UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C 20549
FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2011

Commission file number 1-14527
EVEREST REINSURANCE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2008

Commission file number 1-14527

EVEREST REINSURANCE HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction

of incorporation or organization)

22-3263609

(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)
Securities registered pursuant to Section 12(b) of the Act:

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)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Name of Each Exchange

on Which Registered

8.75% Senior Notes Due 2010

NYSE

5.40% Senior Notes Due 2014

NYSE

6.60% Long Term Notes Due 2067

NYSE

6.20% Trust Preferred Securities of Everest Re

Capital Trust II guaranteed by Everest Reinsurance

Holdings, Inc.

NYSE

Securities registered pursuant to Section 12(g) of the Act:  None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes

X

No


Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes

NoX

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

Yes

X

No


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

Yes

 X

No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [   ]

Yes

X

No


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

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes

X

No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes

No

X

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

Yes

X

No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

X

Smaller reporting company

                     (Do(Do not check if a smaller reporting company)

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

Yes

No

X

The aggregate market value on June 30, 2008, the last business day of the registrant’s most recently completed second quarter, of the voting stock held by non-affiliates of the registrant was zero.

At March 15, 2009, the number of shares outstanding of the registrant common shares was 1,000, all of which are owned by Everest Risk Holdings (Ireland) Limited, a wholly-owned direct subsidiary of Everest Re Group, Ltd.

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


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

YesNoX

The aggregate market value on June 30, 2011, the last business day of the registrant’s most recently completed second quarter, of the voting stock held by non-affiliates of the registrant was zero.

At March 15, 2012, the number of shares outstanding of the registrant common shares was 1,000, all of which are owned by Everest Underwriting Group (Ireland) Limited, a wholly-owned direct subsidiary of Everest Re Group, Ltd.

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

EVEREST REINSURANCE HOLDINGS, INC.


Table of Contents

FORM 10-K


Page

PART I

Item 1.

Business

1

Item 1A.

Risk Factors

7

6

Item 1B.

Unresolved Staff Comments

13

12

Item 2.

Properties

13

12

Item 3.

Legal Proceedings

13

Item 4.

Submission of Matters to a Vote of Security Holders

Mine Safety Disclosures

13

PART II

Item 5.

Market for Registrant’s Common Equity, Related ShareholderStockholder Matters and Issuer
13
Purchases of Equity Securities

13

Item 6.

Selected Financial Data

14

13

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operation

14

Operations
Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

31

28

Item 8.

Financial Statements and Supplementary Data

33

31

Item 9.

Changes in and Disagreements withWith Accountants on Accounting and Financial Disclosure

34

31

Disclosure
Item 9A.

Controls and Procedures

34

31

Item 9B.

Other Information

34

31

PART III

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

34

32

Item 11.

Executive Compensation

35

32

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

35

32

Stockholder Matters
Item 13.

Certain Relationships and Related Transactions, and Director Independence

35

32

Item 14.

Principal Accountant Fees and Services

35

32

PART IV

Item 15.

Exhibits and Financial Statement Schedules

36

33

 


PART I


Unless otherwise indicated, all financial data in this document have been prepared using accounting principles generally accepted in the United States of America (“GAAP”).  As used in this document, “Holdings” means Everest Reinsurance Holdings, Inc.; “Group” means Everest Re Group, Ltd.; “Holdings Ireland” means Everest Risk HoldingsUnderwriting Group (Ireland), Limited; “Everest Re” means Everest Reinsurance Company and its subsidiaries (unless the context otherwise requires) and the “Company”, “we”, “us”, and “our” means Holdings and its subsidiaries (unless the context otherwise requires).


ITEM 1.              BUSINESS


The Company.

Holdings, a Delaware corporation, is a wholly-owned subsidiary of Holdings Ireland.  On December 30, 2008, Group contributed Holdings to its recently established Irish holding company, Holdings Ireland.  Holdings Ireland is a direct subsidiary of Group and was established to serve as a holding company for the U.S. and Irish reinsurance and insurance subsidiaries.  Group is a Bermuda holding company whose common shares are publicly traded in the U.S. on the New York Stock Exchange under the symbol “RE”.  Group files an annual report on Form 10-K with the Securities and Exchange Commission (the “SEC”) with respect to its consolidated operations, including Holdings.


The Company’s principal business, conducted through its operating segments, is the underwriting of reinsurance and insurance in the U.S. and international markets. The Company had gross written premiums, in 20082011, of $2.9$3.6 billion, with approximately 73% representing reinsurance and 27% representing insurance.  Stockholder’s equity at December 31, 20082011 was $2.2$2.9 billion. The Company underwrites reinsurance both through brokers and directly with ceding companies, giving it the flexibility to pursue business based on the ceding company’s preferred reinsurance purchasing method.  The Company underwrites insurance principally through general agent relationships, brokers and surplus lines brokers.  Holdings’ active operating subsidiaries, excluding Mt. McKinley Insurance Company (“Mt. McKinley”), which is in runoff, are each rated A+ (“Superior”) by A.M. Best Company (“A.M. Best”), a leading provider of insurer ratings that assigns financial strength ratings to insurance companies based on their ability to meet their obligations to policyholders.


Following is a summary of the Company’s operating subsidiaries:


·  Everest Re, a Delaware insurance company and a direct subsidiary of Holdings, is a licensed property and casualty insurer and/or reinsurer in all states, the District of Columbia and Puerto Rico and is authorized to conduct reinsurance business in Canada, Singapore and Brazil. Everest Re underwrites property and casualty reinsurance for insurance and reinsurance companies in the U.S. and international markets.  Everest Re has engaged in reinsurance transactions with Everest Reinsurance (Bermuda), Ltd. (“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 affiliated quota share agreement”).  At December 31, 2011 Everest Re had statutory surplus of $2.3 billion.

·  Everest National Insurance Company (“Everest National”), a Delaware insurance company and a direct subsidiary of Everest Re, is licensed in 50 states and the District of Columbia and is authorized to write property and casualty insurance on an admitted basis in the jurisdictions in which it is licensed. The majority of Everest National’s business is reinsured by its parent, Everest Re.

Everest Re, a Delaware insurance company and a direct subsidiary of Holdings, is a licensed property and casualty insurer and/or reinsurer in all states (except Nevada and Wyoming), the District of Columbia and Puerto Rico and is authorized to conduct reinsurance business in Canada, Singapore and Brazil. Everest Re underwrites property and casualty reinsurance for insurance and reinsurance companies in the U.S. and international markets. Everest Re engages in reinsurance transactions with Everest Reinsurance (Bermuda), Ltd. (“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 affiliated quota share agreement”). At December 31, 2008 Everest Re had statutory surplus of $2.3 billion.

Everest National Insurance Company (“Everest National”), a Delaware insurance company and a direct subsidiary of Everest Re, is licensed in 47 states and the District of Columbia and is authorized to write property and casualty insurance on an admitted basis in the jurisdictions in which it is licensed. The majority of Everest National’s business is reinsured by its parent, Everest Re.

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Everest Indemnity Insurance Company (“Everest Indemnity”), a Delaware insurance company and a direct subsidiary of Everest Re, writes excess and surplus lines insurance business in the U.S. on a non-admitted basis. Excess and surplus lines insurance is specialty property and liability coverage that an insurer not licensed to write insurance in a particular jurisdiction is permitted to provide to insureds when the specific specialty coverage is unavailable from admitted insurers. Everest Indemnity is licensed in Delaware and is eligible to write business on a non-admitted basis in all other states, the District of Columbia and Puerto Rico. The majority of Everest Indemnity’s business is reinsured by its parent, Everest Re.

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Mt. McKinley, a Delaware insurance company and a direct subsidiary of Holdings, was acquired by Holdings in September 2000 from The Prudential Insurance Company of America (“The Prudential”). In 1985, Mt. McKinley ceased writing new and renewal insurance and commenced a run-off operation to service claims arising from its previously written business. Effective September 19, 2000, Mt. McKinley and Everest Reinsurance (Bermuda), Ltd. (“Bermuda Re”) entered into a loss portfolio transfer reinsurance agreement, whereby Mt. McKinley transferred, for arm’s length consideration, all of its net insurance exposures and reserves to Bermuda Re.

·  Everest Indemnity Insurance Company (“Everest Indemnity”), a Delaware insurance company and a direct subsidiary of Everest Re, writes excess and surplus lines insurance business in the U.S. on a non-admitted basis. Excess and surplus lines insurance is specialty property and liability coverage that an insurer not licensed to write insurance in a particular jurisdiction is permitted to provide to insureds when the specific specialty coverage is unavailable from admitted insurers.  Everest Indemnity is licensed in Delaware and is eligible to write business on a non-admitted basis in all other states, the District of Columbia and Puerto Rico.  The majority of Everest Indemnity’s business is reinsured by its parent, Everest Re.

·  Everest Security Insurance Company (“Everest Security”), a Georgia insurance company and a direct subsidiary of Everest Re, writes property and casualty insurance on an admitted basis in Georgia and Alabama.  The majority of Everest Security’s business is reinsured by its parent, Everest Re.

·  Everest Insurance Company of Canada (“Everest Canada”), a Canadian insurance company and former direct subsidiary of Everest Re, is licensed to write property and casualty insurance in all Canadian provinces.  During the fourth quarter of 2011, Everest Re sold Everest Canada to an affiliated company, Holdings Ireland.

·  Mt. McKinley, a Delaware insurance company and a direct subsidiary of Holdings, was acquired by Holdings in September 2000 from The Prudential Insurance Company of America (“The Prudential”).  In 1985, Mt. McKinley ceased writing new and renewal insurance and commenced a run-off operation to service claims arising from its previously written business.  Effective September 19, 2000, Mt. McKinley and Bermuda Re entered into a loss portfolio transfer reinsurance agreement, whereby Mt. McKinley transferred, for arm’s length consideration, all of its net insurance exposures and reserves to Bermuda Re.

Reinsurance Industry Overview.

Reinsurance is an arrangement in which an insurance company, the reinsurer, agrees to indemnify another insurance or reinsurance company, the ceding company, against all or a portion of the insurance risks underwritten by the ceding company under one or more insurance contracts.  Reinsurance can provide a ceding company with several benefits, including a reduction in its net liability on individual risks or classes of risks, catastrophe protection from large and/or multiple losses and/or a reduction in operating leverage as measured by the ratio of net premiums and reserves to capital.  Reinsurance also provides a ceding company with additional underwriting capacity by permitting it to accept larger risks and write more business than would be acceptable relative to the ceding company’s financial resources.  Reinsurance does not discharge the ceding company from its liability to policyholders; rather, it reimburses the ceding company for covered losses.


There are two basic types of reinsurance arrangements: treaty and facultative.  Treaty reinsurance obligates the ceding company to cede and the reinsurer to assume a specified portion of a type or category of risks insured by the ceding company.  Treaty reinsurers do not separately evaluate each of the individual risks assumed under their treaties:treaties, instead, the reinsurer relies upon the pricing and underwriting decisions made by the ceding company.  In facultative reinsurance, the ceding company cedes and the reinsurer assumes all or part of the risk under a single insurance contract.  Facultative reinsurance is negotiated separately for each insurance contract that is reinsured.  Facultative reinsurance, when purchased by ceding companies, usually is intended to cover individual risks not covered by their reinsurance treaties because of the dollar limits involved or because the risk is unusual.


Both treaty and facultative reinsurance can be written on either a pro rata basis or an excess of loss basis.  Under pro rata reinsurance, the ceding company and the reinsurer share the premiums as well as the losses and expenses in an agreed proportion.  Under excess of loss reinsurance, the reinsurer indemnifies the ceding company against all or a specified portion of losses and expenses in excess of a specified dollar amount, known as the ceding company’scompany's retention or reinsurer’sreinsurer's attachment point, generally subject to a negotiated reinsurance contract limit.


In pro rata reinsurance, the reinsurer generally pays the ceding company a ceding commission.  The ceding commission generally is based on the ceding company’s cost of acquiring the business being reinsured (commissions, premium taxes, assessments and miscellaneous administrative expense and may contain profit sharing provisions, whereby the ceding commission is adjusted based on loss experience).  Premiums paid by the ceding company to a reinsurer for excess of loss reinsurance are not directly proportional to the

2

premiums that the ceding company receives because the reinsurer does not assume a proportionate risk.  There is usually no ceding commission on excess of loss reinsurance.


Reinsurers may purchase reinsurance to cover their own risk exposure.  Reinsurance of a reinsurer’sreinsurer's business is called a retrocession.  Reinsurance companies cede risks under retrocessional agreements to other reinsurers, known as retrocessionaires, for reasons similar to those that cause insurers to purchase reinsurance:  to reduce net liability on individual or classes of risks, protect against catastrophic losses, stabilize financial ratios and obtain additional underwriting capacity.


Reinsurance can be written through intermediaries, generally professional reinsurance brokers, or directly with ceding companies.  From a ceding company’scompany's perspective, the broker and the direct distribution channels have advantages and disadvantages.  A ceding company’scompany's decision to select one distribution channel over the other will be influenced by its perception of such advantages and disadvantages relative to the reinsurance coverage being placed.


Business Strategy.

The Company’s business strategy is to sustain its leadership position within targeted reinsurance and insurance markets, provide effective management throughout the property and casualty underwriting cycle and thereby achieve an attractive return for its stockholder.  The Company’s underwriting strategies seek to capitalize on its i) financial strength and capacity, ii) global franchise, iii) stable and experienced management team, iii)iv) diversified product and distribution offerings, iv)v) underwriting expertise and disciplined approach, v)vi) efficient and low-cost operating structure and vi)vii) effective enterprise risk management practices.


The Company offers treaty and facultative reinsurance and admitted and non-admitted insurance.  The Company’s products include the full range of property and casualty reinsurance and insurance coverages, including marine, aviation, surety, errors and omissions liability (“E&O”), directors’ and officers’ liability (“D&O”), medical malpractice, other specialty lines, accident and health (“A&H”) and workers’ compensation.


The Company’s underwriting strategy emphasizesstrategies emphasize underwriting profitability over premium volume.  Key elements of this strategy include careful risk selection, appropriate pricing through strict underwriting discipline and adjustment of the Company’s business mix in response to changing market conditions.  The Company focuses on reinsuring companies that effectively manage the underwriting cycle through proper analysis and pricing of underlying risks and whose underwriting guidelines and performance are compatible with its objectives.


The Company’s underwriting strategy emphasizesstrategies emphasize flexibility and responsiveness to changing market conditions, such as increased demand or favorable pricing trends.  The Company believes that its existing strengths, including its broad underwriting expertise, U.S. and international presence, strong financial ratings and substantial capital, facilitate adjustments to its mix of business geographically, by line of business and by type of coverage, allowing it to participate in those market opportunities that provide the greatest potential for underwriting profitability.  The Company’s insurance operations complement these strategies by accessing business that is not available on a reinsurance basis.  The Company carefully monitors its mix of business across all operations to avoid unacceptable geographic or other risk concentrations.


Capital Transactions.

The Company’s business operations are in part dependent on its financial strength and financial strength ratings, and the market’s perception of its financial strength.  The Company’s stockholder’s equity was $2,203.0$2,941.4 million and $2,567.5$3,127.7 million at December 31, 20082011 and 2007,2010, respectively. The Company possesses significant financial flexibility with access to the debt markets and, through its ultimate parent, equity markets, as a result of its perceived financial strength, as evidenced by the financial strength ratings as assigned by independent rating agencies.  During the last six months of 2008 and continuing into early 2009, the capital markets have been illiquid in reaction to the deepening credit crisis which has led to bank and other financial institution failures. Credit spreads have significantly widened and the equity markets have declined significantly during this period making access to the capital markets, for even highly rated companies, difficult and costly. The Company’s capital position remains strong, commensurate with its financial ratings. Theratings and the Company has

3

ample liquidity to meetsmeet its financial obligations for the foreseeable future. Therefore, the Company has no foreseeable need to tap the capital markets in the near term.


On December 17, 2008,October 14, 2011. Group and Holdings renewed the 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.


On April 26, 2007, Holdings completedMarch 19, 2009, Group announced the commencement of a public offeringcash tender offer for any and all of $400.0 million principal amount ofthe 6.6% fixed to floating rate long term subordinated notes.  Upon expiration of the tender offer, the Company had reduced its outstanding debt by $161.4 million, which resulted in a pre-tax gain on debt repurchase of $78.3 million.

On March 15, 2010, the $200.0 million principal amount of 8.75% senior notes with a scheduled maturity date of May 15, 2037matured, and a final maturity date of May 1, 2067. The net proceeds were used to redeem the 7.85% junior subordinated debt securities of Holdings on November 15, 2007, and for general corporate purposes.  See also ITEM 8, "Financial Statements and Supplementary Data" - Note 20 "Subsequent Events" of Notes to Consolidated Financial Statements.

was paid off in cash.


Financial Strength Ratings.

The following table shows the current financial strength ratings of the Company’s operating subsidiaries as reported by A.M. Best, Standard & Poor’s RatingsFinancial Services, LLC (“Standard & Poor’s”) and Moody’s Investors Service,Services, Inc. (“Moody’s”).  These ratings are based upon factors of concern to policyholders and should not be considered an indication of the degree or lack of risk involved in a direct or indirect equity investment in an insurance or reinsurance company.


All of the below mentionedbelow-mentioned ratings are continually monitored and revised, if necessary, by each of the rating agencies.  The ratings presented in the following table were in effect on March 13, 2009.

as of February 28, 2012.


The Company believes that its ratings, in general, are important to its operations because they provide the Company’s customers and investors with an independent assessment of the Company’s underlying financial strength using a scale that provides for relative comparisons.  Strong financial ratings are particularly important for reinsurance companies.  Ceding companies must rely on their reinsurers to pay covered losses well into the future.  As a result, a highly rated reinsurer is generally preferred.

Operating Subsidiary:

A.M. Best

Standard & Poor’s*

Poor's

Moody’s

Moody's

Everest Re

A+ (Superior)

A+ (Strong)

Aa3 (Excellent)

Everest National

Re

A+ (Superior)

A+ (Strong)

Not Rated

Aa3 (Excellent)

Everest Indemnity

National

A+ (Superior)

A+ (Strong)

Not Rated

Not Rated

Everest Security

Indemnity

A+ (Superior)

Not Rated

Not Rated

Everest Security

A+ (Superior)Not RatedNot Rated
Mt. McKinley

Not Rated

Not Rated

Not Rated

* Standard & Poor’s released the Company’s revised ratings on March 13, 2009. S&P lowered the Company’s ratings one level and provided a stable outlook.

A.M. Best states that the “A+” (“Superior”) rating is assigned to those companies which, in its opinion, have a superior ability to meet their ongoing insurance policy and contract obligations to policyholders based on A.M. Best’s comprehensive quantitative and qualitative evaluation of a company’s balance sheet strength, operating performance and business profile.  Standard & Poor’s states that the “A+” rating is assigned to those insurance companies which, in its opinion, have strong financial security characteristics with respect to their ability to pay under its insurance policies and contracts in accordance with their terms.  As this represents a one notch lower rating from previous ratings, management does not believe that this one notch downgrade will have a materially adverse affect on the Company’s business. Moody’s states that insurance companies rated “Aa” offer excellent financial security.  Together with the Aaa“Aaa” rated companies, Aa“Aa” rated companies constitute what are generally known as high gradehigh-grade companies, with Aa“Aa” rated companies generally having somewhat larger longlong-term risks. On January 24, 2012, Moody’s affirmed the rating of Everest Re but changed the outlook on the ratings from stable to negative reflecting their opinion of
the likely direction of the ratings over the medium term risks.

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(12 to 18 months). Management will continue to work with Moody’s over this time to address their concerns but it is not possible to predict the potential outcome. Management does not believe that a potential one notch downgrade would have a material adverse affect on the Company’s business.

Subsidiaries other than Everest Re may not be rated by some or any rating agencies because such ratings are not considered essential by the individual subsidiary’s customers or because of the limited nature of the subsidiary’s operations.  In particular, Mt. McKinley is not rated because it is in run-off.run-off status.


Debt Ratings.

The following table shows the debt ratings by A.M. Best, Standard & Poor’s and Moody’s of the Company’sHoldings’ senior notes due March 15, 2010 and October 15, 2014;2014, long term notes due May 1, 2067 and Everest Re Capital Trust II’s (“Capital Trust II”) trust preferred securities due March 29, 2034, all of which are considered investment grade.  Debt ratings are the rating agencies’ current assessment of the credit worthiness of an obligor with respect to a specific obligation.

A.M. Best

Standard & Poor’s *

Poor's

Moody’s

Moody's

Senior Notes

a-

(Excellent)

a-

(Strong)

BBB+

(Adequate)

A-

A3

(Strong)

(Good security)

A3(Good)

Long Term Notes

bbb(Adequate)BBB(Adequate)Baa1(Adequate)
Trust Preferred Securities

bbb

(Good)

bbb+

(Adequate)

BBB-

(Adequate)

BBB

Baa1

(Adequate)

(Adequate security)

Long Term Notes

bbb+

(Good)

Baa1

BBB-

(Adequate)

Baa1

(Adequate security)

* Standard & Poor’s released the Company’s revised ratings on March 13, 2009. S&P lowered the Company’s ratings one level.

A debt rating of “a-” is assigned by A.M. Best where the issuer, in A.M. Best’s opinion, has a strong ability to meet the terms of the obligation.  A.M. Best assigns a debt rating in the “bbb” range where the issuer, in A.M. Best’s opinion, has adequate ability to meet the terms of the obligation.  Standard & Poor’s assigns a debt rating ofin the “A” range to issuers that exhibit strong capacity and willingness to meet its financial commitments on obligations as they come due.  A debt rating in the “BBB” to issues thatrange is assigned by Standard & Poor’s where the issuers exhibit adequate protection parameters although adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation. As this represents a one notch lower rating, management does not believe that a one notch downgrade will have a materially adverse impact on the Company’s access to the credit markets.  According to Moody’s, a debt rating of “A3” is assigned to issues that are considered upper-medium-grade obligations and subject to low credit risk.  Obligations rated “Baa1” are subject to moderate credit risk and are considered medium-grade and as such may possess certain speculative characteristics.

On January 24, 2012, Moody’s affirmed the ratings of the Company’s debt but changed the outlook on the ratings from stable to negative reflecting their opinion of the potential direction of the ratings over the medium term (12 to 18 months). The Company will continue to work with Moody’s over this time to address their concerns but it is not possible to predict the potential outcome. The Company does not believe that a one notch downgrade would have a material adverse affect on the Company’s business.


Competition.

The worldwide reinsurance and insurance businesses are highly competitive, as well as cyclical by product and market.  As a result,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 the Company underwrites 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.


The Company competes in the U.S. and international reinsurance and insurance markets with numerous global competitors.  The Company’s 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 the Company does 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.

During the latter part of 2007 and throughout 2008, there has been a significant slowdown in the global economy. Excessive availability and use of credit, particularly by individuals, led to increased defaults on sub-prime mortgages in the U.S. and elsewhere, falling values for houses and many commodities prices and contracting consumer spending. The significant increase in default rates negatively impacted the value of

5


mortgage-backed securities held by both foreign and domestic institutions. The defaults have led to a corresponding increase in foreclosures, which have driven down housing values, resulting in additional losses on the asset-backed securities. During the third and fourth quarters of 2008, the credit markets deteriorated dramatically, evidenced by widening credit spreads and dramatically reduced availability of credit. Many financial institutions, including some insurance entities, experienced liquidity crises due to immediate demands for funds for withdrawals or collateral, combined with falling asset values and their inability to sell assets to meet the increased demands. As a result, several financial institutions have failed or been acquired at distressed prices, while others have received loans from the U.S. government to continue operations. The liquidity crisis significantly increased the spreads on fixed maturities and, at the same time, had a dramatic and negative impact on the stock markets around the world. The combination of losses on securities from failed or impaired companies combined with the decline in values of fixed maturities and equity securities has resulted in significant declines in the capital bases of most insurance and reinsurance companies. It is too early to predict the timing and extent of impact the capital deterioration will have on insurance and reinsurance market conditions. There is an expectation that these events will ultimately result in increased rates for insurance and reinsurance in certain segments of the market, but there is no assurance that this will be the case.

Worldwide insurance and reinsurance market conditions continued to be very competitive.competitive, particularly in the casualty lines of business.  Generally, there was ample insurance and reinsurance capacity relative to demand. The Company noted, however, that in many markets and lines, the rates of decline have slowed, pricing in some segments was relatively flat and there was upward movement in some others.  Competition and its effect on rates, terms and conditions vary widely by market and coverage yet continuescontinued to be most prevalent in the U.S. casualty insurance and reinsurance markets. In addition to demanding lower rates

However, during 2011, the industry experienced significant losses from Australian floods, the New Zealand earthquake, the earthquake and improved terms, ceding companies have retained more of their business by reducing quota share percentages, purchasing excess of loss coverstsunami in lieu of quota shares, and increasing retentions on excess of loss business. The Company’s quota share premiums have declined, particularly on catastrophe exposed property business, due to slower growth and increased purchases of common account covers by ceding companies, which reduces the premiums subject to the quota share contract. The U.S. insurance markets in which the Company participates, remains extremely competitive as well, particularlyJapan, storms in the workers’ compensation, public entity and contractor sectors. While the Company’s growth has slowed, given the specialty nature of its business and its underwriting discipline, the Company believes the impact on the profitability of its business to be less pronounced than on the market generally.

Rate decreases in the international markets have generally been less pronounced than in the U.S.,U.S, and the Company has seen some increases, particularly for catastrophe exposed business. The Company has grown its business in the Middle East, Latin America and Asia and has expanded its international reach by opening a new office in Brazil to capitalize on the recently expanded opportunity for professional reinsurers in that market and on the economic growth expected for Brazil in the future.

The reinsurance industry has experienced a period of falling rates and volume. Profit opportunities have become generally less available over time; however, the unfavorable trends appear to have abated somewhat. The Company is now seeing smaller rate declines, pockets of stability and some increases in some markets and for some coverages. As a result of very significant investment and catastrophe losses incurred by both primary insurers and reinsurers over the past year, but principally in the third and fourth quarters, industry-wide capital has declined and rating agency scrutiny has increased. There is an expectation that given the rate softening that has occurred over the past several quarters, the industry-wide decline in capital combined with volatile and inaccessible capital markets and a looming recession, will lead to a hardening of insurance and reinsurance marketplace rates, terms and conditions.Thailand floods.  It is too early to gaugedetermine the extentimpact on market conditions as a result of hardening, if any, that will occur; however, it appears that muchthese 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 the redundant capital has been wrung outthese losses is sufficient to increase rates and improve market conditions for other lines of the industry, and the stage is set for firmer markets.

business remains to be seen.


Overall, the Company believes that current marketplace conditions, offerparticularly for catastrophe coverages, provide profit opportunities for it given its strong ratings, distribution system, reputation and expertise.  The Company continues to employ its strategy of targeting business that offers the greatest profit potential, while maintaining balance and diversification in its overall portfolio.

6


Employees.

As of February 1, 2009,2012, the Company employed 550634 persons.  Management believes that employee relations are good.  None of the Company’s employees are subject to collective bargaining agreements, and the Company is not aware of any current efforts to implement such agreements.


Available Information.

The Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports are available free of charge through the Company’s internet website at http://www.everestre.comwww.everestregroup.com as soon as reasonably practicable after such reports are electronically filed with the SEC.


ITEM 1A.      RISK FACTORS


In addition to the other information provided in this report, the following risk factors should be considered when evaluating us.  If the circumstances contemplated by the individual risk factors materialize, our business, financial condition and results of operations could be materially and adversely affected and our ability to service our debt, our debt ratings and our ability to issue new debt could decline significantly.


RISKS RELATING TO OUR BUSINESS

Deterioration


Fluctuations in the public debt and equityfinancial markets could lead to additionalresult in investment losses.

The prolonged


Prolonged and severe disruptions in the public debt and equity markets, including among other things, widening of credit spreads, bankruptcies and government intervention in a number of large financial institutions, have resultedsuch as occurred during 2008, could result in significant realized and unrealized losses in our investment portfolio. For the year ended December 31, 2008, we incurred $489.2 million of realized investment losses and $276.5 million of unrealized investment losses.  Depending on market conditions, weAlthough financial markets have significantly improved since 2008, they could incur substantial additionaldeteriorate in the future.  Such declines in the financial markets could result in significant realized and unrealized losses in future periods, whichon investments and could have a material adverse impact on our results of operations, equity, business and insurer financial strength and debt ratings.



Our results could be adversely affected by catastrophic events.


We are exposed to unpredictable catastrophic events, including weather-related and other natural catastrophes, as well as acts of terrorism.  Any material reduction in our operating results caused by the occurrence of one or more catastrophes could inhibit our ability to pay dividends or to meet our interest and principal payment obligations.  WeSubsequent to April 1, 2010, we define a catastrophe as an event that causes a pre-tax loss on property exposures before reinsurance of at least $5.0$10.0 million, before corporate level reinsurance and taxes.  Prior to April 1, 2010, we used a threshold of $5.0 million.  By way of illustration, during the past five calendar years, pre-tax catastrophe losses, net of contract specific reinsurance but before cessions under corporate reinsurance programs, were as follows:

Calendar year:                                                                                                                         

 

Pre-tax catastrophe losses

(Dollars in millions)

 

 

 

2008

 

 

$     202.4

2007

 

 

73.3

2006

 

 

209.6

2005

 

 

833.0

2004

 

 

256.3


Calendar year:Pre-tax catastrophe losses
(Dollars in millions)   
2011 $798.4 
2010  267.1 
2009  23.9 
2008  202.4 
2007  73.3 

Our losses from future catastrophic events could exceed our projections.


We use projections of possible losses from future catastrophic events of varying types and magnitudes as a strategic underwriting tool. We use these loss projections to estimate our potential catastrophe losses in certain geographic areas and decide on the purchase of retrocessional coverage or other actions to limit the extent of potential losses in a given geographic area. These loss projections are approximations, reliant on a

7

mix of quantitative and qualitative processes, and actual losses may exceed the projections by a material amount, resulting in a material adverse effect on our financial condition and results of operations.


If our loss reserves are inadequate to meet our actual losses, our net income would be reduced or we could incur a loss.


We are required to maintain reserves to cover our estimated ultimate liability of losses and loss adjustment expenses (“LAE”) for both reported and unreported claims incurred.  These reserves are only estimates of what we believe the settlement and administration of claims will cost based on facts and circumstances known to us.  In setting reserves for our reinsurance liabilities, we rely on claim data supplied by our ceding companies and brokers and we employ actuarial and statistical projections.  The information received from our ceding companies is not always timely or accurate, which can contribute to inaccuracies in our loss projections.  Because of the uncertainties that surround our estimates of loss and LAE reserves, we cannot be certain that ultimate losslosses and LAE payments will not exceed our estimates.  If our reserves are deficient, we would be required to increase loss reserves in the period in which such deficiencies are identified which would cause a charge to our earnings and a reduction of capital.  By way of illustration, during the past five calendar years, the reserve re-estimation process resulted in a decrease to our pre-tax net income in fourall of the years:

Calendar year:                                                                                                                              

 

Effect on pre-tax net income

(Dollars in millions)

 

 

 

 

 

2008

 

 

$

142.0

decrease

2007

 

 

 

275.7

decrease

2006

 

 

 

67.4

decrease

2005

 

 

 

67.3

increase

2004

 

 

 

174.2

decrease


Calendar year: Effect on pre-tax net income
(Dollars in millions)    
2011 $14.8  decrease
2010  62.8  decrease
2009  70.0  decrease
2008  142.0  decrease
2007  275.7  decrease


The difficulty in estimating our reserves is significantly more challenging as it relaterelates to reserving for potential asbestos and environmental (“A&E”) liabilities.  At year end 2008, 10.6%2011, 6.0% of our gross reserves were comprised of A&E reserves.  A&E liabilities are especially hard to estimate for many reasons, including the long delays between exposure and manifestation of any bodily injury or property damage, difficulty in identifying the source of the asbestos or environmental contamination, long reporting delays and difficulty in properly allocating liability for the asbestos or environmental damage.  Legal tactics and judicial and legislative developments affecting the scope of insurers’ liability, which can be difficult to predict, also contribute to uncertainties in estimating reserves for A&E liabilities.


The failure to accurately assess underwriting risk and establish adequate premium rates could reduce our net income or result in a net loss.


Our success depends on our ability to accurately assess the risks associated with the businesses on which the risk is retained.  If we fail to accurately assess the risks we retain, we may fail to establish adequate premium rates to cover our losses and LAE.  This could reduce our net income and even result in a net loss.


In addition, losses may arise from events or exposures that are not anticipated when the coverage is priced.  An example of an unanticipated event is the terrorist attacks on September 11, 2001.  Neither the magnitude of loss on a single line of business nor the combined impact on several lines of business from an act of terrorism on such a large scale was contemplated when we priced our coverages.  In addition to unanticipated events, we also face the unanticipated expansion of our exposures, particularly in long-tail liability lines.  An example of this is the expansion over time of the scope of insurers’ legal liability within the mass tort arena, particularly for A&E exposures discussed above.

8


Decreases in pricing for property and casualty reinsurance and insurance could reduce our net income.


The worldwide reinsurance and insurance businesses are highly competitive, as well as cyclical by product and market.  These cycles, as well as other factors that influence aggregate supply and demand for property and casualty insurance and reinsurance products, are outside of our control.  The supply of (re)insurance is driven by prevailing prices and levels of capacity that may fluctuate in response to a number of factors including large catastrophic losses and investment returns being realized in the insurance industry. Demand for (re)insurance is influenced by underwriting results of insurers and insureds, including catastrophe losses, and prevailing general economic conditions. If any of these factors were to result in a decline in the demand for (re)insurance or an overall increase in (re)insurance capacity, our net income could decrease.


If rating agencies downgrade the ratings of our insurance subsidiaries, future prospects for growth and profitability could be significantly and adversely affected.


Our active insurance company subsidiaries currently hold financial strength ratings assigned by third-party rating agencies which assess and rate the claims paying ability and financial strength of insurers and reinsurers. Our active subsidiaries carry an “A+” (“Superior”) rating from A.M. Best. Everest Re and Everest National hold an “A+” (“Strong”) rating from Standard & Poor’s. Everest Re holds an “Aa3” (“Excellent”) rating from Moody’s.  Financial strength ratings are used by client companies and agents and brokers that place the business as an important means of assessing the financial strength and quality of reinsurers. A downgrade or withdrawal of any of these ratings might adversely affect our ability to market our insurance products and could have a material and adverse effect on future prospects for growth and profitability.


On January 24, 2012, Moody’s affirmed the ratings of Everest Re but changed the outlook on the ratings from stable to negative reflecting their opinion of the likely directions of the ratings over the medium term (12 to 18 months).  We will continue to work with Moody’s over this time to address their concerns but it is not possible to predict the potential outcome.

On March 13, 2009, Standard & Poor’s downgraded its ratings of Everest Re’sRe and Everest National’s ratings were downgradedNational one notch by Standard & Poor’s. However, we cannot assurelevel to “A+”.  It is possible that a further downgrade will not occur in the future if we do not continue to meet the evolving criteria expected of our current rating. In that regard, several of the rating agencies are in the process of modifying their approaches to evaluating catastrophic risk relative to their capital andenterprise risk management requirements.and its impact on ratings. Therefore, we cannot predict the outcome of this reassessment or its potential impact upon our ratings.


Consistent with market practice, much of our treaty reinsurance business allows the ceding company to terminate the contract or seek collateralization of our obligations in the event of a rating downgrade below a certain threshold.  The termination provision would generally be triggered if a rating fell below A.M. Best’sBest Company’s A- rating level, which is three levels below Everest Re’s current rating of A+. To a lesser extent, Everest Re also has modest exposure to reinsurance contracts that contain provisions for obligatory funding of outstanding liabilities in the event of a rating agency downgrade.  That provisionThose provisions would also generally be triggered if Everest Re’s rating fell below A.M. Best’s A- rating level.


The failure of our insureds, intermediaries and reinsurers to satisfy their obligations to us could reduce our net income.


In accordance with industry practice, we have uncollateralized receivables from insureds, agentagents and brokers and/or rely on agents and brokers to process our payments.  We may not be able to collect amounts due from insureds, agents and brokers, resulting in a reduction to net income.


We are also subject to the credit risk of reinsurers in connection with retrocessional arrangements because the transfer of risk to a reinsurer does not relieve us of our liability to the insured. In addition, reinsurers may be unwilling to pay us even though they are able to do so.  The failure of one or more of our reinsurers to honor their obligations to us in a timely fashion would impact our cash flow and reduce our net income and could cause us to incur a significant loss.


If we are unable or choose not to purchase reinsurance and transfer risk to reinsurers, our net income could be reduced or we could incur a net loss in the event of an unusual loss experience.


We are generally less reliant on the purchase of reinsurance than many of our competitors, in part because of our strategic emphasis on underwriting discipline and management of the cycles inherent in our business.


We try to separate our risk taking process from our risk mitigation process in order to avoid developing too great of a reliance on reinsurance.  Because weThe bulk of these cessions are to captives of program managers, who thereby share in the results of the business they produce.  We otherwise generally purchase reinsurance from other third parties only when we expect a net benefit, thebenefit.  The percentage of business that we reinsure as indicated below,to other than captives of program managers may vary considerably from year to year, depending on our view of the relationship between cost and the expected benefit for the contract period.


We have entered into affiliated whole account quota share reinsurance agreements for 2002 through 20082011 and renewed theentered into a new quota share agreement for 20092012 with Bermuda Re and Everest International Reinsurance, Ltd. (“Everest International”).Re.  We believe that the terms, conditions and pricing of the quota share agreements reflect arm’s length market conditions.  In addition, we entered into a loss portfolio transfer agreement with Bermuda Re on October 1, 2008.  These affiliated reinsurance arrangements allow us to more effectively leverage our capital, expertise, distribution platform and market presence than our stand alone capital position would otherwise allow.

Percentage of ceded written premiums to gross written premiums

 

2008

2007

2006

2005

2004

 

 

 

 

 

 

 

Unaffiliated

 

6.0%

5.0%

3.9%

4.0%

4.6%

Affiliated

 

36.2%

29.4%

24.2%

24.2%

18.7%


Because we have purchased limited amounts of reinsurance, our net income could be reduced following a large unreinsured event or adverse overall claims experience.

Percentage of ceded written premiums to gross written premiums 2011 2010 2009 2008 2007
           
Unaffiliated 5.0% 7.4% 6.0% 6.0% 5.0%
Affiliated 45.8% 41.1% 42.0% 36.2% 29.4%

Our affiliated quota share agreements reflect general reinsurance market terms and conditions and are negotiated on an arms’ length basis. As a result, there can be no assurance that these arrangements will continue beyond 2009.2012. If the quota shares are not renewed, we may have to reduce our premium volume and we may be more exposed to reductions in net income from large losses.



Changes in the availability and cost of reinsurance, which are subject to market conditions that are outside of our control, have reduced to some extent our ability to use reinsurance to tailor the risks we assume on a contract or program basis or to mitigate or balance exposures across our reinsurance operations.  Because we have purchased minimal reinsurance in recent years, our net income could be reduced following a large unreinsured event or adverse overall claims experience.

Our industry is highly competitive and we may not be able to compete successfully in the future.


Our industry is highly competitive and subject to pricing cycles that can be pronounced. We compete globally in the U.S.United States and international reinsurance and insurance markets with numerous 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.


According to Standard & Poor’s,A.M. Best, we rank among the top ten global reinsurance groups, in which more than two-thirds of the market share is concentrated.  The worldwide premium available to the reinsurance market, for both life and non-life business, was estimated to be $190 billion in 20072010 according to data compiled by the International Association of Insurance Supervisors.A.M. Best.  The top twentytwenty-five groups in our industry represent approximately 75%just over 85% of these revenues.  The leaders in this market are Munich Re, Swiss Re, Hannover Ruckversicherung AG, Berkshire Hathaway Hannover ReInc., and syndicates at Lloyd’s.  Some of these competitors have greater financial resources than we do and have established long term and continuing business relationships throughout the industry, 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.


We are dependent on our key personnel.


Our success has been, and will continue to be, dependent on theour ability to retain the services of existing key executive officers and to attract and retain additional qualified personnel in the future.  The loss of the services of any key executive officer or the inability to hire and retain other highly qualified personnel in the future could adversely affect our ability to conduct business.  Generally, we consider key executive officers to be those individuals who have the greatest influence in setting overall policy and controlling operations: Chairman and Chief Executive Officer, Joseph V. Taranto (age 60) President and Chief Operating Officer, Thomas J. Gallagher (age 60)62), and Executive Vice President and Chief Financial Officer, Craig EisenacherDominic J. Addesso (age 61)58).  We currently have an employment contractcontracts with Mr. Taranto which has been previouslyand Mr. Addesso.  Mr. Taranto’s contract was filed with the SEC


and which currently provides for termterms of employment ending on December 31, 2009. We are not aware that any2012.  Mr. Addesso’s contract was filed with the SEC and provides for terms of the above three officers are planning to leave or retire in the near future. We do not maintain any key employee insurance on any of our employees.

employment ending June 30, 2013.


Our investment values and investment income could decline because they are exposed to interest rate, credit and market risks.


