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EVEREST GROUP, LTD. - Quarter Report: 2011 September (Form 10-Q)

group10q3q2011.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, 2011
 
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, 2011
Common Shares, $0.01 par value
53,708,254

 
 
 

 
 
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.
 
 
29
     
Item 3.
55
     
Item 4.
55
     

PART II

OTHER INFORMATION

Item 1.
55
     
Item 1A.
55
     
Item 2.
56
     
Item 3.
56
     
Item 4.
56
     
Item 5.
56
     
Item 6.
57
     




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)
 
2011
 
2010
   
(unaudited)
       
ASSETS:
           
Fixed maturities - available for sale, at market value
  $ 12,154,232     $ 12,450,469  
    (amortized cost: 2011, $11,618,929; 2010, $12,011,336)
               
Fixed maturities - available for sale, at fair value
    120,597       180,482  
Equity securities - available for sale, at market value (cost: 2011, $457,075; 2010, $363,283)
    435,699       363,736  
Equity securities - available for sale, at fair value
    1,138,670       721,449  
Short-term investments
    834,871       785,279  
Other invested assets (cost: 2011, $586,142; 2010, $603,681)
    586,142       605,196  
Cash
    443,706       258,408  
       Total investments and cash
    15,713,917       15,365,019  
Accrued investment income
    129,805       148,990  
Premiums receivable
    1,009,653       844,832  
Reinsurance receivables
    589,320       684,718  
Funds held by reinsureds
    271,691       379,616  
Deferred acquisition costs
    362,741       383,769  
Prepaid reinsurance premiums
    83,954       133,007  
Deferred tax asset
    198,692       149,101  
Federal income taxes recoverable
    146,668       147,988  
Other assets
    229,147       170,931  
TOTAL ASSETS
  $ 18,735,588     $ 18,407,971  
                 
LIABILITIES:
               
Reserve for losses and loss adjustment expenses
  $ 9,979,984     $ 9,340,183  
Future policy benefit reserve
    61,971       63,002  
Unearned premium reserve
    1,380,937       1,455,219  
Funds held under reinsurance treaties
    1,971       99,213  
Commission reserves
    37,818       45,936  
Other net payable to reinsurers
    32,150       47,519  
Revolving credit borrowings
    -       50,000  
5.4% Senior notes due 10/15/2014
    249,847       249,812  
6.6% Long term notes due 5/1/2067
    238,353       238,351  
Junior subordinated debt securities payable
    329,897       329,897  
Accrued interest on debt and borrowings
    12,092       4,793  
Equity index put option liability
    77,740       58,467  
Other liabilities
    240,987       142,062  
       Total liabilities
    12,643,747       12,124,454  
                 
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; (2011) 66,403
               
    and (2010) 66,017 outstanding before treasury shares
    664       660  
Additional paid-in capital
    1,884,492       1,863,031  
Accumulated other comprehensive income (loss), net of deferred income tax expense
               
    (benefit) of $127,236 at 2011 and $102,868 at 2010
    402,946       332,258  
Treasury shares, at cost; 12,614 shares (2011) and 11,589 shares (2010)
    (1,065,719 )     (981,480 )
Retained earnings
    4,869,458       5,069,048  
       Total shareholders' equity
    6,091,841       6,283,517  
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
  $ 18,735,588     $ 18,407,971  
                 
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)
 
2011
 
2010
 
2011
 
2010
   
(unaudited)
 
(unaudited)
REVENUES:
                       
Premiums earned
  $ 1,044,338     $ 997,265     $ 3,095,619     $ 2,914,466  
Net investment income
    156,465       141,368       493,788       468,598  
Net realized capital gains (losses):
                               
Other-than-temporary impairments on fixed maturity securities
    (1,050 )     (2,892 )     (15,817 )     (2,892 )
Other-than-temporary impairments on fixed maturity securities
                               
transferred to other comprehensive income (loss)
    -       -       -       -  
Other net realized capital gains (losses)
    (136,621 )     41,187       (114,543 )     72,212  
Total net realized capital gains (losses)
    (137,671 )     38,295       (130,360 )     69,320  
Net derivative gain (loss)
    (23,427 )     (552 )     (19,273 )     (19,802 )
Other income (expense)
    (14,911 )     1,714       (31,744 )     14,851  
Total revenues
    1,024,794       1,178,090       3,408,030       3,447,433  
                                 
CLAIMS AND EXPENSES:
                               
Incurred losses and loss adjustment expenses
    720,711       674,787       2,706,276       2,225,591  
Commission, brokerage, taxes and fees
    227,969       237,473       701,800       686,628  
Other underwriting expenses
    49,437       44,337       140,290       125,028  
Corporate expenses
    4,204       3,917       11,922       12,379  
Interest, fees and bond issue cost amortization expense
    13,085       13,138       39,199       42,796  
Total claims and expenses
    1,015,406       973,652       3,599,487       3,092,422  
                                 
INCOME (LOSS) BEFORE TAXES
    9,388       204,438       (191,457 )     355,011  
Income tax expense (benefit)
    (53,666 )     30,238       (69,929 )     46,790  
                                 
NET INCOME (LOSS)
  $ 63,054     $ 174,200     $ (121,528 )   $ 308,221  
Other comprehensive income (loss), net of tax
    (57,457 )     192,725       70,688       287,553  
                                 
COMPREHENSIVE INCOME (LOSS)
  $ 5,597     $ 366,925     $ (50,840 )   $ 595,774  
                                 
EARNINGS PER COMMON SHARE:
                               
Basic
  $ 1.16     $ 3.12     $ (2.24 )   $ 5.35  
Diluted
    1.16       3.11       (2.24 )     5.33  
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)
 
2011
 
2010
 
2011
 
2010
   
(unaudited)
 
(unaudited)
COMMON SHARES (shares outstanding):
                       
Balance, beginning of period
    54,346,216       56,242,019       54,428,168       59,317,741  
Issued during the period, net
    39,446       14,177       385,532       181,253  
Treasury shares acquired
    (597,006 )     (1,233,667 )     (1,025,044 )     (4,476,465 )
Balance, end of period
    53,788,656       55,022,529       53,788,656       55,022,529  
                                 
COMMON SHARES (par value):
                               
Balance, beginning of period
  $ 664     $ 660     $ 660     $ 658  
Issued during the period, net
    -       -       4       2  
Balance, end of period
    664       660       664       660  
                                 
ADDITIONAL PAID-IN CAPITAL:
                               
Balance, beginning of period
    1,878,242       1,853,158       1,863,031       1,845,181  
Share-based compensation plans
    6,250       5,399       21,461       13,376  
Balance, end of period
    1,884,492       1,858,557       1,884,492       1,858,557  
                                 
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS),
                               
NET OF DEFERRED INCOME TAXES:
                               
Balance, beginning of period
    460,403       366,866       332,258       272,038  
Net increase (decrease) during the period
    (57,457 )     192,725       70,688       287,553  
Balance, end of period
    402,946       559,591       402,946       559,591  
                                 
RETAINED EARNINGS:
                               
Balance, beginning of period
    4,832,340       4,644,952       5,069,048       4,566,771  
Net income (loss)
    63,054       174,200       (121,528 )     308,221  
Dividends declared ($0.48 per quarter and $1.44 year-to-date
                               
per share in 2011 and 2010)
    (25,936 )     (26,574 )     (78,062 )     (82,414 )
Balance, end of period
    4,869,458       4,792,578       4,869,458       4,792,578  
                                 
TREASURY SHARES AT COST:
                               
Balance, beginning of period
    (1,019,091 )     (830,037 )     (981,480 )     (582,926 )
Purchase of treasury shares
    (46,628 )     (99,729 )     (84,239 )     (346,840 )
Balance, end of period
    (1,065,719 )     (929,766 )     (1,065,719 )     (929,766 )
                                 
TOTAL SHAREHOLDERS' EQUITY, END OF PERIOD
  $ 6,091,841     $ 6,281,620     $ 6,091,841     $ 6,281,620  
                                 
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)
 
2011
 
2010
 
2011
 
2010
   
(unaudited)
 
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
                       
Net income (loss)
  $ 63,054     $ 174,200     $ (121,528 )   $ 308,221  
Adjustments to reconcile net income to net cash provided by operating activities:
                               
Decrease (increase) in premiums receivable
    (6,371 )     76,794       (159,868 )     71,659  
Decrease (increase) in funds held by reinsureds, net
    (22,036 )     (10,024 )     17,452       (23,609 )
Decrease (increase) in reinsurance receivables
    89,855       (17,392 )     107,610       (79,683 )
Decrease (increase) in deferred tax asset
    (75,216 )     29,324       (73,558 )     24,260  
Decrease (increase) in prepaid reinsurance premiums
    10,126       (17,459 )     49,472       (30,147 )
Increase (decrease) in reserve for losses and loss adjustment expenses
    (115,014 )     8,642       578,371       458,032  
Increase (decrease) in future policy benefit reserve
    (638 )     (220 )     (1,032 )     (789 )
Increase (decrease) in unearned premiums
    34,686       106,215       (79,001 )     119,472  
Change in equity adjustments in limited partnerships
    (16,439 )     1,026       (67,053 )     (31,229 )
Change in other assets and liabilities, net
    94,111       (34,701 )     118,058       (4,437 )
Non-cash compensation expense
    5,295       4,799       12,953       11,929  
Amortization of bond premium (accrual of bond discount)
    8,814       14,850       34,384       36,189  
Amortization of underwriting discount on senior notes
    12       12       36       65  
Net realized capital (gains) losses
    137,671       (38,295 )     130,360       (69,320 )
Net cash provided by (used in) operating activities
    207,910       297,771       546,656       790,613  
                                 
CASH FLOWS FROM INVESTING ACTIVITIES:
                               
Proceeds from fixed maturities matured/called - available for sale, at market value
    537,715       424,326       1,348,380       1,207,491  
Proceeds from fixed maturities matured/called - available for sale, at fair value
    -       -       12,775       -  
Proceeds from fixed maturities sold - available for sale, at market value
    487,973       122,884       1,355,653       846,346  
Proceeds from fixed maturities sold - available for sale, at fair value
    12,512       10,689       62,632       19,301  
Proceeds from equity securities sold - available for sale, at market value
    1       3       27,207       715  
Proceeds from equity securities sold - available for sale, at fair value
    61,080       14,899       154,747       87,641  
Distributions from other invested assets
    15,923       21,154       143,017       51,514  
Cost of fixed maturities acquired - available for sale, at market value
    (756,432 )     (366,121 )     (2,293,760 )     (2,327,744 )
Cost of fixed maturities acquired - available for sale, at fair value
    (9,801 )     (56,938 )     (25,025 )     (80,618 )
Cost of equity securities acquired - available for sale, at market value
    (4,772 )     (857 )     (120,583 )     (2,283 )
Cost of equity securities acquired - available for sale, at fair value
    (342,567 )     (23,927 )     (684,867 )     (104,344 )
Cost of other invested assets acquired
    (5,730 )     (16,019 )     (57,832 )     (53,097 )
Cost of businesses acquired
    -       -       (63,100 )     -  
Net change in short-term investments
    (51,333 )     (208,162 )     (48,616 )     83,735  
Net change in unsettled securities transactions
    (11,755 )     (22,855 )     35,446       (34,050 )
Net cash provided by (used in) investing activities
    (67,186 )     (100,924 )     (153,926 )     (305,393 )
                                 
CASH FLOWS FROM FINANCING ACTIVITIES:
                               
Common shares issued during the period, net
    951       600       8,508       1,449  
Purchase of treasury shares
    (46,628 )     (99,729 )     (84,239 )     (346,840 )
Revolving credit borrowings
    (40,000 )     (50,000 )     (50,000 )     83,000  
Net cost of senior notes maturing
    -       -       -       (200,000 )
Dividends paid to shareholders
    (25,936 )     (26,574 )     (78,062 )     (82,414 )
Net cash provided by (used in) financing activities
    (111,613 )     (175,703 )     (203,793 )     (544,805 )
                                 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
    3,072       (11,457 )     (3,639 )     13,127  
                                 
Net increase (decrease) in cash
    32,183       9,687       185,298       (46,458 )
Cash, beginning of period
    411,523       191,453       258,408       247,598  
Cash, end of period
  $ 443,706     $ 201,140     $ 443,706     $ 201,140  
                                 
SUPPLEMENTAL CASH FLOW INFORMATION:
                               
Income taxes paid (recovered)
  $ 6,627     $ (877 )   $ (5,919 )   $ (36,715 )
Interest paid
    5,607       5,660       31,385       40,021  
                                 
Non-cash transaction:
                               
Net assets acquired and liabilities assumed from business acquisitions
    -       -       19,130       -  
                                 
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, 2011 and 2010

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 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, 2011 and 2010 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, 2010 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, 2011 and 2010 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, 2010, 2009 and 2008 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 2011 presentation.

Application of Recently Issued Accounting Standard Changes.

Financial Accounting Standards Board Launched Accounting Codification.  In June 2009, 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.


Presentation of Comprehensive Income. In June 2011, FASB issued amendments to existing guidance to provide two alternatives for the presentation of comprehensive income. Components of net income and comprehensive income will either be presented within a single, continuous financial statement or be presented in two separate but consecutive financial statements.  The guidance is effective for reporting periods beginning after December 15, 2011.  The Company will adopt this guidance as of January 1, 2012 and expects to present net income and comprehensive income in a single, continuous financial statement.
 
Common Fair Value Measurement. In May 2011, FASB issued amendments to existing guidance to achieve common fair value measurement and disclosure requirements between GAAP and International Financial Reporting Standards. The amendments change wording used to describe many GAAP fair value measurement requirements and disclosures. FASB does not intend for the amendments to cause a change in application of fair value accounting guidance.  The guidance is effective for reporting periods beginning after December 15, 2011.  The Company will adopt this guidance prospectively as of January 1, 2012.
 
Treatment of Insurance Contract Acquisition Costs. In October 2010, the FASB issued authoritative guidance for the accounting for costs associated with acquiring or renewing insurance contracts.  The guidance identifies the incremental direct costs of contract acquisition and costs directly related to acquisition activities that should be capitalized.  This guidance is effective for reporting periods beginning after December 15, 2011.  The Company will adopt this guidance as of January 1, 2012.  The Company is in the process of determining the effect on its consolidated financial statements.
 
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.  The Company implemented this guidance effective January 1, 2010.  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 this guidance beginning with the third quarter of 2010.

