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:
September 30, 2011March 31, 2012
 
Commission file number:
1-14527

EVEREST REINSURANCE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
 
Delaware 22-3263609
(State or other jurisdiction of
incorporation or organization)
 
 
(I.R.S. Employer
Identification No.)
477 Martinsville Road
Post Office Box 830
Liberty Corner, New Jersey 07938-0830
(908) 604-3000

(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.

YESX NO 

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

YESX NO 

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

Large accelerated filer  Accelerated filer 
 
Non-accelerated filer
X 
 
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  NOX

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 NovemberMay 1, 20112012
Common Shares, $0.01 par value  1,0001,000

The Registrant meets the conditions set forth in General Instruction H (1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format permitted by General Instruction H of Form 10-Q.

 
 
 

EVEREST REINSURANCE HOLDINGS, INC.

Table of Contents
Form 10-Q


Page
PART I

FINANCIAL INFORMATION

     
Item 1. Financial Statements 
     
  
Consolidated Balance Sheets at September 30, 2011March 31, 2012 (unaudited) and
 
   
December 31, 20102011
1
    
  
Consolidated Statements of Operations and Comprehensive Income (Loss) for
 
   
the three and nine months ended September 30,March 31, 2012 and 2011 and 2010 (unaudited)
2
     
  
Consolidated Statements of Changes in Stockholder’s Equity for the three and
 
   
nine months ended September 30,March 31, 2012 and 2011 and 2010 (unaudited)
3
     
  
Consolidated Statements of Cash Flows for the three and nine months ended
 
   
September 30,March 31, 2012 and 2011 and 2010 (unaudited)
4
     
  
Notes to Consolidated Interim Financial Statements (unaudited)
5
     
Item 2. 
Management’s Discussion and Analysis of Financial Condition and
 
   
Results of Operation
2627
    
Item 3. 
Quantitative and Qualitative Disclosures About Market Risk
4240
     
Item 4. 
Controls and Procedures
4240
     

PART II

OTHER INFORMATION

     
Item 1. 
Legal Proceedings
4240
     
Item 1A. 
Risk Factors
4341
    
Item 2. 
Unregistered Sales of Equity Securities and Use of Proceeds
4341
    
Item 3. 
Defaults Upon Senior Securities
4341
    
Item 4. 
ReservedMine Safety Disclosures
4341
    
Item 5. 
Other Information
4341
    
Item 6. 
Exhibits
4341


 
 


Part I

ITEM  1.  FINANCIAL STATEMENTS

EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
 
 September 30,  December 31,  March 31,  December 31, 
(Dollars in thousands, except par value per share) 2011  2010  2012  2011 
 (unaudited)     (unaudited)    
ASSETS:            
Fixed maturities - available for sale, at market value $5,070,084  $5,599,940  $5,158,140  $5,107,028 
(amortized cost: 2011, $4,857,294; 2010, $5,438,359)        
(amortized cost: 2012, $4,917,731; 2011, $4,880,654)        
Fixed maturities - available for sale, at fair value  120,597   180,482   64,936   113,606 
Equity securities - available for sale, at market value (cost: 2011, $15; 2010, $15)  11   13 
Equity securities - available for sale, at market value (cost: 2012, $15; 2011, $15)  12   10 
Equity securities - available for sale, at fair value  1,099,456   683,454   1,163,616   1,207,053 
Short-term investments  535,915   516,885   646,196   423,663 
Other invested assets (cost: 2011, $394,153; 2010, $405,401)  394,153   406,916 
Other invested assets (cost: 2012, $396,403; 2011, $379,342)  396,403   379,342 
Other invested assets, at fair value  771,571   788,142   899,292   817,352 
Cash  265,012   118,092   344,747   348,267 
Total investments and cash  8,256,799   8,293,924   8,673,342   8,396,321 
Accrued investment income  56,977   70,874   57,788   55,849 
Premiums receivable  794,523   643,257   821,610   856,375 
Reinsurance receivables - unaffiliated  581,986   670,168   566,125   570,128 
Reinsurance receivables - affiliated  3,042,544   2,708,193   2,900,866   2,901,174 
Funds held by reinsureds  176,677   171,179   179,861   176,156 
Deferred acquisition costs  172,380   184,247   148,857   166,806 
Prepaid reinsurance premiums  600,642   629,323   621,257   625,391 
Deferred tax asset  285,675   183,924   283,520   366,490 
Federal income taxes recoverable  132,826   142,421   40,015   39,014 
Other assets  226,285   171,923   233,129   195,476 
TOTAL ASSETS $14,327,314  $13,869,433  $14,526,370  $14,349,180 
        
��        
LIABILITIES:                
Reserve for losses and loss adjustment expenses $8,165,262  $7,652,303  $8,169,153  $8,290,619 
Unearned premium reserve  1,216,965   1,287,476   1,233,032   1,239,705 
Funds held under reinsurance treaties  83,145   180,377   86,335   123,479 
Losses in the course of payment  39,766   13,089   47,986   11,002 
Commission reserves  32,520   37,796   34,721   40,353 
Other net payable to reinsurers  622,445   467,486   625,016   620,659 
Revolving credit borrowings  -   50,000 
5.4% Senior notes due 10/15/2014  249,847   249,812   249,870   249,858 
6.6% Long term notes due 5/1/2067  238,353   238,351   238,355   238,354 
Junior subordinated debt securities payable  329,897   329,897   329,897   329,897 
Accrued interest on debt and borrowings  12,092   4,793   12,092   4,781 
Other liabilities  253,632   230,312   326,765   259,080 
Total liabilities  11,243,924   10,741,692   11,353,222   11,407,787 
                
Commitments and Contingencies (Note 6)                
                
STOCKHOLDER'S EQUITY:                
Common stock, par value: $0.01; 3,000 shares authorized;                
1,000 shares issued and outstanding (2011 and 2010)  -   - 
1,000 shares issued and outstanding (2012 and 2011)  -   - 
Additional paid-in capital  332,647   327,767   335,042   333,416 
Accumulated other comprehensive income (loss), net of deferred income tax expense                
(benefit) of $109,416 at 2011 and $88,289 at 2010  203,200   163,966 
(benefit) of $102,412 at 2012 and $94,118 at 2011  190,195   174,790 
Retained earnings  2,547,543   2,636,008   2,647,911   2,433,187 
Total stockholder's equity  3,083,390   3,127,741   3,173,148   2,941,393 
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $14,327,314  $13,869,433  $14,526,370  $14,349,180 
                
The accompanying notes are an integral part of the consolidated financial statements.                


 
1

EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
 
 Three Months Ended  Nine Months Ended  Three Months Ended 
 September 30,  September 30,  March 31, 
(Dollars in thousands) 2011  2010  2011  2010  2012  2011 
 (unaudited)  (unaudited)  (unaudited) 
REVENUES:                  
Premiums earned $442,862  $465,302  $1,354,305  $1,322,160  $433,711  $459,393 
Net investment income  78,325   74,212   249,916   248,665   81,242   87,132 
Net realized capital gains (losses):                        
Other-than-temporary impairments on fixed maturity securities  (911)  (2,023)  (14,522)  (2,023)  (5,674)  (13,611)
Other-than-temporary impairments on fixed maturity securities        ��               
transferred to other comprehensive income (loss)  -   -   -   -   -   - 
Other net realized capital gains (losses)  (178,125)  161,592   (192,222)  60,812   181,815   54,087 
Total net realized capital gains (losses)  (179,036)  159,569   (206,744)  58,789   176,141   40,476 
Other income (expense)  (8,865)  (3,617)  (20,401)  10,204   (6,254)  32 
Total revenues  333,286   695,466   1,377,076   1,639,818   684,840   587,033 
                        
CLAIMS AND EXPENSES:                        
Incurred losses and loss adjustment expenses  322,099   326,925   1,187,936   1,068,678   250,397   553,028 
Commission, brokerage, taxes and fees  70,842   81,455   239,659   237,493   87,491   88,512 
Other underwriting expenses  42,708   37,230   120,148   105,315   39,514   38,217 
Corporate expenses  1,143   1,529   3,498   5,218   1,566   1,190 
Interest, fee and bond issue cost amortization expense  12,706   12,817   38,083   41,879   12,696   12,682 
Total claims and expenses  449,498   459,956   1,589,324   1,458,583   391,664   693,629 
                        
INCOME (LOSS) BEFORE TAXES  (116,212)  235,510   (212,248)  181,235   293,176   (106,596)
Income tax expense (benefit)  (116,473)  66,858   (123,783)  40,625   78,452   (9,063)
                        
NET INCOME (LOSS) $261  $168,652  $(88,465) $140,610  $214,724  $(97,533)
                        
Other comprehensive income (loss), net of tax  3,981   65,718   39,234   102,263 
Other comprehensive income (loss), net of tax :        
Unrealized appreciation (depreciation) ("URA(D)") on securities arising during the period  6,411   (26,889)
Less: reclassification adjustment for realized losses (gains) included in net income (loss)  2,713   16,825 
Total URA(D) on securities arising during the period  9,124   (10,064)
Foreign currency translation adjustments  5,297   10,335 
Pension adjustments  984   746 
Total other comprehensive income (loss), net of tax  15,405   1,017 
                        
COMPREHENSIVE INCOME (LOSS) $4,242  $234,370  $(49,231) $242,873  $230,129  $(96,516)
                        
The accompanying notes are an integral part of the consolidated financial statements.                        



 
2

EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDER’S EQUITY
 
 Three Months Ended  Nine Months Ended  Three Months Ended 
 September 30,  September 30,  March 31, 
(Dollars in thousands, except share amounts) 2011  2010  2011  2010  2012 2011 
 (unaudited)  (unaudited)  (unaudited) 
COMMON STOCK (shares outstanding):                  
Balance, beginning of period  1,000   1,000   1,000   1,000   1,000   1,000 
Balance, end of period  1,000   1,000   1,000   1,000   1,000   1,000 
                        
ADDITIONAL PAID-IN CAPITAL:                        
Balance, beginning of period $330,990  $324,156  $327,767  $321,185  $333,416  $327,767 
Share-based compensation plans  1,657   2,322   4,880   5,293   1,626   1,589 
Balance, end of period  332,647   326,478   332,647   326,478   335,042   329,356 
                        
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS),                        
NET OF DEFERRED INCOME TAXES:                        
Balance, beginning of period  199,219   203,523   163,966   166,978   174,790   163,966 
Net increase (decrease) during the period  3,981   65,718   39,234   102,263   15,405   1,017 
Balance, end of period  203,200   269,241   203,200   269,241   190,195   164,983 
                        
RETAINED EARNINGS:                        
Balance, beginning of period  2,547,282   2,342,569   2,636,008   2,370,611   2,433,187   2,636,008 
Net income (loss)  261   168,652   (88,465)  140,610   214,724   (97,533)
Balance, end of period  2,547,543   2,511,221   2,547,543   2,511,221   2,647,911   2,538,475 
                        
TOTAL STOCKHOLDER'S EQUITY, END OF PERIOD $3,083,390  $3,106,940  $3,083,390  $3,106,940  $3,173,148  $3,032,814 
                        
The accompanying notes are an integral part of the consolidated financial statements.The accompanying notes are an integral part of the consolidated financial statements.                     



 
3

EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

 Three Months Ended  Nine Months Ended  Three Months Ended 
 September 30,  September 30,  March 31, 
(Dollars in thousands) 2011  2010  2011  2010  2012 2011 
 (unaudited)  (unaudited)  (unaudited) 
CASH FLOWS FROM OPERATING ACTIVITIES:                  
Net income (loss) $261  $168,652  $(88,465) $140,610  $214,724  $(97,533)
Adjustments to reconcile net income to net cash provided by operating activities:Adjustments to reconcile net income to net cash provided by operating activities:                     
Decrease (increase) in premiums receivable  (21,017)  29,733   (149,561)  54,616   37,206   (111,328)
Decrease (increase) in funds held by reinsureds, net  (94,290)  2,829   (102,102)  (13,433)  (40,354)  196 
Decrease (increase) in reinsurance receivables  112,376   (71,235)  (243,523)  (299,032)  7,668   (306,071)
Decrease (increase) in federal income taxes receivable  (898)  (54,380)
Decrease (increase) in deferred tax asset  (137,225)  76,238   (122,876)  21,823   74,674   34,314 
Decrease (increase) in prepaid reinsurance premiums  (33,514)  (68,171)  28,649   (84,363)  4,536   23,936 
Increase (decrease) in reserve for losses and loss adjustment expenses  (96,587)  15,455   489,779   305,807   (165,989)  465,159 
Increase (decrease) in unearned premiums  29,928   100,938   (73,434)  108,080   (10,324)  (23,149)
Increase (decrease) in other net payable to reinsurers  4,105   52,782 
Change in equity adjustments in limited partnerships  (12,190)  (1,071)  (44,544)  (19,367)  (11,285)  (18,415)
Change in other assets and liabilities, net  111,571   (15,569)  215,035   127,052   44,382   72,345 
Non-cash compensation expense  1,584   2,273   4,638   5,153   1,616   1,380 
Amortization of bond premium (accrual of bond discount)  (17)  3,579   6,897   8,196   4,274   3,492 
Amortization of underwriting discount on senior notes  12   12   36   65   13   12 
Net realized capital (gains) losses  179,036   (159,569)  206,744   (58,789)  (176,141)  (40,476)
Net cash provided by (used in) operating activities  39,928   84,094   127,273   296,418   (11,793)  2,264 
                        
CASH FLOWS FROM INVESTING ACTIVITIES:                        
Proceeds from fixed maturities matured/called - available for sale, at market value  262,235   173,079   525,768   481,948   202,187   107,455 
Proceeds from fixed maturities matured/called - available for sale, at fair value  -   -   12,775   -   -   6,900 
Proceeds from fixed maturities sold - available for sale, at market value  255,913   85,667   1,042,803   457,230   84,136   516,721 
Proceeds from fixed maturities sold - available for sale, at fair value  12,512   10,689   62,632   19,301   59,281   32,952 
Proceeds from equity securities sold - available for sale, at market value  -   -   27,096   -   -   27,096 
Proceeds from equity securities sold - available for sale, at fair value  61,080   14,899   150,776   87,641   239,540   52,696 
Distributions from other invested assets  13,487   14,148   103,262   38,028   5,861   61,359 
Cost of fixed maturities acquired - available for sale, at market value  (285,414)  (138,332)  (995,210)  (693,908)  (292,848)  (472,805)
Cost of fixed maturities acquired - available for sale, at fair value  (9,801)  (56,937)  (25,025)  (80,618)  (3,124)  (8,076)
Cost of equity securities acquired - available for sale, at market value  -   -   (27,059)  -   -   (27,059)
Cost of equity securities acquired - available for sale, at fair value  (340,493)  (20,938)  (679,764)  (71,817)  (105,214)  (126,665)
Cost of other invested assets acquired  (2,393)  (8,115)  (47,471)  (26,489)  (11,636)  (23,014)
Cost of other invested assets acquired, at fair value  -   (80,765)  (37,611)  (327,876)  -   (37,611)
Cost of businesses acquired  -   -   (63,100)  -   -   (63,100)
Net change in short-term investments  29,080   (52,975)  (18,105)  (43,054)  (222,137)  149,303 
Net change in unsettled securities transactions  (14,007)  1,936   30,834   (33,584)  29,769   (143,998)
Net cash provided by (used in) investing activities  (17,801)  (57,644)  62,601   (193,198)  (14,185)  52,154 
                        
CASH FLOWS FROM FINANCING ACTIVITIES:                        
Tax benefit from share-based compensation  73   49   242   140   10   209 
Net cost of senior notes maturing  -   -   -   (200,000)
Revolving credit borrowings  (40,000)  (50,000)  (50,000)  83,000   -   (10,000)
Net cash provided by (used in) financing activities  (39,927)  (49,951)  (49,758)  (116,860)  10   (9,791)
                        
EFFECT OF EXCHANGE RATE CHANGES ON CASH  (5,553)  9,608   6,804   (886)  22,448   6,646 
                        
Net increase (decrease) in cash  (23,353)  (13,893)  146,920   (14,526)  (3,520)  51,273 
Cash, beginning of period  288,365   106,847   118,092   107,480   348,267   118,092 
Cash, end of period $265,012  $92,954  $265,012  $92,954  $344,747  $169,365 
                        
SUPPLEMENTAL CASH FLOW INFORMATION:                        
Income taxes paid (recovered) $4,149  $(3,202) $(16,616) $(52,592) $4,625  $10,792 
Interest paid  5,228   5,339   30,269   39,104   5,217   5,203 
                        
Non-cash transaction:                        
Net assets acquired and liabilities assumed from business acquisitions  -   -   19,130   -   -   19,130 
                        
The accompanying notes are an integral part of the consolidated financial statements.                        


 
4


NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Nine Months Ended September 30,March 31, 2012 and 2011 and 2010

1.  GENERAL
1. GENERAL

As used in this document, “Holdings” means Everest Reinsurance Holdings, Inc., a Delaware company and direct subsidiary of Everest Underwriting Group (Ireland) Limited (“Holdings Ireland”); “Group” means Everest Re Group, Ltd. (Holdings Ireland’s parent); “Bermuda Re” means Everest Reinsurance (Bermuda), Ltd., a subsidiary of Group; “Everest Re” means Everest Reinsurance Company and its subsidiaries, a subsidiary of Holdings (unless the context otherwise requires); and the “Company” means Holdings and its subsidiaries.

2. BASIS OF PRESENTATION

The unaudited consolidated financial statements of the Company for the three and nine months ended September 30,March 31, 2012 and 2011 and 2010 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, 20102011 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.  The results for the three and nine months ended September 30,March 31, 2012 and 2011 and 2010 are not necessarily indicative of the results for a full year.  These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the years ended December 31, 2011, 2010 2009 and 20082009 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’period amounts to conform to the 2011current period presentation.

Application of Recently Issued Accounting Standard Changes

Financial Accounting Standards Board Launched Accounting Codification.Intangibles-Goodwill or Other.  In June 2009,September 2011, the Financial Accounting Standards Board (“FASB”) issuedamended the authoritative guidance establishingfor disclosures on Goodwill Impairment.  The amendment allows an entity first to assess qualitative factors to determine whether it is more likely than not that the FASB Accounting Standards CodificationTM (“Codification”) as the single sourcefair value of authoritative U.S. GAAP recognized by the FASB to be applied by non-governmental entities.  Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.  The Codification supersedes all existing non-SEC accounting anda reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative.

Following the Codification, the FASB will no longer issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, the FASB will issue Accounting Standards Updates, which will serve to update the Codification, provide background information about the guidance and provide the basis for conclusions on the changes to the Codification.

GAAPunit is not intended to be changedless than its carrying amount as a result ofbasis in determining whether it is necessary to perform the FASB’s Codification, but it will change the way thetwo-step goodwill impairment test.  This guidance is organized and presented.  As a result, these changes will have a significant impact on how companies reference GAAP in their financial statements and in the accounting policieseffective for financial statements issued for interim and annual periods endingbeginning after SeptemberDecember 15, 2009.2011.  The Company’s adoption ofCompany implemented this guidance impacts the way the Company references U.S. GAAP accounting standards in the financial statements and Notes to Consolidated Financial Statements.as of January 1, 2012.

5

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 willcan 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 will adoptimplemented this guidance as of January 1, 2012 and expects to present net income and comprehensive income in a single, continuous financial statement.2012.

Common Fair Value Measurement. In May 2011, FASB issued amendments to existing guidance to achieve common fair value measurement and disclosure requirements between GAAP and International Financial Reporting Standards. The amendments change wording used to describe many GAAP fair value measurement requirements and disclosures. FASB does not intend for the amendments to cause a change in application of fair value accounting guidance.  The guidance is effective for reporting periods beginning after December 15, 2011.  The Company will adoptimplemented this guidance prospectively as of January 1, 2012.


5

Treatment of Insurance Contract Acquisition Costs. In October 2010, the FASB issued authoritative guidance for the accounting for costs associated with acquiring or renewing insurance contracts.  The guidance identifies the incremental direct costs of contract acquisition and costs directly related to acquisition activities that should be capitalized.  This guidance is effective for reporting periods beginning after December 15, 2011.  The Company will adoptimplemented this guidance as of January 1, 2012.  The Company is2012 and determined that $7,215 thousand of previously deferrable acquisition costs will be expensed during 2012 and the first quarter of 2013, including $1,413 thousand of previously deferrable acquisition costs expensed in the processthree months ended March 31, 2012.  If the guidance had been applicable for the prior period, the Company would have expensed $1,619 thousand of determiningdeferrable acquisition costs during the effect on its consolidated financial statements.

Subsequent Events. In May 2009, the FASB issued authoritative guidance for subsequent events, which was later modified in February 2010, that addresses the accounting for and disclosure of subsequent events not addressed in other applicable U.S. GAAP.  The Company implemented the new disclosure requirement beginning with the second quarter of 2009 and included it in the Notes to Consolidated Interim Financial Statements.three months ended March 31, 2011.

