EVEREST GROUP, LTD. - Quarter Report: 2014 March (Form 10-Q)

group10q1q2014.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED:

March 31, 2014

Commission file number:

1-15731

EVEREST RE GROUP, LTD.

(Exact name of registrant as specified in its charter)

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

Wessex House – 2nd Floor

45 Reid Street

PO Box HM 845

Hamilton HM DX, Bermuda

441-295-0006

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

of registrant’s principal executive office)

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

YES

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

YES

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

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

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

YES

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

		Number of Shares Outstanding
Class		At May 1, 2014
Common Shares, $0.01 par value		46,107,042

EVEREST RE GROUP, LTD

Table of Contents

Form 10-Q

Page

PART I

FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets March 31, 2014 (unaudited)
	and December 31, 2013	1

	Consolidated Statements of Operations and Comprehensive Income (Loss) for the
	three months ended March 31, 2014 and 2013 (unaudited)	2

	Consolidated Statements of Changes in Shareholders’ Equity for the three
	months ended March 31, 2014 and 2013 (unaudited)	3

	Consolidated Statements of Cash Flows for the three months ended
	March 31, 2014 and 2013 (unaudited)	4

	Notes to Consolidated Interim Financial Statements (unaudited)	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and
	Results of Operation	28

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	52

Item 4.	Controls and Procedures	52

PART II

OTHER INFORMATION

Item 1.	Legal Proceedings	52

Item 1A.	Risk Factors	53

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53

Item 3.	Defaults Upon Senior Securities	53

Item 4.	Mine Safety Disclosures	53

Item 5.	Other Information	53

Item 6.	Exhibits	54

PART I

ITEM 1. FINANCIAL STATEMENTS

EVEREST RE GROUP, LTD.

CONSOLIDATED BALANCE SHEETS

	March 31,			December 31,
(Dollars and share amounts in thousands, except par value per share)	2014			2013
	(unaudited)
ASSETS:
Fixed maturities - available for sale, at market value	$	13,019,176		$	12,636,907
(amortized cost: 2014, $12,708,891; 2013, $12,391,164)
Fixed maturities - available for sale, at fair value		-			19,388
Equity securities - available for sale, at market value (cost: 2014, $156,000; 2013, $148,342)		153,822			144,081
Equity securities - available for sale, at fair value		1,398,430			1,462,079
Short-term investments		1,363,852			1,214,199
Other invested assets (cost: 2014, $485,771; 2013, $508,447)		485,771			508,447
Cash		385,404			611,382
Total investments and cash		16,806,455			16,596,483
Accrued investment income		116,910			119,058
Premiums receivable		1,427,171			1,453,114
Reinsurance receivables		653,109			540,883
Funds held by reinsureds		224,961			228,000
Deferred acquisition costs		375,393			363,721
Prepaid reinsurance premiums		78,305			81,779
Income taxes		136,513			178,334
Other assets		293,578			246,664
TOTAL ASSETS	$	20,112,395		$	19,808,036

LIABILITIES:
Reserve for losses and loss adjustment expenses	$	9,611,114		$	9,673,240
Future policy benefit reserve		58,089			59,512
Unearned premium reserve		1,658,734			1,579,945
Funds held under reinsurance treaties		2,706			2,692
Commission reserves		57,312			66,160
Other net payable to reinsurers		116,883			116,387
Losses in course of payment		439,708			332,631
5.4% Senior notes due 10/15/2014		249,971			249,958
6.6% Long term notes due 5/1/2067		238,361			238,361
Accrued interest on debt and borrowings		12,092			4,781
Equity index put option liability		37,083			35,423
Unsettled securities payable		95,322			53,867
Other liabilities		182,341			333,425
Total liabilities		12,759,716			12,746,382

NONCONTROLLING INTERESTS:
Redeemable noncontrolling interests - Mt. Logan Re		315,168			93,378

Commitments and contingencies (Note 9)

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; (2014) 68,171
and (2013) 67,965 outstanding before treasury shares		682			680
Additional paid-in capital		2,036,320			2,029,774
Accumulated other comprehensive income (loss), net of deferred income tax expense
(benefit) of $65,137 at 2014 and $57,661 at 2013		211,207			157,728
Treasury shares, at cost; 22,114 shares (2014) and 20,422 shares (2013)		(2,235,856	)		(1,985,873	)
Retained earnings		7,025,158			6,765,967
Total shareholders' equity attributable to Everest Re Group		7,037,511			6,968,276
TOTAL LIABILITIES, NONCONTROLLING INTERESTS AND SHAREHOLDERS' EQUITY	$	20,112,395		$	19,808,036

