holdings10q1q2012.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED:
March 31, 2012
 
Commission file number:
1-14527

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

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

YES
X
 
NO
 

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

YES
X
 
NO
 

Indicate by check mark 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
   
NO
X

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

   
Number of Shares Outstanding
 
Class
 
At May 1, 2012
 
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.
   
     
27
       
Item 3.
 
40
         
Item 4.
 
40
         

PART II

OTHER INFORMATION

         
Item 1.
 
40
         
Item 1A.
 
41
       
Item 2.
 
41
       
Item 3.
 
41
       
Item 4.
 
41
       
Item 5.
 
41
       
Item 6.
 
41


 
 



Part I

ITEM  1.  FINANCIAL STATEMENTS

EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
 
   
March 31,
   
December 31,
 
(Dollars in thousands, except par value per share)
 
2012
   
2011
 
   
(unaudited)
       
ASSETS:
           
Fixed maturities - available for sale, at market value
  $ 5,158,140     $ 5,107,028  
     (amortized cost: 2012, $4,917,731; 2011, $4,880,654)
               
Fixed maturities - available for sale, at fair value
    64,936       113,606  
Equity securities - available for sale, at market value (cost: 2012, $15; 2011, $15)
    12       10  
Equity securities - available for sale, at fair value
    1,163,616       1,207,053  
Short-term investments
    646,196       423,663  
Other invested assets (cost: 2012, $396,403; 2011, $379,342)
    396,403       379,342  
Other invested assets, at fair value
    899,292       817,352  
Cash
    344,747       348,267  
         Total investments and cash
    8,673,342       8,396,321  
Accrued investment income
    57,788       55,849  
Premiums receivable
    821,610       856,375  
Reinsurance receivables - unaffiliated
    566,125       570,128  
Reinsurance receivables - affiliated
    2,900,866       2,901,174  
Funds held by reinsureds
    179,861       176,156  
Deferred acquisition costs
    148,857       166,806  
Prepaid reinsurance premiums
    621,257       625,391  
Deferred tax asset
    283,520       366,490  
Federal income taxes recoverable
    40,015       39,014  
Other assets
    233,129       195,476  
TOTAL ASSETS
  $ 14,526,370     $ 14,349,180  
                 
LIABILITIES:
               
Reserve for losses and loss adjustment expenses
  $ 8,169,153     $ 8,290,619  
Unearned premium reserve
    1,233,032       1,239,705  
Funds held under reinsurance treaties
    86,335       123,479  
Losses in the course of payment
    47,986       11,002  
Commission reserves
    34,721       40,353  
Other net payable to reinsurers
    625,016       620,659  
5.4% Senior notes due 10/15/2014
    249,870       249,858  
6.6% Long term notes due 5/1/2067
    238,355       238,354  
Junior subordinated debt securities payable
    329,897       329,897  
Accrued interest on debt and borrowings
    12,092       4,781  
Other liabilities
    326,765       259,080  
         Total liabilities
    11,353,222       11,407,787  
                 
Commitments and Contingencies (Note 6)
               
                 
STOCKHOLDER'S EQUITY:
               
Common stock, par value: $0.01; 3,000 shares authorized;
               
     1,000 shares issued and outstanding (2012 and 2011)
    -       -  
Additional paid-in capital
    335,042       333,416  
Accumulated other comprehensive income (loss), net of deferred income tax expense
               
     (benefit) of $102,412 at 2012 and $94,118 at 2011
    190,195       174,790  
Retained earnings
    2,647,911       2,433,187  
         Total stockholder's equity
    3,173,148       2,941,393  
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY
  $ 14,526,370     $ 14,349,180  
                 
The accompanying notes are an integral part of the consolidated financial statements.
               


 
1


EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
 
   
Three Months Ended
 
   
March 31,
 
(Dollars in thousands)
 
2012
   
2011
 
   
(unaudited)
 
REVENUES:
           
Premiums earned
  $ 433,711     $ 459,393  
Net investment income
    81,242       87,132  
Net realized capital gains (losses):
               
Other-than-temporary impairments on fixed maturity securities
    (5,674 )     (13,611 )
Other-than-temporary impairments on fixed maturity securities
               
transferred to other comprehensive income (loss)
    -       -  
Other net realized capital gains (losses)
    181,815       54,087  
Total net realized capital gains (losses)
    176,141       40,476  
Other income (expense)
    (6,254 )     32  
Total revenues
    684,840       587,033  
                 
CLAIMS AND EXPENSES:
               
Incurred losses and loss adjustment expenses
    250,397       553,028  
Commission, brokerage, taxes and fees
    87,491       88,512  
Other underwriting expenses
    39,514       38,217  
Corporate expenses
    1,566       1,190  
Interest, fee and bond issue cost amortization expense
    12,696       12,682  
Total claims and expenses
    391,664       693,629  
                 
INCOME (LOSS) BEFORE TAXES
    293,176       (106,596 )
Income tax expense (benefit)
    78,452       (9,063 )
                 
NET INCOME (LOSS)
  $ 214,724     $ (97,533 )
                 
Other comprehensive income (loss), net of tax :
               
Unrealized appreciation (depreciation) ("URA(D)") on securities arising during the period
    6,411       (26,889 )
Less: reclassification adjustment for realized losses (gains) included in net income (loss)
    2,713       16,825  
Total URA(D) on securities arising during the period
    9,124       (10,064 )
Foreign currency translation adjustments
    5,297       10,335  
Pension adjustments
    984       746  
Total other comprehensive income (loss), net of tax
    15,405       1,017  
                 
COMPREHENSIVE INCOME (LOSS)
  $ 230,129     $ (96,516 )
                 
The accompanying notes are an integral part of the consolidated financial statements.
               



 
2


EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDER’S EQUITY
 
   
Three Months Ended
 
   
March 31,
 
(Dollars in thousands, except share amounts)
 
2012
 
2011
 
   
(unaudited)
 
COMMON STOCK (shares outstanding):
           
Balance, beginning of period
    1,000       1,000  
Balance, end of period
    1,000       1,000  
                 
ADDITIONAL PAID-IN CAPITAL:
               
Balance, beginning of period
  $ 333,416     $ 327,767  
Share-based compensation plans
    1,626       1,589  
Balance, end of period
    335,042       329,356  
                 
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS),
               
NET OF DEFERRED INCOME TAXES:
               
Balance, beginning of period
    174,790       163,966  
Net increase (decrease) during the period
    15,405       1,017  
Balance, end of period
    190,195       164,983  
                 
RETAINED EARNINGS:
               
Balance, beginning of period
    2,433,187       2,636,008  
Net income (loss)
    214,724       (97,533 )
Balance, end of period
    2,647,911       2,538,475  
                 
TOTAL STOCKHOLDER'S EQUITY, END OF PERIOD
  $ 3,173,148     $ 3,032,814  
                 
The accompanying notes are an integral part of the consolidated financial statements.
               