Improving Disclosures About Fair Value Measurements.Measurements.  In January 2010, the FASB amended the authoritative guidance for disclosures on fair value measurements.  Effective for interim and annual reporting periods beginning after December 15, 2009, the guidance requires a new separate disclosure for:  significant transfers in and out of Level 1 and 2 and the reasons for the transfers; and provided clarification on existing disclosures to include:  fair value measurement disclosures by class of assets and liabilities and disclosure on valuation techniques and inputs used to measure fair value that fall in either Level 2 or Level 3.  The Company implemented this guidance effective January 1, 2010.  Effective for interim and annual reporting periods beginning after December 15, 2010, the guidance requires another new separate disclosure in regards to Level 3 fair value measurements in that, the period activity will present separately information about purchases, sales, issuances and settlements.  Comparative disclosures shall be required only for periods ending after initial adoption.  The Company implemented this guidance beginning with the third quarter of 2010.

Other-Than-Temporary Impairments on Investment Securities.  In April 2009, the FASB revised the authoritative guidance for the recognition and presentation of other-than-temporary impairments. This new guidance amends the recognition guidance for other-than-temporary impairments of debt securities and expands the financial statement disclosures for other-than-temporary impairments on debt and equity securities. For available for sale debt securities that the Company has no intent to sell and more likely than not will not be required to sell prior to recovery, only the credit loss component of the impairment would be recognized in earnings, while the rest of the fair value loss would be recognized in accumulated other comprehensive income (loss).  The Company adopted this guidance effective April 1, 2009.  Upon adoption the Company recognized a cumulative-effect adjustment increase in retained earnings and decrease in accumulated other comprehensive income (loss) as follows:


(Dollars in thousands)   
Cumulative-effect adjustment, gross $23,846 
Tax  (8,346)
Cumulative-effect adjustment, net $15,500 

6

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 September 30, 2011  At March 31, 2012 
 Amortized  Unrealized  Unrealized  Market  Amortized  Unrealized  Unrealized  Market 
(Dollars in thousands) Cost  Appreciation  Depreciation  Value  Cost  Appreciation  Depreciation  Value 
Fixed maturity securities                        
U.S. Treasury securities and obligations of                        
U.S. government agencies and corporations $84,516  $2,120  $(857) $85,779  $77,872  $1,360  $(646) $78,586 
Obligations of U.S. states and political subdivisions  1,742,305   112,418   (572)  1,854,151   1,445,314   96,989   (304)  1,541,999 
Corporate securities  1,016,890   39,715   (27,996)  1,028,609   1,250,862   53,499   (8,038)  1,296,323 
Asset-backed securities  44,251   987   (82)  45,156   57,881   1,210   (11)  59,080 
Mortgage-backed securities                                
Commercial  41,829   6,926   (2,030)  46,725   46,524   7,690   (521)  53,693 
Agency residential  388,896   17,957   (347)  406,506   503,749   15,457   (1,601)  517,605 
Non-agency residential  25,779   362   (124)  26,017   2,951   431   (50)  3,332 
Foreign government securities  804,875   58,999   (5,115)  858,759   751,818   53,103   (2,193)  802,728 
Foreign corporate securities  707,953   29,573   (19,144)  718,382   780,760   34,553   (10,519)  804,794 
Total fixed maturity securities $4,857,294  $269,057  $(56,267) $5,070,084  $4,917,731  $264,292  $(23,883) $5,158,140 
Equity securities $15  $-  $(4) $11  $15  $-  $(3) $12 
 
  At December 31, 2010 
  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 $153,263  $2,450  $(5,146) $150,567 
Obligations of U.S. states and political subdivisions  2,809,514   116,920   (24,929)  2,901,505 
Corporate securities  688,938   42,522   (9,775)  721,685 
Asset-backed securities  19,860   705   (14)  20,551 
Mortgage-backed securities                
Commercial  31,887   7,618   -   39,505 
Agency residential  355,928   13,975   (212)  369,691 
Non-agency residential  29,373   912   (317)  29,968 
Foreign government securities  731,930   32,678   (15,567)  749,041 
Foreign corporate securities  617,666   20,939   (21,178)  617,427 
Total fixed maturity securities $5,438,359  $238,719  $(77,138) $5,599,940 
Equity securities $15  $-  $(2) $13 
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  At December 31, 2011 
  Amortized  Unrealized  Unrealized  Market 
(Dollars in thousands) Cost  Appreciation  Depreciation  Value 
Fixed maturity securities            
U.S. Treasury securities and obligations of            
U.S. government agencies and corporations $77,351  $2,475  $(287) $79,539 
Obligations of U.S. states and political subdivisions  1,558,615   102,815   (525)  1,660,905 
Corporate securities  1,200,941   45,070   (17,776)  1,228,235 
Asset-backed securities  44,351   758   (6)  45,103 
Mortgage-backed securities                
Commercial  41,953   7,187   (1,266)  47,874 
Agency residential  528,946   16,209   (1,762)  543,393 
Non-agency residential  24,139   470   (320)  24,289 
Foreign government securities  733,814   57,437   (2,602)  788,649 
Foreign corporate securities  670,544   29,421   (10,924)  689,041 
Total fixed maturity securities $4,880,654  $261,842  $(35,468) $5,107,028 
Equity securities $15  $-  $(5) $10 


The $802,728 thousand of foreign government securities at March 31, 2012 included $75,211 thousand of European sovereign securities.  Approximately 59.7%, 17.3%, 8.5%, 6.5% and 5.8% of European Sovereign Securities represented securities held in the governments of France, the United Kingdom, Netherlands, Austria and Germany, 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, 2012.

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


(Dollars in thousands) At September 30, 2011 At December 31, 2010 At March 31, 2012  At December 31, 2011 
Pre-tax cumulative unrealized appreciation (depreciation) $691 $823 $615  $635 

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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 September 30, 2011  At December 31, 2010  At March 31, 2012  At December 31, 2011 
 Amortized  Market  Amortized  Market  Amortized  Market  Amortized  Market 
(Dollars in thousands) Cost  Value  Cost  Value  Cost  Value  Cost  Value 
Fixed maturity securities – available for sale                        
Due in one year or less $190,497  $188,938  $212,728  $207,739  $294,575  $293,824  $224,406  $223,507 
Due after one year through five years  1,959,056   2,021,715   1,642,227   1,681,497   2,138,150   2,215,318   2,055,299   2,129,437 
Due after five years through ten years  1,023,905   1,071,801   1,203,497   1,253,609   948,014   1,005,851   955,253   1,009,893 
Due after ten years  1,183,081   1,263,226   1,942,859   1,997,380   925,887   1,009,437   1,006,307   1,083,532 
Asset-backed securities  44,251   45,156   19,860   20,551   57,881   59,080   44,351   45,103 
Mortgage-backed securities                                
Commercial  41,829   46,725   31,887   39,505   46,524   53,693   41,953   47,874 
Agency residential  388,896   406,506   355,928   369,691   503,749   517,605   528,946   543,393 
Non-agency residential  25,779   26,017   29,373   29,968   2,951   3,332   24,139   24,289 
Total fixed maturity securities $4,857,294  $5,070,084  $5,438,359  $5,599,940  $4,917,731  $5,158,140  $4,880,654  $5,107,028 



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

 Three Months Ended  Nine Months Ended  Three Months Ended 
 September 30,  September 30,  March 31, 
(Dollars in thousands) 2011  2010  2011  2010  2012  2011 
Increase (decrease) during the period between the market value and cost                  
of investments carried at market value, and deferred taxes thereon:                  
Fixed maturity securities $11,911  $83,578  $51,341  $133,595  $14,055  $(16,938)
Fixed maturity securities, cumulative other-than-temporary impairment adjustment  (137)  384   (132)  2,966 
Fixed maturity securities, other-than-temporary impairment  (20)  20 
Equity securities  (1)  (1)  (1)  (2)  2   - 
Other invested assets  215   (34)  (1,515)  462   -   1,435 
Change in unrealized appreciation (depreciation), pre-tax  11,988   83,927   49,693   137,021   14,037   (15,483)
Deferred tax benefit (expense)  (4,243)  (29,240)  (17,438)  (46,919)  (4,920)  5,426 
Deferred tax benefit (expense), cumulative other-than-temporary impairment adjustment  48   (134)  46   (1,038)
Deferred tax benefit (expense), other-than-temporary impairment  7   (7)
Change in unrealized appreciation (depreciation),                        
net of deferred taxes, included in shareholders’ equity $7,793  $54,553  $32,301  $89,064 
net of deferred taxes, included in stockholder's equity $9,124  $(10,064)


The Company frequently reviews all of its fixed maturity, available for sale securities investment portfolio 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, or 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.

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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 and prepayments for pass-through security types.


8


The tabletables below displaysdisplay 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 September 30, 2011 By Security Type  Duration of Unrealized Loss at March 31, 2012 By Security Type 
 Less than 12 months  Greater than 12 months  Total  Less than 12 months  Greater than 12 months  Total 
    Gross     Gross     Gross     Gross     Gross     Gross 
    Unrealized     Unrealized     Unrealized     Unrealized     Unrealized     Unrealized 
(Dollars in thousands) Market Value  Depreciation  Market Value  Depreciation  Market Value  Depreciation  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 $14,174  $(352) $3,460  $(505) $17,634  $(857) $17,409  $(129) $6,169  $(517) $23,578  $(646)
Obligations of U.S. states and political subdivisions  -   -   7,472   (572)  7,472   (572)  -   -   5,726   (304)  5,726   (304)
Corporate securities  373,892   (15,394)  100,497   (12,602)  474,389   (27,996)  153,863   (1,918)  91,635   (6,120)  245,498   (8,038)
Asset-backed securities  9,365   (35)  809   (47)  10,174   (82)  2,762   (11)  -   -   2,762   (11)
Mortgage-backed securities                                                
Commercial  8,471   (2,030)  -   -   8,471   (2,030)  10,096   (521)  -   -   10,096   (521)
Agency residential  57,452   (313)  8,384   (34)  65,836   (347)  183,417   (1,548)  6,644   (53)  190,061   (1,601)
Non-agency residential  -   -   21,344   (124)  21,344   (124)  -   -   582   (50)  582   (50)
Foreign government securities  18,055   (310)  77,907   (4,805)  95,962   (5,115)  8,336   (72)  30,185   (2,121)  38,521   (2,193)
Foreign corporate securities  118,987   (5,714)  90,007   (13,430)  208,994   (19,144)  76,032   (656)  108,967   (9,863)  184,999   (10,519)
Total fixed maturity securities $600,396  $(24,148) $309,880  $(32,119) $910,276  $(56,267) $451,915  $(4,855) $249,908  $(19,028) $701,823  $(23,883)
Equity securities  -   -   11   (4)  11   (4)  -   -   12   (3)  12   (3)
Total $600,396  $(24,148) $309,891  $(32,123) $910,287  $(56,271) $451,915  $(4,855) $249,920  $(19,031) $701,835  $(23,886)
 
 Duration of Unrealized Loss at September 30, 2011 By Maturity  Duration of Unrealized Loss at March 31, 2012 By Maturity 
 Less than 12 months  Greater than 12 months  Total  Less than 12 months  Greater than 12 months  Total 
    Gross     Gross     Gross     Gross     Gross     Gross 
    Unrealized     Unrealized     Unrealized     Unrealized     Unrealized     Unrealized 
(Dollars in thousands) Market Value  Depreciation  Market Value  Depreciation  Market Value  Depreciation  Market Value  Depreciation  Market Value  Depreciation  Market Value  Depreciation 
Fixed maturity securities                                    
Due in one year or less $12,234  $(129) $18,447  $(5,075) $30,681  $(5,204) $1,750  $(7) $30,299  $(5,375) $32,049  $(5,382)
Due in one year through five years  205,065   (8,562)  204,429   (18,107)  409,494   (26,669)  136,652   (1,522)  141,659   (10,591)  278,311   (12,113)
Due in five years through ten years  275,555   (12,380)  26,392   (2,368)  301,947   (14,748)  107,716   (1,181)  57,781   (2,056)  165,497   (3,237)
Due after ten years  32,254   (699)  30,075   (6,364)  62,329   (7,063)  9,522   (65)  12,943   (903)  22,465   (968)
Asset-backed securities  9,365   (35)  809   (47)  10,174   (82)  2,762   (11)  -   -   2,762   (11)
Mortgage-backed securities  65,923   (2,343)  29,728   (158)  95,651   (2,501)  193,513   (2,069)  7,226   (103)  200,739   (2,172)
Total fixed maturity securities $600,396  $(24,148) $309,880  $(32,119) $910,276  $(56,267) $451,915  $(4,855) $249,908  $(19,028) $701,823  $(23,883)


The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at September 30, 2011March 31, 2012 were $910,287$701,835 thousand and $56,271$23,886 thousand, respectively.  There were no unrealized losses on a single issuer that exceeded 0.1%0.04% of the market value of the fixed maturity securities at September 30, 2011.March 31, 2012.  In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector.  The $24,148$4,855 thousand of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for less than one year were generally comprised of domestic and foreign corporate securities as well as commercial and commercialagency residential mortgage-backed securities.  Of these unrealized losses, $10,780$2,952 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating organization.  The majority of the unrealized losses related to foreign corporate and foreign government securities are due to currency

9

exchange rate movements as opposed to market value movements.  The non-investment grade securities with unrealized losses were mainly comprised of corporate securities.  The $32,119$19,028 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 andsecurities as well as foreign government securities.  Of these unrealized losses, $24,671$16,676 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating organization.  The majority of thenon-investment grade securities with unrealized losses related to foreign government and foreignwere mainly comprised of corporate securities, are due to currency exchangewith the majority representing a large number of short duration, floating interest rate movements as opposed to market value movements.bank loan securities.  The gross unrealized depreciation greater than 12 months for mortgage-backed securities included $88$50 thousand related to sub-prime and alt-A loans.  In all instances, there were no projected cash flows were sufficientflow 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.  Unrealized losses at September 30, 2011 are comparable with unrealized losses at December 31, 2010.

The table below displays the aggregate market value and gross unrealized depreciation of fixed maturity and equity securities, by security type and contractual maturity, in each case subdivided according to length of time that individual securities had been in a continuous unrealized loss position for the periods indicated:
 
  Duration of Unrealized Loss at December 31, 2010 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 $47,985  $(1,916) $43,264  $(3,230) $91,249  $(5,146)
Obligations of U.S. states and political subdivisions  336,522   (9,519)  171,812   (15,410)  508,334   (24,929)
Corporate securities  74,389   (2,715)  33,109   (7,060)  107,498   (9,775)
Asset-backed securities  3,900   (14)  -   -   3,900   (14)
Mortgage-backed securities                        
Agency residential  20,867   (212)  -   -   20,867   (212)
Non-agency residential  -   -   22,439   (317)  22,439   (317)
Foreign government securities  92,123   (3,776)  124,807   (11,791)  216,930   (15,567)
Foreign corporate securities  120,294   (5,512)  121,304   (15,666)  241,598   (21,178)
Total fixed maturity securities $696,080  $(23,664) $516,735  $(53,474) $1,212,815  $(77,138)
Equity securities  -   -   13   (2)  13   (2)
Total $696,080  $(23,664) $516,748  $(53,476) $1,212,828  $(77,140)
  Duration of Unrealized Loss at December 31, 2010 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 $5,982  $(319) $48,233  $(8,089) $54,215  $(8,408)
Due in one year through five years  186,524   (9,059)  129,197   (11,559)  315,721   (20,618)
Due in five years through ten years  139,896   (4,356)  92,692   (8,215)  232,588   (12,571)
Due after ten years  338,911   (9,704)  224,174   (25,294)  563,085   (34,998)
Asset-backed securities  3,900   (14)  -   -   3,900   (14)
Mortgage-backed securities  20,867   (212)  22,439   (317)  43,306   (529)
Total fixed maturity securities $696,080  $(23,664) $516,735  $(53,474) $1,212,815  $(77,138)
The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at December 31, 2010 were $1,212,828 thousand and $77,140 thousand, respectively.  There were no unrealized losses on a single issuer that exceeded 0.09% of the market value of the fixed maturity securities at December 31, 2010.  In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector.  The $23,664 thousand of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for less than one year were

 
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generally comprised of highly rated municipal, U.S. government, foreign government and domestic and foreign corporate securities.  Of these unrealized losses, $23,424 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating organization.  The $53,474 thousand of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year also related primarily to highly rated U.S. government, domestic and foreign corporate, foreign government and municipal securities.  Of these unrealized losses, $48,165 thousand related to securities that were rated investment grade by at least one nationally recognized statistical rating organization.  The non-investment grade securities with unrealized losses were mainly comprised of corporate securities.  The gross unrealized depreciation greater than 12 months for mortgage-backed securities included $32 thousand related to sub-prime and alt-A loans.  In all instances, projected cash flows were sufficient to recover the full book value of the investments and the related interest obligations.

The Company, given the size of its investment portfolio and capital position, does not have the intent to sell these securities; and it is more likely than not that the Company will not have to sell the security before recovery of its cost basis.  In addition, all securities currently in an unrealized loss position are current with respect to principal and interest payments.

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


  Duration of Unrealized Loss at December 31, 2011 By Security Type 
  Less than 12 months  Greater than 12 months  Total 
     Gross     Gross     Gross 
     Unrealized     Unrealized     Unrealized 
(Dollars in thousands) Market Value  Depreciation  Market Value  Depreciation  Market Value  Depreciation 
Fixed maturity securities - available for sale                  
U.S. Treasury securities and obligations of                  
U.S. government agencies and corporations $-  $-  $3,452  $(287) $3,452  $(287)
Obligations of U.S. states and political subdivisions  -   -   7,518   (525)  7,518   (525)
Corporate securities  342,959   (8,449)  75,998   (9,327)  418,957   (17,776)
Asset-backed securities  819   (6)  -   -   819   (6)
Mortgage-backed securities                        
Commercial  9,292   (1,266)  -   -   9,292   (1,266)
Agency residential  151,951   (1,695)  7,199   (67)  159,150   (1,762)
Non-agency residential  41   -   20,693   (320)  20,734   (320)
Foreign government securities  12,777   (269)  40,743   (2,333)  53,520   (2,602)
Foreign corporate securities  77,458   (2,025)  94,182   (8,899)  171,640   (10,924)
Total fixed maturity securities $595,297  $(13,710) $249,785  $(21,758) $845,082  $(35,468)
Equity securities  -   -   10   (5)  10   (5)
Total $595,297  $(13,710) $249,795  $(21,763) $845,092  $(35,473)
  Duration of Unrealized Loss at December 31, 2011 By Maturity 
  Less than 12 months  Greater than 12 months  Total 
     Gross     Gross     Gross 
     Unrealized     Unrealized     Unrealized 
(Dollars in thousands) Market Value  Depreciation  Market Value  Depreciation  Market Value  Depreciation 
Fixed maturity securities                  
Due in one year or less $9,583  $(59) $26,204  $(4,486) $35,787  $(4,545)
Due in one year through five years  213,809   (4,754)  137,972   (9,576)  351,781   (14,330)
Due in five years through ten years  186,061   (5,484)  37,964   (2,391)  224,025   (7,875)
Due after ten years  23,741   (446)  19,753   (4,918)  43,494   (5,364)
Asset-backed securities  819   (6)  -   -   819   (6)
Mortgage-backed securities  161,284   (2,961)  27,892   (387)  189,176   (3,348)
Total fixed maturity securities $595,297  $(13,710) $249,785  $(21,758) $845,082  $(35,468)


The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at December 31, 2011 were $845,092 thousand and $35,473 thousand, respectively.  There were no unrealized losses on a single issuer that exceeded 0.09% of the market value of the fixed maturity securities at December 31, 2011.  In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector.  The $13,710 thousand of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for less than one year were generally comprised of domestic and foreign corporate securities as well as commercial and agency residential mortgage-backed securities.  Of these unrealized losses, $5,635 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating organization.  The $21,758 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 and foreign government securities.  Of these unrealized losses, $15,880 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating organization.  The non-
10
investment grade securities with unrealized losses were mainly comprised of corporate securities, with the majority representing a large number of short duration, floating interest rate bank loan securities.  The gross unrealized depreciation for mortgage-backed securities included $56 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.

Other invested assets, at fair value, is comprised of common shares of the Company’s ultimate parent, Group.  At March 31, 2012, the Company held 9,719,971 shares of Group representing 15.6% of the total outstanding shares.

