10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 2010 Commission file number: 1-15731

EVEREST RE GROUP, LTD.

(Exact name of registrant as specified in its charter)

Bermuda	98-0365432
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

Wessex House – 2nd Floor

45 Reid Street

PO Box HM 845

Hamilton HM DX, Bermuda

441-295-0006

(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	X	Accelerated filer
Non-accelerated filer		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 November 1, 2010
Common Shares, $0.01 par value	54,982,512

EVEREST RE GROUP, LTD

Table of Contents

Form 10-Q

Page

PART I

FINANCIAL INFORMATION

Item 1.	Financial Statements
	Consolidated Balance Sheets September 30, 2010 (unaudited) and
	December 31, 2009	1
	Consolidated Statements of Operations and Comprehensive Income (Loss) for the
	three and nine months ended September 30, 2010 and 2009 (unaudited)	2
	Consolidated Statements of Changes in Shareholders’ Equity for the three
	and nine months ended September 30, 2010 and 2009 (unaudited)	3
	Consolidated Statements of Cash Flows for the three and nine months ended
	September 30, 2010 and 2009 (unaudited)	4
	Notes to Consolidated Interim Financial Statements (unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and
	Results of Operation	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	57
Item 4.	Controls and Procedures	57

PART II

OTHER INFORMATION

Item 1.	Legal Proceedings	57
Item 1A.	Risk Factors	57
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	58
Item 3.	Defaults Upon Senior Securities	58
Item 4.	Reserved	58
Item 5.	Other Information	58
Item 6.	Exhibits	59

PART I

ITEM 1.  FINANCIAL STATEMENTS

EVEREST RE GROUP, LTD.

CONSOLIDATED BALANCE SHEETS

	September 30,			December 31,
(Dollars and share amounts in thousands, except par value per share)	2010			2009
	(unaudited)
ASSETS:
Fixed maturities - available for sale, at market value	$	13,569,817		$	13,005,949
(amortized cost: 2010, $12,830,837; 2009, $12,614,742)
Fixed maturities - available for sale, at fair value		116,376			50,528
Equity securities - available for sale, at market value (cost: 2010, $14,077; 2009, $13,970)		17,218			16,301
Equity securities - available for sale, at fair value		415,944			380,025
Short-term investments		590,169			673,131
Other invested assets (cost: 2010, $577,239; 2009, $546,158)		576,827			545,284
Cash		201,140			247,598
Total investments and cash		15,487,491			14,918,816
Accrued investment income		145,905			158,886
Premiums receivable		901,544			978,847
Reinsurance receivables		693,737			636,375
Funds held by reinsureds		399,842			379,864
Deferred acquisition costs		393,042			362,346
Prepaid reinsurance premiums		137,136			108,029
Deferred tax asset		104,780			174,170
Federal income taxes recoverable		96,174			144,903
Other assets		190,260			139,076
TOTAL ASSETS	$	18,549,911		$	18,001,312
LIABILITIES:
Reserve for losses and loss adjustment expenses	$	9,331,987		$	8,937,858
Future policy benefit reserve		63,747			64,536
Unearned premium reserve		1,532,143			1,415,402
Funds held under reinsurance treaties		97,082			91,893
Commission reserves		38,181			55,579
Other net payable to reinsurers		63,796			53,014
Revolving credit borrowings		83,000			-
8.75% Senior notes due 3/15/2010		-			199,970
5.4% Senior notes due 10/15/2014		249,801			249,769
6.6% Long term notes due 5/1/2067		238,350			238,348
Junior subordinated debt securities payable		329,897			329,897
Accrued interest on debt and borrowings		12,129			9,885
Equity index put option liability		77,150			57,349
Other liabilities		151,028			196,090
Total liabilities		12,268,291			11,899,590
Commitments and contingencies (Note 8)
SHAREHOLDERS' EQUITY:
Preferred shares, par value: $0.01; 50,000 shares authorized;
no shares issued and outstanding		-			-
Common shares, par value: $0.01; 200,000 shares authorized; (2010) 66,022
and (2009) 65,841 outstanding before treasury shares		660			658
Additional paid-in capital		1,858,557			1,845,181
Accumulated other comprehensive income (loss), net of deferred income tax expense
(benefit) of $144,680 at 2010 and $101,014 at 2009		559,591			272,038
Treasury shares, at cost; 10,999 shares (2010) and 6,523 shares (2009)		(929,766	)		(582,926	)
Retained earnings (deficit)		4,792,578			4,566,771
Total shareholders' equity		6,281,620			6,101,722
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	18,549,911		$	18,001,312
The accompanying notes are an integral part of the consolidated financial statements.

1

EVEREST RE GROUP, LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Dollars in thousands, except per share amounts)	2010			2009			2010			2009
	(unaudited)						(unaudited)
REVENUES:
Premiums earned	$	997,265		$	975,380		$	2,914,466		$	2,864,578
Net investment income		141,368			165,387			468,598			401,350
Net realized capital gains (losses):
Other-than-temporary impairments on fixed maturity securities		(2,892	)		-			(2,892	)		(13,210	)
Other-than-temporary impairments on fixed maturity securities
transferred to other comprehensive income (loss)		-			-			-			-
Other net realized capital gains (losses)		41,187			31,063			72,212			2,598
Total net realized capital gains (losses)		38,295			31,063			69,320			(10,612	)
Realized gain on debt repurchase		-			-			-			78,271
Net derivative gain (loss)		(552	)		(2,118	)		(19,802	)		(470	)
Other income (expense)		1,714			(13,204	)		14,851			(15,995	)
Total revenues		1,178,090			1,156,508			3,447,433			3,317,122
CLAIMS AND EXPENSES:
Incurred losses and loss adjustment expenses		674,787			587,247			2,225,591			1,723,937
Commission, brokerage, taxes and fees		237,473			229,257			686,628			684,509
Other underwriting expenses		44,337			44,504			125,028			121,829
Corporate expenses		3,917			4,433			12,379			12,580
Interest, fees and bond issue cost amortization expense		13,138			17,376			42,796			54,634
Total claims and expenses		973,652			882,817			3,092,422			2,597,489
INCOME (LOSS) BEFORE TAXES		204,438			273,691			355,011			719,633
Income tax expense (benefit)		30,238			45,073			46,790			109,871
NET INCOME (LOSS)	$	174,200		$	228,618		$	308,221		$	609,762
Other comprehensive income (loss), net of tax		192,725			376,448			287,553			681,727
COMPREHENSIVE INCOME (LOSS)	$	366,925		$	605,066		$	595,774		$	1,291,489
EARNINGS PER COMMON SHARE:
Basic	$	3.12		$	3.76		$	5.35		$	9.97
Diluted		3.11			3.75			5.33			9.94
Dividends declared		0.48			0.48			1.44			1.44
The accompanying notes are an integral part of the consolidated financial statements.

2

EVEREST RE GROUP, LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Dollars in thousands, except share and dividends per share amounts)	2010			2009			2010			2009
	(unaudited)						(unaudited)
COMMON SHARES (shares outstanding):
Balance, beginning of period		56,242,019			60,852,944			59,317,741			61,414,027
Issued during the period, net		14,177			36,647			181,253			183,464
Treasury shares acquired		(1,233,667	)		(491,731	)		(4,476,465	)		(1,199,631	)
Balance, end of period		55,022,529			60,397,860			55,022,529			60,397,860
COMMON SHARES (par value):
Balance, beginning of period	$	660		$	657		$	658		$	656
Issued during the period, net		-			1			2			2
Balance, end of period		660			658			660			658
ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of period		1,853,158			1,831,695			1,845,181			1,824,552
Share-based compensation plans		5,399			4,647			13,376			11,753
Other		-			-			-			37
Balance, end of period		1,858,557			1,836,342			1,858,557			1,836,342
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS),
NET OF DEFERRED INCOME TAXES:
Balance, beginning of period		366,866			(43,884	)		272,038			(291,851	)
Cumulative adjustment of initial adoption(1), net of tax		-			-			-			(57,312	)
Net increase (decrease) during the period		192,725			376,448			287,553			681,727
Balance, end of period		559,591			332,564			559,591			332,564
RETAINED EARNINGS (DEFICIT):
Balance, beginning of period		4,644,952			4,198,694			4,566,771			3,819,327
Cumulative adjustment of initial adoption(1), net of tax		-			-			-			57,312
Net income (loss)		174,200			228,618			308,221			609,762
Dividends declared ($0.48 per quarter and $1.44 year-to-date
per share in 2010 and 2009)		(26,574	)		(29,100	)		(82,414	)		(88,189	)
Balance, end of period		4,792,578			4,398,212			4,792,578			4,398,212
TREASURY SHARES AT COST:
Balance, beginning of period		(830,037	)		(441,747	)		(582,926	)		(392,329	)
Purchase of treasury shares		(99,729	)		(41,077	)		(346,840	)		(90,495	)
Balance, end of period		(929,766	)		(482,824	)		(929,766	)		(482,824	)
TOTAL SHAREHOLDERS' EQUITY, END OF PERIOD	$	6,281,620		$	6,084,952		$	6,281,620		$	6,084,952
(1) The cumulative adjustment to accumulated other comprehensive income (loss), net of deferred income taxes, and retained earnings (deficit), represents the effect of initially
adopting new guidance for other-than-temporary impairments of debt securities.
The accompanying notes are an integral part of the consolidated financial statements.

3

EVEREST RE GROUP, LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Dollars in thousands)	2010			2009			2010			2009
	(unaudited)						(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	174,200		$	228,618		$	308,221		$	609,762
Adjustments to reconcile net income to net cash provided by operating activities:
Decrease (increase) in premiums receivable		76,794			10,974			71,659			(48,369	)
Decrease (increase) in funds held by reinsureds, net		(10,024	)		7,458			(23,609	)		(23,327	)
Decrease (increase) in reinsurance receivables		(17,392	)		34,620			(79,683	)		78,435
Decrease (increase) in deferred tax asset		29,324			5,771			24,260			59,989
Increase (decrease) in reserve for losses and loss adjustment expenses		8,642			26,614			458,032			(152,544	)
Increase (decrease) in future policy benefit reserve		(220	)		(1,168	)		(789	)		(20	)
Increase (decrease) in unearned premiums		106,215			103,568			119,472			114,033
Change in equity adjustments in limited partnerships		1,026			(23,512	)		(31,229	)		29,964
Change in other assets and liabilities, net		(52,160	)		(56,631	)		(34,584	)		(24,819	)
Non-cash compensation expense		4,799			3,534			11,929			10,290
Amortization of bond premium (accrual of bond discount)		14,850			5,912			36,189			12,793
Amortization of underwriting discount on senior notes		12			48			65			142
Realized gain on debt repurchase		-			-			-			(78,271	)
Net realized capital (gains) losses		(38,295	)		(31,063	)		(69,320	)		10,612
Net cash provided by (used in) operating activities		297,771			314,743			790,613			598,670
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from fixed maturities matured/called - available for sale, at market value		424,326			364,585			1,207,491			924,998
Proceeds from fixed maturities matured/called - available for sale, at fair value		-			-			-			5,570
Proceeds from fixed maturities sold - available for sale, at market value		122,884			109,963			846,346			239,621
Proceeds from fixed maturities sold - available for sale, at fair value		10,689			4,010			19,301			12,012
Proceeds from equity securities sold - available for sale, at market value		3			23,067			715			24,143
Proceeds from equity securities sold - available for sale, at fair value		14,899			11,309			87,641			23,548
Distributions from other invested assets		21,154			27,280			51,514			50,591
Cost of fixed maturities acquired - available for sale, at market value		(366,121	)		(840,561	)		(2,327,744	)		(2,203,804	)
Cost of fixed maturities acquired - available for sale, at fair value		(56,938	)		(2,548	)		(80,618	)		(19,101	)
Cost of equity securities acquired - available for sale, at market value		(857	)		-			(2,283	)		-
Cost of equity securities acquired - available for sale, at fair value		(23,927	)		(12,948	)		(104,344	)		(32,247	)
Cost of other invested assets acquired		(16,019	)		(11,882	)		(53,097	)		(36,624	)
Net change in short-term investments		(208,162	)		(229,898	)		83,735			561,164
Net change in unsettled securities transactions		(22,855	)		104,102			(34,050	)		157,430
Net cash provided by (used in) investing activities		(100,924	)		(453,521	)		(305,393	)		(292,699	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Common shares issued during the period, net		600			1,114			1,449			1,502
Purchase of treasury shares		(99,729	)		(41,077	)		(346,840	)		(90,495	)
Revolving credit borrowings		(50,000	)		-			83,000			-
Net cost of debt repurchase		-			-			-			(83,026	)
Net cost of senior notes maturing		-			-			(200,000	)		-
Dividends paid to shareholders		(26,574	)		(29,100	)		(82,414	)		(88,189	)
Net cash provided by (used in) financing activities		(175,703	)		(69,063	)		(544,805	)		(260,208	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH		(11,457	)		616			13,127			13,618
Net increase (decrease) in cash		9,687			(207,225	)		(46,458	)		59,381
Cash, beginning of period		191,453			472,300			247,598			205,694
Cash, end of period	$	201,140		$	265,075		$	201,140		$	265,075
SUPPLEMENTAL CASH FLOW INFORMATION
Cash transactions:
Income taxes paid (recovered)	$	(877	)	$	2,983		$	(36,715	)	$	70,762
Interest paid		5,660			14,194			40,021			52,318
The accompanying notes are an integral part of the consolidated financial statements.

4

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Nine Months Ended September 30, 2010 and 2009

1.  GENERAL

Everest Re Group, Ltd. (“Group”), a Bermuda company, through its subsidiaries, principally provides reinsurance and insurance in the U.S., Bermuda and international markets.  As used in this document, “Company” means Group and its subsidiaries.  On December 30, 2008, Group contributed Everest Reinsurance Holdings, Inc. and its subsidiaries (“Holdings”) to its recently established Irish holding company, Everest Underwriting Group (Ireland), Limited (“Holdings Ireland”).

2.  BASIS OF PRESENTATION

The unaudited consolidated financial statements of the Company for the three and nine months ended September 30, 2010 and 2009 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, 2009 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.  The results for the three and nine months ended September 30, 2010 and 2009 a re 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, 2009, 2008 and 2007 included in the Company’s most recent Form 10-K filing.

All intercompany accounts and transactions have been eliminated.

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

Financial Accounting Standards Board Accounting Codification

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

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

GAAP is not intended to be changed as a result of the FASB’s Codification, but it will change the way the guidance is organized and presented. As a result, these changes will have a significant impact on how companies reference GAAP in their financial statements and in the accounting policies for financial statements issued for interim and annual periods ending after September 15, 2009. The Company’s adoption of this guidance impacts the way the Company references U.S. GAAP accounting standards in the financial statements and Notes to Consolidated Financial Statements.

5

Application of Recently Issued Accounting Standard Changes

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

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

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

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

(Dollars in thousands)
Cumulative-effect adjustment, gross	$	65,658
Tax		(8,346	)
Cumulative-effect adjustment, net	$	57,312

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

6

3.  INVESTMENTS

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

	At September 30, 2010
	Amortized		Unrealized		Unrealized			Market
(Dollars in thousands)	Cost		Appreciation		Depreciation			Value
Fixed maturity securities  - available for sale
U.S. Treasury securities and obligations of
U.S. government agencies and corporations	$	392,468	$	24,939	$	(277	)	$	417,130
Obligations of U.S. states and political subdivisions		3,405,935		220,320		(4,202	)		3,622,053
Corporate securities		2,911,613		223,155		(10,464	)		3,124,304
Asset-backed securities		250,264		10,729		(430	)		260,563
Mortgage-backed securities
Commercial		466,839		26,459		(12,946	)		480,352
Agency residential		2,181,753		96,987		(1,009	)		2,277,731
Non-agency residential		124,246		1,510		(5,556	)		120,200
Foreign government securities		1,551,131		102,105		(14,981	)		1,638,255
Foreign corporate securities		1,546,588		99,113		(16,472	)		1,629,229
Total fixed maturity securities	$	12,830,837	$	805,317	$	(66,337	)	$	13,569,817
Equity securities	$	14,077	$	3,144	$	(3	)	$	17,218

	At December 31, 2009
	Amortized		Unrealized		Unrealized			Market
(Dollars in thousands)	Cost		Appreciation		Depreciation			Value
Fixed maturity securities  - available for sale
U.S. Treasury securities and obligations of
U.S. government agencies and corporations	$	339,839	$	17,879	$	(3,565	)	$	354,153
Obligations of U.S. states and political subdivisions		3,694,267		183,848		(24,256	)		3,853,859
Corporate securities		2,421,875		107,749		(32,963	)		2,496,661
Asset-backed securities		310,429		7,713		(4,413	)		313,729
Mortgage-backed securities
Commercial		475,204		5,172		(37,758	)		442,618
Agency residential		2,310,826		61,481		(3,863	)		2,368,444
Non-agency residential		177,500		238		(17,117	)		160,621
Foreign government securities		1,507,385		100,243		(16,875	)		1,590,753
Foreign corporate securities		1,377,417		72,442		(24,748	)		1,425,111
Total fixed maturity securities	$	12,614,742	$	556,765	$	(165,558	)	$	13,005,949
Equity securities	$	13,970	$	2,333	$	(2	)	$	16,301

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

(Dollars in thousands)	At September 30, 2010		At December 31, 2009
Pre-tax cumulative unrealized appreciation (depreciation)	$	2,266	$	(6,088	)

7

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

	At September 30, 2010				At December 31, 2009
	Amortized		Market		Amortized		Market
(Dollars in thousands)	Cost		Value		Cost		Value
Fixed maturity securities – available for sale
Due in one year or less	$	681,431	$	693,299	$	621,706	$	652,483
Due after one year through five years		3,715,052		3,923,432		3,017,731		3,151,819
Due after five years through ten years		2,536,225		2,746,567		2,530,830		2,634,709
Due after ten years		2,875,027		3,067,673		3,170,516		3,281,526
Asset-backed securities		250,264		260,563		310,429		313,729
Mortgage-backed securities
Commercial		466,839		480,352		475,204		442,618
Agency residential		2,181,753		2,277,731		2,310,826		2,368,444
Non-agency residential		124,246		120,200		177,500		160,621
Total fixed maturity securities	$	12,830,837	$	13,569,817	$	12,614,742	$	13,005,949

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Dollars in thousands)	2010			2009			2010			2009
Increase (decrease) during the period between the market value and cost
of investments carried at market value, and deferred taxes thereon:
Fixed maturity securities	$	193,182		$	428,617		$	339,419		$	700,376
Fixed maturity securities, cumulative other-than-temporary impairment adjustment		2,269			-			8,354			(65,658	)
Equity securities		542			448			810			343
Other invested assets		(33	)		3,387			462			5,614
Change in unrealized appreciation (depreciation), pre-tax		195,960			432,452			349,045			640,675
Deferred tax benefit (expense)		(31,162	)		(88,942	)		(35,520	)		(130,628	)
Deferred tax benefit (expense), cumulative other-than-temporary impairment adjustment		(134	)		-			(1,038	)		8,346
Change in unrealized appreciation (depreciation),
net of deferred taxes, included in shareholders’ equity	$	164,664		$	343,510		$	312,487		$	518,393

