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

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED:
SEPTEMBERJune 30, 20092010
 
Commission file number:
1-14527

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

(Address, including zip code, and telephone number, including area code,
of registrant’s principal executive office)

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

YESX NO 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website,Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES  NO 

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

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

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

YES  NOX

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

  Number of Shares Outstanding
Class At NovemberAugust 1, 20092010
Common Shares, $0.01 par value 1,000

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

 
 
 

EVEREST REINSURANCE HOLDINGS, INC.

Table of Contents
Form 10-Q


Page
PART I

FINANCIAL INFORMATION

EVEREST REINSURANCE HOLDINGS, INC.
Table of Contents
Form 10-Q
Page
PART I
FINANCIAL INFORMATION
     
Item 1. Financial Statements 
     
  
Consolidated Balance Sheets at SeptemberJune 30, 20092010 (unaudited) and
 
   
December 31, 20082009
1
    
  
Consolidated Statements of Operations and Comprehensive Income (Loss) for
 
   
the three and ninesix months ended SeptemberJune 30, 20092010 and 20082009 (unaudited)
2
     
  
Consolidated Statements of Changes in Stockholder’s Equity for the three and
 
   
and ninesix months ended SeptemberJune 30, 20092010 and 20082009 (unaudited)
3
     
  
Consolidated Statements of Cash Flows for the three and ninesix months ended
 
   
ended SeptemberJune 30, 20092010 and 20082009 (unaudited)
4
     
  
Notes to Consolidated Interim Financial Statements (unaudited)
5
     
Item 2. 
Management’s Discussion and Analysis of Financial Condition and
 
   
Results of Operation
2526
    
Item 3. 
Quantitative and Qualitative Disclosures About Market Risk
4445
     
Item 4. 
Controls and Procedures
4445
     
PART II
OTHER INFORMATION

PART II

OTHER INFORMATION

     
Item 1. 
Legal Proceedings
4445
     
Item 1A. 
Risk Factors
4445
    
Item 2. 
Unregistered Sales of Equity Securities and Use of Proceeds
4445
    
Item 3. 
Defaults Upon Senior Securities
4445
    
Item 4. 
Submission of Matters to a Vote of Security HoldersReserved
4445
    
Item 5. 
Other Information
4546
    
Item 6. 
Exhibits
4546



 

Part I

ITEM  1.  FINANCIAL STATEMENTS

EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS


 September 30, December 31, June 30,  December 31, 
(Dollars in thousands, except par value per share) 2009 2008 2010  2009 
 (unaudited)    (unaudited)   
ASSETS:            
Fixed maturities - available for sale, at market value $6,363,908  $5,511,856  $6,393,011  $6,463,168 
(amortized cost: 2009, $6,090,136; 2008, $5,610,483)        
(amortized cost: 2010, $6,133,003; 2009, $6,255,759)        
Fixed maturities - available for sale, at fair value  52,815   43,090   66,351   50,528 
Equity securities - available for sale, at market value (cost: 2009, $15; 2008, $15)  12   16 
Equity securities - available for sale, at market value (cost: 2010, $15; 2009, $15)  12   13 
Equity securities - available for sale, at fair value  158,456   119,815   340,377   380,025 
Short-term investments  645,096   918,712   251,820   261,438 
Other invested assets (cost: 2009, $365,500; 2008, $400,498)  363,205   392,589 
Other invested assets (cost: 2010, $399,989; 2009, $387,200)  399,611   386,326 
Other invested assets, at fair value  364,841   316,750   545,160   382,639 
Cash  125,128   92,264   106,847   107,480 
Total investments and cash  8,073,461   7,395,092   8,103,189   8,031,617 
Accrued investment income  79,124   82,860   78,687   83,705 
Premiums receivable  768,273   714,035   746,384   769,744 
Reinsurance receivables - unaffiliated  606,226   637,890   635,129   618,081 
Reinsurance receivables - affiliated  2,526,007   2,480,016   2,690,402   2,492,152 
Funds held by reinsureds  158,366   147,287   156,702   156,223 
Deferred acquisition costs  186,828   192,096   179,454   183,498 
Prepaid reinsurance premiums  557,751   456,180   578,606   562,146 
Deferred tax asset  290,211   518,042   245,231   210,493 
Federal income tax recoverable  13,992   70,299 
Federal income taxes recoverable  67,238   135,682 
Other assets  121,548   172,825   196,985   136,234 
TOTAL ASSETS $13,381,787  $12,866,622  $13,678,007  $13,379,575 
                
LIABILITIES:                
Reserve for losses and loss adjustment expenses $7,246,981  $7,419,993  $7,583,530  $7,300,139 
Unearned premium reserve  1,274,240   1,176,834   1,247,378   1,239,320 
Funds held under reinsurance treaties  155,096   134,698   159,451   175,257 
Losses in the course of payment  49,051   35,805   23,663   42,633 
Commission reserves  37,927   45,531   42,432   50,897 
Other net payable to reinsurers  479,454   378,800   529,226   444,535 
Revolving credit borrowings  133,000   - 
8.75% Senior notes due 3/15/2010  199,931   199,821   -   199,970 
5.4% Senior notes due 10/15/2014  249,759   249,728   249,790   249,769 
6.6% Long term notes due 05/01/2067  238,347   399,643   238,349   238,348 
Junior subordinated debt securities payable  329,897   329,897   329,897   329,897 
Accrued interest on debt and borrowings  12,821   11,217   4,892   9,885 
Unsettled securities payable  45,915   1,476 
Other liabilities  231,856   280,211   266,151   240,151 
Total liabilities  10,551,275   10,663,654   10,807,759   10,520,801 
                
Commitments and Contingencies (Note 6)                
                
STOCKHOLDER'S EQUITY:                
Common stock, par value: $0.01; 3,000 shares authorized;                
1,000 shares issued and outstanding (2009 and 2008)  -   - 
1,000 shares issued and outstanding (2010 and 2009)  -   - 
Additional paid-in capital  319,887   315,771   324,156   321,185 
Accumulated other comprehensive income (loss), net of deferred income tax expense of        
$105.7 million at 2009 and tax benefit of $38.8 million at 2008  197,560   (72,063)
Retained earnings  2,313,065   1,959,260 
Accumulated other comprehensive income (loss), net of deferred income tax expense (benefit) of        
$109.6 million at 2010 and $89.9 million at 2009  203,523   166,978 
Retained earnings (deficit)  2,342,569   2,370,611 
Total stockholder's equity  2,830,512   2,202,968   2,870,248   2,858,774 
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $13,381,787  $12,866,622  $13,678,007  $13,379,575 
                
The accompanying notes are an integral part of the consolidated financial statements.                



1

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



 Three Months Ended Nine Months Ended Three Months Ended  Six Months Ended 
 September 30, September 30, June 30,  June 30, 
(Dollars in thousands) 2009 2008 2009 2008 2010  2009  2010  2009 
 (unaudited) (unaudited) (unaudited) (unaudited)
REVENUES:                        
Premiums earned $438,320  $449,892  $1,337,539  $1,421,336  $442,724  $460,774  $856,858  $899,219 
Net investment income  65,492   97,305   179,667   292,263   89,346   74,516   174,453   114,175 
Net realized capital gains (losses):                                
Other-than-temporary impairments on fixed maturity securities  -   (63,793)  (5,510)  (67,854)  -   (4,936)  -   (5,510)
Other-than-temporary impairments on fixed maturity securities                                
transferred to other comprehensive income  -   -   -   - 
transferred to other comprehensive income (loss)  -   -   -   - 
Other net realized capital gains (losses)  101,394   (44,859)  61,661   (193,493)  (95,473)  27,877   (100,780)  (39,733)
Total net realized capital gains (losses)  101,394   (108,652)  56,151   (261,347)  (95,473)  22,941   (100,780)  (45,243)
Realized gain on debt repurchase  -   -   78,271   -   -   -   -   78,271 
Other income (expense)  15,081   7,951   7,801   (16,039)  8,709   (7,166)  13,821   (7,280)
Total revenues  620,287   446,496   1,659,429   1,436,213   445,306   551,065   944,352   1,039,142 
                                
CLAIMS AND EXPENSES:                                
Incurred losses and loss adjustment expenses  241,992   446,996   777,295   1,115,813   314,749   246,108   741,753   535,303 
Commission, brokerage, taxes and fees  77,259   73,816   252,401   295,270   88,197   86,923   156,038   175,142 
Other underwriting expenses  39,864   32,769   109,226   95,794   35,371   34,858   68,085   66,166 
Corporate expenses  1,463   1,878   3,689   3,196 
Interest, fee and bond issue cost amortization expense  17,073   19,745   53,779   59,233   12,722   17,073   29,062   36,706 
Total claims and expenses  376,188   573,326   1,192,701   1,566,110   452,502   386,840   998,627   816,513 
                                
INCOME (LOSS) BEFORE TAXES  244,099   (126,830)  466,728   (129,897)  (7,196)  164,225   (54,275)  222,629 
Income tax expense (benefit)  79,958   (47,931)  128,423   (69,290)  (24,083)  35,725   (26,233)  48,465 
                                
NET INCOME (LOSS) $164,141  $(78,899) $338,305  $(60,607) $16,887  $128,500  $(28,042) $174,164 
                                
Other comprehensive income (loss), net of tax  162,343   (145,996)  285,123   (223,813)  24,799   84,300   36,545   122,780 
                                
COMPREHENSIVE INCOME (LOSS) $326,484  $(224,895) $623,428  $(284,420) $41,686  $212,800  $8,503  $296,944 
                                
The accompanying notes are an integral part of the consolidated financial statements.                                

2

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


 Three Months Ended Nine Months Ended Three Months Ended  Six Months Ended 
 September 30, September 30, June 30,  June 30, 
(Dollars in thousands, except share amounts) 2009 2008 2009 2008 2010  2009  2010  2009 
 (unaudited) (unaudited) (unaudited) (unaudited)
COMMON STOCK (shares outstanding):                        
Balance, beginning of period  1,000   1,000   1,000   1,000   1,000   1,000   1,000   1,000 
Balance, end of period  1,000   1,000   1,000   1,000   1,000   1,000   1,000   1,000 
                                
ADDITIONAL PAID-IN CAPITAL:                                
Balance, beginning of period $318,492  $312,924  $315,771  $310,206  $322,459  $317,033  $321,185  $315,771 
Share-based compensation plans  1,395   1,671   4,116   4,389   1,697   1,459   2,971   2,721 
Balance, end of period  319,887   314,595   319,887   314,595   324,156   318,492   324,156   318,492 
                                
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS),                                
NET OF DEFERRED INCOME TAXES:                                
Balance, beginning of period  35,217   85,459   (72,063)  163,276   178,724   (33,583)  166,978   (72,063)
Cumulative adjustment of initial adoption(1), net of tax
  -   -   (15,500)  -   -   (15,500)  -   (15,500)
Net increase (decrease) during the period  162,343   (145,996)  285,123   (223,813)  24,799   84,300   36,545   122,780 
Balance, end of period  197,560   (60,537)  197,560   (60,537)  203,523   35,217   203,523   35,217 
                                
RETAINED EARNINGS:                
RETAINED EARNINGS (DEFICIT):                
Balance, beginning of period  2,148,924   2,112,309   1,959,260   2,094,017   2,325,682   2,004,924   2,370,611   1,959,260 
Cumulative adjustment of initial adoption(1), net of tax
  -   -   15,500   -   -   15,500   -   15,500 
Net income (loss)  164,141   (78,899)  338,305   (60,607)  16,887   128,500   (28,042)  174,164 
Balance, end of period  2,313,065   2,033,410   2,313,065   2,033,410   2,342,569   2,148,924   2,342,569   2,148,924 
                                
TOTAL STOCKHOLDER'S EQUITY, END OF PERIOD $2,830,512  $2,287,468  $2,830,512  $2,287,468  $2,870,248  $2,502,633  $2,870,248  $2,502,633 
                                
(1) The cumulative adjustment to accumulated other comprehensive income (loss), net of deferred income taxes and retained earnings represents the effect of initially adopting ASC 320-10-65-1
        
(FASB Staff Position No. FAS 115-2 and FAS 124-2, "Recognition and Presentation of Other-Than-Temporary Impairments").                
(1) The cumulative adjustment to accumulated other comprehensive income (loss), net of deferred income taxes, and retained earnings (deficit), represents the effect of initially
(1) The cumulative adjustment to accumulated other comprehensive income (loss), net of deferred income taxes, and retained earnings (deficit), 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.The accompanying notes are an integral part of the consolidated financial statements.             The accompanying notes are an integral part of the consolidated financial statements.             




3

EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS


 Three Months Ended Nine Months Ended Three Months Ended  Six Months Ended 
 September 30, September 30, June 30,  June 30, 
(Dollars in thousands) 2009 2008 2009 2008 2010  2009  2010  2009 
 (unaudited) (unaudited) (unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:                        
Net income (loss) $164,141  $(78,899) $338,305  $(60,607) $16,887  $128,500  $(28,042) $174,164 
Adjustments to reconcile net income to net cash provided by operating activities:                                
(Increase) decrease in premiums receivable  (1,371)  (3,405)  (51,192)  45,932 
Decrease (increase) in premiums receivable  21,553   (61,149)  24,883   (49,821)
Decrease (increase) in funds held by reinsureds, net  9,624   (221)  9,459   (1,237)  (18,472)  (671)  (16,262)  (165)
Decrease (increase) in reinsurance receivables  146,809   (48,135)  (6,656)  (118,746)  (18,620)  (100,495)  (227,797)  (153,465)
Decrease (increase) in deferred tax asset  41,994   61,482   74,970   (30,155)  (46,121)  (928)  (54,415)  32,976 
(Decrease) increase in reserve for losses and loss adjustment expenses  (35,920)  194,584   (218,365)  154,284 
Increase (decrease) in reserve for losses and loss adjustment expenses  (12,762)  (133,909)  290,352   (182,445)
Increase (decrease) in unearned premiums  95,297   7,476   91,611   (134,529)  (10,237)  (2,807)  7,142   (3,686)
Change in equity adjustments in limited partnerships  4,423   6,167   36,548   (9,095)  (8,882)  (1,968)  (18,296)  32,125 
Change in other assets and liabilities, net  (161,038)  (79,464)  83,477   (12,364)  18,454   243,408   126,429   244,515 
Non-cash compensation expense  1,384   1,201   4,091   3,834   1,685   1,445   2,880   2,707 
Amortization of bond premium  3,824   3,141   8,802   5,809 
Amortization of bond premium (accrual of bond discount)  1,071   2,707   4,617   4,978 
Amortization of underwriting discount on senior notes  48   45   142   133   11   48   53   94 
Realized gain on debt repurchase  -   -   (78,271)  -   -   -   -   (78,271)
Net realized capital (gains) losses  (101,394)  108,652   (56,151)  261,347   95,473   (22,941)  100,780   45,243 
Net cash provided by operating activities  167,821   172,624   236,770   104,606 
Net cash provided by (used in) operating activities  40,040   51,240   212,324   68,949 
                                
CASH FLOWS FROM INVESTING ACTIVITIES:                                
Proceeds from fixed maturities matured/called - available for sale, at market value  130,349   106,558   324,432   370,220   136,606   84,848   308,869   194,083 
Proceeds from fixed maturities matured/called - available for sale, at fair value  -   -   5,570   -   -   -   -   5,570 
Proceeds from fixed maturities sold - available for sale, at market value  34,602   52,180   87,696   138,326   206,078   8,316   371,563   53,094 
Proceeds from fixed maturities sold - available for sale, at fair value  4,010   -   12,012   -   6,115   4,510   8,612   8,002 
Proceeds from equity securities sold - available for sale, at market value  23,028   -   23,028   - 
Proceeds from equity securities sold - available for sale, at fair value  11,310   151,801   23,535   380,856   51,400   10,591   72,742   12,225 
Distributions from other invested assets  4,448   30,035   24,573   41,246   15,715   7,832   23,880   20,125 
Cost of fixed maturities acquired - available for sale, at market value  (256,130)  (64,455)  (865,910)  (1,343,983)  (280,050)  (348,542)  (555,576)  (609,780)
Cost of fixed maturities acquired - available for sale, at fair value  (2,548)  (11,444)  (19,101)  (11,444)  (9,487)  (3,243)  (23,681)  (16,553)
Cost of equity securities acquired - available for sale, at fair value  (12,948)  (115,399)  (32,244)  (156,363)  (30,140)  (10,320)  (50,879)  (19,296)
Cost of other invested assets acquired  (9,780)  (35,804)  (26,122)  (55,908)  (8,634)  (13,780)  (18,374)  (16,342)
Cost of other invested assets acquired, at fair value  -   (25,007)  -   (150,745)  (200,079)  -   (247,111)  - 
Net change in short-term securities  (86,179)  (197,914)  284,738   687,541 
Net change in short-term investments  (2,164)  182,051   9,921   370,917 
Net change in unsettled securities transactions  18,522   (58,944)  42,856   (64,654)  (51,843)  22,688   (35,520)  24,334 
Net cash used in investing activities  (141,316)  (168,393)  (114,937)  (164,908)
Net cash provided by (used in) investing activities  (166,483)  (55,049)  (135,554)  26,379 
                                
CASH FLOWS FROM FINANCING ACTIVITIES:                                
Tax benefit from share-based compensation  11   469   25   554   12   14   91   14 
Net cost of senior notes maturing  -   -   (200,000)  - 
Revolving credit borrowings  133,000   -   133,000   - 
Net cost of debt repurchase  -   -   (83,026)  -   -   -   -   (83,026)
Net cash provided by (used in) financing activities  11   469   (83,001)  554   133,012   14   (66,909)  (83,012)
                                
EFFECT OF EXCHANGE RATE CHANGES ON CASH  3,411   (8,130)  (5,968)  13,772   (7,459)  3,388   (10,494)  (9,379)
                                
Net increase (decrease) in cash  29,927   (3,430)  32,864   (45,976)  (890)  (407)  (633)  2,937 
Cash, beginning of period  95,201   103,901   92,264   146,447   107,737   95,608   107,480   92,264 
Cash, end of period $125,128  $100,471  $125,128  $100,471  $106,847  $95,201  $106,847  $95,201 
                                
SUPPLEMENTAL CASH FLOW INFORMATION:                                
Cash transactions:                                
Income taxes recovered $(18,847) $(107,359) $(2,488) $(49,014)
Income taxes paid (recovered) $(53,156) $13,213  $(49,390) $16,359 
Interest paid $13,892  $13,887  $51,464  $52,861   19,866   19,764   33,765   37,572 
                                
The accompanying notes are an integral part of the consolidated financial statements.                                


4

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

For the Three and NineSix Months Ended SeptemberJune 30, 20092010 and 20082009

1.  General

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

2. Basis of Presentation

2.BASIS OF PRESENTATION
The unaudited consolidated financial statements of the Company for the three and ninesix months ended SeptemberJune 30, 20092010 and 20082009 include all adjustments, consisting of normal recurring accruals, which, in the opinion of management, are necessary for a fair statement of the results on an interim basis.  Certain financial information, which is normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), has been omitted since it is not required for interim reporting purposes. The December 31, 20082009 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.  The results for the three and ninesix months ended SeptemberJune 30, 20092010 and 20082009 are not necessarilyneces sarily indicative of the results for a full year.  These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the years ended December 31, 2009, 2008 2007 and 20062007 included in the Company’s most recent Form 10-K filing.

All intercompany accounts and transactions have been eliminated.

Certain reclassifications and format changes have been made to prior years’ amounts to conform to the 2010 presentation.

Financial Accounting Standards Board Accounting Codification

Financial Accounting Standards Board Launched Accounting Codification

TheCodification.  In June 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 168, “The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles”. Thisauthoritative guidance establishesestablishing the FASB Accounting Standards CodificationTM (“Codification” or “ASC”) as the single source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmentalnon-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,no n-grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative.

Following the Codification, the FASB will notno 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 FASB’s Codification, but it will change the way the guidance is organized and presented.  As a result, these changes will have a significant impact on how companies reference GAAP in their financial statements and in the accounting policies for financial statements issued for interim and annual 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.

5

Application of Recently Issued Accounting Standard Changes

MeasurementSubsequent 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 Inactive Markets. 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.  Effective for interim and annual reporting periods beginning after December 15, 2010, the guidance requires another new separate disclosure in regards to Level 3 fair value measurements in that, the period activity will present separately information about purchases, sales, issuances and settlements.  Comparative disclosures shall be required only for periods ending after initial adoption.  The Company implemented the first part of this guidance effective January 1, 2010.ASC 820-10-65-4 (FSP No. FAS 157-4 “Determining

Interim Disclosures About Fair Value Whenof Financial Instruments.  In April 2009, the Volume and Level of ActivityFASB revised the authoritative guidance for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”) reaffirms thatdisclosures about fair value isof financial instruments.  This new guidance requires quarterly disclosures on the price that would be receivedqualitative and quantitative information about the fair value of all financial instruments including methods and significant assumptions used to sell an asset or paidestimate fair value during the period. These disclosures were previously only done annually.  The Company adopted this disclosure beginning with the second quarter of 2009 and included it in the Notes 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.Consolidated Interim Financial Statements.