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
	March 31,
(Dollars in thousands, except per share amounts)	2014			2013
	(unaudited)
REVENUES:
Premiums earned	$	1,144,490		$	1,088,759
Net investment income		123,157			145,781
Net realized capital gains (losses):
Other-than-temporary impairments on fixed maturity securities		-			(191	)
Other-than-temporary impairments on fixed maturity securities
transferred to other comprehensive income (loss)		-			-
Other net realized capital gains (losses)		21,126			126,926
Total net realized capital gains (losses)		21,126			126,735
Net derivative gain (loss)		(1,661	)		15,285
Other income (expense)		(3,296	)		(8,887	)
Total revenues		1,283,816			1,367,673

CLAIMS AND EXPENSES:
Incurred losses and loss adjustment expenses		619,409			592,644
Commission, brokerage, taxes and fees		246,002			233,046
Other underwriting expenses		50,638			52,946
Corporate expenses		4,945			5,717
Interest, fees and bond issue cost amortization expense		7,568			13,481
Total claims and expenses		928,562			897,834

INCOME (LOSS) BEFORE TAXES		355,254			469,839
Income tax expense (benefit)		53,232			85,496

NET INCOME (LOSS)	$	302,022		$	384,343
Net (income) loss attributable to noncontrolling interests		(8,089	)		-
NET INCOME (LOSS) ATTRIBUTABLE TO EVEREST RE GROUP	$	293,933		$	384,343

Other comprehensive income (loss), net of tax:
Unrealized appreciation (depreciation) ("URA(D)") on securities arising during the period		53,471			(46,802	)
Reclassification adjustment for realized losses (gains) included in net income (loss)		1,874			(4,091	)
Total URA(D) on securities arising during the period		55,345			(50,893	)

Foreign currency translation adjustments		(2,637	)		(21,066	)

Benefit plan actuarial net gain (loss) for the period		-			-
Reclassification adjustment for amortization of net (gain) loss included in net income (loss)		771			1,346
Total benefit plan net gain (loss) for the period		771			1,346
Total other comprehensive income (loss), net of tax		53,479			(70,613	)
Other comprehensive (income) loss attributable to noncontrolling interests		-			-
Total other comprehensive income (loss), net of tax attributable to Everest Re Group		53,479			(70,613	)

COMPREHENSIVE INCOME (LOSS)	$	347,412		$	313,730

EARNINGS PER COMMON SHARE ATTRIBUTABLE TO EVEREST RE GROUP:
Basic	$	6.26		$	7.56
Diluted		6.21			7.50
Dividends declared		0.75			0.48

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
	March 31,
(Dollars in thousands, except share and dividends per share amounts)	2014			2013
	(unaudited)
COMMON SHARES (shares outstanding):
Balance, beginning of period		47,543,132			51,417,962
Issued during the period, net		206,071			498,157
Treasury shares acquired		(1,692,164	)		(1,950,307	)
Balance, end of period		46,057,039			49,965,812

COMMON SHARES (par value):
Balance, beginning of period	$	680		$	671
Issued during the period, net		2			5
Balance, end of period		682			676

ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of period		2,029,774			1,946,439
Share-based compensation plans		6,546			32,527
Balance, end of period		2,036,320			1,978,966

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS),
NET OF DEFERRED INCOME TAXES:
Balance, beginning of period		157,728			537,049
Net increase (decrease) during the period		53,479			(70,613	)
Balance, end of period		211,207			466,436

RETAINED EARNINGS:
Balance, beginning of period		6,765,967			5,613,266
Net income (loss) attributable to Everest Re Group		293,933			384,343
Dividends declared ($0.75 per share in 2014 and $0.48 per share in 2013)		(34,742	)		(24,231	)
Balance, end of period		7,025,158			5,973,378

TREASURY SHARES AT COST:
Balance, beginning of period		(1,985,873	)		(1,363,958	)
Purchase of treasury shares		(249,983	)		(238,632	)
Balance, end of period		(2,235,856	)		(1,602,590	)

