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, 20102011
 
Commission file number:
1-14527

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

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

YESX NO 

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

YESX NO 

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

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

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

YES  NOX

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

  Number of Shares Outstanding
Class At NovemberAugust 1, 20102011
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

     
Item 1. Financial Statements 
     
   
   1
    
   
   2
     
   
   3
     
   
   4
     
  5
     
Item 2.  
   2728
    
Item 3. 46
     
Item 4. 46
     

PART II

OTHER INFORMATION

     
Item 1. 46
     
Item 1A. 4647
    
Item 2. 4647
    
Item 3. 4647
    
Item 4. 4647
    
Item 5. 47
    
Item 6. 47

 
 


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) 2010 2009 2011  2010 
 (unaudited)    (unaudited)    
ASSETS:            
Fixed maturities - available for sale, at market value $6,368,800  $6,463,168  $5,299,902  $5,599,940 
(amortized cost: 2010, $6,024,830; 2009, $6,255,759)        
(amortized cost: 2011, $5,098,886; 2010, $5,438,359)        
Fixed maturities - available for sale, at fair value  116,376   50,528   128,337   180,482 
Equity securities - available for sale, at market value (cost: 2010, $15; 2009, $15)  12   13 
Equity securities - available for sale, at market value (cost: 2011, $15 2010, $15)  12   13 
Equity securities - available for sale, at fair value  382,279   380,025   972,802   683,454 
Short-term investments  304,880   261,438   566,111   516,885 
Other invested assets (cost: 2010, $395,027; 2009, $387,200)  394,615   386,326 
Other invested assets (cost: 2011, $393,058; 2010, $405,401)  392,843   406,916 
Other invested assets, at fair value  752,533   382,639   794,608   788,142 
Cash  92,954   107,480   288,365   118,092 
Total investments and cash  8,412,449   8,031,617   8,442,980   8,293,924 
Accrued investment income  76,368   83,705   62,790   70,874 
Premiums receivable  718,307   769,744   773,721   643,257 
Reinsurance receivables - unaffiliated  679,066   618,081   685,233   670,168 
Reinsurance receivables - affiliated  2,721,300   2,492,152   3,056,730   2,708,193 
Funds held by reinsureds  168,235   156,223   177,553   171,179 
Deferred acquisition costs  194,988   183,498   167,339   184,247 
Prepaid reinsurance premiums  646,757   562,146   567,466   629,323 
Deferred tax asset  133,607   210,493   150,594   183,924 
Federal income taxes recoverable  75,273   135,682   147,127   142,421 
Other assets  188,947   136,234   240,901   171,923 
TOTAL ASSETS $14,015,297  $13,379,575  $14,472,434  $13,869,433 
                
LIABILITIES:                
Reserve for losses and loss adjustment expenses $7,611,614  $7,300,139  $8,275,580  $7,652,303 
Unearned premium reserve  1,350,522   1,239,320   1,187,555   1,287,476 
Funds held under reinsurance treaties  173,315   175,257   178,453   180,377 
Losses in the course of payment  29,875   13,089 
Commission reserves  37,712   50,897   32,117   37,796 
Other net payable to reinsurers  573,443   444,535   556,127   467,486 
Revolving credit borrowings  83,000   -   40,000   50,000 
8.75% Senior notes due 3/15/2010  -   199,970 
5.4% Senior notes due 10/15/2014  249,801   249,769   249,835   249,812 
6.6% Long term notes due 05/01/2067  238,350   238,348   238,352   238,351 
Junior subordinated debt securities payable  329,897   329,897   329,897   329,897 
Accrued interest on debt and borrowings  12,129   9,885   4,789   4,793 
Other liabilities  248,574   282,784   272,363   230,312 
Total liabilities  10,908,357   10,520,801   11,394,943   10,741,692 
                
Commitments and Contingencies (Note 6)                
                
STOCKHOLDER'S EQUITY:                
Common stock, par value: $0.01; 3,000 shares authorized;                
1,000 shares issued and outstanding (2010 and 2009)  -   - 
1,000 shares issued and outstanding (2011 and 2010)  -   - 
Additional paid-in capital  326,478   321,185   330,990   327,767 
Accumulated other comprehensive income (loss), net of deferred income tax expense (benefit) of        
$144,977 at 2010 and $89,912 at 2009  269,241   166,978 
Retained earnings (deficit)  2,511,221   2,370,611 
Accumulated other comprehensive income (loss), net of deferred income tax expense        
(benefit) of $107,272 at 2011 and $88,289 at 2010  199,219   163,966 
Retained earnings  2,547,282   2,636,008 
Total stockholder's equity  3,106,940   2,858,774   3,077,491   3,127,741 
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $14,015,297  $13,379,575  $14,472,434  $13,869,433 
                
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) 2010 2009 2010 2009 2011  2010  2011  2010 
 (unaudited) (unaudited) (unaudited)  (unaudited) 
REVENUES:                        
Premiums earned $465,302  $438,320  $1,322,160  $1,337,539  $452,050  $442,724  $911,443  $856,858 
Net investment income  74,212   65,492   248,665   179,667   84,459   89,346   171,591   174,453 
Net realized capital gains (losses):                                
Other-than-temporary impairments on fixed maturity securities  (2,023)  -   (2,023)  (5,510)  -   -   (13,611)  - 
Other-than-temporary impairments on fixed maturity securities                                
transferred to other comprehensive income (loss)  -   -   -   -   -   -   -   - 
Other net realized capital gains (losses)  161,592   101,394   60,812   61,661   (68,184)  (95,473)  (14,097)  (100,780)
Total net realized capital gains (losses)  159,569   101,394   58,789   56,151   (68,184)  (95,473)  (27,708)  (100,780)
Realized gain on debt repurchase  -   -   -   78,271 
Other income (expense)  (3,617)  15,081   10,204   7,801   (11,568)  8,709   (11,536)  13,821 
Total revenues  695,466   620,287   1,639,818   1,659,429   456,757   445,306   1,043,790   944,352 
                                
CLAIMS AND EXPENSES:                                
Incurred losses and loss adjustment expenses  326,925   241,992   1,068,678   777,295   312,809   314,749   865,837   741,753 
Commission, brokerage, taxes and fees  81,455   77,259   237,493   252,401   80,305   88,197   168,817   156,038 
Other underwriting expenses  37,230   38,189   105,315   104,355   39,223   35,371   77,440   68,085 
Corporate expenses  1,529   1,675   5,218   4,871   1,165   1,463   2,355   3,689 
Interest, fee and bond issue cost amortization expense  12,817   17,073   41,879   53,779   12,695   12,722   25,377   29,062 
Total claims and expenses  459,956   376,188   1,458,583   1,192,701   446,197   452,502   1,139,826   998,627 
                                
INCOME (LOSS) BEFORE TAXES  235,510   244,099   181,235   466,728   10,560   (7,196)  (96,036)  (54,275)
Income tax expense (benefit)  66,858   79,958   40,625   128,423   1,753   (24,083)  (7,310)  (26,233)
                                
NET INCOME (LOSS) $168,652  $164,141  $140,610  $338,305  $8,807  $16,887  $(88,726) $(28,042)
                                
Other comprehensive income (loss), net of tax  65,718   162,343   102,263   285,123   34,236   24,799   35,253   36,545 
                                
COMPREHENSIVE INCOME (LOSS) $234,370  $326,484  $242,873  $623,428  $43,043  $41,686  $(53,473) $8,503 
                                
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  Six Months Ended 
  June 30,  June 30, 
(Dollars in thousands, except share amounts) 2011  2010  2011  2010 
  (unaudited)  (unaudited) 
COMMON STOCK (shares outstanding):            
Balance, beginning of period  1,000   1,000   1,000   1,000 
Balance, end of period  1,000   1,000   1,000   1,000 
                 
ADDITIONAL PAID-IN CAPITAL:                
Balance, beginning of period $329,356  $322,459  $327,767  $321,185 
Share-based compensation plans  1,634   1,697   3,223   2,971 
Balance, end of period  330,990   324,156   330,990   324,156 
                 
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS),                
NET OF DEFERRED INCOME TAXES:                
Balance, beginning of period  164,983   178,724   163,966   166,978 
Net increase (decrease) during the period  34,236   24,799   35,253   36,545 
Balance, end of period  199,219   203,523   199,219   203,523 
                 
RETAINED EARNINGS:                
Balance, beginning of period  2,538,475   2,325,682   2,636,008   2,370,611 
Net income (loss)  8,807   16,887   (88,726)  (28,042)
Balance, end of period  2,547,282   2,342,569   2,547,282   2,342,569 
                 
TOTAL STOCKHOLDER'S EQUITY, END OF PERIOD $3,077,491  $2,870,248  $3,077,491  $2,870,248 
                 
The accompanying notes are an integral part of the consolidated financial statements.             



  Three Months Ended Nine Months Ended
  September 30, September 30,
(Dollars in thousands, except share amounts) 2010 2009 2010 2009
  (unaudited) (unaudited)
COMMON STOCK (shares outstanding):            
Balance, beginning of period  1,000   1,000   1,000   1,000 
Balance, end of period  1,000   1,000   1,000   1,000 
                 
ADDITIONAL PAID-IN CAPITAL:                
Balance, beginning of period $324,156  $318,492  $321,185  $315,771 
Share-based compensation plans  2,322   1,395   5,293   4,116 
Balance, end of period  326,478   319,887   326,478   319,887 
                 
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS),                
NET OF DEFERRED INCOME TAXES:                
Balance, beginning of period  203,523   35,217   166,978   (72,063)
Cumulative adjustment of initial adoption(1), net of tax
  -   -   -   (15,500)
Net increase (decrease) during the period  65,718   162,343   102,263   285,123 
Balance, end of period  269,241   197,560   269,241   197,560 
                 
RETAINED EARNINGS (DEFICIT):                
Balance, beginning of period  2,342,569   2,148,924   2,370,611   1,959,260 
Cumulative adjustment of initial adoption(1), net of tax
  -   -   -   15,500 
Net income (loss)  168,652   164,141   140,610   338,305 
Balance, end of period  2,511,221   2,313,065   2,511,221   2,313,065 
                 
TOTAL STOCKHOLDER'S EQUITY, END OF PERIOD $3,106,940  $2,830,512  $3,106,940  $2,830,512 
                 
(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.                


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) 2010 2009 2010 2009 2011  2010  2011  2010 
 (unaudited) (unaudited) (unaudited)  (unaudited) 
CASH FLOWS FROM OPERATING ACTIVITIES:                        
Net income (loss) $168,652  $164,141  $140,610  $338,305  $8,807  $16,887  $(88,726) $(28,042)
Adjustments to reconcile net income to net cash provided by operating activities:                Adjustments to reconcile net income to net cash provided by operating activities:             
Decrease (increase) in premiums receivable  29,733   (1,371)  54,616   (51,192)  (17,216)  21,553   (128,544)  24,883 
Decrease (increase) in funds held by reinsureds, net  2,829   9,624   (13,433)  9,459   (8,008)  (18,472)  (7,812)  (16,262)
Decrease (increase) in reinsurance receivables  (71,235)  146,809   (299,032)  (6,656)  (49,828)  (18,620)  (355,899)  (227,797)
Decrease (increase) in deferred tax asset  76,238   41,994   21,823   74,970   (19,965)  (46,121)  14,349   (54,415)
Decrease (increase) in prepaid reinsurance premiums  38,227   2,059   62,163   (16,192)
Increase (decrease) in reserve for losses and loss adjustment expenses  15,455   (35,920)  305,807   (218,365)  121,207   (12,762)  586,366   290,352 
Increase (decrease) in unearned premiums  100,938   95,297   108,080   91,611   (80,213)  (10,237)  (103,362)  7,142 
Change in equity adjustments in limited partnerships  (1,071)  4,423   (19,367)  36,548   (13,939)  (8,882)  (32,354)  (18,296)
Change in other assets and liabilities, net  (83,740)  (161,038)  42,689   83,477   32,717   16,395   103,464   142,621 
Non-cash compensation expense  2,273   1,384   5,153   4,091   1,674   1,685   3,054   2,880 
Amortization of bond premium (accrual of bond discount)  3,579   3,824   8,196   8,802   3,422   1,071   6,914   4,617 
Amortization of underwriting discount on senior notes  12   48   65   142   12   11   24   53 
Realized gain on debt repurchase  -   -   -   (78,271)
Net realized capital (gains) losses  (159,569)  (101,394)  (58,789)  (56,151)  68,184   95,473   27,708   100,780 
Net cash provided by (used in) operating activities  84,094   167,821   296,418   236,770   85,081   40,040   87,345   212,324 
                                
CASH FLOWS FROM INVESTING ACTIVITIES:                                
Proceeds from fixed maturities matured/called - available for sale, at market value  173,079   130,349   481,948   324,432   156,078   136,606   263,533   308,869 
Proceeds from fixed maturities matured/called - available for sale, at fair value  -   -   -   5,570   5,875   -   12,775   - 
Proceeds from fixed maturities sold - available for sale, at market value  85,667   34,602   457,230   87,696   270,169   206,078   786,890   371,563 
Proceeds from fixed maturities sold - available for sale, at fair value  10,689   4,010   19,301   12,012   17,168   6,115   50,120   8,612 
Proceeds from equity securities sold - available for sale, at market value  -   23,028   -   23,028   -   -   27,096   - 
Proceeds from equity securities sold - available for sale, at fair value  14,899   11,310   87,641   23,535   37,000   51,400   89,696   72,742 
Distributions from other invested assets  14,148   4,448   38,028   24,573   28,416   15,715   89,775   23,880 
Cost of fixed maturities acquired - available for sale, at market value  (138,332)  (256,130)  (693,908)  (865,910)  (236,991)  (280,050)  (709,796)  (555,576)
Cost of fixed maturities acquired - available for sale, at fair value  (56,937)  (2,548)  (80,618)  (19,101)  (7,148)  (9,487)  (15,224)  (23,681)
Cost of equity securities acquired - available for sale, at market value  -   -   (27,059)  - 
Cost of equity securities acquired - available for sale, at fair value  (20,938)  (12,948)  (71,817)  (32,244)  (212,606)  (30,140)  (339,271)  (50,879)
Cost of other invested assets acquired  (8,115)  (9,780)  (26,489)  (26,122)  (22,064)  (8,634)  (45,078)  (18,374)
Cost of other invested assets acquired, at fair value  (80,765)  -   (327,876)  -   -   (200,079)  (37,611)  (247,111)
Cost of businesses acquired  -   -   (63,100)  - 
Net change in short-term investments  (52,975)  (86,179)  (43,054)  284,738   (196,488)  (2,164)  (47,185)  9,921 
Net change in unsettled securities transactions  1,936   18,522   (33,584)  42,856   188,839   (51,843)  44,841   (35,520)
Net cash provided by (used in) investing activities  (57,644)  (141,316)  (193,198)  (114,937)  28,248   (166,483)  80,402   (135,554)
                                
CASH FLOWS FROM FINANCING ACTIVITIES:                                
Tax benefit from share-based compensation  49   11   140   25   (40)  12   169   91 
Net cost of senior notes maturing  -   -   (200,000)  -   -   -   -   (200,000)
Revolving credit borrowings  (50,000)  -   83,000   -   -   133,000   (10,000)  133,000 
Net cost of debt repurchase  -   -   -   (83,026)
Net cash provided by (used in) financing activities  (49,951)  11   (116,860)  (83,001)  (40)  133,012   (9,831)  (66,909)
                                
EFFECT OF EXCHANGE RATE CHANGES ON CASH  9,608   3,411   (886)  (5,968)  5,711   (7,459)  12,357   (10,494)
                                
Net increase (decrease) in cash  (13,893)  29,927   (14,526)  32,864   119,000   (890)  170,273   (633)
Cash, beginning of period  106,847   95,201   107,480   92,264   169,365   107,737   118,092   107,480 
Cash, end of period $92,954  $125,128  $92,954  $125,128  $288,365  $106,847  $288,365  $106,847 
                                
SUPPLEMENTAL CASH FLOW INFORMATION:                                
Cash transactions:                                
Income taxes paid (recovered) $(3,202) $(18,847) $(52,592) $(2,488) $(31,557) $(53,156) $(20,765) $(49,390)
Interest paid  5,339   13,892   39,104   51,464   19,838   19,866   25,041   33,765 
                                
Non-cash transaction:                
Net assets acquired and liabilities assumed from business acquisitions  -   -   19,130   - 
                
The accompanying notes are an integral part of the consolidated financial statements.                                

 
4


NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

For the Three and NineSix Months Ended SeptemberJune 30, 20102011 and 20092010

1.  GENERAL

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

2. BASIS OF PRESENTATION

The unaudited consolidated financial statements of the Company for the three and ninesix months ended SeptemberJune 30, 20102011 and 20092010 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, 20092010 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, 2011 and 2010 and 2009 a reare not necessarily indicative of the results for a full year.  These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the years ended December 31, 2010, 2009 2008 and 20072008 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’years' amounts to conform to the 20102011 presentation.

Financial Accounting Standards Board Accounting Codification

Financial Accounting Standards Board Launched Accounting Codification.  In June 2009, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance establishing the FASB Accounting Standards CodificationTM (“Codification”) as the single source of authoritative U.S. GAAP recognized by the FASB to be applied by non-governmental entities.  Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.  The Codification supersedes all existing non-SEC accounting and reporting standards. All other no n-grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative.

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

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.
Application of Recently Issued Accounting Standard Changes

Financial Accounting Standards Board Launched Accounting Codification.  In June 2009, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance establishing the FASB Accounting Standards CodificationTM (“Codification”) as the single source of authoritative U.S. GAAP recognized by the FASB to be applied by non-governmental entities.  Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.  The Codification supersedes all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative.

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

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.


Treatment of Insurance Contract Acquisition Costs. In October 2010, the FASB issued authoritative guidance for the accounting for costs associated with acquiring or renewing insurance contracts.  The guidance identifies the incremental direct costs of contract acquisition and costs directly related to acquisition activities that should be capitalized.  This guidance is effective for reporting periods beginning after December 15, 2011.  The Company will adopt this guidance prospectively, as of January 1, 2012.

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

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

Interim Disclosures About Fair Value of Financial Instruments.  In April 2009, the FASB revised the authoritative guidance for disclosures about fair value of financial instruments.  This new guidance requires quarterly disclosures on the qualitative and quantitative information about the fair value of all financial instruments including methods and significant assumptions used to estimate fair value during the period. These disclosures were previously only done annually.  The Company adopted this disclosure beginning with the secondthird quarter of 2009 and included it in the Notes to Consolidated Interim Financial Statements.2010.

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


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


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


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, 2010  At June 30, 2011 
 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            
Fixed maturity securities            
U.S. Treasury securities and obligations of                        
U.S. government agencies and corporations $151,672  $6,417  $(277) $157,812  $84,214  $1,878  $(1,676) $84,416 
Obligations of U.S. states and political subdivisions  3,405,935   220,320   (4,202)  3,622,053   2,110,206   109,724   (5,985)  2,213,945 
Corporate securities  708,637   51,158   (7,527)  752,268   895,793   42,589   (12,572)  925,810 
Asset-backed securities  25,362   546   (206)  25,702   40,383   685   (16)  41,052 
Mortgage-backed securities                                
Commercial  32,513   8,133   -   40,646   41,840   7,787   (727)  48,900 
Agency residential  386,496   17,406   (107)  403,795   321,195   17,596   (17)  338,774 
Non-agency residential  30,047   922   (1,046)  29,923   27,404   534   (93)  27,845 
Foreign government securities  705,941   41,349   (7,461)  739,829   874,577   43,523   (11,291)  906,809 
Foreign corporate securities  578,227   27,985   (9,440)  596,772   703,274   26,878   (17,801)  712,351 
Total fixed maturity securities $6,024,830  $374,236  $(30,266) $6,368,800  $5,098,886  $251,194  $(50,178) $5,299,902 
Equity securities $15  $-  $(3) $12  $15  $-  $(3) $12 
 
 At December 31, 2009  At December 31, 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            
Fixed maturity securities            
U.S. Treasury securities and obligations of                        
U.S. government agencies and corporations $132,348  $3,614  $(1,671) $134,291  $153,263  $2,450  $(5,146) $150,567 
Obligations of U.S. states and political subdivisions  3,694,267   183,848   (24,256)  3,853,859   2,809,514   116,920   (24,929)  2,901,505 
Corporate securities  618,507   30,298   (13,424)  635,381   688,938   42,522   (9,775)  721,685 
Asset-backed securities  16,597   460   (1,909)  15,148   19,860   705   (14)  20,551 
Mortgage-backed securities                                
Commercial  24,213   4,956   (111)  29,058   31,887   7,618   -   39,505 
Agency residential  556,032   10,366   (1,691)  564,707   355,928   13,975   (212)  369,691 
Non-agency residential  61,098   916   (7,055)  54,959   29,373   912   (317)  29,968 
Foreign government securities  638,204   27,700   (6,687)  659,217   731,930   32,678   (15,567)  749,041 
Foreign corporate securities  514,493   17,184   (15,129)  516,548   617,666   20,939   (21,178)  617,427 
Total fixed maturity securities $6,255,759  $279,342  $(71,933) $6,463,168  $5,438,359  $238,719  $(77,138) $5,599,940 
Equity securities $15  $-  $(2) $13  $15  $-  $(2) $13 
 
In accordance with FASB guidance, the Company reclassified the non-credit portion of other-than-temporary impairments from retained earnings (deficit) into accumulated other comprehensive income (loss), on April 1, 2009.  The table below presents the pre-tax cumulative unrealized appreciation (depreciation) on those corporate securities, for the periods indicated:
 
(Dollars in thousands) At September 30, 2010 At December 31, 2009 At June 30, 2011  At December 31, 2010 
Pre-tax cumulative unrealized appreciation (depreciation) $927  $(2,039) $828  $823 

 
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The amortized cost and market value of fixed maturity securities are shown in the following table by contractual maturity. Mortgage-backed securities are generally more likely to be prepaid than other fixed maturity securities. As the stated maturity of such securities may not be indicative of actual maturities, the totals for mortgage-backed and asset-backed securities are shown separately.
 
