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

everestregroup10q2q2011.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED:

June 30, 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 August 1, 2011
Common Shares, $0.01 par value	54,349,548

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EVEREST RE GROUP, LTD

Table of Contents

Form 10-Q

Page

PART I

FINANCIAL INFORMATION

Item 1.	Financial Statements

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

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

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

	Consolidated Statements of Cash Flows for the three and six months ended
	June 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	57

Item 4.	Controls and Procedures	57

PART II

OTHER INFORMATION

Item 1.	Legal Proceedings	57

Item 1A.	Risk Factors	57

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

Item 3.	Defaults Upon Senior Securities	58

Item 4.	Reserved	58

Item 5.	Other Information	58

Item 6.	Exhibits	59

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PART I

ITEM 1. FINANCIAL STATEMENTS

EVEREST RE GROUP, LTD.

CONSOLIDATED BALANCE SHEETS

	June 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	$	12,456,773		$	12,450,469
(amortized cost: 2011, $11,924,068; 2010, $12,011,336)
Fixed maturities - available for sale, at fair value		128,337			180,482
Equity securities - available for sale, at market value (cost: 2011, $452,942; 2010, $363,283)		461,503			363,736
Equity securities - available for sale, at fair value		1,012,214			721,449
Short-term investments		784,681			785,279
Other invested assets (cost: 2011, $581,803; 2010, $603,681)		581,588			605,196
Cash		411,523			258,408
Total investments and cash		15,836,619			15,365,019
Accrued investment income		144,322			148,990
Premiums receivable		1,007,428			844,832
Reinsurance receivables		693,952			684,718
Funds held by reinsureds		350,595			379,616
Deferred acquisition costs		352,067			383,769
Prepaid reinsurance premiums		95,210			133,007
Deferred tax asset		129,605			149,101
Federal income taxes recoverable		158,943			147,988
Other assets		235,176			170,931
TOTAL ASSETS	$	19,003,917		$	18,407,971

LIABILITIES:
Reserve for losses and loss adjustment expenses	$	10,145,655		$	9,340,183
Future policy benefit reserve		62,608			63,002
Unearned premium reserve		1,348,332			1,455,219
Funds held under reinsurance treaties		100,544			99,213
Commission reserves		37,330			45,936
Other net payable to reinsurers		20,136			47,519
Revolving credit borrowings		40,000			50,000
5.4% Senior notes due 10/15/2014		249,835			249,812
6.6% Long term notes due 5/1/2067		238,352			238,351
Junior subordinated debt securities payable		329,897			329,897
Accrued interest on debt and borrowings		4,789			4,793
Equity index put option liability		54,313			58,467
Other liabilities		219,568			142,062
Total liabilities		12,851,359			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) 66,363
and (2010) 66,017 outstanding before treasury shares		664			660
Additional paid-in capital		1,878,242			1,863,031
Accumulated other comprehensive income (loss), net of deferred income tax expense
(benefit) of $121,456 at 2011 and $102,868 at 2010		460,403			332,258
Treasury shares, at cost; 12,017 shares (2011) and 11,589 shares (2010)		(1,019,091	)		(981,480	)
Retained earnings		4,832,340			5,069,048
Total shareholders' equity		6,152,558			6,283,517
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	19,003,917		$	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						Six Months Ended
	June 30,						June 30,
(Dollars in thousands, except per share amounts)	2011			2010			2011			2010
	(unaudited)						(unaudited)
REVENUES:
Premiums earned	$	1,039,835		$	989,899		$	2,051,281		$	1,917,201
Net investment income		158,618			165,731			337,323			327,230
Net realized capital gains (losses):
Other-than-temporary impairments on fixed maturity securities		-			-			(14,767	)		-
Other-than-temporary impairments on fixed maturity securities
transferred to other comprehensive income (loss)		-			-			-			-
Other net realized capital gains (losses)		(4,845	)		(41,693	)		22,078			31,025
Total net realized capital gains (losses)		(4,845	)		(41,693	)		7,311			31,025
Net derivative gain (loss)		(3,371	)		(22,304	)		4,154			(19,250	)
Other income (expense)		(13,446	)		7,798			(16,833	)		13,137
Total revenues		1,176,791			1,099,431			2,383,236			2,269,343

CLAIMS AND EXPENSES:
Incurred losses and loss adjustment expenses		735,789			643,948			1,985,565			1,550,804
Commission, brokerage, taxes and fees		237,374			236,493			473,831			449,155
Other underwriting expenses		45,897			41,747			90,853			80,691
Corporate expenses		3,790			3,887			7,718			8,462
Interest, fees and bond issue cost amortization expense		13,116			13,016			26,114			29,658
Total claims and expenses		1,035,966			939,091			2,584,081			2,118,770