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 (loss).  The Company adopted this guidance effective April 1, 2009.  Upon adoption the Company recognized a cumulative-effect adjustment increase in retained earnings 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  

 
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, 2011
   
Amortized
 
Unrealized
 
Unrealized
 
Market
(Dollars in thousands)
 
Cost
 
Appreciation
 
Depreciation
 
Value
Fixed maturity securities
                       
U.S. Treasury securities and obligations of
                       
U.S. government agencies and corporations
  $ 293,927     $ 14,397     $ (857 )   $ 307,467  
Obligations of U.S. states and political subdivisions
    1,742,305       112,418       (572 )     1,854,151  
Corporate securities
    3,305,474       180,511       (45,435 )     3,440,550  
Asset-backed securities
    184,839       7,805       (381 )     192,263  
Mortgage-backed securities
                               
Commercial
    314,532       18,811       (15,608 )     317,735  
Agency residential
    2,057,947       98,193       (1,165 )     2,154,975  
Non-agency residential
    60,713       387       (483 )     60,617  
Foreign government securities
    1,653,456       129,637       (8,592 )     1,774,501  
Foreign corporate securities
    2,005,736       88,607       (42,370 )     2,051,973  
Total fixed maturity securities
  $ 11,618,929     $ 650,766     $ (115,463 )   $ 12,154,232  
Equity securities
  $ 457,075     $ 3,744     $ (25,120 )   $ 435,699  
 

   
At December 31, 2010
 
   
Amortized
 
Unrealized
 
Unrealized
 
Market
(Dollars in thousands)
 
Cost
 
Appreciation
 
Depreciation
 
Value
Fixed maturity securities
                       
U.S. Treasury securities and obligations of
                       
U.S. government agencies and corporations
  $ 394,690     $ 12,772     $ (5,655 )   $ 401,807  
Obligations of U.S. states and political subdivisions
    2,809,514       116,920       (24,929 )     2,901,505  
Corporate securities
    2,916,977       168,687       (16,518 )     3,069,146  
Asset-backed securities
    210,717       7,799       (215 )     218,301  
Mortgage-backed securities
                               
Commercial
    324,922       17,751       (5,454 )     337,219  
Agency residential
    2,018,384       76,367       (1,469 )     2,093,282  
Non-agency residential
    76,259       1,205       (1,723 )     75,741  
Foreign government securities
    1,584,355       79,661       (25,668 )     1,638,348  
Foreign corporate securities
    1,675,518       71,268       (31,666 )     1,715,120  
Total fixed maturity securities
  $ 12,011,336     $ 552,430     $ (113,297 )   $ 12,450,469  
Equity securities
  $ 363,283     $ 3,039     $ (2,586 )   $ 363,736  
 
In accordance with FASB guidance, the Company reclassified the non-credit portion of other-than-temporary impairments from retained earnings 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, 2011
 
At December 31, 2010
Pre-tax cumulative unrealized appreciation (depreciation)
  $ 2,326     $ 1,743  


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, 2011
 
At December 31, 2010
   
Amortized
 
Market
 
Amortized
 
Market
(Dollars in thousands)
 
Cost
 
Value
 
Cost
 
Value
Fixed maturity securities – available for sale
                       
    Due in one year or less
  $ 456,049     $ 459,881     $ 572,985     $ 580,528  
    Due after one year through five years
    4,715,290       4,905,261       3,911,482       4,057,230  
    Due after five years through ten years
    2,380,999       2,503,612       2,564,948       2,686,005  
    Due after ten years
    1,448,560       1,559,888       2,331,639       2,402,163  
Asset-backed securities
    184,839       192,263       210,717       218,301  
Mortgage-backed securities
                               
Commercial
    314,532       317,735       324,922       337,219  
Agency residential
    2,057,947       2,154,975       2,018,384       2,093,282  
Non-agency residential
    60,713       60,617       76,259       75,741  
Total fixed maturity securities
  $ 11,618,929     $ 12,154,232     $ 12,011,336     $ 12,450,469  
 
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)
 
2011
 
2010
 
2011
 
2010
Increase (decrease) during the period between the market value and cost
                       
of investments carried at market value, and deferred taxes thereon:
                       
Fixed maturity securities
  $ 3,902     $ 193,182     $ 95,587     $ 339,419  
Fixed maturity securities, cumulative other-than-temporary impairment adjustment
    (1,305 )     2,269       582       8,354  
Equity securities
    (29,936 )     542       (21,828 )     810  
Other invested assets
    215       (33 )     (1,515 )     462  
Change in unrealized appreciation (depreciation), pre-tax
    (27,124 )     195,960       72,826       349,045  
Deferred tax benefit (expense)
    (7,880 )     (31,162 )     (20,680 )     (35,520 )
Deferred tax benefit (expense), cumulative other-than-temporary impairment adjustment
    48       (134 )     46       (1,038 )
Change in unrealized appreciation (depreciation),
                               
net of deferred taxes, included in shareholders’ equity
  $ (34,956 )   $ 164,664     $ 52,192     $ 312,487  
 
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 cost 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, 2011 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
  $ 14,174     $ (352 )   $ 3,460     $ (505 )   $ 17,634     $ (857 )
Obligations of U.S. states and political subdivisions
    -       -       7,472       (572 )     7,472       (572 )
Corporate securities
    786,201       (29,608 )     130,031       (15,827 )     916,232       (45,435 )
Asset-backed securities
    27,912       (214 )     1,455       (167 )     29,367       (381 )
Mortgage-backed securities
                                               
Commercial
    19,475       (2,140 )     47,578       (13,468 )     67,053       (15,608 )
Agency residential
    124,874       (672 )     66,952       (493 )     191,826       (1,165 )
Non-agency residential
    259       (8 )     38,224       (475 )     38,483       (483 )
Foreign government securities
    31,816       (852 )     147,232       (7,740 )     179,048       (8,592 )
Foreign corporate securities
    436,956       (25,487 )     141,881       (16,883 )     578,837       (42,370 )
Total fixed maturity securities
  $ 1,441,667     $ (59,333 )   $ 584,285     $ (56,130 )   $ 2,025,952     $ (115,463 )
Equity securities
    419,281       (25,116 )     11       (4 )     419,292       (25,120 )
Total
  $ 1,860,948     $ (84,449 )   $ 584,296     $ (56,134 )   $ 2,445,244     $ (140,583 )

 
   
Duration of Unrealized Loss at September 30, 2011 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
  $ 36,501     $ (537 )   $ 47,909     $ (8,284 )   $ 84,410     $ (8,821 )
Due in one year through five years
    527,126       (20,364 )     266,180       (21,340 )     793,306       (41,704 )
Due in five years through ten years
    643,071       (31,756 )     76,823       (3,758 )     719,894       (35,514 )
Due after ten years
    62,449       (3,642 )     39,164       (8,145 )     101,613       (11,787 )
Asset-backed securities
    27,912       (214 )     1,455       (167 )     29,367       (381 )
Mortgage-backed securities
    144,608       (2,820 )     152,754       (14,436 )     297,362       (17,256 )
Total fixed maturity securities
  $ 1,441,667     $ (59,333 )   $ 584,285     $ (56,130 )   $ 2,025,952     $ (115,463 )
 
The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at September 30, 2011 were $2,445,244 thousand and $140,583 thousand, respectively.  There were no unrealized losses on a single issuer that exceeded 0.05% of the market value of the fixed maturity securities at September 30, 2011.  In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector.  The $59,333 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 domestic and foreign corporate securities and commercial mortgage-backed securities.  Of these unrealized losses, $29,204 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating organization.  The majority of the unrealized losses related to foreign corporate and foreign government securities are due to currency exchange rate movements as opposed to market value movements.  The $56,130 thousand of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year related


primarily to domestic and foreign corporate securities and commercial mortgage-backed securities.  Of these unrealized losses, $36,598 thousand related to securities that were rated investment grade by at least one nationally recognized statistical rating organization.  The majority of the unrealized losses related to foreign corporate and foreign government securities are due to currency exchange rate movements as opposed to market value movements.  The non-investment grade securities with unrealized losses were mainly comprised of corporate and commercial mortgage-backed securities.  The gross unrealized depreciation for mortgage-backed securities included $365 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 at September 30, 2011 are comparable with unrealized losses at December 31, 2010.

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 periods indicated:
 
   
Duration of Unrealized Loss at December 31, 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
  $ 70,193     $ (2,425 )   $ 43,264     $ (3,230 )   $ 113,457     $ (5,655 )
Obligations of U.S. states and political subdivisions
    336,522       (9,520 )     171,812       (15,409 )     508,334       (24,929 )
Corporate securities
    186,898       (5,077 )     107,520       (11,441 )     294,418       (16,518 )
Asset-backed securities
    7,816       (92 )     2,408       (123 )     10,224       (215 )
Mortgage-backed securities
                                               
Commercial
    962       (25 )     58,036       (5,429 )     58,998       (5,454 )
Agency residential
    208,930       (1,236 )     614       (233 )     209,544       (1,469 )
Non-agency residential
    -       -       44,341       (1,723 )     44,341       (1,723 )
Foreign government securities
    194,113       (6,416 )     203,913       (19,252 )     398,026       (25,668 )
Foreign corporate securities
    309,627       (9,452 )     198,161       (22,214 )     507,788       (31,666 )
Total fixed maturity securities
  $ 1,315,061     $ (34,243 )   $ 830,069     $ (79,054 )   $ 2,145,130     $ (113,297 )
Equity securities
    273,378       (2,584 )     13       (2 )     273,391       (2,586 )
Total
  $ 1,588,439     $ (36,827 )   $ 830,082     $ (79,056 )   $ 2,418,521     $ (115,883 )

 
   
Duration of Unrealized Loss at December 31, 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
  $ 24,854     $ (450 )   $ 55,204     $ (9,061 )   $ 80,058     $ (9,511 )
Due in one year through five years
    313,179       (11,829 )     224,770       (19,685 )     537,949       (31,514 )
Due in five years through ten years
    358,468       (9,538 )     144,264       (12,624 )     502,732       (22,162 )
Due after ten years
    400,852       (11,073 )     300,432       (30,176 )     701,284       (41,249 )
Asset-backed securities
    7,816       (92 )     2,408       (123 )     10,224       (215 )
Mortgage-backed securities
    209,892       (1,261 )     102,991       (7,385 )     312,883       (8,646 )
Total fixed maturity securities
  $ 1,315,061     $ (34,243 )   $ 830,069     $ (79,054 )   $ 2,145,130     $ (113,297 )

 
The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at December 31, 2010 were $2,418,521 thousand and $115,883 thousand, respectively.  There were no unrealized losses on a single issuer that exceeded 0.08% of the market value of the fixed maturity securities at December 31, 2010.  In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector.  The $34,243 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 municipal, foreign government and domestic and foreign corporate securities.  Of these unrealized losses, $33,463 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating organization.  The $79,054 thousand of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year related primarily to highly rated municipal, domestic and foreign corporate, mortgage-backed and foreign government securities.  Of these unrealized losses, $66,514 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 $210 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.

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)
 
2011
 
2010
 
2011
 
2010
Fixed maturity securities
  $ 131,680     $ 143,801     $ 397,204     $ 438,017  
Equity securities
    15,794       2,763       40,813       8,142  
Short-term investments and cash
    366       364       1,042       (26 )
Other invested assets
                               
Limited partnerships
    15,725       (1,108 )     66,700       30,401  
Other
    (1,520 )     183       3,203       885  
Total gross investment income
    162,045       146,003       508,962       477,419  
Interest debited (credited) and other investment expense
    (5,580 )     (4,635 )     (15,174 )     (8,821 )
Total net investment income
  $ 156,465     $ 141,368     $ 493,788     $ 468,598  
 
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 $166,110 thousand in limited partnerships at September 30, 2011.  These commitments will be funded when called in accordance with the partnership agreements, which have investment periods that expire, unless extended, through 2016.

 
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)
 
2011
 
2010
 
2011
 
2010
Fixed maturity securities, market value:
                       
Other-than-temporary impairments
  $ (1,050 )   $ (2,892 )   $ (15,817 )   $ (2,892 )
Gains (losses) from sales
    23,439       (2,410 )     7,821       48,347  
Fixed maturity securities, fair value:
                               
Gains (losses) from sales
    (16 )     480       (966 )     753  
Gains (losses) from fair value adjustments
    (5,013 )     3,296       (8,537 )     3,778  
Equity securities, market value:
                               
Gains (losses) from sales
    -       -       38       111  
Equity securities, fair value:
                               
Gains (losses) from sales
    637       951       2,335       (48 )
Gains (losses) from fair value adjustments
    (155,669 )     38,872       (115,235 )     19,264  
Short-term investments gain (loss)
    1       (2 )     1       7  
Total net realized capital gains (losses)
  $ (137,671 )   $ 38,295     $ (130,360 )   $ 69,320  
 
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)
 
2011
 
2010
 
2011
 
2010
Proceeds from sales of fixed maturity securities
  $ 500,485     $ 133,573     $ 1,418,285     $ 865,647  
Gross gains from sales
    36,850       4,641       61,365       71,012  
Gross losses from sales
    (13,427 )     (6,571 )     (54,510 )     (21,912 )
                                 
Proceeds from sales of equity securities
  $ 61,081     $ 14,902     $ 181,954     $ 88,356  
Gross gains from sales
    6,022       1,033       9,229       4,727  
Gross losses from sales
    (5,385 )     (82 )     (6,856 )     (4,664 )
 
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, 2011, fair value for these equity index put option contracts was $69,676 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, 2011 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 54%.  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, 2011, the present value of these theoretical maximum payouts using a 6% discount factor was $281,229 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, 2011, fair value for this equity index put option contract was $8,065 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, 2011 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 51%.  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, 2011, the present value of the theoretical maximum payout using a 6% discount factor and current exchange rate was $31,246 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, 2011
 
December 31, 2010
                 
Equity index put option contracts
 
Equity index put option liability
  $ 77,740     $ 58,467  
Total
      $ 77,740     $ 58,467  
 
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)
 
2011
 
2010
 
2011
 
2010
                             
Equity index put option contracts
 
Net derivative gain (loss)
  $ (23,427 )   $ (552 )   $ (19,273 )   $ (19,802 )
Total
      $ (23,427 )   $ (552 )   $ (19,273 )   $ (19,802 )
 
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, 2011, was $77,740 thousand for which the Company had posted collateral with a market value of $40,368 thousand.  If on September 30, 2011, the Company’s ratings were such that the collateral threshold was zero, the Company’s collateral requirement would increase by $55,000 thousand.

 
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, 2011 and 2010.

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.

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 the Company’s equity index put option contracts.

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, 2011
     
Contract
 
Contracts
 
based on
 
based on
 
FTSE 100
 
S & P 500 Index
 
Index
Equity index
 1,131.4
 
 5,128.5
Interest rate
3.22% to 4.54%
 
3.99%
Time to maturity
5.7 to 19.5 yrs
 
8.8 yrs
Volatility
22.3% to 24.9%
 
24.7%

 
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, 2011
 
(Level 1)
   
(Level 2)
   
(Level 3)
 
Assets:
                       
Fixed maturities, market value
                       
U.S. Treasury securities and obligations of
                       
U.S. government agencies and corporations
  $ 307,467     $ -     $ 307,467     $ -  
Obligations of U.S. States and political subdivisions
    1,854,151       -       1,854,151       -  
Corporate securities
    3,440,550       -       3,440,550       -  
Asset-backed securities
    192,263       -       189,949       2,314  
Mortgage-backed securities
                               
Commercial
    317,735       -       317,735       -  
Agency residential
    2,154,975       -       2,154,975       -  
Non-agency residential
    60,617       -       60,124       493  
Foreign government securities
    1,774,501       -       1,774,501       -  
Foreign corporate securities
    2,051,973       -       2,048,903       3,070  
Total fixed maturities, market value
    12,154,232       -       12,148,355       5,877  
                                 
Fixed maturities, fair value
    120,597       -       120,597       -  
Equity securities, market value
    435,699       419,292       16,407       -  
Equity securities, fair value
    1,138,670       1,027,921       110,749       -  
                                 
Liabilities:
                               
Equity index put option contracts
  $ 77,740     $ -     $ -     $ 77,740  
 
There were no significant transfers between Level 1 and Level 2 for the nine months ended September 30, 2011.