Other-Than-Temporary Impairments on Investment Securities.  ASC 320-10-65-1 (FSP No. FAS 115-2In April 2009, the FASB revised the authoritative guidance for the recognition and FAS 124-2 “Recognition and Presentationpresentation of Other-Than-Temporary Impairments”)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 otherot her comprehensive income.  The Company adopted ASC 320-10-65-1this guidance effective April 1, 2009.  Upon adoption the Company recognized a $15.5 million cumulative-effect adjustment fromincrease in retained earnings (deficit) and decrease in accumulated other comprehensive income (loss) of $15.5 million, net of $8.3 million of tax.

Interim Disclosures aboutMeasurement of Fair Value of Financial Instruments.in Inactive Markets.  ASC 825-10-65-1 (FSP FAS 107-1 and FSP APB 28-1 “Interim Disclosures about Fair Value of Financial Instruments”) requires quarterly disclosures onIn April 2009, the qualitative and quantitative information aboutFASB revised the authoritative guidance for fair value of all financial instruments including methodsmeasurements and significant assumptions used to estimatedisclosures, which reaffirms that fair value duringis the period. These disclosures were previously only done annually. The Company included these disclosuresprice that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the second quarter 2009 Notesmeasurement date under current market conditions. It also reaffirms the need to Consolidated Interim Financial Statements.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.

Subsequent Events Disclosures. ASC 855-10-50 (FAS 165 “Subsequent Events”) requires a disclosure as to the date through which subsequent events have been evaluated as well as whether that date is the date the financial statements were issued. The Company included this disclosure in its second quarter 2009 Notes to Consolidated Interim Financial Statements.

Future Accounting Standard Changes

Fair Value Disclosures about Pension Plan Assets. ASC 715-20-65-2 (FSP FAS 132(R)-1 “Employers’ Disclosures about Postretirement Benefit Plan Assets”) requires that information about plan assets be disclosed, on an annual basis, based on the fair value disclosure requirements of ASC 820-10. The Company will be required to separate plan assets into the three fair value hierarchy levels and provide a roll forward of the changes in fair value of plan assets classified as Level 3 in the 2009 annual consolidated financial statements. These disclosures have no effect on the Company’s accounting for plan benefits and obligations.



3.  Investments

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

 At September 30, 2009  At June 30, 2010 
 Amortized  Unrealized  Unrealized  Market  Amortized  Unrealized  Unrealized  Market 
(Dollars in thousands) Cost  Appreciation  Depreciation  Value  Cost  Appreciation  Depreciation  Value 
Fixed maturity securities - available for sale                        
U.S. Treasury securities and obligations of                        
U.S. government agencies and corporations $128,645  $6,000  $(195) $134,450  $143,316  $7,565  $(89) $150,792 
Obligations of U.S. states and political subdivisions  3,747,780   231,278   (12,632)  3,966,426   3,469,450   181,595   (17,016)  3,634,029 
Corporate securities  605,130   30,468   (19,554)  616,044   716,311   40,259   (10,378)  746,192 
Asset-backed securities  17,646   545   (2,710)  15,481   28,733   505   (1,835)  27,403 
Mortgage-backed securities                                
Commercial  23,019   4,737   (114)  27,642   32,323   7,079   -   39,402 
Agency residential  418,666   12,495   (6)  431,155   419,199   19,424   (41)  438,582 
Non-agency residential  61,545   773   (11,465)  50,853   59,943   1,719   (224)  61,438 
Foreign government securities  595,855   32,203   (3,809)  624,249   705,682   30,964   (8,037)  728,609 
Foreign corporate securities  491,850   18,263   (12,505)  497,608   558,046   19,546   (11,028)  566,564 
Total fixed maturity securities $6,090,136  $336,762  $(62,990) $6,363,908  $6,133,003  $308,656  $(48,648) $6,393,011 
Equity securities $15  $-  $(3) $12  $15  $-  $(3) $12 

 At December 31, 2008  At December 31, 2009 
 Amortized  Unrealized  Unrealized  Market  Amortized  Unrealized  Unrealized  Market 
(Dollars in thousands) Cost  Appreciation  Depreciation  Value  Cost  Appreciation  Depreciation  Value 
Fixed maturity securities - available for sale                        
U.S. Treasury securities and obligations of                        
U.S. government agencies and corporations $139,776  $15,456  $-  $155,232  $132,348  $3,614  $(1,671) $134,291 
Obligations of U.S. states and political subdivisions  3,846,754   113,885   (164,921)  3,795,718   3,694,267   183,848   (24,256)  3,853,859 
Corporate securities  482,533   18,404   (64,620)  436,317   618,507   30,298   (13,424)  635,381 
Asset-backed securities  13,795   7   (4,441)  9,361   16,597   460   (1,909)  15,148 
Mortgage-backed securities                                
Commercial  6,516   -   (1,067)  5,449   24,213   4,956   (111)  29,058 
Agency residential  170,299   4,838   (33)  175,104   556,032   10,366   (1,691)  564,707 
Non-agency residential  54,816   -   (18,252)  36,564   61,098   916   (7,055)  54,959 
Foreign government securities  467,935   32,538   (7,776)  492,697   638,204   27,700   (6,687)  659,217 
Foreign corporate securities  428,059   6,602   (29,247)  405,414   514,493   17,184   (15,129)  516,548 
Total fixed maturity securities $5,610,483  $191,730  $(290,357) $5,511,856  $6,255,759  $279,342  $(71,933) $6,463,168 
Equity securities $15  $1  $-  $16  $15  $-  $(2) $13 


In accordance with ASC 320-10-65-1,FASB guidance, the Company reclassified previouslythe non-credit portion of other-than-temporary impairments from retained earnings (deficit) into accumulated other comprehensive income. Theincome (loss), on April 1, 2009.  At June 30, 2010, the pre-tax amount of this reclassificationcumulative unrealized appreciation on these corporate securities was $23.8$0.5 million all of which were corporate securities. At September 30, 2009, theas compared to pre-tax cumulative unrealized depreciation on these securities had improved and the remaining unrealized depreciation for the corporate securities was $3.3 million.of $2.0 million at December 31, 2009.


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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 totals for mortgage-backed and asset-backed securities are shown separately.

 At September 30, 2009  At June 30, 2010  At December 31, 2009 
 Amortized  Market  Amortized  Market  Amortized  Market 
(Dollars in thousands) Cost  Value  Cost  Value  Cost  Value 
Fixed maturity securities – available for sale                  
Due in one year or less $326,465  $326,275  $261,435  $261,286  $334,054  $335,948 
Due after one year through five years  1,155,583   1,200,003   1,519,591   1,571,631   1,276,968   1,316,918 
Due after five years through ten years  1,268,070   1,347,261   1,259,022   1,332,129   1,224,457   1,282,470 
Due after ten years  2,819,142   2,965,238   2,552,757   2,661,140   2,762,340   2,863,960 
Asset-backed securities  17,646   15,481   28,733   27,403   16,597   15,148 
Mortgage-backed securities                        
Commercial  23,019   27,642   32,323   39,402   24,213   29,058 
Agency residential  418,666   431,155   419,199   438,582   556,032   564,707 
Non-agency residential  61,545   50,853   59,943   61,438   61,098   54,959 
Total fixed maturity securities $6,090,136  $6,363,908  $6,133,003  $6,393,011  $6,255,759  $6,463,168 


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

 Three Months Ended Nine Months Ended Three Months Ended  Six Months Ended 
 September 30, September 30, June 30,  June 30, 
(Dollars in thousands) 2009 2008 2009 2008 2010  2009  2010  2009 
Increase (decrease) during the period between the market value and cost                        
of investments carried at market value, and deferred taxes thereon:                        
Fixed maturity securities $229,219  $(207,213) $396,245  $(326,254) $46,864  $77,437  $50,017  $167,026 
Fixed maturity securities ASC 320-10-65-1 adjustment  -   -   (23,846)  - 
Fixed maturity securities, cumulative other-than-temporary impairment adjustment  (470)  (23,846)  2,582   (23,846)
Equity securities  -   -   (4)  -   -   2   (1)  (4)
Other invested assets  3,387   (2,232)  5,614   (3,122)  (17)  3,868   496   2,227 
Change in unrealized appreciation (depreciation), pre-tax  232,606   (209,445)  378,009   (329,376)  46,377   57,461   53,094   145,403 
Deferred tax (expense) benefit  (81,412)  73,306   (140,649)  115,281 
Deferred tax benefit ASC 320-10-65-1 adjustment  -   -   8,346   - 
Deferred tax benefit (expense)  (16,396)  (28,457)  (17,679)  (59,237)
Deferred tax benefit (expense), cumulative other-than-temporary impairment adjustment  164   8,346   (904)  8,346 
Change in unrealized appreciation (depreciation),                                
net of deferred taxes, included in stockholder's equity $151,194  $(136,139) $245,706  $(214,095) $30,145  $37,350  $34,511  $94,512 


The Company frequently reviews its fixed maturity securities investment portfolio for declines in market value and focuses its attention on securities whose fair value has fallen below 80% of their amortized value at the time of review.  The Company then assesses whether the decline in value is temporary or other-than-temporary.  In making its assessment, the Company evaluates the current market and interest rate environment as well as specific issuer information.  Generally, a change in a security’s value caused by a change in the market or interest rate 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 adjustment that is credit related is recorded in net realized capital gains (losses) in the Company’s consolidated statements of operations and comprehensive income.income (loss). The fair value adjustment that is non-credit related is recorded as a component of other comprehensive income (loss), net of tax, and is included in accumulated other comprehensive income (loss) in the Company’s consolidated balance sheets.  The Company’s assessments are based on the issuers current and expected future financial position, timeliness with respect to interest and/or principal payments, speed of repayments and any applicable credit

8

enhancements or breakevenb reakeven 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.

The tables below display the aggregate market value and gross unrealized depreciation of fixed maturity and equity securities, by security type and contractual maturity, type, in each case subdivided according to the 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 September 30, 2009 
  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 $4,695  $(195) $-  $-  $4,695  $(195)
Obligations of U.S. states and political subdivisions  15,698   (736)  254,791   (11,896)  270,489   (12,632)
Corporate securities  59,952   (4,180)  127,849   (15,374)  187,801   (19,554)
Asset-backed securities  2,558   (200)  5,235   (2,510)  7,793   (2,710)
Mortgage-backed securities                        
Commercial  -   -   3,274   (114)  3,274   (114)
Agency residential  3,680   (6)  308   -   3,988   (6)
Non-agency residential  1,381   (26)  42,732   (11,439)  44,113   (11,465)
Foreign government securities  55,494   (3,406)  32,621   (403)  88,115   (3,809)
Foreign corporate securities  135,975   (9,059)  33,373   (3,446)  169,348   (12,505)
Total fixed maturity securities $279,433  $(17,808) $500,183  $(45,182) $779,616  $(62,990)


  Duration by maturity of unrealized loss at September 30, 2009 
  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 $73,180  $(7,110) $3,690  $(57) $76,870  $(7,167)
Due in one year through five years  116,675   (7,361)  59,867   (2,139)  176,542   (9,500)
Due in five years through ten years  49,142   (1,249)  52,462   (2,551)  101,604   (3,800)
Due after ten years  32,817   (1,856)  332,615   (26,372)  365,432   (28,228)
Asset-backed securities  2,558   (200)  5,235   (2,510)  7,793   (2,710)
Mortgage-backed securities  5,061   (32)  46,314   (11,553)  51,375   (11,585)
Total fixed maturity securities $279,433  $(17,808) $500,183  $(45,182) $779,616  $(62,990)
  Duration of Unrealized Loss at June 30, 2010 By Security Type 
  Less than 12 months  Greater than 12 months  Total 
     Gross    Gross    Gross
     Unrealized    Unrealized    Unrealized
(Dollars in thousands) Market Value Depreciation Market Value Depreciation Market Value Depreciation
Fixed maturity securities - available for sale                  
U.S. Treasury securities and obligations of                  
U.S. government agencies and corporations$-  $-  $3,398  $(89) $3,398  $(89)
Obligations of U.S. states and political subdivisions 5,008   (28)  362,674   (16,988)  367,682   (17,016)
Corporate securities  107,647   (3,068)  72,766   (7,310)  180,413   (10,378)
Asset-backed securities  1,018   -   6,562   (1,835)  7,580   (1,835)
Mortgage-backed securities                        
Agency residential  7,372   (41)  -   -   7,372   (41)
Non-agency residential  -   -   3,606   (224)  3,606   (224)
Foreign government securities  86,610   (3,298)  76,912   (4,739)  163,522   (8,037)
Foreign corporate securities  72,297   (1,681)  100,942   (9,347)  173,239   (11,028)
Total fixed maturity securities $279,952  $(8,116) $626,860  $(40,532) $906,812  $(48,648)
Equity securities  12   (3)  -   -   12   (3)
Total $279,964  $(8,119) $626,860  $(40,532) $906,824  $(48,651)



  Duration of Unrealized Loss at June 30, 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 $36,199  $(1,221) $37,097  $(3,244) $73,296  $(4,465)
Due in one year through five years  141,671   (3,361)  105,827   (5,922)  247,498   (9,283)
Due in five years through ten years  80,959   (2,900)  57,532   (4,156)  138,491   (7,056)
Due after ten years  12,733   (593)  416,236   (25,151)  428,969   (25,744)
Asset-backed securities  1,018   -   6,562   (1,835)  7,580   (1,835)
Mortgage-backed securities  7,372   (41)  3,606   (224)  10,978   (265)
Total fixed maturity securities $279,952  $(8,116) $626,860  $(40,532) $906,812  $(48,648)


The aggregate market value and gross unrealized losses related to investments in an unrealized loss position as of SeptemberJune 30, 20092010 were $779.6$906.8 million and $63.0$48.7 million, respectively.  There were no unrealized losses on a single security that exceeded 0.18%0.05% of the market value of the fixed maturity securities at SeptemberJune 30, 2009.2010.  In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector.  The $17.8$8.1 million of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for less than one year were generally comprised of highly rated foreign government municipal,and domestic and foreign corporate and mortgage-backed securities.  Of these unrealized losses, $13.9$5.6 million were related to securities that were rated investmentinv estment grade or better by at least one nationally recognized statistical rating organization.  The $45.2$40.5 million of unrealized losses related to fixed maturity and equity securities in an unrealized loss position for more than one year related primarily to highly rated domestic and foreign government and corporate, municipal, asset-backed and mortgage-backed securities.  Of these unrealized losses, $33.1 million related to securities that were rated investment grade by at least one nationally

9

related to securities in an unrealized loss position for more than one year also related primarily to highly rated municipal, corporate and mortgage-backed securities.  Of these unrealized losses, $34.3 million 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 arewere mainly comprised of non-credit other-than-temporary impairedmunicipal and corporate securities.  The gross unrealized depreciation greater than 12 months for mortgage-backed securities included $0.3 million related to sub-prime and non-agency residential mortgage-backed securities.alt-A loans.  In all instances, there were no projected cash flow shortfallsflows were sufficient to recover the full book value of the investments and the related interest obligations.  The mortgage-backed securities still have excess credit coverage and are current on interest and principal payments.  Unrealized losses have decreased since year endDecember 31, 2009, as a result of improved conditions in the overall financial market resulting from increased liquidity and lower interest rates.

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

The tables below display the aggregate market value and gross unrealized depreciation of fixed maturity and equity securities, by security type and contractual maturity, type in each case subdivided according to the length of time that individual securities had been in a continuous unrealized loss position for the periodperiods 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 - available for sale                  
U.S. Treasury securities and obligations of                  
U.S. government agencies and corporations $-  $-  $-  $-  $- ��$- 
Obligations of U.S. states and political subdivisions  1,471,807   (146,292)  176,555   (18,629)  1,648,362   (164,921)
Corporate securities  189,385   (42,278)  97,407   (22,342)  286,792   (64,620)
Asset-backed securities  4,230   (62)  3,983   (4,379)  8,213   (4,441)
Mortgage-backed securities                        
Commercial  2,474   (450)  2,974   (617)  5,448   (1,067)
Agency residential  3,291   (29)  466   (4)  3,757   (33)
Non-agency residential  -   -   36,171   (18,252)  36,171   (18,252)
Foreign government securities  79,063   (7,715)  2,759   (61)  81,822   (7,776)
Foreign corporate securities  167,132   (13,702)  67,537   (15,545)  234,669   (29,247)
Total fixed maturity securities $1,917,382  $(210,528) $387,852  $(79,829) $2,305,234  $(290,357)


  Duration by maturity 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 in one year through five years  198,004   (10,813)  52,705   (5,676)  250,709   (16,489)
Due in five years through ten years  145,943   (10,767)  85,396   (17,662)  231,339   (28,429)
Due after ten years  1,476,316   (179,995)  184,133   (31,723)  1,660,449   (211,718)
Asset-backed securities  4,230   (62)  3,983   (4,379)  8,213   (4,441)
Mortgage-backed securities  5,765   (479)  39,611   (18,873)  45,376   (19,352)
Total fixed maturity securities $1,917,382  $(210,528) $387,852  $(79,829) $2,305,234  $(290,357)
  Duration of Unrealized Loss at December 31, 2009 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$44,943  $(1,671) $-  $-  $44,943  $(1,671)
Obligations of U.S. states and political subdivisions 559   (4)  452,018   (24,252)  452,577   (24,256)
Corporate securities  45,045   (1,056)  118,153   (12,368)  163,198   (13,424)
Asset-backed securities  366   (26)  8,233   (1,883)  8,599   (1,909)
Mortgage-backed securities                        
Commercial  959   (34)  3,312   (77)  4,271   (111)
Agency residential  213,093   (1,691)  -   -   213,093   (1,691)
Non-agency residential  1,272   (31)  47,202   (7,024)  48,474   (7,055)
Foreign government securities  159,493   (2,158)  69,109   (4,529)  228,602   (6,687)
Foreign corporate securities  124,325   (4,205)  98,772   (10,924)  223,097   (15,129)
Total fixed maturity securities $590,055  $(10,876) $796,799  $(61,057) $1,386,854  $(71,933)
Equity securities  13   (2)  -   -   13   (2)
Total $590,068  $(10,878) $796,799  $(61,057) $1,386,867  $(71,935)



  Duration of Unrealized Loss at December 31, 2009 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 $-  $-  $58,010  $(4,887) $58,010  $(4,887)
Due in one year through five years  192,929   (2,975)  140,349   (9,129)  333,278   (12,104)
Due in five years through ten years  137,196   (2,934)  54,279   (3,401)  191,475   (6,335)
Due after ten years  44,240   (3,185)  485,414   (34,656)  529,654   (37,841)
Asset-backed securities  366   (26)  8,233   (1,883)  8,599   (1,909)
Mortgage-backed securities  215,324   (1,756)  50,514   (7,101)  265,838   (8,857)
Total fixed maturity securities $590,055  $(10,876) $796,799  $(61,057) $1,386,854  $(71,933)




The aggregate market value and gross unrealized losses related to investments in an unrealized loss position as of December 31, 20082009 were $2,305.2$1,386.9 million and $290.4$71.9 million, respectively.  There were no unrealized losses on a single security that exceeded 0.35%0.11% of the market value of the fixed maturity securities at December 31, 2008.2009.  In addition, as indicated on the above table, there was no significant concentration of unrealized losses in

10

any one market sector.  The $210.5$10.9 million of unrealized losses related to fixed maturity and equity securities that have been in an unrealized loss position for less than one year were generally comprised of highly rated municipal,domestic and foreign government and corporate and 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$10.7 million were relatedrelate d to securities that were rated investment grade or better by at least one nationally recognized statistical rating organization.  The $79.8$61.1 million of unrealized losses related to securities in an unrealized loss position for more than one year also related primarily to highly rated municipal, domestic and foreign corporate, foreign government and mortgage-backed securities and were also the result of widening credit spreads during the latter part of the year.securities.  Of these unrealized losses, $65.2$50.5 million 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 and commercial mortgage-backed securities.  The gross unrealized depreciation greater than 12 months for mortgage-backed securities includes only $0.1included $0.07 million related to sub-prime and alt-A loans.  In all instances, projected cash flows were sufficient to recover the full book value of the investments and the related interest obligations .  The mortgage-backed securities still had excess credit coverage and were current on interest and principal payments.  Unrealized losses decreased since December 31, 2008, as a result of improved conditions in the overall financial market resulting from increased liquidity and lower interest rates.

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

 Three Months Ended Nine Months Ended Three Months Ended  Six Months Ended 
 September 30, September 30, June 30,  June 30, 
(Dollars in thousands) 2009 2008 2009 2008 2010  2009  2010  2009 
Fixed maturity securities $70,965  $81,112  $212,903  $233,098  $75,862  $71,610  $149,417  $141,938 
Equity securities  758   1,793   2,182   4,905   2,618   730   5,022   1,424 
Short-term investments and cash  277   4,309   3,331   23,773   75   842   152   3,054 
Other invested assets                                
Limited partnerships  (4,423)  10,148   (36,548)  29,856   8,882   1,968   18,296   (32,125)
Other  664   2,272   5,693   7,242   4,457   2,258   6,255   5,029 
Total gross investment income  68,241   99,634   187,561   298,874   91,894   77,408   179,142   119,320 
Interest credited and other expense  (2,749)  (2,329)  (7,894)  (6,611)
Interest debited (credited) and other expense  (2,548)  (2,892)  (4,689)  (5,145)
Total net investment income $65,492  $97,305  $179,667  $292,263  $89,346  $74,516  $174,453  $114,175 


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

The Company had contractual commitments to invest up to an additional $145.6$119.9 million in limited partnerships at SeptemberJune 30, 2009.2010.  These commitments will be funded when called in accordance with the partnership agreements, which have investment periods that expire, unless extended, through 2014.



