The following selected consolidated GAAP financial data of the Company as of and for the years ended December 31, 2009, 2008, 2007, 2006 and 2005 were derived from the audited consolidated financial statements of the Company. The following financial data should be read in conjunction with the Consolidated Financial Statements and accompanying notes.
Catastrophe losses are presented net of reinsurance and reinstatement premiums. A catastrophe is defined, for purposes of the consolidated Selected Financial Data, as an event that caused a loss on property exposures before reinsurance of at least $5.0 million before corporate level reinsurance and taxes. Catastrophe insurance provides coverage for one event. When limits are exhausted, some contractual arrangements provide for the availability of additional coverage upon the payment of additional premium. This additional premium is referred to as reinstatement premium.
Based on weighted average basic common shares outstanding of 60.7 million, 61.7 million, 63.1 million, 64.7 million and 57.6 million for 2009, 2008, 2007, 2006 and 2005, respectively.
Worldwide insurance and reinsurance market conditions continued to be very competitive. Generally, there was ample insurance and reinsurance capacity relative to demand. We noted, however, that in many markets and lines during 2009, 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. Competition and its effect on rates, terms and conditions vary widely by market and coverage yet continues to be most prevalent in the U.S. casualty insurance and reinsurance markets. The U.S. insurance markets in which we participate were extremely competitive as well, particularly in the workers’ compensation, public entity and contractor sectors.
The reinsurance industry has experienced a period of falling rates and volume, particularly in the casualty lines of business. Profit opportunities have become generally less available over time; however the unfavorable trends appear to have abated somewhat. We are now seeing smaller rate declines, pockets of stability and some increases in some markets and for some coverages. Both the primary insurers and reinsurers incurred very significant investment and catastrophe losses during 2008 resulting in capital depletion and increased rating agency scrutiny. Conversely in 2009, the financial markets partially rebounded and catastrophe losses were low resulting in improved industry capital levels. It is too early to gauge the market impacts from these capital accumulations.
Premiums. Gross written premiums increased by $450.8 million, or 12.3%, in 2009 compared to 2008, reflecting an increase of $380.1 million in our reinsurance business and $70.8 million in our insurance business. The increased reinsurance business was primarily attributable to increased rates on property
business, in both the international and U.S. markets, new crop hail quota share treaty business, expanded participation on renewal contracts and new writings as ceding companies continued to favor reinsurers, such as Everest, with strong financial ratings. The increase in insurance premiums were primarily in the workers’ compensation and financial institution D&O and E&O lines of business, which were new offerings for us in 2009. Net written premiums increased $424.5 million, or 12.1%, in 2009 compared to 2008. The increases in net written premiums are primarily due to the increase in gross written premiums. Premiums earned increased $199.8 million, or 5.4%, in 2009 compared to 2008, reflective of the higher net written premiums. 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.
Gross written premiums decreased by $399.4 million, or 9.8%, in 2008 compared to 2007, reflecting a decline of $285.6 million in our reinsurance business and $113.8 million in our U.S. insurance business. The decline in our reinsurance business was primarily attributable to continued competitive conditions in both the property and casualty sectors of the market, especially in the U.S., partially offset by strong renewals and higher rates in international markets. Insurance segment premiums were also lower, as conditions for workers’ compensation, public entity and contractors business became increasingly competitive, which reduced the volume of business that met our underwriting and pricing criteria. Net written premiums decreased $414.2 million, or 10.6%, in 2008 compared to 2007, primarily due to the decrease in gross written premiums and an increase in written premiums ceded, most of which was in the U.S. insurance segment. Correspondingly, premiums earned decreased $303.2 million, or 7.6%, in 2008 compared to 2007. The lesser percentage decrease 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 reflected at the initiation of the coverage period.
Net investment income decreased by 17.1% in 2008 compared to 2007, primarily due to net investment losses from our limited partnership investments, particularly those which were principally invested in public equities, and lower rates on short and long term bonds. Pre-tax investment income as a percentage of average invested assets was 4.0% for 2008 compared to 4.9% for 2007.
Realized Gain on Debt Repurchase. On March 19, 2009, we announced the commencement of a cash tender offer for any and all of the 6.60% fixed to floating rate long term subordinated notes due 2067. Upon expiration of the tender offer, we had reduced our outstanding debt by $161.4 million, which resulted in a pre-tax gain on debt repurchase of $78.3 million.
