EVEREST GROUP, LTD. - Quarter Report: 2012 September (Form 10-Q)

group10q3q12.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED:

September 30, 2012

Commission file number:

1-15731

EVEREST RE GROUP, LTD.

(Exact name of registrant as specified in its charter)

Bermuda		98-0365432
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

Wessex House – 2nd Floor

45 Reid Street

PO Box HM 845

Hamilton HM DX, Bermuda

441-295-0006

(Address, including zip code, and telephone number, including area code,

of registrant’s principal executive office)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES

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

YES

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

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

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

YES

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

		Number of Shares Outstanding
Class		At November 1, 2012
Common Shares, $0.01 par value		51,709,157

EVEREST RE GROUP, LTD

Table of Contents

Form 10-Q

Page

PART I

FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets September 30, 2012 (unaudited)
	and December 31, 2011	1

	Consolidated Statements of Operations and Comprehensive Income (Loss) for the
	three and nine months ended September 30, 2012 and 2011 (unaudited)	2

	Consolidated Statements of Changes in Shareholders’ Equity for the three and nine
	months ended September 30, 2012 and 2011 (unaudited)	3

	Consolidated Statements of Cash Flows for the three and nine months ended
	September 30, 2012 and 2011 (unaudited)	4

	Notes to Consolidated Interim Financial Statements (unaudited)	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and
	Results of Operation	30

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	56

Item 4.	Controls and Procedures	56

PART II

OTHER INFORMATION

Item 1.	Legal Proceedings	56

Item 1A.	Risk Factors	57

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57

Item 3.	Defaults Upon Senior Securities	57

Item 4.	Mine Safety Disclosures	57

Item 5.	Other Information	57

Item 6.	Exhibits	58

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PART I

ITEM 1. FINANCIAL STATEMENTS

EVEREST RE GROUP, LTD.

CONSOLIDATED BALANCE SHEETS

	September 30,			December 31,
(Dollars and share amounts in thousands, except par value per share)	2012			2011
	(unaudited)
ASSETS:
Fixed maturities - available for sale, at market value	$	12,846,495		$	12,293,524
(amortized cost: 2012, $12,100,746; 2011, $11,731,173)
Fixed maturities - available for sale, at fair value		52,217			113,606
Equity securities - available for sale, at market value (cost: 2012, $265,563; 2011, $463,620)		279,375			448,930
Equity securities - available for sale, at fair value		1,301,522			1,249,106
Short-term investments		973,560			685,332
Other invested assets (cost: 2012, $602,230; 2011, $558,232)		602,230			558,232
Cash		478,558			448,651
Total investments and cash		16,533,957			15,797,381
Accrued investment income		128,619			130,193
Premiums receivable		1,204,867			1,077,548
Reinsurance receivables		642,612			580,339
Funds held by reinsureds		224,344			267,295
Deferred acquisition costs		296,410			378,026
Prepaid reinsurance premiums		106,869			85,409
Deferred tax asset		260,809			332,783
Income taxes recoverable		20,378			41,623
Other assets		248,608			202,958
TOTAL ASSETS	$	19,667,473		$	18,893,555

LIABILITIES:
Reserve for losses and loss adjustment expenses	$	9,847,174		$	10,123,215
Future policy benefit reserve		65,734			67,187
Unearned premium reserve		1,370,099			1,412,778
Funds held under reinsurance treaties		2,659			2,528
Commission reserves		51,453			55,103
Other net payable to reinsurers		228,641			60,775
5.4% Senior notes due 10/15/2014		249,894			249,858
6.6% Long term notes due 5/1/2067		238,356			238,354
Junior subordinated debt securities payable		329,897			329,897
Accrued interest on debt and borrowings		12,092			4,781
Equity index put option liability		79,148			69,729
Unsettled securities payable		105,869			8,793
Other liabilities		301,085			199,182
Total liabilities		12,882,101			12,822,180

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; (2012) 67,024
and (2011) 66,455 outstanding before treasury shares		670			665
Additional paid-in capital		1,935,677			1,892,988
Accumulated other comprehensive income (loss), net of deferred income tax expense
(benefit) of $136,906 at 2012 and $112,969 at 2011		593,796			366,978
Treasury shares, at cost; 15,316 shares (2012) and 12,719 shares (2011)		(1,323,995	)		(1,073,970	)
Retained earnings		5,579,224			4,884,714
Total shareholders' equity		6,785,372			6,071,375
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	19,667,473		$	18,893,555

The accompanying notes are an integral part of the consolidated financial statements.

