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

group10q2q10.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:
JUNE 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
   
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 August 1, 2010
Common Shares, $0.01 par value
    56,242,019  


 
 
 

 

EVEREST RE GROUP, LTD

Table of Contents
Form 10-Q


Page
PART I

FINANCIAL INFORMATION

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

PART II

OTHER INFORMATION

Item 1.
56
     
Item 1A.
56
     
Item 2.
57
     
Item 3.
57
     
Item 4.
57
     
Item 5.
57
     
Item 6.
58
     

 
 
 


PART I

ITEM 1.  FINANCIAL STATEMENTS

EVEREST RE GROUP, LTD.
CONSOLIDATED BALANCE SHEETS

 
   
June 30,
 
December 31,
(Dollars in thousands, except par value per share)
 
2010
 
2009
   
(unaudited)
     
ASSETS:
           
Fixed maturities - available for sale, at market value
  $ 13,499,102     $ 13,005,949  
    (amortized cost: 2010, $12,955,574; 2009, $12,614,742)
               
Fixed maturities - available for sale, at fair value
    66,351       50,528  
Equity securities - available for sale, at market value (cost: 2010, $12,574; 2009, $13,970)
    15,173       16,301  
Equity securities - available for sale, at fair value
    367,093       380,025  
Short-term investments
    381,931       673,131  
Other invested assets (cost: 2010, $581,392; 2009, $546,158)
    581,013       545,284  
Cash
    191,453       247,598  
       Total investments and cash
    15,102,116       14,918,816  
Accrued investment income
    154,372       158,886  
Premiums receivable
    968,205       978,847  
Reinsurance receivables
    652,912       636,375  
Funds held by reinsureds
    377,968       379,864  
Deferred acquisition costs
    370,832       362,346  
Prepaid reinsurance premiums
    118,285       108,029  
Deferred tax asset
    170,225       174,170  
Federal income taxes recoverable
    95,890       144,903  
Other assets
    196,071       139,076  
TOTAL ASSETS
  $ 18,206,876     $ 18,001,312  
                 
LIABILITIES:
               
Reserve for losses and loss adjustment expenses
  $ 9,237,813     $ 8,937,858  
Future policy benefit reserve
    63,968       64,536  
Unearned premium reserve
    1,420,099       1,415,402  
Funds held under reinsurance treaties
    95,104       91,893  
Losses in the course of payment
    28,705       39,766  
Commission reserves
    42,425       55,579  
Other net payable to reinsurers
    50,822       53,014  
Revolving credit borrowings
    133,000       -  
8.75% Senior notes due 3/15/2010
    -       199,970  
5.4% Senior notes due 10/15/2014
    249,790       249,769  
6.6% Long term notes due 5/1/2067
    238,349       238,348  
Junior subordinated debt securities payable
    329,897       329,897  
Accrued interest on debt and borrowings
    4,892       9,885  
Equity index put option liability
    76,599       57,349  
Other liabilities
    199,814       156,324  
       Total liabilities
    12,171,277       11,899,590  
                 
Commitments and contingencies (Note 8)
               
                 
SHAREHOLDERS' EQUITY:
               
Preferred shares, par value: $0.01; 50 million shares authorized;
               
    no shares issued and outstanding
    -       -  
Common shares, par value: $0.01; 200 million shares authorized; (2010) 66.0 million
               
    and (2009) 65.8 million issued
    660       658  
Additional paid-in capital
    1,853,158       1,845,181  
Accumulated other comprehensive income (loss), net of deferred income tax expense
               
    (benefit) of $107.4 million at 2010 and $101.0 million at 2009
    366,866       272,038  
Treasury shares, at cost; 9.8 million shares (2010) and 6.5 million shares (2009)
    (830,037 )     (582,926 )
Retained earnings (deficit)
    4,644,952       4,566,771  
       Total shareholders' equity
    6,035,599       6,101,722  
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
  $ 18,206,876     $ 18,001,312  
                 
The accompanying notes are an integral part of the consolidated financial statements.
               