The components of net realized capital gains (losses) are presented in the table below for the periods indicated:
 
 Three Months Ended Nine Months Ended Three Months Ended  Six Months Ended 
 September 30, September 30, June 30,  June 30, 
(Dollars in thousands) 2009 2008 2009 2008 2010  2009  2010  2009 
Fixed maturity securities, market value:                        
Other-than-temporary impairments $-  $(63,793) $(5,510) $(67,854) $-  $(4,936) $-  $(5,510)
Losses from sales  (4,131)  (12,172)  (32,612)  (13,086)
Gains (losses) from sales  1,617   (401)  840   (28,481)
Fixed maturity securities, fair value:                                
Gain from sales  172   -   401   - 
Gains (losses) from sales  190   133   273   229 
Gains (losses) from fair value adjustments  5,837   (247)  7,805   (247)  (2,518)  2,010   482   1,968 
Equity securities, market value:                
Gains from sales  8,041   -   8,041   - 
Equity securities, fair value:                                
Gains (losses) from sales  1,299   (1,061)  6,483   (12,630)  (2,893)  5,630   (999)  5,184 
Gains (losses) from fair value adjustments  23,075   (58,817)  23,448   (122,938)  (30,017)  17,296   (16,786)  373 
Other invested assets, fair value:                                
Gains (losses) from fair value adjustments  67,103   27,438   48,091   (44,562)  (61,853)  3,203   (84,590)  (19,012)
Short-term investment (losses) gains  (2)  -   4   (30)
Short-term investment gains (losses)  1   6   -   6 
Total net realized capital gains (losses) $101,394  $(108,652) $56,151  $(261,347) $(95,473) $22,941  $(100,780) $(45,243)


Proceeds from the sales of fixed maturity securities for the three months ended SeptemberJune 30, 2010 and 2009 and 2008 were $38.6$212.2 million and $52.2$12.8 million, respectively.  Gross gains of $2.3$5.5 million and $0.0$0.8 million and gross losses of $6.2$3.7 million and $12.2$1.0 million were realized on those fixed maturity securities sales for the three months ended SeptemberJune 30, 20092010 and 2008,2009, respectively.  Proceeds from sales of equity securities for the three months ended SeptemberJune 30, 2010 and 2009 and 2008 were $34.3$51.4 million and $151.8$10.6 million, respectively.  Gross gains of $9.4$1.2 million and $3.8$5.7 million and gross losses of $0.0$4.1 million and $4.8$0.0 million were realized on those equity sales for the three months ended SeptemberJune 30, 20092010 and 2008,2009, respectively.

Proceeds from the sales of fixed maturity securities for the ninesix months ended SeptemberJune 30, 2010 and 2009 and 2008 were $99.7$380.2 million and $138.3$61.1 million, respectively.  Gross gains of $4.6$7.3 million and $1.1$2.3 million and gross losses of $36.8$6.2 million and $14.2$30.6 million were realized on those fixed maturity securities sales for the ninesix months ended SeptemberJune 30, 20092010 and 2008,2009, respectively.  Proceeds from sales of equity securities for the ninesix months ended SeptemberJune 30, 2010 and 2009 and 2008 were $46.6$72.7 million and $380.9$12.2 million, respectively.  Gross gains of $15.3$3.6 million and $5.9 million and gross losses of $0.7$4.6 million and $18.6$0.7 million were realized on those equity sales for the ninesix months ended SeptemberJune 30, 20092010 and 2008,2009, respectively.

IncludedThe Company records fair value re-measurements as net realized capital gains (losses) in the consolidated statements of operations and comprehensive income (loss).  The Company recorded net realized capital losses of $94.4 million and net realized capital gains of $22.5 million for the three months ended June 30, 2010 and 2009, respectively, and net realized capital losses of $100.9 million and $16.7 million for the six months ended June 30, 2010 and 2009, respectively, due to fair value re-measurements on fixed maturity and equity securities and other invested assets, at fair value.

For the three and six months ended June 30, 2010, the Company had no write-downs in the value of securities deemed to be impaired on an other-than-temporary basis in net realized capital gains (losses) was $5.5 million for the nine months ended September 30, 2009 and $63.8 million and $67.9 million for.  For the three and ninesix months ended SeptemberJune 30, 2008,2009, the Company recorded $4.9 million and $5.5 million, respectively, of write-downs in the value of securities deemed to be impaired on an other-than-temporary basis.  There were no write-downsbasis in the value of securities deemed to be impaired on an other-than-temporary basis for the three months ended September 30, 2009.

At September 30, 2009 thenet realized capital gains (losses).  The Company had no other-than-temporary impaired securities where the impairment had both a credit and non-credit component.



4.  Fair Value

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 $96.0 million and $79.3 million in net realized capital gains due to fair value re-measurements on fixed maturity securities, equity securities and other invested assets, at fair value, for the three and nine months ended September 30, 2009, respectively.  The Company recorded $31.6 million and $167.7 million in net realized capital losses due to fair value re-measurements on fixed maturity securities, equity securities and other invested assets, at fair value, for the three and nine months ended September 30, 2008, respectively.

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

In limited instances where prices are not provided by pricing services or in rare instances when a manager may not agree with the pricing service, price quotes on a non-binding basis are obtained from investment brokers.  The investment asset managers do not make any changes to prices received from either the pricing services or the investment brokers.  In addition, the investment asset managers have procedures in place to review the reasonableness of the prices from the service providers and may request verification of the prices.  In addition, the Company tests the prices on a random basis to an independent pricing source.  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 ratesrate s to determine fair value.  The Company made no such adjustments at SeptemberJune 30, 2009.2010.

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

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.

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



The following 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) September 30, 2009  (Level 1)  (Level 2)  (Level 3) 
Assets:            
Fixed maturities, market value $6,363,908  $-  $6,351,181  $12,727 
Fixed maturities, fair value  52,815   -   52,815   - 
Equity securities, market value  12   12   -   - 
Equity securities, fair value  158,456   157,459   997   - 
Other invested assets, fair value  364,841   364,841   -   - 

    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, 2008  (Level 1)  (Level 2)  (Level 3)  June 30, 2010 (Level 1)  (Level 2)  (Level 3) 
Assets:                        
Fixed maturities, market value $5,511,856  $-  $5,500,889  $10,967             
U.S. Treasury securities and obligations of            
U.S. government agencies and corporations $150,792  $-  $150,792  $- 
Obligations of U.S. States and political subdivisions  3,634,029   -   3,634,029   - 
Corporate securities  746,192   -   739,227   6,965 
Asset-backed securities  27,403   -   20,841   6,562 
Mortgage-backed securities                
Commercial  39,402   -   39,402   - 
Agency residential  438,582   -   438,582   - 
Non-agency residential  61,438   -   60,941   497 
Foreign government securities  728,609   -   728,609   - 
Foreign corporate securities  566,564   -   566,564   - 
Total fixed maturities, market value  6,393,011   -   6,378,987   14,024 
                
Fixed maturities, fair value  43,090   -   43,090   -   66,351   -   66,351   - 
Equity securities, market value  16   16   -   -   12   12   -   - 
Equity securities, fair value  119,815   119,092   723   -   340,377   340,377   -   - 
Other invested assets, fair value  316,750   316,750   -   -   545,160   545,160   -   - 


There were no significant transfers between Level 1 and Level 2 for the six months ended June 30, 2010.

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


     Fair Value Measurement Using: 
     Quoted Prices       
     in Active  Significant    
     Markets for  Other  Significant 
     Identical  Observable  Unobservable 
     Assets  Inputs  Inputs 
(Dollars in thousands) December 31, 2009 (Level 1)  (Level 2)  (Level 3) 
Assets:            
Fixed maturities, market value            
U.S. Treasury securities and obligations of            
U.S. government agencies and corporations $134,291  $-  $134,291  $- 
Obligations of U.S. States and political subdivisions  3,853,859   -   3,853,859   - 
Corporate securities  635,381   -   628,451   6,930 
Asset-backed securities  15,148   -   8,890   6,258 
Mortgage-backed securities                
Commercial  29,058   -   29,058   - 
Agency residential  564,707   -   564,707   - 
Non-agency residential  54,959   -   54,533   426 
Foreign government securities  659,217   -   659,217   - 
Foreign corporate securities  516,548   -   516,548   - 
Total fixed maturities, market value  6,463,168   -   6,449,554   13,614 
                 
Fixed maturities, fair value  50,528   -   50,528   - 
Equity securities, market value  13   13   -   - 
Equity securities, fair value  380,025   379,058   967   - 
Other invested assets, fair value  382,639   382,639   -   - 



The following tables present the activity under Level 3, fair value measurements using significant unobservable inputs for fixed maturity investments, for the periods indicated:

  Three Months Ended Nine Months Ended
  September 30, September 30,
(Dollars in thousands) 2009 2008 2009 2008
Assets:            
Balance, beginning of period $11,807  $17,132  $10,967  $78,709 
Total gains or (losses) (realized/unrealized)                
Included in earnings (or changes in net assets)  46   (316)  42   (2,630)
Included in other comprehensive income  1,136   (812)  1,692   (1,400)
Purchases, issuances and settlements  (113)  (114)  (192)  (5,318)
Transfers in and/or (out) of Level 3  (149)  36   218   (53,435)
Balance, end of period $12,727  $15,926  $12,727  $15,926 
                 
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 $-  $1,302  $(131) $(2,759)

  By Asset 
  Three Months Ended June 30, 2010  Six Months Ended June 30, 2010 
  Corporate  Asset-backed  Non-agency     Corporate  Asset-backed  Non-agency    
(Dollars in thousands) Securities  Securities  RMBS  Total  Securities  Securities  RMBS  Total 
Beginning balance $6,930  $6,368  $456  $13,754  $6,930  $6,258  $426  $13,614 
Total gains or (losses) (realized/unrealized)                                
Included in earnings (or changes in net assets)  (1)  -   24   23   (1)  -   49   48 
Included in other comprehensive income (loss)  36   122   51   209   36   44   92   172 
Purchases, issuances and settlements  -   72   (34)  38   -   260   (70)  190 
Transfers in and/or (out) of Level 3  -   -   -   -   -   -   -   - 
Ending balance $6,965  $6,562  $497  $14,024  $6,965  $6,562  $497  $14,024 
                                 
The amount of total gains or losses for the period included                                
in earnings (or changes in net assets) attributable to the                                
change in unrealized gains or losses relating to assets                                
still held at the reporting date $-  $-  $-  $-  $-  $-  $-  $- 
                                 
(Some amounts may not reconcile due to rounding.)                             




5.  Capital Transactions
  Summary 
  Three Months Ended  Six Months Ended 
  June 30,  June 30, 
(Dollars in thousands) 2010  2009  2010  2009 
Assets:            
Balance, beginning of period $13,754  $7,464  $13,614  $10,967 
Total gains or (losses) (realized/unrealized)                
Included in earnings (or changes in net assets)  23   21   48   (4)
Included in other comprehensive income (loss)  209   375   172   556 
Purchases, issuances and settlements  38   (3,054)  190   (79)
Transfers in and/or (out) of Level 3  -   7,001   -   367 
Balance, end of period $14,024  $11,807  $14,024  $11,807 
                 
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 $-  $-  $-  $(131)


5.CAPITAL TRANSACTIONS
On December 17, 2008, Group and Holdings renewed their shelf registration statement on Form S-3ASR with the SEC, as a Well Known Seasoned Issuer.  This shelf registration statement can be used by Group to register common shares, preferred shares, debt securities, warrants, share purchase contracts and share purchase units; by Holdings to register debt securities and by Everest Re Capital Trust III (“Capital Trust III”) to register trust preferred securities.

6.  Contingencies

6.CONTINGENCIES
In the ordinary course of business, the Company is involved in lawsuits, arbitrations and other formal and informal dispute resolution procedures, the outcomes of which will determine the Company’s rights and obligations under insurance, reinsurance and other contractual 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.  While the final outcomeoutcom e of these matters cannot be predicted with certainty, the Company does not believe that any of these matters, when finally resolved, will have a material adverse effect on the Company’s financial position 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.

The Company does not believe that there are any material pending legal proceedings to which it or any of its subsidiaries is a party or of which any of their properties are the subject.

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 asbestos and environmental (“A&E”) claims.  As of SeptemberJune 30, 2009,2010, approximately 9%8% of the Company’s gross reserves were an estimate of the Company’s ultimate liability for A&E claims.  The Company’s A&E liabilities emanate from Mt. McKinley Insurance Company’s (“Mt. McKinley”), 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.loss es.



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 on both a gross and net of retrocessional basis for the periods indicated:

 Three Months Ended Nine Months Ended Three Months Ended  Six Months Ended 
 September 30, September 30, June 30,  June 30, 
(Dollars in thousands) 2009 2008 2009 2008 2010  2009  2010  2009 
Gross basis:                        
Beginning of period reserves $704,507  $870,998  $786,842  $922,843  $625,208  $768,761  $638,674  $786,842 
Incurred losses  -   -   -   -   -   -   -   - 
Paid losses  (52,170)  (16,895)  (134,505)  (68,740)  (11,073)  (64,254)  (24,539)  (82,335)
End of period reserves $652,337  $854,103  $652,337  $854,103  $614,135  $704,507  $614,135  $704,507 
                                
Net basis:                                
Beginning of period reserves $455,379  $513,516  $485,296  $537,549  $419,230  $475,209  $430,421  $485,296 
Incurred losses  -   -   -   -   -   -   -   - 
Paid losses  (13,527)  (8,724)  (43,444)  (32,757)  (6,579)  (19,830)  (17,770)  (29,917)
End of period reserves $441,852  $504,792  $441,852  $504,792  $412,651  $455,379  $412,651  $455,379 


At SeptemberJune 30, 2009,2010, the gross reserves for A&E losses were comprised of $141.3$133.9 million representing case reserves reported by ceding companies, $152.1$136.8 million representing additional case reserves established by the Company on assumed reinsurance claims, $66.5$58.7 million representing case reserves established by the Company on direct excess insurance claims, including Mt. McKinley and $292.4$284.8 million representing incurred but not reported (“IBNR”)IBNR reserves.



With respect to asbestos only, at SeptemberJune 30, 2009,2010, the Company had gross asbestos loss reserves of $618.7$586.1 million, or 94.8%95.4%, of total A&E reserves, of which $486.4$459.3 million was for assumed business and $132.3$126.8 million was for direct business.

Management believes that these uncertainties and factors continue to render reserves for A&E and particularly asbestos losses significantly less subject to traditional actuarial analysis than reserves for other types of losses.  The Company establishes reserves to the extent that, in the judgment of management, the facts and prevailing law reflect an exposure for the Company or its ceding companies.

Due to the uncertainties, the ultimate losses attributable to A&E, and particularly asbestos, may be subject to more variability than are non-A&E reserves and such variation, depending on coverage under the Company’s various reinsurance arrangements, could have a material adverse effect on the Company’s future financial condition, results of operations and cash flows.

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.  At SeptemberJune 30, 20092010 and December 31, 2008,2009, the estimated cost to replace all such annuities for which the Company was contingently liable was $151.8$156.0 million and $152.1$1 52.3 million, respectively.

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.  Should the life insurance company become unable to make the annuity payments, the Company would be liable for those claim liabilities.  At SeptemberJune 30, 20092010 and December 31, 2008,2009, the estimated cost to replace such annuities was $24.1$25.6 million and $23.1$24.6 million, respectively.


16
7. OTHER COMPREHENSIVE INCOME (LOSS)

7.  Other Comprehensive Income (Loss)

The following table presents the components of other comprehensive income (loss) in the consolidated statements of operations and comprehensive income (loss) for the periods indicated:
 
  Three Months Ended Nine Months Ended
  September 30, September 30,
(Dollars in thousands) 2009 2008 2009 2008
Unrealized appreciation (depreciation) ("URA(D)") of investments (1)
            
URA(D) of investments $232,607  $(209,446) $401,856  $(329,376)
Tax (expense) benefit  (81,413)  73,307   (140,650)  115,281 
URA(D), net of tax  151,194   (136,139)  261,206   (214,095)
                 
Foreign currency translation adjustments  16,204   (15,469)  33,281   (16,231)
Tax (expense) benefit  (5,672)  5,412   (11,649)  5,679 
Net foreign currency translation adjustments  10,532   (10,057)  21,632   (10,552)
                 
Pension adjustment  949   308   2,849   1,283 
Tax expense  (332)  (108)  (564)  (449)
Net pension adjustment  617   200   2,285   834 
                 
Other comprehensive income (loss), net of deferred taxes $162,343  $(145,996) $285,123  $(223,813)
  Three Months Ended  Six Months Ended 
  June 30,  June 30, 
(Dollars in thousands) 2010  2009  2010  2009 
Unrealized appreciation (depreciation) ("URA(D)") on            
securities arising during the period            
URA(D) of investments - temporary $46,846   75,709  $50,512  $163,651 
URA(D) of investments - non-credit OTTI  (469)  5,598   2,582   5,598 
Tax benefit (expense) from URA(D) arising during the period  (16,232)  (28,457)  (18,583)  (59,237)
Total URA(D) on securities arising during the period, net of tax  30,145   52,850   34,511   110,012 
                 
Foreign currency translation adjustments  (8,896)  45,819   1,830   17,077 
Tax benefit (expense) from foreign currency translation  3,114   (16,037)  (640)  (5,977)
Net foreign currency translation adjustments  (5,782)  29,782   1,190   11,100 
                 
Pension adjustments  671   1,900   1,299   1,900 
Tax benefit (expense) on pension  (235)  (232)  (455)  (232)
Net pension adjustments  436   1,668   844   1,668 
                 
Other comprehensive income (loss), net of tax $24,799  $84,300  $36,545  $122,780 
 

(1) The following are the components of URA(D) of investments:          
               
    Three Months Ended Nine Months Ended
    September 30, September 30,
  (Dollars in thousands)  2009  2008  2009  2008
  URA(D) of investments - temporary $228,966  $(209,446) $388,791  $(329,376)
  Tax expense  (80,138)  (73,307)  (136,077)  (115,281)
  Net URA(D) of investments - temporary $148,828  $(136,139) $252,714  $(214,095)
                   
  URA(D) of investments - credit OTTI $(415) $-  $3,411  $- 
  Tax benefit (expense)  145   -   (1,194)  - 
  Net URA(D) of investments - credit OTTI $(270) $-  $2,217  $- 
                   
  URA(D) of investments - non-credit OTTI $4,056  $-  $9,654  $- 
  Tax expense  (1,420)  -   (3,379)  - 
  Net URA(D) of investments - non-credit OTTI $2,636  $-  $6,275  $- 
17


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


 September 30, December 31, June 30,  December 31,
(Dollars in thousands) 2009 2008 2010  2009 
Unrealized appreciation (depreciation) on investments, net of deferred taxes      
URA(D) on securities, net of deferred taxes      
Temporary $176,405  $(69,248) $168,403  $135,570 
Credit, other-than-temporary impairments  2,217   - 
Non-credit, other-than-temporary impairments  (2,164)  - 
Non-credit, OTTI  353   (1,325)
Total unrealized appreciation (depreciation) on investments, net of deferred taxes  176,458   (69,248)  168,756   134,245 
Foreign currency translation adjustments, net of deferred taxes  50,538   28,906   58,191   57,001 
Pension adjustments, net of deferred taxes  (29,436)  (31,721)  (23,424)  (24,268)
Accumulated other comprehensive income (loss) $197,560  $(72,063) $203,523  $166,978 


17
8.CREDIT FACILITY

8.Holdings Credit LineFacility

Effective August 23, 2006, Holdings entered into a five year, $150.0 million senior revolving credit facility with a syndicate of lenders, 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 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 prime rate or (b) 0.5% per annum above the Federal Funds Rate, 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 plus 25% of future aggregate net income and 25% of future aggregate capital contributions after December 31, 2005, which at SeptemberJune 30, 2009,2010, was $1,889.9$1,954.2 million.  As of SeptemberJune 30, 2009,2010, Holdings was in compliance with all Holdings Credit Facility covenants.

At SeptemberJune 30, 20092010, the Company had outstanding $133.0 million of short-term loans and $17.0 million of letters of credit under the Holdings Credit Facility.  At December 31, 2008, there were2009, the Company had outstanding $28.0 million of letters of credit under the Holdings Credit Facility.  The following table summarizes outstanding letters of credit and/or borrowings as of $28.0 million under the Holdings Credit Facility.June 30, 2010.


(Dollars in thousands)        
Bank Commitment  In Use Date of LoanMaturity/Expiry Date
Citibank Holdings Credit Facility $150,000  $25,000 5/7/20108/9/2010
       25,000 5/10/20108/10/2010
       25,000 5/14/20108/16/2010
       25,000 5/19/20108/19/2010
       20,000 6/11/20109/13/2010
       13,000 6/15/20109/15/2010
Total short-term borrowings      133,000   
Total letters of credit      16,951  12/31/2010
           
Total Citibank Holdings Credit Facility $150,000  $149,951   


Costs incurred in connection with the Holdings Credit Facility were $166,083$130.2 thousand and $106,158$31.5 thousand for the ninethree months ended SeptemberJune 30, 2010 and 2009, respectively, and 2008,$165.8 thousand and $57.8 thousand for the six months ended June 30, 2010 and 2009, respectively.