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EVEREST RE GROUP, LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Dollars in thousands, except per share amounts)	2012			2011			2012			2011
	(unaudited)						(unaudited)
REVENUES:
Premiums earned	$	1,009,454		$	1,044,338		$	3,045,232		$	3,095,619
Net investment income		152,024			156,465			453,791			493,788
Net realized capital gains (losses):
Other-than-temporary impairments on fixed maturity securities		(3,548	)		(1,050	)		(9,902	)		(15,817	)
Other-than-temporary impairments on fixed maturity securities
transferred to other comprehensive income (loss)		-			-			-			-
Other net realized capital gains (losses)		66,291			(136,621	)		154,784			(114,543	)
Total net realized capital gains (losses)		62,743			(137,671	)		144,882			(130,360	)
Net derivative gain (loss)		703			(23,427	)		(9,420	)		(19,273	)
Other income (expense)		(5,943	)		(14,911	)		15,675			(31,744	)
Total revenues		1,218,981			1,024,794			3,650,160			3,408,030

CLAIMS AND EXPENSES:
Incurred losses and loss adjustment expenses		603,654			720,711			1,813,990			2,706,276
Commission, brokerage, taxes and fees		221,082			227,969			724,374			701,800
Other underwriting expenses		55,762			49,437			153,932			140,290
Corporate expenses		5,947			4,204			16,683			11,922
Interest, fees and bond issue cost amortization expense		13,331			13,085			39,753			39,199
Total claims and expenses		899,776			1,015,406			2,748,732			3,599,487

INCOME (LOSS) BEFORE TAXES		319,205			9,388			901,428			(191,457	)
Income tax expense (benefit)		68,283			(53,666	)		131,251			(69,929	)

NET INCOME (LOSS)	$	250,922		$	63,054		$	770,177		$	(121,528	)

Other comprehensive income (loss), net of tax :
Unrealized appreciation (depreciation) ("URA(D)") on securities arising during the period		116,694			(14,536	)		202,229			53,141
Less: reclassification adjustment for realized losses (gains) included in net income (loss)		1,512			(20,420	)		(5,702	)		(949	)
Total URA(D) on securities arising during the period		118,206			(34,956	)		196,527			52,192
Foreign currency translation adjustments		36,252			(23,247	)		27,125			16,258
Pension adjustments		1,199			746			3,166			2,238
Total other comprehensive income (loss), net of tax		155,657			(57,457	)		226,818			70,688

COMPREHENSIVE INCOME (LOSS)	$	406,579		$	5,597		$	996,995		$	(50,840	)

EARNINGS PER COMMON SHARE:
Basic	$	4.84		$	1.16		$	14.66		$	(2.24	)
Diluted		4.82			1.16			14.61			(2.24	)
Dividends declared		0.48			0.48			1.44			1.44

The accompanying notes are an integral part of the consolidated financial statements.

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EVEREST RE GROUP, LTD.

CONSOLIDATED STATEMENTS OF

CHANGES IN SHAREHOLDERS’ EQUITY

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Dollars in thousands, except share and dividends per share amounts)	2012			2011			2012			2011
	(unaudited)						(unaudited)
COMMON SHARES (shares outstanding):
Balance, beginning of period		51,857,047			54,346,216			53,735,551			54,428,168
Issued during the period, net		79,990			39,446			569,872			385,532
Treasury shares acquired		(229,100	)		(597,006	)		(2,597,486	)		(1,025,044	)
Balance, end of period		51,707,937			53,788,656			51,707,937			53,788,656

COMMON SHARES (par value):
Balance, beginning of period	$	669		$	664		$	665		$	660
Issued during the period, net		1			-			5			4
Balance, end of period		670			664			670			664

ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of period		1,924,313			1,878,242			1,892,988			1,863,031
Share-based compensation plans		11,364			6,250			42,689			21,461
Balance, end of period		1,935,677			1,884,492			1,935,677			1,884,492

