Annual Statements Open main menu

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

group10q2q2012.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED:
June 30, 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
X
 
NO
 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
YES
X
 
NO
 

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

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

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

YES
 
 
NO
  X
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

   
Number of Shares Outstanding
Class
 
At August 1, 2012
Common Shares, $0.01 par value
   51,822,388

 
 

 

EVEREST RE GROUP, LTD

Table of Contents
Form 10-Q


Page
PART I

FINANCIAL INFORMATION

Item 1.
Financial Statements
 
     
   
 
1
     
   
 
2
     
   
 
3
     
   
 
4
     
 
5
     
Item 2.
 
 
29
     
Item 3.
55
     
Item 4.
55
     

PART II

OTHER INFORMATION

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


PART I

ITEM 1.  FINANCIAL STATEMENTS

EVEREST RE GROUP, LTD.
CONSOLIDATED BALANCE SHEETS



   
June 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
  $ 12,480,411     $ 12,293,524  
    (amortized cost: 2012, $11,845,861; 2011, $11,731,173)
               
Fixed maturities - available for sale, at fair value
    62,831       113,606  
Equity securities - available for sale, at market value (cost: 2012, $335,081; 2011, $463,620)
    331,212       448,930  
Equity securities - available for sale, at fair value
    1,215,455       1,249,106  
Short-term investments
    947,600       685,332  
Other invested assets (cost: 2012, $593,459; 2011, $558,232)
    593,459       558,232  
Cash
    398,851       448,651  
       Total investments and cash
    16,029,819       15,797,381  
Accrued investment income
    129,309       130,193  
Premiums receivable
    971,599       1,077,548  
Reinsurance receivables
    598,399       580,339  
Funds held by reinsureds
    259,375       267,295  
Deferred acquisition costs
    285,034       378,026  
Prepaid reinsurance premiums
    76,583       85,409  
Deferred tax asset
    294,683       332,783  
Income taxes recoverable
    40,004       41,623  
Other assets
    218,446       202,958  
TOTAL ASSETS
  $ 18,903,251     $ 18,893,555  
                 
LIABILITIES:
               
Reserve for losses and loss adjustment expenses
  $ 9,890,827     $ 10,123,215  
Future policy benefit reserve
    66,269       67,187  
Unearned premium reserve
    1,241,592       1,412,778  
Funds held under reinsurance treaties
    2,646       2,528  
Commission reserves
    44,646       55,103  
Other net payable to reinsurers
    78,366       51,564  
5.4% Senior notes due 10/15/2014
    249,882       249,858  
6.6% Long term notes due 5/1/2067
    238,355       238,354  
Junior subordinated debt securities payable
    329,897       329,897  
Accrued interest on debt and borrowings
    4,781       4,781  
Equity index put option liability
    79,851       69,729  
Other liabilities
    258,788       217,186  
       Total liabilities
    12,485,900       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) 66,944
               
    and (2011) 66,455 outstanding before treasury shares
    669       665  
Additional paid-in capital
    1,924,313       1,892,988  
Accumulated other comprehensive income (loss), net of deferred income tax expense
               
    (benefit) of $117,348 at 2012 and $112,969 at 2011
    438,139       366,978  
Treasury shares, at cost; 15,087 shares (2012) and 12,719 shares (2011)
    (1,298,969 )     (1,073,970 )
Retained earnings
    5,353,199       4,884,714  
       Total shareholders' equity
    6,417,351       6,071,375  
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
  $ 18,903,251     $ 18,893,555  
                 
The accompanying notes are an integral part of the consolidated financial statements.
               

 
EVEREST RE GROUP, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)



   
Three Months Ended
 
Six Months Ended
   
June 30,
 
June 30,
(Dollars in thousands, except per share amounts)
 
2012
 
2011
 
2012
 
2011
   
(unaudited)
 
(unaudited)
REVENUES:
                       
Premiums earned
  $ 1,037,800     $ 1,039,835     $ 2,035,778     $ 2,051,281  
Net investment income
    149,329       158,618       301,767       337,323  
Net realized capital gains (losses):
                               
