EVEREST GROUP, LTD. - Quarter Report: 2017 March (Form 10-Q)

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, 2017

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.)

Seon Place – 4^th Floor

141 Front Street

PO Box HM 845

Hamilton HM 19, 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, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth 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)		Emerging growth company

Indicate by check mark if the registrant is an emerging growth company and has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange act.

YES

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, 2017
Common Shares, $0.01 par value		41,069,286

EVEREST RE GROUP, LTD

Table of Contents

Form 10-Q

Page

PART I

FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets March 31, 2017 (unaudited)
	and December 31, 2016	1

	Consolidated Statements of Operations and Comprehensive Income (Loss) for the
	three months ended March 31, 2017 and 2016 (unaudited)	2

	Consolidated Statements of Changes in Shareholders' Equity for the three
	months ended March 31, 2017 and 2016 (unaudited)	3

	Consolidated Statements of Cash Flows for the three months ended
	March 31, 2017 and 2016 (unaudited)	4

	Notes to Consolidated Interim Financial Statements (unaudited)	5

Item 2.	Management's Discussion and Analysis of Financial Condition and
	Results of Operation	31

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	52

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

EVEREST RE GROUP, LTD.

CONSOLIDATED BALANCE SHEETS

	March 31,			December 31,
(Dollars and share amounts in thousands, except par value per share)	2017			2016
	(unaudited)
ASSETS:
Fixed maturities - available for sale, at market value	$	14,730,995		$	14,107,408
(amortized cost: 2017, $14,542,645; 2016, $13,932,613)
Equity securities - available for sale, at market value (cost: 2017, $108,834; 2016, $129,553)		104,346			119,067
Equity securities - available for sale, at fair value		983,459			1,010,085
Short-term investments		477,177			431,478
Other invested assets (cost: 2017, $1,358,749; 2016, $1,333,069)		1,359,252			1,333,129
Cash		468,240			481,922
Total investments and cash		18,123,469			17,483,089
Accrued investment income		98,169			96,473
Premiums receivable		1,707,232			1,485,990
Reinsurance receivables		1,050,540			1,018,325
Funds held by reinsureds		262,111			260,644
Deferred acquisition costs		347,337			344,052
Prepaid reinsurance premiums		215,749			191,768
Income taxes		135,050			177,704
Other assets		253,296			263,459
TOTAL ASSETS	$	22,192,953		$	21,321,504

LIABILITIES:
Reserve for losses and loss adjustment expenses	$	10,414,046		$	10,312,313
Future policy benefit reserve		55,158			55,074
Unearned premium reserve		1,704,734			1,577,546
Funds held under reinsurance treaties		23,201			21,278
Commission reserves		59,266			70,335
Other net payable to reinsurers		207,592			190,986
Losses in course of payment		181,331			67,107
4.868% Senior notes due 6/1/2044		396,744			396,714
6.6% Long term notes due 5/1/2067		236,487			236,462
Accrued interest on debt and borrowings		12,341			3,537
Equity index put option liability		19,429			22,059
Unsettled securities payable		272,470			27,927
Other liabilities		262,278			264,770
Total liabilities		13,845,077			13,246,108

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; (2017) 69,030
and (2016) 68,871 outstanding before treasury shares		691			689
Additional paid-in capital		2,141,653			2,140,783
Accumulated other comprehensive income (loss), net of deferred income tax expense
(benefit) of $13,886 at 2017 and $8,240 at 2016		(185,518	)		(216,764	)
Treasury shares, at cost; 27,972 shares 2017 and 2016		(3,272,244	)		(3,272,244	)
Retained earnings		9,663,294			9,422,932
Total shareholders' equity		8,347,876			8,075,396
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	22,192,953		$	21,321,504