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS),
NET OF DEFERRED INCOME TAXES:
Balance, beginning of period		438,139			460,403			366,978			332,258
Net increase (decrease) during the period		155,657			(57,457	)		226,818			70,688
Balance, end of period		593,796			402,946			593,796			402,946

RETAINED EARNINGS:
Balance, beginning of period		5,353,199			4,832,340			4,884,714			5,069,048
Net income (loss)		250,922			63,054			770,177			(121,528	)
Dividends declared ($0.48 per quarter and $1.44 year-to-date
per share in 2012 and 2011)		(24,897	)		(25,936	)		(75,667	)		(78,062	)
Balance, end of period		5,579,224			4,869,458			5,579,224			4,869,458

TREASURY SHARES AT COST:
Balance, beginning of period		(1,298,969	)		(1,019,091	)		(1,073,970	)		(981,480	)
Purchase of treasury shares		(25,026	)		(46,628	)		(250,025	)		(84,239	)
Balance, end of period		(1,323,995	)		(1,065,719	)		(1,323,995	)		(1,065,719	)

TOTAL SHAREHOLDERS' EQUITY, END OF PERIOD	$	6,785,372		$	6,091,841		$	6,785,372		$	6,091,841

The accompanying notes are an integral part of the consolidated financial statements.

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EVEREST RE GROUP, LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Dollars in thousands)	2012			2011			2012			2011
	(unaudited)						(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	250,922		$	63,054		$	770,177		$	(121,528	)
Adjustments to reconcile net income to net cash provided by operating activities:
Decrease (increase) in premiums receivable		(227,333	)		(6,371	)		(119,923	)		(159,868	)
Decrease (increase) in funds held by reinsureds, net		37,682			(22,036	)		46,089			17,452
Decrease (increase) in reinsurance receivables		(22,945	)		89,855			(35,972	)		107,610
Decrease (increase) in current income taxes		19,927			14,638			21,386			7,205
Decrease (increase) in deferred tax asset		14,935			(75,216	)		48,896			(73,558	)
Decrease (increase) in prepaid reinsurance premiums		(27,524	)		10,126			(18,401	)		49,472
Increase (decrease) in reserve for losses and loss adjustment expenses		(138,310	)		(115,014	)		(405,540	)		578,371
Increase (decrease) in future policy benefit reserve		(535	)		(638	)		(1,454	)		(1,032	)
Increase (decrease) in unearned premiums		121,344			34,686			(52,225	)		(79,001	)
Increase (decrease) in other net payable to reinsurers		138,239			13,645			165,142			(15,938	)
Change in equity adjustments in limited partnerships		(18,274	)		(16,439	)		(46,766	)		(67,053	)
Change in other assets and liabilities, net		65,247			65,828			184,250			126,791
Non-cash compensation expense		9,452			5,295			22,826			12,953
Amortization of bond premium (accrual of bond discount)		14,829			8,814			45,795			34,384
Amortization of underwriting discount on senior notes		13			12			38			36
Net realized capital (gains) losses		(62,743	)		137,671			(144,882	)		130,360
Net cash provided by (used in) operating activities		174,926			207,910			479,436			546,656