Other (Expense) Income. We recorded other expense of $22.5 million and $15.9 million in 2009 and 2008, respectively, and other income of $18.0 million in 2007. The changes were primarily the result of fluctuations in foreign currency exchange rates for the corresponding periods.
Incurred losses and LAE were lower by $64.9 million, or 2.7%, in 2009 compared to 2008. The absence, in 2009, of any large catastrophe losses as experienced in 2008, reduced the loss ratio 8.0 points, or $290.0 million, period over period. Partially offsetting the reduction in catastrophe losses was the increase in both current and prior years’ attritional losses. The $131.1 million increase in current year attritional losses was principally due to the increase in earned premium from 2008 to 2009. The $100.4 million increase in prior years’ attritional losses was primarily due to increased reserves for exposure related to sub-prime and contractors’ liability.
Incurred losses and LAE were lower by $109.2 million, or 4.3%, in 2008 compared to 2007. Attritional losses were lower than in 2007, largely the result of lower net earned premiums. The current year attritional loss ratio crept up by 0.7 points compared to 2007, the result of softer rates in the U.S. Reinsurance segment mitigated somewhat by improved loss ratios in the other segments, particularly, International.
We experienced $24.4 million of adverse reserve development on our attritional reserves in 2008 compared to $188.7 million of favorable reserve development in 2007. The adverse development in 2008 was the result of $85.3 million of development on loss reserves for a run-off auto loan credit insurance program and a $32.6 million adverse arbitration decision. These items more than offset approximately $93.5 million of favorable development on the remainder of our attritional reserves.
Commission, brokerage, taxes and fees decreased by $31.1 million, or 3.2%, in 2008 compared to 2007. This directly variable expense was influenced by the decline in net earned premiums, partially offset by higher commission rates on new insurance programs, higher contingent commissions and higher ceding commissions on some reinsurance treaties due to more competitive market conditions, as well as business mix.
Other Underwriting Expenses. Other underwriting expenses were $184.8 million and $162.3 million in 2009 and 2008, respectively. The increase was primarily due to the increase in staff and staff related expenses as we continue to grow our direct book of business. In addition, other underwriting expenses include corporate expenses, which are expenses that are not allocated to segments, of $17.6 million and $13.8 million for 2009 and 2008, respectively.
Our combined ratio increased by 4.0 points to 95.6% in 2008 compared to 91.6% in 2007. The loss ratio component increased 2.3 points in 2008, principally due to the increase in current year catastrophe losses and attritional prior years’ reserve development, partially offset by the absence of development on A&E reserves in 2008. The commission and brokerage ratio component increased by 1.1 points in 2008 due to the increased commission rates on new insurance programs and higher contingent commissions. The other underwriting expense ratio component increased by 0.6 points in 2008.
Shareholders’ equity decreased by $724.4 million to $4,960.4 million at December 31, 2008 from $5,684.8 million at December 31, 2007, principally as a result of $236.6 million of unrealized depreciation, net of tax, on investments, $193.3 million of foreign currency translation adjustments, the repurchase of 1.6 million common shares for $150.7 million, $118.6 million of shareholder dividends, pension adjustments, net of tax, of $25.2 million and a net loss of $18.8 million, partially offset by share-based compensation transactions of $20.0 million. The increase in unrealized depreciation was due to the current financial market liquidity crisis that resulted in significantly increased credit spreads and dramatic decreases in corporate and municipal security values.
Because of our historical income orientation, we have generally managed our investments to maximize reportable income. The following table provides a comparison of our total return by asset class relative to broadly accepted industry benchmarks for the periods indicated:
Net realized capital losses were $2.3 million and $695.8 million in 2009 and 2008, respectively, compared to $86.3 million of net realized capital gains in 2007. In 2009, we recorded $29.3 million of net realized capital losses from sales and $13.2 million in other-than-temporary impairments on our available for sale fixed maturity securities, partially offset by $40.2 million gain in fair value re-measurements. In contrast, in 2008, we recorded $276.0 million in losses due to fair value re-measurements primarily on equity securities as a result of the global financial markets credit crisis, $243.3 million of losses from sales of our equity portfolio and $176.5 million of other-than-temporary impairments on our available for sale fixed maturity securities. In 2007, net realized capital gains were $76.6 million of fair value re-measurements, net realized capital gains from sales of $18.1 million and other-than-temporary impairments of $8.4 million.