 At September 30, 2010  At December 31, 2009  At June 30, 2011  At December 31, 2010 
 Amortized  Market  Amortized  Market  Amortized  Market  Amortized  Market 
(Dollars in thousands) Cost  Value  Cost  Value  Cost  Value  Cost  Value 
Fixed maturity securities – available for sale                        
Due in one year or less $242,466  $241,645  $334,054  $335,948  $240,540  $244,567  $212,728  $207,739 
Due after one year through five years  1,563,006   1,632,360   1,276,968   1,316,918   1,810,582   1,858,872   1,642,227   1,681,497 
Due after five years through ten years  1,243,788   1,337,647   1,224,457   1,282,470   1,119,257   1,169,942   1,203,497   1,253,609 
Due after ten years  2,501,152   2,657,082   2,762,340   2,863,960   1,497,685   1,569,950   1,942,859   1,997,380 
Asset-backed securities  25,362   25,702   16,597   15,148   40,383   41,052   19,860   20,551 
Mortgage-backed securities                                
Commercial  32,513   40,646   24,213   29,058   41,840   48,900   31,887   39,505 
Agency residential  386,496   403,795   556,032   564,707   321,195   338,774   355,928   369,691 
Non-agency residential  30,047   29,923   61,098   54,959   27,404   27,845   29,373   29,968 
Total fixed maturity securities $6,024,830  $6,368,800  $6,255,759  $6,463,168  $5,098,886  $5,299,902  $5,438,359  $5,599,940 

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) 2010  2009  2010  2009  2011  2010  2011  2010 
Increase (decrease) during the period between the market value and cost                        
of investments carried at market value, and deferred taxes thereon:                        
Fixed maturity securities $83,578  $229,219  $133,595  $396,245  $56,368  $46,864  $39,430  $50,017 
Fixed maturity securities, cumulative other-than-temporary impairment adjustment  384   -   2,966   (23,846)  (15)  (470)  5   2,582 
Equity securities  (1)  -   (2)  (4)  -   -   -   (1)
Other invested assets  (34)  3,387   462   5,614   (3,165)  (17)  (1,730)  496 
Change in unrealized appreciation (depreciation), pre-tax  83,927   232,606   137,021   378,009   53,188   46,377   37,705   53,094 
Deferred tax benefit (expense)  (29,240)  (81,412)  (46,919)  (140,649)  (18,621)  (16,396)  (13,195)  (17,679)
Deferred tax benefit (expense), cumulative other-than-temporary impairment adjustmentDeferred tax benefit (expense), cumulative other-than-temporary impairment adjustment (134)  -   (1,038)  8,346   5   164   (2)  (904)
Change in unrealized appreciation (depreciation),                                
net of deferred taxes, included in stockholder's equity $54,553  $151,194  $89,064  $245,706 
net of deferred taxes, included in shareholders’ equity $34,572  $30,145  $24,508  $34,511 
 
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 valuecost 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 (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 (loss). The fair value adjustment that is non-credit related is recorded as a component of other comprehensive income (loss), net of tax, and is included in accumulated other comprehensive income (loss) in the Company’s consolidated balance sheets.  The Company’s assessments are based on the issuers current and expected future financial position, timeliness with respect to interest and/or principal payments, speed of repayments and any applicable credit enhancements or b reakeven
8

breakeven constant default rates on mortgage-backed and asset-backed securities, as well as relevant information provided by rating agencies, investment advisors and analysts.

 
8


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 tablestable below displaydisplays the aggregate market value and gross unrealized depreciation of fixed maturity and equity securities, by security type and contractual maturity, in each case subdivided according to length of time that individual securities had been in a continuous unrealized loss position for the periods indicated:
 
 Duration of Unrealized Loss at September 30, 2010 By Security Type  Duration of Unrealized Loss at June 30, 2011 By Security Type 
 Less than 12 months  Greater than 12 months  Total  Less than 12 months  Greater than 12 months  Total 
    Gross     Gross     Gross     Gross     Gross     Gross 
    Unrealized     Unrealized     Unrealized     Unrealized     Unrealized     Unrealized 
(Dollars in thousands) Market Value  Depreciation  Market Value  Depreciation  Market Value  Depreciation  Market Value  Depreciation  Market Value  Depreciation  Market Value  Depreciation 
Fixed maturity securities - available for sale                                    
U.S. Treasury securities and obligations of                                    
U.S. government agencies and corporations $4,243  $(97) $3,467  $(180) $7,710  $(277) $19,681  $(1,153) $3,417  $(523) $23,098  $(1,676)
Obligations of U.S. states and political subdivisionsObligations of U.S. states and political subdivisions 13,461   (34)  102,649   (4,168)  116,110   (4,202)  34,916   (1,152)  55,794   (4,833)  90,710   (5,985)
Corporate securities  83,055   (1,046)  47,949   (6,481)  131,004   (7,527)  183,948   (5,707)  82,476   (6,865)  266,424   (12,572)
Asset-backed securities  -   -   519   (206)  519   (206)  5,089   (16)  -   -   5,089   (16)
Mortgage-backed securities                                                
Commercial  9,716   (727)  -   -   9,716   (727)
Agency residential  17,878   (107)  -   -   17,878   (107)  1,485   (11)  1,258   (6)  2,743   (17)
Non-agency residential  -   -   22,747   (1,046)  22,747   (1,046)  -   -   830   (93)  830   (93)
Foreign government securities  74,145   (2,922)  82,024   (4,539)  156,169   (7,461)  50,741   (1,797)  78,372   (9,494)  129,113   (11,291)
Foreign corporate securities  57,169   (1,070)  86,221   (8,370)  143,390   (9,440)  116,829   (7,890)  57,756   (9,911)  174,585   (17,801)
Total fixed maturity securities $249,951  $(5,276) $345,576  $(24,990) $595,527  $(30,266) $422,405  $(18,453) $279,903  $(31,725) $702,308  $(50,178)
Equity securities  -   -   12   (3)  12   (3)  -   -   12   (3)  12   (3)
Total $249,951  $(5,276) $345,588  $(24,993) $595,539  $(30,269) $422,405  $(18,453) $279,915  $(31,728) $702,320  $(50,181)
 
 Duration of Unrealized Loss at September 30, 2010 By Maturity  Duration of Unrealized Loss at June 30, 2011 By Maturity 
 Less than 12 months  Greater than 12 months  Total  Less than 12 months  Greater than 12 months  Total 
    Gross     Gross     Gross     Gross     Gross     Gross 
    Unrealized     Unrealized     Unrealized     Unrealized     Unrealized     Unrealized 
(Dollars in thousands) Market Value  Depreciation  Market Value  Depreciation  Market Value  Depreciation  Market Value  Depreciation  Market Value  Depreciation  Market Value  Depreciation 
Fixed maturity securities                                    
Due in one year or less $7,995  $(408) $48,026  $(5,556) $56,021  $(5,964) $7,796  $(549) $16,599  $(3,045) $24,395  $(3,594)
Due in one year through five years  132,797   (2,662)  98,042   (5,836)  230,839   (8,498)  177,973   (9,464)  127,966   (12,043)  305,939   (21,507)
Due in five years through ten years  73,149   (2,042)  26,831   (1,921)  99,980   (3,963)  177,091   (5,705)  54,976   (5,852)  232,067   (11,557)
Due after ten years  18,132   (57)  149,411   (10,425)  167,543   (10,482)  43,255   (1,981)  78,274   (10,686)  121,529   (12,667)
Asset-backed securities  -   -   519   (206)  519   (206)  5,089   (16)  -   -   5,089   (16)
Mortgage-backed securities  17,878   (107)  22,747   (1,046)  40,625   (1,153)  11,201   (738)  2,088   (99)  13,289   (837)
Total fixed maturity securities $249,951  $(5,276) $345,576  $(24,990) $595,527  $(30,266) $422,405  $(18,453) $279,903  $(31,725) $702,308  $(50,178)
 
The aggregate market value and gross unrealized losses related to investments in an unrealized loss position as of Septemberat June 30, 20102011 were $595,539$702,320 thousand and $30,269$50,181 thousand, respectively.  There were no unrealized losses on a single securityissuer that exceeded 0.06%0.1% of the market value of the fixed maturity securities at SeptemberJune 30, 2010.2011.  In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector.  The $5,276$18,453 thousand of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for less than one year were generally comprised of highly rated municipal, U.S. and foreign government and domestic and foreign corporate securities.  Of these unrealized losses, $4,488$16,614 thousand were related to securiti essecurities that were rated investment grade by at least one nationally recognized statistical rating organization.  The $24,993 thousandmajority of the unrealized losses related to foreign government and foreign corporate securities are due to currency exchange rate movements as opposed to market value movements.  The non-investment grade securities
 
 
9

 
with unrealized losses were mainly comprised of corporate securities.  The $31,725 thousand of unrealized losses related to fixed maturity and equity securities in an unrealized loss position for more than one year related primarily to foreign corporate and foreign government securities.  Of these unrealized losses, $27,807 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating organization.  The majority of the unrealized losses related to foreign government and foreign corporate securities are due to currency exchange rate movements as opposed to market value movements.  The gross unrealized depreciation greater than 12 months for mortgage-backed securities included $43 thousand related to sub-prime and alt-A loans.  In all instances, projected cash flows were sufficient to recover the full book value of the investments and the related interest obligations.  The mortgage-backed securities still have excess credit coverage and are current on interest and principal payments.  Unrealized losses at June 30, 2011 are comparable with unrealized losses at December 31, 2010.
The table below displays the aggregate market value and gross unrealized depreciation of fixed maturity and equity securities, by security type and contractual maturity, in each case subdivided according to length of time that individual securities had been in a continuous unrealized loss position for the periods indicated:
  Duration of Unrealized Loss at December 31, 2010 By Security Type 
  Less than 12 months  Greater than 12 months  Total 
     Gross     Gross     Gross 
     Unrealized     Unrealized     Unrealized 
(Dollars in thousands) Market Value  Depreciation  Market Value  Depreciation  Market Value  Depreciation 
Fixed maturity securities - available for sale                  
U.S. Treasury securities and obligations of                  
U.S. government agencies and corporations $47,985  $(1,916) $43,264  $(3,230) $91,249  $(5,146)
Obligations of U.S. states and political subdivisions  336,522   (9,519)  171,812   (15,410)  508,334   (24,929)
Corporate securities  74,389   (2,715)  33,109   (7,060)  107,498   (9,775)
Asset-backed securities  3,900   (14)  -   -   3,900   (14)
Mortgage-backed securities                        
Agency residential  20,867   (212)  -   -   20,867   (212)
Non-agency residential  -   -   22,439   (317)  22,439   (317)
Foreign government securities  92,123   (3,776)  124,807   (11,791)  216,930   (15,567)
Foreign corporate securities  120,294   (5,512)  121,304   (15,666)  241,598   (21,178)
Total fixed maturity securities $696,080  $(23,664) $516,735  $(53,474) $1,212,815  $(77,138)
Equity securities  -   -   13   (2)  13   (2)
Total $696,080  $(23,664) $516,748  $(53,476) $1,212,828  $(77,140)
  Duration of Unrealized Loss at December 31, 2010 By Maturity 
  Less than 12 months  Greater than 12 months  Total 
     Gross     Gross     Gross 
     Unrealized     Unrealized     Unrealized 
(Dollars in thousands) Market Value  Depreciation  Market Value  Depreciation  Market Value  Depreciation 
Fixed maturity securities                  
Due in one year or less $5,982  $(319) $48,233  $(8,089) $54,215  $(8,408)
Due in one year through five years  186,524   (9,059)  129,197   (11,559)  315,721   (20,618)
Due in five years through ten years  139,896   (4,356)  92,692   (8,215)  232,588   (12,571)
Due after ten years  338,911   (9,704)  224,174   (25,294)  563,085   (34,998)
Asset-backed securities  3,900   (14)  -   -   3,900   (14)
Mortgage-backed securities  20,867   (212)  22,439   (317)  43,306   (529)
Total fixed maturity securities $696,080  $(23,664) $516,735  $(53,474) $1,212,815  $(77,138)

The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at December 31, 2010 were $1,212,828 thousand and $77,140 thousand, respectively.  There were no unrealized losses on a single issuer that exceeded 0.09% of the market value of the fixed maturity securities at December 31, 2010.  In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector.  The $23,664 thousand of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for less than one year were generally comprised of highly rated municipal, U.S. government, foreign government and domestic and foreign corporate mortgage-backed,securities.  Of these unrealized losses, $23,424 thousand were related to securities that
10

were rated investment grade by at least one nationally recognized statistical rating organization.  The $53,474 thousand of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year also related primarily to highly rated U.S. government, domestic and foreign corporate, foreign government and municipal securities.  Of these unrealized losses, $19,390$48,165 thousand related to securities that were rated investment grade by at least one nationally recognized statistical rating organization.  The non-investment grade securities with unrealized losses were mainly comprised of corporate securities.  The gross unrealized depreciation greater than 12 months for mortgage-backed securities included $298$32 thousand related to sub-prime and alt-A loans.  In all instances, projected cash flows were sufficient to recover the full book value of the investments and the related interest obligations.  Unrealized losses have decreased sinc e December 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, in each case subdivided according to length of time that individual securities had been in a continuous unrealized loss position for the periods indicated:
  Duration of Unrealized Loss at December 31, 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)

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The aggregate market value and gross unrealized losses related to investments in an unrealized loss position as of December 31, 2009 were $1,386,867 thousand and $71,935 thousand, respectively.  There were no unrealized losses on a single security that exceeded 0.11% of the market value of the fixed maturity securities at December 31, 2009.  In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector.  The $10,878 thousand 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 domestic and foreign government and corporate and mortgage-backed securities.  Of these unrealized losses, $10,658 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating organization.  The $61,057 thousand of unrealized losses related to securities in an unrealized loss position for more than one year related primarily to highly rated municipal, domestic and foreign corporate, foreign government and mortgage-backed securities.  Of these unrealized losses, $50,505 thousand related to securities that were rated investment grade by at least one nationally recognized statistical rating organization.  The non-investment grade securities with unrealized losses were mainly comprised of corporate and commercial mortgage-backed securities.  The gross unrealized depreciation greater than 12 months for mortgage-backed securities included $73 thousand related to sub-prime and alt-A loans.  In all instances, projected cash flows were sufficient to recover the full book value of the investments and the related interest obli gations.  The mortgage-backed securities still had excess credit coverage and were current on interest and principal payments.

The components of net investment income are presented in the table below for the periods indicated:
 
 Three Months Ended  Nine Months Ended  Three Months Ended  Six Months Ended 
 September 30,  September 30,  June 30,  June 30, 
(Dollars in thousands) 2010  2009  2010  2009  2011  2010  2011  2010 
Fixed maturity securities $69,918  $70,965  $219,335  $212,903  $59,139  $75,862  $119,758  $149,417 
Equity securities  2,448   758   7,470   2,182   6,468   2,618   11,640   5,022 
Short-term investments and cash  111   277   263   3,331   387   75   594   152 
Other invested assets                                
Limited partnerships  1,071   (4,423)  19,367   (36,548)  13,939   8,882   32,354   18,296 
Dividends from Parent's shares  4,666   4,127   9,314   5,553 
Other  4,199   664   10,454   5,693   4,126   330   4,723   702 
Total gross investment income  77,747   68,241   256,889   187,561   88,725   91,894   178,383   179,142 
Interest debited (credited) and other expense  (3,535)  (2,749)  (8,224)  (7,894)
Interest debited (credited) and other investment expense  (4,266)  (2,548)  (6,792)  (4,689)
Total net investment income $74,212  $65,492  $248,665  $179,667  $84,459  $89,346  $171,591  $174,453 
 
The Company records results from limited partnership investments on the equity method of accounting with changes in value reported through net investment income. Due to the timing of receiving financial information from these partnerships, the results are generally reported on a one month or quarter lag.  If the Company determines there has been a significant decline in value of a limited partnership during this lag period, a loss will be recorded in the period in which the Company indentifies the decline.

The Company had contractual commitments to invest up to an additional $129,690$142,091 thousand in limited partnerships at SeptemberJune 30, 2010.2011.  These commitments will be funded when called in accordance with the partnership agreements, which have investment periods that expire, unless extended, through 2014.2016.

 
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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) 2010  2009  2010  2009  2011  2010  2011  2010 
Fixed maturity securities, market value:                        
Other-than-temporary impairments $(2,023) $-  $(2,023) $(5,510) $-  $-  $(13,611) $- 
Gains (losses) from sales  (4,654)  (4,131)  (3,814)  (32,612)  (5,978)  1,617   (18,288)  840 
Fixed maturity securities, fair value:                                
Gains (losses) from sales  480   172   753   401   565   190   (950)  273 
Gains (losses) from fair value adjustments  3,297   5,837   3,779   7,805   (40)  (2,518)  (3,523)  482 
Equity securities, market value:                                
Gains (losses) from sales  -   8,041   -   8,041   -   -   37   - 
Equity securities, fair value:                                
Gains (losses) from sales  951   1,299   (48)  6,483   (206)  (2,893)  1,666   (999)
Gains (losses) from fair value adjustments  34,912   23,075   18,126   23,448   (23)  (30,017)  38,107   (16,786)
Other invested assets, fair value:                                
Gains (losses) from fair value adjustments  126,608   67,103   42,018   48,091   (62,500)  (61,853)  (31,145)  (84,590)
Short-term investment gains (losses)  (2)  (2)  (2)  4   (2)  1   (1)  - 
Total net realized capital gains (losses) $159,569  $101,394  $58,789  $56,151  $(68,184) $(95,473) $(27,708) $(100,780)

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

The proceeds and split between gross gains and losses, from sales of fixed maturity and equity securities, are presented in the table below for the periods indicated:
 
 Three Months Ended  Nine Months Ended  Three Months Ended  Six Months Ended 
 September 30,  September 30,  June 30,  June 30, 
(Dollars in thousands) 2010  2009  2010  2009  2011  2010  2011  2010 
Proceeds from sales of fixed maturity securities $96,356  $38,612  $476,531  $99,708  $287,337  $212,193  $837,010  $380,175 
Gross gains from sales  642   2,278   7,963   4,584   3,316   5,545   17,582   7,321 
Gross losses from sales  (4,816)  (6,237)  (11,024)  (36,795)  (8,729)  (3,738)  (36,820)  (6,208)
                                
Proceeds from sales of equity secuities $14,899  $34,338  $87,641  $46,563  $37,000  $51,400  $116,792  $72,742 
Gross gains from sales  1,033   9,368   4,616   15,255   722   1,214   3,102   3,584 
Gross losses from sales  (82)  (28)  (4,664)  (731)  (928)  (4,107)  (1,399)  (4,583)
 
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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.

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In limited instances where prices are not provided by pricing services or in rare instances when a manager may not agree with the pricing service, price quotes on a non-binding basis are obtained from investment brokers.  The investment asset managers do not make any changes to prices received from either the pricing services or the investment brokers.  In addition, the investment asset managers have procedures in place to review the reasonableness of the prices from the service providers and may request verification of the prices.  In addition, the Company 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 rate srates to determine fair value.  The Company made no such adjustments at SeptemberJune 30, 2011 and 2010.

