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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	X	Accelerated filer
Non-accelerated filer		Smaller reporting company
(Do not check if smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

	Number of Shares Outstanding
Class	At November 1, 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

	Consolidated Balance Sheets September 30, 2011 (unaudited)
	and December 31, 2010	1

	Consolidated Statements of Operations and Comprehensive Income (Loss) for the
	three and nine months ended September 30, 2011 and 2010 (unaudited)	2

	Consolidated Statements of Changes in Shareholders’ Equity for the three and
	nine months ended September 30, 2011 and 2010 (unaudited)	3

	Consolidated Statements of Cash Flows for the three and nine months ended
	September 30, 2011 and 2010 (unaudited)	4

	Notes to Consolidated Interim Financial Statements (unaudited)	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and
	Results of Operation	29

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	55

Item 4.	Controls and Procedures	55

PART II

OTHER INFORMATION

Item 1.	Legal Proceedings	55

Item 1A.	Risk Factors	55

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56

Item 3.	Defaults Upon Senior Securities	56

Item 4.	Reserved	56

Item 5.	Other Information	56

Item 6.	Exhibits	57

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PART I

ITEM 1. FINANCIAL STATEMENTS

EVEREST RE GROUP, LTD.

CONSOLIDATED BALANCE SHEETS

	September 30,			December 31,
(Dollars and share amounts in thousands, except par value per share)	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.

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EVEREST RE GROUP, LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Dollars in thousands, except per share amounts)	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.

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EVEREST RE GROUP, LTD.

CONSOLIDATED STATEMENTS OF

CHANGES IN SHAREHOLDERS’ EQUITY

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Dollars in thousands, except share and dividends per share amounts)	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.

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EVEREST RE GROUP, LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Dollars in thousands)	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.

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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.

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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

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3. INVESTMENTS

The amortized cost, market value and gross unrealized appreciation and depreciation of available for sale, fixed maturity and equity security investments, carried at market value, are as follows for the periods indicated:

	At September 30, 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

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The amortized cost and market value of fixed maturity securities are shown in the following table by contractual maturity. Mortgage-backed securities are generally more likely to be prepaid than other fixed maturity securities. As the stated maturity of such securities may not be indicative of actual maturities, the totals for mortgage-backed and asset-backed securities are shown separately.

	At September 30, 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.

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Retrospective adjustments are employed to recalculate the values of asset-backed securities. All of the Company’s asset-backed and mortgage-backed securities have a pass-through structure. Each acquisition lot is reviewed to recalculate the effective yield. The recalculated effective yield is used to derive a book value as if the new yield were applied at the time of acquisition. Outstanding principal factors from the time of acquisition to the adjustment date are used to calculate the prepayment history for all applicable securities. Conditional prepayment rates, computed with life to date factor histories and weighted average maturities, are used in the calculation of projected and prepayments for pass-through security types.

The tables below display the aggregate market value and gross unrealized depreciation of fixed maturity and equity securities, by security type and contractual maturity, in each case subdivided according to length of time that individual securities had been in a continuous unrealized loss position for the periods indicated:

	Duration of Unrealized Loss at September 30, 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

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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.

	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	)

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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.

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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	)