 
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, 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
  $ 401,807     $ -     $ 401,807     $ -  
Obligations of U.S. States and political subdivisions
    2,901,505       -       2,901,505       -  
Corporate securities
    3,069,146       -       3,069,146       -  
Asset-backed securities
    218,301       -       217,306       995  
Mortgage-backed securities
                               
Commercial
    337,219       -       337,219       -  
Agency residential
    2,093,282       -       2,093,282       -  
Non-agency residential
    75,741       -       74,241       1,500  
Foreign government securities
    1,638,348       -       1,638,348       -  
Foreign corporate securities
    1,715,120       -       1,710,704       4,416  
Total fixed maturities, market value
    12,450,469       -       12,443,558       6,911  
                                 
Fixed maturities, fair value
    180,482       -       180,482       -  
Equity securities, market value
    363,736       363,736       -       -  
Equity securities, fair value
    721,449       721,449       -       -  
                                 
Liabilities:
                               
Equity index put option contracts
  $ 58,467     $ -     $ -     $ 58,467  

 
The following tables present the activity under Level 3, fair value measurements using significant unobservable inputs by asset type, for the periods indicated:
 
   
Three Months Ended September 30, 2011
 
Nine Months Ended September 30, 2011
   
Asset-backed
 
Foreign
 
Non-agency
     
Asset-backed
 
Foreign
 
Non-agency
   
(Dollars in thousands)
 
Securities
 
Corporate
 
RMBS
 
Total
 
Securities
 
Corporate
 
RMBS
 
Total
Beginning balance
  $ 2,492     $ -     $ 1,353     $ 3,845     $ 995     $ 4,416     $ 1,500     $ 6,911  
Total gains or (losses) (realized/unrealized)
                                                               
Included in earnings (or changes in net assets)
    15       (4 )     344       355       79       (4 )     584       659  
Included in other comprehensive income (loss)
    (148 )     (30 )     (213 )     (391 )     (295 )     (30 )     (246 )     (571 )
Purchases, issuances and settlements
    (19 )     3,104       (643 )     2,442       37       3,104       (997 )     2,144  
Transfers in and/or (out) of Level 3
    (26 )     -       (348 )     (374 )     1,498       (4,416 )     (348 )     (3,266 )
Ending balance
  $ 2,314     $ 3,070     $ 493     $ 5,877     $ 2,314     $ 3,070     $ 493     $ 5,877  
                                                                 
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.)
                                                               

 
   
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.)
                                                               
 
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)
 
2011
   
2010
   
2011
   
2010
 
Liabilities:
                       
Balance, beginning of period
  $ 54,313     $ 76,599     $ 58,467     $ 57,349  
Total (gains) or losses (realized/unrealized)
                               
Included in earnings (or changes in net assets)
    23,427       552       19,273       19,802  
Included in other comprehensive income (loss)
    -       -       -       -  
Purchases, issuances and settlements
    -       -       -       -  
Transfers in and/or (out) of Level 3
    -       -       -       -  
Balance, end of period
  $ 77,740     $ 77,150     $ 77,740     $ 77,150  
                                 
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 October 14, 2011, we renewed our 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)
 
2011
   
2010
   
2011
   
2010
 
Net income (loss) per share:
                       
Numerator
                       
Net income (loss)
  $ 63,054     $ 174,200     $ (121,528 )   $ 308,221  
Less:  dividends declared-common shares and nonvested common shares
    (25,936 )     (26,574 )     (78,062 )     (82,413 )
Undistributed earnings
    37,118       147,627       (199,590 )     225,808  
Percentage allocated to common shareholders (1)
    99.3 %     99.5 %     99.4 %     99.5 %
        36,865       146,841       (198,318 )     224,717  
Add:  dividends declared-common shareholders
    25,764       26,430       77,534       81,983  
Numerator for basic and diluted earnings per common share
  $ 62,629     $ 173,272     $ (120,784 )   $ 306,700  
                                   
Denominator
                               
Denominator for basic earnings per weighted-average common shares
    53,822       55,526       53,942       57,369  
Effect of dilutive securities:
                               
Options
    67       137       135       148  
Denominator for diluted earnings per adjusted weighted-average common shares
    53,889       55,662       54,077       57,516  
                                   
Per common share net income (loss)
                               
Basic
  $ 1.16     $ 3.12     $ (2.24 )   $ 5.35  
Diluted
  $ 1.16     $ 3.11     $ (2.24 )   $ 5.33  
                                   
(1)
Basic weighted-average common shares outstanding
    53,822       55,526       53,942       57,369  
 
Basic weighted-average common shares outstanding and nonvested common shares expected to vest
    54,191       55,823       54,288       57,647  
 
Percentage allocated to common shareholders
    99.3 %     99.5 %     99.4 %     99.5 %
                                   
(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,
 
2011
 
2010
 
2011
 
2010
Anti-dilutive options
 2,010,550
 
 1,902,690
 
 1,548,390
 
 1,902,690
 
All outstanding options expire on or between September 26, 2012 and May 18, 2021.
 

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 and reinsurance 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.  The Company considers the statuses of these proceedings when determining its reserves for unpaid loss and loss adjustment expenses.

Aside from litigation and arbitrations related to these insurance and reinsurance agreements, the Company is not a party to any other material litigation or arbitration.

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, 2011
 
At December 31, 2010
    $ 142,998     $ 150,560  
 
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, 2011
   
At December 31, 2010
 
    $ 27,094     $ 26,542  


9.  OTHER COMPREHENSIVE INCOME (LOSS)

The following table presents the components of comprehensive income (loss) in the consolidated statements of operations for the periods indicated:
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(Dollars in thousands)
 
2011
   
2010
   
2011
   
2010
 
Unrealized appreciation (depreciation) ("URA(D)") on
                       
securities arising during the period
                       
URA(D) of investments - temporary
  $ (25,819 )   $ 193,692     $ 72,244     $ 340,692  
URA(D) of investments - non-credit OTTI
    (1,305 )     2,269       582       8,354  
Tax benefit (expense) from URA(D) arising during the period
    (7,832 )     (31,296 )     (20,634 )     (36,558 )
Total URA(D) on securities arising during the period, net of tax
    (34,956 )     164,665       52,192       312,488  
                                 
Foreign currency translation adjustments
    (25,701 )     33,422       18,787       (19,776 )
Tax benefit (expense) from foreign currency translation
    2,454       (5,784 )     (2,529 )     (6,425 )
Net foreign currency translation adjustments
    (23,247 )     27,638       16,258       (26,201 )
                                 
Pension adjustments
    1,148       649       3,443       1,948  
Tax benefit (expense) on pension
    (402 )     (227 )     (1,205 )     (682 )
Net pension adjustments
    746       422       2,238       1,266  
                                 
Other comprehensive income (loss), net of tax
  $ (57,457 )   $ 192,725     $ 70,688     $ 287,553  
 
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)
 
2011
   
2010
 
URA(D) on securities, net of deferred taxes
           
Temporary
  $ 419,546     $ 367,983  
Non-credit, OTTI
    2,084       1,455  
Total unrealized appreciation (depreciation) on investments, net of deferred taxes
    421,630       369,438  
Foreign currency translation adjustments, net of deferred taxes
    5,161       (11,097 )
Pension adjustments, net of deferred taxes
    (23,845 )     (26,083 )
Accumulated other comprehensive income (loss)
  $ 402,946     $ 332,258  
 
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)
 
2011
   
2010
   
2011
   
2010
 
Credit facility fees incurred
  $ 611     $ 531     $ 1,601     $ 1,562  
 
The terms and outstanding amounts for each facility are discussed below:

Group Credit Facility

Effective July 27, 2007, Group, Bermuda Re and 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”.  Wells Fargo Corporation (“Wells Fargo 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 Wells Fargo 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, 2011, was $4,280,132 thousand.  As of September 30, 2011, 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, 2011
 
At December 31, 2010
Bank
   
Commitment
   
In Use
 
Date of Expiry
 
Commitment
   
In Use
 
Date of Expiry
Wells Fargo Bank Group Credit Facility
Tranche One
  $ 350,000     $ -       $ 350,000     $ -    
 
Tranche Two
    500,000       400,090  
12/31/2011
    500,000       406,427  
12/31/2011
Total Wells Fargo Bank Group Credit Facility
  $ 850,000     $ 400,090       $ 850,000     $ 406,427    

Holdings Credit Facility

Effective August 15, 2011, Holdings entered into a new three year, $150,000 thousand unsecured revolving credit facility with a syndicate of lenders, replacing the August 23, 2006 five year senior revolving credit facility.  Both the August 15, 2011 and August 23, 2006 revolving credit agreements, which have similar terms, are 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 base rate, (b) 0.5% per annum above the Federal Funds Rate or (c) 1% above the one month LIBOR, 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 Re to maintain its statutory surplus at $1,875,000 thousand plus 25% of future aggregate net income and 25% of future aggregate capital contributions after December 31, 2010, which at September 30, 2011, was $1,898,559 thousand.  As of September 30, 2011, 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, 2011
 
At December 31, 2010
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     $ -         $ 150,000     $ 50,000  
12/16/2010
1/18/2011
              -                   -      
Total revolving credit borrowings
            -                   50,000      
Total letters of credit
            9,527    
12/31/2011
            9,527    
12/31/2011
                                         
Total Citibank Holdings Credit Facility
  $ 150,000     $ 9,527         $ 150,000     $ 59,527      


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, 2011
 
At December 31, 2010
Bank
 
Commitment
   
In Use
 
Date of Expiry
 
Commitment
   
In Use
 
Date of Expiry
Citibank Bilateral Letter of Credit Agreement
  $ 300,000     $ 2,291  
11/24/2011
  $ 300,000     $ 2,291  
11/24/2011
              80,577  
12/31/2011
            79,681  
12/31/2011
              1,008  
7/15/2013
            36,462  
1/31/2011
              4,914  
12/31/2014
            340  
6/15/2011
              26,263  
6/30/2015
            25,581  
6/30/2014
              8,897  
9/30/2015
            11,580  
9/30/2014
              10,088  
11/22/2015
            72,398  
12/31/2014
              51,248  
12/31/2015
            -  
-
Total Citibank Bilateral Agreement
  $ 300,000     $ 185,286       $ 300,000     $ 228,333    
 
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, 2011, the total amount on deposit in trust accounts was $89,290 thousand.

12.  SENIOR NOTES

The table below displays Holdings’ outstanding senior notes.  Market value is based on quoted market prices.
 
               
September 30, 2011
   
December 31, 2010
 
               
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     $ 249,847     $ 261,250     $ 249,812     $ 267,500  
8.75% Senior notes (matured and paid on March 15, 2010)
03/14/2000
 
03/15/2010
  $ 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)
 
2011
   
2010
   
2011
   
2010
 
Interest expense incurred
  $ 3,386     $ 3,386     $ 10,159     $ 13,833  

 
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, 2011
 
December 31, 2010
     
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
  $ 238,353     $ 202,776     $ 238,351     $ 227,825  
 
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)
 
2011
   
2010
   
2011
   
2010
 
Interest expense incurred
  $ 3,937     $ 3,937     $ 11,811     $ 11,811  


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, 2011
 
December 31, 2010
             
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     $ 327,337     $ 329,897     $ 294,825  
 
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)
 
2011
   
2010
   
2011
   
2010
 
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, 2010, $2,293,643 thousand of the $2,929,526 thousand in net assets of Holdings’ consolidated subsidiaries were subject to the foregoing regulatory restrictions.

 
15.  SEGMENT REPORTING
 
During the quarter ended September 30, 2011, the Company realigned its reporting segments to reflect recent changes in the type and volume of business written. The Company previously reported the results of Marine & Aviation, Surety, Accident and Health (“A&H”) Reinsurance and A&H Primary operations as a separate segment—Specialty Underwriting.  The A&H primary business, which is a relatively new line of business for the Company, has increased significantly, representing approximately 2% of premiums earned and is projected to continue to grow.  The A&H primary business is better aligned with the Insurance reporting segment based on the similarities of this business with that of those businesses already reflected in the Insurance segment.  The other operating units included in the Specialty Underwriting segment would have encompassed less than 5% of the Company’s premiums earned and their volume is projected to remain less than 5%.  As a result of the size of these remaining operating units and their similarity to the business reported within U.S. Reinsurance, they have been reclassified to the U.S. Reinsurance segment.  There has been no change to the International and Bermuda reporting segments.  The Company has restated all segment information for prior years to conform to the new reporting segment structure.
 
The U.S. Reinsurance operation writes property and casualty reinsurance and specialty lines of business, including Marine, Aviation, Surety and A&H business, on both a treaty and facultative basis, through reinsurance brokers, as well as directly with ceding companies primarily within the U.S.  The Insurance operation writes property and casualty insurance, including medical stop loss insurance, directly and through general agents, brokers and surplus lines brokers within the U.S. and Canada.  The International operation writes non-U.S. property and casualty reinsurance through Everest Re’s branches in Canada and Singapore and through offices in Brazil, 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 subsidiary.
 