9.  Letters
18

The Citibank Holdings Credit Facility involves a syndicate of lenders (see Note 8), with Citibank acting as administrative agent.  At September 30, 2009 and December 31, 2008, letters of credit for $28.0 million were issued and outstanding.  The following table summarizes the Company’s letters of credit at September 30, 2009.
 
(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  
9.TRUST AGREEMENTS
 
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 SeptemberJune 30, 2009,2010, the total amount on deposit in the trust account was $24.0$24.6 million.

11.  Senior Notes
10.SENIOR NOTES

On October 12, 2004, Holdings completed a public offering of $250.0 million principal amount of 5.40% 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.  On March 15, 2010, the $200.0 million principal amount of 8.75% senior notes matured, and was paid in cash.

Interest expense incurred in connection with these senior notes was $3.4 million and $7.8 million for the three months ended SeptemberJune 30, 2010 and 2009, respectively, and 2008,$10.4 million and $23.4$15.6 million for the ninesix months ended SeptemberJune 30, 2010 and 2009, and 2008.respectively.  Market value, which is based on quoted market priceprices at SeptemberJune 30, 20092010 and December 31, 2008,2009, was $247.8$256.6 million and $186.2$256.1 million, respectively, for the 5.40% senior notes and $206.3$200.0 million and $156.8 million, respectively, for the 8.75% senior notes.

notes at December 31, 2009.
18
11. LONG TERM SUBORDINATED NOTES

12.  Long Term Subordinated Notes

On April 26, 2007, Holdings completed a public offering of $400.0 million principal amount of 6.6% 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.  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”) plus 238.5 basis points, reset quarterly, payable quarterly in arrears on FebruaryFe bruary 15, May 15, August 15 and November 15 of each year, subject to Holdings’ right to defer interest on one or more occasions for up to ten consecutive years.  Deferred interest will accumulate interest at the applicable rate compounded semi-annually for periods prior to May 15, 2017, and compounded quarterly for periods from and including May 15, 2017.

Holdings can redeem the long term subordinated notes prior to May 15, 2017, in whole but not in part at the applicable redemption price, which will equal the greater of (a) 100% of the principal amount being redeemed and (b) the present value of the principal payment on May 15, 2017 and scheduled payments of interest that would have accrued from the redemption date to May 15, 2017 on the long term subordinated notes being redeemed, discounted to the redemption date on a semi-annual basis at a discount rate equal to the treasury rate plus an applicable spread of either 0.25% or 0.50%, in each case plus accrued and unpaid interest.  Holdings may redeem the long term subordinated notes on or after May 15, 2017, in whole or in part at 100% of the principal amount plus accrued and unpaid interest; however, redemption on or afteraf ter 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%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.

Interest expense incurred in connection with these long term notes was $3.9 million and $6.6 million for the three months ended SeptemberJune 30, 2010 and 2009, and 2008, respectively, and $14.4$7.9 million and $19.8$10.4 million for the ninesix months ended SeptemberJune 30, 20092010 and 2008,2009, respectively. Market value, which is based on quoted market prices at SeptemberJune 30, 20092010 and December 31, 2008,2009, was $163.4$206.4 million and $176.5 million on the outstanding 6.6% long term subordinated notes, of $238.6 million and $168.0 million on outstanding 6.6% long term subordinated notes of $399.6 million, respectively.

13. Junior Subordinated Debt Securities Payable
12.JUNIOR SUBORDINATED DEBT SECURITIES PAYABLE
On March 29, 2004, Holdings issued $329.9 million of 6.20% junior subordinated debt securities due, March 29, 2034, to Everest Re Capital Trust II (“Capital Trust II”).  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.

Fair value, which is primarily based on the quoted market price of the related trust preferred securities was $269.7 million and $272.6 million at SeptemberJune 30, 20092010 and December 31, 2008, was $296.9 million and $222.2 million,2009, respectively, for the 6.20% junior subordinated debt securities.

Interest expense incurred in connection with these junior subordinated notes was $5.1 million for the three months ended SeptemberJune 30, 2010 and 2009, and 2008, and $15.3$10.2 million for the ninesix months ended SeptemberJune 30, 20092010 and 2008.


Capital Trust II is a wholly owned finance subsidiary of Holdings.

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 the 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’s operating subsidiaries to transfer funds to the Company in the form of cash dividends, loans or advances.  The insurance laws of the State of Delaware, where the Company’s direct insurance subsidiaries are domiciled, require regulatory approval before those subsidiaries can pay dividends or make loans or advances to the Company that exceed certain statutory thresholds.  In addition, the terms of the Holdings Credit Facility (discussed in Note 8) require Everest Re, the Company’s principal insurance subsidiary, to maintain a certain statutory surplus level as measured at the end of each fiscal year.  At December 31, 2008, $1,745.62009, $2,352.0 million of the $2,735.2$3,271.1 million in net assets of the Company’sCompany’ ;s consolidated subsidiaries were subject to the foregoing regulatory restrictions.

14.  Segment Results
13. SEGMENT REPORTING

The Company, through its subsidiaries, operates in four segments:  U.S. Reinsurance, U.S. Insurance, Specialty Underwriting and International.  The U.S. Reinsurance operation writes property and casualty reinsurance, on both a treaty and facultative basis, through reinsurance brokers, as well as directly with ceding companies within the U.S.  The U.S. Insurance operation writes property and casualty insurance primarily through 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.  The International operation writes non-U.S. property and casualty reinsurance through Everest Re’s branches in Canada and Singapore and offices in 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 loss adjustment expenses ("LAE"(“LAE”) incurred, commission and brokerage expenses and other underwriting expenses.  Underwriting results are measured using ratios, in particular loss, commission and brokerage and other underwriting expense ratios, which, respectively, divide incurred losses, commissions and brokerage and other underwriting expenses by premiums earned.

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



The following tables present the underwriting results for the operating segments for the periods indicated:

 Three Months Ended Nine Months Ended Three Months Ended  Six Months Ended 
U.S. Reinsurance September 30, September 30, June 30,  June 30, 
(Dollars in thousands) 2009 2008 2009 2008 2010  2009  2010  2009 
Gross written premiums $345,567  $280,467  $876,049  $714,534  $268,215  $266,151  $512,223  $530,482 
Net written premiums  191,666   146,467   487,849   424,982   150,462   156,751   278,924   296,183 
                                
Premiums earned $162,037  $167,468  $489,067  $527,475  $162,492  $180,697  $289,493  $327,030 
Incurred losses and LAE  56,158   240,734   232,262   446,013   84,346   85,963   174,454   176,104 
Commission and brokerage  21,397   27,473   90,525   125,762   35,854   37,209   63,072   69,128 
Other underwriting expenses  9,665   7,840   25,250   23,500   9,377   8,023   17,183   15,585 
Underwriting gain (loss) $74,817  $(108,579) $141,030  $(67,800) $32,915  $49,502  $34,784  $66,213 
 

  Three Months Ended Nine Months Ended
U.S. Insurance September 30, September 30,
(Dollars in thousands) 2009 2008 2009 2008
Gross written premiums $230,491  $194,021  $648,719  $595,458 
Net written premiums  76,400   98,597   301,910   312,949 
                 
Premiums earned $89,237  $107,822  $306,860  $372,032 
Incurred losses and LAE  71,423   78,386   210,329   335,965 
Commission and brokerage  10,512   4,798   32,379   48,438 
Other underwriting expenses  19,982   16,876   56,415   47,118 
Underwriting (loss) gain $(12,680) $7,762  $7,737  $(59,489)
 

  Three Months Ended Nine Months Ended
Specialty Underwriting September 30, September 30,
(Dollars in thousands) 2009 2008 2009 2008
Gross written premiums $67,615  $54,828  $183,726  $193,941 
Net written premiums  38,259   34,564   102,990   128,787 
                 
Premiums earned $39,182  $35,317  $108,513  $126,318 
Incurred losses and LAE  25,197   37,615   73,740   81,747 
Commission and brokerage  10,510   8,660   29,435   30,418 
Other underwriting expenses  2,383   1,937   6,227   6,182 
Underwriting gain (loss) $1,092  $(12,895) $(889) $7,971 

 Three Months Ended Nine Months Ended Three Months Ended  Six Months Ended 
International September 30, September 30,
U.S. Insurance June 30,  June 30, 
(Dollars in thousands) 2009 2008 2009 2008 2010  2009  2010  2009 
Gross written premiums $272,603  $248,821  $797,606  $654,183  $204,941  $213,511  $433,178  $418,228 
Net written premiums  146,330   144,810   435,650   394,260   80,812   104,358   183,279   225,510 
                                
Premiums earned $147,864  $139,285  $433,099  $395,511  $86,187  $105,651  $187,353  $217,623 
Incurred losses and LAE  89,214   90,261   260,964   252,088   71,800   57,762   144,750   138,906 
Commission and brokerage  34,840   32,885   100,062   90,652   6,098   9,849   7,739   21,867 
Other underwriting expenses  6,159   4,691   16,463   14,492   16,279   19,152   32,856   36,433 
Underwriting gain $17,651  $11,448  $55,610  $38,279 
Underwriting gain (loss) $(7,990) $18,888  $2,008  $20,417 
 

  Three Months Ended  Six Months Ended 
Specialty Underwriting June 30,  June 30, 
(Dollars in thousands) 2010  2009  2010  2009 
Gross written premiums $65,855  $57,188  $131,742  $116,111 
Net written premiums  37,823   32,126   75,062   64,731 
                 
Premiums earned $39,342  $32,495  $78,240  $69,331 
Incurred losses and LAE  34,512   23,160   61,973   48,543 
Commission and brokerage  8,972   8,858   17,507   18,925 
Other underwriting expenses  2,407   1,999   4,358   3,844 
Underwriting gain (loss) $(6,549) $(1,522) $(5,598) $(1,981)
  Three Months Ended  Six Months Ended 
International June 30,  June 30, 
(Dollars in thousands) 2010  2009  2010  2009 
Gross written premiums $306,998  $274,253  $582,348  $525,003 
Net written premiums  166,046   153,964   311,255   289,320 
                 
Premiums earned $154,703  $141,931  $301,772  $285,235 
Incurred losses and LAE  124,091   79,223   360,576   171,750 
Commission and brokerage  37,273   31,007   67,720   65,222 
Other underwriting expenses  7,308   5,684   13,688   10,304 
Underwriting gain (loss) $(13,969) $26,017  $(140,212) $37,959 


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


 Three Months Ended Nine Months Ended Three Months Ended  Six Months Ended 
 September 30, September 30, June 30,  June 30, 
(Dollars in thousands) 2009 2008 2009 2008 2010  2009  2010  2009 
Underwriting gain (loss) $80,880  $(102,264) $203,488  $(81,039) $4,407  $92,885  $(109,018) $122,608 
Net investment income  65,492   97,305   179,667   292,263   89,346   74,516   174,453   114,175 
Net realized capital gains (losses)  101,394   (108,652)  56,151   (261,347)  (95,473)  22,941   (100,780)  (45,243)
Realized gain on debt repurchase  -   -   78,271   -   -   -   -   78,271 
Corporate expense  (1,675)  (1,425)  (4,871)  (4,502)  (1,463)  (1,878)  (3,689)  (3,196)
Interest, fee and bond issue cost amortization expense  (17,073)  (19,745)  (53,779)  (59,233)  (12,722)  (17,073)  (29,062)  (36,706)
Other income (expense)  15,081   7,951   7,801   (16,039)  8,709   (7,166)  13,821   (7,280)
Income (loss) before taxes $244,099  $(126,830) $466,728  $(129,897) $(7,196) $164,225  $(54,275) $222,629 


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, other than the U.S., no other country represented more than 5% of the Company’s revenues.
14.RELATED-PARTY TRANSACTIONS
Parent

15.  Related-Party TransactionsOn September 21, 2004, Group’s Board of Directors approved an amended share repurchase program authorizing Group and/or its subsidiary Holdings to purchase up to an aggregate of 5,000,000 of Group’s common shares through open market transactions, privately negotiated transactions or both.  On July 21, 2008 and on February 24, 2010, the Executive Committee of Group’s Board of Directors, approved amendments to repurchase an additional 5,000,000 common shares for each amendment, bringing the total amount of Group’s common shares authorized to be repurchased by Group and/or Holdings to 15,000,000.

As of June 30, 2010, Holdings held 7,708,707 common shares of Group, which it had purchased in the open market between February 1, 2007 and June 25, 2010, for a total purchase price of $665.3 million.  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).  Dividends received on these common shares of $5.6 million for the six months ended June 30, 2010, were reported in net investment income in the consolidated statements of operations and comprehensive income (loss).



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 operationsoperation and cash flows.

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

·  Effective September 19, 2000, Mt. McKinley 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.

·  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.

·  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 respects new, renewal and in force policies effective on that date through December 31, 2002.  Bermuda Re is liable for any loss exceeding $100,000 per occurrence, with its liability not to exceed $150,000 per 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”). This agreement remained in effect through December 31, 2002.

·  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.


·  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 agreement 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.million (20.0% of $625.0 million).  The property portion of this amendment remained in effect through December 31, 2006.  The casualty portion of this amendment 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 cedesceded 60.0% of its Canadian branch property business to Bermuda Re.  This amendment remained in effect through December 31, 2009.

·  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 amended the 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 a loss portfolio transfer reinsurance agreement, whereby Everest Re 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.

·  Effective January 1, 2009, Everest Re, Bermuda Re and Everest International amended the 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%ceded 36.0% and 8%8.0% 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 occurrence exceed $150.0 million or in the aggregate for each underwriting year for all occurrences exceed $325.0 million.  This amendment remained in effect through December 31, 2009.

·  Effective January 1, 2010, Everest Re entered into a whole account quota share with Bermuda Re, whereby Everest Re’s Canadian branch cedes to Bermuda Re 60.0% of its net retained liability on all new and renewal property business recorded on or after January 1, 2010.  However, in no event shall the loss cessions to Bermuda Re relating to any one occurrence exceed $350.0 million (60% of $583.3 million).

·  Effective January 1, 2010, Everest Re entered into a whole account quota share with Bermuda Re, whereby for all new and renewal business recorded on or after January 1, 2010, Everest Re cedes 44.0% of its net retained liability to Bermuda Re.  However, in no event shall the loss cessions to Bermuda Re relating to any one occurrence exceed $150.0 million or in the aggregate for each underwriting year for all such occurrences exceed $325.0 million.

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


 Three Months Ended Nine Months Ended Three Months Ended  Six Months Ended 
Bermuda Re September 30, September 30, June 30,  June 30, 
(Dollars in thousands) 2009 2008 2009 2008 2010  2009  2010  2009 
Ceded written premiums $323,098  $285,039  $879,163  $705,859  $325,719  $271,299  $645,750  $556,065 
Ceded earned premiums  286,537   243,685   835,673   667,799   326,072   275,068   614,230   549,136 
Ceded losses and LAE (a)  196,630   198,505   529,229   409,440   194,630   191,732   483,076   332,599 

 Three Months Ended Nine Months Ended Three Months Ended  Six Months Ended 
Everest International September 30, September 30, June 30,  June 30, 
(Dollars in thousands) 2009 2008 2009 2008 2010  2009  2010  2009 
Ceded written premiums $68,937  $30,098  $152,819  $73,798  $20,629  $45,534  $48,941  $83,882 
Ceded earned premiums  49,381   25,739   121,664   69,517   34,172   37,947   74,504   72,283 
Ceded losses and LAE  27,070   21,506   63,625   43,762   39,770   17,155   63,786   36,555 
 
(a) Ceded losses and LAE include the Mt. McKinley loss portfolio transfer that constitutes losses ceded under retroactive reinsurance and therefore, in accordance with ASC 944-20 (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 statementstatements of operations and comprehensive income.income (loss).

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

16. Income Taxes
15.INCOME TAXES

The Company uses a projected annual effective tax rate in accordance with ASC 740-10-05 (FAS 109, “Accounting for Income Taxes”), to calculate its quarterly tax expense.expense in accordance with FASB guidance.  Under this methodology, when an interim quarter’s pre-tax income (loss) varies significantly from a full year’s income (loss) projection, the tax impact resulting from the income (loss) variance is effectively spread between the impacted quarter and the remaining quarters of the year, except for discreet items impacting an individual quarter.

The Company recognizes accrued interest related to unrecognized tax benefits and penalties in income taxes.  For the three and ninesix months ended SeptemberJune 30, 2009,2010, the Company expensed approximately $1.3$1.1 million and $3.9$2.2 million, respectively, in interest and penalties.

17. Subsequent Events
 16. SUBSEQUENT EVENTS

The Company has evaluated known recognized and nonrecognizednon-recognized subsequent events through November 16, 2009, the date the financial statements were issued.events.  The Company does not have any subsequent events to report.


ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Industry Conditions.
The worldwide reinsurance and insurance businesses are highly competitive, as well as cyclical by product and market.  As such, financial results tend to fluctuate with periods of constrained availability, high rates and strong profits followed by periods of abundant capacity, low rates and constrained profitability.  Competition in the types of reinsurance and insurance business that we underwrite is based on many factors, including the perceived overall financial strength of the reinsurer or insurer, ratings of the reinsurer or insurer by A.M. Best Company and/or Standard & Poor’s, Rating Services, 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 sourcessource s of potential reinsurance and insurance capacity and competition.

Starting in the latter part of 2007 throughout 2008 and continuing into 2009,2010 there has been a significant slowdown in the global economy, which has negatively impacted the financial resources of the industry.  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 deteriorateddet eriorated 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 beenwere 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 maturitiesmaturity securities 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 maturity and equity securities has resulted in significant declines in the capital bases of most insurance and reinsurance companies. While there has beenther e was significant improvement in the financial markets during 2009 itand into 2010, concerns about interest rates, deflation and sovereign debt levels have hindered financial market recoveries.  It is too early to predict the timing and extent of the impact the capital deterioration and subsequent partial recoverythese financial market fluctuations will have on insurance and reinsurance market conditions.

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 during 2009 and into 2010, the rates of decline have slowed, pricing in some segments was relatively flat and there was upward movement in some others, particularly property catastrophe coverage.coverage in Latin America and Australia where there have been significant losses.  Competition and its effect on rates, terms and conditions vary widely by market and coverage yet continues to be most prevalent in the U.S. casualty insurance and reinsurance markets. The U.S. insurance markets in which we participate were extremely competitive as well, particularly in the workers’ compensation, public entity and contractorwell.

sectors.  While our growth in existing programs 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. In addition, we continue to opportunistically add new programs and lines of business to enhance growth and profitability.

The reinsurance industry has experienced a period of falling rates and volume, particularly in the casualty lines of business.  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 last nine months of 2008, industry-wide capital declined and rating agency scrutiny increased.  It is too early to gauge the extent of hardening, if any, that will occur; however, it appears that much of the redundant capital in the industry has been depleted and the stage is set for firmer markets.

Rates in the international markets have generally been more adequate than in the U.S.,stable 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 with the opening of aour 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 2009 renewals rates, particularly for property catastrophe and retrocessional covers and in international markets, were generally firmer compared to a year ago.