Other-than-temporary impairments on fixed maturity securities
    (466 )     -       (6,354 )     (14,767 )
Other-than-temporary impairments on fixed maturity securities
                               
transferred to other comprehensive income (loss)
    -       -       -       -  
Other net realized capital gains (losses)
    (16,114 )     (4,845 )     88,493       22,078  
Total net realized capital gains (losses)
    (16,580 )     (4,845 )     82,139       7,311  
Net derivative gain (loss)
    (16,306 )     (3,371 )     (10,123 )     4,154  
Other income (expense)
    27,812       (13,446 )     21,618       (16,833 )
Total revenues
    1,182,055       1,176,791       2,431,179       2,383,236  
                                 
CLAIMS AND EXPENSES:
                               
Incurred losses and loss adjustment expenses
    607,870       735,789       1,210,336       1,985,565  
Commission, brokerage, taxes and fees
    265,789       237,374       503,292       473,831  
Other underwriting expenses
    49,675       45,897       98,170       90,853  
Corporate expenses
    6,075       3,790       10,736       7,718  
Interest, fees and bond issue cost amortization expense
    13,244       13,116       26,422       26,114  
Total claims and expenses
    942,653       1,035,966       1,848,956       2,584,081  
                                 
INCOME (LOSS) BEFORE TAXES
    239,402       140,825       582,223       (200,845 )
Income tax expense (benefit)
    24,851       9,513       62,968       (16,263 )
                                 
NET INCOME (LOSS)
  $ 214,551     $ 131,312     $ 519,255     $ (184,582 )
                                 
Other comprehensive income (loss), net of tax :
                               
Unrealized appreciation (depreciation) ("URA(D)") on securities arising during the period
    5,408       108,484       85,535       67,677  
Less:  reclassification adjustment for realized losses (gains) included in net income (loss)
    (7,456 )     3,153       (7,214 )     19,471  
Total URA(D) on securities arising during the period
    (2,048 )     111,637       78,321       87,148  
Foreign currency translation adjustments
    (24,997 )     10,683       (9,127 )     39,505  
Pension adjustments
    983       746       1,967       1,492  
Total other comprehensive income (loss), net of tax
    (26,062 )     123,066       71,161       128,145  
                                 
COMPREHENSIVE INCOME (LOSS)
  $ 188,489     $ 254,378     $ 590,416     $ (56,437 )
                                 
EARNINGS PER COMMON SHARE:
                               
Basic
  $ 4.10     $ 2.42     $ 9.81     $ (3.40 )
Diluted
    4.08       2.41       9.79       (3.40 )
Dividends declared
    0.48       0.48       0.96       0.96  
                                 
The accompanying notes are an integral part of the consolidated financial statements.
                               

 
EVEREST RE GROUP, LTD.
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS’ EQUITY
 
 
   
Three Months Ended
 
Six Months Ended
   
June 30,
 
June 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
    52,624,820       54,224,433       53,735,551       54,428,168  
Issued during the period, net
    223,184       121,783       489,882       346,086  
Treasury shares acquired
    (990,957 )     -       (2,368,386 )     (428,038 )
Balance, end of period
    51,857,047       54,346,216       51,857,047       54,346,216  
                                 
COMMON SHARES (par value):
                               
Balance, beginning of period
  $ 667     $ 662     $ 665     $ 660  
Issued during the period, net
    2       2       4       4  
Balance, end of period
    669       664       669       664  
                                 
ADDITIONAL PAID-IN CAPITAL:
                               
Balance, beginning of period
    1,901,322       1,868,153       1,892,988       1,863,031  
Share-based compensation plans
    22,991       10,089       31,325       15,211  
Balance, end of period
    1,924,313       1,878,242       1,924,313       1,878,242  
                                 
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS),
                               
NET OF DEFERRED INCOME TAXES:
                               
Balance, beginning of period
    464,201       337,337       366,978       332,258  
Net increase (decrease) during the period
    (26,062 )     123,066       71,161       128,145  
Balance, end of period
    438,139       460,403       438,139       460,403  
                                 
RETAINED EARNINGS:
                               
Balance, beginning of period
    5,163,777       4,727,109       4,884,714       5,069,048  
Net income (loss)
    214,551       131,312       519,255       (184,582 )
Dividends declared ($0.48 per quarter and $0.96 year-to-date
                               
per share in 2012 and 2011)
    (25,129 )     (26,081 )     (50,770 )     (52,126 )
Balance, end of period
    5,353,199       4,832,340       5,353,199       4,832,340  
                                 
TREASURY SHARES AT COST:
                               
Balance, beginning of period
    (1,198,969 )     (1,019,091 )     (1,073,970 )     (981,480 )
Purchase of treasury shares
    (100,000 )     -       (224,999 )     (37,611 )
Balance, end of period
    (1,298,969 )     (1,019,091 )     (1,298,969 )     (1,019,091 )
                                 
TOTAL SHAREHOLDERS' EQUITY, END OF PERIOD
  $ 6,417,351     $ 6,152,558     $ 6,417,351     $ 6,152,558  
                                 
The accompanying notes are an integral part of the consolidated financial statements.
                               

