The following tables present the incurred losses and LAE for the U.S. Insurance segment for the periods indicated.
 
   
Three Months Ended September 30,
   
Current
   
Ratio %/
 
Prior
   
Ratio %/
 
Total
   
Ratio %/
(Dollars in millions)
 
Year
   
Pt Change
 
Years
   
Pt Change
 
Incurred
   
Pt Change
2010
                                         
Attritional
  $ 120.8       77.6 %     $ 4.4       2.8 %     $ 125.2       80.4 %  
Catastrophes
    -       0.0 %       -       0.0 %       -       0.0 %  
Total segment
  $ 120.8       77.6 %     $ 4.4       2.8 %     $ 125.2       80.4 %  
                                                       
2009
                                                     
Attritional
  $ 121.0       71.8 %     $ 9.8       5.8 %     $ 130.8       77.7 %  
Catastrophes
    -       0.0 %       -       0.0 %       -       0.0 %  
Total segment
  $ 121.0       71.8 %     $ 9.8       5.8 %     $ 130.8       77.7 %  
                                                       
Variance 2010/2009
                                                     
Attritional
  $ (0.2 )     5.8  
pts
  $ (5.4 )     (3.0 )
pts
  $ (5.6 )     2.7  
pts
Catastrophes
    -       -  
pts
    -       -  
pts
    -       -  
pts
Total segment
  $ (0.2 )     5.8  
pts
  $ (5.4 )     (3.0 )
pts
  $ (5.6 )     2.7  
pts
 

   
Nine Months Ended September 30,
   
Current
   
Ratio %/
 
Prior
   
Ratio %/
 
Total
   
Ratio %/
(Dollars in millions)
 
Year
   
Pt Change
 
Years
   
Pt Change
 
Incurred
   
Pt Change
2010
                                         
Attritional
  $ 349.3       73.9 %     $ 6.6       1.4 %     $ 355.9       75.3 %  
Catastrophes
    -       0.0 %       -       0.0 %       -       0.0 %  
Total segment
  $ 349.3       73.9 %     $ 6.6       1.4 %     $ 355.9       75.3 %  
                                                       
2009
                                                     
Attritional
  $ 356.8       70.9 %     $ 10.3       2.0 %     $ 367.1       73.0 %  
Catastrophes
    -       0.0 %       -       0.0 %       -       0.0 %  
Total segment
  $ 356.8       70.9 %     $ 10.3       2.0 %     $ 367.1       73.0 %  
                                                       
Variance 2010/2009
                                                     
Attritional
  $ (7.5 )     3.0  
pts
  $ (3.7 )     (0.6 )
pts
  $ (11.2 )     2.3  
pts
Catastrophes
    -       -  
pts
    -       -  
pts
    -       -  
pts
Total segment
  $ (7.5 )     3.0  
pts
  $ (3.7 )     (0.6 )
pts
  $ (11.2 )     2.3  
pts
                                                       
(Some amounts may not reconcile due to rounding.)
                                               
 
Incurred losses and LAE decreased by 4.3% to $125.2 million for the three months ended September 30, 2010 compared to $130.8 million for the three months ended September 30, 2009.  The current year attritional loss decrease was due to a decrease in premiums earned, partially offset by an increase in the current year attritional losses for California workers’ compensation business.  In addition, prior years reserve development decreased period over period.

Incurred losses and LAE decreased by 3.1% to $355.9 million for the nine months ended September 30, 2010 compared to $367.1 million for the nine months ended September 30, 2009.  The decrease was due to similar factors as discussed for the three month comparison above.

Segment Expenses. Commission and brokerage decreased by 15.0% to $29.4 million for the three months ended September 30, 2010 compared to $34.6 million for the three months ended September 30, 2009.  Commission and brokerage decreased by 8.9% to $90.5 million for the nine months ended September 30, 2010 compared to $99.3 million for the nine months ended September 30, 2009.  These decreases were primarily the result of a decrease in net earned premiums in conjunction with the impact of additional reinsurance ceded and changes in the mix of business.


Segment other underwriting expenses for the three months ended September 30, 2010 decreased to $19.5 million compared to $20.0 million for the three months ended September 30, 2009.  Segment other underwriting expenses for the nine months ended September 30, 2010 decreased to $52.3 million compared to $56.4 million for the nine months ended September 30, 2009. These decreases were the result of management’s direct actions to reduce operating expenses.

Specialty Underwriting.
The following table presents the underwriting results and ratios for the Specialty Underwriting segment for the periods indicated.
 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
(Dollars in millions)
 
2010
 
2009
 
Variance
 
% Change
 
2010
 
2009
 
Variance
 
% Change
Gross written premiums
  $ 65.9     $ 67.6     $ (1.7 )     -2.5 %   $ 197.7     $ 183.7     $ 13.9       7.6 %
Net written premiums
    64.8       66.9       (2.1 )     -3.1 %     194.4       180.6       13.8       7.6 %
                                                                 
Premiums earned
  $ 66.8     $ 66.8     $ -       0.0 %   $ 203.1     $ 184.9     $ 18.2       9.8 %
Incurred losses and LAE
    46.8       48.2       (1.4 )     -2.9 %     154.9       130.9       24.1       18.4 %
Commission and brokerage
    16.3       19.3       (3.1 )     -15.8 %     49.9       52.8       (3.0 )     -5.6 %
Other underwriting expenses
    2.1       2.4       (0.2 )     -10.1 %     6.5       6.2       0.3       4.4 %
Underwriting gain (loss)
  $ 1.7     $ (3.0 )   $ 4.7       -154.7 %   $ (8.2 )   $ (5.0 )   $ (3.2 )     63.2 %
                                                                 
                           
Point Chg
                         
Point Chg
Loss ratio
    69.9 %     72.0 %             (2.1 )     76.3 %     70.8 %             5.5  
Commission and brokerage ratio
    24.4 %     28.9 %             (4.5 )     24.6 %     28.6 %             (4.0 )
Other underwriting expense ratio
    3.2 %     3.6 %             (0.4 )     3.2 %     3.3 %             (0.1 )
Combined ratio
    97.5 %     104.5 %             (7.0 )     104.1 %     102.7 %             1.4  
                                                                 
(Some amounts may not reconcile due to rounding.)
                                                               
 
Premiums. Gross written premiums decreased by 2.5% to $65.9 million for the three months ended September 30, 2010 compared to $67.6 million for the three months ended September 30, 2009, primarily due to a $6.5 million and $5.8 million decrease in marine and aviation business, respectively, partially offset by a $10.2 million increase in A&H business, attributable to travel reinsurance and medical stop loss business.  Net written premiums decreased 3.1% to $64.8 million for the three months ended September 30, 2010 compared to $66.9 million for the three months ended September 30, 2009, in line with the decrease in gross writings.  Premiums earned remained flat at $66.8 million for the three months ended September 30, 2010 and 2009.  The change in premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.

Gross written premiums increased by 7.6% to $197.7 million for the nine months ended September 30, 2010 compared to $183.7 million for the nine months ended September 30, 2009, primarily due to an increase in A&H business, for travel reinsurance and medical stop loss business of $29.0 million, partially offset by a net decrease in marine and aviation business of $14.2 million.  Correspondingly, net written premiums increased 7.6% to $194.4 million for the nine months ended September 30, 2010 compared to $180.6 million for the nine months ended September 30, 2009.  Premiums earned increased 9.8% to $203.1 million for the nine months ended September 30, 2010 compared to $184.9 million for the nine months ended September 30, 2009, relatively consistent with the increase in net written premiums.


Incurred Losses and LAE.  The following tables present the incurred losses and LAE for the Specialty Underwriting segment for the periods indicated.
 