A significant portion of our investment portfolio consists of fixed income securities and smaller portions consist of equity securities and other investments.  Both the fair market value of our invested assets and associated investment income fluctuate depending on general economic and market conditions.  For example, the fair market value of our predominant fixed income portfolio generally increases or decreases inversely to fluctuations in interest rates.  The market value of our fixed income securities could also decrease as a result of a downturn in the business cycle, such as the downturn we are currently experiencing, that causes the credit quality of such securities to deteriorate.  The net investment income that we realize from future investments in fixed income securities will generally increase or decrease with interest rates.


Interest rate fluctuations also can cause net investment income from fixed income investments that carry prepayment risk, such as mortgage-backed and other asset-backed securities, to differ from the income anticipated from those securities at the time of purchase.  In addition, if issuers of individual investments are unable to meet their obligations, investment income will be reduced and realized capital losses may arise.



The majority of our fixed income securities are classified as available for sale and temporary changes in the market value of these investments are reflected as changes to our stockholder’s equity.  Our actively managed equity security portfolio is fair valued and any changes in fair value are reflected as net realized capital gains or losses.  As a result, a decline in the value of the securities in our portfolio reduces our capital or could cause us to incur a loss.


We have invested a portion of our investment portfolio in equity securities. The value of these assets fluctuatefluctuates with changes in the markets. In times of economic weakness, the fair value of these assets may decline, and may negatively impact net income.  We also invest in non-traditional investments which have different risk characteristics than traditional fixed income and equity securities. These alternative investments are comprised primarily of private equity limited partnerships.  The changes in value and investment income/(loss) for these partnerships aremay be more volatile than over-the-counter securities.


The following table quantifies the portion of our investment portfolio that consists of fixed income securities, equity securities and asset-backed investments that carry prepayment risk.

 

At

 

 

(Dollars in millions)

December 31, 2008

 

% of Total

Mortgage-backed securities

$                    217.1

 

2.9%

Other asset-backed

9.4

 

0.1%

     Total asset-backed

226.5

 

3.0%

Other fixed income

5,285.4

 

71.5%

     Total fixed income, at market value

5,511.9

 

74.5%

Fixed income, at fair value

43.1

 

0.6%

Equity securities, at fair value

119.8

 

1.6%

Other invested assets, at market value                                

392.6

 

5.3%

Other invested assets, at fair value

316.8

 

4.3%

Cash and short-term investments

1,010.9

 

13.7%

     Total investments and cash

$                 7,395.1

 

100.0%

 

 

 

 

(Some amounts may not reconcile due to rounding.)

 

 

 


11

  At  
(Dollars in millions) December 31, 2011 % of Total
Mortgage-backed securities      
Commercial $47.9   0.6%
Agency residential  543.4   6.5%
Non-agency residential  24.3   0.3%
Other asset-backed  45.1   0.5%
Total asset-backed  660.7   7.9%
Other fixed income  4,446.3   52.9%
Total fixed income, at market value  5,107.0   60.8%
Fixed maturities, at fair value  113.6   1.4%
Equity securities, at fair value  1,207.1   14.4%
Other invested assets, at market value  379.3   4.5%
Other invested assets, at fair value  817.4   9.7%
Cash and short-term investments  771.9   9.2%
Total investments and cash $8,396.3   100.0%
         
(Some amounts may not reconcile due to rounding.)        


We may experience foreign currency exchange losses that reduce our net income and capital levels.


Through our international operations, we conduct business in a variety of foreign (non-U.S.) currencies, principally the Euro, the British pound, the Canadian dollar and the Singapore dollar. Assets, liabilities, revenues and expenses denominated in foreign currencies are exposed to changes in currency exchange rates. Our functional currency is the U.S. dollar, and exchange rate fluctuations relative to the U.S. dollar may materially impact our results and financial position. In 2008,2011, we wrote 20.9%approximately 24.5% of our reinsurance coverages in non-U.S. currencies; as of December 31, 2008,2011, we maintained 9.9%approximately 17.0% of our investment portfolio in investments denominated in non-U.S. currencies. During 2008, 20072011, 2010 and 2006,2009, the impact on our quarterly pre-tax net income from exchange rate fluctuations ranged from a loss of $14.6$23.3 million to a gain of $54.6$9.9 million.

In addition to net income impacts, changes in foreign exchange rates resulted in pre-tax translation adjustments through other comprehensive income of $46.9 million and $46.3 million for the years ended December 31, 2008 and 2007, respectively. On a cumulative after-tax basis, translation had increased equity by $28.9 million and $59.4 million as of December 31, 2008 and 2007, respectively.


RISKS RELATING TO REGULATION


Insurance laws and regulations restrict our ability to operate and any failure to comply with those laws and regulations could have a material adverse effect on our business.


We are subject to extensive and increasing regulation under U.S., state and foreign insurance laws.  These laws limit the amount of dividends that can be paid to us by our operating subsidiaries, impose restrictions on the amount and type of investments that we can hold, prescribe solvency, accounting and internal control standards that must be met and maintained and require us to maintain reserves.  These laws also require disclosure of material inter-affiliate transactions and require prior approval of “extraordinary” transactions.  
Such “extraordinary” transactions include declaring dividends from operating subsidiaries that exceed statutory thresholds.  These laws also generally require approval of changes of control of insurance companies.  The application of these laws could affect our liquidity and ability to pay dividends, interest and other payments on securities, as applicable, and could restrict our ability to expand our business operations through acquisitions of new insurance subsidiaries.  We may not have or maintain all required licenses and approvals or fully comply with the wide variety of applicable laws and regulations or the relevant authority’s interpretation of the laws and regulations.  If we do not have the requisite licenses and approvals or do not comply with applicable regulatory requirements, the insurance regulatory authorities could preclude or temporarily suspend us from carrying on some or all of our activities or monetarily penalize us.  These types of actions could have a material adverse effect on our business.  To date, no material fine, penalty or restriction has been imposed on us for failure to comply with any insurance law or regulation.

The extreme


As a result of the recent dislocation of the financial markets, combined with the newmarket, Congress and the Presidential administration in the United States, has increased the likelihood of changesare contemplating change in the way the financial services industry is regulated.  It is possible that insurance regulation will be drawn into this process, and that federal regulatory initiatives in the insurance industry could emerge.  The future impact of such initiatives, if any, on our operation, net income or financial condition cannot be determined at this time.


RISK RELATING TO OUR SECURITIES


Because of our holding company structure, our ability to pay dividends, interest and principal is dependent on our receipt of dividends, loan payments and other funds from our subsidiaries.


We are a holding company, whose most significant assets consistasset consists of the stock of our operating subsidiaries.  As a result, our ability to pay dividends, interest or other payments on our securities in the future will depend on the earnings and cash flows of the operating subsidiaries and the ability of the subsidiaries to pay dividends or to advance or repay funds to us.  This ability is subject to general economic, financial, competitive, regulatory and other factors beyond our control. Payment of dividends and advances and repayments from some of the operating subsidiaries are regulated by U.S., state and foreign insurance laws


and regulatory restrictions, including minimum solvency and liquidity thresholds.  Accordingly, the operating subsidiaries may not be able to pay dividends or advance or repay funds to us in the future, which could prevent us from paying dividends, interest or other payments on our securities.


ITEM 1B.UNRESOLVED STAFF COMMENTS


None.


ITEM 2.              PROPERTIES


Everest Re’s corporate offices are located in approximately 203,800230,500 square feet of leased office space in Liberty Corner, New Jersey.  The Company’s other thirteeneleven locations occupy a total of approximately 76,000124,070 square feet, all of which are leased.  Management believes that the above described office space is adequate for its current and anticipated needs.



ITEM 3.              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 reinsurance and other contractualreinsurance 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.  WhileThe Company considers the final outcomestatuses of these matters cannot be predicted with certainty,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 doesis not believe thata party to any of these matters, when finally resolved, will have a materially adverse effect on the Company’s financial positionother material litigation or liquidity. However, an adverse resolution of one or more of these items in any one quarter or fiscal year could have a materially adverse effect on the Company’s results of operations in that period.

The Company’s insurance subsidiaries have also received and have responded to broadly distributed information requests by state regulators including among others, from Delaware and Georgia.

arbitration.


ITEM 4.              SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSMINE SAFETY DISCLOSURES


Information for Item 4 is not required pursuant to General Instruction I(2) of Form 10-K.

Not applicable.

PART II

ITEM 5.      MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER

                     PURCHASES OF EQUITY SECURITIES


ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information and Holder of Common Stock.

As of December 31, 2008,2011, all of the Company’s common stock was owned by Holdings Ireland and was not publicly traded.


Dividend History and Restrictions.

In 2008, the Company paid a $10.0 million dividend to Holdings Ireland.

The Company did not pay any dividends in 20072011, 2010 and 2006.2009.  The declaration and payment of future dividends, if any, by the Company will be at the discretion of the Board of Directors and will depend upon many factors, including the Company’s earnings, financial condition, business needs and growth objectives, capital and surplus requirements of its operating subsidiaries, regulatory restrictions, rating agency considerations and other factors.  As an insurance holding company, the Company is dependent on dividends and other permitted payments from its subsidiaries to pay cash dividends to its stockholder.  The payment of dividends to Holdings by Everest Re is subject to limitations imposed by Delaware law.  Generally, Everest Re may only pay dividends out of its statutory earned surplus, which was $1.4 billion at December 31, 2008,2011, and only after it has given 10 days

prior notice to the Delaware Insurance Commissioner.  During this 10-day period, the Commissioner may, by order, limit or disallow the payment of ordinary dividends if the Commissioner finds the insurer to be presently or potentially in financial distress.  Further, the maximum amount of dividends that may be paid without the prior approval of the Delaware Insurance Commissioner in any twelve month period is the greater of (1) 10% of an insurer’s statutory surplus as of the end of the prior calendar year or (2) the insurer’s statutory net income, not including realized capital gains, for the prior calendar year.  The maximum amount that is available for the payment of dividends by Everest Re in 20092012 without prior regulatory approval is $315.6$232.2 million.


Recent Sales of Unregistered Securities.


None.


ITEM 6.              SELECTED FINANCIAL DATA

 

Information for Item 6 is not required pursuant to General Instruction I(2) of Form 10-K.


ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATION

13
ITEM 7.              MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The following is a discussion and analysis of our results of operations and financial condition.  It should be read in conjunction with the Consolidated Financial Statements and accompanying notes thereto presented under ITEM 8, “Financial Statements and Supplementary Data”.


Industry Conditions.

The worldwide reinsurance and insurance businesses are highly competitive, as well as cyclical by product and market.  As a result,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.

During the latter part of 2007 and throughout 2008, there has been a significant slowdown in the global economy. Excessive availability and use of credit, particularly by individuals, led to increased defaults on sub-prime mortgages in the U.S. and elsewhere, falling values for houses and many commodities and contracting consumer spending. The significant increase in default rates negatively impacted the value of asset-backed securities held by both foreign and domestic institutions. The defaults have led to a corresponding increase in foreclosures, which have driven down housing values, resulting in additional losses on the asset-backed securities. During the third and fourth quarters of 2008, the credit markets deteriorated dramatically, evidenced by widening credit spreads and dramatically reduced availability of credit. Many financial institutions, including some insurance entities, experienced liquidity crises due to

14


immediate demands for funds for withdrawals or collateral, combined with falling asset values and their inability to sell assets to meet the increased demands. As a result, several financial institutions have failed or been acquired at distressed prices, while others have received loans from the U.S. government to continue operations. The liquidity crisis significantly increased the spreads on fixed maturities and, at the same time, had a dramatic and negative impact on the stock markets around the world. The combination of losses on securities from failed or impaired companies combined with the decline in values of fixed maturities and equity securities has resulted in significant declines in the capital bases of most insurance and reinsurance companies. It is too early to predict the timing and extent of impact the capital deterioration will have on insurance and reinsurance market conditions. There is an expectation that these events will ultimately result in increased rates for insurance and reinsurance in certain segments of the market, but there is no assurance that this will not be the case.

Worldwide insurance and reinsurance market conditions continued to be very competitive.competitive, particularly in the casualty lines of business.  Generally, there was ample insurance and reinsurance capacity relative to demand. We noted, however, that in many markets and lines, the rates of decline have slowed, pricing in some segments was relatively flat and there was upward movement in some others.  Competition and its effect on rates, terms and conditions vary widely by market and coverage yet continuescontinued to be most prevalent in the U.S. casualty insurance and reinsurance markets. In addition to demanding lower rates

However, during 2011, the industry experienced significant losses from Australian floods, the New Zealand earthquake, the earthquake and improved terms, ceding companies have retained more of their business by reducing quota share percentages, purchasing excess of loss coverstsunami in lieu of quota shares, and increasing retentions on excess of loss business. Our quota share premiums have declined, particularly on catastrophe exposed property business, due to slower growth and increased purchases of common account covers by ceding companies, which reduces the premiums subject to the quota share contract. The U.S. insurance markets in which we participate were extremely competitive as well, particularlyJapan, storms in the workers’ compensation, public entityU.S, and contractor sectors. While our growth has slowed, given the specialty nature of our business and our underwriting discipline, we believe the impact on the profitability of our business will be less pronounced than on the market generally.

Rates in the international markets have generally been more adequate than in the U.S., and we have seen some increases, particularly for catastrophe exposed business. We have grown our business in the Middle East, Latin America and Asia. We are expanding our international reach by opening a new office in Brazil to capitalize on the recently expanded opportunity for professional reinsurers in that market and on the economic growth expected for Brazil in the future.

The reinsurance industry has experienced a period of falling rates and volume. Profit opportunities have become generally less available over time; however the unfavorable trends appear to have abated somewhat. We are now seeing smaller rate declines, pockets of stability and some increases in some markets and for some coverages. As a result of very significant investment and catastrophe losses incurred by both primary insurers and reinsurers over the past year, but principally in the most recent six months, industry-wide capital has declined and rating agency scrutiny has increased. There is an expectation that given the rate softening that has occurred over the past several quarters, the industry-wide decline in capital combined with volatile and unreceptive markets and a looming recession, will lead to a hardening of insurance and reinsurance marketplace rates, terms and conditions.Thailand floods.  It is too early to gaugedetermine the extentimpact on market conditions as a result of hardening, if any, that will occur; however, it appears that muchthese 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 the redundant capital has been wrung outthese losses is sufficient to increase rates and improve market conditions for other lines of the industry, and the stage is set for firmer markets.

January 2009, renewal rates, particularly for property catastrophes and retrocessional covers and in international markets were generally firmer comparedbusiness remains to a year ago.

be seen.


Overall, we believe that current marketplace conditions, offerparticularly 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) income,, ratios and stockholder’s equity for the periods indicated:

 

Years Ended December 31,

 

Percentage Increase/(Decrease)

(Dollars in millions)

2008

 

2007

 

2006

 

2008/2007

 

2007/2006

Gross written premiums

$    2,894.8

 

$   3,155.1

 

$   3,186.0

 

-8.2%

 

-1.0%

Net written premiums

  1,675.4

 

  2,072.9

 

   2,290.3

 

-19.2%

 

-9.5%

 

 

 

 

 

 

 

 

 

 

REVENUES:

 

 

 

 

 

 

 

 

 

Premiums earned

$    1,881.8

 

$   2,178.9

 

$   2,247.2

 

-13.6%

 

-3.0%

Net investment income

  363.1

 

  406.6

 

  372.4

 

-10.7%

 

9.2%

Net realized capital (losses) gains

  (489.2)

 

  80.9

 

  35.0

 

NM

 

131.4%

Other income (expense)

  57.9

 

  (73.6)

 

  (40.5)

 

-178.7%

 

81.6%

Total revenues

  1,813.6

 

  2,592.7

 

  2,614.0

 

-30.1%

 

-0.8%

 

 

 

 

 

 

 

 

 

 

CLAIMS AND EXPENSES:

 

 

 

 

 

 

 

 

 

Incurred losses and loss adjustment expenses

  1,465.6

 

  1,507.6

 

  1,557.1

 

-2.8%

 

-3.2%

Commission, brokerage, taxes and fees

  398.6

 

  465.9

 

  438.5

 

-14.4%

 

6.3%

Other underwriting expenses

  129.9

 

  123.9

 

  98.7

 

4.8%

 

25.5%

Interest, fee and bond issue cost amortization expense           

  79.0

 

  91.1

 

  69.7

 

-13.3%

 

30.7%

Total claims and expenses

  2,073.1

 

  2,188.5

 

  2,164.0

 

-5.3%

 

1.1%

 

 

 

 

 

 

 

 

 

 

(LOSS) INCOME BEFORE TAXES

   (259.5)

 

  404.3

 

   450.0

 

-164.2%

 

-10.2%

Income tax (benefit) expense

  (134.7)

 

   100.1

 

   117.1

 

-234.6%

 

-14.5%

NET (LOSS) INCOME

$    (124.8)

 

$      304.2

 

$      332.9

 

-141.0%

 

-8.6%

 

 

 

 

 

 

 

 

 

 

RATIOS:

 

 

 

 

 

 

Point Change

Loss ratio

77.9%

 

69.2%

 

69.3%

 

8.7

 

(0.1)

Commission and brokerage ratio

21.2%

 

21.4%

 

19.5%

 

(0.2)

 

1.9

Other underwriting expense ratio

6.9%

 

5.7%

 

4.4%

 

1.2

 

1.3

Combined ratio

106.0%

 

96.3%

 

93.2%

 

9.7

 

3.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31,

 

Percentage Increase/(Decrease)

(Dollars in millions)

2008

 

2007

 

2006

 

2008/2007

 

2007/2006

Balance sheet data:

 

 

 

 

 

 

 

 

 

     Total investments and cash

$    7,395.1

 

$   8,992.8

 

$   8,451.8

 

-17.8%

 

6.4%

     Total assets

  12,866.6

 

  13,543.5

 

  12,888.3

 

-5.0%

 

5.1%

     Loss and loss adjustment expense reserves

  7,420.0

 

  7,538.7

 

  7,397.3

 

-1.6%

 

1.9%

     Total debt

  1,179.1

 

  1,178.9

 

  995.6

 

0.0%

 

18.4%

     Total liabilities

  10,663.7

 

  10,976.0

 

  10,669.9

 

-2.8%

 

2.9%

     Stockholder’s equity

     2,203.0

 

  2,567.5

 

  2,218.4

 

-14.2%

 

15.7%

 

 

 

 

 

 

 

 

 

 

(NM, not meaningful)

 

 

 

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding)

 

 

 

 

 

 

 

 

 


  Years Ended December 31, Percentage Increase/(Decrease)
(Dollars in millions) 2011 2010 2009  2011/2010  2010/2009
Gross written premiums $3,558.5  $3,467.8  $3,334.1   2.6%  4.0%
Net written premiums  1,754.0   1,788.7   1,735.3   -1.9%  3.1%
                     
REVENUES:                    
Premiums earned $1,793.9  $1,813.8  $1,785.1   -1.1%  1.6%
Net investment income  312.9   350.3   262.1   -10.7%  33.7%
Net realized capital gains (losses)  (41.1)  65.3   56.9   -163.0%  14.7%
Realized gain on debt repurchase  -   -   78.3   0.0%  -100.0%
Other income (expense)  (11.7)  12.1   0.4   -197.3% NM 
Total revenues  2,053.9   2,241.5   2,182.7   -8.4%  2.7%
                     
CLAIMS AND EXPENSES:                    
Incurred losses and loss adjustment expenses  1,877.6   1,477.5   1,091.7   27.1%  35.3%
Commission, brokerage, taxes and fees  338.7   335.1   344.6   1.1%  -2.8%
Other underwriting expenses  154.3   139.8   142.6   10.4%  -1.9%
Corporate expense  6.1   5.9   7.7   3.5%  -24.0%
Interest, fee and bond issue cost amortization expense  50.8   54.6   70.9   -6.9%  -23.0%
Total claims and expenses  2,427.4   2,012.8   1,657.5   20.6%  21.4%
                     
INCOME (LOSS) BEFORE TAXES  (373.5)  228.8   525.2  NM   -56.4%
Income tax expense (benefit)  (170.7)  (36.6)  129.4  NM   -128.3%
NET INCOME (LOSS) $(202.8) $265.4  $395.9   -176.4%  -33.0%
                     
RATIOS:             Point Change
Loss ratio  104.7%  81.5%  61.2%  23.2   20.3 
Commission and brokerage ratio  18.9%  18.5%  19.3%  0.4   (0.8)
Other underwriting expense ratio  8.6%  7.6%  7.9%  1.0   (0.3)
Combined ratio  132.2%  107.6%  88.4%  24.6   19.2 
                     
                     
  At December 31, Percentage Increase/(Decrease)
(Dollars in millions)  2011  2010  2009  2011/2010  2010/2009
Balance sheet data:                    
Total investments and cash $8,396.3  $8,293.9  $8,031.6   1.2%  3.3%
Total assets  14,349.2   13,845.7   13,349.1   3.7%  3.7%
Loss and loss adjustment expense reserves  8,290.6   7,652.3   7,300.1   8.3%  4.8%
Total debt  818.1   868.1   1,018.0   -5.8%  -14.7%
Total liabilities  11,407.8   10,717.9   10,490.3   6.6%  2.2%
Stockholder's equity  2,941.4   3,127.7   2,858.8   -6.0%  9.4%
                     
(NM, not meaningful)                    
(Some amounts may not reconcile due to rounding)                    

Revenues.
Revenues.Premiums.

  Gross written premiums increased by $90.8 million, or 2.6%, in 2011 compared to 2010, reflecting a $103.7 million increase in our insurance business, partially offset by a $12.9 million decrease in our reinsurance business.  The year over year increase in insurance premiums was primarily due to the acquisition of Heartland, which provided $169.6 million of new crop insurance business, our recent initiative in primary medical stop loss insurance, which added $54.0 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, $24.5 million resulting from catastrophe losses and favorable foreign exchange impact, year over year, of $33.4

15
Premiums. GrossTable of Contents
million.  Net written premiums decreased by $260.3$34.7 million, or 8.2%1.9%, in 20082011 compared to 2007,2010.  The fluctuations 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 $20.0 million, or 1.1%, in 2011 compared to 2010.  The change in net premiums earned is relatively consistent with the decline in net written premiums.

Gross written premiums increased by $133.6 million, or 4.0%, in 2010 compared to 2009, reflecting a declinean increase of $146.5$110.8 million in our reinsurance business and $113.8$22.8 million increase in our insurance business.  The declineincrease in reinsurance premiums was primarily the result of increased writings in our reinsurance business was primarily attributable to continued competitive conditions in both theU.S. treaty property and casualty sectorsinternational books of the market, especiallybusiness, driven by a combination of new business, increased participations on renewal contracts, rate increases in the U.S.,select areas and economic and insurance growth in several regions.  The increase in insurance premiums was due to increased writings in professional liability and California workers’ compensation business, partially offset by strong renewals and higher ratesa reduction in international markets. Insurance segment premiums were also lower, as

conditionsthe audit premium accrual for workers’ compensation public equity and contractors business became increasingly competitive, which reduced the volume of business that met our underwriting and pricing criteria.business.  Net written premiums decreasedincreased by $397.6$53.4 million, or 19.2%3.1%, in 20082010 compared to 2007.2009.  The decreasefluctuations in net written premiums in comparison to the fluctuations in gross written premiums in conjunction with the increasewere primarily attributable to fluctuations in cessions under the affiliated quota share agreement, contributedagreement.  Premiums earned increased $28.8 million, or 1.6%, in 2010 compared to the decline. Correspondingly,2009.  The change in net premiums earned is relatively consistent with the increase in net written premiums.


Net Investment Income.  Net investment income decreased by $297.1$37.4 million, or 13.6%10.7%, in 2008 compared to 2007.

Gross written premiums decreased by $30.9 million, or 1.0%, in 2007 compared to 2006, reflecting a decline of $50.2$312.9 million in 2011 compared with net investment income of $350.3 million in 2010, primarily due to a $58.2 million decline in income from our reinsurance business,fixed maturities, reflective of reducing our municipal bond exposures and declining reinvestment rates.  These decreases were partially offset by an increase of $19.3$19.5 million in our U.S. insurance business. Net written premiums decreased by $217.4 million, or 9.5%, in 2007 compared to 2006,income from equities due to the change in the mix of our program businessexpanded public equity portfolio and the resulting change in reinsurance. Premiums earned decreased by $68.3 million, or 3.0%, in 2007 compared to 2006. The decrease is primarily due to the result of timing; premiums are earned ratably over the coverage period whereas net written premiums are reflected at the initiation of the coverage period.

emerging market debt mutual funds.  Net Investment Income.Net investment income decreased by 10.7% in 2008 compared to 2007, primarily due to the decrease in short-term investment income from both lower rates and decreased holdings, diminished limited partnership investment income, particularly from limited partnerships which were principally invested in public equities and decreased income from reduced holdings in equity securities. Partially offsetting these decreases was an increase in fixed maturity securities income. Pre-taxpre-tax investment income, as a percentage of average invested assets, was 4.5% for 20083.9% in 2011 compared to 4.9% for 2007.4.4% in 2010.  The variance in this yield was primarily the result of fluctuations in our limited partnership income.


Net investment income increased by 9.2%$88.3 million, or 33.7%, to $350.3 million in 20072010, compared to 2006,with net investment income of $262.1 million in 2009, primarily due to the growthas a result of a $73.9 million increase in invested assets to $9.0 billion at December 31, 2007investment income from $8.5 billion at December 31, 2006. The growth inour limited partnerships.  Net pre-tax investment income, as a percentage of average invested assets, was principally driven by the $400.0 million of long term note issuance and $151.9 million of operating cash flows, partially offset by the redemption of $216.5 million of junior subordinated debt securities. Pre-tax investment portfolio yield for 2007 was 4.9%4.4% in 2010, compared to 4.8%3.4% for 2006.

2009.


Net Realized Capital Gains (Losses) Gains..  Net realized capital losses were $489.2$41.1 million for 2008, while in 2007 and 2006 we had net realized capital gains of $80.9were $65.3 million and $35.0$56.9 million in 2011, 2010 and 2009, respectively.

The net realized capital  Of the $41.1 million, there were $16.7 million of losses from fair value re-measurements, $14.5 million of other-than-temporary impairments on our available for 2008 were primarily the result of the global declines in the values of equitysale fixed maturity securities and fixed income securities. We incurred $193.5$9.9 million of net realized capital losses from sales on our fixed maturity and equity securities.  The net realized capital gains of $65.3 million in 2010 were the saleresult of $93.8 million of gains of fair value re-measurements, partially offset by $26.4 million of net realized capital losses from sales on our fixed maturity and equity securities we owned as we realigned our investment portfolios. Our equity security portfolio decreased $134.9and $2.1 million and our other invested assets decreased $87.8 million as a result of fair value adjustments. Our fixed maturity securities decreased $74.5 million due to other-than-temporary impairments.  We report changes in fair values asThe net realized capital gains or losses in accordance with Statement of Financial Accounting Standards (“FAS”) No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment to FASB Statement No. 115” (“FAS 159”), and we report realized capital losses on our fixed income portfolio from other-than-temporary impairments as realized capital losses in accordance with FASB Staff Position (“FSP”) FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairments and Its Application to Certain Investments” (“FAS 115-1”).

Net realized gains in 2007 consisted of $96.6$56.9 million in changes in fair value of the equity securities and other invested asset investment portfolios, partially offset by $11.7 million of losses from sales of equity and fixed maturity securities and $4.0 million of other-than-temporary impairments of the fixed maturity securities. Net realized gains in 20062009 were the result of $80.3 million of gains in fair value re-measurements, partially offset by $17.9 million of net realized capital losses from sales fromon our fixed maturity and equity securities of $26.6and $5.5 million andin other-than-temporary impairments on our available for sale fixed maturity securitiessecurities.


Realized Gain on Debt Repurchase.  On March 19, 2009, we commenced a cash tender offer for any and all of $8.4the 6.60% fixed to floating rate long term subordinated notes due 2067. Upon expiration of the tender offer, we had reduced our outstanding debt by $161.4 million, which resulted in a pre-tax gain on debt repurchase of $78.3 million.


Other Income (Expense)..  We recorded other expense of $11.7 million in 2011 and other income of $57.9 million for 2008 and expense of $73.6$12.1 million and $40.5$0.4 million for 2007in 2010 and 2006,2009, respectively.  The fluctuations in net other income (expense)changes were primarily due to fluctuations in the change in foreign currency exchange rates over the periods and change in deferralsamortization of deferred gains on retroactive reinsurance agreements with affiliates.affiliates and fluctuations in currency exchange rates for the corresponding periods.


Claims and Expenses.

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

 

Years Ended December 31,

 

 

Current

 

Ratio %/

 

Prior

 

Ratio %/

 

Total

 

Ratio %/

(Dollars in millions)

Year

 

Pt Change

 

Years

 

Pt Change

 

Incurred

 

Pt Change

2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attritional (a)

$  1,134.8

 

60.3%

 

 

$       128.4

 

6.8%

 

 

$     1,263.1

 

67.1%

 

Catastrophes

188.7

 

10.0%

 

 

13.7

 

0.7%

 

 

202.4

 

10.8%

 

A&E

-

 

0.0%

 

 

-

 

0.0%

 

 

-

 

0.0%

 

Total segment

$  1,323.5

 

70.3%

 

 

$       142.0

 

7.5%

 

 

$     1,465.6

 

77.9%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attritional (a)

$  1,174.9

 

53.9%

 

 

$         (6.9)

 

-0.3%

 

 

$      1,168.0

 

53.6%

 

Catastrophes

56.9

 

2.6%

 

 

16.3

 

0.8%

 

 

73.3

 

3.4%

 

A&E

-

 

0.0%

 

 

266.4

 

12.2%

 

 

266.4

 

12.2%

 

Total segment

$  1,231.8

 

56.5%

 

 

$       275.7

 

12.7%

 

 

$     1,507.6

 

69.2%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attritional (a)

$  1,477.2

 

65.7%

 

 

$    (157.1)

 

-7.0%

 

 

$     1,320.1

 

58.7%

 

Catastrophes

12.4

 

0.6%

 

 

197.2

 

8.8%

 

 

209.6

 

9.3%

 

A&E

-

 

0.0%

 

 

27.4

 

1.2%

 

 

27.4

 

1.2%

 

Total segment

$  1,489.7

 

66.3%

 

 

$         67.4

 

3.0%

 

 

$     1,557.1

 

69.3%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variance 2008/2007                      

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attritional (a)

$     (40.1)

 

6.4

pts

 

$       135.3

 

7.1

pts

 

$          95.2

 

13.5

pts

Catastrophes

131.8

 

7.4

pts

 

(2.6)

 

(0.0)

pts

 

129.2

 

7.4

pts

A&E

-

 

-

pts

 

(266.4)

 

(12.2)

pts

 

(266.4)

 

(12.2)

pts

Total segment

$        91.7

 

13.8

pts

 

$    (133.7)

 

(5.1)

pts

 

$       (42.0)

 

8.7

pts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variance 2007/2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attritional (a)

$    (302.3)

 

(11.8)

pts

 

$       150.2

 

6.7

pts

 

$     (152.1)

 

(5.1)

pts

Catastrophes

44.5

 

2.1

pts

 

(180.9)

 

(8.0)

pts

 

(136.4)

 

(6.0)

pts

A&E

-

 

-

pts

 

239.0

 

11.0

pts

 

239.0

 

11.0

pts

Total segment

$    (257.8)

 

(9.8)

pts

 

$       208.3

 

9.7

pts

 

$       (49.5)

 

(0.1)

pts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a) Attritional losses exclude catastrophe and A&E losses.

 

 

 

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding.)

 

 

 

 

 

 

 

 

 

 


  Years Ended December 31,
  Current Ratio %/ Prior Ratio %/ Total Ratio %/
(Dollars in millions) Year Pt Change Years Pt Change Incurred Pt Change
2011                     
Attritional (a) $1,073.9   59.9%  $5.3   0.3%  $1,079.2   60.2% 
Catastrophes (b)  788.9   44.0%   9.5   0.5%   798.4   44.5% 
A&E  -   0.0%   -   0.0%   -   0.0% 
Total $1,862.8   103.9%  $14.8   0.8%  $1,877.6   104.7% 
                            
2010                           
Attritional (a) $1,144.1   63.1%  $66.2   3.7%  $1,210.4   66.7% 
Catastrophes  270.5   14.9%   (3.4)  -0.2%   267.1   14.7% 
A&E  -   0.0%   -   0.0%   -   0.0% 
Total $1,414.6   78.0%  $62.8   3.5%  $1,477.5   81.5% 
                            
2009                           
Attritional (a) $999.6   56.0%  $67.7   3.8%  $1,067.3   59.8% 
Catastrophes  22.1   1.2%   1.8   0.1%   23.9   1.3% 
A&E  -   0.0%   0.4   0.0%   0.4   0.0% 
Total $1,021.7   57.2%  $70.0   3.9%  $1,091.7   61.2% 
                            
Variance 2011/2010                           
Attritional (a) $(70.2)  (3.2)pts $(60.9)  (3.4)pts $(131.2)  (6.5)pts
Catastrophes  518.4   29.1 pts  12.9   0.7 pts  531.3   29.8 pts
A&E  -   - pts  -   - pts  -   - pts
Total $448.2   25.9 pts $(48.0)  (2.7)pts $400.1   23.2 pts
                            
Variance 2010/2009                           
Attritional (a) $144.5   7.1 pts $(1.5)  (0.1)pts $143.1   6.9 pts
Catastrophes  248.4   13.7 pts  (5.2)  (0.3)pts  243.2   13.4 pts
A&E  -   - pts  (0.4)  - pts  (0.4)  - pts
Total $392.9   20.8 pts $(7.2)  (0.4)pts $385.8   20.3 pts
                            
(a) Attritional losses exclude catastrophe and A&E losses.                    
(b) Effective with the 2010 reporting period, a catastrophe is a property event with expected reported losses of at least $10.0 million.      
       All prior periods reflect a catastrophe as a property event with expected reported losses of at least $5.0 million.
         
(Some amounts may not reconcile due to rounding.)
                        

Incurred losses and LAE were lowerincreased by $42.0$400.1 million, or 2.8%27.1%, in 20082011 compared to 2007 as increases2010.  Catastrophe losses increased $531.3 million (29.8 points), period over period, primarily due to losses from the Japan and New Zealand earthquakes, Thailand and Australia floods and U.S. storms.  Partially offsetting the catastrophe increase was the decrease in attritional losses of $131.2 million, primarily due to the non-recurrence of prior yearsyears’ development, the decrease in premiums earned and catastrophe losses were more than offset by a reductionchanges in A&E period over period. Prior years’ attritional losses increased $135.3 million, principally as a resultthe mix of $85.3 million of development on loss reserves for a run-off auto loan credit insurance program.

Catastrophe losses, at $202.4 million, were $129.2 million higher than in 2007, driven by Hurricanes Gustav and Ike and a major snowstorm in China. While 2008 ranks as one of the costliest years on record for insured natural catastrophe losses, our losses were generally in line with our modeled expected annual aggregate catastrophe losses as developed through our enterprise risk and catastrophe exposure management processes.

We strengthened our asbestos reserves by $266.4 million in 2007, and had no development in 2008 as loss activity in 2008 was generally in line with the expected run-off of the reserves established at December 31, 2007.

business.


Incurred losses and LAE decreasedincreased by $49.5$385.8 million, or 3.2%35.3%, in 2007for the year ended December 31, 2010 compared to the same period in 2006. This decrease was2009.  Of the $385.8 million increase, current year catastrophe losses increased $248.4 million (13.7 points), period over period, primarily due to lowerlosses on the Chilean earthquake, New Zealand earthquake, Australian hailstorms and floods, and the Canadian hailstorm. The current year attritional losses also increased $144.5 million (7.1 points) reflecting higher expected loss ratios on current year business due to prevailing market conditions. Partially offsetting these higher current year losses was a decrease of $152.1$7.2 million, or 0.4 points, in prior year loss development as the 2010 reserve studies indicated net favorable reserve development and lower catastrophe lossesloss estimates for prior year catastrophes were reduced.

18

The decrease in catastrophe losses reflects the non-recurrence in 2007 of significant prior years’ development experienced in 2006 on catastrophe loss reserves. The increase in A&E reserves emanated from actions taken in response to an extensive in-house study of our asbestos exposures by our actuarial and claim units.

Commission, Brokerage, Taxes and Fees.  Commission, brokerage, taxes and fees increased by $3.6 million, or 1.1%, in 2011 compared to the same period in 2010.  The variance was primarily the result of fluctuations in the mix of business and a change in the affiliated quota share agreement.

Commission, brokerage, taxes and fees decreased by $67.3$9.5 million, or 14.4%2.8%, in 2008for the year ended December 31, 2010 compared to 2007. This directly variable expensethe same period in 2009.  The change was influenced byprimarily the decline in net earned premiums,result of the mix of business and lower contingent commissions and increased cessions under the affiliated quota share agreement, partially offset by higher commission rates on new insurance programs.

Commission, brokerage and tax expenses increased by $27.4 million, or 6.3%, in 2007 compared to 2006. An increase in ceding commissions due to market conditions and higher commissions on new insurance programs were the principal drivers in this directly variable expense.

commissions.


Other Underwriting Expenses.Other underwriting expenses for 2008 were $129.9$154.3 million, compared to $123.9$139.8 million for 2007.and $142.6 million in 2011, 2010 and 2009, respectively.  The increase is primarily due to higher compensation and benefits expense resulting from increased staff, primarily in the U.S. Insurance segment. Included in other underwriting expenses for 2011 compared to 2010 was mainly due to expenses of Heartland, which was acquired in January, 2011.  The expenses for 2010 and 2009 were corporatecomparable.

Corporate Expenses.  Corporate expenses, which are general operating expenses that are not allocated to segments, of $5.6were $6.1 million, $5.9 million and $5.3$7.7 million for 2008the years ended December 31, 2011, 2010 and 2007,2009, respectively.

Other  These expenses were previously included as underwriting expenses for 2007 were $123.9 million compared to $98.7 million for 2006. The increase was primarily due to higher compensation and benefits expense resulting from increased staff, primarilytherefore included in the U.S. Insurance segment. Included in other underwriting expense ratio.  Effective January 1, 2010, these expenses were corporate expensesremoved from the calculation of $5.3 millionthe other underwriting expense ratio and $4.5 million for 2007 and 2006, respectively.

prior periods were recalculated to conform.


Interest, Fees and Bond Issue Cost Amortization Expense. Interest, fees and other bond amortization expense was $79.0$50.8 million and $91.1$54.6 million for 2008 and 2007,$70.9 million in 2011, 2010 and 2009, respectively.  The decrease from 2009 was primarily due to the accelerationmaturing of amortizationdebt in March, 2010.

Income Tax Expense (Benefit).  We had an income tax benefit of the bond issue costs for the junior subordinated debt securities which were retired in November, 2007, with no such expense in 2008. In addition, the interest reduction on the retired junior subordinated notes was partially offset by the interest on the new long term notes.

Interest and other expense was $91.1$170.7 million and $69.7$36.6 million for 2007in 2011 and 2006, respectively. The increase was due to the new long term notes we issued in April, 20072010, and the acceleration of the amortization of the bond issue costs associated with the November 15, 2007 early retirement of the 7.85% junior subordinated debt securities.

Income Tax (Benefit) Expense. Our income tax was a benefit of $134.7 million for 2008, principally as a result of net realized capital losses due to fair value re-measurements, other-than-temporary impairments and losses on sales of public equity securities. We hadan income tax expense of $100.1$129.4 million and $117.1 million for 2007 and 2006, respectively, primarily due to income from operations and net realized capital gains in both periods.2009.  Our income tax benefit/expense is primarily a function of the statutory tax rate reduced byrates coupled with the impact offrom tax-preferenced investment income.  Variations in our effective tax rate generally result from changes in the relative levels of pre-tax income.  The decrease in tax year over year was primarily attributable to the impact on taxable income from the previously mentioned catastrophe losses.


Net Income (Loss) Income.

We recorded a.

Our net loss of $124.8was $202.8 million for 2008in 2011 compared to a net income of $304.2$265.4 million for 2007in 2010.  The variance was primarily driven by higher catastrophe losses in 2011 in addition to the other components discussed above.

Our net income was $265.4 million and $332.9$395.9 million for 2006.in 2010 and 2009, respectively.  The decrease was primarily driven by after-tax net realized capital losses and increaseda few large catastrophe losses in 20082010 compared to after-taxno similar catastrophe events in 2009 and the realized gain on debt repurchase in 2009, partially offset by an increase in net realized capital gains and fewer catastrophe lossesa reduction in 2007.

income taxes.


Ratios.

Our combined ratio increased by 9.724.6 points to 106.0%132.2% in 20082011 compared to 96.3%107.6% in 2007. Most2010.  The loss ratio component increased by 23.2 points in 2011, over the same period last year, principally due to higher current year catastrophe losses as a result of the increase was dueJapan earthquake, New Zealand earthquake, Thailand floods, U.S. storms and the Australia floods.    The commission and brokerage expense ratio increased slightly to an 8.7 point increase18.9% in the 2008 loss ratio2011 compared to 2007. Items affecting this18.5% in 2010.  The other underwriting expense ratio period over period, were a higher current accident year attritional loss ratio, greater catastrophe losses and higher adverse development on attritional loss reserves, which were partially offset bycomponent increased to 8.6% in 2011 compared to 7.6% in 2010 due primarily to the non-recurrence in 2008acquisition of any A&E development.

Heartland.


