EVEREST GROUP, LTD. - Quarter Report: 2013 June (Form 10-Q)

group10q2q2013.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, 2013

Commission file number:

1-15731

EVEREST RE GROUP, LTD.

(Exact name of registrant as specified in its charter)

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

Wessex House – 2nd Floor

45 Reid Street

PO Box HM 845

Hamilton HM DX, Bermuda

441-295-0006

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

of registrant’s principal executive office)

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

YES

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

YES

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

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

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

YES

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

		Number of Shares Outstanding
Class		At August 1, 2013
Common Shares, $0.01 par value		48,624,595

EVEREST RE GROUP, LTD

Table of Contents

Form 10-Q

Page

PART I

FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets June 30, 2013 (unaudited)
	and December 31, 2012	1

	Consolidated Statements of Operations and Comprehensive Income (Loss) for the
	three and six months ended June 30, 2013 and 2012 (unaudited)	2

	Consolidated Statements of Changes in Shareholders’ Equity for the three and six
	months ended June 30, 2013 and 2012 (unaudited)	3

	Consolidated Statements of Cash Flows for the three and six months ended
	June 30, 2013 and 2012 (unaudited)	4

	Notes to Consolidated Interim Financial Statements (unaudited)	5

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

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	55

Item 4.	Controls and Procedures	55

PART II

OTHER INFORMATION

Item 1.	Legal Proceedings	55

Item 1A.	Risk Factors	56

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

Item 3.	Defaults Upon Senior Securities	56

Item 4.	Mine Safety Disclosures	56

Item 5.	Other Information	56

Item 6.	Exhibits	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)	2013			2012
	(unaudited)
ASSETS:
Fixed maturities - available for sale, at market value	$	12,879,955		$	13,141,657
(amortized cost: 2013, $12,544,171; 2012, $12,444,880)
Fixed maturities - available for sale, at fair value		18,129			41,470
Equity securities - available for sale, at market value (cost: 2013, $142,409; 2012, $131,630)		140,197			143,493
Equity securities - available for sale, at fair value		1,295,816			1,255,557
Short-term investments		727,965			860,379
Other invested assets (cost: 2013, $526,704; 2012, $596,590)		526,704			596,590
Cash		439,136			537,050
Total investments and cash		16,027,902			16,576,196
Accrued investment income		125,729			130,209
Premiums receivable		1,455,774			1,237,859
Reinsurance receivables		711,719			659,081
Funds held by reinsureds		239,267			228,375
Deferred acquisition costs		324,306			303,268
Prepaid reinsurance premiums		76,417			71,107
Deferred tax asset		258,132			262,024
Income taxes recoverable		67,300			68,442
Other assets		272,502			241,346
TOTAL ASSETS	$	19,559,048		$	19,777,907

LIABILITIES:
Reserve for losses and loss adjustment expenses	$	9,843,480		$	10,069,055
Future policy benefit reserve		65,541			66,107
Unearned premium reserve		1,444,979			1,322,525
Funds held under reinsurance treaties		2,592			2,755
Commission reserves		56,050			65,533
Other net payable to reinsurers		191,931			162,778
Losses in course of payment		421,002			191,076
Revolving credit borrowings		40,000			-
5.4% Senior notes due 10/15/2014		249,932			249,907
6.6% Long term notes due 5/1/2067		238,359			238,357
Junior subordinated debt securities payable		-			329,897
Accrued interest on debt and borrowings		4,791			4,781
Equity index put option liability		52,101			79,467
Unsettled securities payable		115,362			48,830
Other liabilities		210,128			213,372
Total liabilities		12,936,248			13,044,440

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; (2013) 67,812
and (2012) 67,105 outstanding before treasury shares		678			671
Additional paid-in capital		2,003,166			1,946,439
Accumulated other comprehensive income (loss), net of deferred income tax expense
(benefit) of $67,381 at 2013 and $119,629 at 2012		207,164			537,049
Treasury shares, at cost; 19,224 shares (2013) and 15,687 shares (2012)		(1,813,913	)		(1,363,958	)
Retained earnings		6,225,705			5,613,266
Total shareholders' equity		6,622,800			6,733,467
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	19,559,048		$	19,777,907