   
Three Months Ended September 30,
   
Current
   
Ratio %/
 
Prior
   
Ratio %/
 
Total
   
Ratio %/
(Dollars in millions)
 
Year
   
Pt Change
 
Years
   
Pt Change
 
Incurred
   
Pt Change
2010
                                         
Attritional
  $ 46.0       68.7 %     $ -       0.0 %     $ 46.0       68.7 %  
Catastrophes
    -       0.0 %       0.8       1.2 %       0.8       1.2 %  
Total segment
  $ 46.0       68.7 %     $ 0.8       1.2 %     $ 46.8       69.9 %  
                                                       
2009
                                                     
Attritional
  $ 46.4       69.5 %     $ 2.5       3.7 %     $ 48.9       73.2 %  
Catastrophes
    -       0.0 %       (0.8 )     -1.2 %       (0.8 )     -1.2 %  
Total segment
  $ 46.4       69.5 %     $ 1.7       2.6 %     $ 48.2       72.0 %  
                                                       
Variance 2010/2009
                                                     
Attritional
  $ (0.4 )     (0.8 )
pts
  $ (2.5 )     (3.7 )
pts
  $ (2.9 )     (4.5 )
pts
Catastrophes
    -       -  
pts
    1.6       2.4  
pts
    1.6       2.4  
pts
Total segment
  $ (0.4 )     (0.8 )
pts
  $ (0.9 )     (1.4 )
pts
  $ (1.4 )     (2.1 )
pts
 

   
Nine Months Ended September 30,
   
Current
   
Ratio %/
 
Prior
   
Ratio %/
 
Total
   
Ratio %/
(Dollars in millions)
 
Year
   
Pt Change
 
Years
   
Pt Change
 
Incurred
   
Pt Change
2010
                                         
Attritional
  $ 150.1       73.9 %     $ -       0.0 %     $ 150.1       73.9 %  
Catastrophes
    -       0.0 %       4.8       2.4 %       4.8       2.4 %  
Total segment
  $ 150.1       73.9 %     $ 4.8       2.4 %     $ 154.9       76.3 %  
                                                       
2009
                                                     
Attritional
  $ 124.5       67.4 %     $ 2.5       1.4 %     $ 127.0       68.7 %  
Catastrophes
    -       0.0 %       3.9       2.1 %       3.9       2.1 %  
Total segment
  $ 124.5       67.4 %     $ 6.4       3.4 %     $ 130.9       70.8 %  
                                                       
Variance 2010/2009
                                                     
Attritional
  $ 25.6       6.5  
pts
  $ (2.5 )     (1.4 )
pts
  $ 23.1       5.2  
pts
Catastrophes
    -       -  
pts
    0.9       0.3  
pts
    0.9       0.3  
pts
Total segment
  $ 25.6       6.5  
pts
  $ (1.6 )     (1.0 )
pts
  $ 24.0       5.5  
pts
                                                       
(Some amounts may not reconcile due to rounding.)
                                               
 
Incurred losses and LAE decreased by 2.9% to $46.8 million for the three months ended September 30, 2010 compared to $48.2 million for the three months ended September 30, 2009, primarily the result of a decrease in prior years attritional reserve development, specifically the marine line of business, partially offset by an increase in prior years catastrophe losses.

Incurred losses and LAE increased by 18.4% to $154.9 million for the nine months ended September 30, 2010 compared to $130.9 million for the nine months ended September 30, 2009, primarily driven by a $25.6 million (6.5 points) increase in current year attritional losses, as a result of losses on the offshore oil rig in the Gulf.

Segment Expenses. Commission and brokerage decreased 15.8% to $16.3 million for the three months ended September 30, 2010 compared to $19.3 million for the three months ended September 30, 2009.  Commission and brokerage decreased 5.6% to $49.9 million for the nine months ended September 30, 2010 compared to $52.8 million for the nine months ended September 30, 2009. These decreases were due to the changes in the mix of business and lower contingent commissions on the surety book of business.


Segment other underwriting expenses for the three months ended September 30, 2010 decreased slightly to $2.1 million compared to $2.4 million for the three months ended September 30, 2009.  Segment other underwriting expenses for the nine months ended September 30, 2010 increased slightly to $6.5 million compared to $6.2 million for the nine months ended September 30, 2009.

International.
The following table presents the underwriting results and ratios for the International segment for the periods indicated.
 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
(Dollars in millions)
 
2010
 
2009
 
Variance
 
% Change
 
2010
 
2009
 
Variance
 
% Change
Gross written premiums
  $ 323.7     $ 272.6     $ 51.1       18.8 %   $ 906.1     $ 797.6     $ 108.5       13.6 %
Net written premiums
    319.4       270.9       48.5       17.9 %     901.7       794.5       107.2       13.5 %
                                                                 
Premiums earned
  $ 301.3     $ 262.2     $ 39.1       14.9 %   $ 869.8     $ 771.1     $ 98.8       12.8 %
Incurred losses and LAE
    223.4       165.4       58.0       35.1 %     875.1       454.2       420.8       92.6 %
Commission and brokerage
    78.6       68.3       10.2       15.0 %     221.4       197.6       23.7       12.0 %
Other underwriting expenses
    6.7       6.2       0.5       8.4 %     20.4       16.5       3.9       23.7 %
Underwriting gain (loss)
  $ (7.3 )   $ 22.3     $ (29.7 )     -132.9 %   $ (247.0 )   $ 102.7     $ (349.7 )  
NM
                                                                 
                           
Point Chg
                         
Point Chg
Loss ratio
    74.1 %     63.1 %             11.0       100.6 %     58.9 %             41.7  
Commission and brokerage ratio
    26.1 %     26.1 %             -       25.4 %     25.6 %             (0.2 )
Other underwriting expense ratio
    2.2 %     2.3 %             (0.1 )     2.4 %     2.2 %             0.2  
Combined ratio
    102.4 %     91.5 %             10.9       128.4 %     86.7 %             41.7  
                                                                 
(NM, not meaningful)
                                                               
(Some amounts may not reconcile due to rounding.)
                                                               

Premiums. Gross written premiums increased by 18.8% to $323.7 million for the three months ended September 30, 2010 compared to $272.6 million for the three months ended September 30, 2009, due to continued strong growth in our Brazil, Miami and New Jersey offices, a $42.9 million increase; Canada, a $5.5 million increase; and Asia, a $2.8 million increase.  Net written premiums increased by 17.9% to $319.4 million for the three months ended September 30, 2010 compared to $270.9 million for the three months ended September 30, 2009, principally as a result of the increase in gross written premiums.  Premiums earned increased 14.9% to $301.3 million for the three months ended September 30, 2010 compared to $262.2 million for the three months ended September 30, 2009, relatively consistent with the increase in net written premiums.

Gross written premiums increased by 13.6% to $906.1 million for the nine months ended September 30, 2010 compared to $797.6 million for the nine months ended September 30, 2009, due to continued strong growth in Brazil, Miami and New Jersey offices, a $49.4 million increase; Asia, a $36.6 million increase; and Canada, a $22.6 million increase; the result of a combination of new business, rate increases in select areas and economic and insurance growth in some markets.  Also contributing to the increase was $13.4 million in reinstatement premiums from the Chilean earthquake.  Net written premiums increased by 13.5% to $901.7 million for the nine months ended September 30, 2010 compared to $794.5 million for the nine months ended September 30, 2009.  Premiums earned increased 12.8% to $869.8 million for the nine months ended September 30, 2010 compared to $771.1 million for the nine months ended September 30, 2009.  Variance explanations for net written premiums and premiums earned for the nine months were similar to those discussed above for the three months.


Incurred Losses and LAE.  The following tables present the incurred losses and LAE for the International segment for the periods indicated.
 
   
Three Months Ended September 30,
   
Current
   
Ratio %/
 
Prior
   
Ratio %/
 
Total
   
Ratio %/
(Dollars in millions)
 
Year
   
Pt Change
 
Years
   
Pt Change
 
Incurred
   
Pt Change
2010
                                         
Attritional
  $ 172.4       57.1 %     $ (24.8 )     -8.2 %     $ 147.6       49.0 %  
Catastrophes
    77.3       25.7 %       (1.5 )     -0.5 %       75.8       25.2 %  
Total segment
  $ 249.6       82.9 %     $ (26.3 )     -8.7 %     $ 223.4       74.1 %  
                                                       
2009
                                                     
Attritional
  $ 139.9       53.4 %     $ 2.3       0.9 %     $ 142.2       54.2 %  
Catastrophes
    20.1       7.7 %       3.1       1.2 %       23.2       8.8 %  
Total segment
  $ 160.0       61.0 %     $ 5.4       2.1 %     $ 165.4       63.1 %  
                                                       
Variance 2010/2009
                                                     
Attritional
  $ 32.5       3.7  
pts
  $ (27.1 )     (9.1 )
pts
  $ 5.4       (5.2 )
pts
Catastrophes
    57.2       18.0  
pts
    (4.6 )     (1.7 )
pts
    52.6       16.4  
pts
Total segment
  $ 89.6       21.9  
pts
  $ (31.7 )     (10.8 )
pts
  $ 58.0       11.0  
pts
 

   
Nine Months Ended September 30,
   
Current
   
Ratio %/
 
Prior
   
Ratio %/
 
Total
   
Ratio %/
(Dollars in millions)
 