Our combined ratio increased by 3.119.2 points to 96.3%107.6% in 20072010 compared to 93.2%88.4% in 2006,2009.  The loss ratio component increased 20.3 points in 2010 compared to 2009, principally driven bydue to the 1.9 point increase in current year catastrophe losses as a result of the Chilean earthquake, Australian hailstorms and floods, New Zealand earthquake and the Canadian hailstorm.   Both the other underwriting expense ratio component and the commission and brokerage ratio and the 1.3 point increase in the other underwriting expense ratio.

Stockholder’scomponent declined slightly compared to 2009.


Stockholder's Equity.

Stockholder’s

Stockholder's equity decreased by $364.5$186.3 million to $2,203.0$2,941.4 million in 2008at December 31, 2011 from $2,567.5$3,127.7 million in 2007, due to $179.7at December 31, 2010, principally as a result of $202.8 million of unrealized depreciation, net of tax, on our investments, at market value; a net loss, of $124.8 million; $30.5$29.5 million of foreign currency translation adjustments; $25.2 million pensionnet benefit plan obligation adjustments and $10.0 million of dividends, partially offset by $5.6 million of capital paid-in from share-based compensation transactions. The increase in unrealized depreciation is due to the current financial market liquidity crisis that has resulted in significantly increased credit spreads and concomitantly lower corporate and municipal security values.

Stockholder’s equity increased by $349.1 million to $2,567.5 million in 2007 from $2,218.4 million in 2006, due to net income of $304.2 million, $30.1$0.9 million of foreign currency translation adjustments, $11.3partially offset by $41.1 million of pensionunrealized appreciation on investments, net of tax, and $6.4 million of share-based compensation transactions.


Stockholder's equity increased by $269.0 million to $3,127.7 million at December 31, 2010 from $2,858.8 million at December 31, 2009, principally as a result of $265.4 million of net income, $27.0 million of foreign currency translation adjustments and $9.4$6.6 million of capital paid-in from share-based compensation transactions, partially offset by $6.0$28.2 million of unrealized depreciation on investments, net of tax, on our investments at market value.

and $1.8 million of pension adjustments.


Consolidated Investment Results


Net Investment Income.

Net investment income decreased 10.7% to $363.1$312.9 million in 2008 from $406.62011 compared to $350.3 million in 2007,2010, primarily due to the decreasea $58.2 million decline in short-term investment income from both lower ratesour fixed maturities, reflective of reducing our municipal bond exposures and decreased holdings, diminished limited partnerships investmentdeclining reinvestment rates.  These decreases were partially offset by an increase of $19.5 million in income particularly from limited partnerships which were principally invested inequities due to our expanded public equity securitiesportfolio and decreased dividend income from reduced holdings in equity securities. Partially offsetting these decreases was an increase in fixed maturity securities income.

emerging market debt mutual funds.


Net investment income increased 9.2%33.7% to $406.6$350.3 million in 2007 from $372.42010 compared to $262.1 million in 2006,2009.  The increase, period over period, was primarily due to a growthan increase in invested assets to $9.0 billion at December 31, 2007recorded gains from $8.5 billion at December 31, 2006. The invested asset growth emanated largelyour limited partnership investments and an increase in dividend income from continued positive cash flow from operations and the net proceeds from debt issuance and redemption.

owning more shares of our parent’s common shares.


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

 

Years Ended December 31,

(Dollars in millions)

2008

 

2007

 

2006

Fixed maturities

$          313.7

 

$         294.7

 

$          299.6

Equity securities

6.0

 

15.7

 

18.6

Short-term investments and cash                                

28.6

 

61.9

 

28.4

Other invested assets

 

 

 

 

 

     Limited partnerships

13.2

 

35.5

 

38.5

     Other

9.5

 

7.1

 

2.9

Total gross investment income

370.9

 

414.9

 

388.0

Interest credited and other expense

(7.8)

 

(8.3)

 

(15.7)

Total net investment income

$          363.1

 

$         406.6

 

$          372.4

(Some amounts may not reconcile due to rounding)

 

 

 

 

 


  Years Ended December 31,
(Dollars in millions) 2011 2010 2009
Fixed maturities $232.3  $290.5  $286.0 
Equity securities  29.7   10.2   3.6 
Short-term investments and cash  1.1   0.4   3.5 
Other invested assets            
Limited partnerships  42.3   45.5   (28.5)
Dividends from Parent's shares  18.6   14.0   8.0 
Other  2.7   1.3   0.1 
Total gross investment income  326.8   361.8   272.7 
Interest debited (credited) and other expense  (13.9)  (11.5)  (10.6)
Total net investment income $312.9  $350.3  $262.1 
(Some amounts may not reconcile due to rounding)            

The following table shows a comparison of various investment yields for the periods indicated:

 

2008

2007

2006

Imbedded pre-tax yield of cash and invested assets at December 31

4.3%

4.6%

4.6%

Imbedded after-tax yield of cash and invested assets at December 31

3.5%

3.6%

3.7%

 

 

 

 

Annualized pre-tax yield on average cash and invested assets

4.5%

4.9%

4.8%

Annualized after-tax yield on average cash and invested assets

3.6%

3.9%

3.8%


 201120102009
Imbedded pre-tax yield of cash and invested assets at December 313.6%3.6%3.7%
Imbedded after-tax yield of cash and invested assets at December 312.7%2.8%3.1%
    
Annualized pre-tax yield on average cash and invested assets3.9%4.4%3.4%
Annualized after-tax yield on average cash and invested assets3.0%3.5%2.9%

Net Realized Capital Gains (Losses) Gains.

.

The following table presents the composition of our net realized capital gains (losses) gains for the periods indicated:

 

Years Ended December 31,

 

2008/2007

 

2007/2006

(Dollars in millions)

2008

 

2007

 

2006

 

Variance

 

Variance

(Losses) gains from sales:

 

 

 

 

 

 

 

 

 

   Fixed maturities, market value

 

 

 

 

 

 

 

 

 

       Gains

$          7.0

 

$        1.0

 

$         8.4

 

$              6.0

 

$           (7.4)

       Losses

 (94.4)

 

  (2.0)

 

 -

 

  (92.4)

 

 (2.0)

   Total

 (87.4)

 

  (1.0)

 

 8.4

 

 (86.4)

 

 (9.4)

 

 

 

 

 

 

 

 

 

 

   Equity securities, market value

 

 

 

 

 

 

 

 

 

       Gains

 -

 

  -

 

31.2

 

-

 

 (31.2)

       Losses

 -

 

  -

 

 (4.6)

 

-

 

 4.6

   Total

 -

 

  -

 

 26.6

 

-

 

 (26.6)

 

 

 

 

 

 

 

 

 

 

   Equity securities, fair value

 

 

 

 

 

 

 

 

 

       Gains

 6.4

 

   3.0

 

-

 

 3.4

 

 3.0

       Losses

 (112.3)

 

    (13.7)

 

-

 

 (98.6)

 

 (13.7)

   Total

 (105.9)

 

    (10.7)

 

-

 

(95.2)

 

 (10.7)

 

 

 

 

 

 

 

 

 

 

   Short-term assets

 

 

 

 

 

 

 

 

 

       Gains

 -

 

  -

 

 -

 

-

 

-

       Losses

 (0.2)

 

  -

 

-

 

 (0.2)

 

-

   Total

 (0.2)

 

  -

 

-

 

(0.2)

 

-

 

 

 

 

 

 

 

 

 

 

Total net realized capital (losses) gains from sales               

 

 

 

 

 

 

 

 

 

       Gains

 13.4

 

    4.0

 

 39.6

 

 9.4

 

(35.6)

       Losses

 (206.9)

 

  (15.7)

 

 (4.6)

 

 (191.2)

 

(11.1)

Total

 (193.5)

 

  (11.7)

 

 35.0

 

 (181.8)

 

(46.7)

 

 

 

 

 

 

 

 

 

 

Other-than-temporary impairments

 (74.5)

 

  (4.0)

 

-

 

 (70.5)

 

(4.0)

 

 

 

 

 

 

 

 

 

 

(Losses) gains from fair value adjustments:

 

 

 

 

 

 

 

 

 

   Fixed maturities, fair value

 1.5

 

  -

 

-

 

 1.5

 

-

   Equity securities, fair value

 (134.9)

 

  84.4

 

-

 

 (219.3)

 

 84.4

   Other invested assets, fair value

 (87.8)

 

  12.2

 

-

 

 (100.0)

 

 12.2

Total

 (221.2)

 

  96.6

 

-

 

 (317.8)

 

 96.6

 

 

 

 

 

 

 

 

 

 

Total net realized capital (losses) gains

$    (489.2)

 

$      80.9

 

$       35.0

 

$       (570.1)

 

$            45.9

 

 

 

 

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding)

 

 

 

 

 

 

 

 

 


21

  Years Ended December 31,  2011/2010  2010/2009
(Dollars in millions) 2011 2010 2009 Variance Variance
Gains (losses) from sales:                 
Fixed maturity securities, market value                 
Gains $38.3  $7.6  $7.3  $30.7  $0.3 
Losses  (55.0)  (41.0)  (41.4)  (14.0)  0.4 
Total  (16.7)  (33.3)  (34.1)  16.6   0.8 
                     
Fixed maturity securities, fair value                    
Gains  1.1   0.8   0.8   0.3   - 
Losses  (2.0)  -   (0.2)  (2.0)  0.2 
Total  (0.9)  0.8   0.7   (1.7)  0.2 
                     
Equity securities, market value                    
Gains  0.2   -   8.0   0.2   (8.0)
Losses  (0.2)  -   -   (0.2)  - 
Total  -   -   8.0   -   (8.0)
                     
Equity securities, fair value                    
Gains  15.7   11.4   8.4   4.3   3.0 
Losses  (8.0)  (5.3)  (0.9)  (2.7)  (4.4)
Total  7.6   6.2   7.5   1.5   (1.4)
                     
Total net realized gains (losses) from sales                    
Gains  55.3   19.9   24.5   35.5   (4.7)
Losses  (65.2)  (46.3)  (42.5)  (18.9)  (3.8)
Total  (9.9)  (26.4)  (17.9)  16.5   (8.5)
                     
Other than temporary impairments:  (14.5)  (2.1)  (5.5)  (12.4)  3.4 
                     
Gains (losses) from fair value adjustments:                    
Fixed maturities, fair value  (15.5)  15.1   9.3   (30.6)  5.8 
Equity securities, fair value  7.2   52.8   30.9   (45.6)  21.9 
Other invested assets, fair value  (8.4)  25.9   40.1   (34.3)  (14.2)
Total  (16.7)  93.8   80.3   (110.5)  13.5 
                     
Total net realized gains (losses) $(41.1) $65.3  $56.9  $(106.4) $8.4 
                     
(Some amounts may not reconcile due to rounding)                    

We recorded $221.2


Net realized capital losses were $41.1 million and net realized capital gains were $65.3 million and $56.9 million in net realized capital2011, 2010 and 2009, respectively.  In 2011, we recorded $16.7 million of losses due to fair value re-measurements on fixed maturity securities,and equity securities and other invested assets, for 2008$14.5 million of other-than-temporary impairments on fixed maturity securities and $96.6$9.9 million of net realized capital losses from sales of fixed maturity and equity securities.  In 2010, we recorded $93.8 million in gains due to fair value re-measurements on fixed maturity and equity securities and other invested assets, for 2007. In addition, we recorded other-than-temporary impairmentspartially offset by $26.4 million of $74.5 million and $4.0 million for 2008 and 2007, respectively. These net realized capital losses from sales of fixed maturity and equity securities and $2.1 million
of other-than-temporary impairments on fixed maturity securities.  The losses in 2011 and 2010 included the impact of selling part of our municipal bond portfolio as credit concerns arose in this market sector.  We were attributableable to carry the 2010 realized losses back for income tax purposes to offset previously realized gains.  This carry back availability expired at the end of 2010.  In 2009, we recorded $80.3 million of gains due to fair value re-measurements on fixed maturity and equity securities and other invested assets, partially offset by $17.9 million of net realized capital losses from sales of fixed maturity and equity securities and $5.5 million of other-than-temporary impairments on fixed maturity securities.

Segment Results.
During the quarter ended September 30, 2011, we realigned our reporting segments to reflect recent changes in the type and volume of business written. We 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 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 those businesses already reflected in the Insurance segment.  The other operating units included in the Specialty Underwriting segment would have encompassed less than 5% of our 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 current financial liquidity crisis and related global economic downturn. Numerous financial corporationsbusiness reported within U.S. Reinsurance, they have either filed for bankruptcy or received assistance frombeen reclassified to the U.S. Government. This activityReinsurance segment.  There has severely impacted bothbeen no change to the equity and credit markets. Equities are trading at multiyear lows, spreads on fixed maturities are at unprecedented levels and many securitiesInternational reporting segment.  We have been downgraded by rating agencies.

Segment Results.

Through our subsidiaries, we operate in four segments: U.S. Reinsurance, U.S. Insurance, Specialty Underwriting and International. 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 U.S. Insurance operation writes property and casualty insurance, primarilyincluding medical stop loss insurance, directly and through general agents, brokers and surplus lines brokers within the U.S. The Specialty Underwriting operation writes A&H, marine, aviation and surety business within the U.S. and worldwide through brokers and directly with ceding companies.  The International operation writes non-U.S. property and casualty reinsurance through Everest Re’s branches in Singapore and Canada and Singapore andthrough offices in Brazil, Miami and New Jersey.


These segments are managed in a coordinated fashionindependently, 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.


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.


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.

 

 

Years Ended December 31,

 

2008/2007

 

2007/2006

(Dollars in millions)

 

2008

 

2007

 

2006

 

Variance

% Change

 

Variance

% Change

Gross written premiums

 

$     957.9

 

$ 1,193.5

 

$ 1,336.7

 

$   (235.6)

-19.7%

 

$   (143.2)

-10.7%

Net written premiums

 

569.9

 

854.8

 

992.8

 

(284.9)

-33.3%

 

(138.0)

-13.9%

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums earned

 

$     685.1

 

$    939.7

 

$    978.1

 

$   (254.6)

-27.1%

 

$     (38.4)

-3.9%

Incurred losses and LAE

 

560.0

 

636.9

 

721.2

 

(76.9)

-12.1%

 

(84.3)

-11.7%

Commission and brokerage

 

159.7

 

230.5

 

202.8

 

(70.9)

-30.7%

 

27.7

13.7%

Other underwriting expenses

 

32.2

 

33.3

 

24.9

 

(1.1)

-3.3%

 

8.3

33.4%

Underwriting (loss) gain

 

$    (66.8)

 

$      39.0

 

$      29.2

 

$   (105.7)

NM

 

$          9.8

33.7%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Point Chg

 

 

Point Chg

Loss ratio

 

81.7%

 

67.8%

 

73.7%

 

 

14.0

 

 

(5.9)

Commission and brokerage ratio

 

23.3%

 

24.5%

 

20.7%

 

 

(1.2)

 

 

3.8

Other underwriting expense ratio

 

4.7%

 

3.6%

 

2.6%

 

 

1.1

 

 

1.0

Combined ratio

 

109.7%

 

95.9%

 

97.0%

 

 

13.9

 

 

(1.1)

 

 

 

 

 

 

 

 

 

 

 

 

 

(NM, not meaningful)

 

 

 

 

 

 

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding)

 

 

 

 

 

 

 

 

 

 


  Years Ended December 31, 2011/2010 2010/2009
(Dollars in millions) 2011 2010 2009 Variance % Change Variance % Change
Gross written premiums $1,346.8  $1,395.4  $1,407.1  $(48.6)  -3.5% $(11.6)  -0.8%
Net written premiums  688.5   773.6   793.5   (85.1)  -11.0%  (19.9)  -2.5%
                             
Premiums earned $697.7  $777.7  $815.6  $(80.0)  -10.3% $(37.9)  -4.6%
Incurred losses and LAE  623.1   556.5   440.7   66.6   12.0%  115.8   26.3%
Commission and brokerage  156.0   169.3   183.1   (13.3)  -7.9%  (13.7)  -7.5%
Other underwriting expenses  39.3   42.5   44.9   (3.2)  -7.6%  (2.4)  -5.3%
Underwriting gain (loss) $(120.7) $9.3  $146.8  $(130.0) NM  $(137.5)  -93.6%
                             
                  Point Chg     Point Chg
Loss ratio  89.3%  71.6%  54.0%      17.7       17.6 
Commission and brokerage ratio  22.4%  21.8%  22.4%      0.6       (0.6)
Other underwriting expense ratio  5.6%  5.4%  5.6%      0.2       (0.2)
Combined ratio  117.3%  98.8%  82.0%      18.5       16.8 
                             
(NM, not meaningful)                            
(Some amounts may not reconcile due to rounding)                         

Premiums. Gross written premiums decreased by 19.7%3.5% to $957.9$1,346.8 million in 20082011 from $1,193.5$1,395.4 million in 2007,2010, primarily due to reduced reinsurance premiums for accident and health, crop and marine business, partially offset by a $104.9$24.4 million (14.7%) decreaseincrease in treaty property volume, a $71.7 million (21.6%) decrease in treaty casualty volume and a $57.9 million (39.9%) decrease in facultative volume. Propertyreinstatement premiums were lower due to increased common account reinsurance protections, particularly on one Florida quota share account and two quota share non-renewals. Our treaty casualty premium was lower than last year as we reduced this book to a group of core accountshigher catastrophe loss activity in response to the softer market conditions. Facultative volume decreased due to ceding companies retaining a greater portion of gross premiums and a marketplace that remains competitive.period.  Net written premiums decreased by 33.3%11.0% to $569.9$688.5 million in 20082011 compared to $854.8$773.6 million in 2007,2010, primarily due to the decrease in gross written premiums and increased cessionsa higher percentage of premium ceded under the affiliated quota share agreement.  Correspondingly, premiumsPremiums earned decreased by 27.1%10.3% to $685.1$697.7 million for 2008in 2011 compared to $939.7$777.7 million for 2007, consistent within 2010, primarily due to the changedecline in net written premiums.


Gross written premiums decreased by 10.7%0.8% to $1,193.5$1,395.4 million in 20072010 from $1,336.7$1,407.1 million in 2006,2009, primarily due to a $202.6$40.7 million (37.9%(48.2%) decrease in the crop hail quota share treaties, a $32.4 million (8.9%) decrease in U.S. treaty casualty volume and a $70.5$28.6 million (32.7%(29.2%) decrease in facultative volume, partially offset by a $126.8$73.7 million (21.6%(11.8%) increase in treaty property volume. The increase in treaty property writings emanated principally from new quota share treaties. The more competitive environment for the U.S. casualty business resulted in reduced opportunities to write this business profitably. Net written premiums decreased by 13.9%2.5% to $854.8$773.6 million in 20072010 compared to $992.8$793.5 million in 2006,for 2009, primarily due to the decrease in gross written premiums.  Premiums earned decreased 4.6% to $777.7 million in 2010 compared to $815.6 million in 2009, primarily due to the decline in net written premiums.


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

  Years Ended December 31,
  Current Ratio %/ Prior Ratio %/ Total Ratio %/
(Dollars in millions) Year Pt Change Years Pt Change Incurred Pt Change
2011                     
Attritional $399.5   57.2%  $37.4   5.4%  $436.9   62.6% 
Catastrophes  176.6   25.3%   9.6   1.4%   186.2   26.7% 
A&E  -   0.0%   -   0.0%   -   0.0% 
Total segment $576.1   82.5%  $47.0   6.8%  $623.1   89.3% 
                            
2010                           
Attritional $469.5   60.4%  $63.3   8.1%  $532.8   68.5% 
Catastrophes  17.5   2.3%   6.2   0.8%   23.7   3.1% 
A&E  -   0.0%   -   0.0%   -   0.0% 
Total segment $487.0   62.7%  $69.5   8.9%  $556.5   71.6% 
                       ��    
2009                           
Attritional $411.4   50.3%  $29.2   3.6%  $440.6   53.9% 
Catastrophes  -   0.0%   (0.3)  0.0%   (0.3)  0.0% 
A&E  -   0.0%   0.4   0.1%   0.4   0.1% 
Total segment $411.4   50.3%  $29.3   3.7%  $440.7   54.0% 
                            
Variance 2011/2010                           
Attritional $(70.0)  (3.2)pts $(25.9)  (2.7)pts $(95.9)  (5.9)pts
Catastrophes  159.1   23.0 pts  3.4   0.6 pts  162.5   23.6 pts
A&E  -   - pts  -   - pts  -   - pts
Total segment $89.1   19.8 pts $(22.5)  (2.1)pts $66.6   17.7 pts
                            
Variance 2010/2009                           
Attritional $58.1   10.1 pts $34.1   4.5 pts $92.2   14.6 pts
Catastrophes  17.5   2.3 pts  6.5   0.8 pts  24.0   3.1 pts
A&E  -   - pts  (0.4)  (0.1)pts  (0.4)  (0.1)pts
Total segment $75.6   12.4 pts $40.2   5.2 pts $115.8   17.6 pts
                            
(Some amounts may not reconcile due to rounding.)                        

Incurred losses were $66.6 million (17.7 points) higher at $623.1 million in 2011 compared to $556.5 million in 2010, primarily as a result of the $159.1 million (23.0 points) increase in current year catastrophe losses, largely due to the Japan and New Zealand earthquakes, U.S. Midwest tornadoes, Hurricane Irene and Thailand floods.  Partially offsetting this increase, the current year attritional losses decreased $70.0 million (3.2 points), primarily due to a shift in the mix of business, with a higher level of excess of loss business in the current year, which carries a lower attritional loss ratio, than pro rata business as well as the decline in earned premiums.

Incurred losses were $115.8 million (17.6 points) higher at $556.5 million in 2010 compared to $440.7 million in 2009, primarily as a result of the $58.1 million (10.1 points) increase in current year attritional losses, reflective of current competitive market conditions, $34.1 million (4.5 points) increase in prior year attritional losses and a $24.0 million (3.1 points) increase in catastrophe losses, due to the New Zealand and Chilean earthquakes.  The increase in prior years’ attritional losses was primarily driven by 3.9%reserve strengthening in casualty lines for construction liability claims.

Segment Expenses.  Commission and brokerage expenses decreased 7.9% to $939.7$156.0 million in 2011 compared to $169.3 million in 2010.  This decrease was primarily due to the decline in premiums earned.  Segment other underwriting expenses decreased to $39.3 million in 2011 compared to $42.5 million for 2007the same period in 2010.  This decline was due to reduced operating costs for the segment.

Commission and brokerage expenses decreased 7.5% to $169.3 million in 2010 compared to $978.1$183.1 million in 2009, primarily due to the decline in premiums earned.  Segment other underwriting expenses in 2010 decreased slightly to $42.5 million from $44.9 million in 2009.

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

  Years Ended December 31, 2011/2010 2010/2009
(Dollars in millions) 2011 2010 2009 Variance % Change Variance % Change
Gross written premiums $969.1  $865.4  $842.6  $103.7   12.0% $22.8   2.7%
Net written premiums  450.4   373.7   352.1   76.7   20.5%  21.7   6.2%
                             
Premiums earned $459.4  $409.8  $382.8  $49.6   12.1% $27.0   7.1%
Incurred losses and LAE  398.4   359.0   317.8   39.3   10.9%  41.3   13.0%
Commission and brokerage  40.4   29.6   29.8   10.8   36.5%  (0.3)  -0.9%
Other underwriting expenses  87.7   69.7   74.6   18.1   25.9%  (5.0)  -6.6%
Underwriting gain (loss) $(67.0) $(48.5) $(39.4) $(18.5)  38.3% $(9.0)  22.9%
                             
                  Point Chg     Point Chg
Loss ratio  86.7%  87.6%  83.0%      (0.9)      4.6 
Commission and brokerage ratio  8.8%  7.2%  7.8%      1.6       (0.6)
Other underwriting expense ratio  19.1%  17.0%  19.5%      2.1       (2.5)
Combined ratio  114.6%  111.8%  110.3%      2.8       1.5 
                             
(Some amounts may not reconcile due to rounding)                         

Premiums. Gross written premiums increased by 12.0% to $969.1 million in 2011 compared to $865.4 million in 2010.  This was due to strategic portfolio changes with growth in short-tail business, primarily driven by the acquisition of Heartland, which provided $169.6 million of new crop insurance premium in 2011 and $54.0 million growth in A&H primary business, partially offset by the reduction of a large casualty program.  Net written premiums increased 20.5% to $450.4 million in 2011 compared to $373.7 million for 2006.the same period in 2010 due to higher gross premiums and reduced levels of ceded reinsurance, primarily due to the reduction of the large casualty program.  Premiums earned increased 12.1% to $459.4 million in 2011 compared to $409.8 million in 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.


Gross written premiums increased by 2.7% to $865.4 million in 2010 compared to $842.6 million in 2009. This was primarily due to increased writings in A&H primary, professional liability and California workers’ compensation business, partially offset by a reduction in audit premiums for workers’ compensation business.  Net written premiums increased 6.2% to $373.7 million in 2010 compared to $352.1 million in 2009, primarily due to the increase in gross written premiums.  Premiums earned increased 7.1% to $409.8 million in 2010 compared to $382.8 million in 2009.  The change in premiums earned is relatively consistent with the increase in net written premium.

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

 

Years Ended December 31,

 

 

Current

 

Ratio %/

 

Prior

 

Ratio %/

 

Total

 

Ratio %/

(Dollars in millions)

Year

 

Pt Change

 

Years

 

Pt Change

 

Incurred

 

Pt Change

2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attritional

$        346.6

 

50.6%

 

 

$           46.1

 

6.7%

 

 

$         392.7

 

57.3%

 

Catastrophes

152.1

 

22.2%

 

 

15.2

 

2.2%

 

 

167.3

 

24.4%

 

A&E

-

 

0.0%

 

 

-

 

0.0%

 

 

 -

 

0.0%

 

Total segment

$        498.7

 

72.8%

 

 

$           61.3

 

8.9%

 

 

$         560.0

 

81.7%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attritional

$        423.4

 

45.1%

 

 

$        (49.5)

 

-5.3%

 

 

$         374.0

 

39.8%

 

Catastrophes

0.1

 

0.0%

 

 

(3.5)

 

-0.4%

 

 

(3.4)

 

-0.4%

 

A&E

-

 

0.0%

 

 

266.4

 

28.4%

 

 

266.4

 

28.3%

 

Total segment

$        423.5

 

45.1%

 

 

$         213.4

 

22.7%

 

 

$        636.9

 

67.8%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attritional

$        597.3

 

61.1%

 

 

$         (46.9)

 

-4.8%

 

 

$        550.4

 

56.3%

 

Catastrophes

7.1

 

0.7%

 

 

136.3

 

13.9%

 

 

143.3

 

14.7%

 

A&E

-

 

0.0%

 

 

27.4

 

2.8%

 

 

27.4

 

2.8%

 

Total segment

$        604.4

 

61.8%

 

 

$         116.8

 

11.9%

 

 

$         721.2

 

73.7%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variance 2008/2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attritional

$       (76.9)

 

5.5

pts

 

$           95.6

 

12.0

pts

 

$           18.7

 

17.5

pts

Catastrophes

152.0

 

22.2

pts

 

18.7

 

2.6

pts

 

170.7

 

24.8

pts

A&E

-

 

-

pts

 

(266.4)

 

(28.4)

pts

 

(266.4)

 

(28.4)

pts

Total segment

$          75.2

 

27.7

pts

 

$       (152.1)

 

(13.8)

pts

 

$        (76.9)

 

14.0

pts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variance 2007/2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attritional

$     (173.9)

 

(16.0)

pts

 

$           (2.6)

 

(0.5)

pts

 

$      (176.4)

 

(16.5)

pts

Catastrophes

(7.0)

 

(0.7)

pts

 

(139.8)

 

(14.3)

pts

 

(146.8)

 

(15.0)

pts

A&E

-

 

-

pts

 

239.0

 

25.6

pts

 

239.0

 

25.6

pts

Total segment                          

$     (180.9)

 

(16.7)

pts

 

$            96.6

 

10.8

pts

 

$        (84.3)

 

(5.9)

pts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding.)

 

 

 

 

 

 

 

 

 

 

Incurred losses were lower by $76.9 million in 2008 compared to 2007, primarily due to no reserve adjustments in 2008 for A&E losses, which experienced $266.4 million adverse development in 2007. Partially offsetting the decrease were catastrophe losses, principally from Hurricanes Gustav and Ike and unfavorable reserve development on prior years’ losses for 2008 compared to favorable development in 2007.

Incurred losses were lower by $84.3 million (5.9 points) for 2007 compared to 2006. The current year’s attritional loss ratio improved by 16.0 points due to positive results from increased property quota share business. We experienced $136.3 million of prior years’ catastrophe loss development in 2006 which did not recur in 2007 that improved the loss ratio by 14.3 points. These favorable factors were partially mitigated by a 25.6 point increase in the loss ratio driven by asbestos reserve strengthening.

Segment Expenses. Commission and brokerage expenses decreased 30.7% to $159.7 million for 2008 from $230.5 million in 2007, generally in line with the decrease in premiums earned. Segment other underwriting expenses for 2008 decreased slightly to $32.2 million from $33.3 million for 2007.

Commission and brokerage expense increased by 13.7% to $230.5 million for 2007 from $202.8 million in 2006, principally driven by an increase in ceding commissions due to market conditions. Segment other underwriting expenses for 2007 increased to $33.3 million from $24.9 million for 2006, principally due to

the allocation of certain corporate charges to segments, which had been previously retained in corporate expenses.

U.S. Insurance.

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

 

 

Years Ended December 31,

 

2008/2007

 

2007/2006

(Dollars in millions)

 

2008

   

2007

   

2006

   

Variance

% Change

   

Variance

% Change

Gross written premiums

 

$      771.8

 

$     885.6

 

$     866.3

 

$      (113.8)

-12.9%

 

$           19.3

2.2%

Net written premiums

 

398.7

 

479.8

 

591.2

 

(81.1)

-16.9%

 

(111.4)

-18.8%

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums earned

 

$      482.7

 

$      496.2

 

$     574.0

 

$        (13.4)

-2.7%

 

$         (77.8)

-13.6%

Incurred losses and LAE

 

422.2

 

412.7

 

432.2

 

9.5

2.3%

 

(19.6)

-4.5%

Commission and brokerage

 

68.2

 

64.3

 

72.7

 

3.9

6.0%

 

(8.4)

-11.5%

Other underwriting expenses

     

64.3

 

58.2

 

48.9

 

6.1

10.5%

 

9.3

19.0%

Underwriting (loss) gain

 

$      (72.0)

 

$     (39.1)

 

$       20.1

 

$        (32.9)

84.3%

 

$         (59.2)

NM

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Point Chg

 

 

Point Chg

Loss ratio

 

87.5%

 

83.2%

 

75.3%

 

 

4.3

 

 

7.9

Commission and brokerage ratio         

  

14.1%

 

13.0%

 

12.7%

 

 

1.1

 

 

0.3

Other underwriting expense ratio

 

13.3%

 

11.7%

 

8.5%

 

 

1.6

 

 

3.2

Combined ratio

 

114.9%

 

107.9%

 

96.5%

 

 

7.0

 

 

11.4

 

 

 

 

 

 

 

 

 

 

 

 

 

(NM, not meaningful)

 

 

 

 

 

 

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding)

 

 

 

 

 

 

 

 

 

 

Premiums. Gross written premiums decreased by 12.9% to $771.8 million for 2008 from $885.6 million for 2007. Conditions for workers’ compensation, contractors and public entity business have gotten increasingly competitive, which has reduced the volume of business that meets our underwriting and pricing criteria. A little less than half of the decline compared to last year was from the C.V. Starr program, where we have lost some public entity business because we did not match market pricing and terms. In addition, the $76.3 million of gross written premium we assumed on a new program in 2007, did not recur in 2008. Net written premiums decreased by 16.9% to $398.7 million for 2008 compared to $479.8 million for 2007. The decrease in net written premiums was larger than the decline in gross written premiums primarily due to increased reinsurance purchases on select larger new programs and an increase in the ceding percentage for 2008 in the affiliated quota share agreement. Premiums earned decreased 2.7% to $482.7 million for 2008 from $496.2 million for 2007. The reduction 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 reflected at the initiation of the coverage period.

Gross written premiums increased by 2.2% to $885.6 million for 2007 from $866.3 million for 2006. The increase was primarily the result of a new program we assumed late in 2007 with approximately $76 million in gross written premium. Absent this new program gross written premiums would have decreased due to the further decline in our workers’ compensation and contractors liability writings in response to increased competition. Net written premiums decreased by 18.8% to $479.8 million for 2007 compared to $591.2 million for 2006, as our retention level decreased. Premiums earned decreased 13.6% to $496.2 million for 2007 from $574.0 million for 2006, generally in line with the decrease in net written premiums.

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

 

Years Ended December 31,

 

 

Current

 

Ratio %/

 

Prior

 

Ratio %/

 

Total

 

Ratio %/

(Dollars in millions)

Year

 

Pt Change

 

Years

 

Pt Change

 

Incurred

 

Pt Change

2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attritional

$     335.0

 

69.4%

 

 

$       87.4

 

18.1%

 

 

$      422.4

 

87.5%

 

Catastrophes

 -

 

0.0%

 

 

(0.2)

 

0.0%

 

 

(0.2)

 

0.0%

 

Total segment

$     335.0

 

69.4%

 

 

$       87.2

 

18.1%

 

 

$      422.2

 

87.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attritional

$     360.6

 

72.7%

 

 

$       52.4

 

10.6%

 

 

$      413.0

 

83.2%

 

Catastrophes

-

 

0.0%

 

 

(0.3)

 

-0.1%

 

 

(0.3)

 

-0.1%

 

Total segment

$     360.6

 

72.7%

 

 

$       52.1

 

10.5%

 

 

$      412.7

 

83.2%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attritional

$     480.4

 

83.7%

 

 

$     (48.5)

 

-8.5%

 

 

$      431.9

 

75.3%

 

Catastrophes

-

 

0.0%

 

 

0.3

 

0.1%

 

 

0.3

 

0.1%

 

Total segment

$     480.4

 

83.7%

 

 

$     (48.2)

 

-8.4%

 

 

$      432.2

 

75.3%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variance 2008/2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attritional

$     (25.6)

 

(3.3)

pts

 

$       35.0

 

7.5

pts

 

$           9.4

 

4.3

pts

Catastrophes

-

 

-

pts

 

0.1

 

0.0

pts

 

0.1

 

0.0

pts

Total segment

$     (25.6)

 

(3.3)

pts

 

$       35.1

 

7.6

pts

 

$           9.5

 

4.3

pts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variance 2007/2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attritional

$   (119.9)

 

(11.0)

pts

 

$     100.9

 

19.0

pts

 

$      (18.9)

 

8.0

pts

Catastrophes                    

-

 

-

pts

 

(0.6)

 

(0.1)

pts

 

(0.6)

 

(0.1)

pts

Total segment

$   (119.9)

 

(11.0)

pts

 

$     100.3

 

18.9

pts

 

$      (19.6)

 

7.9

pts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding.)

 

 

 

 

 

 

 

 

 

 


  Years Ended December 31,
  CurrentRatio %/ Prior Ratio %/ Total Ratio %/
(Dollars in millions) YearPt Change Years Pt Change Incurred Pt Change
2011                     
Attritional $371.7   80.9%  $24.7   5.4%  $396.4   86.3% 
Catastrophes  1.8   0.4%   0.2   0.0%   2.0   0.4% 
Total segment $373.5   81.3%  $24.9   5.4%  $398.4   86.7% 
                            
2010                           
Attritional $329.2   80.3%  $29.9   7.3%  $359.0   87.6% 
Catastrophes  -   0.0%   -   0.0%   -   0.0% 
Total segment $329.2   80.3%  $29.9   7.3%  $359.0   87.6% 
                            
2009                           
Attritional $291.8   76.2%  $26.0   6.8%  $317.8   83.0% 
Catastrophes  -   0.0%   -   0.0%   -   0.0% 
Total segment $291.8   76.2%  $26.0   6.8%  $317.8   83.0% 
                            
Variance 2011/2010                           
Attritional $42.5   0.6 pts $(5.2)  (1.9)pts $37.3   (1.3)pts
Catastrophes  1.8   0.4 pts  0.2   - pts  2.0   0.4 pts
Total segment $44.3   1.0 pts $(5.0)  (1.9)pts $39.3   (0.9)pts
                            
Variance 2010/2009                           
Attritional $37.4   4.1 pts $3.9   0.5 pts $41.2   4.6 pts
Catastrophes  -   - pts  -   - pts  -   - pts
Total segment $37.4   4.1 pts $3.9   0.5 pts $41.2   4.6 pts
                            
(Some amounts may not reconcile due to rounding.)                        

Incurred losses and LAE increased by 2.3%$39.3 million, or 10.9%, to $422.2 million for 2008 from $412.7 million for 2007. In 2008, we strengthened our reserves for an auto loan credit insurance program by $85.3 million as the deterioration in general economic conditions adversely impacted loan performance resulting in unforeseen increases in loan default rates and claim amounts. We had also strengthened the reserves for this program by $64.7$398.4 million in 2007. In 2008, we commuted our remaining liability on this program with the largest policyholder representing approximately one third2011 compared to $359.0 million in 2010.  This increase was primarily due to an increase of the remaining loss exposure. Given the magnitude$42.5 million (0.6 points) in current year attritional losses primarily due to higher net premiums earned.  The $24.7 million of our current reserves, the maturity of the remaining insured portfolioprior years’ development was primarily attributable to excess casualty and the reduced principal exposure, we believe the future loss development, if any, related to this program will not be material. Other than as related to this program, the segment experienced negligible reserve development in 2008 and favorable reserve development in 2007.

California workers’ compensation reserves.


Incurred losses and LAE decreased by 4.5% to $412.7 million for 2007 from $432.2 million for 2006 as the segment loss ratio increased by 7.9 points13.0% to 83.2%. From a ratio perspective,$359.0 million in 2010 compared to $317.8 million in 2009.  The increase was primarily due to the swing$37.4 million increase in current years’ attritional losses, primarily due to higher expected loss ratios on several programs, reflective of current market conditions.  The 2010 prior years’ unfavorable development from favorable in 2006 to adverse in 2007 resulted in 18.9 points of increase. The adverse development in 2007$29.9 million was primarily the result of $64.7 million of adverse reserve run-offstrengthening on a canceled auto loan credit insurance program, partially offset by favorable development on the remainder of the reserves. The 2007 accident year loss ratio was 72.7%, which was 11.0 points lower than in 2006. The 2006 accident year ratio was negatively impacted by 14.7 points due to the auto loan credit insurance program referenced above.

several terminated programs.


Segment Expenses. Commission and brokerage expenses increased by 6.0% to $68.2 million for 2008 from $64.3$40.4 million in 2007, principally due2011 compared to higher commissions on two new programs.$29.6 million in 2010.  These increases were primarily the result of an increase in net premiums earned and changes in distribution, mix of business and ceded reinsurance.  Segment other underwriting expenses for 2008in 2011 increased to $64.3$87.7 million as compared to $58.2from $69.7 million for 2007,in 2010.  These increases were primarily due to increased compensation costs associated with increased staff.the expenses of the newly acquired Heartland.

26


Commission and brokerage expenses decreased by 11.5%slightly to $64.3 million for 2007 from $72.7$29.6 million in 2006,2010 from $29.8 million in line with the2009. The decrease in premiums earned. Segment other underwriting expenses for 2007 increased to $58.2 million as compared to $48.9 million for 2006is primarily due to the allocationimpact of certain corporate charges to segments, which had been previously retainedvariations in corporate expenses.

Specialty Underwriting.

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

 

 

Years Ended December 31,

 

2008/2007

 

2007/2006

(Dollars in millions)

 

2008

 

2007

 

2006

 

Variance

% Change

 

Variance

% Change

Gross written premiums

 

$     260.4

 

$    270.1

 

$     251.2

 

$        (9.7)

-3.6%

 

$           18.9

7.5%

Net written premiums

 

167.7

 

185.4

 

174.4

 

(17.7)

-9.5%

 

10.9

6.3%

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums earned

 

$     168.4

 

$    184.9

 

$     176.3

 

$      (16.5)

-8.9%

 

$             8.6

4.9%

Incurred losses and LAE

 

116.3

 

118.3

 

125.2

 

(2.0)

-1.7%

 

(6.8)

-5.5%

Commission and brokerage

 

40.9

 

44.3

 

44.9

 

(3.3)

-7.5%

 

(0.6)

-1.3%

Other underwriting expenses

 

8.1

 

8.5

 

6.6

 

(0.4)

-4.8%

 

1.9

29.0%

Underwriting gain (loss)

 

$         3.1

 

$      13.8

 

$      (0.2)

 

$      (10.7)

-77.4%

 

$           14.1

NM

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Point Chg

 

 

Point Chg

Loss ratio

 

69.0%

 

64.0%

 

71.0%

 

 

5.0

 

 

(7.0)

Commission and brokerage ratio

 

24.3%

 

23.9%

 

25.4%

 

 

0.4

 

 

(1.5)

Other underwriting expense ratio      

 

4.8%

 

4.6%

 

3.7%

 

 

0.2

 

 

0.9

Combined ratio

 

98.1%

 

92.5%

 

100.1%

 

 

5.6

 

 

(7.6)

 

 

 

 

 

 

 

 

 

 

 

 

 

(NM, not meaningful)

 

 

 

 

 

 

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding)

 

 

 

 

 

 

 

 

 

 

Premiums. Gross written premiums decreased by 3.6% to $260.4 million for 2008 from $270.1 million for 2007. Aviation premiums were lower by $16.9 million (58.9%) owing to very competitive market conditions and A&H premiums were lower by $15.4 million (16.1%) largely due to lower premiums under certain quota share contracts where the ceding companies have culled their books to improve their loss experience. Partially offsetting these declines were marine premiums, up by $19.8 million (19.8%) due to higher premiums on our quota share covers and improved rates across the book and surety premiums, up $2.8 million or 6.1%. Net written premiums decreased by 9.5% to $167.7 million for 2008 compared to $185.4 million for 2007, as a result of the decrease in gross written premiums combined with the increased cessions under the affiliated quota share agreement. Premiums earned decreased by 8.9% to $168.4 million for 2008 compared to $184.9 million for 2007 as a result of the decline in net written premiums.