 
 
 
1


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

 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(Dollars in thousands, except per share amounts)
 
2010
 
2009
 
2010
 
2009
   
(unaudited)
 
(unaudited)
REVENUES:
                       
Premiums earned
  $ 989,899     $ 956,908     $ 1,917,201     $ 1,889,198  
Net investment income
    165,731       167,209       327,230       235,963  
Net realized capital gains (losses):
                               
Other-than-temporary impairments on fixed maturity securities
    -       (4,936 )     -       (13,210 )
Other-than-temporary impairments on fixed maturity securities
                               
transferred to other comprehensive income (loss)
    -       -       -       -  
Other net realized capital gains (losses)
    (41,693 )     28,398       31,025       (28,465 )
Total net realized capital gains (losses)
    (41,693 )     23,462       31,025       (41,675 )
Realized gain on debt repurchase
    -       -       -       78,271  
Net derivative gain (loss)
    (22,304 )     21,351       (19,250 )     1,648  
Other income (expense)
    7,798       2,389       13,137       (2,791 )
Total revenues
    1,099,431       1,171,319       2,269,343       2,160,614  
                                 
CLAIMS AND EXPENSES:
                               
Incurred losses and loss adjustment expenses
    643,948       566,785       1,550,804       1,136,690  
Commission, brokerage, taxes and fees
    236,493       229,214       449,155       455,252  
Other underwriting expenses
    41,747       40,970       80,691       77,325  
Corporate expenses
    3,887       4,367       8,462       8,147  
Interest, fees and bond issue cost amortization expense
    13,016       17,116       29,658       37,258  
Total claims and expenses
    939,091       858,452       2,118,770       1,714,672  
                                 
INCOME (LOSS) BEFORE TAXES
    160,340       312,867       150,573       445,942  
Income tax expense (benefit)
    3,667       40,279       16,552       64,798  
                                 
NET INCOME (LOSS)
  $ 156,673     $ 272,588     $ 134,021     $ 381,144  
Other comprehensive income (loss), net of tax
    65,889       308,064       94,828       305,279  
                                 
COMPREHENSIVE INCOME (LOSS)
  $ 222,562     $ 580,652     $ 228,849     $ 686,423  
                                 
EARNINGS PER COMMON SHARE:
                               
Basic
  $ 2.70     $ 4.44     $ 2.29     $ 6.21  
Diluted
    2.70       4.43       2.28       6.19  
Dividends declared
    0.48       0.48       0.96       0.96  
                                 
The accompanying notes are an integral part of the consolidated financial statements.
                         

 
 
 
2


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

 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(Dollars in thousands, except per share amounts)
 
2010
 
2009
 
2010
 
2009
   
(unaudited)
 
(unaudited)
COMMON SHARES (shares outstanding):
                       
Balance, beginning of period
    58,922,474       61,542,089       59,317,741       61,414,027  
Issued during the period, net
    37       18,755       167,076       146,817  
Treasury shares acquired
    (2,680,492 )     (707,900 )     (3,242,798 )     (707,900 )
Balance, end of period
    56,242,019       60,852,944       56,242,019       60,852,944  
                                 
COMMON SHARES (par value):
                               
Balance, beginning of period
  $ 660     $ 657     $ 658     $ 656  
Issued during the period, net
    -       -       2       1  
Balance, end of period
    660       657       660       657  
                                 
ADDITIONAL PAID-IN CAPITAL:
                               
Balance, beginning of period
    1,849,441       1,827,819       1,845,181       1,824,552  
Share-based compensation plans
    3,717       3,876       7,977       7,106  
Other
    -       -       -       37  
Balance, end of period
    1,853,158       1,831,695       1,853,158       1,831,695  
                                 
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS),
                         
NET OF DEFERRED INCOME TAXES:
                               
Balance, beginning of period
    300,977       (294,636 )     272,038       (291,851 )
Cumulative adjustment of initial adoption(1), net of tax
    -       (57,312 )     -       (57,312 )
Net increase (decrease) during the period
    65,889       308,064       94,828       305,279  
Balance, end of period
    366,866       (43,884 )     366,866       (43,884 )
                                 
RETAINED EARNINGS (DEFICIT):
                               
Balance, beginning of period
    4,515,835       3,898,343       4,566,771       3,819,327  
Cumulative adjustment of initial adoption(1), net of tax
    -       57,312       -       57,312  
Net income (loss)
    156,673       272,588       134,021       381,144  
Dividends declared ($0.48 per quarter and $0.96 year-to-date
                               
per share in 2010 and 2009)
    (27,556 )     (29,549 )     (55,840 )     (59,089 )
Balance, end of period
    4,644,952       4,198,694       4,644,952       4,198,694  
                                 