Year
   
Pt Change
 
Years
   
Pt Change
 
Incurred
   
Pt Change
2010
                                         
Attritional
  $ 487.8       56.0 %     $ (30.8 )     -3.5 %     $ 457.0       52.5 %  
Catastrophes
    431.2       49.6 %       (13.1 )     -1.5 %       418.1       48.1 %  
Total segment
  $ 919.0       105.7 %     $ (43.9 )     -5.0 %     $ 875.1       100.6 %  
                                                       
2009
                                                     
Attritional
  $ 412.6       53.5 %     $ 3.2       0.4 %     $ 415.9       53.9 %  
Catastrophes
    36.3       4.7 %       2.1       0.3 %       38.4       5.0 %  
Total segment
  $ 448.9       58.2 %     $ 5.4       0.7 %     $ 454.2       58.9 %  
                                                       
Variance 2010/2009
                                                     
Attritional
  $ 75.2       2.5  
pts
  $ (34.0 )     (3.9 )
pts
  $ 41.1       (1.4 )
pts
Catastrophes
    394.9       44.9  
pts
    (15.2 )     (1.8 )
pts
    379.7       43.1  
pts
Total segment
  $ 470.1       47.5  
pts
  $ (49.3 )     (5.7 )
pts
  $ 420.9       41.7  
pts
                                                       
(Some amounts may not reconcile due to rounding.)
                                               
 
Incurred losses and LAE increased 35.1% to $223.4 million for the three months ended September 30, 2010 compared to $165.4 million for the three months ended September 30, 2009.  The increase was principally due to a $57.2 million increase in current year catastrophes losses, primarily for the New Zealand earthquake, Chile earthquake and the Canadian hailstorm.  Attritional losses also increased primarily due to the increased premiums earned and higher expected loss ratios, which were partially offset by favorable development of prior years attritional reserves.

Incurred losses and LAE increased 92.6% to $875.1 million for the nine months ended September 30, 2010 compared to $454.2 million for the nine months ended September 30, 2009.  The increase was principally due to the 2010 large catastrophes of $334.0 million for the Chilean earthquake, $50.0 million for the New Zealand earthquake, $32.1 million for the Australian hailstorms and $15.0 million for the Canadian hailstorm compared to the absence in 2009 of any similar large events.  Attritional losses also increased primarily due to the increased premiums earned and higher expected loss ratios, which were partially offset by favorable development of prior years attritional reserves.

Segment Expenses. Commission and brokerage increased 15.0% to $78.6 million for the three months ended September 30, 2010 compared to $68.3 million for the three months ended September 30, 2009.  Commission and brokerage increased 12.0% to $221.4 million for the nine months ended September 30, 2010 compared to $197.6 million for the nine months ended September 30, 2009.  The increases were primarily in line with the increases in premiums earned.


Segment other underwriting expenses for the three months ended September 30, 2010 increased to $6.7 million compared to $6.2 million for the three months ended September 30, 2009.  Segment other underwriting expenses for the nine months ended September 30, 2010 increased to $20.4 million compared to $16.5 million for the nine months ended September 30, 2009.  These increases were due to growth in the overall infrastructure and consistent with the growth in premiums earned resulting in stable other underwriting expense ratios.

Bermuda.
The following table presents the underwriting results and ratios for the Bermuda segment for the periods indicated.
 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
(Dollars in millions)
 
2010
 
2009
 
Variance
 
% Change
 
2010
 
2009
 
Variance
 
% Change
Gross written premiums
  $ 189.9     $ 212.6     $ (22.6 )     -10.6 %   $ 565.0     $ 594.3     $ (29.4 )     -4.9 %
Net written premiums
    190.0       212.6       (22.7 )     -10.7 %     565.0       594.5       (29.5 )     -5.0 %
                                                                 
Premiums earned
  $ 183.9     $ 201.2     $ (17.3 )     -8.6 %   $ 555.5     $ 569.8     $ (14.3 )     -2.5 %
Incurred losses and LAE
    120.8       122.0       (1.2 )     -1.0 %     381.1       354.0       27.0       7.6 %
Commission and brokerage
    42.6       53.1       (10.5 )     -19.8 %     125.9       145.5       (19.5 )     -13.4 %
Other underwriting expenses
    7.1       6.3       0.8       12.5 %     19.7       17.5       2.2       12.8 %
Underwriting gain (loss)
  $ 13.4     $ 19.8     $ (6.4 )     -32.4 %   $ 28.8     $ 52.9     $ (24.0 )     -45.5 %
                                                                 
                           
Point Chg
                         
Point Chg
Loss ratio
    65.7 %     60.6 %             5.1       68.6 %     62.1 %             6.5  
Commission and brokerage ratio
    23.2 %     26.4 %             (3.2 )     22.7 %     25.5 %             (2.8 )
Other underwriting expense ratio
    3.8 %     3.2 %             0.6       3.5 %     3.1 %             0.4  
Combined ratio
    92.7 %     90.2 %             2.5       94.8 %     90.7 %             4.1  
                                                                 
(Some amounts may not reconcile due to rounding.)
                                                               
 
Premiums. Gross written premiums decreased 10.6% to $189.9 million for the three months ended September 30, 2010 compared to $212.6 million for the three months ended September 30, 2009.  Premiums written by the U.K. branch and Ireland decreased $20.9 million, or 14.4%, in continental Europe in response to softening market conditions.  Bermuda home office business was down 2.6%, or $1.8 million.  Net written premiums decreased 10.7% to $190.0 million for the three months ended September 30, 2010 compared to $212.6 million for the three months ended September 30, 2009, in line with the decrease in gross written premiums.  Premiums earned decreased 8.6% to $183.9 million for the three months ended September 30, 2010 compared to $201.2 million for the three months ended September 30, 2009, relatively consistent with the decline in net written premiums.

Gross written premiums decreased 4.9% to $565.0 million for the nine months ended September 30, 2010 compared to $594.3 million for the nine months ended September 30, 2009.  Bermuda home office business was down 4.6%, or $10.0 million, due to lower property catastrophe excess of loss business.  Premiums written by the U.K. branch and Ireland decreased $19.3 million, or 5.1%, driven by the same factor mentioned above for the quarterly variance.  Net written premiums decreased 5.0% to $565.0 million for the nine months ended September 30, 2010 compared to $594.5 million for the nine months ended September 30, 2009, in line with the decrease in gross written premiums.  Premiums earned decreased 2.5% to $555.5 million for the nine months ended September 30, 2010 compared to $569.8 million for the nine months ended September 30, 2009.  The change in premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.

 
Incurred Losses and LAE.  The following tables present the incurred losses and LAE for the Bermuda segment for the periods indicated.
 
   
Three Months Ended September 30,
   
Current
   
Ratio %/
 
Prior
   
Ratio %/
 
Total
   
Ratio %/
(Dollars in millions)
 
Year
   
Pt Change
 
Years
   
Pt Change
 
Incurred
   
Pt Change
2010
                                         
Attritional
  $ 103.8       56.4 %     $ (1.5 )     -0.8 %     $ 102.3       55.6 %  
Catastrophes
    19.3       10.5 %       (0.7 )     -0.4 %       18.5       10.1 %  
A&E
    -       0.0 %       -       0.0 %       -       0.0 %  
Total segment
  $ 123.1       66.9 %     $ (2.3 )     -1.2 %     $ 120.8       65.7 %  
                                                       
2009
                                                     
Attritional
  $ 112.0       55.7 %     $ 10.3       5.1 %     $ 122.3       60.8 %  
Catastrophes
    -       0.0 %       (0.3 )     -0.2 %       (0.3 )     -0.2 %  
A&E
    -       0.0 %       -       0.0 %       -       0.0 %  
Total segment
  $ 112.0       55.7 %     $ 10.0       5.0 %     $ 122.0       60.6 %  
                                                       
Variance 2010/2009
                                                     
Attritional
  $ (8.2 )     0.7  
pts
  $ (11.8 )     (5.9 )
pts
  $ (20.0 )     (5.2 )
pts
Catastrophes
    19.3       10.5  
pts
    (0.4 )     (0.2 )
pts
    18.8       10.3  
pts
A&E
    -       -  
pts
    -       -  
pts
    -       -  
pts
Total segment
  $ 11.1       11.2  
pts
  $ (12.3 )     (6.2 )
pts
  $ (1.2 )     5.1  
pts

 
   