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)	2017			2016
	(unaudited)
REVENUES:
Premiums earned	$	1,312,097		$	1,218,867
Net investment income		122,289			102,524
Net realized capital gains (losses):
Other-than-temporary impairments on fixed maturity securities		(1,229	)		(28,793	)
Other-than-temporary impairments on fixed maturity securities
transferred to other comprehensive income (loss)		-			-
Other net realized capital gains (losses)		53,957			(45,466	)
Total net realized capital gains (losses)		52,728			(74,259	)
Net derivative gain (loss)		2,630			(3,020	)
Other income (expense)		(4,966	)		(2,066	)
Total revenues		1,484,778			1,242,046

CLAIMS AND EXPENSES:
Incurred losses and loss adjustment expenses		770,788			700,749
Commission, brokerage, taxes and fees		282,269			275,006
Other underwriting expenses		75,887			72,110
Corporate expenses		8,457			7,886
Interest, fees and bond issue cost amortization expense		8,964			9,228
Total claims and expenses		1,146,365			1,064,979

INCOME (LOSS) BEFORE TAXES		338,413			177,067
Income tax expense (benefit)		46,770			5,381

NET INCOME (LOSS)	$	291,643		$	171,686

Other comprehensive income (loss), net of tax:
Unrealized appreciation (depreciation) ("URA(D)") on securities arising during the period		19,548			142,962
Reclassification adjustment for realized losses (gains) included in net income (loss)		(2,199	)		32,381
Total URA(D) on securities arising during the period		17,349			175,343

Foreign currency translation adjustments		11,893			9,773

Benefit plan actuarial net gain (loss) for the period		-			-
Reclassification adjustment for amortization of net (gain) loss included in net income (loss)		2,004			1,340
Total benefit plan net gain (loss) for the period		2,004			1,340
Total other comprehensive income (loss), net of tax		31,246			186,456

COMPREHENSIVE INCOME (LOSS)	$	322,889		$	358,142

EARNINGS PER COMMON SHARE:
Basic	$	7.12		$	4.03
Diluted		7.07			4.00
Dividends declared		1.25			1.15

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)	2017			2016
	(unaudited)
COMMON SHARES (shares outstanding):
Balance, beginning of period		40,898,864			42,694,252
Issued during the period, net		159,127			169,774
Treasury shares acquired		-			(464,360	)
Balance, end of period		41,057,991			42,399,666

COMMON SHARES (par value):
Balance, beginning of period	$	689		$	686
Issued during the period, net		2			2
Balance, end of period		691			688

ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of period		2,140,783			2,103,638
Share-based compensation plans		870			8,190
Balance, end of period		2,141,653			2,111,828

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS),
NET OF DEFERRED INCOME TAXES:
Balance, beginning of period		(216,764	)		(231,755	)
Net increase (decrease) during the period		31,246			186,456
Balance, end of period		(185,518	)		(45,299	)

RETAINED EARNINGS:
Balance, beginning of period		9,422,932			8,621,972
Net income (loss)		291,643			171,686
Dividends declared ($1.25 per share in 2017 and $1.15 per share in 2016)		(51,281	)		(48,706	)
Balance, end of period		9,663,294			8,744,952

TREASURY SHARES AT COST:
Balance, beginning of period		(3,272,244	)		(2,885,956	)
Purchase of treasury shares		-			(85,914	)
Balance, end of period		(3,272,244	)		(2,971,870	)

TOTAL SHAREHOLDERS' EQUITY, END OF PERIOD	$	8,347,876		$	7,840,299

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)	2017			2016
	(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	291,643		$	171,686
Adjustments to reconcile net income to net cash provided by operating activities:
Decrease (increase) in premiums receivable		(220,367	)		7,604
Decrease (increase) in funds held by reinsureds, net		1,211			60,592
Decrease (increase) in reinsurance receivables		(30,158	)		(32,865	)
Decrease (increase) in income taxes		37,010			(3,883	)
Decrease (increase) in prepaid reinsurance premiums		(23,704	)		(10,219	)
Increase (decrease) in reserve for losses and loss adjustment expenses		99,095			50,497
Increase (decrease) in future policy benefit reserve		83			(473	)
Increase (decrease) in unearned premiums		125,614			(26,116	)
Increase (decrease) in other net payable to reinsurers		13,666			5,254
Increase (decrease) in losses in course of payment		113,815			24,473
Change in equity adjustments in limited partnerships		(10,998	)		6,181
Distribution of limited partnership income		5,384			15,915
Change in other assets and liabilities, net		12,998			12,175
Non-cash compensation expense		7,501			8,041
Amortization of bond premium (accrual of bond discount)		11,746			12,354
Amortization of underwriting discount on senior notes		1			1
Net realized capital (gains) losses		(52,728	)		74,259
Net cash provided by (used in) operating activities		381,812			375,476