 
3


EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS



   
Three Months Ended
 
   
March 31,
 
(Dollars in thousands)
 
2012
 
2011
 
   
(unaudited)
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income (loss)
  $ 214,724     $ (97,533 )
Adjustments to reconcile net income to net cash provided by operating activities:
               
Decrease (increase) in premiums receivable
    37,206       (111,328 )
Decrease (increase) in funds held by reinsureds, net
    (40,354 )     196  
Decrease (increase) in reinsurance receivables
    7,668       (306,071 )
Decrease (increase) in federal income taxes receivable
    (898 )     (54,380 )
Decrease (increase) in deferred tax asset
    74,674       34,314  
Decrease (increase) in prepaid reinsurance premiums
    4,536       23,936  
Increase (decrease) in reserve for losses and loss adjustment expenses
    (165,989 )     465,159  
Increase (decrease) in unearned premiums
    (10,324 )     (23,149 )
Increase (decrease) in other net payable to reinsurers
    4,105       52,782  
Change in equity adjustments in limited partnerships
    (11,285 )     (18,415 )
Change in other assets and liabilities, net
    44,382       72,345  
Non-cash compensation expense
    1,616       1,380  
Amortization of bond premium (accrual of bond discount)
    4,274       3,492  
Amortization of underwriting discount on senior notes
    13       12  
Net realized capital (gains) losses
    (176,141 )     (40,476 )
Net cash provided by (used in) operating activities
    (11,793 )     2,264  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from fixed maturities matured/called - available for sale, at market value
    202,187       107,455  
Proceeds from fixed maturities matured/called - available for sale, at fair value
    -       6,900  
Proceeds from fixed maturities sold - available for sale, at market value
    84,136       516,721  
Proceeds from fixed maturities sold - available for sale, at fair value
    59,281       32,952  
Proceeds from equity securities sold - available for sale, at market value
    -       27,096  
Proceeds from equity securities sold - available for sale, at fair value
    239,540       52,696  
Distributions from other invested assets
    5,861       61,359  
Cost of fixed maturities acquired - available for sale, at market value
    (292,848 )     (472,805 )
Cost of fixed maturities acquired - available for sale, at fair value
    (3,124 )     (8,076 )
Cost of equity securities acquired - available for sale, at market value
    -       (27,059 )
Cost of equity securities acquired - available for sale, at fair value
    (105,214 )     (126,665 )
Cost of other invested assets acquired
    (11,636 )     (23,014 )
Cost of other invested assets acquired, at fair value
    -       (37,611 )
Cost of businesses acquired
    -       (63,100 )
Net change in short-term investments
    (222,137 )     149,303  
Net change in unsettled securities transactions
    29,769       (143,998 )
Net cash provided by (used in) investing activities
    (14,185 )     52,154  
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Tax benefit from share-based compensation
    10       209  
Revolving credit borrowings
    -       (10,000 )
Net cash provided by (used in) financing activities
    10       (9,791 )
                 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
    22,448       6,646  
                 
Net increase (decrease) in cash
    (3,520 )     51,273  
Cash, beginning of period
    348,267       118,092  
Cash, end of period
  $ 344,747     $ 169,365  
                 
SUPPLEMENTAL CASH FLOW INFORMATION:
               
Income taxes paid (recovered)
  $ 4,625     $ 10,792  
Interest paid
    5,217       5,203  
                 
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 Months Ended March 31, 2012 and 2011

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

Application of Recently Issued Accounting Standard Changes

Intangibles-Goodwill or Other.  In September 2011, the Financial Accounting Standards Board (“FASB”) amended the authoritative guidance for disclosures on Goodwill Impairment.  The amendment allows an entity first to assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis in determining whether it is necessary to perform the two-step goodwill impairment test.  This guidance is effective for periods beginning after December 15, 2011.  The Company implemented this guidance as of January 1, 2012.

Presentation of Comprehensive Income. In June 2011, FASB issued amendments to existing guidance to provide two alternatives for the presentation of comprehensive income. Components of net income and comprehensive income can either be presented within a single, continuous financial statement or be presented in two separate but consecutive financial statements.  The Company has chosen to present the components of net income and comprehensive income in a single, continuous financial statement.  The guidance is effective for reporting periods beginning after December 15, 2011.  The Company implemented this guidance as of January 1, 2012.

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


 
5


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

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 this guidance beginning with the third quarter of 2010.

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 March 31, 2012
 
   
Amortized
   
Unrealized
   
Unrealized
   
Market
 
(Dollars in thousands)
 
Cost
   
Appreciation
   
Depreciation
   
Value
 
Fixed maturity securities
                       
U.S. Treasury securities and obligations of
                       
U.S. government agencies and corporations
  $ 77,872     $ 1,360     $ (646 )   $ 78,586  
Obligations of U.S. states and political subdivisions
    1,445,314       96,989       (304 )     1,541,999  
Corporate securities
    1,250,862       53,499       (8,038 )     1,296,323  
Asset-backed securities
    57,881       1,210       (11 )     59,080  
Mortgage-backed securities
                               
Commercial
    46,524       7,690       (521 )     53,693  
Agency residential
    503,749       15,457       (1,601 )     517,605  
Non-agency residential
    2,951       431       (50 )     3,332  
Foreign government securities
    751,818       53,103       (2,193 )     802,728  
Foreign corporate securities
    780,760       34,553       (10,519 )     804,794  
Total fixed maturity securities
  $ 4,917,731     $ 264,292     $ (23,883 )   $ 5,158,140  
Equity securities
  $ 15     $ -     $ (3 )   $ 12  
 
 
6


   
At December 31, 2011
 
   
Amortized
   
Unrealized
   
Unrealized
   
Market
 
(Dollars in thousands)
 
Cost
   
Appreciation
   
Depreciation
   
Value
 
Fixed maturity securities
                       
U.S. Treasury securities and obligations of
                       
U.S. government agencies and corporations
  $ 77,351     $ 2,475     $ (287 )   $ 79,539  
Obligations of U.S. states and political subdivisions
    1,558,615       102,815       (525 )     1,660,905  
Corporate securities
    1,200,941       45,070       (17,776 )     1,228,235  
Asset-backed securities
    44,351       758       (6 )     45,103  
Mortgage-backed securities
                               
Commercial
    41,953       7,187       (1,266 )     47,874  
Agency residential
    528,946       16,209       (1,762 )     543,393  
Non-agency residential
    24,139       470       (320 )     24,289  
Foreign government securities
    733,814       57,437       (2,602 )     788,649  
Foreign corporate securities
    670,544       29,421       (10,924 )     689,041  
Total fixed maturity securities
  $ 4,880,654     $ 261,842     $ (35,468 )   $ 5,107,028  
Equity securities
  $ 15     $ -     $ (5 )   $ 10  


The $802,728 thousand of foreign government securities at March 31, 2012 included $75,211 thousand of European sovereign securities.  Approximately 59.7%, 17.3%, 8.5%, 6.5% and 5.8% of European Sovereign Securities represented securities held in the governments of France, the United Kingdom, Netherlands, Austria and Germany, respectively.  No other countries represented more than 5% of the European sovereign securities.  The Company held no sovereign securities of Portugal, Italy, Ireland, Greece or Spain at March 31, 2012.

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


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


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


   
At March 31, 2012
   
At December 31, 2011
 
   
Amortized
   
Market
   
Amortized
   
Market
 
(Dollars in thousands)
 
Cost
   
Value
   
Cost
   
Value
 
Fixed maturity securities – available for sale
                       
     Due in one year or less
  $ 294,575     $ 293,824     $ 224,406     $ 223,507  
     Due after one year through five years
    2,138,150       2,215,318       2,055,299       2,129,437  
     Due after five years through ten years
    948,014       1,005,851       955,253       1,009,893  
     Due after ten years
    925,887       1,009,437       1,006,307       1,083,532  
Asset-backed securities
    57,881       59,080       44,351       45,103  
Mortgage-backed securities
                               
Commercial
    46,524       53,693       41,953       47,874  
Agency residential
    503,749       517,605       528,946       543,393  
Non-agency residential
    2,951       3,332       24,139       24,289  
Total fixed maturity securities
  $ 4,917,731     $ 5,158,140     $ 4,880,654     $ 5,107,028  



 
7



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
 
   
March 31,
 
(Dollars in thousands)
 
2012
   
2011
 
Increase (decrease) during the period between the market value and cost
           
of investments carried at market value, and deferred taxes thereon:
           
Fixed maturity securities
  $ 14,055     $ (16,938 )
Fixed maturity securities, other-than-temporary impairment
    (20 )     20  
Equity securities
    2       -  
Other invested assets
    -       1,435  
Change in unrealized  appreciation (depreciation), pre-tax
    14,037       (15,483 )
Deferred tax benefit (expense)
    (4,920 )     5,426  
Deferred tax benefit (expense), other-than-temporary impairment
    7       (7 )
Change in unrealized appreciation (depreciation),
               
net of deferred taxes, included in stockholder's equity
  $ 9,124     $ (10,064 )