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)	2013			2012			2013			2012
	(unaudited)						(unaudited)
REVENUES:
Premiums earned	$	1,151,533		$	1,037,800		$	2,240,292		$	2,035,778
Net investment income		148,729			149,329			294,510			301,767
Net realized capital gains (losses):
Other-than-temporary impairments on fixed maturity securities		-			(466	)		(191	)		(6,354	)
Other-than-temporary impairments on fixed maturity securities
transferred to other comprehensive income (loss)		-			-			-			-
Other net realized capital gains (losses)		33,905			(16,114	)		160,831			88,493
Total net realized capital gains (losses)		33,905			(16,580	)		160,640			82,139
Net derivative gain (loss)		12,081			(16,306	)		27,366			(10,123	)
Other income (expense)		8,295			27,812			(592	)		21,618
Total revenues		1,354,543			1,182,055			2,722,216			2,431,179

CLAIMS AND EXPENSES:
Incurred losses and loss adjustment expenses		711,590			607,870			1,304,234			1,210,336
Commission, brokerage, taxes and fees		242,067			265,789			475,113			503,292
Other underwriting expenses		54,901			49,675			107,847			98,170
Corporate expenses		6,168			6,075			11,885			10,736
Interest, fees and bond issue cost amortization expense		17,362			13,244			30,843			26,422
Total claims and expenses		1,032,088			942,653			1,929,922			1,848,956

INCOME (LOSS) BEFORE TAXES		322,455			239,402			792,294			582,223
Income tax expense (benefit)		46,813			24,851			132,309			62,968

NET INCOME (LOSS)	$	275,642		$	214,551		$	659,985		$	519,255

Other comprehensive income (loss), net of tax:
Unrealized appreciation (depreciation) ("URA(D)") on securities arising during the period		(272,540	)		5,408			(319,342	)		85,535
Less: reclassification adjustment for realized losses (gains) included in net income (loss)		(1,828	)		(7,456	)		(5,919	)		(7,214	)
Total URA(D) on securities arising during the period		(274,368	)		(2,048	)		(325,261	)		78,321
Foreign currency translation adjustments		13,751			(24,997	)		(7,315	)		(9,127	)
Pension adjustments		1,345			983			2,691			1,967
Total other comprehensive income (loss), net of tax		(259,272	)		(26,062	)		(329,885	)		71,161

COMPREHENSIVE INCOME (LOSS)	$	16,370		$	188,489		$	330,100		$	590,416

EARNINGS PER COMMON SHARE:
Basic	$	5.60		$	4.10		$	13.19		$	9.81
Diluted		5.56			4.08			13.09			9.79
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)	2013			2012			2013			2012
	(unaudited)						(unaudited)
COMMON SHARES (shares outstanding):
Balance, beginning of period		49,965,812			52,624,820			51,417,962			53,735,551
Issued during the period, net		208,935			223,184			707,092			489,882
Treasury shares acquired		(1,586,707	)		(990,957	)		(3,537,014	)		(2,368,386	)
Balance, end of period		48,588,040			51,857,047			48,588,040			51,857,047

COMMON SHARES (par value):
Balance, beginning of period	$	676		$	667		$	671		$	665
Issued during the period, net		2			2			7			4
Balance, end of period		678			669			678			669

ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of period		1,978,966			1,901,322			1,946,439			1,892,988
Share-based compensation plans		24,200			22,991			56,727			31,325
Balance, end of period		2,003,166			1,924,313			2,003,166			1,924,313

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS),
NET OF DEFERRED INCOME TAXES:
Balance, beginning of period		466,436			464,201			537,049			366,978
Net increase (decrease) during the period		(259,272	)		(26,062	)		(329,885	)		71,161
Balance, end of period		207,164			438,139			207,164			438,139