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

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

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The following table presents the fair value measurement levels for all assets, which the Company has recorded at fair value (fair and market value) as of the period indicated:
 
    Fair Value Measurement Using:     Fair Value Measurement Using: 
    Quoted Prices           Quoted Prices       
    in Active  Significant        in Active  Significant    
    Markets for  Other  Significant     Markets for  Other  Significant 
    Identical  Observable  Unobservable     Identical  Observable  Unobservable 
    Assets  Inputs  Inputs     Assets  Inputs  Inputs 
(Dollars in thousands) September 30, 2010 (Level 1)  (Level 2)  (Level 3)  June 30, 2011  (Level 1)  (Level 2)  (Level 3) 
Assets:                        
Fixed maturities, market value                        
U.S. Treasury securities and obligations of                        
U.S. government agencies and corporations $157,812  $-  $157,812  $-  $84,416  $-  $84,416  $- 
Obligations of U.S. States and political subdivisions
  3,622,053   -   3,622,053   -   2,213,945   -   2,213,945   - 
Corporate securities  752,268   -   745,277   6,991   925,810   -   925,810   - 
Asset-backed securities  25,702   -   25,183   519   41,052   -   38,586   2,466 
Mortgage-backed securities                                
Commercial  40,646   -   40,646   -   48,900   -   48,900   - 
Agency residential  403,795   -   403,795   -   338,774   -   338,774   - 
Non-agency residential  29,923   -   29,461   462   27,845   -   27,464   381 
Foreign government securities  739,829   -   739,829   -   906,809   -   906,809   - 
Foreign corporate securities  596,772   -   596,772   -   712,351   -   712,351   - 
Total fixed maturities, market value  6,368,800   -   6,360,828   7,972   5,299,902   -   5,297,055   2,847 
                                
Fixed maturities, fair value  116,376   -   116,376   -   128,337   -   128,337   - 
Equity securities, market value  12   12   -   -   12   12   -   - 
Equity securities, fair value  382,279   382,279   -   -   972,802   899,146   73,656   - 
Other invested assets, fair value  752,533   752,533   -   -   794,608   794,608   -   - 
 
There were no significant transfers between Level 1 and Level 2 for the ninethree and six months ended SeptemberJune 30, 2010.2011.


 
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The following table presents the fair value measurement levels for all assets, which the Company has recorded at fair value (fair and market value) as of the period indicated:
 
    Fair Value Measurement Using:     Fair Value Measurement Using: 
    Quoted Prices           Quoted Prices       
    in Active  Significant        in Active  Significant    
    Markets for  Other  Significant     Markets for  Other  Significant 
    Identical  Observable  Unobservable     Identical  Observable  Unobservable 
    Assets  Inputs  Inputs     Assets  Inputs  Inputs 
(Dollars in thousands) December 31, 2009 (Level 1)  (Level 2)  (Level 3)  December 31, 2010  (Level 1)  (Level 2)  (Level 3) 
Assets:                        
Fixed maturities, market value                        
U.S. Treasury securities and obligations of                        
U.S. government agencies and corporations $134,291  $-  $134,291  $-  $150,567  $-  $150,567  $- 
Obligations of U.S. States and political subdivisions  3,853,859   -   3,853,859   -   2,901,505   -   2,901,505   - 
Corporate securities  635,381   -   628,451   6,930   721,685   -   721,685   - 
Asset-backed securities  15,148   -   8,890   6,258   20,551   -   19,590   961 
Mortgage-backed securities                                
Commercial  29,058   -   29,058   -   39,505   -   39,505   - 
Agency residential  564,707   -   564,707   -   369,691   -   369,691   - 
Non-agency residential  54,959   -   54,533   426   29,968   -   29,510   458 
Foreign government securities  659,217   -   659,217   -   749,041   -   749,041   - 
Foreign corporate securities  516,548   -   516,548   -   617,427   -   613,792   3,635 
Total fixed maturities, market value  6,463,168   -   6,449,554   13,614   5,599,940   -   5,594,886   5,054 
                                
Fixed maturities, fair value  50,528   -   50,528   -   180,482   -   180,482   - 
Equity securities, market value  13   13   -   -   13   13   -   - 
Equity securities, fair value  380,025   379,058   967   -   683,454   683,454   -   - 
Other invested assets, fair value  382,639   382,639   -   -   788,142   788,142   -   - 

The following tables present the activity under Level 3, fair value measurements using significant unobservable inputs by asset type, for the periods indicated:
 
 By Asset 
 Three Months Ended September 30, 2010  Nine Months Ended September 30, 2010  Three Months Ended June 30, 2011  Six Months Ended June 30, 2011 
 Corporate Asset-backed Non-agency    Corporate Asset-backed Non-agency    Asset-backed  Foreign  Non-agency     Asset-backed  Foreign  Non-agency    
(Dollars in thousands) Securities Securities RMBS Total Securities Securities RMBS Total Securities  Corporate  RMBS  Total  Securities  Corporate  RMBS  Total 
Beginning balance $6,965  $6,562  $497  $14,024  $6,930  $6,258  $426  $13,614  $6,273  $519  $448  $7,240  $961  $3,635  $458  $5,054 
Total gains or (losses) (realized/unrealized)Total gains or (losses) (realized/unrealized)                                                               
Included in earnings (or changes in net assets)Included in earnings (or changes in net assets) -   (258)  32   (226)  (1)  (258)  81   (178)  64   -   28   92   64   -   49   113 
Included in other comprehensive income (loss)Included in other comprehensive income (loss) 26   1,628   (22)  1,632   62   1,672   70   1,804   (84)  -   (48)  (132)  (147)  -   (48)  (195)
Purchases, issuances and settlements  -   (7,413)  (45)  (7,458)  -   (7,153)  (115)  (7,268)  (82)  -   (47)  (129)  56   -   (78)  (22)
Transfers in and/or (out) of Level 3  -   -   -   -   -   -   -   -   (3,705)  (519)  -   (4,224)  1,532   (3,635)  -   (2,103)
Ending balance $6,991  $519  $462  $7,972  $6,991  $519  $462  $7,972  $2,466  $-  $381  $2,847  $2,466  $-  $381  $2,847 
                                                                
The amount of total gains or losses for the period includedThe amount of total gains or losses for the period included                                                               
in earnings (or changes in net assets) attributable to thein earnings (or changes in net assets) attributable to the                                                               
change in unrealized gains or losses relating to assetschange in unrealized gains or losses relating to assets                                                               
still held at the reporting datestill held at the reporting date$-  $-  $-  $-  $-  $-  $-  $-  $-  $-  $-  $-  $-  $-  $-  $- 
                                                                
(Some amounts may not reconcile due to rounding.)(Some amounts may not reconcile due to rounding.)                     (Some amounts may not reconcile due to rounding.)                       

 
1415

 
 By Asset 
 Three Months Ended September 30, 2009 Nine Months Ended September 30, 2009  Three Months Ended June 30, 2010  Six Months Ended June 30, 2010 
 Corporate Asset-backed Non-agency    Corporate Asset-backed Non-agency    Corporate  Asset-backed  Non-agency     Corporate  Asset-backed  Non-agency    
(Dollars in thousands) Securities Securities RMBS Total Securities Securities RMBS Total Securities  Securities  RMBS  Total  Securities  Securities  RMBS  Total 
Beginning balance $6,230  $5,123  $454  $11,807  $7,000  $3,409  $558  $10,967  $6,930  $6,368  $456  $13,754  $6,930  $6,258  $426  $13,614 
Total gains or (losses) (realized/unrealized)Total gains or (losses) (realized/unrealized)                                                               
Included in earnings (or changes in net assets)Included in earnings (or changes in net assets) -   -   46   46   (1)  -   43   42   (1)  -   24   23   (1)  -   49   48 
Included in other comprehensive income (loss)Included in other comprehensive income (loss) 630   479   27   1,136   (139)  1,826   5   1,692   36   122   51   209   36   44   92   172 
Purchases, issuances and settlements  -   -   (113)  (113)  -   -   (192)  (192)  -   72   (34)  38   -   260   (70)  190 
Transfers in and/or (out) of Level 3  -   (149)  -   (149)  -   218   -   218   -   -   -   -   -   -   -   - 
Ending balance $6,860  $5,453  $414  $12,727  $6,860  $5,453  $414  $12,727  $6,965  $6,562  $497  $14,024  $6,965  $6,562  $497  $14,024 
                                                                
The amount of total gains or losses for the period includedThe amount of total gains or losses for the period included                                                               
in earnings (or changes in net assets) attributable to thein earnings (or changes in net assets) attributable to the                                                               
change in unrealized gains or losses relating to assetschange in unrealized gains or losses relating to assets                                                               
still held at the reporting datestill held at the reporting date$-  $-  $-  $-  $-  $(73) $(58) $(131) $-  $-  $-  $-  $-  $-  $-  $- 
                                                                
(Some amounts may not reconcile due to rounding.)(Some amounts may not reconcile due to rounding.)                     (Some amounts may not reconcile due to rounding.)                     

5.  CAPITAL TRANSACTIONS

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

6.  CONTINGENCIES

In the ordinary course of business, the Company is involved in lawsuits, arbitrations and other formal and informal dispute resolution procedures, the outcomes of which will determine the Company’s rights and obligations under insurance, 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.  The statuses of these proceedings are considered when the Company determines its reserves for losses and loss adjustment expenses.  While the final outcom eoutcome 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 thereThere are any materialno known significant pending legal proceedings to which itissues not involving insurance or any of its subsidiaries is a party or of which any of their properties are the subject.reinsurance business activity.

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.

 
1516

 
The Company’s reserves include an estimate of the Company’s ultimate liability for asbestos and environmental (“A&E”) claims.  As of SeptemberJune 30, 2010,2011, approximately 8%6% 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 itsit’s A&E losses.

A&E exposures represent a separate exposure group for monitoring and evaluating reserve adequacy. The following table summarizes incurred losses with respect to A&E reserves on both a gross and net of retrocessionalreinsurance 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) 2010  2009  2010  2009  2011  2010  2011  2010 
Gross basis:                        
Beginning of period reserves $614,135  $704,507  $638,674  $786,842  $535,764  $625,208  $554,790  $638,674 
Incurred losses  -   -   -   -   753   -   753   - 
Paid losses  (36,598)  (52,170)  (61,137)  (134,505)  (9,795)  (11,073)  (28,821)  (24,539)
End of period reserves $577,537  $652,337  $577,537  $652,337  $526,722  $614,135  $526,722  $614,135 
                                
Net basis:                                
Beginning of period reserves $412,651  $455,379  $430,421  $485,296  $368,144  $419,230  $382,507  $430,421 
Incurred losses  -   -   -   -   (30)  -   (30)  - 
Paid losses  (14,693)  (13,527)  (32,463)  (43,444)  (7,585)  (6,579)  (21,948)  (17,770)
End of period reserves $397,958  $441,852  $397,958  $441,852  $360,528  $412,651  $360,528  $412,651 
                
(Some amounts may not reconcile due to rounding)                
 
At SeptemberJune 30, 2010,2011, the gross reserves for A&E losses were comprised of $131,785$139,183 thousand representing case reserves reported by ceding companies, $131,818$108,765 thousand representing additional case reserves established by the Company on assumed reinsurance claims, $41,245$36,881 thousand representing case reserves established by the Company on direct excess insurance claims, including Mt. McKinley and $272,689$241,893 thousand representing IBNR reserves.

With respect to asbestos only, at SeptemberJune 30, 2010,2011, the Company had gross asbestos loss reserves of $551,439$505,146 thousand, or 95.5%95.9%, of total A&E reserves, of which $445,766$403,150 thousand was for assumed business and $105,673$101,996 thousand 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.

 
1617


In 1993 and prior, the Company had a business arrangement with The Prudential Insurance Company of America (“The Prudential”) wherein, for a fee, the Company accepted settled claim payment obligations of certain property and casualty insurers, and, concurrently, became the owner of the annuity or assignee of the annuity proceeds funded by the property and casualty insurers specifically to fulfill these fully settled obligations.  In these circumstances, the Company would be liable if The Prudential, which has an A+ (Superior) financial strength rating from A.M. Best Company (“A.M. Best”), was unable to make the annuity payments.  The table below presents the estimated cost to replace all such annuities for which the Company was contingently liable for the periods indicated:
 
(Dollars in thousands) At September 30, 2010 At December 31, 2009
  $150,614  $152,340 
(Dollars in thousands) At June 30, 2011 At December 31, 2010
  $143,013  $150,560 

Prior to its 1995 initial public offering, the Company had purchased annuities from an unaffiliated life insurance company with an A+ (Superior) financial strength rating from A.M. Best to settle certain claim liabilities of the company.  Should the life insurance company become unable to make the annuity payments, the Company would be liable for those claim liabilities.  The table below presents the estimated cost to replace all such annuities for which the Company was contingently liable for the periods indicated:
 
(Dollars in thousands) At September 30, 2010 At December 31, 2009
  $26,030  $24,568 
(Dollars in thousands) At June 30, 2011 At December 31, 2010
  $26,988  $26,542 
 
7.  OTHER COMPREHENSIVE INCOME (LOSS)

The following table presents the components of comprehensive income (loss) 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) 2010  2009  2010  2009  2011  2010  2011  2010 
Unrealized appreciation (depreciation) ("URA(D)") on                        
securities arising during the period                        
URA(D) of investments - temporary $83,543  $228,551  $134,055  $392,202  $53,203  $46,846  $37,700  $50,512 
URA(D) of investments - non-credit OTTI  384   4,056   2,966   9,654   (15)  (469)  5   2,582 
Tax benefit (expense) from URA(D) arising during the period  (29,374)  (81,413)  (47,957)  (140,650)  (18,616)  (16,232)  (13,197)  (18,583)
Total URA(D) on securities arising during the period, net of tax  54,553   151,194   89,064   261,206   34,572   30,145   24,508   34,511 
                                
Foreign currency translation adjustments  16,528   16,204   18,358   33,281   (1,664)  (8,896)  14,236   1,830 
Tax benefit (expense) from foreign currency translation  (5,785)  (5,672)  (6,425)  (11,649)  582   3,114   (4,983)  (640)
Net foreign currency translation adjustments  10,743   10,532   11,933   21,632   (1,082)  (5,782)  9,253   1,190 
                                
Pension adjustments  649   949   1,948   2,849   1,147   671   2,295   1,299 
Tax benefit (expense) on pension  (227)  (332)  (682)  (564)  (401)  (235)  (803)  (455)
Net pension adjustments  422   617   1,266   2,285   746   436   1,492   844 
                                
Other comprehensive income (loss), net of tax $65,718  $162,343  $102,263  $285,123  $34,236  $24,799  $35,253  $36,545 

 
1718


The following table presents the components of accumulated other comprehensive income (loss), net of tax, in the consolidated balance sheets for the periods indicated:
 
 At September 30,  At December 31,  At June 30,  At December 31, 
(Dollars in thousands) 2010  2009  2011  2010 
URA(D) on securities, net of deferred taxes            
Temporary $222,706  $135,570  $129,980  $105,474 
Non-credit, OTTI  603   (1,325)  538   535 
Total unrealized appreciation (depreciation) on investments, net of deferred taxes  223,309   134,245   130,518   106,009 
Foreign currency translation adjustments, net of deferred taxes  68,934   57,001   93,292   84,040 
Pension adjustments, net of deferred taxes  (23,002)  (24,268)  (24,591)  (26,083)
Accumulated other comprehensive income (loss) $269,241  $166,978  $199,219  $163,966 
 
8.  CREDIT FACILITY

Holdings Credit Facility

Effective August 23, 2006, Holdings entered into a five year, $150,000 thousand 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 $150,000 thousand with interest at a rate selected by Holdings equal to either, (1) the Base Rate (as defined below) or (2) a periodic fixed rate equal to the Eurodollar Rate plus an applicable margin.  The Base Rate means a fluctuating interest rate per annum in effect from time to time to be equal to the higher of (a) the rate of interest publicly announced by Citiba nkCitibank 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 Reinsurance Company (“Everest Re”)Re to maintain its statutory surplus at $1,500,000 thousand plus 25% of future aggregate net income and 25% of future aggregate capital contributions after December 31, 2005, which at SeptemberJune 30, 2010,2011, was $1,970,322$2,005,890 thousand.  As of SeptemberJune 30, 2010,2011, Holdings was in compliance with all Holdings Credit Facility covenants.

The following table summarizes outstanding letters of credit and/or borrowings for the periods indicated:
 
(Dollars in thousands) At September 30, 2010 At December 31, 2009 At June 30, 2011 At December 31, 2010
Bank Commitment  In Use Date of LoanMaturity/Expiry Date Commitment  In Use Date of LoanMaturity/Expiry Date Commitment  In Use Date of LoanMaturity/Expiry Date Commitment  In Use Date of LoanMaturity/Expiry Date
Citibank Holdings Credit Facility $150,000  $50,000 9/01/201010/01/2010 $150,000  $-    $150,000  $15,000 6/16/20117/18/2011 $150,000  $50,000 12/16/20101/18/2011
      20,000 9/13/201010/13/2010      -         10,000 6/28/20117/28/2011      -   
      13,000 9/15/201010/15/2010      -         15,000 6/06/20117/06/2011      -   
Total revolving credit borrowings      83,000         -         40,000         50,000   
Total letters of credit      16,951  12/31/2010      27,959  12/31/2010      9,527  12/31/2011      9,527  12/31/2011
                                        
Total Citibank Holdings Credit Facility $150,000  $99,951    $150,000  $27,959    $150,000  $49,527    $150,000  $59,527   

18Prior to August 23, 2011, the Company plans to enter into a new Holdings Credit Facility with terms similar to the expiring Facility.


The following table presents the costs incurred in connection with the Holdings Credit Facility for the periods indicated:
 
 Three Months Ended  Nine Months Ended  Three Months Ended  Six Months Ended 
 September 30,  September 30,  June 30,  June 30, 
(Dollars in thousands) 2010  2009  2010  2009  2011  2010  2011  2010 
Credit facility fees incurred $225  $108  $376  $166  $89  $141  $179  $150 

 
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9.  TRUST AGREEMENTS

A subsidiary of the Company, Everest Re, has established a trust agreement, which effectively uses Everest Re’s investments as collateral, as security for assumed losses payable to a non-affiliated ceding company.  At SeptemberJune 30, 2010,2011, the total amount on deposit in the trust account was $26,046$14,268 thousand.

10.  SENIOR NOTES

Holdings has completed multiple public offerings.  The table below displays Holdings’ outstanding senior notes.  Market value is based on quoted market prices.
 
       September 30, 2010 December 31, 2009       June 30, 2011  December 31, 2010 
       Consolidated Balance    Consolidated Balance          Consolidated Balance     Consolidated Balance    
(Dollars in thousands)Date Issued Date Due Principal Amounts Sheet Amount Market Value Sheet Amount Market ValueDate Issued Date Due Principal Amounts  Sheet Amount  Market Value  Sheet Amount  Market Value 
5.40% Senior notes10/12/2004 10/15/2014 $250,000  $249,801  $270,000  $249,769  $256,100 10/12/2004 10/15/2014 $250,000  $249,835  $270,570  $249,812  $267,500 
8.75% Senior notes (matured and paid on March 15, 2010)03/14/2000 03/15/2010 $200,000  $-  $-  $199,970  $200,000 03/14/2000 03/15/2010 $200,000  $-  $-  $-  $- 
 
Interest expense incurred in connection with these senior notes is as follows for the periods indicated:
 
 Three Months Ended  Nine Months Ended  Three Months Ended  Six Months Ended 
 September 30,  September 30,  June 30,  June 30, 
(Dollars in thousands) 2010  2009  2010  2009  2011  2010  2011  2010 
Interest expense incurred $3,386  $7,798  $13,833  $23,391  $3,387  $3,385  $6,773  $10,447 

11.  LONG TERM SUBORDINATED NOTES

The table below displays Holdings’ outstanding fixed to floating rate long term subordinated notes.  Market value is based on quoted market prices.
 
    Maturity Date September 30, 2010 December 31, 2009    Maturity Date June 30, 2011  December 31, 2010 
  Original     Consolidated Balance    Consolidated Balance     Original     Consolidated Balance     Consolidated Balance    
(Dollars in thousands)Date Issued Principal Amount Scheduled Final Sheet Amount Market Value Sheet Amount Market ValueDate Issued Principal Amount Scheduled Final Sheet Amount  Market Value  Sheet Amount  Market Value 
6.6% Long term subordinated notes04/26/2007 $400,000 05/15/2037 05/01/2067 $238,350  $220,072  $238,348  $176,534 04/26/2007 $400,000 05/15/2037 05/01/2067 $238,352  $236,031  $238,351  $227,825 

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

19

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 af terafter 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.