Gross written premiums increased by 7.5% to $270.1 million for 2007 from $251.2 million for 2006. This increase was the result of a $36.9 million (58.7%) increase in marine writings and a $12.2 million (14.7%) increase in A&H writings, partially offset by a $24.6 million (34.9%) decrease in surety writings and a $5.7 million (16.5%) decrease in aviation writings. The increased marine premium growth emanated from growth in existing quota share business as well as new quota share contracts. We continued to decrease our aviation and surety writings in response to more competitive market conditions. Net written premiums increased by 6.3% to $185.4 million for 2007 compared to $174.4 million for 2006, as a result of the increase in gross written premiums. Premiums earned increased by 4.9% to $184.9 million for 2007 compared to $176.3 million for 2006, generally in line with the growth in net written premiums.

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

 

Years Ended December 31,

 

 

Current

 

Ratio %/

 

Prior

 

Ratio %/

 

Total

 

Ratio %/

(Dollars in millions)

Year

 

Pt Change

 

Years

 

Pt Change

 

Incurred

 

Pt Change

2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attritional

$      103.2

 

61.3%

 

 

$       (1.2)

 

-0.7%

 

 

$      102.0

 

60.6%

 

Catastrophes

10.5

 

6.2%

 

 

3.8

 

2.2%

 

 

14.3

 

8.5%

 

Total segment

$      113.7

 

67.5%

 

 

$          2.6

 

1.5%

 

 

$      116.3

 

69.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attritional

$      105.3

 

57.0%

 

 

$       (4.7)

 

-2.6%

 

 

$      100.6

 

54.4%

 

Catastrophes

0.3

 

0.2%

 

 

17.4

 

9.4%

 

 

17.7

 

9.6%

 

Total segment

$      105.6

 

57.1%

 

 

$        12.7

 

6.9%

 

 

$      118.3

 

64.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attritional

$      109.4

 

62.1%

 

 

$     (30.1)

 

-17.1%

 

 

$        79.4

 

45.0%

 

Catastrophes

-

 

0.0%

 

 

45.8

 

26.0%

 

 

45.8

 

26.0%

 

Total segment

$     109.4

 

62.1%

 

 

$        15.7

 

8.9%

 

 

$      125.2

 

71.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variance 2008/2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attritional

$       (2.1)

 

4.3

pts

 

$          3.5

 

1.8

pts

 

$           1.4

 

6.2

pts

Catastrophes

10.2

 

6.1

pts

 

(13.7)

 

(7.2)

pts

 

(3.5)

 

(1.1)

pts

Total segment                   

$          8.1

 

10.4

pts

 

$     (10.1)

 

(5.4)

pts

 

$         (2.0)

 

5.1

pts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variance 2007/2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attritional

$       (4.1)

 

(5.1)

pts

 

$        25.3

 

14.5

pts

 

$          21.2

 

9.4

pts

Catastrophes

0.3

 

0.2

pts

 

(28.4)

 

(16.5)

pts

 

(28.1)

 

(16.4)

pts

Total segment

$       (3.8)

 

(5.0)

pts

 

$       (3.0)

 

(2.0)

pts

 

$         (6.8)

 

(7.0)

pts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding.)

 

 

 

 

 

 

 

 

 

 

Incurred losses and LAE decreased by 1.7% to $116.3 million for 2008 compared to $118.3 million for 2007 primarily due to lower catastrophe losses in 2008 as compared to 2007, partially offset by slightly higher attritional losses in 2008.

Incurred losses and LAE decreased by 5.5% to $118.3 million for 2007 compared to $125.2 million for 2006. The loss ratio for the current accident year was lower by 5.0 points in 2007 compared to 2006. We experienced 6.9 points of adverse development in 2007 compared to 8.9 points in 2006. Catastrophe loss development, principally within the marine business related to the 2005 hurricanes, was the principal driver of the overall development in both 2007 and 2006.

Segment Expenses. Commission and brokerage expenses decreased 7.5% to $40.9 million in 2008 from $44.3 million in 2007 due primarily to the increased cessionsreinsurance ceded, particularly under the affiliated quota share agreement.  Segment other underwriting expenses in 2010 decreased slightly to $8.1$69.7 million for 2008 from $8.5 million for 2007.

Commission and brokerage expense decreased 1.3% to $44.3$74.6 million in 2007 from $44.9 million in 2006, primarily due2009.  The decrease is the result of management’s direct actions to the mixreduce expenses.


28

International.

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

 

 

Years Ended December 31,

 

2008/2007

 

2007/2006

(Dollars in millions)

 

2008

 

2007

 

2006

 

Variance

% Change

 

Variance

% Change

Gross written premiums

 

$    904.7

 

$     805.9

 

$    731.7

 

$        98.8

12.3%

 

$         74.1

10.1%

Net written premiums

 

539.1

 

553.0

 

531.8

 

(13.9)

-2.5%

 

21.1

4.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums earned

 

$    545.6

 

$     558.2

 

$    518.8

 

$     (12.6)

-2.3%

 

$         39.3

7.6%

Incurred losses and LAE

 

367.1

 

339.7

 

278.5

 

27.4

8.1%

 

61.2

22.0%

Commission and brokerage

 

129.7

 

126.7

 

118.1

 

3.0

2.4%

 

8.6

7.3%

Other underwriting expenses

 

19.8

 

18.6

 

13.8

 

1.1

6.2%

 

4.8

34.7%

Underwriting gain

 

$      28.9

 

$       73.1

 

$    108.4

 

$     (44.2)

-60.4%

 

$      (35.3)

-32.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Point Chg

 

 

Point Chg

Loss ratio

 

67.3%

 

60.9%

 

53.7%

 

 

6.4

 

 

7.2

Commission and brokerage ratio

 

23.8%

 

22.7%

 

22.7%

 

 

1.1

 

 

0.0

Other underwriting expense ratio       

 

3.6%

 

3.3%

 

2.7%

 

 

0.3

 

 

0.6

Combined ratio

 

94.7%

 

86.9%

 

79.1%

 

 

7.8

 

 

7.8

 

 

 

 

 

 

 

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding)

 

 

 

 

 

 

 

 

 

 


  Years Ended December 31, 2011/2010 2010/2009
(Dollars in millions) 2011 2010 2009 Variance % Change Variance % Change
Gross written premiums $1,242.6  $1,207.0  $1,084.5  $35.7   3.0% $122.5   11.3%
Net written premiums  615.1   641.4   589.7   (26.3)  -4.1%  51.6   8.8%
                             
Premiums earned $636.7  $626.3  $586.7  $10.4   1.7% $39.6   6.7%
Incurred losses and LAE  856.1   561.9   333.2   294.3   52.4%  228.7   68.6%
Commission and brokerage  142.3   136.2   131.7   6.1   4.5%  4.5   3.4%
Other underwriting expenses  27.3   27.6   23.1   (0.3)  -1.2%  4.6   19.8%
Underwriting gain (loss) $(389.0) $(99.4) $98.8  $(289.6) NM  $(198.2)  -200.6%
                             
                  Point Chg      Point Chg 
Loss ratio  134.5%  89.7%  56.8%      44.8       32.9 
Commission and brokerage ratio  22.3%  21.7%  22.4%      0.6       (0.7)
Other underwriting expense ratio  4.3%  4.5%  4.0%      (0.2)      0.5 
Combined ratio  161.1%  115.9%  83.2%      45.2       32.7 
                             
(Some amounts may not reconcile due to rounding)                         

Premiums. Gross written premiums increased by 12.3%3.0% to $904.7$1,242.6 million for 2008in 2011 compared to $1,207.0 million in 2010, primarily due to the effects of foreign exchange.  Eliminating this effect, premiums were essentially flat.  Growth from $805.9 million for 2007. We obtained increased participations on treatiesrate levels, particularly in most regions overrecently affected by catastrophe losses was offset by the coursetermination of the past twelve months. As well, we benefited as some insurers sought to further diversify their reinsurance panels by reducing exposures to certain other reinsurers, which created opportunities for us, givenbusiness that did not meet our strong financial strength ratings. In addition, we have obtained some preferential signings including preferential terms and conditions and benefited from higher rates in some markets. Premiums written through the Miami and New Jersey offices increased by $106.0 million (22.5%); the Asian branch increased by $24.2 million (14.6%), while premiums for the Canadian branch decreased by $31.8 million (18.7%).current pricing targets.  Net written premiums decreased by 2.5%4.1% to $539.1$615.1 million for 2008in 2011 compared to $553.0$641.4 million for 2007,in 2010, primarily due to the increased cessions under thechange in our affiliated quota share agreement.  Premiums earned decreasedincreased by 2.3%1.7% to $545.6$636.7 million for 2008in 2011 compared to $558.2$626.3 million for 2007, generally consistent with the decrease in net written premiums.

Gross written premiums increased by 10.1% to $805.9 million for 2007 from $731.7 million for 2006. Approximately half of this increase was attributable to the impact of the weaker U.S. dollar. We write business in many currencies and as these currencies strengthened against the U.S. dollar, they converted to higher dollar values. Business written through the Miami and New Jersey office increased by $35.0 million (8.0%), business written through the Asian branch increased by $22.3 million (15.6%) and business written through the Canadian branch increased by $17.9 million (11.8%). We have experienced strong fundamental growth in geographic areas where economic growth and demand for reinsurance is strong. Net written premiums increased by 4.0% to $553.0 million for 2007 compared to $531.8 million for 2006, primarily as a result of the increase in gross written premiums. Premiums earned increased by 7.6% to $558.2 million for 2007 compared to $518.8 million for 2006.2010.   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 reflectedrecorded at the initiation of the coverage period.


Gross written premiums increased by 11.3% to $1,207.0 million in 2010 compared to $1,084.5 million in 2009, due to continued strong growth in premiums written through the Brazil, Miami and New Jersey offices, a $42.7 million increase; Asia, a $55.7 million increase; and Canada, a $24.2 million increase; resulting from a combination of new business, rate increases in select areas, and economic and insurance growth in some markets.  Also contributing to the increase was $16.0 million in reinstatement premiums from the Chilean earthquake and Calgary hailstorm.  Net written premiums increased by 8.8% to $641.4 million in 2010 compared to $589.7 million in 2009, principally as a result of the increase in gross written premiums.  Premiums earned increased by 6.7% to $626.3 million in 2010 compared to $586.7 million in 2009 consistent with the trend noted for net written premiums.

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

 

Years Ended December 31,

 

 

Current

 

Ratio %/

 

Prior

 

Ratio %/

 

Total

 

Ratio %/

(Dollars in millions)

Year

 

Pt Change

 

Years

 

Pt Change

 

Incurred

 

Pt Change

2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attritional

$      350.0

 

64.2%

 

 

$      (3.9)

 

-0.7%

 

 

$      346.1

 

63.4%

 

Catastrophes

26.1

 

4.8%

 

 

(5.0)

 

-0.9%

 

 

21.1

 

3.9%

 

Total segment                                 

$      376.1

 

68.9%

 

 

$      (9.0)

 

-1.6%

 

 

$      367.1

 

67.3%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attritional

$      285.5

 

51.2%

 

 

$      (5.1)

 

-0.9%

 

 

$      280.4

 

50.2%

 

Catastrophes

56.6

 

10.1%

 

 

2.7

 

0.5%

 

 

59.3

 

10.6%

 

Total segment

$      342.1

 

61.3%

 

 

$      (2.4)

 

-0.4%

 

 

$      339.7

 

60.9%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attritional

$      290.0

 

55.9%

 

 

$     (31.6)

 

-6.1%

 

 

$      258.4

 

49.8%

 

Catastrophes

5.4

 

1.0%

 

 

14.8

 

2.9%

 

 

20.2

 

3.9%

 

Total segment

$      295.4

 

56.9%

 

 

$     (16.8)

 

-3.2%

 

 

$      278.5

 

53.7%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variance 2008/2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attritional

$        64.5

 

13.0

pts

 

$          1.2

 

0.2

pts

 

$        65.7

 

13.2

pts

Catastrophes

(30.5)

 

(5.3)

pts

 

(7.8)

 

(1.4)

pts

 

(38.2)

 

(6.8)

pts

Total segment

$        34.0

 

7.7

pts

 

$       (6.6)

 

(1.2)

pts

 

$        27.4

 

6.4

pts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variance 2007/2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attritional

$       (4.5)

 

(4.7)

pts

 

$       26.5

 

5.2

pts

 

$        22.0

 

0.4

pts

Catastrophes

51.2

 

9.1

pts

 

(12.1)

 

(2.4)

pts

 

39.1

 

6.7

pts

Total segment

$        46.7

 

4.4

pts

 

$       14.4

 

2.8

pts

 

$        61.2

 

7.2

pts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding.)

 

 

 

 

 

 

 

 

 

 


  Years Ended December 31,
  Current  Ratio %/ Prior  Ratio %/ Total  Ratio %/
(Dollars in millions) Year  Pt Change Years  Pt Change Incurred  Pt Change
2011
                     
Attritional $302.8   47.6%  $(56.8)  -8.9%  $246.0   38.7% 
Catastrophes  610.5   95.9%   (0.3)  -0.1%   610.2   95.8% 
Total segment $913.3   143.5%  $(57.1)  -9.0%  $856.1   134.5% 
                            
2010                           
Attritional $345.4   55.1%  $(26.9)  -4.3%  $318.5   50.8% 
Catastrophes  253.0   40.4%   (9.6)  -1.5%   243.4   38.9% 
Total segment $598.4   95.5%  $(36.5)  -5.8%  $561.9   89.7% 
                            
2009                           
Attritional $296.4   50.5%  $12.5   2.1%  $309.0   52.7% 
Catastrophes  22.1   3.8%   2.1   0.4%   24.2   4.1% 
Total segment $318.5   54.3%  $14.7   2.5%  $333.2   56.8% 
                            
Variance 2011/2010                           
Attritional $(42.6)  (7.5)pts $(29.9)  (4.6)pts $(72.5)  (12.1)pts
Catastrophes  357.5   55.5 pts  9.3   1.4 pts  366.8   56.9 pts
Total segment $314.9   48.0 pts $(20.6)  (3.2)pts $294.2   44.8 pts
                            
Variance 2010/2009                           
Attritional $49.0   4.6 pts $(39.4)  (6.4)pts $9.5   (1.9)pts
Catastrophes  230.9   36.6 pts  (11.7)  (1.9)pts  219.2   34.8 pts
Total segment $279.9   41.2 pts $(51.2)  (8.3)pts $228.7   32.9 pts
                            
(Some amounts may not reconcile due to rounding.)                        

Incurred losses and LAE increased by 8.1%52.4% to $367.1$856.1 million for 2008in 2011 compared to $339.7$561.9 million for 2007.in 2010.  The segmentincrease was principally due to a $357.5 million (55.5 points) increase in current year catastrophes (Japan and New Zealand earthquakes, the Thailand and Australia floods, the wildfire loss in Alberta, Canada and Hurricane Irene), compared to the 2010 reported catastrophe losses (Chile earthquake and Australia hailstorms).  The current year attritional loss ratio increased by 6.4 points for 2008 compareddecreased to 2007,47.6% in 2011 from 55.1% in 2010, primarily due to highera shift in the mix of business towards property, catastrophe and excess of loss business, which generally carries a lower loss ratio. Prior years’ attritional losses decreased by $29.9 million (4.6 points) due to favorable development on non-catastrophe property business in 2008 compared to 2007, partially offset by lower catastrophe losses.

Singapore and other international markets.


Incurred losses and LAE increased by 22.0%68.6% to $339.7$561.9 million for 2007in 2010 compared to $278.5$333.2 million for 2006.in 2009.  The segment loss ratio increased by 7.2 points year over year,increase was principally due to ana $230.9 million (36.6 points) increase in current year catastrophes related to the catastropheChilean earthquake, the Australian hailstorms and floods, the New Zealand earthquake, and the Canadian hailstorm compared to the absence in 2009 of any similar large events.  Attritional losses in 2007.

also increased primarily due to the increased premiums earned and higher expected loss ratios, which were partially offset by favorable development of prior years’ attritional reserves.


Segment Expenses. Commission and brokerage expenses increased slightly4.5% to $129.7 million for 2008 from $126.7$142.3 million in 2007 despite a slight decline2011 compared to $136.2 million in 2010.  These variances were due to the changes in premiums earned. The commission and brokerage ratio increased principally due to increased contingent commissions emanating from the profitable results.mix of business.  Segment other underwriting expenses for 2008 was $19.8decreased slightly to $27.3 million in 2011 compared to $18.6$27.6 million for 2007.in 2010.


Commission and brokerage expenses increased by 7.3%3.4% to $126.7 million for 2007 from $118.1$136.2 million in 2006, consistent2010 compared to $131.7 million in 2009. The increase was primarily in line with the increaseincreases in premiums earned.  Segment other underwriting expenses for 2007 was $18.6in 2010 were $27.6 million compared to $13.8$23.1 million in 2009.  The increase was consistent with the growth in premiums earned resulting in stable other underwriting expense ratios for 2006, primarily due to the allocationperiods.


30

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 those discussed under the caption ITEM 1A, “Risk Factors”.  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 7A.                      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


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 holdgenerally 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 securities,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 maturitiesmaturity 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 $7.4$8.4 billion investment portfolio, at December 31, 20082011, is principally comprised of fixed maturity securities, which are generally subject to interest rate risk and of which 15.3% are exposed tosome foreign currency movements,exchange rate risk, and some equity securities, which are subject to price fluctuations.fluctuations and some foreign exchange rate risk.  The overall economic impact of the foreign exchange movementsrisks 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 $217.1$615.6 million of mortgage-backed securities in the $5,554.9$5,220.6 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.


The tables below display the potential impact of market value fluctuations and after-tax unrealized appreciation on our fixed maturity portfolio (including $918.7$423.7 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

 

 

At December 31, 2008

 

(Dollars in millions)

-200

 

-100

 

0

 

100

 

200

 

Total Market/Fair Value

$     7,209.1

 

$    6,855.1

 

$    6,473.7

 

$      6,083.4

 

$     5,720.2

 

Market/Fair Value Change from Base (%)

 11.4

%

 5.9

%

  0.0

%

 -6.0

%

 -11.6

%

Change in Unrealized Appreciation

 

 

 

 

 

 

 

 

 

 

   After-tax from Base ($)

$        478.0

 

$       247.9

 

$               -

 

$      (253.7)

 

$     (489.7)

 

 

 

 

 

 

 

 

 

 

 

 

 

Impact of Interest Rate Shift in Basis Points

 

 

At December 31, 2007

 

(Dollars in millions)

-200

 

-100

 

0

 

100

 

200

 

Total Market/Fair Value

$     7,953.6

 

$    7,649.8

 

$    7,325.5

 

$      6,944.8

 

$     6,552.6

 

Market/Fair Value Change from Base (%)

 8.6

%

 4.4

%

 0.0

%

 -5.2

%

 -10.6

%

Change in Unrealized Appreciation

 

 

 

 

 

 

 

 

 

 

   After-tax from Base ($)

$        408.3

 

$       210.8

 

$               -

 

$      (247.5)

 

$     (502.4)

 


  Impact of Interest Rate Shift in Basis Points
  At December 31, 2011
(Dollars in millions)  -200  -100  0  100  200
Total Market/Fair Value $5,913.2  $5,782.7  $5,644.3  $5,490.5  $5,327.6 
Market/Fair Value Change from Base (%)  4.8%  2.5%  0.0%  -2.7%  -5.6%
Change in Unrealized Appreciation                    
After-tax from Base ($) $174.8  $90.0  $-  $(100.0) $(205.9)

  Impact of Interest Rate Shift in Basis Points
  At December 31, 2010
(Dollars in millions)  -200  -100  0  100  200
Total Market/Fair Value $6,769.2  $6,546.0  $6,297.3  $6,032.8  $5,778.3 
Market/Fair Value Change from Base (%)  7.5%  3.9%  0.0%  -4.2%  -8.2%
Change in Unrealized Appreciation                    
After-tax from Base ($) $306.7  $161.7  $-  $(171.9) $(337.4)

We had $7,420.0$8,290.6 million and $7,538.7$7,652.3 million of gross reserves for losses and LAE as of December 31, 20082011 and 2007,December 31, 2010, 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 equity 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 wasis to obtain greater total return relative to bonds over time through market appreciation and income.


The tables below display the impact on fair/market value and after-tax appreciation/(depreciation)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

 

At December 31, 2008

(Dollars in millions)

-20%

-10%

0%

10%

20%

Fair/Market Value of the Equity Portfolio                

$      95.9

 

$   107.8

 

$   119.8

 

$   131.8

 

$   143.8

 

After-tax Change in Fair/Market Value

(15.6)

 

(7.8)

 

-

 

7.8

 

15.6

 

 

 

 

 

 

 

 

 

 

 

 

 

Impact of Percentage Change in Equity Fair/Market Values

 

At December 31, 2007

(Dollars in millions)

-20%

-10%

0%

10%

20%

Fair/Market Value of the Equity Portfolio

$    660.2

 

$   742.7

 

$   825.3

 

$   907.8

 

$   990.3

 

After-tax Change in Fair/Market Value

(106.0)

 

(53.0)

 

-

 

53.0

 

106.0

 


  Impact of Percentage Change in Equity Fair/Market Values
  At December 31, 2011
(Dollars in millions)  -20%  -10%  0%  10%  20%
Fair/Market Value of the Equity Portfolio $965.7  $1,086.4  $1,207.1  $1,327.8  $1,448.5 
After-tax Change in Fair/Market Value  (156.9)  (78.5)  -   78.5   156.9 

  Impact of Percentage Change in Equity Fair/Market Values
  At December 31, 2010
(Dollars in millions)  -20%  -10%  0%  10%  20%
Fair/Market Value of the Equity Portfolio $546.8  $615.1  $683.5  $751.8  $820.2 
After-tax Change in Fair/Market Value  (88.9)  (44.4)  -   44.4   88.9 

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.  Generally, we prefer to maintain the capital of our operations in U.S. dollar assets, although this varies by regulatory jurisdiction in accordance with market needs. 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 Dollar,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 FAS No. 52, “Foreign Currency Translation”,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 December 31, 2008 there has been no material change in exposure to foreign exchange rates as compared to December 31, 2007.


The tables below display the potential impact of a parallel and immediate 10% and 20% increase and decrease in foreign exchange rates on the valuation of invested assets subject to foreign currency exposure for the periods indicated.  This analysis includes the after-tax impact of translation from transactional currency to functional currency as well as the after-tax impact of translation from functional currency to the U.S. dollar reporting currency.

 

Change in Foreign Exchange Rates in Percent

 

At December 31, 2008

 

(Dollars in millions)

-20%

-10%

0%

10%

20%

Total After-tax Foreign Exchange Exposure             

$   (51.7)

 

$   (29.4)

 

$        -

 

$     34.6

 

$     73.2

 


Change in Foreign Exchange Rates in Percent

 Change in Foreign Exchange Rates in Percent 

At December 31, 2007

 

 At December 31, 2011 

(Dollars in millions)

-20%

-10%

0%

10%

20%

  -20%  -10%  0%  10%  20%

Total After-tax Foreign Exchange Exposure

$    (61.8)

 

$    (34.1)

 

$        -

 

$      38.8

 

$     81.0

 

 $(100.3) $(50.1) $-  $50.1  $100.3 


  Change in Foreign Exchange Rates in Percent 
  At December 31, 2010 
(Dollars in millions)  -20%  -10%  0%  10%  20%
Total After-tax Foreign Exchange Exposure $(81.4) $(45.3) $-  $52.0  $109.0 

ITEM 8.              FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


The financial statements and schedules listed in the accompanying Index to Financial Statements and Schedules on page F-1 are filed as part of this report.


ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

33

ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL

DISCLOSURE

None.

ITEM 9A.CONTROLS AND PROCEDURES


Disclosure Controls and Procedures

As required by Rule 13a-15(b) of the Securities Exchange Act of 1934 (the Exchange Act), our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act).  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report.


Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal controls over financial reporting.  Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external purposes in accordance with generally accepted accounting principles.


Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2008.2011.  In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework.  Based on our assessment we concluded that, as of December 31, 2008,2011, our internal control over financial reporting is effective based on those criteria.


Attestation Report of the Registered Public Accounting Firm

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

report due to the Company’s status as a non-accelerated filer.


Changes in Internal Control Over Financial Reporting

As required by Rule 13a-15(d) of the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated our internal control over financial reporting to determine whether any changes occurred during the fourth fiscal quarter covered by this annual 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 fourth quarter.


ITEM 9B. OTHER INFORMATION


None.

PART III


ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE


Information for Item 10 is not required pursuant to General Instruction I(2) of Form 10-K.


34

ITEM 11.EXECUTIVE COMPENSATION


Information for Item 11 is not required pursuant to General Instruction I(2) of Form 10-K.


ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED

STOCKHOLDER MATTERS


Information for Item 12 is not required pursuant to General Instruction I(2) of Form 10-K.

ITEM 13.   

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE


ITEM 13.        CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Information for Item 13 is not required pursuant to General Instruction I(2) of Form 10-K.


ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES


The PricewaterhouseCoopers LLP (and its worldwide affiliates) fees incurred are as follows for the periods indicated:

(Dollars in thousands)

2008

2007

(1)

Audit Fees

$       1,880.5

$     1,866.8

(2)

Audit-Related Fees

75.1

102.5

(3)

Tax Fees

32.8

164.2

(4)

All Other Fees

5.0

5.0


(Dollars in thousands) 2011 2010
 (1)Audit Fees $2,192.7  $2,116.1 
 (2)Audit-Related Fees  78.9   78.9 
 (3)Tax Fees  139.6   135.9 
 (4)All Other Fees  2.8   2.3 

Audit fees include the annual audit and quarterly financial statement reviews, subsidiary audits, and procedures required to be performed by the independent auditor to be able to form an opinion on our consolidated financial statements.  These other procedures include information systems and procedural reviews and testing performed in order to understand and place reliance on the systems of internal control, and consultations relating to the audit or quarterly review.  Audit fees may also include statutory audits or financial audits for our subsidiaries or affiliates and services associated with SEC registration statements, periodic reports and other documents filed with the SEC or other documents issued in connection with securities offerings.


Audit-related fees include assurance and related services that are reasonably related to the performance of the audit or review of our financial statements, including due diligence services pertaining to potential business acquisitions/dispositions, accounting consultations related to accounting, financial reporting or disclosure matters not classified as “audit services”; assistance with understanding and implementing new accounting and financial reporting guidance from rule making authorities; financial audits of employee benefit plans; agreed-upon or expanded audit procedures related to accounting and/or billing records required to respond to or comply with financial, accounting or regulatory reporting matters and assistance with internal control reporting requirements.


Tax fees include tax compliance, tax planning and tax advice and is granted general pre-approval by Group’s Audit Committee.


All other fees represent an accounting research subscription and software.


PricewaterhouseCoopers LLP used no leased employees on the Company’s audit engagement.


Under its Charter and the “Audit and Non-Audit Services Pre-Approval Policy” (the “Policy”), Group’s Audit Committee or its delegate (one or more of its members) is required to pre-approve the audit and non-audit services performed by the independent auditor.  The Policy requires that any service that has not received a general pre-approval or that exceeds pre-approved cost levels or budgeted amounts requires specific approval by Group’s Audit Committee or its delegate.  For both specific and general pre-approval, Group’s Audit Committee will consider whether such services are consistent with the SEC’s rules on auditor

35

independence.  Group’s Audit Committee will also consider whether the independent auditor is best positioned to provide the most effective and efficient service and whether the service might enhance our ability to manage or control risk or improve audit quality.  Group’s Audit Committee is also mindful of the relationship between fees for audit and non-audit services in deciding whether to pre-approve any such services and may determine, for each fiscal year, the appropriate ratio between the total amount of fees for audit, audit-related and tax fees and a total amount of fees for certain permissible non-audit services classified as “All Other Fees” above.  All such factors will be considered as a whole and no one factor is determinative. Group’s Audit Committee has considered whether the performance by PricewaterhouseCoopers LLP of the services disclosed below is compatible with maintaining their independence.

No portion


Some of the fees listed in (2) through (4) above was approvedwere not pre-approved by Group’s Audit Committee after the beginning of the engagement pursuant to the waiver of the pre-approval requirement for certain de minimis non-audit services described in section 10A of the Securities Exchange Act of 1934 and applicable regulations.


PART IV


ITEM 15.            EXHIBITS AND FINANCIAL STATEMENT SCHEDULES


Exhibits

The exhibits listed on the accompanying Index to Exhibits on page E-1 are filed as part of this report except that the certifications in Exhibit 32 are being furnished to the SEC, rather than filed with the SEC, as permitted under applicable SEC rules.


Financial Statements and Schedules.

The financial statements and schedules listed in the accompanying Index to Financial Statements and Schedules on page F-1 are filed as part of this report.


33

SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) 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 on March 31, 2009.

30, 2012.


EVEREST REINSURANCE HOLDINGS, INC.

By:

/S/ JOSEPH V. TARANTO

Joseph V. Taranto

(Chairman and Chief Executive Officer)





Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


Signature

Title

Date

/S/ JOSEPH V. TARANTO

Chairman and Chief Executive Officer and
Director (Principal Executive Officer)

March 31, 2009

30, 2012

Joseph V. Taranto

/S/ THOMASDOMINIC J. GALLAGHER

ADDESSO

President and Chief Operating Officer

March 31, 2009

Thomas J. Gallagher

/S/ CRAIG EISENACHER

Executive Vice

President and Chief Financial Officer (Principal
(Principal Financial Officer)

March 31 , 2009

30, 2012

Craig Eisenacher

Dominic J. Addesso

/S/ KEITH T. SHOEMAKER

Comptroller (Principal Accounting Officer)

March 31, 2009

30, 2012

Keith T. Shoemaker

37

INDEX TO EXHIBITS

Exhibit No.

2.1 

Agreement and Plan of Merger among Everest Reinsurance Holdings, Inc., Everest Re Group, Ltd. and Everest Re Merger Corporation, incorporated herein by reference to Exhibit 2.1 to the Registration Statement on Form S-4 (No. 333-87361)

3.1 

Certificate of Incorporation of Everest Reinsurance Holdings, Inc., incorporated herein by reference to Exhibit 4.1 to the Registration Statement on Form S-8 (No. 333-05771)

3.2 

By-Laws of Everest Reinsurance Holdings, Inc., incorporated herein by reference to Exhibit 3.2 to the Everest Reinsurance Holdings, Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 2000

4.1 

Indenture, dated March 14, 2000, between Everest Reinsurance Holdings, Inc. and The Chase Manhattan Bank, as Trustee, incorporated herein by reference to Exhibit 4.1 to Everest Reinsurance Holdings, Inc. Form 8-K filed on March 15, 2000

4.2 

First Supplemental Indenture relating to the 8.5% Senior Notes due March 15, 2005, dated March 14, 2000, between Everest Reinsurance Holdings, Inc. and The Chase Manhattan Bank, as Trustee, incorporated herein by reference to Exhibit 4.2 to Everest Reinsurance Holdings, Inc. Form 8-K filed on March 15, 2000

4.3 

Second Supplemental Indenture relating to the 8.75% Senior Notes due March 15, 2010, dated March 14, 2000, between Everest Reinsurance Holdings, Inc. and The Chase Manhattan Bank, as Trustee, incorporated herein by reference to Exhibit 4.3 to the Everest Reinsurance Holdings, Inc. Form 8-K filed on March 15, 2000

4.4 

Junior Subordinated Indenture, dated November 14, 2002, between Everest Reinsurance Holdings, Inc. and JPMorgan Chase Bank as Trustee, incorporated herein by reference to Exhibit 4.5 to the Registration Statement on Form S-3 (No. 333-106595)

4.5 

First Supplemental Indenture relating to Holdings 7.85% Junior Subordinated Debt Securities due November 15, 2032, dated as of November 14, 2002, among Holdings, Group and JPMorgan Chase Bank, as Trustee, incorporated herein by reference to Exhibit 10.2 to Everest Re Group, Ltd. Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (the “second quarter 2003 10-Q”)

4.6 

Amended and Restated Trust Agreement of Everest Re Capital Trust, dated as of November 14, 2002, incorporated herein by reference to Exhibit 10.1 to the second quarter 2003 10-Q

4.7 

Guarantee Agreement, dated as of November 14, 2002, between Holdings and JPMorgan Chase Bank, incorporated herein by reference to Exhibit 10.3 to the second quarter 2003 10-Q

4.8 

Expense Agreement, dated as of November 14, 2002, between Holdings and Everest Re Capital Trust, incorporated herein by reference to Exhibit 10.4 to the second quarter 2003 10-Q

4.9 

Second Supplemental Indenture relating to Holdings 6.20% Junior Subordinated Debt Securities due March 29, 2034, dated as of March 29, 2004, among Holdings, Group and JPMorgan Chase Bank, as Trustee, incorporated herein by reference to Exhibit 4.1 to Everest Reinsurance Holdings, Inc. Form 8-K filed on March 30, 2004 (the “March 30, 2004 8-K”)

E-1

4.10

Amended and Restated Trust Agreement of Everest Re Capital Trust II, dated as of March 29, 2004, incorporated herein by reference to Exhibit 4.2 to the March 30, 2004 8-K

4.11

Guarantee Agreement, dated as of March 29, 2004, between Holdings and JPMorgan Chase Bank, incorporated herein by reference to Exhibit 4.3 to the March 30, 2004 8-K

4.12

Expense Agreement, dated as of March 29, 2004, between Holdings and Everest Re Capital Trust II, incorporated herein by reference to Exhibit 4.4 to the March 30, 2004 8-K

4.13

Third Supplemental Indenture relating to Holdings 5.40% Senior Notes due October 15, 2014, dated as of October 12, 2004, among Holdings and JPMorgan Chase Bank, as Trustee, incorporated herein by reference to Exhibit 4.1 to Everest Reinsurance Holdings, Inc. Form 8-K filed on October 12, 2004

*10.1

Employment Agreement with Joseph V. Taranto executed on July 15, 1998, incorporated herein by reference to Exhibit 10.21 to Everest Reinsurance Holdings, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (the “second quarter 1998 10-Q”)

*10.2

Amendment of Employment Agreement by and among Everest Reinsurance Company, Everest Reinsurance Holdings, Inc., Everest Re Group, Ltd. and Joseph V. Taranto dated February 15, 2000, incorporated herein by reference to Exhibit 10.29 to Everest Re Group, Ltd. Annual Report on Form 10-K for the year ended December 31, 1999 (the “1999 10-K”)

*10.3

Change of Control Agreement with Joseph V. Taranto effective July 15, 1998, incorporated herein by reference to Exhibit 10.22 to the second quarter 1998 10-Q

*10.4

Amendment of Change of Control Agreement by and among Everest Reinsurance Company, Everest Reinsurance Holdings, Inc., Everest Re Group, Ltd. and Joseph V. Taranto dated February 15, 2000, incorporated herein by reference to Exhibit 10.30 to the 1999 10-K

10.5

Stock Purchase Agreement between The Prudential Insurance Company of America and Everest Reinsurance Holdings, Inc. for the sale of common stock of Gibraltar Casualty Company dated February 24, 2000, incorporated herein by reference to Exhibit 10.32 to the 1999 10-K

10.6

Amendment No. 1 to Stock Purchase Agreement between The Prudential Insurance Company of America and Everest Reinsurance Holdings, Inc. for the sale of common stock of Gibraltar Casualty Company dated August 8, 2000, incorporated herein by reference to Exhibit 10.1 to the Everest Re Group, Ltd. Quarterly Report on Form 10-Q for the quarter ended June 30, 2000

10.7

Proportional Excess of Loss Reinsurance Agreement entered into between Gibraltar Casualty Company and Prudential Property and Casualty Insurance Company, incorporated herein by reference to Exhibit 10.24 to the 2000 10-K

10.8

Guarantee Agreement made by The Prudential Insurance Company of America in favor of Gibraltar Casualty Company, incorporated herein by reference to Exhibit 10.25 to the 2000 10-K

10.9

Lease, effective December 26, 2000 between OTR, an Ohio general partnership, and Everest Reinsurance Company, incorporated herein by reference to Exhibit 10.26 to the 2000 10-K

E-2

*10.10

Amendment of Employment Agreement by and among Everest Reinsurance Company, Everest Reinsurance Holdings, Inc., Everest Re Group, Ltd., Everest Global Services, Inc. and Joseph V. Taranto, dated March 30, 2001, incorporated herein by reference to Exhibit 10.1 to Everest Re Group, Ltd. Report on Form 10-Q for the quarter ended March 31, 2001 (the “first quarter 2001 10-Q”)

*10.11

Amendment of Employment Agreement by and among Everest Reinsurance Company, Everest Reinsurance Holdings, Inc., Everest Re Group, Ltd., Everest Global Services, Inc. and Joseph V. Taranto, dated April 20, 2001, incorporated herein by reference to Exhibit 10.2 to the first quarter 2001 10-Q

*10.12

Amendment of Change of Control Agreement by and among Everest Reinsurance Company, Everest Reinsurance Holdings, Inc., Everest Re Group, Ltd., Everest Global Services, Inc. and Joseph V. Taranto, dated March 30, 2001, incorporated herein by reference to Exhibit 10.3 to the first quarter 2001 10-Q

*10.13

Amendment of Employment Agreement by and among Everest Reinsurance Company, Everest Reinsurance Holdings, Inc., Everest Re Group Ltd., Everest Global Services Inc. and Joseph V. Taranto, dated April 18, 2003, incorporated herein by reference to Exhibit 10.1 to Everest Re Group, Ltd. Form 8-K filed on April 21, 2003

*10.14

Amendment of Employment Agreement by and among Everest Reinsurance Company, Everest Reinsurance Holdings, Inc., Everest Re Group, Ltd., Everest Global Services, Inc. and Joseph V. Taranto, dated August 31, 2005, incorporated by reference to Exhibit 10.1 to Everest Re Group, Ltd. From 8-K filed on August 31, 2005

  10.15

Credit Agreement, dated August 23, 2006, between Everest Reinsurance Holdings, Inc., the lenders named therein and Citibank N.A., as administrative agent, providing for $150.0 million five year senior revolving credit facility, incorporated herein by reference to Exhibit 10.1 to Everest Re Group, Ltd. Quarterly Report on Form 10-Q for the quarter ended September 30, 2006. This new agreement replaces the October 10, 2003 three year senior revolving credit facility which expired on October 10, 2006

*10.16

Employment Agreement by and among Everest Reinsurance Company, Everest Reinsurance Holdings, Inc., Everest Re Group, Ltd., Everest Global Services, Inc. and Craig E. Eisenacher, dated December 18, 2006, incorporated by reference to Exhibit 10.1 to Everest Re Group, Ltd. Form 8-K filed on December 5, 2006

*10.17

Amendment to Employment Agreement by and among Everest Reinsurance Company, Everest Reinsurance Holdings, Inc. and Joseph V. Taranto, dated April 5, 2007, incorporated herein by reference to Exhibit 10.1 to Everest Re Group, Ltd. Form 8-K filed on April 5, 2007

*10.18

Amendment to Change of Control Agreement by and among Everest Reinsurance Company, Everest Reinsurance Holdings, Inc., Everest Re Group, Ltd., Everest Global Services and Joseph V. Taranto, dated April 5, 2007, incorporated herein by reference to Exhibit 10.2 to Everest Re Group, Ltd. Form 8-K filed on April 5, 2007

23.1

Consent of PricewaterhouseCoopers LLP, filed herewith

31.1

Section 302 Certification of Joseph V. Taranto, filed herewith

31.2

Section 302 Certification of Craig Eisenacher, filed herewith

32.1

Section 906 Certification of Joseph V. Taranto and Craig Eisenacher, furnished herewith

* Management contract or compensatory plan or arrangement.



 

INDEX TO EXHIBITS
    
Exhibit No.
    