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from fixed maturities matured/called - available for sale, at market value		525,873			503,428
Proceeds from fixed maturities sold - available for sale, at market value		428,491			324,118
Proceeds from equity securities sold - available for sale, at market value		18,802			203
Proceeds from equity securities sold - available for sale, at fair value		140,315			92,245
Distributions from other invested assets		1,165,905			1,111,710
Cost of fixed maturities acquired - available for sale, at market value		(1,552,743	)		(1,078,990	)
Cost of equity securities acquired - available for sale, at market value		(1,282	)		(1,105	)
Cost of equity securities acquired - available for sale, at fair value		(66,902	)		(96,297	)
Cost of other invested assets acquired		(1,184,270	)		(1,454,123	)
Net change in short-term investments		(45,178	)		360,238
Net change in unsettled securities transactions		236,702			30,390
Net cash provided by (used in) investing activities		(334,287	)		(208,183	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Common shares issued during the period, net		(6,629	)		151
Purchase of treasury shares		-			(85,914	)
Dividends paid to shareholders		(51,281	)		(48,706	)
Cost of shares withheld for taxes on settlements of share-based compensation awards		(11,517	)		(8,331	)
Net cash provided by (used in) financing activities		(69,427	)		(142,800	)

EFFECT OF EXCHANGE RATE CHANGES ON CASH		8,220			20,792

Net increase (decrease) in cash		(13,682	)		45,285
Cash, beginning of period		481,922			283,658
Cash, end of period	$	468,240		$	328,943

SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid (recovered)	$	9,593		$	5,000
Interest paid		105			370

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, 2017 and 2016

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.

During the third quarter of 2016, the Company established domestic subsidiaries, Everest Premier Insurance Company ("Everest Premier") and Everest Denali Insurance Company ("Everest Denali"), which will be used in the continued expansion of the Insurance operations.

Effective August 24, 2016, the Company sold its wholly-owned subsidiary, Heartland Crop Insurance Company ("Heartland"), a managing agent for crop insurance, to CGB Diversified Services, Inc. ("CGB"). The operating results of Heartland through August 24, 2016, are included within the Company's financial statements.

Effective July 1, 2016, the Company established a new Irish holding company, Everest Dublin Insurance Holdings Limited (Ireland) ("Everest Dublin Holdings").

During the fourth quarter of 2015, the Company established new subsidiaries, Everest Preferred International Holdings, Ltd. ("Preferred International"), a Bermuda based company and Everest International Holdings (Bermuda), Ltd. ("International Holdings"), a Bermuda based company. These new subsidiaries were part of a capital restructuring within the Company to support a planned increase in international business production, which includes directly supporting Group's new Lloyd's of London Syndicate corporate member.

Effective July 13, 2015, the Company sold all of the outstanding shares of capital stock of a wholly-owned subsidiary entity, Mt. McKinley Insurance Company ("Mt. McKinley"), to Clearwater Insurance Company. The operating results of Mt. McKinley through July 13, 2015 are included within the Company's financial statements.

2. BASIS OF PRESENTATION

The unaudited consolidated financial statements of the Company for the three months ended March 31, 2017 and 2016 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, 2016 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, 2017 and 2016 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, 2016, 2015 and 2014 included in the Company's most recent Form 10-K filing.

The Company consolidates the results of operations and financial position of all voting interest entities ("VOE") in which the Company has a controlling financial interest and all variable interest entities ("VIE") in which the Company is considered to be the primary beneficiary. The consolidation assessment, including the determination as to whether an entity qualifies as a VIE or VOE, depends on the facts and circumstances surrounding each entity.