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)
 
2011
   
2010
   
2011
   
2010
 
Gross written premiums
  $ 360,833     $ 435,218     $ 947,155     $ 1,076,614  
Net written premiums
    360,331       434,337       945,273       1,074,173  
                                 
Premiums earned
  $ 326,824     $ 353,245     $ 953,459     $ 1,010,540  
Incurred losses and LAE
    193,886       203,482       712,044       610,029  
Commission and brokerage
    71,131       86,288       231,486       247,831  
Other underwriting expenses
    10,843       11,076       30,621       32,617  
Underwriting gain (loss)
  $ 50,964     $ 52,399     $ (20,692 )   $ 120,063  
 
 
   
Three Months Ended
   
Nine Months Ended
 
Insurance
 
September 30,
   
September 30,
 
(Dollars in thousands)
 
2011
   
2010
   
2011
   
2010
 
Gross written premiums
  $ 236,294     $ 214,701     $ 750,283     $ 650,448  
Net written premiums
    203,395       141,495       647,964       462,581  
                                 
Premiums earned
  $ 216,220     $ 158,840     $ 641,881     $ 478,555  
Incurred losses and LAE
    195,602       127,150       506,945       359,431  
Commission and brokerage
    38,582       29,986       106,025       91,503  
Other underwriting expenses
    24,316       19,479       68,589       52,335  
Underwriting gain (loss)
  $ (42,280 )   $ (17,775 )   $ (39,678 )   $ (24,714 )
 
 
   
Three Months Ended
   
Nine Months Ended
 
International
 
September 30,
   
September 30,
 
(Dollars in thousands)
 
2011
   
2010
   
2011
   
2010
 
Gross written premiums
  $ 326,053     $ 323,741     $ 923,649     $ 906,089  
Net written premiums
    321,601       319,405       912,145       901,677  
                                 
Premiums earned
  $ 300,692     $ 301,267     $ 934,187     $ 869,831  
Incurred losses and LAE
    169,475       223,360       995,821       875,077  
Commission and brokerage
    78,228       78,574       230,444       221,355  
Other underwriting expenses
    7,549       6,675       20,938       20,363  
Underwriting gain (loss)
  $ 45,440     $ (7,342 )   $ (313,016 )   $ (246,964 )
 
 
   
Three Months Ended
   
Nine Months Ended
 
Bermuda
 
September 30,
   
September 30,
 
(Dollars in thousands)
 
2011
   
2010
   
2011
   
2010
 
Gross written premiums
  $ 205,326     $ 189,931     $ 560,213     $ 564,968  
Net written premiums
    205,463       189,988       560,413       565,017  
                                 
Premiums earned
  $ 200,602     $ 183,913     $ 566,092     $ 555,540  
Incurred losses and LAE
    161,748       120,795       491,466       381,054  
Commission and brokerage
    40,028       42,625       133,845       125,939  
Other underwriting expenses
    6,729       7,107       20,142       19,713  
Underwriting gain (loss)
  $ (7,903 )   $ 13,386     $ (79,361 )   $ 28,834  

 
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)
 
2011
   
2010
   
2011
   
2010
 
Underwriting gain (loss)
  $ 46,221     $ 40,668     $ (452,747 )   $ (122,781 )
Net investment income
    156,465       141,368       493,788       468,598  
Net realized capital gains (losses)
    (137,671 )     38,295       (130,360 )     69,320  
Net derivative gain (loss)
    (23,427 )     (552 )     (19,273 )     (19,802 )
Corporate expenses
    (4,204 )     (3,917 )     (11,922 )     (12,379 )
Interest, fee and bond issue cost amortization expense
    (13,085 )     (13,138 )     (39,199 )     (42,796 )
Other income (expense)
    (14,911 )     1,714       (31,744 )     14,851  
Income (loss) before taxes
  $ 9,388     $ 204,438     $ (191,457 )   $ 355,011  
 
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
 
   
September 30,
   
September 30,
 
(Dollars in thousands)
 
2011
   
2010
   
2011
   
2010
 
United Kingdom
  $ 137,089     $ 157,199     $ 346,916     $ 397,117  
 
No other country represented more than 5% of the Company’s revenues.

16.  SHARE-BASED COMPENSATION PLANS

For the three months ended September 30, 2011, share-based compensation awards granted were 2,443 restricted shares, granted on July 1, 2011, with a grant exercise price of $81.85 per share and 16,500 restricted shares, granted on September 21, 2011, with a grant exercise price of $79.49 per share.

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)
 
2011
   
2010
   
2011
   
2010
 
Service cost
  $ 2,047     $ 1,736     $ 6,142     $ 5,208  
Interest cost
    1,921       1,763       5,764       5,289  
Expected return on plan assets
    (2,265 )     (1,993 )     (6,795 )     (5,978 )
Amortization of prior service cost
    13       12       38       37  
Amortization of net (income) loss
    1,094       617       3,284       1,850  
ASC 715 settlement charge
    230       -       691       2,241  
Net periodic benefit cost
  $ 3,040     $ 2,135     $ 9,124     $ 8,647  
                                 
Other Benefits
 
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(Dollars in thousands)
    2011       2010       2011       2010  
Service cost
  $ 291     $ 254     $ 871     $ 762  
Interest cost
    234       213       703       637  
Amortization of net (income) loss
    40       20       122       61  
Net periodic benefit cost
  $ 565     $ 487     $ 1,696     $ 1,460  

 
The Company did not make any contributions to the qualified pension benefit plan for the three and nine months ended September 30, 2011 and 2010.

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 is domiciled in Bermuda and has significant subsidiaries and/or branches in Canada, Ireland, Singapore, the United Kingdom, and the United States.  The Company’s Bermuda domiciled subsidiaries are exempt from income taxation under Bermuda law until 2035. The Company’s non-Bermudian subsidiaries and branches are subject to income taxation at varying rates in their respective domiciles.

For 2010 and the first six months ending June 30 2011, the Company utilized the estimated annual effective tax rate approach for calculating its tax provision for interim periods as prescribed by ASC 740-270, Interim Reporting.  Under the estimated annual effective tax rate approach, the estimated annual effective tax rate is applied to the interim year-to-date pre-tax ordinary income to determine the income tax expense or benefit for the year-to-date period, adjusted by the tax impact for discrete items.  Due to potential volatility in the estimated annual effective tax rate approach, management has determined that an estimated annual effective tax rate approach is not reliable for the current interim reporting period and is recording taxes using the actual tax rate for the year-to-date results.  The tax expense or benefit for a quarter represents the difference between the year-to-date tax expense or benefit for the current year-to-date period less such amount for the immediately preceding year-to-date period. Management considers the impact of all known events in its estimation of the Company’s annual pre-tax income and effective tax rate.
 
20.  ACQUISITIONS

During the first quarter of 2011, the Company made several acquisitions to expand its domestic and Canadian insurance operations.  Below are descriptions of the transactions.

On January 2, 2011, the Company acquired the entire business and operations of Heartland Crop Insurance, Inc. (“Heartland”) of Topeka, Kansas for $55,000 thousand in cash, plus contingent payments in future periods based upon achievement of performance targets. Heartland is a managing general agent specializing in crop insurance.

On January 28, 2011, the Company acquired the entire business and operations of Premiere Underwriting Services (“Premiere”) of Toronto, Canada. Premiere is a managing general agent specializing in entertainment and sports and leisure risks.  On January 31, 2011, the Company acquired the renewal rights and operations of the financial lines business of Executive Risk Insurance Services, Ltd. (“Executive Risk”) of Toronto, Canada. The financial lines business of Executive Risk mainly underwrites Directors and Officers Liability, Fidelity, and Errors and Omissions Liability.

Overall, the Company recorded $35,068 thousand of goodwill and $26,903 thousand of intangible assets related to these acquisitions.  All intangible assets recorded as part of these acquisitions will be amortized on a straight line basis over seven years.

21.  SUBSEQUENT EVENTS

There is currently significant flooding in Thailand.  Due to the recentness of this event, the Company is unable to estimate the amount of loss at this time.  However, the Company anticipates that the flooding will adversely impact fourth quarter financial statements.

 
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.

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.  Competition and its effect on rates, terms and conditions vary widely by market and coverage yet continued to be most prevalent in the U.S. casualty insurance and reinsurance markets.

However, during the first nine months of 2011, the industry experienced significant losses from Australian floods, the New Zealand earthquake, the earthquake and tsunami in Japan and storms in the U.S.  It is too early to determine the impact on market conditions as a result of these events.  While there have been meaningful rate increases for catastrophe coverages in some global catastrophe prone regions, particularly areas impacted by these losses, whether the magnitude of these losses is sufficient to increase rates and improve market conditions for other lines of business remains to be seen.

Overall, we believe that current marketplace conditions, particularly for catastrophe coverages, provide 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)
 
2011
   
2010
   
(Decrease)
   
2011
   
2010
   
(Decrease)
 
Gross written premiums
  $ 1,128.5     $ 1,163.6       -3.0 %   $ 3,181.3     $ 3,198.1       -0.5 %
Net written premiums
    1,090.8       1,085.2       0.5 %     3,065.8       3,003.4       2.1 %
                                                 
REVENUES:
                                               
Premiums earned
  $ 1,044.3     $ 997.3       4.7 %   $ 3,095.6     $ 2,914.5       6.2 %
Net investment income
    156.5       141.4       10.7 %     493.8       468.6       5.4 %
Net realized capital gains (losses)
    (137.7 )     38.3    
NM
    (130.4 )     69.3    
NM
Net derivative gain (loss)
    (23.4 )     (0.6 )  
NM
    (19.3 )     (19.8 )     -2.7 %
Other income (expense)
    (14.9 )     1.7    
NM
    (31.7 )     14.9    
NM
Total revenues
    1,024.8       1,178.1       -13.0 %     3,408.0       3,447.4       -1.1 %
                                                 
CLAIMS AND EXPENSES:
                                               
Incurred losses and loss adjustment expenses
    720.7       674.8       6.8 %     2,706.3       2,225.6       21.6 %
Commission, brokerage, taxes and fees
    228.0       237.5       -4.0 %     701.8       686.6       2.2 %
Other underwriting expenses
    49.4       44.3       11.5 %     140.3       125.0       12.2 %
Corporate expenses
    4.2       3.9       7.4 %     11.9       12.4       -3.7 %
Interest, fees and bond issue cost amortization expense
    13.1       13.1       -0.4 %     39.2       42.8       -8.4 %
Total claims and expenses
    1,015.4       973.7       4.3 %     3,599.5       3,092.4       16.4 %
                                                 
INCOME (LOSS) BEFORE TAXES
    9.4       204.4       -95.4 %     (191.5 )     355.0       -153.9 %
Income tax expense (benefit)
    (53.7 )     30.2    
NM
    (69.9 )     46.8    
NM
NET INCOME (LOSS)
  $ 63.1     $ 174.2       -63.8 %   $ (121.5 )   $ 308.2       -139.4 %
                                                 
                   
Point
                   
Point
 
RATIOS:
                 
Change
                   
Change
 
Loss ratio
    69.0 %     67.7 %     1.3       87.4 %     76.4 %     11.0  
Commission and brokerage ratio
    21.8 %     23.8 %     (2.0 )     22.7 %     23.6 %     (0.9 )
Other underwriting expense ratio
    4.8 %     4.4 %     0.4       4.5 %     4.2 %     0.3  
Combined ratio
    95.6 %     95.9 %     (0.3 )     114.6 %     104.2 %     10.4  
                                                 
                           
At
   
At
   
Percentage
 
                           
September 30,
   
December 31,
   
Increase/
 
(Dollars in millions, except per share amounts)
                            2011       2010    
(Decrease)
 
Balance sheet data:
                                               
Total investments and cash
                          $ 15,713.9     $ 15,365.0       2.3 %
Total assets
                            18,735.6       18,408.0       1.8 %
Loss and loss adjustment expense reserves
                            9,980.0       9,340.2       6.8 %
Total debt
                            818.1       868.1       -5.8 %
Total liabilities
                            12,643.7       12,124.5       4.3 %
Shareholders' equity
                            6,091.8       6,283.5       -3.1 %
Book value per share
                            113.26       115.45       -1.9 %
                                                 
(NM, not meaningful)
                                               
(Some amounts may not reconcile due to rounding.)
                                               
 
Revenues.
Premiums.  Gross written premiums decreased by $35.1 million, or 3.0%, for the three months ended September 30, 2011, compared to the three months ended September 30, 2010 reflecting a $56.7 million decrease in our reinsurance business, partially offset by a $21.6 million increase in our insurance business.  Gross written premiums decreased by $16.8 million, or 0.5%, for the nine months ended September 30, 2011, compared to the nine months ended September 30, 2010 reflecting a $116.7 million decrease in our reinsurance business, partially offset by a $99.8 million increase in our insurance business.  The year over year increase in insurance premiums was primarily due to the acquisition of Heartland, which provided $122.3 million of new crop insurance business, our recent initiative in primary medical stop loss insurance, which added $44.8 million of premium and improved premium rates on our California workers’ compensation business, partially offset by our reduced participation on a large casualty program.  The decrease in reinsurance premiums was due to the continued reduction in U.S. casualty business, the loss of


several large crop reinsurance contracts, as well as the planned reduction of catastrophe exposed business in certain territories, partially offset by higher reinstatement premiums resulting from catastrophe losses and favorable foreign exchange impact period over period of $20.1 million and $54.3 million for the quarter and year-to-date, respectively.

Net written premiums increased $5.6 million, or 0.5%, for the three months ended September 30, 2011 compared to the three months ended September 30, 2010 and increased $62.3 million, or 2.1%, for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010.  The larger increase in net written premiums relative to the change in gross written premiums was due to a lower level of ceded reinsurance in the Insurance segment due to the planned reduction in one casualty program. Premiums earned increased $47.1 million, or 4.7%, for the three months ended September 30, 2011, compared to the three months ended September 30, 2010 and increased by $181.2 million, or 6.2%, for the nine months ended September 30, 2011, compared to the nine months ended September 30, 2010.  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.

Net Investment Income.  Net investment income increased $15.1 million, or 10.7%, for the three months ended September 30, 2011 compared to the three months ended September 30, 2010, primarily driven by a $16.8 million increase in investment income from our limited partnerships.  Net investment income increased $25.2 million, or 5.4%, for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010, primarily as a result of a $36.3 million increase in investment income from our limited partnerships.  The increases from the limited partnerships were partially offset by effects of lower reinvestment rates.  Net pre-tax investment income, as a percentage of average invested assets, was 4.1% for the three months ended September 30, 2011 compared to 3.9% for the three months ended September 30, 2010 and 4.4% for the nine months ended September 30, 2011 compared to 4.3% for the nine months ended September 30, 2010.

Net Realized Capital Gains (Losses).  Net realized capital losses were $137.7 million and net realized capital gains were $38.3 million for the three months ended September 30, 2011 and 2010, respectively.  The $137.7 million was comprised of $160.7 million of losses from fair value re-measurements and $1.1 million of other-than-temporary impairments which were partially offset by $24.0 million of net realized capital gains from sales on our fixed maturity and equity securities.  The net realized capital gain of $38.3 million for the three months ended September 30, 2010 was the result of $42.2 million of gains from fair value re-measurements, 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 losses were $130.4 million and net realized capital gains were $69.3 million for the nine months ended September 30, 2011 and 2010, respectively.  The $130.4 million was comprised of $123.8 million of losses from fair value re-measurements and $15.8 million of other-than-temporary impairments which were partially offset by $9.2 million of net realized capital gains from sales on our fixed maturity and equity securities.  The net realized capital gain of $69.3 million for the nine months ended September 30, 2010 was the result of $49.2 million of net realized capital gains from sales on our available for sale fixed maturity and equity securities and $23.0 million of gains from fair value re-measurements, partially offset by $2.9 million of other-than-temporary impairments.