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 A&H, marine, aviation and surety business within the U.S. and worldwide through brokers and directly with ceding companies. The International operation writes non-U.S. property and casualty reinsurance through Everest Re 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.
Premiums. Gross written premiums increased by 22.4% to $1,172.3 million in 2009 from $957.9 million in 2008, primarily due to $103.9 million (40.0%) increase in U.S. treaty casualty volume, $84.6 million from the new crop hail quota share treaties, a $15.8 million (2.6%) increase in treaty property volume and a $10.5 million (12.0%) increase in facultative volume. Our treaty casualty premiums were higher as we wrote more quota share business as a replacement for more business written on an excess of loss basis. Net written premiums increased 23.0% to $1,167.2 million in 2009 compared to $948.8 million in 2008, relatively in line with the increase in gross written premiums. Premiums earned increased 9.5% to $1,150.3 million in 2009 compared to $1,050.3 million in 2008. The change in premiums earned relative to net written premiums is the result of timing; premiums, for proportionate contracts, are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.
Incurred losses were $223.4 million (26.0 points) lower at $574.8 million in 2009 compared to $798.2 million in 2008, primarily as a result of the $281.0 million (26.7 points) decrease in catastrophe losses due to the absence of current year catastrophes in 2009. The prior years’ reserve development in 2009 primarily relates to sub-prime liability exposures.
Segment Expenses. Commission and brokerage expenses decreased by 0.4% to $272.2 million in 2009 compared to $273.3 million in 2008, primarily due to the change in the mix and type of business written. Segment other underwriting expenses for 2009 increased to $36.2 million from $32.2 million in for 2008, due to growth in the overall infrastructure.
Commission and brokerage expenses decreased by 16.5% to $273.3 million for 2008 from $327.2 million in 2007, generally in line with the 18.1% decrease in net earned premiums. Segment other underwriting expenses for 2008 decreased slightly to $32.2 million from $33.3 million for 2007.
Incurred losses and LAE decreased by 1.2% to $549.9 million in 2008 compared to $556.4 million in 2007 driven by the 4.1% decrease in net earned premium and a 2.3 point reduction in the current year loss ratio. In 2008, we strengthened reserves for an auto loan credit insurance program by $85.3 million as the deterioration in general economic conditions adversely impacted loan performance resulting in unforeseen increases in loan default rates and claim amounts. We had strengthened the reserves for this program by $64.7 million in 2007. We commuted our remaining liability on this program with the largest policyholder representing approximately one third of the remaining loss exposure. Given the magnitude of our current reserves, the maturity of the remaining insured portfolio and the reduced principal exposure, we believe future loss development, if any, related to this program will not be material. Other than as related to this run-off program, the segment experienced favorable reserve development in both 2008 and 2007.
Segment Expenses. Commission and brokerage decreased by 15.2% to $124.4 million in 2009 compared to $146.7 million in 2008. The decrease was primarily due to the change in the mix of business written and the reinsurance purchased on the business written. Segment other underwriting expenses in 2009 increased to $74.6 million compared to $64.3 million in 2008. The increase was primarily due to increased costs associated with the expanded infrastructure.
Commission and brokerage increased by 7.7% to $146.7 million in 2008 compared to $136.2 million in 2007, principally due to higher commissions on two new programs. Segment other underwriting expenses in 2008 increased to $64.3 million compared to $58.2 million in 2007, primarily due to increased compensation costs associated with increased staff.
Premiums. Gross written premiums decreased by 9.8% to $234.8 million in 2009 compared to $260.4 million for 2008, primarily due to a $33.7 million decrease in marine premiums and a $5.9 million decrease in surety premiums, partially offset by a $10.0 million increase in aviation premiums and a $2.7 million increase in A&H premiums. Net written premiums decreased 9.5% to $230.0 million in 2009 compared to $254.2 million in 2008, in line with the decrease in gross writings. Premiums earned decreased 6.8% to $234.5 million in 2009 compared to $251.8 million in 2008. 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.
Segment Expenses. Commission and brokerage increased 15.7% to $267.1 million in 2009 compared to $230.9 million in 2008. The increase was primarily due to the growth in premiums earned in conjunction with the blend of business mix. Segment other underwriting expenses in 2009 increased to $23.1 million compared to $19.8 million in 2008, consistent with growth in business.