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

 Three Months Ended  Nine Months Ended  Three Months Ended 
 September 30,  September 30,  March 31, 
(Dollars in thousands) 2011  2010  2011  2010  2012  2011 
Fixed maturity securities $58,248  $69,918  $178,006  $219,335  $54,821  $60,619 
Equity securities  8,726   2,448   20,366   7,470   10,305   5,172 
Short-term investments and cash  296   111   890   263   128   207 
Other invested assets                        
Limited partnerships  12,399   1,071   44,753   19,367   11,612   18,415 
Dividends from Parent's shares  4,665   4,016   13,979   9,569   4,666   4,648 
Other  (1,520)  183   3,203   885   1,518   597 
Total gross investment income  82,814   77,747   261,197   256,889   83,050   89,658 
Interest debited (credited) and other investment expense  (4,489)  (3,535)  (11,281)  (8,224)  (1,808)  (2,526)
Total net investment income $78,325  $74,212  $249,916  $248,665  $81,242  $87,132 


The Company records results from limited partnership investments on the equity method of accounting with changes in value reported through net investment income. Due to the timing of receiving financial information from these partnerships, the results are generally reported on a one month or quarter lag.  If the Company determines there has been a significant decline in value of a limited partnership during this lag period, a loss will be recorded in the period in which the Company indentifies the decline.

The Company had contractual commitments to invest up to an additional $123,579$107,566 thousand in limited partnerships at September 30, 2011.March 31, 2012.  These commitments will be funded when called in accordance with the partnership agreements, which have investment periods that expire, unless extended, through 2016.


 
11


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

 Three Months Ended  Nine Months Ended  Three Months Ended 
 September 30,  September 30,  March 31, 
(Dollars in thousands) 2011  2010  2011  2010  2012  2011 
Fixed maturity securities, market value:                  
Other-than-temporary impairments $(911) $(2,023) $(14,522) $(2,023) $(5,674) $(13,611)
Gains (losses) from sales  2,699   (4,654)  (15,589)  (3,814)  1,501   (12,310)
Fixed maturity securities, fair value:                        
Gains (losses) from sales  (16)  480   (966)  753 
Gain (losses) from sales  5,207   (1,515)
Gains (losses) from fair value adjustments  (5,014)  3,297   (8,537)  3,779   3,031   (3,483)
Equity securities, market value:                        
Gains (losses) from sales  -   -   37   -   -   37 
Equity securities, fair value:                        
Gains (losses) from sales  637   951   2,303   (48)  22,317   1,872 
Gains (losses) from fair value adjustments  (153,395)  34,912   (115,288)  18,126   67,820   38,130 
Other invested assets, fair value:                        
Gains (losses) from fair value adjustments  (23,036)  126,608   (54,181)  42,018   81,939   31,355 
Short-term investment gains (losses)  -   (2)  (1)  (2)  -   1 
Total net realized capital gains (losses) $(179,036) $159,569  $(206,744) $58,789  $176,141  $40,476 


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  Nine Months Ended  Three Months Ended 
 September 30,  September 30,  March 31, 
(Dollars in thousands) 2011  2010  2011  2010  2012  2011 
Proceeds from sales of fixed maturity securities $268,425  $96,356  $1,105,435  $476,531  $143,417  $549,673 
Gross gains from sales  11,572   642   29,154   7,963   8,988   14,266 
Gross losses from sales  (8,889)  (4,816)  (45,709)  (11,024)  (2,280)  (28,091)
                        
Proceeds from sales of equity secuities $61,080  $14,899  $177,872  $87,641  $239,540  $79,792 
Gross gains from sales  6,022   1,033   9,124   4,616   26,826   2,380 
Gross losses from sales  (5,385)  (82)  (6,784)  (4,664)  (4,509)  (471)



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4.  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.

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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 September 30, 2011March 31, 2012 and 2010.2011.

The Company internally manages a small public equity portfolio which had a fair value at March 31, 2012 of $43,756 thousand 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.

As of March 31, 2012 and December 31, 2011, 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 our asset managers and management.

Other invested assets, at fair value, are categorized as Level 1, Quoted Prices in Active Markets for Identical Assets, since the securities are shares of the Company’s parent, which are actively traded on an exchange and the price is based on a quoted price.

The following table presents the fair value measurement levels for all assets, which the Company has recorded at fair value (fair and market value) as of the period indicated:
     Fair Value Measurement Using: 
     Quoted Prices       
     in Active  Significant    
     Markets for  Other  Significant 
     Identical  Observable  Unobservable 
     Assets  Inputs  Inputs 
(Dollars in thousands) September 30, 2011  (Level 1)  (Level 2)  (Level 3) 
Assets:            
Fixed maturities, market value            
U.S. Treasury securities and obligations of            
U.S. government agencies and corporations $85,779  $-  $85,779  $- 
Obligations of U.S. States and political subdivisions  1,854,151   -   1,854,151   - 
Corporate securities  1,028,609   -   1,028,609   - 
Asset-backed securities  45,156   -   42,842   2,314 
Mortgage-backed securities                
Commercial  46,725   -   46,725   - 
Agency residential  406,506   -   406,506   - 
Non-agency residential  26,017   -   26,010   7 
Foreign government securities  858,759   -   858,759   - 
Foreign corporate securities  718,382   -   715,824   2,558 
Total fixed maturities, market value  5,070,084   -   5,065,205   4,879 
                 
Fixed maturities, fair value  120,597   -   120,597   - 
Equity securities, market value  11   11   -   - 
Equity securities, fair value  1,099,456   988,707   110,749   - 
Other invested assets, fair value  771,571   771,571   -   - 

 
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There were no significant transfers between Level 1 and Level 2 for the three and nine months ended September 30, 2011.

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

    Fair Value Measurement Using:     Fair Value Measurement Using: 
    Quoted Prices           Quoted Prices       
    in Active  Significant        in Active  Significant    
    Markets for  Other  Significant     Markets for  Other  Significant 
    Identical  Observable  Unobservable     Identical  Observable  Unobservable 
    Assets  Inputs  Inputs     Assets  Inputs  Inputs 
(Dollars in thousands) December 31, 2010  (Level 1)  (Level 2)  (Level 3)  March 31, 2012 (Level 1)  (Level 2)  (Level 3) 
Assets:                        
Fixed maturities, market value                        
U.S. Treasury securities and obligations of                        
U.S. government agencies and corporations $150,567  $-  $150,567  $-  $78,586  $-  $78,586  $- 
Obligations of U.S. States and political subdivisions  2,901,505   -   2,901,505   -   1,541,999   -   1,541,999   - 
Corporate securities  721,685   -   721,685   -   1,296,323   -   1,296,323   - 
Asset-backed securities  20,551   -   19,590   961   59,080   -   46,324   12,756 
Mortgage-backed securities                                
Commercial  39,505   -   39,505   -   53,693   -   53,693   - 
Agency residential  369,691   -   369,691   -   517,605   -   517,605   - 
Non-agency residential  29,968   -   29,510   458   3,332   -   3,326   6 
Foreign government securities  749,041   -   749,041   -   802,728   -   802,728   - 
Foreign corporate securities  617,427   -   613,792   3,635   804,794   -   799,675   5,119 
Total fixed maturities, market value  5,599,940   -   5,594,886   5,054   5,158,140   -   5,140,259   17,881 
                                
Fixed maturities, fair value  180,482   -   180,482   -   64,936   -   64,936   - 
Equity securities, market value  13   13   -   -   12   12   -   - 
Equity securities, fair value  683,454   683,454   -   -   1,163,616   1,040,663   122,953   - 
Other invested assets, fair value  788,142   788,142   -   - 
Other invested assets, fair value
  899,292   899,292   -   - 


There were no transfers between Level 1 and Level 2 for the three months ended March 31, 2012.


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The following tables presenttable presents the fair value measurement levels for all assets, which the Company has recorded at fair value (fair and market value) as of the period 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, 2011 (Level 1)  (Level 2)  (Level 3) 
Assets:            
Fixed maturities, market value            
U.S. Treasury securities and obligations of            
U.S. government agencies and corporations $79,539  $-  $79,539  $- 
Obligations of U.S. States and political subdivisions  1,660,905   -   1,660,905   - 
Corporate securities  1,228,235   -   1,228,235   - 
Asset-backed securities  45,103   -   29,057   16,046 
Mortgage-backed securities                
Commercial  47,874   -   47,874   - 
Agency residential  543,393   -   543,393   - 
Non-agency residential  24,289   -   24,282   7 
Foreign government securities  788,649   -   788,649   - 
Foreign corporate securities  689,041   -   686,505   2,536 
Total fixed maturities, market value  5,107,028   -   5,088,439   18,589 
                 
Fixed maturities, fair value  113,606   -   113,606   - 
Equity securities, market value  10   10   -   - 
Equity securities, fair value  1,207,053   1,090,959   116,094   - 
Other invested assets, fair value
  817,352   817,352   -   - 


The following table presents the activity under Level 3, fair value measurements using significant unobservable inputs by asset type, for the periods indicated:

 Three Months Ended September 30, 2011  Nine Months Ended September 30, 2011  Three Months Ended March 31, 2012  Three Months Ended March 31, 2011 
 Asset-backed  Foreign  Non-agency     Asset-backed  Foreign  Non-agency     Asset-backed  Foreign  Non-agency     Asset-backed  Foreign  Non-agency    
(Dollars in thousands) Securities  Corporate  RMBS  Total  Securities  Corporate  RMBS  Total  Securities  Corporate  RMBS  Total  Securities  Corporate  RMBS  Total 
Beginning balance $2,466  $-  $381  $2,847  $961  $3,635  $458  $5,054  $16,046  $2,536  $7  $18,589  $961  $3,635  $458  $5,054 
Total gains or (losses) (realized/unrealized)                                                                
Included in earnings (or changes in net assets)  16   (3)  (39)  (26)  80   (3)  10   87   55   (3)  1   53   -   -   21   21 
Included in other comprehensive income (loss)  (122)  (25)  102   (45)  (269)  (25)  54   (240)  332   125   (1)  456   (63)  -   -   (63)
Purchases, issuances and settlements  (19)  2,586   (88)  2,479   37   2,586   (166)  2,457   2,675   2,461   (1)  5,135   138   -   (31)  107 
Transfers in and/or (out) of Level 3  (27)  -   (349)  (376)  1,505   (3,635)  (349)  (2,479)  (6,352)  -   -   (6,352)  5,237   (3,116)  -   2,121 
Ending balance $2,314  $2,558  $7  $4,879  $2,314  $2,558  $7  $4,879  $12,756  $5,119  $6  $17,881  $6,273  $519  $448  $7,240 
                                                                
The amount of total gains or losses for the period included                                                                
in earnings (or changes in net assets) attributable to the                                                                
change in unrealized gains or losses relating to assets                                                                
still held at the reporting date $-  $-  $-  $-  $-  $-  $-  $-  $-  $-  $-  $-  $-  $-  $-  $- 
                                                                
(Some amounts may not reconcile due to rounding.)(Some amounts may not reconcile due to rounding.)                                                 



 
1415
  Three Months Ended September 30, 2010  Nine Months Ended September 30, 2010 
  Corporate  Asset-backed  Non-agency     Corporate  Asset-backed  Non-agency    
(Dollars in thousands) Securities  Securities  RMBS  Total  Securities  Securities  RMBS  Total 
Beginning balance $6,965  $6,562  $497  $14,024  $6,930  $6,258  $426  $13,614 
Total gains or (losses) (realized/unrealized)                                
Included in earnings (or changes in net assets)  -   (258)  32   (226)  (1)  (258)  81   (178)
Included in other comprehensive income (loss)  26   1,628   (22)  1,632   62   1,672   70   1,804 
Purchases, issuances and settlements  -   (7,413)  (45)  (7,458)  -   (7,153)  (115)  (7,268)
Transfers in and/or (out) of Level 3  -   -   -   -   -   -   -   - 
Ending balance $6,991  $519  $462  $7,972  $6,991  $519  $462  $7,972 
                                 
The amount of total gains or losses for the period included                                
in earnings (or changes in net assets) attributable to the                                
change in unrealized gains or losses relating to assets                                
still held at the reporting date $-  $-  $-  $-  $-  $-  $-  $- 
                                 
(Some amounts may not reconcile due to rounding.)                     


5.  CAPITAL TRANSACTIONS

On October 14, 2011. we2011, the Company renewed ourits shelf registration statement on Form S-3ASR with the SEC, as a Well Known Seasoned Issuer.  This shelf registration statement can be used by Group to register common shares, preferred shares, debt securities, warrants, share purchase contracts and share purchase units; by Holdings to register debt securities and by Everest Re Capital Trust III (“Capital Trust III”) to register trust preferred securities.

6.  CONTINGENCIES

In the ordinary course of business, the Company is involved in lawsuits, arbitrations and other formal and informal dispute resolution procedures, the outcomes of which will determine the Company’s rights and obligations under insurance and reinsurance agreements.  In some disputes, the Company seeks to enforce its rights under an agreement or to collect funds owing to it.  In other matters, the Company is resisting attempts by others to collect funds or enforce alleged rights.  These disputes arise from time to time and are ultimately resolved through both informal and formal means, including negotiated resolution, arbitration and litigation.  In all such matters, the Company believes that its positions are legally and commercially reasonable.  The Company considers the statuses of these proceedings when determining its reserves for unpaid loss and loss adjustment expenses.

Aside from litigation and arbitrations related to these insurance and reinsurance agreements, the Company is not a party to any other material litigation or arbitration.

In 1993 and prior, the Company had a business arrangement with The Prudential Insurance Company of America (“The Prudential”) wherein, for a fee, the Company accepted settled claim payment obligations of certain property and casualty insurers, and, concurrently, became the owner of the annuity or assignee of the annuity proceeds funded by the property and casualty insurers specifically to fulfill these fully settled obligations.  In these circumstances, the Company would be liable if The Prudential, which has an A+ (Superior) financial strength rating from A.M. Best Company (“A.M. Best”), was unable to make the annuity payments.  The table below presents the estimated cost to replace all such annuities for which the Company was contingently liable for the periods indicated:
(Dollars in thousands) At September 30, 2011 At December 31, 2010
  $142,998 $150,560


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(Dollars in thousands) At March 31, 2012  At December 31, 2011 
  $143,220  $143,447 


Prior to its 1995 initial public offering, the Company purchased annuities from an unaffiliated life insurance company with an A+ (Superior) financial strength rating from A.M. Best to settle certain claim liabilities of the company.  Should the life insurance company become unable to make the annuity payments, the Company would be liable for those claim liabilities.  The table below presents the estimated cost to replace all such annuities for which the Company was contingently liable for the periods indicated:
(Dollars in thousands) At September 30, 2011 At December 31, 2010
  $27,094 $26,542


(Dollars in thousands) At March 31, 2012  At December 31, 2011 
  $27,454  $27,634 



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7.  OTHER COMPREHENSIVE INCOME (LOSS)

The following table presents the components of comprehensive income (loss) in the consolidated statements of operations for the periods indicated:

 Three Months Ended  Nine Months Ended  Three Months Ended 
 September 30,  September 30,  March 31, 
(Dollars in thousands) 2011  2010  2011  2010  2012  2011 
Unrealized appreciation (depreciation) ("URA(D)") on                  
securities arising during the period                  
URA(D) of investments - temporary $12,125  $83,543  $49,825  $134,055  $14,057  $(15,503)
URA(D) of investments - non-credit OTTI  (137)  384   (132)  2,966   (20)  20 
Tax benefit (expense) from URA(D) arising during the period  (4,195)  (29,374)  (17,392)  (47,957)  (4,913)  5,419 
Total URA(D) on securities arising during the period, net of tax  7,793   54,553   32,301   89,064   9,124   (10,064)
                        
Foreign currency translation adjustments  (7,012)  16,528   7,224   18,358   8,149   15,900 
Tax benefit (expense) from foreign currency translation  2,454   (5,785)  (2,529)  (6,425)  (2,852)  (5,565)
Net foreign currency translation adjustments  (4,558)  10,743   4,695   11,933   5,297   10,335 
                        
Pension adjustments  1,148   649   3,443   1,948   1,513   1,148 
Tax benefit (expense) on pension  (402)  (227)  (1,205)  (682)  (529)  (402)
Net pension adjustments  746   422   2,238   1,266   984   746 
                        
Other comprehensive income (loss), net of tax $3,981  $65,718  $39,234  $102,263  $15,405  $1,017 


The following table presents the components of accumulated other comprehensive income (loss), net of tax, in the consolidated balance sheets for the periods indicated:

 At September 30,  At December 31,  At March 31,  At December 31, 
(Dollars in thousands) 2011  2010  2012  2011 
URA(D) on securities, net of deferred taxes            
Temporary $137,861  $105,474  $155,864  $146,727 
Non-credit, OTTI  449   535   400   413 
Total unrealized appreciation (depreciation) on investments, net of deferred taxes  138,310   106,009   156,264   147,140 
Foreign currency translation adjustments, net of deferred taxes  88,735   84,040   88,482   83,185 
Pension adjustments, net of deferred taxes  (23,845)  (26,083)  (54,551)  (55,535)
Accumulated other comprehensive income (loss) $203,200  $163,966  $190,195  $174,790 


8.  CREDIT FACILITY

Effective August 15, 2011, Holdingsthe Company entered into a new three year, $150,000 thousand unsecured revolving credit facility with a syndicate of lenders, replacing the August 23, 2006 five year senior revolving credit facility.  Both the August 15, 2011 and August 23, 2006 revolving credit agreements, which have similar terms, are referred to as the “Holdings Credit Facility”.  Citibank N.A. is the administrative agent for the Holdings Credit Facility.  The Holdings Credit Facility may be used for liquidity and general corporate purposes.  The Holdings Credit Facility provides for the borrowing of up to $150,000 thousand with interest at a rate selected by Holdings equal to either, (1) the Base Rate (as defined below) or (2) a periodic fixed rate equal to the Eurodollar Rate plus an applicable margin.  The Base Rate means a fluctuating interest rate per

16

annum in effect from time to time to be equal to the higher of (a) the rate of interest publicly announced by Citibank as its base rate, (b) 0.5% per annum above the Federal Funds Rate or (c) 1% above the one month LIBOR,London Interbank Offered Rate (“LIBOR”), in each case plus the applicable margin.  The amount of margin and the fees payable for the Holdings Credit Facility depends upon Holdings’ senior unsecured debt rating.

The Holdings Credit Facility requires Holdings to maintain a debt to capital ratio of not greater than 0.35 to 1 and Everest Re to maintain its statutory surplus at $1,875,000 thousand plus 25% of future aggregate net income and 25% of future aggregate capital contributions after December 31, 2010, which at September 30, 2011,March 31, 2012, was $1,898,559$1,932,995 thousand.  As of September 30, 2011, HoldingsMarch 31, 2012, the Company was in compliance with all Holdings Credit Facility covenants.

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The following table summarizes outstanding letters of credit and/or borrowings for the periods indicated:

(Dollars in thousands) At September 30, 2011 At December 31, 2010 At March 31, 2012 At December 31, 2011
Bank Commitment  In Use Date of LoanMaturity/Expiry Date Commitment  In Use Date of LoanMaturity/Expiry Date Commitment  In Use Date of LoanMaturity/Expiry Date Commitment  In Use Date of LoanMaturity/Expiry Date
Citibank Holdings Credit Facility $150,000  $-    $150,000  $50,000 12/16/20101/18/2011 $150,000  $-    $150,000  $-   
      -         -   
      -         -   
Total revolving credit borrowings      -         50,000         -         -   
Total letters of credit      9,527  12/31/2011      9,527  12/31/2011      5,020  12/31/2012      5,020  12/31/2012
                                        
Total Citibank Holdings Credit Facility $150,000  $9,527    $150,000  $59,527    $150,000  $5,020    $150,000  $5,020   


The following table presents the costs incurred in connection with the Holdings Credit Facility for the periods indicated:

 Three Months Ended  Nine Months Ended  Three Months Ended 
 September 30,  September 30,  March 31, 
(Dollars in thousands) 2011  2010  2011  2010  2012  2011 
Credit facility fees incurred $163  $225  $341  $376  $167  $90 


9.  TRUST AGREEMENTS

A subsidiary of the Company, Everest Re, has established a trust agreement, which effectively uses Everest Re’s investments as collateral, as security for assumed losses payable to a non-affiliated ceding company.  At September 30, 2011,March 31, 2012, the total amount on deposit in the trust account was $14,341$136,375 thousand.

10.  SENIOR NOTES

The table below displays Holdings’ outstanding senior notes.  Market value is based on quoted market prices.
        September 30, 2011  December 31, 2010 
        Consolidated Balance     Consolidated Balance    
(Dollars in thousands)Date Issued Date Due Principal Amounts  Sheet Amount  Market Value  Sheet Amount  Market Value 
5.40% Senior notes10/12/2004 10/15/2014 $250,000  $249,847  $261,250  $249,812  $267,500 
8.75% Senior notes (matured and paid on March 15, 2010)03/14/2000 03/15/2010 $200,000  $-  $-  $-  $- 
prices, but due to limited trading activity, these senior notes are considered Level 2 in the fair value hierarchy.