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 $23.4 million and $0.6 million for the three months ended September 30, 2011 and 2010, respectively, and net derivative losses of $19.3 million and $19.8 million for the nine months ended September 30, 2011 and 2010, 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 expense of $14.9 million and $31.7 million for the three and nine months ended September 30, 2011, respectively, and other income of $1.7 million and $14.9 million for the three and nine months ended September 30, 2010, 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
2011
                                         
Attritional (a)
  $ 584.1       55.9 %     $ 4.3       0.4 %     $ 588.4       56.3 %  
Catastrophes
    132.3       12.7 %       -       0.0 %       132.3       12.7 %  
A&E
    -       0.0 %       -       0.0 %       -       0.0 %  
Total
  $ 716.4       68.6 %     $ 4.3       0.4 %     $ 720.7       69.0 %  
                                                       
2010
                                                     
Attritional (a)
  $ 605.9       60.8 %     $ (20.8 )     -2.1 %     $ 585.1       58.7 %  
Catastrophes
    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 %  
                                                       
Variance 2011/2010
                                                     
Attritional (a)
  $ (21.8 )     (4.9 )
pts
  $ 25.1       2.5  
pts
  $ 3.3       (2.4 )
pts
Catastrophes
    40.7       3.5  
pts
    2.0       0.2  
pts
    42.6       3.7  
pts
A&E
    -       -  
pts
    -       -  
pts
    -       -  
pts
Total
  $ 18.9       (1.3 )
pts
  $ 27.1       2.7  
pts
  $ 45.9       1.3  
pts
 
 
   
Nine Months Ended September 30,
   
Current
   
Ratio %/
 
Prior
   
Ratio %/
 
Total
   
Ratio %/
(Dollars in millions)
 
Year
   
Pt Change
 
Years
   
Pt Change
 
Incurred
   
Pt Change
2011
                                         
Attritional (a)
  $ 1,784.6       57.6 %     $ 0.6       0.0 %     $ 1,785.2       57.6 %  
Catastrophes
    920.3       29.7 %       -       0.0 %       920.3       29.7 %  
A&E
    -       0.0 %       0.8       0.0 %       0.8       0.0 %  
Total
  $ 2,705.0       87.4 %     $ 1.3       0.0 %     $ 2,706.3       87.4 %  
                                                       
2010
                                                     
Attritional (a)
  $ 1,741.6       59.8 %     $ (29.8 )     -1.0 %     $ 1,711.8       58.7 %  
Catastrophes
    527.1       18.1 %       (13.3 )     -0.5 %       513.8       17.6 %  
A&E
    -       0.0 %       -       0.0 %       -       0.0 %  
Total
  $ 2,268.7       77.9 %     $ (43.1 )     -1.5 %     $ 2,225.6       76.4 %  
                                                       
Variance 2011/2010
                                                     
Attritional (a)
  $ 43.0       (2.2 )
pts
  $ 30.4       1.0  
pts
  $ 73.4       (1.1 )
pts
Catastrophes
    393.2       11.6  
pts
    13.3       0.5  
pts
    406.5       12.1  
pts
A&E
    -       -  
pts
    0.8       -  
pts
    0.8       -  
pts
Total
  $ 436.3       9.5  
pts
  $ 44.4       1.5  
pts
  $ 480.7       11.0  
pts
                                                       
(a) Attritional losses exclude catastrophe and Asbestos and Environmental ("A&E") losses.
                                   
(Some amounts may not reconcile due to rounding.)
                                               
 
Incurred losses and LAE increased by $45.9 million, or 6.8%, for the three months ended September 30, 2011 compared to the same period in 2010.  Of the $45.9 million increase, current year catastrophe losses increased $40.7 million, or 3.5 points, period over period, primarily due to losses from Hurricane Irene and incurred loss estimates on the first quarter earthquakes in Japan and New Zealand.

Incurred losses and LAE increased by $480.7 million, or 21.6%, for the nine months ended September 30, 2011 compared to the same period in 2010.  Of the $480.7 million increase, current year catastrophe losses increased $393.2 million, or 11.6 points, period over period, primarily due to losses from the Japan and New Zealand earthquakes, Australia floods, and U.S. storms. In addition, the overall attritional losses


increased $73.4 million due to favorable development in 2010 without comparable favorable development in 2011.

Commission, Brokerage, Taxes and Fees.  Commission, brokerage, taxes and fees decreased by $9.5 million, or 4.0%, for the three months ended September 30, 2011 compared to the same period in 2010, and increased by $15.2 million, or 2.2%, for the nine months ended September 30, 2011 compared to the same period in 2010.  Commissions, as a percentage of earned premium, are down for both the quarter and the year driven by a shift in the mix of reinsurance business from proportional to excess of loss, with the latter generally having lower commission rates, as well as higher level of reinstatement premiums which are booked without commissions.  Also driving the lower commission ratio, period over period, is the change in distribution on the insurance book, with a greater proportion of the business being accessed directly rather than through managing general agents.

Other Underwriting Expenses.  Other underwriting expenses were $49.4 million and $44.3 million for the three months ended September 30, 2011 and 2010, respectively, and $140.3 million and $125.0 million for the nine months ended September 30, 2011 and 2010, respectively.  The increases in other underwriting expenses were mainly due to expenses of Heartland, which was acquired in January, 2011.

Corporate Expenses.  Corporate expenses, which are expenses that are not allocated to segments, were $4.2 million and $3.9 million for the three months ended September 30, 2011 and 2010, respectively, and $11.9 million and $12.4 million for the nine months ended September 30, 2011 and 2010, respectively.

Interest, Fees and Bond Issue Cost Amortization Expense.  Interest, fees and other bond amortization expense was $13.1 million for the three months ended September 30, 2011 and 2010, and $39.2 million and $42.8 million for the nine months ended September 30, 2011 and 2010, respectively.  The decrease for the nine month period was primarily due to the maturing of debt in March, 2010.

Income Tax Expense (Benefit).  We had an income tax benefit of $53.7 million and $69.9 million for the three and nine months ended September 30, 2011, respectively, and an income tax expense of $30.2 million and $46.8 million for the three and nine months ended September 30, 2010, 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.  The decrease in taxes year over year was primarily attributable to the previously mentioned catastrophe losses.

In addition, due to the timing and size of realized losses during the third quarter of 2011, we were unable to reliably estimate the annual effective tax rate for 2011 as small changes to the assumptions underlying our full year projections produce large changes in the annual effective tax rate.  As a result, the tax benefit for the nine months ended September 30, 2011 was calculated on a discrete basis using the actual effective tax rate.  The tax benefit for the three months ended September 30, 2011 reflects the difference between the year-to-date discrete basis and the annual effective tax rate used through June 30, 2011.  In 2010, we applied the effective tax rate method for all interim periods.

Net Income (Loss).
Our net income was $63.1 million and our net loss was $121.5 million for the three and nine months ended September 30, 2011, respectively.  Our net income was $174.2 million and $308.2 million for the three and nine months ended September 30, 2010, respectively.  The decreases were primarily driven by an increase in catastrophe losses in 2011 in addition to the other components discussed above.

Ratios.
Our combined ratio decreased by 0.3 points to 95.6% for the three months ended September 30, 2011 compared to 95.9% for the same period in 2010, and increased by 10.4 points to 114.6% for the nine months ended September 30, 2011 compared to 104.2% for the same period in 2010.  The loss ratio component increased 1.3 points and 11.0 points for the three and nine months ended September 30, 2011, respectively, over the same periods last year, principally due to the increase in current year catastrophe losses as a result of Hurricane Irene, the Japan earthquake, New Zealand earthquake, U.S. storms and the


Australia floods.  The other underwriting expense ratio component increased slightly and the commission and brokerage ratio component decreased slightly over the same periods last year due to the mix of business.

Shareholders’ Equity.
Shareholders’ equity decreased by $191.7 million to $6,091.8 million at September 30, 2011 from $6,283.5 million at December 31, 2010, principally as a result of $121.5 million of net loss, repurchases of 1,025,044 common shares for $84.2 million and $78.1 million of shareholder dividends, partially offset by $52.2 million of unrealized appreciation on investments, net of tax, share-based compensation transactions of $21.5 million and $16.3 million of net foreign currency translation adjustments.

Consolidated Investment Results

Net Investment Income.
Net investment income increased by 10.7% to $156.5 million for the three months ended September 30, 2011 compared to $141.4 million for the three months ended September 30, 2010 and increased by 5.4% to $493.8 million for the nine months ended September 30, 2011 compared to $468.6 million for the nine months ended September 30, 2010, primarily due to an increase in income from our limited partnership investments and increased dividend income from equities due to our expanded public equity portfolio and emerging market debt mutual funds.  These increases were partially offset by a decline in income from our fixed maturities, reflective of reducing our municipal bond exposure and declining reinvestment rates.  Proceeds from reducing this portfolio were used to expand our public equity and emerging markets portfolios.

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)
 
2011
   
2010
   
2011
   
2010
 
Fixed maturities
  $ 131.7     $ 143.8     $ 397.2     $ 438.0  
Equity securities
    15.8       2.7       40.8       8.1  
Short-term investments and cash
    0.4       0.4       1.0       -  
Other invested assets
                               
Limited partnerships
    15.7       (1.1 )     66.7       30.4  
Other
    (1.5 )     0.2       3.2       0.9  
Total gross investment income
    162.0       146.0       509.0       477.4  
Interest debited (credited) and other expense
    (5.6 )     (4.6 )     (15.2 )     (8.8 )
Total net investment income
  $ 156.5     $ 141.4     $ 493.8     $ 468.6  
                                 
(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,
 
2011
 
2010
Imbedded pre-tax yield of cash and invested assets
3.9%
 
3.9%
Imbedded after-tax yield of cash and invested assets
3.4%
 
3.5%

 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
Annualized pre-tax yield on average cash and invested assets
4.1%
 
3.9%
 
4.4%
 
4.3%
Annualized after-tax yield on average cash and invested assets
3.6%
 
3.4%
 
3.8%
 
3.8%

 
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)
 
2011
   
2010
   
Variance
   
2011
   
2010
   
Variance
 
Gains (losses) from sales:
                                   
Fixed maturity securities, market value
                                   
Gains
  $ 36.7     $ 4.1     $ 32.6     $ 60.4     $ 70.2     $ (9.8 )
Losses
    (13.2 )     (6.6 )     (6.6 )     (52.5 )     (21.9 )     (30.6 )
Total
    23.4       (2.5 )     25.9       7.8       48.3       (40.5 )
                                                 
Fixed maturity securities, fair value
                                               
Gains
    0.2       0.5       (0.3 )     1.0       0.8       0.2  
Losses
    (0.3 )     -       (0.3 )     (2.0 )     -       (2.0 )
Total
    (0.1 )     0.5       (0.6 )     (1.0 )     0.8       (1.8 )
                                                 
Equity securities, market value
                                               
Gains
    -       -       -       0.2       0.1       0.1  
Losses
    -       -       -       (0.2 )     -       (0.2 )
Total
    -       -       -       -       0.1       (0.1 )
                                                 
Equity securities, fair value
                                               
Gains
    6.0       1.0       5.0       9.0       4.6       4.4  
Losses
    (5.4 )     (0.1 )     (5.3 )     (6.7 )     (4.7 )     (2.0 )
Total
    0.6       0.9       (0.3 )     2.3       -       2.4  
                                                 
Total net realized capital gains (losses) from sales
                                               
Gains
    42.9       5.6       37.3       70.6       75.7       (5.1 )
Losses
    (18.9 )     (6.7 )     (12.2 )     (61.4 )     (26.6 )     (34.8 )
Total
    24.0       (1.0 )     25.1       9.2       49.2       (39.9 )
                                                 
Other-than-temporary impairments:
    (1.1 )     (2.9 )     1.8       (15.8 )     (2.9 )     (12.9 )
                                                 
Gains (losses) from fair value adjustments:
                                               
Fixed maturities, fair value
    (5.0 )     3.3       (8.3 )     (8.5 )     3.8       (12.3 )
Equity securities, fair value
    (155.7 )     38.9       (194.6 )     (115.2 )     19.3       (134.5 )
Total
    (160.7 )     42.2       (202.9 )     (123.8 )     23.0       (146.8 )
                                                 
Total net realized capital gains (losses)
  $ (137.7 )   $ 38.3     $ (176.0 )   $ (130.4 )   $ 69.3     $ (199.7 )
                                                 
(Some amounts may not reconcile due to rounding.)
                                               
 
Net realized capital losses were $137.7 million and net realized capital gains were $38.3 million for the three months ended September 30, 2011 and 2010, respectively.  For the three months ended September 30, 2011, we recorded $160.7 million of net realized capital losses due to fair value re-measurements on fixed maturity and equity securities and $1.1 million of other-than-temporary impairments, partially offset by $24.0 million of net realized capital gains from sales of fixed maturity and equity securities.  The gains and losses on the sales of fixed maturity securities included the impact of selling part of our municipal bond portfolio as credit concerns arose in this market sector.  For the three months ended September 30, 2010, we recorded $42.2 million of gains due to fair value re-measurements on fixed maturity and equity securities, partially offset by $2.9 million of other-than-temporary impairments and $1.0 million of net realized capital losses from sales of fixed maturity and equity securities.

Net realized capital losses were $130.4 million and net realized capital gains were $69.3 million for the nine months ended September 30, 2011 and 2010, respectively.  For the nine months ended September 30, 2011, we recorded $123.8 million of net realized capital losses due to fair value re-measurements on fixed maturity and equity securities and $15.8 million of other-than-temporary impairments, partially offset by $9.2 million of net realized capital gains from sales of fixed maturity and equity securities.  The gains and losses on the sales of fixed maturity securities included the impact of selling part of our municipal bond portfolio as credit concerns arose in this market sector.  For the nine months ended September 30, 2010,


we recorded $49.2 million of net realized capital gains from sales of fixed maturity and equity securities and $23.0 million of gains due to fair value re-measurements on fixed maturity and equity securities, partially offset by $2.9 million of other-than-temporary impairments.  The gains on the sales of fixed maturity securities were primarily the result of selling securities in foreign currencies, which reduced our exposure to currency fluctuations.

Segment Results.
During the quarter ended September 30, 2011, the Company realigned its reporting segments to reflect recent changes in the type and volume of business written. The Company previously reported the results of Marine & Aviation, Surety, A&H Reinsurance and A&H Primary operations as a separate segment—Specialty Underwriting.  The A&H primary business, which is a relatively new line of business for the Company, has increased significantly, representing approximately 2% of premiums earned and is projected to continue to grow.  The A&H primary business is better aligned with the Insurance reporting segment based on the similarities of this business with that of those businesses already reflected in the Insurance segment.  The other operating units included in the Specialty Underwriting segment would have encompassed less than 5% of the Company’s premiums earned and their volume is projected to remain less than 5%.  As a result of the size of these remaining operating units and their similarity to the business reported within U.S. Reinsurance, they have been reclassified to the U.S. Reinsurance segment.  There has been no change to the International and Bermuda reporting segments.  The Company has restated all segment information for prior years to conform to the new reporting segment structure.
 
The U.S. Reinsurance operation writes property and casualty reinsurance and specialty lines of business, including Marine, Aviation, Surety and A&H business, on both a treaty and facultative basis, through reinsurance brokers, as well as directly with ceding companies primarily within the U.S.  The Insurance operation writes property and casualty insurance, including medical stop loss insurance, directly and through general agents, brokers and surplus lines brokers within the U.S. and Canada.  The International operation writes non-U.S. property and casualty reinsurance through Everest Re’s branches in Canada and Singapore and through offices in Brazil, 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 subsidiary.