 
EVEREST RE GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS

 
   
Three Months Ended
 
Six Months Ended
   
June 30,
 
June 30,
(Dollars in thousands)
 
2012
 
2011
 
2012
 
2011
   
(unaudited)
 
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
                       
Net income (loss)
  $ 214,551     $ 131,312     $ 519,255     $ (184,582 )
Adjustments to reconcile net income to net cash provided by operating activities:
                               
Decrease (increase) in premiums receivable
    70,139       (35,074 )     107,410       (153,497 )
Decrease (increase) in funds held by reinsureds, net
    10,673       22,645       8,407       39,488  
Decrease (increase) in reinsurance receivables
    (33,809 )     537       (13,027 )     17,755  
Decrease (increase) in income taxes recoverable
    4,768       49,873       1,459       (7,433 )
Decrease (increase) in deferred tax asset
    3,956       (17,582 )     33,961       1,658  
Decrease (increase) in prepaid reinsurance premiums
    3,130       22,319       9,123       39,346  
Increase (decrease) in reserve for losses and loss adjustment expenses
    (95,066 )     146,938       (267,230 )     693,385  
Increase (decrease) in future policy benefit reserve
    (574 )     (176 )     (919 )     (394 )
Increase (decrease) in unearned premiums
    (186,162 )     (106,556 )     (173,569 )     (113,687 )
Increase (decrease) in other net payable to reinsurers
    30,025       (6,899 )     26,903       (29,583 )
Change in equity adjustments in limited partnerships
    (15,972 )     (14,309 )     (28,492 )     (50,614 )
Change in other assets and liabilities, net
    92,669       (64,275 )     119,003       60,963  
Non-cash compensation expense
    7,652       4,212       13,374       7,658  
Amortization of bond premium (accrual of bond discount)
    16,200       12,818       30,966       25,570  
Amortization of underwriting discount on senior notes
    12       12       25       24  
Net realized capital (gains) losses
    16,580       4,845       (82,139 )     (7,311 )
Net cash provided by (used in) operating activities
    138,772       150,640       304,510       338,746  
                                 
CASH FLOWS FROM INVESTING ACTIVITIES:
                               
Proceeds from fixed maturities matured/called - available for sale, at market value
    381,216       372,401       791,593       810,665  
Proceeds from fixed maturities matured/called - available for sale, at fair value
    -       5,875       -       12,775  
Proceeds from fixed maturities sold - available for sale, at market value
    203,240       336,770       421,318       867,680  
Proceeds from fixed maturities sold - available for sale, at fair value
    1,862       17,168       61,143       50,120  
Proceeds from equity securities sold - available for sale, at market value
    34,549       110       54,792       27,206  
Proceeds from equity securities sold - available for sale, at fair value
    53,950       37,000       297,606       93,667  
Distributions from other invested assets
    12,798       40,535       21,017       127,094  
Cost of fixed maturities acquired - available for sale, at market value
    (641,902 )     (582,696 )     (1,254,576 )     (1,537,328 )
Cost of fixed maturities acquired - available for sale, at fair value
    (2,382 )     (7,148 )     (5,506 )     (15,224 )
Cost of equity securities acquired - available for sale, at market value
    (6,202 )     (28,683 )     (12,654 )     (115,811 )
Cost of equity securities acquired - available for sale, at fair value
    (79,934 )     (213,658 )     (193,279 )     (342,300 )
Cost of other invested assets acquired
    (16,680 )     (27,544 )     (28,592 )     (52,102 )
Cost of businesses acquired
    -       -       -       (63,100 )
Net change in short-term investments
    (5,025 )     (130,222 )     (262,730 )     2,717  
Net change in unsettled securities transactions
    (32,856 )     175,061       5,966       47,201  
Net cash provided by (used in) investing activities
    (97,366 )     (5,031 )     (103,902 )     (86,740 )
                                 