Commission and brokerage increased 15.8% to $230.9 million for 2008 from $199.5 million in 2007. The increase was principally due to the growth in premiums earned. In addition, the commission and brokerage ratio increased largely due to increased contingent commissions emanating from the profitable results. Segment other underwriting expenses in 2008 increased to $19.8 million compared to $18.6 million in 2007.
Incurred losses and LAE decreased 31.2% to $420.3 million in 2008 compared to $611.2 million in 2007. The principal driver of the decrease was the absence of development on A&E loss reserves in 2008, which reduced the segment loss ratio by 13.3 points.
Segment Expenses. Commission and brokerage decreased 8.0% to $192.1 million in 2009 as compared to $208.9 million in 2008. The variance was principally the result of lower earned premiums and changes in the mix of business. Segment other underwriting expenses in 2009 increased slightly to $24.6 million compared to $24.2 million in 2008.
Commission and brokerage decreased 9.3% to $208.9 million in 2008 as compared to $230.4 million in 2007, principally the result of a decline in premiums earned and the change in the mix of business. Segment other underwriting expenses in 2008 increased to $24.2 million compared to $20.9 million in 2007, primarily due to a general increase in operations to support the business.
Loss and LAE Reserves. Our most critical accounting policy is the determination of our loss and LAE reserves. We maintain reserves equal to our estimated ultimate liability for losses and LAE for reported and unreported claims for our insurance and reinsurance businesses. Because reserves are based on estimates of ultimate losses and LAE by underwriting or accident year, we use a variety of statistical and actuarial techniques to monitor reserve adequacy over time, evaluate new information as it becomes known and adjust reserves whenever an adjustment appears warranted. We consider many factors when setting reserves including: (1) our exposure base and projected ultimate premiums earned; (2) our expected loss ratios by product and class of business, which are developed collaboratively by underwriters and actuaries; (3) actuarial methodologies which analyze our loss reporting and payment experience, reports from ceding companies and historical trends, such as reserving patterns, loss payments and product mix; (4) current legal interpretations of coverage and liability; (5) economic conditions; and (6) uncertainties discussed below regarding our liability for A&E claims. Our insurance and reinsurance loss and LAE reserves represent our best estimate of our ultimate liability. Actual losses and LAE ultimately paid may deviate, perhaps substantially, from such reserves. Our net income will be impacted in a period in which the change in estimated ultimate losses and LAE is recorded. See also ITEM 8, “Financial Statements and Supplementary Data” - Note 1 of Notes to the Consolidated Financial Statements.
We use similar actuarial methodologies, such as expected loss ratio, chain ladder reserving methods and Borhuetter Ferguson, supplemented by judgment where appropriate, to estimate our ultimate losses and LAE for each exposure group. Although we use similar actuarial methodologies for both short tail and long tail lines, the faster reporting of experience for the short tail lines allows us to have greater confidence in our estimates of ultimate losses for short tail lines at an earlier stage than for long tail lines. As a result, we utilize, as well, exposure-based methods to estimate our ultimate losses for longer tail lines, especially for immature accident years. For both short and long tail lines, we supplement these general approaches with analytically based judgments. We cannot estimate losses from widespread catastrophic events, such as hurricanes, using traditional actuarial methods. We estimate losses for these types of events based on information derived from catastrophe models, quantitative and qualitative exposure analyses, reports and communications from ceding companies and development patterns for historically similar events. Due to the inherent uncertainty in estimating such losses, these estimates are subject to variability, which increases with the severity and complexity of the underlying event.
We have direct relationships with Mt. McKinley policyholders and we attempt to uphold our contractual rights and assert valid defenses to coverage where appropriate. The uncertainties inherent in asbestos coverage and bankruptcy litigations have provided us the opportunity to engage in settlement negotiations with a number of policyholders who have potentially significant asbestos liabilities. Those discussions are aimed at achieving reasonable negotiated settlements that limit Mt. McKinley’s liability to a given policyholder to a sum certain. Because of the risks and uncertainties inherent in litigation, we cannot be certain that this approach will lead to a negotiated settlement in the range expected by us in each or every instance. Between 2004 and 2009, we concluded settlements or reached agreement in principle with 22 of our high profile policyholders. We continue the approach of attempting to negotiate with such policyholders that may have significant asbestos liabilities, in part because their exposures have developed to the point where we and the policyholder have sufficient information to be motivated to settle. We believe that this active approach will ultimately result in a more cost-effective liquidation of Mt. McKinley’s liabilities than a passive approach, although it may also introduce additional variability in Mt. McKinley’s losses and cash flows as reserves are adjusted to reflect the developments in litigation, negotiations and, ultimately, potential settlements.