The Company frequently reviews all of its fixed maturity, available for sale securities for declines in market value and focuses its attention on securities whose fair value has fallen below 80% of their amortized cost at the time of review.  The Company then assesses whether the decline in value is temporary or other-than-temporary.  In making its assessment, the Company evaluates the current market and interest rate environment as well as specific issuer information.  Generally, a change in a security’s value caused by a change in the market, interest rate or foreign exchange environment does not constitute an other-than-temporary impairment, but rather a temporary decline in market value.  Temporary declines in market value are recorded as unrealized losses in accumulated other comprehensive income (loss).  If the Company determines that the decline is other-than-temporary and the Company does not have the intent to sell the security; and it is more likely than not that the Company will not have to sell the security before recovery of its cost basis, the carrying value of the investment is written down to fair value.  The fair value adjustment that is credit or foreign exchange related is recorded in net realized capital gains (losses) in the Company’s consolidated statements of operations and comprehensive income (loss). The fair value adjustment that is non-credit related is recorded as a component of other comprehensive income (loss), net of tax, and is included in accumulated other comprehensive income (loss) in the Company’s consolidated balance sheets.  The Company’s assessments are based on the issuers current and expected future financial position, timeliness with respect to interest and/or principal payments, speed of repayments and any applicable credit enhancements or breakeven constant default rates on mortgage-backed and asset-backed securities, as well as relevant information provided by rating agencies, investment advisors and analysts.

Retrospective adjustments are employed to recalculate the values of asset-backed securities. All of the Company’s asset-backed and mortgage-backed securities have a pass-through structure. Each acquisition lot is reviewed to recalculate the effective yield. The recalculated effective yield is used to derive a book value as if the new yield were applied at the time of acquisition. Outstanding principal factors from the time of acquisition to the adjustment date are used to calculate the prepayment history for all applicable securities. Conditional prepayment rates, computed with life to date factor histories and weighted average maturities, are used in the calculation of projected prepayments for pass-through security types.


 
8



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


   
Duration of Unrealized Loss at March 31, 2012 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
  $ 17,409     $ (129 )   $ 6,169     $ (517 )   $ 23,578     $ (646 )
Obligations of U.S. states and political subdivisions
    -       -       5,726       (304 )     5,726       (304 )
Corporate securities
    153,863       (1,918 )     91,635       (6,120 )     245,498       (8,038 )
Asset-backed securities
    2,762       (11 )     -       -       2,762       (11 )
Mortgage-backed securities
                                               
Commercial
    10,096       (521 )     -       -       10,096       (521 )
Agency residential
    183,417       (1,548 )     6,644       (53 )     190,061       (1,601 )
Non-agency residential
    -       -       582       (50 )     582       (50 )
Foreign government securities
    8,336       (72 )     30,185       (2,121 )     38,521       (2,193 )
Foreign corporate securities
    76,032       (656 )     108,967       (9,863 )     184,999       (10,519 )
Total fixed maturity securities
  $ 451,915     $ (4,855 )   $ 249,908     $ (19,028 )   $ 701,823     $ (23,883 )
Equity securities
    -       -       12       (3 )     12       (3 )
Total
  $ 451,915     $ (4,855 )   $ 249,920     $ (19,031 )   $ 701,835     $ (23,886 )
 
   
Duration of Unrealized Loss at March 31, 2012 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
  $ 1,750     $ (7 )   $ 30,299     $ (5,375 )   $ 32,049     $ (5,382 )
Due in one year through five years
    136,652       (1,522 )     141,659       (10,591 )     278,311       (12,113 )
Due in five years through ten years
    107,716       (1,181 )     57,781       (2,056 )     165,497       (3,237 )
Due after ten years
    9,522       (65 )     12,943       (903 )     22,465       (968 )
Asset-backed securities
    2,762       (11 )     -       -       2,762       (11 )
Mortgage-backed securities
    193,513       (2,069 )     7,226       (103 )     200,739       (2,172 )
Total fixed maturity securities
  $ 451,915     $ (4,855 )   $ 249,908     $ (19,028 )   $ 701,823     $ (23,883 )


The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at March 31, 2012 were $701,835 thousand and $23,886 thousand, respectively.  There were no unrealized losses on a single issuer that exceeded 0.04% of the market value of the fixed maturity securities at March 31, 2012.  In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector.  The $4,855 thousand of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for less than one year were generally comprised of domestic and foreign corporate securities as well as commercial and agency residential mortgage-backed securities.  Of these unrealized losses, $2,952 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating organization.  The $19,028 thousand of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year related primarily to domestic and foreign corporate securities as well as foreign government securities.  Of these unrealized losses, $16,676 thousand were 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, with the majority representing a large number of short duration, floating interest rate bank loan securities.  The gross unrealized depreciation for mortgage-backed securities included $50 thousand related to sub-prime and alt-A loans.  In all instances, there were no projected cash flow shortfalls to recover the full book value of the investments and the related interest obligations.  The mortgage-backed securities still have excess credit coverage and are current on interest and principal payments.
 
 
 
9


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

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


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


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

 
investment grade securities with unrealized losses were mainly comprised of corporate securities, with the majority representing a large number of short duration, floating interest rate bank loan securities.  The gross unrealized depreciation for mortgage-backed securities included $56 thousand related to sub-prime and alt-A loans.  In all instances, there were no projected cash flow shortfalls to recover the full book value of the investments and the related interest obligations.  The mortgage-backed securities still have excess credit coverage and are current on interest and principal payments.

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

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


   
Three Months Ended
 
   
March 31,
 
(Dollars in thousands)
 
2012
   
2011
 
Fixed maturity securities
  $ 54,821     $ 60,619  
Equity securities
    10,305       5,172  
Short-term investments and cash
    128       207  
Other invested assets
               
Limited partnerships
    11,612       18,415  
Dividends from Parent's shares
    4,666       4,648  
Other
    1,518       597  
Total gross investment income
    83,050       89,658  
Interest debited (credited) and other investment expense
    (1,808 )     (2,526 )
Total net investment income
  $ 81,242     $ 87,132  


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

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


 
11



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


   
Three Months Ended
 
   
March 31,
 
(Dollars in thousands)
 
2012
   
2011
 
Fixed maturity securities, market value:
           
Other-than-temporary impairments
  $ (5,674 )   $ (13,611 )
Gains (losses) from sales
    1,501       (12,310 )
Fixed maturity securities, fair value:
               
Gain (losses) from sales
    5,207       (1,515 )
Gains (losses) from fair value adjustments
    3,031       (3,483 )
Equity securities, market value:
               
Gains (losses) from sales
    -       37  
Equity securities, fair value:
               
Gains (losses) from sales
    22,317       1,872  
Gains (losses) from fair value adjustments
    67,820       38,130  
Other invested assets, fair value:
               
Gains (losses) from fair value adjustments
    81,939       31,355  
Short-term investment gains (losses)
    -       1  
Total net realized capital gains (losses)
  $ 176,141     $ 40,476  


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

The proceeds and split between gross gains and losses, from sales of fixed maturity and equity securities, are presented in the table below for the periods indicated:


   
Three Months Ended
 
   
March 31,
 
(Dollars in thousands)
 
2012
   
2011
 
Proceeds from sales of fixed maturity securities
  $ 143,417     $ 549,673  
Gross gains from sales
    8,988       14,266  
Gross losses from sales
    (2,280 )     (28,091 )
                 
Proceeds from sales of equity secuities
  $ 239,540     $ 79,792  
Gross gains from sales
    26,826       2,380  
Gross losses from sales
    (4,509 )     (471 )



 
12



4.  FAIR VALUE

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

In limited instances where prices are not provided by pricing services or in rare instances when a manager may not agree with the pricing service, price quotes on a non-binding basis are obtained from investment brokers.  The investment asset managers do not make any changes to prices received from either the pricing services or the investment brokers.  In addition, the investment asset managers have procedures in place to review the reasonableness of the prices from the service providers and may request verification of the prices.  In addition, the Company continually performs analytical reviews of price changes and tests the prices on a random basis to an independent pricing source.   No material variances were noted during these price validation procedures.  In limited situations, where financial markets are inactive or illiquid, the Company may use its own assumptions about future cash flows and risk-adjusted discount rates to determine fair value.  The Company made no such adjustments at March 31, 2012 and 2011.