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)
 
2011
   
2010
   
Variance
   
% Change
   
2011
   
2010
   
Variance
   
% Change
 
Gross written premiums
  $ 360.8     $ 435.2     $ (74.4 )     -17.1 %   $ 947.2     $ 1,076.6     $ (129.5 )     -12.0 %
Net written premiums
    360.3       434.3       (74.0 )     -17.0 %     945.3       1,074.2       (128.9 )     -12.0 %
                                                                 
Premiums earned
  $ 326.8     $ 353.2     $ (26.4 )     -7.5 %   $ 953.5     $ 1,010.5     $ (57.1 )     -5.6 %
Incurred losses and LAE
    193.9       203.5       (9.6 )     -4.7 %     712.0       610.0       102.0       16.7 %
Commission and brokerage
    71.1       86.3       (15.2 )     -17.6 %     231.5       247.8       (16.3 )     -6.6 %
Other underwriting expenses
    10.8       11.1       (0.2 )     -2.1 %     30.6       32.6       (2.0 )     -6.1 %
Underwriting gain (loss)
  $ 51.0     $ 52.4     $ (1.4 )     -2.7 %   $ (20.7 )   $ 120.1     $ (140.8 )     -117.2 %
                                                                 
                           
Point Chg
                         
Point Chg
Loss ratio
    59.3 %     57.6 %             1.7       74.7 %     60.4 %             14.3  
Commission and brokerage ratio
    21.8 %     24.4 %             (2.6 )     24.3 %     24.5 %             (0.2 )
Other underwriting expense ratio
    3.3 %     3.2 %             0.1       3.2 %     3.2 %             -  
Combined ratio
    84.4 %     85.2 %             (0.8 )     102.2 %     88.1 %             14.1  
                                                                 
(Some amounts may not reconcile due to rounding.)
                                                               
 
Premiums. Gross written premiums decreased by 17.1% to $360.8 million for the three months ended September 30, 2011 from $435.2 million for the three months ended September 30, 2010, primarily due to non-renewed business in treaty property, treaty casualty, accident and health and crop lines of business.  Net written premiums decreased 17.0% to $360.3 million for the three months ended September 30, 2011 compared to $434.3 million for the same period in 2010, which is in line with the decrease in gross written premiums for the quarter.  Premiums earned decreased 7.5% to $326.8 million for the three months ended September 30, 2011 compared to $353.2 million for the three months ended September 30, 2010.  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 12.0% to $947.2 million for the nine months ended September 30, 2011 from $1,076.6 million for the nine months ended September 30, 2010, primarily due to non-renewed quota share business in treaty property, treaty casualty, and crop as well as reduced premium for accident and health and marine business, partially offset by an $19.1 million increase in reinstatement premiums due to catastrophe loss activity.  Net written premiums decreased 12.0% to $945.3 million for the nine months ended September 30, 2011 compared to $1,074.2 million for the same period in 2010, which is in line with the decrease in gross written premiums for the year.  Premiums earned decreased 5.6% to $953.5 million for the nine months ended September 30, 2011 compared to $1,010.5 million for the nine months ended September 30, 2010.  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 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
2011
                                         
Attritional
  $ 163.8       50.0 %     $ (2.5 )     -0.7 %     $ 161.3       49.3 %  
Catastrophes
    30.8       9.4 %       1.8       0.6 %       32.6       10.0 %  
A&E
    -       0.0 %       -       0.0 %       -       0.0 %  
Total segment
  $ 194.6       59.4 %     $ (0.7 )     -0.1 %     $ 193.9       59.3 %  
                                                       
2010
                                                     
Attritional
  $ 207.0       58.6 %     $ 1.1       0.3 %     $ 208.2       58.9 %  
Catastrophes
    (4.9 )     -1.4 %       0.2       0.1 %       (4.7 )     -1.3 %  
A&E
    -       0.0 %       -       0.0 %       -       0.0 %  
Total segment
  $ 202.1       57.2 %     $ 1.3       0.4 %     $ 203.5       57.6 %  
                                                       
Variance 2011/2010
                                                     
Attritional
  $ (43.2 )     (8.6 )
pts
  $ (3.6 )     (1.0 )
pts
  $ (46.9 )     (9.6 )
pts
Catastrophes
    35.7       10.8  
pts
    1.6       0.5  
pts
    37.3       11.3  
pts
A&E
    -       -  
pts
    -       -  
pts
    -       -  
pts
Total segment
  $ (7.5 )     2.2  
pts
  $ (2.0 )     (0.6 )
pts
  $ (9.6 )     1.7  
pts

 
   
Nine Months Ended September 30,
   
Current
   
Ratio %/
 
Prior
   
Ratio %/
 
Total
   
Ratio %/
(Dollars in millions)
 
Year
   
Pt Change
 
Years
   
Pt Change
 
Incurred
   
Pt Change
2011
                                         
Attritional
  $ 502.6       52.7 %     $ (1.4 )     -0.1 %     $ 501.2       52.6 %  
Catastrophes
    199.1       20.9 %       11.7       1.2 %       210.8       22.1 %  
A&E
    -       0.0 %       -       0.0 %       -       0.0 %  
Total segment
  $ 701.7       73.6 %     $ 10.3       1.1 %     $ 712.0       74.7 %  
                                                       
2010
                                                     
Attritional
  $ 580.2       57.4 %     $ 6.9       0.7 %     $ 587.2       58.1 %  
Catastrophes
    18.1       1.8 %       4.8       0.5 %       22.8       2.3 %  
A&E
    -       0.0 %       -       0.0 %       -       0.0 %  
Total segment
  $ 598.3       59.2 %     $ 11.7       1.2 %     $ 610.0       60.4 %  
                                                       
Variance 2011/2010
                                                     
Attritional
  $ (77.6 )     (4.7 )
pts
  $ (8.3 )     (0.8 )
pts
  $ (86.0 )     (5.5 )
pts
Catastrophes
    181.0       19.1  
pts
    6.9       0.7  
pts
    188.0       19.8  
pts
A&E
    -       -  
pts
    -       -  
pts
    -       -  
pts
Total segment
  $ 103.4       14.4  
pts
  $ (1.4 )     (0.1 )
pts
  $ 102.0       14.3  
pts
                                                       
(Some amounts may not reconcile due to rounding.)
                                               
 
Incurred losses were $9.6 million lower at $193.9 million for the three months ended September 30, 2011 compared to $203.5 million for the three months ended September 30, 2010, primarily as a result of the $43.2 million (8.6 points) decrease in current year attritional losses and the $3.6 million (1.0 point) decrease to prior year attritional losses, partially offset by the $35.7 million increase in current year catastrophe losses, primarily due to Hurricane Irene and development on the Japan and New Zealand earthquakes.  The decline in the current year attritional losses is primarily due to a combination of lower earned premiums and a change in the mix of business.

Incurred losses were $102.0 million (14.3 points) higher at $712.0 million for the nine months ended September 30, 2011 compared to $610.0 million for the nine months ended September 30, 2010, primarily as a result of the $181.0 million (19.1 points) increase in current year catastrophe losses, largely due to the Japan and New Zealand earthquakes, U.S. Midwest tornadoes and Hurricane Irene, and the $6.9 million (0.7 points) increase in prior year catastrophe losses, largely due to the Chile earthquake. The current year attritional losses decreased $77.6 million (4.7 points), primarily due to a shift in the mix of business, with a higher level of catastrophe excess of loss business in the current year, which carries a lower attritional loss


ratio, coupled with a significant reduction in pro rata property business, which further reduces the current year attritional loss ratio.

Segment Expenses.  Commission and brokerage expenses decreased by 17.6% to $71.1 million for the three months ended September 30, 2011 compared to $86.3 million for the three months ended September 30, 2010.  Commission and brokerage expenses decreased by 6.6% to $231.5 million for the nine months ended September 30, 2011 compared to $247.8 million for the nine months ended September 30, 2010.  These variances were due to the changes in premiums earned and the mix of business with varying commission rates.

Segment other underwriting expenses decreased slightly to $10.8 million for the three months ended September 30, 2011 compared to $11.1 million for the same period in 2010.  Segment other underwriting expenses decreased to $30.6 million for the nine months ended September 30, 2011 compared to $32.6 million for the same period in 2010.  These variances were due to reduced operating costs for the segment.

Insurance.
The following table presents the underwriting results and ratios for the Insurance segment for the periods indicated.
 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
(Dollars in millions)
 
2011
   
2010
   
Variance
   
% Change
   
2011
   
2010
   
Variance
   
% Change
 
Gross written premiums
  $ 236.3     $ 214.7     $ 21.6       10.1 %   $ 750.3     $ 650.4     $ 99.8       15.3 %
Net written premiums
    203.4       141.5       61.9       43.7 %     648.0       462.6       185.4       40.1 %
                                                                 
Premiums earned
  $ 216.2     $ 158.8     $ 57.4       36.1 %   $ 641.9     $ 478.6     $ 163.3       34.1 %
Incurred losses and LAE
    195.6       127.2       68.5       53.8 %     506.9       359.4       147.5       41.0 %
Commission and brokerage
    38.6       30.0       8.6       28.7 %     106.0       91.5       14.5       15.9 %
Other underwriting expenses
    24.3       19.5       4.8       24.8 %     68.6       52.3       16.3       31.1 %
Underwriting gain (loss)
  $ (42.3 )   $ (17.8 )   $ (24.5 )     137.9 %   $ (39.7 )   $ (24.7 )   $ (15.0 )     60.5 %
                                                                 
                           
Point Chg
                         
Point Chg
Loss ratio
    90.5 %     80.0 %             10.5       79.0 %     75.1 %             3.9  
Commission and brokerage ratio
    17.8 %     18.9 %             (1.1 )     16.5 %     19.1 %             (2.6 )
Other underwriting expense ratio
    11.3 %     12.3 %             (1.0 )     10.7 %     11.0 %             (0.3 )
Combined ratio
    119.6 %     111.2 %             8.4       106.2 %     105.2 %             1.0  
                                                                 
(Some amounts may not reconcile due to rounding.)
                                                               
 
Premiums. Gross written premiums increased by 10.1% to $236.3 million for the three months ended September 30, 2011 compared to $214.7 million for the three months ended September 30, 2010. This was due to strategic portfolio changes with growth in short-tail business, primarily driven by the acquisition of Heartland, which provided $44.8 million of new crop insurance premium in the current quarter and $14.0 million growth in A&H primary business, partially offset by the planned reduction of a large casualty program.  Net written premiums increased 43.7% to $203.4 million for the three months ended September 30, 2011 compared to $141.5 million for the same period in 2010 due to higher gross premiums, reduced levels of ceded reinsurance primarily related to the reduced casualty program and an increase in A&H primary business.  Premiums earned increased 36.1% to $216.2 million for the three months ended September 30, 2011 compared to $158.8 million for the three months ended September 30, 2010.  The change in premiums earned is relatively consistent with the increase in net written premium.

Gross written premiums increased by 15.3% to $750.3 million for the nine months ended September 30, 2011 compared to $650.4 million for the nine months ended September 30, 2010. This was due to strategic portfolio changes with growth in short-tail business, primarily driven by the acquisition of Heartland, which provided $122.3 million of new crop insurance premium in 2011 and $44.8 million growth in A&H primary business, partially offset by the reduction of a large casualty program.  Net written premiums increased 40.1% to $648.0 million for the nine months ended September 30, 2011 compared to $462.6 million for the same period in 2010 due to higher gross premiums, reduced levels of ceded reinsurance and an increase in A&H primary business.  Premiums earned increased 34.1% to $641.9 million for the nine


months ended September 30, 2011 compared to $478.6 million for the nine months ended September 30, 2010.  The change in premiums earned is relatively consistent with the increase in net written premium.

Incurred Losses and LAE. The following tables present the incurred losses and LAE for the 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
2011
                                         
Attritional
  $ 168.1       77.7 %     $ 25.0       11.6 %     $ 193.1       89.3 %  
Catastrophes
    2.5       1.2 %       -       0.0 %       2.5       1.2 %  
Total segment
  $ 170.6       78.9 %     $ 25.0       11.6 %     $ 195.6       90.5 %  
                                                       
2010
                                                     
Attritional
  $ 122.8       77.2 %     $ 4.4       2.8 %     $ 127.2       80.0 %  
Catastrophes
    -       0.0 %       -       0.0 %       -       0.0 %  
Total segment
  $ 122.8       77.2 %     $ 4.4       2.8 %     $ 127.2       80.0 %  
                                                       
Variance 2011/2010
                                                     
Attritional
  $ 45.3       0.5  
pts
  $ 20.6       8.8  
pts
  $ 65.9       9.3  
pts
Catastrophes
    2.5       1.2  
pts
    -       -  
pts
    2.5       1.2  
pts
Total segment
  $ 47.8       1.7  
pts
  $ 20.6       8.8  
pts
  $ 68.4       10.5  
pts

 
   
Nine Months Ended September 30,
   
Current
   
Ratio %/
 
Prior
   
Ratio %/
 
Total
   
Ratio %/
(Dollars in millions)
 
Year
   
Pt Change
 
Years
   
Pt Change
 
Incurred
   
Pt Change
2011
                                         
Attritional
  $ 479.1       74.6 %     $ 25.0       3.9 %     $ 504.1       78.5 %  
Catastrophes
    2.5       0.4 %       0.3       0.1 %       2.8       0.5 %  
Total segment
  $ 481.6       75.0 %     $ 25.3       4.0 %     $ 506.9       79.0 %  
                                                       
2010
                                                     
Attritional
  $ 352.8       73.7 %     $ 6.6       1.4 %     $ 359.4       75.1 %  
Catastrophes
    -       0.0 %       -       0.0 %       -       0.0 %  
Total segment
  $ 352.8       73.7 %     $ 6.6       1.4 %     $ 359.4       75.1 %  
                                                       
Variance 2011/2010
                                                     
Attritional
  $ 126.3       0.9  
pts
  $ 18.4       2.5  
pts
  $ 144.7       3.4  
pts
Catastrophes
    2.5       0.4  
pts
    0.3       0.1  
pts
    2.8       0.5  
pts
Total segment
  $ 128.8       1.3  
pts
  $ 18.7       2.6  
pts
  $ 147.5       3.9  
pts
                                                       
(Some amounts may not reconcile due to rounding.)
                                               
 
Incurred losses and LAE increased by $68.4 million, or 53.8%, to $195.6 million for the three months ended September 30, 2011 compared to $127.2 million for the three months ended September 30, 2010. This was primarily due to an increase of $45.3 million (0.5 points) in current year attritional losses and an increase in prior years’ losses of $20.6 million (8.8 points) attributable to development on excess casualty and California workers compensation reserves.

Incurred losses and LAE increased by $147.5 million, or 41.0%, to $506.9 million for the nine months ended September 30, 2011 compared to $359.4 million for the nine months ended September 30, 2010. This was primarily due to an increase of $126.3 million (0.9 points) in current year attritional losses and an increase in prior years’ losses of $18.7 million (2.6 points) attributable to development on excess casualty and California workers compensation reserves.

Segment Expenses. Commission and brokerage increased by 28.7% to $38.6 million for the three months ended September 30, 2011 compared to $30.0 million for the three months ended September 30, 2010.  Commission and brokerage increased by 15.9% to $106.0 million for the nine months ended September 30, 2011 compared to $91.5 million for the nine months ended September 30, 2010.  These increases were primarily the result of an increase in net premiums earned offset by reduced commission ratios due to changes in distribution and the mix of business.


Segment other underwriting expenses increased to $24.3 million for the three months ended September 30, 2011 compared to $19.5 million for the same period in 2010.   Segment other underwriting expenses increased to $68.6 million for the nine months ended September 30, 2011 compared to $52.3 million for the same period in 2010.  These increases were primarily due to the expenses of the newly acquired Heartland.