INCOME (LOSS) BEFORE TAXES		140,825			160,340			(200,845	)		150,573
Income tax expense (benefit)		9,513			3,667			(16,263	)		16,552

NET INCOME (LOSS)	$	131,312		$	156,673		$	(184,582	)	$	134,021
Other comprehensive income (loss), net of tax		123,066			65,889			128,145			94,828

COMPREHENSIVE INCOME (LOSS)	$	254,378		$	222,562		$	(56,437	)	$	228,849

EARNINGS PER COMMON SHARE:
Basic	$	2.42		$	2.70		$	(3.40	)	$	2.29
Diluted		2.41			2.70			(3.40	)		2.28
Dividends declared		0.48			0.48			0.96			0.96

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						Six Months Ended
	June 30,						June 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		54,224,433			58,922,474			54,428,168			59,317,741
Issued during the period, net		121,783			37			346,086			167,076
Treasury shares acquired		-			(2,680,492	)		(428,038	)		(3,242,798	)
Balance, end of period		54,346,216			56,242,019			54,346,216			56,242,019

COMMON SHARES (par value):
Balance, beginning of period	$	662		$	660		$	660		$	658
Issued during the period, net		2			-			4			2
Balance, end of period		664			660			664			660

ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of period		1,868,153			1,849,441			1,863,031			1,845,181
Share-based compensation plans		10,089			3,717			15,211			7,977
Balance, end of period		1,878,242			1,853,158			1,878,242			1,853,158

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS),
NET OF DEFERRED INCOME TAXES:
Balance, beginning of period		337,337			300,977			332,258			272,038
Net increase (decrease) during the period		123,066			65,889			128,145			94,828
Balance, end of period		460,403			366,866			460,403			366,866

RETAINED EARNINGS:
Balance, beginning of period		4,727,109			4,515,835			5,069,048			4,566,771
Net income (loss)		131,312			156,673			(184,582	)		134,021
Dividends declared ($0.48 per quarter and $0.96 year-to-date
per share in 2011 and 2010)		(26,081	)		(27,556	)		(52,126	)		(55,840	)
Balance, end of period		4,832,340			4,644,952			4,832,340			4,644,952

TREASURY SHARES AT COST:
Balance, beginning of period		(1,019,091	)		(629,958	)		(981,480	)		(582,926	)
Purchase of treasury shares		-			(200,079	)		(37,611	)		(247,111	)
Balance, end of period		(1,019,091	)		(830,037	)		(1,019,091	)		(830,037	)

TOTAL SHAREHOLDERS' EQUITY, END OF PERIOD	$	6,152,558		$	6,035,599		$	6,152,558		$	6,035,599

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						Six Months Ended
	June 30,						June 30,
(Dollars in thousands)	2011			2010			2011			2010
	(unaudited)						(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	131,312		$	156,673		$	(184,582	)	$	134,021
Adjustments to reconcile net income to net cash provided by operating activities:
Decrease (increase) in premiums receivable		(35,074	)		2,624			(153,497	)		(5,135	)
Decrease (increase) in funds held by reinsureds, net		22,645			(11,156	)		39,488			(13,585	)
Decrease (increase) in reinsurance receivables		537			(29,147	)		17,755			(62,291	)
Decrease (increase) in deferred tax asset		(17,582	)		(11,853	)		1,658			(5,064	)
Decrease (increase) in prepaid reinsurance premiums		22,319			(13,098	)		39,346			(12,688	)
Increase (decrease) in reserve for losses and loss adjustment expenses		146,938			30,445			693,385			449,390
Increase (decrease) in future policy benefit reserve		(176	)		(434	)		(394	)		(569	)
Increase (decrease) in unearned premiums		(106,556	)		(28,341	)		(113,687	)		13,257
Change in equity adjustments in limited partnerships		(14,309	)		(16,091	)		(50,614	)		(32,255	)
Change in other assets and liabilities, net		(21,301	)		86,141			23,947			30,264
Non-cash compensation expense		4,212			3,589			7,658			7,130
Amortization of bond premium (accrual of bond discount)		12,818			10,454			25,570			21,339
Amortization of underwriting discount on senior notes		12			11			24			53
Net realized capital (gains) losses		4,845			41,693			(7,311	)		(31,025	)
Net cash provided by (used in) operating activities		150,640			221,510			338,746			492,842

