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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
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, 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
 
     
   
 
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)
 
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.
               

 
1

 
 
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.
                               

 
2

 
 
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.
                               

 
3

 
 
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.
                               

 
4

 
 
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.

 
5

 
 
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.

 
6

 
 
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
 
 
7

 
 
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 )
 
 
8

 
   
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.

 
9

 
 
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, 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.
 
 
10

 
 
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