 2.   1Agreement and Plan of Merger among Everest Reinsurance Holdings, Inc., Everest Re Group, Ltd. and Everest Re Merger Corporation, incorporated herein by reference to Exhibit 2.1 to the Registration Statement on Form S-4 (No. 333-87361)
    
 3.   1Certificate of Incorporation of Everest Reinsurance Holdings, Inc., incorporated herein by reference to Exhibit 4.1 to the Registration Statement on Form S-8 (No. 333-05771)
    
 3.   2By-Laws of Everest Reinsurance Holdings, Inc., incorporated herein by reference to Exhibit 3.2 to the Everest Reinsurance Holdings, Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 2000
    
 4.   1Indenture, dated March 14, 2000, between Everest Reinsurance Holdings, Inc. and The Chase Manhattan Bank, as Trustee, incorporated herein by reference to Exhibit 4.1 to Everest Reinsurance Holdings, Inc. Form 8-K filed on March 15, 2000
    
 4.   2Second Supplemental Indenture relating to the 8.75% Senior Notes due March 15, 2010, dated March 14, 2000, between Everest Reinsurance Holdings, Inc. and The Chase Manhattan Bank, as Trustee, incorporated herein by reference to Exhibit 4.3 to the Everest Reinsurance Holdings, Inc. Form 8-K filed on March 15, 2000
    
 4.   3Junior Subordinated Indenture, dated November 14, 2002, between Everest Reinsurance Holdings, Inc. and JPMorgan Chase Bank as Trustee, incorporated herein by reference to Exhibit 4.5 to the Registration Statement on Form S-3 (No. 333-106595)
    
 4.   4Second Supplemental Indenture relating to Holdings 6.20% Junior Subordinated Debt Securities due March 29, 2034, dated as of March 29, 2004, among Holdings, Group and JPMorgan Chase Bank, as Trustee, incorporated herein by reference to Exhibit 4.1 to Everest Reinsurance Holdings, Inc. Form 8-K filed on March 30, 2004 (the “March 30, 2004 8-K”)
    
 4.   5Amended and Restated Trust Agreement of Everest Re Capital Trust II, dated as of March 29, 2004, incorporated herein by reference to Exhibit 4.2 to the March 30, 2004 8-K
    
 4.   6Guarantee Agreement, dated as of March 29, 2004, between Holdings and JPMorgan Chase Bank, incorporated herein by reference to Exhibit 4.3 to the March 30, 2004 8-K
    
 4.   7Expense Agreement, dated as of March 29, 2004, between Holdings and Everest Re Capital Trust II, incorporated herein by reference to Exhibit 4.4 to the March 30, 2004 8-K
    
 4.   8Third Supplemental Indenture relating to Holdings 5.40% Senior Notes due October 15, 2014, dated as of October 12, 2004, among Holdings and JPMorgan Chase Bank, as Trustee, incorporated herein by reference to Exhibit 4.1 to Everest Reinsurance Holdings, Inc. Form 8-K filed on October 12, 2004
    
 10.   1
Stock Purchase Agreement between The Prudential Insurance Company of America and Everest Reinsurance Holdings, Inc. for the sale of common stock of Gibraltar Casualty Company dated February 24, 2000, incorporated herein by reference to Exhibit 10.32 to the 1999 10-K
 


E-1
 10.   2Amendment No. 1 to Stock Purchase Agreement between The Prudential Insurance Company of America and Everest Reinsurance Holdings, Inc. for the sale of common stock of Gibraltar Casualty Company dated August 8, 2000, incorporated herein by reference to Exhibit 10.1 to the Everest Re Group, Ltd. Quarterly Report on Form 10-Q for the quarter ended June 30, 2000
    
 10.   3Proportional Excess of Loss Reinsurance Agreement entered into between Gibraltar Casualty Company and Prudential Property and Casualty Insurance Company, incorporated herein by reference to Exhibit 10.24 to the Everest Re Group, Ltd. Annual Report on Form 10-K for the year ended December 31, 2000 (the “2000 10-K”)
    
 10.   4Guarantee Agreement made by The Prudential Insurance Company of America in favor of Gibraltar Casualty Company, incorporated herein by reference to Exhibit 10.25 to the 2000 10-K
    
 10.   5Credit Agreement, dated August 23, 2006, between Everest Reinsurance Holdings, Inc., the lenders named therein and Citibank N.A., as administrative agent, providing for $150.0 million five year senior revolving credit facility, incorporated herein by reference to Exhibit 10.1 to Everest Re Group, Ltd. Quarterly Report on Form 10-Q for the quarter ended September 30, 2006.  This new agreement replaces the October 10, 2003 three year senior revolving credit facility which expired on October 10, 2006
    
 10.   6
Completion of Tender Offer relating to Everest Reinsurance Holdings, Inc. 6.60% Fixed to Floating Rate Long Term Subordinated Notes (LoTSSM) dated March 19, 2009, incorporated herein by reference to Exhibit 99.1 to Everest Re Group, Ltd. Form 8-K filed on March 31, 2009
    
 *10.   7Employment Agreement between Everest Global Services, Inc., Everest Reinsurance Holdings, Inc. and Joseph V. Taranto, dated January 1, 2011, incorporated herein by reference to Exhibit 10.1 to Everest Re Group, Ltd. Form 8-K filed on March 31, 2011
    
 *10.   8Change of Control Agreement between and among Everest Reinsurance Company, Everest Reinsurance Holdings, Inc., Everest Re Group, Ltd., Everest Global Services, Inc. and Joseph V. Taranto, dated January 1, 2011, incorporated herein by reference to Exhibit 10.2 to Everest Re Group, Ltd. Form 8-K filed on March 31, 2011
    
 *10.   9Employment Agreement between Everest Global Services, Inc., Everest Reinsurance Holdings, Inc. and Dominic J. Addesso, dated June 16, 2011, incorporated herein by reference to Exhibit 10.1 to Everest Re Group, Ltd. Form 8-K filed on June 20, 2011
    
 *10.   10Employment Agreement between Everest Global Services, Inc., Everest Reinsurance Holdings, Inc. and Joseph V. Taranto, dated January 1, 2011, This employment supersedes the prior agreement between registrant and Joseph V. Taranto dated March 25, 2011.  This new agreement dated January 1, 2011, incorporated herein by reference to Exhibit 10.2 to Everest Re Group, Ltd. Form 8-K filed on June 20, 2011
    
 10.   11Credit Agreement, dated August 15, 2011, between Everest Reinsurance Holdings, Inc., the lenders named therein and Citibank, National Association, as administrative agent, providing for a $150.0 million three year revolving credit facility, incorporated herein by reference to Exhibit 10.30 to Everest Re Group, Ltd. Form 10K filed on February 29, 2012.  This new agreement replaces the August 23, 2006 five year senior revolving credit facility

E-2
    
 23.   1Consent of PricewaterhouseCoopers LLP, filed herewith
    
 31.   1Section 302 Certification of Joseph V. Taranto, filed herewith
    
 31.   2Section 302 Certification of Dominic J. Addesso, filed herewith
    
 32.   1Section 906 Certification of Joseph V. Taranto and Dominic J. Addesso, filed herewith
    
 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 Label Linkbase
    
 101.   PREXBRL Taxonomy Extension Presentation Linkbase
    
* Management contract or compensatory plan or arrangement.

E-3

EVEREST REINSURANCE HOLDINGS, INC.


INDEX TO FINANCIAL STATEMENTS AND SCHEDULES



Pages

Report of Independent Registered Public Accounting Firm

F-2

Consolidated Balance Sheets at December 31, 20082011 and 2007

2010

F-3

Consolidated Statements of Operations and Comprehensive Income (Loss) Income for the

Years Ended

Years Ended

December 31, 2008, 20072011, 2010 and 2006

2009

F-4

Consolidated Statements of Changes in Stockholder’s Equity for the Years Ended

December 31, 2008, 20072011, 2010 and 2006

2009

F-5

Consolidated Statements of Cash Flows for the Years Ended

December 31, 2008, 20072011, 2010 and 2006

2009

F-6

Notes to Consolidated Financial Statements

F-7

Schedules

I

Summary of Investments Other Than Investments in Related Parties at

December 31, 2011

S-1

    December 31, 2008

S-1

II

II

Condensed Financial Information of Registrant:

Balance Sheets as of December 31, 20082011 and 2007

2010

S-2

Statements of Operations for the Years Ended December 31, 2008, 20072011, 2010 and 2006

2009

S-3

Statements of Cash Flows for the Years Ended December 31, 2008, 20072011, 2010 and 2006

2009

S-4

III

Supplementary Insurance Information for the Years Ended

December 31, 2008, 20072011, 2010 and 2006

2009

S-5

IV

Reinsurance for the Years Ended December 31, 2008, 20072011, 2010 and 2006

2009

S-6


Schedules other than those listed above are omitted for the reason that they are not applicable or the information is
otherwise contained in the Financial Statements.




Report of Independent Registered Public Accounting Firm


To the Board of Directors and Stockholder

of Everest Reinsurance Holdings, Inc.:


In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Everest Reinsurance Holdings, Inc. and its subsidiaries (the “Company”) at December 31, 20082011 and 2007,2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 20082011 in conformity with accounting principles generally accepted in the United States of America.  In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.  These financial statements and financial statement schedules are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.  We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.


As discussed in Note 1 to the consolidated financial statements, the Company adopted SFAS No. 157, “Fair Value Measurements” and SFAS No. 159, “The Fair Value Optionchanged the manner in which it accounts for Financial Assets and Financial Liabilities”other-than-temporary impairments of debt securities in 2007.

2009.




PricewaterhouseCoopers LLP

New York, New York

March 30, 2009

2012
EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS

EVEREST REINSURANCE HOLDINGS, INC.

 

 

 

 

CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

(Dollars in thousands, except par value per share)

 

2008

 

2007

 

 

 

 

 

ASSETS:

 

 

 

 

Fixed maturities - available for sale, at market value

 

$      5,511,856

 

$     5,998,157

(amortized cost: 2008, $5,610,483; 2007, $5,830,676)

 

 

 

 

Fixed maturities - available for sale, at fair value

 

43,090

 

-

Equity securities - available for sale, at market value (cost: 2008, $15; 2007, $0)

 

16

 

-

Equity securities - available for sale, at fair value

 

119,815

 

815,372

Short-term investments

 

918,712

 

1,327,391

Other invested assets (cost: 2008, $400,498; 2007, $449,182)

 

392,589

 

451,639

Other invested assets, at fair value

 

316,750

 

253,791

Cash

 

92,264

 

146,447

Total investments and cash

 

7,395,092

 

8,992,797

Accrued investment income

 

82,860

 

86,129

Premiums receivable

 

714,035

 

800,211

Reinsurance receivables - unaffiliated

 

637,890

 

644,693

Reinsurance receivables - affiliated

 

2,480,016

 

1,698,454

Funds held by reinsureds

 

147,287

 

132,443

Deferred acquisition costs

 

192,096

 

234,719

Prepaid reinsurance premiums

 

456,180

 

433,271

Deferred tax asset

 

518,042

 

279,302

Federal income tax recoverable

 

70,299

 

88,330

Other assets

 

172,825

 

153,180

TOTAL ASSETS

 

$    12,866,622

 

$   13,543,529

 

 

 

 

 

LIABILITIES:

 

 

 

 

Reserve for losses and adjustment expenses

 

$      7,419,993

 

$     7,538,704

Unearned premium reserve

 

1,176,834

 

1,368,096

Funds held under reinsurance treaties

 

134,698

 

117,404

Losses in the course of payment

 

35,805

 

50,047

Commission reserves

 

45,531

 

47,953

Other net payable to reinsurers

 

378,800

 

374,929

8.75% Senior notes due 3/15/2010

 

199,821

 

199,685

5.4% Senior notes due 10/15/2014

 

249,728

 

249,689

6.6% Long term notes due 05/01/2067

 

399,643

 

399,639

Junior subordinated debt securities payable

 

329,897

 

329,897

Accrued interest on debt and borrowings

 

11,217

 

11,217

Other liabilities

 

281,687

 

288,770

Total liabilities

 

10,663,654

 

10,976,030

 

 

 

 

 

Commitments and Contingencies (Note 17)

 

 

 

 

 

 

 

 

 

STOCKHOLDER'S EQUITY:

 

 

 

 

Common stock, par value: $0.01; 3,000 shares authorized;

 

 

 

 

1,000 shares issued and outstanding (2008 and 2007)

 

-

 

-

Additional paid-in capital

 

315,771

 

310,206

Accumulated other comprehensive (loss) income, net of deferred income tax benefit of

 

 

 

 

$38.8 million at 2008 and expense of $87.9 million at 2007

 

(72,063)

 

163,276

Retained earnings

 

1,959,260

 

2,094,017

Total stockholder's equity

 

2,202,968

 

2,567,499

TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY

 

$    12,866,622

 

$   13,543,529

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 


  December 31,
(Dollars in thousands, except par value per share) 2011 2010
       
ASSETS:      
Fixed maturities - available for sale, at market value $5,107,028  $5,599,940 
     (amortized cost: 2011, $4,880,654; 2010, $5,438,359)        
Fixed maturities - available for sale, at fair value  113,606   180,482 
Equity securities - available for sale, at market value (cost: 2011, $15; 2010, $15)  10   13 
Equity securities - available for sale, at fair value  1,207,053   683,454 
Short-term investments  423,663   516,885 
Other invested assets (cost: 2011, $379,342; 2010, $405,401)  379,342   406,916 
Other invested assets, at fair value  817,352   788,142 
Cash  348,267   118,092 
         Total investments and cash  8,396,321   8,293,924 
Accrued investment income  55,849   70,874 
Premiums receivable  856,375   643,257 
Reinsurance receivables - unaffiliated  570,128   670,168 
Reinsurance receivables - affiliated  2,901,174   2,708,193 
Funds held by reinsureds  176,156   171,179 
Deferred acquisition costs  166,806   184,247 
Prepaid reinsurance premiums  625,391   629,323 
Deferred tax asset  366,490   183,924 
Federal income taxes recoverable  39,014   118,649 
Other assets  195,476   171,923 
TOTAL ASSETS $14,349,180  $13,845,661 
         
LIABILITIES:        
Reserve for losses and loss adjustment expenses $8,290,619  $7,652,303 
Unearned premium reserve  1,239,705   1,287,476 
Funds held under reinsurance treaties  123,479   180,377 
Losses in the course of payment  11,002   13,089 
Commission reserves  40,353   37,796 
Other net payable to reinsurers  620,659   467,486 
Revolving credit borrowings  -   50,000 
5.4% Senior notes due 10/15/2014  249,858   249,812 
6.6% Long term notes due 5/1/2067  238,354   238,351 
Junior subordinated debt securities payable  329,897   329,897 
Accrued interest on debt and borrowings  4,781   4,793 
Other liabilities  259,080   206,540 
         Total liabilities  11,407,787   10,717,920 
         
Commitments and Contingencies (Note 16)        
         
STOCKHOLDER'S EQUITY:        
Common stock, par value: $0.01; 3,000 shares authorized;        
     1,000 shares issued and outstanding (2011 and 2010)  -   - 
Additional paid-in capital  333,416   327,767 
Accumulated other comprehensive income (loss), net of deferred income tax expense        
     (benefit) of $94,118 at 2011 and $88,289 at 2010  174,790   163,966 
Retained earnings  2,433,187   2,636,008 
         Total stockholder's equity  2,941,393   3,127,741 
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $14,349,180  $13,845,661 
         
The accompanying notes are an integral part of the consolidated financial statements.        


EVEREST REINSURANCE HOLDINGS, INC.

 

 

 

 

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

 

 

AND COMPREHENSIVE (LOSS) INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

(Dollars in thousands)

2008

 

2007

 

2006

 

 

 

 

 

 

REVENUES:

 

 

 

 

 

Premiums earned

$        1,881,782

 

$       2,178,900

 

$      2,247,200

Net investment income

363,053

 

406,592

 

372,352

Net realized capital (losses) gains

(489,186)

 

80,887

 

34,957

Other income (expense)

57,921

 

(73,641)

 

(40,542)

Total revenues

1,813,570

 

2,592,738

 

2,613,967

 

 

 

 

 

 

CLAIMS AND EXPENSES:

 

 

 

 

 

Incurred losses and loss adjustment expenses

1,465,560

 

1,507,574

 

1,557,079

Commission, brokerage, taxes and fees

398,610

 

465,912

 

438,505

Other underwriting expenses

129,926

 

123,916

 

98,729

Interest, fee and bond issue cost amortization expense                    

78,979

 

91,059

 

69,696

Total claims and expenses

2,073,075

 

2,188,461

 

2,164,009

 

 

 

 

 

 

(LOSS) INCOME BEFORE TAXES

(259,505)

 

404,277

 

449,958

Income tax (benefit) expense

(134,748)

 

100,086

 

117,052

 

 

 

 

 

 

NET (LOSS) INCOME

$        (124,757)

 

$          304,191

 

$         332,906

 

 

 

 

 

 

Other comprehensive (loss) income, net of tax

(235,339)

 

35,482

 

101,313

 

 

 

 

 

 

COMPREHENSIVE (LOSS) INCOME

$        (360,096)

 

$          339,673

 

$         434,219

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

F-3

EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)

EVEREST REINSURANCE HOLDINGS, INC.

 

 

 

 

 

CONSOLIDATED STATEMENTS OF

 

 

 

 

 

CHANGES IN STOCKHOLDER'S EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

(Dollars in thousands, except share amounts)

2008

 

2007

 

2006

 

 

 

 

 

 

COMMON STOCK (shares outstanding):

 

 

 

 

 

Balance, beginning of period

1,000

 

1,000

 

1,000

Balance, end of period

1,000

 

1,000

 

1,000

 

 

 

 

 

 

ADDITIONAL PAID-IN CAPITAL:

 

 

 

 

 

Balance, beginning of period

$           310,206

 

$          300,764

 

$          292,281

Share-based compensation plans

5,565

 

9,442

 

8,483

Balance, end of period

315,771

 

310,206

 

300,764

 

 

 

 

 

 

ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME,       

 

 

 

 

 

NET OF DEFERRED INCOME TAXES:

 

 

 

 

 

Balance, beginning of period

163,276

 

332,578

 

246,285

Cumulative effect to adopt FAS No. 159, net of tax

-

 

(204,784)

 

-

Adjustment to initially apply FAS no. 158, net of tax

-

 

-

 

(15,020)

Net (decrease) increase during the period

(235,339)

 

35,482

 

101,313

Balance, end of period

(72,063)

 

163,276

 

332,578

 

 

 

 

 

 

RETAINED EARNINGS:

 

 

 

 

 

Balance, beginning of period

2,094,017

 

1,585,042

 

1,252,136

Cumulative effect to adopt FAS No. 159, net of tax

-

 

204,784

 

-

Net (loss) income

(124,757)

 

304,191

 

332,906

Dividends declared

(10,000)

 

-

 

-

Balance, end of period

1,959,260

 

2,094,017

 

1,585,042

 

 

 

 

 

 

TOTAL STOCKHOLDER'S EQUITY, END OF PERIOD

$        2,202,968

 

$       2,567,499

 

$       2,218,384

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 


EVEREST REINSURANCE HOLDINGS, INC.

 

 

 

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

(Dollars in thousands)

2008

 

2007

 

2006

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net (loss) income

$    (124,757)

 

$      304,191

 

$      332,906

Adjustments to reconcile net income to net cash provided by operating activities:            

 

 

 

 

 

    Decrease in premiums receivable

82,398

 

145,022

 

117,936

    Decrease (increase) in funds held by reinsureds, net

2,426

 

6,808

 

(155,669)

    (Increase) decrease in reinsurance receivables

(50,349)

 

(63,541)

 

274,443

    Increase in deferred tax asset

(112,021)

 

(50,191)

 

(33,460)

    (Decrease) increase in reserve for losses and loss adjustment expenses

(42,354)

 

66,119

 

(353,176)

    (Decrease) increase in unearned premiums

(181,240)

 

(66,483)

 

32,986

    Change in equity adjustments in limited partnerships

30,985

 

(22,726)

 

(38,536)

    Change in other assets and liabilities, net

(65,102)

 

(83,460)

 

204,332

    Non-cash compensation expense

4,983

 

4,832

 

-

    Non-cash loss portfolio transfer transaction

315

 

-

 

-

    Amortization of bond premium/(accrual of bond discount)

9,257

 

(7,969)

 

9,873

    Amortization of underwriting discount on senior notes

179

 

164

 

149

    Net realized capital losses (gains)

489,186

 

(80,887)

 

(34,957)

Net cash provided by operating activities

43,906

 

151,879

 

356,827

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Proceeds from fixed maturities matured/called - available for sale, at market value

486,174

 

736,297

 

461,341

Proceeds from fixed maturities matured/called - available for sale, at fair value

1,900

 

-

 

-

Proceeds from fixed maturities sold - available for sale, at market value

140,139

 

38,504

 

45,051

Proceeds from equity securities sold - available for sale, at market value

(15)

 

6,497

 

206,522

Proceeds from equity securities sold - available for sale, at fair value

777,250

 

760,729

 

-

Distributions from other invested assets

94,082

 

48,712

 

54,195

Cost of fixed maturities acquired - available for sale, at market value

(1,362,282)

 

(585,910)

 

(599,175)

Cost of fixed maturities acquired - available for sale, at fair value

(43,414)

 

-

 

-

Cost of equity securities acquired - available for sale, at fair value

(322,530)

 

(329,486)

 

(176,678)

Cost of other invested assets acquired

(76,384)

 

(135,357)

 

(148,342)

Cost of other invested assets acquired, at fair value

(150,744)

 

(241,584)

 

-

Net change in short-term securities

364,811

 

(628,453)

 

(143,637)

Net change in unsettled securities transactions

7,436

 

(5,609)

 

(10,706)

Net cash used in investing activities

(83,577)

 

(335,660)

 

(311,429)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Tax benefit from share-based compensation

582

 

4,610

 

8,483

Net proceeds from issuance of long term notes

-

 

395,637

 

-

Redemption of junior subordinated debt securities

-

 

(216,496)

 

-

Dividends paid to stockholder

(10,000)

 

-

 

-

Net cash (used in) provided by financing activities

(9,418)

 

183,751

 

8,483

 

 

 

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH

(5,094)

 

9,942

 

16,460

 

 

 

 

 

 

Net (decrease) increase in cash

(54,183)

 

9,912

 

70,341

Cash, beginning of period

146,447

 

136,535

 

66,194

Cash, end of period

$        92,264

 

$      146,447

 

$      136,535

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

Cash transactions:

 

 

 

 

 

Income taxes (recoverable) paid

$      (46,666)

 

$      250,909

 

$        35,460

Interest paid

77,948

 

82,635

 

68,608

 

 

 

 

 

 

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

 

 

 

 

 


  Years Ended December 31,
(Dollars in thousands) 2011 2010 2009
          
REVENUES:         
Premiums earned $1,793,855  $1,813,823  $1,785,060 
Net investment income  312,933   350,344   262,086 
Net realized capital gains (losses):            
Other-than-temporary impairments on fixed maturity securities  (14,522)  (2,106)  (5,510)
Other-than-temporary impairments on fixed maturity securities            
transferred to other comprehensive income (loss)  -   -   - 
Other net realized capital gains (losses)  (26,594)  67,397   62,438 
Total net realized capital gains (losses)  (41,116)  65,291   56,928 
Realized gain on debt repurchase  -   -   78,271 
Other income (expense)  (11,745)  12,074   366 
Total revenues  2,053,927   2,241,532   2,182,711 
             
CLAIMS AND EXPENSES:            
Incurred losses and loss adjustment expenses  1,877,603   1,477,450   1,091,676 
Commission, brokerage, taxes and fees  338,655   335,061   344,577 
Other underwriting expenses  154,331   139,832   142,610 
Corporate expenses  6,073   5,867   7,722 
Interest, fee and bond issue cost amortization expense  50,763   54,553   70,883 
Total claims and expenses  2,427,425   2,012,763   1,657,468 
             
INCOME (LOSS) BEFORE TAXES  (373,498)  228,769   525,243 
Income tax expense (benefit)  (170,677)  (36,628)  129,392 
             
NET INCOME (LOSS) $(202,821) $265,397  $395,851 
             
Other comprehensive income (loss), net of tax  10,032   (3,012)  254,541 
             
COMPREHENSIVE INCOME (LOSS) $(192,789) $262,385  $650,392 
             
The accompanying notes are an integral part of the consolidated financial statements.            


EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDER’S EQUITY



  Years Ended December 31,
(Dollars in thousands, except share amounts) 2011 2010 2009
          
COMMON STOCK (shares outstanding):         
Balance, beginning of period  1,000   1,000   1,000 
Balance, end of period  1,000   1,000   1,000 
             
ADDITIONAL PAID-IN CAPITAL:            
Balance, beginning of period $327,767  $321,185  $315,771 
Share-based compensation plans  6,441   6,582   5,414 
Reclassification due to sale of subsidiary to related party  (792)  -   - 
Balance, end of period  333,416   327,767   321,185 
             
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS),            
NET OF DEFERRED INCOME TAXES:            
Balance, beginning of period  163,966   166,978   (72,063)
Cumulative adjustment of initial adoption(1), net of tax
  -   -   (15,500)
Reclassification due to sale of subsidiary to related party  792   -   - 
Net increase (decrease) during the period  10,032   (3,012)  254,541 
Balance, end of period  174,790   163,966   166,978 
             
RETAINED EARNINGS:            
Balance, beginning of period  2,636,008   2,370,611   1,959,260 
Cumulative adjustment of initial adoption(1), net of tax
  -   -   15,500 
Net income (loss)  (202,821)  265,397   395,851 
Balance, end of period  2,433,187   2,636,008   2,370,611 
             
TOTAL STOCKHOLDER'S EQUITY, END OF PERIOD $2,941,393  $3,127,741  $2,858,774 
             
(1)   The cumulative adjustment to accumulated other comprehensive income (loss), net of deferred income taxes, and retained earnings, represents the effect of
 
       initially adopting new guidance for other-than-temporary impairments of debt securities.            
             
The accompanying notes are an integral part of the consolidated financial statements.            


EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS



  Years Ended December 31,
(Dollars in thousands) 2011 2010 2009
          
CASH FLOWS FROM OPERATING ACTIVITIES:         
Net income (loss) $(202,821) $265,397  $395,851 
Adjustments to reconcile net income to net cash provided by operating activities:            
Decrease (increase) in premiums receivable  (214,581)  131,870   (51,103)
Decrease (increase) in funds held by reinsureds, net  (62,082)  (8,910)  31,915 
Decrease (increase) in reinsurance receivables  (96,003)  (271,644) ��15,207 
Decrease (increase) in federal income taxes receivable  79,504   (13,560)  (70,447)
Decrease (increase) in deferred tax asset  (187,967)  28,192   170,490 
Decrease (increase) in prepaid reinsurance premiums  3,655   (66,408)  (103,677)
Increase (decrease) in reserve for losses and loss adjustment expenses  674,001   318,301   (175,589)
Increase (decrease) in unearned premiums  (46,182)  40,729   54,760 
Increase (decrease) in other net payable to reinsurers  153,508   22,072   62,535 
Change in equity adjustments in limited partnerships  (42,047)  (45,463)  28,467 
Change in other assets and liabilities, net  69,549   (63,273)  32,904 
Non-cash compensation expense  6,166   6,382   5,384 
Amortization of bond premium (accrual of bond discount)  10,125   8,614   11,665 
Amortization of underwriting discount on senior notes  49   76   192 
Realized gain on debt repurchase  -   -   (78,271)
Net realized capital (gains) losses  41,116   (65,291)  (56,928)
Net cash provided by (used in) operating activities  185,990   287,084   273,355 
             
CASH FLOWS FROM INVESTING ACTIVITIES:            
Proceeds from fixed maturities matured/called - available for sale, at market value  695,921   676,822   445,817 
Proceeds from fixed maturities matured/called - available for sale, at fair value  12,775   -   15,358 
Proceeds from fixed maturities sold - available for sale, at market value  1,209,150   953,714   102,396 
Proceeds from fixed maturities sold - available for sale, at fair value  65,158   20,237   14,778 
Proceeds from equity securities sold - available for sale, at market value  27,096   -   23,028 
Proceeds from equity securities sold - available for sale, at fair value  237,849   230,562   43,483 
Proceeds from sale of subsidiary to related party  61,005   -   - 
Distributions from other invested assets  121,176   60,283   28,460 
Cost of fixed maturities acquired - available for sale, at market value  (1,455,940)  (785,831)  (1,152,966)
Cost of fixed maturities acquired - available for sale, at fair value  (27,481)  (134,324)  (27,555)
Cost of equity securities acquired - available for sale, at market value  (27,059)  -   - 
Cost of equity securities acquired - available for sale, at fair value  (746,604)  (475,047)  (265,272)
Cost of other invested assets acquired  (53,070)  (33,021)  (43,628)
Cost of other invested assets acquired, at fair value  (37,611)  (379,591)  (25,840)
Cost of businesses acquired  (63,100)  -   - 
Net change in short-term investments  89,735   (254,160)  666,882 
Net change in unsettled securities transactions  13,467   (11,773)  6,042 
Net cash provided by (used in) investing activities  122,467   (132,129)  (169,017)
             
CASH FLOWS FROM FINANCING ACTIVITIES:            
Tax benefit from share-based compensation  275   200   30 
Net cost of senior notes maturing  -   (200,000)  - 
Revolving credit borrowings  (50,000)  50,000   - 
Net cost of debt repurchase  -   -   (83,026)
Net cash provided by (used in) financing activities  (49,725)  (149,800)  (82,996)
             
EFFECT OF EXCHANGE RATE CHANGES ON CASH  (28,557)  5,457   (6,126)
             
Net increase (decrease) in cash  230,175   10,612   15,216 
Cash, beginning of period  118,092   107,480   92,264 
Cash, end of period $348,267  $118,092  $107,480 
             
SUPPLEMENTAL CASH FLOW INFORMATION:            
Income taxes paid (recovered) $(62,137) $(51,360) $30,859 
Interest paid  50,091   58,921   71,256 
             
Non-cash transaction:            
Net assets acquired and liabilities assumed from business acquisitions  19,130   -   - 
             
The accompanying notes are an integral part of the consolidated financial statements.            


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Years Ended December 31, 2008, 20072011, 2010 and 2006

2009


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


A.  Business and Basis of Presentation.

Everest Reinsurance Holdings, Inc. (“Holdings”), a Delaware company and direct subsidiary of Everest Risk HoldingsUnderwriting Group (Ireland) Limited (“Holdings Ireland”), which is a direct subsidiary of Everest Re Group, Ltd. (“Group”), through its subsidiaries, principally provides property and casualty reinsurance and insurance in the United States of America and internationally.  As used in this document, “Company” means Holdings and its subsidiaries.  On December 30, 2008, Group contributed Everest Reinsurance Holdings, Inc. and its subsidiariesthe Company to its recently established Irish holding company, Holdings Ireland.


The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).  The statements include all of the following domestic and foreign direct and indirect subsidiaries of the Company:  Everest Reinsurance Company (“Everest Re”), Everest National Insurance Company (“Everest National”), Everest Indemnity Insurance Company (“Everest Indemnity”), Everest Security Insurance Company (“Everest Security”), Heartland Crop Insurance, Inc. (“Heartland”), Everest Insurance Company of Canada (“Everest Canada”), Premiere Insurance Underwriting Services (“Premiere”), Mt. Whitney Securities, Inc., Everest Reinsurance Company – Escritório de Representação No Brasil Ltda. (Brazil)(“Everest Brazil”), Mt. McKinley Managers, L.L.C., Workcare Southeast, Inc., Workcare Southeast of Georgia, Inc. and Mt. McKinley Insurance Company (“Mt. McKinley”).  The Company sold Everest Canada and Premiere to Holdings Ireland, an affiliated company, during the fourth quarter of 2011.  All amounts are reported in U.S. dollars.


The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities (and disclosure of contingent assets and liabilities) at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  All intercompany accounts and transactions have been eliminated. Ultimate actual results could differ, possibly materially, from those estimates.


All intercompany accounts and transactions have been eliminated.

Certain reclassifications and format changes have been made to prior years’ amounts to conform to the 20082011 presentation.


B.  Investments.

Fixed maturity and market value equity security investments are all classified as available for sale. Unrealizedsale, at market value, reflect unrealized appreciation and depreciation, as a result of temporary changes in market value during the period, are reflected in stockholder’s equity, net of income taxes in “accumulated other comprehensive income”income (loss)” in the consolidated balance sheets.  Fixed maturities, actively managedmaturity, equity securities and other invested assets at fair value, are carried at fair value withreflect fair value re-measurements reflected as net realized capital gains orand losses in the consolidated statements of operations and comprehensive income.income (loss).  The Company records changes in fair value for its fixed maturities-available for sale, at market value through shareholders’ equity, net of taxes in accumulated other comprehensive income (loss) since cash flows from these investments will be primarily used to settle its reserve for losses and loss adjustment expense liabilities.  The Company anticipates holding these investments for an extended period as the cash flow from interest and maturities will fund the projected payout of these liabilities.  Fixed maturities carried at fair value represent a portfolio of foreign denominated fixed maturity securities, which will be used to settle loss and loss adjustment reserves in the same currency, and a portfolio of convertible bond securities, which have characteristics similar to equity securities.  The Company carries all of its equity securities at fair value except for mutual fund investments whose underlying investments are comprised of fixed maturity securities. For equity securities, available for sale, at fair value, the Company reflects changes in value as net realized capital gains and losses since these securities may be sold in the near term depending on financial market conditions.  Other invested assets, at fair value, are comprised of common shares of the Company’s ultimate parent, Everest Re Group, Ltd.  Interest income on
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all fixed maturities and dividend income on all equity securities are included as part of net investment income in the consolidated statements of operations and comprehensive income (loss).  Unrealized losses on fixed maturities, which are deemed other-than-temporary and related to the credit quality of a security, are charged to net income (loss) as net realized capital losses.  Short-term investments are stated at cost, which approximates market value.  Realized gains or losses on sales of investments are determined on the basis of identified cost.  For non-publicly traded securities, market prices are determined through the use of pricing models that evaluate securities relative to the U.S. Treasury yield curve, taking into account the issue type, credit quality, and cash flow characteristics of each security.  For publicly traded securities, market value is based on quoted market prices or valuation models that use observable market inputs.  When a sector of the financial markets is inactive or illiquid, the Company may use its own assumptions about future cash flows and risk-adjusted discount rates to determine fair value.  Retrospective adjustments are employed to recalculate the values of asset-backed securities.  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 to effect the calculation of projected and prepayments for pass-through security types.  Other invested assets include limited partnerships, rabbi trusts

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and an affiliated entity.  Limited partnerships and the affiliated entity are accounted for under the equity method of accounting, which maycan be recorded on a monthly or quarterly lag.


C.  Uncollectible Receivable Balances.

The Company provides reserves for uncollectible premium receivables and reinsurance recoverable and premium receivable balances based on management’s assessment of the collectibilitycollectability of the outstanding balances.  Such reserves were $263.7 million and $187.8 million at December 31, 2008 and 2007, respectively.

are presented in the table below for the periods indicated.

  Years Ended December 31, 
(Dollars in thousands) 2011  2010 
Reinsurance recoverable and premium receivables $33,430  $34,121 
D.  Deferred Acquisition Costs.

Acquisition costs, consisting principally of commissions and brokerage expenses and certain premium taxes and fees incurred at the time a contract or policy is issued and that vary with and are directly related to the Company’s reinsurance and insurance business, are deferred and amortized over the period in which the related premiums are earned, generally one year.earned.  Deferred acquisition costs are limited to their estimated realizable value by line of business based on the related unearned premiums, anticipated claims and claim expenses and anticipated investment income.  Deferred acquisition costs amortized to income were $398.6 million, $465.9 million and $438.5 millionare presented in 2008, 2007 and 2006, respectively.

the table below for the periods indicated.

  Years Ended December 31, 
(Dollars in thousands) 2011  2010  2009 
Deferred acquisition costs $338,655  $335,061  $344,577 


E.  Reserve for Losses and Loss Adjustment Expenses.

The reserve for losses and loss adjustment expenses (“LAE”) is based on individual case estimates and reports received from ceding companies.  A provision is included for losses and LAE incurred but not reported (“IBNR”) based on past experience.  A provision is also included for certain potential liabilities relating to asbestos and environmental (“A&E”) exposures, which liabilities cannot be estimated using traditional reserving techniques.  See also Note 3.  The reserves are reviewed periodically and any changes in estimates are reflected in earnings in the period the adjustment is made. The Company’s loss and LAE reserves represent management’s best estimate of the ultimate liability.  Loss and LAE reserves are presented gross of reinsurance receivables and incurred losses and LAE are presented net of reinsurance.


Accruals for commissions are established for reinsurance contracts that provide for the stated commission percentage to increase or decrease based on the loss experience of the contract.  Changes in estimates for such arrangements are recorded as commission expense.  Commission accruals for contracts with adjustable features are estimated based on expected loss and LAE.


F.  Premium Revenues.

Written premiums are earned ratably over the periods of the related insurance and reinsurance contracts.  Unearned premium reserves are established relative to the unexpired contract period.  Such reserves are established based upon reports received from ceding companies or estimated using pro rata methods based on statistical data. Reinstatement premiums represent additional premium received on reinsurance coverages, most prevalently catastrophe related, when limits have been depleted under the original reinsurance contract and additional coverage is granted.  Written and earned premiums and the related costs, which have not yet been reported to the Company, are estimated and accrued.  Premiums are net of ceded reinsurance.


G.  Prepaid Reinsurance Premiums.
Prepaid reinsurance premiums represent unearned premium reserves ceded to other reinsurers.  Prepaid reinsurance premiums for any foreign reinsurers comprising more than 10% of the outstanding balance at December 31, 2011 were collateralized either through a trust arrangement or letters of credit, thereby limiting the credit risk to the Company.

H.  Income Taxes.

The Company and its wholly-owned subsidiaries file a consolidated U.S. federal income tax return.  Foreign branches of subsidiaries file local tax returns as required.  Deferred income taxes have been recorded to recognize the tax effect of temporary differences between the financial reporting and income tax bases of assets and liabilities, which arise because of differences between GAAP and income tax accounting rules.

H.


I.  Foreign Currency.

Assets and liabilities relating to foreign operations are translated into U.S. dollars at the exchange rates in effect at the balance sheet date; revenues and expenses are translated into U.S. dollars using average exchange rates in effect during the reporting period.  Gains and losses resulting from translating foreign currency financial statements, net of deferred income taxes, are excluded from net income (loss) and accumulated in stockholder’s equity.  Gains and losses resulting from foreign currency transactions, other than debt securities available for sale, are recorded through the consolidated statements of operations and comprehensive income (loss) in other income (expense).  Gains and losses resulting from changes in the

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foreign currency exchange rates oron debt securities, available for sale at market value, are recorded in the consolidated balance sheets in accumulated other comprehensive income (loss) as unrealized appreciation (depreciation).

I. and any losses which are deemed other-than-temporary are changed to net income (loss) as net realized capital loss.


J.  Segmentation.

The Company, through its subsidiaries, operates in fourthree segments:  U.S. Reinsurance, U.S. Insurance Specialty Underwriting and International.  See also Note 19.

J.18.


K.  Retroactive Reinsurance.

Premiums on ceded retroactive contracts are earned when written with a corresponding reinsurance recoverable established for the amount of reserves ceded.  The initial gain, if applicable, is deferred and amortized into income over an actuarially determined expected payout period.  Any future loss is recognized immediately and charged against earnings.

K. Policyholder Dividends.

The Company issues certain insurance policies with dividend payment features. These policyholders share in the operating results of their respective policies in the form of dividends declared. Dividends to policyholders are accrued during the period in which the related premiums are earned and are determined based on the terms of the individual policies.


L. Application of NewRecently Issued Accounting Standards.Standard Changes.
Financial Accounting Standards Board Launched Accounting Codification.

In July 2006,June 2009, the Financial Accounting Standards Board (“FASB”) releasedissued authoritative guidance establishing the FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretationAccounting Standards CodificationTM (“Codification”) as the single source of FASB Statement No. 109” (“FIN 48”), which was effective for fiscal years beginning after December 15, 2006. FIN 48 clarifiesauthoritative U.S. GAAP recognized by the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes” (“FAS 109”). FIN 48 prescribes the financial statement recognition and measurement criteria for tax positions taken or expected to be takenapplied 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 and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in a tax return. Further, FIN 48 expands the required disclosures associated with uncertain tax positions. AsCodification have become non-authoritative.



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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.

GAAP is not intended to be changed as a result of the implementation of FIN 48,FASB’s Codification, but it will change the Company recorded no adjustmentway the guidance is organized and presented.  As a result, these changes have a significant impact on how companies reference GAAP in their financial statements and in the liability for unrecognized income tax benefits and no adjustment to beginning retained earnings.

In September 2006, the FASB issued Statement of Financial Accounting Standards (“FAS”) No. 157 “Fair Value Measurements” (“FAS 157”). FAS 157 defines fair value, establishes a framework for measuring fair value consistently in GAAP and expands disclosures about fair value measurements. The Company adopted FAS 157 as of January 1, 2007.

In September 2006, the FASB issued FAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“FAS 158”), which was effective for employers with publicly traded equity securities as of the end of the fiscal year ending after December 15, 2006. FAS 158 requires an employer to (a) recognize in its financial statements an asset for a plan’s over funded status or a liability for a plan’s under funded status, (b) measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year and (c) recognize changes in the funded status of a defined benefit post-retirement plan in the year in which the changes occur as other comprehensive income. The Company adopted FAS 158 for the reporting period ended December 31, 2006.

In February 2007, the FASB issued FAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment to FASB Statement No. 115” (“FAS 159”). FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The Company adopted FAS 159 as of January 1, 2007.

In March 2008, the FASB issued FAS No. 161 “Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133” (“FAS 161”). FAS 161 requires entities to provide additional disclosures on derivative and hedging activities regarding their effect on financial position, financial performance and cash flows. This statement is effectivepolicies for financial statements issued for fiscal

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yearsinterim and interimannual periods ending after September 15, 2009.  The Company’s adoption of this guidance impacts the way the Company references U.S. GAAP accounting standards in the financial statements and Notes to Consolidated Financial Statements.