TREASURY SHARES AT COST:
                               
Balance, beginning of period
    (629,958 )     (392,329 )     (582,926 )     (392,329 )
Purchase of treasury shares
    (200,079 )     (49,418 )     (247,111 )     (49,418 )
Balance, end of period
    (830,037 )     (441,747 )     (830,037 )     (441,747 )
                                 
TOTAL SHAREHOLDERS' EQUITY, END OF PERIOD
  $ 6,035,599     $ 5,545,415     $ 6,035,599     $ 5,545,415  
                                 
(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.
                         

 
 
 
3


EVEREST RE GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS

 
   
Three Months Ended
 
Six Months Ended
   
June 30,
 
June 30,
(Dollars in thousands)
 
2010
 
2009
 
2010
 
2009
   
(unaudited)
 
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
                       
Net income (loss)
  $ 156,673     $ 272,588     $ 134,021     $ 381,144  
Adjustments to reconcile net income to net cash provided by operating activities:
                         
Decrease (increase) in premiums receivable
    2,624       (44,864 )     (5,135 )     (59,343 )
Decrease (increase) in funds held by reinsureds, net
    (11,156 )     (21,004 )     (13,585 )     (30,785 )
Decrease (increase) in reinsurance receivables
    (29,147 )     75,952       (62,291 )     43,815  
Decrease (increase) in deferred tax asset
    (11,853 )     9,228       (5,064 )     54,218  
Increase (decrease) in reserve for losses and loss adjustment expenses
    30,445       (181,592 )     449,390       (179,158 )
Increase (decrease) in future policy benefit reserve
    (434 )     (2,013 )     (569 )     1,148  
Increase (decrease) in unearned premiums
    (28,341 )     (22,387 )     13,257       10,465  
Change in equity adjustments in limited partnerships
    (16,091 )     (19,809 )     (32,255 )     53,476  
Change in other assets and liabilities, net
    73,043       52,725       17,576       31,812  
Non-cash compensation expense
    3,589       3,620       7,130       6,756  
Amortization of bond premium (accrual of bond discount)
    10,454       4,391       21,339       6,881  
Amortization of underwriting discount on senior notes
    11       48       53       94  
Realized gain on debt repurchase
    -       -       -       (78,271 )
Net realized capital (gains) losses
    41,693       (23,462 )     (31,025 )     41,675  
Net cash provided by (used in) operating activities
    221,510       103,421       492,842       283,927  
                                 
CASH FLOWS FROM INVESTING ACTIVITIES:
                               
Proceeds from fixed maturities matured/called - available for sale, at market value
    369,775       318,283       783,165       560,413  
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
    238,940       48,701       723,462       129,658  
Proceeds from fixed maturities sold - available for sale, at fair value
    6,115       4,510       8,612       8,002  
Proceeds from equity securities sold - available for sale, at market value
    712       34       712       1,076  
Proceeds from equity securities sold - available for sale, at fair value
    51,400       10,591       72,742       12,239  
Distributions from other invested assets
    19,630       10,647       30,360       23,311  
Cost of fixed maturities acquired - available for sale, at market value
    (938,124 )     (550,863 )     (1,961,623 )     (1,363,243 )
Cost of fixed maturities acquired - available for sale, at fair value
    (9,486 )     (3,244 )     (23,680 )     (16,553 )
Cost of equity securities acquired - available for sale, at market value
    (1,426 )     -       (1,426 )     -  
Cost of equity securities acquired - available for sale, at fair value
    (38,095 )     (10,320 )     (80,417 )     (19,299 )
Cost of other invested assets acquired
    (10,034 )     (18,503 )     (37,078 )     (24,742 )
Net change in short-term investments
    209,878       78,140       291,897       791,062  
Net change in unsettled securities transactions
    (58,493 )     49,629       (11,195 )     53,328  
Net cash provided by (used in) investing activities
    (159,208 )     (62,395 )     (204,469 )     160,822  
                                 
CASH FLOWS FROM FINANCING ACTIVITIES:
                               