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

8

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

The 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 September 30, 2010 By Security Type
	Less than 12 months					Greater than 12 months					Total
			Gross					Gross					Gross
			Unrealized					Unrealized					Unrealized
(Dollars in thousands)	Market Value		Depreciation			Market Value		Depreciation			Market Value		Depreciation
Fixed maturity securities - available for sale
U.S. Treasury securities and obligations of
U.S. government agencies and corporations	$	4,243	$	(97	)	$	3,466	$	(180	)	$	7,709	$	(277	)
Obligations of U.S. states and political subdivisions		13,460		(34	)		102,649		(4,168	)		116,109		(4,202	)
Corporate securities		102,390		(1,362	)		87,690		(9,102	)		190,080		(10,464	)
Asset-backed securities		-		(58	)		6,534		(372	)		6,534		(430	)
Mortgage-backed securities
Commercial		1,549		(19	)		67,354		(12,927	)		68,903		(12,946	)
Agency residential		203,115		(775	)		638		(234	)		203,753		(1,009	)
Non-agency residential		-		-			69,490		(5,556	)		69,490		(5,556	)
Foreign government securities		119,662		(4,762	)		148,957		(10,219	)		268,619		(14,981	)
Foreign corporate securities		94,695		(2,387	)		144,131		(14,085	)		238,826		(16,472	)
Total fixed maturity securities	$	539,114	$	(9,494	)	$	630,909	$	(56,843	)	$	1,170,023	$	(66,337	)
Equity securities		-		-			12		(3	)		12		(3	)
Total	$	539,114	$	(9,494	)	$	630,921	$	(56,846	)	$	1,170,035	$	(66,340	)

	Duration of Unrealized Loss at September 30, 2010 By Maturity
	Less than 12 months					Greater than 12 months					Total
			Gross					Gross					Gross
			Unrealized					Unrealized					Unrealized
(Dollars in thousands)	Market Value		Depreciation			Market Value		Depreciation			Market Value		Depreciation
Fixed maturity securities
Due in one year or less	$	24,186	$	(1,033	)	$	57,646	$	(6,459	)	$	81,832	$	(7,492	)
Due in one year through five years		154,929		(3,523	)		158,034		(11,016	)		312,963		(14,539	)
Due in five years through ten years		123,554		(3,774	)		100,372		(7,133	)		223,926		(10,907	)
Due after ten years		31,781		(312	)		170,841		(13,146	)		202,622		(13,458	)
Asset-backed securities		-		(58	)		6,534		(372	)		6,534		(430	)
Mortgage-backed securities		204,664		(794	)		137,482		(18,717	)		342,146		(19,511	)
Total fixed maturity securities	$	539,114	$	(9,494	)	$	630,909	$	(56,843	)	$	1,170,023	$	(66,337	)

The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at September 30, 2010 were $1,170,035 thousand and $66,340 thousand, respectively.  There were no unrealized losses on a single security that exceeded 0.04% of the market value of the fixed maturity securities at September 30, 2010.  In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector.  The $9,494 thousand of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for less than one year were generally comprised of highly rated foreign government and domestic and foreign corporate securities.  Of these unrealized losses, $8,605 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating organization.  The $56,846 thousand of unrealized losses related to fixed maturity and equity securities in an unrealized loss position for more than one year related primarily to highly rated domestic and foreign corporate, mortgage-backed, foreign government and municipal securities.  Of these unrealized losses, $38,103 thousand related to securities that were rated investment grade by at least one nationally recognized statistical rating organization.  The non-investment

9

grade securities with unrealized losses were mainly comprised of corporate and commercial mortgage-backed securities.  The gross unrealized depreciation greater than 12 months for mortgage-backed securities included $1,027 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.  Unrealized losses have decreased since December 31, 2009, as a result of improved conditions in the overall financial market resulting from increased liquidity and lower interest rates.

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

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

	Duration of Unrealized Loss at December 31, 2009 By Security Type
	Less than 12 months					Greater than 12 months					Total
			Gross					Gross					Gross
			Unrealized					Unrealized					Unrealized
(Dollars in thousands)	Market Value		Depreciation			Market Value		Depreciation			Market Value		Depreciation
Fixed maturity securities - available for sale
U.S. Treasury securities and obligations of
U.S. government agencies and corporations	$	155,007	$	(3,444	)	$	1,375	$	(121	)	$	156,382	$	(3,565	)
Obligations of U.S. states and political subdivisions		559		(4	)		452,018		(24,252	)		452,577		(24,256	)
Corporate securities		170,323		(2,539	)		357,442		(30,424	)		527,765		(32,963	)
Asset-backed securities		12,514		(87	)		47,273		(4,326	)		59,787		(4,413	)
Mortgage-backed securities
Commercial		8,411		(135	)		294,163		(37,623	)		302,574		(37,758	)
Agency residential		591,372		(3,541	)		6,216		(322	)		597,588		(3,863	)
Non-agency residential		-		(1	)		153,698		(17,116	)		153,698		(17,117	)
Foreign government securities		215,048		(3,737	)		154,225		(13,138	)		369,273		(16,875	)
Foreign corporate securities		299,769		(7,356	)		179,550		(17,392	)		479,319		(24,748	)
Total fixed maturity securities	$	1,453,003	$	(20,844	)	$	1,645,960	$	(144,714	)	$	3,098,963	$	(165,558	)
Equity securities		13		(2	)		-		-			13		(2	)
Total	$	1,453,016	$	(20,846	)	$	1,645,960	$	(144,714	)	$	3,098,976	$	(165,560	)

	Duration of Unrealized Loss at December 31, 2009 By Maturity
	Less than 12 months					Greater than 12 months					Total
			Gross					Gross					Gross
			Unrealized					Unrealized					Unrealized
(Dollars in thousands)	Market Value		Depreciation			Market Value		Depreciation			Market Value		Depreciation
Fixed maturity securities
Due in one year or less	$	5,777	$	(1	)	$	74,211	$	(5,504	)	$	79,988	$	(5,505	)
Due in one year through five years		423,782		(6,120	)		268,321		(19,861	)		692,103		(25,981	)
Due in five years through ten years		315,853		(6,094	)		198,398		(14,972	)		514,251		(21,066	)
Due after ten years		95,294		(4,865	)		603,680		(44,990	)		698,974		(49,855	)
Asset-backed securities		12,514		(87	)		47,273		(4,326	)		59,787		(4,413	)
Mortgage-backed securities		599,783		(3,677	)		454,077		(55,061	)		1,053,860		(58,738	)
Total fixed maturity securities	$	1,453,003	$	(20,844	)	$	1,645,960	$	(144,714	)	$	3,098,963	$	(165,558	)

10

The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at December 31, 2009 were $3,098,976 thousand and $165,560 thousand, respectively.  There were no unrealized losses on a single security that exceeded 0.07% of the market value of the fixed maturity securities at December 31, 2009.  In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector.  The $20,846 thousand of unrealized losses related to fixed maturity and equity securities that have been in an unrealized loss position for less than one year were generally comprised of highly rated government, corporate and mortgage-backed securities.  Of these unrealized losses, $20,653 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating organization.  The $144,714 thousand of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year related primarily to highly rated government, municipal, corporate and mortgage-backed securities.  Of these unrealized losses, $111,340 thousand related to securities that were rated investment grade by at least one nationally recognized statistical rating organization.  The non-investment grade securities with unrealized losses are mainly comprised of corporate and commercial mortgage-backed securities.  The gross unrealized depreciation greater than 12 months for mortgage-backed securities included $3,676 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 mortga ge-backed securities still had excess credit coverage and were current on interest and principal payments.

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Dollars in thousands)	2010			2009			2010			2009
Fixed maturity securities	$	143,801		$	145,408		$	438,017		$	434,363
Equity securities		2,763			757			8,142			2,183
Short-term investments and cash		364			629			(26	)		5,872
Other invested assets
Limited partnerships		(1,108	)		23,452			30,401			(29,227	)
Other		183			(1,332	)		885			(297	)
Total gross investment income		146,003			168,914			477,419			412,894
Interest debited (credited) and other expense		(4,635	)		(3,527	)		(8,821	)		(11,544	)
Total net investment income	$	141,368		$	165,387		$	468,598		$	401,350

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 $190,064 thousand in limited partnerships at September 30, 2010.  These commitments will be funded when called in accordance with the partnership agreements, which have investment periods that expire, unless extended, through 2014.

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Dollars in thousands)	2010			2009			2010			2009
Fixed maturity securities, market value:
Other-than-temporary impairments	$	(2,892	)	$	-		$	(2,892	)	$	(13,210	)
Gains (losses) from sales		(2,410	)		(7,363	)		48,347			(43,644	)
Fixed maturity securities, fair value:
Gains (losses) from sales		480			172			753			401
Gains (losses) from fair value adjustments		3,296			5,837			3,778			7,805
Equity securities, market value:
Gains (losses) from sales		-			8,040			111			8,087
Equity securities, fair value:
Gains (losses) from sales		951			1,298			(48	)		6,480
Gains (losses) from fair value adjustments		38,872			23,075			19,264			23,448
Short-term investments gains (losses)		(2	)		4			7			21
Total net realized capital gains (losses)	$	38,295		$	31,063		$	69,320		$	(10,612	)

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

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Dollars in thousands)	2010			2009			2010			2009
Proceeds from sales of fixed maturity securities	$	133,573		$	113,973		$	865,647		$	251,633
Gross gains from sales		4,641			4,289			71,012			12,552
Gross losses from sales		(6,571	)		(11,480	)		(21,912	)		(55,795	)
Proceeds from sales of equity securities	$	14,902		$	34,376		$	88,356		$	47,691
Gross gains from sales		1,033			9,366			4,727			15,301
Gross losses from sales		(82	)		(28	)		(4,664	)		(734	)

4.  DERIVATIVES

The Company sold seven equity index put option contracts, based on two indices, in 2001 and 2005, which are outstanding. The Company sold these equity index put options as insurance products with the intent of achieving a profit.  These equity index put option contracts meet the definition of a derivative under FASB guidance and the Company’s position in these equity index put option contracts is unhedged.  Accordingly, these equity index put option contracts are carried at fair value in the consolidated balance sheets with changes in fair value recorded in the consolidated statements of operations and comprehensive income (loss).

12

The Company sold six equity index put option contracts, based on the Standard & Poor’s 500 (“S&P 500”) index, for total consideration, net of commissions, of $22,530 thousand.  At September 30, 2010, fair value for these equity index put option contracts was $69,666 thousand.  These equity index put option contracts each have a single exercise date, with maturities ranging from 12 to 30 years and strike prices ranging from $1,141.21 to $1,540.63.  No amounts will be payable under these equity index put option contracts if the S&P 500 index is at, or above, the strike prices on the exercise dates, which fall between June 2017 and March 2031.  If the S&P 500 index is lower than the strike price on the applicable exercise date, the amount due would vary proport ionately with the percentage by which the index is below the strike price.  Based on historical index volatilities and trends and the September 30, 2010 S&P 500 index value, the Company estimates the probability that each equity index put option contract of the S&P 500 index falling below the strike price on the exercise date to be less than 45%.  The theoretical maximum payouts under the equity index put option contracts would occur if on each of the exercise dates the S&P 500 index value were zero.  At September 30, 2010, the present value of these theoretical maximum payouts using a 6% discount factor was $265,310 thousand.

The Company sold one equity index put option contract based on the FTSE 100 index for total consideration, net of commissions, of $6,706 thousand.  At September 30, 2010, fair value for this equity index put option contract was $7,485 thousand.  This equity index put option contract has an exercise date of July 2020 and a strike price of ₤5,989.75.  No amount will be payable under this equity index put option contract if the FTSE 100 index is at, or above, the strike price on the exercise date.  If the FTSE 100 index is lower than the strike price on the exercise date, the amount due will vary proportionately with the percentage by which the index is below the strike price.  Based on historical index volatilities and trends and the September 30, 2010 FTSE 100 index value, the Company estimates the probability that the equity index put option contract of the FTSE 100 index will fall below the strike price on the exercise date to be less than 36%.  The theoretical maximum payout under the equity index put option contract would occur if on the exercise date the FTSE 100 index value was zero.  At September 30, 2010, the present value of the theoretical maximum payout using a 6% discount factor and current exchange rate was $28,500 thousand.

The fair value of the equity index put options can be found in the Company’s consolidated balance sheets as follows:

(Dollars in thousands)
Derivatives not designated as	Location of fair value	At		At
hedging instruments	in balance sheets	September 30, 2010		December 31, 2009
Equity index put option contracts	Equity index put option liability	$	77,150	$	57,349
Total		$	77,150	$	57,349

The change in fair value of the equity index put option contracts can be found in the Company’s statement of operations and comprehensive income (loss) as follows:

(Dollars in thousands)		For the Three Months Ended						For the Nine Months Ended
Derivatives not designated as	Location of gain (loss) in statements of	September 30,						September 30,
hedging instruments	operations and comprehensive income (loss)	2010			2009			2010			2009
Equity index put option contracts	Net derivative gain (loss)	$	(552	)	$	(2,118	)	$	(19,802	)	$	(470	)
Total		$	(552	)	$	(2,118	)	$	(19,802	)	$	(470	)

The Company’s equity index put option contracts contain provisions that require collateralization of the fair value, as calculated by the counterparty, above a specified threshold, which is based on the Company’s financial strength ratings (Moody’s Investors Service, Inc.) and/or debt ratings (Standard & Poor’s Ratings Services). The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a liability position on September 30, 2010, was $77,150 thousand for which the Company had posted collateral with a market value of $53,052 thousand.  If on September 30, 2010, the Company’s ratings were such that the collateral threshold was zero, the Company would be required to post an additional $55,000 thousand, which is an approximation of the c ounterparties’ fair value calculation.

13

5.  FAIR VALUE

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

In limited instances where prices are not provided by pricing services or in rare instances when a manager may not agree with the pricing service, price quotes on a non-binding basis are obtained from investment brokers.  The investment asset managers do not make any changes to prices received from either the pricing services or the investment brokers.  In addition, the investment asset managers have procedures in place to review the reasonableness of the prices from the service providers and may request verification of the prices.  In addition, the Company tests the prices on a random basis to an independent pricing source.  In limited situations, where financial markets are inactive or illiquid, the Company may use its own assumptions about future cash flows and risk-adjusted discount rate s to determine fair value.  The Company made no such adjustments at September 30, 2010.

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

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.

The Company sold seven equity index put option contracts which meet the definition of a derivative.  The Company’s position in these contracts is unhedged.  The Company records the change in fair value of equity index put option contracts in its consolidated statements of operations and comprehensive income (loss).

The fair value was calculated using an industry accepted option pricing model, Black-Scholes, which used the following assumptions:

	At September 30, 2010
		Contract
	Contracts	based on
	based on	FTSE 100
	S & P 500 Index	Index
Equity index	1,141.2	5,548.6
Interest rate	2.92% to 4.58%	3.86%
Time to maturity	6.7 to 20.5 yrs	9.8 yrs
Volatility	22.5% to 24.7%	25.8%

14

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

			Fair Value Measurement Using:
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
(Dollars in thousands)	September 30, 2010		(Level 1)		(Level 2)		(Level 3)
Assets:
Fixed maturities, market value
U.S. Treasury securities and obligations of
U.S. government agencies and corporations	$	417,130	$	-	$	417,130	$	-
Obligations of U.S. States and political subdivisions		3,622,053		-		3,622,053		-
Corporate securities		3,124,304		-		3,114,316		9,988
Asset-backed securities		260,563		-		260,034		529
Mortgage-backed securities
Commercial		480,352		-		480,352		-
Agency residential		2,277,731		-		2,277,731		-
Non-agency residential		120,200		-		118,657		1,543
Foreign government securities		1,638,255		-		1,638,255		-
Foreign corporate securities		1,629,229		-		1,629,229		-
Total fixed maturities, market value		13,569,817		-		13,557,757		12,060
Fixed maturities, fair value		116,376		-		116,376		-
Equity securities, market value		17,218		17,218		-		-
Equity securities, fair value		415,944		415,944		-		-
Liabilities:
Equity index put option contracts	$	77,150	$	-	$	-	$	77,150

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

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

			Fair Value Measurement Using:
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
(Dollars in thousands)	December 31, 2009		(Level 1)		(Level 2)		(Level 3)
Assets:
Fixed maturities, market value
U.S. Treasury securities and obligations of
U.S. government agencies and corporations	$	354,153	$	-	$	354,153	$	-
Obligations of U.S. States and political subdivisions		3,853,859		-		3,853,859		-
Corporate securities		2,496,661		-		2,486,761		9,900
Asset-backed securities		313,729		-		307,460		6,269
Mortgage-backed securities
Commercial		442,618		-		442,618		-
Agency residential		2,368,444		-		2,368,444		-
Non-agency residential		160,621		-		159,227		1,394
Foreign government securities		1,590,753		-		1,590,753		-
Foreign corporate securities		1,425,111		-		1,425,111		-
Total fixed maturities, market value		13,005,949		-		12,988,386		17,563
Fixed maturities, fair value		50,528		-		50,528		-
Equity securities, market value		16,301		16,301		-		-
Equity securities, fair value		380,025		379,058		967		-
Liabilities:
Equity index put option contracts	$	57,349	$	-	$	-	$	57,349

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

	By Asset
	Three Months Ended September 30, 2010											Nine Months Ended September 30, 2010
	Corporate		Asset-backed			Non-agency						Corporate			Asset-backed			Non-agency
(Dollars in thousands)	Securities		Securities			RMBS			Total			Securities			Securities			RMBS			Total
Beginning balance	$	9,950	$	6,562		$	1,508			18,020		$	9,900		$	6,268		$	1,394		$	17,563
Total gains or (losses) (realized/unrealized)
Included in earnings (or changes in net assets)		-		(258	)		113			(145	)		(2	)		(258	)		273			13
Included in other comprehensive income (loss)		38		1,628			84			1,750			90			1,672			268			2,030
Purchases, issuances and settlements		-		(7,413	)		(162	)		(7,575	)		-			(7,154	)		(392	)		(7,546	)
Transfers in and/or (out) of Level 3		-		10			-			10			-			-			-			-
Ending balance	$	9,988	$	529		$	1,543		$	12,060		$	9,988		$	529		$	1,543		$	12,060
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.)

	By Asset
	Three Months Ended September 30, 2009														Nine Months Ended September 30, 2009
	Corporate			Asset-backed			Non-agency								Corporate			Asset-backed			Non-agency
(Dollars in thousands)	Securities			Securities			RMBS			CMBS		Total			Securities			Securities			RMBS			CMBS			Total
Beginning balance	$	8,901		$	5,124		$	1,449		$	-	$	15,474		$	22,693		$	3,409		$	1,757		$	265,748		$	293,607
Total gains or (losses) (realized/unrealized)
Included in earnings (or changes in net assets)		-			-			174			-		174			(1	)		-			34			-			33
Included in other comprehensive income (loss)		900			479			157			-		1,536			(199	)		1,826			285			-			1,912
Purchases, issuances and settlements		-			-			(298	)		-		(298	)		-			-			(594	)		-			(594	)
Transfers in and/or (out) of Level 3		(1	)		(149	)		-			-		(150	)		(12,693	)		219			-			(265,748	)		(278,222	)
Ending balance	$	9,800		$	5,454		$	1,482		$	-	$	16,736		$	9,800		$	5,454		$	1,482		$	-		$	16,736
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	$	-		$	-		$	-		$	-	$	-		$	-		$	(73	)	$	(743	)	$	-		$	(816	)
(Some amounts may not reconcile due to rounding.)

