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

group10q1q11.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:

March 31, 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 May 1, 2011
Common Shares, $0.01 par value		54,288,571

EVEREST RE GROUP, LTD

Table of Contents

Form 10-Q

Page

PART I

FINANCIAL INFORMATION

Item 1.	Financial Statements

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

	Consolidated Statements of Operations and Comprehensive Income (Loss) for the
	three months ended March 31, 2011 and 2010 (unaudited)	2

	Consolidated Statements of Changes in Shareholders’ Equity for the three months
	ended March 31, 2011 and 2010 (unaudited)	3

	Consolidated Statements of Cash Flows for the three months ended
	March 31, 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	28

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	51

Item 4.	Controls and Procedures	51

PART II

OTHER INFORMATION

Item 1.	Legal Proceedings	51

Item 1A.	Risk Factors	51

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52

Item 3.	Defaults Upon Senior Securities	52

Item 4.	Reserved	52

Item 5.	Other Information	52

Item 6.	Exhibits	53

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PART I

ITEM 1. FINANCIAL STATEMENTS

EVEREST RE GROUP, LTD.

CONSOLIDATED BALANCE SHEETS

	March 31,			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	$	12,442,887		$	12,450,469
(amortized cost: 2011, $12,039,137; 2010, $12,011,336)
Fixed maturities - available for sale, at fair value		143,708			180,482
Equity securities - available for sale, at market value (cost: 2011, $423,956; 2010, $363,283)		423,789			363,736
Equity securities - available for sale, at fair value		835,322			721,449
Short-term investments		653,605			785,279
Other invested assets (cost: 2011, $579,409; 2010, $603,681)		582,359			605,196
Cash		284,147			258,408
Total investments and cash		15,365,817			15,365,019
Accrued investment income		137,754			148,990
Premiums receivable		969,644			844,832
Reinsurance receivables		688,602			684,718
Funds held by reinsureds		371,497			379,616
Deferred acquisition costs		372,870			383,769
Prepaid reinsurance premiums		117,464			133,007
Deferred tax asset		134,572			149,101
Federal income taxes recoverable		207,082			147,988
Other assets		427,132			170,931
TOTAL ASSETS	$	18,792,434		$	18,407,971

LIABILITIES:
Reserve for losses and loss adjustment expenses	$	9,969,189		$	9,340,183
Future policy benefit reserve		62,785			63,002
Unearned premium reserve		1,453,362			1,455,219
Funds held under reinsurance treaties		101,245			99,213
Commission reserves		42,196			45,936
Other net payable to reinsurers		26,818			47,519
Revolving credit borrowings		40,000			50,000
5.4% Senior notes due 10/15/2014		249,824			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		12,103			4,793
Equity index put option liability		50,943			58,467
Other liabilities		301,550			142,062
Total liabilities		12,878,264			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) 66,241
and (2010) 66,017 outstanding before treasury shares		662			660
Additional paid-in capital		1,868,153			1,863,031
Accumulated other comprehensive income (loss), net of deferred income tax expense
(benefit) of $98,757 at 2011 and $102,868 at 2010		337,337			332,258
Treasury shares, at cost; 12,017 shares (2011) and 11,589 shares (2010)		(1,019,091	)		(981,480	)
Retained earnings		4,727,109			5,069,048
Total shareholders' equity		5,914,170			6,283,517
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	18,792,434		$	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
	March 31,
(Dollars in thousands, except per share amounts)	2011			2010
	(unaudited)
REVENUES:
Premiums earned	$	1,011,446		$	927,302
Net investment income		178,705			161,499
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)		26,923			72,718
Total net realized capital gains (losses)		12,156			72,718
Net derivative gain (loss)		7,525			3,054
Other income (expense)		(3,387	)		5,339
Total revenues		1,206,445			1,169,912

CLAIMS AND EXPENSES:
Incurred losses and loss adjustment expenses		1,249,776			906,856
Commission, brokerage, taxes and fees		236,457			212,662
Other underwriting expenses		44,956			38,944
Corporate expenses		3,928			4,575
Interest, fees and bond issue cost amortization expense		12,998			16,642
Total claims and expenses		1,548,115			1,179,679

INCOME (LOSS) BEFORE TAXES		(341,670	)		(9,767	)
Income tax expense (benefit)		(25,776	)		12,885

NET INCOME (LOSS)	$	(315,894	)	$	(22,652	)
Other comprehensive income (loss), net of tax		5,079			28,939

COMPREHENSIVE INCOME (LOSS)	$	(310,815	)	$	6,287

EARNINGS PER COMMON SHARE:
Basic	$	(5.81	)	$	(0.38	)
Diluted		(5.81	)		(0.38	)
Dividends declared		0.48			0.48