Intangibles-Goodwill or Other.  In September 2011, the FASB amended the authoritative guidance for disclosures on Goodwill Impairment.  The amendment allows an entity first to assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis in determining whether it is necessary to perform the two-step goodwill impairment test.  This guidance is effective for periods beginning after NovemberDecember 15, 2008.2011.  The Company will adopt FAS 161 onthis guidance as of January 1, 2009.

2012.


Presentation of Comprehensive Income. In October 2008, theJune 2011, FASB issued FASB Staff Position FAS 157-3 “Determiningamendments to existing guidance to provide two alternatives for the Fair Valuepresentation of comprehensive income. Components of net income and comprehensive income will either be presented within a Financial Asset When the Market for That Asset is Not Active” (“FAS 157-3”). FAS 157-3 clarifies the application of FAS No. 157 “Fair Value Measurements” (“FAS 157”),single, continuous financial statement or be presented in a market that is not active. This FASB Staff Position was effective upon issuance.

In December 2008, the FASB issued FASB Staff Position FAS 132(R)-1 “Employers’ Disclosures about Postretirement Benefit Plan Assets” (“FAS 132(R)-1”). FAS 132(R)-1 requires additional disclosures about plan assets. Additional disclosures include investment policies and strategies, fair value of each major plan asset category, inputs and valuation techniques used to develop fair value and any significant concentrations of risk. This FASB Staff Positiontwo separate but consecutive financial statements.  The guidance is effective for fiscal years endingreporting periods beginning after December 15, 2009.2011.  The Company will adopt FAS 132(R)-1this guidance as of January 1, 2012 and expects to present net income and comprehensive income in a single, continuous financial statement.


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 adopt this guidance prospectively as of January 1, 2012.

Treatment of Insurance Contract Acquisition Costs. In October 2010, the FASB issued authoritative guidance for the accounting for costs associated with acquiring or renewing insurance contracts.  The guidance identifies the incremental direct costs of contract acquisition and costs directly related to acquisition activities that should be capitalized.  This guidance is effective for reporting periods beginning after December 15, 2011.  The Company will adopt this guidance as of January 1, 2012 and estimates that $7,215 thousand of acquisition costs will no longer be capitalized during 2012.

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.

Improving Disclosures About Fair Value 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
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only for periods ending December 31,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 


Measurement of Fair Value in Inactive Markets.  In April 2009, the FASB revised the authoritative guidance for fair value measurements and disclosures, which reaffirms that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. It also reaffirms the need to use judgment in determining if a formerly active market has become inactive and in determining fair values when the market has become inactive. There was no impact to the Company’s financial statements upon adoption.

2.  INVESTMENTS


The amortized cost, market value and gross unrealized appreciation and depreciation of available for sale, market value fixed maturity and equity security investments, carried at market value, are as follows for the periods indicated:

 

At December 31, 2008

 

Amortized

 

Unrealized

 

Unrealized

 

Market

(Dollars in thousands)

Cost

 

Appreciation

 

Depreciation

 

Value

Fixed maturities - available for sale

 

 

 

 

 

 

 

   U.S. Treasury securities and obligations of

 

 

 

 

 

 

 

      U.S. government agencies and corporations

$      139,776

 

$           15,456

 

$                    -

 

$       155,232

   Obligations of U.S. states and political subdivisions

3,846,754

 

113,885

 

(164,921)

 

3,795,718

   Corporate securities

496,328

 

18,411

 

(69,061)

 

445,678

   Mortgage-backed securities

231,631

 

4,838

 

(19,352)

 

217,117

   Foreign government securities

467,935

 

32,538

 

(7,776)

 

492,697

   Foreign corporate securities

428,059

 

6,602

 

(29,247)

 

405,414

Total fixed maturities

$   5,610,483

 

$         191,730

 

$      (290,357)

 

$    5,511,856

Equity securities

$               15

 

$                    1

 

$                     -

 

$                16

 

 

 

 

 

 

 

 

 

At December 31, 2007

 

Amortized

 

Unrealized

 

Unrealized

 

Market

(Dollars in thousands)

Cost

 

Appreciation

 

Depreciation

 

Value

Fixed maturities - available for sale

 

 

 

 

 

 

 

   U.S. Treasury securities and obligations of

 

 

 

 

 

 

 

      U.S. government agencies and corporations

$        92,932

 

$             3,571

 

$                  (3)

 

$         96,500

   Obligations of U.S. states and political subdivisions                

3,512,695

 

138,374

 

(2,540)

 

3,648,529

   Corporate securities

741,380

 

12,819

 

(10,909)

 

743,290

   Mortgage-backed securities

566,041

 

4,100

 

(5,119)

 

565,022

   Foreign government securities

416,715

 

20,678

 

(876)

 

436,517

   Foreign corporate securities

500,913

 

11,614

 

(4,228)

 

508,299

Total fixed maturities

$   5,830,676

 

$         191,156

 

$         (23,675)

 

$    5,998,157

Equity securities

$                  -

 

$                     -

 

$                     -

 

$                   -

  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 


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  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 
The $788,649 thousand of foreign government securities at December 31, 2011 included $80,223 thousand of European sovereign securities.  Approximately 54%, 21%, 9%, 8% and 5% represented securities held in the governments of France, the United Kingdom, Austria, Netherlands 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 December 31, 2011.

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:
  At December 31, 
(Dollars in thousands) 2011  2010 
Pre-tax cumulative unrealized appreciation (depreciation) $635  $823 


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

 

At December 31, 2008

 

Amortized

 

Market

(Dollars in thousands)

Cost

 

Value

Fixed maturities – available for sale

 

 

 

   Due in one year or less

$         293,575

 

$        286,141

   Due after one year through five years                                                                       

953,239

 

978,739

   Due after five years through ten years

1,161,265

 

1,166,117

   Due after ten years

2,970,773

 

2,863,742

   Mortgage-backed securities

231,631

 

217,117

Total

$      5,610,483

 

$     5,511,856

  At December 31, 2011  At December 31, 2010 
  Amortized  Market  Amortized  Market 
(Dollars in thousands) Cost  Value  Cost  Value 
Fixed maturity securities – available for sale            
    Due in one year or less $224,406  $223,507  $212,728  $207,739 
    Due after one year through five years  2,055,299   2,129,437   1,642,227   1,681,497 
    Due after five years through ten years  955,253   1,009,893   1,203,497   1,253,609 
    Due after ten years  1,006,307   1,083,532   1,942,859   1,997,380 
Asset-backed securities  44,351   45,103   19,860   20,551 
Mortgage-backed securities                
Commercial  41,953   47,874   31,887   39,505 
Agency residential  528,946   543,393   355,928   369,691 
Non-agency residential  24,139   24,289   29,373   29,968 
Total fixed maturity securities $4,880,654  $5,107,028  $5,438,359  $5,599,940 

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

 

Years Ended December 31,

(Dollars in thousands)

2008

 

2007

Decrease during the period between the market value and cost of                          

 

 

 

   investments carried at market value, and deferred taxes thereon:

 

 

 

      Fixed maturities

$       (266,108)

 

$       (10,699)

      Other invested assets

(10,366)

 

1,496

      Change in unrealized depreciation, pre-tax

(276,474)

 

(9,203)

      Deferred taxes

96,766

 

3,221

Change in unrealized depreciation, net of deferred

 

 

 

   taxes, included in stockholder's equity

$       (179,708)

 

$         (5,982)

  Years Ended December 31, 
(Dollars in thousands)
 2011  2010 
Increase (decrease) during the period between the market value and cost      
of investments carried at market value, and deferred taxes thereon:      
Fixed maturity securities $66,765  $(48,690)
Fixed maturity securities, other-than-temporary impairment  (188)  2,862 
Fixed maturity securities, reclassification due to sale of subsidiary to related party, pre-tax  (1,785)  - 
Equity securities  (3)  (1)
Other invested assets  (1,515)  2,389 
Change in unrealized  appreciation (depreciation), pre-tax  63,274   (43,440)
Deferred tax benefit (expense)  (22,837)  16,206 
Deferred tax benefit (expense), other-than-temporary impairment  66   (1,002)
Deferred tax benefit (expense), reclassification due to sale of subsidiary to related party  625   - 
Change in unrealized appreciation (depreciation),        
net of deferred taxes, included in stockholder's equity $41,128  $(28,236)


The Company frequently reviews all of its investment portfoliofixed maturity, available for sale securities for declines in market value and focuses its attention on securities whose fair value has fallen below 80% of their amortized valuecost at the time of review.  The Company then assesses whether the decline in value is temporary or “other-than-temporary”.other-than-temporary.  In making its assessment, the Company evaluates the current market and interest rate environment as well as specific issuer information and the Company’s ability and intent to hold to recovery.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.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 and a realized lossadjustment 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) income.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.


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.

F-13
The tables below display the aggregate market value and gross unrealized depreciation of fixed maturity and equity securities, by investment categorysecurity type and contractual maturity, category byin each case subdivided according to length of time that individual securities had been in a continuous unrealized loss position for the periods indicated:

 

Duration by security type of unrealized loss at December 31, 2008

 

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                                           

 

 

 

 

 

 

 

 

 

 

 

   U.S. government

 

 

 

 

 

 

 

 

 

 

 

      agencies and authorities

$                     -

 

$                    -

 

$                     -

 

$                   -

 

$                    -

 

$                   -

   States, municipalities

 

 

 

 

 

 

 

 

 

 

 

      and political subdivisions

1,471,807

 

(146,292)

 

176,555

 

(18,629)

 

1,648,362

 

(164,921)

   Foreign governments

79,063

 

(7,715)

 

2,759

 

(61)

 

81,822

 

(7,776)

   All other corporate

366,512

 

(56,521)

 

208,538

 

(61,139)

 

575,050

 

(117,660)

Total fixed maturities

$      1,917,382

 

$      (210,528)

 

$          387,852

 

$       (79,829)

 

$      2,305,234

 

$     (290,357)

 

Duration by maturity type of unrealized loss at December 31, 2008

 

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

$              87,124

 

$         (8,412)

 

$           22,024

 

$         (1,516)

 

$        109,148

 

$         (9,928)

   Due after one year through five years                

199,864

 

(10,869)

 

52,880

 

(5,677)

 

252,744

 

(16,546)

   Due after five years through ten years

145,943

 

(10,767)

 

88,806

 

(21,998)

 

234,749

 

(32,765)

   Due after ten years

1,478,686

 

(180,001)

 

184,531

 

(31,765)

 

1,663,217

 

(211,766)

   Mortgage-backed securities

5,765

 

(479)

 

39,611

 

(18,873)

 

45,376

 

(19,352)

Total

$         1,917,382

 

$     (210,528)

 

$         387,852

 

$       (79,829)

 

$     2,305,234

 

$     (290,357)

  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 as ofat December 31, 20082011 were $2,305.2 million$845,092 thousand and $290.4 million,$35,473 thousand, respectively.  There were no unrealized losses on a single securityissuer that exceeded 0.35%0.09% of the market value of the fixed maturity securities at December 31, 2008.2011.  In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector.  The $210.5 million$13,710 thousand of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for less than one year arewere generally comprised of highly rated municipal,domestic and foreign corporate bondssecurities as well as commercial and agency residential mortgage-backed securities with the losses primarily the result of widening credit spreads from the financial markets crisis during the latter part of the year.securities.  Of these unrealized losses, $206.9 million$5,635 thousand were related to securities that were rated investment grade or better by at least one nationally recognized statistical rating organization.  The $79.8 million$21,758 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 municipal,domestic and foreign corporate bonds and mortgage-backed securities and were also the result of widening credit spreads during the latter part of the year.foreign government securities.  Of these unrealized losses, $65.2 million$15,880 thousand were related to securities that were rated investment grade or better by at least one nationally recognized statistical rating organization.  The non-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 greater than 12 months for mortgage-backed securities includes only $0.1 millionincluded $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.


F-14
The Company, given the size of its investment portfolio and capital position, hasdoes not have the ability and intent to holdsell these securities untilsecurities; and it is more likely than not that the Company will not have to sell the security before recovery of market value.its cost basis.  In addition, all securities currently in an unrealized loss position are current with respect to principal and interest payments.

F-12


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

 

Duration by security type of unrealized loss at December 31, 2007

 

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                                       

 

 

 

 

 

 

 

 

 

 

 

   U.S. government

 

 

 

 

 

 

 

 

 

 

 

      agencies and authorities

$                    -

 

$                   -

 

$            3,130

 

$                (3)

 

$            3,130

 

$                (3)

   States, municipalities

 

 

 

 

 

 

 

 

 

 

 

      and political subdivisions

161,999

 

(1,704)

 

96,266

 

(836)

 

258,265

 

(2,540)

   Foreign governments

20,000

 

(537)

 

73,612

 

(339)

 

93,612

 

(876)

   All other corporate

184,824

 

(3,784)

 

827,661

 

(16,472)

 

1,012,485

 

(20,256)

Total fixed maturities

$         366,823

 

$         (6,025)

 

$     1,000,669

 

$       (17,650)

 

$      1,367,492

 

$       (23,675)


 

Duration by maturity type of unrealized loss at December 31, 2007

 

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

$             22,635

 

$            (144)

 

$        173,595

 

$            (677)

 

$         196,230

 

$            (821)

   Due after one year through five years            

60,036

 

(1,290)

 

249,351

 

(4,145)

 

309,387

 

(5,435)

   Due after five years through ten years

75,133

 

(1,308)

 

157,960

 

(4,990)

 

233,093

 

(6,298)

   Due after ten years

209,006

 

(3,282)

 

65,202

 

(2,720)

 

274,208

 

(6,002)

   Mortgage-backed securities

13

 

(1)

 

354,561

 

(5,118)

 

354,574

 

(5,119)

Total

$           366,823

 

$         (6,025)

 

$     1,000,669

 

$       (17,650)

 

$      1,367,492

 

$       (23,675)


  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 as ofat December 31, 20072010 were $1,367.5 million$1,212,828 thousand and $23.7 million,$77,140 thousand, respectively.  There were no material concentrationsunrealized 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 by issuer, security type or industry within the fixed maturity portfolio.in any one market sector.  The $6.0 million$23,664 thousand of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for less than one year arewere generally comprised of highly rated municipal, U.S. government, foreign government and domestic and foreign corporate bonds and the losses were primarily the result of widening credit spreads during the latter part of the year.securities.  Of these unrealized losses, $4.7 million$23,424 thousand were related to securities that were rated investment grade or better by at least one nationally recognized statistical rating organization.  The $17.7 million$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 and corporate bonds and were the result of widening credit spreads during the latter part of the year.securities.  Of these unrealized losses, $16.7 million$48,165 thousand related to securities that were rated investment grade or better by at least one nationally recognized statistical rating organization.

  The non-investment grade securities with unrealized losses were mainly comprised of

F-15
corporate securities.  The gross unrealized depreciation for mortgage-backed securities included $32 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.

Other invested assets, at fair value, is comprised of common shares of the Company’s ultimate parent, Group.  At December 31, 2011, the Company held 9,719,971 shares of Group representing 15.3% of the total outstanding shares.

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

 

Years Ended December 31,

(Dollars in thousands)

2008

 

2007

 

2006

Fixed maturities

$      313,651

 

$      294,707

 

$      299,569

Equity securities

5,968

 

15,725

 

18,589

Short-term investments and cash                                                

28,553

 

61,940

 

28,413

Other investment assets

 

 

 

 

 

   Limited partnerships

13,191

 

35,472

 

38,536

   Other

9,494

 

7,054

 

2,938

Total gross investment income

370,857

 

414,898

 

388,045

Interest credited and other expense

(7,804)

 

(8,306)

 

(15,693)

Total net investment income

$      363,053

 

$      406,592

 

$      372,352

Some of the

  Years Ended December 31, 
(Dollars in thousands) 2011  2010  2009 
Fixed maturity securities $232,287  $290,454  $286,031 
Equity securities  29,694   10,190   3,573 
Short-term investments and cash  1,078   407   3,484 
Other invested assets            
Limited partnerships  42,349   45,464   (28,467)
Dividends from Parent's shares  18,645   14,029   7,987 
Other  2,741   1,274   74 
Total gross investment income  326,794   361,818   272,682 
Interest debited (credited) and other investment expense  (13,861)  (11,474)  (10,596)
Total net investment income $312,933  $350,344  $262,086 
The Company records results from limited partnership investments investon the equity method of accounting with changes in public equity securities. The Company is a passive investor invalue reported through net investment income. Due to the timing of receiving financial information from these partnerships, andthe results are generally reported on a one month or quarter lag.  If the Company determines there has less than 10% participation.

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 $175.3 million$119,049 thousand in limited partnerships at December 31, 2008.2011.  These commitments will be funded when called in accordance with the partnership agreements, which have investment periods that expire, unless extended, through 2014.

2016.


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

 

Years Ended December 31,

(Dollars in thousands)

2008

 

2007

 

2006

Fixed maturities, market value:

 

 

 

 

 

   Other-than-temporary impairments

$         (74,500)

 

$           (4,014)

 

$                     -

   (Losses) gains from sales

(87,410)

 

(977)

 

8,385

Fixed maturities, fair value:

 

 

 

 

 

   Gains from sales

102

 

-

 

-

   Gains from fair value adjustments

1,473

 

-

 

-

Equity securities, market value:

 

 

 

 

 

   Gains from sales

-

 

-

 

26,574

Equity securities, fair value:

 

 

 

 

 

   Losses from sales

(105,931)

 

(10,767)

 

-

   (Losses) gains from fair value adjustments                   

(134,907)

 

84,434

 

-

Other invested assets, fair value:

 

 

 

 

 

   (Losses) gains from fair value adjustments

(87,786)

 

12,207

 

-

Short-term investments (losses) gains

(227)

 

4

 

(2)

Total net realized capital (losses) gains

$       (489,186)

 

$           80,887

 

$           34,957

Proceeds from sales of fixed maturity investments during 2008, 2007 and 2006 were $140.1 million, $38.5 million and $45.1 million, respectively. Gross gains of $7.0 million, $1.0 million and $8.4 million and gross losses of $94.4 million, $2.0 million and $0.0 million were realized on those fixed maturity sales during 2008, 2007 and 2006, respectively. Proceeds from sales of equity security investments during 2008, 2007 and 2006 were $777.2 million, $767.2 million and $206.5 million, respectively. Gross gains of $6.4 million, $3.0 million and $31.2 million and gross losses of $112.3 million, $13.8 million and $4.6 million were realized on those equity sales during 2008, 2007 and 2006, respectively.

  Years Ended December 31, 
(Dollars in thousands) 2011  2010  2009 
Fixed maturity securities, market value:         
Other-than-temporary impairments $(14,522) $(2,106) $(5,510)
Gains (losses) from sales  (16,652)  (33,323)  (34,100)
Fixed maturity securities, fair value:            
Gain (losses) from sales  (905)  775   682 
Gains (losses) from fair value adjustments  (15,518)  15,091   9,337 
Equity securities, market value:            
Gains (losses) from sales  37   -   8,041 
Equity securities, fair value:            
Gains (losses) from sales  7,644   6,153   7,513 
Gains (losses) from fair value adjustments  7,200   52,790   30,908 
Other invested assets, fair value:            
Gains (losses) from fair value adjustments  (8,400)  25,912   40,048 
Short-term investment gains (losses)  -   (1)  9 
Total net realized capital gains (losses) $(41,116) $65,291  $56,928 



F-16

Included in


The Company recorded as net realized capital gains for 2008(losses) in the consolidated statements of operations and 2007 was $74.5 millioncomprehensive income (loss) both fair value re-measurements and $4.0 million, respectively, for write-downs in the value of securities deemed to be impaired on an other-than-temporary basis. No realized capital losses due to write-downsbasis as displayed in the valuetable 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, deemed to be impaired on an other-than- temporary basis were recordedare presented in 2006.

At December 31, 2008, securitiesthe table below for the periods indicated:

  Years Ended December 31, 
(Dollars in thousands) 2011  2010  2009 
Proceeds from sales of fixed maturity securities $1,274,308  $973,951  $117,174 
Gross gains from sales  39,363   8,436   8,174 
Gross losses from sales  (56,920)  (40,984)  (41,592)
             
Proceeds from sales of equity secuities $264,945  $230,562  $66,511 
Gross gains from sales  15,875   11,446   16,437 
Gross losses from sales  (8,194)  (5,293)  (883)


Securities with a carrying value amount of $1,257.4 million$1,410,030 thousand at December 31, 2011, were on deposit with various state or governmentgovernmental insurance departments in compliance with insurance laws.


3.  RESERVES FOR LOSSES AND LAE


Reserves for losses and LAE.

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

 

At December 31,

(Dollars in thousands)

2008

 

2007

 

2006

Gross reserves at January 1

$     7,538,704

 

$    7,397,270

 

$   7,729,171

   Less reinsurance recoverables

(2,279,417)

 

(2,179,002)

 

(2,369,925)

      Net reserves at January 1

5,259,287

 

5,218,268

 

5,359,246

 

 

 

 

 

 

Incurred related to:

 

 

 

 

 

   Current year

1,323,520

 

1,231,834

 

1,489,659

   Prior years

142,040

 

275,740

 

67,420

      Total incurred losses and LAE

1,465,560

 

1,507,574

 

1,557,079

 

 

 

 

 

 

Paid related to:

 

 

 

 

 

   Current year

305,122

 

290,474

 

413,452

   Prior years

1,931,267

 

1,242,072

 

1,299,021

      Total paid losses and LAE

2,236,389

 

1,532,546

 

1,712,473

 

 

 

 

 

 

Foreign exchange/translation adjustment                     

(114,157)

 

65,991

 

14,416

 

 

 

 

 

 

Net reserves at December 31

4,374,301

 

5,259,287

 

5,218,268

   Plus reinsurance recoverables

3,045,692

 

2,279,417

 

2,179,002

      Gross reserves at December 31

$     7,419,993

 

$    7,538,704

 

$   7,397,270

  At December 31, 
(Dollars in thousands) 2011  2010  2009 
Gross reserves at January 1 $7,652,303  $7,300,139  $7,419,993 
Less reinsurance recoverables  (3,265,528)  (3,051,704)  (3,045,692)
Net reserves at January 1  4,386,775   4,248,435   4,374,301 
             
Incurred related to:            
Current year  1,862,836   1,414,604   1,021,687 
Prior years  14,767   62,846   69,989 
Total incurred losses and LAE  1,877,603   1,477,450   1,091,676 
             
Paid related to:            
Current year  447,182   277,177   183,566 
Prior years  894,242   1,086,262   1,117,940 
Total paid losses and LAE  1,341,424   1,363,438   1,301,506 
             
Foreign exchange/translation adjustment  (6,762)  24,328   83,964 
             
Net reserves at December 31  4,916,192   4,386,775   4,248,435 
Plus reinsurance recoverables  3,374,427   3,265,528   3,051,704 
Gross reserves at December 31 $8,290,619  $7,652,303  $7,300,139 
             
(Some amounts may not reconcile due to rounding.)            
Prior years’ reserves increased by $142.0 million, $275.7 million$14,767 thousand, $62,846 thousand and $67.4 million$69,989 thousand for the years ended December 31, 2008, 20072011, 2010 and 2006,2009, respectively.  The increase for 20082011 was primarily attributable to a $71,896 thousand increase in insurance and U.S. reinsurance business, primarily related to development on contractors’ liability, excess casualty and California workers compensation reserves, partially offset by the $85.3 million of$57,129 thousand decrease in non-US reinsurance business, primarily related to favorable development on non-catastrophe property reserves.
F-17

Prior years’ reserve development for a run-off auto loan credit insurance program.

The 2007 prior years’ reserves increase of $275.7 million was primarily attributable to $266.4 million of adverse development on A&E reserves. The increase in the A&E reserves was primarily due to an extensive in-house study by the Company’s actuarial and claim units.

The increase for 20062010 was the result of additional development$29,884 thousand increase in insurance reserves, primarily due to reserve strengthening on several terminated programs and $32,962 thousand increase in reinsurance reserves, as a result of losses from contractors’ liability exposure.


The increase for 2009 was the 2005 catastrophesresult of $25,989 thousand increase in insurance business, primarily contractor liability exposures, and A&E, which was$44,000 thousand in reinsurance reserves, in both domestic and international, as a result of losses from sub-prime exposures and property, partially offset by favorable attritional development.

development on other casualty lines.


Reinsurance Receivables.Reinsurance receivables for both paid and unpaid losses totaled $3,117.9 million$3,471,302 thousand and $2,343.1 million$3,378,361 thousand at December 31, 20082011 and 2007,2010, respectively. At December 31, 2008, $2,366.5 million,2011, $2,774,864 thousand, or 75.9%79.9%, was receivable from Everest Reinsurance (Bermuda), Ltd. (“Bermuda Re”) and is collateralized by a combination of letters of credit and trust agreements and $185.4 million,$213,601 thousand, or 5.9%6.2%, was receivable from Transatlantic Reinsurance Company (“Transatlantic”)C.V. Starr (Bermuda).  In addition, $227.3 million was receivable from Founders Insurance Company Limited (“Founders”), for which the Company has recorded a full provision for uncollectibility.Bermuda Re and CV Starr (Bermuda) are all collateralized by trust agreements.  No other retrocessionaire accounted for more than 5% of reinsurance receivables.

F-15


The Company continues to receive claims under expired insurance and reinsurance contracts asserting injuries and/or damages relating to or resulting from environmental pollution and hazardous substances, including asbestos.  Environmental claims typically assert liability for (a) the mitigation or remediation of environmental contamination or (b) bodily injury or property damage caused by the release of hazardous substances into the land, air or water.  Asbestos claims typically assert liability for bodily injury from exposure to asbestos or for property damage resulting from asbestos or products containing asbestos.


The Company’s reserves include an estimate of the Company’s ultimate liability for A&E claims.  The Company’s A&E liabilities emanate from Mt. McKinley’sMcKinley, a direct subsidiary of the Company, direct insurance business and Everest Re’s assumed reinsurance business.  All of the contracts of insurance and reinsurance under which the Company has received claims during the past three years, expired more than 20 years ago.  There are significant uncertainties surrounding the Company’s reserves for its A&E losses.


A&E exposures represent a separate exposure group for monitoring and evaluating reserve adequacy. The following table summarizes incurred losses with respect to A&E reserves on both a gross and net of reinsurance basis for the periods indicated:

 

At December 31,

(Dollars in thousands)

2008

 

2007

 

2006

Gross basis:

 

 

 

 

 

   Beginning of period reserves                              

$      922,843

 

$      650,134

 

$      649,460

   Incurred losses

-

 

405,000

 

113,400

   Paid losses

(136,000)

 

(132,291)

 

(112,726)

End of period reserves

$      786,843

 

$      922,843

 

$      650,134

 

 

 

 

 

 

Net basis:

 

 

 

 

 

   Beginning of period reserves

$      537,549

 

$      313,308

 

$      311,552

   Incurred losses

-

 

266,362

 

27,388

   Paid losses

(52,253)

 

(42,121)

 

(25,632)

End of period reserves

$      485,296

 

$      537,549

 

$      313,308

  At December 31, 
(Dollars in thousands) 2011  2010  2009 
Gross basis:         
Beginning of period reserves $554,790  $638,674  $786,843 
Incurred losses  753   -   - 
Paid losses  (55,632)  (83,884)  (148,169)
End of period reserves $499,911  $554,790  $638,674 
             
Net basis:            
Beginning of period reserves $382,507  $430,421  $485,296 
Incurred losses  (30)  (300)  (4,715)
Paid losses  (41,226)  (47,614)  (50,160)
End of period reserves $341,251  $382,507  $430,421 


At December 31, 2008,2011, the gross reserves for A&E losses were comprised of $161.0 million$145,571 thousand representing case reserves reported by ceding companies, $139.7 million$102,934 thousand representing additional case reserves established by the Company on assumed reinsurance claims, $133.8 million$40,555 thousand representing case reserves established by the Company on direct excess insurance claims, including Mt. McKinley and $352.3 million$210,851 thousand representing IBNR reserves.


With respect to asbestos only, at December 31, 2008,2011, the Company had gross asbestos loss reserves of $734.1 million,$479,729 thousand, or 93.3%96.0%, of total A&E reserves, of which $533.2 million$382,334 thousand was for assumed business and $200.9 million$97,395 thousand was for direct excess business.

In 2007, the Company completed a detailed study of its asbestos experience and its cedants’ asbestos exposures and also considered industry trends. The Company’s Claims Department undertook a contract by contract analysis of its direct business and projected those findings to its assumed reinsurance business. The Company’s actuaries utilized nine methodologies to project potential ultimate liabilities including projections based on internal data and assessments, extrapolations of non-public and publicly available data for the Company’s cedants and benchmarking against industry data and experience. As a result of the study, the Company made changes to gross asbestos reserves. The Company has not experienced significant claims activity related to environmental exposures other than asbestos. The Company’s A&E reserves represent management’s best estimate of the ultimate liability, however, there can be no assurance that ultimate loss payments will not exceed such reserves, perhaps by a significant amount. No additional reserve strengthening was made in 2008.

F-18

In connection with the acquisition of Mt. McKinley, which has significant exposure to A&E claims, LM Property and Casualty Insurance Company (“LM”) provided reinsurance to Mt. McKinley covering 80% ($160.0 million) of the first $200.0 million of any adverse development of Mt. McKinley’s reserves as of September 19, 2000 and The Prudential guaranteed LM’s obligation to Mt. McKinley. Coverage under this reinsurance agreement was exhausted as of December 31, 2003.


4.  FAIR VALUE

Effective January 1, 2007, the Company adopted and implemented FAS 159 for its actively managed equity securities and equity shares of its parent. The Company implemented a more active management strategy for these securities and FAS 159 provided guidance on accounting and presentation of these investments in the Company’s consolidated financial statements. Upon adoption of FAS 159, the Company recognized a $204.8 million positive cumulative-effect adjustment to retained earnings, net of $110.3 million of tax.

The Company records fair value re-measurements as net realized capital gains or losses in the consolidated statements of operations and comprehensive income (loss). The Company recorded $221.2 million in net realized capital losses due to fair value re-measurement on fixed maturities, equity securities and other invested assets at fair value for the year ended December 31, 2008. The Company recorded $96.6 million in net realized capital gains due to fair value re-measurement on equity securities and other invested assets at fair value for the year ended December 31, 2007.


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

In limited instances where prices are not provided by pricing services or in rare instances when a manager may not agree with the pricing service, price quotes on a non-binding basis are obtained from investment brokers.  The investment asset managers do not make any changes to prices received from either the pricing services or the investment brokers.  In addition, the investment asset managers have procedures in place to review the reasonableness of the prices from the service providers and may obtain additional price quotes for verification.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.

Fixed maturities are categorized as Level 2, Significant Other Observable Inputs, since  The Company made no such adjustments at December 31, 2011 and 2010.


The Company internally manages 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 curvessmall public equity portfolio which had a fair value at December 31, 2011 of $126,173 thousand and all prices for similar fixed maturities in terms of issuer, maturity and seniority. Valuations that are derivedwere obtained from techniques in which one or more of the significant inputs are unobservable (including assumptions about risk) are categorized as Level 3, Significant Unobservable Inputs. These securities include broker priced securities and valuation of less liquid securities such as commercial mortgage-backed securities.

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.

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.



F-19

The following tables presenttable presents the fair value measurement levels for all assets, and liabilities, which the Company has recorded at fair value (fair and market value) as of the periodsperiod 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, 2008

 

(Level 1)

 

(Level 2)

 

(Level 3)

Assets:

 

 

 

 

 

 

 

 

    Fixed maturities, market value

 

$               5,511,856

 

$                         -

 

$      5,500,889

 

$             10,967

    Fixed maturities, fair value

 

43,090

 

-

 

43,090

 

-

    Equity securities, market value

 

16

 

16

 

-

 

-

    Equity securities, fair value

 

119,815

 

119,092

 

723

 

-

    Other invested assets, fair value

 

316,750

 

316,750

 

-

 

-

 

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, 2007

 

(Level 1)

 

(Level 2)

 

(Level 3)

 December 31, 2011  (Level 1)  (Level 2)  (Level 3) 

Assets:

 

            

Fixed maturities, market value

 

$              5,998,157

 

$                        -

 

$        5,919,448

 

$             78,709

            
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

 

815,372

 

 801,611

 

13,761

 

-

  1,207,053   1,090,959   116,094   - 

Other invested assets, fair value

 

253,791

 

 253,791

 

-

 

-

  817,352   817,352   -   - 

There were no significant transfers between Level 1 and Level 2 for the twelve months ended December 31, 2011.


F-20


The following table presents the fixed maturity investments for which fair value was measuredmeasurement 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, 2010  (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  $- 
Obligations of U.S. States and political subdivisions  2,901,505   -   2,901,505   - 
Corporate securities  721,685   -   721,685   - 
Asset-backed securities  20,551   -   19,590   961 
Mortgage-backed securities                
Commercial  39,505   -   39,505   - 
Agency residential  369,691   -   369,691   - 
Non-agency residential  29,968   -   29,510   458 
Foreign government securities  749,041   -   749,041   - 
Foreign corporate securities  617,427   -   613,792   3,635 
Total fixed maturities, market value  5,599,940   -   5,594,886   5,054 
                 
Fixed maturities, fair value  180,482   -   180,482   - 
Equity securities, market value  13   13   -   - 
Equity securities, fair value  683,454   683,454   -   - 
Other invested assets, fair value  788,142   788,142   -   - 


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

 

Years Ended December 31,

(Dollars in thousands)

2008

 

2007

Assets:

 

 

 

Beginning balance at January 1

$             78,709

 

$            24,024

   Total gains or (losses) (realized/unrealized)

 

 

 

      Included in earnings (or changes in net assets)                                          

(13,550)

 

(2,023)

      Included in other comprehensive income

(3,691)

 

(533)

   Purchases, issuances and settlements

(9,732)

 

57,241

   Transfers in and/or (out) of Level 3

(40,769)

 

-

Ending balance at December 31

$              10,967

 

$            78,709

 

 

 

 

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

$             (1,585)

 

$                      -

  December 31, 2011 December 31, 2010
  Asset-backed Foreign Non-agency   Corporate Asset-backed Foreign Non-agency  
(Dollars in thousands) Securities Corporate RMBS Total Securities Securities Corporate RMBS Total
Beginning balance $961  $3,635  $458  $5,054  $6,930  $6,258  $-  $426  $13,614 
Total gains or (losses) (realized/unrealized)                                  - 
Included in earnings (or changes in net assets)  194   (7)  11   198   (1)  (258)  1   105   (153)
Included in other comprehensive income (loss)  (659)  (66)  54   (671)  71   2,101   268   76   2,516 
Purchases, issuances and settlements  15,550   2,609   (168)  17,991   (7,000)  (7,140)  3,366   (149)  (10,923)
Transfers in and/or (out) of Level 3  -   (3,635)  (348)  (3,983)  -   -   -   -   - 
Ending balance $16,046  $2,536  $7  $18,589  $-  $961  $3,635  $458  $5,054 
                                     
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.)                                    



F-21
5.  CREDIT LINES

FACILITY


Effective August 23, 2006, Holdings15, 2011, the Company entered into a fivenew three year, $150.0 million senior$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 $150.0 million$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 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 primebase rate, or (b) 0.5% per annum above the Federal Funds Rate or (c) 1% above the one month 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 $1.5 billion$1,875,000 thousand plus 25% of future aggregate net income and 25% of future aggregate capital contributions after December 31, 2005,2010, which at December 31, 20082011, was $1,821.1 million.$1,898,936 thousand.  As of December 31, 2008, Holdings2011, the Company was in compliance with all Holdings Credit Facility covenants.

At December 31, 2008 and 2007, there were


The following table summarizes outstanding letters of credit of $28.0 million and $17.2 million, respectively, underand/or borrowings for the Holdings Credit Facility, respectively.

Costsperiods indicated:

(Dollars in thousands) At December 31, 2011 At December 31, 2010
Bank 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
Total revolving credit borrowings      -         50,000   
Total letters of credit      5,020  12/31/2012      9,527  12/31/2011
                     
Total Citibank Holdings Credit Facility $150,000  $5,020    $150,000  $59,527   
The following table presents the costs incurred in connection with the Holdings Credit Facility were $130.3 thousand, $106.9 thousand and $159.7 thousand for the years ended December 31, 2008, 2007 and 2006, respectively.

periods indicated:

  Years Ended December 31, 
(Dollars in thousands) 2011  2010  2009 
Credit facility fees incurred $476  $457  $226 


6.  SENIOR NOTES

On October 12, 2004, Holdings completed a public offering of $250.0 million principal amount of 5.40%


The table below displays Holdings’ outstanding senior notes due October 15, 2014. On March 14, 2000, Holdings completed a public offering of $200.0 million principal amount of 8.75% senior notes due March 15, 2010.

notes.  Market value is based on quoted market prices.

        December 31, 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  $249,858  $251,370  $249,812  $267,500 
8.75% Senior notes (matured and paid on March 15, 2010)03/14/2000 03/15/2010 $200,000  $-  $-  $-  $- 
Interest expense incurred in connection with these senior notes was $31.2 million, $31.2 million and $31.1 millionis as follows for the years ended December 31, 2008, 2007 and 2006, respectively. Market value, which is based on quoted market price at December 31, 2008 and 2007, was $186.2 million and $235.3 million, respectively, for the 5.40% senior notes and $156.8 million and $215.9 million, respectively, for the 8.75% senior notes.

periods indicated:

  Years Ended December 31, 
(Dollars in thousands) 2011  2010  2009 
Interest expense incurred $13,546  $17,219  $31,190 

F-22

7.  LONG TERM SUBORDINATED NOTES

On April 26, 2007, Holdings completed a public offering of $400.0 million principal amount of 6.6%


The table below displays Holdings’ outstanding fixed to floating rate long term subordinated notes with a scheduled maturity date of May 15, 2037 and a final maturity date of May 1, 2067. notes.  Market value is based on quoted market prices.
     Maturity Date December 31, 2011  December 31, 2010 
   Original     Consolidated Balance     Consolidated Balance    
(Dollars in thousands)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 $238,354  $210,195  $238,351  $227,825 
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 London Interbank Offered Rate (“LIBOR”)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

F-19

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 was $26.4 million and $17.4 millionis as follows for the years ended December 31, 2008 and 2007, respectively. Market value, which is based on quoted market price at December 31, 2008 and 2007, was $168.0 million and $349.8 million, respectively, for the 6.6% long term subordinated notes.

periods indicated:

  Years Ended December 31, 
(Dollars in thousands) 2011  2010  2009 
Interest expense incurred $15,748  $15,748  $18,322 


F-23
8.  JUNIOR SUBORDINATED DEBT SECURITIES PAYABLE

On March 29, 2004, Holdings issued $329.9 million of 6.20%


The following table displays Holdings’ outstanding junior subordinated debt securities due March 29, 2034 to Everest Re Capital Trust II (“Capital Trust II”). , a wholly owned finance subsidiary of Holdings.  Fair value is primarily based on the quoted market price of the related trust preferred securities.
        December 31, 2011  December 31, 2010 
        Consolidated Balance     Consolidated Balance    
(Dollars in thousands)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  $326,313  $329,897  $294,825 


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.

On November 14, 2002, Holdings issued $216.5 million of 7.85% junior subordinated debt securities due November 15, 2032 to Everest Re Capital Trust (“Capital Trust”). Holdings redeemed all of the junior subordinated debt securities at 100% of their principal amount plus accrued interest on November 15, 2007.

Fair value, which is primarily based on the quoted market price of the related trust preferred securities at December 31, 2008 and 2007, was $222.2 million and $250.8 million, respectively, for the 6.20% junior subordinated debt securities.


Interest expense incurred in connection with these junior subordinated notes was $20.5 million, $35.3 million and $37.4 milliondebt securities is as follows for the years ended December 31, 2008, 2007 and 2006, respectively.

Capital Trust II is a wholly owned finance subsidiary of Holdings. Capital Trust was dissolved upon the completion of the redemption of the trust preferred securities on November 15, 2007.

periods indicated:

  Years Ended December 31, 
(Dollars in thousands) 2011  2010  2009 
Interest expense incurred $20,454  $20,454  $20,454 
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 the Company’sHoldings’ operating subsidiaries to transfer funds to the CompanyHoldings in the form of cash dividends, loans or advances.  The insurance laws of the State of Delaware, where the Company’sHoldings’ direct insurance subsidiaries are domiciled, require regulatory approval before those subsidiaries can pay dividends or make loans or advances to the CompanyHoldings that exceed certain statutory thresholds.  In addition, the terms of the Holdings Credit Facility (discussed in Note 5) require Everest Re, the Company’sHoldings’ principal insurance subsidiary, to maintain a certain statutory surplus level as measured at the end of each fiscal year.  At December 31, 2008, $1,745.6 million2011, $2,108,692 thousand of the $2,735.2 million$2,763,171 thousand in net assets of the Company’sHoldings’ consolidated subsidiaries were subject to the foregoing regulatory restrictions.

F-20


9. LETTERS OF CREDIT

The Citibank Holdings Credit Facility involves a syndicate of lenders (see Note 5), with Citibank acting as administrative agent. At December 31, 2008 and 2007, letters of credit for $28.0 million and $17.2 million, respectively, were issued and outstanding. The following table summarizes the Company’s letters of credit at December 31, 2008.