20


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

Interest expense incurred in connection with these long term subordinated notes is as follows for the periods indicated:
 
 Three Months Ended  Nine Months Ended  Three Months Ended  Six Months Ended 
 September 30,  September 30,  June 30,  June 30, 
(Dollars in thousands) 2010  2009  2010  2009  2011  2010  2011  2010 
Interest expense incurred $3,937  $3,937  $11,811  $14,385  $3,937  $3,937  $7,874  $7,874 

12. JUNIOR SUBORDINATED DEBT SECURITIES PAYABLE

The following table displays Holdings’ outstanding junior subordinated debt securities due to Everest Re Capital Trust II (“Capital Trust II”), a wholly ownedwholly-owned finance subsidiary of Holdings.  Fair value is primarily based on the quoted market price of the related trust preferred securities.
 
       September 30, 2010 December 31, 2009       June 30, 2011  December 31, 2010 
       Consolidated Balance    Consolidated Balance          Consolidated Balance     Consolidated Balance    
(Dollars in thousands)Date Issued Date Due Amount Issued Sheet Amount Fair Value Sheet Amount Fair ValueDate Issued Date Due Amount Issued  Sheet Amount  Fair Value  Sheet Amount  Fair Value 
6.20% Junior subordinated debt securities03/29/2004 03/29/2034 $329,897  $329,897  $319,913  $329,897  $272,553 03/29/2004 03/29/2034 $329,897  $329,897  $321,577  $329,897  $294,825 

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

Interest expense incurred in connection with these junior subordinated debt securities is as follows for the periods indicated:
 
 Three Months Ended  Nine Months Ended  Three Months Ended  Six Months Ended 
 September 30,  September 30,  June 30,  June 30, 
(Dollars in thousands) 2010  2009  2010  2009  2011  2010  2011  2010 
Interest expense incurred $5,113  $5,113  $15,340  $15,340  $5,114  $5,114  $10,227  $10,227 

20

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

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

There are certain regulatory and contractual restrictions on the ability of Holdings’ operating subsidiaries to transfer funds to Holdings in the form of cash dividends, loans or advances.  The insurance laws of the State of Delaware, where Holdings’ direct insurance subsidiaries are domiciled, require regulatory approval before those subsidiaries can pay dividends or make loans or advances to Holdings that exceed certain statutory thresholds.  In addition, the terms of Holdings Credit Facility (discussed in Note 10)8) require Everest Re, Holdings’ principal insurance subsidiary, to maintain a certain statutory surplus level as measured at the end of each fiscal year.  At December 31, 2009, $2,351,9902010, $2,293,643 thousand of the $3,271,079$2,929,526 thousand in net assets of Holdings’ consolidated sub sidiariessubsidiaries were subject to the foregoing regulatory restrictions.


21


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 primarilydirectly and through general agents, brokers and surplus lines brokers within the U.S.U.S and Canada.  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 Brazil, Miami and New Jersey.

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

Underwriting results include earned premium less losses and loss adjustment expenses (“LAE”) 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.

21

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) 2010  2009  2010  2009  2011  2010  2011  2010 
Gross written premiums $372,358  $345,567  $884,581  $876,049  $230,260  $268,215  $484,167  $512,223 
Net written premiums  205,125   191,666   484,049   487,849��  123,797   150,462   260,348   278,924 
                                
Premiums earned $159,666  $162,037  $449,159  $489,067  $141,633  $162,492  $286,788  $289,493 
Incurred losses and LAE  84,320   56,158   258,774   232,262   112,650   84,346   236,077   174,454 
Commission and brokerage  25,070   21,397   88,142   90,525   32,541   35,854   69,646   63,072 
Other underwriting expenses  8,933   9,665   26,116   25,250   7,871   9,377   15,773   17,183 
Underwriting gain (loss) $41,343  $74,817  $76,127  $141,030  $(11,429) $32,915  $(34,708) $34,784 
 
 Three Months Ended  Nine Months Ended  Three Months Ended  Six Months Ended 
U.S. Insurance September 30,  September 30, 
Insurance June 30,  June 30, 
(Dollars in thousands) 2010  2009  2010  2009  2011  2010  2011  2010 
Gross written premiums $211,632  $230,491  $644,810  $648,719 ��$226,132  $204,941  $480,607  $433,178 
Net written premiums  89,218   76,400   272,497   301,910   109,204   80,812   234,230   183,279 
                                
Premiums earned $103,971  $89,237  $291,324  $306,860  $114,937  $86,187  $220,265  $187,353 
Incurred losses and LAE  98,989   71,423   243,739   210,329   84,404   71,800   169,922   144,750 
Commission and brokerage  10,432   10,512   18,171   32,379   7,377   6,098   13,698   7,739 
Other underwriting expenses  19,479   19,982   52,335   56,415   22,401   16,279   44,273   32,856 
Underwriting gain (loss) $(24,929) $(12,680) $(22,921) $7,737  $755  $(7,990) $(7,628) $2,008 
 
  Three Months Ended  Nine Months Ended 
Specialty Underwriting September 30,  September 30, 
(Dollars in thousands) 2010  2009  2010  2009 
Gross written premiums $65,929  $67,615  $197,671  $183,726 
Net written premiums  35,130   38,259   110,192   102,990 
                 
Premiums earned $37,716  $39,182  $115,956  $108,513 
Incurred losses and LAE  25,226   25,197   87,199   73,740 
Commission and brokerage  7,664   10,510   25,171   29,435 
Other underwriting expenses  2,143   2,383   6,501   6,227 
Underwriting gain (loss) $2,683  $1,092  $(2,915) $(889)
  Three Months Ended  Nine Months Ended 
International September 30,  September 30, 
(Dollars in thousands) 2010  2009  2010  2009 
Gross written premiums $323,741  $272,603  $906,089  $797,606 
Net written premiums  168,400   146,330   479,655   435,650 
                 
Premiums earned $163,949  $147,864  $465,721  $433,099 
Incurred losses and LAE  118,390   89,214   478,966   260,964 
Commission and brokerage  38,289   34,840   106,009   100,062 
Other underwriting expenses  6,675   6,159   20,363   16,463 
Underwriting gain (loss) $595  $17,651  $(139,617) $55,610 

 
22


  Three Months Ended  Six Months Ended 
Specialty Underwriting June 30,  June 30, 
(Dollars in thousands) 2011  2010  2011  2010 
Gross written premiums $66,367  $65,855  $135,537  $131,742 
Net written premiums  35,500   37,823   75,882   75,062 
                 
Premiums earned $33,057  $39,342  $75,451  $78,240 
Incurred losses and LAE  24,891   34,512   50,148   61,973 
Commission and brokerage  7,439   8,972   15,404   17,507 
Other underwriting expenses  2,001   2,407   4,005   4,358 
Underwriting gain (loss) $(1,274) $(6,549) $5,894  $(5,598)
 
  Three Months Ended  Six Months Ended 
International June 30,  June 30, 
(Dollars in thousands) 2011  2010  2011  2010 
Gross written premiums $288,749  $306,998  $597,596  $582,348 
Net written premiums  141,501   166,046   299,625   311,255 
                 
Premiums earned $162,423  $154,703  $328,939  $301,772 
Incurred losses and LAE  90,864   124,091   409,690   360,576 
Commission and brokerage  32,948   37,273   70,069   67,720 
Other underwriting expenses  6,950   7,308   13,389   13,688 
Underwriting gain (loss) $31,661  $(13,969) $(164,209) $(140,212)

The following table reconciles the underwriting results for the operating segments to income (loss) before taxes as reported in the consolidated statements of operations and comprehensive income (loss) for the periods indicated:
 
 Three Months Ended  Nine Months Ended  Three Months Ended  Six Months Ended 
 September 30,  September 30,  June 30,  June 30, 
(Dollars in thousands) 2010  2009  2010  2009  2011  2010  2011  2010 
Underwriting gain (loss) $19,692  $80,880  $(89,326) $203,488  $19,713  $4,407  $(200,651) $(109,018)
Net investment income  74,212   65,492   248,665   179,667   84,459   89,346   171,591   174,453 
Net realized capital gains (losses)  159,569   101,394   58,789   56,151   (68,184)  (95,473)  (27,708)  (100,780)
Realized gain on debt repurchase  -   -   -   78,271 
Corporate expense  (1,529)  (1,675)  (5,218)  (4,871)  (1,165)  (1,463)  (2,355)  (3,689)
Interest, fee and bond issue cost amortization expense  (12,817)  (17,073)  (41,879)  (53,779)  (12,695)  (12,722)  (25,377)  (29,062)
Other income (expense)  (3,617)  15,081   10,204   7,801   (11,568)  8,709   (11,536)  13,821 
Income (loss) before taxes $235,510  $244,099  $181,235  $466,728  $10,560  $(7,196) $(96,036) $(54,275)

The Company produces business in the U.S. and internationally.  The net income deriving from and assets residing in the individual foreign countries in which the Company writes business are not identifiable in the Company’s financial records.  Based on gross written premium, the table below presents the largest country, other than the U.S. and Canada, no, in which the Company writes business, for the periods indicated:
  Three Months Ended  Six Months Ended 
  June 30,  June 30, 
(Dollars in thousands) 2011  2010  2011  2010 
Canada $39,232  $49,976  $83,184  $85,279 
No other country represented more than 5% of the Company’s revenues.revenue.


23


14.  RELATED-PARTY TRANSACTIONS

Parent

Group’s Board of Directors approved an amended share repurchase program authorizing Group and/or its subsidiary Holdings to purchase Group’s common shares through open market transactions, privately negotiated transactions or both.  The table below represents the amendments to the share repurchase program for the common shares approved for repurchase.
 
  Common Shares
Amendment Date Purchased
(Dollars in thousands)   
09/21/2004 $5,000,000 
07/21/2008  5,000,000 
02/24/2010  5,000,000 
  $15,000,000 
 Common Shares
 Authorized for
Amendment Date Repurchase
09/21/2004 5,000,000
07/21/2008 5,000,000
02/24/2010 5,000,000
 15,000,000

As of SeptemberJune 30, 2010,2011, Holdings held 8,702,8269,719,971 common shares of Group, which it had purchased in the open market between February 1, 2007 and September 27, 2010.March 8, 2011.  The table below represents the total purchase price for these common shares purchased.

(Dollars in thousands)   
Total purchase price $746,046 
 
(Dollars in thousands)   
Total purchase price $835,371 
Holdings reports these purchases as other invested assets, fair value, in the consolidated balance sheets with changes in fair value re-measurement recorded in net realized capital gains (losses) in the consolidated statements of operations and comprehensive income (loss).  The following table presents the dividends received on these common shares that are reported as net investment income in the consolidated statements of operations and comprehensive income (loss) for the period indicated.
 
 Three Months Ended  Six Months Ended 
 June 30,  June 30, 
(Dollars in thousands) At September 30, 2010 2011  2010  2011  2010 
Dividends received $9,569  $4,666  $4,127  $9,314  $5,553 

Outside Directors

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

Affiliated Companies

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

The following table presents the expenses incurred by Holdings from services provided by Everest Global for the periods indicated.
  Three Months Ended  Six Months Ended 
  June 30,  June 30, 
(Dollars in thousands) 2011  2010  2011  2010 
Expenses incurred $15,370  $16,566  $30,447  $31,467 

Affiliates

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

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

 
For premiums earned and losses incurred for the period January 1, 2002 through December 31, 2002, Everest Re, Everest National Insurance Company and Everest Security Insurance Company entered into an Excess of Loss Reinsurance Agreement with Bermuda Re, covering workers’ compensation losses occurring on and after January 1, 2002, as respect to new, renewal and in force policies effective on that date through December 31, 2002.  The table below represents Bermuda Re's liability limits for any losses per one occurrence.
 
  Liability Limits 
(Dollars in thousands) Exceeding  Not to Exceed 
Losses per one occurrence $100,000  $150,000 
 
The table below represents loss portfolio transfer reinsurance agreements whereby net insurance exposures and reserves were transferred to an affiliate.
 
(Dollars in thousands)         
          
Effective Transferring Assuming % of Business or  Covered Period
Date Company Company Amount of Transfer  of Transfer
          
09/19/2000 Mt. McKinley Bermuda Re  100% All years
10/01/2001 Everest Re  (Belgium Branch) Bermuda Re  100% All years
10/01/2008 Everest Re Bermuda Re $747,022  01/01/2002-12/31/2007

The following tables summarize the premiums and losses ceded by the Company to Bermuda Re and Everest International, respectively, 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) 2010  2009  2010  2009  2011  2010  2011  2010 
Ceded written premiums $400,977  $323,098  $1,046,727  $879,163  $368,614  $325,719  $749,422  $645,750 
Ceded earned premiums  330,525   286,537   944,755   835,673   380,353   326,072   760,400   614,230 
Ceded losses and LAE (a)  211,862   196,630   694,938   529,229   294,364   194,630   785,077   483,076 
                
 Three Months Ended  Six Months Ended 
Everest International June 30,  June 30, 
(Dollars in thousands)  2011   2010   2011   2010 
Ceded written premiums $175  $20,629  $639  $48,941 
Ceded earned premiums  4,436   34,172   14,041   74,504 
Ceded losses and LAE  3,995   39,770   6,913   63,786 
  Three Months Ended  Nine Months Ended 
Everest International September 30,  September 30, 
(Dollars in thousands) 2010  2009  2010  2009 
Ceded written premiums $(3,587) $68,937  $45,354  $152,819 
Ceded earned premiums  17,548   49,381   92,052   121,664 
Ceded losses and LAE  15,491   27,070   79,277   63,625 

(a) Ceded losses and LAE include the Mt. McKinley loss portfolio transfer that constitutes losses ceded under retroactive reinsurance and therefore, in accordance with FASB guidance, a deferred gain on retroactive reinsurance is reflected in other expenses on the consolidated statements of operations and comprehensive income (loss).

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

 
2526


15. INCOME TAXES

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

The Company generally will use the estimated annual effective tax rate approach for calculating its tax provision for interim periods as prescribed by ASC 740-270, Interim Reporting.  Under the estimated annual effective tax rate approach, the estimated annual effective tax rate is applied to calculate its quarterlythe interim year-to-date pre-tax income to determine the income tax expense in accordance with FASB guidance.  Under this methodology, when an interim quarter’s pre-tax income (loss) varies significantly fromor benefit for the year-to-date period.  The tax expense or benefit for a full year’s income (loss) projection,quarter represents the tax impact resulting from the income (loss) variance is effectively spreaddifference between the impacted quarter andyear-to-date tax expense or benefit for the remaining quarterscurrent year-to-date period less such amount for the immediately preceding year-to-date period. Management considers the estimated impact of the year, except for discrete items impacting an individual quarter.

In 2007, the Internal Revenue Service completedall known events in its examinationestimation of the Company’s consolidated U.S.annual pre-tax income and effective tax returns for 2003 and 2004 and issued an examination report proposing various adjustments.  The Company submitted a formal protest including requests for affirmative adjustments and has been participating in the appeals process.  This appeal process may result in recognition of the Company’s related unrecognized tax benefits within the next 12 months, which will positively affect the Company’s results of operations in the period of recognition.rate.

16.  ACQUISITIONS

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

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

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

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

17.  SUBSEQUENT EVENTS

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


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

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

Starting in the latter part of 2007 and continuing into 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 asset-backed securities.  During the third and fourth quarters of 2008, credit markets det 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 failed or were acquired at distressed prices, while others received loans from the U.S. government to continue operations.  The liquidity crisis significantly increased the spreads on fixed maturity 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 resulted in significant declines in the capital bases of most insurance and reinsurance companies. While ther e was significant improvement in the financial markets during 2009 and 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 these financial market fluctuations will have on insurance and reinsurance market conditions.

Worldwide insurance and reinsurance market conditions continued to be very competitive, particularly in the casualty lines of business.  Generally, there was ample insurance and reinsurance capacity relative to demand.  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 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 continuescontinued 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.



Rates2011, the industry experienced significant losses from Australian floods, the New Zealand earthquake, the earthquake and tsunami in Japan and spring storms in the international marketsU.S.  It is too early to determine the impact on market conditions as a result of these events.  While there have generally been stable and we have seen somemeaningful rate increases particularly for catastrophe exposed business.  We have grown ourcoverages in some global catastrophe prone regions, particularly areas impacted by these losses, whether the magnitude of these losses is sufficient to increase rates and improve market conditions for other lines of business in the Middle East, Latin America and Asia.  We are expanding our international reach with our new office in Brazilremains to capitalize on the recently expanded opportunity for professional reinsurers in that market and on the economic growth expected for Brazil in the future.be seen.

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



Financial Summary.
We monitor and evaluate our overall performance based upon financial results.  The following table displays a summary of the consolidated net income (loss), ratios and stockholder’s equity for the periods indicated:
 
 Three Months Ended Percentage Nine Months Ended Percentage Three Months Ended  Percentage  Six Months Ended  Percentage 
 September 30, Increase/ September 30, Increase/ June 30,  Increase/  June 30,  Increase/ 
(Dollars in millions) 2010  2009  (Decrease) 2010  2009  (Decrease) 2011  2010  (Decrease)  2011  2010  (Decrease) 
Gross written premiums $973.7  $916.3   6.3% $2,633.2  $2,506.1   5.1% $811.5  $846.0   -4.1% $1,697.9  $1,659.5   2.3%
Net written premiums  497.9   452.7   10.0%  1,346.4   1,328.4   1.4%  410.0   435.1   -5.8%  870.1   848.5   2.5%
                                                
REVENUES:                                                
Premiums earned $465.3  $438.3   6.2% $1,322.2  $1,337.5   -1.1% $452.1  $442.7   2.1% $911.4  $856.9   6.4%
Net investment income  74.2   65.5   13.3%  248.7   179.7   38.4%  84.5   89.3   -5.5%  171.6   174.5   -1.6%
Net realized capital gains (losses)  159.6   101.4   57.4%  58.8   56.2   4.7%  (68.2)  (95.5)  -28.6%  (27.7)  (100.8)  -72.5%
Realized gain on debt repurchase  -   -  NA  -   78.3  NA
Other income (expense)  (3.6)  15.1   -124.0%  10.2   7.8   30.8%  (11.6)  8.7   -232.8%  (11.5)  13.8   -183.5%
Total revenues  695.5   620.3   12.1%  1,639.8   1,659.4   -1.2%  456.8   445.3   2.6%  1,043.8   944.4   10.5%
                                                
CLAIMS AND EXPENSES:                                                
Incurred losses and loss adjustment expenses  326.9   242.0   35.1%  1,068.7   777.3   37.5%  312.8   314.7   -0.6%  865.8   741.8   16.7%
Commission, brokerage, taxes and fees  81.5   77.3   5.4%  237.5   252.4   -5.9%  80.3   88.2   -8.9%  168.8   156.0   8.2%
Other underwriting expenses  37.2   38.2   -2.5%  105.3   104.4   0.9%  39.2   35.4   10.9%  77.4   68.1   13.7%
Corporate expense  1.5   1.7   -8.7%  5.2   4.9   7.2%  1.2   1.5   -20.3%  2.4   3.7   -36.2%
Interest, fee and bond issue cost amortization expense  12.8   17.1   -24.9%  41.9   53.8   -22.1%  12.7   12.7   -0.2%  25.4   29.1   -12.7%
Total claims and expenses  460.0   376.3   22.3%  1,458.6   1,192.7   22.3%  446.2   452.5   -1.4%  1,139.8   998.6   14.1%
                                                
INCOME (LOSS) BEFORE TAXES  235.5   244.1   -3.5%  181.2   466.7   -61.2%  10.6   (7.2)  -246.8%  (96.0)  (54.3)  76.9%
Income tax expense (benefit)  66.9   80.0   -16.4%  40.6   128.4   -68.4%  1.8   (24.1)  -107.3%  (7.3)  (26.2)  -72.1%
NET INCOME (LOSS) $168.7  $164.1   2.7% $140.6  $338.3   -58.4% $8.8  $16.9   -47.8% $(88.7) $(28.0)  216.4%
                                                
RATIOS:         Point Change         Point Change         Point Change          Point Change 
Loss ratio  70.3%  55.2%  15.1   80.8%  58.1%  22.7   69.2%  71.1%  (1.9)  95.0%  86.6%  8.4 
Commission and brokerage ratio  17.5%  17.6%  (0.1)  18.0%  18.9%  (0.9)  17.8%  19.9%  (2.1)  18.5%  18.2%  0.3 
Other underwriting expense ratio  8.0%  8.7%  (0.7)  8.0%  7.8%  0.2   8.6%  8.0%  0.6   8.5%  7.9%  0.6 
Combined ratio  95.8%  81.5%  14.3   106.8%  84.8%  22.0   95.6%  99.0%  (3.4)  122.0%  112.7%  9.3 
                                                