16

The following table presents the activity under Level 3, fair value measurements using significant unobservable inputs for equity index put option contracts, for the periods indicated:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(Dollars in thousands)	2010		2009		2010		2009
Liabilities:
Balance, beginning of period	$	76,599	$	58,905	$	57,349	$	60,552
Total (gains) or losses (realized/unrealized)
Included in earnings (or changes in net assets)		552		2,118		19,802		470
Included in other comprehensive income (loss)		-		-		-		-
Purchases, issuances and settlements		-		-		-		-
Transfers in and/or (out) of Level 3		-		-		-		-
Balance, end of period	$	77,150	$	61,022	$	77,150	$	61,022
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 liabilities still held at the reporting date	$	-	$	-	$	-	$	-
(Some amounts may not reconcile due to rounding.)

6.  CAPITAL TRANSACTIONS

On December 17, 2008, 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.

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7.  EARNINGS PER COMMON SHARE

Net income (loss) per common share has been computed as per below, based upon weighted average common basic and dilutive shares outstanding.

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
(Dollars and shares in thousands, except per share amounts)		2010			2009			2010			2009
Net income (loss) per share:
Numerator
Net income (loss)		$	174,200		$	228,618		$	308,221		$	609,762
Less:  dividends declared-common shares and nonvested common shares			(26,574	)		(29,100	)		(82,413	)		(88,189	)
Undistributed earnings			147,627			199,518			225,808			521,574
Percentage allocated to common shareholders (1)			99.5	%		99.6	%		99.5	%		99.7	%
			146,841			198,756			224,717			519,764
Add:  dividends declared-common shareholders			26,430			28,989			81,983			87,860
Numerator for basic and diluted earnings per common share		$	173,272		$	227,745		$	306,700		$	607,624
Denominator
Denominator for basic earnings per weighted-average common shares			55,526			60,495			57,369			60,966
Effect of dilutive securities:
Options			137			225			148			164
Denominator for diluted earnings per adjusted weighted-average common shares			55,662			60,720			57,516			61,130
Per common share net income (loss)
Basic		$	3.12		$	3.76		$	5.35		$	9.97
Diluted		$	3.11		$	3.75		$	5.33		$	9.94
(1)	Basic weighted-average common shares outstanding		55,526			60,495			57,369			60,966
	Basic weighted-average common shares outstanding and nonvested common shares expected to vest		55,823			60,727			57,647			61,178
	Percentage allocated to common shareholders		99.5	%		99.6	%		99.5	%		99.7	%
(Some amounts may not reconcile due to rounding.)

The table below presents the options to purchase common shares that were outstanding, but were not included in the computation of earnings per diluted share as they were anti-dilutive, for the periods indicated:

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2010	2009	2010	2009
Anti-dilutive options	1,902,690	1,587,400	1,902,690	1,844,710

All outstanding options expire on or between April 20, 2011 and February 24, 2020.

8.  CONTINGENCIES

In the ordinary course of business, the Company is involved in lawsuits, arbitrations and other formal and informal dispute resolution procedures, the outcomes of which will determine the Company’s rights and obligations under insurance, reinsurance and other contractual agreements.  In some disputes, the Company seeks to enforce its rights under an agreement or to collect funds owing to it.  In other matters, the Company is resisting attempts by others to collect funds or enforce alleged rights.  These disputes arise from time to time and are ultimately resolved through both informal and formal means, including negotiated resolution, arbitration and litigation.  In all such matters, the Company believes that its positions are legally and commercially reasonable. While the final outcom e of these matters cannot be predicted with certainty, the Company does not believe that any of these matters, when finally resolved, will have a material adverse effect on the Company’s financial position or liquidity.  However, an adverse resolution of one or more of these items in any one quarter or fiscal year could have a material adverse effect on the Company’s results of operations in that period.

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

(Dollars in thousands)	At September 30, 2010		At December 31, 2009
	$	150,614	$	152,340

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

(Dollars in thousands)	At September 30, 2010		At December 31, 2009
	$	26,030	$	24,568

9.  OTHER COMPREHENSIVE INCOME (LOSS)

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Dollars in thousands)	2010			2009			2010			2009
Unrealized appreciation (depreciation) ("URA(D)") on
securities arising during the period
URA(D) of investments - temporary	$	193,692		$	418,164		$	340,692		$	677,587
URA(D) of investments - non-credit OTTI		2,269			14,288			8,354			28,746
Tax benefit (expense) from URA(D) arising during the period		(31,296	)		(88,942	)		(36,558	)		(130,628	)
Total URA(D) on securities arising during the period, net of tax		164,665			343,510			312,488			575,705
Foreign currency translation adjustments		33,422			37,992			(19,776	)		115,385
Tax benefit (expense) from foreign currency translation		(5,784	)		(5,671	)		(6,425	)		(11,648	)
Net foreign currency translation adjustments		27,638			32,321			(26,201	)		103,737
Pension adjustments		649			950			1,948			2,849
Tax benefit (expense) on pension		(227	)		(332	)		(682	)		(564	)
Net pension adjustments		422			617			1,266			2,285
Other comprehensive income (loss), net of tax	$	192,725		$	376,448		$	287,553		$	681,727

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

	At September 30,			At December 31,
(Dollars in thousands)	2010			2009
URA(D) on securities, net of deferred taxes
Temporary	$	619,821		$	314,648
Non-credit, OTTI		1,941			(5,374	)
Total unrealized appreciation (depreciation) on investments, net of deferred taxes		621,762			309,274
Foreign currency translation adjustments, net of deferred taxes		(39,169	)		(12,968	)
Pension adjustments, net of deferred taxes		(23,002	)		(24,268	)
Accumulated other comprehensive income (loss)	$	559,591		$	272,038

10.  CREDIT FACILITIES

The Company has three credit facilities for a total commitment of up to $1,300,000 thousand, providing for the issuance of letters of credit and/or unsecured revolving credit lines. The following table presents the costs incurred in connection with the three credit facilities for the periods indicated:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(Dollars in thousands)	2010		2009		2010		2009
Credit facility fees incurred	$	531	$	451	$	1,562	$	1,413

The terms and outstanding amounts for each facility are discussed below:

Group Credit Facility

Effective July 27, 2007, Group, Everest Reinsurance (Bermuda), Ltd. (“Bermuda Re”) and Everest International Reinsurance, Ltd. (“Everest International”) entered into a five year, $850,000 thousand senior credit facility with a syndicate of lenders referred to as the “Group Credit Facility”.  Wachovia Bank, a subsidiary of Wells Fargo Corporation (“Wachovia Bank”) is the administrative agent for the Group Credit Facility, which consists of two tranches.  Tranche one provides up to $350,000 thousand of unsecured revolving credit for liquidity and general corporate purposes, and for the issuance of unsecured standby letters of credit.  The interest on the revolving loans shall, at the Company’s option, be either (1) the Base Rate (as defined below) or (2) an adjusted London Interbank Offered Rate (“LIBOR”) plus a margin.  The Base Rate is the higher of (a) the prime commercial lending rate established by Wachovia Bank or (b) the Federal Funds Rate plus 0.5% per annum. The amount of margin and the fees payable for the Group Credit Facility depends on Group’s senior unsecured debt rating.  Tranche two exclusively provides up to $500,000 thousand for the issuance of standby letters of credit on a collateralized basis.

The Group Credit Facility requires Group to maintain a debt to capital ratio of not greater than 0.35 to 1 and to maintain a minimum net worth.  Minimum net worth is an amount equal to the sum of $3,575,381 thousand plus 25% of consolidated net income for each of Group’s fiscal quarters, for which statements are available ending on or after January 1, 2007 and for which consolidated net income is positive, plus 25% of any increase in consolidated net worth during such period attributable to the issuance of ordinary and preferred shares, which at September 30, 2010, was $4,149,423 thousand.  As of September 30, 2010, the Company was in compliance with all Group Credit Facility covenants.

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

(Dollars in thousands)		At September 30, 2010					At December 31, 2009
Bank		Commitment		In Use		Date of Expiry	Commitment		In Use		Date of Expiry
Wachovia Group Credit Facility	Tranche One	$	350,000	$	-		$	350,000	$	-
	Tranche Two		500,000		358,955	12/31/2010		500,000		386,548	12/31/2010
Total Wachovia Group Credit Facility		$	850,000	$	358,955		$	850,000	$	386,548

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Holdings Credit Facility

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

The Holdings Credit Facility requires Holdings to maintain a debt to capital ratio of not greater than 0.35 to 1 and Everest Reinsurance Company (“Everest Re”) to maintain its statutory surplus at $1,500,000 thousand plus 25% of future aggregate net income and 25% of future aggregate capital contributions after December 31, 2005, which at September 30, 2010, was $1,970,322 thousand.  As of September 30, 2010, Holdings was in compliance with all Holdings Credit Facility covenants.

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

(Dollars in thousands)	At September 30, 2010						At December 31, 2009
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	$	50,000	9/01/2010	10/01/2010	$	150,000	$	-
				20,000	9/13/2010	10/13/2010				-
				13,000	9/15/2010	10/15/2010				-
Total revolving credit borrowings				83,000						-
Total letters of credit				16,951		12/31/2010				27,959		12/31/2010
Total Citibank Holdings Credit Facility	$	150,000	$	99,951			$	150,000	$	27,959

Bermuda Re Letter of Credit Facility

Bermuda Re has a $300,000 thousand letter of credit issuance facility with Citibank N.A. referred to as the “Bermuda Re Letter of Credit Facility”, which commitment is reconfirmed annually.  The Bermuda Re Letter of Credit Facility provides for the issuance of up to $300,000 thousand of secured letters of credit to collateralize reinsurance obligations as a non-admitted reinsurer.  The interest on drawn letters of credit shall be (A) 0.20% per annum of the principal amount of issued standard letters of credit (expiry of 15 months or less) and (B) 0.25% per annum of the principal amount of issued extended tenor letters of credit (expiry maximum of up to 60 months).  The commitment fee on undrawn credit shall be 0.10% per annum.

The following table summarizes the outstanding letters of credit for the periods indicated:

(Dollars in thousands)	At September 30, 2010					At December 31, 2009
Bank	Commitment		In Use		Date of Expiry	Commitment		In Use		Date of Expiry
Citibank Bilateral Letter of Credit Agreement	$	300,000	$	2,291	11/24/2010	$	300,000	$	2,291	11/24/2010
				63,255	12/31/2010				74,744	12/31/2010
				36,191	1/31/2011				37,735	1/31/2011
				310	6/15/2011				-	-
				24,392	6/30/2014				25,432	6/30/2013
				29,253	12/31/2013				37,089	12/31/2013
				11,494	9/30/2014				11,984	9/30/2014
				28,674	12/31/2014				29,896	12/31/2014
Total Citibank Bilateral Agreement	$	300,000	$	195,860		$	300,000	$	219,171

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11.  TRUST AGREEMENTS

Certain subsidiaries of Group, principally Bermuda Re, a Bermuda insurance company and direct subsidiary of Group, have established trust agreements, which effectively use the Company’s investments as collateral, as security for assumed losses payable to certain non-affiliated ceding companies.  At September 30, 2010, the total amount on deposit in trust accounts was $100,562 thousand.

12.  SENIOR NOTES

Holdings has completed multiple public offerings.  The table below displays Holdings’ outstanding senior notes.  Market value is based on quoted market prices.

					September 30, 2010				December 31, 2009
					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	$	249,801	$	270,000	$	249,769	$	256,100
8.75% Senior notes (matured and paid on March 15, 2010)	03/14/2000	03/15/2010	$	200,000	$	-	$	-	$	199,970	$	200,000

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(Dollars in thousands)	2010		2009		2010		2009
Interest expense incurred	$	3,386	$	7,798	$	13,833	$	23,391

13.  LONG TERM SUBORDINATED NOTES

The table below displays Holdings’ outstanding fixed to floating rate long term subordinated notes.  Market value is based on quoted market prices.

Maturity Date

September 30, 2010

December 31, 2009

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

$

238,350

$

220,072

$

238,348

$

176,534

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 af ter the scheduled maturity date and prior to May 1, 2047 is subject to a replacement capital covenant.  This covenant is for the benefit of certain senior note holders and it mandates that Holdings receive proceeds

22

from the sale of another subordinated debt issue, of at least similar size, before it may redeem the subordinated notes.

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

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(Dollars in thousands)	2010		2009		2010		2009
Interest expense incurred	$	3,937	$	3,937	$	11,811	$	14,385

14.  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.

					September 30, 2010				December 31, 2009
					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	$	319,913	$	329,897	$	272,553

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

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(Dollars in thousands)	2010		2009		2010		2009
Interest expense incurred	$	5,113	$	5,113	$	15,340	$	15,340

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

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

There are certain regulatory and contractual restrictions on the ability of Holdings’ operating subsidiaries to transfer funds to Holdings in the form of cash dividends, loans or advances.  The insurance laws of the State of Delaware, where Holdings’ direct insurance subsidiaries are domiciled, require regulatory approval before those subsidiaries can pay dividends or make loans or advances to Holdings that exceed certain statutory thresholds.  In addition, the terms of Holdings Credit Facility (discussed in Note 10) require Everest Re, Holdings’ principal insurance subsidiary, to maintain a certain statutory surplus level as measured at the end

23

of each fiscal year.  At December 31, 2009, $2,351,990 thousand of the $3,271,079 thousand in net assets of Holdings’ consolidated subsidiaries were subject to the foregoing regulatory restrictions.

15.  SEGMENT REPORTING

The Company, through its subsidiaries, operates in five segments:  U.S. Reinsurance, U.S. Insurance, Specialty Underwriting, International and Bermuda.  The U.S. Reinsurance operation writes property and casualty reinsurance, on both a treaty and facultative basis, through reinsurance brokers, as well as directly with ceding companies within the U.S.  The U.S. Insurance operation writes property and casualty insurance primarily through general agents, brokers and surplus lines brokers within the U.S.  The Specialty Underwriting operation writes accident and health (“A&H”), marine, aviation and surety business within the U.S. and worldwide through brokers and directly with ceding companies.  The International operation writes non-U.S. property and casualty reinsuranc e through Everest Re’s branches in Canada and Singapore and offices in Miami and New Jersey. The Bermuda operation provides reinsurance and insurance to worldwide property and casualty markets and reinsurance to life insurers through brokers and directly with ceding companies from its Bermuda office and reinsurance to the United Kingdom and European markets through its UK branch and the Company’s Ireland location.

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

Underwriting results include earned premium less losses and loss adjustment expenses (“LAE”) incurred, commission and brokerage expenses and other underwriting expenses.  Underwriting results are measured using ratios, in particular loss, commission and brokerage and other underwriting expense ratios, which, respectively, divide incurred losses, commissions and brokerage and other underwriting expenses by premiums earned.  The Company utilizes inter-affiliate reinsurance, although such reinsurance does not materially impact segment results, as business is generally reported within the segment in which the business was first produced.

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

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

	Three Months Ended				Nine Months Ended
U.S. Reinsurance	September 30,				September 30,
(Dollars in thousands)	2010		2009		2010		2009
Gross written premiums	$	372,358	$	345,567	$	884,581	$	876,049
Net written premiums		372,579		346,306		885,404		873,112
Premiums earned	$	289,472	$	276,696	$	813,098	$	835,744
Incurred losses and LAE		158,655		120,980		458,658		417,670
Commission and brokerage		70,586		53,847		198,966		189,259
Other underwriting expenses		8,933		9,665		26,116		25,250
Underwriting gain (loss)	$	51,298	$	92,204	$	129,358	$	203,565

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	Three Months Ended						Nine Months Ended
U.S. Insurance	September 30,						September 30,
(Dollars in thousands)	2010			2009			2010			2009
Gross written premiums	$	211,632		$	230,491		$	644,810		$	648,719
Net written premiums		138,426			160,499			456,943			511,994
Premiums earned	$	155,770		$	168,402		$	472,916		$	503,039
Incurred losses and LAE		125,222			130,784			355,874			367,131
Commission and brokerage		29,404			34,591			90,486			99,290
Other underwriting expenses		19,479			19,982			52,335			56,415
Underwriting gain (loss)	$	(18,335	)	$	(16,955	)	$	(25,779	)	$	(19,797	)

	Three Months Ended					Nine Months Ended
Specialty Underwriting	September 30,					September 30,
(Dollars in thousands)	2010		2009			2010			2009
Gross written premiums	$	65,929	$	67,615		$	197,671		$	183,726
Net written premiums		64,827		66,909			194,407			180,622
Premiums earned	$	66,843	$	66,839		$	203,081		$	184,889
Incurred losses and LAE		46,755		48,153			154,928			130,869
Commission and brokerage		16,284		19,340			49,882			52,835
Other underwriting expenses		2,143		2,383			6,501			6,227
Underwriting gain (loss)	$	1,661	$	(3,037	)	$	(8,230	)	$	(5,042	)

	Three Months Ended					Nine Months Ended
International	September 30,					September 30,
(Dollars in thousands)	2010			2009		2010			2009
Gross written premiums	$	323,741		$	272,603	$	906,089		$	797,606
Net written premiums		319,405			270,891		901,677			794,520
Premiums earned	$	301,267		$	262,215	$	869,831		$	771,070
Incurred losses and LAE		223,360			165,370		875,077			454,249
Commission and brokerage		78,574			68,341		221,355			197,643
Other underwriting expenses		6,675			6,159		20,363			16,463
Underwriting gain (loss)	$	(7,342	)	$	22,345	$	(246,964	)	$	102,715

	Three Months Ended				Nine Months Ended
Bermuda	September 30,				September 30,
(Dollars in thousands)	2010		2009		2010		2009
Gross written premiums	$	189,931	$	212,564	$	564,968	$	594,346
Net written premiums		189,988		212,649		565,017		594,498
Premiums earned	$	183,913	$	201,228	$	555,540	$	569,836
Incurred losses and LAE		120,795		121,960		381,054		354,018
Commission and brokerage		42,625		53,138		125,939		145,482
Other underwriting expenses		7,107		6,315		19,713		17,474
Underwriting gain (loss)	$	13,386	$	19,815	$	28,834	$	52,862

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Dollars in thousands)	2010			2009			2010			2009
Underwriting gain (loss)	$	40,668		$	114,372		$	(122,781	)	$	334,303
Net investment income		141,368			165,387			468,598			401,350
Net realized capital gains (losses)		38,295			31,063			69,320			(10,612	)
Realized gain on debt repurchase		-			-			-			78,271
Net derivative gain (loss)		(552	)		(2,118	)		(19,802	)		(470	)
Corporate expenses		(3,917	)		(4,433	)		(12,379	)		(12,580	)
Interest, fee and bond issue cost amortization expense		(13,138	)		(17,376	)		(42,796	)		(54,634	)
Other income (expense)		1,714			(13,204	)		14,851			(15,995	)
Income (loss) before taxes	$	204,438		$	273,691		$	355,011		$	719,633

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

	Three Months Ended		Nine Months Ended
(Dollars in thousands)	September 30, 2010		September 30, 2010
United Kingdom	$	157,199	$	397,117

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

16.  SHARE-BASED COMPENSATION PLANS

There were no share-based compensation awards granted for the three months ended September 30, 2010.