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


 

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

 Three Months Ended Percentage Nine Months Ended Percentage Three Months Ended  Percentage  Six Months Ended  Percentage 
 September 30, Increase/ September 30, Increase/ June 30,  Increase/  June 30,  Increase/ 
(Dollars in millions) 2009 2008 (Decrease) 2009 2008 (Decrease) 2010 2009 (Decrease)  2010 2009  (Decrease) 
Gross written premiums $916.3  $778.1   17.8% $2,506.1  $2,158.1   16.1% $846.0  $811.1   4.3% $1,659.5  $1,589.8   4.4%
Net written premiums  452.7   424.4   6.6%  1,328.4   1,261.0   5.3%  435.1   447.2   -2.7%  848.5   875.7   -3.1%
                                                
REVENUES:                                                
Premiums earned $438.3  $449.9   -2.6% $1,337.5  $1,421.3   -5.9% $442.7  $460.8   -3.9% $856.9  $899.2   -4.7%
Net investment income  65.5   97.3   -32.7%  179.7   292.3   -38.5%  89.3   74.5   19.9%  174.5   114.2   52.8%
Net realized capital gains (losses)  101.4   (108.7)  -193.3%  56.2   (261.3)  -121.5%  (95.5)  22.9  NM  (100.8)  (45.2)  122.8%
Gain on tender of debt  -   -   -   78.3   -   - 
Realized gain on debt repurchase  -   -  NA  -   78.3  NA
Other income (expense)  15.1   8.0   89.6%  7.8   (16.0)  -148.6%  8.7   (7.2)  -221.6%  13.8   (7.3) NM
Total revenues  620.3   446.5   38.9%  1,659.4   1,436.2   15.5%  445.3   551.1   -19.2%  944.4   1,039.1   -9.1%
                                                
CLAIMS AND EXPENSES:                                                
Incurred losses and loss adjustment expenses  242.0   447.0   -45.9%  777.3   1,115.8   -30.3%  314.7   246.1   27.9%  741.8   535.3   38.6%
Commission, brokerage, taxes and fees  77.3   73.8   4.7%  252.4   295.3   -14.5%  88.2   86.9   1.5%  156.0   175.1   -10.9%
Other underwriting expenses  39.9   32.8   21.7%  109.2   95.8   14.0%  35.4   34.9   1.5%  68.1   66.2   2.9%
Corporate expense  1.5   1.9   -22.1%  3.7   3.2   15.4%
Interest, fee and bond issue cost amortization expense  17.1   19.7   -13.5%  53.8   59.2   -9.2%  12.7   17.1   -25.5%  29.1   36.7   -20.8%
Total claims and expenses  376.2   573.3   -34.4%  1,192.7   1,566.1   -23.8%  452.5   386.8   17.0%  998.6   816.5   22.3%
                                                
INCOME (LOSS) BEFORE TAXES  244.1   (126.8) NM   466.7   (129.9) NM   (7.2)  164.2   -104.4%  (54.3)  222.6   -124.4%
Income tax expense (benefit)  80.0   (47.9) NM   128.4   (69.3) NM 
Income tax (benefit) expense  (24.1)  35.7   -167.4%  (26.2)  48.5   -154.1%
NET INCOME (LOSS) $164.1  $(78.9) NM  $338.3  $(60.6) NM  $16.9  $128.5   -86.9% $(28.0) $174.2   -116.1%
                        
         Point         Point                        
RATIOS:         Change         Change         Point Change          Point Change 
Loss ratio  55.2%  99.4%  (44.2)  58.1%  78.5%  (20.4)  71.1%  53.4%  17.7   86.6%  59.5%  27.1 
Commission and brokerage ratio  17.6%  16.4%  1.2   18.9%  20.8%  (1.9)  19.9%  18.9%  1.0   18.2%  19.5%  (1.3)
Other underwriting expense ratio  9.1%  7.2%  1.9   8.2%  6.7%  1.5   8.0%  7.5%  0.5   7.9%  7.4%  0.5 
Combined ratio  81.9%  123.0%  (41.1)  85.2%  106.0%  (20.8)  99.0%  79.8%  19.2   112.7%  86.4%  26.3 
                                                
                                                
             At At Percentage              At  At Percentage 
             September 30, December 31, Increase/              June 30,  December 31, Increase/ 
(Dollars in millions)              2009   2008  (Decrease)              2010  2009 (Decrease) 
Balance sheet data:                                                
Total investments and cash             $8,073.5  $7,395.1   9.2%             $8,103.2  $8,031.6   0.9%
Total assets              13,381.8   12,866.6   4.0%              13,678.0   13,379.6   2.2%
Loss and loss adjustment expense reserves              7,247.0   7,420.0   -2.3%              7,583.5   7,300.1   3.9%
Total debt              1,017.9   1,179.1   -13.7%              951.0   1,018.0   -6.6%
Total liabilities              10,551.3   10,663.7   -1.1%              10,807.8   10,520.8   2.7%
Stockholder's equity              2,830.5   2,203.0   28.5%              2,870.2   2,858.8   0.4%
                                                
(NM, not meaningful)                                                
(Some amounts may not reconcile due to rounding)                        
(NA, not applicable)                        
(Some amounts may not reconcile due to rounding.)                        
 
Revenues.
Premiums.  Gross written premiums increased by $138.1$34.9 million, or 17.8%4.3%, for the three months ended SeptemberJune 30, 20092010 compared to the three months ended SeptemberJune 30, 2008,2009, reflecting an increase of $101.7$43.5 million in our reinsurance business, and $36.5partially offset by a decline of $8.6 million in our insurance business.  Gross written premiums increased by $348.0$69.7 million, or 16.1%4.4%, for the ninesix months ended SeptemberJune 30, 20092010 compared to the ninesix months ended SeptemberJune 30, 2008,2009, reflecting an increase of $294.7$54.7 million in our reinsurance business and $53.3$15.0 million in our insurance business.  The increase in reinsurance premiums was the result of increased reinsurance business waswritings from Brazil, Asia and Canadian locations.  The increase in insurance premiums were primarily in t he workers’ compensation, Florida property and financial institution D&O and E&O lines of business.


primarily attributable to increased rates on property business, in both the international and U.S. markets, new crop hail quota share treaty business, expanded participation on renewal contracts and new writings as ceding companies continue to favor reinsurers such as Everest, with strong financial ratings. The increase in insurance premiums were primarily in the financial institutions directors and officers (“D&O”) and errors and omissions (“E&O”) lines of business, which are new offerings for us, as well as additional written property insurance premiums in Florida where rates to exposure remain attractive.

Net written premiums increaseddecreased by $28.2$12.1 million, or 6.6%2.7%, for the three months ended SeptemberJune 30, 20092010 compared to the three months ended SeptemberJune 30, 2008,2009 and $67.4by $27.2 million, or 5.3%3.1%, for the ninesix months ended SeptemberJune 30, 20092010 compared to the ninesix months ended SeptemberJune 30, 2008.2009.  The increasesdecrease in net written premiums arewas primarily due to increased reinsurance on the increase in gross written premiums, partially offset by the increase innewer insurance program business as well as increased cessions under the affiliated quota share agreement.on an existing insurance program.  Premiums earned decreased by $11.6$18.1 million, or 2.6%3.9%, for the three months ended SeptemberJune 30, 20092010 compared to the three months ended SeptemberJune 30, 2008,2009 and $83.8by $42.4 million, or 5.9%4.7%, for the ninesix months ended SeptemberJune 30, 20092010 compared to the ninesix months ended SeptemberJune 30, 2008.2009.  The change in net 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 onat the initiation of coverage.the coverage period.

Net Investment Income. Net investment income decreasedincreased by 32.7%19.9% for the three months ended SeptemberJune 30, 2009,2010, compared to the three months ended SeptemberJune 30, 20082009, and by 38.5%52.8% for the ninesix months ended SeptemberJune 30, 2009,2010, compared to the ninesix months ended SeptemberJune 30, 2008,2009, primarily due primarily to lossesnet investment gains from our limited partnership investmentspartnerships that principally invest in public and non-public securities, both equity and debt, which reportdebt.  Gains related to us on a quarter lag, a reductionthese limited partnerships were $8.9 million and $2.0 million for the three months ended June 30, 2010 and 2009, respectively.  Gains related to these limited partnerships were $18.3 million for the six months ended June 30, 2010, compared with losses of $32.1 million for the comparable period in invested assets resulting from the October 1, 2008 loss portfolio transfer agreement with Everest Reinsurance (Bermuda), Ltd. (“Bermuda Re”) and lower yields for new long and short term fixed maturity investments.  As a result, net2009.  Net pre-tax investment income,incom e, as a percentage of average invested assets, was 3.4%at 4.5% for the three months ended SeptemberJune 30, 20092010, compared to 4.6%4.0% for the three months ended SeptemberJune 30, 20082009 and 3.1%at 4.4% for the ninesix months ended SeptemberJune 30, 20092010, compared to 4.5%3.0% for the ninesix months ended SeptemberJune 30, 2008.2009.   The variances in these yields were primarily due to the fluctuations in limited partnership income.

Net Realized Capital Gains (Losses).  Net realized capital gainslosses were $101.4 million and $56.2$95.5 million for the three and nine months ended SeptemberJune 30, 2010, which consisted of a $94.4 million loss in fair value re-measurements and $1.1 million of loss from sales on our available for sale fixed maturity and equity securities. Net realized capital gains were $22.9 million for the three months ended June 30, 2009, respectively.  which consisted of a $22.5 million gain in fair value re-measurements, $5.4 million of gains from sales of fixed maturity and equity securities, partially offset by $4.9 million of other-than-temporary impairments on our available for sale fixed maturity securities.

Net realized capital losses were $108.7 million and $261.3$100.8 million for the three and ninesix months ended SeptemberJune 30, 2008, respectively.  The2010, which consisted of a $100.9 million loss in fair value re-measurements, which were partially offset by $0.1 million of gains from sales on our available for sale fixed maturity and equity securities.  Net realized gainscapital losses were $45.2 million for the six months ended June 30, 2009, which consisted of $23.1 million of losses from sales of fixed maturity and losses reflected for each period were primarily a function of changesequity securities, $16.6 million loss in sales, fair value re-measurements and other-than-temporary impairments. The largest changes were the result of the fair value re-measurements of our investment$5.5 million loss in an affiliated entity’s shares and public equity securities portfolio.  During 2008, our public equity securities portfolio was much larger and with the equity markets declining rapidly, fair value re-measurements resulted in realized losses.  Conversely in 2009, the equity markets improved resulting in fair value re-measurement gains. In addition, other-than-temporary impairments on our available for sale fixed income securities, decreased period over period due to the improving financial markets.maturity securities.

Realized Gain on Debt Repurchase.  On March 19, 2009, we announced the commencement ofcommenced a cash tender offer for any and all of the 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 income of $15.1$8.7 million and $7.8$13.8 million for the three and ninesix months ended SeptemberJune 30, 2009, respectively. We recorded other income of $8.0 million2010, respectively, and other expense of $16.0$7.2 million and $7.3 million for the three and ninesix months ended SeptemberJune 30, 2008,2009, respectively.  The varianceschanges were primarily due to the result of fluctuations in foreign currency exchange rates and the deferrals on retroactive reinsurance agreements with affiliates and changes in foreign currency exchange rates for the corresponding periods.


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


  Three Months Ended September 30,
 CurrentRatio%/ Prior Ratio%/ Total Ratio%/
(Dollars in millions)YearPt Change Years Pt Change Incurred Pt Change
2009                
Attritional (a)$ 246.756.3%  $ (19.1) -4.4%  $ 227.6 51.9% 
Catastrophes  11.22.6%    3.2 0.7%    14.4 3.3% 
A&E  -0.0%    - 0.0%    - 0.0% 
Total segment$ 257.958.8%  $ (15.9) -3.6%  $ 242.0 55.2% 
                 
2008                
Attritional (a)$ 301.767.1%  $ (12.2) -2.7%  $ 289.5 64.4% 
Catastrophes  151.533.7%    6.0 1.3%    157.5 35.0% 
A&E  -0.0%    - 0.0%    - 0.0% 
Total segment$ 453.2100.7%  $ (6.2) -1.4%  $ 447.0 99.4% 
                 
Variance 2009/2008                
Attritional (a)$ (55.0) (10.8)pts $ (6.9)  (1.6)pts $ (61.9)  (12.4)pts
Catastrophes  (140.3) (31.1)pts   (2.8)  (0.6)pts   (143.1)  (31.7)pts
A&E  - -pts   -  -pts   -  -pts
Total segment$ (195.3) (41.9)pts $ (9.7)  (2.2)pts $ (205.0)  (44.2)pts
  Nine Months Ended September 30,
 CurrentRatio%/ Prior Ratio%/ Total Ratio%/
(Dollars in millions)YearPt Change Years Pt Change Incurred Pt Change
2009                
Attritional (a)$ 789.059.0%  $ (36.0) -2.7%  $ 753.0 56.3% 
Catastrophes  20.31.5%    4.0 0.3%    24.3 1.8% 
A&E  -0.0%    - 0.0%    - 0.0% 
Total segment$ 809.360.5%  $ (32.0) -2.4%  $ 777.3 58.1% 
                 
2008                
Attritional (a)$ 870.361.2%  $ 62.9 4.4%  $ 933.1 65.7% 
Catastrophes  168.311.8%    14.4 1.0%    182.7 12.9% 
A&E  -0.0%    - 0.0%    - 0.0% 
Total segment$ 1,038.673.1%  $ 77.2 5.4%  $ 1,115.8 78.5% 
                 
Variance 2009/2008                
Attritional (a)$ (81.3) (2.2)pts $ (98.8)  (7.1)pts $ (180.2)  (9.4)pts
Catastrophes  (148.0) (10.3)pts   (10.4)  (0.7)pts   (158.4)  (11.0)pts
A&E  - -pts   -  -pts   -  -pts
Total segment$ (229.3) (12.6)pts $ (109.2)  (7.8)pts $ (338.5)  (20.4)pts
                 
(a) Attritional losses exclude catastrophe and A&E losses.              
(Some amounts may not reconcile due to rounding.)              
Incurred losses and LAE were lower by $205.0 million, or 45.9%, for the three months ended September 30, 2009 compared to the same period in 2008. Catastrophe losses, at $14.4 million for the three months ended September 30, 2009, were $143.1 million lower than the same period in 2008, primarily due to the absence in 2009, of any large catastrophe losses.  Attritional losses incurred decreased $61.9 million (12.4 points) for the third quarter, period over period, due to mix of business and premiums earned, in conjunction with affiliated cessions.

Incurred losses and LAE were lower by $338.5 million, or 30.3%, for the nine months ended September 30, 2009 compared to the same period in 2008.  The primary contributor to the decrease was the result of the reduction in current year catastrophe losses of $148.0 million. The variance in the prior years’ attritional losses was primarily due to the absence, in 2009, of $85.3 million reserve strengthening on an auto loan credit program.

Claims and Expenses.
Incurred Losses and LAE.  The following tables present our incurred losses and LAE for the periods indicated.


  Three Months Ended June 30,
  Current  Ratio %/ Prior  Ratio %/ Total  Ratio %/
(Dollars in millions) Year  Pt Change Years  Pt Change Incurred  Pt Change
2010                     
Attritional (a) $265.5   60.0%  $9.7   2.2%  $275.2   62.2% 
Catastrophes (b)  45.9   10.4%   (6.4)  -1.4%   39.5   8.9% 
A&E  -   0.0%   -   0.0%   -   0.0% 
Total $311.4   70.3%  $3.3   0.8%  $314.7   71.1% 
                            
2009                           
Attritional (a) $284.8   61.8%  $(37.0)  -8.0%  $247.8   53.8% 
Catastrophes  -   0.0%   (1.7)  -0.4%   (1.7)  -0.4% 
A&E  -   0.0%   -   0.0%   -   0.0% 
Total $284.8   61.8%  $(38.7)  -8.4%  $246.1   53.4% 
                            
Variance 2010/2009                           
Attritional (a) $(19.3)  (1.8)pts $46.7   10.2 pts $27.4   8.4 pts
Catastrophes  45.9   10.4 pts  (4.7)  (1.0)pts  41.2   9.3 pts
A&E  -   - pts  -   - pts  -   - pts
Total $26.6   8.5 pts $42.0   9.2 pts $68.6   17.7 pts



  Six Months Ended June 30,
  Current  Ratio %/ Prior  Ratio %/ Total  Ratio %/
(Dollars in millions) Year  Pt Change Years  Pt Change Incurred  Pt Change
2010                     
Attritional (a) $533.8   62.3%  $0.4   0.1%  $534.2   62.3% 
Catastrophes (b)  211.1   24.6%   (3.5)  -0.4%   207.5   24.2% 
A&E  -   0.0%   -   0.0%   -   0.0% 
Total $744.9   86.9%  $(3.1)  -0.4%  $741.8   86.6% 
                            
2009                           
Attritional (a) $542.3   60.3%  $(16.9)  -1.9%  $525.4   58.4% 
Catastrophes  9.1   1.0%   0.9   0.1%   9.9   1.1% 
A&E  -   0.0%   -   0.0%   -   0.0% 
Total $551.3   61.3%  $(16.0)  -1.8%  $535.3   59.5% 
                            
Variance 2010/2009                           
Attritional (a) $(8.5)  2.0 pts $17.3   2.0 pts $8.8   3.9 pts
Catastrophes  202.0   23.6 pts  (4.4)  (0.5)pts  197.6   23.1 pts
A&E  -   - pts  -   - pts  -   - pts
Total $193.6   25.6 pts $12.9   1.4 pts $206.5   27.1 pts
                            
(a) Attritional losses exclude catastrophe and A&E losses.                        
(b) Effective with the June 30, 2010 reporting period, which includes June 30, 2010 year-to-date and the quarter results, 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 increased by $68.6 million, or 27.9%, for the three months ended June 30, 2010 compared to the three months ended June 30, 2009.  Of the $68.6 million increase, current year catastrophe losses increased $45.9 million, or 10.4 points, period over period, primarily due to the Chilean earthquake, partially offset by the takedown of Windstorm Xynthia as this catastrophe loss was less than we anticipated.  The $27.4 million increase in attritional losses was primarily the result of unfavorable loss development on prior years’ attritional loss reserves in 2010 as compared to favorable loss development on prior years’ attritional loss reserves in 2009.

Incurred losses and LAE increased by $206.5 million, or 38.6%, for the six months ended June 30, 2010 compared to the six months ended June 30, 2009.  Of the $206.5 million increase, current year catastrophe losses increased $202.0 million, or 23.6 points, period over period, primarily due to the Chilean earthquake and Australian hailstorms.


Commission, Brokerage, Taxes and Fees.Commission, brokerage, taxes and fees increased by $3.4$1.3 million, or 4.7%1.5%, for the three months ended SeptemberJune 30, 20092010 compared to the same period in 2008,2009. Commission, brokerage, taxes and fees decreased by $42.9$19.1 million, or 14.5%10.9%, for the ninesix months ended SeptemberJune 30, 20092010 compared to the same period in 2008.  The change in this directly variable expense was influenced by changes in2009, primarily the result of lower premiums earned and mix of business and increased cessions under the affiliated quota share agreement.business.

Other Underwriting Expenses.  Other underwriting expenses were $39.9 million compared to $32.8$35.4 million for the three months ended SeptemberJune 30, 2010 compared to $34.9 million for the three months ended June 30, 2009, and 2008, respectively, and $109.2 million compared to $95.8$68.1 million for the ninesix months ended SeptemberJune 30, 2009 and 2008, respectively. These2010 compared to $66.2 million for the six months ended June 30, 2009.  Other underwriting expense increases were relatively consistent across our reinsurance business, due to normal growth in expenses but decreased for our insurance business due to cost containment measures for the result of expansion as we continue to grow our books of business.  In addition, other underwriting expenses included corporatethree and six months ended June 30, 2010 and 2009.

Corporate Expenses.  Corporate expenses, which are expenses that are not allocated to segments, of $1.7were $1.5 million and $1.4$1.9 million for the three months ended SeptemberJune 30, 20092010 and 2008,2009, respectively, and $4.9$3.7 million and $4.5$3.2 million for the ninesix months ended SeptemberJune 30, 2010 and 2009, respectively.  These expenses were previously included as underwriting expenses and 2008, respectively.therefore included in the other underwriting expense ratio.  Effective January 1, 2010, these expenses were removed from the calculation of the other underwriting expense ratio and prior periods were recalculated to conform.

Interest, Fees and Bond Issue Cost Amortization Expense.  Interest and other expense was $17.1$12.7 million and $19.7$17.1 million for the three months ended SeptemberJune 30, 20092010 and 2008,2009, respectively, and $53.8$29.1 million and $59.2$36.7 million for the ninesix months ended SeptemberJune 30, 2010 and 2009, and 2008, respectively.  The decrease, period over period, wasThese decreases were primarily due to the partialcombination of the repurchase of our long term subordinated notesdebt in March 2009.the first quarter of 2009 and maturing of debt in 2010.

Income Tax Expense (Benefit). Expense.  We had an income tax expensebenefits of $80.0$24.1 million and $128.4$26.2 million for the three and ninesix months ended SeptemberJune 30, 2009, respectively, and an2010, respectively.  We had income tax benefit $47.9expense of $35.7 million and $69.3$48.5 million for the three and ninesix months ended SeptemberJune 30, 2008,2009, respectively.  The period over period variances werevariance was primarily due to the increasepre-tax losses in 2010 versus pre-tax net income in 2009 versus pre-tax net losses in 2008.2009.  Our income tax is primarily a function of the statutory tax rate coupled with the impact from tax-preferenced investment income.

Net Income (Loss).
OurWe reported net income was $164.1of $16.9 million and $338.3a net loss of $28.0 million for the three and ninesix months ended SeptemberJune 30, 2009,2010, respectively, compared to a net lossincome of $78.9$128.5 million and $60.6$174.2 million for the three and ninesix months ended SeptemberJune 30, 2008,2009, respectively.  These changes wereThis change was the result of the items discussed above.

Ratios.
Our combined ratio decreasedincreased by 41.119.2 points to 81.9%99.0% for the three months ended SeptemberJune 30, 20092010 compared to 123.0%79.8% for the three months ended SeptemberJune 30, 2008, and decreased2009.  Our combined ratio increased by 20.826.3 points to 85.2%112.7% for the ninesix months ended SeptemberJune 30, 20092010 compared to 106.0%86.4% for the ninesix months ended SeptemberJune 30, 2008.2009.  The loss ratio component decreased 44.2increased 17.7 points and 20.427.1 points for the three and ninesix months ended SeptemberJune 30, 2009, respectively, compared to2010 over the same periodsperiod last year, principally due to the significant decrease10.4 point and 23.6 point increase in current year catastrophe losses.losses as a result of the Chilean earthquake and Australian hailstorms. The commission and brokerage ratio component increased by 1.21.0 points and decreased by 1.91.3 points for the three and ninesix months ended SeptemberJune 30, 2009,2010, respectively, compared toover the same periodsperiod last year, due toprimarily as a resul t of the mix ofin business quarter over quarter and increased cessions under the affiliated quota share agreement,reinstatement premiums, which are fully earned, but have no commission expense, year over year, while the other underwriting expense ratio component increased by 1.9 points and 1.5 points for the three and nine months ended September 30, 2009, respectively, compared towas relatively flat over the same periodsperiod last year.

