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: June 30, 2016

Commission file number: 1-14527

(Exact name of registrant as specified in its charter)

Delaware		22-3263609
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

477 Martinsville Road

Post Office Box 830

Liberty Corner, New Jersey 07938-0830

(908) 604-3000

(Address, including zip code, and telephone number, including area code,

of registrant's principal executive office)

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

YES

X

NO

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

YES

X

NO

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

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

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

YES

NO

X

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

		Number of Shares Outstanding
Class		At August 1, 2016
Common Shares, $0.01 par value		1,000

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

Item 1.		Financial Statements
		Consolidated Balance Sheets at June 30, 2016 (unaudited) and
			December 31, 2015	1
		Consolidated Statements of Operations and Comprehensive Income (Loss) for the
			three and six months ended June 30, 2016 and 2015 (unaudited)	2
		Consolidated Statements of Changes in Stockholder's Equity for the three and six
			months ended June 30, 2016 and 2015 (unaudited)	3
		Consolidated Statements of Cash Flows for the six months ended
			June 30, 2016 and 2015 (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		44
Item 4.		Controls and Procedures		44

Item 1.		Legal Proceedings		44
Item 1A.		Risk Factors		45
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		45
Item 3.		Defaults Upon Senior Securities		45
Item 4.		Mine Safety Disclosures		45
Item 5.		Other Information		45
Item 6.		Exhibits		46

EVEREST REINSURANCE HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

		June 30,				December 31,
(Dollars in thousands, except par value per share)		2016				2015
		(unaudited)
ASSETS:
Fixed maturities - available for sale, at market value		$	5,768,749			$	5,356,477
(amortized cost: 2016, $5,617,412; 2015, $5,335,472)
Fixed maturities - available for sale, at fair value			-				2,102
Equity securities - available for sale, at fair value			976,879				1,215,377
Short-term investments			387,705				563,536
Other invested assets (cost: 2016, $604,512; 2015, $450,154)			604,512				450,154
Other invested assets, at fair value			1,772,458				1,773,214
Cash			229,927				155,429
Total investments and cash			9,740,230				9,516,289
Note receivable - affiliated			250,000				250,000
Accrued investment income			42,454				41,727
Premiums receivable			1,119,371				1,129,656
Reinsurance receivables - unaffiliated			814,866				716,982
Reinsurance receivables - affiliated			3,676,433				3,742,105
Funds held by reinsureds			185,170				176,712
Deferred acquisition costs			72,696				92,651
Prepaid reinsurance premiums			750,713				772,686
Other assets			272,767				256,395
TOTAL ASSETS		$	16,924,700			$	16,695,203
LIABILITIES:
Reserve for losses and loss adjustment expenses		$	8,247,764			$	7,940,720
Unearned premium reserve			1,264,499				1,349,799
Funds held under reinsurance treaties			106,611				101,531
Losses in the course of payment			128,048				125,592
Commission reserves			61,254				51,873
Other net payable to reinsurers			860,872				1,225,260
4.868% Senior notes due 6/1/2044			396,654				396,594
6.6% Long term notes due 5/1/2067			236,413				236,364
Accrued interest on debt and borrowings			3,537				3,537
Income taxes			138,621				68,024
Unsettled securities payable			59,891				15,040
Other liabilities			256,483				249,658
Total liabilities			11,760,647				11,763,992
Commitments and Contingencies (Note 5)
STOCKHOLDER'S EQUITY:
Common stock, par value: $0.01; 3,000 shares authorized;
1,000 shares issued and outstanding (2016 and 2015)			-				-
Additional paid-in capital			382,537				374,789
Accumulated other comprehensive income (loss), net of deferred income tax expense
(benefit) of $29,988 at 2016 and ($33,458) at 2015			55,682				(62,136	)
Retained earnings			4,725,834				4,618,558
Total stockholder's equity			5,164,053				4,931,211
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY		$	16,924,700			$	16,695,203
The accompanying notes are an integral part of the consolidated financial statements.