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        March 31, 2012  December 31, 2011 
        Consolidated Balance     Consolidated Balance    
(Dollars in thousands)Date Issued Date Due Principal Amounts  Sheet Amount  Market Value  Sheet Amount  Market Value 
5.40% Senior notes10/12/2004 10/15/2014 $250,000  $249,870  $267,423  $249,858  $251,370 


Interest expense incurred in connection with these senior notes is as follows for the periods indicated:

 Three Months Ended  Nine Months Ended  Three Months Ended 
 September 30,  September 30,  March 31, 
(Dollars in thousands) 2011  2010  2011  2010  2012  2011 
Interest expense incurred $3,386  $3,386  $10,159  $13,833  $3,387  $3,386 



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11.  LONG TERM SUBORDINATED NOTES

The table below displays Holdings’ outstanding fixed to floating rate long term subordinated notes.  Market value is based on quoted market prices.prices, but due to limited trading activity, these subordinated notes are considered Level 2 in the fair value hierarchy.

    Maturity Date September 30, 2011  December 31, 2010     Maturity Date March 31, 2012  December 31, 2011 
  Original     Consolidated Balance     Consolidated Balance      Original     Consolidated Balance     Consolidated Balance    
(Dollars in thousands)Date Issued Principal Amount Scheduled Final Sheet Amount  Market Value  Sheet Amount  Market Value Date Issued Principal Amount Scheduled Final Sheet Amount  Market Value  Sheet Amount  Market Value 
6.6% Long term subordinated notes04/26/2007 $400,000 05/15/2037 05/01/2067 $238,353  $202,776  $238,351  $227,825 04/26/2007 $400,000 05/15/2037 05/01/2067 $238,355  $229,018  $238,354  $210,195 


During the fixed rate interest period from May 3, 2007 through May 14, 2017, interest will be at the annual rate of 6.6%, payable semi-annually in arrears on November 15 and May 15 of each year, commencing on November 15, 2007, subject to Holdings’ right to defer interest on one or more occasions for up to ten consecutive years.  During the floating rate interest period from May 15, 2017 through maturity, interest will be based on the 3 month LIBOR plus 238.5 basis points, reset quarterly, payable quarterly in arrears on February 15, May 15, August 15 and November 15 of each year, subject to Holdings’ right to defer interest on one or more occasions for up to ten consecutive years.  Deferred interest will accumulate interest at the applicable rate compounded semi-annually for periods prior to May 15, 2017, and compounded quarterly for periods from and including May 15, 2017.

Holdings can redeem the long term subordinated notes prior to May 15, 2017, in whole but not in part at the applicable redemption price, which will equal the greater of (a) 100% of the principal amount being redeemed and (b) the present value of the principal payment on May 15, 2017 and scheduled payments of interest that would have accrued from the redemption date to May 15, 2017 on the long term subordinated notes being redeemed, discounted to the redemption date on a semi-annual basis at a discount rate equal to the treasury rate plus an applicable spread of either 0.25% or 0.50%, in each case plus accrued and unpaid interest.  Holdings may redeem the long term subordinated notes on or after May 15, 2017, in whole or in part at 100% of the principal amount plus accrued and unpaid interest; however, redemption on or after the scheduled maturity date and prior to May 1, 2047 is subject to a replacement capital covenant.  This covenant is for the benefit of certain senior note holders and it mandates that Holdings receive proceeds from the sale of another subordinated debt issue, of at least similar size, before it may redeem the subordinated notes.

On March 19, 2009, Group announced the commencement of a cash tender offer for any and all of the 6.60% fixed to floating rate long term subordinated notes.  Upon expiration of the tender offer, the Company had reduced its outstanding debt by $161,441 thousand, which resulted in a pre-tax gain on debt repurchase of $78,271 thousand.

Interest expense incurred in connection with these long term subordinated notes is as follows for the periods indicated:

 Three Months Ended  Nine Months Ended  Three Months Ended 
 September 30,  September 30,  March 31, 
(Dollars in thousands) 2011  2010  2011  2010  2012  2011 
Interest expense incurred $3,937  $3,937  $11,811  $11,811  $3,937  $3,937 



 
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12.  JUNIOR SUBORDINATED DEBT SECURITIES PAYABLE

The following table displays Holdings’ outstanding junior subordinated debt securities due to Everest Re Capital Trust II (“Capital Trust II”), a wholly-ownedwholly owned finance subsidiary of Holdings.  Fair value is primarily based on the quoted market price of the related trust preferred securities.securities, and as such, these securities are considered Level 2 under the fair value hierarchy.


       September 30, 2011  December 31, 2010        March 31, 2012  December 31, 2011 
       Consolidated Balance     Consolidated Balance           Consolidated Balance     Consolidated Balance    
(Dollars in thousands)Date Issued Date Due Amount Issued  Sheet Amount  Fair Value  Sheet Amount  Fair Value Date Issued Date Due Amount Issued  Sheet Amount  Fair Value  Sheet Amount  Fair Value 
6.20% Junior subordinated debt securities03/29/2004 03/29/2034 $329,897  $329,897  $327,337  $329,897  $294,825 03/29/2004 03/29/2034 $329,897  $329,897  $326,697  $329,897  $326,313 


Holdings may redeem the junior subordinated debt securities before their maturity at 100% of their principal amount plus accrued interest as of the date of redemption.  The securities may be redeemed, in whole or in part, on one or more occasions at any time on or after March 30, 2009; or at any time, in whole, but not in part, within 90 days of the occurrence and continuation of a determination that the Trust may become subject to tax or the Investment Company Act.

Interest expense incurred in connection with these junior subordinated debt securities is as follows for the periods indicated:

 Three Months Ended  Nine Months Ended  Three Months Ended 
 September 30,  September 30,  March 31, 
(Dollars in thousands) 2011  2010  2011  2010  2012  2011 
Interest expense incurred $5,113  $5,113  $15,340  $15,340  $5,113  $5,113 


Holdings considers that the mechanisms and obligations relating to the trust preferred securities, taken together, constitute a full and unconditional guarantee by Holdings of Capital Trust II’s payment obligations with respect to their trust preferred securities.

Capital Trust II will redeem all of the outstanding trust preferred securities when the junior subordinated debt securities are paid at maturity on March 29, 2034.  The Company may elect to redeem the junior subordinated debt securities, in whole or in part, at any time on or after March 30, 2009.  If such an early redemption occurs, the outstanding trust preferred securities would also be proportionately redeemed.

There are certain regulatory and contractual restrictions on the ability of Holdings’ operating subsidiaries to transfer funds to Holdings in the form of cash dividends, loans or advances.  The insurance laws of the State of Delaware, where Holdings’ direct insurance subsidiaries are domiciled, require regulatory approval before those subsidiaries can pay dividends or make loans or advances to Holdings that exceed certain statutory thresholds.  In addition, the terms of Holdings Credit Facility (discussed in Note 8) require Everest Re, Holdings’ principal insurance subsidiary, to maintain a certain statutory surplus level as measured at the end of each fiscal year.  At December 31, 2010, $2,293,6432011, $2,108,692 thousand of the $2,929,526$2,763,171 thousand in net assets of Holdings’ consolidated subsidiaries were subject to the foregoing regulatory restrictions.


 
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13.  SEGMENT REPORTING

During the quarter ended September 30, 2011, the Company realigned its reporting segments to reflect recent changes in the type and volume of business written. The Company previously reported the results of Marine & Aviation, Surety, Accident and Health (“A&H”) Reinsurance and A&H Primary operations as a separate segment—Specialty Underwriting.  The A&H primary business, which is a relatively new line of business for the Company, has increased significantly, representing approximately 2% of premiums earned and is projected to continue to grow.  The A&H primary business is better aligned with the Insurance reporting segment based on the similarities of this business with that of those businesses already reflected in the Insurance segment.  The other operating units included in the Specialty Underwriting segment would have encompassed approximately 6%less than 5% of the Company’s premiums earned and their volume is projected to remain approximately 6%.  As a result of the size of these remaining operating units and their similarity to the business reported within U.S. Reinsurance,, they have been reclassified to the U.S. Reinsurance segment.  There has been no change to the International reporting segment.  The Company has restated all segment information for prior years to conform to the new reporting segment structure.

The U.S. Reinsurance operation writes property and casualty reinsurance and specialty lines of business, including Marine, Aviation, Surety and A&H business, on both a treaty and facultative basis, through reinsurance brokers, as well as directly with ceding companies primarily within the U.S.  The Insurance operation writes property and casualty insurance, including medical stop loss insurance, directly and through general agents, brokers and surplus lines brokers within the U.S. and Canada.  The International operation writes non-U.S. property and casualty reinsurance through Everest Re’s branches in Canada, and Singapore and through offices in Brazil, Miami and New Jersey.

These segments are managed independently, but conform with corporate guidelines with respect to pricing, risk management, control of aggregate catastrophe exposures, capital, investments and support operations.  Management generally monitors and evaluates the financial performance of these operating segments based upon their underwriting results.

Underwriting results include earned premium less losses and loss adjustment expenses (“LAE”)LAE incurred, commission and brokerage expenses and other underwriting expenses.  Underwriting results are measured using ratios, in particular loss, commission and brokerage and other underwriting expense ratios, which, respectively, divide incurred losses, commissions and brokerage and other underwriting expenses by premiums earned.

The Company does not maintain separate balance sheet data for its operating segments.  Accordingly, the Company does not review and evaluate the financial results of its operating segments based upon balance sheet data.


  Three Months Ended 
U.S. Reinsurance March 31, 
(Dollars in thousands) 2012  2011 
Gross written premiums $369,481  $306,091 
Net written premiums  187,225   165,069 
         
Premiums earned $183,867  $175,685 
Incurred losses and LAE  109,749   142,579 
Commission and brokerage  45,177   43,753 
Other underwriting expenses  10,754   9,906 
Underwriting gain (loss) $18,187  $(20,553)

 
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The following tables present the underwriting results for the operating segments for the periods indicated:
  Three Months Ended 
Insurance March 31, 
(Dollars in thousands) 2012  2011 
Gross written premiums $207,249  $271,461 
Net written premiums  103,825   136,890 
         
Premiums earned $102,051  $117,192 
Incurred losses and LAE  76,008   91,623 
Commission and brokerage  10,552   7,638 
Other underwriting expenses  22,020   21,872 
Underwriting gain (loss) $(6,529) $(3,941)
 
  Three Months Ended  Nine Months Ended 
U.S. Reinsurance September 30,  September 30, 
(Dollars in thousands) 2011  2010  2011  2010 
Gross written premiums $360,833  $435,218  $947,155  $1,076,614 
Net written premiums  167,469   238,536   486,032   591,083 
                 
Premiums earned $167,530  $195,663  $512,104  $561,958 
Incurred losses and LAE  97,197   109,059   371,638   344,047 
Commission and brokerage  23,298   32,434   106,123   112,790 
Other underwriting expenses  10,843   11,076   30,621   32,617 
Underwriting gain (loss) $36,192  $43,094  $3,722  $72,504 
 
  Three Months Ended  Nine Months Ended 
Insurance September 30,  September 30, 
(Dollars in thousands) 2011  2010  2011  2010 
Gross written premiums $236,294  $214,701  $750,283  $650,448 
Net written premiums  114,328   90,937   366,223   275,655 
                 
Premiums earned $124,282  $105,690  $362,212  $294,481 
Incurred losses and LAE  120,332   99,476   302,038   245,665 
Commission and brokerage  11,858   10,732   27,781   18,694 
Other underwriting expenses  24,316   19,479   68,589   52,335 
Underwriting gain (loss) $(32,224) $(23,997) $(36,196) $(22,213)
 Three Months Ended  Nine Months Ended  Three Months Ended 
International September 30,  September 30,  March 31, 
(Dollars in thousands) 2011  2010  2011  2010  2012  2011 
Gross written premiums $326,053  $323,741  $923,649  $906,089  $280,461  $308,847 
Net written premiums  158,038   168,400   457,663   479,655   136,329   158,124 
                        
Premiums earned $151,050  $163,949  $479,989  $465,721  $147,793  $166,516 
Incurred losses and LAE  104,570   118,390   514,260   478,966   64,640   318,826 
Commission and brokerage  35,686   38,289   105,755   106,009   31,762   37,121 
Other underwriting expenses  7,549   6,675   20,938   20,363   6,740   6,439 
Underwriting gain (loss) $3,245  $595  $(160,964) $(139,617) $44,651  $(195,870)


The following table reconciles the underwriting results for the operating segments to income (loss) before taxes as reported in the consolidated statements of operations and comprehensive income (loss) for the periods indicated:
  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
(Dollars in thousands) 2011  2010  2011  2010 
Underwriting gain (loss) $7,213  $19,692  $(193,438) $(89,326)
Net investment income  78,325   74,212   249,916   248,665 
Net realized capital gains (losses)  (179,036)  159,569   (206,744)  58,789 
Corporate expense  (1,143)  (1,529)  (3,498)  (5,218)
Interest, fee and bond issue cost amortization expense  (12,706)  (12,817)  (38,083)  (41,879)
Other income (expense)  (8,865)  (3,617)  (20,401)  10,204 
Income (loss) before taxes $(116,212) $235,510  $(212,248) $181,235 


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  Three Months Ended 
  March 31, 
(Dollars in thousands) 2012  2011 
Underwriting gain (loss) $56,309  $(220,364)
Net investment income  81,242   87,132 
Net realized capital gains (losses)  176,141   40,476 
Corporate expense  (1,566)  (1,190)
Interest, fee and bond issue cost amortization expense  (12,696)  (12,682)
Other income (expense)  (6,254)  32 
Income (loss) before taxes $293,176  $(106,596)


The Company produces business in the U.S. and internationally.  The net income deriving from and assets residing in the individual foreign countries in which the Company writes business are not identifiable in the Company’s financial records.  Based on gross written premium, the table below presents the largest country, other than the U.S., in which the Company writes business, for the periods indicated:

 Three Months Ended  Nine Months Ended  Three Months Ended 
 September 30,  September 30,  March 31, 
(Dollars in thousands) 2011  2010  2011  2010  2012  2011 
Canada $73,543  $48,333  $156,727  $133,612  $47,440  $43,952 


No other country represented more than 5% of the Company’s revenue.revenues.


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14.  RELATED-PARTY TRANSACTIONS

Parent

Group’s Board of Directors approved an amended share repurchase program authorizing Group and/or its subsidiary Holdings to purchase Group’s common shares through open market transactions, privately negotiated transactions or both.  The table below represents the amendments to the share repurchase program for the common shares approved for repurchase.


 Common Shares
 Authorized for
Amendment Date Repurchase
09/21/2004 5,000,000
07/21/2008 5,000,000
02/24/2010 5,000,000
 15,000,000
  Common Shares 
  Authorized for 
Amendment Date Repurchase 
(Dollars in thousands)   
09/21/2004 $5,000,000 
07/21/2008  5,000,000 
02/24/2010  5,000,000 
02/22/2012  5,000,000 
  $20,000,000 


As of September 30, 2011,March 31, 2012, Holdings held 9,719,971 common shares of Group, which it had purchased in the open market between February 1, 2007 and March 8, 2011.  The table below represents the total purchase price for these common shares purchased.


(Dollars in thousands)   
Total purchase price $835,371 


Holdings reports these purchases as other invested assets, fair value, in the consolidated balance sheets with changes in fair value re-measurement recorded in net realized capital gains (losses) in the consolidated statements of operations and comprehensive income (loss).  The following table presents the dividends received on these common shares that are reported as net investment income in the consolidated statements of operations and comprehensive income (loss) for the period indicated.

 Three Months Ended  Nine Months Ended  Three Months Ended 
 September 30,  September 30,  March 31, 
(Dollars in thousands) 2011  2010  2011  2010  2012  2011 
Dividends received $4,665  $4,016  $13,979  $9,569  $4,666  $4,648 


Outside Directors

During the normal course of business, the Company, through its affiliates, engages in insurance and brokerage and commission business transactions, with companies controlled by or affiliated with one or more of its outside directors.  Such transactions, individually and in the aggregate, are not material to the Company’s financial condition, results of operation and cash flows.

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Affiliated Companies

During the fourth quarter of 2011, the Company sold its subsidiaries, Everest Insurance Company of Canada (“Everest Canada”) and Premiere Insurance Underwriting Services (“Premiere”), to an affiliated company, Holdings Ireland.  Holdings Ireland is a direct subsidiary of Group, the Company’s ultimate parent.  The Company sold the subsidiaries to Holdings Ireland for $61,005 thousand, which was the book value of the subsidiaries as of September 30, 2011.

Everest Global Services, Inc. (“Everest Global”Global Services”), an affiliate of Holdings, provides centralized management and home office services, through a management agreement, to Holdings and other affiliated companies within Holdings’ consolidated structure.  Services provided by Everest Global include executive managerial services, legal services, actuarial services, accounting services, information technology services and others.


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The following table presents the expenses incurred by Holdings from services provided by Everest Global for the periods indicated.


 Three Months Ended  Nine Months Ended  Three Months Ended 
 September 30,  September 30,  March 31, 
(Dollars in thousands) 2011  2010  2011  2010  2012  2011 
Expenses incurred $16,537  $15,554  $46,984  $47,021  $18,134  $15,077 


Affiliates

The Company engages in reinsurance transactions with Bermuda Re and Everest International Reinsurance, Ltd. (“Everest International”), affiliates, primarily driven by enterprise risk and capital management considerations under which business is ceded at market rates and terms.

The table below represents affiliated quota share reinsurance agreements ("whole account quota share") for all new and renewal business for the indicated coverage period:
 
(Dollars in thousands)                 
    Percent  Assuming   Single   Aggregate  
Coverage Period Ceding Company Ceded  Company Type of Business Occurrence Limit   Limit  
                  
01/01/2002-12/31/2002  Everest Re  20.0% Bermuda Re property / casualty business $-   $-  
                     
01/01/2003-12/31/2003  Everest Re  25.0% Bermuda Re property / casualty business  -    -  
                     
01/01/2004-12/31/2005  Everest Re  22.5% Bermuda Re property / casualty business  -    -  
   Everest Re  2.5% Everest International property / casualty business  -    -  
                     
01/01/2006-12/31/2006  Everest Re  18.0% Bermuda Re property business  125,000 (1)  -  
   Everest Re  2.0% Everest International property business  -    -  
                     
01/01/2006-12/31/2007  Everest Re  31.5% Bermuda Re casualty business  -    -  
   Everest Re  3.5% Everest International casualty business  -    -  
                     
01/01/2007-12/31/2007  Everest Re  22.5% Bermuda Re property business  130,000 (1)  -  
   Everest Re  2.5% Everest International property business  -    -  
                     
01/01/2008-12/31/2008  Everest Re  36.0% Bermuda Re property / casualty business  130,000 (1)  275,000 (2)
   Everest Re  4.0% Everest International property / casualty business  -    -  
                     
01/01/2009-12/31/2009  Everest Re  36.0% Bermuda Re property / casualty business  150,000 (1)  325,000 (2)
   Everest Re  8.0% Everest International property / casualty business  -    -  
                     
01/01/2010-12/31/2010 Everest Re  44.0% Bermuda Re property / casualty business  150,000    325,000  
                     
01/01/2011-12/31/2011 Everest Re  50.0% Bermuda Re property / casualty business  150,000    300,000  
                     
01/01/2012 Everest Re  50.0% Bermuda Re property / casualty business  100,000    200,000  
                     
01/01/2003-12/31/2006  Everest Re- Canadian Branch  50.0% Bermuda Re property business  -    -  
01/01/2007-12/31/2009  Everest Re- Canadian Branch  60.0% Bermuda Re property business  -    -  
01/01/2010-12/31/2010  Everest Re- Canadian Branch  60.0% Bermuda Re property business  350,000    -  
01/01/2011-12/31/2011  Everest Re- Canadian Branch  60.0% Bermuda Re property business  350,000    -  
01/01/2012  Everest Re- Canadian Branch  75.0% Bermuda Re property / casualty business  220,000    440,000  
                     
01/01/2012  Everest Canada  80.0% Everest Re- Canadian Branch property business  -    -  
                     
(1) The single occurance limit is applied before the loss cessions to either Bermuda Re or Everest International.
            
(2) The aggregate limit is applied before the loss cessions to either Bermuda Re or Everest International.
            