Nine Months Ended September 30,
   
Current
   
Ratio %/
 
Prior
   
Ratio %/
 
Total
   
Ratio %/
(Dollars in millions)
 
Year
   
Pt Change
 
Years
   
Pt Change
 
Incurred
   
Pt Change
2010
                                         
Attritional
  $ 320.7       57.8 %     $ (12.6 )     -2.3 %     $ 308.2       55.5 %  
Catastrophes
    77.9       14.0 %       (5.0 )     -0.9 %       72.9       13.1 %  
A&E
    -       0.0 %       -       0.0 %       -       0.0 %  
Total segment
  $ 398.6       71.7 %     $ (17.5 )     -3.2 %     $ 381.1       68.6 %  
                                                       
2009
                                                     
Attritional
  $ 310.6       54.5 %     $ 20.3       3.6 %     $ 330.9       58.1 %  
Catastrophes
    19.7       3.5 %       3.4       0.6 %       23.2       4.1 %  
A&E
    -       0.0 %       -       0.0 %       -       0.0 %  
Total segment
  $ 330.3       58.0 %     $ 23.7       4.2 %     $ 354.0       62.1 %  
                                                       
Variance 2010/2009
                                                     
Attritional
  $ 10.1       3.3  
pts
  $ (32.9 )     (5.9 )
pts
  $ (22.7 )     (2.6 )
pts
Catastrophes
    58.2       10.5  
pts
    (8.4 )     (1.5 )
pts
    49.7       9.0  
pts
A&E
    -       -  
pts
    -       -  
pts
    -       -  
pts
Total segment
  $ 68.3       13.7  
pts
  $ (41.2 )     (7.4 )
pts
  $ 27.1       6.5  
pts
                                                       
(Some amounts may not reconcile due to rounding.)
                                               
 
Incurred losses and LAE decreased 1.0% to $120.8 million for the three months ended September 30, 2010 compared to $122.0 million for the three months ended September 30, 2009.  Attritional losses decreased $20.0 million due to a decrease in current year attritional losses as earned premiums decreased and favorable development of prior years attritional losses, partially offset by $19.3 million of increase in 2010 current year catastrophe losses, principally from the New Zealand earthquake.

Incurred losses and LAE increased 7.6% to $381.1 million for the nine months ended September 30, 2010 compared to $354.0 million for the nine months ended September 30, 2009.  The increase was primarily due to current year catastrophe losses from the Chilean earthquake, New Zealand earthquake and an Australian hailstorm, partially offset by the favorable development of prior years attritional and catastrophe reserves.


Segment Expenses. Commission and brokerage decreased 19.8% to $42.6 million for the three months ended September 30, 2010 compared to $53.1 million for the three months ended September 30, 2009.  Commission and brokerage decreased 13.4% to $125.9 million for the nine months ended September 30, 2010 compared to $145.5 million for the nine months ended September 30, 2009.  The decreases were primarily due to lower commission on covers in London and Bermuda property pro rata, a higher level of excess of loss business, which carries a lower commission, and for the nine months, higher reinstatement premiums, which have no commission expense.

Segment other underwriting expenses for the three months ended September 30, 2010 increased to $7.1 million from $6.3 million for the three months ended September 30, 2009.  Segment other underwriting expenses for the nine months ended September 30, 2010 increased to $19.7 million from $17.5 million for the nine months ended September 30, 2009.  These increases were primarily the result of our expanded operations in Ireland.

FINANCIAL CONDITION

Cash and Invested Assets.  Aggregate invested assets, including cash and short-term investments, were $15,487.5 million at September 30, 2010, an increase of $568.7 million compared to $14,918.8 million at December 31, 2009.  This increase was the result of $790.6 million of cash flows from operations, $349.0 million of unrealized appreciation, $83.0 million revolving credit borrowings, $69.3 million of realized capital gains and $33.5 million in equity adjustments of our limited partnership investments, partially offset by $346.8 million of share repurchases, $200.0 million payoff of debt that matured, $82.4 million paid out in dividends to shareholders, $68.8 million of miscellaneous items and $58.7 million due to fluctuations in foreign currencies.

Our principal investment objectives are to ensure funds are available to meet our insurance and reinsurance obligations and to maximize after-tax investment income while maintaining a high quality diversified investment portfolio.  Considering these objectives, we view our investment portfolio as having two components: 1) the investments needed to satisfy outstanding liabilities and 2) investments funded by our shareholders’ equity.

For the portion needed to satisfy outstanding liabilities, we invest in taxable and tax-preferenced fixed income securities with an average credit quality of Aa2, as rated by Moody’s Investors Service, Inc.  Our mix of taxable and tax-preferenced investments is adjusted periodically, consistent with our current and projected operating results, market conditions and our tax position.  This fixed maturity portfolio is externally managed by an independent, professional investment manager using portfolio guidelines approved by us.

Over the past few years, we have allocated our equity investment portfolio to include:  1) publicly traded equity securities and 2) private equity limited partnership investments.  The objective of this portfolio diversification is to enhance the risk-adjusted total return of the investment portfolio by allocating a prudent portion of the portfolio to higher return asset classes.  We limit our allocation to these asset classes because of 1) the potential for volatility in their values and 2) the impact of these investments on regulatory and rating agency capital adequacy models.  We adjust our allocation to these investments based upon market conditions.  As a result of the dramatic slowdown in the global economy and the liquidity crisis affecting the financial markets, we significantly reduced our exposure to public equities during the fourth quarter of 2008 and have increased our exposure to equities in the latter part of 2009 and now into 2010, as financial markets improved.  At September 30, 2010, the market value of investments in equity and limited partnership securities, carried at both market and fair value, approximated 16% of shareholders’ equity, an increase of 1 point from 15% of shareholders’ equity at December 31, 2009.

The Company’s limited partnership investments are comprised of limited partnerships that invest in public equities and limited partnerships that invest in private equities.  Generally, the public equity limited partnerships are reported on a one month lag while the private equity partnerships are included in the financials on a quarter lag.  All of the limited partnerships are required to report using fair value accounting in accordance with FASB guidance.  We receive annual audited financial statements for all of the limited partnerships.  For the quarterly reports, the Company’s staff performs reviews of the financial reports for any


unusual changes in carrying value.  If the Company becomes aware of a significant decline in value during the lag reporting period, the loss will be recorded in the period in which the Company identifies the decline.

The tables below summarize the composition and characteristics of our investment portfolio as of the dates indicated:

   
At September 30, 2010
 
At December 31, 2009
Fixed maturities, market value
  $ 13,569.8       87.6 %   $ 13,005.9       87.2 %
Fixed maturities, fair value
    116.4       0.8 %     50.5       0.3 %
Equity securities, market value
    17.2       0.1 %     16.3       0.1 %
Equity securities, fair value
    415.9       2.7 %     380.0       2.5 %
Short-term investments
    590.2       3.8 %     673.1       4.5 %
Other invested assets
    576.8       3.7 %     545.3       3.7 %
Cash
    201.1       1.3 %     247.6       1.7 %
Total investments and cash
  $ 15,487.5       100.0 %   $ 14,918.8       100.0 %
                                 
(Some amounts may not reconcile due to rounding.)
                               

 
 
At
 
At
 
September 30, 2010
 
December 31, 2009
Fixed income portfolio duration (years)
3.7
 
3.8
Fixed income composite credit quality
Aa2
 
Aa2
Imbedded end of period yield, pre-tax
4.1%
 
4.1%
Imbedded end of period yield, after-tax
3.7%
 
3.6%
 
The following table provides a comparison of our total return by asset class relative to broadly accepted industry benchmarks for the periods indicated:
 
 
Nine Months Ended
 
Twelve Months Ended
 
September 30, 2010
 
December 31, 2009
Fixed income portfolio total return
6.6%
 
9.4%
Barclay's Capital - U.S. aggregate index
7.9%
 
5.9%
       
Common equity portfolio total return
6.7%
 
28.9%
S&P 500 index
3.9%
 
26.5%
       
Other invested asset portfolio total return
6.0%
 
-1.8%
 
Reinsurance Receivables.  Reinsurance receivables for both paid and unpaid losses totaled $693.7 million at September 30, 2010 and $636.4 million at December 31, 2009.  At September 30, 2010, $141.7 million, or 20.4%, was receivable from C.V. Starr (Bermuda); $124.5 million, or 18.0%, was receivable from Transatlantic Reinsurance Company; $100.0 million, or 14.4%, was receivable from Continental Insurance Company; $55.9 million, or 8.1%, was receivable from Munich Reinsurance Company and $46.8 million, or 6.7%, was receivable from Berkley Insurance Company.  The receivable from Continental Insurance Company is collateralized by a funds held arrangement under which we have retained the premiums earned by the retrocessionaire to secure obligations of the retrocessionaire, recorded them as a liability, credited interest on the balances at a stated contractual rate and reduced the liability account as payments become due.  No other retrocessionaire accounted for more than 5% of our receivables.