 

EVEREST REINSURANCE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(Dollars in thousands)		2016				2015				2016				2015
		(unaudited)								(unaudited)
REVENUES:
Premiums earned		$	488,855			$	521,424			$	970,780			$	1,042,486
Net investment income			73,872				70,925				132,317				143,506
Net realized capital gains (losses):
Other-than-temporary impairments on fixed maturity securities			(1,391	)			(8,810	)			(24,406	)			(32,931	)
Other-than-temporary impairments on fixed maturity securities
transferred to other comprehensive income (loss)			-				-				-				-
Other net realized capital gains (losses)			30,556				60,035				(12,806	)			105,452
Total net realized capital gains (losses)			29,165				51,225				(37,212	)			72,521
Other income (expense)			(10,700	)			12,289				2,402				28,122
Total revenues			581,192				655,863				1,068,287				1,286,635
CLAIMS AND EXPENSES:
Incurred losses and loss adjustment expenses			338,536				322,879				634,598				631,759
Commission, brokerage, taxes and fees			72,126				72,953				140,948				169,484
Other underwriting expenses			58,330				51,573				117,557				100,116
Corporate expenses			2,010				1,785				4,346				3,394
Interest, fee and bond issue cost amortization expense			8,858				8,858				17,717				17,717
Total claims and expenses			479,860				458,048				915,166				922,470
INCOME (LOSS) BEFORE TAXES			101,332				197,815				153,121				364,165
Income tax expense (benefit)			32,982				64,049				45,845				114,455
NET INCOME (LOSS)		$	68,350			$	133,766			$	107,276			$	249,710
Other comprehensive income (loss), net of tax:
Unrealized appreciation (depreciation) ("URA(D)") on securities arising during the period			39,264				(35,938	)			58,864				(19,988	)
Less: reclassification adjustment for realized losses (gains) included in net income (loss)			(63	)			13,661				25,852				37,326
Total URA(D) on securities arising during the period			39,201				(22,277	)			84,716				17,338
Foreign currency translation adjustments			15,489				16,145				30,421				(17,163	)
Benefit plan actuarial net gain (loss) for the period			-				-				-				-
Reclassification adjustment for amortization of net (gain) loss included in net income (loss)			1,341				1,609				2,681				3,213
Total benefit plan net gain (loss) for the period			1,341				1,609				2,681				3,213
Total other comprehensive income (loss), net of tax			56,031				(4,523	)			117,818				3,388
COMPREHENSIVE INCOME (LOSS)		$	124,381			$	129,243			$	225,094			$	253,098
The accompanying notes are an integral part of the consolidated financial statements.

 

EVEREST REINSURANCE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF

CHANGES IN STOCKHOLDER'S EQUITY

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(Dollars in thousands, except share amounts)		2016				2015				2016				2015
		(unaudited)								(unaudited)
COMMON STOCK (shares outstanding):
Balance, beginning of period			1,000				1,000				1,000				1,000
Balance, end of period			1,000				1,000				1,000				1,000
ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of period		$	379,582			$	366,258			$	374,789			$	362,293
Share-based compensation plans			2,955				3,026				7,748				6,991
Balance, end of period			382,537				369,284				382,537				369,284
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS),
NET OF DEFERRED INCOME TAXES:
Balance, beginning of period			(349	)			12,430				(62,136	)			4,519
Net increase (decrease) during the period			56,031				(4,523	)			117,818				3,388
Balance, end of period			55,682				7,907				55,682				7,907
RETAINED EARNINGS:
Balance, beginning of period			4,657,484				4,321,849				4,618,558				4,205,905
Net income (loss)			68,350				133,766				107,276				249,710
Balance, end of period			4,725,834				4,455,615				4,725,834				4,455,615
TOTAL STOCKHOLDER'S EQUITY, END OF PERIOD		$	5,164,053			$	4,832,806			$	5,164,053			$	4,832,806
The accompanying notes are an integral part of the consolidated financial statements.