CASH FLOWS FROM FINANCING ACTIVITIES:
                               
Common shares issued during the period, net
    15,344       5,879       17,955       7,557  
Purchase of treasury shares
    (100,000 )     -       (224,999 )     (37,611 )
Revolving credit borrowings
    -       -       -       (10,000 )
Dividends paid to shareholders
    (25,129 )     (26,081 )     (50,770 )     (52,126 )
Net cash provided by (used in) financing activities
    (109,785 )     (20,202 )     (257,814 )     (92,180 )
                                 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
    (4,817 )     1,969       7,406       (6,711 )
                                 
Net increase (decrease) in cash
    (73,196 )     127,376       (49,800 )     153,115  
Cash, beginning of period
    472,047       284,147       448,651       258,408  
Cash, end of period
  $ 398,851     $ 411,523     $ 398,851     $ 411,523  
                                 
SUPPLEMENTAL CASH FLOW INFORMATION:
                               
Income taxes paid (recovered)
  $ 12,617     $ (24,471 )   $ 23,801     $ (12,546 )
Interest paid
    20,387       20,259       26,085       25,778  
                                 
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       -       92,981       -  
                                 
The accompanying notes are an integral part of the consolidated financial statements.
                               

 
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Six Months Ended June 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 six months ended June 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 six months ended June 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.



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 $3,595 thousand and $6,241 thousand of previously deferrable acquisition costs expensed in the three and six months ended June 30, 2012, respectively.  If the guidance had been applicable for the prior periods, the Company would have expensed $3,401 thousand and $6,447 thousand of deferrable acquisition costs during the three and six months ended June 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 June 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
  $ 294,101     $ 15,445     $ (465 )   $ 309,081  
Obligations of U.S. states and political subdivisions
    1,353,400       93,071       (245 )     1,446,226  
Corporate securities
    3,611,149       226,104       (12,733 )     3,824,520  
Asset-backed securities
    186,595       7,139       (411 )     193,323  
Mortgage-backed securities
                               
Commercial
    311,176       24,077       (6,966 )     328,287  
Agency residential
    2,056,703       73,608       (2,657 )     2,127,654  
Non-agency residential
    13,378       735       (236 )     13,877  
Foreign government securities
    1,639,567       122,945       (5,683 )     1,756,829  
Foreign corporate securities
    2,379,792       118,789       (17,967 )     2,480,614  
Total fixed maturity securities
  $ 11,845,861     $ 681,913     $ (47,363 )   $ 12,480,411  
Equity securities
  $ 335,081     $ 3,634     $ (7,503 )   $ 331,212  

 
   
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 $1,756,829 thousand of foreign government securities at June 30, 2012 included $788,695 thousand of European sovereign securities.  Approximately 56.3%, 19.2% and 7.2% of European sovereign securities represented securities held in the governments of the United Kingdom, France and Austria, 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 June 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 June 30, 2012
 
At December 31, 2011
Pre-tax cumulative unrealized appreciation (depreciation)
  $ 4,028     $ 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 June 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
  $ 800,697     $ 808,527     $ 494,098     $ 494,911  
    Due after one year through five years
    5,219,213       5,464,033       5,052,484       5,268,748  
    Due after five years through ten years
    2,098,202       2,264,549       2,188,080       2,325,142  
    Due after ten years
    1,159,897       1,280,161       1,246,886       1,354,208  
Asset-backed securities
    186,595       193,323       186,936       193,406  
Mortgage-backed securities:
                               
Commercial
    311,176       328,287       310,387       321,427  
Agency residential
    2,056,703       2,127,654       2,198,937       2,282,593  
Non-agency residential
    13,378       13,877       53,365       53,089  
Total fixed maturity securities
  $ 11,845,861     $ 12,480,411     $ 11,731,173     $ 12,293,524  

 
The changes in net unrealized appreciation (depreciation) for the Company’s investments are derived from the following sources for the periods indicated:
 
   
Three Months Ended
 
Six Months Ended
   
June 30,
 
June 30,
(Dollars in thousands)
 
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
  $ 9,352     $ 128,231     $ 70,739     $ 91,685  
Fixed maturity securities, other-than-temporary impairment
    559       723       1,461       1,887  
Equity securities
    (12,029 )     8,728       10,821       8,108  
Other invested assets
    -       (3,165 )     -       (1,730 )
Change in unrealized appreciation (depreciation), pre-tax
    (2,118 )     134,517       83,021       99,950  
Deferred tax benefit (expense)
    53       (22,885 )     (4,724 )     (12,800 )
Deferred tax benefit (expense), other-than-temporary impairment
    17       5       24       (2 )
Change in unrealized appreciation (depreciation),
                               
net of deferred taxes, included in shareholders’ equity
  $ (2,048 )   $ 111,637     $ 78,321     $ 87,148  
 
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.