 
Loss and LAE Reserves.  Gross loss and LAE reserves totaled $9,332.0 million at September 30, 2010 and $8,937.9 million at December 31, 2009.

The following tables summarize gross outstanding loss and LAE reserves by segment, classified by case reserves and IBNR reserves, for the periods indicated:
 
   
At September 30, 2010
 
   
Case
   
IBNR
   
Total
   
% of
 
(Dollars in millions)
 
Reserves
   
Reserves
   
Reserves
   
Total
 
U.S. Reinsurance
  $ 1,305.7     $ 1,630.5     $ 2,936.2       31.5 %
U.S. Insurance
    858.7       1,115.4       1,974.1       21.1 %
Specialty Underwriting
    238.5       189.1       427.6       4.6 %
International
    949.6       705.0       1,654.6       17.7 %
Bermuda
    774.0       988.0       1,762.0       18.9 %
Total excluding A&E
    4,126.5       4,628.0       8,754.5       93.8 %
A&E
    304.8       272.7       577.5       6.2 %
Total including A&E
  $ 4,431.3     $ 4,900.7     $ 9,332.0       100.0 %
                                 
(Some amounts may not reconcile due to rounding.)
                               
 

   
At December 31, 2009
 
   
Case
   
IBNR
   
Total
   
% of
 
(Dollars in millions)
 
Reserves
   
Reserves
   
Reserves
   
Total
 
U.S. Reinsurance
  $ 1,382.0     $ 1,652.3     $ 3,034.3       34.0 %
U.S. Insurance
    716.2       1,157.1       1,873.4       21.0 %
Specialty Underwriting
    238.5       175.8       414.4       4.6 %
International
    752.1       545.7       1,297.7       14.5 %
Bermuda
    718.8       960.5       1,679.4       18.8 %
Total excluding A&E
    3,807.7       4,491.5       8,299.2       92.9 %
A&E
    354.7       283.9       638.7       7.1 %
Total including A&E
  $ 4,162.4     $ 4,775.4     $ 8,937.9       100.0 %
                                 
(Some amounts may not reconcile due to rounding.)
                               
 
Changes in premiums earned and business mix, reserve re-estimations, catastrophe losses and changes in catastrophe loss reserves and claim settlement activity all impact loss and LAE reserves by segment and in total.

Our loss and LAE reserves represent our best estimate of our ultimate liability for unpaid claims.  We continuously re-evaluate our reserves, including re-estimates of prior period reserves, taking into consideration all available information and, in particular, newly reported loss and claim experience.  Changes in reserves resulting from such re-evaluations are reflected in incurred losses in the period when the re-evaluation is made.  Our analytical methods and processes operate at multiple levels including individual contracts, groupings of like contracts, classes and lines of business, internal business units, segments, legal entities, and in the aggregate.  In order to set appropriate reserves, we make qualitative and quantitative analyses and judgments at these various levels.  Additionally, the attribution of reserves, changes in reserves and incurred losses among accident years requires qualitative and quantitative adjustments and allocations at these various levels.  We utilize actuarial science, business expertise and management judgment in a manner intended to assure the accuracy and consistency of our reserving practices.  Nevertheless, our reserves are estimates, which are subject to variation, which may be significant.

There can be no assurance that reserves for, and losses from, claim obligations will not increase in the future, possibly by a material amount.  However, we believe that our existing reserves and reserving methodologies lessen the probability that any such increase would have a material adverse effect on our financial condition, results of operations or cash flows.  In this context, we note that over the past 10 years, our calendar year operations have been affected by effects from prior period reserve re-estimates, ranging from a favorable $26.4 million in 2005, representing 0.5% of the net prior period reserves for the year in which the adjustment was made, to an unfavorable $249.4 million in 2004, representing 3.7% of the net prior period reserves for the year in which the adjustment was made.


Asbestos and Environmental Exposures.  A&E exposures represent a separate exposure group for monitoring and evaluating reserve adequacy.  The following table summarizes incurred losses and outstanding loss reserves with respect to A&E reserves on both a gross and net of retrocessions basis for the periods indicated:


   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(Dollars in millions)
 
2010
 
2009
 
2010
 
2009
Gross Basis:
                       
Beginning of period reserves
  $ 614.1     $ 704.5     $ 638.7     $ 786.8  
Incurred losses
    -       -       -       -  
Paid losses
    (36.6 )     (52.2 )     (61.1 )     (134.5 )
End of period reserves
  $ 577.5     $ 652.3     $ 577.5     $ 652.3  
                                 
Net Basis:
                               
Beginning of period reserves
  $ 589.5     $ 673.9     $ 613.1     $ 749.1  
Incurred losses
    -       -       -       -  
Paid losses
    (34.9 )     (51.2 )     (58.5 )     (126.3 )
End of period reserves
  $ 554.6     $ 622.8     $ 554.6     $ 622.8  
                                 
(Some amounts may not reconcile due to rounding.)
                               
 
At September 30, 2010, the gross reserves for A&E losses were comprised of $131.8 million representing case reserves reported by ceding companies, $131.8 million representing additional case reserves established by us on assumed reinsurance claims, $41.2 million representing case reserves established by us on direct excess insurance claims, including Mt. McKinley, and $272.7 million representing IBNR reserves.

With respect to asbestos only, at September 30, 2010, we had gross asbestos loss reserves of $551.4 million, or 95.5%, of total A&E reserves, of which $445.8 million was for assumed business and $105.6 million was for direct business.

Industry analysts use the “survival ratio” to compare the A&E reserves among companies with such liabilities.  The survival ratio is typically calculated by dividing a company’s current net reserves by the three year average of annual paid losses.  Hence, the survival ratio equals the number of years that it would take to exhaust the current reserves if future loss payments were to continue at historical levels.  Using this measurement, our net three year asbestos survival ratio was 5.7 years at September 30, 2010.  These metrics can be skewed by the large settlements occurring in the prior three years causing the ratio to decline and therefore, is probably not indicative of the timing of future payments.

Shareholders’ Equity.  Our shareholders’ equity increased to $6,281.6 million as of September 30, 2010 from $6,101.7 million as of December 31, 2009.  This increase was the result of unrealized appreciation on investments, net of tax, of $312.5 million, $308.2 million in net income and share-based compensation transactions of $13.4 million, partially offset by repurchasing 4,476,465 common shares for $346.8 million, $82.4 million of shareholder dividends and $26.2 million of foreign currency translation adjustments.

LIQUIDITY AND CAPITAL RESOURCES

Capital.  Our business operations are in part dependent on our financial strength and financial strength ratings, and the market’s perception of our financial strength, as measured by shareholders’ equity, which was $6,281.6 million at September 30, 2010 and $6,101.7 million at December 31, 2009.  On March 13, 2009, Everest Re and Everest National, wholly-owned indirect subsidiaries of the Company, received notification of a one level ratings downgrade by Standard & Poor’s.  On April 7, 2010, Standard & Poor’s upgraded the Company’s debt ratings one level.  We continue to possess significant financial flexibility and access to the debt and equity markets as a result of our perceived financial strength, as evidenced by the financial strength ratings as assigned by independent rating agencies.  During the last six months of 2008 and into 2009, the capital markets were illiquid in reaction to the deepening credit crisis which led to bank and other financial institution failures and effective failures.  Credit spreads widened and the equity markets


declined significantly during this period making access to the capital markets, for even highly rated companies, difficult and costly.  Our capital position remains strong, commensurate with our financial ratings.  We have ample liquidity to meet our financial obligations for the foreseeable future.  Therefore, we have no foreseeable need to enter the capital markets in the near term.

From time to time, we have used open market share repurchases to adjust our capital position and enhance long term expected returns to our shareholders.  On July 21, 2008, our existing authorization to purchase up to 5 million of our shares was amended to authorize the purchase of up to 10 million shares.  On February 24, 2010, our existing authorization to purchase up to 10 million of our shares was amended to authorize the purchase of up to 15 million shares.  As of September 30, 2010, we had repurchased 11.0 million shares under this authorization.