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from fixed maturities matured/called - available for sale, at market value		503,303			537,715			1,294,896			1,348,380
Proceeds from fixed maturities matured/called - available for sale, at fair value		1,300			-			1,300			12,775
Proceeds from fixed maturities sold - available for sale, at market value		217,983			487,973			639,301			1,355,653
Proceeds from fixed maturities sold - available for sale, at fair value		11,783			12,512			72,926			62,632
Proceeds from equity securities sold - available for sale, at market value		76,000			1			130,792			27,207
Proceeds from equity securities sold - available for sale, at fair value		89,311			61,080			386,917			154,747
Distributions from other invested assets		32,015			15,923			53,032			143,017
Cost of fixed maturities acquired - available for sale, at market value		(889,195	)		(756,432	)		(2,143,771	)		(2,293,760	)
Cost of fixed maturities acquired - available for sale, at fair value		(1,658	)		(9,801	)		(7,164	)		(25,025	)
Cost of equity securities acquired - available for sale, at market value		(7,472	)		(4,772	)		(20,126	)		(120,583	)
Cost of equity securities acquired - available for sale, at fair value		(111,767	)		(342,567	)		(305,046	)		(684,867	)
Cost of other invested assets acquired		(21,089	)		(5,730	)		(49,681	)		(57,832	)
Cost of businesses acquired		-			-			-			(63,100	)
Net change in short-term investments		(24,466	)		(51,333	)		(287,196	)		(48,616	)
Net change in unsettled securities transactions		59,991			(11,755	)		65,957			35,446
Net cash provided by (used in) investing activities		(63,961	)		(67,186	)		(167,863	)		(153,926	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Common shares issued during the period, net		1,913			951			19,868			8,508
Purchase of treasury shares		(25,026	)		(46,628	)		(250,025	)		(84,239	)
Revolving credit borrowings		-			(40,000	)		-			(50,000	)
Dividends paid to shareholders		(24,897	)		(25,936	)		(75,667	)		(78,062	)
Net cash provided by (used in) financing activities		(48,010	)		(111,613	)		(305,824	)		(203,793	)

EFFECT OF EXCHANGE RATE CHANGES ON CASH		16,752			3,072			24,158			(3,639	)

Net increase (decrease) in cash		79,707			32,183			29,907			185,298
Cash, beginning of period		398,851			411,523			448,651			258,408
Cash, end of period	$	478,558		$	443,706		$	478,558		$	443,706

SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid (recovered)	$	30,662		$	6,627		$	54,463		$	(5,919	)
Interest paid		5,851			5,607			31,936			31,385

Non-cash transaction:
Net assets acquired and liabilities assumed from business acquisitions		-			-			-			19,130
Conversion of equity securities - available for sale, at market value, to fixed
maturity securities - available for sale, at market value, including accrued
interest at time of conversion		-			-			92,981			-

The accompanying notes are an integral part of the consolidated financial statements.

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NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Nine Months Ended September 30, 2012 and 2011

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.

2. BASIS OF PRESENTATION

The unaudited consolidated financial statements of the Company for the three and nine months ended September 30, 2012 and 2011 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, 2011 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The results for the three and nine months ended September 30, 2012 and 2011 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, 2011, 2010 and 2009 included in the Company’s most recent Form 10-K filing.

All intercompany accounts and transactions have been eliminated.

Certain reclassifications and format changes have been made to prior period amounts to conform to the current period presentation.

Application of Recently Issued Accounting Standard Changes.

Intangibles-Goodwill or Other. In September 2011, the Financial Accounting Standards Board (“FASB“) amended the authoritative guidance for disclosures on Goodwill Impairment. The amendment allows an entity first to assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis in determining whether it is necessary to perform the two-step goodwill impairment test. This guidance is effective for periods beginning after December 15, 2011. The Company implemented this guidance as of January 1, 2012.

Presentation of Comprehensive Income. In June 2011, FASB issued amendments to existing guidance to provide two alternatives for the presentation of comprehensive income. Components of net income and comprehensive income can either be presented within a single, continuous financial statement or be presented in two separate but consecutive financial statements. The Company has chosen to present the components of net income and comprehensive income in a single, continuous financial statement. The guidance is effective for reporting periods beginning after December 15, 2011. The Company implemented this guidance as of January 1, 2012.

Common Fair Value Measurement. In May 2011, FASB issued amendments to existing guidance to achieve common fair value measurement and disclosure requirements between GAAP and International Financial Reporting Standards. The amendments change wording used to describe many GAAP fair value measurement requirements and disclosures. FASB does not intend for the amendments to cause a change in application of fair value accounting guidance. The guidance is effective for reporting periods beginning after December 15, 2011. The Company implemented this guidance prospectively as of January 1, 2012.

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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 implemented this guidance as of January 1, 2012 and determined that $13,492 thousand of previously deferrable acquisition costs will be expensed during 2012 and the first quarter of 2013, including $2,549 thousand and $8,790 thousand of previously deferrable acquisition costs expensed in the three and nine months ended September 30, 2012, respectively. If the guidance had been applicable for the prior periods, the Company would have expensed $4,958 thousand and $11,405 thousand of deferrable acquisition costs during the three and nine months ended September 30, 2011, respectively.