RETAINED EARNINGS:
Balance, beginning of period		5,973,378			5,163,777			5,613,266			4,884,714
Net income (loss)		275,642			214,551			659,985			519,255
Dividends declared ($0.48 per quarter and $0.96 year-to-date
per share in 2013 and 2012)		(23,315	)		(25,129	)		(47,546	)		(50,770	)
Balance, end of period		6,225,705			5,353,199			6,225,705			5,353,199

TREASURY SHARES AT COST:
Balance, beginning of period		(1,602,590	)		(1,198,969	)		(1,363,958	)		(1,073,970	)
Purchase of treasury shares		(211,323	)		(100,000	)		(449,955	)		(224,999	)
Balance, end of period		(1,813,913	)		(1,298,969	)		(1,813,913	)		(1,298,969	)

TOTAL SHAREHOLDERS' EQUITY, END OF PERIOD	$	6,622,800		$	6,417,351		$	6,622,800		$	6,417,351

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)	2013			2012			2013			2012
	(unaudited)						(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	275,642		$	214,551		$	659,985		$	519,255
Adjustments to reconcile net income to net cash provided by operating activities:
Decrease (increase) in premiums receivable		(167,239	)		70,139			(220,306	)		107,410
Decrease (increase) in funds held by reinsureds, net		(16,828	)		10,673			(12,244	)		8,407
Decrease (increase) in reinsurance receivables		26,758			(33,809	)		(65,978	)		(13,027	)
Decrease (increase) in current income taxes		(25,569	)		4,768			1,089			1,459
Decrease (increase) in deferred tax asset		18,071			3,956			55,640			33,961
Decrease (increase) in prepaid reinsurance premiums		(10,354	)		3,130			(6,908	)		9,123
Increase (decrease) in reserve for losses and loss adjustment expenses		(47,200	)		(95,066	)		(175,142	)		(267,230	)
Increase (decrease) in future policy benefit reserve		229			(574	)		(567	)		(919	)
Increase (decrease) in unearned premiums		72,212			(186,162	)		126,535			(173,569	)
Increase (decrease) in other net payable to reinsurers		25,577			30,025			29,765			26,903
Increase (decrease) in losses in course of payment		81,362			(20,878	)		230,135			10,810
Change in equity adjustments in limited partnerships		(18,994	)		(15,972	)		(36,350	)		(28,492	)
Change in other assets and liabilities, net		(31,052	)		113,547			(74,866	)		108,193
Non-cash compensation expense		4,551			7,652			10,165			13,374
Amortization of bond premium (accrual of bond discount)		16,900			16,200			35,507			30,966
Amortization of underwriting discount on senior notes		14			12			27			25
Net realized capital (gains) losses		(33,905	)		16,580			(160,640	)		(82,139	)
Net cash provided by (used in) operating activities		170,175			138,772			395,847			304,510

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from fixed maturities matured/called - available for sale, at market value		706,674			381,216			1,318,718			791,593
Proceeds from fixed maturities matured/called - available for sale, at fair value		4,213			-			7,213			-
Proceeds from fixed maturities sold - available for sale, at market value		376,688			203,240			631,184			421,318
Proceeds from fixed maturities sold - available for sale, at fair value		13,678			1,862			17,342			61,143
Proceeds from equity securities sold - available for sale, at market value		44,194			34,549			45,423			54,792
Proceeds from equity securities sold - available for sale, at fair value		252,594			53,950			358,769			297,606
Distributions from other invested assets		33,846			12,798			117,548			21,017
Cost of fixed maturities acquired - available for sale, at market value		(1,105,870	)		(641,902	)		(2,122,159	)		(1,254,576	)
Cost of fixed maturities acquired - available for sale, at fair value		(1,411	)		(2,382	)		(2,706	)		(5,506	)
Cost of equity securities acquired - available for sale, at market value		(51,921	)		(6,202	)		(53,487	)		(12,654	)
Cost of equity securities acquired - available for sale, at fair value		(121,327	)		(79,934	)		(243,944	)		(193,279	)
Cost of other invested assets acquired		(4,617	)		(16,680	)		(11,301	)		(28,592	)
Net change in short-term investments		53,629			(5,025	)		132,136			(262,730	)
Net change in unsettled securities transactions		64,135			(32,856	)		55,668			5,966
Net cash provided by (used in) investing activities		264,505			(97,366	)		250,404			(103,902	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Common shares issued during the period, net		19,651			15,344			46,569			17,955
Purchase of treasury shares		(211,323	)		(100,000	)		(449,955	)		(224,999	)
Revolving credit borrowings		40,000			-			40,000			-
Net cost of junior subordinated debt securities maturing		(329,897	)		-			(329,897	)		-
Dividends paid to shareholders		(23,315	)		(25,129	)		(47,546	)		(50,770	)
Net cash provided by (used in) financing activities		(504,884	)		(109,785	)		(740,829	)		(257,814	)