                                                
             At At Percentage             At  At  Percentage 
             September 30, December 31, Increase/             June 30,  December 31,  Increase/ 
(Dollars in millions)              2010   2009  (Decrease)              2011   2010  (Decrease) 
Balance sheet data:                                                
Total investments and cash             $8,412.4  $8,031.6   4.7%             $8,443.0  $8,293.9   1.8%
Total assets              14,015.3   13,379.6   4.8%              14,472.4   13,869.4   4.3%
Loss and loss adjustment expense reserves              7,611.6   7,300.1   4.3%              8,275.6   7,652.3   8.1%
Total debt              901.0   1,018.0   -11.5%              858.1   868.1   -1.2%
Total liabilities              10,908.4   10,520.8   3.7%              11,394.9   10,741.7   6.1%
Stockholder's equity              3,106.9   2,858.8   8.7%              3,077.5   3,127.7   -1.6%
                                                
(NA, not applicable)                        
(Some amounts may not reconcile due to rounding.)                                                

Revenues.
Premiums.  Gross written premiums increaseddecreased by $57.4$34.5 million, or 6.3%4.1%, for the three months ended SeptemberJune 30, 20102011 compared to the three months ended SeptemberJune 30, 2009,2010, reflecting an increasea decrease of $76.2$55.7 million in our reinsurance business, partially offset by a decline of $18.9$21.2 million increase in our insurance business.  Gross written premiums increased by $127.1$38.4 million, or 5.1%2.3%, for the ninesix months ended SeptemberJune 30, 20102011 compared to the ninesix months ended SeptemberJune 30, 2009,2010, reflecting ana $47.4 million increase of $131.0 million in our reinsuranceinsurance business, partially offset by a declinedecrease of $3.9$9.0 million in our insurancereinsurance business.  The increase in reinsurance premiums were primarily the result of increased writings in our treaty property and international t reaty lines of business.  The decrease in insurance premiums werewas primarily due to the resultacquisition of lossHeartland, which provided $77.4 million of new crop insurance business, on terminated programs, lower premiums on a few of the existing programs and lower audit premium accruals on the workers’ compensation line of business.


as well as improved premium rates on our California workers’ compensation business, partially offset by our reduced participation on a large casualty program.  The decrease in reinsurance premiums was due to the continued reduction in U.S. casualty business as well as the planned reduction of catastrophe exposed business in certain territories, partially offset by higher reinstatement premiums resulting from catastrophe losses, year over year.
Net written premiums increaseddecreased by $45.2$25.1 million, or 10.0%5.8%, for the three months ended SeptemberJune 30, 20102011 compared to the three months ended SeptemberJune 30, 2009,2010, and increased by $18.0$21.6 million, or 1.4%2.5%, for the ninesix months ended SeptemberJune 30, 20102011 compared to the ninesix months ended SeptemberJune 30, 2009.2010.  The fluctuations in net written premiums in comparisonrelative to the fluctuationschange in gross written premiums were primarily attributabledue to fluctuations in cessionsa combination of a higher percentage of premiums ceded under the affiliated quota share agreements.agreement and a lower level of ceded reinsurance in the Insurance segment due to the planned reduction in one casualty program.  Premiums earned increased $27.0$9.3 million, or 6.2%2.1%, for the three months ended SeptemberJune 30, 20102011 compared to the three months ended SeptemberJune 30, 20092010 and decreased by $15.4increased $54.6 million, or 1.1%6.4%, for the ninesix months ended SeptemberJune 30, 20102011 compared to the ninesix months ended SeptemberJune 30, 2009.2010.  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 at the initiation of the coverage period.

Net Investment Income.  Net investment income increased $8.7decreased $4.9 million, or 13.3%5.5%, for the three months ended September 30, 2010, primarily as a result of net investment gains from our limited partnerships of $1.1 million compared to net investment losses of $4.4$84.5 million for the three months ended SeptemberJune 30, 2009.  Net investment income increased $69.0 million, or 38.4%, for the nine months ended September 30, 2010, primarily as a result of net investment gains from our limited partnerships of $19.4 million2011 compared with net investment lossesincome of $36.5$89.3 million for the comparable period in 2009.three months ended June 30, 2010.  Net investment income decreased $2.9 million, or 1.6%, to $171.6 million for the six months ended June 30, 2011 compared with net investment income of $174.5 million for the six months ended June 30, 2010.  Net pre-tax investment income, as a percentage of average invested assets, was 3.7%4.2% for the three months ended SeptemberJune 30, 2010,2011 compared to 3. 4%4.5% for the three months ended SeptemberJune 30, 20092010 and was 4.2%4.3% for the ninesix months ended SeptemberJune 30, 20102011 compared to 3.1%4.4% for the ninesix months ended SeptemberJune 30, 2009.2010.   The variances in theseinvestment yields wereare lower primarily the result of fluctuations in our limited partnership income.due to lower reinvestment rates.

Net Realized Capital Gains (Losses).  Net realized capital gainslosses were $159.6$68.2 million and $95.5 million for the three months ended SeptemberJune 30, 2011 and 2010, andrespectively.  Of the $68.2 million, there were comprised$62.5 million of $164.8 millionlosses from gains in fair value re-measurements whichand $5.6 million of net realized capital losses from sales on our fixed maturity and equity securities.  The net realized capital losses of $95.5 million for the three months ended June 30, 2010 were partially offset by $3.2the result of $94.4 million of losses from fair value re-measurements and $1.1 million of net realized capital losses from sales on our fixed maturity and equity securities.

Net realized capital losses were $27.7 million and $100.8 million for the six months ended June 30, 2011 and 2010, respectively.  Of the $27.7 million, there were $17.5 million of net realized capital losses from sales on our fixed maturity and equity securities and $2.0$13.6 million of other-than-temporary impairments.  Netimpairments on our available for sale fixed maturity securities, which were partially offset by $3.5 million of gains from fair value re-measurements.  The net realized capital gains were $101.4losses of $100.8 million for the threesix months ended SeptemberJune 30, 2009.  Of2010 were the $101.4result of $100.9 million $96.0 million wasof losses from gains in fair value re-measurements, and $5.4partially offset by $0.1 million of net realized capital gains from sales on our fixed maturity and equity securities.

Net realized capital gains were $58.8 million for the nine months ended September 30, 2010 and were comprised of $63.9 million from gains in fair value re-measurements, which were partially offset by $3.1 million net realized capital loss from sales on our fixed maturity and equity securities and $2.0 million of other-than-temporary impairments.  Net realized capital gains were $56.2 million for the nine months ended September 30, 2009 and were comprised of $79.3 million from gains in fair value re-measurements, which were partially offset by $17.7 million net realized capital losses from the sale on our fixed maturity and equity securities and $5.5 million of other-than-temporary impairments.

Realized Gain on Debt Repurchase.  On March 19, 2009, we commenced 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 expense of $3.6$11.6 million and other income of $10.2$11.5 million for the three and ninesix months ended SeptemberJune 30, 2010,2011, respectively.  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, 2009,2010, respectively.  The changes were primarily due tothe result of fluctuations in the amortization of deferred gains on retroactive reinsurance agreements with affiliates and fluctuations inforeign currency exchange rates.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 the periods indicated.
 
  Three Months Ended September 30,
  Current  Ratio %/ Prior  Ratio %/ Total  Ratio %/
(Dollars in millions) Year  Pt Change Years  Pt Change Incurred  Pt Change
2010                     
Attritional (a) $297.6   64.0%  $(5.6)  -1.2%  $292.0   62.7% 
Catastrophes (b)  35.5   7.6%   (0.5)  -0.1%   35.0   7.5% 
A&E  -   0.0%   -   0.0%   -   0.0% 
Total $333.1   71.6%  $(6.2)  -1.3%  $326.9   70.3% 
                            
2009                           
Attritional (a) $246.7   56.3%  $(19.1)  -4.4%  $227.6   51.9% 
Catastrophes  11.2   2.6%   3.2   0.7%   14.4   3.3% 
A&E  -   0.0%   -   0.0%   -   0.0% 
Total $257.9   58.8%  $(15.9)  -3.6%  $242.0   55.2% 
                            
Variance 2010/2009                           
Attritional (a) $50.9   7.7 pts $13.5   3.2 pts $64.4   10.8 pts
Catastrophes  24.3   5.0 pts  (3.7)  (0.8)pts  20.6   4.2 pts
A&E  -   - pts  -   - pts  -   - pts
Total $75.2   12.8 pts $9.7   2.3 pts $84.9   15.1 pts



 Nine Months Ended September 30, Three Months Ended June 30,
 Current  Ratio %/ Prior  Ratio %/ Total  Ratio %/ Current  Ratio %/ Prior  Ratio %/ Total  Ratio %/
(Dollars in millions) Year  Pt Change Years  Pt Change Incurred  Pt Change Year  Pt Change Years  Pt Change Incurred  Pt Change
2010                     
Attritional (a) $831.4   62.9%  $(5.2)  -0.4%  $826.2   62.5% 
Catastrophes (b)  246.6   18.6%   (4.1)  -0.3%   242.5   18.3% 
A&E  -   0.0%   -   0.0%   -   0.0% 
Total $1,077.9   81.5%  $(9.3)  -0.7%  $1,068.7   80.8% 
                           
2009                           
2011                     
Attritional (a) $789.0   59.0%  $(36.0)  -2.7%  $753.0   56.3%  $251.7   55.8%  $(7.5)  -1.7%  $244.2   54.1% 
Catastrophes  20.3   1.5%   4.0   0.3%   24.3   1.8%   60.8   13.4%   7.9   1.7%   68.7   15.2% 
A&E  -   0.0%   -   0.0%   -   0.0%   -   0.0%   -   0.0%   -   0.0% 
Total $809.3   60.5%  $(32.0)  -2.4%  $777.3   58.1%  $312.5   69.2%  $0.4   0.0%  $312.8   69.2% 
                                                      
Variance 2010/2009                           
2010                           
Attritional (a) $42.4   3.9 pts $30.8   2.3 pts $73.2   6.2 pts $265.5   60.0%  $9.7   2.2%  $275.2   62.2% 
Catastrophes  226.3   17.1 pts  (8.1)  (0.6)pts  218.2   16.5 pts  45.9   10.4%   (6.4)  -1.4%   39.5   8.9% 
A&E  -   - pts  -   - pts  -   - pts  -   0.0%   -   0.0%   -   0.0% 
Total $268.6   21.0 pts $22.7   1.7 pts $291.4   22.7 pts $311.4   70.3%  $3.3   0.8%  $314.7   71.1% 
                                                      
(a) Attritional losses exclude catastrophe and A&E losses.               
(b) Effective with 2010 reporting period, a catastrophe is a property event with expected reported losses of at least $10.0 million.       
All prior periods reflect a catastrophe as a property event with expected reported losses of at least $5.0 million.      
(Some amounts may not reconcile due to rounding.)             
Variance 2011/2010                           
Attritional (a) $(13.8)  (4.2)pts $(17.2)  (3.9)pts $(31.0)  (8.1)pts
Catastrophes  14.9   3.0 pts  14.3   3.1 pts  29.2   6.3 pts
A&E  -   - pts  -   - pts  -   - pts
Total $1.1   (1.1)pts $(2.9)  (0.8)pts $(1.9)  (1.9)pts
 
Incurred losses and LAE increased by $84.9 million, or 35.1%, for the three months ended September 30, 2010 compared to the three months ended September 30, 2009.  Of the $84.9 million increase, current year attritional losses increased $50.9 million, or 7.7 points, primarily as the result of an increase in premiums earned and higher expected loss ratios.  The $24.3 million, or 5.0 points, increase in current year catastrophe losses was primarily due to the New Zealand earthquake and the Canadian hailstorm.
  Six Months Ended June 30,
  Current  Ratio %/ Prior  Ratio %/ Total  Ratio %/
(Dollars in millions) Year  Pt Change Years  Pt Change Incurred  Pt Change
2011                     
Attritional (a) $508.1   55.7%  $(18.0)  -2.0%  $490.2   53.8% 
Catastrophes  365.1   40.1%   10.6   1.2%   375.7   41.2% 
A&E  -   0.0%   -   0.0%   -   0.0% 
Total $873.2   95.8%  $(7.3)  -0.8%  $865.8   95.0% 
                            
2010                           
Attritional (a) $533.8   62.3%  $0.4   0.1%  $534.2   62.3% 
Catastrophes  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% 
                            
Variance 2011/2010                           
Attritional (a) $(25.7)  (6.6)pts $(18.4)  (2.1)pts $(44.0)  (8.5)pts
Catastrophes  154.0   15.5 pts  14.1   1.6 pts  168.2   17.0 pts
A&E  -   - pts  -   - pts  -   - pts
Total $128.3   8.9 pts $(4.2)  (0.4)pts $124.0   8.4 pts
                            
(a) Attritional losses exclude catastrophe and Asbestos and Environmental ("A&E") losses.           
(Some amounts may not reconcile due to rounding.)           

Incurred losses and LAE increaseddecreased by $291.4$1.9 million, or 37.5%0.6%, for the ninethree months ended SeptemberJune 30, 20102011 compared to the ninethree months ended SeptemberJune 30, 2009.2010.  Of the $291.4$1.9 million increase, current year catastrophedecrease, attritional losses increased $226.3decreased $31.0 million, or 17.18.1 points, period over period, primarily due to lower attritional loss ratios across most segments due, in part, to changes in the Chilean earthquake,mix of business, but also due to the impact of the change in cessions under the affiliated quota share agreement. Partially offsetting the decrease in attritional losses was an increase in catastrophe losses of $29.2 million, primarily due to current year losses from the U.S. Midwest tornadoes and the first quarter earthquakes in New Zealand earthquake, Australian hailstorms and Japan as well as unfavorable prior year development mainly due to the Canadian hailstorm.Chile earthquake.

Incurred losses and LAE increased by $124.0 million, or 16.7%, for the six months ended June 30, 2011 compared to the six months ended June 30, 2010.  Current year catastrophe losses increased $154.0 million (15.5 points), period over period, primarily due to losses from the Japan and New Zealand earthquakes, Australia floods and the U.S. Midwest tornadoes.  Partially offsetting the catastrophe increase, the current year attritional losses decreased by $25.7 million compared to the prior year, primarily due to lower attritional loss ratios across most segments due, in part, to changes in the mix of business, but also due to the impact of the change in cessions under the affiliated quota share agreement.

Commission, Brokerage, Taxes and Fees.  Commission, brokerage, taxes and fees decreased by $7.9 million, or 8.9%, for the three months ended June 30, 2011 compared to the same period in 2010.  Commission, brokerage, taxes and fees increased by $4.2$12.8 million, or 5.4%8.2%, for the threesix months ended SeptemberJune 30, 20102011 compared to the same period in 2009. Commission, brokerage, taxes and fees decreased by $14.9 million, or 5.9%, for the nine months ended September 30, 2010 compared to the same period in 2009.  These changes2010.  The variances were primarily the result of the changesfluctuations in premiums earned, and thechanges in mix of business.business and a change in the affiliated quota share agreement.

Other Underwriting Expenses.  Other underwriting expenses were comparable, period over period, $37.2$39.2 million and $38.3$35.4 million incurred for the three months ended SeptemberJune 30, 20102011 and 2009,2010, respectively and $105.3$77.4 million and $104.4$68.1 million incurred for the ninesix months ended SeptemberJune 30, 2011 and 2010, and 2009, respectively.  The increases were primarily attributable to expenses of Heartland, which was acquired in January 2011.

Corporate Expenses.  Corporate expenses, which are expenses that are not allocated to segments, were comparable at $1.5$1.2 million and $1.7$1.5 million for the three months ended SeptemberJune 30, 20102011 and 2009,2010, respectively, and $5.2$2.4 million and $4.9$3.7 million for the ninesix months ended SeptemberJune 30, 2011 and 2010, and 2009, respectively.  These expenses were previously included as underwriting expenses and 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, fees and other bond amortization expense was $12.8 million and $17.1$12.7 million for the three months ended SeptemberJune 30, 2011 and 2010 and 2009, respectively, and $41.9$25.4 million and $53.8$29.1 million for the ninesix months ended SeptemberJune 30, 2011 and 2010, and 2009, respectively.  These decreases wereThe decrease for the six month period was primarily due to the combination of the repurchasematuring of debt in March, 2009 and maturing of debt in 2010.

Income Tax Expense (Benefit).  We had an income tax expense of $66.9$1.8 million and $40.6an income tax benefit of $7.3 million for the three and ninesix months ended SeptemberJune 30, 2010, respectively, and2011, respectively.  We had an income tax expensebenefit of $80.0$24.1 million and $128.4$26.2 million for the three and ninesix months ended SeptemberJune 30, 2009,2010, respectively.  The period over period variance was primarily due to lower pre-tax income in 2010 versus 2009.  Our income tax is primarily a function of the statutory tax raterates coupled with the impact from tax-preferenced investment income.  Variations in our effective tax rate generally result from changes in the relative levels of pre-tax income.

Net Income (Loss).
We reportedOur net income of $168.7was $8.8 million and $140.6$16.9 million for the three and nine months ended SeptemberJune 30, 2011 and 2010, respectively, compared torespectively.  Our net income of $164.1loss was $88.7 million and $338.3$28.0 million for the three and ninesix months ended SeptemberJune 30, 2009,2011 and 2010, respectively. These changesThe decreases were primarily driven by higher catastrophe losses in 2011 in addition to the result of the itemsother components discussed above.

Ratios.
Our combined ratio increaseddecreased by 14.33.4 points to 95.8%95.6% for the three months ended SeptemberJune 30, 20102011 compared to 81.5%99.0% for the same period in 2010, and increased by 9.3 points to 122.0% for the six months ended June 30, 2011 compared to 112.7% for the same period in 2010.  The loss ratio component decreased by 1.9 points and increased by 8.4 points for the three and six months ended June 30, 2011, respectively, over the same periods last year.  The commission and brokerage expense ratio decreased by 2.1 points to 17.8% for the three months ended SeptemberJune 30, 2009, and increased by 22.0 points to 106.8% for the nine months ended September 30, 20102011 compared to 84.8% for the nine months ended September 30, 2009.  The loss ratio component increased 15.1 points and 22.7 points19.9% for the three and nine months ended SeptemberJune 30, 2010, respectively, overand increased slightly to 18.5% for the same period last year, principally duesix months ended June 30, 2011 compared to 18.2% for the increase in current year catastrophe losses as a result of the Chilean earthquake, New Zealand earthquake, Australian hailstorms and the Canadian hailstorm and also due to an increase in expected current year loss ratios.   Both thesix months ended June 30, 2010.  The other underwriting expense ratio component increased slightly for both the three and the commission and brokerage ratio c omponent remained relatively flat oversix months ended June 30, 2011 compared to the same periods last year.

Stockholder's Equity.
Stockholder's equity increased by $248.2 million to $3,106.9 million at September 30, 2010 from $2,858.8 million at December 31, 2009, principally as a result of $140.6 million of net income, $89.1 million of unrealized appreciation on investments, net of tax, $11.9 million of foreign currency translation adjustments, $5.3 million of share-based compensation transactions and $1.3 million of pension adjustments.

 
Stockholder's Equity.
Stockholder's equity decreased by $50.2 million to $3,077.5 million at June 30, 2011 from $3,127.7 million at December 31, 2010, principally as a result of $88.7 million of net loss, partially offset by $24.5 million of unrealized appreciation on investments, net of tax, $9.3 million of foreign currency translation adjustments and $3.2 million of share-based compensation transactions.