The Company internally manages a small public equity portfolio which had a fair value at March 31, 2012 of $43,756 thousand and all prices were obtained from publically published sources.

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

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

As of March 31, 2012 and December 31, 2011, all Level 3 fixed maturity securities, were priced using single non-binding broker quotes since prices for these securities were not provided by normal pricing service companies.  The single broker quotes are provided by market makers or broker-dealers who are recognized as market participants in the markets in which they are providing the quotes.  The prices received from brokers are reviewed for reasonableness by our asset managers and management.

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


 
13



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


         
Fair Value Measurement Using:
 
         
Quoted Prices
             
         
in Active
   
Significant
       
         
Markets for
   
Other
   
Significant
 
         
Identical
   
Observable
   
Unobservable
 
         
Assets
   
Inputs
   
Inputs
 
(Dollars in thousands)
 
March 31, 2012
 
(Level 1)
   
(Level 2)
   
(Level 3)
 
Assets:
                       
Fixed maturities, market value
                       
U.S. Treasury securities and obligations of
                       
U.S. government agencies and corporations
  $ 78,586     $ -     $ 78,586     $ -  
Obligations of U.S. States and political subdivisions
    1,541,999       -       1,541,999       -  
Corporate securities
    1,296,323       -       1,296,323       -  
Asset-backed securities
    59,080       -       46,324       12,756  
Mortgage-backed securities
                               
Commercial
    53,693       -       53,693       -  
Agency residential
    517,605       -       517,605       -  
Non-agency residential
    3,332       -       3,326       6  
Foreign government securities
    802,728       -       802,728       -  
Foreign corporate securities
    804,794       -       799,675       5,119  
Total fixed maturities, market value
    5,158,140       -       5,140,259       17,881  
                                 
Fixed maturities, fair value
    64,936       -       64,936       -  
Equity securities, market value
    12       12       -       -  
Equity securities, fair value
    1,163,616       1,040,663       122,953       -  
Other invested assets, fair value
    899,292       899,292       -       -  


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


 
14



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


         
Fair Value Measurement Using:
 
         
Quoted Prices
             
         
in Active
   
Significant
       
         
Markets for
   
Other
   
Significant
 
         
Identical
   
Observable
   
Unobservable
 
         
Assets
   
Inputs
   
Inputs
 
(Dollars in thousands)
 
December 31, 2011
 
(Level 1)
   
(Level 2)
   
(Level 3)
 
Assets:
                       
Fixed maturities, market value
                       
U.S. Treasury securities and obligations of
                       
U.S. government agencies and corporations
  $ 79,539     $ -     $ 79,539     $ -  
Obligations of U.S. States and political subdivisions
    1,660,905       -       1,660,905       -  
Corporate securities
    1,228,235       -       1,228,235       -  
Asset-backed securities
    45,103       -       29,057       16,046  
Mortgage-backed securities
                               
Commercial
    47,874       -       47,874       -  
Agency residential
    543,393       -       543,393       -  
Non-agency residential
    24,289       -       24,282       7  
Foreign government securities
    788,649       -       788,649       -  
Foreign corporate securities
    689,041       -       686,505       2,536  
Total fixed maturities, market value
    5,107,028       -       5,088,439       18,589  
                                 
Fixed maturities, fair value
    113,606       -       113,606       -  
Equity securities, market value
    10       10       -       -  
Equity securities, fair value
    1,207,053       1,090,959       116,094       -  
Other invested assets, fair value
    817,352       817,352       -       -  


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


   
Three Months Ended March 31, 2012
   
Three Months Ended March 31, 2011
 
   
Asset-backed
   
Foreign
   
Non-agency
         
Asset-backed
   
Foreign
   
Non-agency
       
(Dollars in thousands)
 
Securities
   
Corporate
   
RMBS
   
Total
   
Securities
   
Corporate
   
RMBS
   
Total
 
Beginning balance
  $ 16,046     $ 2,536     $ 7     $ 18,589     $ 961     $ 3,635     $ 458     $ 5,054  
Total gains or (losses) (realized/unrealized)
                                                               
Included in earnings (or changes in net assets)
    55       (3 )     1       53       -       -       21       21  
Included in other comprehensive income (loss)
    332       125       (1 )     456       (63 )     -       -       (63 )
Purchases, issuances and settlements
    2,675       2,461       (1 )     5,135       138       -       (31 )     107  
Transfers in and/or (out) of Level 3
    (6,352 )     -       -       (6,352 )     5,237       (3,116 )     -       2,121  
Ending balance
  $ 12,756     $ 5,119     $ 6     $ 17,881     $ 6,273     $ 519     $ 448     $ 7,240  
                                                                 
The amount of total gains or losses for the period included
                                                               
in earnings (or changes in net assets) attributable to the
                                                               
change in unrealized gains or losses relating to assets
                                                               
still held at the reporting date
  $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -  
                                                                 
(Some amounts may not reconcile due to rounding.)
                                                               



 
15



5.  CAPITAL TRANSACTIONS

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

6.  CONTINGENCIES

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

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

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


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


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


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



 
16



7.  OTHER COMPREHENSIVE INCOME (LOSS)

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


   
Three Months Ended
 
   
March 31,
 
(Dollars in thousands)
 
2012
   
2011
 
Unrealized appreciation (depreciation) ("URA(D)") on
           
securities arising during the period
           
URA(D) of investments - temporary
  $ 14,057     $ (15,503 )
URA(D) of investments - non-credit OTTI
    (20 )     20  
Tax benefit (expense) from URA(D) arising during the period
    (4,913 )     5,419  
Total URA(D) on securities arising during the period, net of tax
    9,124       (10,064 )
                 
Foreign currency translation adjustments
    8,149       15,900  
Tax benefit (expense) from foreign currency translation
    (2,852 )     (5,565 )
Net foreign currency translation adjustments
    5,297       10,335  
                 
Pension adjustments
    1,513       1,148  
Tax benefit (expense) on pension
    (529 )     (402 )
Net pension adjustments
    984       746  
                 
Other comprehensive income (loss), net of tax
  $ 15,405     $ 1,017  


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


   
At March 31,
   
At December 31,
 
(Dollars in thousands)
 
2012
   
2011
 
URA(D) on securities, net of deferred taxes
           
Temporary
  $ 155,864     $ 146,727  
Non-credit, OTTI
    400       413  
Total unrealized appreciation (depreciation) on investments, net of deferred taxes
    156,264       147,140  
Foreign currency translation adjustments, net of deferred taxes
    88,482       83,185  
Pension adjustments, net of deferred taxes
    (54,551 )     (55,535 )
Accumulated other comprehensive income (loss)
  $ 190,195     $ 174,790  


8.  CREDIT FACILITY

Effective August 15, 2011, the Company entered into a new three year, $150,000 thousand unsecured revolving credit facility with a syndicate of lenders, replacing the August 23, 2006 five year senior revolving credit facility.  Both the August 15, 2011 and August 23, 2006 revolving credit agreements, which have similar terms, are referred to as the “Holdings Credit Facility”.  Citibank N.A. is the administrative agent for the Holdings Credit Facility.  The Holdings Credit Facility may be used for liquidity and general corporate purposes.  The Holdings Credit Facility provides for the borrowing of up to $150,000 thousand with interest at a rate selected by Holdings equal to either, (1) the Base Rate (as defined below) or (2) a periodic fixed rate equal to the Eurodollar Rate plus an applicable margin.  The Base Rate means a fluctuating interest rate per annum in effect from time to time to be equal to the higher of (a) the rate of interest publicly announced by Citibank as its base rate, (b) 0.5% per annum above the Federal Funds Rate or (c) 1% above the one month London Interbank Offered Rate (“LIBOR”), in each case plus the applicable margin.  The amount of margin and the fees payable for the Holdings Credit Facility depends upon Holdings’ senior unsecured debt rating.