 

EVEREST REINSURANCE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

		Six Months Ended
		June 30,
(Dollars in thousands)		2016				2015
		(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)		$	107,276			$	249,710
Adjustments to reconcile net income to net cash provided by operating activities:
Decrease (increase) in premiums receivable			13,635				(19,661	)
Decrease (increase) in funds held by reinsureds, net			(3,111	)			(1,191	)
Decrease (increase) in reinsurance receivables			(9,694	)			(167,876	)
Decrease (increase) in income taxes			8,190				34,836
Decrease (increase) in prepaid reinsurance premiums			24,418				38,141
Increase (decrease) in reserve for losses and loss adjustment expenses			257,415				75,995
Increase (decrease) in unearned premiums			(89,903	)			(99,896	)
Increase (decrease) in other net payable to reinsurers			(370,242	)			(144,661	)
Increase (decrease) in losses in course of payment			1,813				76,607
Change in equity adjustments in limited partnerships			(11,352	)			(13,872	)
Distribution of limited partnership income			22,822				14,597
Change in other assets and liabilities, net			14,216				2,437
Non-cash compensation expense			5,433				3,955
Amortization of bond premium (accrual of bond discount)			8,972				9,352
Amortization of underwriting discount on senior notes			2				2
Net realized capital (gains) losses			37,212				(72,521	)
Net cash provided by (used in) operating activities			17,102				(14,046	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from fixed maturities matured/called - available for sale, at market value			368,179				493,648
Proceeds from fixed maturities sold - available for sale, at market value			296,888				288,211
Proceeds from fixed maturities sold - available for sale, at fair value			1,587				1,613
Proceeds from equity securities sold - available for sale, at market value			-				16
Proceeds from equity securities sold - available for sale, at fair value			421,980				303,477
Distributions from other invested assets			696,889				19,999
Cost of fixed maturities acquired - available for sale, at market value			(923,755	)			(850,526	)
Cost of fixed maturities acquired - available for sale, at fair value			-				(234	)
Cost of equity securities acquired - available for sale, at fair value			(180,406	)			(306,602	)
Cost of other invested assets acquired			(862,717	)			(33,996	)
Net change in short-term investments			178,128				30,157
Net change in unsettled securities transactions			36,119				3,008
Net cash provided by (used in) investing activities			32,892				(51,229	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Tax benefit from share-based compensation			2,315				3,036
Net cash provided by (used in) financing activities			2,315				3,036
EFFECT OF EXCHANGE RATE CHANGES ON CASH			22,189				(11,317	)
Net increase (decrease) in cash			74,498				(73,556	)
Cash, beginning of period			155,429				323,975
Cash, end of period		$	229,927			$	250,419
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid (recovered)		$	35,375			$	77,577
Interest paid			17,608				17,608
The accompanying notes are an integral part of the consolidated financial statements.

 

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Six Months Ended June 30, 2016 and 2015

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

Effective July 13, 2015, the Company sold all of the outstanding shares of capital stock of a wholly-owned subsidiary entity, Mt. McKinley Insurance Company ("Mt. McKinley"), to Clearwater Insurance Company. The operating results of Mt. McKinley for the three and six months ended June 30, 2015 are included within the Company's financial statements.

The unaudited consolidated financial statements of the Company for the three and six months ended June 30, 2016 and 2015 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, 2015 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 six months ended June 30, 2016 and 2015 are not necessarily indicative of the results for a full year.  These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the years ended December 31, 2015, 2014 and 2013 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 2016 presentation.

Disclosures about Short-Duration Contracts. In May 2015, the FASB issued ASU 2015-09, authoritative guidance regarding required disclosures associated with short duration insurance contracts.  The new disclosure requirements focus on information about initial claim estimates and subsequent claim estimate adjustment, methodologies in estimating claims and the timing, frequency and severity of claims related to short duration insurance contracts. This guidance is effective for annual reporting periods beginning after December 15, 2015 and interim reporting periods beginning after December 15, 2016.  Therefore, the initial presentation of this guidance in the Company's financial statements and footnotes will be for its 10-K filing as of December 31, 2016. The Company does not anticipate that it will have a significant impact on its financial statements.