TOTAL SHAREHOLDERS' EQUITY, END OF PERIOD	$	7,037,511		$	6,816,866

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

EVEREST RE GROUP, LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months Ended
	March 31,
(Dollars in thousands)	2014			2013
	(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	302,022		$	384,343
Adjustments to reconcile net income to net cash provided by operating activities:
Decrease (increase) in premiums receivable		25,533			(53,067	)
Decrease (increase) in funds held by reinsureds, net		3,399			4,584
Decrease (increase) in reinsurance receivables		(114,898	)		(92,736	)
Decrease (increase) in income taxes		34,417			64,227
Decrease (increase) in prepaid reinsurance premiums		2,359			3,446
Increase (decrease) in reserve for losses and loss adjustment expenses		(56,348	)		(127,942	)
Increase (decrease) in future policy benefit reserve		(1,423	)		(796	)
Increase (decrease) in unearned premiums		80,016			54,323
Increase (decrease) in other net payable to reinsurers		1,176			4,188
Increase (decrease) in losses in course of payment		107,003			148,773
Change in equity adjustments in limited partnerships		2,313			(17,356	)
Distribution of limited partnership income		8,600			33,686
Change in other assets and liabilities, net		(23,959	)		(43,814	)
Non-cash compensation expense		4,427			5,614
Amortization of bond premium (accrual of bond discount)		13,572			18,607
Amortization of underwriting discount on senior notes		14			13
Net realized capital (gains) losses		(21,126	)		(126,735	)
Net cash provided by (used in) operating activities		367,097			259,358

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from fixed maturities matured/called - available for sale, at market value		490,745			612,044
Proceeds from fixed maturities matured/called - available for sale, at fair value		875			3,000
Proceeds from fixed maturities sold - available for sale, at market value		328,709			254,496
Proceeds from fixed maturities sold - available for sale, at fair value		20,763			3,664
Proceeds from equity securities sold - available for sale, at market value		534			1,229
Proceeds from equity securities sold - available for sale, at fair value		178,598			106,175
Distributions from other invested assets		17,077			50,016
Cost of fixed maturities acquired - available for sale, at market value		(1,163,440	)		(1,016,289	)
Cost of fixed maturities acquired - available for sale, at fair value		(1,309	)		(1,295	)
Cost of equity securities acquired - available for sale, at market value		(8,546	)		(1,566	)
Cost of equity securities acquired - available for sale, at fair value		(92,329	)		(122,617	)
Cost of other invested assets acquired		(4,961	)		(6,684	)
Net change in short-term investments		(152,715	)		78,507
Net change in unsettled securities transactions		1,564			(8,467	)
Net cash provided by (used in) investing activities		(384,435	)		(47,787	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Common shares issued during the period, net		2,121			26,918
Purchase of treasury shares		(249,983	)		(238,632	)
Third party investment in redeemable noncontrolling interest		70,700			-
Dividends paid to shareholders		(34,742	)		(24,231	)
Net cash provided by (used in) financing activities		(211,904	)		(235,945	)

EFFECT OF EXCHANGE RATE CHANGES ON CASH		3,264			11,460

Net increase (decrease) in cash		(225,978	)		(12,914	)
Cash, beginning of period		611,382			537,050
Cash, end of period	$	385,404		$	524,136

SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid (recovered)	$	16,260		$	19,188
Interest paid		174			6,001

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

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

For the Three Months Ended March 31, 2014 and 2013

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.

Effective February 27, 2013, the Company established a new subsidiary, Mt. Logan Re Ltd. (“Mt. Logan Re”) and effective July 1, 2013, Mt. Logan Re established separate segregated accounts and issued non-voting redeemable preferred shares to capitalize the segregated accounts. Accordingly, the financial position and operating results for Mt. Logan Re are consolidated with the Company and the non-controlling interests in Mt. Logan Re’s operating results and equity are presented as separate captions in the Company’s financial statements.

2. BASIS OF PRESENTATION

The unaudited consolidated financial statements of the Company for the three months ended March 31, 2014 and 2013 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, 2013 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The results for the three months ended March 31, 2014 and 2013 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, 2013, 2012 and 2011 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 years’ amounts to conform to the 2014 presentation. One reclassification relates to a correction in the manner in which the Company reports distributions received from limited partnership investments in the consolidated Statements of Cash Flows. Prior to the fourth quarter of 2013, the Company incorrectly reflected all distributions as cash flows from investing activities in its Consolidated Statements of Cash Flows. Starting with the fourth quarter of 2013, cash distributions from the limited partnerships that represent net investment income are reflected as cash flows from operating activities and distributions that represent the return of capital contributions are reflected as cash flows from investing activities. For the three months ended March 31, 2013, $33,686 thousand has been reclassified from “Distributions from other invested assets” included in cash flows from investing activities to “Distribution of limited partnership income” included in cash flows from operations. The Company has determined that this error is not material to the financial statements of any prior period.