Consolidated Investment Results

Net Investment Income.
Net investment income increased 13.3%decreased 5.5% to $74.2$84.5 million for the three months ended SeptemberJune 30, 20102011 compared to $65.5$89.3 million for the three months ended SeptemberJune 30, 2009,2010, and increased 38.4%decreased 1.6% to $248.7$171.6 million for the ninesix months ended SeptemberJune 30, 20102011 compared to $179.7$174.5 million for the ninesix months ended SeptemberJune 30, 2009.2010.  The increase for the three and nine months,decreases, period over period, waswere primarily due to an increasea decline in recorded gainsincome from our fixed maturities, reflective of reducing our municipal bond exposure and lossesdeclining reinvestment rates.  The declines were partially offset by income from our expanded public equity portfolios and higher income from our limited partnership investments.  The losses for the nine months of 2009 included the results of 2008 fourth quarter losses from those limited partnerships that invested in non-public securities and were on a quarter 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) 2010  2009  2010  2009  2011  2010  2011  2010 
Fixed maturities $69.9  $71.0  $219.3  $212.9  $59.1  $75.8  $119.8  $149.4 
Equity securities  2.5   0.8   7.5   2.2   6.5   2.6   11.6   5.0 
Short-term investments and cash  0.1   0.3   0.3   3.3   0.4   0.1   0.6   0.2 
Other invested assets                                
Limited partnerships  1.1   (4.4)  19.4   (36.5)  13.9   8.9   32.4   18.3 
Dividends from Parent's shares  4.7   4.1   9.3   5.6 
Other  4.2   0.7   10.5   5.7   4.1   0.4   4.7   0.7 
Total gross investment income  77.7   68.2   256.9   187.6   88.7   91.9   178.4   179.2 
Interest debited (credited) and other expense  (3.5)  (2.8)  (8.2)  (7.9)  (4.3)  (2.6)  (6.8)  (4.7)
Total net investment income $74.2  $65.5  $248.7  $179.7  $84.5  $89.3  $171.6  $174.5 
(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 AtAt At
September 30, December 31,June 30, December 31,
2010 20092011 2010
Imbedded pre-tax yield of cash and invested assets3.8% 3.7%3.6% 3.6%
Imbedded after-tax yield of cash and invested assets3.1% 3.1%2.8% 2.8%
 
Three Months Ended Nine Months EndedThree Months Ended Six Months Ended
September 30, September 30,June 30, June 30,
2010 2009 2010 20092011 2010 2011 2010
Annualized pre-tax yield on average cash and invested assets3.7% 3.4% 4.2% 3.1%4.2% 4.5% 4.3% 4.4%
Annualized after-tax yield on average cash and invested assets3.0% 2.9% 3.4% 2.7%3.2% 3.6% 3.3% 3.6%

 
33


Net Realized Capital Gains (Losses).
The following table presents the composition of our net realized capital gains (losses) for the periods indicated:
 
 Three Months Ended September 30,  Nine Months Ended September 30,  Three Months Ended June 30,  Six Months Ended June 30, 
(Dollars in millions) 2010  2009  Variance 2010  2009  Variance 2011  2010  Variance  2011  2010  Variance 
Gains (losses) from sales:                                    
Fixed maturity securities, market value                                    
Gains $0.2  $2.0  $(1.8) $7.2  $4.0  $3.2  $2.7  $5.4  $(2.7) $16.8  $7.0  $9.8 
Losses  (4.8)  (6.1)  1.3   (11.0)  (36.6)  25.6   (8.7)  (3.7)  (5.0)  (35.1)  (6.2)  (28.9)
Total  (4.6)  (4.1)  (0.5)  (3.8)  (32.6)  28.8   (6.0)  1.6   (7.6)  (18.3)  0.8   (19.1)
                                                
Fixed maturity securities, fair value                                                
Gains  0.5   0.3   0.2   0.8   0.6   0.2   0.6   0.2   0.4   0.8   0.3   0.5 
Losses  -   (0.1)  0.1   -   (0.1)  0.1   -   -   -   (1.7)  -   (1.7)
Total  0.5   0.2   0.3   0.8   0.4   0.3   0.6   0.2   0.4   (0.9)  0.3   (1.2)
                                                
Equity securities, market value                                                
Gains  -   8.0   (8.0)  -   8.0   (8.0)  -   -   -   0.2   -   0.2 
Losses  -   -   -   -   -   -   -   -   -   (0.2)  -   (0.2)
Total  -   8.0   (8.0)  -   8.0   (8.0)  -   -   -   -   -   - 
                                                
Equity securities, fair value                                                
Gains  1.0   1.3   (0.3)  4.6   7.2   (2.6)  0.7   1.2   (0.5)  2.9   3.6   (0.7)
Losses  (0.1)  -   (0.1)  (4.7)  (0.7)  (4.0)  (0.9)  (4.1)  3.2   (1.2)  (4.6)  3.4 
Total  1.0   1.3   (0.3)  -   6.5   (6.5)  (0.2)  (2.9)  2.7   1.7   (1.0)  2.7 
                                                
Total net realized gains (losses) from sales                                                
Gains  1.7   11.6   (9.9)  12.6   19.8   (7.2)  4.0   6.8   (2.8)  20.7   10.9   9.8 
Losses  (4.9)  (6.3)  1.4   (15.7)  (37.5)  21.8   (9.6)  (7.8)  (1.8)  (38.2)  (10.8)  (27.4)
Total  (3.2)  5.4   (8.6)  (3.1)  (17.7)  14.6   (5.6)  (1.1)  (4.5)  (17.5)  0.1   (17.6)
                                                
Other-than-temporary impairments:  (2.0)  -   (2.0)  (2.0)  (5.5)  3.5   -   -   -   (13.6)  -   (13.6)
                                                
Gains (losses) from fair value adjustments:                                                
Fixed maturities, fair value  3.3   5.8   (2.5)  3.8   7.8   (4.0)  -   (2.5)  2.5   (3.5)  0.5   (4.0)
Equity securities, fair value  34.9   23.1   11.8   18.1   23.4   (5.3)  -   (30.0)  30.0   38.1   (16.8)  54.9 
Other invested assets, fair value  126.6   67.1   59.5   42.0   48.1   (6.1)  (62.5)  (61.9)  (0.6)  (31.1)  (84.6)  53.5 
Total  164.8   96.0   68.8   63.9   79.3   (15.4)  (62.5)  (94.4)  31.9   3.5   (100.9)  104.4 
                                                
Total net realized capital gains (losses) $159.6  $101.4  $58.2  $58.8  $56.2  $2.6  $(68.2) $(95.5) $27.4  $(27.7) $(100.8) $73.1 
                                                
(Some amounts may not reconcile due to rounding.)(Some amounts may not reconcile due to rounding.)                 (Some amounts may not reconcile due to rounding.)                     
 
Net realized capital gainslosses were $159.6 million and $101.4$68.2 million for the three months ended SeptemberJune 30, 2011 compared to $95.5 million for the three months ended June 30, 2010.  For the three months ended June 30, 2011, we recorded $62.5 million of losses due to fair value re-measurements on other invested assets and $5.6 million of net realized capital losses from sales of fixed maturity and equity securities.  The net realized losses included the impact of selling part of our municipal bond portfolio as credit concerns arose in this market sector.  For the three months ended June 30, 2010, we recorded $94.4 million in losses due to fair value re-measurements on fixed maturity and 2009, respectively.  Weequity securities and other invested assets and $1.1 million of net realized capital losses from sales of fixed maturity and equity securities.

34

Net realized capital losses were $27.7 million for the six months ended June 30, 2011 compared to net realized capital losses of $100.8 million for the six months ended June 30, 2010.  For the six months ended June 30, 2011, we recorded $164.8$17.5 million of net realized capital losses from sales of fixed maturity and $96.0equity securities and $13.6 million of other-than-temporary impairments on fixed maturity securities, partially offset by $3.5 million of gains due to fair value re-measurements on fixed maturity and equity securities and other invested assets, and $3.2 million ofassets.  The net realized capital losses and $5.4 millionincluded the impact of net realized capital gains from salesselling part of fixed maturity and equity securities and $2.0 million and $0.0 million of other-than-temporary impairments on fixed maturity securities forour municipal bond portfolio as credit concerns arose in this market sector.  For the threesix months ended SeptemberJune 30, 2010, and 2009, respectively.  The gains from other invested assets at fair value represent the movementwe recorded $100.9 million in market value from our investment in our parent’s common equity.

Net realized capital gains were $58.8 million and $56.2 million for the nine months ended September 30, 2010 and 2009, respectively.  We recorded $63.9 million and $79.3 million of gainslosses due to fair value re-measurements on fixed maturity and equity securities and other invested assets and $3.1 million and $17.7$0.1 million of net realized capital lossesgains from sales of fixed maturity and equity securities and $2.0 million and
34

securities.

$5.5 million of other-than-temporary impairments on fixed maturity securities for the nine months ended September 30, 2010 and 2009, 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 primarilydirectly and through general agents, brokers and surplus lines brokers within the U.S.U.S and Canada.  The Specialty Underwriting operation writes accident and health (“A&H”),&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 br anchesbranches in Canada and Singapore and offices in Brazil, Miami and New Jersey.

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

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

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.

 
35


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 June 30,  Six Months Ended June 30, 
(Dollars in millions) 2011  2010  Variance  % Change  2011  2010  Variance  % Change 
Gross written premiums $230.3  $268.2  $(38.0)  -14.2% $484.2  $512.2  $(28.1)  -5.5%
Net written premiums  123.8   150.5   (26.7)  -17.7%  260.3   278.9   (18.6)  -6.7%
                                 
Premiums earned $141.6  $162.5  $(20.9)  -12.8% $286.8  $289.5  $(2.7)  -0.9%
Incurred losses and LAE  112.7   84.3   28.3   33.6%  236.1   174.5   61.6   35.3%
Commission and brokerage  32.5   35.9   (3.3)  -9.2%  69.6   63.1   6.6   10.4%
Other underwriting expenses  7.9   9.4   (1.5)  -16.1%  15.8   17.2   (1.4)  -8.2%
Underwriting gain (loss) $(11.4) $32.9  $(44.3)  -134.7% $(34.7) $34.8  $(69.5)  -199.8%
                                 
              Point Chg              Point Chg 
Loss ratio  79.5%  51.9%      27.6   82.3%  60.3%      22.0 
Commission and brokerage ratio  23.0%  22.1%      0.9   24.3%  21.8%      2.5 
Other underwriting expense ratio  5.6%  5.7%      (0.1)  5.5%  5.9%      (0.4)
Combined ratio  108.1%  79.7%      28.4   112.1%  88.0%      24.1 
                                 
(Some amounts may not reconcile due to rounding.)                                

  Three Months Ended September 30, Nine Months Ended September 30,
(Dollars in millions) 2010  2009  Variance % Change 2010  2009  Variance % Change
Gross written premiums $372.4  $345.6  $26.8   7.8% $884.6  $876.0  $8.5   1.0%
Net written premiums  205.1   191.7   13.5   7.0%  484.0   487.8   (3.8)  -0.8%
                                 
Premiums earned $159.7  $162.0  $(2.4)  -1.5% $449.2  $489.1  $(39.9)  -8.2%
Incurred losses and LAE  84.3   56.2   28.2   50.1%  258.8   232.3   26.5   11.4%
Commission and brokerage  25.1   21.4   3.7   17.2%  88.1   90.5   (2.4)  -2.6%
Other underwriting expenses  8.9   9.7   (0.7)  -7.6%  26.1   25.3   0.9   3.4%
Underwriting gain (loss) $41.3  $74.8  $(33.5)  -44.7% $76.1  $141.0  $(64.9)  -46.0%
                                 
              Point Chg             Point Chg
Loss ratio  52.8%  34.7%      18.1   57.6%  47.5%      10.1 
Commission and brokerage ratio  15.7%  13.2%      2.5   19.6%  18.5%      1.1 
Other underwriting expense ratio  5.6%  5.9%      (0.3)  5.9%  5.2%      0.7 
Combined ratio  74.1%  53.8%      20.3   83.1%  71.2%      11.9 
                                 
(Some amounts may not reconcile due to rounding.)                     
Premiums. Gross written premiums increaseddecreased by 7.8%14.2% to $372.4$230.3 million for the three months ended SeptemberJune 30, 20102011 from $345.6$268.2 million for the three months ended SeptemberJune 30, 2009,2010, primarily due to a $37.0 million (18.2%) increase inreduced premium volume for treaty property volume,casualty and crop reinsurance business due to the non-renewal of several contracts, partially offset by a $5.3$2.5 million (19.6%) decreaseincrease in the crop hail quota share treaties, $4.2 million (4.5%) decrease in U.S. treaty casualty volume and a $0.7 million (3.1%) decrease in facultative volume.reinstatement premiums due to current quarter catastrophe loss activity.  Net written premiums increased by 7.0%decreased 17.7% to $205.1$123.8 million for the three months ended SeptemberJune 30, 20102011 compared to $191.7$150.5 million for the three months ended SeptemberJune 30, 2009,2010, primarily due to the increasedecrease in gross written premiums.  0;premiums for the quarter.  Premiums earned decreased by 1.5%12.8% to $159.7$141.6 million for the three months ended SeptemberJune 30, 20102011 compared to $162.0$162.5 million for the three months ended SeptemberJune 30, 2009.2010.  The change in premiums earned is relatively consistent with the decrease in net written premiums.  

Gross written premiums decreased by 5.5% to $484.2 million for the six months ended June 30, 2011 from $512.2 million for the six months ended June 30, 2010, primarily due to reduced premium volume for treaty casualty and crop reinsurance business due to the non-renewal of several contracts, partially offset by a $9.2 million increase in reinstatement premiums due to catastrophe loss activity.  Net written premiums decreased 6.7% to $260.3 million for the six months ended June 30, 2011 compared to $278.9 million for the six months ended June 30, 2010, primarily due to the decrease in gross written premiums for the year.  Premiums earned decreased 0.9% to $286.8 million for the six months ended June 30, 2011 compared to $289.5 million for the six months ended June 30, 2010.  The change in premiums earned relative to net written premiums is primarily the result of timing on proportional contracts wheretiming; premiums are earned ratably over the coverage period whereas written premiums are recorded onat the initiation of the coverage period.

Gross written premiums increased by 1.0% to $884.6 million for the nine months ended September 30, 2010 from $876.0 million for the nine months ended September 30, 2009, primarily due to a $64.0 million (13.5%) increase in treaty property volume, partially offset by a $24.4 million (35.7%) decrease in the crop hail quota share treaties, a $17.6 million (24.6%) decrease in facultative volume and a $13.3 million (5.1%) decrease in U.S. treaty casualty volume. Net written premiums decreased slightly by 0.8% to $484.0 million for the nine months ended September 30, 2010 compared to $487.8 million for the nine months ended September 30, 2009.  Premiums earned decreased by 8.2% to $449.2 million for the nine months ended September 30, 2010 compared to $489.1 million for the nine months ended September 30, 2009.   ;Variances for premiums earned for the nine months were driven by similar factors as those discussed above for the three months.

 
36


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,
 Current  Ratio %/ Prior  Ratio %/ Total  Ratio %/ Current  Ratio %/ Prior  Ratio %/ Total  Ratio %/
(Dollars in millions) Year  Pt Change Years  Pt Change Incurred  Pt Change Year  Pt Change Years  Pt Change Incurred  Pt Change
2011                     
Attritional $74.9   52.8%  $1.8   1.3%  $76.7   54.1% 
Catastrophes  26.7   18.8%   9.3   6.6%   36.0   25.4% 
A&E  -   0.0%   -   0.0%   -   0.0% 
Total segment $101.6   71.6%  $11.1   7.9%  $112.7   79.5% 
                           
2010                                                
Attritional $88.9   55.6%  $(1.5)  -0.9%  $87.4   54.7%  $79.0   48.6%  $9.7   6.0%  $88.7   54.6% 
Catastrophes  (2.7)  -1.7%   (0.3)  -0.2%   (3.1)  -1.9%   (2.8)  -1.7%   (1.6)  -1.0%   (4.4)  -2.7% 
A&E  -   0.0%   -   0.0%   -   0.0%   -   0.0%   -   0.0%   -   0.0% 
Total segment $86.1   53.9%  $(1.8)  -1.1%  $84.3   52.8%  $76.2   46.9%  $8.1   5.0%  $84.3   51.9% 
                                                      
2009                           
Variance 2011/2010                           
Attritional $72.7   44.9%  $(18.4)  -11.4%  $54.3   33.5%  $(4.1)  4.2 pts $(7.9)  (4.7)pts $(12.0)  (0.5)pts
Catastrophes  -   0.0%   1.8   1.1%   1.8   1.1%   29.5   20.5 pts  10.9   7.6 pts  40.4   28.1 pts
A&E  -   0.0%   -   0.0%   -   0.0%   -   - pts  -   - pts  -   - pts
Total segment $72.7   44.9%  $(16.6)  -10.2%  $56.2   34.7%  $25.4   24.7 pts $3.0   2.9 pts $28.4   27.6 pts
                           
Variance 2010/2009                           
Attritional $16.2   10.7 pts $16.9   10.5 pts $33.1   21.2 pts
Catastrophes  (2.7)  (1.7)pts  (2.1)  (1.3)pts  (4.9)  (3.0)pts
A&E  -   - pts  -   - pts  -   - pts
Total segment $13.4   9.0 pts $14.8   9.1 pts $28.1   18.1 pts
 
 Nine Months Ended September 30, Six Months Ended June 30,
 Current  Ratio %/ Prior  Ratio %/ Total  Ratio %/ Current  Ratio %/ Prior  Ratio %/ Total  Ratio %/
(Dollars in millions) Year  Pt Change Years  Pt Change Incurred  Pt Change Year  Pt Change Years  Pt Change Incurred  Pt Change
2011                     
Attritional $141.4   49.2%  $0.2   0.1%  $141.6   49.3% 
Catastrophes  84.5   29.5%   10.1   3.5%   94.5   33.0% 
A&E  -   0.0%   -   0.0%   -   0.0% 
Total segment $225.9   78.7%  $10.3   3.6%  $236.1   82.3% 
                           
2010                                                
Attritional $244.0   54.3%  $4.0   0.9%  $248.1   55.2%  $155.2   53.6%  $5.5   1.9%  $160.7   55.5% 
Catastrophes  10.1   2.3%   0.6   0.1%   10.7   2.4%   12.9   4.4%   0.9   0.3%   13.8   4.8% 
A&E  -   0.0%   -   0.0%   -   0.0%   -   0.0%   -   0.0%   -   0.0% 
Total segment $254.2   56.6%  $4.6   1.0%  $258.8   57.6%  $168.1   58.1%  $6.4   2.2%  $174.5   60.3% 
                                                      
2009                           
Attritional $250.2   51.2%  $(18.1)  -3.7%  $232.1   47.5% 
Catastrophes  -   0.0%   0.1   0.0%   0.1   0.0% 
A&E  -   0.0%   -   0.0%   -   0.0% 
Total segment $250.2   51.2%  $(18.0)  -3.7%  $232.3   47.5% 
                           
Variance 2010/2009                           
Variance 2011/2010                           
Attritional $(6.2)  3.1 pts $22.1   4.6 pts $16.0   7.7 pts $(13.8)  (4.4)pts $(5.3)  (1.8)pts $(19.1)  (6.2)pts
Catastrophes  10.1   2.3 pts  0.5   0.1 pts  10.6   2.4 pts  71.6   25.1 pts  9.2   3.2 pts  80.7   28.2 pts
A&E  -   - pts  -   - pts  -   - pts  -   - pts  -   - pts  -   - pts
Total segment $4.0   5.4 pts $22.6   4.7 pts $26.5   10.1 pts $57.8   20.7 pts $3.9   1.4 pts $61.6   22.0 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 $28.1$28.4 million (18.1(27.6 points) higher at $112.7 million for the three months ended June 30, 2011 compared to $84.3 million for the three months ended SeptemberJune 30, 2010, compared to $56.2 million for the three months ended September 30, 2009, primarily as a result of the $33.1$29.5 million increase in attritional losses due to the(20.5 points) increase in current year treaty property expected loss ratios and a $16.9 million increase in prior years reserve development primarily on treaty casualty businesscatastrophe losses, largely due to more favorablethe U.S. Midwest tornadoes and Australian floods, and the $10.9 million (7.6 points) increase to prior year catastrophe losses, primarily due to development in 2009,on the Chile earthquake, partially offset by a $4.9the $4.1 million combined(4.2 points) decrease in both current year and prior years’ catastrophe losses.attritional losses, reflective of lower earned premium.

Incurred losses were $26.5$61.6 million (10.1(22.0 points) higher at $258.8$236.1 million for the ninesix months ended SeptemberJune 30, 20102011 compared to $232.3$174.5 million for the ninesix months ended SeptemberJune 30, 2009,2010, primarily as a result of the $22.1$71.6 million (4.6(25.1 points) increase in current year catastrophe losses, largely due to the Japan and New Zealand earthquakes, U.S. Midwest tornadoes and Australian floods, and the $9.2 million (3.2 points) increase in prior years’ attritionalyear catastrophe losses, principally due to less favorable development on treaty casualty’s prior years’ losses, and a $10.6 million (2.4 points) increase in catastrophe losses,largely due to the New Zealand earthquake and ChileanChile earthquake. Partially offsetting these increases, the current year attritional losses decreased $13.8 million (4.4 points), due, in part, to higher reinstatement premiums in the current year, which are booked without an additional loss provision.

 
37


Segment Expenses. Commission and brokerage expenses increased 17.2%decreased 9.2% to $25.1$32.5 million for the three months ended SeptemberJune 30, 20102011 compared to $21.4$35.9 million for the three months ended SeptemberJune 30, 2009.2010.  Commission and brokerage expenses decreased 2.6%increased 10.4% to $88.1$69.6 million for the ninesix months ended SeptemberJune 30, 20102011 compared to $90.5$63.1 million for the ninesix months ended SeptemberJune 30, 2009. The increase for the quarter was2010.  These variances were primarily due to an increasethe changes in premiums earned and the mix of business with varying commission on a large treaty property transaction and an increase in contingent commissions on treaty casualty business.rates.