On December 17, 2008, we renewed our shelf registration statement on Form S-3ASR with the Securities and Exchange Commission (“SEC”), as a Well Known Seasoned Issuer.  This shelf registration statement can be used by Group to register common shares, preferred shares, debt securities, warrants, share purchase contracts and share purchase units; by Holdings to register debt securities and by Everest Re Capital Trust III (“Capital Trust III”) to register trust preferred securities.

Liquidity.  Our principal investment objectives are to ensure funds are available to meet our insurance and reinsurance obligations and to maximize after-tax investment income while maintaining a high quality diversified investment portfolio.  Considering these objectives, we view our investment portfolio as having two components: 1) the investments needed to satisfy outstanding liabilities and 2) investments funded by our shareholders’ equity.

For the portion needed to satisfy outstanding liabilities, we invest in taxable and tax-preferenced fixed income securities with an average credit quality of Aa2, as rated by Moody’s.  Our mix of taxable and tax-preferenced investments is adjusted periodically, consistent with our current and projected operating results, market conditions and our tax position.  This fixed maturity securities portfolio is externally managed by an independent, professional investment manager using portfolio guidelines approved by us.

Over the past few years, we have allocated our equity portfolio to include: 1) publicly traded equity securities and 2) private equity limited partnership investments.  The objective of this portfolio diversification is to enhance the risk-adjusted total return of the investment portfolio by allocating a prudent portion of the portfolio to higher return asset classes.  We limit our allocation to these asset classes because of 1) the potential for volatility in their values and 2) the impact of these investments on regulatory and rating agency capital adequacy models.  We adjust our allocation to these investments based upon market conditions.  As a result of the dramatic slowdown in the global economy and the liquidity crisis affecting the financial markets, we significantly reduced our exposure to public equities during the fourth quarter of 2008 and have increased our exposure to equities in the latter part of 2009 and now into 2010, as financial markets improved.  At September 30, 2010, the market value of investments in equity and limited partnership securities, carried at both market and fair value, approximated 16% of shareholders’ equity.

Our liquidity requirements are generally met from positive cash flow from operations.  Positive cash flow results from reinsurance and insurance premiums being collected prior to disbursements for claims, which disbursements generally take place over an extended period after the collection of premiums, sometimes a period of many years.  Collected premiums are generally invested, prior to their use in such disbursements, and investment income provides additional funding for loss payments.  Our net cash flows from operating activities were $790.6 million and $598.7 million for the nine months ended September 30, 2010 and 2009, respectively.  Additionally, these cash flows reflected a net tax refund of $36.7 million and a net tax payment of $70.8 million for the nine months ended September 30, 2010 and 2009, respectively; net catastrophe loss payments of $312.0 million and $184.8 million for the nine months ended September 30, 2010 and 2009, respectively; and net A&E payments of $58.5 million and $126.3 million for the nine months ended September 30, 2010 and 2009, respectively.


If disbursements for claims and benefits, policy acquisition costs and other operating expenses were to exceed premium inflows, cash flow from reinsurance and insurance operations would be negative.  The effect on cash flow from insurance operations would be partially offset by cash flow from investment income.  Additionally, cash inflows from investment maturities and dispositions, both short-term investments and longer term maturities are available to supplement other operating cash flows.

As the timing of payments for claims and benefits cannot be predicted with certainty, we maintain portfolios of long term invested assets with varying maturities, along with short-term investments that provide additional liquidity for payment of claims.  At September 30, 2010 and December 31, 2009, we held cash and short-term investments of $791.3 million and $920.7 million, respectively.  All of our short-term investments are readily marketable and can be converted to cash.  In addition to these cash and short-term investments, at September 30, 2010, we had $693.3 million of available for sale fixed maturity securities maturing within one year or less, $3,923.4 million maturing within one to five years and $5,814.2 million maturing after five years.  Our $433.2 million of equity securities are comprised primarily of publicly traded securities that can be easily liquidated.  We believe that these fixed maturity and equity securities, in conjunction with the short-term investments and positive cash flow from operations, provide ample sources of liquidity for the expected payment of losses in the near future.  We do not anticipate selling securities or using available credit facilities to pay losses and LAE but have the ability to do so.  Sales of securities might result in realized capital gains or losses.  At September 30, 2010 we had $741.7 million of net pre-tax unrealized appreciation, comprised of $808.5 million of pre-tax unrealized appreciation and $66.8 million of pre-tax unrealized depreciation.

Management expects annual positive cash flow from operations, which in general reflects the strength of overall pricing, to persist over the near term, absent any unusual catastrophe activity.  In the intermediate and long term, our cash flow from operations will be impacted to the extent by which competitive pressures affect overall pricing in our markets and by which our premium receipts are impacted from our strategy of emphasizing underwriting profitability over premium volume.

Effective July 27, 2007, Group, Everest Reinsurance (Bermuda), Ltd. (“Bermuda Re”) and Everest International Reinsurance, Ltd. (“Everest International”) entered into a five year, $850.0 million senior credit facility with a syndicate of lenders referred to as the “Group Credit Facility”.  Wachovia Bank, a subsidiary of Wells Fargo Corporation (“Wachovia Bank”) is the administrative agent for the Group Credit Facility, which consists of two tranches.  Tranche one provides up to $350.0 million of unsecured revolving credit for liquidity and general corporate purposes, and for the issuance of unsecured standby letters of credit.  The interest on the revolving loans shall, at the Company’s option, be either (1) the Base Rate (as defined below) or (2) an adjusted London Interbank Offered Rate (“LIBOR”) plus a margin.  The Base Rate is the higher of (a) the prime commercial lending rate established by Wachovia Bank or (b) the Federal Funds Rate plus 0.5% per annum.  The amount of margin and the fees payable for the Group Credit Facility depends on Group’s senior unsecured debt rating.  Tranche two exclusively provides up to $500.0 million for the issuance of standby letters of credit on a collateralized basis.

The Group Credit Facility requires Group to maintain a debt to capital ratio of not greater than 0.35 to 1 and to maintain a minimum net worth.  Minimum net worth is an amount equal to the sum of $3,575.4 million plus 25% of consolidated net income for each of Group’s fiscal quarters, for which statements are available ending on or after January 1, 2007 and for which consolidated net income is positive, plus 25% of any increase in consolidated net worth during such period attributable to the issuance of ordinary and preferred shares, which at September 30, 2010, was $4,149.4 million.  As of September 30, 2010, the Company was in compliance with all Group Credit Facility covenants.

At September 30, 2010, the Group Credit Facility had no outstanding letters of credit under tranche one and $359.0 million outstanding letters of credit under tranche two.  At December 31, 2009, the Group Credit Facility had no outstanding letters of credit under tranche one and $386.5 million outstanding letters of credit under tranche two.

 
Effective August 23, 2006, Holdings entered into a five year, $150.0 million senior revolving credit facility with a syndicate of lenders referred to as the “Holdings Credit Facility”.  Citibank N.A. is the administrative agent for the Holdings Credit Facility.  The Holdings Credit Facility may be used for liquidity and general corporate purposes.  The Holdings Credit Facility provides for the borrowing of up to $150.0 million with interest at a rate selected by Holdings equal to either, (1) the Base Rate (as defined below) or (2) a periodic fixed rate equal to the Eurodollar Rate plus an applicable margin.  The Base Rate means a fluctuating interest rate per annum in effect from time to time to be equal to the higher of (a) the rate of interest publicly announced by Citibank as its prime rate or (b) 0.5% per annum above the Federal Funds Rate, in each case plus the applicable margin.  The amount of margin and the fees payable for the Holdings Credit Facility depends upon Holdings’ senior unsecured debt rating.

The Holdings Credit Facility requires Holdings to maintain a debt to capital ratio of not greater than 0.35 to 1 and Everest Reinsurance Company (“Everest Re”) to maintain its statutory surplus at $1.5 billion plus 25% of future aggregate net income and 25% of future aggregate capital contributions after December 31, 2005, which at September 30, 2010, was $1,970.3 million.  As of September 30, 2010, Holdings was in compliance with all Holdings Credit Facility covenants.

At September 30, 2010, the Company had outstanding $83.0 million of short-term borrowings from the Holdings Credit Facility revolving credit line, with maturity dates between October 1, 2010 and October 15, 2010.  These short-term borrowings can be paid either through renewal with a one, two, three or six month term; or out of cash flows from operations.  The highest amount outstanding in short-term borrowings was $133.0 million for the period from June 15, 2010 to August 9, 2010.  In addition, at September 30, 2010 and December 31, 2009, the Holdings Credit Facility had outstanding letters of credit of $17.0 million and $28.0 million, respectively.