(Dollars in thousands)                 
    Percent  Assuming   Single Aggregate
Coverage Period Ceding Company Ceded  Company Type of Business Occurrence Limit Limit
                  
01/01/2002-12/31/2002 Everest Re  20.0% Bermuda Re property / casualty business $-   $-  
                     
01/01/2003-12/31/2003 Everest Re  25.0% Bermuda Re property / casualty business  -    -  
                     
01/01/2004-12/31/2005 Everest Re  22.5% Bermuda Re property / casualty business  -    -  
  Everest Re  2.5% Everest International property / casualty business  -    -  
                     
01/01/2006-12/31/2006 Everest Re  18.0% Bermuda Re property business  125,000 (1)  -  
  
Everest Re
  2.0% Everest International property business  -     -  
                     
01/01/2006-12/31/2007 Everest Re  31.5% Bermuda Re casualty business  -    -  
  Everest Re  3.5% Everest International casualty business  -     -  
                     
01/01/2007-12/31/2007 Everest Re  22.5% Bermuda Re property business  130,000 (1)  -  
  Everest Re  2.5% Everest International property business  -    -  
                     
01/01/2008-12/31/2008 Everest Re  36.0% Bermuda Re property / casualty business  130,000 (1)  275,000 (2)
  Everest Re   4.0% Everest International property / casualty business   -     -  
                     
01/01/2009-12/31/2009 Everest Re  36.0% Bermuda Re property / casualty business  150,000 (1)  325,000 (2)
  Everest Re   8.0% Everest International property / casualty business   -     -  
                     
01/01/2010-12/31/2010
 Everest Re  44.0% Bermuda Re property / casualty business  150,000    325,000�� 
                     
01/01/2011 Everest Re 50.0% Bermuda Re property / casualty business  150,000    300,000  
                    
01/01/2003-12/31/2006 Everest Re- Canadian Branch 50.0% Bermuda Re property business  -    -  
01/01/2007-12/31/2009 Everest Re- Canadian Branch 60.0% Bermuda Re property business  -    -  
01/01/2010-12/31/2010
 Everest Re- Canadian Branch 60.0% Bermuda Re property business  350,000    -  
01/01/2011 Everest Re- Canadian Branch 60.0%  Bermuda Re property business  350,000    -  
                    
(1) The single occurance limit is applied before the loss cessions to either Bermuda Re or Everest International.
  
(2) The aggregate limit is applied before the loss cessions to either Bermuda Re or Everest International.
  

 
2324

For premiums earned and losses incurred for the period January 1, 2002 through December 31, 2002, Everest Re, Everest National Insurance Company and Everest Security Insurance Company entered into an Excess of Loss Reinsurance Agreement with Bermuda Re, covering workers’ compensation losses occurring on and after January 1, 2002, as respect to new, renewal and in force policies effective on that date through December 31, 2002.  The table below represents Bermuda Re's liability limits for any losses per one occurrence.


  Liability Limits 
(Dollars in thousands) Exceeding  Not to Exceed 
Losses per one occurrence $100,000  $150,000 


The table below represents loss portfolio transfer reinsurance agreements whereby net insurance exposures and reserves were transferred to an affiliate.


(Dollars in thousands)       
          
Effective Transferring Assuming % of Business or  Covered Period
Date Company Company Amount of Transfer  of Transfer
          
09/19/2000 Mt. McKinley Bermuda Re  100% All years
10/01/2001 Everest Re  (Belgium Branch) Bermuda Re  100% All years
10/01/2008 Everest Re Bermuda Re $747,022  01/01/2002-12/31/2007


The following tables summarize the premiums and losses ceded by the Company to Bermuda Re and Everest International, respectively, and premiums and losses assumed by the Company from Everest Canada for the periods indicated:

 Three Months Ended  Nine Months Ended  Three Months Ended 
Bermuda Re September 30,  September 30,  March 31, 
(Dollars in thousands) 2011  2010  2011  2010  2012  2011 
Ceded written premiums $445,601  $400,977  $1,195,023  $1,046,727  $399,068  $380,808 
Ceded earned premiums  398,561   330,525   1,158,961   944,755   398,032   380,047 
Ceded losses and LAE (a)  238,405   211,862   1,023,482   694,938   256,375   490,713 
                
 Three Months Ended  Nine Months Ended 
Everest International September 30,  September 30, 
(Dollars in thousands)  2011   2010   2011   2010 
Ceded written premiums $31  $(3,587) $670  $45,354 
Ceded earned premiums  2,448   17,548   16,489   92,052 
Ceded losses and LAE  (1,005)  15,491   5,908   79,277 
  Three Months Ended 
Everest International March 31, 
(Dollars in thousands) 2012  2011 
Ceded written premiums $255  $464 
Ceded earned premiums  1,092   9,605 
Ceded losses and LAE  (2,099)  2,918 
  Three Months Ended 
Everest Canada March 31, 
(Dollars in thousands) 2012  2011 
Assumed written premiums $3,167  $- 
Assumed earned premiums  3,852   - 
Assumed losses and LAE  2,311   - 
 
(a) Ceded losses and LAE include the Mt. McKinley loss portfolio transfer that constitutes losses ceded under retroactive reinsurance and therefore, in accordance with FASB guidance, a deferred gain on retroactive reinsurance is reflected in other expenses on the consolidated statements of operations and comprehensive income (loss).

Everest Re sold net assets of its UK branch to Bermuda Re and provided Bermuda Re with a reserve indemnity agreement allowing for indemnity payments of up to 90% of ₤25.0 million of the excess of 2002 and prior reserves, provided that any recognition of profit from the reserves for 2002 and prior underwriting years is taken into account.  The limit available under this agreement was fully exhausted at December 31, 2004.


 
2425


15. INCOME TAXES

The Company is domiciled in the United States and has subsidiaries domiciled within the United States with significant branches in Canada and Singapore.  The Company’s non-U.S. branches are subject to income taxation at varying rates in their respective domiciles.

For 2010 and the first six months ending June 30 2011, theThe Company utilizedgenerally will use the estimated annual effective tax rate approach for calculating its tax provision for interim periods as prescribed by ASC 740-270, Interim Reporting.  Under the estimated annual effective tax rate approach, the estimated annual effective tax rate is applied to the interim year-to-date pre-tax ordinary income to determine the income tax expense or benefit for the year-to-date period, adjusted by the tax impact for discrete items.  Due to potential volatility in the estimated annual effective tax rate approach, management has determined that an estimated annual effective tax rate approach is not reliable for the current interim reporting period and is recording taxes using the actual tax rate for the year-to-date results.period.  The tax expense or benefit for a quarter represents the difference between the year-to-date tax expense or benefit for the current year-to-date period less such amount for the immediately preceding year-to-date period.  Management considers the impact of all known events in its estimation of the Company’s annual pre-tax income and effective tax rate.

During the first quarter of 2012, the Company identified an understatement in its Deferred tax asset account of $12,417 thousand. The understatement resulted from differences between filed and recorded amounts that had accumulated over several prior periods. The Company corrected this understatement in its March 31, 2012 financial statements, resulting in an additional $12,417 thousand income tax benefit included in the income tax expense (benefit) caption in the Consolidated Statements of Operations and Comprehensive Income (Loss) and increased net income for the same amount for the quarter ended March 31, 2012. The Company also increased its Deferred tax asset in its Consolidated Balance Sheets by the same amount. The Company believes that this out of period adjustment is immaterial to its March 31, 2012 financial statements and to all prior periods. As such, the Company has not restated any prior period amounts.

16.  ACQUISITIONS

During the first nine monthsquarter of 2011, the Company made several acquisitions to expand its domestic and Canadian insurance operations.  Below are descriptions of the transactions.

On January 2, 2011, the Company acquired the entire business and operations of Heartland Crop Insurance, Inc. (“Heartland”) of Topeka, Kansas for $55,000 thousand in cash, plus contingent payments in future periods based upon achievement of performance targets. Heartland is a managing general agent specializing in crop insurance.

On January 28, 2011, the Company acquired the entire business and operations of Premiere Underwriting Services (“Premiere”) of Toronto, Canada.  Premiere is a managing general agent specializing in entertainment and sports and leisure risks.  On January 31, 2011, the Company acquired the renewal rights and operations of the financial lines business of Executive Risk Insurance Services, Ltd. (“Executive Risk”) of Toronto, Canada. The financial lines business of Executive Risk mainly underwrites Directors and Officers Liability, Fidelity, and Errors and Omissions Liability.

Overall, the Company recorded $35,068 thousand of goodwill and $26,903 thousand of intangible assets related to these acquisitions.acquisitions, which are reported as part of other assets within the consolidated balance sheets.  All intangible assets recorded as part of these acquisitions will be amortized on a straight line basis over seven years.

17. SUBSEQUENT EVENTS

There is currently significant flooding in Thailand.  DueThe Company has evaluated known recognized and non-recognized subsequent events.  The Company does not have any subsequent events to the recentness of this event, the Company is unable to estimate the amount of loss at this time.  However, the Company anticipates that the flooding will adversely impact fourth quarter financial statements.report.


 
2526

 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
 
Industry Conditions.
The worldwide reinsurance and insurance businesses are highly competitive, as well as cyclical by product and market.  As such, financial results tend to fluctuate with periods of constrained availability, high rates and strong profits followed by periods of abundant capacity, low rates and constrained profitability.  Competition in the types of reinsurance and insurance business that we underwrite is based on many factors, including the perceived overall financial strength of the reinsurer or insurer, ratings of the reinsurer or insurer by A.M. Best and/or Standard & Poor’s, underwriting expertise, the jurisdictions where the reinsurer or insurer is licensed or otherwise authorized, capacity and coverages offered, premiums charged, other terms and conditions of the reinsurance and insurance business offered, services offered, speed of claims payment and reputation and experience in lines written.  Furthermore, the market impact from these competitive factors related to reinsurance and insurance is generally not consistent across lines of business, domestic and international geographical areas and distribution channels.

We compete in the U.S. and international reinsurance and insurance markets with numerous global competitors.  Our competitors include independent reinsurance and insurance companies, subsidiaries or affiliates of established worldwide insurance companies, reinsurance departments of certain insurance companies and domestic and international underwriting operations, including underwriting syndicates at Lloyd’s.  Some of these competitors have greater financial resources than we do and have established long term and continuing business relationships, which can be a significant competitive advantage.  In addition, the lack of strong barriers to entry into the reinsurance business and the potential for securitization of reinsurance and insurance risks through capital markets provide additional sources of potential reinsurance and insurance capacity and competition.

Worldwide insurance and reinsurance market conditions continued to be very competitive, particularly in the casualty lines of business.  Generally, there was ample insurance and reinsurance capacity relative to demand.  Competition and its effect on rates, terms and conditions vary widely by market and coverage yet continued to be most prevalent in the U.S. casualty insurance and reinsurance markets.

However, during the first three quarters of 2011, the industry experienced significant losses from Australian floods, the New Zealand earthquake, the earthquake and tsunami in Japan, and storms in the U.S.U.S, and the Thailand floods.  It is too early to determine the impact on market conditions as a result of these events.  While there have been meaningful rate increases for catastrophe coverages in some global catastrophe prone regions, particularly areas impacted by these losses, whether the magnitude of these losses is sufficient to increase rates and improve market conditions for other lines of business remains to be seen.

Overall, we believe that current marketplace conditions, particularly for catastrophe coverages, provide profit opportunities for us given our strong ratings, distribution system, reputation and expertise.  We continue to employ our strategy of targeting business that offers the greatest profit potential, while maintaining balance and diversification in our overall portfolio.


Financial Summary.
We monitor and evaluate our overall performance based upon financial results.  The following table displays a summary of the consolidated net income (loss), ratios and stockholder’s equity for the periods indicated:

 Three Months Ended  Percentage  Nine Months Ended  Percentage  Three Months Ended  Percentage 
 September 30,  Increase/  September 30,  Increase/  March 31,  Increase/ 
(Dollars in millions) 2011  2010  (Decrease)  2011  2010  (Decrease)  2012  2011  (Decrease) 
Gross written premiums $923.2  $973.7   -5.2% $2,621.1  $2,633.2   -0.5% $857.2  $886.4   -3.3%
Net written premiums  439.8   497.9   -11.7%  1,309.9   1,346.4   -2.7%  427.4   460.1   -7.1%
                                    
REVENUES:                                    
Premiums earned $442.9  $465.3   -4.8% $1,354.3  $1,322.2   2.4% $433.7  $459.4   -5.6%
Net investment income  78.3   74.2   5.5%  249.9   248.7   0.5%  81.2   87.1   -6.8%
Net realized capital gains (losses)  (179.0)  159.6   -212.2%  (206.7)  58.8  NM  176.1   40.5  NM
Other income (expense)  (8.9)  (3.6)  145.0%  (20.4)  10.2  NM  (6.3)  -  NM
Total revenues  333.3   695.5   -52.1%  1,377.1   1,639.8   -16.0%  684.8   587.0   16.7%
                                    
CLAIMS AND EXPENSES:                                    
Incurred losses and loss adjustment expenses  322.1   326.9   -1.5%  1,187.9   1,068.7   11.2%  250.4   553.0   -54.7%
Commission, brokerage, taxes and fees  70.8   81.5   -13.0%  239.7   237.5   0.9%  87.5   88.5   -1.2%
Other underwriting expenses  42.7   37.2   14.7%  120.1   105.3   14.1%  39.5   38.2   3.4%
Corporate expense  1.1   1.5   -25.2%  3.5   5.2   -33.0%  1.6   1.2   31.6%
Interest, fee and bond issue cost amortization expense  12.7   12.8   -0.9%  38.1   41.9   -9.1%  12.7   12.7   0.1%
Total claims and expenses  449.5   460.0   -2.3%  1,589.3   1,458.6   9.0%  391.7   693.6   -43.5%
                                    
INCOME (LOSS) BEFORE TAXES  (116.2)  235.5   -149.3%  (212.2)  181.2   -217.1%  293.2   (106.6) NM
Income tax expense (benefit)  (116.5)  66.9  NM  (123.8)  40.6  NM  78.5   (9.1) NM
NET INCOME (LOSS) $0.3  $168.7   -99.8% $(88.5) $140.6   -162.9% $214.7  $(97.5) NM
                                    
RATIOS:         Point Change          Point Change          Point Change 
Loss ratio  72.7%  70.3%  2.4   87.7%  80.8%  6.9   57.7%  120.4%  (62.7)
Commission and brokerage ratio  16.0%  17.5%  (1.5)  17.7%  18.0%  (0.3)  20.2%  19.3%  0.9 
Other underwriting expense ratio  9.7%  8.0%  1.7   8.9%  8.0%  0.9   9.1%  8.3%  0.8 
Combined ratio  98.4%  95.8%  2.6   114.3%  106.8%  7.5   87.0%  148.0%  (61.0)
                                    
                                    
             At  At  Percentage  At  At  Percentage 
             September 30,  December 31,  Increase/  March 31,  December 31,  Increase/ 
(Dollars in millions)              2011   2010  (Decrease)   2012   2011  (Decrease) 
Balance sheet data:                                    
Total investments and cash             $8,256.8  $8,293.9   -0.4% $8,673.3  $8,396.3   3.3%
Total assets              14,327.3   13,869.4   3.3%  14,526.4   14,349.2   1.2%
Loss and loss adjustment expense reserves              8,165.3   7,652.3   6.7%  8,169.2   8,290.6   -1.5%
Total debt              818.1   868.1   -5.8%  818.1   818.1   0.0%
Total liabilities              11,243.9   10,741.7   4.7%  11,353.2   11,407.8   -0.5%
Stockholder's equity              3,083.4   3,127.7   -1.4%  3,173.1   2,941.4   7.9%
                                    
(NM, not meaningful)                                    
(Some amounts may not reconcile due to rounding.)                                    


Revenues.
Premiums.  Gross written premiums decreased by $50.5$29.2 million, or 5.2%3.3%, for the three months ended September 30, 2011March 31, 2012 compared to the three months ended September 30, 2010,March 31, 2011, reflecting a $64.2 million decrease of $72.1 million in our reinsuranceinsurance business, partially offset by a $21.6$35.0 million increase in our reinsurance business.  The decrease in insurance business.  Grosspremiums was primarily due to the termination and runoff of several large casualty programs and a shift in the seasonality of reporting crop business that will be reflected in subsequent quarters, partially offset by growth in primary medical stop loss insurance. The increase in reinsurance premiums was due to new property business and higher renewal rates, particularly for catastrophe exposed risks, partially offset by lower reinstatement premiums in the current quarter.  Net written premiums decreased by $12.1$32.7 million, or 0.5%7.1%, for the ninethree months ended September 30, 2011March 31, 2012 compared to the ninethree months ended September 30, 2010, reflecting aMarch 31, 2011.  The decrease of $111.9 million in our reinsurance business, partially offset by a $99.8 million increasenet written premiums is primarily attributable to the decline in our insurancegross written premiums.  


business.  The year over year increase in insurance premiums was primarily due to the acquisition of Heartland, which provided $122.3 million of new crop insurance business, our recent initiative in primary medical stop loss insurance, which added $44.8 million of premium and improved premium rates on our California workers’ compensation business, partially offset by our reduced participation on a large casualty program.  The decrease in reinsurance premiums was due to the continued reduction in U.S. casualty business, the loss of several large crop reinsurance contracts, as well as the planned reduction of catastrophe exposed business in certain territories, partially offset by higher reinstatement premiums resulting from catastrophe losses, year over year.

Net written premiumsPremiums earned decreased by $58.0$25.7 million, or 11.7%5.6%, for the three months ended September 30, 2011March 31, 2012 compared to the three monthsmonth ended September 30, 2010, and decreased by $36.5 million, or 2.7%, forMarch 31, 2011.  The change in net premiums earned is comparable with the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010.  The fluctuationsdecrease in net written premiums relative to the change in gross written premiums were due to a combination of a higher percentage of premiums ceded under the affiliated quota share agreement and a lower level of ceded reinsurance in the Insurance segment due to the planned reduction in one casualty program.  Premiums earned decreased $22.4 million, or 4.8%, for the three months ended September 30, 2011 compared to the three months ended September 30, 2010 and increased $32.1 million, or 2.4%, for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010.  The change in premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.  premiums.

Net Investment Income.  Net investment income increased $4.1decreased $5.9 million, or 5.5%6.8%, to $78.3$81.2 million for the three months ended September 30, 2011March 31, 2012 compared with net investment income of $74.2$87.1 million for the three months ended September 30, 2010,March 31, 2011, primarily driven by an $11.3as a result of a $6.8 million increasedecrease in investment income from our limited partnerships.  Net investment income increased $1.3 million, or 0.5%, to $249.9 million for the nine months ended September 30, 2011 compared with net investment income of $248.7 million for the nine months ended September 30, 2010, primarily as a result of a $25.4 million increase in investment income from our limited partnerships.  The increases from the limited partnerships were partially offset by effects of lower reinvestment rates.partnership investments.  Net pre-tax investment income, as a percentage of average invested assets, was 3.9%4.0% for the three months ended September 30, 2011March 31, 2012 compared to 3.7%4.4% for the three months ended September 30, 2010March 31, 2011.  The variance in this yield was primarily the result of fluctuations in our limited partnership income and was 4.1%to a lesser extent, lower reinvestment rates for the nine months ended September 30, 2011 compared to 4.2% for the nine months ended September 30, 2010.  The nine month investment yield is lower primarily due to an increase in the average invested asset base.fixed income portfolio.

Net Realized Capital Gains (Losses).  Net realized capital lossesgains were $179.0$176.1 million and net realized capital gains were $159.6$40.5 million for the three months ended September 30,March 31, 2012 and 2011, and 2010, respectively.  The $179.0Of the $176.1 million, was comprised of $181.5there were $152.8 million of lossesgains from fair value re-measurements and $0.9 million of other-than-temporary impairments on our available for sale fixed maturity securities, which was partially offset by $3.3$29.0 million of net realized capital gains from sales on our fixed maturity and equity securities, partially offset by $5.7 million of other-than-temporary impairments on our available for sale fixed maturity securities.  The net realized capital gains of $159.6$40.5 million for the three months ended September 30, 2010March 31, 2011 were the result of $164.8$66.0 million of gains fromof fair value re-measurements, which was partially offset by $3.2$13.6 million of other-than-temporary impairments and $11.9 million of net realized capital losses from sales on our fixed maturity and equity securities and $2.0 million of other-than-temporary impairments.securities.

Net realized capital losses were $206.7 million and net realized capital gains were $58.8 million for the nine months ended September 30, 2011 and 2010, respectively.  Of the $206.7 million, there were $178.0 million of losses from fair value re-measurements, $14.5 million of other-than-temporary impairments on our available for sale fixed maturity securities and $14.2 million of net realized capital losses from sales on our fixed maturity and equity securities.  The net realized capital gains of $58.8 million for the nine months ended September 30, 2010 were the result of $63.9 million of gains of fair value re-measurements, partially offset by $3.1 million of net realized capital losses from sales on our fixed maturity and equity securities and $2.0 million of other-than-temporary impairments.

Other Income (Expense).  We recorded other expense of $8.9 million and $20.4 million for the three and nine months ended September 30, 2011, respectively.  We recorded other expense of $3.6$6.3 million and other income of $10.2$0.0 million for the three and nine months ended September 30, 2010,March 31, 2012 and 2011, respectively.  The


changes were primarily the result ofdue to fluctuations in foreignthe amortization of deferred gains on retroactive reinsurance agreements with affiliates and fluctuations in currency exchange rates for the corresponding periods.

Claims and Expenses.
Incurred Losses and Loss Adjustment Expenses.  The following tables presenttable presents our incurred losses and loss adjustment expenses (“LAE”) for the periods indicated.