Application of Recently Issued Accounting Standard Changes.

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.

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, including $10,876 thousand and $2,616 thousand expensed in the years ended December 31, 2012 and 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 March 31, 2014
	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	$	161,235	$	2,755	$	(1,711	)	$	162,279
Obligations of U.S. states and political subdivisions		927,315		43,571		(4,562	)		966,324
Corporate securities		4,311,095		162,455		(19,196	)		4,454,354
Asset-backed securities		181,005		3,273		(214	)		184,064
Mortgage-backed securities
Commercial		234,356		16,000		(1,022	)		249,334
Agency residential		2,209,374		35,761		(30,791	)		2,214,344
Non-agency residential		4,302		287		(184	)		4,405
Foreign government securities		1,700,019		72,058		(23,806	)		1,748,271
Foreign corporate securities		2,980,190		91,586		(35,975	)		3,035,801
Total fixed maturity securities	$	12,708,891	$	427,746	$	(117,461	)	$	13,019,176
Equity securities	$	156,000	$	4,828	$	(7,006	)	$	153,822

	At December 31, 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	$	160,013	$	2,690	$	(1,678	)	$	161,025
Obligations of U.S. states and political subdivisions		970,735		40,815		(9,022	)		1,002,528
Corporate securities		3,950,887		155,619		(27,090	)		4,079,416
Asset-backed securities		169,980		3,485		(422	)		173,043
Mortgage-backed securities
Commercial		254,765		16,683		(1,007	)		270,441
Agency residential		2,294,719		34,509		(50,175	)		2,279,053
Non-agency residential		4,816		229		(226	)		4,819
Foreign government securities		1,740,337		69,779		(29,347	)		1,780,769
Foreign corporate securities		2,844,912		86,529		(45,628	)		2,885,813
Total fixed maturity securities	$	12,391,164	$	410,338	$	(164,595	)	$	12,636,907
Equity securities	$	148,342	$	4,336	$	(8,597	)	$	144,081

The $1,748,271 thousand of foreign government securities at March 31, 2014 included $796,804 thousand of European sovereign securities. Approximately 52.5%, 21.9%, 6.7% and 5.6% 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 March 31, 2014.

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

(Dollars in thousands)		At March 31, 2014				At December 31, 2013
Pre-tax cumulative unrealized appreciation (depreciation)		$	3,245			$	3,169

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

	At March 31, 2014				At December 31, 2013
	Amortized		Market		Amortized		Market
(Dollars in thousands)	Cost		Value		Cost		Value
Fixed maturity securities – available for sale:
Due in one year or less	$	1,305,956	$	1,316,967	$	1,059,052	$	1,067,799
Due after one year through five years		5,567,088		5,728,265		5,565,112		5,740,662
Due after five years through ten years		2,237,873		2,278,200		2,081,908		2,101,234
Due after ten years		968,937		1,043,597		960,812		999,856
Asset-backed securities		181,005		184,064		169,980		173,043
Mortgage-backed securities:
Commercial		234,356		249,334		254,765		270,441
Agency residential		2,209,374		2,214,344		2,294,719		2,279,053
Non-agency residential		4,302		4,405		4,816		4,819
Total fixed maturity securities	$	12,708,891	$	13,019,176	$	12,391,164	$	12,636,907

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

	Three Months Ended
	March 31,
(Dollars in thousands)	2014			2013
Increase (decrease) during the period between the market value and cost
of investments carried at market value, and deferred taxes thereon:
Fixed maturity securities	$	64,466		$	(47,947	)
Fixed maturity securities, other-than-temporary impairment		76			(228	)
Equity securities		2,083			(2,017	)
Other invested assets		-			-
Change in unrealized appreciation (depreciation), pre-tax		66,625			(50,192	)
Deferred tax benefit (expense)		(11,280	)		(735	)
Deferred tax benefit (expense), other-than-temporary impairment		-			34
Change in unrealized appreciation (depreciation),
net of deferred taxes, included in shareholders’ equity	$	55,345		$	(50,893	)