Costs incurred in connection with the Group Credit Facility and the Holdings Credit Facility were $0.6 million and $0.4 million for the three months ended September 30, 2010 and 2009, respectively, and $1.3 million and $1.1 million for the nine months ended September 30, 2010 and 2009, respectively.

Market Sensitive Instruments.
The SEC’s Financial Reporting Release #48 requires registrants to clarify and expand upon the existing financial statement disclosure requirements for derivative financial instruments, derivative commodity instruments and other financial instruments (collectively, “market sensitive instruments”).  We do not generally enter into market sensitive instruments for trading purposes.

Our current investment strategy seeks to maximize after-tax income through a high quality, diversified, taxable and tax-preferenced fixed maturity portfolio, while maintaining an adequate level of liquidity.  Our mix of taxable and tax-preferenced investments is adjusted periodically, consistent with our current and projected operating results, market conditions and our tax position.  The fixed maturity securities in the investment portfolio are comprised of non-trading available for sale securities.  Additionally, we have invested in equity securities.  We have also written a small number of equity index put option contracts.

The overall investment strategy considers the scope of present and anticipated Company operations.  In particular, estimates of the financial impact resulting from non-investment asset and liability transactions, together with our capital structure and other factors, are used to develop a net liability analysis.  This analysis includes estimated payout characteristics for which our investments provide liquidity.  This analysis is considered in the development of specific investment strategies for asset allocation, duration and credit quality.  The change in overall market sensitive risk exposure principally reflects the asset changes that took place during the period.

Interest Rate Risk.  Our $15.5 billion investment portfolio, at September 30, 2010, is principally comprised of fixed maturity securities, which are generally subject to interest rate risk and some foreign currency exchange rate risk, and some equity securities, which are subject to price fluctuations and some foreign exchange rate risk.  The impact of the foreign exchange risks on the investment portfolio is partially mitigated by changes in the dollar value of foreign currency denominated liabilities and their associated income statement impact.


Interest rate risk is the potential change in value of the fixed maturity securities portfolio, including short-term investments, from a change in market interest rates.  In a declining interest rate environment, it includes prepayment risk on the $2,878.3 million of mortgage-backed securities in the $13,686.2 million fixed maturity portfolio.  Prepayment risk results from potential accelerated principal payments that shorten the average life and thus the expected yield of the security.

The table below displays the potential impact of market value fluctuations and after-tax unrealized appreciation on our fixed maturity securities portfolio (including $590.2 million of short-term investments) for the period indicated based on upward and downward parallel and immediate 100 and 200 basis point shifts in interest rates.  For legal entities with a U.S. dollar functional currency, this modeling was performed on each security individually.  To generate appropriate price estimates on mortgage-backed securities, changes in prepayment expectations under different interest rate environments were taken into account.  For legal entities with a non-U.S. dollar functional currency, the effective duration of the involved portfolio of securities was used as a proxy for the market value change under the various interest rate change scenarios.
 
   
Impact of Interest Rate Shift in Basis Points
   
At September 30, 2010
      -200     -100     0     100     200
(Dollars in millions)
                                       
Total Market/Fair Value
  $ 15,252.6     $ 14,785.6     $ 14,276.4     $ 13,697.1     $ 13,105.9  
Market/Fair Value Change from Base (%)
    6.8 %     3.6 %     0.0 %     -4.1 %     -8.2 %
Change in Unrealized Appreciation
                                       
After-tax from Base ($)
  $ 773.2     $ 402.0     $ -     $ (454.8 )   $ (923.1 )
 
We had $9,332.0 million and $8,937.9 million of gross reserves for losses and LAE as of September 30, 2010 and December 31, 2009, respectively.  These amounts are recorded at their nominal value, as opposed to present value, which would reflect a discount adjustment to reflect the time value of money.  Since losses are paid out over a period of time, the present value of the reserves is less than the nominal value.  As interest rates rise, the present value of the reserves decreases and, conversely, as interest rates decline, the present value increases.  These movements are the opposite of the interest rate impacts on the fair value of investments.  While the difference between present value and nominal value is not reflected in our financial statements, our financial results will include investment income over time from the investment portfolio until the claims are paid.  Our loss and loss reserve obligations have an expected duration of approximately 3.8 years, which is reasonably consistent with our fixed income portfolio.  If we were to discount our loss and LAE reserves, net of $0.7 billion of reinsurance receivables on unpaid losses, the discount would be approximately $1.4 billion resulting in a discounted reserve balance of approximately $7.2 billion, representing approximately 50.8% of the market value of the fixed maturity investment portfolio funds.

Equity Risk.  Equity risk is the potential change in fair and/or market value of the common stock and preferred stock portfolios arising from changing equity prices.  Our equity investments consist of a diversified portfolio of individual securities and mutual funds, which invest principally in high quality common and preferred stocks that are traded on the major exchanges.  The primary objective of the equity portfolio is to obtain greater total return relative to bonds over time through market appreciation and income.

 
The table below displays the impact on fair/market value and after-tax change in fair/market value of a 10% and 20% change in equity prices up and down for the period indicated.
 
   
Impact of Percentage Change in Equity Fair/Market Values
   
At September 30, 2010
(Dollars in millions)
    -20%     -10%     0%     10%     20%
Fair/Market Value of the Equity Portfolio
  $ 346.5     $ 389.8     $ 433.2     $ 476.5     $ 519.8  
After-tax Change in Fair/Market Value
    (56.6 )     (28.3 )     -       28.3       56.6  
 
Foreign Currency Risk.  Foreign currency risk is the potential change in value, income and cash flow arising from adverse changes in foreign currency exchange rates.  Each of our non-U.S./Bermuda (“foreign”) operations maintains capital in the currency of the country of its geographic location consistent with local regulatory guidelines.  Each foreign operation may conduct business in its local currency, as well as the currency of other countries in which it operates.  The primary foreign currency exposures for these foreign operations are the Canadian Dollar, the British Pound Sterling and the Euro.  We mitigate foreign exchange exposure by generally matching the currency and duration of our assets to our corresponding operating liabilities.  In accordance with FASB guidance, we translate the assets, liabilities and income of non-U.S. dollar functional currency legal entities to the U.S. dollar.  This translation amount is reported as a component of other comprehensive income.  As of September 30, 2010 there has been no material change in exposure to foreign exchange rates as compared to December, 31, 2009.

Equity Index Put Option Contracts.  Although not considered material in the context of our aggregate exposure to market sensitive instruments, we have issued six equity index put option contracts based on the Standard & Poor’s 500 (“S&P 500”) index and one equity index put option contract based on the FTSE 100 index, that are market sensitive and sufficiently unique to warrant supplemental disclosure.

The Company sold six equity index put option contracts, based on the S&P 500 index, for total consideration, net of commissions, of $22.5 million.  At September 30, 2010, fair value for these equity index put option contracts was $69.7 million.  These equity index put option contracts each have a single exercise date, with maturities ranging from 12 to 30 years and strike prices ranging from $1,141.21 to $1,540.63.  The S&P 500 index value at September 30, 2010 was $1,141.20.  No amounts will be payable under these equity index put option contracts if the S&P 500 index is at, or above, the strike prices on the exercise dates, which fall between June 2017 and March 2031.  If the S&P 500 index is lower than the strike price on the applicable exercise date, the amount due would vary proportionately with the percentage by which the index is below the strike price.  Based on historical index volatilities and trends and the September 30, 2010 S&P 500 index value, the Company estimates the probability that each equity index put option contract of the S&P 500 index falling below the strike price on the exercise date to be less than 45%.  The theoretical maximum payouts under the equity index put option contracts would occur if on each of the exercise dates the S&P 500 index value were zero.  At September 30, 2010, the present value of these theoretical maximum payouts using a 6% discount factor was $265.3 million.

The Company sold one equity index put option contract based on the FTSE 100 index for total consideration, net of commissions, of $6.7 million.  At September 30, 2010, fair value for this equity index put option contract was $7.5 million.  This equity index put option contract has an exercise date of July 2020 and a strike price of ₤5,989.75.  The FTSE 100 index value at September 30, 2010 was ₤5,548.60.  No amount will be payable under this equity index put option contract if the FTSE 100 index is at, or above, the strike price on the exercise date.  If the FTSE 100 index is lower than the strike price on the exercise date, the amount due will vary proportionately with the percentage by which the index is below the strike price.  Based on historical index volatilities and trends and the September 30, 2010 FTSE 100 index value, the Company estimates the probability that the equity index put option contract of the FTSE 100 index will fall below the strike price on the exercise date to be less than 36%.  The theoretical maximum payout under the equity index put option contract would occur if on the exercise date the FTSE 100 index value was zero.  At September 30, 2010, the present value of the theoretical maximum payout using a 6% discount factor and current exchange rate was $28.5 million.