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
	March 31,
(Dollars in thousands, except share and dividends per share amounts)	2011			2010
	(unaudited)
COMMON SHARES (shares outstanding):
Balance, beginning of period		54,428,168			59,317,741
Issued during the period, net		224,303			167,039
Treasury shares acquired		(428,038	)		(562,306	)
Balance, end of period		54,224,433			58,922,474

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

ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of period		1,863,031			1,845,181
Share-based compensation plans		5,122			4,260
Balance, end of period		1,868,153			1,849,441

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS),
NET OF DEFERRED INCOME TAXES:
Balance, beginning of period		332,258			272,038
Net increase (decrease) during the period		5,079			28,939
Balance, end of period		337,337			300,977

RETAINED EARNINGS:
Balance, beginning of period		5,069,048			4,566,771
Net income (loss)		(315,894	)		(22,652	)
Dividends declared ($0.48 per share in 2011 and 2010)		(26,045	)		(28,284	)
Balance, end of period		4,727,109			4,515,835

TREASURY SHARES AT COST:
Balance, beginning of period		(981,480	)		(582,926	)
Purchase of treasury shares		(37,611	)		(47,032	)
Balance, end of period		(1,019,091	)		(629,958	)

TOTAL SHAREHOLDERS' EQUITY, END OF PERIOD	$	5,914,170		$	6,036,955

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
	March 31,
(Dollars in thousands)	2011			2010
	(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(315,894	)	$	(22,652	)
Adjustments to reconcile net income to net cash provided by operating activities:
Decrease (increase) in premiums receivable		(118,423	)		(7,759	)
Decrease (increase) in funds held by reinsureds, net		16,843			(2,429	)
Decrease (increase) in reinsurance receivables		17,218			(33,144	)
Decrease (increase) in deferred tax asset		19,240			6,789
Decrease (increase) in prepaid reinsurance premiums		17,027			410
Increase (decrease) in reserve for losses and loss adjustment expenses		546,447			418,945
Increase (decrease) in future policy benefit reserve		(218	)		(135	)
Increase (decrease) in unearned premiums		(7,131	)		41,598
Change in equity adjustments in limited partnerships		(36,305	)		(16,164	)
Change in other assets and liabilities, net		45,248			(55,877	)
Non-cash compensation expense		3,446			3,541
Amortization of bond premium (accrual of bond discount)		12,752			10,885
Amortization of underwriting discount on senior notes		12			42
Net realized capital (gains) losses		(12,156	)		(72,718	)
Net cash provided by (used in) operating activities		188,106			271,332

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from fixed maturities matured/called - available for sale, at market value		438,264			413,390
Proceeds from fixed maturities matured/called - available for sale, at fair value		6,900			-
Proceeds from fixed maturities sold - available for sale, at market value		530,910			484,522
Proceeds from fixed maturities sold - available for sale, at fair value		32,952			2,497
Proceeds from equity securities sold - available for sale, at market value		27,096			-
Proceeds from equity securities sold - available for sale, at fair value		56,667			21,342
Distributions from other invested assets		86,559			10,730
Cost of fixed maturities acquired - available for sale, at market value		(954,632	)		(1,023,499	)
Cost of fixed maturities acquired - available for sale, at fair value		(8,076	)		(14,194	)
Cost of equity securities acquired - available for sale, at market value		(87,128	)		-
Cost of equity securities acquired - available for sale, at fair value		(128,642	)		(42,322	)
Cost of other invested assets acquired		(24,558	)		(27,044	)
Cost of businesses acquired		(63,100	)		-
Net change in short-term investments		132,939			82,019
Net change in unsettled securities transactions		(127,860	)		47,298
Net cash provided by (used in) investing activities		(81,709	)		(45,261	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Common shares issued during the period, net		1,678			721
Purchase of treasury shares		(37,611	)		(47,032	)
Revolving credit borrowings		(10,000	)		-
Net cost of senior notes maturing		-			(200,000	)
Dividends paid to shareholders		(26,045	)		(28,284	)
Net cash provided by (used in) financing activities		(71,978	)		(274,595	)

EFFECT OF EXCHANGE RATE CHANGES ON CASH		(8,680	)		15,085

Net increase (decrease) in cash		25,739			(33,439	)
Cash, beginning of period		258,408			247,598
Cash, end of period	$	284,147		$	214,159

SUPPLEMENTAL CASH FLOW INFORMATION
Income taxes paid (recovered)	$	11,924		$	12,759
Interest paid		5,519			14,201