(Dollars in thousands)

 

 

 

 

 

Bank

Commitment

 

In Use

 

Date of Expiry

Citibank Holdings Credit Facility

$       150,000

 

$         27,959

 

12/31/2009

Total Citibank Holdings Credit Facility                                           

$       150,000

 

$         27,959

 

 

10.  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 December 31, 2008,2011, the total amount on deposit in the trust account was $19.9 million.

$14,900 thousand.



F-24

10.  OPERATING LEASE AGREEMENTS


The future minimum rental commitments, exclusive of cost escalation clauses, at December 31, 20082011, for all of the Company’s operating leases with remaining non-cancelable terms in excess of one year are as follows:

(Dollars in thousands)                                                                                                                                            

 

2009

$      7,756

2010

8,218

2011

7,826

2012

7,884

2013

7,313

Thereafter

49,164

Net commitments

$    88,161

(Dollars in thousands)   
2012 $10,808 
2013  10,510 
2014  8,953 
2015  9,212 
2016  9,293 
Thereafter  33,713 
Net commitments $82,489 
     
(Some amounts may not recconcile due to rounding.)    
All of these leases, the expiration terms of which range from 20092013 to 2020, are for the rental of office space.  Rental expense was $9.5 million, $8.9 million$12,656 thousand, $11,769 thousand and $7.6 million$10,489 thousand for the years ended December 31, 2008, 20072011, 2010 and 2006,2009, respectively.

F-21


12.

11.  INCOME TAXES


All the income of Holdings’ U.S. subsidiaries is subject to the applicable federal, foreign, state and local taxes on corporations.  Additionally, the income of foreign branches of the Company’s insurance operating companies is subject to various income taxes.  The provision for income taxes in the consolidated statementsstatement of operations and comprehensive income (loss) has been determined in accordance with the individual income of each entity and the respective applicable tax laws. The provision reflects the permanent differences between financial and taxable income relevant to each entity. The significant components of the provision are as follows for the periods indicated:

 

Years Ended December 31,

(Dollars in thousands)

2008

 

2007

 

2006

Current tax:

 

 

 

 

 

   U.S.

$    (48,382)

 

$   131,021

 

$   133,103

   Foreign

26,081

 

19,899

 

15,348

   Total current tax (benefit) expense                                

(22,301)

 

150,920

 

148,451

Total deferred U.S. tax benefit

(112,447)

 

(50,834)

 

(31,399)

   Total income tax (benefit) expense

$  (134,748)

 

$   100,086

 

$   117,052

  Years Ended December 31, 
(Dollars in thousands) 2011  2010  2009 
Current tax expense (benefit):         
U.S. $660  $(73,747) $(49,644)
Foreign  19,227   9,797   8,184 
Total current tax expense (benefit)  19,887   (63,950)  (41,460)
Total deferred U.S. tax expense (benefit)  (190,564)  27,322   170,852 
Total income tax expense (benefit) $(170,677) $(36,628) $129,392 
A reconciliation of the U.S. federal income tax rate to the Company’s effective tax rate is as follows for the periods indicated:

 

Years Ended December 31,

 

2008

 

2007

 

2006

Federal income tax rate

-35.0%

 

35.0%

 

35.0%

Increase (reduction) in taxes resulting from:                                   

 

 

 

 

 

   Tax exempt income

-23.8%

 

-15.0%

 

-13.6%

   Dividend received deduction

-1.1%

 

-1.1%

 

-0.7%

   Proration

3.6%

 

2.4%

 

2.1%

   Other, net

4.4%

 

3.5%

 

3.2%

   Effective tax rate

-51.9%

 

24.8%

 

26.0%

  Years Ended December 31,
(Dollars in thousands) 2011 2010 2009
Expected income tax provision at the U.S. statutory tax rate $(130,724)  35.0% $80,069   35.0% $183,835   35.0%
Increase (reduction) in taxes resulting from:                        
Tax exempt income  (33,672)  9.0%  (56,457)  -24.7%  (60,378)  -11.5%
Dividend received deduction  (6,517)  1.7%  (2,535)  -1.1%  (1,409)  -0.3%
Proration  5,080   -1.4%  8,510   3.7%  9,139   1.7%
Tax audit settlement  (710)  0.2%  (48,867)  -21.4%  (13,069)  -2.5%
Other, net  (4,134)  1.1%  (17,348)  -7.6%  11,274   2.1%
Total income tax provision and effective tax rate $(170,677)  45.7% $(36,628)  -16.0% $129,392   24.6%



F-25

During the fourth quarter of 2011, the Company identified an understatement in its deferred tax asset account of $12,232 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 2011 financial statements, resulting in an additional $12,232 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 year ended December 31, 2011 and for the fourth quarter 2011.  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 full year 2011 financial statements, its fourth quarter 2011 financial statements, and to all prior periods.  As such, the Company has not restated any prior period amounts.

Deferred income taxes reflect the tax effect of the temporary differences between the value of assets and liabilities for financial statement purposes and such values as measured by the U.S. tax laws and regulations.  The principal items making up the net deferred income tax assetassets are as follows for the periods indicated:

 

At December 31,

(Dollars in thousands)

2008

 

2007

Deferred tax assets:

 

 

 

   Reserve for losses and LAE

$      194,910

 

$      266,623

   Unearned premium reserve

50,727

 

65,235

   Investment impairments

26,997

 

1,405

   Net unrealized depreciation of investments                                         

63,245

 

-

   Fair value adjustments

31,697

 

-

   Deferred compensation

15,088

 

14,007

   Deferred reinsurance

52,677

 

57,479

   AMT credits

10,561

 

28,054

   Foreign tax credits

38,353

 

48,510

   Uncollectible reinsurance

84,898

 

58,658

   Minimum pension

17,080

 

3,531

   Other assets

38,961

 

22,189

Total deferred tax assets

625,194

 

565,691

 

 

 

 

Deferred tax liabilities:

 

 

 

   Deferred acquisition costs

67,069

 

81,325

   Investment discounts

8,653

 

5,169

   Net unrealized appreciation of investments

-

 

60,103

   Fair value adjustments

-

 

94,632

   Foreign currency translation

16,561

 

31,345

   Other liabilities

14,869

 

13,815

Total deferred tax liabilities

107,152

 

286,389

 

 

 

 

Net deferred tax assets

$      518,042

 

$      279,302

The Company adopted the provisions of FIN 48 on January 1, 2007.

  
At December 31,
 
(Dollars in thousands) 2011  2010 
Deferred tax assets:      
Loss reserve $183,883  $177,237 
Net operating loss carryforward  167,089   - 
Foreign tax credits  74,253   55,026 
Unearned premium reserve  43,020   46,146 
Deferred gain on reinsurance  31,464   35,903 
Unfunded pension liability  29,903   14,045 
Alternative minimum tax credits  21,438   41,693 
Deferred expenses  19,351   17,447 
Deferred compensation  7,243   7,271 
Uncollectible reinsurance reserve  5,675   5,675 
Investment impairments  4,478   3,988 
Other assets  17,717   14,056 
Total deferred tax assets  605,514   418,487 
         
Deferred tax liabilities:        
Net unrealized investment gains  97,442   78,478 
Deferred acquisition costs  58,571   64,487 
Net unrealized foreign currency gains  45,837   45,234 
Gain on tender of debt  27,395   27,395 
Bond market discount  2,902   3,062 
Other liabilities  6,877   15,906 
Total deferred tax liabilities  239,024   234,562 
         
Net deferred tax assets $366,490  $183,924 

F-26

A reconciliation of the beginning and ending amount of unrecognized tax benefits, for the periods indicated, is as follows:

(Dollars in thousands)

2008

 

2007

Balance at January 1

$       29,132

 

$       13,800

Additions based on tax positions related to the current year                                    

5,234

 

4,423

Additions for tax positions of prior years

-

 

10,909

Reductions for tax positions of prior years

-

 

-

Settlements with taxing authorities

-

 

-

Lapses of applicable statutes of limitations

-

 

-

Balance at December 31

$       34,366

 

$       29,132

(Dollars in thousands)2011  2010  2009 
Balance at January 1$23,773  $29,010  $34,366 
Additions based on tax positions related to the current year 8,139   7,119   6,997 
Additions for tax positions of prior years -   -   - 
Reductions for tax positions of prior years -   -   - 
Settlements with taxing authorities -   (12,356)  (12,353)
Lapses of applicable statutes of limitations -   -   - 
Balance at December 31$31,912  $23,773  $29,010 
The entire amount of the unrecognized tax benefits would affect the effective tax rate if recognized.

F-23


In 2007,2010, the Internal Revenue Service (“IRS”) completed its examination of the Company’s consolidated U.S. income tax returns forCompany favorably settled a 2003 and 2004 IRS audit.  During the years ended December 31, 2011 and issued an examination report proposing various adjustments.2010, the Company recorded a net overall tax benefit including accrued interest of $710 thousand and $25,920 thousand, respectively.  In addition, in 2010, the Company was also able to take down a $12,356 thousand FIN 48 reserve that had been established regarding the 2003 and 2004 IRS audit.  The Company has submitted a formal protest and believes that it has a strong chance of prevailing on the issues involved. With few exceptions, the Company is no longer subject to U.S. federal, state and local or foreign income tax examinations by tax authorities for years before 2003.

2007.


The Company recognizes accrued interest related to net unrecognized tax benefits and penalties in income taxes.  During the years ended December 31, 20082011, 2010 and 2007,2009, the Company accrued and recognized a net expense (benefit) of approximately $2.5 million$957 thousand, ($9,938) thousand and $6.0 million,$1,563 thousand, respectively, in interest and penalties.

  Included within the 2010 net expense (benefit) of ($9,938) thousand is ($10,591) thousand of accrued interest related to the 2003 and 2004 IRS audit.


The Company is not aware of any positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within twelve months of the reporting date unless the formal protest to the IRS for 2003 and 2004 is finally resolved. It is not possible to estimate the change that would be required as a result of such resolution.

date.


For U.S. income tax purposes the Company has foreign tax credit carryforwards of $38.4 million$74,253 thousand that begin to expire in 2014.2017 and net operating loss carryforwards of $477,397 thousand that begin to expire in 2030. In addition, for U.S. income tax purposes the Company has $10.6 million$21,438 thousand of Alternative Minimum Tax credits that do not expire. Management believes that it is more likely than not that the Company will realize the benefits of its net deferred tax assets and accordingly, no valuation allowance has been recorded for the periods presented.


Tax benefits of $0.6 million$1,266 thousand and $1.9 million related to$339 thousand of share-based compensation deductions for stock options exercised in 20082011 and 2007,2010, respectively, are reflected in additional paid-in capital in the change in stockholder’s equity in “additional paid-in capital”.

section of the consolidated balance sheet.



F-27


12.  REINSURANCE


The Company utilizes reinsurance agreements to reduce its exposure to large claims and catastrophic loss occurrences.  These agreements provide for recovery from reinsurers of a portion of losses and LAE under certain circumstances without relieving the ceding company of its obligations to the policyholders.  Losses and LAE incurred and premiums earned are reported after deduction for reinsurance.  In the event that one or more of the reinsurers were unable to meet their obligations under these reinsurance agreements, the Company would not realize the full value of the reinsurance recoverable balances.  The Company may hold partial collateral, including letters of credit, trust accounts and funds held, under these agreements.  See also Note 1C.

1C and Note 3.

F-24


Premiums written and earned and incurred losses and LAE are comprised of the following for the periods indicated:

 

Years Ended December 31,

(Dollars in thousands)

2008

 

2007

 

2006

Written premiums:

 

 

 

 

 

   Direct

$        778,243

 

$        838,406

 

$       900,381

   Assumed

2,116,545

 

2,316,675

 

2,285,594

   Ceded

(1,219,426)

 

(1,082,155)

 

(895,714)

Net written premiums

$     1,675,362

 

$     2,072,926

 

$    2,290,261

 

 

 

 

 

 

Premiums earned:

 

 

 

 

 

   Direct

$        839,251

 

$        899,328

 

$       961,133

   Assumed

2,235,381

 

2,322,698

 

2,189,061

   Ceded

(1,192,850)

 

(1,043,126)

 

(902,994)

Net premiums earned

$     1,881,782

 

$     2,178,900

 

$    2,247,200

 

 

 

 

 

 

Incurred losses and LAE:                                                   

 

 

 

 

 

   Direct

$        655,964

 

$        777,000

 

$       704,864

   Assumed

1,439,019

 

1,427,019

 

1,398,659

   Ceded

(629,423)

 

(696,445)

 

(546,444)

Net incurred losses and LAE

$     1,465,560

 

$     1,507,574

 

$    1,557,079

The amounts deducted from losses and LAE incurred for net reinsurance recoveries were $629.4 million, $696.4 million and $546.4 million for the years ended December 31, 2008, 2007 and 2006, respectively. See also Note 3.

  Years Ended December 31, 
(Dollars in thousands) 2011  2010  2009 
Written premiums:         
Direct $808,526  $823,305  $824,267 
Assumed  2,749,993   2,644,451   2,509,850 
Ceded  (1,804,508)  (1,679,045)  (1,598,816)
Net written premiums $1,754,011  $1,788,711  $1,735,301 
             
Premiums earned:            
Direct $867,340  $823,734  $808,634 
Assumed  2,734,765   2,602,704   2,471,667 
Ceded  (1,808,250)  (1,612,615)  (1,495,241)
Net premiums earned $1,793,855  $1,813,823  $1,785,060 
             
Incurred losses and LAE:            
Direct $738,823  $703,229  $654,409 
Assumed  2,491,002   1,946,124   1,348,581 
Ceded  (1,352,222)  (1,171,903)  (911,314)
Net incurred losses and LAE $1,877,603  $1,477,450  $1,091,676 
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. These transactions include:


Effective September 19, 2000, Mt. McKinley

F-28

The table below represents affiliated quota share reinsurance agreements ("whole account quota share") for all new and Bermuda Re entered into a loss portfolio transfer reinsurance agreement, whereby Mt. McKinley transferred all of its net insurance exposures and reserves to Bermuda Re.

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 (3)
  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.
            
(3) Pending regulatory approval.            

Effective October 1, 2001, Everest Re and Bermuda Re entered into a loss portfolio reinsurance agreement, whereby Everest Re transferred all of its Belgium branch net insurance exposures and reserves to Bermuda Re.

F-29


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 respectsrespect to new, renewal and in force policies effective on that date through December 31, 2002.  The table below represents Bermuda Re is liableRe's liability limits for any loss exceeding $100,000losses per occurrence, with its liability not to exceed $150,000 perone occurrence.

Effective January 1, 2002 for the 2002 underwriting year, Everest Re ceded 20.0% of its net retained liability to Bermuda Re through a quota share reinsurance agreement (“whole account quota share”).

 

F-25

Effective January 1, 2003, Everest Re and Bermuda Re amended the whole account quota share, through which Everest Re previously ceded 20.0% of its business to Bermuda Re so that effective January 1, 2003 Everest Re ceded 25.0% to Bermuda Re of the net retained liability on all new and renewal policies underwritten during the term of this agreement. This amendment remained in effect through December 31, 2003.

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

Effective January 1, 2003, Everest Re entered into a whole account quota share with Bermuda Re, whereby Everest Re’s Canadian branch ceded to Bermuda Re 50.0% of its net retained liability on all new and renewal property business. This remained in effect through December 31, 2006.

Effective January 1, 2004, Everest Re and Bermuda Re amended the whole account quota share through which Everest Re previously ceded 25.0% of its business to Bermuda Re so that effective January 1, 2004 Everest Re ceded 22.5% to Bermuda Re and 2.5% to Everest International of the net retained liability on all new and renewal covered business written during the term of this agreement. This amendment remained in effect through December 31, 2005.

Effective January 1, 2006, Everest Re, Bermuda Re and Everest International amended the whole account quota share so that for all new and renewal business recorded on or after January 1, 2006, Everest Re ceded 31.5% and 3.5% of its casualty business to Bermuda Re and Everest International, respectively, and Everest Re ceded 18.0% and 2.0% of its property business to Bermuda Re and Everest International, respectively. However, in no event shall the loss cessions to Bermuda Re and Everest International relating to any one occurrence on the property business exceed $125.0 million. The property portion of this amendment remained in effect through December 31, 2006. The casualty portion remained in effect through December 31, 2007.

Effective January 1, 2007, Everest Re and Bermuda Re amended the whole account quota share so that for all new and renewal business recorded on or after January 1, 2007, Everest Re cedes 60.0% of its Canadian branch property business to Bermuda Re.

Effective January 1, 2007, Everest Re, Bermuda Re and Everest International amended the whole account quota share so that for all new and renewal property business recorded on or after January 1, 2007, Everest Re ceded 22.5% and 2.5% to Bermuda Re and Everest International, respectively. However, in no event shall the loss cessions to Bermuda Re and Everest International relating to any one occurrence on the property business exceed $130.0 million. This amendment remained in effect through December 31, 2007.

Effective January 1, 2008, Everest Re, Bermuda Re and Everest International entered into a whole account quota share whereby, for all new and renewal casualty and property business recorded on or after January 1, 2008, Everest Re ceded 36.0% and 4.0% to Bermuda Re and Everest International, respectively. However, in no event shall the loss cessions to Bermuda Re and Everest International relating to any one catastrophe occurrence on the property business exceed $130.0 million or in the aggregate for each underwriting year for all property catastrophes exceed $275.0 million. This amendment remained in effect through December 31, 2008.

Effective October 1, 2008, Everest Re and Bermuda Re entered into atable below represents loss portfolio transfer reinsurance agreement,agreements whereby Everest Renet insurance exposures and reserves were transferred a percentage of its net loss reserves ($747.0 million) corresponding to all existing open and future liabilities at December 31, 2007, arising from policies, insurance or reinsurance written or renewed by or on behalf of Everest Re during the period of January 1, 2002 through December 31, 2007, classified by Everest Re as casualty.

an affiliate.

F-26
(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

Effective January 1, 2009, Everest Re, Bermuda Re and Everest International entered into a whole account quota share whereby, for all new and renewal casualty and property business recorded on or after January 1, 2009, Everest Re cedes 36% and 8% to Bermuda Re and Everest International, respectively. However, in no event shall the loss cessions to Bermuda Re and Everest International relating to any one occurrence exceed $150.0 million or in the aggregate for each underwriting year for all occurrences exceed $325.0 million.

The following table summarizestables summarize the premiums and losses ceded by the Company to Bermuda Re and Everest International, respectively, for the periods indicated:

Bermuda Re

Years Ended December 31,

(Dollars in thousands)

2008

2007

2006

Ceded written premiums

$         947,344

$         837,129

$        697,795

Ceded earned premiums

915,706

820,400

690,677

Ceded losses and LAE (a)                                                        

467,717

540,851

396,538

 

 

 

 

Everest International

Years Ended December 31,

(Dollars in thousands)

2008

2007

2006

Ceded written premiums

$           99,633

$           86,980

$           72,465

Ceded earned premiums

95,835

85,162

69,821

Ceded losses and LAE

54,380

41,318

39,443

Bermuda Re Years Ended December 31,
(Dollars in thousands) 2011  2010  2009 
Ceded written premiums $1,627,298  $1,375,778  $1,181,875 
Ceded earned premiums  1,565,561   1,282,720   1,142,223 
Ceded losses and LAE (a)  1,226,832   923,123   699,515 
             
             
Everest International Years Ended December 31,
(Dollars in thousands)  2011   2010   2009 
Ceded written premiums $885  $48,128  $217,708 
Ceded earned premiums  18,238   99,731   182,436 
Ceded losses and LAE  5,084   93,648   100,768 
(a) Ceded losses and LAE include the Mt. McKinley loss portfolio transfer that constitutes losses ceded under retroactive reinsurance and therefore, in accordance with FAS 113, “Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts,”FASB guidance, a deferred gain on retroactive reinsurance is reflected in other expenses on the consolidated statements of operations and comprehensive income.

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₤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 areis taken into account.  The limit available under this agreement was fully exhausted at December 31, 2004.


F-30
13.  COMPREHENSIVE INCOME (LOSS) INCOME


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

 

Years Ended December 31,

(Dollars in thousands)

2008

 

2007

 

2006

 

 

 

 

 

 

Net (loss) income

$  (124,757)

 

$   304,191

 

$    332,906

Other comprehensive (loss) income, before tax:

 

 

 

 

 

   Unrealized (losses) gains on securities arising during the period

(438,383)

 

(14,194)

 

177,213

   Less: reclassification adjustment for realized losses (gains)

 

 

 

 

 

      included in net (loss) income

161,910

 

4,991

 

(34,957)

   Foreign currency translation adjustments

(46,872)

 

46,349

 

13,611

   Pension adjustments

(38,714)

 

17,442

 

-

Other comprehensive (loss) income, before tax

(362,059)

 

54,588

 

155,867

 

 

 

 

 

 

Income tax benefit (expense) related to items of other comprehensive

 

 

 

 

 

      (loss) income:

 

 

 

 

 

   Tax benefit (expense) from unrealized (losses) gains arising during the period

153,434

 

4,968

 

(62,025)

   Tax reclassification due to realized (losses) gains included in net (loss) income

(56,669)

 

(1,747)

 

12,235

   Tax benefit (expense) from foreign currency translation

16,405

 

(16,222)

 

(4,764)

   Tax benefit (expense) on pension

13,550

 

(6,105)

 

-

Total income tax benefit (expense) related to items of other

 

 

 

 

 

      comprehensive (loss) income

126,720

 

(19,106)

 

(54,554)

Other comprehensive (loss) income, net of tax

(235,339)

 

35,482

 

101,313

Comprehensive (loss) income

$  (360,096)

 

$   339,673

 

$    434,219

  Years Ended December 31, 
(Dollars in thousands) 2011  2010  2009 
          
Net income (loss) $(202,821) $265,397  $395,851 
Other comprehensive income (loss), before tax:            
Unrealized appreciation (depreciation) ("URA(D)") on securities arising during the period            
URA(D) of investments - temporary  34,109   (81,731)  294,401 
URA(D) of investments - non-credit OTTI  (188)  2,862   10,943 
URA(D) on securities arising during the period  33,921   (78,869)  305,344 
Less:  reclassification adjustment for realized losses included in net income (loss)  31,138   35,429   31,569 
Total URA(D) on securities arising during the period  65,059   (43,440)  336,913 
Foreign currency translation adjustments  (4,316)  41,597   43,223 
Pension adjustments  (45,310)  (2,792)  11,466 
Total other comprehensive income (loss), before tax  15,434   (4,635)  391,602 
             
Income tax benefit (expense) related to items of other comprehensive income (loss):            
Tax benefit (expense) on URA(D) arising during the period            
Tax benefit (expense) on URA(D) of investments - temporary  (11,939)  28,606   (103,041)
Tax benefit (expense) on URA(D) of investments - non-credit OTTI  66   (1,002)  (3,830)
Tax benefit (expense) on URA(D) on securities arising during the period  (11,873)  27,604   (106,871)
Tax reclassification due to realized gains (losses) included in net income (loss)  (10,898)  (12,400)  (11,049)
Total tax benefit (expense) from URA(D) arising during the period  (22,771)  15,204   (117,920)
Tax benefit (expense) from foreign currency translation  1,511   (14,558)  (15,128)
Tax benefit (expense) on pension  15,858   977   (4,013)
Total income tax benefit (expense) related to items of other comprehensive income (loss):  (5,402)  1,623   (137,061)
Other comprehensive income (loss), net of tax  10,032   (3,012)  254,541 
Comprehensive income (loss) $(192,789) $262,385  $650,392 
The following table presents the components of the change in accumulated other comprehensive income (loss) income, net of tax, in the consolidated balance sheets for the periods indicated:

 

Years Ended December 31,

(Dollars in thousands)

2008

 

2007

 

 

 

 

Beginning balance of unrealized gains (losses) on securities

$     110,460

 

$    321,226

Current period change in unrealized gains (losses) on securities

(179,708)

 

(5,982)

Adjustment to initially apply FASB Statement No. 159, net of tax

-

 

(204,784)

Ending balance of unrealized (losses) gains on securities

(69,248)

 

110,460

 

 

 

 

Beginning balance of foreign currency translation adjustments

59,373

 

29,246

Current period change in foreign currency translation adjustments                                           

(30,467)

 

30,127

Ending balance of foreign currency translation adjustments

28,906

 

59,373

 

 

 

 

Beginning balance of pension

(6,557)

 

(17,894)

Current period change in pension

(25,164)

 

11,337

Ending balance of pension

(31,721)

 

(6,557)

 

 

 

 

Ending balance of accumulated other comprehensive (loss) income

$     (72,063)

 

$    163,276

  Years Ended December 31, 
(Dollars in thousands) 2011  2010 
       
Beginning balance of URA (D) on securities $106,009  $134,245 
Current period change in URA (D) of investments - temporary  42,413   (30,096)
Current period change in URA (D) of investments - non-credit OTTI  (122)  1,860 
Current period change in URA (D) of investments - reclassification due to sale of subsidiary to related party  (1,160)  - 
Ending balance of URA (D) on securities  147,140   106,009 
         
Beginning balance of foreign currency translation adjustments  84,040   57,001 
Current period change in foreign currency translation adjustments  (2,807)  27,039 
Current period change in foreign currency translation adjustments - reclassification due to sale of subsidiary to related party  1,952   - 
Ending balance of foreign currency translation adjustments  83,185   84,040 
         
Beginning balance of pension  (26,083)  (24,268)
Current period change in pension  (29,452)  (1,815)
Ending balance of pension  (55,535)  (26,083)
         
Ending balance of accumulated other comprehensive income (loss) $174,790  $163,966 



F-31

14.  EMPLOYEE BENEFIT PLANS


Defined Benefit Pension Plans.

The Company maintains both qualified and non-qualified defined benefit pension plans for its U.S. employees.employees employed prior to April 1, 2010.  Generally, the Company computes the benefits based on average earnings over a period prescribed by the plans and credited length of service.  The Company’s non-qualified defined benefit pension plan, affected in October 1995, provides compensating pension benefits for participants whose benefits have been curtailed under the qualified plan due to Internal Revenue Code limitations.


Although not required to make contributions under IRS regulations, the Company contributed $20.6 million and $3.6 millionfollowing table summarizes the Company’s contributions to the qualified plan in 2008 and 2007, respectively. Pensiondefined benefit pension plans for the periods indicated:
  Years Ended December 31, 
(Dollars in thousands) 2011  2010  2009 
Company contributions $3,223  $6,759  $7,851 
The following table summarizes the Company’s pension expense for the Company’s plans for the years ended December 31, 2008, 2007 and 2006 was $5.9 million, $6.4 million and $9.2 million, respectively.

periods indicated:

  Years Ended December 31, 
(Dollars in thousands) 2011  2010  2009 
Pension expense $10,874  $10,783  $10,772 
The following table summarizes the status of these defined benefit plans for U.S. employees for the periods indicated:

 

Years Ended December 31,

(Dollars in thousands)

2008

 

2007

Change in projected benefit obligation:

 

 

 

   Benefit obligation at beginning of year

$      90,645

 

$     92,443

       Service cost

5,174

 

5,096

       Interest cost

5,916

 

5,263

       Actuarial loss (gain)

5,650

 

(10,979)

       Benefits paid

(4,478)

 

(1,178)

   Projected benefit obligation at end of year

102,907

 

90,645

 

 

 

 

Change in plan assets:

 

 

 

   Fair value of plan assets at beginning of year                                                         

82,963

 

69,796

       Actual return on plan assets

(26,391)

 

10,550

       Actual contributions during the year

23,843

 

3,914

       Administrative expenses paid

(139)

 

(119)

       Benefits paid

(4,478)

 

(1,178)

  Fair value of plan assets at end of year

75,798

 

82,963

 

 

 

 

Funded status at end of year

$    (27,109)

 

$     (7,682)

  Years Ended December 31, 
(Dollars in thousands) 2011  2010 
Change in projected benefit obligation:      
Benefit obligation at beginning of year $138,392  $118,166 
Service cost  7,548   6,944 
Interest cost  7,702   7,052 
Actuarial loss  26,802   14,631 
Benefits paid  (5,080)  (8,401)
Projected benefit obligation at end of year  175,364   138,392 
         
Change in plan assets:        
Fair value of plan assets at beginning of year  114,470   100,728 
Actual return on plan assets  (11,309)  15,383 
Actual contributions during the year  3,223   6,760 
Benefits paid  (5,080)  (8,401)
Fair value of plan assets at end of year  101,304   114,470 
         
Funded status at end of year $(74,060) $(23,922)


Amounts recognized in the consolidated balance sheets for the periods indicated:

 

At December 31,

(Dollars in thousands)

2008

 

2007

Other assets (due beyond one year)

$                  -

 

$         14,133

Other liabilities (due within one year)

(6,077)

 

(1,468)

Other liabilities (due beyond one year)

(21,032)

 

(20,347)

Net amount recognized in the consolidated balance sheet                                   

$      (27,109)

 

$        (7,682)

  At December 31, 
(Dollars in thousands) 2011  2010 
Other assets (due beyond one year) $-  $952 
Other liabilities (due within one year)  (3,497)  (2,560)
Other liabilities (due beyond one year)  (70,563)  (22,314)
Net amount recognized in the consolidated balance sheets $(74,060) $(23,922)


F-32
Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive income (loss) for the periods indicated:

 

At December 31,

(Dollars in thousands)

2008

 

2007

Prior service cost

$            (315)

 

$            (367)

Accumulated loss

(46,252)

 

(8,873)

Accumulated other comprehensive loss                                                              

$       (46,567)

 

$         (9,240)

  At December 31, 
(Dollars in thousands) 2011  2010 
Prior service cost $(168) $(217)
Accumulated income (loss)  (78,755)  (36,219)
Accumulated other comprehensive income (loss) $(78,923) $(36,436)
Other changes in other comprehensive income (loss) for the periods indicated are as follows:

 

Years Ended December 31,

(Dollars in thousands)

2008

 

2007

Other comprehensive loss at December 31, prior year

$        (9,240)

 

$      (26,662)

Net (loss) gain arising during period

(38,763)

 

15,871

Recognition of amortizations in net periodic benefit cost:                                   

 

 

 

   Prior service cost

51

 

126

   Actuarial loss

1,385

 

1,425

Other comprehensive loss at December 31, current year

$      (46,567)

 

$        (9,240)

  Years Ended December 31, 
(Dollars in thousands) 2011  2010 
Other comprehensive income (loss) at December 31, prior year $(36,436) $(33,974)
Net gain (loss) arising during period  (47,177)  (7,220)
Recognition of amortizations in net periodic benefit cost:        
Prior service cost  49   49 
Actuarial loss  4,641   4,709 
Other comprehensive income (loss) at December 31, current year $(78,923) $(36,436)
Net periodic benefit cost for U.S. employees included the following components for the periods indicated:

 

Years Ended December 31,

(Dollars in thousands)

2008

 

2007

 

2006

Service cost

$        5,174

 

$        5,096

 

$       5,089

Interest cost

 5,916

 

 5,263

 

 4,890

Expected return on assets

 (6,583)

 

 (5,538)

 

 (3,549)

Amortization of actuarial loss from earlier periods

 601

 

 1,425

 

 2,633

Amortization of unrecognized prior service cost

 51

 

 126

 

 127

Settlement

 784

 

-

 

 -

Net periodic benefit cost

$        5,943

 

$        6,372

 

$       9,190

 

 

 

 

 

 

Other changes recognized in other comprehensive income:

 

 

 

 

 

   Other comprehensive income attributable to change from prior year

 37,327

 

 (17,422)

 

 

 

 

 

 

 

 

Total recognized in net periodic benefit cost and other

 

 

 

 

 

   comprehensive income

$      43,270

 

$    (11,050)

 

 

  Years Ended December 31, 
(Dollars in thousands) 2011  2010  2009 
Service cost $7,548  $6,944  $6,015 
Interest cost  7,702   7,052   6,385 
Expected return on assets  (9,067)  (7,971)  (6,145)
Amortization of actuarial loss from earlier periods  3,367   2,467   3,663 
Amortization of unrecognized prior service cost  49   49   49 
Settlement  1,275   2,242   805 
Net periodic benefit cost $10,874  $10,783  $10,772 
             
Other changes recognized in other comprehensive income (loss):            
Other comprehensive income (loss) attributable to change from prior year  42,487   2,462     
             
Total recognized in net periodic benefit cost and other            
comprehensive income (loss) $53,361  $13,244     
             
(Some amounts may not reconcile due to rounding.)            


The estimated transition obligation, actuarial loss and prior service cost that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next year are $0.0 million, $3.3 million$0 thousand, $7,062 thousand and $0.0 million,$49 thousand, respectively.


The weighted average discount rates used to determine net periodic benefit cost for 20082011, 2010 and 20072009 were 6.55%5.60%, 6.10% and 5.94%6.25%, respectively.  The rate of compensation increase used to determine the net periodic benefit cost for 20082011, 2010 and 20072009 was 4.5%4.0%.  The expected long-term rate of return on plan assets for 20082011, 2010 and 20072009 was 8.0%8%, and was based on expected portfolio returns and allocations.


The weighted average discount rates used to determine the actuarial present value of the projected benefit obligation forat year end 20082011, 2010, and 20072009 were 6.25%4.60%, 5.60% and 6.55%6.10%, respectively.



F-33
The following table summarizes the accumulated benefit obligation for the periods indicated:

 

At December 31,

(Dollars in thousands)

2008

 

2007

Qualified Plan

$        63,663

 

$       53,693

Non-qualified Plan                                                                                                                  

20,171

 

16,130

Total

$        83,834

 

$       69,823

  At December 31, 
(Dollars in thousands) 2011  2010 
Qualified Plan $118,981  $91,254 
Non-qualified Plan  21,231   19,141 
Total $140,212  $110,395 
The following table displays the plans with projected benefit obligations in excess of plan assets for the periods indicated:

 

At December 31,

(Dollars in thousands)

2008

 

2007

Qualified Plan

 

 

 

   Projected benefit obligation                                                                    ��                         

$        79,574

 

NA

   Fair value of plan assets

75,798

 

NA

Non-qualified Plan

 

 

 

   Projected benefit obligation

$        23,333

 

$        21,815

   Fair value of plan assets

-

 

-

  At December 31, 
(Dollars in thousands) 2011  2010 
Qualified Plan      
Projected benefit obligation $146,350  NA 
Fair value of plan assets  101,304  NA 
Non-qualified Plan       
Projected benefit obligation $29,014  $24,874 
Fair value of plan assets  -   - 
The following table displays the plans with accumulated benefit obligations in excess of plan assets for the periods indicated:

 

At December 31,

(Dollars in thousands)

2008

 

2007

Qualified Plan

 

 

 

   Accumulated benefit obligation                                                                                          

NA

 

NA

   Fair value of plan assets

NA

 

NA

Non-qualified Plan

 

 

 

   Accumulated benefit obligation

$     20,171

 

$      16,130

   Fair value of plan assets

-

 

-

  At December 31, 
(Dollars in thousands) 2011  2010 
Qualified Plan      
Accumulated benefit obligation $118,981  NA 
Fair value of plan assets  101,304  NA 
Non-qualified Plan       
Accumulated benefit obligation $21,231  $19,141 
Fair value of plan assets  -   - 
The following table displays the expected benefit payments in the periods indicated:

(Dollars in thousands)

 

2009        

$         7,622

2010

5,171

2011

5,604

2012

5,625

2013

6,883

Next 5 years

33,229

The asset allocation percentages for the qualified benefit plan, by asset category for the periods indicated:

 

At December 31,

Asset Category:

2008

 

2007

Equity securities

42.36%

 

64.90%

Debt securities

28.84%

 

29.50%

Cash and short-term investments                                                                                                     

28.80%

 

5.60%

Total

100.00%

 

100.00%

(Dollars in thousands)   
2012 $6,068 
2013  7,459 
2014  7,464 
2015  6,913 
2016  6,994 
Next 5 years  39,715 

F-31

Plan assets consist of shares in investment trusts with approximately 42%64%, 29%33% and 29%3% of the underlying assets consisting of equity securities, fixed maturities and cash, respectively.  The Company manages the qualified plan investments for U.S. employees.  The assets in the plan consist of debt and equity mutual funds.  Due to the long term nature of the plan, the target asset allocation has historically been 70% equities and 30% bonds; however, due to recent market conditions, contributions are being invested in short-term securities.

bonds.


F-34

The following tables present the fair value measurement levels for the qualified plan assets at fair value for the periods indicated:
     Fair Value Measurement Using: 
     Quoted Prices       
     in Active  Significant    
     Markets for  Other  Significant 
     Identical  Observable  Unobservable 
     Assets  Inputs  Inputs 
(Dollars in thousands) December 31, 2011  (Level 1)  (Level 2)  (Level 3) 
Assets:            
Cash $317  $317  $-  $- 
Short-term investments, which approximates fair value (a)  3,109   3,109   -   - 
Mutual funds, fair value                
Fixed income (b)  33,573   33,573   -   - 
Equities (c)  55,423   55,423   -   - 
Multi-strategy equity fund, fair value (d)  7,891   -   -   7,891 
Private equity limited partnership  991   -   -   991 
Total $101,304  $92,422  $-  $8,882 
(a)  This category includes high quality, short-term money market instruments, which are issued and payable in U.S. dollars.
(b)  This category includes three fixed income funds, which invest in investment grade securities of corporations, governments and government agencies with approximately half in U.S. securities and half in international securities.
(c)  This category includes eight funds, which invest in small, mid and multi-cap equity securities including common stocks, securities convertible into common stock and securities with common stock characteristics, such as rights and warrants, with approximately three-fourths in U.S. equities and one-fourth in international equities.
(d)  This category consists of a privately held fund of U.S. and international equity funds and may include currency hedges for the foreign funds. The fair value is provided by the external investment manager.
     Fair Value Measurement Using: 
     Quoted Prices       
     in Active  Significant    
     Markets for  Other  Significant 
     Identical  Observable  Unobservable 
     Assets  Inputs  Inputs 
(Dollars in thousands) December 31, 2010  (Level 1)  (Level 2)  (Level 3) 
Assets:            
Cash $356  $356  $-  $- 
Short-term investments, which approximates fair value (a)  2,728   2,728   -   - 
Mutual funds, fair value                
Fixed income (b)  35,334   35,334   -   - 
Equities (c)  65,793   65,793   -   - 
Multi-strategy equity fund, fair value (d)  10,259   -   -   10,259 
Total $114,470  $104,211  $-  $10,259 
(a)  This category includes high quality, short-term money market instruments, which are issued and payable in U.S. dollars.
(b)  This category includes three fixed income funds, which invest in investment grade securities of corporations, governments and government agencies with approximately half in U.S. securities and half in international securities.
(c)  This category includes eight funds, which invest in small, mid and multi-cap equity securities including common stocks, securities convertible into common stock and securities with common stock characteristics, such as rights and warrants, with approximately three-fourths in U.S. equities and one-fourth in international equities.
(d)  This category consists of a privately held fund of U.S. and international equity funds and may include currency hedges for the foreign funds. The fair value is provided by the external investment manager.


F-35
The following table presents the activity under Level 3, fair value measurements using significant unobservable inputs for fixed maturity investments, for the period indicated:
  Year Ended December 31, 
  2011  2010 
Assets:      
Balance, beginning of period $10,259  $6,564 
Actual return on plan assets:        
Realized gains (losses)  21   7 
Unrealized gains (losses)  (2,380)  1,629 
Purchases  1,200   2,000 
Investment income earned on assets  (95)  146 
Sales  (123)  (88)
Transfers in and/or (out) of Level 3  -   - 
Balance, end of period $8,882  $10,259 
         
The amount of total gains (losses) for the period included in changes in        
net assets attributable to the change in unrealized gains (losses)        
relating to assets still held at the reporting date $(2,401) $2,149 
         
(Some amounts may not reconcile due to rounding.)        
The Company expectsdoes not expect to contribute approximately $5.1 million in 2009make any contributions to the qualified plan.

plan in 2012.


Defined Contribution Plans.

The Company also maintains both qualified and non-qualified defined contribution plans (“Savings Plan” and “Non-Qualified Savings Plan”, respectively) covering U.S. employees.  Under the plans, the Company contributes up to a maximum 3% of the participants’ compensation based on the contribution percentage of the employee.  The Non-Qualified Savings Plan provides compensating savings plan benefits for participants whose benefits have been curtailed under the Savings Plan due to Internal Revenue Code limitations.  In addition, effective for new hires (and rehires) on or after April 1, 2010, the Company will contribute between 3% and 8% of an employee’s earnings for each payroll period based on the employee’s age.  These contributions will be 100% vested after three years.

The following table presents the Company’s incurred expenses related to these plans were $1.4 million, $1.2 million and $1.0 million in 2008, 2007 and 2006, respectively.

for the periods indicated:

  Years Ended December 31, 
(Dollars in thousands) 2011  2010  2009 
Incurred expenses $2,062  $1,801  $1,631 

In addition, the Company maintains several defined contribution pension plans covering non-U.S. employees.  Each non-U.S. office (Canada(Brazil, Canada and Singapore) maintains a separate plan for the non-U.S. employees working in that location.  The Company contributes various amounts based on salary, age and/or years of service.  The contributions as a percentage of salary for the branch offices range from 7.0%1.6% to 9.5%9.3%.  The contributions are generally used to purchase pension benefits from local insurance providers.  The following table presents the Company’s incurred expenses related to these plans were $0.2 million for 2008, 2007 and 2006.

the periods indicated:

  Years Ended December 31, 
(Dollars in thousands) 2011  2010  2009 
Incurred expenses $419  $377  $317 


F-36

Post-Retirement Plan.