Debt Issuance Costs. In April 2015, The FASB issued ASU 2015–03, authoritative guidance on the presentation of debt issuance costs.  This guidance requires that debt issuance costs be presented within the balance sheet as a reduction of the carrying value of the debt liability, rather than as a separate asset.  This guidance is effective for annual reporting periods beginning after December 15, 2015 and related interim reporting periods.  Based upon this guidance, the Company has adjusted prior financial statements and footnotes to conform with this new presentation.

Consolidation. In February 2015, the FASB issued ASU 2015-02, authoritative guidance regarding consolidation of reporting entities.  The new guidance focuses on the required evaluation of whether certain legal entities should be consolidated.  This guidance is effective for annual and interim reporting periods beginning after December 15, 2015. The Company has determined that the guidance will not have a significant impact on its financial statements.

3.  INVESTMENTS

The amortized cost, market value and gross unrealized appreciation and depreciation of available for sale, fixed maturity, equity security investments, carried at market value and other-than-temporary impairments ("OTTI") in accumulated other comprehensive income ("AOCI") are as follows for the periods indicated:

		At June 30, 2016
		Amortized				Unrealized				Unrealized				Market				OTTI in AOCI
(Dollars in thousands)		Cost				Appreciation				Depreciation				Value				(a)
Fixed maturity securities
U.S. Treasury securities and obligations of
U.S. government agencies and corporations		$	383,388			$	8,705			$	(149	)		$	391,944			$	-
Obligations of U.S. states and political subdivisions			701,171				49,219				(478	)			749,912				-
Corporate securities			2,032,340				54,062				(20,239	)			2,066,163				4,451
Asset-backed securities			167,478				1,592				(157	)			168,913				-
Mortgage-backed securities
Commercial			73,543				1,623				(65	)			75,101				-
Agency residential			756,403				11,867				(574	)			767,696				-
Non-agency residential			103				17				-				120				-
Foreign government securities			512,414				28,986				(7,997	)			533,403				-
Foreign corporate securities			990,572				35,288				(10,363	)			1,015,497				2,123
Total fixed maturity securities		$	5,617,412			$	191,359			$	(40,022	)		$	5,768,749			$	6,574
Equity securities		$	-			$	-			$	-			$	-			$	-

		At December 31, 2015
		Amortized				Unrealized				Unrealized				Market				OTTI in AOCI
(Dollars in thousands)		Cost				Appreciation				Depreciation				Value				(a)
Fixed maturity securities
U.S. Treasury securities and obligations of
U.S. government agencies and corporations		$	329,281			$	2,422			$	(718	)		$	330,985			$	-
Obligations of U.S. states and political subdivisions			669,945				34,020				(890	)			703,075				-
Corporate securities			2,011,997				27,286				(70,725	)			1,968,558				(86	)
Asset-backed securities			145,755				290				(1,063	)			144,982				-
Mortgage-backed securities
Commercial			61,527				1,430				(511	)			62,446				-
Agency residential			714,907				3,994				(6,603	)			712,298				-
Non-agency residential			126				24				-				150				-
Foreign government securities			447,244				24,255				(8,425	)			463,074				-
Foreign corporate securities			954,690				27,616				(11,397	)			970,909				17
Total fixed maturity securities		$	5,335,472			$	121,337			$	(100,332	)		$	5,356,477			$	(69	)

^(a)  Represents the amount of OTTI recognized in AOCI.  Amount includes unrealized gains and losses on impaired securities relating to changes in the value of such securities subsequent to the impairment measurement date.

		At June 30, 2016								At December 31, 2015
		Amortized				Market				Amortized				Market
(Dollars in thousands)		Cost				Value				Cost				Value
Fixed maturity securities – available for sale
Due in one year or less		$	406,621			$	405,264			$	330,029			$	330,509
Due after one year through five years			2,809,371				2,856,628				2,617,079				2,618,056
Due after five years through ten years			692,168				717,637				870,266				856,230
Due after ten years			711,725				777,390				595,783				631,806
Asset-backed securities			167,478				168,913				145,755				144,982
Mortgage-backed securities
Commercial			73,543				75,101				61,527				62,446
Agency residential			756,403				767,696				714,907				712,298
Non-agency residential			103				120				126				150
Total fixed maturity securities		$	5,617,412			$	5,768,749			$	5,335,472			$	5,356,477