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.

3. INVESTMENTS

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

	At September 30, 2012
	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	$	299,691	$	12,743	$	(823	)	$	311,611
Obligations of U.S. states and political subdivisions		1,275,966		90,415		(53	)		1,366,328
Corporate securities		3,629,746		262,117		(7,019	)		3,884,844
Asset-backed securities		190,269		7,878		(381	)		197,766
Mortgage-backed securities
Commercial		301,225		28,941		(3,643	)		326,523
Agency residential		2,050,526		79,504		(1,840	)		2,128,190
Non-agency residential		10,718		1,082		(190	)		11,610
Foreign government securities		1,741,813		140,982		(6,222	)		1,876,573
Foreign corporate securities		2,600,792		156,725		(14,467	)		2,743,050
Total fixed maturity securities	$	12,100,746	$	780,387	$	(34,638	)	$	12,846,495
Equity securities	$	265,563	$	13,814	$	(2	)	$	279,375

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	At December 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	$	284,514	$	16,407	$	(287	)	$	300,634
Obligations of U.S. states and political subdivisions		1,558,615		102,815		(525	)		1,660,905
Corporate securities		3,495,761		197,914		(27,054	)		3,666,621
Asset-backed securities		186,936		7,020		(550	)		193,406
Mortgage-backed securities
Commercial		310,387		20,942		(9,902	)		321,427
Agency residential		2,198,937		86,722		(3,066	)		2,282,593
Non-agency residential		53,365		499		(775	)		53,089
Foreign government securities		1,555,707		120,900		(8,389	)		1,668,218
Foreign corporate securities		2,086,951		91,869		(32,189	)		2,146,631
Total fixed maturity securities	$	11,731,173	$	645,088	$	(82,737	)	$	12,293,524
Equity securities	$	463,620	$	4,060	$	(18,750	)	$	448,930

The $1,876,573 thousand of foreign government securities at September 30, 2012 included $838,200 thousand of European sovereign securities. Approximately 54.0%, 18.9%, 6.9% and 5.2% of European sovereign securities represented securities held in the governments of the United Kingdom, France, Austria and the Netherlands, respectively. No other countries represented more than 5% of the European sovereign securities. The Company held no sovereign securities of Portugal, Italy, Ireland, Greece or Spain at September 30, 2012.

In accordance with FASB guidance, the Company reclassified the non-credit portion of other-than-temporary impairments from retained earnings into accumulated other comprehensive income (loss), on April 1, 2009. The table below presents the pre-tax cumulative unrealized appreciation (depreciation) on those corporate securities, for the periods indicated:

(Dollars in thousands)		At September 30, 2012				At December 31, 2011
Pre-tax cumulative unrealized appreciation (depreciation)		$	4,992			$	2,567

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

	At September 30, 2012				At December 31, 2011
	Amortized		Market		Amortized		Market
(Dollars in thousands)	Cost		Value		Cost		Value
Fixed maturity securities – available for sale:
Due in one year or less	$	894,249	$	906,069	$	494,098	$	494,911
Due after one year through five years		5,257,997		5,537,891		5,052,484		5,268,748
Due after five years through ten years		2,310,643		2,517,076		2,188,080		2,325,142
Due after ten years		1,085,119		1,221,370		1,246,886		1,354,208
Asset-backed securities		190,269		197,766		186,936		193,406
Mortgage-backed securities:
Commercial		301,225		326,523		310,387		321,427
Agency residential		2,050,526		2,128,190		2,198,937		2,282,593
Non-agency residential		10,718		11,610		53,365		53,089
Total fixed maturity securities	$	12,100,746	$	12,846,495	$	11,731,173	$	12,293,524