17.  RETIREMENT BENEFITS

The Company maintains both qualified and non-qualified defined benefit pension plans and a retiree health plan for its U.S. employees employed prior to April 1, 2010.

Net periodic benefit cost for U.S. employees included the following components for the periods indicated:

Pension Benefits	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Dollars in thousands)	2010			2009			2010			2009
Service cost	$	1,736		$	1,504		$	5,208		$	4,511
Interest cost		1,763			1,597			5,289			4,789
Expected return on plan assets		(1,993	)		(1,537	)		(5,978	)		(4,609	)
Amortization of prior service cost		12			12			37			37
Amortization of net (income) loss		617			915			1,850			2,747
ASC 715 settlement charge		-			1			2,241			805
Net periodic benefit cost	$	2,135		$	2,492		$	8,647		$	8,280
Other Benefits	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Dollars in thousands)		2010			2009			2010			2009
Service cost	$	254		$	226		$	762		$	677
Interest cost		213			195			637			585
Amortization of net (income) loss		20			22			61			65
Net periodic benefit cost	$	487		$	443		$	1,460		$	1,327

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The Company contributions to the pension benefit plan were as follows for the periods indicated:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(Dollars in thousands)	2010		2009		2010		2009
Company contributions	$	-	$	1,746	$	-	$	5,237

18.  RELATED-PARTY TRANSACTIONS

During the normal course of business, the Company, through its affiliates, engages in reinsurance 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 operations and cash flows.

19.  INCOME TAXES

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

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

20.  SUBSEQUENT EVENTS

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

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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 charge d, 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., Bermuda 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 addition al sources of potential reinsurance and insurance capacity and competition.

Starting in the latter part of 2007 and continuing into 2010, there has been a significant slowdown in the global economy, which has negatively impacted the financial resources of the industry.  Excessive availability and use of credit, particularly by individuals, led to increased defaults on sub-prime mortgages in the U.S. and elsewhere, falling values for houses and many commodities and contracting consumer spending.  The significant increase in default rates negatively impacted the value of asset-backed securities held by both foreign and domestic institutions.  The defaults have led to a corresponding increase in foreclosures, which have driven down housing values, resulting in additional losses on asset-backed securities.  During the third and fourth quarters of 2008, credit markets de teriorated dramatically, evidenced by widening credit spreads and dramatically reduced availability of credit.  Many financial institutions, including some insurance entities, experienced liquidity crises due to immediate demands for funds for withdrawals or collateral, combined with falling asset values and their inability to sell assets to meet the increased demands.  As a result, several financial institutions failed or were acquired at distressed prices, while others received loans from the U.S. government to continue operations.  The liquidity crisis significantly increased the spreads on fixed maturity securities and, at the same time, had a dramatic and negative impact on the stock markets around the world.  The combination of losses on securities from failed or impaired companies combined with the decline in values of fixed maturity and equity securities resulted in significant declines in the capital bases of most insurance and reinsurance companies.  0;While there was significant improvement in the financial markets during 2009 and into 2010, concerns about interest rates, deflation and sovereign debt levels have hindered financial market recoveries.  It is too early to predict the timing and extent of the impact these financial market fluctuations will have on insurance and reinsurance market conditions.

Worldwide insurance and reinsurance market conditions continued to be very competitive, particularly in the casualty lines of business.  Generally, there was ample insurance and reinsurance capacity relative to demand.  We noted, however, that in many markets and lines during 2009 and into 2010, the rates of decline have slowed, pricing in some segments was relatively flat and there was upward movement in some others, particularly property catastrophe coverage in Latin America and Australia where there have been significant losses.  Competition and its effect on rates, terms and conditions vary widely by market and coverage yet continues to be most prevalent in the U.S. casualty insurance and reinsurance markets.  The U.S. insurance markets in which we participate were extremely competitive as well.

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

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

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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 shareholders’ equity for the periods indicated.

	Three Months Ended						Percentage			Nine Months Ended						Percentage
	September 30,						Increase/			September 30,						Increase/
(Dollars in millions)	2010			2009			(Decrease)			2010			2009			(Decrease)
Gross written premiums	$	1,163.6		$	1,128.8			3.1	%	$	3,198.1		$	3,100.4			3.2	%
Net written premiums		1,085.2			1,057.3			2.6	%		3,003.4			2,954.7			1.6	%
REVENUES:
Premiums earned	$	997.3		$	975.4			2.2	%	$	2,914.5		$	2,864.6			1.7	%
Net investment income		141.4			165.4			-14.5	%		468.6			401.4			16.8	%
Net realized capital gains (losses)		38.3			31.1			23.3	%		69.3			(10.6	)	NM
Realized gain on debt repurchase		-			-		NA				-			78.3		NA
Net derivative gain (loss)		(0.6	)		(2.1	)		-74.0	%		(19.8	)		(0.5	)	NM
Other income (expense)		1.7			(13.2	)		-113.0	%		14.9			(16.0	)		-192.8	%
Total revenues		1,178.1			1,156.5			1.9	%		3,447.4			3,317.1			3.9	%
CLAIMS AND EXPENSES:
Incurred losses and loss adjustment expenses		674.8			587.2			14.9	%		2,225.6			1,723.9			29.1	%
Commission, brokerage, taxes and fees		237.5			229.3			3.6	%		686.6			684.5			0.3	%
Other underwriting expenses		44.3			44.5			-0.4	%		125.0			121.8			2.6	%
Corporate expenses		3.9			4.4			-11.7	%		12.4			12.6			-1.6	%
Interest, fees and bond issue cost amortization expense		13.1			17.4			-24.4	%		42.8			54.6			-21.7	%
Total claims and expenses		973.7			882.8			10.3	%		3,092.4			2,597.5			19.1	%
INCOME (LOSS) BEFORE TAXES		204.4			273.7			-25.3	%		355.0			719.6			-50.7	%
Income tax expense (benefit)		30.2			45.1			-32.9	%		46.8			109.9			-57.4	%
NET INCOME (LOSS)	$	174.2		$	228.6			-23.8	%	$	308.2		$	609.8			-49.5	%
							Point									Point
RATIOS:							Change									Change
Loss ratio		67.7	%		60.2	%		7.5			76.4	%		60.2	%		16.2
Commission and brokerage ratio		23.8	%		23.5	%		0.3			23.6	%		23.9	%		(0.3	)
Other underwriting expense ratio		4.4	%		4.6	%		(0.2	)		4.2	%		4.2	%		-
Combined ratio		95.9	%		88.3	%		7.6			104.2	%		88.3	%		15.9
										At			At			Percentage
										September 30,			December 31,			Increase/
(Dollars in millions, except per share amounts)											2010			2009		(Decrease)
Balance sheet data:
Total investments and cash										$	15,487.5		$	14,918.8			3.8	%
Total assets											18,549.9			18,001.3			3.0	%
Loss and loss adjustment expense reserves											9,332.0			8,937.9			4.4	%
Total debt											901.0			1,018.0			-11.5	%
Total liabilities											12,268.3			11,899.6			3.1	%
Shareholders' equity											6,281.6			6,101.7			2.9	%
Book value per share											114.16			102.87
(NA, not applicable)
(NM, not meaningful)
(Some amounts may not reconcile due to rounding.)

Revenues.

Premiums.  Gross written premiums increased by $34.8 million, or 3.1%, for the three months ended September 30, 2010, compared to the three months ended September 30, 2009, reflecting an increase of $53.6 million in our reinsurance business, partially offset by an $18.9 million decrease in our insurance business.  Gross written premiums increased by $97.7 million, or 3.2%, for the nine months ended September 30, 2010, compared to the nine months ended September 30, 2009, reflecting a $101.6 million increase in our reinsurance business, partially offset by a $3.9 million decrease in our insurance business.  The increase in reinsurance premiums were primarily the result of increased writings in our treaty property and international treaty lines of business.  The decrease in insurance premiums were primarily the result of loss of business on terminated programs, lower premiums on a few of the existing programs and lower audit premium accruals on the workers’ compensation line of business.

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Net written premiums increased $28.0 million, or 2.6%, for the three months ended September 30, 2010 compared to the three months ended September 30, 2009, and increased $48.7 million, or 1.6%, for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009.  The increase in net written premiums was less proportionately than the increase in gross written premiums as a result of increased reinsurance on the newer insurance program business as well as increased cessions on an existing insurance program.  Premiums earned increased $21.9 million, or 2.2%, for the three months ended September 30, 2010, compared to the three months ended September 30, 2009, and increased $49.9 million, or 1.7%, for the nine months ended September 30, 2010, compared to the nine months ended September 30, 2009.  The change in net premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period, whereas written premiums are recorded at the initiation of the coverage period.

Net Investment Income.  Net investment income decreased $24.0 million, or 14.5%, for the three months ended September 30, 2010, primarily as a result of net investment losses from our limited partnerships of $1.1 million compared to net investment gains of $23.5 million for the three months ended September 30, 2009.  In contrast, net investment income increased $67.2 million, or 16.8%, for the nine months ended September 30, 2010, primarily as a result of net investment gains from our limited partnerships of $30.4 million compared with net investment losses of $29.2 million for the comparable period in 2009.  Net pre-tax investment income, as a percentage of average invested assets, was 3.9% for the three months ended September 30, 2010, compared to 4.6% for the three months ended September 30, 2009 and up at 4.3% for the nine months ended September 30, 2010 compared to 3.7% for the nine months ended September 30, 2009.  The variances in these yields were primarily the result of fluctuations in our limited partnership income.

Net Realized Capital Gains (Losses).  Net realized capital gains were $38.3 million for the three months ended September 30, 2010 and were comprised of $42.2 million from gains in fair value re-measurements, which were partially offset by $2.9 million of other-than-temporary impairments and $1.0 million of net realized capital losses from sales on our fixed maturity and equity securities.  Net realized capital gains were $31.1 million for the three months ended September 30, 2009.  Of the $31.1 million, $28.9 million was from gains in fair value re-measurements and $2.3 million of net realized capital gains from sales on our fixed maturity and equity securities.

Net realized capital gains were $69.3 million for the nine months ended September 30, 2010.  Of the $69.3 million, $49.2 million was from net realized capital gains from sales on our fixed maturity and equity securities and $23.0 million of gains in fair value re-measurements, which were partially offset by $2.9 million of other-than-temporary impairments.  Net realized capital losses were $10.6 million for the nine months ended September 30, 2009 and were comprised of $28.6 million from net realized capital losses from the sale on our fixed maturity and equity securities and $13.2 million of other-than-temporary impairments, which were partially offset by $31.3 million of gains in fair value re-measurements.

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

Net Derivative Gain (Loss).  In 2005 and prior, we sold seven equity index put option contracts, which are outstanding.  These contracts meet the definition of a derivative in accordance with FASB guidance and as such, are fair valued each quarter with the change recorded as net derivative gain or loss in the consolidated statements of operations and comprehensive income (loss).  As a result of these adjustments in value, we recognized net derivative losses of $0.6 million and $19.8 million for the three and nine months ended September 30, 2010, respectively, and net derivative losses of $2.1 million and $0.5 million for the three and nine months ended September 30, 2009, respectively.  The change in the fair value of these equ ity index put option contracts is indicative of the change in the financial markets over the same periods.

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Other Income (Expense).  We recorded other income of $1.7 million and $14.9 million for the three and nine months ended September 30, 2010, respectively, and other expense of $13.2 million and $16.0 million for the three and nine months ended September 30, 2009, respectively.  The changes were primarily the result of fluctuations in foreign currency exchange rates for the corresponding periods.

Claims and Expenses.

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

	Three Months Ended September 30,
	Current		Ratio %/				Prior			Ratio %/				Total		Ratio %/
(Dollars in millions)	Year		Pt Change				Years			Pt Change				Incurred		Pt Change
2010
Attritional (a)	$	605.9		60.8	%		$	(20.8	)		-2.1	%		$	585.1		58.7	%
Catastrophes (b)		91.6		9.2	%			(2.0	)		-0.2	%			89.7		9.0	%
A&E		-		0.0	%			-			0.0	%			-		0.0	%
Total	$	697.5		69.9	%		$	(22.8	)		-2.3	%		$	674.8		67.7	%
2009
Attritional (a)	$	554.0		56.8	%		$	8.7			0.9	%		$	562.7		57.7	%
Catastrophes		20.1		2.1	%			4.5			0.5	%			24.5		2.5	%
A&E		-		0.0	%			-			0.0	%			-		0.0	%
Total	$	574.1		58.9	%		$	13.2			1.3	%		$	587.2		60.2	%
Variance 2010/2009
Attritional (a)	$	51.9		4.0		pts	$	(29.5	)		(3.0	)	pts	$	22.4		1.0		pts
Catastrophes		71.5		7.1		pts		(6.5	)		(0.7	)	pts		65.2		6.5		pts
A&E		-		-		pts		-			-		pts		-		-		pts
Total	$	123.4		11.0		pts	$	(36.0	)		(3.6	)	pts	$	87.6		7.5		pts

	Nine Months Ended September 30,
	Current		Ratio %/				Prior			Ratio %/				Total		Ratio %/
(Dollars in millions)	Year		Pt Change				Years			Pt Change				Incurred		Pt Change
2010
Attritional (a)	$	1,741.6		59.8	%		$	(29.8	)		-1.0	%		$	1,711.8		58.7	%
Catastrophes (b)		527.1		18.1	%			(13.3	)		-0.5	%			513.8		17.6	%
A&E		-		0.0	%			-			0.0	%			-		0.0	%
Total	$	2,268.7		77.8	%		$	(43.1	)		-1.5	%		$	2,225.6		76.4	%
2009
Attritional (a)	$	1,625.4		56.7	%		$	32.6			1.1	%		$	1,658.0		57.9	%
Catastrophes		56.0		2.0	%			9.9			0.4	%			65.9		2.3	%
A&E		-		0.0	%			-			0.0	%			-		0.0	%
Total	$	1,681.3		58.7	%		$	42.6			1.5	%		$	1,723.9		60.2	%
Variance 2010/2009
Attritional (a)	$	116.2		3.1		pts	$	(62.4	)		(2.1	)	pts	$	53.8		0.8		pts
Catastrophes		471.1		16.1		pts		(23.2	)		(0.9	)	pts		447.9		15.3		pts
A&E		-		-		pts		-			-		pts		-		-		pts
Total	$	587.4		19.1		pts	$	(85.7	)		(3.0	)	pts	$	501.7		16.2		pts
(a)  Attritional losses exclude catastrophe and Asbestos and Environmental ("A&E").
(b)  Effective with the 2010 reporting period, a catastrophe is a property event with expected reported losses of at least $10.0 million.
All prior periods reflect a catastrophe as a property event with expected reported losses of at least $5.0 million.
(Some amounts may not reconcile due to rounding.)

Incurred losses and LAE increased by $87.6 million, or 14.9%, for the three months ended September 30, 2010 compared to the same period in 2009.  Of the $87.6 million increase, current year catastrophe losses increased $71.5 million, or 7.1 points, period over period, primarily due to the New Zealand earthquake and the Canadian hailstorm.

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Incurred losses and LAE increased by $501.7 million, or 29.1%, for the nine months ended September 30, 2010 compared to the same period in 2009.  Of the $501.7 million increase, current year catastrophe losses increased $471.1 million, or 16.1 points, period over period, primarily due to the Chilean earthquake, New Zealand earthquake, Australian hailstorms and the Canadian hailstorm.

Commission, Brokerage, Taxes and Fees.  Commission, brokerage, taxes and fees increased by $8.2 million, or 3.6%, for the three months ended September 30, 2010 compared to the same period in 2009, and by $2.1 million, or 0.3%, for the nine months ended September 30, 2010 compared to the same period in 2009.  These increases were primarily the result of the changes in the mix of business and the increase in premiums earned.

Other Underwriting Expenses.  Other underwriting expenses were $44.3 million and $44.5 million for the three months ended September 30, 2010 and 2009, respectively, and $125.0 million and $121.8 million for the nine months ended September 30, 2010 and 2009, respectively.

Corporate Expenses.  Corporate expenses, which are expenses that are not allocated to segments, were $3.9 million and $4.4 million for the three months ended September 30, 2010 and 2009, respectively, and $12.4 million and $12.6 million for the nine months ended September 30, 2010 and 2009, respectively.  These expenses were previously included as underwriting expenses and therefore included in the other underwriting expense ratio.  Effective January 1, 2010, these expenses were removed from the calculation of the other underwriting expense ratio and prior periods were recalculated to conform.

Interest, Fees and Bond Issue Cost Amortization Expense.  Interest, fees and other bond amortization expense was $13.1 million and $17.4 million for the three months ended September 30, 2010 and 2009, respectively, and $42.8 million and $54.6 million for the nine months ended September 30, 2010 and 2009, respectively.  These decreases were primarily due to the combination of the repurchase of debt in March 2009 and the maturing of debt in 2010.

Income Tax Expense (Benefit).  We had income tax expense of $30.2 million and $46.8 million for the three and nine months ended September 30, 2010, respectively, and $45.1 million and $109.9 million for the three and nine months ended September 30, 2009, respectively.  Our income tax is primarily a function of the statutory tax rates and corresponding pre-tax income in the jurisdictions where we operate, 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 among jurisdictions with different tax rates.

Net Income (Loss).

Our net income was $174.2 million and $228.6 million for the three months ended September 30, 2010 and 2009, respectively, and $308.2 million and $609.8 million for the nine months ended September 30, 2010 and 2009, respectively.  These decreases were primarily driven by a few large catastrophe losses in 2010 compared to no similar catastrophe events in 2009 in addition to the other components discussed above.

Ratios.

Our combined ratio increased by 7.6 points to 95.9% for the three months ended September 30, 2010 compared to 88.3% for the three months ended September 30, 2009, and increased by 15.9 points to 104.2% for the nine months ended September 30, 2010 compared to 88.3% for the nine months ended September 30, 2009.  The loss ratio component increased 7.5 points and 16.2 points for the three and nine months ended September 30, 2010, respectively, over the same period last year, principally due to the increase in current year catastrophe losses as a result of the Chilean earthquake, New Zealand earthquake, Australian hailstorms and the Canadian hailstorm.   Both the other underwriting expense ratio component and the commission and brokerage ratio component remained relatively flat over the same periods last year.< /font>

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Shareholders’ Equity.