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 March 31, 2014 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	$	54,900	$	(988	)	$	8,689	$	(723	)	$	63,589	$	(1,711	)
Obligations of U.S. states and political subdivisions		35,182		(1,091	)		68,552		(3,471	)		103,734		(4,562	)
Corporate securities		1,055,875		(14,522	)		106,380		(4,674	)		1,162,255		(19,196	)
Asset-backed securities		22,658		(128	)		119		(86	)		22,777		(214	)
Mortgage-backed securities
Commercial		-		-			11,287		(1,022	)		11,287		(1,022	)
Agency residential		597,387		(10,129	)		608,422		(20,662	)		1,205,809		(30,791	)
Non-agency residential		1,559		(11	)		392		(173	)		1,951		(184	)
Foreign government securities		371,847		(12,538	)		159,214		(11,268	)		531,061		(23,806	)
Foreign corporate securities		828,567		(21,720	)		239,057		(14,255	)		1,067,624		(35,975	)
Total fixed maturity securities	$	2,967,975	$	(61,127	)	$	1,202,112	$	(56,334	)	$	4,170,087	$	(117,461	)
Equity securities		136,145		(7,006	)		-		-			136,145		(7,006	)
Total	$	3,104,120	$	(68,133	)	$	1,202,112	$	(56,334	)	$	4,306,232	$	(124,467	)

	Duration of Unrealized Loss at March 31, 2014 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	$	182,786	$	(5,312	)	$	46,643	$	(5,320	)	$	229,429	$	(10,632	)
Due in one year through five years		1,331,340		(23,562	)		288,624		(12,169	)		1,619,964		(35,731	)
Due in five years through ten years		740,585		(18,467	)		124,208		(7,167	)		864,793		(25,634	)
Due after ten years		91,660		(3,518	)		122,417		(9,735	)		214,077		(13,253	)
Asset-backed securities		22,658		(128	)		119		(86	)		22,777		(214	)
Mortgage-backed securities		598,946		(10,140	)		620,101		(21,857	)		1,219,047		(31,997	)
Total fixed maturity securities	$	2,967,975	$	(61,127	)	$	1,202,112	$	(56,334	)	$	4,170,087	$	(117,461	)

The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at March 31, 2014 were $4,306,232 thousand and $124,467 thousand, respectively. The market value of securities for the single issuer whose securities comprised the largest unrealized loss position at March 31, 2014, did not exceed 0.5% 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 $61,127 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 foreign and domestic corporate securities, foreign government securities and agency residential mortgage-backed securities. Of these unrealized losses, $55,242 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating organization. The $56,334 thousand of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year related primarily to agency residential mortgage-backed securities, domestic and foreign corporate securities, foreign government securities and municipal securities. Of these unrealized losses, $54,566 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 $230 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, 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	$	74,847	$	(1,033	)	$	8,751	$	(645	)	$	83,598	$	(1,678	)
Obligations of U.S. states and political subdivisions		92,760		(4,852	)		39,689		(4,170	)		132,449		(9,022	)
Corporate securities		959,396		(22,331	)		75,946		(4,759	)		1,035,342		(27,090	)
Asset-backed securities		5,494		(6	)		1,128		(416	)		6,622		(422	)
Mortgage-backed securities
Commercial		51		-			11,353		(1,007	)		11,404		(1,007	)
Agency residential		1,220,845		(40,420	)		264,640		(9,755	)		1,485,485		(50,175	)
Non-agency residential		1,758		(22	)		1,541		(204	)		3,299		(226	)
Foreign government securities		409,252		(20,350	)		85,029		(8,997	)		494,281		(29,347	)
Foreign corporate securities		872,907		(34,819	)		151,748		(10,809	)		1,024,655		(45,628	)
Total fixed maturity securities	$	3,637,310	$	(123,833	)	$	639,825	$	(40,762	)	$	4,277,135	$	(164,595	)
Equity securities		127,030		(8,597	)		-		-			127,030		(8,597	)
Total	$	3,764,340	$	(132,430	)	$	639,825	$	(40,762	)	$	4,404,165	$	(173,192	)