 Three Months Ended September 30, Three Months Ended March 31,
 Current  Ratio %/ Prior  Ratio %/ Total  Ratio %/ Current  Ratio %/ Prior  Ratio %/ Total  Ratio %/
(Dollars in millions) Year  Pt Change Years  Pt Change Incurred  Pt Change Year  Pt Change Years  Pt Change Incurred  Pt Change
2012                     
Attritional (a) $235.4   54.2%  $1.8   0.4%  $237.2   54.6% 
Catastrophes  15.0   3.5%   (1.9)  -0.4%   13.1   3.1% 
A&E  -   0.0%   0.1   0.0%   0.1   0.0% 
Total $250.4   57.7%  $0.0   0.0%  $250.4   57.7% 
                           
2011                                                
Attritional (a) $244.4   55.2%  $6.6   1.5%  $251.0   56.7%  $256.5   55.9%  $(10.5)  -2.3%  $246.0   53.6% 
Catastrophes  70.5   15.9%   0.6   0.1%   71.1   16.0%   304.3   66.2%   2.7   0.6%   307.0   66.8% 
A&E  -   0.0%   -   0.0%   -   0.0%   -   0.0%   -   0.0%   -   0.0% 
Total $314.9   71.1%  $7.2   1.6%  $322.1   72.7%  $560.8   122.1%  $(7.8)  -1.7%  $553.0   120.4% 
                                                      
2010                           
Variance 2012/2011                           
Attritional (a) $297.6   64.0%  $(5.6)  -1.2%  $292.0   62.7%  $(21.1)  (1.7)pts $12.3   2.7 pts $(8.8)  1.0 pts
Catastrophes  35.5   7.6%   (0.5)  -0.1%   35.0   7.5%   (289.3)  (62.7)pts  (4.6)  (1.0)pts  (293.9)  (63.7)pts
A&E  -   0.0%   -   0.0%   -   0.0%   -   - pts  0.1   - pts  0.1   - pts
Total $333.1   71.6%  $(6.2)  -1.3%  $326.9   70.3%  $(310.4)  (64.4)pts $7.8   1.7 pts $(302.6)  (62.7)pts
                                                      
Variance 2011/2010                           
Attritional (a) $(53.2)  (8.8)pts $12.2   2.7 pts $(41.0)  (6.0)pts
Catastrophes  35.0   8.3 pts  1.1   0.2 pts  36.1   8.5 pts
A&E  -   - pts  -   - pts  -   - pts
Total $(18.2)  (0.5)pts $13.4   2.9 pts $(4.8)  2.4 pts
(a) Attritional losses exclude catastrophe and Asbestos and Environmental ("A&E") losses.(a) Attritional losses exclude catastrophe and Asbestos and Environmental ("A&E") losses.                  
(Some amounts may not reconcile due to rounding.)(Some amounts may not reconcile due to rounding.)               
  Nine Months Ended September 30,
  Current  Ratio %/ Prior  Ratio %/ Total  Ratio %/
(Dollars in millions) Year  Pt Change Years  Pt Change Incurred  Pt Change
2011                     
Attritional (a) $752.5   55.5%  $(11.4)  -0.8%  $741.1   54.7% 
Catastrophes  435.5   32.2%   11.3   0.8%   446.8   33.0% 
A&E  -   0.0%   -   0.0%   -   0.0% 
Total $1,188.0   87.7%  $(0.1)  0.0%  $1,187.9   87.7% 
                            
2010                           
Attritional (a) $831.4   62.9%  $(5.2)  -0.4%  $826.2   62.5% 
Catastrophes  246.6   18.6%   (4.1)  -0.3%   242.5   18.3% 
A&E  -   0.0%   -   0.0%   -   0.0% 
Total $1,077.9   81.5%  $(9.3)  -0.7%  $1,068.7   80.8% 
                            
Variance 2011/2010                           
Attritional (a) $(78.9)  (7.4)pts $(6.2)  (0.4)pts $(85.1)  (7.8)pts
Catastrophes  188.9   13.6 pts  15.4   1.1 pts  204.3   14.7 pts
A&E  -   - pts  -   - pts  -   - pts
Total $110.1   6.2 pts $9.2   0.7 pts $119.3   6.9 pts
                            
(a) Attritional losses exclude catastrophe and Asbestos and Environmental ("A&E") losses.           
(Some amounts may not reconcile due to rounding.)               


Incurred losses and LAE decreased by $4.8$302.6 million, or 1.5%54.7%, for the three months ended September 30, 2011March 31, 2012 compared to the three months ended September 30, 2010.  Current year attritional losses decreased $53.2March 31, 2011.  Of the $302.6 million or 8.8 points, primarily due to changes in the mix of business, but also due to the impact of the change in cessions under the affiliated quota share agreement.  The decrease, in attritional losses was partially offset by the increase in current year catastrophe losses of $35.0represented $289.3 million, primarilyor 62.7 points, period over period, and attritional losses decreased $8.8 million due, in part, to Hurricane Irenelower earned premium in the current quarter and increased loss estimatesby improved margins, particularly on catastrophe exposed business, which generated lower attritional losses for the first quarter earthquakes in Japan and New Zealand.current quarter.

Incurred losses and LAE increased by $119.3 million, or 11.2%, for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010.  Catastrophe losses increased $204.3 million (14.7 points), period over period, primarily due to losses from the Japan and New Zealand earthquakes, Australia floods and U.S. storms.  Partially offsetting the catastrophe increase was the decrease in attritional losses of $85.1 million, primarily due to changes in the mix of business, but also due to the impact of the change in cessions under the affiliated quota share agreement.

Commission, Brokerage, Taxes and Fees.  Commission, brokerage, taxes and fees decreased by $10.6$1.0 million, or 13.0%1.2%, for the three months ended September 30, 2011March 31, 2012 compared to the same period in 2010.  Commission, brokerage, taxes and fees increased by $2.2 million, or 0.9%, for the nine months ended September 30, 2011 compared to the same period in 2010.2011.  The variances werevariance was primarily the result of fluctuations inlower premiums earned, changes in mix of businessfewer deferred expenses and a change in the affiliated quota share agreement.  Commissions, as a percentage of earned premium, are down for both the quarter and the year driven by a shiftfluctuations in the mix of reinsurance business from proportional to excess of loss, with the latter generally having lower commission rates, as well as a higher level of reinstatement premiums, which are booked without commissions.  Also driving the lower commission ratio, period over period, is the change in distribution on the insurance book, with a greater proportion of the business being accessed directly rather than through managing general agents.business.

Other Underwriting Expenses.  Other underwriting expenses were $42.7increased slightly to $39.5 million and $37.2from $38.2 million for the three months ended September 30,March 31, 2012 and 2011, and 2010, respectively, and $120.1 million and $105.3 million for the nine months ended September 30, 2011 and 2010, respectively.  The increases were primarily attributabledue to expenses of Heartland, which was acquired in January 2011.higher employee benefit plan expenses.

Corporate Expenses.  Corporate expenses, which are general operating expenses that are not allocated to segments, were $1.1$1.6 million and $1.5$1.2 million for the three months ended September 30,March 31, 2012 and 2011, and 2010, respectively, and $3.5 million and $5.2 million for the nine months ended September 30, 2011 and 2010, respectively.

Interest, Fees and Bond Issue Cost Amortization Expense. Interest, fees and other bond amortization expense was $12.7 million and $12.8 million for the three months ended September 30, 2011March 31, 2012 and 2010, respectively, and $38.1 million and $41.9 million for the nine months ended September 30, 2011 and 2010, respectively.  The decrease for the nine month period was primarily due to the maturing of debt in March, 2010.2011.

Income Tax Expense (Benefit).  We had an income tax expense of $78.5 million and an income tax benefit of $116.5 million and $123.8$9.1 million for the three and nine months ended September 30,March 31, 2012 and 2011, respectively.  We had an income tax expense of $66.9 million and $40.6 million for the three and nine months ended September 30, 2010, respectively.  Our income tax is primarily a function of the statutory tax rates coupled with the impact from tax-preferenced investment income.  Variations in our effective tax rate generally result from changes in the relative levels of pre-tax income.

In addition,  The increase in tax year over year was primarily attributable to the impact on 2011 taxable income from the previously mentioned catastrophe losses partially mitigated by a tax reduction in the first quarter of 2012 of $12.4 million due to the timing and sizecorrection of realized losses during the third quarter of 2011, we were unable to reliably estimate the annual effective tax rate for 2011 as small changes to the assumptions underlying our full year projections produce large changesunderstatement in the annual effectivedeferred tax rate.  As a result, the tax benefit for the nine months ended September 30, 2011 was calculated on a discrete basis using the actual effective tax rate.  The tax benefit for the three months ended September 30, 2011 reflects the difference between the year-to-date discrete basis and the annual effective tax rate used through June 30, 2011.  In 2010, we applied the effective tax rate method for all interim periods.asset account.

Net Income (Loss).
Our net income was $0.3$214.7 million and $168.7our net loss was $97.5 million for the three months ended September 30,March 31, 2012 and 2011, respectively.  The increase was primarily driven by the decline in catastrophe losses in 2012 compared to the prior period.

Ratios.
Our combined ratio decreased by 61.0 points to 87.0% for the three months ended March 31, 2012 compared to 148.0% for the three months ended March 31, 2011.  The loss ratio component decreased 62.7 points for the three months ended March 31, 2012 over the same period last year due to lower catastrophe losses.  The other underwriting expense ratio component and 2010, respectively.  We hadthe commission and brokerage ratio component both increased slightly over the same period last year due to the increase in expenses explained above.

Stockholder's Equity.
Stockholder's equity increased by $231.8 million to $3,173.1 million at March 31, 2012 from $2,941.4 million at December 31, 2011, principally as a net lossresult of $88.5$214.7 million and aof net income, $9.1 million of $140.6unrealized appreciation on investments, net of tax, $5.3 million of foreign currency translation adjustments, $1.6 million of share-based compensation transactions and $1.0 million of net benefit plan obligation adjustments.

Consolidated Investment Results

Net Investment Income.
Net investment income decreased 6.8% to $81.2 million for the ninethree months ended September 30,March 31, 2012 compared to $87.1 million for the three months ended March 31, 2011, primarily due to a decrease in income from our limited partnership investments and 2010, respectively. The variancesa decline in income from our fixed maturities, reflective of reducing our municipal bond exposures and declining reinvestment rates.  These decreases were primarily drivenpartially offset by higher catastrophe losses in 2011 in additionincreased dividend income from equities due to the other components discussed above.our expanded public equity portfolio and emerging market debt mutual funds.

Ratios.
Our combined ratio increased by 2.6 points to 98.4% for the three months ended September 30, 2011 compared to 95.8% for the same period in 2010, and increased by 7.5 points to 114.3% for the nine months ended September 30, 2011 compared to 106.8% for the same period in 2010.  The loss ratio component increased by 2.4 points and by 6.9 points for the three and nine months ended September 30, 2011, respectively, over the same periods last year, primarily driven by increased catastrophe losses.  The commission and brokerage expense ratio decreased by 1.5 points to 16.0% for the three months ended September 30, 2011 compared to 17.5% for the three months ended September 30, 2010, and decreased slightly to 17.7% for the nine months ended September 30, 2011 compared to 18.0% for the nine months ended September 30, 2010.  The other underwriting expense ratio component increased slightly for both the three and nine months ended September 30, 2011 compared to the same periods last year due to the mix of business, primarily due to the acquisition of Heartland.

Stockholder's Equity.
Stockholder's equity decreased by $44.4 million to $3,083.4 million at September 30, 2011 from $3,127.7 million at December 31, 2010, principally as a result of $88.5 million of net loss, partially offset by $32.3 million of unrealized appreciation on investments, net of tax, $4.9 million of share-based compensation transactions and $4.7 million of foreign currency translation adjustments.

Consolidated Investment Results

Net Investment Income.
Net investment income increased 5.5% to $78.3 million for the three months ended September 30, 2011 compared to $74.2 million for the three months ended September 30, 2010, and increased 0.5% to $249.9 million for the nine months ended September 30, 2011 compared to $248.7 million for the nine months ended September 30, 2010.  These increases, period over period, were primarily due to an increase in income from our equity securities and higher income from our limited partnership investments.  These increases were partially offset by a decline in income from our fixed maturities, reflective of reducing our municipal bond exposure and declining reinvestment rates.  Proceeds from reducing this portfolio were used to expand our public equity portfolio.

The following table shows the components of net investment income for the periods indicated:

 Three Months Ended  Nine Months Ended  Three Months Ended 
 September 30,  September 30,  March 31, 
(Dollars in millions) 2011  2010  2011  2010  2012  2011 
Fixed maturities $58.2  $69.9  $178.0  $219.3  $54.8  $60.6 
Equity securities  8.7   2.5   20.4   7.5   10.3   5.2 
Short-term investments and cash  0.3   0.1   0.9   0.3   0.1   0.2 
Other invested assets                        
Limited partnerships  12.4   1.1   44.8   19.4   11.6   18.4 
Dividends from Parent's shares  4.7   4.0   14.0   9.6   4.7   4.6 
Other  (1.5)  0.2   3.2   0.9   1.5   0.6 
Total gross investment income  82.8   77.7   261.2   256.9   83.1   89.7 
Interest debited (credited) and other expense  (4.5)  (3.5)  (11.3)  (8.2)  (1.8)  (2.5)
Total net investment income $78.3  $74.2  $249.9  $248.7  $81.2  $87.1 
(Some amounts may not reconcile due to rounding.)                        
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The following tables show a comparison of various investment yields for the periods indicated:
 
At AtAt At
September 30, December 31,March 31, December 31,
2011 20102012 2011
Imbedded pre-tax yield of cash and invested assets3.5% 3.6%3.5% 3.6%
Imbedded after-tax yield of cash and invested assets2.7% 2.8%2.6% 2.7%
 
Three Months Ended Nine Months EndedThree Months Ended
September 30, September 30,March 31,
2011 2010 2011 20102012 2011
Annualized pre-tax yield on average cash and invested assets3.9% 3.7% 4.1% 4.2%4.0% 4.4%
Annualized after-tax yield on average cash and invested assets2.9% 3.0% 3.2% 3.4%2.9% 3.4%


 
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Net Realized Capital Gains (Losses).
The following table presents the composition of our net realized capital gains (losses) for the periods indicated:

 Three Months Ended September 30,  Nine Months Ended September 30,  Three Months Ended March 31, 
(Dollars in millions) 2011  2010  Variance  2011  2010  Variance  2012  2011  Variance 
Gains (losses) from sales:                           
Fixed maturity securities, market value                           
Gains $11.4  $0.2  $11.2  $28.2  $7.2  $21.0  $3.6  $14.1  $(10.5)
Losses  (8.6)  (4.8)  (3.8)  (43.7)  (11.0)  (32.7)  (2.1)  (26.4)  24.3 
Total  2.7   (4.6)  7.3   (15.6)  (3.8)  (11.8)  1.5   (12.3)  13.8 
                                    
Fixed maturity securities, fair value                                    
Gains  0.2   0.5   (0.3)  1.0   0.8   0.2   5.4   0.2   5.2 
Losses  (0.3)  -   (0.3)  (2.0)  -   (2.0)  (0.2)  (1.7)  1.5 
Total  (0.1)  0.5   (0.6)  (1.0)  0.8   (1.8)  5.2   (1.5)  6.7 
                                    
Equity securities, market value                                    
Gains  -   -   -   0.2   -   0.2   -   0.2   (0.2)
Losses  -   -   -   (0.2)  -   (0.2)  -   (0.2)  0.2 
Total  -   -   -   -   -   -   -   -   - 
                                    
Equity securities, fair value                                    
Gains  6.0   1.0   5.0   8.9   4.6   4.3   26.8   2.2   24.6 
Losses  (5.4)  (0.1)  (5.3)  (6.6)  (4.7)  (1.9)  (4.5)  (0.3)  (4.2)
Total  0.6   1.0   (0.4)  2.3   -   2.3   22.3   1.9   20.4 
                                    
Total net realized gains (losses) from sales                                    
Gains  17.6   1.7   15.9   38.3   12.6   25.7   35.8   16.7   19.1 
Losses  (14.3)  (4.9)  (9.4)  (52.5)  (15.7)  (36.8)  (6.8)  (28.6)  21.8 
Total  3.3   (3.2)  6.5   (14.2)  (3.1)  (11.1)  29.0   (11.9)  40.9 
                                    
Other-than-temporary impairments:  (0.9)  (2.0)  1.1   (14.5)  (2.0)  (12.5)  (5.7)  (13.6)  7.9 
                                    
Gains (losses) from fair value adjustments:                                    
Fixed maturities, fair value  (5.0)  3.3   (8.3)  (8.5)  3.8   (12.3)  3.0   (3.5)  6.5 
Equity securities, fair value  (153.4)  34.9   (188.3)  (115.3)  18.1   (133.4)  67.8   38.1   29.7 
Other invested assets, fair value  (23.1)  126.6   (149.7)  (54.2)  42.0   (96.2)  81.9   31.4   50.5 
Total  (181.5)  164.8   (346.3)  (178.0)  63.9   (241.9)  152.8   66.0   86.8 
                                    
Total net realized capital gains (losses) $(179.0) $159.6  $(338.6) $(206.7) $58.8  $(265.5) $176.1  $40.5  $135.6 
                                    
(Some amounts may not reconcile due to rounding.)                                    

32

Net realized capital lossesgains were $179.0$176.1 million and $40.5 for the three months ended September 30,March 31, 2012 and 2011, compared to net realized capital gains of $159.6 million for the three months ended September 30, 2010.respectively.  For the three months ended September 30, 2011,March 31, 2012, we recorded $181.5$152.8 million of lossesgains due to fair value re-measurements on fixed maturity and equity securities and other invested assets and $0.9 million of other-than-temporary impairments on fixed maturity securities, partially offset by $3.3$29.0 million of net realized capital gains from sales of fixed maturity and equity securities, partially offset by $5.7 million of other-than-temporary impairments on fixed maturity securities.  For the three months ended September 30, 2010,March 31, 2011, we recorded $164.8$66.0 million in gains due to fair value re-measurements on fixed maturity and equity securities and other invested assets, partially offset by $3.2 million of net realized capital losses from sales of fixed maturity and equity securities and $2.0 million of other-than-temporary impairments on fixed maturity securities.

Net realized capital losses were $206.7 million for the nine months ended September 30, 2011 compared to net realized capital gains of $58.8 million for the nine months ended September 30, 2010.  For the nine months ended September 30, 2011, we recorded $178.0 million of losses due to fair value re-measurements on fixed maturity and equity securities and other invested assets, $14.5$13.6 million of other-than-temporary impairments on fixed maturity securities and $14.2$11.9 million of net realized capital losses from sales of fixed maturity and equity securities.  The net realizedgains and losses on the sales of fixed maturity securities during the first quarter of 2011 included the impact of selling part of our municipal bond portfolio as credit concerns arose in this market sector.  For the nine months ended September 30, 2010, we recorded $63.9 million in gains due to fair value re-measurements on fixed maturity and equity securities and other invested assets, partially offset by $3.1 million of net realized capital losses from sales of fixed maturity and equity securities and $2.0 million of other-than-temporary impairments on fixed maturity securities.


32

Segment Results.
During the quarter ended September 30, 2011, the Companywe realigned itsour reporting segments to reflect recent changes in the type and volume of business written. The CompanyWe previously reported the results of Marine & Aviation, Surety, A&H Reinsurance and A&H Primary operations as a separate segment—Specialty Underwriting.  The A&H primary business, which is a relatively new line of business for the Company,us, has increased significantly, representing approximately 2% of premiums earned and is projected to continue to grow.  The A&H primary business is better aligned with the Insurance reporting segment based on the similarities of this business with that of those businesses already reflected in the Insurance segment.  The other operating units included in the Specialty Underwriting segment would have encompassed approximately 6%less than 5% of the Company’sour premiums earned and their volume is projected to remain approximately 6%.  As a result of the size of these remaining operating units and their similarity to the business reported within U.S. Reinsurance,, they have been reclassified to the U.S. Reinsurance segment.  There has been no change to the International reporting segment.  The Company hasWe have restated all segment information for prior years to conform to the new reporting segment structure.

The U.S. Reinsurance operation writes property and casualty reinsurance and specialty lines of business, including Marine, Aviation, Surety and A&H business, on both a treaty and facultative basis, through reinsurance brokers, as well as directly with ceding companies primarily within the U.S.  The Insurance operation writes property and casualty insurance, including medical stop loss insurance, directly and through general agents, brokers and surplus lines brokers within the U.S.U.S and Canada.  The International operation writes non-U.S. property and casualty reinsurance through Everest Re’s branches in Canada, and Singapore and through offices in Brazil, Miami and New Jersey.

These segments are managed independently, but conform with corporate guidelines with respect to pricing, risk management, control of aggregate catastrophe exposures, capital, investments and support operations.  Management generally monitors and evaluates the financial performance of these operating segments based upon their underwriting results.