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from fixed maturities matured/called - available for sale, at market value		372,401			369,775			810,665			783,165
Proceeds from fixed maturities matured/called - available for sale, at fair value		5,875			-			12,775			-
Proceeds from fixed maturities sold - available for sale, at market value		336,770			238,940			867,680			723,462
Proceeds from fixed maturities sold - available for sale, at fair value		17,168			6,115			50,120			8,612
Proceeds from equity securities sold - available for sale, at market value		110			712			27,206			712
Proceeds from equity securities sold - available for sale, at fair value		37,000			51,400			93,667			72,742
Distributions from other invested assets		40,535			19,630			127,094			30,360
Cost of fixed maturities acquired - available for sale, at market value		(582,696	)		(938,124	)		(1,537,328	)		(1,961,623	)
Cost of fixed maturities acquired - available for sale, at fair value		(7,148	)		(9,486	)		(15,224	)		(23,680	)
Cost of equity securities acquired - available for sale, at market value		(28,683	)		(1,426	)		(115,811	)		(1,426	)
Cost of equity securities acquired - available for sale, at fair value		(213,658	)		(38,095	)		(342,300	)		(80,417	)
Cost of other invested assets acquired		(27,544	)		(10,034	)		(52,102	)		(37,078	)
Cost of businesses acquired		-			-			(63,100	)		-
Net change in short-term investments		(130,222	)		209,878			2,717			291,897
Net change in unsettled securities transactions		175,061			(58,493	)		47,201			(11,195	)
Net cash provided by (used in) investing activities		(5,031	)		(159,208	)		(86,740	)		(204,469	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Common shares issued during the period, net		5,879			128			7,557			849
Purchase of treasury shares		-			(200,079	)		(37,611	)		(247,111	)
Revolving credit borrowings		-			133,000			(10,000	)		133,000
Net cost of senior notes maturing		-			-			-			(200,000	)
Dividends paid to shareholders		(26,081	)		(27,556	)		(52,126	)		(55,840	)
Net cash provided by (used in) financing activities		(20,202	)		(94,507	)		(92,180	)		(369,102	)

EFFECT OF EXCHANGE RATE CHANGES ON CASH		1,969			9,499			(6,711	)		24,584

Net increase (decrease) in cash		127,376			(22,706	)		153,115			(56,145	)
Cash, beginning of period		284,147			214,159			258,408			247,598
Cash, end of period	$	411,523		$	191,453		$	411,523		$	191,453

SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid (recovered)	$	(24,471	)	$	(48,597	)	$	(12,546	)	$	(35,838	)
Interest paid		20,259			20,160			25,778			34,361

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 Six Months Ended June 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 six months ended June 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 six months ended June 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.

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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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 prospectively, as of January 1, 2012.

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 June 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	$	312,358	$	11,997	$	(3,391	)	$	320,964
Obligations of U.S. states and political subdivisions		2,110,206		109,724		(5,985	)		2,213,945
Corporate securities		3,222,053		183,137		(19,746	)		3,385,444
Asset-backed securities		184,042		7,439		(183	)		191,298
Mortgage-backed securities
Commercial		313,214		21,059		(5,262	)		329,011
Agency residential		1,923,180		97,009		(506	)		2,019,683
Non-agency residential		68,189		946		(585	)		68,550
Foreign government securities		1,764,176		95,292		(17,608	)		1,841,860
Foreign corporate securities		2,026,650		86,826		(27,458	)		2,086,018
Total fixed maturity securities	$	11,924,068	$	613,429	$	(80,724	)	$	12,456,773
Equity securities	$	452,942	$	8,564	$	(3	)	$	461,503

	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 June 30, 2011				At December 31, 2010
Pre-tax cumulative unrealized appreciation (depreciation)		$	3,630			$	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 June 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	$	552,557	$	566,288	$	572,985	$	580,528
Due after one year through five years		4,433,423		4,612,294		3,911,482		4,057,230
Due after five years through ten years		2,590,743		2,720,260		2,564,948		2,686,005
Due after ten years		1,858,720		1,949,389		2,331,639		2,402,163
Asset-backed securities		184,042		191,298		210,717		218,301
Mortgage-backed securities
Commercial		313,214		329,011		324,922		337,219
Agency residential		1,923,180		2,019,683		2,018,384		2,093,282
Non-agency residential		68,189		68,550		76,259		75,741
Total fixed maturity securities	$	11,924,068	$	12,456,773	$	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						Six Months Ended
	June 30,						June 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	$	128,231		$	129,039		$	91,685		$	146,237
Fixed maturity securities, cumulative other-than-temporary impairment adjustment		723			33			1,887			6,085
Equity securities		8,728			(32	)		8,108			268
Other invested assets		(3,165	)		(19	)		(1,730	)		495
Change in unrealized appreciation (depreciation), pre-tax		134,517			129,021			99,950			153,085
Deferred tax benefit (expense)		(22,885	)		(15,934	)		(12,800	)		(4,358	)
Deferred tax benefit (expense), cumulative other-than-temporary impairment adjustment		5			164			(2	)		(904	)
Change in unrealized appreciation (depreciation),
net of deferred taxes, included in shareholders’ equity	$	111,637		$	113,251		$	87,148		$	147,823