Effective January 1, 2016, the Company adopted Accounting Standards Update 2015-02, "Consolidation (Topic 810) Amendments to the Consolidation Analysis" issued by the United States Financial Accounting Standards Board ("FASB"), which changed the method in which the Company determines whether entities are consolidated by the Company. The adoption of this amended accounting guidance was implemented utilizing a full retrospective application for prior periods.

The amended guidance includes changes in the identification of the primary beneficiary of companies considered to be VIEs. These changes resulted in the Company concluding that Mt. Logan Re is a VIE given it has insufficient equity at risk and that each underlying separate segregated account is likewise a VIE. The Company has concluded that it is the primary beneficiary of Mt. Logan Re, but not of the underlying separate segregated accounts and therefore has deconsolidated these segregated accounts. This change had no impact to the net income or retained earnings of the Company.

All significant intercompany accounts and transactions have been eliminated.

Certain reclassifications and format changes have been made to prior years' amounts to conform to the 2017 presentation.

Application of Recently Issued Accounting Standard Changes.

Accounting for Share-Based Compensation. In March 2016, the FASB issued Accounting Standards Update ("ASU") 2016-09, authoritative guidance regarding the accounting for share-based compensation. This guidance requires that the income tax effects resulting from the change in the value of share-based compensation awards between grant and settlement will be recorded as part of the Consolidated Statements of Operations and Comprehensive Income/(Loss). Previously, excess tax benefits have been recorded as part of the additional paid in capital within the Consolidated Balance Sheets. The guidance is effective for annual reporting periods beginning after December 15, 2016 and interim periods within that annual reporting period. The Company has implemented this guidance prospectively as of January 1, 2017. The guidance also requires that the cost of employee taxes paid via shares withheld upon settlement of share-based compensation awards must be shown as a financing activity within the Statements of Cash Flows. The Company has implemented this guidance retrospectively as of January 1, 2017.

The following table presents certain financial statement line items as previously reported in 2016, the effect of those line items due to treating the cost of shares withheld upon settlement of share-based compensation awards as a financing activity with the Statements of Cash Flows and the line items as currently reported within the financial statements.

Consolidated Statements of Cash Flows:	Three Months Ended March 31, 2016
				Effect of
				adoption of
	As previously			new accounting
	reported			policy			As adopted
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Change in other assets and liabilities, net	$	3,844		$	8,331		$	12,175
Net cash provided by (used in) operating activities		367,145			8,331			375,476

CASH FLOWS FROM FINANCING ACTIVITIES:
Cost of shares withheld for taxes on settlements of
share-based compensation awards		-			(8,331	)		(8,331	)
Net cash provided by (used in) financing activities		(134,469	)		(8,331	)		(142,800	)

Disclosures about Short-Duration Contracts. In May 2015, the FASB issued ASU 2015-09, authoritative guidance regarding required disclosures associated with short duration insurance contracts. The new disclosure requirements focus on information about initial claim estimates and subsequent claim estimate adjustment, methodologies in estimating claims and the timing, frequency and severity of claims related to short duration insurance contracts. This guidance is effective for annual reporting periods beginning after December 15, 2015 and interim reporting periods beginning after December 15, 2016. The Company implemented this guidance effective in the fourth quarter of 2016.

Disclosures for Investments in Certain Entities that Calculate Net Asset Value Per Share. In May 2015, the FASB issued ASU 2015-07, which removes the requirement to categorize, within the fair value hierarchy, investments for which fair values are estimated using the net asset value practical expedient provided by Accounting Standards Codification 820, Fair Value Measurement. The updated guidance is effective for annual reporting periods beginning after December 15, 2015. The adoption did not have a material impact on the Company's financial statements.

