The following selected consolidated GAAP financial data of the Company as of and for the years ended December 31, 2013, 2012, 2011, 2010 and 2009, 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.
Based on weighted average basic common shares outstanding of 48.6 million, 51.9 million, 53.8 million, 56.6 million and 60.7 million for 2013, 2012, 2011, 2010 and 2009, respectively.
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.
Net Derivative Gain (Loss). In 2005 and prior, we sold seven equity index put option contracts, which remain 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 gains of $44.0 million in 2013 and net derivative losses of $9.7 million and $11.3 million in 2012 and 2011, respectively. The change in the fair value of these equity index put option contracts is indicative of the change in the equity markets and interest rates over the same periods.
Other Income (Expense). We recorded other expense of $5.5 million in 2013, other income of $3.3 million in 2012 and other expense of $23.1 million in 2011. The changes were primarily the result of fluctuations in foreign currency exchange rates for the corresponding periods.
Incurred losses and LAE increased by 2.0% to $2,800.3 million for the year ended December 31, 2013 compared to $2,745.3 million for the year ended December 31, 2012, primarily due to increases in current year attritional losses, partially offset by the decline in current year catastrophe losses. The increase in current year attritional losses of $284.6 million is primarily due to the impact of the increase in premiums earned. Despite the increase in current year attritional losses, the current year attritional loss ratio decreased by 1.0 points due to the shift in the mix of business towards excess of loss business, which generally results in lower loss ratios. Current year catastrophe losses for the year ended December 31, 2013 were $195.0 million, or 4.1 points, due to Canadian floods ($79.7 million), U.S. storms ($44.8 million), Typhoon Fitow ($30.0 million), German hailstorms ($20.5 million) and European floods ($20.0 million). The $410.0 million of current year catastrophe losses for 2012 represented 9.8 points and related to Superstorm Sandy ($325.0 million), U.S. storms ($60.0 million) and Hurricane Isaac ($25.0 million).
Commission, brokerage, taxes and fees increased by 0.2% to $952.7 million for the year ended December 31, 2012 compared to $950.5 million in 2011. The increase is due primarily to the one-time effect of the non-renewal of a Florida quota share contract and the adoption of new accounting standards concerning the accounting for acquisition costs, which increased expenses in 2012. The increased expenses resulting from these two factors were partially offset by an increase in excess of loss business which carries a lower commission than pro rata business.
Corporate Expenses. Corporate expenses, which are general operating expenses that are not allocated to segments, were $24.8 million, $24.0 million and $16.5 million for the years ended December 31, 2013, 2012 and 2011, respectively. The increase in corporate expenses were mainly due to higher share-based compensation expense.
Interest, Fees and Bond Issue Cost Amortization Expense. Interest, fees and other bond amortization expense was $46.1 million and $53.7 million in 2013 and 2012, respectively. The decrease was primarily due to the redemption of $329.9 million of trust preferred securities in May 2013. The year over year decrease was partially offset by $7.7 million of amortization expense on remaining capitalized issuance costs related to the redeemed securities.
Interest, fees and other bond amortization expense was $53.7 million and $52.3 million in 2012 and 2011, respectively. The increase was primarily due to additional costs for the new Group Credit Facility signed in June, 2012.
Our combined ratio decreased by 24.7 points to 93.8% in 2012 compared to 118.5% in 2011. The loss ratio component decreased 25.0 points in 2012 over the same period last year primarily due to the decline in catastrophe losses in 2012 compared to 2011. The commission and brokerage ratio component slightly decreased over the same period last year due to an increase in excess of loss business which carries a lower commission than pro rata business, partially offset by the one-time effect of the non-renewal of the Florida quota share and the adoption of new accounting standards concerning the accounting for acquisition costs. Eliminating the impact of reinstatement premiums, contingent commissions, and these one-time items, the commission and brokerage ratio improved 1.5 points to 21.2% driven by the shift in the mix of business. The other underwriting expense ratio component increased slightly from the same period last year due to higher employee benefit costs.
Net investment income decreased by 3.2% to $600.2 million in 2012 compared to $620.0 million in 2011, primarily due to declines in income from our fixed maturities, reflective of declining reinvestment rates, partially offset by an increase in income from our limited partnership investments.
As indicated above, there is a relatively large variation between the total return on our fixed income portfolio for the year ended December 31, 2011 versus the Barclay’s - U.S. aggregate index for the same period. One of the reasons is that the duration of our portfolio is much shorter than the duration of the index. Historically, our duration has been shorter than the index because we align our investment portfolio with our liabilities. In addition, we shortened our duration in anticipation of a reversing trend in interest rate movements. With interest rates continuing to decline in 2011, the index benefited from its longer duration; however, in the longer term, there will be a benefit from a reduced exposure to unrealized market valuation losses on our fixed income portfolio if interest rates rise. Our total return was more comparable to the index in 2013 and 2012 as interest rates remained fairly steady. The composition of the index is also different from our portfolio as we hold foreign securities to match our foreign liabilities, while the index is comprised of only U.S. securities.