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

 
17


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


(Dollars in thousands)
 
At March 31, 2012
 
At December 31, 2011
Bank
 
Commitment
   
In Use
 
Date of Loan
Maturity/Expiry Date
 
Commitment
   
In Use
 
Date of Loan
Maturity/Expiry Date
Citibank Holdings Credit Facility
  $ 150,000     $ -         $ 150,000     $ -      
Total revolving credit borrowings
            -                   -      
Total letters of credit
            5,020    
12/31/2012
            5,020    
12/31/2012
                                         
Total Citibank Holdings Credit Facility
  $ 150,000     $ 5,020         $ 150,000     $ 5,020      


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


   
Three Months Ended
 
   
March 31,
 
(Dollars in thousands)
 
2012
   
2011
 
Credit facility fees incurred
  $ 167     $ 90  


9.  TRUST AGREEMENTS

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

10.  SENIOR NOTES

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


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


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


   
Three Months Ended
 
   
March 31,
 
(Dollars in thousands)
 
2012
   
2011
 
Interest expense incurred
  $ 3,387     $ 3,386  



 
18


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, but due to limited trading activity, these subordinated notes are considered Level 2 in the fair value hierarchy.


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


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

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

On March 19, 2009, Group announced the commencement of a cash tender offer for any and all of the 6.60% fixed to floating rate long term subordinated notes.  Upon expiration of the tender offer, the Company had reduced its outstanding debt by $161,441 thousand.

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


   
Three Months Ended
 
   
March 31,
 
(Dollars in thousands)
 
2012
   
2011
 
Interest expense incurred
  $ 3,937     $ 3,937  



 
19


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 owned finance subsidiary of Holdings.  Fair value is primarily based on the quoted market price of the related trust preferred securities, and as such, these securities are considered Level 2 under the fair value hierarchy.


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


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

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


   
Three Months Ended
 
   
March 31,
 
(Dollars in thousands)
 
2012
   
2011
 
Interest expense incurred
  $ 5,113     $ 5,113  


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

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

There are certain regulatory and contractual restrictions on the ability of Holdings’ operating subsidiaries to transfer funds to Holdings in the form of cash dividends, loans or advances.  The insurance laws of the State of Delaware, where Holdings’ direct insurance subsidiaries are domiciled, require regulatory approval before those subsidiaries can pay dividends or make loans or advances to Holdings that exceed certain statutory thresholds.  In addition, the terms of Holdings Credit Facility (discussed in Note 8) require Everest Re, Holdings’ principal insurance subsidiary, to maintain a certain statutory surplus level as measured at the end of each fiscal year.  At December 31, 2011, $2,108,692 thousand of the $2,763,171 thousand in net assets of Holdings’ consolidated subsidiaries were subject to the foregoing regulatory restrictions.


 
20


13.  SEGMENT REPORTING

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

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

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

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

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


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

 
21


 
   
Three Months Ended
 
Insurance
 
March 31,
 
(Dollars in thousands)
 
2012
   
2011
 
Gross written premiums
  $ 207,249     $ 271,461  
Net written premiums
    103,825       136,890  
                 
Premiums earned
  $ 102,051     $ 117,192  
Incurred losses and LAE
    76,008       91,623  
Commission and brokerage
    10,552       7,638  
Other underwriting expenses
    22,020       21,872  
Underwriting gain (loss)
  $ (6,529 )   $ (3,941 )
 
 
 
   
Three Months Ended
 
International
 
March 31,
 
(Dollars in thousands)
 
2012
   
2011
 
Gross written premiums
  $ 280,461     $ 308,847  
Net written premiums
    136,329       158,124  
                 
Premiums earned
  $ 147,793     $ 166,516  
Incurred losses and LAE
    64,640       318,826  
Commission and brokerage
    31,762       37,121  
Other underwriting expenses
    6,740       6,439  
Underwriting gain (loss)
  $ 44,651     $ (195,870 )


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


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


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


   
Three Months Ended
 
   
March 31,
 
(Dollars in thousands)
 
2012
   
2011
 
Canada
  $ 47,440     $ 43,952  


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


 
22


14.  RELATED-PARTY TRANSACTIONS

Parent

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


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


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


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


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


   
Three Months Ended
 
   
March 31,
 
(Dollars in thousands)
 
2012
   
2011
 
Dividends received
  $ 4,666     $ 4,648  


Outside Directors

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

Affiliated Companies

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

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


 
23


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


   
Three Months Ended
 
   
March 31,
 
(Dollars in thousands)
 
2012
   
2011
 
Expenses incurred
  $ 18,134     $ 15,077  


Affiliates

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

 
24


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


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


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


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


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


   
Three Months Ended
 
Bermuda Re
 
March 31,
 
(Dollars in thousands)
 
2012
   
2011
 
Ceded written premiums
  $ 399,068     $ 380,808  
Ceded earned premiums
    398,032       380,047  
Ceded losses and LAE (a)
    256,375       490,713  
 
   
Three Months Ended
 
Everest International
 
March 31,
 
(Dollars in thousands)
 
2012
   
2011
 
Ceded written premiums
  $ 255     $ 464  
Ceded earned premiums
    1,092       9,605  
Ceded losses and LAE
    (2,099 )     2,918  
 
   
Three Months Ended
 
Everest Canada
 
March 31,
 
(Dollars in thousands)
 
2012
   
2011
 
Assumed written premiums
  $ 3,167     $ -  
Assumed earned premiums
    3,852       -  
Assumed losses and LAE
    2,311       -  
 
(a) Ceded losses and LAE include the Mt. McKinley loss portfolio transfer that constitutes losses ceded under retroactive reinsurance and therefore, in accordance with FASB guidance, a deferred gain on retroactive reinsurance is reflected in other expenses on the consolidated statements of operations and comprehensive income (loss).

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

 
25



15. INCOME TAXES

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

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 the interim year-to-date pre-tax income to determine the income tax expense or benefit for the year-to-date period.  The tax expense or benefit for a quarter represents the difference between the year-to-date tax expense or benefit for the current year-to-date period less such amount for the immediately preceding year-to-date period.  Management considers the impact of all known events in its estimation of the Company’s annual pre-tax income and effective tax rate.

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

16.  ACQUISITIONS

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

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

17. SUBSEQUENT EVENTS

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


 
26


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

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

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

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

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

 
27


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
 
   
March 31,
   
Increase/
 
(Dollars in millions)
 
2012
   
2011
   
(Decrease)
 
Gross written premiums
  $ 857.2     $ 886.4       -3.3 %
Net written premiums
    427.4       460.1       -7.1 %
                         
REVENUES:
                       
Premiums earned
  $ 433.7     $ 459.4       -5.6 %
Net investment income
    81.2       87.1       -6.8 %
Net realized capital gains (losses)
    176.1       40.5    
NM
Other income (expense)
    (6.3 )     -    
NM
Total revenues
    684.8       587.0       16.7 %
                         
CLAIMS AND EXPENSES:
                       
Incurred losses and loss adjustment expenses
    250.4       553.0       -54.7 %
Commission, brokerage, taxes and fees
    87.5       88.5       -1.2 %
Other underwriting expenses
    39.5       38.2       3.4 %
Corporate expense
    1.6       1.2       31.6 %
Interest, fee and bond issue cost amortization expense
    12.7       12.7       0.1 %
Total claims and expenses
    391.7       693.6       -43.5 %
                         