Shareholders’ equity increased by $179.9 million to $6,281.6 million at September 30, 2010 from $6,101.7 million at December 31, 2009, principally as a result of $312.5 million of unrealized appreciation, net of tax, on investments, $308.2 million of net income and share-based compensation transactions of $13.4 million, partially offset by repurchases of 4.5 million common shares for $346.8 million, $82.4 million of shareholder dividends and $26.2 million of foreign currency translation adjustments.

Consolidated Investment Results

Net Investment Income.

Net investment income decreased by 14.5% to $141.4 million for the three months ended September 30, 2010 compared to $165.4 million for the three months ended September 30, 2009 and increased by 16.8% to $468.6 million for the nine months ended September 30, 2010 from $401.4 million for the nine months ended September 30, 2009.  The variances for the three and nine months, period over period, were primarily due to the changes in reported gains and losses from our limited partnership investments.  The losses for the nine months of 2009 included the results of 2008 fourth quarter losses from those limited partnerships that invested in non-public securities and were on a quarter reporting lag.

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Dollars in millions)	2010			2009			2010			2009
Fixed maturities	$	143.8		$	145.4		$	438.0		$	434.4
Equity securities		2.7			0.8			8.1			2.2
Short-term investments and cash		0.4			0.6			-			5.9
Other invested assets
Limited partnerships		(1.1	)		23.5			30.4			(29.2	)
Other		0.2			(1.3	)		0.9			(0.3	)
Total gross investment income		146.0			168.9			477.4			412.9
Interest debited (credited) and other expense		(4.6	)		(3.5	)		(8.8	)		(11.5	)
Total net investment income	$	141.4		$	165.4		$	468.6		$	401.4
(Some amounts may not reconcile due to rounding.)

The following tables show a comparison of various investment yields for the periods indicated.

	At	At
	September 30,	December 31,
	2010	2009
Imbedded pre-tax yield of cash and invested assets	4.1%	4.1%
Imbedded after-tax yield of cash and invested assets	3.7%	3.6%

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2010	2009	2010	2009
Annualized pre-tax yield on average cash and invested assets	3.9%	4.6%	4.3%	3.7%
Annualized after-tax yield on average cash and invested assets	3.4%	4.2%	3.8%	3.4%

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Net Realized Capital Gains (Losses).

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

	Three Months Ended September 30,									Nine Months Ended September 30,
(Dollars in millions)	2010			2009			Variance			2010			2009			Variance
Gains (losses) from sales:
Fixed maturity securities, market value
Gains	$	4.1		$	4.0		$	0.1		$	70.2		$	12.0		$	58.2
Losses		(6.6	)		(11.4	)		4.8			(21.9	)		(55.6	)		33.7
Total		(2.5	)		(7.4	)		4.9			48.3			(43.6	)		91.9
Fixed maturity securities, fair value
Gains		0.5			0.3			0.2			0.8			0.6			0.2
Losses		-			-			-			-			(0.1	)		0.1
Total		0.5			0.2			0.3			0.8			0.4			0.4
Equity securities, market value
Gains		-			8.1			(8.1	)		0.1			8.1			(8.0	)
Losses		-			-			-			-			-			-
Total		-			8.1			(8.1	)		0.1			8.1			(8.0	)
Equity securities, fair value
Gains		1.0			1.3			(0.3	)		4.6			7.2			(2.6	)
Losses		(0.1	)		-			(0.1	)		(4.7	)		(0.7	)		(4.0	)
Total		0.9			1.3			(0.4	)		-			6.5			(6.5	)
Total net realized capital gains (losses) from sales
Gains		5.6			13.8			(8.2	)		75.7			27.9			47.8
Losses		(6.7	)		(11.4	)		4.7			(26.6	)		(56.4	)		29.8
Total		(1.0	)		2.3			(3.4	)		49.2			(28.6	)		77.7
Other-than-temporary impairments:		(2.9	)		-			(2.9	)		(2.9	)		(13.2	)		10.3
Gains (losses) from fair value adjustments:
Fixed maturities, fair value		3.3			5.8			(2.5	)		3.8			7.8			(4.0	)
Equity securities, fair value		38.9			23.0			15.9			19.3			23.4			(4.1	)
Total		42.2			28.9			13.3			23.0			31.3			(8.3	)
Total net realized capital gains (losses)	$	38.3		$	31.1		$	7.2		$	69.3		$	(10.6	)	$	79.9
(Some amounts may not reconcile due to rounding.)

Net realized capital gains were $38.3 million and $31.1 million for the three months ended September 30, 2010 and 2009, respectively.  We recorded $42.2 million and $28.9 million of gains due to fair value re-measurements on fixed maturity and equity securities, $2.9 million and $0.0 million of other-than-temporary impairments on fixed maturity securities and $1.0 million of net realized capital losses and $2.3 million of net realized capital gains from sales of fixed maturity and equity securities for the three months ended September 30, 2010 and 2009, respectively.

Net realized capital gains were $69.3 million and net realized capital losses were $10.6 million for the nine months ended September 30, 2010 and 2009, respectively.  We recorded $49.2 million of net realized capital gains and $28.6 million of net realized capital losses from sales of fixed maturity and equity securities, $23.0 million and $31.3 million of gains due to fair value re-measurements on fixed maturity and equity securities and $2.9 million and $13.2 million of other-than-temporary impairments on fixed maturity securities for the nine months ended September 30, 2010 and 2009, respectively.  The gains on the sales of fixed maturity securities were primarily the result of selling securities in foreign currencies, which will reduce our exposure to currency fluctuations in the future.

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Segment Results.

Through our subsidiaries, we operate in five segments:  U.S. Reinsurance, U.S. Insurance, Specialty Underwriting, International and Bermuda.  The U.S. Reinsurance operation writes property and casualty reinsurance, on both a treaty and facultative basis, through reinsurance brokers, as well as directly with ceding companies within the U.S.  The U.S. Insurance operation writes property and casualty insurance primarily through general agents, brokers and surplus lines brokers within the U.S.  The Specialty Underwriting operation writes accident and health (“A&H”), marine, aviation and surety business within the U.S. and worldwide through brokers and directly with ceding companies.  The International operation writes non-U.S. property and casualty reinsurance through E verest Re’s branches in Canada and Singapore and offices in Miami and New Jersey.  The Bermuda operation provides reinsurance and insurance to worldwide property and casualty markets and reinsurance to life insurers through brokers and directly with ceding companies from its Bermuda office and reinsurance to the United Kingdom and European markets through its UK branch and the Company’s Ireland location.

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.  We utilize inter-affiliate reinsurance, although such reinsurance does not materially impact segment results, as business is generally reported within the segment in which the business was first produced.

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 re-evaluation is made.

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

U.S. Reinsurance.

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

	Three Months Ended September 30,												Nine Months Ended September 30,
(Dollars in millions)	2010			2009			Variance			% Change			2010			2009			Variance			% Change
Gross written premiums	$	372.4		$	345.6		$	26.8			7.8	%	$	884.6		$	876.0		$	8.5			1.0	%
Net written premiums		372.6			346.3			26.3			7.6	%		885.4			873.1			12.3			1.4	%
Premiums earned	$	289.5		$	276.7		$	12.8			4.6	%	$	813.1		$	835.7		$	(22.6	)		-2.7	%
Incurred losses and LAE		158.7			121.0			37.7			31.1	%		458.7			417.7			41.0			9.8	%
Commission and brokerage		70.6			53.8			16.7			31.1	%		199.0			189.3			9.7			5.1	%
Other underwriting expenses		8.9			9.7			(0.7	)		-7.6	%		26.1			25.3			0.9			3.4	%
Underwriting gain (loss)	$	51.3		$	92.2		$	(40.9	)		-44.4	%	$	129.4		$	203.6		$	(74.2	)		-36.5	%
										Point Chg												Point Chg
Loss ratio		54.8	%		43.7	%					11.1			56.4	%		50.0	%					6.4
Commission and brokerage ratio		24.4	%		19.5	%					4.9			24.5	%		22.6	%					1.9
Other underwriting expense ratio		3.1	%		3.5	%					(0.4	)		3.2	%		3.0	%					0.2
Combined ratio		82.3	%		66.7	%					15.6			84.1	%		75.6	%					8.5
(Some amounts may not reconcile due to rounding.)

Premiums.Gross written premiums increased by 7.8% to $372.4 million for the three months ended September 30, 2010 from $345.6 million for the three months ended September 30, 2009, primarily due to a $37.0 million (18.2%) increase in treaty property volume, partially offset by a $5.3 million (19.6%) decrease in the crop hail quota share treaties, $4.2 million (4.5%) decrease in U.S. treaty casualty volume and a $0.7 million (3.1%) decrease in facultative volume.  Net written premiums increased 7.6% to $372.6 million for the three months ended September 30, 2010 compared to $346.3 million for the three months ended September 30, 2009, in line with the increase in gross written premiums.   ;Premiums earned increased 4.6% to $289.5 million for the three months ended September 30, 2010 compared to $276.7 million for the three months ended September 30, 2009.  The change in premiums earned relative to net written premiums is the result of timing on proportional contracts where premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.

Gross written premiums increased by 1.0% to $884.6 million for the nine months ended September 30, 2010 from $876.0 million for the nine months ended September 30, 2009, primarily due to a $64.0 million (13.5%) increase in treaty property volume, partially offset by a $24.4 million (35.7%) decrease in the crop hail quota share treaties, a $17.6 million (24.6%) decrease in facultative volume and a $13.3 million (5.1%) decrease in U.S. treaty casualty volume.  Net written premiums increased 1.4% to $885.4 million for the nine months ended September 30, 2010 compared to $873.1 million for the nine months ended September 30, 2009.  Premiums earned decreased 2.7% to $813.1 million for the nine months ended September 30, 2010 compared to $835.7 million for the nine months ended September 30, 2009.  Variance s for net written premiums and premiums earned for the nine months were driven by similar factors as those discussed above for the three months.

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

	Three Months Ended September 30,
	Current			Ratio %/				Prior			Ratio %/				Total			Ratio %/
(Dollars in millions)	Year			Pt Change				Years			Pt Change				Incurred			Pt Change
2010
Attritional	$	163.0			56.3	%		$	1.1			0.4	%		$	164.1			56.7	%
Catastrophes		(4.9	)		-1.7	%			(0.6	)		-0.2	%			(5.5	)		-1.9	%
A&E		-			0.0	%			-			0.0	%			-			0.0	%
Total segment	$	158.1			54.6	%		$	0.6			0.2	%		$	158.7			54.8	%
2009
Attritional	$	134.7			48.7	%		$	(16.2	)		-5.9	%		$	118.5			42.8	%
Catastrophes		-			0.0	%			2.5			0.9	%			2.5			0.9	%
A&E		-			0.0	%			-			0.0	%			-			0.0	%
Total segment	$	134.7			48.7	%		$	(13.8	)		-5.0	%		$	121.0			43.7	%
Variance 2010/2009
Attritional	$	28.3			7.6		pts	$	17.3			6.3		pts	$	45.6			13.9		pts
Catastrophes		(4.9	)		(1.7	)	pts		(3.1	)		(1.1	)	pts		(8.0	)		(2.8	)	pts
A&E		-			-		pts		-			-		pts		-			-		pts
Total segment	$	23.4			5.9		pts	$	14.4			5.2		pts	$	37.7			11.1		pts

	Nine Months Ended September 30,
	Current		Ratio %/				Prior			Ratio %/				Total		Ratio %/
(Dollars in millions)	Year		Pt Change				Years			Pt Change				Incurred		Pt Change
2010
Attritional	$	433.7		53.3	%		$	6.9			0.9	%		$	440.7		54.2	%
Catastrophes		18.1		2.2	%			(0.1	)		0.0	%			18.0		2.2	%
A&E		-		0.0	%			-			0.0	%			-		0.0	%
Total segment	$	451.8		55.6	%		$	6.9			0.8	%		$	458.7		56.4	%
2009
Attritional	$	420.8		50.4	%		$	(3.7	)		-0.4	%		$	417.1		49.9	%
Catastrophes		-		0.0	%			0.6			0.1	%			0.6		0.1	%
A&E		-		0.0	%			-			0.0	%			-		0.0	%
Total segment	$	420.8		50.4	%		$	(3.1	)		-0.4	%		$	417.7		50.0	%
Variance 2010/2009
Attritional	$	12.9		2.9		pts	$	10.6			1.3		pts	$	23.6		4.3		pts
Catastrophes		18.1		2.2		pts		(0.7	)		(0.1	)	pts		17.4		2.1		pts
A&E		-		-		pts		-			-		pts		-		-		pts
Total segment	$	31.0		5.2		pts	$	10.0			1.2		pts	$	41.0		6.4		pts
(Some amounts may not reconcile due to rounding.)

Incurred losses were $37.7 million (11.1 points) higher at $158.7 million for the three months ended September 30, 2010 compared to $121.0 million for the three months ended September 30, 2009, primarily as a result of the $45.6 million increase in attritional losses due to the increase in current year treaty property expected loss ratios and a $17.3 million increase in prior year reserve development on treaty casualty business primarily due to favorable development in 2009, partially offset by an $8.0 million combined decrease in both current year and prior years catastrophe losses.

Incurred losses were $41.0 million (6.4 points) higher at $458.7 million for the nine months ended September 30, 2010 compared to $417.7 million for the nine months ended September 30, 2009, primarily as a result of the $23.6 million (4.3 points) increase in attritional losses, principally due to the increase in current year treaty property expected loss ratios, less favorable development on treaty casualty’s prior years losses and a $17.4 million (2.1 points) increase in catastrophe losses, due to the New Zealand earthquake and the Chilean earthquake.

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Segment Expenses.  Commission and brokerage expenses increased by 31.1% to $70.6 million for the three months ended September 30, 2010 compared to $53.8 million for the three months ended September 30, 2009.  Commission and brokerage expenses increased by 5.1% to $199.0 million for the nine months ended September 30, 2010 compared to $189.3 million for the nine months ended September 30, 2009.  These increases were primarily due to an increase in commission on a large treaty property transaction and an increase in contingent commissions on treaty casualty business.

Segment other underwriting expenses for the three months ended September 30, 2010 decreased slightly to $8.9 million from $9.7 million for the three months ended September 30, 2009, and segment other underwriting expenses for the nine months ended September 30, 2010 increased slightly to $26.1 million from $25.3 million for the nine months ended September 30, 2009.

U.S. Insurance.

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

	Three Months Ended September 30,												Nine Months Ended September 30,
(Dollars in millions)	2010			2009			Variance			% Change			2010			2009			Variance			% Change
Gross written premiums	$	211.6		$	230.5		$	(18.9	)		-8.2	%	$	644.8		$	648.7		$	(3.9	)		-0.6	%
Net written premiums		138.4			160.5			(22.1	)		-13.8	%		456.9			512.0			(55.1	)		-10.8	%
Premiums earned	$	155.8		$	168.4		$	(12.6	)		-7.5	%	$	472.9		$	503.0		$	(30.1	)		-6.0	%
Incurred losses and LAE		125.2			130.8			(5.6	)		-4.3	%		355.9			367.1			(11.3	)		-3.1	%
Commission and brokerage		29.4			34.6			(5.2	)		-15.0	%		90.5			99.3			(8.8	)		-8.9	%
Other underwriting expenses		19.5			20.0			(0.5	)		-2.5	%		52.3			56.4			(4.1	)		-7.2	%
Underwriting gain (loss)	$	(18.3	)	$	(17.0	)	$	(1.4	)		8.1	%	$	(25.8	)	$	(19.8	)	$	(6.0	)		30.2	%
										Point Chg												Point Chg
Loss ratio		80.4	%		77.7	%					2.7			75.3	%		73.0	%					2.3
Commission and brokerage ratio		18.9	%		20.5	%					(1.6	)		19.1	%		19.7	%					(0.6	)
Other underwriting expense ratio		12.5	%		11.9	%					0.6			11.1	%		11.2	%					(0.1	)
Combined ratio		111.8	%		110.1	%					1.7			105.5	%		103.9	%					1.6
(Some amounts may not reconcile due to rounding.)

Premiums.Gross written premiums decreased by 8.2% to $211.6 million for the three months ended September 30, 2010 compared to $230.5 million for the three months ended September 30, 2009, as we continue to adjust our book of business in response to changing market conditions.  Net written premiums decreased by a larger percentage than the decline in gross written premiums due to increased cessions on the newer business and one older program.  Ceded premiums generally relate to specific reinsurance purchased and fluctuate based upon the level of premiums written in the individual reinsured programs.  Premiums earned decreased 7.5% to $155.8 million for the three months ended Se ptember 30, 2010 compared to $168.4 million for the three months ended September 30, 2009.  The change in premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.

Gross written premiums decreased by 0.6% to $644.8 million for the nine months ended September 30, 2010 compared to $648.7 million for the nine months ended September 30, 2009.  Net written premiums decreased by a larger percentage than the decline in gross written premiums due to increased cessions on some new programs and one older program.  Premiums earned decreased 6.0% to $472.9 million for the nine months ended September 30, 2010 compared to $503.0 million for the nine months ended September 30, 2009 due to timing as discussed above.

39

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

	Three Months Ended September 30,
	Current			Ratio %/				Prior			Ratio %/				Total			Ratio %/
(Dollars in millions)	Year			Pt Change				Years			Pt Change				Incurred			Pt Change
2010
Attritional	$	120.8			77.6	%		$	4.4			2.8	%		$	125.2			80.4	%
Catastrophes		-			0.0	%			-			0.0	%			-			0.0	%
Total segment	$	120.8			77.6	%		$	4.4			2.8	%		$	125.2			80.4	%
2009
Attritional	$	121.0			71.8	%		$	9.8			5.8	%		$	130.8			77.7	%
Catastrophes		-			0.0	%			-			0.0	%			-			0.0	%
Total segment	$	121.0			71.8	%		$	9.8			5.8	%		$	130.8			77.7	%
Variance 2010/2009
Attritional	$	(0.2	)		5.8		pts	$	(5.4	)		(3.0	)	pts	$	(5.6	)		2.7		pts
Catastrophes		-			-		pts		-			-		pts		-			-		pts
Total segment	$	(0.2	)		5.8		pts	$	(5.4	)		(3.0	)	pts	$	(5.6	)		2.7		pts

	Nine Months Ended September 30,
	Current			Ratio %/				Prior			Ratio %/				Total			Ratio %/
(Dollars in millions)	Year			Pt Change				Years			Pt Change				Incurred			Pt Change
2010
Attritional	$	349.3			73.9	%		$	6.6			1.4	%		$	355.9			75.3	%
Catastrophes		-			0.0	%			-			0.0	%			-			0.0	%
Total segment	$	349.3			73.9	%		$	6.6			1.4	%		$	355.9			75.3	%
2009
Attritional	$	356.8			70.9	%		$	10.3			2.0	%		$	367.1			73.0	%
Catastrophes		-			0.0	%			-			0.0	%			-			0.0	%
Total segment	$	356.8			70.9	%		$	10.3			2.0	%		$	367.1			73.0	%
Variance 2010/2009
Attritional	$	(7.5	)		3.0		pts	$	(3.7	)		(0.6	)	pts	$	(11.2	)		2.3		pts
Catastrophes		-			-		pts		-			-		pts		-			-		pts
Total segment	$	(7.5	)		3.0		pts	$	(3.7	)		(0.6	)	pts	$	(11.2	)		2.3		pts
(Some amounts may not reconcile due to rounding.)