Segment other underwriting expenses for the three months ended September 30, 2010 decreased slightly to $8.9 million from $9.7$7.9 million for the three months ended SeptemberJune 30, 2009 and segment2011 compared to $9.4 million for the same period in 2010.  Segment other underwriting expenses for the nine months ended September 30, 2010 increased slightlydecreased to $26.1 million from $25.3$15.8 million for the ninesix months ended SeptemberJune 30, 2009.2011 compared to $17.2 million for the same period in 2010.  These variances were due to reduced operating costs for the segment.

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) 2010  2009  Variance % Change 2010  2009  Variance % Change 2011  2010  Variance  % Change  2011  2010  Variance  % Change 
Gross written premiums $211.6  $230.5  $(18.9)  -8.2% $644.8  $648.7  $(3.9)  -0.6% $226.1  $204.9  $21.2   10.3% $480.6  $433.2  $47.4   10.9%
Net written premiums  89.2   76.4   12.8   16.8%  272.5   301.9   (29.4)  -9.7%  109.2   80.8   28.4   35.1%  234.2   183.3   51.0   27.8%
                                                                
Premiums earned $104.0  $89.2  $14.7   16.5% $291.3  $306.9  $(15.5)  -5.1% $114.9  $86.2  $28.8   33.4% $220.3  $187.4  $32.9   17.6%
Incurred losses and LAE  99.0   71.4   27.6   38.6%  243.7   210.3   33.4   15.9%  84.4   71.8   12.6   17.6%  169.9   144.8   25.2   17.4%
Commission and brokerage  10.4   10.5   (0.1)  -0.8%  18.2   32.4   (14.2)  -43.9%  7.4   6.1   1.3   21.0%  13.7   7.7   6.0   77.0%
Other underwriting expenses  19.5   20.0   (0.5)  -2.5%  52.3   56.4   (4.1)  -7.2%  22.4   16.3   6.1   37.6%  44.3   32.9   11.4   34.7%
Underwriting gain (loss) $(24.9) $(12.7) $(12.2)  96.6% $(22.9) $7.7  $(30.7) NM $0.8  $(8.0) $8.7   -109.4% $(7.6) $2.0  $(9.6) NM
                                                                
             Point Chg             Point Chg             Point Chg              Point Chg 
Loss ratio  95.2%  80.0%      15.2   83.7%  68.5%      15.2   73.4%  83.3%      (9.9)  77.1%  77.3%      (0.2)
Commission and brokerage ratio  10.0%  11.8%      (1.8)  6.2%  10.6%      (4.4)  6.4%  7.1%      (0.7)  6.2%  4.1%      2.1 
Other underwriting expense ratio  18.8%  22.4%      (3.6)  18.0%  18.4%      (0.4)  19.5%  18.9%      0.6   20.2%  17.5%      2.7 
Combined ratio  124.0%  114.2%      9.8   107.9%  97.5%      10.4   99.3%  109.3%      (10.0)  103.5%  98.9%      4.6 
                                                                
(NM, not meaningful)                                                                
(Some amounts may not reconcile due to rounding.)(Some amounts may not reconcile due to rounding.)                                                     

Premiums. Gross written premiums decreasedincreased by 8.2%10.3% to $211.6$226.1 million for the three months ended SeptemberJune 30, 20102011 compared to $230.5$204.9 million for the three months ended SeptemberJune 30, 2009, as we continue2010.  This was due to adjust our bookstrategic portfolio changes with growth in short-tail business, primarily driven by the acquisition of businessHeartland, which provided $38.7 million of new crop insurance premium in response to changing market conditions.the current quarter, partially offset by the planned reduction of a large casualty program.  Net written premiums were higher in 2010 primarily dueincreased 35.1% to higher cessions under the affiliated quota share during the third quarter of 2009.  Premiums earned increased 16.5% to $104.0$109.2 million for the three months ended SeptemberJune 30, 20102011 compared to $89.2$80.8 million for the same period in 2010 due to higher gross premiums and reduced levels of ceded reinsurance primarily related to the reduced casualty program.  Premiums earned increased 33.4% to $114.9 million for the three months ended SeptemberJune 30, 2009, generally2011 compared to $86.2 million for the three months ended June 30, 2010.  The change in linepremiums earned is relatively consistent with the increase in net written premiums.premium.

Gross written premiums decreasedincreased by 0.6%10.9% to $644.8$480.6 million for the ninesix months ended SeptemberJune 30, 20102011 compared to $648.7$433.2 million for the ninesix months ended SeptemberJune 30, 2009.2010.  This was due to strategic portfolio changes with growth in short-tail business, primarily driven by the acquisition of Heartland, which provided $77.4 million of new crop insurance premium in 2011, partially offset by the reduction of a large casualty program.  Net written premiums decreased by a larger percentage than the decline in gross written premiums dueincreased 27.8% to increased cessions on certain programs.  Premiums earned decreased 5.1% to $291.3$234.2 million for the ninesix months ended SeptemberJune 30, 20102011 compared to $306.9$183.3 million for the ninesame period in 2010 due to higher gross premiums and reduced levels of ceded reinsurance.  Premiums earned increased 17.6% to $220.3 million for the six months ended SeptemberJune 30, 2009 due2011 compared to $187.4 million for the lowersix months ended June 30, 2010.  The change in premiums earned is relatively consistent with the increase in net written premiums.premium.

 
38


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, Three Months Ended June 30,
 Current  Ratio %/ Prior  Ratio %/ Total  Ratio %/ Current  Ratio %/ Prior  Ratio %/ Total  Ratio %/
(Dollars in millions) Year  Pt Change Years  Pt Change Incurred  Pt Change Year  Pt Change Years  Pt Change Incurred  Pt Change
2011                     
Attritional $85.4   74.3%  $(1.2)  -1.1%  $84.2   73.2% 
Catastrophes  -   0.0%   0.2   0.2%   0.2   0.2% 
Total segment $85.4   74.3%  $(1.0)  -0.9%  $84.4   73.4% 
                           
2010                                                
Attritional $89.2   85.8%  $9.8   9.4%  $99.0   95.2%  $70.6   81.9%  $1.2   1.4%  $71.8   83.3% 
Catastrophes  -   0.0%   -   0.0%   -   0.0%   -   0.0%   -   0.0%   -   0.0% 
Total segment $89.2   85.8%  $9.8   9.4%  $99.0   95.2%  $70.6   81.9%  $1.2   1.4%  $71.8   83.3% 
                                                      
2009                           
Variance 2011/2010                           
Attritional $71.4   80.0%  $0.1   0.1%  $71.4   80.0%  $14.8   (7.6)pts $(2.4)  (2.5)pts $12.4   (10.1)pts
Catastrophes  -   0.0%   -   0.0%   -   0.0%   -   - pts  0.2   0.2 pts  0.2   0.2 pts
Total segment $71.4   80.0%  $0.1   0.1%  $71.4   80.0%  $14.8   (7.6)pts $(2.2)  (2.3)pts $12.6   (9.9)pts
                           
Variance 2010/2009                           
Attritional $17.8   5.8 pts $9.7   9.3 pts $27.6   15.2 pts
Catastrophes  -   - pts  -   - pts  -   - pts
Total segment $17.8   5.8 pts $9.7   9.3 pts $27.6   15.2 pts
 
 Nine Months Ended September 30, Six Months Ended June 30,
 Current  Ratio %/ Prior  Ratio %/ Total  Ratio %/ Current  Ratio %/ Prior  Ratio %/ Total  Ratio %/
(Dollars in millions) Year  Pt Change Years  Pt Change Incurred  Pt Change Year  Pt Change Years  Pt Change Incurred  Pt Change
2011                     
Attritional $175.1   79.5%  $(5.4)  -2.5%  $169.7   77.0% 
Catastrophes  -   0.0%   0.2   0.1%   0.2   0.1% 
Total segment $175.1   79.5%  $(5.2)  -2.4%  $169.9   77.1% 
                           
2010                                                
Attritional $234.0   80.4%  $9.7   3.3%  $243.7   83.7%  $144.8   77.3%  $-   0.0%  $144.8   77.3% 
Catastrophes  -   0.0%   -   0.0%   -   0.0%   -   0.0%   -   0.0%   -   0.0% 
Total segment $234.0   80.4%  $9.7   3.3%  $243.7   83.7%  $144.8   77.3%  $-   0.0%  $144.8   77.3% 
                                                      
2009                           
Attritional $226.8   73.9%  $(16.4)  -5.4%  $210.3   68.5% 
Catastrophes  -   0.0%   -   0.0%   -   0.0% 
Total segment $226.8   73.9%  $(16.4)  -5.4%  $210.3   68.5% 
                           
Variance 2010/2009                           
Variance 2011/2010                           
Attritional $7.2   6.5 pts $26.1   8.7 pts $33.4   15.2 pts $30.3   2.2 pts $(5.4)  (2.5)pts $24.9   (0.3)pts
Catastrophes  -   - pts  -   - pts  -   - pts  -   - pts  0.2   0.1 pts  0.2   0.1 pts
Total segment $7.2   6.5 pts $26.1   8.7 pts $33.4   15.2 pts $30.3   2.2 pts $(5.2)  (2.4)pts $25.1   (0.2)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 increased by 38.6%17.6% to $99.0$84.4 million for the three months ended SeptemberJune 30, 20102011 compared to $71.4$71.8 million for the three months ended SeptemberJune 30, 2009.2010.  The increase was primarily due to higher net premiums earned, partially offset by a decline of 7.6 points in the current year attritional reserves, resulting primarily fromloss ratio, year over year.  The lower current year attritional loss ratio was due to a change in the increasemix of business with growth in premiums earned and the $9.7 million increase in prior years’ reserves.short-tail/package business that has a lower loss ratio.

Incurred losses and LAE increased by 15.9%17.4% to $243.7$169.9 million for the ninesix months ended SeptemberJune 30, 20102011 compared to $210.3$144.8 million for the ninesix months ended SeptemberJune 30, 2009.2010.  The increase was primarily due to higher net premiums earned and an increase of 2.2 points in the $26.1 million increase in prior years’current year attritional losses, primarilyloss ratio, due to higher expected loss ratios on several casualty programs, reflective of current market conditions, partially offset by favorable development in 2009 of prior years’ attritional reserves, specifically net casualty losses.year development.

Segment Expenses. Commission and brokerage expenses decreased by 0.8%increased to $10.4$7.4 million for the three months ended SeptemberJune 30, 20102011 compared to $10.5$6.1 million for the three months ended SeptemberJune 30, 2009.2010.  Commission and brokerage expenses decreased by 43.9%increased to $18.2$13.7 million for the ninesix months ended SeptemberJune 30, 20102011 compared to $32.4$7.7 million for the ninesix months ended SeptemberJune 30, 2009.2010.  These decreases areincreases were primarily due to the changesresult of an increase in net premiums earned and changes in conjunction with the impactmix of variations in reinsurance ceded, particularly under the affiliated quota share.business.

 
39


Segment other underwriting expenses for the three months ended SeptemberJune 30, 2010 decreased2011 increased to $19.5$22.4 million from $20.0$16.3 million for the three months ended SeptemberJune 30, 2009.2010.  Segment other underwriting expenses for the ninesix months ended SeptemberJune 30, 2010 decreased2011 increased to $52.3$44.3 million from $56.4$32.9 million for the ninesix months ended SeptemberJune 30, 2009.2010.  These decreasesincreases were primarily due to the resultexpenses of management’s direct actions to reduce expenses.the newly acquired Heartland.

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) 2010  2009  Variance % Change 2010  2009  Variance % Change 2011  2010  Variance  % Change  2011  2010  Variance  % Change 
Gross written premiums $65.9  $67.6  $(1.7)  -2.5% $197.7  $183.7  $13.9   7.6% $66.4  $65.9  $0.5   0.8% $135.5  $131.7  $3.8   2.9%
Net written premiums  35.1   38.3   (3.1)  -8.2%  110.2   103.0   7.2   7.0%  35.5   37.8   (2.3)  -6.1%  75.9   75.1   0.8   1.1%
                                                                
Premiums earned $37.7  $39.2  $(1.5)  -3.7% $116.0  $108.5  $7.4   6.9% $33.1  $39.3  $(6.3)  -16.0% $75.5  $78.2  $(2.8)  -3.6%
Incurred losses and LAE  25.2   25.2   -   0.1%  87.2   73.7   13.5   18.3%  24.9   34.5   (9.6)  -27.9%  50.1   62.0   (11.8)  -19.1%
Commission and brokerage  7.7   10.5   (2.8)  -27.1%  25.2   29.4   (4.3)  -14.5%  7.4   9.0   (1.5)  -17.1%  15.4   17.5   (2.1)  -12.0%
Other underwriting expenses  2.1   2.4   (0.2)  -10.1%  6.5   6.2   0.3   4.4%  2.0   2.4   (0.4)  -16.9%  4.0   4.4   (0.4)  -8.1%
Underwriting gain (loss) $2.7  $1.1  $1.6   145.7% $(2.9) $(0.9) $(2.0)  227.9% $(1.3) $(6.5) $5.3   -80.5% $5.9  $(5.6) $11.5   -205.3%
                                                                
             Point Chg             Point Chg             Point Chg              Point Chg 
Loss ratio  66.9%  64.3%      2.6   75.2%  68.0%      7.2   75.3%  87.7%      (12.4)  66.5%  79.2%      (12.7)
Commission and brokerage ratio  20.3%  26.8%      (6.5)  21.7%  27.1%      (5.4)  22.5%  22.8%      (0.3)  20.4%  22.4%      (2.0)
Other underwriting expense ratio  5.7%  6.1%      (0.4)  5.6%  5.7%      (0.1)  6.0%  6.1%      (0.1)  5.3%  5.6%      (0.3)
Combined ratio  92.9%  97.2%      (4.3)  102.5%  100.8%      1.7   103.8%  116.6%      (12.8)  92.2%  107.2%      (15.0)
                                                                
(Some amounts may not reconcile due to rounding.)(Some amounts may not reconcile due to rounding.)                                                     
 
Premiums. Gross written premiums decreasedincreased by 2.5%0.8% to $66.4 million for the three months ended June 30, 2011 compared to $65.9 million for the three months ended SeptemberJune 30, 2010, comparedprimarily due to $67.6an increase in A&H primary business for medical stop loss insurance offset by reductions in A&H reinsurance, Marine and Surety writings.  Net written premiums decreased 6.1% to $35.5 million for the three months ended SeptemberJune 30, 2009, primarily due2011 compared to a $6.5 million and $5.8 million decrease in marine and aviation business, respectively, partially offset by a $10.2 million increase in A&H business, attributable to travel reinsurance and medical stop loss business.  Net written premiums decreased by 8.2% to $35.1$37.8 million for the three months ended SeptemberJune 30, 2010, comparedprimarily due to $38.3a change in the affiliated quota share agreement.  Premiums earned decreased 16.0% to $33.1 million for the three months ended SeptemberJune 30, 2009, primarily as a result of the decrease in gross written premiums combined with changes in amounts ceded un der the affiliated quota share.  Premiums earned decreased 3.7%2011 compared to $37.7$39.3 million for the three months ended SeptemberJune 30, 2010, comparedrelatively consistent with the decrease in net written premiums.

Gross written premiums increased by 2.9% to $39.2$135.5 million for the threesix months ended SeptemberJune 30, 2009.2011 compared to $131.7 million for the six months ended June 30, 2010, primarily due to an increase in A&H primary business for medical stop loss insurance offset by a reduction in A&H reinsurance and Marine business.  Net written premiums increased 1.1% to $75.9 million for the six months ended June 30, 2011 compared to $75.1 million for the six months ended June 30, 2010.  The lower increase in net written premiums is primarily due to the change in the affiliated quota share agreement.  Premiums earned decreased 3.6% to $75.5 million for the six months ended June 30, 2011 compared to $78.2 million for the six months ended June 30, 2010.  The change in premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.

Gross written premiums increased by 7.6% to $197.7 million for the nine months ended September 30, 2010 compared to $183.7 million for the nine months ended September 30, 2009, primarily due to an increase in A&H business, attributable to travel reinsurance and medical stop loss business of $29.0 million, partially offset by a net decrease in marine and aviation business of $14.2 million.  Correspondingly, net written premiums increased 7.0% to $110.2 million for the nine months ended September 30, 2010 compared to $103.0 million for the nine months ended September 30, 2009.  Premiums earned increased 6.9% to $116.0 million for the nine months ended September 30, 2010 compared to $108.5 million for the nine months ended September 30, 2009, relatively consistent with the increase in net written premiums.

 
40

 
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,
 Current  Ratio %/ Prior  Ratio %/ Total  Ratio %/ Current  Ratio %/ Prior  Ratio %/ Total  Ratio %/
(Dollars in millions) Year  Pt Change Years  Pt Change Incurred  Pt Change Year  Pt Change Years  Pt Change Incurred  Pt Change
2011                     
Attritional $24.1   72.8%  $-   0.0%  $24.1   72.9% 
Catastrophes  1.3   3.9%   (0.5)  -1.5%   0.8   2.4% 
Total segment $25.4   76.7%  $(0.5)  -1.4%  $24.9   75.3% 
                           
2010                                                
Attritional $25.1   66.7%  $(0.4)  -1.0%  $24.8   65.6%  $32.2   81.9%  $0.7   1.9%  $33.0   83.8% 
Catastrophes  -   0.0%   0.5   1.2%   0.5   1.2%   -   0.0%   1.6   4.0%   1.6   4.0% 
Total segment $25.1   66.7%  $0.1   0.2%  $25.2   66.9%  $32.2   81.9%  $2.3   5.8%  $34.5   87.7% 
                                                      
2009                           
Variance 2011/2010                           
Attritional $26.2   66.8%  $(0.2)  -0.4%  $26.0   66.4%  $(8.1)  (9.1)pts $(0.7)  (1.8)pts $(8.9)  (10.9)pts
Catastrophes  -   0.0%   (0.8)  -2.1%   (0.8)  -2.1%   1.3   3.9 pts  (2.1)  (5.5)pts  (0.8)  (1.6)pts
Total segment $26.2   66.8%  $(1.0)  -2.5%  $25.2   64.3%  $(6.8)  (5.2)pts $(2.8)  (7.2)pts $(9.6)  (12.4)pts
                           
Variance 2010/2009                           
Attritional $(1.1)  (0.1)pts $(0.2)  (0.6)pts $(1.2)  (0.8)pts
Catastrophes  -   - pts  1.3   3.3 pts  1.3   3.3 pts
Total segment $(1.1)  (0.1)pts $1.1   2.7 pts $-   2.6 pts
 
 Nine Months Ended September 30, Six Months Ended June 30,
 Current  Ratio %/ Prior  Ratio %/ Total  Ratio %/ Current  Ratio %/ Prior  Ratio %/ Total  Ratio %/
(Dollars in millions) Year  Pt Change Years  Pt Change Incurred  Pt Change Year  Pt Change Years  Pt Change Incurred  Pt Change
2011                     
Attritional $50.1   66.4%  $(0.7)  -0.9%  $49.4   65.5% 
Catastrophes  1.3   1.7%   (0.5)  -0.7%   0.7   1.0% 
Total segment $51.4   68.1%  $(1.2)  -1.6%  $50.1   66.5% 
                           
2010                                                
Attritional $83.9   72.3%  $0.1   0.1%  $84.0   72.4%  $58.8   75.1%  $0.5   0.6%  $59.2   75.7% 
Catastrophes  -   0.0%   3.2   2.8%   3.2   2.8%   -   0.0%   2.7   3.5%   2.7   3.5% 
Total segment $83.9   72.3%  $3.3   2.8%  $87.2   75.2%  $58.8   75.1%  $3.2   4.1%  $62.0   79.2% 
                                                      
2009                           
Attritional $77.0   70.9%  $(6.0)  -5.5%  $71.0   65.4% 
Catastrophes  -   0.0%   2.8   2.6%   2.8   2.6% 
Total segment $77.0   70.9%  $(3.2)  -3.0%  $73.7   68.0% 
                           
Variance 2010/2009                           
Variance 2011/2010                           
Attritional $6.9   1.4 pts $6.1   5.6 pts $13.0   7.0 pts $(8.7)  (8.7)pts $(1.2)  (1.5)pts $(9.8)  (10.2)pts
Catastrophes  -   - pts  0.4   0.2 pts  0.4   0.2 pts  1.3   1.7 pts  (3.2)  (4.2)pts  (2.0)  (2.5)pts
Total segment $6.9   1.4 pts $6.5   5.8 pts $13.5   7.2 pts $(7.4)  (7.0)pts $(4.4)  (5.7)pts $(11.9)  (12.7)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 remained flat at $25.2decreased by 27.9% to $24.9 million for the three months ended SeptemberJune 30, 2011 compared to $34.5 million for the three months ended June 30, 2010, and 2009.  due primarily to the Deep Water Horizon rig loss included in the 2010 attritional losses, as well as changes in the mix of business.