Because the equity index put option contracts meet the definition of a derivative, we report the fair value of these instruments in our consolidated balance sheets as a liability and record any changes to fair value in our consolidated statements of operations and comprehensive income (loss) as a net derivative gain (loss).  Our financial statements reflect fair values for our obligations on these equity index put option contracts at September 30, 2010, of $77.2 million and at December 31, 2009, of $57.3 million; even though it may not be likely that the ultimate settlement of these transactions would require a payment that would exceed the initial consideration received, or any payment at all.

As there is no active market for these instruments, the determination of their fair value is based on an industry accepted option pricing model, which requires estimates and assumptions, including those regarding volatility and expected rates of return.

The table below displays the impact of potential movements in interest rates and the equity indices, which are the principal factors affecting fair value of these instruments, looking forward from the fair value for the period indicated.  As these are estimates, there can be no assurance regarding future market performance.  The asymmetrical results of the interest rate and S&P 500 and FTSE 100 indices shift reflect that the liability cannot fall below zero whereas it can increase to its theoretical maximum.


   
Equity Indices Put Options Obligation – Sensitivity Analysis
(Dollars in millions)
 
At September 30, 2010
Interest Rate Shift in Basis Points:
    -200     -100     0     100     200
Total Fair Value
  $ 128.0     $ 99.6     $ 77.2     $ 59.6     $ 45.8  
Fair Value Change from Base (%)
    -65.9 %     -29.0 %     0.0 %     22.8 %     40.7 %
                                         
Equity Indices Shift in Points (S&P 500/FTSE 100):
    -500/-2000     -250/-1000     0     250/1000     500/2000
Total Fair Value
  $ 148.1     $ 106.1     $ 77.2     $ 57.0     $ 42.9  
Fair Value Change from Base (%)
    -92.0 %     -37.5 %     0.0 %     26.1 %     44.4 %
                                         
Combined Interest Rate /
    -200/     -100/             100/     200/
   Equity Indices Shift (S&P 500/FTSE 100):
    -500/-2000     -250/-1000     0/0     250/1000     500/2000
Total Fair Value
  $ 220.2     $ 133.3     $ 77.2     $ 42.9     $ 23.1  
Fair Value Change from Base (%)
    -185.5 %     -72.8 %     0.0 %     44.3 %     70.0 %
 
Safe Harbor Disclosure.
This report contains forward-looking statements within the meaning of the U.S. federal securities laws.  We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in the federal securities laws.  In some cases, these statements can be identified by the use of forward-looking words such as “may”, “will”, “should”, “could”, “anticipate”, “estimate”, “expect”, “plan”, “believe”, “predict”, “potential” and “intend”.  Forward-looking statements contained in this report include information regarding our reserves for losses and LAE, the adequacy of our provision for uncollectible balances, estimates of our catastrophe exposure, the effects of catastrophic events on our financial statements, the ability of Everest Re, Holdings, Everest Underwriting Group (Ireland) Limited and Bermuda Re to pay dividends and the settlement costs of our specialized equity index put option contracts.  Forward-looking statements only reflect our expectations and are not guarantees of performance.  These statements involve risks, uncertainties and assumptions.  Actual events or results may differ materially from our expectations.  Important factors that could cause our actual events or results to be materially different from our expectations include the uncertainties that surround the impact on our financial statements and liquidity resulting from changes in the global economy and credit markets, the estimating of reserves for losses and LAE, those discussed in Note 8 of the Notes to Consolidated Financial Statements (unaudited) included in this report and the risks described under the caption “Risk Factors” in our most recently filed Annual Report on Form 10-K, PART 1, ITEM 1A.  We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

 
ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk Instruments.  See “Liquidity and Capital Resources - Market Sensitive Instruments” in PART I – ITEM 2.


ITEM 4.  CONTROLS AND PROCEDURES

As of the end of the period covered by this report, our management carried out an evaluation, with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)).  Based on their evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission’s rules and forms.  Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of our internal control over financial reporting to determine whether any changes occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  Based on that evaluation, there has been no such change during the quarter covered by this report.


PART II

ITEM 1.  LEGAL PROCEEDINGS

In the ordinary course of business, we are involved in lawsuits, arbitrations and other formal and informal dispute resolution procedures, the outcomes of which will determine our rights and obligations under insurance, reinsurance and other contractual agreements.  These disputes arise from time to time and are ultimately resolved through both informal and formal means, including negotiated resolution, arbitration and litigation.  In all such matters, we believe that our positions are legally and commercially reasonable, and we vigorously seek to preserve, enforce and defend our legal rights under various agreements.  While the final outcome of these matters cannot be predicted with certainty, we do not believe that any of these matters, when finally resolved, will have a material adverse effect on our financial position or liquidity.  However, an adverse resolution of one or more of these items in any one quarter or fiscal year could have a material adverse effect on our results of operations in that period.


ITEM 1A.  RISK FACTORS

No material changes.




ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities.


Issuer Purchases of Equity Securities
 
 
(a)
   
(b)
   
(c)
   
(d)
 
                   
Maximum Number (or
 
             
Total Number of
   
Approximate Dollar
 
             
Shares (or Units)
   
Value) of Shares (or
 
             
Purchased as Part
   
Units) that May Yet
 
 
Total Number of
       
of Publicly
   
Be Purchased Under
 
 
Shares (or Units)
 
Average Price Paid
   
Announced Plans or
   
the Plans or
 
Period
Purchased
 
per Share (or Unit)
   
Programs
   
Programs (1)
 
July 1 - 31, 2010
  0     $ -       0       5,227,765  
August 1 - 31, 2010
  842,036     $ 80.0132       842,036       4,385,729  
September 1 - 30, 2010
  395,457     $ 82.6359       391,631       3,994,098  
Total
  1,237,493     $ 80.8513       1,233,667       3,994,098  
 
(1)       On September 21, 2004, the Company’s board of directors approved an amended share repurchase program authorizing the Company and/or its subsidiary Holdings to purchase up to an aggregate of 5,000,000 of the Company’s common shares through open market transactions, privately negotiated transactions or both.  On July 21, 2008, the Company’s executive committee of the board of directors approved an amendment to the September 21, 2004 share repurchase program authorizing the Company and/or its subsidiary Holdings to purchase up to an aggregate of 10,000,000 of the Company’s common shares (recognizing that the number of shares authorized for repurchase has been reduced by those shares that have already been purchased) in open market transactions, privately negotiated transactions or both.  On February 24, 2010, the Company’s executive committee of the board of directors approved an amendment to the September 21, 2004, share repurchase program and the July 21, 2008, amendment authorizing the Company and/or its subsidiary Holdings, to purchase up to 15,000,000 of the Company’s common shares (recognizing that the number of shares authorized for repurchase has been reduced by those shares that have already been purchased) in open market transactions, privately negotiated transactions or both.


ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.


ITEM 4.  RESERVED


ITEM 5.  OTHER INFORMATION

None.



ITEM 6.  EXHIBITS

Exhibit Index:
 
 Exhibit No.    Description
     
    31.1  Section 302 Certification of Joseph V. Taranto
     
    31.2  Section 302 Certification of Dominic J. Addesso
     
    32.1   Section 906 Certification of Joseph V. Taranto and Dominic J. Addesso
     
    101.INS  XBRL Instance Document
     
    101.SCH   XBRL Taxonomy Extension Schema
     
    101.CAL  XBRL Taxonomy Extension Calculation Linkbase
     
    101.DEF  XBRL Taxonomy Extension Definition Linkbase
     
    101.LAB  XBRL Taxonomy Extension Labels Linkbase
     
    101.PRE  XBRL Taxonomy Extension Presentation Linkbase
 

Everest Re Group, Ltd.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
Everest Re Group, Ltd.  
(Registrant)  
     
     
/S/ DOMINIC J. ADDESSO  
Dominic J. Addesso  
Executive Vice President and  
  Chief Financial Officer  
     
(Duly Authorized Officer and Principal Financial Officer)  
 

Dated:  November 9, 2010