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)
 
2011
   
2010
   
Variance
   
% Change
   
2011
   
2010
   
Variance
   
% Change
 
Gross written premiums
  $ 326.1     $ 323.7     $ 2.3       0.7 %   $ 923.6     $ 906.1     $ 17.6       1.9 %
Net written premiums
    321.6       319.4       2.2       0.7 %     912.1       901.7       10.5       1.2 %
                                                                 
Premiums earned
  $ 300.7     $ 301.3     $ (0.6 )     -0.2 %   $ 934.2     $ 869.8     $ 64.4       7.4 %
Incurred losses and LAE
    169.5       223.4       (53.9 )     -24.1 %     995.8       875.1       120.7       13.8 %
Commission and brokerage
    78.2       78.6       (0.3 )     -0.4 %     230.4       221.4       9.1       4.1 %
Other underwriting expenses
    7.5       6.7       0.9       13.1 %     20.9       20.4       0.6       2.8 %
Underwriting gain (loss)
  $ 45.4     $ (7.3 )   $ 52.8    
NM
  $ (313.0 )   $ (247.0 )   $ (66.1 )     26.7 %
                                                                 
                           
Point Chg
                         
Point Chg
Loss ratio
    56.4 %     74.1 %             (17.7 )     106.6 %     100.6 %             6.0  
Commission and brokerage ratio
    26.0 %     26.1 %             (0.1 )     24.7 %     25.4 %             (0.7 )
Other underwriting expense ratio
    2.5 %     2.2 %             0.3       2.2 %     2.4 %             (0.2 )
Combined ratio
    84.9 %     102.4 %             (17.5 )     133.5 %     128.4 %             5.1  
                                                                 
(NM, not meaningful)
                                                               
(Some amounts may not reconcile due to rounding.)
                                                               
 
Premiums. Gross written premiums increased by 0.7% to $326.1 million for the three months ended September 30, 2011 compared to $323.7 million for the three months ended September 30, 2010, due to an increase in premiums written through Canada, $11.2 million; and Asia, $8.4 million; partially offset by a $17.5 million net decrease in business written in the Latin America, South America, Middle East, and Africa regions. The increases were primarily due to generally higher rate levels on retained business and favorable foreign exchange impact of $11.3 million, partially offset by non-renewed business in certain catastrophe exposed territories that have not responded to the recent elevation in catastrophe loss activity.  Net written premiums increased by 0.7% to $321.6 million for the three months ended September 30, 2011 compared to $319.4 million for the same period in 2010, principally as a result of the increase in gross written premiums.  Premiums earned decreased 0.2% to $300.7 million for the three months ended September 30, 2011 compared to $301.3 million for the same period in 2010.  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 1.9% to $923.6 million for the nine months ended September 30, 2011 compared to $906.1 million for the nine months ended September 30, 2010, due to a net increase of $9.2 million in premiums written in Canada, $5.3 million in the Latin America, South America, Middle East, and Africa regions, $2.9 million in Asia.  The increase in gross written premiums included a net favorable foreign exchange impact of $33.4 million.  Growth from increased rate levels, particularly in regions recently affected by catastrophe losses was partially offset by non-renewed business which did not meet our current pricing targets.  Net written premiums increased by 1.2% to $912.1 million for the nine months ended September 30, 2011 compared to $901.7 million for the same period in 2010, principally as a result of the increase in gross written premiums.  Premiums earned increased 7.4% to $934.2 million for the nine months ended September 30, 2011 compared to $869.8 million for the same period in 2010.  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 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
2011
                                         
Attritional
  $ 138.6       46.2 %     $ (20.0 )     -6.7 %     $ 118.6       39.5 %  
Catastrophes
    51.3       17.1 %       (0.5 )     -0.2 %       50.8       16.9 %  
Total segment
  $ 189.9       63.3 %     $ (20.5 )     -6.9 %     $ 169.5       56.4 %  
                                                       
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 %  
                                                       
Variance 2011/2010
                                                     
Attritional
  $ (33.8 )     (10.9 )
pts
  $ 4.8       1.5  
pts
  $ (29.0 )     (9.5 )
pts
Catastrophes
    (26.0 )     (8.6 )
pts
    1.0       0.3  
pts
    (25.0 )     (8.3 )
pts
Total segment
  $ (59.8 )     (19.6 )
pts
  $ 5.8       1.8  
pts
  $ (53.9 )     (17.7 )
pts

 
   
Nine Months Ended September 30,
   
Current
   
Ratio %/
 
Prior
   
Ratio %/
 
Total
   
Ratio %/
(Dollars in millions)
 
Year
   
Pt Change
 
Years
   
Pt Change
 
Incurred
   
Pt Change
2011
                                         
Attritional
  $ 472.7       50.6 %     $ (30.0 )     -3.2 %     $ 442.6       47.4 %  
Catastrophes
    556.5       59.6 %       (3.4 )     -0.4 %       553.2       59.2 %  
Total segment
  $ 1,029.2       110.2 %     $ (33.4 )     -3.6 %     $ 995.8       106.6 %  
                                                       
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 %  
                                                       
Variance 2011/2010
                                                     
Attritional
  $ (15.1 )     (5.4 )
pts
  $ 0.8       0.3  
pts
  $ (14.4 )     (5.1 )
pts
Catastrophes
    125.3       10.0  
pts
    9.7       1.1  
pts
    135.1       11.1  
pts
Total segment
  $ 110.2       4.5  
pts
  $ 10.5       1.4  
pts
  $ 120.7       6.0  
pts
                                                       
(Some amounts may not reconcile due to rounding.)
                                               
 
Incurred losses and LAE decreased 24.1% to $169.5 million for the three months ended September 30, 2011 compared to $223.4 million for the three months ended September 30, 2010.  The decrease was principally due to a $33.8 million (10.9 point) decrease in current year attritional losses and a $26.0 million (8.6 points) decrease in current year catastrophe losses in the third quarter of 2011 (Japan earthquake) compared to the catastrophe losses reported in the third quarter of 2010 (Chile earthquake).

Incurred losses and LAE increased 13.8% to $995.8 million for the nine months ended September 30, 2011 compared to $875.1 million for the nine months ended September 30, 2010.  The increase was principally due to a $125.3 million (10.0 points) increase in current year catastrophes in 2011 (Japan and New Zealand earthquakes, the Australia floods, and the wildfire loss in Alberta, Canada) compared to the 2010 reported catastrophe losses (Chile earthquake and Australia hailstorms).  The current year attritional loss ratio was down to 50.6% for the nine months ended September 30, 2011 from 56.0% for the nine months ended September 30, 2010, primarily due to a shift in the mix of business with a lower level of quota share business, which generally carries a higher loss ratio.

Segment Expenses. Commission and brokerage decreased 0.4% to $78.2 million for the three months ended September 30, 2011 compared to $78.6 million for the three months ended September 30, 2010.  Commission and brokerage increased 4.1% to $230.4 million for the nine months ended September 30, 2011 compared to $221.4 million for the nine months ended September 30, 2010.  These variances were due to changes in commission rates, premiums earned and the mix of business.

 
Segment other underwriting expenses increased to $7.5 million for the three months ended September 30, 2011 compared to $6.7 million for the three months ended September 30, 2010.  Segment other underwriting expenses increased to $20.9 million for the nine months ended September 30, 2011 compared to $20.4 million for the nine months ended September 30, 2010.

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)
 
2011
   
2010
   
Variance
   
% Change
   
2011
   
2010
   
Variance
   
% Change
 
Gross written premiums
  $ 205.3     $ 189.9     $ 15.4       8.1 %   $ 560.2     $ 565.0     $ (4.8 )     -0.8 %
Net written premiums
    205.5       190.0       15.5       8.1 %     560.4       565.0       (4.6 )     -0.8 %
                                                                 
Premiums earned
  $ 200.6     $ 183.9     $ 16.7       9.1 %   $ 566.1     $ 555.5     $ 10.6       1.9 %
Incurred losses and LAE
    161.7       120.8       41.0       33.9 %     491.5       381.1       110.4       29.0 %
Commission and brokerage
    40.0       42.6       (2.6 )     -6.1 %     133.8       125.9       7.9       6.3 %
Other underwriting expenses
    6.7       7.1       (0.4 )     -5.3 %     20.1       19.7       0.4       2.2 %
Underwriting gain (loss)
  $ (7.9 )   $ 13.4     $ (21.3 )     -159.0 %   $ (79.4 )   $ 28.8     $ (108.2 )  
NM
                                                                 
                           
Point Chg
                         
Point Chg
Loss ratio
    80.6 %     65.7 %             14.9       86.8 %     68.6 %             18.2  
Commission and brokerage ratio
    20.0 %     23.2 %             (3.2 )     23.6 %     22.7 %             0.9  
Other underwriting expense ratio
    3.3 %     3.8 %             (0.5 )     3.6 %     3.5 %             0.1  
Combined ratio
    103.9 %     92.7 %             11.2       114.0 %     94.8 %             19.2  
                                                                 
(NM, not meaningful)
                                                               
(Some amounts may not reconcile due to rounding.)
                                                               
 
Premiums. Gross written premiums increased 8.1% to $205.3 million for the three months ended September 30, 2011 compared to $189.9 million for the same period in 2010, primarily due to an increase of $12.1 million in reinstatement premiums for catastrophe excess of loss business and favorable foreign exchange impact of $7.1 million, partially offset by reduced participations and non-renewal of U.K. property and property catastrophe business, where rate increases were not achieved.  Net written premiums increased 8.1% to $205.5 million for the three months ended September 30, 2011 compared to $190.0 million for the three months ended September 30, 2010, in line with the increase in gross written premiums.  Premiums earned increased 9.1% to $200.6 million for the three months ended September 30, 2011 compared to $183.9 million for the three months ended September 30, 2010, consistent with the trend noted for net written premiums.

Gross written premiums decreased 0.8% to $560.2 million for the nine months ended September 30, 2011 compared to $565.0 million for the same period in 2010, primarily due to reduced participations and non-renewal of U.K. property and property catastrophe business, where rate increases were not achieved, partially offset by an increase of $11.3 million in reinstatement premiums for catastrophe excess of loss business and favorable foreign exchange impact of $17.3 million.  Net written premiums decreased 0.8% to $560.4 million for the nine months ended September 30, 2011 compared to $565.0 million for the nine months ended September 30, 2010, in line with the decrease in gross written premiums.  Premiums earned increased 1.9% to $566.1 million for the nine months ended September 30, 2011 compared to $555.5 million for the nine months ended September 30, 2010.  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
2011
                                         
Attritional
  $ 113.6       56.6 %     $ 1.8       0.9 %     $ 115.4       57.5 %  
Catastrophes
    47.7       23.8 %       (1.3 )     -0.7 %       46.4       23.1 %  
A&E
    -       0.0 %       -       0.0 %       -       0.0 %  
Total segment
  $ 161.3       80.4 %     $ 0.5       0.2 %     $ 161.7       80.6 %  
                                                       
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 %  
                                                       
Variance 2011/2010
                                                     
Attritional
  $ 9.8       0.2  
pts
  $ 3.3       1.7  
pts
  $ 13.1       1.9  
pts
Catastrophes
    28.4       13.3  
pts
    (0.6 )     (0.3 )
pts
    27.9       13.0  
pts
A&E
    -       -  
pts
    -       -  
pts
    -       -  
pts
Total segment
  $ 38.2       13.5  
pts
  $ 2.8       1.4  
pts
  $ 41.0       14.9  
pts

 
   
Nine Months Ended September 30,
   
Current
   
Ratio %/
 
Prior
   
Ratio %/
 
Total
   
Ratio %/
(Dollars in millions)
 
Year
   
Pt Change
 
Years
   
Pt Change
 
Incurred
   
Pt Change
2011
                                         
Attritional
  $ 330.2       58.4 %     $ 7.0       1.2 %     $ 337.2       59.6 %  
Catastrophes
    162.2       28.6 %       (8.7 )     -1.5 %       153.5       27.1 %  
A&E
    -       0.0 %       0.8       0.1 %       0.8       0.1 %  
Total segment
  $ 492.4       87.0 %     $ (0.9 )     -0.2 %     $ 491.5       86.8 %  
                                                       
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 %  
                                                       
Variance 2011/2010
                                                     
Attritional
  $ 9.5       0.6  
pts
  $ 19.6       3.5  
pts
  $ 29.0       4.1  
pts
Catastrophes
    84.3       14.6  
pts
    (3.7 )     (0.6 )
pts
    80.6       14.0  
pts
A&E
    -       -  
pts
    0.8       0.1  
pts
    0.8       0.1  
pts
Total segment
  $ 93.8       15.3  
pts
  $ 16.6       3.0  
pts
  $ 110.4       18.2  
pts
                                                       
(Some amounts may not reconcile due to rounding.)
                                               
 
Incurred losses and LAE increased 33.9% to $161.7 million for the three months ended September 30, 2011 compared to $120.8 million for the same period in 2010, representing a 14.9 point increase to the loss ratio, quarter over quarter.  The increase was primarily attributable to an increase of $28.4 million (13.3 points) in current year catastrophe losses, primarily from the Japan and New Zealand earthquakes and Hurricane Irene as well as an increase in current year attritional losses primarily due to the increase in premiums earned.

Incurred losses and LAE increased 29.0% to $491.5 million for the nine months ended September 30, 2011 compared to $381.1 million for the same period in 2010.  The increase was principally due to an $84.3 million (14.6 points) increase in current year catastrophe losses, primarily for the Japan and New Zealand earthquakes, the Australian floods and Hurricane Irene.

 
Segment Expenses. Commission and brokerage decreased 6.1% to $40.0 million for the three months ended September 30, 2011 compared to $42.6 million for the same period in 2010.  Commission and brokerage increased 6.3% to $133.8 million for the nine months ended September 30, 2011 compared to $125.9 million for the same period in 2010.  The commission variances differ from the premiums earned variances due to the fluctuation in reinstatement premiums, which have no related commission expense; foreign exchange fluctuation and change in the mix of business.

Segment other underwriting expenses decreased to $6.7 million for the three months ended September 30, 2011 compared to $7.1 million for the three months ended September 30, 2010.  Segment other underwriting expenses increased to $20.1 million for the nine months ended September 30, 2011 compared to $19.7 million for the nine months ended September 30, 2010.

FINANCIAL CONDITION

Cash and Invested Assets.  Aggregate invested assets, including cash and short-term investments, were $15,713.9 million at September 30, 2011, an increase of $348.9 million compared to $15,365.0 million at December 31, 2010.  This increase was primarily the result of $546.7 million of cash flows from operations, $72.8 million of unrealized appreciation, $66.5 million in equity adjustments of our limited partnership investments, $59.1 million due to fluctuations in foreign currencies, and $35.4 million of unsettled securities, partially offset by $123.8 million in fair value re-measurements, $84.2 million paid for share repurchases, $78.1 million paid out in dividends to shareholders, $63.1 million due to the cost of businesses acquired and a $50.0 million revolving credit pay off.

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 (our core fixed maturities portfolio) and 2) investments funded by our shareholders’ equity.

For the portion needed to satisfy global outstanding liabilities, we generally invest in taxable and tax-preferenced fixed income securities with an average credit quality of Aa3.  For the U.S. portion of this portfolio, our mix of taxable and tax-preferenced investments is adjusted periodically, consistent with our current and projected U.S. operating results, market conditions and our tax position.  This global fixed maturity securities portfolio is externally managed by an independent, professional investment manager using portfolio guidelines approved by us.