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 significantly 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 as financial markets improved. At December 31, 2009, the market value of investments in equity and limited partnership securities, carried at both market and fair value, approximated 15% of shareholders’ equity, a decrease of 1 point from 16% of shareholders’ equity at December 31, 2008.
them as a liability, credited interest on the balances at a stated contractual rate and reduced the liability account as payments become due. In addition, $31.9 million was receivable from Founders, for which the Company has recorded a full provision for uncollectibility. No other retrocessionaire accounted for more than 5% of our receivables.
Although totals are displayed for both the low and high range amounts, it should be noted that statistically the range of the total is not equal to the sum of the ranges of the segments.
The vast majority of Mt. McKinley’s A&E exposed insurance policies are excess casualty policies, with aggregate coverage limits. Mt. McKinley’s attachment points vary but generally are excess of millions, often tens of millions, of dollars of underlying coverage. The excess nature of most of Mt. McKinley’s policies also offers insulation against “non-product” claims (for example, claims arising under general liability coverage). Although under some circumstances an excess policy could be exposed to non-product claims, such claims generally pose more of a risk to primary policies because non-product claims are generally less likely to aggregate since each non-product claim is a separate loss; whereas for product claims, all claims related to a given product “aggregate” as one loss. Environmental claims arise under general liability coverage, and generally do not aggregate. Thus, these claims tend to create exposure for primary policies to a greater extent than excess policies.
With respect to asbestos only, at December 31, 2009, we had gross asbestos loss reserves of $608.8 million, or 95.3%, of total A&E reserves, of which $477.9 million was for assumed business and $130.9 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 7 years at December 31, 2009. These metrics can be skewed by individual large settlements occurring in the prior three years and therefore, may not be indicative of the timing of future payments.
Because the survival ratio was developed as a comparative measure of reserve strength and does not indicate absolute reserve adequacy, we consider, but do not rely on, the survival ratio when evaluating our reserves. In particular, we note that year to year loss payment variability can be material. This is due, in part, to our orientation to negotiated settlements, particularly on our Mt. McKinley exposures, which significantly reduces the credibility and utility of this measure as an analytical tool. During 2009, we made asbestos net claim payments of $63.5 million to Mt McKinley high profile claimants where the claim was either closed or a settlement had been reached. Such payments, which are non-repetitive, distort downward our three year survival ratio for 2009 and will continue to do so for 2010 and 2011. Adjusting for such settlements, recognizing that total settlements are generally considered fully reserved to an agreed settlement, we consider that our adjusted asbestos survival ratio for net unsettled claims is 9 years, which is better than prevailing industry norms.
the equity markets 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.
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 exposure to public equities during the fourth quarter of 2008 and have increased our exposure to equities in the latter part of 2009 as financial markets improved. At December 31, 2009, the market value of investments in equity and limited partnership securities, carried at both market and fair value, approximated 15% of shareholders’ equity.
If disbursements for claims and benefits, policy acquisition costs and other operating expenses were to exceed premium inflows, cash flow from 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
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, Bermuda Re and 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) 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 $500.0 million for the issuance of standby letters of credit on a collateralized basis.
Costs incurred in connection with the Group Credit Facility and the Holdings Credit Facility were $1.5 million and $1.3 million for December 31, 2009 and 2008, respectively.
We focus on potential losses that could result from any single event, or series of events as part of our evaluation and monitoring of our aggregate exposures to catastrophic events. Accordingly, we employ various techniques to estimate the amount of loss we could sustain from any single catastrophic event in various geographic areas. These techniques range from deterministic approaches, such as tracking aggregate limits exposed in catastrophe-prone zones and applying historic damage factors, to modeled approaches that attempt to scientifically measure catastrophe loss exposure using sophisticated Monte Carlo simulation techniques that forecast frequency and severity of expected losses on a probabilistic basis.
No single universal model or group of models is currently capable of projecting the amount and probability of loss in all global geographic regions in which we conduct business. In addition, the form, quality and granularity of underwriting exposure data furnished by ceding companies is not uniformly compatible with the data requirements for our licensed models, which adds to the inherent imprecision in the potential loss projections. Further, the results from multiple models and analytical methods must be combined and interpolated to estimate potential losses by and across business units. Also, while most models have been updated to better incorporate factors that contributed to unprecedented industry storm losses in 2004 and 2005, such as flood, storm surge and demand surge, catastrophe model projections are inherently imprecise. In addition, uncertainties with respect to future climatic patterns and cycles add to the already significant uncertainty of loss projections from models using historic long term frequency and severity data.