Debt Issuance Costs. In April 2015, The FASB issued ASU 2015–03, authoritative guidance on the presentation of debt issuance costs. This guidance requires that debt issuance costs be presented within the balance sheet as a reduction of the carrying value of the debt liability, rather than as a separate asset. This guidance is effective for annual reporting periods beginning after December 15, 2015 and related interim reporting periods. The Company implemented this guidance effective in the second quarter of 2016. The adoption did not have a material impact on the Company's financial statements.

Consolidation. In February 2015, the FASB issued ASU 2015-02, authoritative guidance regarding consolidation of reporting entities. The new guidance focuses on the required evaluation of whether certain legal entities should be consolidated. This guidance is effective for annual and interim reporting periods beginning after December 15, 2015. Based upon this guidance, the Company has determined that the separate segregated accounts associated with Mt. Logan Re should not be consolidated. The Company implemented the guidance effective January 1, 2016.

3. INVESTMENTS

The amortized cost, market value and gross unrealized appreciation and depreciation of available for sale, fixed maturity, equity security investments, carried at market value and other-than-temporary impairments ("OTTI") in accumulated other comprehensive income ("AOCI") are as follows for the periods indicated:

	At March 31, 2017
	Amortized		Unrealized		Unrealized			Market		OTTI in AOCI
(Dollars in thousands)	Cost		Appreciation		Depreciation			Value		(a)
Fixed maturity securities
U.S. Treasury securities and obligations of
U.S. government agencies and corporations	$	1,434,890	$	19,729	$	(4,550	)	$	1,450,069	$	-
Obligations of U.S. states and political subdivisions		705,145		18,818		(11,526	)		712,437		-
Corporate securities		5,307,357		124,365		(28,769	)		5,402,953		3,728
Asset-backed securities		556,928		1,225		(901	)		557,252		-
Mortgage-backed securities
Commercial		299,824		2,167		(3,057	)		298,934		-
Agency residential		2,399,912		16,437		(26,172	)		2,390,177		-
Non-agency residential		598		43		(45	)		596		-
Foreign government securities		1,237,190		58,713		(53,139	)		1,242,764		159
Foreign corporate securities		2,600,801		130,152		(55,140	)		2,675,813		847
Total fixed maturity securities	$	14,542,645	$	371,649	$	(183,299	)	$	14,730,995	$	4,734
Equity securities	$	108,834	$	2,038	$	(6,526	)	$	104,346	$	-

	At December 31, 2016
	Amortized		Unrealized		Unrealized			Market		OTTI in AOCI
(Dollars in thousands)	Cost		Appreciation		Depreciation			Value		(a)
Fixed maturity securities
U.S. Treasury securities and obligations of
U.S. government agencies and corporations	$	1,115,208	$	20,410	$	(5,303	)	$	1,130,315	$	-
Obligations of U.S. states and political subdivisions		723,938		18,016		(11,970	)		729,984		-
Corporate securities		5,059,388		131,651		(35,758	)		5,155,281		7,936
Asset-backed securities		488,824		1,110		(1,286	)		488,648		-
Mortgage-backed securities
Commercial		308,827		1,983		(3,878	)		306,932		-
Agency residential		2,415,901		17,478		(27,910	)		2,405,469		-
Non-agency residential		642		44		(45	)		641		-
Foreign government securities		1,254,175		61,226		(57,241	)		1,258,160		115
Foreign corporate securities		2,565,710		130,714		(64,446	)		2,631,978		1,184
Total fixed maturity securities	$	13,932,613	$	382,632	$	(207,837	)	$	14,107,408	$	9,235
Equity securities	$	129,553	$	2,298	$	(12,784	)	$	119,067	$	-

^(a) Represents the amount of OTTI recognized in AOCI. Amount includes unrealized gains and losses on impaired securities relating to changes in the value of such securities subsequent to the impairment measurement date.