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 Months Ended March 31, 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 months ended March 31, 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 months ended March 31, 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 March 31, 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	$	310,889	$	9,868	$	(3,518	)	$	317,239
Obligations of U.S. states and political subdivisions		2,402,357		94,023		(16,195	)		2,480,185
Corporate securities		3,071,369		165,858		(17,937	)		3,219,290
Asset-backed securities		200,003		6,664		(238	)		206,429
Mortgage-backed securities
Commercial		306,979		18,659		(2,399	)		323,239
Agency residential		1,977,406		70,689		(2,310	)		2,045,785
Non-agency residential		71,025		1,212		(500	)		71,737
Foreign government securities		1,756,192		70,507		(24,994	)		1,801,705
Foreign corporate securities		1,942,917		67,026		(32,665	)		1,977,278
Total fixed maturity securities	$	12,039,137	$	504,506	$	(100,756	)	$	12,442,887
Equity securities	$	423,956	$	3,595	$	(3,762	)	$	423,789

	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 March 31, 2011				At December 31, 2010
Pre-tax cumulative unrealized appreciation (depreciation)		$	2,907			$	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 March 31, 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	$	517,203	$	527,412	$	572,985	$	580,528
Due after one year through five years		4,247,066		4,383,766		3,911,482		4,057,230
Due after five years through ten years		2,578,707		2,677,854		2,564,948		2,686,005
Due after ten years		2,140,748		2,206,665		2,331,639		2,402,163
Asset-backed securities		200,003		206,429		210,717		218,301
Mortgage-backed securities
Commercial		306,979		323,239		324,922		337,219
Agency residential		1,977,406		2,045,785		2,018,384		2,093,282
Non-agency residential		71,025		71,737		76,259		75,741
Total fixed maturity securities	$	12,039,137	$	12,442,887	$	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
	March 31,
(Dollars in thousands)	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	$	(35,382	)	$	23,250
Equity securities		(620	)		300
Other invested assets		1,435			514
Change in unrealized appreciation (depreciation), pre-tax		(34,567	)		24,064
Deferred tax benefit (expense)		10,078			10,508
Change in unrealized appreciation (depreciation),
net of deferred taxes, included in shareholders’ equity	$	(24,489	)	$	34,572

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 March 31, 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	$	45,212	$	(3,037	)	$	3,366	$	(481	)	$	48,578	$	(3,518	)
Obligations of U.S. states and political subdivisions		256,186		(7,613	)		86,114		(8,582	)		342,300		(16,195	)
Corporate securities		284,647		(7,031	)		114,804		(10,906	)		399,451		(17,937	)
Asset-backed securities		7,898		(98	)		2,029		(140	)		9,927		(238	)
Mortgage-backed securities
Commercial		1,910		(101	)		39,953		(2,298	)		41,863		(2,399	)
Agency residential		277,750		(2,047	)		11,649		(263	)		289,399		(2,310	)
Non-agency residential		-		-			8,712		(500	)		8,712		(500	)
Foreign government securities		341,138		(9,195	)		220,674		(15,799	)		561,812		(24,994	)
Foreign corporate securities		505,242		(12,273	)		206,077		(20,392	)		711,319		(32,665	)
Total fixed maturity securities	$	1,719,983	$	(41,395	)	$	693,378	$	(59,361	)	$	2,413,361	$	(100,756	)
Equity securities		303,630		(3,760	)		13		(2	)		303,643		(3,762	)
Total	$	2,023,613	$	(45,155	)	$	693,391	$	(59,363	)	$	2,717,004	$	(104,518	)

	Duration of Unrealized Loss at March 31, 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	$	33,303	$	(728	)	$	48,241	$	(6,151	)	$	81,544	$	(6,879	)
Due in one year through five years		545,304		(13,491	)		255,132		(19,201	)		800,436		(32,692	)
Due in five years through ten years		509,959		(13,353	)		125,056		(10,399	)		635,015		(23,752	)
Due after ten years		343,859		(11,577	)		202,606		(20,409	)		546,465		(31,986	)
Asset-backed securities		7,898		(98	)		2,029		(140	)		9,927		(238	)
Mortgage-backed securities		279,660		(2,148	)		60,314		(3,061	)		339,974		(5,209	)
Total fixed maturity securities	$	1,719,983	$	(41,395	)	$	693,378	$	(59,361	)	$	2,413,361	$	(100,756	)

The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at March 31, 2011 were $2,717,004 thousand and $104,518 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 March 31, 2011. In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector. The $41,395 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, $40,499 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating organization. The $59,361 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, foreign government and domestic and foreign corporate

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securities. Of these unrealized losses, $51,930 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 $272 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 March 31, 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. Unrealized losses have decreased since December 31, 2009, as a result of improved conditions in the overall financial market resulting from increased liquidity and lower interest rates.