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The changes in net unrealized appreciation (depreciation) for the Company’s investments are derived from the following sources for the periods indicated:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Dollars in thousands)	2012			2011			2012			2011
Increase (decrease) during the period between the market value and cost
of investments carried at market value, and deferred taxes thereon:
Fixed maturity securities	$	110,234		$	3,902		$	180,973		$	95,587
Fixed maturity securities, other-than-temporary impairment		964			(1,305	)		2,425			582
Equity securities		17,681			(29,936	)		28,502			(21,828	)
Other invested assets		-			215			-			(1,515	)
Change in unrealized appreciation (depreciation), pre-tax		128,879			(27,124	)		211,900			72,826
Deferred tax benefit (expense)		(10,700	)		(7,880	)		(15,424	)		(20,680	)
Deferred tax benefit (expense), other-than-temporary impairment		27			48			51			46
Change in unrealized appreciation (depreciation),
net of deferred taxes, included in shareholders’ equity	$	118,206		$	(34,956	)	$	196,527		$	52,192

The Company frequently reviews all of its fixed maturity, available for sale securities 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, interest rate or foreign exchange 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 or foreign exchange 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.

The majority of the Company’s equity securities available for sale at market value are primarily comprised of mutual fund investments whose underlying securities consist of fixed maturity securities. When a fund’s value reflects an unrealized loss, the Company assesses whether the decline in value is temporary or other-than-temporary. In making its assessment, the Company considers the composition of its portfolios and their related markets, reports received from the portfolio managers and discussions with portfolio managers. If the Company determines that the declines are temporary and it has the ability and intent to continue to hold the investments, then the declines are recorded as unrealized losses in accumulated other comprehensive income (loss). If declines are deemed to be other-than-temporary, then the carrying value of the investment is written down to fair value and recorded in net realized capital gains (losses) in the Company’s consolidated statements of operations and comprehensive income (loss).

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 prepayments for pass-through security types.

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

	Duration of Unrealized Loss at September 30, 2012 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	$	639	$	(6	)	$	11,543	$	(817	)	$	12,182	$	(823	)
Obligations of U.S. states and political subdivisions		-		-			5,779		(53	)		5,779		(53	)
Corporate securities		93,239		(916	)		114,607		(6,103	)		207,846		(7,019	)
Asset-backed securities		2,000		-			14,852		(381	)		16,852		(381	)
Mortgage-backed securities
Commercial		-		-			50,429		(3,643	)		50,429		(3,643	)
Agency residential		189,960		(1,289	)		23,856		(551	)		213,816		(1,840	)
Non-agency residential		-		-			2,261		(190	)		2,261		(190	)
Foreign government securities		87,969		(1,199	)		72,205		(5,023	)		160,174		(6,222	)
Foreign corporate securities		164,401		(3,263	)		129,403		(11,204	)		293,804		(14,467	)
Total fixed maturity securities	$	538,208	$	(6,673	)	$	424,935	$	(27,965	)	$	963,143	$	(34,638	)
Equity securities		-		-			13		(2	)		13		(2	)
Total	$	538,208	$	(6,673	)	$	424,948	$	(27,967	)	$	963,156	$	(34,640	)

	Duration of Unrealized Loss at September 30, 2012 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	$	26,704	$	(471	)	$	52,743	$	(6,657	)	$	79,447	$	(7,128	)
Due in one year through five years		254,344		(4,112	)		196,928		(13,059	)		451,272		(17,171	)
Due in five years through ten years		59,693		(733	)		59,816		(2,212	)		119,509		(2,945	)
Due after ten years		5,507		(68	)		24,050		(1,272	)		29,557		(1,340	)
Asset-backed securities		2,000		-			14,852		(381	)		16,852		(381	)
Mortgage-backed securities		189,960		(1,289	)		76,546		(4,384	)		266,506		(5,673	)
Total fixed maturity securities	$	538,208	$	(6,673	)	$	424,935	$	(27,965	)	$	963,143	$	(34,638	)

The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at September 30, 2012 were $963,156 thousand and $34,640 thousand, respectively. There were no unrealized losses on a single issuer that exceeded 0.02% of the market value of the fixed maturity securities at September 30, 2012. In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector. The $6,673 thousand of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for less than one year were generally comprised of domestic and foreign corporate securities, agency residential mortgage-backed securities and foreign government securities. Of these unrealized losses, $5,699 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating organization. The $27,965 thousand of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year related primarily to domestic and foreign corporate securities, foreign government securities and commercial mortgage-backed securities. Of these unrealized losses, $22,490 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 for mortgage-backed securities included $241 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.