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, 2017				At December 31, 2016
	Amortized		Market		Amortized		Market
(Dollars in thousands)	Cost		Value		Cost		Value
Fixed maturity securities – available for sale:
Due in one year or less	$	1,121,273	$	1,129,238	$	956,945	$	966,970
Due after one year through five years		7,198,076		7,305,413		6,769,585		6,870,056
Due after five years through ten years		1,996,817		2,028,852		2,020,215		2,052,733
Due after ten years		969,217		1,020,533		971,674		1,015,959
Asset-backed securities		556,928		557,252		488,824		488,648
Mortgage-backed securities:
Commercial		299,824		298,934		308,827		306,932
Agency residential		2,399,912		2,390,177		2,415,901		2,405,469
Non-agency residential		598		596		642		641
Total fixed maturity securities	$	14,542,645	$	14,730,995	$	13,932,613	$	14,107,408

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)	2017			2016
Increase (decrease) during the period between the market value and cost
of investments carried at market value, and deferred taxes thereon:
Fixed maturity securities	$	18,055		$	200,308
Fixed maturity securities, other-than-temporary impairment		(4,501	)		210
Equity securities		5,999			4,366
Other invested assets		444			-
Change in unrealized appreciation (depreciation), pre-tax		19,997			204,884
Deferred tax benefit (expense)		(3,873	)		(29,472	)
Deferred tax benefit (expense), other-than-temporary impairment		1,225			(69	)
Change in unrealized appreciation (depreciation),
net of deferred taxes, included in shareholders' equity	$	17,349		$	175,343

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, 2017 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	$	403,943	$	(4,550	)	$	-	$	-		$	403,943	$	(4,550	)
Obligations of U.S. states and political subdivisions		206,241		(10,966	)		492		(560	)		206,733		(11,526	)
Corporate securities		1,293,796		(19,093	)		141,724		(9,676	)		1,435,520		(28,769	)
Asset-backed securities		157,135		(467	)		11,241		(434	)		168,376		(901	)
Mortgage-backed securities
Commercial		78,082		(1,899	)		21,512		(1,158	)		99,594		(3,057	)
Agency residential		1,611,271		(21,394	)		179,414		(4,778	)		1,790,685		(26,172	)
Non-agency residential		-		-			99		(45	)		99		(45	)
Foreign government securities		279,924		(12,692	)		247,576		(40,447	)		527,500		(53,139	)
Foreign corporate securities		542,953		(9,280	)		287,612		(45,860	)		830,565		(55,140	)
Total fixed maturity securities	$	4,573,345	$	(80,341	)	$	889,670	$	(102,958	)	$	5,463,015	$	(183,299	)
Equity securities		-		-			90,810		(6,526	)		90,810		(6,526	)
Total	$	4,573,345	$	(80,341	)	$	980,480	$	(109,484	)	$	5,553,825	$	(189,825	)

	Duration of Unrealized Loss at March 31, 2017 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	$	338,289	$	(1,311	)	$	89,469	$	(21,621	)	$	427,758	$	(22,932	)
Due in one year through five years		1,599,496		(22,510	)		497,328		(67,024	)		2,096,824		(89,534	)
Due in five years through ten years		546,075		(20,007	)		84,641		(7,210	)		630,716		(27,217	)
Due after ten years		242,997		(12,753	)		5,966		(688	)		248,963		(13,441	)
Asset-backed securities		157,135		(467	)		11,241		(434	)		168,376		(901	)
Mortgage-backed securities		1,689,353		(23,293	)		201,025		(5,981	)		1,890,378		(29,274	)
Total fixed maturity securities	$	4,573,345	$	(80,341	)	$	889,670	$	(102,958	)	$	5,463,015	$	(183,299	)