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 June 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	$	45,218	$	(2,868	)	$	3,417	$	(523	)	$	48,635	$	(3,391	)
Obligations of U.S. states and political subdivisions		34,916		(1,152	)		55,794		(4,833	)		90,710		(5,985	)
Corporate securities		335,186		(10,277	)		123,138		(9,469	)		458,324		(19,746	)
Asset-backed securities		9,250		(85	)		939		(98	)		10,189		(183	)
Mortgage-backed securities
Commercial		11,445		(731	)		58,760		(4,531	)		70,205		(5,262	)
Agency residential		44,495		(210	)		17,438		(296	)		61,933		(506	)
Non-agency residential		272		(8	)		12,116		(577	)		12,388		(585	)
Foreign government securities		147,502		(4,460	)		158,544		(13,148	)		306,046		(17,608	)
Foreign corporate securities		293,117		(14,041	)		109,163		(13,417	)		402,280		(27,458	)
Total fixed maturity securities	$	921,401	$	(33,832	)	$	539,309	$	(46,892	)	$	1,460,710	$	(80,724	)
Equity securities		-		-			12		(3	)		12		(3	)
Total	$	921,401	$	(33,832	)	$	539,321	$	(46,895	)	$	1,460,722	$	(80,727	)

	Duration of Unrealized Loss at June 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	$	18,085	$	(729	)	$	40,580	$	(5,047	)	$	58,665	$	(5,776	)
Due in one year through five years		339,365		(15,199	)		181,797		(14,515	)		521,162		(29,714	)
Due in five years through ten years		403,944		(13,222	)		104,581		(8,235	)		508,525		(21,457	)
Due after ten years		94,545		(3,648	)		123,098		(13,593	)		217,643		(17,241	)
Asset-backed securities		9,250		(85	)		939		(98	)		10,189		(183	)
Mortgage-backed securities		56,212		(949	)		88,314		(5,404	)		144,526		(6,353	)
Total fixed maturity securities	$	921,401	$	(33,832	)	$	539,309	$	(46,892	)	$	1,460,710	$	(80,724	)

The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at June 30, 2011 were $1,460,722 thousand and $80,727 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 June 30, 2011. In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector. The $33,832 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, U.S. and foreign government and domestic and foreign corporate securities. Of these unrealized losses, $30,165 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 government and foreign corporate securities are due to currency exchange rate movements as opposed to market value movements. The $46,892 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 highly rated municipal, foreign government and domestic and foreign corporate securities. Of these unrealized losses, $38,491 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 government and foreign corporate 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 $303 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 June 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 domestic and foreign corporate, mortgage-backed, foreign government and municipal 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						Six Months Ended
	June 30,						June 30,
(Dollars in thousands)	2011			2010			2011			2010
Fixed maturity securities	$	132,668		$	149,017		$	265,524		$	294,216
Equity securities		13,156			2,856			25,019			5,379
Short-term investments and cash		439			(82	)		676			(390	)
Other invested assets
Limited partnerships		14,344			15,611			50,975			31,509
Other		4,126			330			4,723			702
Total gross investment income		164,733			167,732			346,917			331,416
Interest debited (credited) and other investment expense		(6,115	)		(2,001	)		(9,594	)		(4,186	)
Total net investment income	$	158,618		$	165,731		$	337,323		$	327,230

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 $194,342 thousand in limited partnerships at June 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						Six Months Ended
	June 30,						June 30,
(Dollars in thousands)	2011			2010			2011			2010
Fixed maturity securities, market value:
Other-than-temporary impairments	$	-		$	-		$	(14,767	)	$	-
Gains (losses) from sales		(5,603	)		(2,249	)		(15,618	)		50,757
Fixed maturity securities, fair value:
Gains (losses) from sales		565			190			(950	)		273
Gains (losses) from fair value adjustments		(41	)		(2,518	)		(3,524	)		482
Equity securities, market value:
Gains (losses) from sales		1			111			38			111
Equity securities, fair value:
Gains (losses) from sales		(206	)		(2,894	)		1,698			(999	)
Gains (losses) from fair value adjustments		440			(34,341	)		40,434			(19,608	)
Short-term investments gain (loss)		(1