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

		Three Months Eded								Six Months Eded
		June 30,								June 30,
(Dollars in thousands)		2016				2015				2016				2015
Increase (decrease) during the period between the market value and cost
of investments carried at market value, and deferred taxes thereon:
Fixed maturity securities		$	53,863			$	(34,272	)		$	123,689			$	16,939
Fixed maturity securities, other-than-temporary impairment			6,446				-				6,643				9,735
Equity Securities			-				(1	)			-				(1	)
Change in unrealized  appreciation (depreciation), pre-tax			60,309				(34,273	)			130,332				26,673
Deferred tax benefit (expense)			(18,852	)			11,996				(43,291	)			(5,928	)
Deferred tax benefit (expense), other-than-temporary impairment			(2,256	)			-				(2,325	)			(3,407	)
Change in unrealized appreciation (depreciation),
net of deferred taxes, included in stockholder's equity		$	39,201			$	(22,277	)		$	84,716			$	17,338

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

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

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 June 30, 2016 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		$	4,759			$	(149	)		$	-			$	-			$	4,759			$	(149	)
Obligations of U.S. states and political subdivisions			-				-				562				(478	)			562				(478	)
Corporate securities			261,660				(4,945	)			293,977				(15,294	)			555,637				(20,239	)
Asset-backed securities			13,337				(71	)			30,016				(86	)			43,353				(157	)
Mortgage-backed securities
Commercial			3,470				(20	)			3,352				(45	)			6,822				(65	)
Agency residential			32,558				(106	)			107,907				(468	)			140,465				(574	)
Non-agency residential			29				-				-				-				29				-
Foreign government securities			9,456				(209	)			66,601				(7,788	)			76,057				(7,997	)
Foreign corporate securities			100,483				(3,051	)			83,260				(7,312	)			183,743				(10,363	)
Total fixed maturity securities		$	425,752			$	(8,551	)		$	585,675			$	(31,471	)		$	1,011,427			$	(40,022	)
Equity securities			-				-				-				-				-				-
Total		$	425,752			$	(8,551	)		$	585,675			$	(31,471	)		$	1,011,427			$	(40,022	)

		Duration of Unrealized Loss at June 30, 2016 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		$	19,629			$	(664	)		$	29,635			$	(3,386	)		$	49,264			$	(4,050	)
Due in one year through five years			217,063				(4,758	)			325,768				(22,222	)			542,831				(26,980	)
Due in five years through ten years			136,768				(2,909	)			87,271				(5,149	)			224,039				(8,058	)
Due after ten years			2,898				(23	)			1,726				(115	)			4,624				(138	)
Asset-backed securities			13,337				(71	)			30,016				(86	)			43,353				(157	)
Mortgage-backed securities			36,057				(126	)			111,259				(513	)			147,316				(639	)
Total fixed maturity securities		$	425,752			$	(8,551	)		$	585,675			$	(31,471	)		$	1,011,427			$	(40,022	)

The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at June 30, 2016 were $1,011,427 thousand and $40,022 thousand, respectively.  The market value of securities for the single issuer whose securities comprised the largest unrealized loss position at June 30, 2016, did not exceed 0.9% of the overall market value of the Company's fixed maturity securities.  In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector.  The $8,551 thousand of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for less than one year were primarily comprised of domestic and foreign corporate securities.  The majority of these unrealized losses are attributable to net unrealized foreign exchange losses, $6,030 thousand, as the U.S. dollar has strengthened against other currencies.  The $31,471 thousand of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year related primarily to domestic and foreign corporate securities and foreign government securities.  The majority of these unrealized losses are attributable to net unrealized foreign

exchange losses, $22,677 thousand, as the U.S. dollar has strengthened against other currencies.  The Company did not have any sub-prime or alt-A loans with gross unrealized depreciation at June 30, 2016.  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.