Incurred losses and LAE increaseddecreased by 18.3%19.1% to $87.2$50.1 million for the ninesix months ended SeptemberJune 30, 20102011 compared to $73.7$62.0 million for the ninesix months ended SeptemberJune 30, 2009.  This increase was driven by a $13.0 million (7.0 points) increase2010, due primarily to the Deep Water Horizon rig losses included in the 2010 attritional losses primarily from the A&H business and from losses on the offshore oil rigchanges in the Gulf.mix of business.

Segment Expenses. Commission and brokerage expenses decreased 27.1%17.1% to $7.7$7.4 million for the three months ended SeptemberJune 30, 20102011 compared to $10.5$9.0 million for the three months ended SeptemberJune 30, 2009.2010.  Commission and brokerage expenses decreased 14.5%12.0% to $25.2$15.4 million for the ninesix months ended SeptemberJune 30, 20102011 compared to $29.4$17.5 million for the ninesix months ended SeptemberJune 30, 2009. These2010.  The decreases were primarily due to lower premiums earned and the changes in the mix inof business, andwith a higher level of primary A&H business, which carries a lower contingent commissions oncommission ratio.

Segment other underwriting expenses decreased to $2.0 million for the surety book of business.three months ended June 30, 2011 compared to $2.4 million for the three months ended June 30, 2010.  Segment other underwriting expenses decreased to $4.0 million for the six months ended June 30, 2011 compared to $4.4 million for the six months ended June 30, 2010.

 
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Segment other underwriting expenses decreased slightly to $2.1 million for the three months ended September 30, 2010 compared to $2.4 million for the three months ended September 30, 2009.  Segment other underwriting expenses increased slightly to $6.5 million for the nine months ended September 30, 2010 compared to $6.2 million for the nine months ended September 30, 2009.

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) 2010  2009  Variance % Change 2010  2009  Variance % Change 2011  2010  Variance  % Change  2011  2010  Variance  % Change 
Gross written premiums $323.7  $272.6  $51.1   18.8% $906.1  $797.6  $108.5   13.6% $288.7  $307.0  $(18.2)  -5.9% $597.6  $582.3  $15.2   2.6%
Net written premiums  168.4   146.3   22.1   15.1%  479.7   435.7   44.0   10.1%  141.5   166.0   (24.5)  -14.8%  299.6   311.3   (11.6)  -3.7%
                                                                
Premiums earned $163.9  $147.9  $16.1   10.9% $465.7  $433.1  $32.6   7.5% $162.4  $154.7  $7.7   5.0% $328.9  $301.8  $27.2   9.0%
Incurred losses and LAE  118.4   89.2   29.2   32.7%  479.0   261.0   218.0   83.5%  90.9   124.1   (33.2)  -26.8%  409.7   360.6   49.1   13.6%
Commission and brokerage  38.3   34.8   3.4   9.9%  106.0   100.1   5.9   5.9%  32.9   37.3   (4.3)  -11.6%  70.1   67.7   2.3   3.5%
Other underwriting expenses  6.7   6.2   0.5   8.4%  20.4   16.5   3.9   23.7%  7.0   7.3   (0.4)  -4.9%  13.4   13.7   (0.3)  -2.2%
Underwriting gain (loss) $0.6  $17.7  $(17.1)  -96.6% $(139.6) $55.6  $(195.2) NM $31.7  $(14.0) $45.6  NM $(164.2) $(140.2) $(24.0)  17.1%
                                                                
             Point Chg             Point Chg             Point Chg              Point Chg 
Loss ratio  72.2%  60.3%      11.9   102.8%  60.3%      42.5   55.9%  80.2%      (24.3)  124.5%  119.5%      5.0 
Commission and brokerage ratio  23.4%  23.6%      (0.2)  22.8%  23.1%      (0.3)  20.3%  24.1%      (3.8)  21.3%  22.4%      (1.1)
Other underwriting expense ratio  4.0%  4.2%      (0.2)  4.4%  3.8%      0.6   4.3%  4.7%      (0.4)  4.1%  4.6%      (0.5)
Combined ratio  99.6%  88.1%      11.5   130.0%  87.2%      42.8   80.5%  109.0%      (28.5)  149.9%  146.5%      3.4 
                                                                
(NM, not meaningful)                                                                
(Some amounts may not reconcile due to rounding.)(Some amounts may not reconcile due to rounding.)                                                       

Premiums. Gross written premiums increaseddecreased by 18.8%5.9% to $323.7$288.7 million for the three months ended SeptemberJune 30, 20102011 compared to $272.6$307.0 million for the three months ended SeptemberJune 30, 2009,2010 due to continued strong growtha decrease in our Brazil, Miamipremiums written through Asia and New Jersey offices,Canada, partially offset by a $42.9 million increase; Canada, a $5.5 million increase;net increase in business written in the Latin America, South America, Middle East, and Asia, a $2.8 million increase.Africa regions. Non-renewed business in certain catastrophe exposed territories that have not responded to the recent elevation in catastrophe loss activity resulted in the overall decline in writings, partially offset by generally higher rate levels on retained business and favorable foreign exchange impact of $14.2 million.  Net written premiums increaseddecreased by 15.1%14.8% to $168.4$141.5 million for the three months ended SeptemberJune 30, 20102011 compared to $146.3$166.0 million for the three months ended SeptemberJune 30, 2009,2010, principally as a result of the increasedecrease in gross written premiums.premiums and change in the affiliated quota share agreement.  Premiums earned increased by 10.9%5.0% to $163.9$162.4 million for the three months ended SeptemberJune 30, 20102011 compared to $147.9$154.7 million for the three months ended SeptemberJune 30, 2009.2010.  The change in premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.

Gross written premiums increased by 13.6%2.6% to $906.1$597.6 million for the ninesix months ended SeptemberJune 30, 20102011 compared to $797.6$582.3 million for the ninesix months ended SeptemberJune 30, 2009,2010 due to continued strong growtha net increase in Brazil, Miamipremiums written in the Latin America, Middle East, and New Jersey offices, a $49.4Africa regions and favorable foreign exchange impact of $22.1 million, increase;partially offset by lower premium in Asia a $36.6 million increase; and Canada, a $22.6 million increase; the result of a combination of newCanada.  Growth from increased rate levels, particularly in regions recently affected by catastrophe losses was partially offset by non-renewed business rate increases in select areas and economic and insurance growth in some markets.  Also contributing to the increase was $13.4 million in reinstatement premiums from the Chilean earthquake.which did not meet our current pricing targets.  Net written premiums increaseddecreased by 10.1%3.7% to $479.7$299.6 million for the ninesix months ended SeptemberJune 30, 20102011 compared to $435.7$311.3 million for the ninesix months ended SeptemberJune 30, 2009.2010, primarily due to the change in our affiliated quota share agreement.  Premiums earned increased by 7.5%9.0% to $465.7 million f or the nine months ended September 30, 2010 compared to $433.1$328.9 million for the ninesix months ended SeptemberJune 30, 2009, as a result of2011 compared to $301.8 million for the increasesix months ended June 30, 2010.   The change in net written premiums.  Variance explanations forpremiums earned relative to net written premiums andis the result of timing; premiums are earned forratably over the nine months were similar to those discussed above forcoverage period whereas written premiums are recorded at the three months.initiation of the coverage period.

 
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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,
 Current  Ratio %/ Prior  Ratio %/ Total  Ratio %/ Current  Ratio %/ Prior  Ratio %/ Total  Ratio %/
(Dollars in millions) Year  Pt Change Years  Pt Change Incurred  Pt Change Year  Pt Change Years  Pt Change Incurred  Pt Change
2011                     
Attritional $67.3   41.4%  $(8.1)  -5.0%  $59.2   36.4% 
Catastrophes  32.8   20.2%   (1.1)  -0.7%   31.7   19.5% 
Total segment $100.1   61.6%  $(9.2)  -5.7%  $90.9   55.9% 
                           
2010                                                
Attritional $94.4   57.6%  $(13.5)  -8.3%  $80.8   49.3%  $83.8   54.1%  $(2.0)  -1.3%  $81.7   52.8% 
Catastrophes  38.2   23.3%   (0.7)  -0.4%   37.5   22.9%   48.7   31.5%   (6.3)  -4.1%   42.3   27.4% 
Total segment $132.6   80.9%  $(14.2)  -8.7%  $118.4   72.2%  $132.4   85.6%  $(8.3)  -5.4%  $124.1   80.2% 
                                                      
2009                           
Variance 2011/2010                           
Attritional $76.4   51.7%  $(0.6)  -0.4%  $75.8   51.3%  $(16.5)  (12.7)pts $(6.1)  (3.7)pts $(22.5)  (16.4)pts
Catastrophes  11.2   7.6%   2.1   1.5%   13.4   9.0%   (15.9)  (11.3)pts  5.2   3.4 pts  (10.6)  (7.9)pts
Total segment $87.7   59.3%  $1.5   1.0%  $89.2   60.3%  $(32.3)  (24.0)pts $(0.9)  (0.3)pts $(33.2)  (24.3)pts
                           
Variance 2010/2009                           
Attritional $18.0   5.9 pts $(12.9)  (7.9)pts $5.0   (2.0)pts
Catastrophes  27.0   15.7 pts  (2.8)  (1.9)pts  24.1   13.9 pts
Total segment $44.9   21.6 pts $(15.7)  (9.7)pts $29.2   11.9 pts
 
 Nine Months Ended September 30, Six Months Ended June 30,
 Current  Ratio %/ Prior  Ratio %/ Total  Ratio %/ Current  Ratio %/ Prior  Ratio %/ Total  Ratio %/
(Dollars in millions) Year  Pt Change Years  Pt Change Incurred  Pt Change Year  Pt Change Years  Pt Change Incurred  Pt Change
2011                     
Attritional $141.5   42.9%  $(12.0)  -3.6%  $129.5   39.3% 
Catastrophes  279.3   84.9%   0.9   0.3%   280.2   85.2% 
Total segment $420.8   127.8%  $(11.1)  -3.3%  $409.7   124.5% 
                           
2010                                                
Attritional $269.4   57.8%  $(19.0)  -4.1%  $250.4   53.8%  $175.1   58.0%  $(5.5)  -1.8%  $169.6   56.2% 
Catastrophes  236.4   50.8%   (7.9)  -1.7%   228.6   49.1%   198.2   65.7%   (7.2)  -2.4%   191.0   63.3% 
Total segment $505.9   108.6%  $(26.9)  -5.8%  $479.0   102.8%  $373.2   123.7%  $(12.7)  -4.2%  $360.6   119.5% 
                                                      
2009                           
Attritional $235.0   54.3%  $4.5   1.1%  $239.5   55.3% 
Catastrophes  20.3   4.7%   1.1   0.3%   21.4   5.0% 
Total segment $255.3   58.9%  $5.7   1.3%  $261.0   60.3% 
                           
Variance 2010/2009                           
Variance 2011/2010                           
Attritional $34.4   3.5 pts $(23.5)  (5.2)pts $10.9   (1.5)pts $(33.6)  (15.1)pts $(6.5)  (1.8)pts $(40.1)  (16.9)pts
Catastrophes  216.1   46.1 pts  (9.0)  (2.0)pts  207.2   44.1 pts  81.1   19.2 pts  8.1   2.7 pts  89.2   21.9 pts
Total segment $250.6   49.7 pts $(32.6)  (7.1)pts $218.0   42.5 pts $47.6   4.1 pts $1.6   0.9 pts $49.1   5.0 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 increased 32.7%decreased 26.8% to $118.4$90.9 million for the three months ended SeptemberJune 30, 20102011 compared to $89.2$124.1 million for the three months ended SeptemberJune 30, 2009.2010.  The decrease was principally due to a $22.5 million (16.4 points) decrease in attritional losses and lower current year catastrophe losses.  Current year catastrophes decreased $15.9 million (11.3 points) due to Japan and New Zealand earthquakes, and the wildfire loss in Alberta, Canada in 2011, compared to the higher catastrophe losses reported in the second quarter of 2010 (Chile earthquake).

Incurred losses and LAE increased 13.6% to $409.7 million for the six months ended June 30, 2011 compared to $360.6 million for the six months ended June 30, 2010.  The increase was principally due to a $27.0$81.1 million (19.2 points) increase in current year catastrophes losses, duerelated to the Japan and New Zealand earthquake, Chileearthquakes, the Australia floods, and the wildfire loss in Alberta, Canada, compared to the 2010 reported catastrophe losses (Chile earthquake and Australia hailstorms).  The current year attritional loss ratio decreased to 42.9% for the Canadian hailstorm. Attritional losses also increasedsix months ended June 30, 2011 from 58.0% for the six months ended June 30, 2010, primarily due to a shift in the increased premiums earned andmix of business with a lower level of quota share business, which generally carries a higher expected loss ratios, which were partially offset by more favorable development of prior years’ attritional reserves.

Incurred losses and LAE increased 83.5% to $479.0 million for the nine months ended September 30, 2010 compared to $261.0 million for the nine months ended September 30, 2009.  The increase was principally dueratio, in addition to the 2010 large catastrophesimpact of $187.1 million forchanges in the Chilean earthquake, $28.0 million for the New Zealand earthquake, $18.0 million for the Australian hailstorms and $3.4 million for the Canadian hailstorm compared to the absence in 2009 of any similar large events.  Attritional losses also increased primarily due to the increased premiums earned and higher expected loss ratios, which were partially offset by favorable development of prior years’ attritional reserves.affiliated quota share agreement.

Segment Expenses. Commission and brokerage expenses increased 9.9% to $38.3 million for the three months ended September 30, 2010 compared to $34.8 million for the three months ended September 30, 2009. Commission and brokerage expenses increased 5.9% to $106.0 million for the nine months ended September 30, 2010 compared to $100.1 million for the nine months ended September 30, 2009. The increases were primarily in line with the increases in premiums earned.

 
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Segment other underwritingExpenses. Commission and brokerage expenses for the three months ended September 30, 2010 were $6.7 million compareddecreased 11.6% to $6.2$32.9 million for the three months ended SeptemberJune 30, 2009.  2011 compared to $37.3 million for the three months ended June 30, 2010.  Commission and brokerage expenses increased 3.5% to $70.1 million for the six months ended June 30, 2011 compared to $67.7 million for the six months ended June 30, 2010.  These variances were due to the changes in premiums and the mix of business.

Segment other underwriting expenses for the nine months ended September 30, 2010 were $20.4 million compareddecreased to $16.5$7.0 million for the ninethree months ended SeptemberJune 30, 2009.  These increases were due2011 compared to growth in$7.3 million for the overall infrastructure and consistent with the growth in premiums earned resulting in stablethree months ended June 30, 2010.  Segment other underwriting expense ratios.expenses decreased to $13.4 million for the six months ended June 30, 2011 compared to $13.7 million for the six months ended June 30, 2010.

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

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

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

Interest Rate Risk.  Our $8.4 billion investment portfolio, at SeptemberJune 30, 2010,2011, 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.fluctuations and some foreign exchange rate risk.  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 $474.4$415.5 million of mortgage-backed securities in the $6,485.2$5,428.2 million fixed maturity portfolio.  Prepayment risk results from potential accelerated principal payments that shorten the average life and thus the expected yield of the security.

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The table below displays the potential impact of market value fluctuations and after-tax unrealized appreciation on our fixed maturity securities portfolio (including $304.9$566.1 million of short-term investments) for the periodperiods indicated based on upward and downward parallel and immediate 100 and 200 basis point shifts in interest rates.  For legal entities with a U.S. dollar functional currency, this modeling was performed on each security individually.  To generate appropriate price estimates for mortgage-backed securities, changes in prepayment expectations under different interest rate environments were taken into account.  For legal entities with non-U.S. dollar functional currency, the effective duration of the involved portfolio of securities was used as a proxy for the market value change under th ethe various interest rate change scenarios.
 
 Impact of Interest Rate Shift in Basis Points Impact of Interest Rate Shift in Basis Points 
 At September 30, 2010 At June 30, 2011 
(Dollars in millions)  -200   -100   0   100   200   -200   -100   0   100   200 
Total Market/Fair Value $7,310.9  $7,066.6  $6,790.1  $6,464.2  $6,142.7  $6,353.4  $6,183.6  $5,994.4  $5,780.4  $5,570.7 
Market/Fair Value Change from Base (%)  7.7%  4.1%  0.0%  -4.8%  -9.5%  6.0%  3.2%  0.0%  -3.6%  -7.1%
Change in Unrealized Appreciation                                        
After-tax from Base ($) $338.5  $179.7  $-  $(211.8) $(420.8) $233.4  $123.0  $-  $(139.1) $(275.4)

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We had $7,611.6$8,275.6 million and $7,300.1$7,652.3 million of gross reserves for losses and LAE as of SeptemberJune 30, 20102011 and December 31, 2009,2010, respectively.  These amounts are recorded at their nominal value, as opposed to present value, which would reflect a discount adjustment to reflect the time value of money.  Since losses are paid out over a period of time, the present value of the reserves is less than the nominal value.  As interest rates rise, the present value of the reserves decreases and, conversely, as interest rates decline, the present value increases.  These movements are the opposite of the interest rate impacts on the fair value of investments.  While the difference between present value and nominal value is not reflected in our financial statements, our financial results will include investment income over time from the investment portfolio until the claims are paid.  Our loss and loss reserve obligations have an expected duration that is reasonably consistent with our fixed income portfolio.

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

The table below displays the impact on fair/market value and after-tax change in fair/market value of a 10% and 20% change in equity prices up and down for the periodperiods indicated.
 
 Impact of Percentage Change in Equity Fair/Market Values Impact of Percentage Change in Equity Fair/Market Values 
 At September 30, 2010 At June 30, 2011 
(Dollars in millions)  -20%  -10%  0%  10%  20%  -20%  -10%  0%  10%  20%
Fair/Market Value of the Equity Portfolio $305.8  $344.1  $382.3  $420.5  $458.7  $778.3  $875.5  $972.8  $1,070.1  $1,167.4 
After-tax Change in Fair/Market Value  (49.7)  (24.8)  -   24.8   49.7   (126.5)  (63.2)  -   63.2   126.5 

Foreign Exchange Risk.  Foreign currency risk is the potential change in value, income and cash flow arising from adverse changes in foreign currency exchange rates.  Each of our non-U.S. (“foreign”) operations maintains capital in the currency of the country of its geographic location consistent with local regulatory guidelines.  Each foreign operation may conduct business in its local currency, as well as the currency of other countries in which it operates.  The primary foreign currency exposures for these foreign operations are the Singapore and Canadian Dollar,Dollars, the British Pound Sterling and the Euro.  We mitigate foreign exchange exposure by generally matching the currency and duration of our assets to our corresp ondingcorresponding operating liabilities.  In accordance with FASB guidance, we translate the assets, liabilities and income of non-U.S. dollar functional currency legal entities to the U.S. dollar.  This translation amount is reported as a component of other comprehensive income.  As of SeptemberJune 30, 2010,2011, there has been no material change in exposure to foreign exchange rates as compared to December 31, 2009.2010.

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

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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 Of ficerOfficer 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.  The statuses of these proceedings are considered when we determine our reserves for losses and loss adjustment expenses.  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 o urour 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.

There are no known significant pending legal issues not involving insurance or reinsurance business activity.

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ITEM 1A.RISK FACTORS
 
No material changes.

 
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
None.

 
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
None.

 
ITEM 4.RESERVED
 

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ITEM 5.OTHER INFORMATION
 
None.

 
ITEM 6.EXHIBITS
 
Exhibit Index:
Exhibit No.  Index:Description
  
Exhibit No.Description
31.1Section 302 Certification of Joseph V. Taranto
  
31.2Section 302 Certification of Dominic J. Addesso
  
32.1Section 906 Certification of Joseph V. Taranto and Dominic J. Addesso
   101.INSXBRL Instance Document
   101.SCHXBRL Taxonomy Extension Schema
   101.CALXBRL Taxonomy Extension Calculation Linkbase
   101.DEFXBRL Taxonomy Extension Definition Linkbase
   101.LABXBRL Taxonomy Extension Labels Linkbase
   101.PREXBRL Taxonomy Extension Presentation Linkbase

 
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Everest Reinsurance Holdings, Inc.
Everest Reinsurance Holdings, Inc.
Signatures
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 15, 20102011