Incurred losses and LAE decreased by 4.3% to $125.2 million for the three months ended September 30, 2010 compared to $130.8 million for the three months ended September 30, 2009.  The current year attritional loss decrease was due to a decrease in premiums earned, partially offset by an increase in the current year attritional losses for California workers’ compensation business.  In addition, prior years reserve development decreased period over period.

Incurred losses and LAE decreased by 3.1% to $355.9 million for the nine months ended September 30, 2010 compared to $367.1 million for the nine months ended September 30, 2009.  The decrease was due to similar factors as discussed for the three month comparison above.

Segment Expenses.Commission and brokerage decreased by 15.0% to $29.4 million for the three months ended September 30, 2010 compared to $34.6 million for the three months ended September 30, 2009.  Commission and brokerage decreased by 8.9% to $90.5 million for the nine months ended September 30, 2010 compared to $99.3 million for the nine months ended September 30, 2009.  These decreases were primarily the result of a decrease in net earned premiums in conjunction with the impact of additional reinsurance ceded and changes in the mix of business.

40

Segment other underwriting expenses for the three months ended September 30, 2010 decreased to $19.5 million compared to $20.0 million for the three months ended September 30, 2009.  Segment other underwriting expenses for the nine months ended September 30, 2010 decreased to $52.3 million compared to $56.4 million for the nine months ended September 30, 2009. These decreases were the result of management’s direct actions to reduce operating expenses.

Specialty Underwriting.

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

	Three Months Ended September 30,												Nine Months Ended September 30,
(Dollars in millions)	2010			2009			Variance			% Change			2010			2009			Variance			% Change
Gross written premiums	$	65.9		$	67.6		$	(1.7	)		-2.5	%	$	197.7		$	183.7		$	13.9			7.6	%
Net written premiums		64.8			66.9			(2.1	)		-3.1	%		194.4			180.6			13.8			7.6	%
Premiums earned	$	66.8		$	66.8		$	-			0.0	%	$	203.1		$	184.9		$	18.2			9.8	%
Incurred losses and LAE		46.8			48.2			(1.4	)		-2.9	%		154.9			130.9			24.1			18.4	%
Commission and brokerage		16.3			19.3			(3.1	)		-15.8	%		49.9			52.8			(3.0	)		-5.6	%
Other underwriting expenses		2.1			2.4			(0.2	)		-10.1	%		6.5			6.2			0.3			4.4	%
Underwriting gain (loss)	$	1.7		$	(3.0	)	$	4.7			-154.7	%	$	(8.2	)	$	(5.0	)	$	(3.2	)		63.2	%
										Point Chg												Point Chg
Loss ratio		69.9	%		72.0	%					(2.1	)		76.3	%		70.8	%					5.5
Commission and brokerage ratio		24.4	%		28.9	%					(4.5	)		24.6	%		28.6	%					(4.0	)
Other underwriting expense ratio		3.2	%		3.6	%					(0.4	)		3.2	%		3.3	%					(0.1	)
Combined ratio		97.5	%		104.5	%					(7.0	)		104.1	%		102.7	%					1.4
(Some amounts may not reconcile due to rounding.)

Premiums.Gross written premiums decreased by 2.5% to $65.9 million for the three months ended September 30, 2010 compared to $67.6 million for the three months ended September 30, 2009, primarily due to a $6.5 million and $5.8 million decrease in marine and aviation business, respectively, partially offset by a $10.2 million increase in A&H business, attributable to travel reinsurance and medical stop loss business.  Net written premiums decreased 3.1% to $64.8 million for the three months ended September 30, 2010 compared to $66.9 million for the three months ended September 30, 2009, in line with the decrease in gross writings.  Premiums earned remained flat at $66.8 million for t he three months ended September 30, 2010 and 2009.  The change in premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.

Gross written premiums increased by 7.6% to $197.7 million for the nine months ended September 30, 2010 compared to $183.7 million for the nine months ended September 30, 2009, primarily due to an increase in A&H business, for travel reinsurance and medical stop loss business of $29.0 million, partially offset by a net decrease in marine and aviation business of $14.2 million.  Correspondingly, net written premiums increased 7.6% to $194.4 million for the nine months ended September 30, 2010 compared to $180.6 million for the nine months ended September 30, 2009.  Premiums earned increased 9.8% to $203.1 million for the nine months ended September 30, 2010 compared to $184.9 million for the nine months ended September 30, 2009, relatively consistent with the increase in net written premiums.

41

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

	Three Months Ended September 30,
	Current			Ratio %/				Prior			Ratio %/				Total			Ratio %/
(Dollars in millions)	Year			Pt Change				Years			Pt Change				Incurred			Pt Change
2010
Attritional	$	46.0			68.7	%		$	-			0.0	%		$	46.0			68.7	%
Catastrophes		-			0.0	%			0.8			1.2	%			0.8			1.2	%
Total segment	$	46.0			68.7	%		$	0.8			1.2	%		$	46.8			69.9	%
2009
Attritional	$	46.4			69.5	%		$	2.5			3.7	%		$	48.9			73.2	%
Catastrophes		-			0.0	%			(0.8	)		-1.2	%			(0.8	)		-1.2	%
Total segment	$	46.4			69.5	%		$	1.7			2.6	%		$	48.2			72.0	%
Variance 2010/2009
Attritional	$	(0.4	)		(0.8	)	pts	$	(2.5	)		(3.7	)	pts	$	(2.9	)		(4.5	)	pts
Catastrophes		-			-		pts		1.6			2.4		pts		1.6			2.4		pts
Total segment	$	(0.4	)		(0.8	)	pts	$	(0.9	)		(1.4	)	pts	$	(1.4	)		(2.1	)	pts

	Nine Months Ended September 30,
	Current		Ratio %/				Prior			Ratio %/				Total		Ratio %/
(Dollars in millions)	Year		Pt Change				Years			Pt Change				Incurred		Pt Change
2010
Attritional	$	150.1		73.9	%		$	-			0.0	%		$	150.1		73.9	%
Catastrophes		-		0.0	%			4.8			2.4	%			4.8		2.4	%
Total segment	$	150.1		73.9	%		$	4.8			2.4	%		$	154.9		76.3	%
2009
Attritional	$	124.5		67.4	%		$	2.5			1.4	%		$	127.0		68.7	%
Catastrophes		-		0.0	%			3.9			2.1	%			3.9		2.1	%
Total segment	$	124.5		67.4	%		$	6.4			3.4	%		$	130.9		70.8	%
Variance 2010/2009
Attritional	$	25.6		6.5		pts	$	(2.5	)		(1.4	)	pts	$	23.1		5.2		pts
Catastrophes		-		-		pts		0.9			0.3		pts		0.9		0.3		pts
Total segment	$	25.6		6.5		pts	$	(1.6	)		(1.0	)	pts	$	24.0		5.5		pts
(Some amounts may not reconcile due to rounding.)

Incurred losses and LAE decreased by 2.9% to $46.8 million for the three months ended September 30, 2010 compared to $48.2 million for the three months ended September 30, 2009, primarily the result of a decrease in prior years attritional reserve development, specifically the marine line of business, partially offset by an increase in prior years catastrophe losses.

Incurred losses and LAE increased by 18.4% to $154.9 million for the nine months ended September 30, 2010 compared to $130.9 million for the nine months ended September 30, 2009, primarily driven by a $25.6 million (6.5 points) increase in current year attritional losses, as a result of losses on the offshore oil rig in the Gulf.

Segment Expenses.Commission and brokerage decreased 15.8% to $16.3 million for the three months ended September 30, 2010 compared to $19.3 million for the three months ended September 30, 2009.  Commission and brokerage decreased 5.6% to $49.9 million for the nine months ended September 30, 2010 compared to $52.8 million for the nine months ended September 30, 2009. These decreases were due to the changes in the mix of business and lower contingent commissions on the surety book of business.

42

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

International.

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

	Three Months Ended September 30,												Nine Months Ended September 30,
(Dollars in millions)	2010			2009			Variance			% Change			2010			2009			Variance			% Change
Gross written premiums	$	323.7		$	272.6		$	51.1			18.8	%	$	906.1		$	797.6		$	108.5			13.6	%
Net written premiums		319.4			270.9			48.5			17.9	%		901.7			794.5			107.2			13.5	%
Premiums earned	$	301.3		$	262.2		$	39.1			14.9	%	$	869.8		$	771.1		$	98.8			12.8	%
Incurred losses and LAE		223.4			165.4			58.0			35.1	%		875.1			454.2			420.8			92.6	%
Commission and brokerage		78.6			68.3			10.2			15.0	%		221.4			197.6			23.7			12.0	%
Other underwriting expenses		6.7			6.2			0.5			8.4	%		20.4			16.5			3.9			23.7	%
Underwriting gain (loss)	$	(7.3	)	$	22.3		$	(29.7	)		-132.9	%	$	(247.0	)	$	102.7		$	(349.7	)	NM
										Point Chg												Point Chg
Loss ratio		74.1	%		63.1	%					11.0			100.6	%		58.9	%					41.7
Commission and brokerage ratio		26.1	%		26.1	%					-			25.4	%		25.6	%					(0.2	)
Other underwriting expense ratio		2.2	%		2.3	%					(0.1	)		2.4	%		2.2	%					0.2
Combined ratio		102.4	%		91.5	%					10.9			128.4	%		86.7	%					41.7
(NM, not meaningful)
(Some amounts may not reconcile due to rounding.)

Premiums.Gross written premiums increased by 18.8% to $323.7 million for the three months ended September 30, 2010 compared to $272.6 million for the three months ended September 30, 2009, due to continued strong growth in our Brazil, Miami and New Jersey offices, a $42.9 million increase; Canada, a $5.5 million increase; and Asia, a $2.8 million increase.  Net written premiums increased by 17.9% to $319.4 million for the three months ended September 30, 2010 compared to $270.9 million for the three months ended September 30, 2009, principally as a result of the increase in gross written premiums.  Premiums earned increased 14.9% to $301.3 million for the three months ended September 30 , 2010 compared to $262.2 million for the three months ended September 30, 2009, relatively consistent with the increase in net written premiums.

Gross written premiums increased by 13.6% to $906.1 million for the nine months ended September 30, 2010 compared to $797.6 million for the nine months ended September 30, 2009, due to continued strong growth in Brazil, Miami and New Jersey offices, a $49.4 million increase; Asia, a $36.6 million increase; and Canada, a $22.6 million increase; the result of a combination of new business, rate increases in select areas and economic and insurance growth in some markets.  Also contributing to the increase was $13.4 million in reinstatement premiums from the Chilean earthquake.  Net written premiums increased by 13.5% to $901.7 million for the nine months ended September 30, 2010 compared to $794.5 million for the nine months ended September 30, 2009.  Premiums earned increased 12.8% to $869.8 million for the nine months ended September 30, 2010 compared to $771.1 million for the nine months ended September 30, 2009.  Variance explanations for net written premiums and premiums earned for the nine months were similar to those discussed above for the three months.

43

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

	Three Months Ended September 30,
	Current		Ratio %/				Prior			Ratio %/				Total		Ratio %/
(Dollars in millions)	Year		Pt Change				Years			Pt Change				Incurred		Pt Change
2010
Attritional	$	172.4		57.1	%		$	(24.8	)		-8.2	%		$	147.6		49.0	%
Catastrophes		77.3		25.7	%			(1.5	)		-0.5	%			75.8		25.2	%
Total segment	$	249.6		82.9	%		$	(26.3	)		-8.7	%		$	223.4		74.1	%
2009
Attritional	$	139.9		53.4	%		$	2.3			0.9	%		$	142.2		54.2	%
Catastrophes		20.1		7.7	%			3.1			1.2	%			23.2		8.8	%
Total segment	$	160.0		61.0	%		$	5.4			2.1	%		$	165.4		63.1	%
Variance 2010/2009
Attritional	$	32.5		3.7		pts	$	(27.1	)		(9.1	)	pts	$	5.4		(5.2	)	pts
Catastrophes		57.2		18.0		pts		(4.6	)		(1.7	)	pts		52.6		16.4		pts
Total segment	$	89.6		21.9		pts	$	(31.7	)		(10.8	)	pts	$	58.0		11.0		pts

	Nine Months Ended September 30,
	Current		Ratio %/				Prior			Ratio %/				Total		Ratio %/
(Dollars in millions)	Year		Pt Change				Years			Pt Change				Incurred		Pt Change
2010
Attritional	$	487.8		56.0	%		$	(30.8	)		-3.5	%		$	457.0		52.5	%
Catastrophes		431.2		49.6	%			(13.1	)		-1.5	%			418.1		48.1	%
Total segment	$	919.0		105.7	%		$	(43.9	)		-5.0	%		$	875.1		100.6	%
2009
Attritional	$	412.6		53.5	%		$	3.2			0.4	%		$	415.9		53.9	%
Catastrophes		36.3		4.7	%			2.1			0.3	%			38.4		5.0	%
Total segment	$	448.9		58.2	%		$	5.4			0.7	%		$	454.2		58.9	%
Variance 2010/2009
Attritional	$	75.2		2.5		pts	$	(34.0	)		(3.9	)	pts	$	41.1		(1.4	)	pts
Catastrophes		394.9		44.9		pts		(15.2	)		(1.8	)	pts		379.7		43.1		pts
Total segment	$	470.1		47.5		pts	$	(49.3	)		(5.7	)	pts	$	420.9		41.7		pts
(Some amounts may not reconcile due to rounding.)

Incurred losses and LAE increased 35.1% to $223.4 million for the three months ended September 30, 2010 compared to $165.4 million for the three months ended September 30, 2009.  The increase was principally due to a $57.2 million increase in current year catastrophes losses, primarily for the New Zealand earthquake, Chile earthquake and the Canadian hailstorm.  Attritional losses also increased primarily due to the increased premiums earned and higher expected loss ratios, which were partially offset by favorable development of prior years attritional reserves.

Incurred losses and LAE increased 92.6% to $875.1 million for the nine months ended September 30, 2010 compared to $454.2 million for the nine months ended September 30, 2009.  The increase was principally due to the 2010 large catastrophes of $334.0 million for the Chilean earthquake, $50.0 million for the New Zealand earthquake, $32.1 million for the Australian hailstorms and $15.0 million for the Canadian hailstorm compared to the absence in 2009 of any similar large events.  Attritional losses also increased primarily due to the increased premiums earned and higher expected loss ratios, which were partially offset by favorable development of prior years attritional reserves.

Segment Expenses.Commission and brokerage increased 15.0% to $78.6 million for the three months ended September 30, 2010 compared to $68.3 million for the three months ended September 30, 2009.  Commission and brokerage increased 12.0% to $221.4 million for the nine months ended September 30, 2010 compared to $197.6 million for the nine months ended September 30, 2009.  The increases were primarily in line with the increases in premiums earned.

44

Segment other underwriting expenses for the three months ended September 30, 2010 increased to $6.7 million compared to $6.2 million for the three months ended September 30, 2009.  Segment other underwriting expenses for the nine months ended September 30, 2010 increased to $20.4 million compared to $16.5 million for the nine months ended September 30, 2009.  These increases were due to growth in the overall infrastructure and consistent with the growth in premiums earned resulting in stable other underwriting expense ratios.

Bermuda.

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

	Three Months Ended September 30,												Nine Months Ended September 30,
(Dollars in millions)	2010			2009			Variance			% Change			2010			2009			Variance			% Change
Gross written premiums	$	189.9		$	212.6		$	(22.6	)		-10.6	%	$	565.0		$	594.3		$	(29.4	)		-4.9	%
Net written premiums		190.0			212.6			(22.7	)		-10.7	%		565.0			594.5			(29.5	)		-5.0	%
Premiums earned	$	183.9		$	201.2		$	(17.3	)		-8.6	%	$	555.5		$	569.8		$	(14.3	)		-2.5	%
Incurred losses and LAE		120.8			122.0			(1.2	)		-1.0	%		381.1			354.0			27.0			7.6	%
Commission and brokerage		42.6			53.1			(10.5	)		-19.8	%		125.9			145.5			(19.5	)		-13.4	%
Other underwriting expenses		7.1			6.3			0.8			12.5	%		19.7			17.5			2.2			12.8	%
Underwriting gain (loss)	$	13.4		$	19.8		$	(6.4	)		-32.4	%	$	28.8		$	52.9		$	(24.0	)		-45.5	%
										Point Chg												Point Chg
Loss ratio		65.7	%		60.6	%					5.1			68.6	%		62.1	%					6.5
Commission and brokerage ratio		23.2	%		26.4	%					(3.2	)		22.7	%		25.5	%					(2.8	)
Other underwriting expense ratio		3.8	%		3.2	%					0.6			3.5	%		3.1	%					0.4
Combined ratio		92.7	%		90.2	%					2.5			94.8	%		90.7	%					4.1
(Some amounts may not reconcile due to rounding.)

Premiums.Gross written premiums decreased 10.6% to $189.9 million for the three months ended September 30, 2010 compared to $212.6 million for the three months ended September 30, 2009.  Premiums written by the U.K. branch and Ireland decreased $20.9 million, or 14.4%, in continental Europe in response to softening market conditions.  Bermuda home office business was down 2.6%, or $1.8 million.  Net written premiums decreased 10.7% to $190.0 million for the three months ended September 30, 2010 compared to $212.6 million for the three months ended September 30, 2009, in line with the decrease in gross written premiums.  Premiums earned decreased 8.6% to $183.9 millio n for the three months ended September 30, 2010 compared to $201.2 million for the three months ended September 30, 2009, relatively consistent with the decline in net written premiums.

Gross written premiums decreased 4.9% to $565.0 million for the nine months ended September 30, 2010 compared to $594.3 million for the nine months ended September 30, 2009.  Bermuda home office business was down 4.6%, or $10.0 million, due to lower property catastrophe excess of loss business.  Premiums written by the U.K. branch and Ireland decreased $19.3 million, or 5.1%, driven by the same factor mentioned above for the quarterly variance.  Net written premiums decreased 5.0% to $565.0 million for the nine months ended September 30, 2010 compared to $594.5 million for the nine months ended September 30, 2009, in line with the decrease in gross written premiums.  Premiums earned decreased 2.5% to $555.5 million for the nine months ended September 30, 2010 compared to $569.8 million for t he nine months ended September 30, 2009.  The change in premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.