	Duration of Unrealized Loss at December 31, 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	$	143,098	$	(3,503	)	$	46,691	$	(5,330	)	$	189,789	$	(8,833	)
Due in one year through five years		1,125,680		(25,365	)		204,779		(11,279	)		1,330,459		(36,644	)
Due in five years through ten years		810,969		(35,169	)		48,064		(3,844	)		859,033		(39,013	)
Due after ten years		329,415		(19,348	)		61,629		(8,927	)		391,044		(28,275	)
Asset-backed securities		5,494		(6	)		1,128		(416	)		6,622		(422	)
Mortgage-backed securities		1,222,654		(40,442	)		277,534		(10,966	)		1,500,188		(51,408	)
Total fixed maturity securities	$	3,637,310	$	(123,833	)	$	639,825	$	(40,762	)	$	4,277,135	$	(164,595	)

The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at December 31, 2013 were $4,404,165 thousand and $173,192 thousand, respectively. The market value of securities for the single issuer whose securities comprised the largest unrealized loss position at December 31, 2013, did not exceed 0.4% 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 $123,833 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, $112,658 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating organization. The $40,762 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, municipal securities and agency residential mortgage-backed securities. Of these unrealized losses, $38,964 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 $273 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
	March 31,
(Dollars in thousands)	2014			2013
Fixed maturities	$	116,253		$	120,757
Equity securities		11,459			9,741
Short-term investments and cash		330			304
Other invested assets
Limited partnerships		(2,258	)		17,483
Other		2,021			2,321
Gross investment income before adjustments		127,805			150,606
Funds held interest income (expense)		3,017			4,429
Future policy benefit reserve income (expense)		(303	)		(531	)
Gross investment income		130,519			154,504
Investment expenses		(7,362	)		(8,723	)
Net investment income	$	123,157		$	145,781

(Some amounts may not reconcile due to rounding.)

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 identifies the decline.

The Company had contractual commitments to invest up to an additional $121,387 thousand in limited partnerships at March 31, 2014. These commitments will be funded when called in accordance with the partnership agreements, which have investment periods that expire, unless extended, through 2018.

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

	Three Months Ended
	March 31,
(Dollars in thousands)	2014			2013
Fixed maturity securities, market value:
Other-than-temporary impairments	$	-		$	(191	)
Gains (losses) from sales		(1,948	)		4,877
Fixed maturity securities, fair value:
Gains (losses) from sales		940			(58	)
Gains (losses) from fair value adjustments		-			84
Equity securities, market value:
Gains (losses) from sales		(488	)		233
Equity securities, fair value:
Gains (losses) from sales		(1,415	)		8,019
Gains (losses) from fair value adjustments		24,035			113,757
Short-term investments gain (loss)		2			14
Total net realized capital gains (losses)	$	21,126		$	126,735

The Company recorded as net realized capital gains (losses) in the consolidated statements of operations and comprehensive income (loss) both fair value re-measurements and write-downs in the value of securities deemed to be impaired on an other-than-temporary basis as displayed in the table above. The Company had no other-than-temporary impaired securities where the impairment had both a credit and non-credit component.

The proceeds and split between gross gains and losses, from sales of fixed maturity and equity securities, are presented in the table below for the periods indicated:

	Three Months Ended
	March 31,
(Dollars in thousands)	2014			2013
Proceeds from sales of fixed maturity securities	$	349,472		$	258,160
Gross gains from sales		7,936			7,713
Gross losses from sales		(8,944	)		(2,894	)

Proceeds from sales of equity securities	$	179,132		$	107,404
Gross gains from sales		6,620			9,102
Gross losses from sales		(8,523	)		(850	)

4. DERIVATIVES

The Company sold seven equity index put option contracts, based on two indices, in 2001 and 2005, which remain outstanding. The Company sold these equity index put options as insurance products with the intent of achieving a profit. These equity index put option contracts meet the definition of a derivative under FASB guidance and the Company’s position in these equity index put option contracts is unhedged. Accordingly, these equity index put option contracts are carried at fair value in the consolidated balance sheets with changes in fair value recorded in the consolidated statements of operations and comprehensive income (loss).