INCOME (LOSS) BEFORE TAXES
    293.2       (106.6 )  
NM
Income tax expense (benefit)
    78.5       (9.1 )  
NM
NET INCOME (LOSS)
  $ 214.7     $ (97.5 )  
NM
                         
RATIOS:
                 
Point Change
 
Loss ratio
    57.7 %     120.4 %     (62.7 )
Commission and brokerage ratio
    20.2 %     19.3 %     0.9  
Other underwriting expense ratio
    9.1 %     8.3 %     0.8  
Combined ratio
    87.0 %     148.0 %     (61.0 )
                         
                         
   
At
   
At
   
Percentage
 
   
March 31,
   
December 31,
   
Increase/
 
(Dollars in millions)
    2012       2011    
(Decrease)
 
Balance sheet data:
                       
Total investments and cash
  $ 8,673.3     $ 8,396.3       3.3 %
Total assets
    14,526.4       14,349.2       1.2 %
Loss and loss adjustment expense reserves
    8,169.2       8,290.6       -1.5 %
Total debt
    818.1       818.1       0.0 %
Total liabilities
    11,353.2       11,407.8       -0.5 %
Stockholder's equity
    3,173.1       2,941.4       7.9 %
                         
(NM, not meaningful)
                       
(Some amounts may not reconcile due to rounding.)
                       


Revenues.
Premiums.  Gross written premiums decreased by $29.2 million, or 3.3%, for the three months ended March 31, 2012 compared to the three months ended March 31, 2011, reflecting a $64.2 million decrease in our insurance business, partially offset by a $35.0 million increase in our reinsurance business.  The decrease in insurance premiums was primarily due to the termination and runoff of several large casualty programs and a shift in the seasonality of reporting crop business that will be reflected in subsequent quarters, partially offset by growth in primary medical stop loss insurance. The increase in reinsurance premiums was due to new property business and higher renewal rates, particularly for catastrophe exposed risks, partially offset by lower reinstatement premiums in the current quarter.  Net written premiums decreased by $32.7 million, or 7.1%, for the three months ended March 31, 2012 compared to the three months ended March 31, 2011.  The decrease in net written premiums is primarily attributable to the decline in gross written premiums.  
 
 
28

 
Premiums earned decreased $25.7 million, or 5.6%, for the three months ended March 31, 2012 compared to the three month ended March 31, 2011.  The change in net premiums earned is comparable with the decrease in net written premiums.

Net Investment Income.  Net investment income decreased $5.9 million, or 6.8%, to $81.2 million for the three months ended March 31, 2012 compared with net investment income of $87.1 million for the three months ended March 31, 2011, primarily as a result of a $6.8 million decrease in investment income from our limited partnership investments.  Net pre-tax investment income, as a percentage of average invested assets, was 4.0% for the three months ended March 31, 2012 compared to 4.4% for the three months ended March 31, 2011.  The variance in this yield was primarily the result of fluctuations in our limited partnership income and to a lesser extent, lower reinvestment rates for the fixed income portfolio.

Net Realized Capital Gains (Losses).  Net realized capital gains were $176.1 million and $40.5 million for the three months ended March 31, 2012 and 2011, respectively.  Of the $176.1 million, there were $152.8 million of gains from fair value re-measurements and $29.0 million of net realized capital gains from sales on our fixed maturity and equity securities, partially offset by $5.7 million of other-than-temporary impairments on our available for sale fixed maturity securities.  The net realized capital gains of $40.5 million for the three months ended March 31, 2011 were the result of $66.0 million of gains of fair value re-measurements, partially offset by $13.6 million of other-than-temporary impairments and $11.9 million of net realized capital losses from sales on our fixed maturity and equity securities.

Other Income (Expense).  We recorded other expense of $6.3 million and other income of $0.0 million for the three months ended March 31, 2012 and 2011, respectively.  The changes were primarily due to fluctuations in the amortization of deferred gains on retroactive reinsurance agreements with affiliates and fluctuations in currency exchange rates for the corresponding periods.

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


   
Three Months Ended March 31,
   
Current
   
Ratio %/
 
Prior
   
Ratio %/
 
Total
   
Ratio %/
(Dollars in millions)
 
Year
   
Pt Change
 
Years
   
Pt Change
 
Incurred
   
Pt Change
2012
                                         
Attritional (a)
  $ 235.4       54.2 %     $ 1.8       0.4 %     $ 237.2       54.6 %  
Catastrophes
    15.0       3.5 %       (1.9 )     -0.4 %       13.1       3.1 %  
A&E
    -       0.0 %       0.1       0.0 %       0.1       0.0 %  
Total
  $ 250.4       57.7 %     $ 0.0       0.0 %     $ 250.4       57.7 %  
                                                       
2011
                                                     
Attritional (a)
  $ 256.5       55.9 %     $ (10.5 )     -2.3 %     $ 246.0       53.6 %  
Catastrophes
    304.3       66.2 %       2.7       0.6 %       307.0       66.8 %  
A&E
    -       0.0 %       -       0.0 %       -       0.0 %  
Total
  $ 560.8       122.1 %     $ (7.8 )     -1.7 %     $ 553.0       120.4 %  
                                                       
Variance 2012/2011
                                                     
Attritional (a)
  $ (21.1 )     (1.7 )
pts
  $ 12.3       2.7  
pts
  $ (8.8 )     1.0  
pts
Catastrophes
    (289.3 )     (62.7 )
pts
    (4.6 )     (1.0 )
pts
    (293.9 )     (63.7 )
pts
A&E
    -       -  
pts
    0.1       -  
pts
    0.1       -  
pts
Total
  $ (310.4 )     (64.4 )
pts
  $ 7.8       1.7  
pts
  $ (302.6 )     (62.7 )
pts
                                                       
(a) Attritional losses exclude catastrophe and Asbestos and Environmental ("A&E") losses.
                                   
(Some amounts may not reconcile due to rounding.)
                             


Incurred losses and LAE decreased by $302.6 million, or 54.7%, for the three months ended March 31, 2012 compared to the three months ended March 31, 2011.  Of the $302.6 million decrease, current year catastrophe losses represented $289.3 million, or 62.7 points, period over period, and attritional losses decreased $8.8 million due, in part, to lower earned premium in the current quarter and by improved margins, particularly on catastrophe exposed business, which generated lower attritional losses for the current quarter.

 
29


Commission, Brokerage, Taxes and Fees.  Commission, brokerage, taxes and fees decreased by $1.0 million, or 1.2%, for the three months ended March 31, 2012 compared to the same period in 2011.  The variance was primarily the result of lower premiums earned, fewer deferred expenses and fluctuations in the mix of business.

Other Underwriting Expenses.  Other underwriting expenses increased slightly to $39.5 million from $38.2 million for the three months ended March 31, 2012 and 2011, respectively, due to higher employee benefit plan expenses.

Corporate Expenses.  Corporate expenses, which are general operating expenses that are not allocated to segments, were $1.6 million and $1.2 million for the three months ended March 31, 2012 and 2011, respectively.

Interest, Fees and Bond Issue Cost Amortization Expense. Interest, fees and other bond amortization expense was $12.7 million for the three months ended March 31, 2012 and 2011.

Income Tax Expense (Benefit).  We had an income tax expense of $78.5 million and an income tax benefit of $9.1 million for the three months ended March 31, 2012 and 2011, respectively.  Our income tax is primarily a function of the statutory tax rates coupled with the impact from tax-preferenced investment income.  Variations in our effective tax rate generally result from changes in the relative levels of pre-tax income.  The increase in tax year over year was primarily attributable to the impact on 2011 taxable income from the previously mentioned catastrophe losses partially mitigated by a tax reduction in the first quarter of 2012 of $12.4 million due to correction of understatement in the deferred tax asset account.