The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at March 31, 2017 were $5,553,825 thousand and $189,825 thousand, respectively. The market value of securities for the single issuer whose securities comprised the largest unrealized loss position at March 31, 2017, did not exceed 1.0% 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 $80,341 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 agency residential mortgage-backed securities, domestic and foreign corporate securities, foreign government securities and obligations of U.S. states and political subdivisions. Of these unrealized losses, $77,268 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating agency. The $102,958 thousand of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year related primarily to foreign corporate securities, foreign government securities, domestic corporate securities and agency residential mortgage-backed securities. Nearly all of these unrealized losses are attributable to net unrealized foreign exchange losses, as the U.S. dollar has strengthened against other currencies. There was no gross unrealized depreciation for mortgage-backed securities 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 securities before recovery of 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, 2016 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	$	638,740	$	(5,303	)	$	-	$	-		$	638,740	$	(5,303	)
Obligations of U.S. states and political subdivisions		221,088		(11,486	)		564		(484	)		221,652		(11,970	)
Corporate securities		1,360,743		(24,023	)		177,153		(11,735	)		1,537,896		(35,758	)
Asset-backed securities		150,023		(565	)		18,786		(721	)		168,809		(1,286	)
Mortgage-backed securities
Commercial		143,554		(3,223	)		7,184		(655	)		150,738		(3,878	)
Agency residential		1,618,372		(22,461	)		189,665		(5,449	)		1,808,037		(27,910	)
Non-agency residential		-		-			113		(45	)		113		(45	)
Foreign government securities		360,289		(12,041	)		236,820		(45,200	)		597,109		(57,241	)
Foreign corporate securities		687,599		(12,769	)		295,500		(51,677	)		983,099		(64,446	)
Total fixed maturity securities	$	5,180,408	$	(91,871	)	$	925,785	$	(115,966	)	$	6,106,193	$	(207,837	)
Equity securities		-		-			105,507		(12,784	)		105,507		(12,784	)
Total	$	5,180,408	$	(91,871	)	$	1,031,292	$	(128,750	)	$	6,211,700	$	(220,621	)

	Duration of Unrealized Loss at December 31, 2016 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	$	178,281	$	(1,122	)	$	78,153	$	(14,318	)	$	256,434	$	(15,440	)
Due in one year through five years		2,123,113		(26,263	)		538,130		(84,803	)		2,661,243		(111,066	)
Due in five years through ten years		680,334		(22,555	)		86,631		(8,754	)		766,965		(31,309	)
Due after ten years		286,731		(15,682	)		7,123		(1,221	)		293,854		(16,903	)
Asset-backed securities		150,023		(565	)		18,786		(721	)		168,809		(1,286	)
Mortgage-backed securities		1,761,926		(25,684	)		196,962		(6,149	)		1,958,888		(31,833	)
Total fixed maturity securities	$	5,180,408	$	(91,871	)	$	925,785	$	(115,966	)	$	6,106,193	$	(207,837	)

The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at December 31, 2016 were $6,211,700 thousand and $220,621 thousand, respectively. The market value of securities for the single issuer whose securities comprised the largest unrealized loss position at December 31, 2016, did not exceed 1.1% 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 $91,871 thousand of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for less than one year were generally comprised of domestic and foreign corporate securities, agency residential mortgage-backed securities, foreign government securities and obligations of U.S. states and political subdivisions. Of these unrealized losses, $85,078 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating agency. The $115,966 thousand of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year related primarily to foreign government securities, foreign corporate securities and domestic corporate securities. Of these unrealized losses $112,132 thousand is attributable to net unrealized foreign exchange losses, as the U.S. dollar has strengthened against other currencies. There was no gross unrealized depreciation for mortgage-backed

securities 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)	2017			2016
Fixed maturities	$	103,245		$	102,525
Equity securities		8,745			11,139
Short-term investments and cash		630			400
Other invested assets
Limited partnerships		10,998			(6,158	)
Other		2,272			(850	)
Gross investment income before adjustments		125,890			107,056
Funds held interest income (expense)		3,148			2,540
Future policy benefit reserve income (expense)		(319	)		(301	)
Gross investment income		128,719			109,295
Investment expenses		(6,430	)		(6,771	)
Net investment income	$	122,289		$	102,524

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 $535,550 thousand in limited partnerships at March 31, 2017. These commitments will be funded when called in accordance with the partnership agreements, which have investment periods that expire, unless extended, through 2021.

The Company's other invested assets at March 31, 2017 and December 31, 2016 included $397,757 thousand and $378,862 thousand, respectively, related to a private placement liquidity sweep facility. The primary purpose of the facility is to enhance the Company's return on its short-term investments and cash positions. The facility invests in high quality, short-duration securities and permits daily liquidity.