Stockholder's Equity.
Stockholder's equity increased by $627.5$11.5 million to $2,830.5$2,870.2 million at SeptemberJune 30, 20092010 from $2,203.0$2,858.8 million at December 31, 2008,2009, principally as a result of $338.3 million of net income, $261.2$34.5 million of unrealized appreciation on investments, net of tax, $21.6$3.0 million of share-based compensation transactions, $1.2 million of foreign currency translation adjustments and $4.1$0.8 million of share-based compensation transactions.pension adjustments, partially offset by $28.0 million of net loss.


Consolidated Investment Results

Net Investment Income.
Net investment income decreased 32.7%increased 19.9% to $65.5$89.3 million for the three months ended SeptemberJune 30, 2009 from $97.32010 compared to $74.5 million for the three months ended SeptemberJune 30, 2008,2009, and decreasedincreased 52.8% to $179.7$174.5 million for the ninesix months ended SeptemberJune 30, 2009 from $292.32010 compared to $114.2 million for the ninesix months ended SeptemberJune 30, 2008.  These decreases were2009.  The increase for the six months, period over period, was primarily due to an increase in recorded gains in 2010 as opposed to recorded losses in 2009 from our limited partnership investmentsinvestments.  The losses in 2009 were the result of 2008 fourth quarter losses from those limited partnerships that principally investinvested in public and non-public securities both equity and debt, which reported to uswere on a quarter lag, a reduction in invested assets resulting from the October 1, 2008 loss portfolio transfer agreement with Bermuda Re and lower yields for new long and short term fixed maturity investments.reporting lag.

The following table shows the components of net investment income for the periods indicated:
 
 Three Months Ended  Nine Months Ended  Three Months Ended  Six Months Ended 
 September 30,  September 30,  June 30,  June 30, 
(Dollars in millions) 2009  2008  2009  2008  2010  2009  2010  2009 
Fixed maturity securities $71.0  $81.1  $212.9  $233.1 
Fixed maturities $75.8  $71.6  $149.4  $141.9 
Equity securities  0.8   1.8   2.2   4.9   2.6   0.7   5.0   1.4 
Short-term investments and cash  0.3   4.3   3.3   23.8 
Short-term investments and cash
  0.1   0.8   0.2   3.1 
Other invested assets                                
Limited partnerships  (4.4)  10.2   (36.5)  29.9   8.9   2.0   18.3   (32.1)
Other  0.7   2.4   5.7   7.2   4.5   2.3   6.3   5.0 
Total gross investment income  68.2   99.8   187.6   299.0   91.9   77.4   179.2   119.3 
Interest credited and other expense  (2.8)  (2.4)  (7.9)  (6.6)
Interest debited (credited) and other expense  (2.6)  (2.9)  (4.7)  (5.1)
Total net investment income $65.5  $97.3  $179.7  $292.3  $89.3  $74.5  $174.5  $114.2 
(Some amounts may not reconcile due to rounding)                
(Some amounts may not reconcile due to rounding.)                
 
The following tables show a comparison of various investment yields for the periods indicated:
 
At At
At September 30, At December 31,June 30, December 31,
2009 20082010 2009
Imbedded pre-tax yield of cash and invested assets3.8% 4.3%3.9% 3.7%
Imbedded after-tax yield of cash and invested assets3.1% 3.5%3.1% 3.1%
 
Three Months Ended Nine Months EndedThree Months Ended Six Months Ended
September 30, September 30,June 30, June 30,
20092008 200920082010 2009 2010 2009
Annualized pre-tax yield on average cash and invested assets3.4%4.6% 3.1%4.5%4.5% 4.0% 4.4% 3.0%
Annualized after-tax yield on average cash and invested assets2.9%3.6% 2.7%3.6%3.6% 3.3% 3.6% 2.7%
 

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

 Three Months Ended  Nine Months Ended 
 September 30,  September 30,  Three Months Ended June 30,  Six Months Ended June 30, 
(Dollars in millions) 2009  2008  Variance  2009  2008  Variance  2010  2009  Variance  2010  2009  Variance 
Gains (losses) from sales:                                    
Fixed maturity, market value                  
Fixed maturity securities, market value                  
Gains $2.0  $-  $2.0  $4.0  $1.1  $2.9  $5.4  $0.5  $4.9  $7.0  $2.0  $ 5.0 
Losses  (6.1)  (12.2)  6.1   (36.6)  (14.2)  (22.4)  (3.7)  (0.9)  (2.8)  (6.2)  (30.5)  24.3 
Total  (4.1)  (12.2)  8.1   (32.6)  (13.1)  (19.5)  1.6   (0.4)  2.0   0.8   (28.5)  29.3 
                                                
Fixed maturity securities, fair value                                                
Gains  0.3   -   0.3   0.6   -   0.6 
Losses  (0.1)  -   (0.1)  (0.1)  -   (0.1)
Total  0.2   -   0.2   0.4   -   0.5 
                        
Equity securities, market value                        
Gains  8.0   -   8.0   8.0   -   8.0   0.2   0.1   0.1   0.3   0.3   - 
Losses  -   -   -   -   -   -   -   -   -   -   (0.1)  0.1 
Total  8.0   -   8.0   8.0   -   8.0   0.2   0.1   0.1   0.3   0.2   0.1 
                                                
Equity securities, fair value                                                
Gains  1.3   3.8   (2.5)  7.2   5.9   1.3   1.2   5.7   (4.5)  3.6   5.9   (2.3)
Losses  -   (4.8)  4.8   (0.7)  (18.5)  17.8   (4.1)  -   (4.1)  (4.6)  (0.7)  (3.9)
Total  1.3   (1.0)  2.3   6.5   (12.6)  19.1   (2.9)  5.7   (8.6)  (1.0)  5.2   (6.2)
                                                
Total net realized gains (losses) from sales                                                
Gains  11.6   3.8   7.8   19.8   7.0   12.8   6.8   6.3   0.5   10.9   8.2   2.7 
Losses  (6.3)  (17.0)  10.7   (37.5)  (32.7)  (4.8)  (7.8)  (0.9)  (6.9)  (10.8)  (31.3)  20.5 
Total  5.4   (13.2)  18.6   (17.7)  (25.7)  8.0   (1.1)  5.4   (6.5)  0.1   (23.1)  23.2 
                                                
Other than temporary impairments:  -   (63.8)  63.8   (5.5)  (67.9)  62.4 
Other-than-temporary impairments:  -   (4.9)  4.9   -   (5.5)  5.5 
                                                
Gains (losses) from fair value adjustments:                                                
Fixed maturities, fair value  5.8   (0.2)  6.0   7.8   (0.2)  8.0   (2.5)  2.0   (4.5)  0.5   2.0   (1.5)
Equity securities, fair value  23.1   (58.8)  81.9   23.4   (122.9)  146.3   (30.0)  17.3   (47.3)  (16.8)  0.4   (17.2)
Other invested assets, fair value  67.1   27.4   39.7   48.1   (44.6)  92.7   (61.9)  3.2   (65.1)  (84.6)  (19.0)  (65.6)
Total  96.0   (31.6)  127.6   79.3   (167.7)  247.0   (94.4)  22.5   (116.9)  (100.9)  (16.7)  (84.3)
                                                
Total net realized gains (losses) $101.4  $(108.7) $210.0  $56.2  $(261.3) $317.5 
Total net realized capital gains (losses) $(95.5) $22.9  $(118.4) $(100.8) $(45.2) $(55.6)
                                                
(Some amounts may not reconcile due to rounding)                        
(Some amounts may not reconcile due to rounding.)                        
We reported $101.4

Net realized capital losses were $95.5 million and net realized capital gains and $108.7were $22.9 million net realized capital losses for the three months ended SeptemberJune 30, 20092010 and 2008,2009, respectively.  We recorded $96.0$94.4 million in net realized capitalof losses and $22.5 million of gains and $31.6 million in net realized capital losses due to fair value re-measurements on fixed maturity and equity securities and other invested assets, and $1.1 million of net realized capital losses and $5.4 million of net realized capital gains from sales of fixed maturity and equity securities for the three months ended SeptemberJune 30, 2010 and 2009, and 2008, respectively. This improvement in fair value was primarily due to the healthier financial markets.  In addition, we did not record any other-than-temporary impairments for the three months ended SeptemberJune 30, 20092010 compared to the $63.8$4.9 million recorded for the three months ended SeptemberJune 30, 2008.2009.

We reported $56.2 million net realized capital gains and $261.3 million netNet realized capital losses were $100.8 million and $45.2 million for the ninesix months ended SeptemberJune 30, 20092010 and 2008,2009, respectively.  We recorded $79.3$100.9 million in net realized capital gains and $167.7$16.7 million in net realized capitalof losses due to fair value re-measurements on fixed maturity and equity securities and other invested assets, and $0.1 million of net realized capital gains and $23.1 million of net realized capital losses from sales of fixed maturity and equity securities for the ninesix months ended June 30, 2010 and 2009, respectively.  In addition, we did not record any other-than-temporary impairments for the six months ended June 30, 2010 compared to $5.5 million recorded for the six months ended June 30, 2009.



months ended September 30, 2009 and 2008, respectively. Once again, this improvement in fair value was primarily due to the improved financial markets. We recorded other-than-temporary impairments of $5.5 million and $67.9 million for the nine months ended September 30, 2009 and 2008, respectively.

Segment Results.
Through our subsidiaries, we operate in four segments: U.S. Reinsurance, U.S. Insurance, Specialty Underwriting and International.  The U.S. Reinsurance operation writes property and casualty reinsurance, on both a treaty and facultative basis, through reinsurance brokers, as well as directly with ceding companies within the U.S.  The U.S. Insurance operation writes property and casualty insurance primarily through 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.  The International operation writes non-U.S. property and casualty reinsurance through Everest Reinsurance Company’s (“Everest Re”) branchesRe’s br anches in Canada and Singapore and offices in 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.
 
 Three Months Ended September 30,  Nine Months Ended September 30,  Three Months Ended June 30,  Six Months Ended June 30, 
(Dollars in millions) 2009  2008  Variance  % Change  2009  2008  Variance  % Change  2010 2009 Variance % Change 2010 2009 Variance % Change
Gross written premiums $345.6  $280.5  $65.1   23.2% $876.0  $714.5  $161.5   22.6% $268.2  $266.2  $2.1   0.8% $512.2  $530.5  $(18.3)  -3.4%
Net written premiums  191.7   146.5   45.2   30.9%  487.8   425.0   62.9   14.8%  150.5   156.8   (6.3)  -4.0%  278.9   296.2   (17.3)  -5.8%
                                                                
Premiums earned $162.0  $167.5  $(5.4)  -3.2% $489.1  $527.5  $(38.4)  -7.3% $162.5  $180.7  $(18.2)  -10.1% $289.5  $327.0  $(37.5)  -11.5%
Incurred losses and LAE  56.2   240.7   (184.6)  -76.7%  232.3   446.0   (213.8)  -47.9%  84.3   86.0   (1.6)  -1.9%  174.5   176.1   (1.7)  -0.9%
Commission and brokerage  21.4   27.5   (6.1)  -22.1%  90.5   125.8   (35.2)  -28.0%  35.9   37.2   (1.4)  -3.6%  63.1   69.1   (6.1)  -8.8%
Other underwriting expenses  9.7   7.8   1.8   23.3%  25.3   23.5   1.8   7.4%  9.4   8.0   1.4   16.9%  17.2   15.6   1.6   10.3%
Underwriting gain (loss) $74.8  $(108.6) $183.4   -168.9% $141.0  $(67.8) $208.8  NM  $32.9  $49.5  $(16.6)  -33.5% $34.8  $66.2  $(31.4)  -47.5%
                                                                
             Point Chg              Point Chg              Point Chg              Point Chg 
Loss ratio  34.7%  143.7%      (109.0)  47.5%  84.6%      (37.1)  51.9%  47.6%      4.3   60.3%  53.8%      6.5 
Commission and brokerage ratio  13.2%  16.4%      (3.2)  18.5%  23.8%      (5.3)  22.1%  20.6%      1.5   21.8%  21.1%      0.7 
Other underwriting expense ratio  5.9%  4.7%      1.2   5.2%  4.5%      0.7   5.7%  4.4%      1.3   5.9%  4.9%      1.0 
Combined ratio  53.8%  164.8%      (111.0)  71.2%  112.9%      (41.7)  79.7%  72.6%      7.1   88.0%  79.8%      8.2 
                                                                
(NM, not meaningful)                                
(Some amounts may not reconcile due to rounding)                             
(Some amounts may not reconcile due to rounding.)(Some amounts may not reconcile due to rounding.)                            
 
Premiums. Gross written premiums increased by 23.2%0.8% to $345.6$268.2 million for the three months ended SeptemberJune 30, 20092010 from $280.5$266.2 million for the three months ended SeptemberJune 30, 2008,2009, primarily due to $26.8an $11.3 million from several new crop hail quota share treaties, a $20.9 million (28.6%(14.1%) increase in U.S. treaty casualty volume a $13.4and an $8.4 million (7.0%(6.3%) increase in treaty property volume, partially offset by a $13.9 million (57.1%) decrease in the crop hail quota share treaties and a $4.0$3.5 million (22.7%(12.2%) increasedecrease in facultative volume. Our treaty casualty premiums were higher as we are writing more quota share business, which in part, is driven by the capital concerns of our ceding company customers looking for broader reinsurance support. The crop hail business is a new 2009 line of business for us and we anticipate similar volume in the remaining quarter of 2009. Net written premiums increaseddecreased by 30.9%4.0% to $191.7$150.5 million for the three months ended SeptemberJune 30, 20092010 compared to $146.5$156.8 million for the three months ended SeptemberJune 30, 2008,2009, primarily due to thea 7.6% increase in gross written premiums.cessions.  Premiums earned decreaseddecr eased by 3.2%10.1% to $162.0$162.5 million for the three months ended SeptemberJune 30, 20092010 compared to $167.5$180.7 million for the three months ended SeptemberJune 30, 2008.2009.  The change in premiums earned relative to net written premiums is primarily the result of timing;timing on proportional contracts where premiums for proportionate contracts, are earned ratably over the coverage period whereas written premiums are recorded on the initiation of the coverage period. In addition, part of the variance was due to the impact of changes in the affiliated quota share agreement.

Gross written premiums increaseddecreased by 22.6%3.4% to $876.0$512.2 million for the ninesix months ended SeptemberJune 30, 20092010 from $714.5$530.5 million for the ninesix months ended SeptemberJune 30, 2008,2009, primarily due to $68.5a $19.2 million from(46.0%) decrease in the new crop hail quota share treaties, a $59.8$16.9 million (29.7%(33.9%) increasedecrease in facultative volume and a $9.0 million (5.4%) decrease in U.S. treaty casualty volume, partially offset by a $31.0$27.0 million (7.0%(10.0%) increase in treaty property volume and a $2.2 million (3.2%) increase in facultative volume. Net written premiums increaseddecreased by 14.8%5.8% to $487.8$278.9 million for the ninesix months ended SeptemberJune 30, 20092010 compared to $425.0$296.2 million for the ninesix months ended SeptemberJune 30, 2008,2009, primarily due to the increasedecrease in gross written premiums combined with increased cessions under the affiliated quota share agreement.premiums.  Premiums earned decreased by 7.3%11.5% to $489.1$289.5 million for the ninesix months ended SeptemberJune 30, 20092010 compared to $527.5$327.0 million for the ninesix months ended SeptemberJune 30, 2008.2009 .  Variances for net written premiums and premiums earned for the ninesix months were reflective ofdriven by similar factors as those discussed above for the change in premium volume, timing and cessions under the affiliated quota share reinsurance agreement.three months.


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

 Three Months Ended September 30, Three Months Ended June 30,
CurrentRatio%/ Prior Ratio%/ Total Ratio%/ Current  Ratio %/ Prior  Ratio %/ Total  Ratio %/
(Dollars in millions)YearPt Change Years Pt Change Incurred Pt Change Year  Pt Change Years  Pt ChangeIncurred  Pt Change
2010                     
Attritional $79.0   48.6%  $9.7   6.0%  $88.7   54.6% 
Catastrophes  (2.8)  -1.7%   (1.6)  -1.0%   (4.4)  -2.7% 
A&E  -   0.0%   -   0.0%   -   0.0% 
Total segment $76.2   46.9%  $8.1   5.0%  $84.3   51.9% 
                           
2009                                        
Attritional$ 72.744.9%  $ (18.4) -11.4%  $ 54.3 33.5%  $104.0   57.6%  $(16.2)  -8.9%  $87.8   48.6% 
Catastrophes  -0.0%   1.8 1.1%   1.8 1.1%   -   0.0%   (1.9)  -1.0%   (1.9)  -1.0% 
A&E  -0.0%    - 0.0%    - 0.0%   -   0.0%   -   0.0%   -   0.0% 
Total segment$ 72.744.9%  $ (16.6) -10.2%  $ 56.2 34.7%  $104.0   57.6%  $(18.0)  -10.0%  $86.0   47.6% 
                                        
2008             
Variance 2010/2009                           
Attritional$ 96.957.8%  $ 4.9 2.9%  $ 101.8 60.8%  $(25.0)  (9.0)pts $25.9   14.9 pts $0.9   6.0 pts
Catastrophes  133.479.7%   5.6 3.3%   138.9 83.0%   (2.8)  (1.7)pts  0.3   - pts  (2.5)  (1.7)pts
A&E  -0.0%    - 0.0%    - 0.0%   -   - pts  -   - pts  -   - pts
Total segment$ 230.3137.5%  $ 10.5 6.3%  $ 240.7 143.7%  $(27.8)  (10.7)pts $26.1   15.0 pts $(1.7)  4.3 pts
             
Variance 2009/2008             
Attritional$ (24.1) (13.0)pts $ (23.3)  (14.3)pts $ (47.5)  (27.3)pts
Catastrophes  (133.4) (79.7)pts  (3.7)  (2.2)pts  (137.1)  (81.8)pts
A&E  -pts   -  -pts   -  -pts
Total segment$ (157.5) (92.6)pts $ (27.1)  (16.5)pts $ (184.6)  (109.0)pts
 
 Nine Months Ended September 30, Six Months Ended June 30,
CurrentRatio%/ Prior Ratio%/ Total Ratio%/ Current  Ratio %/ Prior  Ratio %/ Total  Ratio %/
(Dollars in millions)YearPt Change Years Pt Change Incurred Pt Change Year  Pt Change Years  Pt Change Incurred  Pt Change
2010                     
Attritional $155.2   53.6%  $5.5   1.9%  $160.7   55.5% 
Catastrophes  12.9   4.4%   0.9   0.3%   13.8   4.8% 
A&E  -   0.0%   -   0.0%   -   0.0% 
Total segment $168.1   58.1%  $6.4   2.2%  $174.5   60.3% 
                           
2009                                        
Attritional$ 250.251.2%  $ (18.1) -3.7%  $ 232.1 47.5%  $177.5   54.3%  $0.3   0.1%  $177.8   54.4% 
Catastrophes  -0.0%   0.1 0.0%   0.1 0.0%   -   0.0%   (1.7)  -0.5%   (1.7)  -0.5% 
A&E  -0.0%    - 0.0%    - 0.0%   -   0.0%   -   0.0%   -   0.0% 
Total segment$ 250.251.2%  $ (18.0) -3.7%  $ 232.3 47.5%  $177.5   54.3%  $(1.4)  -0.4%  $176.1   53.8% 
                                        
2008             
Attritional$ 285.654.2%  $ 9.5 1.8%  $ 295.1 55.9% 
Catastrophes  139.426.4%   11.6 2.2%   150.9 28.6% 
A&E  -0.0%    - 0.0%    - 0.0% 
Total segment$ 425.080.6%  $ 21.0 4.0%  $ 446.0 84.6% 
             
Variance 2009/2008             
Variance 2010/2009                           
Attritional$ (35.4) (3.0)pts $ (27.6)  (5.5)pts $ (62.9)  (8.5)pts $(22.3)  (0.7)pts $5.2   1.8 pts $(17.1)  1.1 pts
Catastrophes  (139.4) (26.4)pts  (11.4)  (2.2)pts  (150.8)  (28.6)pts  12.9   4.4 pts  2.6   0.8 pts  15.5   5.3 pts
A&E  -pts   -  -pts   -  -pts  -   - pts  -   - pts  -   - pts
Total segment$ (174.8) (29.4)pts $ (39.0)  (7.7)pts $ (213.8)  (37.1)pts $(9.4)  3.8 pts $7.8   2.6 pts $(1.6)  6.5 pts
                                        
(Some amounts may not reconcile due to rounding.)(Some amounts may not reconcile due to rounding.)            (Some amounts may not reconcile due to rounding.)                        
Incurred losses were $184.6 million (109.0 points) lower for the three months ended September 30, 2009 compared the three months ended September 30, 2008, primarily as a result of a $133.4 million (79.7 points) decrease due to the absence of current year catastrophe losses in the third quarter of 2009 compared to the same period in 2008. In addition, prior years’ reserves developed favorably in 2009 by $16.6 million, primarily treaty casualty, compared to unfavorable development in 2008 of $10.5 million, primarily treaty property.

Incurred losses were $213.8$1.7 million (37.1(4.3 points) lower at $232.3 million for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008, primarily due to a $139.4 million (26.4 points) decrease due to absence of current year catastrophe losses in 2009 and $39.0 million (7.7 points) favorable variance, period over period, of prior years’ reserve development.