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

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

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

Consolidated Investment Results

Net Investment Income.
Net investment income decreased 6.8% to $81.2 million for the three months ended March 31, 2012 compared to $87.1 million for the three months ended March 31, 2011, primarily due to a decrease in income from our limited partnership investments and a decline in income from our fixed maturities, reflective of reducing our municipal bond exposures and declining reinvestment rates.  These decreases were partially offset by increased dividend income from equities due to our expanded public equity portfolio and emerging market debt mutual funds.

 
30



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


   
Three Months Ended
 
   
March 31,
 
(Dollars in millions)
 
2012
   
2011
 
Fixed maturities
  $ 54.8     $ 60.6  
Equity securities
    10.3       5.2  
Short-term investments and cash
    0.1       0.2  
Other invested assets
               
Limited partnerships
    11.6       18.4  
Dividends from Parent's shares
    4.7       4.6  
Other
    1.5       0.6  
Total gross investment income
    83.1       89.7  
Interest debited (credited) and other expense
    (1.8 )     (2.5 )
Total net investment income
  $ 81.2     $ 87.1  
(Some amounts may not reconcile due to rounding.)
               


The following tables show a comparison of various investment yields for the periods indicated:
 
 
At
 
At
 
March 31,
 
December 31,
 
2012
 
2011
Imbedded pre-tax yield of cash and invested assets
3.5%
 
3.6%
Imbedded after-tax yield of cash and invested assets
2.6%
 
2.7%
 
 
Three Months Ended
 
March 31,
 
2012
 
2011
Annualized pre-tax yield on average cash and invested assets
4.0%
 
4.4%
Annualized after-tax yield on average cash and invested assets
2.9%
 
3.4%


 
31


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 March 31,
 
(Dollars in millions)
 
2012
   
2011
   
Variance
 
Gains (losses) from sales:
                 
Fixed maturity securities, market value
                 
Gains
  $ 3.6     $ 14.1     $ (10.5 )
Losses
    (2.1 )     (26.4 )     24.3  
Total
    1.5       (12.3 )     13.8  
                         
Fixed maturity securities, fair value
                       
Gains
    5.4       0.2       5.2  
Losses
    (0.2 )     (1.7 )     1.5  
Total
    5.2       (1.5 )     6.7  
                         
Equity securities, market value
                       
Gains
    -       0.2       (0.2 )
Losses
    -       (0.2 )     0.2  
Total
    -       -       -  
                         
Equity securities, fair value
                       
Gains
    26.8       2.2       24.6  
Losses
    (4.5 )     (0.3 )     (4.2 )
Total
    22.3       1.9       20.4  
                         
Total net realized gains (losses) from sales
                       
Gains
    35.8       16.7       19.1  
Losses
    (6.8 )     (28.6 )     21.8  
Total
    29.0       (11.9 )     40.9  
                         
Other-than-temporary impairments:
    (5.7 )     (13.6 )     7.9  
                         
Gains (losses) from fair value adjustments:
                       
Fixed maturities, fair value
    3.0       (3.5 )     6.5  
Equity securities, fair value
    67.8       38.1       29.7  
Other invested assets, fair value
    81.9       31.4       50.5  
Total
    152.8       66.0       86.8  
                         
Total net realized capital gains (losses)
  $ 176.1     $ 40.5     $ 135.6  
                         
(Some amounts may not reconcile due to rounding.)
                       


Net realized capital gains were $176.1 million and $40.5 for the three months ended March 31, 2012 and 2011, respectively.  For the three months ended March 31, 2012, we recorded $152.8 million of gains due to fair value re-measurements on fixed maturity and equity securities and other invested assets and $29.0 million of net realized capital gains from sales of fixed maturity and equity securities, partially offset by $5.7 million of other-than-temporary impairments on fixed maturity securities.  For the three months ended March 31, 2011, we recorded $66.0 million in gains due to fair value re-measurements on fixed maturity and equity securities and other invested assets, partially offset by $13.6 million of other-than-temporary impairments on fixed maturity securities and $11.9 million of net realized capital losses from sales of fixed maturity and equity securities.  The gains and losses on the sales of fixed maturity securities during the first quarter of 2011 included the impact of selling part of our municipal bond portfolio as credit concerns arose in this market sector.


 
32


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

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

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

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

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


 
33


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

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


   
Three Months Ended March 31,
 
(Dollars in millions)
 
2012
   
2011
   
Variance
   
% Change
 
Gross written premiums
  $ 369.5     $ 306.1     $ 63.4       20.7 %
Net written premiums
    187.2       165.1       22.2       13.4 %
                                 
Premiums earned
  $ 183.9     $ 175.7     $ 8.2       4.7 %
Incurred losses and LAE
    109.7       142.6       (32.8 )     -23.0 %
Commission and brokerage
    45.2       43.8       1.4       3.3 %
Other underwriting expenses
    10.8       9.9       0.8       8.6 %
Underwriting gain (loss)
  $ 18.2     $ (20.6 )   $ 38.7       -188.5 %
                                 
                           
Point Chg
 
Loss ratio
    59.7 %     81.2 %             (21.5 )
Commission and brokerage ratio
    24.6 %     24.9 %             (0.3 )
Other underwriting expense ratio
    5.8 %     5.6 %             0.2  
Combined ratio
    90.1 %     111.7 %             (21.6 )
                                 
(Some amounts may not reconcile due to rounding.)
                               


Premiums. Gross written premiums increased by 20.7% to $369.5 million for the three months ended March 31, 2012 from $306.1 million for the three months ended March 31, 2011, primarily due to increased reinsurance premiums for treaty property business arising from new business and rate increases on renewals, particularly for catastrophe exposed risks, partially offset by the portfolio shift from pro rata to excess of loss contracts and lower reinstatement premiums.  Net written premiums increased 13.4% to $187.2 million for the three months ended March 31, 2012 compared to $165.1 million for the three months ended March 31, 2011, which reflects the increase in gross written premiums for the quarter, partially offset by increased cessions under the affiliated quota share agreement.  Premiums earned increased 4.7% to $183.9 million for the three months ended March 31, 2012 compared to $175.7 million for the three months ended March 31, 2011.  The change in premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.  


 
34



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


   
Three Months Ended March 31,
   
Current
   
Ratio %/
 
Prior
   
Ratio %/
 
Total
   
Ratio %/
(Dollars in millions)
 
Year
   
Pt Change
 
Years
   
Pt Change
 
Incurred
   
Pt Change
2012
                                         
Attritional
  $ 94.7       51.5 %     $ 4.3       2.4 %     $ 99.0       53.8 %  
Catastrophes
    15.0       8.2 %       (4.4 )     -2.4 %       10.6       5.8 %  
A&E
    -       0.0 %       0.1       0.1 %       0.1       0.1 %  
Total segment
  $ 109.7       59.7 %     $ -       0.1 %     $ 109.7       59.7 %  
                                                       
2011
                                                     
Attritional
  $ 86.4       49.3 %     $ (2.4 )     -1.4 %     $ 84.0       47.9 %  
Catastrophes
    57.8       32.9 %       0.8       0.4 %       58.6       33.3 %  
A&E
    -       0.0 %       -       0.0 %       -       0.0 %  
Total segment
  $ 144.2       82.2 %     $ (1.6 )     -1.0 %     $ 142.6       81.2 %  
                                                       
Variance 2012/2011
                                                     
Attritional
  $ 8.3       2.2  
pts
  $ 6.7       3.8  
pts
  $ 15.0       6.0  
pts
Catastrophes
    (42.8 )     (24.7 )
pts
    (5.2 )     (2.8 )
pts
    (48.0 )     (27.5 )
pts
A&E
    -       -  
pts
    0.1       0.1  
pts
    0.1       0.1  
pts
Total segment
  $ (34.5 )     (22.5 )
pts
  $ 1.6       1.1  
pts
  $ (32.8 )     (21.5 )
pts
                                                       
(Some amounts may not reconcile due to rounding.)
                                               


Incurred losses were $32.8 million (21.5 points) lower at $109.7 million for the three months ended March 31, 2012 compared to $142.6 million for the three months ended March 31, 2011, primarily as a result of the $42.8 million (24.7 points) decrease in current year catastrophe losses.  Conversely, the current year attritional losses increased $8.3 million (2.2 points), primarily due to the increase in earned premiums and a large marine loss.