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

	Three Months Ended September 30,
	Current			Ratio %/				Prior			Ratio %/				Total			Ratio %/
(Dollars in millions)	Year			Pt Change				Years			Pt Change				Incurred			Pt Change
2010
Attritional	$	103.8			56.4	%		$	(1.5	)		-0.8	%		$	102.3			55.6	%
Catastrophes		19.3			10.5	%			(0.7	)		-0.4	%			18.5			10.1	%
A&E		-			0.0	%			-			0.0	%			-			0.0	%
Total segment	$	123.1			66.9	%		$	(2.3	)		-1.2	%		$	120.8			65.7	%
2009
Attritional	$	112.0			55.7	%		$	10.3			5.1	%		$	122.3			60.8	%
Catastrophes		-			0.0	%			(0.3	)		-0.2	%			(0.3	)		-0.2	%
A&E		-			0.0	%			-			0.0	%			-			0.0	%
Total segment	$	112.0			55.7	%		$	10.0			5.0	%		$	122.0			60.6	%
Variance 2010/2009
Attritional	$	(8.2	)		0.7		pts	$	(11.8	)		(5.9	)	pts	$	(20.0	)		(5.2	)	pts
Catastrophes		19.3			10.5		pts		(0.4	)		(0.2	)	pts		18.8			10.3		pts
A&E		-			-		pts		-			-		pts		-			-		pts
Total segment	$	11.1			11.2		pts	$	(12.3	)		(6.2	)	pts	$	(1.2	)		5.1		pts

	Nine Months Ended September 30,
	Current		Ratio %/				Prior			Ratio %/				Total			Ratio %/
(Dollars in millions)	Year		Pt Change				Years			Pt Change				Incurred			Pt Change
2010
Attritional	$	320.7		57.8	%		$	(12.6	)		-2.3	%		$	308.2			55.5	%
Catastrophes		77.9		14.0	%			(5.0	)		-0.9	%			72.9			13.1	%
A&E		-		0.0	%			-			0.0	%			-			0.0	%
Total segment	$	398.6		71.7	%		$	(17.5	)		-3.2	%		$	381.1			68.6	%
2009
Attritional	$	310.6		54.5	%		$	20.3			3.6	%		$	330.9			58.1	%
Catastrophes		19.7		3.5	%			3.4			0.6	%			23.2			4.1	%
A&E		-		0.0	%			-			0.0	%			-			0.0	%
Total segment	$	330.3		58.0	%		$	23.7			4.2	%		$	354.0			62.1	%
Variance 2010/2009
Attritional	$	10.1		3.3		pts	$	(32.9	)		(5.9	)	pts	$	(22.7	)		(2.6	)	pts
Catastrophes		58.2		10.5		pts		(8.4	)		(1.5	)	pts		49.7			9.0		pts
A&E		-		-		pts		-			-		pts		-			-		pts
Total segment	$	68.3		13.7		pts	$	(41.2	)		(7.4	)	pts	$	27.1			6.5		pts
(Some amounts may not reconcile due to rounding.)

Incurred losses and LAE decreased 1.0% to $120.8 million for the three months ended September 30, 2010 compared to $122.0 million for the three months ended September 30, 2009.  Attritional losses decreased $20.0 million due to a decrease in current year attritional losses as earned premiums decreased and favorable development of prior years attritional losses, partially offset by $19.3 million of increase in 2010 current year catastrophe losses, principally from the New Zealand earthquake.

Incurred losses and LAE increased 7.6% to $381.1 million for the nine months ended September 30, 2010 compared to $354.0 million for the nine months ended September 30, 2009.  The increase was primarily due to current year catastrophe losses from the Chilean earthquake, New Zealand earthquake and an Australian hailstorm, partially offset by the favorable development of prior years attritional and catastrophe reserves.

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Segment Expenses.Commission and brokerage decreased 19.8% to $42.6 million for the three months ended September 30, 2010 compared to $53.1 million for the three months ended September 30, 2009.  Commission and brokerage decreased 13.4% to $125.9 million for the nine months ended September 30, 2010 compared to $145.5 million for the nine months ended September 30, 2009.  The decreases were primarily due to lower commission on covers in London and Bermuda property pro rata, a higher level of excess of loss business, which carries a lower commission, and for the nine months, higher reinstatement premiums, which have no commission expense.

Segment other underwriting expenses for the three months ended September 30, 2010 increased to $7.1 million from $6.3 million for the three months ended September 30, 2009.  Segment other underwriting expenses for the nine months ended September 30, 2010 increased to $19.7 million from $17.5 million for the nine months ended September 30, 2009.  These increases were primarily the result of our expanded operations in Ireland.

FINANCIAL CONDITION

Cash and Invested Assets.  Aggregate invested assets, including cash and short-term investments, were $15,487.5 million at September 30, 2010, an increase of $568.7 million compared to $14,918.8 million at December 31, 2009.  This increase was the result of $790.6 million of cash flows from operations, $349.0 million of unrealized appreciation, $83.0 million revolving credit borrowings, $69.3 million of realized capital gains and $33.5 million in equity adjustments of our limited partnership investments, partially offset by $346.8 million of share repurchases, $200.0 million payoff of debt that matured, $82.4 million paid out in dividends to shareholders, $68.8 million of miscellaneous items and $58.7 million due to fluctuations in foreign currenc ies.

Our principal investment objectives are to ensure funds are available to meet our insurance and reinsurance obligations and to maximize after-tax investment income while maintaining a high quality diversified investment portfolio.  Considering these objectives, we view our investment portfolio as having two components: 1) the investments needed to satisfy outstanding liabilities and 2) investments funded by our shareholders’ equity.

For the portion needed to satisfy outstanding liabilities, we invest in taxable and tax-preferenced fixed income securities with an average credit quality of Aa2, as rated by Moody’s Investors Service, Inc.  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.  This fixed maturity portfolio is externally managed by an independent, professional investment manager using portfolio guidelines approved by us.

Over the past few years, we have allocated our equity investment portfolio to include:  1) publicly traded equity securities and 2) private equity limited partnership investments.  The objective of this portfolio diversification is to enhance the risk-adjusted total return of the investment portfolio by allocating a prudent portion of the portfolio to higher return asset classes.  We limit our allocation to these asset classes because of 1) the potential for volatility in their values and 2) the impact of these investments on regulatory and rating agency capital adequacy models.  We adjust our allocation to these investments based upon market conditions.  As a result of the dramatic slowdown in the global economy and the liquidity crisis affecting the financial markets, we signific antly reduced our exposure to public equities during the fourth quarter of 2008 and have increased our exposure to equities in the latter part of 2009 and now into 2010, as financial markets improved.  At September 30, 2010, the market value of investments in equity and limited partnership securities, carried at both market and fair value, approximated 16% of shareholders’ equity, an increase of 1 point from 15% of shareholders’ equity at December 31, 2009.

The Company’s limited partnership investments are comprised of limited partnerships that invest in public equities and limited partnerships that invest in private equities.  Generally, the public equity limited partnerships are reported on a one month lag while the private equity partnerships are included in the financials on a quarter lag.  All of the limited partnerships are required to report using fair value accounting in accordance with FASB guidance.  We receive annual audited financial statements for all of the limited partnerships.  For the quarterly reports, the Company’s staff performs reviews of the financial reports for any

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unusual changes in carrying value.  If the Company becomes aware of a significant decline in value during the lag reporting period, the loss will be recorded in the period in which the Company identifies the decline.

The tables below summarize the composition and characteristics of our investment portfolio as of the dates indicated:

	At September 30, 2010				At December 31, 2009
Fixed maturities, market value	$	13,569.8	87.6	%	$	13,005.9	87.2	%
Fixed maturities, fair value		116.4	0.8	%		50.5	0.3	%
Equity securities, market value		17.2	0.1	%		16.3	0.1	%
Equity securities, fair value		415.9	2.7	%		380.0	2.5	%
Short-term investments		590.2	3.8	%		673.1	4.5	%
Other invested assets		576.8	3.7	%		545.3	3.7	%
Cash		201.1	1.3	%		247.6	1.7	%
Total investments and cash	$	15,487.5	100.0	%	$	14,918.8	100.0	%
(Some amounts may not reconcile due to rounding.)

	At	At
	September 30, 2010	December 31, 2009
Fixed income portfolio duration (years)	3.7	3.8
Fixed income composite credit quality	Aa2	Aa2
Imbedded end of period yield, pre-tax	4.1%	4.1%
Imbedded end of period yield, after-tax	3.7%	3.6%

The following table provides a comparison of our total return by asset class relative to broadly accepted industry benchmarks for the periods indicated:

	Nine Months Ended	Twelve Months Ended
	September 30, 2010	December 31, 2009
Fixed income portfolio total return	6.6%	9.4%
Barclay's Capital - U.S. aggregate index	7.9%	5.9%
Common equity portfolio total return	6.7%	28.9%
S&P 500 index	3.9%	26.5%
Other invested asset portfolio total return	6.0%	-1.8%

Reinsurance Receivables.  Reinsurance receivables for both paid and unpaid losses totaled $693.7 million at September 30, 2010 and $636.4 million at December 31, 2009.  At September 30, 2010, $141.7 million, or 20.4%, was receivable from C.V. Starr (Bermuda); $124.5 million, or 18.0%, was receivable from Transatlantic Reinsurance Company; $100.0 million, or 14.4%, was receivable from Continental Insurance Company; $55.9 million, or 8.1%, was receivable from Munich Reinsurance Company and $46.8 million, or 6.7%, was receivable from Berkley Insurance Company.  The receivable from Continental Insurance Company is collateralized by a funds held arrangement under which we have retained the premiums earned by the retrocessionaire to secure obl igations of the retrocessionaire, recorded them as a liability, credited interest on the balances at a stated contractual rate and reduced the liability account as payments become due.  No other retrocessionaire accounted for more than 5% of our receivables.

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Loss and LAE Reserves.  Gross loss and LAE reserves totaled $9,332.0 million at September 30, 2010 and $8,937.9 million at December 31, 2009.

The following tables summarize gross outstanding loss and LAE reserves by segment, classified by case reserves and IBNR reserves, for the periods indicated:

	At September 30, 2010
	Case		IBNR		Total		% of
(Dollars in millions)	Reserves		Reserves		Reserves		Total
U.S. Reinsurance	$	1,305.7	$	1,630.5	$	2,936.2		31.5	%
U.S. Insurance		858.7		1,115.4		1,974.1		21.1	%
Specialty Underwriting		238.5		189.1		427.6		4.6	%
International		949.6		705.0		1,654.6		17.7	%
Bermuda		774.0		988.0		1,762.0		18.9	%
Total excluding A&E		4,126.5		4,628.0		8,754.5		93.8	%
A&E		304.8		272.7		577.5		6.2	%
Total including A&E	$	4,431.3	$	4,900.7	$	9,332.0		100.0	%
(Some amounts may not reconcile due to rounding.)

	At December 31, 2009
	Case		IBNR		Total		% of
(Dollars in millions)	Reserves		Reserves		Reserves		Total
U.S. Reinsurance	$	1,382.0	$	1,652.3	$	3,034.3		34.0	%
U.S. Insurance		716.2		1,157.1		1,873.4		21.0	%
Specialty Underwriting		238.5		175.8		414.4		4.6	%
International		752.1		545.7		1,297.7		14.5	%
Bermuda		718.8		960.5		1,679.4		18.8	%
Total excluding A&E		3,807.7		4,491.5		8,299.2		92.9	%
A&E		354.7		283.9		638.7		7.1	%
Total including A&E	$	4,162.4	$	4,775.4	$	8,937.9		100.0	%
(Some amounts may not reconcile due to rounding.)

Changes in premiums earned and business mix, reserve re-estimations, catastrophe losses and changes in catastrophe loss reserves and claim settlement activity all impact loss and LAE reserves by segment and in total.

Our loss and LAE reserves represent our best estimate of our ultimate liability for unpaid claims.  We continuously re-evaluate our reserves, including re-estimates of prior period reserves, taking into consideration all available information and, in particular, newly reported loss and claim experience.  Changes in reserves resulting from such re-evaluations are reflected in incurred losses in the period when the re-evaluation is made.  Our analytical methods and processes operate at multiple levels including individual contracts, groupings of like contracts, classes and lines of business, internal business units, segments, legal entities, and in the aggregate.  In order to set appropriate reserves, we make qualitative and quantitative analyses and judgments at these various levels. 
60;Additionally, the attribution of reserves, changes in reserves and incurred losses among accident years requires qualitative and quantitative adjustments and allocations at these various levels.  We utilize actuarial science, business expertise and management judgment in a manner intended to assure the accuracy and consistency of our reserving practices.  Nevertheless, our reserves are estimates, which are subject to variation, which may be significant.

There can be no assurance that reserves for, and losses from, claim obligations will not increase in the future, possibly by a material amount.  However, we believe that our existing reserves and reserving methodologies lessen the probability that any such increase would have a material adverse effect on our financial condition, results of operations or cash flows.  In this context, we note that over the past 10 years, our calendar year operations have been affected by effects from prior period reserve re-estimates, ranging from a favorable $26.4 million in 2005, representing 0.5% of the net prior period reserves for the year in which the adjustment was made, to an unfavorable $249.4 million in 2004, representing 3.7% of the net prior period reserves for the year in which the adjustment was made.

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Dollars in millions)	2010			2009			2010			2009
Gross Basis:
Beginning of period reserves	$	614.1		$	704.5		$	638.7		$	786.8
Incurred losses		-			-			-			-
Paid losses		(36.6	)		(52.2	)		(61.1	)		(134.5	)
End of period reserves	$	577.5		$	652.3		$	577.5		$	652.3
Net Basis:
Beginning of period reserves	$	589.5		$	673.9		$	613.1		$	749.1
Incurred losses		-			-			-			-
Paid losses		(34.9	)		(51.2	)		(58.5	)		(126.3	)
End of period reserves	$	554.6		$	622.8		$	554.6		$	622.8
(Some amounts may not reconcile due to rounding.)

At September 30, 2010, the gross reserves for A&E losses were comprised of $131.8 million representing case reserves reported by ceding companies, $131.8 million representing additional case reserves established by us on assumed reinsurance claims, $41.2 million representing case reserves established by us on direct excess insurance claims, including Mt. McKinley, and $272.7 million representing IBNR reserves.

With respect to asbestos only, at September 30, 2010, we had gross asbestos loss reserves of $551.4 million, or 95.5%, of total A&E reserves, of which $445.8 million was for assumed business and $105.6 million was for direct business.

Industry analysts use the “survival ratio” to compare the A&E reserves among companies with such liabilities.  The survival ratio is typically calculated by dividing a company’s current net reserves by the three year average of annual paid losses.  Hence, the survival ratio equals the number of years that it would take to exhaust the current reserves if future loss payments were to continue at historical levels.  Using this measurement, our net three year asbestos survival ratio was 5.7 years at September 30, 2010.  These metrics can be skewed by the large settlements occurring in the prior three years causing the ratio to decline and therefore, is probably not indicative of the timing of future payments.

Shareholders’ Equity.  Our shareholders’ equity increased to $6,281.6 million as of September 30, 2010 from $6,101.7 million as of December 31, 2009.  This increase was the result of unrealized appreciation on investments, net of tax, of $312.5 million, $308.2 million in net income and share-based compensation transactions of $13.4 million, partially offset by repurchasing 4,476,465 common shares for $346.8 million, $82.4 million of shareholder dividends and $26.2 million of foreign currency translation adjustments.

LIQUIDITY AND CAPITAL RESOURCES

Capital.  Our business operations are in part dependent on our financial strength and financial strength ratings, and the market’s perception of our financial strength, as measured by shareholders’ equity, which was $6,281.6 million at September 30, 2010 and $6,101.7 million at December 31, 2009.  On March 13, 2009, Everest Re and Everest National, wholly-owned indirect subsidiaries of the Company, received notification of a one level ratings downgrade by Standard & Poor’s.  On April 7, 2010, Standard & Poor’s upgraded the Company’s debt ratings one level.  We continue to possess significant financial flexibility and access to the debt and equity markets as a result of our perceived financi al strength, as evidenced by the financial strength ratings as assigned by independent rating agencies.  During the last six months of 2008 and into 2009, the capital markets were illiquid in reaction to the deepening credit crisis which led to bank and other financial institution failures and effective failures.  Credit spreads widened and the equity markets

50

declined significantly during this period making access to the capital markets, for even highly rated companies, difficult and costly.  Our capital position remains strong, commensurate with our financial ratings.  We have ample liquidity to meet our financial obligations for the foreseeable future.  Therefore, we have no foreseeable need to enter the capital markets in the near term.

From time to time, we have used open market share repurchases to adjust our capital position and enhance long term expected returns to our shareholders.  On July 21, 2008, our existing authorization to purchase up to 5 million of our shares was amended to authorize the purchase of up to 10 million shares.  On February 24, 2010, our existing authorization to purchase up to 10 million of our shares was amended to authorize the purchase of up to 15 million shares.  As of September 30, 2010, we had repurchased 11.0 million shares under this authorization.

On December 17, 2008, we renewed our shelf registration statement on Form S-3ASR with the Securities and Exchange Commission (“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.

Liquidity.  Our principal investment objectives are to ensure funds are available to meet our insurance and reinsurance obligations and to maximize after-tax investment income while maintaining a high quality diversified investment portfolio.  Considering these objectives, we view our investment portfolio as having two components: 1) the investments needed to satisfy outstanding liabilities and 2) investments funded by our shareholders’ equity.

For the portion needed to satisfy outstanding liabilities, we invest in taxable and tax-preferenced fixed income securities with an average credit quality of Aa2, as rated by Moody’s.  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.  This fixed maturity securities portfolio is externally managed by an independent, professional investment manager using portfolio guidelines approved by us.

Over the past few years, we have allocated our equity portfolio to include: 1) publicly traded equity securities and 2) private equity limited partnership investments.  The objective of this portfolio diversification is to enhance the risk-adjusted total return of the investment portfolio by allocating a prudent portion of the portfolio to higher return asset classes.  We limit our allocation to these asset classes because of 1) the potential for volatility in their values and 2) the impact of these investments on regulatory and rating agency capital adequacy models.  We adjust our allocation to these investments based upon market conditions.  As a result of the dramatic slowdown in the global economy and the liquidity crisis affecting the financial markets, we significantly reduced our expo sure to public equities during the fourth quarter of 2008 and have increased our exposure to equities in the latter part of 2009 and now into 2010, as financial markets improved.  At September 30, 2010, the market value of investments in equity and limited partnership securities, carried at both market and fair value, approximated 16% of shareholders’ equity.

Our liquidity requirements are generally met from positive cash flow from operations.  Positive cash flow results from reinsurance and insurance premiums being collected prior to disbursements for claims, which disbursements generally take place over an extended period after the collection of premiums, sometimes a period of many years.  Collected premiums are generally invested, prior to their use in such disbursements, and investment income provides additional funding for loss payments.  Our net cash flows from operating activities were $790.6 million and $598.7 million for the nine months ended September 30, 2010 and 2009, respectively.  Additionally, these cash flows reflected a net tax refund of $36.7 million and a net tax payment of $70.8 million for the nine months ended September 30, 2010 and 2009, respectively; net catastrophe loss payments of $312.0 million and $184.8 million for the nine months ended September 30, 2010 and 2009, respectively; and net A&E payments of $58.5 million and $126.3 million for the nine months ended September 30, 2010 and 2009, respectively.

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If disbursements for claims and benefits, policy acquisition costs and other operating expenses were to exceed premium inflows, cash flow from reinsurance and insurance operations would be negative.  The effect on cash flow from insurance operations would be partially offset by cash flow from investment income.  Additionally, cash inflows from investment maturities and dispositions, both short-term investments and longer term maturities are available to supplement other operating cash flows.