Common shares issued during the period, net
    128       256       849       388  
Purchase of treasury shares
    (200,079 )     (49,418 )     (247,111 )     (49,418 )
Revolving credit borrowings
    133,000       -       133,000       -  
Net cost of debt repurchase
    -       -       -       (83,026 )
Net cost of senior notes maturing
    -       -       (200,000 )     -  
Dividends paid to shareholders
    (27,556 )     (29,549 )     (55,840 )     (59,089 )
Net cash provided by (used in) financing activities
    (94,507 )     (78,711 )     (369,102 )     (191,145 )
                                 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
    9,499       42,737       24,584       13,002  
                                 
Net increase (decrease) in cash
    (22,706 )     5,052       (56,145 )     266,606  
Cash, beginning of period
    214,159       467,248       247,598       205,694  
Cash, end of period
  $ 191,453     $ 472,300     $ 191,453     $ 472,300  
                                 
SUPPLEMENTAL CASH FLOW INFORMATION
                               
Cash transactions:
                               
Income taxes paid (recovered)
  $ (48,597 )   $ 40,644     $ (35,838 )   $ 67,779  
Interest paid
    20,160       19,806       34,361       38,124  
                                 
The accompanying notes are an integral part of the consolidated financial statements.
                               

 
 
4

 

For the Three and Six Months Ended June 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 six months ended June 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 six months ended June 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) of $57.3 million, net of $8.3 million of tax.

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 June 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
  $ 382,529     $ 23,033     $ (89 )   $ 405,473  
Obligations of U.S. states and political subdivisions
    3,469,450       181,595       (17,016 )     3,634,029  
Corporate securities
    2,875,998       164,601       (19,657 )     3,020,942  
Asset-backed securities
    277,060       8,955       (3,049 )     282,966  
Mortgage-backed securities
                               
Commercial
    475,259       17,195       (20,984 )     471,470  
Agency residential
    2,347,896       106,641       (571 )     2,453,966  
Non-agency residential
    162,333       1,753       (5,197 )     158,889  
Foreign government securities
    1,508,822       83,584       (22,818 )     1,569,588  
Foreign corporate securities
    1,456,227       70,473       (24,921 )     1,501,779  
Total fixed maturity securities
  $ 12,955,574     $ 657,830     $ (114,302 )   $ 13,499,102  
Equity securities
  $ 12,574     $ 2,602     $ (3 )   $ 15,173  
 
 
   
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.  At June 30, 2010, the pre-tax cumulative unrealized depreciation on these corporate securities had improved, with the remaining unrealized depreciation at $3.2 thousand compared to $6.1 million at December 31, 2009.
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 June 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
  $ 626,717     $ 637,761     $ 621,706     $ 652,483  
    Due after one year through five years
    3,590,646       3,747,860       3,017,731       3,151,819  
    Due after five years through ten years
    2,569,986       2,712,264       2,530,830       2,634,709  
    Due after ten years
    2,905,677       3,033,926       3,170,516       3,281,526  
Asset-backed securities
    277,060       282,966       310,429       313,729  
Mortgage-backed securities
                               
Commercial
    475,259       471,470       475,204       442,618  
Agency residential
    2,347,896       2,453,966       2,310,826       2,368,444  
Non-agency residential
    162,333       158,889       177,500       160,621  
Total fixed maturity securities
  $ 12,955,574     $ 13,499,102     $ 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
   
Six Months Ended
 
   
June 30,
   
June 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
  $ 129,039     $ 197,599     $ 146,237     $ 271,759  
Fixed maturity securities, cumulative other-than-temporary impairment adjustment
    33       (65,658 )     6,085       (65,658 )
Equity securities
    (32 )     139       268       (105 )
Other invested assets
    (19 )     3,868       495       2,227  
Change in unrealized appreciation (depreciation), pre-tax
    129,021       135,948       153,085       208,223  
Deferred tax benefit (expense)
    (15,934 )     (16,359 )     (4,358 )     (41,686 )
Deferred tax benefit (expense), cumulative other-than-temporary impairment adjustment
    164       8,346       (904 )     8,346  
Change in unrealized appreciation (depreciation),
                               
net of deferred taxes, included in shareholders’ equity
  $ 113,251     $ 127,935     $ 147,823     $ 174,883  
 