The components of net investment income are presented in the table below for the periods indicated:

	Three Months Ended
	March 31,
(Dollars in thousands)	2011			2010
Fixed maturity securities	$	132,856		$	145,199
Equity securities		11,863			2,523
Short-term investments and cash		237			(308	)
Other invested assets
Limited partnerships		36,631			15,898
Other		597			372
Total gross investment income		182,184			163,684
Interest debited (credited) and other investment expense		(3,479	)		(2,185	)
Total net investment income	$	178,705		$	161,499

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 $177,386 thousand in limited partnerships at March 31, 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
	March 31,
(Dollars in thousands)	2011			2010
Fixed maturity securities, market value:
Other-than-temporary impairments	$	(14,767	)	$	-
Gains (losses) from sales		(10,015	)		53,006
Fixed maturity securities, fair value:
Gains (losses) from sales		(1,515	)		83
Gains (losses) from fair value adjustments		(3,483	)		3,000
Equity securities, market value:
Gains (losses) from sales		37			-
Equity securities, fair value:
Gains (losses) from sales		1,904			1,895
Gains (losses) from fair value adjustments		39,994			14,733
Short-term investments gain (loss)		1			1
Total net realized capital gains (losses)	$	12,156		$	72,718

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
	March 31,
(Dollars in thousands)	2011			2010
Proceeds from sales of fixed maturity securities	$	563,862		$	487,019
Gross gains from sales		17,350			58,654
Gross losses from sales		(28,880	)		(5,565	)

Proceeds from sales of equity securities	$	83,763		$	21,342
Gross gains from sales		2,482			2,371
Gross losses from sales		(541	)		(476	)

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 March 31, 2011, fair value for these equity index put option contracts was $45,122 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

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historical index volatilities and trends and the March 31, 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 34%. 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 March 31, 2011, the present value of these theoretical maximum payouts using a 6% discount factor was $273,132 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 March 31, 2011, fair value for this equity index put option contract was $5,821 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 March 31, 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 33%. 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 March 31, 2011, the present value of the theoretical maximum payout using a 6% discount factor and current exchange rate was $30,732 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	March 31, 2011		December 31, 2010

Equity index put option contracts	Equity index put option liability	$	50,943	$	58,467
Total		$	50,943	$	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
Derivatives not designated as	Location of gain (loss) in statements of	March 31,
hedging instruments	operations and comprehensive income (loss)	2011		2010

Equity index put option contracts	Net derivative gain (loss)	$	7,525	$	3,054
Total		$	7,525	$	3,054

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 March 31, 2011, was $50,943 thousand for which the Company had posted collateral with a market value of $32,162 thousand. If on March 31, 2011, the Company’s ratings were such that the collateral threshold was zero, the Company’s collateral requirement would increase by $55,000 thousand.

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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 March 31, 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 March 31, 2011
		Contract
	Contracts	based on
	based on	FTSE 100
	S & P 500 Index	Index
Equity index	1,325.8	5,908.8
Interest rate	3.68% to 5.12%	4.53%
Time to maturity	6.2 to 20.0 yrs	9.3 yrs
Volatility	22.1% to 24.5%	24.9%

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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 periods indicated:

			Fair Value Measurement Using:
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
(Dollars in thousands)	March 31, 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	$	317,239	$	-	$	317,239	$	-
Obligations of U.S. States and political subdivisions		2,480,185		-		2,480,185		-
Corporate securities		3,219,290		-		3,219,290		-
Asset-backed securities		206,429		-		197,084		9,345
Mortgage-backed securities
Commercial		323,239		-		323,239		-
Agency residential		2,045,785		-		2,045,785		-
Non-agency residential		71,737		-		70,167		1,570
Foreign government securities		1,801,705		-		1,801,705		-
Foreign corporate securities		1,977,278		-		1,976,759		519
Total fixed maturities, market value		12,442,887		-		12,431,453		11,434

Fixed maturities, fair value		143,708		-		143,708		-
Equity securities, market value		423,789		423,789		-		-
Equity securities, fair value		835,322		835,322		-		-

Liabilities:
Equity index put option contracts	$	50,943	$	-	$	-	$	50,943

There were no significant transfers between Level 1 and Level 2 for the three months ended March 31, 2011.

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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 periods 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 table presents the activity under Level 3, fair value measurements using significant unobservable inputs by asset type, for the periods indicated:

	Three Months Ended March 31, 2011									Three Months Ended March 31, 2010
	Asset-backed			Foreign		Non-agency				Corporate		Asset-backed		Non-agency
(Dollars in thousands)	Securities			Corporate		RMBS		Total		Securities		Securities		RMBS		Total
Beginning balance	$	995		$	4,416	$	1,500	$	6,911	$	9,900	$	6,268	$	1,394	$	17,563
Total gains or (losses) (realized/unrealized)
Included in earnings (or changes in net assets)		-			-		145		145		-		-		92		92
Included in other comprehensive income (loss)		(24	)		-