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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, 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	$	-	$	-		$	3,452	$	(287	)	$	3,452	$	(287	)
Obligations of U.S. states and political subdivisions		-		-			7,518		(525	)		7,518		(525	)
Corporate securities		512,255		(14,962	)		120,064		(12,092	)		632,319		(27,054	)
Asset-backed securities		20,839		(339	)		3,655		(211	)		24,494		(550	)
Mortgage-backed securities
Commercial		9,292		(1,267	)		54,535		(8,635	)		63,827		(9,902	)
Agency residential		253,171		(2,524	)		43,894		(542	)		297,065		(3,066	)
Non-agency residential		1,542		(19	)		35,679		(756	)		37,221		(775	)
Foreign government securities		39,534		(1,035	)		132,977		(7,354	)		172,511		(8,389	)
Foreign corporate securities		278,949		(12,287	)		259,641		(19,902	)		538,590		(32,189	)
Total fixed maturity securities	$	1,115,582	$	(32,433	)	$	661,415	$	(50,304	)	$	1,776,997	$	(82,737	)
Equity securities		108,939		(8,499	)		204,466		(10,251	)		313,405		(18,750	)
Total	$	1,224,521	$	(40,932	)	$	865,881	$	(60,555	)	$	2,090,402	$	(101,487	)

	Duration of Unrealized Loss at December 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	$	26,581	$	(326	)	$	72,083	$	(8,953	)	$	98,664	$	(9,279	)
Due in one year through five years		421,995		(12,001	)		256,698		(15,635	)		678,693		(27,636	)
Due in five years through ten years		337,232		(13,019	)		159,476		(8,264	)		496,708		(21,283	)
Due after ten years		44,930		(2,938	)		35,395		(7,308	)		80,325		(10,246	)
Asset-backed securities		20,839		(339	)		3,655		(211	)		24,494		(550	)
Mortgage-backed securities		264,005		(3,810	)		134,108		(9,933	)		398,113		(13,743	)
Total fixed maturity securities	$	1,115,582	$	(32,433	)	$	661,415	$	(50,304	)	$	1,776,997	$	(82,737	)

The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at December 31, 2011 were $2,090,402 thousand and $101,487 thousand, respectively. There were no unrealized losses on a single issuer that exceeded 0.04% of the market value of the fixed maturity securities at December 31, 2011. In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector. The $32,433 thousand of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for less than one year were generally comprised of domestic and foreign corporate securities. Of these unrealized losses, $17,207 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating organization. The $50,304 thousand of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year related primarily to domestic and foreign corporate securities, foreign government securities and commercial mortgage-backed securities. Of these unrealized losses, $34,840 thousand related to securities that were rated investment grade by at least one nationally recognized statistical rating organization. All of the unrealized losses related to foreign corporate and foreign government securities are due to temporary currency exchange rate movements as opposed to market value movements. The non-investment grade securities with unrealized losses were mainly comprised of corporate

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and commercial mortgage-backed securities. The gross unrealized depreciation for mortgage-backed securities included $322 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 unrealized losses related to equity securities represent temporary declines in value of mutual fund investments where the underlying investments are comprised of emerging market debt fixed maturities.

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Dollars in thousands)	2012			2011			2012			2011
Fixed maturity securities	$	122,824		$	131,680		$	367,770		$	397,204
Equity securities		13,394			15,794			46,898			40,813
Short-term investments and cash		384			366			911			1,042
Other invested assets
Limited partnerships		18,571			15,725			47,857			66,700
Other		1,427			(1,520	)		2,453			3,203
Total gross investment income		156,600			162,045			465,889			508,962
Interest debited (credited) and other investment expense		(4,576	)		(5,580	)		(12,098	)		(15,174	)
Total net investment income	$	152,024		$	156,465		$	453,791		$	493,788

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 $111,715 thousand in limited partnerships at September 30, 2012. These commitments will be funded when called in accordance with the partnership agreements, which have investment periods that expire, unless extended, through 2016.

The components of net realized capital gains (losses) are presented in the table below for the periods indicated:

Three Months Ended

Nine Months Ended

September 30,

(Dollars in thousands)

2012

2011

2012