As the timing of payments for claims and benefits cannot be predicted with certainty, we maintain portfolios of long term invested assets with varying maturities, along with short-term investments that provide additional liquidity for payment of claims.  At September 30, 2010 and December 31, 2009, we held cash and short-term investments of $791.3 million and $920.7 million, respectively.  All of our short-term investments are readily marketable and can be converted to cash.  In addition to these cash and short-term investments, at September 30, 2010, we had $693.3 million of available for sale fixed maturity securities maturing within one year or less, $3,923.4 million maturing within one to five years and $5,814.2 million maturing after five years.  Our $433.2 million of equity securities are comprised primarily of publicly traded securities that can be easily liquidated.  We believe that these fixed maturity and equity securities, in conjunction with the short-term investments and positive cash flow from operations, provide ample sources of liquidity for the expected payment of losses in the near future.  We do not anticipate selling securities or using available credit facilities to pay losses and LAE but have the ability to do so.  Sales of securities might result in realized capital gains or losses.  At September 30, 2010 we had $741.7 million of net pre-tax unrealized appreciation, comprised of $808.5 million of pre-tax unrealized appreciation and $66.8 million of pre-tax unrealized depreciation.

Management expects annual positive cash flow from operations, which in general reflects the strength of overall pricing, to persist over the near term, absent any unusual catastrophe activity.  In the intermediate and long term, our cash flow from operations will be impacted to the extent by which competitive pressures affect overall pricing in our markets and by which our premium receipts are impacted from our strategy of emphasizing underwriting profitability over premium volume.

Effective July 27, 2007, Group, Everest Reinsurance (Bermuda), Ltd. (“Bermuda Re”) and Everest International Reinsurance, Ltd. (“Everest International”) entered into a five year, $850.0 million senior credit facility with a syndicate of lenders referred to as the “Group Credit Facility”.  Wachovia Bank, a subsidiary of Wells Fargo Corporation (“Wachovia Bank”) is the administrative agent for the Group Credit Facility, which consists of two tranches.  Tranche one provides up to $350.0 million of unsecured revolving credit for liquidity and general corporate purposes, and for the issuance of unsecured standby letters of credit.  The interest on the revolving loans shall, at the Company’s option, be either (1) the Base Rate (as defined below) or (2) a n adjusted London Interbank Offered Rate (“LIBOR”) plus a margin.  The Base Rate is the higher of (a) the prime commercial lending rate established by Wachovia Bank or (b) the Federal Funds Rate plus 0.5% per annum.  The amount of margin and the fees payable for the Group Credit Facility depends on Group’s senior unsecured debt rating.  Tranche two exclusively provides up to $500.0 million for the issuance of standby letters of credit on a collateralized basis.

The Group Credit Facility requires Group to maintain a debt to capital ratio of not greater than 0.35 to 1 and to maintain a minimum net worth.  Minimum net worth is an amount equal to the sum of $3,575.4 million plus 25% of consolidated net income for each of Group’s fiscal quarters, for which statements are available ending on or after January 1, 2007 and for which consolidated net income is positive, plus 25% of any increase in consolidated net worth during such period attributable to the issuance of ordinary and preferred shares, which at September 30, 2010, was $4,149.4 million.  As of September 30, 2010, the Company was in compliance with all Group Credit Facility covenants.

At September 30, 2010, the Group Credit Facility had no outstanding letters of credit under tranche one and $359.0 million outstanding letters of credit under tranche two.  At December 31, 2009, the Group Credit Facility had no outstanding letters of credit under tranche one and $386.5 million outstanding letters of credit under tranche two.

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Effective August 23, 2006, Holdings entered into a five year, $150.0 million senior revolving credit facility with a syndicate of lenders referred to as the “Holdings Credit Facility”.  Citibank N.A. is the administrative agent for the Holdings Credit Facility.  The Holdings Credit Facility may be used for liquidity and general corporate purposes.  The Holdings Credit Facility provides for the borrowing of up to $150.0 million with interest at a rate selected by Holdings equal to either, (1) the Base Rate (as defined below) or (2) a periodic fixed rate equal to the Eurodollar Rate plus an applicable margin.  The Base Rate means a fluctuating interest rate per annum in effect from time to time to be equal to the higher of (a) the rate of interest publicly announced by Citibank as its prime rate or (b) 0.5% per annum above the Federal Funds Rate, in each case plus the applicable margin.  The amount of margin and the fees payable for the Holdings Credit Facility depends upon Holdings’ senior unsecured debt rating.

The Holdings Credit Facility requires Holdings to maintain a debt to capital ratio of not greater than 0.35 to 1 and Everest Reinsurance Company (“Everest Re”) to maintain its statutory surplus at $1.5 billion plus 25% of future aggregate net income and 25% of future aggregate capital contributions after December 31, 2005, which at September 30, 2010, was $1,970.3 million.  As of September 30, 2010, Holdings was in compliance with all Holdings Credit Facility covenants.

At September 30, 2010, the Company had outstanding $83.0 million of short-term borrowings from the Holdings Credit Facility revolving credit line, with maturity dates between October 1, 2010 and October 15, 2010.  These short-term borrowings can be paid either through renewal with a one, two, three or six month term; or out of cash flows from operations.  The highest amount outstanding in short-term borrowings was $133.0 million for the period from June 15, 2010 to August 9, 2010.  In addition, at September 30, 2010 and December 31, 2009, the Holdings Credit Facility had outstanding letters of credit of $17.0 million and $28.0 million, respectively.

Costs incurred in connection with the Group Credit Facility and the Holdings Credit Facility were $0.6 million and $0.4 million for the three months ended September 30, 2010 and 2009, respectively, and $1.3 million and $1.1 million for the nine months ended September 30, 2010 and 2009, respectively.

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.  We have also written a small number of equity index put option contracts.

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 $15.5 billion investment portfolio, at September 30, 2010, 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 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.

53

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 $2,878.3 million of mortgage-backed securities in the $13,686.2 million fixed maturity portfolio.  Prepayment risk results from potential accelerated principal payments that shorten the average life and thus the expected yield of the security.

The table below displays the potential impact of market value fluctuations and after-tax unrealized appreciation on our fixed maturity securities portfolio (including $590.2 million of short-term investments) for the period indicated based on upward and downward parallel and immediate 100 and 200 basis point shifts in interest rates.  For legal entities with a U.S. dollar functional currency, this modeling was performed on each security individually.  To generate appropriate price estimates on mortgage-backed securities, changes in prepayment expectations under different interest rate environments were taken into account.  For legal entities with a non-U.S. dollar functional currency, the effective duration of the involved portfolio of securities was used as a proxy for the market value change under t he various interest rate change scenarios.

	Impact of Interest Rate Shift in Basis Points
	At September 30, 2010
		-200			-100			0			100			200
(Dollars in millions)
Total Market/Fair Value	$	15,252.6		$	14,785.6		$	14,276.4		$	13,697.1		$	13,105.9
Market/Fair Value Change from Base (%)		6.8	%		3.6	%		0.0	%		-4.1	%		-8.2	%
Change in Unrealized Appreciation
After-tax from Base ($)	$	773.2		$	402.0		$	-		$	(454.8	)	$	(923.1	)

We had $9,332.0 million and $8,937.9 million of gross reserves for losses and LAE as of September 30, 2010 and December 31, 2009, respectively.  These amounts are recorded at their nominal value, as opposed to present value, which would reflect a discount adjustment to reflect the time value of money.  Since losses are paid out over a period of time, the present value of the reserves is less than the nominal value.  As interest rates rise, the present value of the reserves decreases and, conversely, as interest rates decline, the present value increases.  These movements are the opposite of the interest rate impacts on the fair value of investments.  While the difference between present value and nominal value is not reflected in our financial statements, our financial results will include investment income over time from the investment portfolio until the claims are paid.  Our loss and loss reserve obligations have an expected duration of approximately 3.8 years, which is reasonably consistent with our fixed income portfolio.  If we were to discount our loss and LAE reserves, net of $0.7 billion of reinsurance receivables on unpaid losses, the discount would be approximately $1.4 billion resulting in a discounted reserve balance of approximately $7.2 billion, representing approximately 50.8% of the market value of the fixed maturity investment portfolio funds.

Equity Risk.  Equity risk is the potential change in fair and/or market value of the common stock and preferred stock portfolios arising from changing equity prices.  Our equity investments consist of a diversified portfolio of individual securities and mutual funds, which invest principally in high quality common and preferred stocks that are traded on the 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.

54

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 period indicated.

	Impact of Percentage Change in Equity Fair/Market Values
	At September 30, 2010
(Dollars in millions)		-20%			-10%			0%		10%		20%
Fair/Market Value of the Equity Portfolio	$	346.5		$	389.8		$	433.2	$	476.5	$	519.8
After-tax Change in Fair/Market Value		(56.6	)		(28.3	)		-		28.3		56.6

Foreign Currency 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./Bermuda (“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 Canadian Dollar, the British Pound Sterling and the Euro.  We mitigate foreign exchange exposure by generally matching the currency and duration of our assets to our corresponding operating liabilities.  In accordance with FASB guidance, we translate the assets, liabilities and income of non-U.S. dollar functional currency legal entities to the U.S. dollar.  This translation amount is reported as a component of other comprehensive income.  As of September 30, 2010 there has been no material change in exposure to foreign exchange rates as compared to December, 31, 2009.

Equity Index Put Option Contracts.  Although not considered material in the context of our aggregate exposure to market sensitive instruments, we have issued six equity index put option contracts based on the Standard & Poor’s 500 (“S&P 500”) index and one equity index put option contract based on the FTSE 100 index, that are market sensitive and sufficiently unique to warrant supplemental disclosure.

The Company sold six equity index put option contracts, based on the S&P 500 index, for total consideration, net of commissions, of $22.5 million.  At September 30, 2010, fair value for these equity index put option contracts was $69.7 million.  These equity index put option contracts each have a single exercise date, with maturities ranging from 12 to 30 years and strike prices ranging from $1,141.21 to $1,540.63.  The S&P 500 index value at September 30, 2010 was $1,141.20.  No amounts will be payable under these equity index put option contracts if the S&P 500 index is at, or above, the strike prices on the exercise dates, which fall between June 2017 and March 2031.  If the S&P 500 index is lower than the strike price on the applicable exercise date, the amount due would vary proportionately with the percentage by which the index is below the strike price.  Based on historical index volatilities and trends and the September 30, 2010 S&P 500 index value, the Company estimates the probability that each equity index put option contract of the S&P 500 index falling below the strike price on the exercise date to be less than 45%.  The theoretical maximum payouts under the equity index put option contracts would occur if on each of the exercise dates the S&P 500 index value were zero.  At September 30, 2010, the present value of these theoretical maximum payouts using a 6% discount factor was $265.3 million.

The Company sold one equity index put option contract based on the FTSE 100 index for total consideration, net of commissions, of $6.7 million.  At September 30, 2010, fair value for this equity index put option contract was $7.5 million.  This equity index put option contract has an exercise date of July 2020 and a strike price of ₤5,989.75.  The FTSE 100 index value at September 30, 2010 was ₤5,548.60.  No amount will be payable under this equity index put option contract if the FTSE 100 index is at, or above, the strike price on the exercise date.  If the FTSE 100 index is lower than the strike price on the exercise date, the amount due will vary proportionately with the percentage by which the index is below the strike price.  Based on historical index vol atilities and trends and the September 30, 2010 FTSE 100 index value, the Company estimates the probability that the equity index put option contract of the FTSE 100 index will fall below the strike price on the exercise date to be less than 36%.  The theoretical maximum payout under the equity index put option contract would occur if on the exercise date the FTSE 100 index value was zero.  At September 30, 2010, the present value of the theoretical maximum payout using a 6% discount factor and current exchange rate was $28.5 million.

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Because the equity index put option contracts meet the definition of a derivative, we report the fair value of these instruments in our consolidated balance sheets as a liability and record any changes to fair value in our consolidated statements of operations and comprehensive income (loss) as a net derivative gain (loss).  Our financial statements reflect fair values for our obligations on these equity index put option contracts at September 30, 2010, of $77.2 million and at December 31, 2009, of $57.3 million; even though it may not be likely that the ultimate settlement of these transactions would require a payment that would exceed the initial consideration received, or any payment at all.

As there is no active market for these instruments, the determination of their fair value is based on an industry accepted option pricing model, which requires estimates and assumptions, including those regarding volatility and expected rates of return.

The table below displays the impact of potential movements in interest rates and the equity indices, which are the principal factors affecting fair value of these instruments, looking forward from the fair value for the period indicated.  As these are estimates, there can be no assurance regarding future market performance.  The asymmetrical results of the interest rate and S&P 500 and FTSE 100 indices shift reflect that the liability cannot fall below zero whereas it can increase to its theoretical maximum.

	Equity Indices Put Options Obligation – Sensitivity Analysis
(Dollars in millions)	At September 30, 2010
Interest Rate Shift in Basis Points:		-200			-100			0			100			200
Total Fair Value	$	128.0		$	99.6		$	77.2		$	59.6		$	45.8
Fair Value Change from Base (%)		-65.9	%		-29.0	%		0.0	%		22.8	%		40.7	%
Equity Indices Shift in Points (S&P 500/FTSE 100):		-500/-2000			-250/-1000			0			250/1000			500/2000
Total Fair Value	$	148.1		$	106.1		$	77.2		$	57.0		$	42.9
Fair Value Change from Base (%)		-92.0	%		-37.5	%		0.0	%		26.1	%		44.4	%
Combined Interest Rate /		-200/			-100/						100/			200/
Equity Indices Shift (S&P 500/FTSE 100):		-500/-2000			-250/-1000			0/0			250/1000			500/2000
Total Fair Value	$	220.2		$	133.3		$	77.2		$	42.9		$	23.1
Fair Value Change from Base (%)		-185.5	%		-72.8	%		0.0	%		44.3	%		70.0	%

Safe Harbor Disclosure.

This report contains forward-looking statements within the meaning of the U.S. federal securities laws.  We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in the federal securities laws.  In some cases, these statements can be identified by the use of forward-looking words such as “may”, “will”, “should”, “could”, “anticipate”, “estimate”, “expect”, “plan”, “believe”, “predict”, “potential” and “intend”.  Forward-looking statements contained in this report include information regarding our reserves for losses and LAE, the adequacy of our provision for uncollectible balances, estimates of our c atastrophe exposure, the effects of catastrophic events on our financial statements, the ability of Everest Re, Holdings, Everest Underwriting Group (Ireland) Limited and Bermuda Re to pay dividends and the settlement costs of our specialized equity index put option contracts.  Forward-looking statements only reflect our expectations and are not guarantees of performance.  These statements involve risks, uncertainties and assumptions.  Actual events or results may differ materially from our expectations.  Important factors that could cause our actual events or results to be materially different from our expectations include the uncertainties that surround the impact on our financial statements and liquidity resulting from changes in the global economy and credit markets, the estimating of reserves for losses and LAE, those discussed in Note 8 of the Notes to Consolidated Financial Statements (unaudited) included in this report and the risks described under the caption “Risk Factors” in our most recently filed Annual Report on Form 10-K, PART 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.

56

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk Instruments.  See “Liquidity and Capital Resources - 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 it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission’s rules and forms.  Our management, with the participation of the Chief Exec utive 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, we are involved in lawsuits, arbitrations and other formal and informal dispute resolution procedures, the outcomes of which will determine our rights and obligations under insurance, reinsurance and other contractual agreements.  These disputes arise from time to time and are ultimately resolved through both informal and formal means, including negotiated resolution, arbitration and litigation.  In all such matters, we believe that our positions are legally and commercially reasonable, and we vigorously seek to preserve, enforce and defend our legal rights under various agreements.  While the final outcome of these matters cannot be predicted with certainty, we do not believe that any of these matters, when finally resolved, will have a material adverse effect on o ur financial position or liquidity.  However, an adverse resolution of one or more of these items in any one quarter or fiscal year could have a material adverse effect on our results of operations in that period.

ITEM 1A.  RISK FACTORS

No material changes.

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

Issuer Purchases of Equity Securities.

Issuer Purchases of Equity Securities
	(a)		(b)		(c)		(d)
							Maximum Number (or
					Total Number of		Approximate Dollar
					Shares (or Units)		Value) of Shares (or
					Purchased as Part		Units) that May Yet
	Total Number of				of Publicly		Be Purchased Under
	Shares (or Units)		Average Price Paid		Announced Plans or		the Plans or
Period	Purchased		per Share (or Unit)		Programs		Programs (1)
July 1 - 31, 2010		0	$	-		0		5,227,765
August 1 - 31, 2010		842,036	$	80.0132		842,036		4,385,729
September 1 - 30, 2010		395,457	$	82.6359		391,631		3,994,098
Total		1,237,493	$	80.8513		1,233,667		3,994,098

(1)       On September 21, 2004, the Company’s board of directors approved an amended share repurchase program authorizing the Company and/or its subsidiary Holdings to purchase up to an aggregate of 5,000,000 of the Company’s common shares through open market transactions, privately negotiated transactions or both.  On July 21, 2008, the Company’s executive committee of the board of directors approved an amendment to the September 21, 2004 share repurchase program authorizing the Company and/or its subsidiary Holdings to purchase up to an aggregate of 10,000,000 of the Company’s common shares (recognizing that the number of shares authorized for repurchase has been reduced by those shares that have already been purchased) in open market transactions, privately ne gotiated transactions or both.  On February 24, 2010, the Company’s executive committee of the board of directors approved an amendment to the September 21, 2004, share repurchase program and the July 21, 2008, amendment authorizing the Company and/or its subsidiary Holdings, to purchase up to 15,000,000 of the Company’s common shares (recognizing that the number of shares authorized for repurchase has been reduced by those shares that have already been purchased) in open market transactions, privately negotiated transactions or both.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.  RESERVED

ITEM 5.  OTHER INFORMATION

None.

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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

59

Everest Re Group, Ltd.

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 Re Group, Ltd.
(Registrant)
/S/ DOMINIC J. ADDESSO
Dominic J. Addesso
Executive Vice President and
	Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)

Dated:  November 9, 2010

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Joseph V. Taranto, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Everest Re Group, Ltd;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)and 15d-15(f)) or the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

November 9, 2010

/S/ JOSEPH V. TARANTO
Joseph V. Taranto
Chairman and
	Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Dominic J. Addesso, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Everest Re Group, Ltd;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)and 15d-15(f)) or the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

November 9, 2010

/S/ DOMINIC J. ADDESSO
Dominic J. Addesso
Executive Vice President and
	Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATIONS PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q for the quarter ended September 30, 2010 of Everest Re Group, Ltd., a company organized under the laws of Bermuda (the “Company”), filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certify, pursuant to 18 U.S.C. ss. 1350, as enacted by section 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934, and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

November 9, 2010

/S/ JOSEPH V. TARANTO
Joseph V. Taranto
Chairman and
	Chief Executive Officer

/S/ DOMINIC J. ADDESSO
Dominic J. Addesso
Executive Vice President and
	Chief Financial Officer