EFFECT OF EXCHANGE RATE CHANGES ON CASH		(14,796	)		(4,817	)		(3,336	)		7,406

Net increase (decrease) in cash		(85,000	)		(73,196	)		(97,914	)		(49,800	)
Cash, beginning of period		524,136			472,047			537,050			448,651
Cash, end of period	$	439,136		$	398,851		$	439,136		$	398,851

SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid (recovered)	$	47,550		$	12,617		$	66,738		$	23,801
Interest paid		17,280			20,387			23,281			26,085

Non-cash transaction:
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, 2013 and 2012

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, 2013 and 2012 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, 2012 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, 2013 and 2012 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, 2012, 2011 and 2010 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. In February, 2013, the FASB issued an additional amendment for the presentation of amounts reclassified out of accumulated other comprehensive income by component. The Company implemented the proposed guidance as of January 1, 2013.

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 would be expensed during 2012 and 2013, including $10,876 thousand and $2,616 thousand expensed during 2012 and in the six months ended June 30, 2013, respectively. No additional expense will be incurred related to this guidance implementation in future periods.

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, 2013
	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	$	288,613	$	6,411	$	(1,958	)	$	293,066
Obligations of U.S. states and political subdivisions		1,053,722		50,344		(8,017	)		1,096,049
Corporate securities		3,774,268		166,423		(27,371	)		3,913,320
Asset-backed securities		140,042		4,830		(406	)		144,466
Mortgage-backed securities
Commercial		290,176		19,934		(1,989	)		308,121
Agency residential		2,385,213		40,914		(29,224	)		2,396,903
Non-agency residential		5,901		259		(256	)		5,904
Foreign government securities		1,785,275		88,509		(23,884	)		1,849,900
Foreign corporate securities		2,820,961		97,929		(46,664	)		2,872,226
Total fixed maturity securities	$	12,544,171	$	475,553	$	(139,769	)	$	12,879,955
Equity securities	$	142,409	$	4,106	$	(6,318	)	$	140,197

	At December 31, 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	$	302,050	$	11,079	$	(1,007	)	$	312,122
Obligations of U.S. states and political subdivisions		1,214,990		78,097		(1,124	)		1,291,963
Corporate securities		3,794,979		247,439		(7,098	)		4,035,320
Asset-backed securities		169,615		7,296		(333	)		176,578
Mortgage-backed securities
Commercial		294,596		27,965		(2,473	)		320,088
Agency residential		2,091,672		63,794		(3,331	)		2,152,135
Non-agency residential		7,660		590		(201	)		8,049
Foreign government securities		1,785,738		132,947		(6,457	)		1,912,228
Foreign corporate securities		2,783,580		159,632		(10,038	)		2,933,174
Total fixed maturity securities	$	12,444,880	$	728,839	$	(32,062	)	$	13,141,657
Equity securities	$	131,630	$	11,864	$	(1	)	$	143,493

The $1,849,900 thousand of foreign government securities at June 30, 2013 included $816,908 thousand of European sovereign securities. Approximately 52.1%, 20.2%, 6.5% and 5.3% 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 June 30, 2013.