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

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

		Duration of Unrealized Loss at December 31, 2015 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		$	216,352			$	(712	)		$	692			$	(6	)		$	217,044			$	(718	)
Obligations of U.S. states and political subdivisions			6,434				(84	)			4,917				(806	)			11,351				(890	)
Corporate securities			866,715				(49,034	)			307,215				(21,691	)			1,173,930				(70,725	)
Asset-backed securities			102,506				(791	)			28,048				(272	)			130,554				(1,063	)
Mortgage-backed securities
Commercial			26,483				(511	)			-				-				26,483				(511	)
Agency residential			320,285				(3,094	)			150,095				(3,509	)			470,380				(6,603	)
Non-agency residential			-				-				-				-				-				-
Foreign government securities			61,498				(2,182	)			77,911				(6,243	)			139,409				(8,425	)
Foreign corporate securities			324,904				(6,289	)			76,951				(5,108	)			401,855				(11,397	)
Total fixed maturity securities		$	1,925,177			$	(62,697	)		$	645,829			$	(37,635	)		$	2,571,006			$	(100,332	)

		Duration of Unrealized Loss at December 31, 2015 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		$	21,780			$	(1,577	)		$	12,212			$	(1,171	)		$	33,992			$	(2,748	)
Due in one year through five years			1,023,437				(23,255	)			347,203				(21,582	)			1,370,640				(44,837	)
Due in five years through ten years			394,978				(31,423	)			99,335				(10,131	)			494,313				(41,554	)
Due after ten years			35,708				(2,046	)			8,936				(970	)			44,644				(3,016	)
Asset-backed securities			102,506				(791	)			28,048				(272	)			130,554				(1,063	)
Mortgage-backed securities			346,768				(3,605	)			150,095				(3,509	)			496,863				(7,114	)
Total fixed maturity securities		$	1,925,177			$	(62,697	)		$	645,829			$	(37,635	)		$	2,571,006			$	(100,332	)

The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at December 31, 2015 were $2,571,006 thousand and $100,332 thousand, respectively.  The market value of securities for the single issuer whose securities comprised the largest unrealized loss position at December 31, 2015, did not exceed 0.07% of the overall market value of the Company's fixed maturity securities.  In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector.  The $62,697 thousand of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for less than one year were primarily comprised of domestic and foreign corporate securities, agency residential mortgage-backed securities and foreign government securities.  The majority of these unrealized losses are attributable to unrealized losses in the energy sector, $35,978 thousand, as falling oil prices disrupted the market values for this sector,

particularly for oil exploration, production and servicing companies and unrealized foreign exchange losses, $6,090 thousand, as the U.S. dollar has strengthened against other currencies. The $37,635 thousand of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year related primarily to domestic and foreign corporate securities, foreign government securities and agency residential mortgage-backed securities. The majority of these unrealized losses are attributable to unrealized foreign exchange losses, $14,807 thousand, as the U.S. dollar has strengthened against other currencies and unrealized losses in the energy sector, $6,959 thousand, as falling oil prices disrupted the market values for this sector, particularly for oil exploration, production and servicing companies. The Company did not have any sub-prime or alt-A loans with gross unrealized depreciation at December 31, 2015.  In all instances, there were no projected cash flow shortfalls to recover the full book value of the investments and the related interest obligations.  The mortgage-backed securities still have excess credit coverage and are current on interest and principal payments.

Other invested assets, at fair value, as of June 30, 2016, and December 31, 2015, were comprised of preferred shares held in Everest Preferred International Holdings ("Preferred Holdings"), an affiliated company.

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

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(Dollars in thousands)		2016				2015				2016				2015
Fixed maturities		$	44,795			$	46,443			$	90,121			$	94,415
Equity securities			8,734				9,892				17,882				18,634
Short-term investments and cash			251				321				555				485
Other invested assets
Limited partnerships			14,192				7,276				11,678				14,655
Dividends from Parent's shares			-				9,234				-				18,468
Dividends from preferred shares of affiliate			7,758				-				15,516				-
Other			729				983				(183	)			1,608
Gross investment income before adjustments			76,459				74,149				135,569				148,265
Funds held interest income (expense)			974				865				3,628				3,386
Interest income from Parent			1,075				1,075				2,150				2,150
Gross investment income			78,508				76,089				141,347				153,801
Investment expenses			(4,636	)			(5,164	)			(9,030	)			(10,295	)
Net investment income		$	73,872			$	70,925			$	132,317			$	143,506
(Some amounts may not reconcile due to rounding.)