Segment Expenses. Commission and brokerage expenses decreased 22.1% to $21.4$84.3 million for the three months ended SeptemberJune 30, 2009 from $27.52010 compared to $86.0 million for the three months ended SeptemberJune 30, 2008. Commission2009, primarily as a result of an upward adjustment in the second quarter of 2009 to the Crop Hail current year expected loss ratio and brokerage expenses decreased 28.0%a $2.8 million decrease in current year catastrophe losses from the reversal of the first quarter estimate of Windstorm Xynthia, partially offset by unfavorable development in prior years’ losses in 2010 compared to $90.5favorable development in 2009.

Incurred losses were $1.6 million (6.5 points) lower at $174.5 million for the ninesix months ended SeptemberJune 30, 2009 from $125.82010 compared to $176.1 million for the ninesix months ended SeptemberJune 30, 2008. These decreases were2009, primarily as a result of the $22.3 million decrease in current year attritional losses, principally the Crop Hail business, partially offset by a $15.5 million (5.3 points) increase in catastrophe losses primarily due to the fluctuation in premiums earned in conjunction with the change in the mix and type of business written and the increased cessions under the affiliated quota share agreement.  Segment otherChilean earthquake.



underwritingSegment Expenses. Commission and brokerage expenses were $9.7 million and $7.8decreased 3.6% to $35.9 million for the three months ended SeptemberJune 30, 20092010 compared to $37.2 million for the three months ended June 30, 2009.  Commission and 2008,brokerage expenses decreased 8.8% to $63.1 million for the six months ended June 30, 2010 compared to $69.1 million for the six months ended June 30, 2009. These variances were due to the changes in premiums earned and the mix of business.

Segment other underwriting expenses were $9.4 million and $8.0 million for the three months ended June 30, 2010 and 2009, respectively.  Segment other underwriting expenses were $17.2 million and $15.6 million for the ninesix months ended SeptemberJune 30, 2010 and 2009, and 2008respectively.  These increases were $25.3 million and $23.5 million, respectively.due to normal growth in overall operating expenses.

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

 Three Months Ended September 30,  Nine Months Ended September 30,  Three Months Ended June 30,  Six Months Ended June 30, 
(Dollars in millions) 2009  2008  Variance  % Change  2009  2008  Variance  % Change  2010 2009 Variance % Change 2010 2009 Variance % Change
Gross written premiums $230.5  $194.0  $36.5   18.8% $648.7  $595.5  $53.3   8.9% $204.9  $213.5  $(8.6)  -4.0% $433.2  $418.2  $15.0   3.6%
Net written premiums  76.4   98.6   (22.2)  -22.5%  301.9   312.9   (11.0)  -3.5%  80.8   104.4   (23.5)  -22.6%  183.3   225.5   (42.2)  -18.7%
                                                                
Premiums earned $89.2  $107.8  $(18.6)  -17.2% $306.9  $372.0  $(65.2)  -17.5% $86.2  $105.7  $(19.5)  -18.4% $187.4  $217.6  $(30.3)  -13.9%
Incurred losses and LAE  71.4   78.4   (7.0)  -8.9%  210.3   336.0   (125.6)  -37.4%  71.8   57.8   14.0   24.3%  144.8   138.9   5.8   4.2%
Commission and brokerage  10.5   4.8   5.7   119.1%  32.4   48.4   (16.1)  -33.2%  6.1   9.8   (3.8)  -38.1%  7.7   21.9   (14.1)  -64.6%
Other underwriting expenses  20.0   16.9   3.1   18.4%  56.4   47.1   9.3   19.7%  16.3   19.2   (2.9)  -15.0%  32.9   36.4   (3.6)  -9.8%
Underwriting (loss) gain $(12.7) $7.8  $(20.4) NM  $7.7  $(59.5) $67.2   -113.0%
Underwriting gain (loss) $(8.0) $18.9  $(26.9)  -142.3% $2.0  $20.4  $(18.4)  -90.2%
                                                                
             Point Chg              Point Chg              Point Chg              Point Chg 
Loss ratio  80.0%  72.7%      7.3   68.5%  90.3%      (21.8)  83.3%  54.7%      28.6   77.3%  63.8%      13.5 
Commission and brokerage ratio  11.8%  4.4%      7.4   10.6%  13.0%      (2.4)  7.1%  9.3%      (2.2)  4.1%  10.0%      (5.9)
Other underwriting expense ratio  22.4%  15.7%      6.7   18.4%  12.7%      5.7   18.9%  18.1%      0.8   17.5%  16.8%      0.7 
Combined ratio  114.2%  92.8%      21.4   97.5%  116.0%      (18.5)  109.3%  82.1%      27.2   98.9%  90.6%      8.3 
                                                                
(NM, not meaningful)                                
(Some amounts may not reconcile due to rounding)                             
(Some amounts may not reconcile due to rounding.)(Some amounts may not reconcile due to rounding.)                          


Premiums. Gross written premiums increaseddecreased by 18.8%4.0% to $230.5$204.9 million for the three months ended SeptemberJune 30, 2009 from $194.02010 compared to $213.5 million for the three months ended SeptemberJune 30, 2008. Most2009, as we continue to adjust our book of the new premium was derived from our entry into the financial institution D&O and E&O market and additional property insurance written in Florida, where ratesbusiness to exposure remain attractive.achieve an appropriate underwriting margin.  Net written premiums decreased by 22.5%22.6% to $76.4$80.8 million for the three months ended SeptemberJune 30, 20092010 compared to $98.6$104.4 million for the three months ended SeptemberJune 30, 2008. The change in net written premiums was primarily2009, due to increased reinsurance ceded on certain programs.  Ceded premiums generally relate to the increase in gross written premiums, partially offset by the change inaffiliated quota share agreement and third party specific reinsurance cessions.purchased for individual reinsured programs.  Premiums earned decreased 17.2%18.4% to $89.2$86.2 million for the three months ended SeptemberJune 30, 2009 from $107.82010 compared to $105.7 million for the three months ended SeptemberJune 30, 2008.

Gross written premiums increased by 8.9% to $648.7 million for the nine months ended September 30, 2009 from $595.5 million for the nine months ended September 30, 2008. Net written premiums decreased by 3.5% to $301.9 million for the nine months ended September 30, 2009 compared to $312.9 million for the nine months ended September 30, 2008. Premiums earned decreased 17.5% to $306.9 million for the nine months ended September 30, 2009 from $372.0 million for the nine months ended September 30, 2008.2009.  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, in additionperiod.

Gross written premiums increased by 3.6% to $433.2 million for the impact ofsix months ended June 30, 2010 compared to $418.2 million for the affiliated quota share agreement.six months ended June 30, 2009. Growth was derived from our direct specialty lines and increased rates on the workers’ compensation business.  Net written premiums decreased by 18.7% to $183.3 million for the six months ended June 30, 2010 compared to $225.5 million for the six months ended June 30, 2009, once again due to increased reinsurance ceded on certain programs.  Premiums earned decreased 13.9% to $187.4 million for the six months ended June 30, 2010 compared to $217.6 million for the six months ended June 30, 2009 due to timing as explained above.

3637

Incurred Losses and LAE. The following tables present the incurred losses and LAE for the U.S. Insurance segment for the periods indicated.
  Three Months Ended September 30,
 CurrentRatio%/ Prior Ratio%/ Total Ratio%/
(Dollars in millions)YearPt Change Years Pt Change Incurred Pt Change
2009                
Attritional$ 71.480.0%  $ 0.1 0.1%  $ 71.4 80.0% 
Catastrophes  -0.0%    - 0.0%    - 0.0% 
Total segment$ 71.480.0%  $ 0.1 0.1%  $ 71.4 80.0% 
                 
2008                
Attritional$ 80.774.9%  $ (2.4) -2.2%  $ 78.4 72.7% 
Catastrophes  -0.0%    - 0.0%    - 0.0% 
Total segment$ 80.774.9%  $ (2.4) -2.2%  $ 78.4 72.7% 
                 
Variance 2009/2008                
Attritional$ (9.4) 5.1pts $ 2.4  2.3pts $ (7.0)  7.3pts
Catastrophes  - -pts   -  -pts   -  -pts
Total segment$ (9.4) 5.1pts $ 2.4  2.3pts $ (7.0)  7.3pts


 Nine Months Ended September 30, Three Months Ended June 30,
CurrentRatio%/ Prior Ratio%/ Total Ratio%/ Current  Ratio %/ Prior  Ratio %/ Total  Ratio %/
(Dollars in millions)YearPt Change Years Pt Change Incurred Pt Change Year  Pt Change Years  Pt Change Incurred  Pt Change
2010                     
Attritional $70.6   81.9%  $1.2   1.4%  $71.8   83.3% 
Catastrophes  -   0.0%   -   0.0%   -   0.0% 
Total segment $70.6   81.9%  $1.2   1.4%  $71.8   83.3% 
                           
2009                                        
Attritional$ 226.873.9%  $ (16.4) -5.4%  $ 210.3 68.5%  $75.4   71.3%  $(17.6)  -16.7%  $57.8   54.7% 
Catastrophes  -0.0%    - 0.0%    - 0.0%   -   0.0%   -   0.0%   -   0.0% 
Total segment$ 226.873.9%  $ (16.4) -5.4%  $ 210.3 68.5%  $75.4   71.3%  $(17.6)  -16.7%  $57.8   54.7% 
                                        
2008             
Variance 2010/2009                           
Attritional$ 261.870.4%  $ 74.4 20.0%  $ 336.2 90.4%  $(4.8)  10.6 pts $18.8   18.1 pts $14.0   28.6 pts
Catastrophes  -0.0%    (0.2) -0.1%    (0.2) -0.1%   -   - pts  -   - pts  -   - pts
Total segment$ 261.870.4%  $ 74.2 19.9%  $ 336.0 90.3%  $(4.8)  10.6 pts $18.8   18.1 pts $14.0   28.6 pts
             
Variance 2009/2008             
Attritional$ (35.1) 3.5pts $ (90.8)  (25.3)pts $ (125.8)  (21.8)pts
Catastrophes  -pts   0.2  0.1pts   0.2  0.1pts
Total segment$ (35.1) 3.5pts $ (90.6)  (25.3)pts $ (125.6)  (21.8)pts
             
(Some amounts may not reconcile due to rounding.)            
 

  Six Months Ended June 30,
  Current  Ratio %/ Prior  Ratio %/ Total  Ratio %/
(Dollars in millions) Year  Pt Change Years  Pt Change Incurred  Pt Change
2010                     
Attritional $144.8   77.3%  $-   0.0%  $144.8   77.3% 
Catastrophes  -   0.0%   -   0.0%   -   0.0% 
Total segment $144.8   77.3%  $-   0.0%  $144.8   77.3% 
                            
2009                           
Attritional $155.4   71.4%  $(16.5)  -7.6%  $138.9   63.8% 
Catastrophes  -   0.0%   -   0.0%   -   0.0% 
Total segment $155.4   71.4%  $(16.5)  -7.6%  $138.9   63.8% 
                            
Variance 2010/2009                           
Attritional $(10.6)  5.9 pts $16.5   7.6 pts $5.9   13.5 pts
Catastrophes  -   - pts  -   - pts  -   - pts
Total segment $(10.6)  5.9 pts $16.5   7.6 pts $5.9   13.5 pts
                            
(Some amounts may not reconcile due to rounding.)                        


Incurred losses and LAE decreasedincreased by 8.9%24.3% to $71.4$71.8 million for the three months ended SeptemberJune 30, 2009 from $78.42010 compared to $57.8 million for the three months ended SeptemberJune 30, 2008,2009.  The increase, period over period, was primarily driven by the $9.4 million decreasedue to favorable development in current year2009 of prior years’ attritional losses, principally as a result of the 17.2% decrease in premiums earned.reserves, specifically net casualty losses.

Incurred losses and LAE decreasedincreased by 37.4%4.2% to $210.3$144.8 million for the ninesix months ended SeptemberJune 30, 2009 from $336.02010 compared to $138.9 million for the ninesix months ended SeptemberJune 30, 2008,2009.  The increase was primarily driven bydue to similar factors as discussed above for the 17.5% decrease in premiums earned and the absence, in 2009, of $85.3 million of prior years’ attritional loss development on an auto loan credit program.three months.

Segment Expenses. Commission and brokerage expenses increaseddecreased by 38.1% to $10.5$6.1 million for the three months ended SeptemberJune 30, 2009 from $4.82010 compared to $9.8 million for the three months ended SeptemberJune 30, 2008.2009.  Commission and brokerage expenses decreased by 33.2%64.6% to $32.4$7.7 million for the ninesix months ended SeptemberJune 30, 2009 from $48.42010 compared to $21.9 million for the ninesix months ended SeptemberJune 30, 2008.2009. These variancesdecreases were primarily due to the decreaseresult of a decline in net premiums earned changes in the mix of business written and the impact from internal quota share agreements whereby other underwriting expenses were ceded through commission and brokerage expense.  conjunction with additional reinsurance cessions.

Segment other underwriting expenses were $20.0for the three months ended June 30, 2010 decreased to $16.3 million and $16.9from $19.2 million for the three months ended SeptemberJune 30, 2009 and 2008, respectively.2009.  Segment other underwriting expenses were $56.4for the six months ended June 30, 2010 decreased to $32.9 million and $47.1from $36.4 million for the ninesix months ended SeptemberJune 30, 2009 and 2008, respectively.2009.  These increasesdecreases were primarily duethe result of management’s direct actions to compensation costs.reduce expenses.

3738

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

 Three Months Ended September 30,  Nine Months Ended September 30,  Three Months Ended June 30,  Six Months Ended June 30, 
(Dollars in millions) 2009  2008  Variance  % Change  2009  2008  Variance  % Change  2010 2009 Variance % Change 2010 2009 Variance % Change
Gross written premiums $67.6  $54.8  $12.8   23.3% $183.7  $193.9  $(10.2)  -5.3% $65.9  $57.2  $8.7   15.2% $131.7  $116.1  $15.6   13.5%
Net written premiums  38.3   34.6   3.7   10.7%  103.0   128.8   (25.8)  -20.0%  37.8   32.1   5.7   17.7%  75.1   64.7   10.3   16.0%
                                                                
Premiums earned $39.2  $35.3  $3.9   10.9% $108.5  $126.3  $(17.8)  -14.1% $39.3  $32.5  $6.8   21.1% $78.2  $69.3  $8.9   12.8%
Incurred losses and LAE  25.2   37.6   (12.4)  -33.0%  73.7   81.7   (8.0)  -9.8%  34.5   23.2   11.4   49.0%  62.0   48.5   13.4   27.7%
Commission and brokerage  10.5   8.7   1.9   21.4%  29.4   30.4   (1.0)  -3.2%  9.0   8.9   0.1   1.3%  17.5   18.9   (1.4)  -7.5%
Other underwriting expenses  2.4   1.9   0.4   23.0%  6.2   6.2   -   0.7%  2.4   2.0   0.4   20.4%  4.4   3.8   0.5   13.4%
Underwriting gain (loss) $1.1  $(12.9) $14.0   -108.5% $(0.9) $8.0  $(8.9)  -111.2% $(6.5) $(1.5) $(5.0) NM $(5.6) $(2.0) $(3.6)  182.6%
                                                                
             Point Chg              Point Chg              Point Chg              Point Chg 
Loss ratio  64.3%  106.5%      (42.2)  68.0%  64.7%      3.3   87.7%  71.3%      16.4   79.2%  70.0%      9.2 
Commission and brokerage ratio  26.8%  24.5%      2.3   27.1%  24.1%      3.0   22.8%  27.3%      (4.5)  22.4%  27.3%      (4.9)
Other underwriting expense ratio  6.1%  5.5%      0.6   5.7%  4.9%      0.8   6.1%  6.1%      -   5.6%  5.6%      - 
Combined ratio  97.2%  136.5%      (39.3)  100.8%  93.7%      7.1   116.6%  104.7%      11.9   107.2%  102.9%      4.3 
                                                                
(NM, not meaningful)                                                                
(Some amounts may not reconcile due to rounding)                             
(Some amounts may not reconcile due to rounding.)(Some amounts may not reconcile due to rounding.)                          


Premiums. Gross written premiums increased by 23.3%15.2% to $67.6$65.9 million for the three months ended SeptemberJune 30, 2009 from $54.82010 compared to $57.2 million for the three months ended SeptemberJune 30, 2008, primarily due to a $9.0 million increase2009.  This was driven by strong growth in aviation premiums and a $7.6 million increase inour A&H premiums,business, both the travel accident business as well as several new self-funded medical accounts, partially offset by a $4.0 million decrease in surety premiums.marine business.  Net written premiums increased by 10.7%17.7% to $38.3$37.8 million for the three months ended SeptemberJune 30, 20092010 compared to $34.6$32.1 million for the three months ended SeptemberJune 30, 2008,2009, primarily as a result of the increase in gross written premiums combined with the aviation and A&H lines.change in business mix.  Premiums earned increased by 10.9%21.1% to $39.2$3 9.3 million for the three months ended SeptemberJune 30, 20092010 compared to $35.3$32.5 million for the three months ended SeptemberJune 30, 2008, in line with the change in net written premiums.

Gross written premiums decreased by 5.3% to $183.7 million for the nine months ended September 30, 2009 from $193.9 million for the nine months ended September 30, 2008, primarily due to a $24.1 million decrease in marine premiums, partially offset by a $9.5 million increase in aviation premiums and a $3.6 million increase in A&H premiums.  Net written premiums decreased by 20.0% to $103.0 million for the nine months ended September 30, 2009 compared to $128.8 million for the nine months ended September 30, 2008, as a result of the decrease in gross writings and increased cessions under the affiliated quota share agreement.  Premiums earned decreased to $108.5 million for the nine months ended September 30, 2009 from $126.3 million for the nine months ended September 30, 2008.2009. 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 13.5% to $131.7 million for the six months ended June 30, 2010 compared to $116.1 million for the six months ended June 30, 2009.  Net written premiums increased 16.0% to $75.1 million for the six months ended June 30, 2010 compared to $64.7 million for the six months ended June 30, 2009.  Premiums earned increased 12.8% to $78.2 million for the six months ended June 30, 2010 compared to $69.3 million for the six months ended June 30, 2009.  Variances for the six months were driven by similar factors as those discussed above for the three months.


3839

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

 Three Months Ended September 30, Three Months Ended June 30,
CurrentRatio%/ Prior Ratio%/ Total Ratio%/ Current  Ratio %/ Prior  Ratio %/ Total  Ratio %/
(Dollars in millions)YearPt Change Years Pt Change Incurred Pt Change Year  Pt Change Years  Pt Change Incurred  Pt Change
2010                     
Attritional $32.2   81.9%  $0.7   1.9%  $33.0   83.8% 
Catastrophes  -   0.0%   1.6   4.0%   1.6   4.0% 
Total segment $32.2   81.9%  $2.3   5.8%  $34.5   87.7% 
                           
2009                                        
Attritional$ 26.266.8%  $ (0.2) -0.4%  $ 26.0 66.4%  $28.2   86.8%  $(6.7)  -20.7%  $21.5   66.1% 
Catastrophes  -0.0%    (0.8) -2.1%    (0.8) -2.1%   -   0.0%   1.7   5.2%   1.7   5.2% 
Total segment$ 26.266.8%  $ (1.0) -2.5%  $ 25.2 64.3%  $28.2   86.7%  $(5.0)  -15.5%  $23.2   71.3% 
                                        
2008             
Variance 2010/2009                           
Attritional$ 24.669.8%  $ - 0.0%  $ 24.6 69.8%  $4.0   (4.9)pts $7.4   22.6 pts $11.5   17.7 pts
Catastrophes  10.529.7%    2.5 7.0%    13.0 36.7%   -   - pts  (0.1)  (1.2)pts  (0.1)  (1.2)pts
Total segment$ 35.199.5%  $ 2.5 7.0%  $ 37.6 106.5%  $4.0   (4.9)pts $7.3   21.3 pts $11.3   16.4 pts
             
Variance 2009/2008             
Attritional$ 1.5 (3.0)pts $ (0.2)  (0.4)pts $ 1.4  (3.4)pts
Catastrophes  (10.5) (29.7)pts   (3.3)  (9.1)pts   (13.8)  (38.8)pts
Total segment$ (9.0) (32.7)pts $ (3.4)  (9.5)pts $ (12.4)  (42.2)pts
  Nine Months Ended September 30,
 CurrentRatio%/ Prior Ratio%/ Total Ratio%/
(Dollars in millions)YearPt Change Years Pt Change Incurred Pt Change
2009                
Attritional$ 77.070.9%  $ (6.0) -5.5%  $ 71.0 65.4% 
Catastrophes  -0.0%    2.8 2.6%    2.8 2.6% 
Total segment$ 77.070.9%  $ (3.2) -3.0%  $ 73.7 68.0% 
                 
2008                
Attritional$ 75.159.5%  $ (7.7) -6.1%  $ 67.4 53.4% 
Catastrophes  10.58.3%    3.9 3.1%    14.4 11.4% 
Total segment$ 85.667.8%  $ (3.9) -3.1%  $ 81.7 64.7% 
                 
Variance 2009/2008                
Attritional$ 1.8 11.5pts $ 1.7  0.6pts $ 3.6  12.0pts
Catastrophes  (10.5) (8.3)pts   (1.1)  (0.5)pts   (11.6)  (8.8)pts
Total segment$ (8.7) 3.1pts $ 0.7  0.1pts $ (8.0)  3.3pts
                 
(Some amounts may not reconcile due to rounding.)              