If such a single catastrophe loss were to occur, management estimates that the economic loss to us would be approximately $541 million. The estimate involves multiple variables, including which Everest entity would experience the loss, and as a result there can be no assurance that this amount would not be exceeded.
On March 15, 2010, Holdings’ $200.0 million principal amount of 8.75% senior notes will mature. We anticipate paying off the debt on the due date with current liquidity as opposed to refinancing.
During 2009, 2008 and 2007, we declared and paid shareholder dividends of $116.9 million, $118.6 million and $121.4 million, respectively. As an insurance holding company, we are partially dependent on dividends and other permitted payments from our subsidiaries to pay cash dividends to our shareholders. The payment of dividends to Group by Holdings Ireland is subject to Irish corporate and regulatory restrictions; the payment of dividends to Holdings Ireland by Holdings and to Holdings by Everest Re is subject to Delaware regulatory restrictions; and the payment of dividends to Group by Bermuda Re is subject to Bermuda insurance regulatory restrictions. Management expects that, absent extraordinary catastrophe losses, such restrictions should not affect Everest Re’s ability to declare and pay dividends sufficient to support Holdings’ general corporate needs and that Holdings Ireland and Bermuda Re will have the ability to declare and pay dividends sufficient to support Group’s general corporate needs. For the years ended December 31, 2009, 2008 and 2007, Everest Re paid dividends to Holdings of $60.0 million, $285.0 million and $245.0 million, respectively. For the years ended December 31, 2009, 2008 and 2007, Bermuda Re paid dividends to Group of $245.0 million, $120.0 million and $0.0 million, respectively. See ITEM 1, “Business - Regulatory Matters - Dividends” and ITEM 8, “Financial Statements and Supplementary Data” - Note 16 of Notes to Consolidated Financial Statements.
Financial Accounting Standards Board Launched Accounting Codification. In June 2009, the 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 SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The Codification supersedes all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative.
Following the Codification, the FASB will no longer issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, the FASB will issue Accounting Standards Updates, which will serve to update the Codification, provide background information about the guidance and provide the basis for conclusions on the changes to the Codification.
GAAP is not intended to be changed as a result of the FASB’s Codification, but it will change the way the guidance is organized and presented. As a result, these changes will have a significant impact on how companies reference GAAP in their financial statements and in the accounting policies for financial statements issued for interim and annual periods ending after September 15, 2009. The Company’s adoption of this guidance impacts the way the Company references U.S. GAAP accounting standards in the financial statements and Notes to Consolidated Financial Statements.
Fair Value Disclosures about Pension Plan Assets. In December 2008, the FASB revised the authoritative guidance for employers’ disclosures about pension plan assets. This new guidance requires additional disclosures about the components of plan assets, investment strategies for plan assets and significant concentrations of risk within plan assets. The Company, in conjunction with fair value measurement of plan assets, will separate plan assets into the three fair value hierarchy levels and provide a roll forward of the changes in fair value of plan assets classified as Level 3 in the current 2009 annual consolidated financial statements. These disclosures have no effect on the Company’s accounting for plan benefits and obligations.
Interest Rate Risk. Our $14.9 billion investment portfolio at December 31, 2009 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.
The tables below display the potential impact of market value fluctuations and after-tax unrealized appreciation on our fixed maturity portfolio (including $673.1 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 the various interest rate change scenarios.
We sold one equity index put option contract, based on the FTSE 100 index, for total consideration, net of commissions, of $6.7 million. At December 31, 2009, fair value for this equity index put option contract was $6.1 million. 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 December 31, 2009 index value, we estimate the probability, that this FTSE 100 equity index put option contract will fall below the strike price on the exercise date, to be less than 32%. 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 December 31, 2009, the present value of the theoretical maximum payout using a 6% discount factor and current exchange rate was $28.4 million.
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 as net derivative expense or income. Our financial statements reflect fair values for our obligations on these equity index put option contracts at December 31, 2009 and 2008, of $57.3 million and $60.6 million, respectively; however, we do not believe that the ultimate settlement of these transactions is likely to require a payment that would exceed the initial consideration received, or any payment at all.