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 identifies the decline.

The Company had contractual commitments to invest up to an additional $290,398 thousand in limited partnerships at June 30, 2016.  These commitments will be funded when called in accordance with the partnership agreements, which have investment periods that expire, unless extended, through 2020.

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

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(Dollars in thousands)		2016				2015				2016				2015
Fixed maturity securities, market value:
Other-than-temporary impairments		$	(1,391	)		$	(8,810	)		$	(24,406	)		$	(32,931	)
Gains (losses) from sales			2,244				(12,208	)			(14,611	)			(23,726	)
Fixed maturity securities, fair value:
Gain (losses) from sales			(1,854	)			14				(1,854	)			42
Gains (losses) from fair value adjustments			1,571				(6	)			1,339				56
Equity securities, market value:
Gains (losses) from sales			-				1				-				1
Equity securities, fair value:
Gains (losses) from sales			(7,636	)			(289	)			(15,586	)			(354	)
Gains (losses) from fair value adjustments			36,987				(5,334	)			18,662				15,612
Other invested assets, fair value:
Gains (losses) from fair value adjustments			(756	)			77,857				(756	)			113,821
Total net realized capital gains (losses)		$	29,165			$	51,225			$	(37,212	)		$	72,521

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								Six Months Ended
		June 30,								June 30,
(Dollars in thousands)		2016				2015				2016				2015
Proceeds from sales of fixed maturity securities		$	110,429			$	175,742			$	298,475			$	289,824
Gross gains from sales			6,154				5,096				7,618				7,638
Gross losses from sales			(5,764	)			(17,290	)			(24,083	)			(31,322	)
Proceeds from sales of equity securities		$	335,831			$	169,533			$	421,980			$	303,493
Gross gains from sales			4,853				7,272				6,635				12,414
Gross losses from sales			(12,489	)			(7,561	)			(22,221	)			(12,768	)

4.  FAIR VALUE

GAAP guidance regarding fair value measurements address how companies should measure fair value when they are required to use fair value measures for recognition or disclosure purposes under GAAP and provides a common definition of fair value to be used throughout GAAP.  It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly fashion between market participants at the measurement date.  In addition, it establishes a three-level valuation hierarchy for the disclosure of fair value measurements.  The valuation hierarchy is based on the transparency of inputs to the valuation of an asset or liability.  The level in the hierarchy within which a given fair value measurement falls is determined based on the lowest level input that is significant to the measurement, with Level 1 being the highest priority and Level 3 being the lowest priority.

The levels in the hierarchy are defined as follows:

Level 1:

Inputs to the valuation methodology are observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in an active market;

Level 2:

Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument;

Level 3:

Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

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

In limited instances where prices are not provided by pricing services or in rare instances when a manager may not agree with the pricing service, price quotes on a non-binding basis are obtained from investment brokers.  The investment asset managers do not make any changes to prices received from either the pricing services or the investment brokers.  In addition, the investment asset managers have procedures in place to review the reasonableness of the prices from the service providers and may request verification of the prices.  In addition, the Company continually performs analytical reviews of price changes and tests the prices on a random basis to an independent pricing source.   No material variances were noted during these price validation procedures.  In limited situations, where financial markets are inactive or illiquid, the Company may use its own assumptions about future cash flows and risk-adjusted discount rates to determine fair value.  Due to the unavailability of prices for fifteen private placement securities, the Company valued the fifteen securities at $34,431 thousand at June 30, 2016.  Due to the unavailability of prices for two private placement securities, the Company valued the two securities at $3,593 thousand at December 31, 2015.