  Six Months Ended June 30,
  Current  Ratio %/ Prior  Ratio %/ Total  Ratio %/
(Dollars in millions) Year  Pt Change Years  Pt Change Incurred  Pt Change
2010                     
Attritional $58.8   75.1%  $0.5   0.6%  $59.2   75.7% 
Catastrophes  -   0.0%   2.7   3.5%   2.7   3.5% 
Total segment $58.8   75.1%  $3.2   4.1%  $62.0   79.2% 
                            
2009                           
Attritional $50.8   73.3%  $(5.8)  -8.4%  $44.9   64.8% 
Catastrophes  -   0.0%   3.6   5.2%   3.6   5.2% 
Total segment $50.8   73.3%  $(2.2)  -3.2%  $48.5   70.0% 
                            
Variance 2010/2009                           
Attritional $8.0   1.8 pts $6.3   9.0 pts $14.3   10.9 pts
Catastrophes  -   - pts  (0.9)  (1.7)pts  (0.9)  (1.7)pts
Total segment $8.0   1.8 pts $5.4   7.3 pts $13.5   9.2 pts
                            
(Some amounts may not reconcile due to rounding.)                        


Incurred losses and LAE decreasedincreased by 33.0%49.0% to $25.2$34.5 million for the three months ended SeptemberJune 30, 20092010 compared to $37.6$23.2 million for the three months ended SeptemberJune 30, 2008, principally as a2009, primarily the result of favorable variancesan increase in current and prior years’ catastrophe lossesyear attritional reserves for the offshore oil rig in 2009 in comparison to 2008.the Gulf.

Incurred losses and LAE decreasedincreased by 9.8%27.7% to $73.7$62.0 million for the ninesix months ended SeptemberJune 30, 20092010 compared to $81.7$48.5 million for the ninesix months ended SeptemberJune 30, 2008, primarily2009.  This increase was driven by the same factor as a result of decreased catastrophe losses in 2009 in comparison to 2008.discussed above for the three months.

Segment Expenses. Commission and brokerage expenses increased 1.3% to $10.5$9.0 million for the three months ended SeptemberJune 30, 2009 from $8.72010 compared to $8.9 million for the three months ended SeptemberJune 30, 2008.2009.  This slight increase was primarily driven by the increase in premiums earned in combination with the mix of business.  Commission and brokerage expenses decreased 7.5% to $29.4$17.5 million for the ninesix months ended SeptemberJune 30, 2009 from $30.42010 compared to $18.9 million for the ninesix months ended SeptemberJune 30, 2008. These fluctuations are2009. This decrease was primarily driven by the resultmix in business as the lower commission business, A&H, had increased while the higher commission business of fluctuations in premiums earnedma rine and the increase in the affiliated quota share agreement. Segment other underwriting expenses were $2.4 million and $1.9 million for the three months ended September 30, 2009 and 2008, respectively.  Segment other underwriting expenses were $6.2 million for the nine months ended September 30, 2009 and 2008.surety had declined.



Segment other underwriting expenses increased to $2.4 million for the three months ended June 30, 2010 compared to $2.0 million for the three months ended June 30, 2009.  Segment other underwriting expenses increased to $4.4 million for the six months ended June 30, 2010 compared to $3.8 million for the six months ended June 30, 2009.  These increases were due to normal growth in overall operating expenses.
International.
The following table presents the underwriting results and ratios for the International segment for the periods indicated.
 
 Three Months Ended September 30,  Nine Months Ended September 30,  Three Months Ended June 30,  Six Months Ended June 30, 
(Dollars in millions) 2009  2008  Variance  % Change  2009  2008  Variance  % Change  2010 2009 Variance % Change 2010 2009 Variance % Change
Gross written premiums $272.6  $248.8  $23.8   9.6% $797.6  $654.2  $143.4   21.9% $307.0  $274.3  $32.7   11.9% $582.3  $525.0  $57.3   10.9%
Net written premiums  146.3   144.8   1.5   1.0%  435.7   394.3   41.4   10.5%  166.0   154.0   12.1   7.8%  311.3   289.3   21.9   7.6%
                                                                
Premiums earned $147.9  $139.3  $8.6   6.2% $433.1  $395.5  $37.6   9.5% $154.7  $141.9  $12.8   9.0% $301.8  $285.2  $16.5   5.8%
Incurred losses and LAE  89.2   90.3   (1.0)  -1.2%  261.0   252.1   8.9   3.5%  124.1   79.2   44.9   56.6%  360.6   171.8   188.8   109.9%
Commission and brokerage  34.8   32.9   2.0   5.9%  100.1   90.7   9.4   10.4%  37.3   31.0   6.3   20.2%  67.7   65.2   2.5   3.8%
Other underwriting expenses  6.2   4.7   1.5   31.3%  16.5   14.5   2.0   13.6%  7.3   5.7   1.6   28.6%  13.7   10.3   3.4   32.8%
Underwriting gain $17.7  $11.4  $6.2   54.2% $55.6  $38.3  $17.3   45.3%
Underwriting gain (loss) $(14.0) $26.0  $(40.0)  -153.7% $(140.2) $38.0  $(178.2) NM
                                                                
             Point Chg              Point Chg              Point Chg              Point Chg 
Loss ratio  60.3%  64.8%      (4.5)  60.3%  63.7%      (3.4)  80.2%  55.8%      24.4   119.5%  60.2%      59.3 
Commission and brokerage ratio  23.6%  23.6%      -   23.1%  22.9%      0.2   24.1%  21.8%      2.3   22.4%  22.9%      (0.5)
Other underwriting expense ratio  4.2%  3.4%      0.8   3.8%  3.7%      0.1   4.7%  4.1%      0.6   4.6%  3.6%      1.0 
Combined ratio  88.1%  91.8%      (3.7)  87.2%  90.3%      (3.1)  109.0%  81.7%      27.3   146.5%  86.7%      59.8 
                                                                
(NM, not meaningful)                                                                
(Some amounts may not reconcile due to rounding)                             
(Some amounts may not reconcile due to rounding.)(Some amounts may not reconcile due to rounding.)                          


Premiums. Gross written premiums increased by 9.6%11.9% to $272.6$307.0 million for the three months ended SeptemberJune 30, 2009 from $248.82010 compared to $274.3 million for the three months ended SeptemberJune 30, 2008. As2009, due to continued strong growth in Asia, a result of our strong financial strength ratings, we continue to see increased participations on treaties in most regions, new business writings$23.5 million increase; Canada, a $19.4 million increase; and preferential signings, including preferential terms and conditions. In addition, rates, in some markets, also contributed to the increased written premiums. Premiums written through the Brazil, Miami and New Jersey offices increased by $11.1a $5.2 million (7.0%), through the Asian branch by $7.4 million (13.8%) and through the Canadian branch by $5.3 million (14.0%).increase.  Net written premiums increased by 1.0%7.8% to $146.3$166.0 million for the three months ended SeptemberJune 30, 20092010 compared to $144.8$154.0 million for the three months ended SeptemberJune 30, 2008, primarily due to2009, principally as a result of the increase in gross written premiums, which were partially offset by increasedan increase in cessions under the affiliated quota share agreement.share.  Premiums earned increased by 6.2%9.0% to $147.9$154.7 million for the three months ended SeptemberJune 30, 20092010 compared to $139.3$141.9 million for the three months ended SeptemberJune 30, 2008.2009.  The change in premiums earned relative to net written premiums is the result of timing; premiums are earned notablyratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.

Gross written premiums increased by 21.9%10.9% to $797.6$582.3 million for the ninesix months ended SeptemberJune 30, 2009 from $654.22010 compared to $525.0 million for the ninesix months ended SeptemberJune 30, 2008. Premiums written through2009, due to continued strong growth in Asia, a $33.8 million increase; Canada, a $17.1 million increase; and Brazil, a $15.1 million increase.  Also contributing to the Brazil, Miami and New Jersey offices increased by $112.5increase was $13.4 million (27.3%) and throughin gross reinstatement premiums from the Asian branch by $31.9 million (24.5%), while premiums written through the Canadian branch decreased by $1.0 million (0.9%).Chilean earthquake.  Net written premiums increased by 10.5%7.6% to $435.7$311.3 million for the ninesix months ended SeptemberJune 30, 20092010 compared to $394.3$289.3 million for the ninesix months ended SeptemberJune 30, 2008.2009.  Premiums earned increased by 9.5%5.8% to $433.1$301.8 million for the ninesix months ended SeptemberJune 30, 20092010 compared to $395.5$285.2 million for the ninesix months ended SeptemberJune 30, 2008, in line with2009, as a result of the increase in net written premiums.  VarianceVarianc e explanations for net written premiums and premiums earned for the ninesix months were similar to factorsthose discussed above for the three months.


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

 Three Months Ended September 30, Three Months Ended June 30,
CurrentRatio%/ Prior Ratio%/ Total Ratio%/ Current  Ratio %/ Prior  Ratio %/ Total  Ratio %/
(Dollars in millions)YearPt Change Years Pt Change Incurred Pt Change Year  Pt Change Years  Pt Change Incurred  Pt Change
2010                     
Attritional $83.8   54.1%  $(2.0)  -1.3%  $81.7   52.8% 
Catastrophes  48.7   31.5%   (6.3)  -4.1%   42.3   27.4% 
Total segment $132.4   85.6%  $(8.3)  -5.4%  $124.1   80.2% 
                           
2009                                        
Attritional$ 76.451.7%  $ (0.6) -0.4%  $ 75.8 51.3%  $77.3   54.4%  $3.4   2.4%  $80.7   56.9% 
Catastrophes  11.27.6%    2.1 1.5%    13.4 9.0%   -   0.0%   (1.5)  -1.1%   (1.5)  -1.1% 
Total segment$ 87.759.3%  $ 1.5 1.0%  $ 89.2 60.3%  $77.3   54.4%  $2.0   1.4%  $79.2   55.8% 
                                        
2008             
Variance 2010/2009                           
Attritional$ 99.471.4%  $ (14.8) -10.6%  $ 84.7 60.8%  $6.5   (0.3)pts $(5.4)  (3.7)pts $1.0   (4.1)pts
Catastrophes  7.65.5%    (2.0) -1.5%    5.6 4.0%   48.7   31.5 pts  (4.8)  (3.0)pts  43.8   28.5 pts
Total segment$ 107.076.9%  $ (16.8) -12.0%  $ 90.3 64.8%  $55.1   31.2 pts $(10.3)  (6.8)pts $44.9   24.4 pts
             
Variance 2009/2008             
Attritional$ (23.0) (19.7)pts $ 14.2  10.2pts $ (8.8)  (9.5)pts
Catastrophes  3.6 2.1pts   4.2  2.9pts   7.8  5.0pts
Total segment$ (19.4) (17.6)pts $ 18.3  13.0pts $ (1.0)  (4.5)pts

 
 Nine Months Ended September 30, Six Months Ended June 30,
CurrentRatio%/ Prior Ratio%/ Total Ratio%/ Current  Ratio %/ Prior  Ratio %/ Total  Ratio %/
(Dollars in millions)YearPt Change Years Pt Change Incurred Pt Change Year  Pt Change Years  Pt Change Incurred  Pt Change
2010                     
Attritional $175.1   58.0%  $(5.5)  -1.8%  $169.6   56.2% 
Catastrophes  198.2   65.7%   (7.2)  -2.4%   191.0   63.3% 
Total segment $373.2   123.7%  $(12.7)  -4.2%  $360.6   119.5% 
                           
2009                                        
Attritional$ 235.054.3%  $ 4.5 1.1%  $ 239.5 55.3%  $158.6   55.6%  $5.1   1.8%  $163.7   57.4% 
Catastrophes  20.34.7%    1.1 0.3%    21.4 5.0%   9.1   3.2%   (1.0)  -0.4%   8.1   2.8% 
Total segment$ 255.358.9%  $ 5.7 1.3%  $ 261.0 60.3%  $167.6   58.8%  $4.1   1.4%  $171.8   60.2% 
                                        
2008             
Attritional$ 247.762.6%  $ (13.2) -3.3%  $ 234.5 59.3% 
Catastrophes  18.44.7%    (0.8) -0.2%    17.6 4.5% 
Total segment$ 266.167.3%  $ (14.1) -3.6%  $ 252.1 63.7% 
             
Variance 2009/2008             
Variance 2010/2009                           
Attritional$ (12.7) (8.4)pts $ 17.8  4.4pts $ 5.0  (4.0)pts $16.5   2.4 pts $(10.6)  (3.6)pts $5.9   (1.2)pts
Catastrophes  1.9 0.0pts   2.0  0.5pts   3.8  0.5pts  189.1   62.5 pts  (6.2)  (2.0)pts  182.9   60.5 pts
Total segment$ (10.8) (8.4)pts $ 19.7  4.9pts $ 8.9  (3.4)pts $205.6   64.9 pts $(16.8)  (5.6)pts $188.8   59.3 pts
                                        
(Some amounts may not reconcile due to rounding.)(Some amounts may not reconcile due to rounding.)            (Some amounts may not reconcile due to rounding.)                        
Incurred losses and LAE decreased by 1.2% to $89.2 million for the three months ended September 30, 2009 compared to $90.3 million for the three months ended September 30, 2008.  The segment loss ratio decreased by 4.5 points for the three months ended September 30, 2009 compared to the three months ended September 30, 2008, primarily due to the decreased third quarter 2009 attritional losses (9.5 points), partially offset by the increased catastrophe losses (5.0 points).

Incurred losses and LAE increased by 3.5%56.6% to $261.0$124.1 million for the ninethree months ended SeptemberJune 30, 20092010 compared to $252.1$79.2 million for the ninethree months ended SeptemberJune 30, 2008, primarily as2009. The increase was principally due to a result of the$48.7 million increase in premiumcurrent year catastrophes for the Chilean earthquake. Attritional losses also increased primarily due to the increased premiums earned.

Incurred losses and LAE increased 109.9% to $360.6 million for the six months ended June 30, 2010 compared to $171.8 million for the six months ended June 30, 2009. The increase was principally due to the large current year catastrophe of $178.6 million for the Chilean earthquake and $19.5 million for the Australian hailstorms in 2010 compared to the absence in 2009 of similar large events.

Segment Expenses. Commission and brokerage expenses increased 5.9%20.2% to $34.8$37.3 million for the three months ended SeptemberJune 30, 2009 from $32.92010 compared to $31.0 million for the three months ended SeptemberJune 30, 2008.2009. Commission and brokerage expenses increased 10.4%3.8% to $100.1$67.7 million for the ninesix months ended SeptemberJune 30, 2009 from $90.72010 compared to $65.2 million for the ninesix months ended SeptemberJune 30, 2008.  These changes are2009. The increases were primarily due to an increase in premiums earned, an increase in contingent commission on the result ofInternational U.S. business and an increase in commission ratio on the change in earned premium and the blend of business mix. Segment other underwriting expenses were $6.2 million and $4.7 million for the three months ended September 30, 2009 and 2008, respectively.  Segment other underwriting expenses were $16.5 million and $14.5 million for the nine months ended September 30, 2009 and 2008, respectively.Brazil book.

4142

Segment other underwriting expenses for the three months ended June 30, 2010 were $7.3 million compared to $5.7 million for the three months ended June 30, 2009.  Segment other underwriting expenses for the six months ended June 30, 2010 were $13.7 million compared to $10.3 million for the six months ended June 30, 2009.  These increases were due to normal growth in overall operating expenses.

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

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

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

Interest Rate Risk.  Our $8.1 billion investment portfolio, at SeptemberJune 30, 2009 was2010, is principally comprised of fixed maturity securities, which are generally subject to interest rate risk and some foreign currency exchange rate risk, and some equity securities, which are subject to price fluctuations and some foreign exchange rate risk.fluctuations.  The impact of the foreign exchange risks on the investment portfolio is partially mitigated by changes in the dollar value of foreign currency denominated liabilities and their associated income statement impact.

Interest rate risk is the potential change in value of the fixed maturity securities portfolio, including short-term investments, from a change in market interest rates.  In a declining interest rate environment, it includes prepayment risk on the $509.7$539.4 million of mortgage-backed securities in the $6,416.7$6,459.4 million fixed maturity securities portfolio.  Prepayment risk results from potential accelerated principal payments that shorten the average life and thus the expected yield of the security.

The table below displays the potential impact of market value fluctuations and after-tax unrealized appreciation on our fixed maturity securities portfolio (including $645.1$251.8 million of short-term investments) for the period 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 onfor mortgage-backed securities, changes in prepayment expectations under different interest rate environments were taken into account.  For legal entities with a 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 theth e various interest rate change scenarios.

 Impact of Interest Rate Shift in Basis Points  Impact of Interest Rate Shift in Basis Points
 At September 30, 2009  At June 30, 2010
(Dollars in millions)  -200  -100  0  100  200  -200  -100   0  100  200
Total Market/Fair Value $7,665.3  $7,380.6  $7,061.8  $6,697.5  $6,353.4  $7,273.5  $7,013.4  $6,711.2  $6,373.1  $6,047.5 
Market/Fair Value Change from Base (%)  8.5%  4.5%  0.0%  -5.2%  -10.0%  8.4%  4.5%  0.0%  -5.0%  -9.9%
Change in Unrealized Appreciation                                        
After-tax from Base ($) $392.3  $207.2  $-  $(236.8) $(460.5) $365.5  $196.4  $-  $(219.8) $(431.4)
 

43

We had $7,247.0$7,583.5 million and $7,420.0$7,300.1 million of gross reserves for losses and LAE as of SeptemberJune 30, 20092010 and December 31, 2008,2009, 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 includeincl ude investment income over time from the investment portfolio until the claims are paid.  Our fixed income portfolio hasloss and loss reserve obligations have an expected duration that is reasonably consistent with our loss and loss reserve obligations.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 dividend income.

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

 Impact of Percentage Change in Equity Fair/Market Values Impact of Percentage Change in Equity Fair/Market Values
 At September 30, 2009 At June 30, 2010
(Dollars in millions)  -20% -10% 0% 10%  20%  -20%  -10%  0%  10%  20%
Fair/Market Value of the Equity Portfolio $126.8  $142.6  $158.5  $174.3  $190.2  $272.3  $306.4  $340.4  $374.4  $408.5 
After-tax Change in Fair/Market Value $(20.6) $(10.3) $-  $10.3  $20.6   (44.3)  (22.1)  -   22.1   44.3 


Foreign CurrencyExchange 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 ourthese foreign operations are the Canadian Dollar, the British Pound Sterling and the Euro.  We mitigate foreign exchange exposure by generally matching the currency and duration of our assets to our correspondingcorresp onding operating liabilities.  In accordance with ASC 830 (Financial Accounting Standards 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 SeptemberJune 30, 20092010, there has been no material change in exposure to foreign exchange rates as compared to December 31, 2008.2009.

Safe Harbor Disclosure.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 catastrophec atastrophe exposure, the effects of catastrophic events on our financial statements and the ability of our subsidiaries to pay dividends.  Forward-looking statements only reflect our expectations and are not guarantees of performance.  These statements involve risks, uncertainties and assumptions.  Actual events or results may differ materially from our expectations.  Important factors that could cause our actual events or results to be materially different from our expectations include the uncertainties that surround the impact on our financial statements and liquidity resulting from changes in the global economy and credit markets, the estimating of reserves for losses and LAE, those discussed in Note 6 of Notes to Consolidated Financial Statements (unaudited) included in this report and the risks described under the caption “Risk Factors” in our most recently filed Annual Report on Form 10-K, PART I,Part 1, ITEM 1A.  We undertake no obligation to update oro r revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk Instruments.  See “Market Sensitive Instruments” in PART I – ITEM 2.


ITEM 4.  CONTROLS AND PROCEDURES

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



PART II

ITEM 1.  LEGAL PROCEEDINGS

In the ordinary course of business, we are involved in lawsuits, arbitrations and other formal and informal dispute resolution procedures, the outcomes of which will determine our rights and obligations under insurance, reinsurance and other contractual agreements.  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, we believe that our positions are legally and commercially reasonable, and we vigorously seek to preserve, enforce and defend our legal rights under various agreements.  While the final outcome of these matters cannot be predicted with certainty, we do not believe that any of these matters, when finally resolved, will have a material adverse effect on ouro ur financial position 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 our results of operations in that period.


ITEM 1A.  RISK FACTORS

No material changes.


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

None.


ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSRESERVED

None.



ITEM 5.  OTHER INFORMATION

None.


ITEM 6.  EXHIBITS

Exhibit Index:

Exhibit No.                      
Exhibit No.Description
31.1 Section 302 Certification of Joseph V. Taranto
31.2 Section 302 Certification of Dominic J. Addesso
32.1Section 906 Certification of Joseph V. Taranto and Dominic J. Addesso

31.1                                  Section 302 Certification of Joseph V. Taranto

31.2                                  Section 302 Certification of Dominic J. Addesso

32.1                                  Section 906 Certification of Joseph V. Taranto and Dominic J. Addesso




Everest Reinsurance Holdings, Inc.
     
Signatures
     
     
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
     
  Everest Reinsurance Holdings, Inc. 
  (Registrant) 
     
     
  /S/ DOMINIC J. ADDESSO 
  Dominic J. Addesso 
  Executive Vice President and 
   Chief Financial Officer 
     
  (Duly Authorized Officer and Principal Financial Officer)
     
     
     
Dated: NovemberAugust 16, 20092010