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)	2017			2016
Fixed maturity securities, market value:
Other-than-temporary impairments	$	(1,229	)	$	(28,793	)
Gains (losses) from sales		11,373			(16,911	)
Fixed maturity securities, fair value:
Gains (losses) from fair value adjustments		-			(232	)
Equity securities, market value:
Gains (losses) from sales		(3,436	)		57
Equity securities, fair value:
Gains (losses) from sales		4,516			(8,426	)
Gains (losses) from fair value adjustments		41,507			(19,955	)
Other invested assets		1			-
Short-term investments gain (loss)		(4	)		1
Total net realized capital gains (losses)	$	52,728		$	(74,259	)

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)	2017			2016
Proceeds from sales of fixed maturity securities	$	428,491		$	324,118
Gross gains from sales		15,473			8,552
Gross losses from sales		(4,100	)		(25,463	)

Proceeds from sales of equity securities	$	159,117		$	92,448
Gross gains from sales		8,208			1,839
Gross losses from sales		(7,128	)		(10,208	)

4. RESERVE FOR LOSSES, LAE AND FUTURE POLICY BENEFIT RESERVE

Activity in the reserve for losses and LAE is summarized for the periods indicated:

	Three Months Ended			Twelve Months Ended
	March 31,			December 31,
(Dollars in thousands)	2017			2016
Gross reserves at January 1	$	10,312,313		$	9,951,798
Less reinsurance recoverables		(990,862	)		(881,503	)
Net reserves at January 1		9,321,451			9,070,295

Incurred related to:
Current year		770,660			3,434,964
Prior years		128			(295,335	)
Total incurred losses and LAE		770,788			3,139,629

Paid related to:
Current year		106,606			745,642
Prior years		582,431			2,042,972
Total paid losses and LAE		689,037			2,788,614

Foreign exchange/translation adjustment		20,910			(99,859	)

Net reserves at December 31		9,424,112			9,321,451
Plus reinsurance recoverables		989,934			990,862
Gross reserves at December 31	$	10,414,046		$	10,312,313

Incurred prior years' reserves increased by $128 thousand and decreased by $295,335 thousand for the three months ended March 31, 2017 and for the twelve months ended December 31, 2016, respectively.

The decrease for the twelve months ended December 31, 2016 was attributable to favorable development in the reinsurance segments of $468,749 thousand related primarily to property and short-tail business in the U.S., property business in Canada, Latin America, Middle East and Africa, as well as favorable development on prior year catastrophe losses, partially offset by $53,909 thousand of adverse development on asbestos and environmental ("A&E") reserves. Part of the favorable development in the reinsurance segments related to the 2015 loss from the explosion at the Chinese port of Tianjin. In 2015, this loss was originally estimated to be $60,000 thousand. At December 31, 2016, this loss was projected to be $16,720

thousand resulting in $43,280 thousand of favorable development in 2016. The net favorable development in the reinsurance segments was partially offset by $173,414 thousand of unfavorable development in the insurance segment primarily related to run-off construction liability and umbrella program business.

5. 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. Based on historical index volatilities and trends and the March 31, 2017 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 4%. 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, 2017, the present value of these theoretical maximum payouts using a 3% discount factor was $448,887 thousand. Conversely, if the contracts had all expired on March 31, 2017, with the S&P index at $2,362.72, 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. Based on historical index volatilities and trends and the March 31, 2017 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 22%. 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, 2017, the present value of the theoretical maximum payout using a 3% discount factor and current exchange rate was $36,274 thousand. Conversely, if the contract had expired on March 31, 2017, with the FTSE index at ₤7,322.92, there would have been no settlement amount.

At March 31, 2017 and December 31, 2016, the fair value for these equity put options was $19,429 thousand and $22,059 thousand, respectively.

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, 2017		December 31, 2016

Equity index put option contracts	Equity index put option liability	$	19,429	$	22,059
Total		$	19,429	$	22,059