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, 2013				At December 31, 2012
Pre-tax cumulative unrealized appreciation (depreciation)		$	3,376			$	4,748

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, 2013				At December 31, 2012
	Amortized		Market		Amortized		Market
(Dollars in thousands)	Cost		Value		Cost		Value
Fixed maturity securities – available for sale:
Due in one year or less	$	978,756	$	993,082	$	944,446	$	957,775
Due after one year through five years		5,614,941		5,817,795		5,463,158		5,741,258
Due after five years through ten years		2,087,888		2,114,695		2,331,593		2,511,525
Due after ten years		1,041,254		1,098,989		1,142,140		1,274,249
Asset-backed securities		140,042		144,466		169,615		176,578
Mortgage-backed securities:
Commercial		290,176		308,121		294,596		320,088
Agency residential		2,385,213		2,396,903		2,091,672		2,152,135
Non-agency residential		5,901		5,904		7,660		8,049
Total fixed maturity securities	$	12,544,171	$	12,879,955	$	12,444,880	$	13,141,657

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)	2013			2012			2013			2012
Increase (decrease) during the period between the market value and cost
of investments carried at market value, and deferred taxes thereon:
Fixed maturity securities	$	(311,674	)	$	9,352		$	(359,621	)	$	70,739
Fixed maturity securities, other-than-temporary impairment		(1,144	)		559			(1,372	)		1,461
Equity securities		(12,058	)		(12,029	)		(14,075	)		10,821
Other invested assets		-			-			-			-
Change in unrealized appreciation (depreciation), pre-tax		(324,876	)		(2,118	)		(375,068	)		83,021
Deferred tax benefit (expense)		50,402			53			49,667			(4,724	)
Deferred tax benefit (expense), other-than-temporary impairment		106			17			140			24
Change in unrealized appreciation (depreciation),
net of deferred taxes, included in shareholders’ equity	$	(274,368	)	$	(2,048	)	$	(325,261	)	$	78,321

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, 2013 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	$	50,263	$	(1,260	)	$	5,979	$	(698	)	$	56,242	$	(1,958	)
Obligations of U.S. states and political subdivisions		96,852		(7,802	)		5,480		(215	)		102,332		(8,017	)
Corporate securities		1,043,819		(22,767	)		100,852		(4,604	)		1,144,671		(27,371	)
Asset-backed securities		7,447		(52	)		1,150		(354	)		8,597		(406	)
Mortgage-backed securities
Commercial		7		-			30,459		(1,989	)		30,466		(1,989	)
Agency residential		877,507		(27,451	)		201,292		(1,773	)		1,078,799		(29,224	)
Non-agency residential		2,182		(30	)		1,833		(226	)		4,015		(256	)
Foreign government securities		348,024		(16,432	)		78,997		(7,452	)		427,021		(23,884	)
Foreign corporate securities		829,749		(36,355	)		169,708		(10,309	)		999,457		(46,664	)
Total fixed maturity securities	$	3,255,850	$	(112,149	)	$	595,750	$	(27,620	)	$	3,851,600	$	(139,769	)
Equity securities		123,684		(6,318	)		15		-			123,699		(6,318	)
Total	$	3,379,534	$	(118,467	)	$	595,765	$	(27,620	)	$	3,975,299	$	(146,087	)

	Duration of Unrealized Loss at June 30, 2013 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	$	45,998	$	(955	)	$	37,316	$	(4,093	)	$	83,314	$	(5,048	)
Due in one year through five years		1,116,155		(24,612	)		198,219		(12,155	)		1,314,374		(36,767	)
Due in five years through ten years		911,332		(38,575	)		98,517		(4,921	)		1,009,849		(43,496	)
Due after ten years		295,222		(20,474	)		26,964		(2,109	)		322,186		(22,583	)
Asset-backed securities		7,447		(52	)		1,150		(354	)		8,597		(406	)
Mortgage-backed securities		879,696		(27,481	)		233,584		(3,988	)		1,113,280		(31,469	)
Total fixed maturity securities	$	3,255,850	$	(112,149	)	$	595,750	$	(27,620	)	$	3,851,600	$	(139,769	)

The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at June 30, 2013 were $3,975,299 thousand and $146,087 thousand, respectively. The market value of securities for the single issuer whose securities comprised the largest unrealized loss position at June 30, 2013, did not exceed 0.7% of the overall market value of the Company’s fixed maturity securities. In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector. The $112,149 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, foreign government securities and agency residential mortgage-backed securities. Of these unrealized losses, $99,293 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating organization. The $27,620 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 as well as foreign government securities. Of these unrealized losses, $23,590 thousand related to securities that were rated investment grade by at least one nationally recognized statistical rating organization. The gross unrealized depreciation for mortgage-backed securities included $310 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.