Over the past few years and particularly in 2010 and 2011, we have expanded the allocation of our investments funded by shareholders’ equity to include:  1) a greater percentage of publicly traded equity securities, 2) emerging market fixed maturities through mutual fund structures, 3) high yield fixed maturities, 4) bank loan securities and 5) 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, which are also less subject to changes in value with movements in interest rates.  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 use investment managers experienced in these markets and adjust our allocation to these investments based upon market conditions.  At September 30, 2011, the market value of investments in these investment market sectors, carried at both market and fair value, approximated 52% of shareholders’ equity.

The Company’s limited partnership investments are comprised of limited partnerships that invest in private equities.  Generally, the limited partnerships are reported 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.
 
(Dollars in millions)
 
At September 30, 2011
 
At December 31, 2010
Fixed maturities, market value
  $ 12,154.2       77.3 %   $ 12,450.5       81.0 %
Fixed maturities, fair value
    120.6       0.8 %     180.5       1.2 %
Equity securities, market value
    435.7       2.8 %     363.7       2.4 %
Equity securities, fair value
    1,138.7       7.3 %     721.4       4.7 %
Short-term investments
    834.9       5.3 %     785.3       5.1 %
Other invested assets
    586.1       3.7 %     605.2       3.9 %
Cash
    443.7       2.8 %     258.4       1.7 %
Total investments and cash
  $ 15,713.9       100.0 %   $ 15,365.0       100.0 %
                                 
(Some amounts may not reconcile due to rounding.)
                               

 
 
At
 
At
 
September 30, 2011
 
December 31, 2010
Fixed income portfolio duration (years)
3.1
 
3.8
Fixed income composite credit quality
Aa3
 
Aa2
Imbedded end of period yield, pre-tax
3.9%
 
3.9%
Imbedded end of period yield, after-tax
3.4%
 
3.5%
 
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, 2011
 
December 31, 2010
Fixed income portfolio total return
3.5%
 
5.3%
Barclay's Capital - U.S. aggregate index
6.7%
 
6.5%
       
Common equity portfolio total return
-6.2%
 
15.4%
S&P 500 index
-8.7%
 
15.1%
       
Other invested asset portfolio total return
15.2%
 
18.7%
 
Reinsurance Receivables.  Reinsurance receivables for both paid and recoverable on unpaid losses totaled $589.3 million at September 30, 2011 and $684.7 million at December 31, 2010.  At September 30, 2011, $209.4 million, or 35.5%, was receivable from C.V. Starr (Bermuda); $88.5 million, or 15.0%, was receivable from Transatlantic Reinsurance Company; $49.6 million, or 8.4%, was receivable from Munich Reinsurance Company and $41.1 million, or 7.0%, was receivable from Berkley Insurance Company.  The receivable from C.V. Starr (Bermuda) is fully collateralized by a trust agreement.  No other retrocessionaire accounted for more than 5% of our receivables.


Loss and LAE Reserves.  Gross loss and LAE reserves totaled $9,980.0 million at September 30, 2011 and $9,340.2 million at December 31, 2010.

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, 2011
   
Case
   
IBNR
   
Total
   
% of
 
(Dollars in millions)
 
Reserves
   
Reserves
   
Reserves
   
Total
 
U.S. Reinsurance
  $ 1,501.8     $ 1,884.0     $ 3,385.8       33.9 %
Insurance
    897.6       1,265.0       2,162.6       21.7 %
International
    1,260.0       798.8       2,058.8       20.6 %
Bermuda
    766.2       1,090.2       1,856.4       18.6 %
Total excluding A&E
    4,425.7       5,037.9       9,463.6       94.8 %
A&E
    290.7       225.7       516.4       5.2 %
Total including A&E
  $ 4,716.4     $ 5,263.6     $ 9,980.0       100.0 %
                                 
(Some amounts may not reconcile due to rounding.)
                               

 
   
At December 31, 2010
   
Case
   
IBNR
   
Total
   
% of
 
(Dollars in millions)
 
Reserves
   
Reserves
   
Reserves
   
Total
 
U.S. Reinsurance
  $ 1,530.4     $ 1,861.0     $ 3,391.5       36.3 %
Insurance
    859.6       1,147.5       2,007.0       21.5 %
International
    945.8       711.6       1,657.4       17.8 %
Bermuda
    788.2       941.3       1,729.5       18.5 %
Total excluding A&E
    4,123.9       4,661.5       8,785.4       94.1 %
A&E
    290.4       264.4       554.8       5.9 %
Total including A&E
  $ 4,414.4     $ 4,925.8     $ 9,340.2       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 ensure 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 $30.9 million in 2010, representing 0.4% 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)
 
2011
   
2010
   
2011
   
2010
 
Gross Basis:
                       
Beginning of period reserves
  $ 526.7     $ 614.1     $ 554.8     $ 638.7  
Incurred losses
    -       -       0.8       -  
Paid losses
    (10.3 )     (36.6 )     (39.1 )     (61.1 )
End of period reserves
  $ 516.4     $ 577.5     $ 516.4     $ 577.5  
                                 
Net Basis:
                               
Beginning of period reserves
  $ 505.9     $ 589.5     $ 532.9     $ 613.1  
Incurred losses
    -       -       0.8       -  
Paid losses
    (9.9 )     (34.9 )     (37.7 )     (58.5 )
End of period reserves
  $ 496.0     $ 554.6     $ 496.0     $ 554.6  
                                 
(Some amounts may not reconcile due to rounding.)
                               
 
At September 30, 2011, the gross reserves for A&E losses were comprised of $148.9 million representing case reserves reported by ceding companies, $103.3 million representing additional case reserves established by us on assumed reinsurance claims, $38.5 million representing case reserves established by us on direct excess insurance claims, including Mt. McKinley, and $225.7 million representing IBNR reserves.

With respect to asbestos only, at September 30, 2011, we had gross asbestos loss reserves of $495.5 million, or 96.0%, of total A&E reserves, of which $396.3 million was for assumed business and $99.2 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 5.0 years at September 30, 2011.  These metrics can be skewed by individual large settlements occurring in the prior three years and therefore, may not be indicative of the timing of future payments.

Because the survival ratio was developed as a comparative measure of reserve strength and does not indicate absolute reserve adequacy, we consider, but do not rely on, the survival ratio when evaluating our reserves.  In particular, we note that year to year loss payment variability can be material.  This is due, in part, to our orientation to negotiated settlements, particularly on our Mt. McKinley exposures, which significantly reduces the credibility and utility of this measure as an analytical tool.  In the third quarter of 2011, we made asbestos net claim payments of $1.1 million to Mt McKinley high profile claimants where the claim was either closed or a settlement had been reached.  Such payments, which are non-repetitive, distort downward our three year survival ratio.  Adjusting for such settlements, recognizing that total settlements are generally considered fully reserved to an agreed settlement, we consider that our adjusted asbestos survival ratio for net unsettled claims is 8.9 years, which is better than prevailing industry norms.

Shareholders’ Equity.  Our shareholders’ equity decreased to $6,091.8 million as of September 30, 2011 from $6,283.5 million as of December 31, 2010.  This decrease was the result of $121.5 million in net loss, $78.1 million of shareholder dividends and repurchases of 1,025,044 common shares for $84.2 million, partially offset by unrealized appreciation on investments, net of tax, of $52.2 million, share-based compensation transactions of $21.5 million, $16.3 million of foreign currency translation adjustments and $2.2 million of benefit plan obligation 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 $6,091.8 million at September 30, 2011 and $6,283.5 million at December 31, 2010.  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.

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, 2011, we had repurchased 12.6 million shares under this authorization.

On October 14, 2011, 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 (our core fixed maturities portfolio) and 2) investments funded by our shareholders’ equity.

For the portion needed to satisfy global outstanding liabilities, we generally invest in taxable and tax-preferenced fixed income securities with an average credit quality of Aa3.  For the U.S. portion of this portfolio, our mix of taxable and tax-preferenced investments is adjusted periodically, consistent with our current and projected U.S. operating results, market conditions and our tax position.  This global fixed maturity securities portfolio is externally managed by an independent, professional investment manager using portfolio guidelines approved by us.

Over the past few years and particularly in 2010 and 2011, we have expanded the allocation of our investments funded by shareholders’ equity to include:  1) a greater percentage of publicly traded equity securities, 2) emerging market fixed maturities through mutual fund structures, 3) high yield fixed maturities, 4) bank loan securities and 5) 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, which are also less subject to changes in value with movements in interest rates.  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 use investment managers experienced in these markets and adjust our allocation to these investments based upon market conditions.  At September 30, 2011, the market value of investments in these investment market sectors, carried at both market and fair value, approximated 52% 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 $546.7 million and $790.6 million for the nine months ended September 30, 2011 and 2010, respectively.  Additionally, these cash flows reflected net tax refunds of $5.9 million and $36.7 million


for the nine months ended September 30, 2011 and 2010, respectively; net catastrophe loss payments of $391.6 million and $312.0 million for the nine months ended September 30, 2011 and 2010, respectively; and net A&E payments of $37.7 million and $58.5 million for nine months ended September 30, 2011 and 2010, 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, 2011 and December 31, 2010, we held cash and short-term investments of $1,278.6 million and $1,043.7 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, 2011, we had $459.9 million of available for sale fixed maturity securities maturing within one year or less, $4,905.3 million maturing within one to five years and $4,063.5 million maturing after five years.  Our $1,574.4 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, 2011 we had $513.9 million of net pre-tax unrealized appreciation, comprised of $654.5 million of pre-tax unrealized appreciation and $140.6 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.  Due to the significant catastrophe losses in the first half of 2011, cash flow from operations may be slightly negative in the near term as these losses are paid.  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, Bermuda Re and 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”.  Wells Fargo Corporation (“Wells Fargo 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 Wells Fargo 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, 2011, was $4,280.1 million.  As of September 30, 2011, the Company was in compliance with all Group Credit Facility covenants.


At September 30, 2011, the Group Credit Facility had no outstanding letters of credit under tranche one and $400.1 million outstanding letters of credit under tranche two.  At December 31, 2010, the Group Credit Facility had no outstanding letters of credit under tranche one and $406.4 million outstanding letters of credit under tranche two.

Effective August 15, 2011, Holdings entered into a new three year, $150.0 million unsecured revolving credit facility with a syndicate of lenders, replacing the August 23, 2006 five year senior revolving credit facility.  Both the August 15, 2011 and August 23, 2006 revolving credit agreements, which have similar terms, are 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 base rate, (b) 0.5% per annum above the Federal Funds Rate or (c) 1% above the one month LIBOR, 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 Re to maintain its statutory surplus at $1,875.0 million plus 25% of future aggregate net income and 25% of future aggregate capital contributions after December 31, 2010, which at September 30, 2011, was $1,898.6 million.  As of September 30, 2011, Holdings was in compliance with all Holdings Credit Facility covenants.

At September 30, 2011, the Company had no outstanding short-term borrowings from the Holdings Credit Facility revolving credit line.  Short-term borrowings can be paid either through renewal with a one, two, three or six month term; or out of available liquidity.  The highest amount outstanding in short-term borrowings during 2011 and 2010 was $50.0 million and $133.0 million for the periods from January 1, 2011 to January 18, 2011 and June 15, 2010 to August 9, 2010, respectively.  In addition, at September 30, 2011 and December 31, 2010, the Holdings Credit Facility had outstanding letters of credit of $9.5 million.

Costs incurred in connection with the Group Credit Facility and the Holdings Credit Facility were $0.5 million and $0.6 million for the three months ended September 30, 2011 and 2010, respectively, and $1.3 million for the nine months ended September 30, 2011 and 2010, 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 $15.7 billion investment portfolio, at September 30, 2011, 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 $2,533.3 million of mortgage-backed securities in the $12,274.8 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 portfolio (including $834.9 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, 2011
      -200     -100     0     100     200
(Dollars in millions)
                                       
Total Market/Fair Value
  $ 13,866.0     $ 13,501.2     $ 13,109.7     $ 12,678.0     $ 12,228.2  
Market/Fair Value Change from Base (%)
    5.8 %     3.0 %     0.0 %     -3.3 %     -6.7 %
Change in Unrealized Appreciation
                                       
After-tax from Base ($)
  $ 627.6     $ 325.6     $ -     $ (359.9 )   $ (736.2 )
 
We had $9,980.0 million and $9,340.2 million of gross reserves for losses and LAE as of September 30, 2011 and December 31, 2010, 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 $0.6 billion of reinsurance receivables on unpaid losses, the discount would be approximately $1.5 billion resulting in a discounted reserve balance of approximately $7.9 billion, representing approximately 60.5% 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, preferred stock and mutual fund portfolios arising from changing 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, and mutual fund investments in emerging market debt.  The primary objective of the equity portfolio is to obtain greater total return relative to our core 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, 2011
(Dollars in millions)
    -20%     -10%     0%     10%     20%
Fair/Market Value of the Equity Portfolio
  $ 1,259.5     $ 1,416.9     $ 1,574.4     $ 1,731.8     $ 1,889.2  
After-tax Change in Fair/Market Value
    (234.3 )     (117.2 )     -       117.2       234.3  
 
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, 2011 there has been no material change in exposure to foreign exchange rates as compared to December, 31, 2010.

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.

We 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, 2011, 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, 2011 was $1,131.42.  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, 2011 S&P 500 index value, we estimate 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 54%.  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, 2011, the present value of these theoretical maximum payouts using a 6% discount factor was $281.2 million.

We 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, 2011, fair value for this equity index put option contract was $8.1 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, 2011 was ₤5,128.50.  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, 2011 FTSE 100 index value, we estimate 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 51%.  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, 2011, the present value of the theoretical maximum payout using a 6% discount factor and current exchange rate was $31.2 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, 2011, of $77.7 million and at December 31, 2010, of $58.5 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, 2011
Interest Rate Shift in Basis Points:
    -200     -100     0     100     200
Total Fair Value
  $ 125.7     $ 99.0     $ 77.7     $ 60.9     $ 47.5  
Fair Value Change from Base (%)
    -61.6 %     -27.3 %     0.0 %     21.7 %     38.9 %
                                         
Equity Indices Shift in Points (S&P 500/FTSE 100):
    -500/-2000     -250/-1000     0     250/1000     500/2000
Total Fair Value
  $ 155.5     $ 109.4     $ 77.7     $ 56.1     $ 41.2  
Fair Value Change from Base (%)
    -100.0 %     -40.7 %     0.0 %     27.8 %     47.0 %
                                         
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
  $ 224.3     $ 135.4     $ 77.7     $ 42.8     $ 22.7  
Fair Value Change from Base (%)
    -188.5 %     -74.2 %     0.0 %     45.0 %     70.8 %
 
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, Holdings Ireland 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 those discussed under the caption ITEM 1A, “Risk Factors”.  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, 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 and reinsurance 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.  The Company considers the statuses of these proceedings when determining its reserves for unpaid loss and loss adjustment expenses.

Aside from litigation and arbitrations related to these insurance and reinsurance agreements, the Company is not a party to any other material litigation or arbitration.


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, 2011
    0     $ -       0       2,976,953  
August 1 - 31, 2011
    318,006     $ 78.6160       318,006       2,658,947  
September 1 - 30, 2011
    280,554     $ 77.5224       279,000       2,379,947  
Total
    598,560     $ -       597,006       2,379,947  
 
(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  
 President and  
   Chief Financial Officer  
 (Duly Authorized Officer and Principal Financial Officer)  
     
 

 

Dated:  November 9, 2011