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 June 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
  $ -     $ -     $ 3,398     $ (89 )   $ 3,398     $ (89 )
Obligations of U.S. states and political subdivisions
    5,008       (28 )     362,675       (16,988 )     367,683       (17,016 )
Corporate securities
    272,409       (6,379 )     174,227       (13,278 )     446,636       (19,657 )
Asset-backed securities
    2,601       (3 )     16,748       (3,046 )     19,349       (3,049 )
Mortgage-backed securities
                                               
Commercial
    -       -       81,331       (20,984 )     81,331       (20,984 )
Agency residential
    95,220       (344 )     672       (227 )     95,892       (571 )
Non-agency residential
    -       -       57,715       (5,197 )     57,715       (5,197 )
Foreign government securities
    170,280       (6,458 )     150,503       (16,360 )     320,783       (22,818 )
Foreign corporate securities
    172,419       (4,762 )     177,007       (20,159 )     349,426       (24,921 )
Total fixed maturity securities
  $ 717,937     $ (17,974 )   $ 1,024,276     $ (96,328 )   $ 1,742,213     $ (114,302 )
Equity securities
    12       (3 )     -       -       12       (3 )
Total
  $ 717,949     $ (17,977 )   $ 1,024,276     $ (96,328 )   $ 1,742,225     $ (114,305 )

 
   
Duration of Unrealized Loss at June 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
  $ 57,680     $ (1,664 )   $ 52,120     $ (5,000 )   $ 109,800     $ (6,664 )
Due in one year through five years
    247,136       (5,992 )     192,851       (15,340 )     439,987       (21,332 )
Due in five years through ten years
    279,725       (8,372 )     145,914       (16,560 )     425,639       (24,932 )
Due after ten years
    35,575       (1,599 )     476,925       (29,974 )     512,500       (31,573 )
Asset-backed securities
    2,601       (3 )     16,748       (3,046 )     19,349       (3,049 )
Mortgage-backed securities
    95,220       (344 )     139,718       (26,408 )     234,938       (26,752 )
Total fixed maturity securities
  $ 717,937     $ (17,974 )   $ 1,024,276     $ (96,328 )   $ 1,742,213     $ (114,302 )
 


The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at June 30, 2010 were $1,742.2 million and $114.3 million, respectively.  There were no unrealized losses on a single security that exceeded 0.05% of the market value of the fixed maturity securities at June 30, 2010.  In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector.  The $18.0 million of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for less than one year were generally comprised of highly rated domestic and foreign government and corporate securities.  Of these unrealized losses, $12.3 million were related to securities that were rated investment grade by at least one nationally recognized statistical rating organization.  The $96.3 million 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 government, municipal, corporate and asset-backed and mortgage-backed securities.  Of these unrealized losses, $69.2 million 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 $2.9 million 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 $3,099.0 million and $165.6 million, 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 $20.8 million 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, $20.7 million were related to securities that were rated investment grade by at least one nationally recognized statistical rating organization.  The $144.7 million 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, $111.3 million 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 $3.7 million 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.  Unrealized losses decreased since December 31, 2008, as a result of improved conditions in the overall financial market resulting from increased liquidity and lower interest rates.

The components of net investment income are presented in the table below for the periods indicated:
 
 
   
Three Months Ended
 
Six Months Ended
   
June 30,
 
June 30,
(Dollars in thousands)
 
2010
 
2009
 
2010
 
2009
Fixed maturity securities
  $ 149,017     $ 144,333     $ 294,216     $ 288,955  
Equity securities
    2,856       730       5,379       1,426  
Short-term investments and cash
    (82 )     1,682       (390 )     5,243  
Other invested assets
                               
Limited partnerships
    15,611       20,267       31,509       (52,679 )
Other
    330       261       702       1,035  
Total gross investment income
    167,732       167,273       331,416       243,980  
Interest debited (credited) and other expense
    (2,001 )     (64 )     (4,186 )     (8,017 )
Total net investment income
  $ 165,731     $ 167,209     $ 327,230     $ 235,963  

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 $184.6 million in limited partnerships at June 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
 
Six Months Ended
   
June 30,
   
June 30,
 
(Dollars in thousands)
 
2010
 
2009
 
2010
 
2009
Fixed maturity securities, market value:
                       
Other-than-temporary impairments
  $ -     $ (4,936 )   $ -     $ (13,210 )
Gains (losses) from sales
    (2,249 )     3,313       50,757       (36,281 )
Fixed maturity securities, fair value:
                               
Gains (losses) from sales
    190       133       273