The Company sold six equity index put option contracts, based on the Standard & Poor’s 500 (“S&P 500”) index, for total consideration, net of commissions, of $22,530 thousand. At March 31, 2014, fair value for these equity index put option contracts was $30,516 thousand. These equity index put option contracts each have a single exercise date, with maturities ranging from 12 to 30 years and strike prices ranging from $1,141.21 to $1,540.63. No amounts will be payable under these equity index put option contracts if the S&P 500 index is at, or above, the strike prices on the exercise dates, which fall between June 2017 and March 2031. If the S&P 500 index is lower than the strike price on the applicable exercise date, the amount due would vary proportionately with the percentage by which the index is below the strike price. Based on historical index volatilities and trends and the March 31, 2014 S&P 500 index value, the Company estimates the probability that each equity index put option contract of the S&P 500 index falling below the strike price on the exercise date to be less than 25%. The theoretical maximum payouts under these six equity index put option contracts would occur if on each of the exercise dates the S&P 500 index value were zero. At March 31, 2014, the present value of these theoretical maximum payouts using a 3% discount factor was $410,762 thousand. Conversely, if the contracts had all expired on March 31, 2014, with the S&P index at $1,872.34, there would have been no settlement amount.

The Company sold one equity index put option contract based on the FTSE 100 index for total consideration, net of commissions, of $6,706 thousand. At March 31, 2014, fair value for this equity index put option contract was $6,567 thousand. This equity index put option contract has an exercise date of July 2020 and a strike price of ₤5,989.75. No amount will be payable under this equity index put option contract if the FTSE 100 index is at, or above, the strike price on the exercise date. If the FTSE 100 index is lower than the strike price on the exercise date, the amount due will vary proportionately with the percentage by which the index is below the strike price. Based on historical index volatilities and trends and the March 31, 2014 FTSE 100 index value, the Company estimates the probability that the equity index put option contract of the FTSE 100 index will fall below the strike price on the exercise date to be less than 41%. The theoretical maximum payout under the equity index put option contract would occur if on the exercise date the FTSE 100 index value was zero. At March 31, 2014, the present value of the theoretical maximum payout using a 3% discount factor and current exchange rate was $45,416 thousand. Conversely, if the contract had expired on March 31, 2014, with the FTSE index at ₤6,598.40, there would have been no settlement amount.

The fair value of the equity index put options can be found in the Company’s consolidated balance sheets as follows:

(Dollars in thousands)
Derivatives not designated as	Location of fair value	At		At
hedging instruments	in balance sheets	March 31, 2014		December 31, 2013

Equity index put option contracts	Equity index put option liability	$	37,083	$	35,423
Total		$	37,083	$	35,423

The change in fair value of the equity index put option contracts can be found in the Company’s statement of operations and comprehensive income (loss) as follows:

(Dollars in thousands)		For the Three Months Ended
Derivatives not designated as	Location of gain (loss) in statements of	March 31,
hedging instruments	operations and comprehensive income (loss)	2014			2013

Equity index put option contracts	Net derivative gain (loss)	$	(1,661	)	$	15,285
Total		$	(1,661	)	$	15,285

The Company’s equity index put option contracts contain provisions that require collateralization of the fair value, as calculated by the counterparty, above a specified threshold, which is based on the Company’s financial strength ratings (Moody’s Investors Service, Inc.) and/or debt ratings (Standard & Poor’s Ratings Services). The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a liability position on March 31, 2014, was $37,083 thousand for which the Company had posted collateral with a market value of $30,014 thousand. If on March 31, 2014, the Company’s ratings were such that the collateral threshold was zero, the Company’s collateral requirement would increase by $55,000 thousand.

5. FAIR VALUE

The Company’s fixed maturity and equity securities are primarily managed by third party investment asset managers. The investment asset managers obtain prices from nationally recognized pricing services. These services seek to utilize market data and observations in their evaluation process. They use pricing applications that vary by asset class and incorporate available market information and when fixed maturity securities do not trade on a daily basis the services will apply available information through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing. In addition, they use model processes, such as the Option Adjusted Spread model to develop prepayment and interest rate scenarios for securities that have prepayment features.

In limited instances where prices are not provided by pricing services or in rare instances when a manager may not agree with the pricing service, price quotes on a non-binding basis are obtained from investment brokers. The investment asset managers do not make any changes to prices received from either the pricing services or the investment brokers. In addition, the investment asset managers have procedures in place to review the reasonableness of the prices from the service providers and may request verification of the prices. In addition, the Company continually performs analytical reviews of price changes and tests the prices on a random basis to an independent pricing source. No material variances were noted during these price validation procedures. In limited situations, where financial markets are inactive or illiquid, the Company may use its own assumptions about future cash flows and risk-adjusted discount rates to determine fair value. The Company made no such adjustments at March 31, 2014 and December 31, 2013.