Segment Expenses.  Commission and brokerage expenses increased 3.3% to $45.2 million for the three months ended March 31, 2012 compared to $43.8 million for the three months ended March 31, 2011, primarily due to the increase in premiums earned and a lower expense deferral percentage, partially offset by a shift in the mix of business towards excess of loss, which carries a lower commission ratio.  Segment other underwriting expenses increased to $10.8 million for the three months ended March 31, 2012 compared to $9.9 million for the same period in 2011.

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


   
Three Months Ended March 31,
 
(Dollars in millions)
 
2012
   
2011
   
Variance
   
% Change
 
Gross written premiums
  $ 207.2     $ 271.5     $ (64.2 )     -23.7 %
Net written premiums
    103.8       136.9       (33.1 )     -24.2 %
                                 
Premiums earned
  $ 102.1     $ 117.2     $ (15.1 )     -12.9 %
Incurred losses and LAE
    76.0       91.6       (15.6 )     -17.0 %
Commission and brokerage
    10.6       7.6       2.9       38.2 %
Other underwriting expenses
    22.0       21.9       0.1       0.7 %
Underwriting gain (loss)
  $ (6.5 )   $ (3.9 )   $ (2.6 )     65.7 %
                                 
                           
Point Chg
 
Loss ratio
    74.5 %     78.2 %             (3.7 )
Commission and brokerage ratio
    10.3 %     6.5 %             3.8  
Other underwriting expense ratio
    21.6 %     18.7 %             2.9  
Combined ratio
    106.4 %     103.4 %             3.0  
                                 
(Some amounts may not reconcile due to rounding.)
                               


 
35


Premiums.  Gross written premiums decreased by 23.7% to $207.2 million for the three months ended March 31, 2012 compared to $271.5 million for the three months ended March 31, 2011.  This decrease was primarily driven by the termination and runoff of several large casualty programs and lower crop premium due to a shift in the seasonality of reporting this business, partially offset by an increase in A&H primary business.  Net written premiums decreased 24.2% to $103.8 million for the three months ended March 31, 2012 compared to $136.9 million for the same period in 2011 due to the lower gross written premiums.  Premiums earned decreased 12.9% to $102.1 million for the three months ended March 31, 2012 compared to $117.2 million for the three months ended March 31, 2011.  The change in premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.

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


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


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

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


 
36



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


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


Premiums. Gross written premiums decreased by 9.2% to $280.5 million for the three months ended March 31, 2012 compared to $308.8 million for the three months ended March 31, 2011, primarily due to a reduction in proportional property business starting in 2011 and continuing into 2012, particularly in regions recently affected by catastrophe losses.  Net written premiums decreased by 13.8% to $136.3 million for the three months ended March 31, 2012 compared to $158.1 million for the three months ended March 31, 2011, primarily due to a decrease in gross written premiums and a change in our affiliated quota share agreement.  Premiums earned decreased by 11.2% to $147.8 million for the three months ended March 31, 2012 compared to $166.5 million for the three months ended March 31, 2011.   The change in premiums is relatively comparable with the decrease in net written premiums.

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


   
Three Months Ended March 31,
   
Current
   
Ratio %/
 
Prior
   
Ratio %/
 
Total
   
Ratio %/
(Dollars in millions)
 
Year
   
Pt Change
 
Years
   
Pt Change
 
Incurred
   
Pt Change
2012
                                         
Attritional
  $ 65.1       44.0 %     $ (3.0 )     -2.0 %     $ 62.1       42.0 %  
Catastrophes
    -       0.0 %       2.5       1.7 %       2.5       1.7 %  
Total segment
  $ 65.1       44.0 %     $ (0.5 )     -0.3 %     $ 64.6       43.7 %  
                                                       
2011
                                                     
Attritional
  $ 74.2       44.6 %     $ (3.9 )     -2.3 %     $ 70.3       42.3 %  
Catastrophes
    246.5       148.0 %       2.0       1.2 %       248.5       149.2 %  
Total segment
  $ 320.7       192.6 %     $ (1.9 )     -1.1 %     $ 318.8       191.5 %  
                                                       
Variance 2012/2011
                                                     
Attritional
  $ (9.1 )     (0.6 )
pts
  $ 0.9       0.3  
pts
  $ (8.2 )     (0.3 )
pts
Catastrophes
    (246.5 )     (148.0 )
pts
    0.5       0.5  
pts
    (246.0 )     (147.5 )
pts
Total segment
  $ (255.6 )     (148.6 )
pts
  $ 1.4       0.8  
pts
  $ (254.2 )     (147.8 )
pts
                                                       
(Some amounts may not reconcile due to rounding.)
                                               


Incurred losses and LAE decreased 79.7% to $64.6 million for the three months ended March 31, 2012 compared to $318.8 million for the three months ended March 31, 2011.  The decrease was principally due to a $246.5 million (148.0 points) decrease in current year catastrophes.  Current years’ attritional losses decreased by $9.1 million due to a decrease in premiums earned and a shift in mix of business towards property catastrophe and excess of loss business, which generally carries a lower loss ratio.


 
37


Segment Expenses. Commission and brokerage expenses decreased 14.4% to $31.8 million for the three months ended March 31, 2012 compared to $37.1 million for the three months ended March 31, 2011.  These variances were principally due to a decrease in premiums earned, a lower expense deferral percentage and a shift in the mix of business.  Segment other underwriting expenses increased slightly to $6.7 million for the three months ended March 31, 2012 compared to $6.4 million for the three months ended March 31, 2011.

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

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

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

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

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


 
38



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


   
Impact of Interest Rate Shift in Basis Points
 
   
At March 31, 2012
 
(Dollars in millions)
    -200       -100       0       100       200  
Total Market/Fair Value
  $ 6,134.8     $ 6,005.5     $ 5,869.3     $ 5,719.3     $ 5,561.8  
Market/Fair Value Change from Base (%)
    4.5 %     2.3 %     0.0 %     -2.6 %     -5.2 %
Change in Unrealized Appreciation
                                       
After-tax from Base ($)
  $ 172.6     $ 88.5     $ -     $ (97.5 )   $ (199.9 )


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

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

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


   
Impact of Percentage Change in Equity Fair/Market Values
 
   
At March 31, 2012
 
(Dollars in millions)
    -20%     -10%     0%     10%     20%
Fair/Market Value of the Equity Portfolio
  $ 930.9     $ 1,047.3     $ 1,163.6     $ 1,280.0     $ 1,396.4  
After-tax Change in Fair/Market Value
    (151.3 )     (75.6 )     -       75.6       151.3  


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


 
39



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

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

ITEM 4.  CONTROLS AND PROCEDURES

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


PART II

ITEM 1.  LEGAL PROCEEDINGS

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

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



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.  MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.  OTHER INFORMATION

None.

ITEM 6.  EXHIBITS

Exhibit Index:
   
     
Exhibit No.
Description
 
     
   31.1
Section 302 Certification of Joseph V. Taranto
 
     
   31.2
Section 302 Certification of Dominic J. Addesso
 
     
   32.1
Section 906 Certification of Joseph V. Taranto and Dominic J. Addesso
 
     
   101.INS
XBRL Instance Document
 
     
   101.SCH
XBRL Taxonomy Extension Schema
 
     
   101.CAL
XBRL Taxonomy Extension Calculation Linkbase
 
     
   101.DEF
XBRL Taxonomy Extension Definition Linkbase
 
     
   101.LAB
XBRL Taxonomy Extension Labels Linkbase
 
     
   101.PRE
XBRL Taxonomy Extension Presentation Linkbase
 
     

 
41

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