Underwriting results include earned premium less losses and LAE incurred, commission and brokerage expenses and other underwriting expenses.  We measure our underwriting results using ratios, in particular loss, commission and brokerage and other underwriting expense ratios, which respectively, divide incurred losses, commissions and brokerage and other underwriting expenses by premiums earned.
33

Our loss and LAE reserves are our best estimate of our ultimate liability for unpaid claims.  We re-evaluate our estimates on an ongoing basis, including all prior period reserves, taking into consideration all available information and, in particular, recently reported loss claim experience and trends related to prior periods.  Such re-evaluations are recorded in incurred losses in the period in which the re-evaluation is made.


33

The following discusses the underwriting results for each of our segments for the periods indicated:

U.S. Reinsurance.
The following table presents the underwriting results and ratios for the U.S. Reinsurance segment for the periods indicated.

 Three Months Ended September 30,  Nine Months Ended September 30,  Three Months Ended March 31, 
(Dollars in millions) 2011  2010  Variance  % Change  2011  2010  Variance  % Change  2012  2011  Variance  % Change 
Gross written premiums $360.8  $435.2  $(74.4)  -17.1% $947.2  $1,076.6  $(129.5)  -12.0% $369.5  $306.1  $63.4   20.7%
Net written premiums  167.5   238.5   (71.1)  -29.8%  486.0   591.1   (105.1)  -17.8%  187.2   165.1   22.2   13.4%
                                                
Premiums earned $167.5  $195.7  $(28.1)  -14.4% $512.1  $562.0  $(49.9)  -8.9% $183.9  $175.7  $8.2   4.7%
Incurred losses and LAE  97.2   109.1   (11.9)  -10.9%  371.6   344.0   27.6   8.0%  109.7   142.6   (32.8)  -23.0%
Commission and brokerage  23.3   32.4   (9.1)  -28.2%  106.1   112.8   (6.7)  -5.9%  45.2   43.8   1.4   3.3%
Other underwriting expenses  10.8   11.1   (0.2)  -2.1%  30.6   32.6   (2.0)  -6.1%  10.8   9.9   0.8   8.6%
Underwriting gain (loss) $36.2  $43.1  $(6.9)  -16.0% $3.7  $72.5  $(68.8)  -94.9% $18.2  $(20.6) $38.7   -188.5%
                                                
             Point Chg              Point Chg              Point Chg 
Loss ratio  58.0%  55.7%      2.3   72.6%  61.2%      11.4   59.7%  81.2%      (21.5)
Commission and brokerage ratio  13.9%  16.6%      (2.7)  20.7%  20.1%      0.6   24.6%  24.9%      (0.3)
Other underwriting expense ratio  6.5%  5.7%      0.8   6.0%  5.8%      0.2   5.8%  5.6%      0.2 
Combined ratio  78.4%  78.0%      0.4   99.3%  87.1%      12.2   90.1%  111.7%      (21.6)
                                                
(Some amounts may not reconcile due to rounding.)(Some amounts may not reconcile due to rounding.)                                     


Premiums. Gross written premiums decreasedincreased by 17.1%20.7% to $360.8$369.5 million for the three months ended September 30, 2011March 31, 2012 from $435.2$306.1 million for the three months ended September 30, 2010,March 31, 2011, primarily due to non-renewed business inincreased reinsurance premiums for treaty property treaty casualty, accidentbusiness arising from new business and healthrate increases on renewals, particularly for catastrophe exposed risks, partially offset by the portfolio shift from pro rata to excess of loss contracts and crop lines of business.lower reinstatement premiums.  Net written premiums decreased 29.8%increased 13.4% to $167.5$187.2 million for the three months ended September 30, 2011March 31, 2012 compared to $238.5$165.1 million for the three months ended September 30, 2010, primarily due toMarch 31, 2011, which reflects the decreaseincrease in gross written premiums and a higher percentage of premium cededfor the quarter, partially offset by increased cessions under the affiliated quota share agreement.  Premiums earned decreased 14.4%increased 4.7% to $167.5$183.9 million for the three months ended September 30, 2011March 31, 2012 compared to $195.7$175.7 million for the three months ended September 30, 2010.March 31, 2011.  The change in premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.  

Gross written premiums decreased by 12.0% to $947.2 million for the nine months ended September 30, 2011 from $1,076.6 million for the nine months ended September 30, 2010, primarily due to non-renewed quota share business in treaty property, treaty casualty and crop as well reduced premium for accident and health and marine business, partially offset by a $9.6 million increase in reinstatement premiums due to catastrophe loss activity.  Net written premiums decreased 17.8% to $486.0 million for the nine months ended September 30, 2011 compared to $591.1 million for the nine months ended September 30, 2010, primarily due to the decrease in gross written premiums and a higher percentage of premium ceded under the affiliated quota share agreement.  Premiums earned decreased 8.9% to $512.1 million for the nine months ended September 30, 2011 compared to $562.0 million for the nine months ended September 30, 2010.  The change in premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.  

 
34


Incurred Losses and LAE. The following tables presenttable presents the incurred losses and LAE for the U.S. Reinsurance segment for the periods indicated.

 Three Months Ended September 30, Three Months Ended March 31,
 Current  Ratio %/ Prior  Ratio %/ Total  Ratio %/ Current  Ratio %/ Prior  Ratio %/ Total  Ratio %/
(Dollars in millions) Year  Pt Change Years  Pt Change Incurred  Pt Change Year  Pt Change Years  Pt Change Incurred  Pt Change
2012                     
Attritional $94.7   51.5%  $4.3   2.4%  $99.0   53.8% 
Catastrophes  15.0   8.2%   (4.4)  -2.4%   10.6   5.8% 
A&E  -   0.0%   0.1   0.1%   0.1   0.1% 
Total segment $109.7   59.7%  $-   0.1%  $109.7   59.7% 
                           
2011                                                
Attritional $82.7   49.3%  $(3.5)  -2.1%  $79.2   47.2%  $86.4   49.3%  $(2.4)  -1.4%  $84.0   47.9% 
Catastrophes  16.7   10.0%   1.3   0.8%   18.0   10.8%   57.8   32.9%   0.8   0.4%   58.6   33.3% 
A&E  -   0.0%   -   0.0%   -   0.0%   -   0.0%   -   0.0%   -   0.0% 
Total segment $99.4   59.3%  $(2.2)  -1.3%  $97.2   58.0%  $144.2   82.2%  $(1.6)  -1.0%  $142.6   81.2% 
                                                      
2010                           
Variance 2012/2011                           
Attritional $113.5   58.0%  $(1.9)  -1.0%  $111.6   57.0%  $8.3   2.2 pts $6.7   3.8 pts $15.0   6.0 pts
Catastrophes  (2.7)  -1.4%   0.1   0.1%   (2.6)  -1.3%   (42.8)  (24.7)pts  (5.2)  (2.8)pts  (48.0)  (27.5)pts
A&E  -   0.0%   -   0.0%   -   0.0%   -   - pts  0.1   0.1 pts  0.1   0.1 pts
Total segment $110.8   56.6%  $(1.8)  -0.9%  $109.1   55.7%  $(34.5)  (22.5)pts $1.6   1.1 pts $(32.8)  (21.5)pts
                                                      
Variance 2011/2010                           
Attritional $(30.8)  (8.7)pts $(1.6)  (1.1)pts $(32.4)  (9.8)pts
Catastrophes  19.4   11.4 pts  1.2   0.7 pts  20.6   12.1 pts
A&E  -   - pts  -   - pts  -   - pts
Total segment $(11.4)  2.7 pts $(0.4)  (0.4)pts $(11.9)  2.3 pts
(Some amounts may not reconcile due to rounding.)(Some amounts may not reconcile due to rounding.)                        
  Nine Months Ended September 30,
  Current  Ratio %/ Prior  Ratio %/ Total  Ratio %/
(Dollars in millions) Year  Pt Change Years  Pt Change Incurred  Pt Change
2011                     
Attritional $262.4   51.3%  $(4.0)  -0.8%  $258.4   50.5% 
Catastrophes  102.4   20.0%   10.9   2.1%   113.3   22.1% 
A&E  -   0.0%   -   0.0%   -   0.0% 
Total segment $364.8   71.3%  $6.9   1.3%  $371.6   72.6% 
                            
2010                           
Attritional $326.0   58.0%  $4.1   0.7%  $330.1   58.7% 
Catastrophes  10.1   1.8%   3.8   0.7%   13.9   2.5% 
A&E  -   0.0%   -   0.0%   -   0.0% 
Total segment $336.1   59.8%  $7.9   1.4%  $344.0   61.2% 
                            
Variance 2011/2010                           
Attritional $(63.6)  (6.7)pts $(8.1)  (1.5)pts $(71.7)  (8.2)pts
Catastrophes  92.3   18.2 pts  7.1   1.4 pts  99.4   19.6 pts
A&E  -   - pts  -   - pts  -   - pts
Total segment $28.7   11.5 pts $(1.0)  (0.1)pts $27.6   11.4 pts
                            
(Some amounts may not reconcile due to rounding.)                        


Incurred losses were $11.9$32.8 million (21.5 points) lower at $97.2$109.7 million for the three months ended September 30, 2011March 31, 2012 compared to $109.1$142.6 million for the three months ended September 30, 2010,March 31, 2011, primarily as a result of the $30.8$42.8 million (8.7(24.7 points) decrease in current year attritional losses, primarily due to a combination of lower earned premiums and a change in the mix of business.  Partially offsetting these decreases, the current year catastrophe losses increased $19.4 million (11.4 points), largely due to Hurricane Irene and the development on the current year Japan and New Zealand earthquakes.

35

Incurred losses were $27.6 million (11.4 points) higher at $371.6 million for the nine months ended September 30, 2011 compared to $344.0 million for the nine months ended September 30, 2010, primarily as a result of the $92.3 million (18.2 points) increase in current year catastrophe losses, largely due to the Japan and New Zealand earthquakes, U.S. Midwest tornadoes and Hurricane Irene, and the $7.1 million (1.4 points) increase in prior year catastrophe losses, largely due to the Chile earthquake. Partially offsetting these increases,losses.  Conversely, the current year attritional losses decreased $63.6increased $8.3 million (6.7(2.2 points), primarily due to the increase in earned premiums and a shift in the mix of business, with a higher level of catastrophe excess of loss business in the current year, which carries a lower attritional loss ratio, coupled with a significant reduction in pro rata property business, which further reduces the current year attritional loss ratio.large marine loss.

Segment Expenses.  Commission and brokerage expenses decreased 28.2%increased 3.3% to $23.3$45.2 million for the three months ended September 30, 2011March 31, 2012 compared to $32.4$43.8 million for the three months ended September 30, 2010.  Commission and brokerage expenses decreased 5.9% to $106.1 million for the nine months ended September 30,March 31, 2011, compared to $112.8 million for the nine months ended September 30, 2010.  These variances were primarily due to the changesincrease in premiums earned and a lower expense deferral percentage, partially offset by a shift in the mix of business with varyingtowards excess of loss, which carries a lower commission rates.

ratio.  Segment other underwriting expenses decreased slightlyincreased to $10.8 million for the three months ended September 30, 2011March 31, 2012 compared to $11.1$9.9 million for the same period in 2010.  Segment other underwriting expenses decreased to $30.6 million for the nine months ended September 30, 2011 compared to $32.6 million for the same period in 2010.  These variances were due to reduced operating costs for the segment.2011.

Insurance.
The following table presents the underwriting results and ratios for the Insurance segment for the periods indicated.

 Three Months Ended September 30,  Nine Months Ended September 30,  Three Months Ended March 31, 
(Dollars in millions) 2011  2010  Variance  % Change  2011  2010  Variance  % Change  2012  2011  Variance  % Change 
Gross written premiums $236.3  $214.7  $21.6   10.1% $750.3  $650.4  $99.8   15.3% $207.2  $271.5  $(64.2)  -23.7%
Net written premiums  114.3   90.9   23.4   25.7%  366.2   275.7   90.6   32.9%  103.8   136.9   (33.1)  -24.2%
                                                
Premiums earned $124.3  $105.7  $18.6   17.6% $362.2  $294.5  $67.7   23.0% $102.1  $117.2  $(15.1)  -12.9%
Incurred losses and LAE  120.3   99.5   20.9   21.0%  302.0   245.7   56.4   22.9%  76.0   91.6   (15.6)  -17.0%
Commission and brokerage  11.9   10.7   1.1   10.5%  27.8   18.7   9.1   48.6%  10.6   7.6   2.9   38.2%
Other underwriting expenses  24.3   19.5   4.8   24.8%  68.6   52.3   16.3   31.1%  22.0   21.9   0.1   0.7%
Underwriting gain (loss) $(32.2) $(24.0) $(8.2)  34.3% $(36.2) $(22.2) $(14.0)  62.9% $(6.5) $(3.9) $(2.6)  65.7%
                                                
             Point Chg              Point Chg              Point Chg 
Loss ratio  96.8%  94.1%      2.7   83.4%  83.4%      -   74.5%  78.2%      (3.7)
Commission and brokerage ratio  9.5%  10.2%      (0.7)  7.7%  6.3%      1.4   10.3%  6.5%      3.8 
Other underwriting expense ratio  19.6%  18.4%      1.2   18.9%  17.8%      1.1   21.6%  18.7%      2.9 
Combined ratio  125.9%  122.7%      3.2   110.0%  107.5%      2.5   106.4%  103.4%      3.0 
                                                
                                
(Some amounts may not reconcile due to rounding.)(Some amounts may not reconcile due to rounding.)                                     
Premiums. Gross written premiums increased by 10.1% to $236.3 million for the three months ended September 30, 2011 compared to $214.7 million for the three months ended September 30, 2010.  This increase was due to strategic portfolio changes with growth in short-tail business, primarily driven by the acquisition of Heartland, which provided $44.8 million of new crop insurance premium in the current quarter and $14.0 million growth in A&H primary business, partially offset by the planned reduction of a large casualty program.  Net written premiums increased 25.7% to $114.3 million for the three months ended September 30, 2011 compared to $90.9 million for the same period in 2010 due to higher gross premiums and reduced levels of ceded reinsurance primarily related to the reduced casualty program.  Premiums earned increased 17.6% to $124.3 million for the three months ended September 30, 2011 compared to $105.7 million for the three months ended September 30, 2010.  The change in premiums earned is relatively consistent with the increase in net written premium.

 
3635

Premiums.Gross written premiums increaseddecreased by 15.3%23.7% to $750.3$207.2 million for the ninethree months ended September 30, 2011March 31, 2012 compared to $650.4$271.5 million for the ninethree months ended September 30, 2010.March 31, 2011.  This increasedecrease was due to strategic portfolio changes with growth in short-tail business, primarily driven by the acquisitiontermination and runoff of Heartland, which provided $122.3 millionseveral large casualty programs and lower crop premium due to a shift in the seasonality of new crop insurance premium in 2011 and $44.8 million growthreporting this business, partially offset by an increase in A&H primary business, partially offset by the reduction of a large casualty program.business.  Net written premiums increased 32.9%decreased 24.2% to $366.2$103.8 million for the ninethree months ended September 30, 2011March 31, 2012 compared to $275.7$136.9 million for the same period in 20102011 due to higherthe lower gross premiums and reduced levels of ceded reinsurance.written premiums.  Premiums earned increased 23.0%decreased 12.9% to $362.2 million for the nine months ended September 30, 2011 compared to $294.5 million for the nine months ended September 30, 2010.  The change in premiums earned is relatively consistent with the increase in net written premium.

Incurred Losses and LAE. The following tables present the incurred losses and LAE for the Insurance segment for the periods indicated.
  Three Months Ended September 30,
  Current  Ratio %/ Prior  Ratio %/ Total  Ratio %/
(Dollars in millions) Year  Pt Change Years  Pt Change Incurred  Pt Change
2011                     
Attritional $100.9   81.1%  $18.0   14.5%  $118.9   95.6% 
Catastrophes  1.4   1.2%   -   0.0%   1.4   1.2% 
Total segment $102.3   82.3%  $18.0   14.5%  $120.3   96.8% 
                            
2010                           
Attritional $89.7   84.9%  $9.8   9.2%  $99.5   94.1% 
Catastrophes  -   0.0%   -   0.0%   -   0.0% 
Total segment $89.7   84.9%  $9.8   9.2%  $99.5   94.1% 
                            
Variance 2011/2010                           
Attritional $11.2   (3.8)pts $8.2   5.3 pts $19.4   1.5 pts
Catastrophes  1.4   1.2 pts  -   - pts  1.4   1.2 pts
Total segment $12.6   (2.6)pts $8.2   5.3 pts $20.9   2.7 pts
  Nine Months Ended September 30,
  Current  Ratio %/ Prior  Ratio %/ Total  Ratio %/
(Dollars in millions) Year  Pt Change Years  Pt Change Incurred  Pt Change
2011                     
Attritional $287.9   79.4%  $12.5   3.5%  $300.4   82.9% 
Catastrophes  1.4   0.4%   0.2   0.1%   1.6   0.5% 
Total segment $289.3   79.8%  $12.7   3.6%  $302.0   83.4% 
                            
2010                           
Attritional $235.9   80.1%  $9.7   3.3%  $245.7   83.4% 
Catastrophes  -   0.0%   -   0.0%   -   0.0% 
Total segment $235.9   80.1%  $9.7   3.3%  $245.7   83.4% 
                            
Variance 2011/2010                           
Attritional $52.0   (0.7)pts $2.8   0.2 pts $54.7   (0.5)pts
Catastrophes  1.4   0.4 pts  0.2   0.1 pts  1.6   0.5 pts
Total segment $53.4   (0.3)pts $3.0   0.3 pts $56.4   - pts
                            
(Some amounts may not reconcile due to rounding.)               
Incurred losses and LAE increased by $20.9 million, or 21.0%, to $120.3$102.1 million for the three months ended September 30, 2011March 31, 2012 compared to $99.5$117.2 million for the three months ended September 30, 2010.  This increase was primarily due to an increase of $11.2 million (3.8 points) in current year attritional losses primarily due to higher net premiums earned and an increase in prior years’ losses of $8.2 million (5.3 points) attributable to development on excess casualty and California workers’ compensation reserves.

Incurred losses and LAE increased by $56.4 million, or 22.9%, to $302.0 million for the nine months ended September 30, 2011 compared to $245.7 million for the nine months ended September 30, 2010.  This increase was primarily due to an increase of $52.0 million (0.7 points) in current year attritional losses primarily due to higher net premiums earned and an increase in prior years’ losses of $3.0 million (0.3 points) primarily attributable to development on excess casualty and California workers’ compensation.

Segment Expenses. Commission and brokerage expenses increased to $11.9 million for the three months ended September 30, 2011 compared to $10.7 million for the three months ended September 30, 2010.  Commission and brokerage expenses increased to $27.8 million for the nine months ended September 30, 2011 compared to $18.7 million for the nine months ended September 30, 2010.  These increases were primarily the result of an increase in net premiums earned and changes in distribution and the mix of business.

Segment other underwriting expenses for the three months ended September 30, 2011 increased to $24.3 million from $19.5 million for the three months ended September 30, 2010.  Segment other underwriting expenses for the nine months ended September 30, 2011 increased to $68.6 million from $52.3 million for the nine months ended September 30, 2010.  These increases were primarily due to the expenses of the newly acquired Heartland.

International.
The following table presents the underwriting results and ratios for the International segment for the periods indicated.
  Three Months Ended September 30,  Nine Months Ended September 30, 
(Dollars in millions) 2011  2010  Variance  % Change  2011  2010  Variance  % Change 
Gross written premiums $326.1  $323.7  $2.3   0.7% $923.6  $906.1  $17.6   1.9%
Net written premiums  158.0   168.4   (10.4)  -6.2%  457.7   479.7   (22.0)  -4.6%
                                 
Premiums earned $151.1  $163.9  $(12.9)  -7.9% $480.0  $465.7  $14.3   3.1%
Incurred losses and LAE  104.6   118.4   (13.8)  -11.7%  514.3   479.0   35.3   7.4%
Commission and brokerage  35.7   38.3   (2.6)  -6.8%  105.8   106.0   (0.3)  -0.2%
Other underwriting expenses  7.5   6.7   0.9   13.1%  20.9   20.4   0.6   2.8%
Underwriting gain (loss) $3.2  $0.6  $2.7  NM $(161.0) $(139.6) $(21.3)  15.3%
                                 
              Point Chg              Point Chg 
Loss ratio  69.2%  72.2%      (3.0)  107.1%  102.8%      4.3 
Commission and brokerage ratio  23.6%  23.4%      0.2   22.0%  22.8%      (0.8)
Other underwriting expense ratio  5.1%  4.0%      1.1   4.4%  4.4%      - 
Combined ratio  97.9%  99.6%      (1.7)  133.5%  130.0%      3.5 
                                 
(NM, not meaningful)                                
(Some amounts may not reconcile due to rounding.)                     
Premiums. Gross written premiums increased by 0.7% to $326.1 million for the three months ended September 30, 2011 compared to $323.7 million for the three months ended September 30, 2010, due to an increase in premiums written through Canada, $11.2 million; and Asia, $8.4 million; partially offset by a $17.5 million net decrease in business written in the Latin America, South America, Middle East, and Africa regions. The increases were primarily due to generally higher rate levels on retained business and favorable foreign exchange impact of $11.3 million, partially offset by non-renewed business in certain catastrophe exposed territories that have not responded to the recent elevation in catastrophe loss activity.  Net written premiums decreased by 6.2% to $158.0 million for the three months ended September 30, 2011 compared to $168.4 million for the three months ended September 30, 2010, principally as a result of the change in the affiliated quota share agreement.  Premiums earned decreased by 7.9% to $151.1 million for the three months ended September 30, 2011 compared to $163.9 million for the three months ended September 30, 2010.March 31, 2011.  The change in premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.