The Company internally manages a small public equity portfolio which had a fair value at June 30, 2016 and December 31, 2015 of $124,776 thousand and $131,219 thousand, respectively, and all prices were obtained from publically published sources.

Equity securities denominated in U.S. currency with quoted prices in active markets for identical assets are categorized as level 1 since the quoted prices are directly observable.  Equity securities traded on foreign exchanges are categorized as level 2 due to the added input of a foreign exchange conversion rate to determine fair or market value.  The Company uses foreign currency exchange rates published by nationally recognized sources.

All categories of fixed maturity securities listed in the tables below are generally categorized as level 2, 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.  For foreign government securities and foreign corporate securities, the fair values provided by the third party pricing services in local currencies, and where applicable, are converted to U.S. dollars using currency exchange rates from nationally recognized sources.

The fixed maturities with fair values categorized as level 3 result when prices are not available from the nationally recognized pricing services.  The asset managers will then obtain non-binding price quotes for the securities from brokers. The single broker quotes are provided by market makers or broker-dealers who are recognized as market participants in the markets in which they are providing the quotes.  The prices received from brokers are reviewed for reasonableness by the third party asset managers and the Company.  If the broker quotes are for foreign denominated securities, the quotes are converted to U.S. dollars using currency exchange rates from nationally recognized sources. In limited circumstances when broker prices are not available for private placements, the Company will value the securities using comparable market information.

 

The composition and valuation inputs for the presented fixed maturities categories are as follows:

·	U.S. Treasury securities and obligations of U.S. government agencies and corporations are primarily comprised of U.S. Treasury bonds and the fair value is based on observable market inputs such as quoted prices, reported trades, quoted prices for similar issuances or benchmark yields;

·	Obligations of U.S. states and political subdivisions are comprised of state and municipal bond issuances and the fair values are based on observable market inputs such as quoted market prices, quoted prices for similar securities, benchmark yields and credit spreads;

·	Corporate securities are primarily comprised of U.S. corporate and public utility bond issuances and the fair values are based on observable market inputs such as quoted market prices, quoted prices for similar securities, benchmark yields and credit spreads;

·	Asset-backed and mortgage-backed securities fair values are based on observable inputs such as quoted prices, reported trades, quoted prices for similar issuances or benchmark yields and cash flow models using observable inputs such as prepayment speeds, collateral performance and default spreads;

·

Foreign government securities are comprised of global non-U.S. sovereign bond issuances and the fair values are based on observable market inputs such as quoted market prices, quoted prices for similar securities and models with observable inputs such as benchmark yields and credit spreads and then, where applicable, converted to U.S. dollars using an exchange rate from a nationally recognized source;

·

Foreign corporate securities are comprised of global non-U.S. corporate bond issuances and the fair values are based on observable market inputs such as quoted market prices, quoted prices for similar securities and models with observable inputs such as benchmark yields and credit spreads and then, where applicable, converted to U.S. dollars using an exchange rate from a nationally recognized source.

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

						Fair Value Measurement Using:
						Quoted Prices
						in Active				Significant
						Markets for				Other				Significant
						Identical				Observable				Unobservable
						Assets				Inputs				Inputs
(Dollars in thousands)		June 30, 2016				(Level 1)				(Level 2)				(Level 3)
Assets:
Fixed maturities, market value
U.S. Treasury securities and obligations of
U.S. government agencies and corporations		$	391,944			$	-			$	391,944			$	-
Obligations of U.S. States and political subdivisions			749,912				-				749,912				-
Corporate securities			2,066,163				-				2,033,753				32,410
Asset-backed securities			168,913				-				168,913				-
Mortgage-backed securities
Commercial			75,101				-				75,101				-
Agency residential			767,696				-				767,696				-
Non-agency residential			120				-				120				-
Foreign government securities			533,403				-				533,403				-
Foreign corporate securities			1,015,497				-				1,013,476				2,021
Total fixed maturities, market value			5,768,749				-				5,734,318				34,431
Equity securities, fair value			976,879				915,003				61,876				-
Other invested assets, fair value			1,772,458				-				-				1,772,458