The tables below display the aggregate market value and gross unrealized depreciation of fixed maturity and equity securities, by security type and contractual maturity, in each case subdivided according to length of time that individual securities had been in a continuous unrealized loss position for the periods indicated:
 
   
Duration of Unrealized Loss at June 30, 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
  $ -     $ -     $ 6,145     $ (465 )   $ 6,145     $ (465 )
Obligations of U.S. states and political subdivisions
    712       (9 )     5,793       (236 )     6,505       (245 )
Corporate securities
    249,060       (3,865 )     169,654       (8,868 )     418,714       (12,733 )
Asset-backed securities
    15,514       (182 )     1,208       (229 )     16,722       (411 )
Mortgage-backed securities
                                               
Commercial
    -       -       46,708       (6,966 )     46,708       (6,966 )
Agency residential
    346,230       (2,328 )     3,222       (329 )     349,452       (2,657 )
Non-agency residential
    -       -       3,211       (236 )     3,211       (236 )
Foreign government securities
    75,726       (1,049 )     65,899       (4,634 )     141,625       (5,683 )
Foreign corporate securities
    216,307       (3,512 )     157,896       (14,455 )     374,203       (17,967 )
Total fixed maturity securities
  $ 903,549     $ (10,945 )   $ 459,736     $ (36,418 )   $ 1,363,285     $ (47,363 )
Equity securities
    315,882       (7,501 )     13       (2 )     315,895       (7,503 )
Total
  $ 1,219,431     $ (18,446 )   $ 459,749     $ (36,420 )   $ 1,679,180     $ (54,866 )

 
   
Duration of Unrealized Loss at June 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
  $ 34,588     $ (589 )   $ 55,410     $ (7,886 )   $ 89,998     $ (8,475 )
Due in one year through five years
    316,457       (4,112 )     217,912       (12,762 )     534,369       (16,874 )
Due in five years through ten years
    166,048       (3,029 )     106,435       (4,365 )     272,483       (7,394 )
Due after ten years
    24,712       (705 )     25,630       (3,645 )     50,342       (4,350 )
Asset-backed securities
    15,514       (182 )     1,208       (229 )     16,722       (411 )
Mortgage-backed securities
    346,230       (2,328 )     53,141       (7,531 )     399,371       (9,859 )
Total fixed maturity securities
  $ 903,549     $ (10,945 )   $ 459,736     $ (36,418 )   $ 1,363,285     $ (47,363 )
 
The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at June 30, 2012 were $1,679,180 thousand and $54,866 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 June 30, 2012.  In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector.  The $10,945 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, $6,854 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating organization. The $36,418 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, $25,801 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 $282 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 Company, given the size of its investment portfolio and capital position, does not have the intent to sell these securities; and it is more likely than not that the Company will not have to sell the security before recovery of its cost basis.  In addition, all securities currently in an unrealized loss position are current with respect to principal and interest payments.

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

   
Duration of Unrealized Loss at December 31, 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 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
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(Dollars in thousands)
 
2012
 
2011
 
2012
 
2011
Fixed maturity securities
  $ 120,602     $ 132,668     $ 244,946     $ 265,524  
Equity securities
    16,228       13,156       33,504       25,019  
Short-term investments and cash
    358       439       527       676  
Other invested assets
                               
Limited partnerships
    16,439       14,344       29,286       50,975  
Other
    (492 )     4,126       1,026       4,723  
Total gross investment income
    153,135       164,733       309,289       346,917  
Interest debited (credited) and other investment expense
    (3,806 )     (6,115 )     (7,522 )     (9,594 )
Total net investment income
  $ 149,329     $ 158,618     $ 301,767     $ 337,323  
 
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 $125,261 thousand in limited partnerships at June 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
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(Dollars in thousands)
 
2012
 
2011
 
2012
 
2011
Fixed maturity securities, market value:
                       
Other-than-temporary impairments
  $ (466 )