	Duration of Unrealized Loss at December 31, 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	$	21,468	$	(430	)	$	3,386	$	(577	)	$	24,854	$	(1,007	)
Obligations of U.S. states and political subdivisions		38,754		(1,073	)		5,781		(51	)		44,535		(1,124	)
Corporate securities		174,665		(2,069	)		71,483		(5,029	)		246,148		(7,098	)
Asset-backed securities		-		-			13,714		(333	)		13,714		(333	)
Mortgage-backed securities
Commercial		-		-			50,999		(2,473	)		50,999		(2,473	)
Agency residential		396,016		(2,215	)		67,781		(1,116	)		463,797		(3,331	)
Non-agency residential		-		-			2,105		(201	)		2,105		(201	)
Foreign government securities		85,032		(923	)		66,329		(5,534	)		151,361		(6,457	)
Foreign corporate securities		197,029		(2,802	)		103,720		(7,236	)		300,749		(10,038	)
Total fixed maturity securities	$	912,964	$	(9,512	)	$	385,298	$	(22,550	)	$	1,298,262	$	(32,062	)
Equity securities		-		-			13		(1	)		13		(1	)
Total	$	912,964	$	(9,512	)	$	385,311	$	(22,551	)	$	1,298,275	$	(32,063	)

	Duration of Unrealized Loss at December 31, 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	$	21,909	$	(502	)	$	30,177	$	(3,631	)	$	52,086	$	(4,133	)
Due in one year through five years		261,625		(3,891	)		163,480		(12,748	)		425,105		(16,639	)
Due in five years through ten years		135,391		(1,409	)		37,926		(1,431	)		173,317		(2,840	)
Due after ten years		98,023		(1,495	)		19,116		(617	)		117,139		(2,112	)
Asset-backed securities		-		-			13,714		(333	)		13,714		(333	)
Mortgage-backed securities		396,016		(2,215	)		120,885		(3,790	)		516,901		(6,005	)
Total fixed maturity securities	$	912,964	$	(9,512	)	$	385,298	$	(22,550	)	$	1,298,262	$	(32,062	)

The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at December 31, 2012 were $1,298,275 thousand and $32,063 thousand, respectively. The market value of securities for the single issuer whose securities comprised the largest unrealized loss position at December 31, 2012, did not exceed 0.3% of the overall market value of the Company’s fixed maturity securities. In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector. The $9,512 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, as well as agency residential mortgage-backed securities. Of these unrealized losses, $7,982 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating organization. The $22,550 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, $19,150 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 $250 thousand related to sub-prime and alt-A loans. In all instances, there were no projected cash flow shortfalls to recover the full book value of the investments and the related interest obligations. The mortgage-backed securities still have excess credit coverage and are current on interest and principal payments.

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(Dollars in thousands)	2013			2012			2013			2012
Fixed maturities	$	120,253		$	120,602		$	241,010		$	244,946
Equity securities		12,795			16,228			22,536			33,504
Short-term investments and cash		176			358			480			527
Other invested assets
Limited partnerships		19,585			16,439			37,068			29,286
Other		1,935			(492	)		4,256			1,026
Gross investment income before adjustments		154,744			153,135			305,350			309,289
Funds held interest income (expense)		1,847			3,268			6,276			6,381
Future policy benefit reserve income (expense)		(621	)		(509	)		(1,152	)		(1,147	)
Gross investment income		155,970			155,894			310,474			314,523
Investment expenses		(7,241	)		(6,565	)		(15,964	)		(12,756