The Company sponsors thea Retiree Health Plan.Plan for employees employed prior to April 1, 2010.  This plan provides healthcare benefits for eligible retired employees (and their eligible dependants), who have elected coverage.  The Company currently anticipates that most covered employees will become eligible for these benefits if they retire while working for the Company.  The cost of these benefits is shared with the retiree.  The Company accrues the post-retirement benefit expense during the period of the employee’s service.

A


The following medical cost trend rates were used to determine net cost and benefit obligations:  a healthcare inflation rate for pre-Medicare claims of 9%7.9% in 20082011 was assumed to decrease gradually to 5%4.5% in 20152027 and then remain at that level. Alevel; and a healthcare inflation rate for post-Medicare claims of 7%6.4% in 20082011 was assumed to decrease gradually to 5%4.5% in 20152027 then remain at that level.

Effective December 31, 2008, the healthcare inflation rate for pre-Medicare claims is 9% in 2009, decreasing gradually to 5% in 2018. The healthcare inflation rate for post-Medicare claims is 7% in 2009, decreasing gradually to 5% in 2018.


Changes in the assumed healthcare cost trend can have a significant effect on the amounts reported for the healthcare plans.  A one percent change in the rate would have the following effects on:

 

Percentage

 

Percentage

 

Point Increase

 

Point Decrease

(Dollars in thousands)

($ Impact)

 

($ Impact)

a.  Effect on total service and interest cost components

$                 295

 

$               (232)

b.  Effect on accumulated post-retirement benefit obligation                                                     

2,341

 

(1,869)


Benefit expense for this plan


  Percentage  Percentage 
  Point Increase Point Decrease 
(Dollars in thousands) ($ Impact)  ($ Impact) 
a.  Effect on total service and interest cost components $286  $(240)
b.  Effect on accumulated post-retirement benefit obligation  2,456   (2,089)
The following table presents the post-retirement benefit expenses for the years ended December 31, 2008, 2007 and 2006 was $1.4 million, $1.2 million and $1.1 million, respectively.

periods indicated:

F-32

  Years Ended December 31, 
(Dollars in thousands) 2011  2010  2009 
Post-retirement benefit expenses $2,258  $1,947  $1,769 
The following table summarizes the status of this plan for the periods indicated:

 

At December 31,

(Dollars in thousands)

2008

 

2007

Change in projected benefit obligation:

 

 

 

   Benefit obligation at beginning of year

$           9,832

 

$          8,780

       Service cost

732

 

663

       Interest cost

664

 

536

       Actuarial loss (gain)

1,401

 

(1)

       Benefits paid

(273)

 

(146)

   Benefit obligation at end of year

12,356

 

9,832

 

 

 

 

Change in plan assets:

 

 

 

   Fair value of plan assets at beginning of year                                                          

-

 

-

       Employer contributions

273

 

146

       Benefits paid

(273)

 

(146)

  Fair value of plan assets at end of year

-

 

-

 

 

 

 

Funded status at end of year

$      (12,356)

 

$       (9,832)

  At December 31, 
(Dollars in thousands) 2011  2010 
Change in projected benefit obligation:      
Benefit obligation at beginning of year $16,754  $14,919 
Service cost  1,165   1,017 
Interest cost  934   849 
Actuarial loss  2,930   412 
Excise tax cost  53   - 
Benefits paid  (374)  (443)
Benefit obligation at end of year  21,462   16,754 
         
Change in plan assets:        
Fair value of plan assets at beginning of year  -   - 
Employer contributions  374   443 
Benefits paid  (374)  (443)
Fair value of plan assets at end of year  -   - 
         
Funded status at end of year $(21,462) $(16,754)


F-37

Amounts recognized in the consolidated balance sheets for the periods indicated:

 

At December 31,

(Dollars in thousands)

2008

 

2007

Other liabilities (due within one year)

$          (219)

 

$         (144)

Other liabilities (due beyond one year)

(12,137)

 

(9,688)

Net amount recognized in the consolidated balance sheets                                         

$     (12,356)

 

$      (9,832)

  At December 31, 
(Dollars in thousands) 2011  2010 
Other liabilities (due within one year) $(470) $(377)
Other liabilities (due beyond one year)  (20,992)  (16,377)
Net amount recognized in the consolidated balance sheets $(21,462) $(16,754)
Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive income (loss) for the periods indicated:

 

At December 31,

(Dollars in thousands)

2008

 

2007

Accumulated loss

$      (2,234)

 

$        (848)

Accumulated other comprehensive loss                                                                           

$      (2,234)

 

$        (848)

  At December 31, 
(Dollars in thousands) 2011  2010 
Accumulated income (loss) $(6,516) $(3,692)
Accumulated other comprehensive income (loss) $(6,516) $(3,692)
Other changes in other comprehensive income (loss) for the periods indicated are as follows:

 

Years Ended December 31,

(Dollars in thousands)

2008

 

2007

Other comprehensive loss at December 31, prior year

$         (848)

 

$         (867)

Net loss arising during period

(1,401)

 

1

Recognition of amortizations in net periodic benefit cost:                                           

 

 

 

  Actuarial loss

15

 

18

Other comprehensive loss at December 31, current year

$      (2,234)

 

$         (848)


F-33


  Years Ended December 31, 
(Dollars in thousands) 2011  2010 
Other comprehensive income (loss) at December 31, prior year $(3,692) $(3,361)
Net gain (loss) arising during period  (2,983)  (412)
Recognition of amortizations in net periodic benefit cost:        
Actuarial loss (gain)  159   81 
Other comprehensive income (loss) at December 31, current year $(6,516) $(3,692)


Net periodic benefit cost included the following components for the periods indicated:

 

Years Ended December 31,

(Dollars in thousands)

2008

 

2007

 

2006

Service cost

$        732

 

$        663

 

$        631

Interest cost

664

 

536

 

464

Net loss recognition

15

 

18

 

50

Net periodic cost

$     1,411

 

$     1,217

 

$     1,145

 

 

 

 

 

 

Other changes recognized in other comprehensive income:

 

 

 

 

 

  Other comprehensive gain attributable to change from prior year         

1,386

 

(19)

 

 

 

 

 

 

 

 

Total recognized in net periodic benefit cost and

 

 

 

 

 

  other comprehensive income

$     2,797

 

$     1,198

 

 



  
Years Ended December 31,
(Dollars in thousands) 2011  2010  2009 
Service cost $1,165  $1,017  $902 
Interest cost  934   849   780 
Net loss recognition  159   81   87 
Net periodic cost $2,258  $1,947  $1,769 
             
Other changes recognized in other comprehensive income (loss):            
Other comprehensive gain (loss) attributable to change from prior year  2,823   331     
             
Total recognized in net periodic benefit cost and            
other comprehensive income (loss) $5,081  $2,278     

The estimated transition obligation, actuarial loss and prior service cost that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost over the next fiscal year are $0.0$0 thousand, $68.7$328 thousand and $0.0$0 thousand, respectively.


The weighted average discount rates used to determine net periodic benefit cost for 20082011, 2010 and 20072009 were 6.55%5.60%, 6.10% and 5.94%6.25%, respectively.


The weighted average discount rates used to determine the actuarial present value of the projected benefit obligation at year end 20082011, 2010 and 20072009 were 6.25%4.60%, 5.60% and 6.55%6.10%, respectively.

The following table summarizes the benefit obligation for the post-retirement plan for the periods indicated:

 

Years Ended December 31,

(Dollars in thousands)

2008

 

2007

Post-retirement Plan                                                                                                                    

$        12,356

 

$          9,832



F-38
The following table displays the expected benefit payments in the periodsyears indicated:

(Dollars in thousands)

 

2009

$             219

2010

298

2011

378

2012

453

2013

538

Next 5 years

4,233

16.

(Dollars in thousands)   
2012 $469 
2013  597 
2014  717 
2015  900 
2016  1,048 
Next 5 years  8,000 
15.  DIVIDEND RESTRICTIONS AND STATUTORY FINANCIAL INFORMATION


Dividend Restrictions.

Delaware law provides that an insurance company which is a member of an insurance holding company system and is domiciled in the state shall not pay dividends without giving prior notice to the Insurance Commissioner of Delaware and may not pay dividends without the approval of the Insurance Commissioner if the value of the proposed dividend, together with all other dividends and distributions made in the preceding twelve months, exceeds the greater of (1) 10% of statutory surplus or (2) net income, not including realized capital gains, each as reported in the prior year’s statutory annual statement.  In addition, no dividend may be paid in excess of unassigned earned surplus.  At December 31, 2008,2011, Everest Re has $315.6 million$232,211 thousand available for payment of dividends in 20092012 without the need for prior regulatory approval.

F-34


Statutory Financial Information.

Everest Re prepares its statutory financial statements in accordance with accounting practices prescribed or permitted by the National Association of Insurance Commissioners (“NAIC”) and the Delaware Insurance Department.  Prescribed statutory accounting practices are set forth in the NAIC Accounting Practices and Procedures Manual.  The capital and statutory surplus of Everest Re was $2,342.4 million$2,322,115 thousand and $2,864.1 million$2,527,519 thousand at December 31, 20082011 and 2007,2010, respectively.  The statutory net loss of Everest Re was $326,400 thousand for the year ended December 31, 2011 and the statutory net income of Everest Re was $74.4 million, $673.1 million$218,452 thousand and $298.7 million$442,735 thousand for the years ended December 31, 2008, 20072010 and 2006,2009, respectively.

17.


16.  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 reinsurance and other contractualreinsurance 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.  WhileThe Company considers the final outcomestatuses of these matters cannot be predicted with certainty,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 doesis not believe thata party to any of these matters, when finally resolved, will have aother material adverse effect on the Company’s financial positionlitigation or liquidity. However, an adverse resolution of one or more of these items in any one quarter or fiscal year could have a material adverse effect on the Company’s results of operations in that period.

arbitration.



F-39
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 at December 31, 2008 and 2007, was $152.1 million and $150.4 million, respectively.

for the periods indicated:

  Years Ended December 31, 
(Dollars in thousands) 2011  2010 
  $143,447  $150,560 
Prior to its 1995 initial public offering, the Company had 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.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 atfor which the Company was contingently liable for the periods indicated:
  Years Ended December 31, 
(Dollars in thousands) 2011  2010 
  $27,634  $26,542 


17.  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 
(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 December 31, 20082011, Holdings held 9,719,971 common shares of Group, which it had purchased in the open market between February 1, 2007 and 2007,March 8, 2011.  The table below represents the total purchase price for these common shares purchased.
(Dollars in thousands)   
Total purchase price $835,371 



F-40
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.


  Years Ended December 31, 
(Dollars in thousands) 2011  2010  2009 
Dividends received $18,645  $14,029  $7,987 


Affiliated Companies

During the fourth quarter of 2011, the Company sold its subsidiaries, Everest Canada and 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 $23.1 millionthe book value of the subsidiaries as of September 30, 2011.

Everest Global Services, Inc. (“Global Services”), an affiliate of Holdings, provides centralized management and $21.7 million, respectively.

18. RELATED-PARTY TRANSACTIONS

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.


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


  Years Ended December 31, 
(Dollars in thousands) 2011  2010  2009 
Expenses incurred $61,108  $62,740  $53,015 
Outside Directors

During the normal course of business, the Company, through its affiliates, engages in reinsuranceinsurance 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.

The Company engages in reinsurance transactions with Bermuda Re and Everest International under which business is ceded for what management believes to be arm’s length consideration.  See also Note 13.

12.

F-35


19.

18.  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 through its subsidiaries, operatespreviously 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 those businesses already reflected in four segments:the Insurance segment.  The other operating units included in the Specialty Underwriting segment would have encompassed less than 5% of the Company’s premiums earned and their volume is projected to remain less than 5%.  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 U.S. Insurance, Specialty Underwriting and International. 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 U.S. Insurance operation writes property and casualty insurance, primarilyincluding medical stop loss insurance, directly and through

F-41
general agents, brokers and surplus lines brokers within the U.S. The Specialty Underwriting operation writes accident and health (“A&H”), marine, aviation and surety business within the U.S. and worldwide through brokers and directly with ceding companies.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 in a coordinated fashionindependently, 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.  Underwriting results are measured using ratios, in particular loss, commission and brokerage and other underwriting expense ratios, which, respectively, divide incurred losses, commissioncommissions 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.

U.S. Reinsurance

Years Ended December 31,

(Dollars in thousands)

2008

 

2007

 

2006

Gross written premiums

$     957,900

 

$   1,193,524

 

$   1,336,728

Net written premiums

569,866

 

854,801

 

992,819

 

 

 

 

 

 

Premiums earned

$     685,075

 

$      939,684

 

$      978,072

Incurred losses and LAE

559,985

 

636,895

 

721,157

Commission and brokerage

159,677

 

230,540

 

202,809

Other underwriting expenses

32,180

 

33,275

 

24,947

Underwriting (loss) gain

$    (66,767)

 

$        38,974

 

$        29,159

U.S. Insurance

Years Ended December 31,

U.S. Reinsurance Years Ended December 31, 

(Dollars in thousands)

2008

 

2007

 

2006

 2011  2010  2009 

Gross written premiums

$     771,798

 

$     885,604

 

$      866,294

 $1,346,830  $1,395,433  $1,407,078 

Net written premiums

398,723

 

479,812

 

591,177

  688,524   773,615   793,510 

 

 

 

 

 

            

Premiums earned

$     482,729

 

$     496,166

 

$      573,965

 $697,737  $777,704  $815,555 

Incurred losses and LAE

422,183

 

412,669

 

432,232

  623,113   556,529   440,748 

Commission and brokerage

68,238

 

64,349

 

72,723

  156,026   169,327   183,065 

Other underwriting expenses

64,324

 

58,216

 

48,918

  39,290   42,510   44,900 

Underwriting (loss) gain

$    (72,016)

 

$    (39,068)

 

$        20,092

Underwriting gain (loss) $(120,692) $9,338  $146,842 


Insurance Years Ended December 31, 
(Dollars in thousands) 2011  2010  2009 
Gross written premiums $969,079  $865,371  $842,564 
Net written premiums  450,423   373,737   352,077 
             
Premiums earned $459,437  $409,824  $382,802 
Incurred losses and LAE  398,359   359,049   317,753 
Commission and brokerage  40,356   29,568   29,848 
Other underwriting expenses  87,734   69,676   74,627 
Underwriting gain (loss) $(67,012) $(48,469) $(39,426)

International Years Ended December 31, 
(Dollars in thousands) 2011  2010  2009 
Gross written premiums $1,242,609  $1,206,953  $1,084,476 
Net written premiums  615,064   641,359   589,714 
             
Premiums earned $636,681  $626,295  $586,703 
Incurred losses and LAE  856,131   561,872   333,175 
Commission and brokerage  142,273   136,166   131,664 
Other underwriting expenses  27,307   27,646   23,083 
Underwriting gain (loss) $(389,030) $(99,389) $98,781 


Specialty Underwriting

Years Ended December 31,

(Dollars in thousands)

2008

 

2007

 

2006

Gross written premiums

$     260,422

 

$      270,081

 

$     251,209

Net written premiums

167,677

 

185,350

 

174,431

 

 

 

 

 

 

Premiums earned

$     168,399

 

$      184,894

 

$     176,326

Incurred losses and LAE

116,277

 

118,324

 

125,160

Commission and brokerage

40,948

 

44,278

 

44,851

Other underwriting expenses

8,055

 

8,464

 

6,559

Underwriting gain (loss)

$          3,119

 

$        13,828

 

$          (244)


International

Years Ended December 31,

(Dollars in thousands)

2008

 

2007

 

2006

Gross written premiums

$      904,668

 

$      805,872

 

$     731,745

Net written premiums

539,096

 

552,963

 

531,834

 

 

 

 

 

 

Premiums earned

$      545,579

 

$      558,156

 

$     518,837

Incurred losses and LAE

367,115

 

339,686

 

278,530

Commission and brokerage

129,747

 

126,745

 

118,122

Other underwriting expenses

19,780

 

18,633

 

13,830

Underwriting gain

$        28,937

 

$        73,092

 

$     108,355

The following table reconciles the underwriting results for the operating segments to income (loss) income before taxes as reported in the consolidated statements of operations and comprehensive income (loss) income for the periods indicated:

 

Years Ended December 31,

(Dollars in thousands)

2008

 

2007

 

2006

Underwriting (loss) gain

$  (106,727)

 

$      86,826

 

$    157,362

Net investment income

363,053

 

406,592

 

372,352

Net realized capital (losses) gains

(489,186)

 

80,887

 

34,957

Corporate expense

(5,587)

 

(5,328)

 

(4,475)

Interest, fee and bond issue cost amortization expense                 

(78,979)

 

(91,059)

 

(69,696)

Other income (expense)

57,921

 

(73,641)

 

(40,542)

(Loss) income before taxes

$  (259,505)

 

$    404,277

 

$    449,958

  Years Ended December 31, 
(Dollars in thousands) 2011  2010  2009 
Underwriting gain (loss) $(576,734) $(138,520) $206,197 
Net investment income  312,933   350,344   262,086 
Net realized capital gains (losses)  (41,116)  65,291   56,928 
Realized gain on debt repurchase  -   -   78,271 
Corporate expense  (6,073)  (5,867)  (7,722)
Interest, fee and bond issue cost amortization expense  (50,763)  (54,553)  (70,883)
Other income (expense)  (11,745)  12,074   366 
Income (loss) before taxes $(373,498) $228,769  $525,243 
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., no other country represented more than 5% ofin which the Company’s revenues.

Company writes business, for the periods indicated:

  Years Ended December 31, 
(Dollars in thousands) 2011  2010  2009 
Canada $185,184  $186,861  $162,695 
Approximately 21.6%29.9%, 16.1%27.0% and 18.1%22.7% of the Company’s gross written premiums in 2008, 20072011, 2010 and 2006,2009, respectively, were sourced through the Company’s largest intermediary.

20. SUBSEQUENT EVENT

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 due 2067, which were issued by the Company, at a price of $500 per $1,000 principal amount plus accrued and unpaid interest. The offer expired at 5:00 p.m., New York City time, on March 26, 2009. Upon expiration, the Company had purchased $161.4 million

F-37

face amount of the $400 million debt securities. The Company estimates the pre-tax gain to be $74 million, which will be reflected in


19.  ACQUISITIONS

During the first quarter 2009 results. See also Note 7.

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 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 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, 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.

20. SUBSEQUENT EVENTS

The Company has evaluated known recognized and non-recognized subsequent events.  The Company does not have any subsequent events to report.

F-43

21. UNAUDITED QUARTERLY FINANCIAL DATA


Summarized quarterly financial data for the periods indicated:

 

2008

(Dollars in thousands)

1st Quarter

2nd Quarter

3rd Quarter

4th Quarter

 

 

 

 

 

Operating data:

 

 

 

 

   Gross written premiums

$       685,468

$      694,511

$     778,137

$   736,672

   Net written premiums

410,796

425,744

424,438

414,384

 

 

 

 

 

   Premiums earned

500,030

471,414

449,892

460,446

   Net investment income

87,977

106,981

97,305

70,790

   Net realized capital losses

(101,900)

(50,795)

(108,652)

(227,839)

   Total claims and underwriting expenses

451,869

501,427

553,581

487,219

   Net income (loss)

4,640

13,652

(78,899)

(64,150)

 

 

 

 

 

 

2007

(Dollars in thousands)

1st Quarter

2nd Quarter

3rd Quarter

4th Quarter

 

 

 

 

 

Operating data:

 

 

 

 

   Gross written premiums

$       799,750

$      712,310

$     839,833

$   803,188

   Net written premiums

558,286

495,851

602,753

416,036

 

 

 

 

 

   Premiums earned

569,838

565,426

561,150

482,486

   Net investment income

95,934

106,852

105,023

98,783

   Net realized capital gains (losses)

33,874

89,585

22,121

(64,693)

   Total claims and underwriting expenses

464,737

464,373

488,715

679,577

   Net income (loss)

159,318

185,191

110,569

(150,887)

F-38

SCHEDULE I - SUMMARY OF INVESTMENTS -

 

 

 

 

 

OTHER THAN INVESTMENTS IN RELATED PARTIES

 

 

 

 

 

DECEMBER 31, 2008

 

 

 

 

 

 

 

 

 

 

 

Column A

Column B

 

Column C

 

Column D

 

 

 

 

 

Amount

 

 

 

 

 

Shown in

 

 

 

Market

 

Balance

(Dollars in thousands)

Cost

 

Value

 

Sheet

Fixed maturities-available for sale

 

 

 

 

 

   Bonds:

 

 

 

 

 

       U.S. government and government agencies

$          139,776

 

$        155,232

 

$       155,232

       State, municipalities and political subdivisions

3,846,754

 

3,795,718

 

3,795,718

       Foreign government securities

467,935

 

492,697

 

492,697

       Foreign corporate securities

428,059

 

405,414

 

405,414

       Public utilities

17,484

 

16,897

 

16,897

       All other corporate bonds

384,035

 

353,140

 

353,140

   Mortgage pass-through securities

231,631

 

217,117

 

217,117

   Redeemable preferred stock

94,809

 

75,641

 

75,641

Total fixed maturities-available for sale

5,610,483

 

5,511,856

 

5,511,856

Fixed maturities - available for sale, at fair value(1)

41,616

 

43,090

 

43,090

Equity securities - available for sale, at market value

15

 

16

 

16

Equity securities - available for sale, at fair value(1)

135,904

 

119,815

 

119,815

Short-term investments

918,712

 

918,712

 

918,712

Other invested assets

400,498

 

392,589

 

392,589

Other invested assets, at fair value (1)

392,329

 

316,750

 

316,750

Cash

92,264

 

92,264

 

92,264

 

 

 

 

 

 

Total investments and cash

$       7,591,821

 

$     7,395,092

 

$     7,395,092

 

 

 

 

 

 

 

 

 

 

 

 

(1) Original cost does not reflect fair value adjustments, which have been realized through the statements of operations and comprehensive income.

S-1

SCHEDULE II - CONDENSED FINANCIAL INFORMATION

 

 

 

OF THE REGISTRANT CONDENSED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

 

 

 

At December 31,

(Dollars in thousands, except par value per share)

2008

 

2007

ASSETS:

 

 

 

   Other invested assets, at market value

$        12,943

 

$        12,941

   Other invested assets, at fair value

316,750

 

253,791

   Short-term investments

271,830

 

176,274

   Cash

284

 

916

   Investment in subsidiaries, at equity in the underlying net assets                          

2,710,192

 

3,248,507

   Accrued investment income

217

 

494

   Deferred tax asset

22,093

 

-

   Current federal income tax receivable

46,130

 

54,240

   Other assets

14,397

 

16,294

TOTAL ASSETS

$   3,394,836

 

$   3,763,457

 

 

 

 

LIABILITIES:

 

 

 

   8.75% Senor notes due 3/15/2010

$      199,821

 

$      199,685

   5.4% Senior notes due 10/15/2014

249,728

 

249,689

   6.6% Long term notes due 5/1/2067

399,643

 

399,639

   Junior subordinated debt securities

329,897

 

329,897

   Accrued interest on debt and borrowings

11,217

 

11,217

   Due to subsidiaries

889

 

1,351

   Other liabilities

673

 

4,480

       Total liabilities

1,191,868

 

1,195,958

 

 

 

 

STOCKHOLDER'S EQUITY:

 

 

 

   Common stock, par value: $0.01; 3,000 shares authorized;

 

 

 

       1,000 shares issued and outstanding (2008 and 2007)

-

 

-

   Additional paid-in capital

315,771

 

310,206

   Accumulated other comprehensive income, net of deferred income

 

 

 

       tax benefit of $0.0 million at 2008 and $0.0 million at 2007

(72,063)

 

163,276

   Retained earnings

1,959,260

 

2,094,017

   Total stockholder's equity

2,202,968

 

2,567,499

TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY

$   3,394,836

 

$   3,763,457

 

 

 

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements.

 

 

 

S-2



SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF THE

 

 

 

 

REGISTRANT CONDENSED STATEMENTS OF OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

(Dollars in thousands)

2008

 

2007

 

2006

 

 

 

 

 

 

REVENUES:

 

 

 

 

 

Net investment income

$        11,863

 

$        17,756

 

$          2,793

Net realized capital (losses) gains

(87,786)

 

12,207

 

-

Other expense

(186)

 

(148)

 

(94)

Net (loss) income of subsidiaries

(23,542)

 

345,936

 

381,135

Total revenues

(99,651)

 

375,751

 

383,834

 

 

 

 

 

 

EXPENSES:

 

 

 

 

 

Interest expense

78,979

 

91,059

 

69,696

Other expense

3,219

 

3,456

 

1,782

Total expenses

82,198

 

94,515

 

71,478

 

 

 

 

 

 

(LOSS) INCOME BEFORE TAXES

(181,849)

 

281,236

 

312,356

Income tax benefit

(57,092)

 

(22,955)

 

(20,550)

 

 

 

 

 

 

NET (LOSS) INCOME

$   (124,757)

 

$     304,191

 

$     332,906

 

 

 

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements.

S-3

SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF THE

 

 

 

 

REGISTRANT CONDENSED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

(Dollars in thousands)

2008

 

2007

 

2006

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net (loss) income

$    (124,757)

 

$      304,191

 

$         332,906

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

   Equity in retained earnings of subsidiaries

  23,542

 

 (345,936)

 

  (381,135)

   Dividends received from subsidiaries

  285,000

 

 245,000

 

  100,000

   Change in other assets and liabilities

  2,657

 

 5,151

 

  1,836

   Increase in accrued interest on debt and borrowings

  -

 

 1,176

 

  -

   Decrease (increase) in federal income tax recoverable

  8,110

 

 (44,830)

 

  (7,050)

   (Increase) decrease in deferred tax asset

  (26,383)

 

 4,290

 

  4,103

   (Decrease) increase in due to/from affiliates

  (463)

 

 988

 

 (722)

   Accrual of bond discount

  -

 

 (7,255)

 

  -

   Amortization of underwriting discount on senior notes

  179

 

 164

 

  149

   Realized capital losses (gains)

  87,786

 

 (12,207)

 

  -

Net cash provided by operating activities

  255,671

 

 150,732

 

   50,087

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Additional investment in subsidiaries

  -

 

 -

 

   (1,925)

Proceeds from equity securities sold-available for sale, market value

 -

 

 6,496

 

   -

Net change of short-term securities

  (95,556)

 

 (94,229)

 

   (48,137)

Cost to aquire other invested assets

  (150,747)

 

 (241,584)

 

 -

Net cash used in investing activities

  (246,303)

 

 (329,317)

 

  (50,062)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Dividends to stockholder

  (10,000)

��

 -

 

  -

Redemption of junior subordinated debt securities

  -

 

 (216,496)

 

  -

Net proceeds from issuance of long term subordinated notes

  -

 

 395,637

 

  -

Tax benefit from share-based compensation

  -

 

 -

 

  113

Net cash (used in) provided by financing activities

  (10,000)

 

 179,141

 

  113

 

 

 

 

 

 

Net (decrease) increase in cash

  (632)

 

 556

 

  138

Cash, beginning of period

  916

 

 360

 

  222

Cash, end of period

$              284

 

$             916

 

$                360

 

 

 

 

 

 

Non-cash financing transaction:

 

 

 

 

 

   Non-cash contribution from parent

$            5,565

 

$          9,442

 

$             8,370

   Non-cash contribution to subsidiaries

$         (5,565)

$       (9,442)

$          (8,370)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements.

 

 

 

 

 

S-4

 
  2011
(Dollars in thousands) 1st Quarter  2nd Quarter  3rd Quarter  4th Quarter 
             
Operating data:            
Gross written premiums $886,399  $811,508  $923,180  $937,431 
Net written premiums  460,083   410,002   439,835   444,093 
                 
Premiums earned  459,393   452,050   442,862   439,550 
Net investment income  87,132   84,459   78,325   63,017 
Net realized capital gains (losses)  40,476   (68,184)  (179,036)  165,628 
Total claims and underwriting expenses  679,757   432,337   435,649   822,846 
Net income (loss)  (97,533)  8,807   261   (114,356)

EVEREST REINSURANCE HOLDINGS, INC.

 

 

 

 

 

 

 

SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Column A

Column B

Column C

Column D

Column E

Column F

Column G

Column H

Column I

Column J

 

 

Reserve

 

 

 

Incurred

 

 

 

Geographic Area            

 

for Losses

 

 

 

Loss and

Amortization

 

 

 

Deferred

and Loss

Unearned

 

Net

Loss

of Deferred

Other

Net

 

Acquisition

Adjustment

Premium

Premiums

Investment

Adjustment

Acquisition

Operating

Written

(Dollars in thousands)

Costs

Expenses

Reserves

Earned

Income

Expenses

Costs

Expenses

Premium

December 31, 2008

 

 

 

 

 

 

 

 

 

   Domestic

$       137,021

$    6,279,851

$       962,884

$       1,336,203

$          323,896

$     1,098,445

$         268,863

$         110,146

$      1,136,266

   International

55,075

1,140,142

213,950

545,579

39,157

367,115

129,747

19,780

539,096

       Total

$       192,096

$    7,419,993

$    1,176,834

$       1,881,782

$          363,053

$     1,465,560

$         398,610

$         129,926

$      1,675,362

 

 

 

 

 

 

 

 

 

 

December 31, 2007

 

 

 

 

 

 

 

 

 

   Domestic

$       182,501

$    6,383,401

$    1,159,409

$       1,620,744

$          367,646

$     1,167,888

$         339,167

$         105,283

$      1,519,963

   International

52,218

1,155,303

208,687

558,156

38,946

339,686

126,745

18,633

552,963

       Total

$       234,719

$    7,538,704

$    1,368,096

$       2,178,900

$          406,592

$     1,507,574

$         465,912

$         123,916

$      2,072,926

 

 

 

 

 

 

 

 

 

 

December 31, 2006

 

 

 

 

 

 

 

 

 

   Domestic

$       189,060

$    6,430,793

$    1,228,509

$       1,728,363

$          339,388

$     1,278,549

$         320,383

$          84,899

$      1,758,427

   International

51,286

966,477

195,168

518,837

32,964

278,530

118,122

13,830

531,834

       Total

$       240,346

$    7,397,270

$    1,423,677

$       2,247,200

$          372,352

$     1,557,079

$         438,505

$          98,729

$      2,290,261

  2010
(Dollars in thousands) 1st Quarter  2nd Quarter  3rd Quarter  4th Quarter 
             
Operating data:            
Gross written premiums $813,482  $846,009  $973,659  $834,606 
Net written premiums  413,377   435,143   497,873   442,318 
                 
Premiums earned  414,134   442,724   465,302   491,663 
Net investment income  85,107   89,346   74,212   101,679 
Net realized capital gains (losses)  (5,307)  (95,473)  159,569   6,502 
Total claims and underwriting expenses  527,559   438,317   445,610   540,857 
Net income (loss)  (44,929)  16,887   168,652   124,787 

SCHEDULE IV - REINSURANCE                                   

 

 

 

 

 

 

 

 

 

 

 

Column A

Column B

Column C

Column D

Column E

Column F

 

 

Ceded to

Assumed

 

 

 

Gross

Other

from Other

Net

Assumed

(Dollars in thousands)

Amount

Companies

Companies

Amount

to Net

 

 

 

 

 

 

December 31, 2008

 

 

 

 

 

   Total property and liability

 

 

 

 

 

       insurance premiums earned

$      839,251

$   1,192,850

$   2,235,381

$   1,881,782

118.8%

 

 

 

 

 

 

December 31, 2007

 

 

 

 

 

   Total property and liability

 

 

 

 

 

       insurance premiums earned

$      899,328

$   1,043,126

$   2,322,698

$   2,178,900

106.6%

 

 

 

 

 

 

December 31, 2006

 

 

 

 

 

   Total property and liability

 

 

 

 

 

       insurance premiums earned

$      961,133

$      902,994

$   2,189,061

$   2,247,200

97.4%



F-44

SCHEDULE I – SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2011


Column A Column B  Column C  Column D 
        Amount 
        Shown in 
     Market  Balance 
(Dollars in thousands) Cost  Value  Sheet 
Fixed maturities-available for sale         
Bonds:         
U.S. government and government agencies $77,351  $79,539  $79,539 
State, municipalities and political subdivisions  1,558,615   1,660,905   1,660,905 
Foreign government securities  733,814   788,649   788,649 
Foreign corporate securities  670,544   689,041   689,041 
Public utilities  67,755   71,565   71,565 
All other corporate bonds  1,138,227   1,165,257   1,165,257 
Mortgage - backed securities            
Commercial  41,953   47,874   47,874 
Agency residential  528,946   543,393   543,393 
Non-agency residential  24,139   24,289   24,289 
Redeemable preferred stock  39,310   36,516   36,516 
Total fixed maturities-available for sale  4,880,654   5,107,028   5,107,028 
Fixed maturities - available for sale, at fair value(1)
  113,859   113,606   113,606 
Equity securities - available for sale, at market value  15   10   10 
Equity securities - available for sale, at fair value(1)
  1,128,810   1,207,053   1,207,053 
Short-term investments  423,663   423,663   423,663 
Other invested assets  379,342   379,342   379,342 
Other invested assets, at fair value (1)
  835,371   817,352   817,352 
Cash  348,267   348,267   348,267 
             
Total investments and cash $8,109,981  $8,396,321  $8,396,321 
(1)Original cost does not reflect adjustments, which have been realized through the statements of operations and comprehensive income.




SCHEDULE II – CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
CONDENSED BALANCE SHEETS




  At December 31, 
(Dollars and share amounts in thousands, except par value per share) 2011  2010 
ASSETS:      
Fixed maturities - available for sale, at market value $15,065  $813 
(amortized cost: 2011, $15,103; 2010, $800)        
Equity securities - available for sale, at fair value  43,896   69,608 
Other invested assets, at market value  12,943   12,943 
Other invested assets, at fair value  817,352   788,142 
Short-term investments  44,489   122,105 
Cash  327   1,369 
Total investments and cash  934,072   994,980 
Investment in subsidiaries, at equity in the underlying net assets  2,763,172   2,929,526 
Accrued investment income  244   1 
Federal income taxes recoverable  43,381   90,146 
Other assets  40,617   11,213 
TOTAL ASSETS $3,781,486  $4,025,866 
         
LIABILITIES:        
Revolving credit borrowings $-  $50,000 
5.4% Senior notes due 10/15/2014  249,858   249,812 
6.6% Long term notes due 5/1/2067  238,354   238,351 
Junior subordinated debt securities payable  329,897   329,897 
Accrued interest on debt and borrowings  4,781   4,793 
Deferred tax liability  13,855   24,178 
Due to subsidiaries  914   667 
Other liabilities  2,434   427 
Total liabilities  840,093   898,125 
         
STOCKHOLDER'S EQUITY:        
Common stock, par value:  $0.01; 3,000 shares authorized;        
1,000 shares issued and outstanding (2011 and 2010)  -   - 
Additional paid-in capital  333,416   327,767 
Accumulated other comprehensive income (loss), net of deferred income        
tax expense (benefit) of $94,118 at 2011 and $88,289 at 2010  174,790   163,966 
Retained earnings  2,433,187   2,636,008 
Total stockholder's equity  2,941,393   3,127,741 
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $3,781,486  $4,025,866 
         
See notes to consolidated financial statements.        



SCHEDULE II – CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS




  Years Ended December 31,
(Dollars in thousands) 2011  2010  2009 
REVENUES:         
Net investment income $21,619  $15,436  $9,567 
Net realized capital gains (losses)  (1,789)  25,070   40,000 
Realized gain on debt repurchase  -   -   78,271 
Other income (expense)  (191)  (227)  (207)
Net income (loss) of subsidiaries  (181,912)  245,753   360,065 
Total revenues  (162,273)  286,032   487,696 
             
EXPENSES:            
Interest expense  50,736   54,496   70,855 
Corporate expense  3,353   3,462   3,609 
Total expenses  54,089   57,958   74,464 
             
INCOME (LOSS) BEFORE TAXES  (216,362)  228,074   413,232 
Income tax expense (benefit)  (13,541)  (37,323)  17,381 
             
NET INCOME (LOSS) $(202,821) $265,397  $395,851 
             
See notes to consolidated financial statements.            



SCHEDULE II – CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
CONDENSED STATEMENTS OF CASH FLOW


  Years Ended December 31,
(Dollars in thousands) 2011  2010  2009 
          
CASH FLOWS FROM OPERATING ACTIVITIES:         
Net income (loss) $(202,821) $265,397  $395,851 
Adjustments to reconcile net income to net cash provided by operating activities:            
Equity in (earnings) deficit of subsidiaries  181,912   (245,753)  (360,065)
Dividends received from subsidiaries  75,000   590,000   60,000 
Increase (decrease) in accrued interest on debt and borrowings  (13)  (5,091)  (1,332)
Decrease (increase) in federal income tax recoverable  46,765   (26,913)  (17,102)
Decrease (increase) in deferred tax asset  (10,306)  4,889   41,377 
Change in other assets and liabilities, net  (27,391)  5,232   (2,301)
Amortization of bond premium (accrual of bond discount)  80   571   58 
Amortization of underwriting discount on senior notes  49   76   192 
Realized gain on debt repurchase  -   -   (78,271)
Net realized capital losses (gains)  1,789   (25,070)  (40,000)
Net cash provided by (used in) operating activities  65,064   563,338   (1,593)
             
CASH FLOWS FROM INVESTING ACTIVITIES:            
Additional investment in subsidiaries    (19,051)    -    - 
Proceeds from fixed maturities matured/called - available for sale, at market value  394   7,581   - 
Proceeds from fixed maturities sold - available for sale, at market value  -   124,957   - 
Proceeds from equity maturities sold - available for sale, at fair value  32,323   20,842   - 
Cost of fixed maturities acquired - available for sale, at market value  (14,777)  (800)  (133,353)
Cost of equity securities acquired - available for sale, at fair value  -   (71,161)  (19,993)
Cost of other invested assets acquired, at fair value  (37,611)  (379,591)  (25,841)
Cost of business acquired  (55,000)  -   - 
Net change in short-term investments  77,616   (115,056)  264,781 
Net cash provided by (used in) investing activities  (16,106)   (413,228)  85,594 
             
CASH FLOWS FROM FINANCING ACTIVITIES:            
Dividends to stockholder  -   -   - 
Net cost of senior notes maturing  -   (200,000)  - 
Revolving credit borrowings  (50,000)  50,000   - 
Net cost of debt repurchase  -   -   (83,026)
Net cash provided by (used in) financing activities  (50,000)  (150,000)  (83,026)
             
Net increase (decrease) in cash  (1,042)  110   975 
Cash, beginning of period  1,369   1,259   284 
Cash, end of period $327  $1,369  $1,259 
             
Non-cash financing transaction:            
Non-cash contribution from parent $5,650  $6,582  $5,414 
Non-cash contribution to subsidiaries  (5,650)  (6,582)  (5,414)
             
See notes to consolidated financial statements.            


SCHEDULE III – SUPPLEMENTARY INSURANCE INFORMATION


Column A Column B  Column C  Column D  Column E  Column F  Column G  Column H  Column I  Column J 
     Reserve           Incurred          
 Geographic Area    for Losses           Loss and  Amortization       
  Deferred  and Loss  Unearned     Net  Loss  of Deferred  Other  Net 
  Acquisition  Adjustment  Premium  Premiums  Investment  Adjustment  Acquisition  Operating  Written 
 (Dollars in thousands) Costs  Expenses  Reserves  Earned  Income  Expenses  Costs  Expenses  Premium 
December 31, 2011                           
Domestic $93,950  $6,099,606  $976,332  $1,157,174  $260,923  $1,021,472  $196,382  $127,024  $1,138,947 
International  72,856   2,191,013   263,373   636,681   52,010   856,131   142,273   27,307   615,064 
Total $166,806  $8,290,619  $1,239,705  $1,793,855  $312,933  $1,877,603  $338,655  $154,331  $1,754,011 
                                     
December 31, 2010                                    
Domestic $104,862  $5,944,708  $998,755  $1,187,528  $306,256  $915,578  $198,895  $112,186  $1,147,352 
International  79,385   1,707,595   288,721   626,295   44,088   561,872   136,166   27,646   641,359 
Total $184,247  $7,652,303  $1,287,476  $1,813,823  $350,344  $1,477,450  $335,061  $139,832  $1,788,711 
                                     
December 31, 2009                                    
Domestic $114,937  $5,952,679  $988,901  $1,198,357  $224,405  $758,501  $212,913  $119,527  $1,145,587 
International  68,561   1,347,460   250,419   586,703   37,681   333,175   131,664   23,083   589,714 
Total $183,498  $7,300,139  $1,239,320  $1,785,060  $262,086  $1,091,676  $344,577  $142,610  $1,735,301 



SCHEDULE IV – REINSURANCE
Column A Column B  Column C  Column D  Column E  Column F 
     Ceded to  Assumed       
  Gross  Other  from Other  Net  Assumed 
(Dollars in thousands) Amount  Companies  Companies  Amount  to Net 
                
December 31, 2011               
Total property and liability               
insurance premiums earned $867,340  $1,808,250  $2,734,765  $1,793,855   152.5%
                     
December 31, 2010                    
Total property and liability                    
insurance premiums earned $823,734  $1,612,615  $2,602,704  $1,813,823   143.5%
                     
December 31, 2009                    
Total property and liability                    
insurance premiums earned $808,634  $1,495,241  $2,471,667  $1,785,060   138.5%


S-6