Incurred Losses and LAE. The following table presents the incurred losses and LAE for the Insurance segment for the periods indicated.


  Three Months Ended March 31,
  Current  Ratio %/ Prior  Ratio %/ Total  Ratio %/
(Dollars in millions) Year  Pt Change Years  Pt Change Incurred  Pt Change
2012                     
Attritional $75.5   74.0%  $0.5   0.5%  $76.0   74.5% 
Catastrophes  -   0.0%   -   0.0%   -   0.0% 
Total segment $75.5   74.0%  $0.5   0.5%  $76.0   74.5% 
                            
2011                           
Attritional $95.8   81.8%  $(4.2)  -3.6%  $91.6   78.2% 
Catastrophes  -   0.0%   -   0.0%   -   0.0% 
Total segment $95.8   81.8%  $(4.2)  -3.6%  $91.6   78.2% 
                            
Variance 2012/2011                           
Attritional $(20.3)  (7.8)pts $4.7   4.1 pts $(15.6)  (3.7)pts
Catastrophes  -   - pts  -   - pts  -   - pts
Total segment $(20.3)  (7.8)pts $4.7   4.1 pts $(15.6)  (3.7)pts
                            
(Some amounts may not reconcile due to rounding.)                        


Incurred losses and LAE decreased by $15.6 million, or 17.0%, to $76.0 million for the three months ended March 31, 2012 compared to $91.6 million for the three months ended March 31, 2011.  This was due to a decrease of $20.3 million in current year attritional losses driven by the decline in premiums earned and a shift in the mix of business towards short-tail business with lower loss ratios.

Segment Expenses. Commission and brokerage expenses increased to $10.6 million for the three months ended March 31, 2012 compared to $7.6 million for the three months ended March 31, 2011 reflecting the adoption of new accounting standards concerning the accounting for commission costs and variation in cessions under the affiliated quota share agreement.  Segment other underwriting expenses for the three months ended March 31, 2012 increased to $22.0 million from $21.9 million for the three months ended March 31, 2011.


 
3836


International.
The following table presents the underwriting results and ratios for the International segment for the periods indicated.


  Three Months Ended March 31, 
(Dollars in millions) 2012  2011  Variance  % Change 
Gross written premiums $280.5  $308.8  $(28.4)  -9.2%
Net written premiums  136.3   158.1   (21.8)  -13.8%
                 
Premiums earned $147.8  $166.5  $(18.7)  -11.2%
Incurred losses and LAE  64.6   318.8   (254.2)  -79.7%
Commission and brokerage  31.8   37.1   (5.4)  -14.4%
Other underwriting expenses  6.7   6.4   0.3   4.7%
Underwriting gain (loss) $44.7  $(195.9) $240.5   -122.8%
                 
              Point Chg 
Loss ratio  43.7%  191.5%      (147.8)
Commission and brokerage ratio  21.5%  22.3%      (0.8)
Other underwriting expense ratio  4.6%  3.8%      0.8 
Combined ratio  69.8%  217.6%      (147.8)
                 
(Some amounts may not reconcile due to rounding.)                


Premiums.Gross written premiums increaseddecreased by 1.9%9.2% to $923.6$280.5 million for the ninethree months ended September 30, 2011March 31, 2012 compared to $906.1$308.8 million for the ninethree months ended September 30, 2010,March 31, 2011, primarily due to a net increase of $9.2 millionreduction in premiums writtenproportional property business starting in Canada, $5.3 million in the Latin America, South America, Middle East,2011 and Africa regions and $2.9 million in Asia.  The increase in gross written premiums included a net favorable foreign exchange impact of $33.4 million.  Growth from increased rate levels,continuing into 2012, particularly in regions recently affected by catastrophe losses, and from the impact of foreign exchange were partially offset by non-renewed business which did not meet our current pricing targets.losses.  Net written premiums decreased by 4.6%13.8% to $457.7$136.3 million for the ninethree months ended September 30, 2011March 31, 2012 compared to $479.7$158.1 million for the ninethree months ended September 30, 2010,March 31, 2011, primarily due to thea decrease in gross written premiums and a change in our affiliated quota share agreement.  Premiums earned increaseddecreased by 3.1%11.2% to $480.0$147.8 million for the ninethree months ended September 30, 2011March 31, 2012 compared to $465.7$166.5 million for the ninethree months ended September 30, 2010.March 31, 2011.   The change in premiums earned relative tois relatively comparable with the decrease in net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.premiums.

Incurred Losses and LAE. The following tables presenttable presents the incurred losses and LAE for the International segment for the periods indicated.

 Three Months Ended September 30, Three Months Ended March 31,
 Current  Ratio %/ Prior  Ratio %/ Total  Ratio %/ Current  Ratio %/ Prior  Ratio %/ Total  Ratio %/
(Dollars in millions) Year  Pt Change Years  Pt Change Incurred  Pt Change Year  Pt Change Years  Pt Change Incurred  Pt Change
2012                     
Attritional $65.1   44.0%  $(3.0)  -2.0%  $62.1   42.0% 
Catastrophes  -   0.0%   2.5   1.7%   2.5   1.7% 
Total segment $65.1   44.0%  $(0.5)  -0.3%  $64.6   43.7% 
                           
2011                                                
Attritional $60.8   40.2%  $(7.9)  -5.2%  $52.9   35.0%  $74.2   44.6%  $(3.9)  -2.3%  $70.3   42.3% 
Catastrophes  52.3   34.6%   (0.7)  -0.4%   51.7   34.2%   246.5   148.0%   2.0   1.2%   248.5   149.2% 
Total segment $113.1   74.8%  $(8.6)  -5.6%  $104.6   69.2%  $320.7   192.6%  $(1.9)  -1.1%  $318.8   191.5% 
                                                      
2010                           
Variance 2012/2011                           
Attritional $94.4   57.6%  $(13.5)  -8.3%  $80.8   49.3%  $(9.1)  (0.6)pts $0.9   0.3 pts $(8.2)  (0.3)pts
Catastrophes  38.2   23.3%   (0.7)  -0.4%   37.5   22.9%   (246.5)  (148.0)pts  0.5   0.5 pts  (246.0)  (147.5)pts
Total segment $132.6   80.9%  $(14.2)  -8.7%  $118.4   72.2%  $(255.6)  (148.6)pts $1.4   0.8 pts $(254.2)  (147.8)pts
                                                      
Variance 2011/2010                           
Attritional $(33.6)  (17.4)pts $5.6   3.1 pts $(27.9)  (14.3)pts
Catastrophes  14.1   11.3 pts  -   - pts  14.2   11.3 pts
Total segment $(19.5)  (6.1)pts $5.6   3.1 pts $(13.8)  (3.0)pts
(Some amounts may not reconcile due to rounding.)(Some amounts may not reconcile due to rounding.)                        
  Nine Months Ended September 30,
  Current  Ratio %/ Prior  Ratio %/ Total  Ratio %/
(Dollars in millions) Year  Pt Change Years  Pt Change Incurred  Pt Change
2011                     
Attritional $202.3   42.1%  $(19.9)  -4.1%  $182.4   38.0% 
Catastrophes  331.7   69.1%   0.2   0.0%   331.9   69.1% 
Total segment $534.0   111.2%  $(19.7)  -4.1%  $514.3   107.1% 
                            
2010                           
Attritional $269.4   57.8%  $(19.0)  -4.1%  $250.4   53.8% 
Catastrophes  236.4   50.8%   (7.9)  -1.7%   228.6   49.1% 
Total segment $505.9   108.6%  $(26.9)  -5.8%  $479.0   102.8% 
                            
Variance 2011/2010                           
Attritional $(67.1)  (15.7)pts $(0.9)  - pts $(68.0)  (15.8)pts
Catastrophes  95.3   18.3 pts  8.1   1.7 pts  103.3   20.0 pts
Total segment $28.1   2.6 pts $7.2   1.7 pts $35.3   4.3 pts
                            
(Some amounts may not reconcile due to rounding.)               


Incurred losses and LAE decreased 11.7%79.7% to $104.6$64.6 million for the three months ended September 30, 2011March 31, 2012 compared to $118.4$318.8 million for the three months ended September 30, 2010.March 31, 2011.  The decrease was principally due to a $33.6$246.5 million (17.4(148.0 points) decrease in current year attritional losses.  Partially offsetting thecatastrophes.  Current years’ attritional losses were current year catastrophes losses which increased $14.1decreased by $9.1 million (11.3 points) primarily due to the Japan earthquake.a decrease in premiums earned and a shift in mix of business towards property catastrophe and excess of loss business, which generally carries a lower loss ratio.


 
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Incurred losses and LAE increased 7.4% to $514.3 million for the nine months ended September 30, 2011 compared to $479.0 million for the nine months ended September 30, 2010.  The increase was principally due to a $95.3 million (18.3 points) increase in current year catastrophes (Japan and New Zealand earthquakes, the Australia floods, and the wildfire loss in Alberta, Canada), compared to the 2010 reported catastrophe losses (Chile earthquake and Australia hailstorms).  The current year attritional loss ratio decreased to 42.1% for the nine months ended September 30, 2011 from 57.8% for the nine months ended September 30, 2010, primarily due to a shift in the mix of business with a lower level of quota share business, which generally carries a higher loss ratio, in addition to the impact of changes in the affiliated quota share agreement.

Segment Expenses. Commission and brokerage expenses decreased 6.8%14.4% to $35.7$31.8 million for the three months ended September 30, 2011March 31, 2012 compared to $38.3$37.1 million for the three months ended September 30, 2010.  Commission and brokerage expenses decreased 0.2% to $105.8 million for the nine months ended September 30, 2011 compared to $106.0 million for the nine months ended September 30, 2010.March 31, 2011.  These variances were principally due to the changesa decrease in premiums earned, a lower expense deferral percentage and a shift in the mix of business.

Segment other underwriting expenses increased to $7.5 million for the three months ended September 30, 2011 comparedslightly to $6.7 million for the three months ended September 30, 2010.  Segment other underwriting expenses increasedMarch 31, 2012 compared to $20.9$6.4 million for the ninethree months ended September 30, 2011 compared to $20.4 million for the nine months ended September 30, 2010.March 31, 2011.

Market Sensitive Instruments.
The SEC’s Financial Reporting Release #48 requires registrants to clarify and expand upon the existing financial statement disclosure requirements for derivative financial instruments, derivative commodity instruments and other financial instruments (collectively, “market sensitive instruments”).  We do not generally enter into market sensitive instruments for trading purposes.

Our current investment strategy seeks to maximize after-tax income through a high quality, diversified, taxable and tax-preferenced fixed maturity portfolio, while maintaining an adequate level of liquidity.  Our mix of taxable and tax-preferenced investments is adjusted periodically, consistent with our current and projected operating results, market conditions and our tax position.  The fixed maturity securities in the investment portfolio are comprised of non-trading available for sale securities.  Additionally, we have invested in equity securities.

The overall investment strategy considers the scope of present and anticipated Company operations.  In particular, estimates of the financial impact resulting from non-investment asset and liability transactions, together with our capital structure and other factors, are used to develop a net liability analysis.  This analysis includes estimated payout characteristics for which our investments provide liquidity.  This analysis is considered in the development of specific investment strategies for asset allocation, duration and credit quality.  The change in overall market sensitive risk exposure principally reflects the asset changes that took place during the period.

Interest Rate Risk.  Our $8.3$8.7 billion investment portfolio, at September 30, 2011,March 31, 2012, is principally comprised of fixed maturity securities, which are generally subject to interest rate risk and some foreign currency exchange rate risk, and some equity securities, which are subject to price fluctuations and some foreign exchange rate risk.  The overall economic impact of the foreign exchange risks on the investment portfolio is partially mitigated by changes in the dollar value of foreign currency denominated liabilities and their associated income statement impact.

Interest rate risk is the potential change in value of the fixed maturity securities portfolio, including short-term investments, from a change in market interest rates.  In a declining interest rate environment, it includes prepayment risk on the $479.2$574.6 million of mortgage-backed securities in the $5,190.7$5,223.1 million fixed maturity portfolio.  Prepayment risk results from potential accelerated principal payments that shorten the average life and thus the expected yield of the security.


 
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The table below displays the potential impact of market value fluctuations and after-tax unrealized appreciation on our fixed maturity portfolio (including $535.9$646.2 million of short-term investments) for the periods indicated based on upward and downward parallel and immediate 100 and 200 basis point shifts in interest rates.  For legal entities with a U.S. dollar functional currency, this modeling was performed on each security individually.  To generate appropriate price estimates for mortgage-backed securities, changes in prepayment expectations under different interest rate environments were taken into account.  For legal entities with non-U.S. dollar functional currency, the effective duration of the involved portfolio of securities was used as a proxy for the market value change under the various interest rate change scenarios.

 Impact of Interest Rate Shift in Basis Points  Impact of Interest Rate Shift in Basis Points 
 At September 30, 2011  At March 31, 2012 
(Dollars in millions)  -200   -100   0   100   200   -200   -100   0   100   200 
Total Market/Fair Value $6,030.8  $5,883.2  $5,726.6  $5,553.3  $5,375.1  $6,134.8  $6,005.5  $5,869.3  $5,719.3  $5,561.8 
Market/Fair Value Change from Base (%)  5.3%  2.7%  0.0%  -3.0%  -6.1%  4.5%  2.3%  0.0%  -2.6%  -5.2%
Change in Unrealized Appreciation                                        
After-tax from Base ($) $197.7  $101.8  $-  $(112.6) $(228.5) $172.6  $88.5  $-  $(97.5) $(199.9)


We had $8,165.3$8,169.2 million and $7,652.3$8,290.6 million of gross reserves for losses and LAE as of September 30, 2011March 31, 2012 and December 31, 2010,2011, respectively.  These amounts are recorded at their nominal value, as opposed to present value, which would reflect a discount adjustment to reflect the time value of money.  Since losses are paid out over a period of time, the present value of the reserves is less than the nominal value.  As interest rates rise, the present value of the reserves decreases and, conversely, as interest rates decline, the present value increases.  These movements are the opposite of the interest rate impacts on the fair value of investments.  While the difference between present value and nominal value is not reflected in our financial statements, our financial results will include investment income over time from the investment portfolio until the claims are paid.  Our loss and loss reserve obligations have an expected duration that is reasonably consistent with our fixed income portfolio.

Equity Risk.  Equity risk is the potential change in fair and/or market value of the common stock and preferred stock portfolios arising from changing prices.  Our equity investments consist of a diversified portfolio of individual securities and mutual funds, which invest principally in high quality common and preferred stocks that are traded on major exchanges.  The primary objective of the equity portfolio is to obtain greater total return relative to bonds over time through market appreciation and income.

The table below displays the impact on fair/market value and after-tax change in fair/market value of a 10% and 20% change in equity prices up and down for the periods indicated.

 Impact of Percentage Change in Equity Fair/Market Values  Impact of Percentage Change in Equity Fair/Market Values 
 At September 30, 2011  At March 31, 2012 
(Dollars in millions)  -20%  -10%  0%  10%  20%  -20%  -10%  0%  10%  20%
Fair/Market Value of the Equity Portfolio $879.6  $989.5  $1,099.5  $1,209.4  $1,319.4  $930.9  $1,047.3  $1,163.6  $1,280.0  $1,396.4 
After-tax Change in Fair/Market Value  (142.9)  (71.5)  -   71.5   142.9   (151.3)  (75.6)  -   75.6   151.3 


Foreign Exchange Risk.  Foreign currency risk is the potential change in value, income and cash flow arising from adverse changes in foreign currency exchange rates.  Each of our non-U.S. (“foreign”) operations maintains capital in the currency of the country of its geographic location consistent with local regulatory guidelines.  Each foreign operation may conduct business in its local currency, as well as the currency of other countries in which it operates.  The primary foreign currency exposures for these foreign operations are the Singapore and Canadian Dollars, the British Pound Sterling and the Euro.  We mitigate foreign exchange exposure by generally matching the currency and duration of our assets to our corresponding operating liabilities.  In accordance with FASB guidance, we translate the assets, liabilities and income of non-U.S. dollar functional currency legal entities to the U.S. dollar.  This translation amount is reported as a component of other comprehensive income.  As of September 30, 2011,March 31, 2012, there has been no material change in exposure to foreign exchange rates as compared to December 31, 2010.2011.


 
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SAFE HARBOR DISCLOSURE
This report contains forward-looking statements within the meaning of the U.S. federal securities laws.  We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in the federal securities laws.  In some cases, these statements can be identified by the use of forward-looking words such as “may”, “will”, “should”, “could”, “anticipate”, “estimate”, “expect”, “plan”, “believe”, “predict”, “potential” and “intend”.  Forward-looking statements contained in this report include information regarding our reserves for losses and LAE, the adequacy of our provision for uncollectible balances, estimates of our catastrophe exposure, the effects of catastrophic events on our financial statements and the ability of our subsidiaries to pay dividends.  Forward-looking statements only reflect our expectations and are not guarantees of performance.  These statements involve risks, uncertainties and assumptions.  Actual events or results may differ materially from our expectations.  Important factors that could cause our actual events or results to be materially different from our expectations include the uncertainties that surround the impact on our financial statements and liquidity resulting from changes in the global economy and credit markets, the estimating of reserves for losses and LAE, those discussed in Note 6 of Notes to Consolidated Financial Statements (unaudited) included in this report and risks described under the caption “Risk Factors” in our most recently filed Annual Report on Form 10-K, Part 1, ITEMItem 1A.  We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
 

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Market Risk Instruments.  See “Market Sensitive Instruments” in PART I – ITEM 2.

ITEM 4.  CONTROLS AND PROCEDURES

As of the end of the period covered by this report, our management carried out an evaluation, with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)).  Based on their evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.  Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of our internal control over financial reporting to determine whether any changes occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  Based on that evaluation, there has been no such change during the quarter covered by this report.


PART II

ITEM 1.  LEGAL PROCEEDINGS

In the ordinary course of business, the Company is involved in lawsuits, arbitrations and other formal and informal dispute resolution procedures, the outcomes of which will determine the Company’s rights and obligations under insurance and reinsurance agreements.  In some disputes, the Company seeks to enforce its rights under an agreement or to collect funds owing to it.  In other matters, the Company is resisting attempts by others to collect funds or enforce alleged rights.  These disputes arise from time to time and are ultimately resolved through both informal and formal means, including negotiated resolution, arbitration and litigation.  In all such matters, the Company believes that its positions are legally and commercially reasonable.  The Company considers the statuses of these proceedings when determining its reserves for unpaid loss and loss adjustment expenses.

Aside from litigation and arbitrations related to these insurance and reinsurance agreements, the Company is not a party to any other material litigation or arbitration.

 
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ITEM 1A.  RISK FACTORS

No material changes.


ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.


ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None.


ITEM 4.  RESERVEDMINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.  OTHER INFORMATION

None.


ITEM 6.  EXHIBITS

Exhibit Index:  
   
Exhibit No.Description 
   
   31.1Section 302 Certification of Joseph V. Taranto 
   
   31.2Section 302 Certification of Dominic J. Addesso 
   
   32.1Section 906 Certification of Joseph V. Taranto and Dominic J. Addesso 
   
   101.INSXBRL Instance Document 
   
   101.SCHXBRL Taxonomy Extension Schema 
   
   101.CALXBRL Taxonomy Extension Calculation Linkbase 
   
   101.DEFXBRL Taxonomy Extension Definition Linkbase 
   
   101.LABXBRL Taxonomy Extension Labels Linkbase 
   
   101.PREXBRL Taxonomy Extension Presentation Linkbase 
   

 
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Everest Reinsurance Holdings, Inc.
 
Signatures
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
     
  Everest Reinsurance Holdings, Inc. 
  (Registrant) 
     
     
  /S/ DOMINIC J. ADDESSO 
  Dominic J. Addesso 
  President and 
   Chief Financial Officer 
     
  (Duly Authorized Officer and Principal Financial Officer)
     
     
     
Dated: November 14, 2011May 15, 2012