The Company internally manages a small public equity portfolio which had a fair value at March 31, 2014 and December 31, 2013 of $184,175 thousand and $174,628 thousand, respectively, and all prices were obtained from publically published sources.

Equity securities in U.S. denominated currency are categorized as Level 1, Quoted Prices in Active Markets for Identical Assets, since the securities are actively traded on an exchange and prices are based on quoted prices from the exchange. Equity securities traded on foreign exchanges are categorized as Level 2 due to potential foreign exchange adjustments to fair or market value.

Fixed maturity securities are generally categorized as Level 2, Significant Other Observable Inputs, since a particular security may not have traded but the pricing services are able to use valuation models with observable market inputs such as interest rate yield curves and prices for similar fixed maturity securities in terms of issuer, maturity and seniority. Valuations that are derived from techniques in which one or more of the significant inputs are unobservable (including assumptions about risk) are categorized as Level 3, Significant Unobservable Inputs. These securities include broker priced securities and the Company’s equity index put option contracts.

As of March 31, 2014 and December 31, 2013, all Level 3 fixed maturity securities, were priced using single non-binding broker quotes since prices for these securities were not provided by normal pricing service companies. The single broker quotes are provided by market makers or broker-dealers who are recognized as market participants in the markets in which they are providing the quotes. The prices received from brokers are reviewed for reasonableness by the third party asset managers and the Company.

The Company sold seven equity index put option contracts which meet the definition of a derivative. The Company’s position in these contracts is unhedged. The Company records the change in fair value of equity index put option contracts in its consolidated statements of operations and comprehensive income (loss).

The fair value was calculated using an industry accepted option pricing model, Black-Scholes, which used the following assumptions:

	At March 31, 2014
		Contract
	Contracts	based on
	based on	FTSE 100
	S & P 500 Index	Index
Equity index	1,872.3	6,598.4
Interest rate	1.28% to 3.64%	2.52%
Time to maturity	3.1 to 17.0 yrs	6.3 yrs
Volatility	20.8% to 25.0%	23.2%

The following table presents the fair value measurement levels for all assets and liabilities, which the Company has recorded at fair value (fair and market value) as of the periods indicated:

			Fair Value Measurement Using:
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
(Dollars in thousands)	March 31, 2014		(Level 1)		(Level 2)		(Level 3)
Assets:
Fixed maturities, market value
U.S. Treasury securities and obligations of
U.S. government agencies and corporations	$	162,279	$	-	$	162,279	$	-
Obligations of U.S. States and political subdivisions		966,324		-		966,324		-
Corporate securities		4,454,354		-		4,454,354		-
Asset-backed securities		184,064		-		180,392		3,672
Mortgage-backed securities
Commercial		249,334		-		249,334		-
Agency residential		2,214,344		-		2,214,344		-
Non-agency residential		4,405		-		4,141		264
Foreign government securities		1,748,271		-		1,748,271		-
Foreign corporate securities		3,035,801		-		3,035,328		473
Total fixed maturities, market value		13,019,176		-		13,014,767		4,409

Fixed maturities, fair value		-		-		-		-
Equity securities, market value		153,822		136,145		17,677		-
Equity securities, fair value		1,398,430		1,282,347		116,083		-

Liabilities:
Equity index put option contracts	$	37,083	$	-	$	-	$	37,083

There were no transfers between Level 1 and Level 2 for the three months ended March 31, 2014.

The following table presents the fair value measurement levels for all assets and liabilities, which the Company has recorded at fair value (fair and market value) as of the periods indicated:

			Fair Value Measurement Using:
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
(Dollars in thousands)	December 31, 2013		(Level 1)		(Level 2)		(Level 3)
Assets:
Fixed maturities, market value
U.S. Treasury securities and obligations of
U.S. government agencies and corporations	$	161,025	$	-	$	161,025	$	-
Obligations of U.S. States and political subdivisions		1,002,528		-		1,002,528		-
Corporate securities		4,079,416		-		4,079,416		-
Asset-backed securities		173,043		-		167,744		5,299
Mortgage-backed securities
Commercial		270,441		-		270,441		-
Agency residential		2,279,053		-		2,279,053		-
Non-agency residential		4,819		-		4,472		347
Foreign government securities		1,780,769