Net realized capital gains were $300.2 million in 2013 compared to net realized capital gains of $164.4 million and $6.9 million in 2012 and 2011, respectively. In 2013, we recorded $258.9 million of net realized capital gains due to fair value re-measurements on fixed maturity and equity securities and $42.4 million of net realized capital gains from sales of fixed maturity and equity securities, partially offset by $1.1 million of other-than-temporary impairments. The fixed maturity and equity sales in 2013 related primarily to adjusting the portfolios for overall market changes and individual credit shifts along with maintaining a balanced foreign currency exposure. In 2012, we recorded $118.1 million of net realized capital gains due to fair value re-measurements on fixed maturity and equity securities and $56.3 million of net realized capital gains from sales of fixed maturity and equity securities, partially offset by $10.0 million of other-than-temporary impairments. The fixed maturity sales in 2012 related primarily to maintaining a balanced foreign currency exposure and the equity sales related primarily to reducing our equity exposure. In 2011, we recorded $27.5 million of net realized capital gains from sales of fixed maturity and equity securities, partially offset by $16.2 million of other-than-temporary impairments and $4.4 million of net realized capital losses due to fair value re-measurements on fixed maturity and equity securities. The gains and losses on the sales of fixed maturity securities included the impact of selling part of our municipal bond portfolio as credit concerns arose in this market sector.
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.
Premiums. Gross written premiums increased by 38.1% to $1,809.7 million in 2013 from $1,310.7 million in 2012, primarily due to the impact of a large Florida quota share reinsurance contract, new business opportunities, particularly for contracts with catastrophe exposed risks and higher subject premium on casualty quota share business as rates began to rise in these markets. Excluding the impact of the Florida quota share reinsurance contract, gross written premiums increased 17.8%. Net written premiums increased by 38.3% to $1,807.1 million in 2013 compared to $1,306.5 million in 2012, which is in line with the increase in gross written premiums. Premiums earned increased 18.0% to $1,671.5 million in 2013 compared to $1,416.4 million in 2012. Premiums earned were only minimally impacted by the Florida quota share reinsurance contract that affected written premiums. The change in premiums earned was relatively comparable to net written premiums, excluding the Florida quota share reinsurance contract.
Gross written premiums decreased by 2.7% to $1,310.7 million in 2012 from $1,346.8 million in 2011, primarily due to the non-renewal of a large Florida quota share reinsurance contract, partially offset by increased new business and higher premium rates on renewals, particularly for contracts with catastrophe exposed risks. Net written premiums decreased by 2.8% to $1,306.5 million in 2012 compared to $1,344.3 million in 2011, which is in line with the decrease in gross written premiums. Premiums earned increased by 7.9% to $1,416.4 million in 2012 compared to $1,312.7 million in 2011. The variance difference between premiums earned and net written premiums is primarily attributable to the non-renewal of the large Florida quota share reinsurance contract, which had a larger negative impact on gross and net written premiums, increases in new business, rate increases on renewals, particularly for catastrophe exposed contracts and changes in the mix of business.
Segment Expenses. Commission and brokerage expenses increased by 4.6% to $366.9 million in 2013 compared to $350.6 million in 2012. The year over year change was primarily due to the impact of the increase in premiums earned, partially offset by the impact of the termination of the large Florida quota share reinsurance contract in second quarter 2012 as well as the adoption of new accounting standards concerning the accounting for acquisition costs, which increased expenses in 2012. Segment other underwriting expenses increased to $47.2 million in 2013 from $44.8 million in 2012, primarily due to increased compensation expenses and higher premiums earned.
Commission and brokerage expenses increased by 7.0% to $350.6 million in 2012 compared to $327.8 million in 2011. These variances were primarily due to the increase in premiums earned and the effect on commissions resulting from the non-renewal of a Florida quota share contract. Segment other underwriting expenses increased to $44.8 million in 2012 from $39.3 million in 2011. These increases were primarily due to higher share-based compensation and employee benefit plan expenses.
Premiums. Gross written premiums increased by 12.9% to $1,345.8 million in 2013 compared to $1,192.3 million in 2012, primarily due to growth in Latin and South America business. Net written premiums increased by 11.7% to $1,327.4 million in 2013 compared to $1,188.7 million in 2012, which is consistent with the increase in gross written premiums. Premiums earned increased 6.1% to $1,289.3 million in 2013 compared to $1,214.8 million in 2012. The change in premiums earned relative to net written premiums is primarily the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.
Incurred losses and LAE increased by 15.2% to $675.4 million in 2013 compared to $586.3 million in 2012, representing 4.1 loss ratio points. Current year catastrophe losses were $104.4 million in 2013, due to the Canadian floods ($75.2 million) and Typhoon Fitow ($29.2 million). The current year catastrophe losses of $16.6 million in 2012 related primarily to Superstorm Sandy ($16.5 million). The current year attritional losses increased by $42.6 million primarily due to the increase in premiums earned as the current year attritional loss ratio was relatively flat period over period.
Premiums. Gross written premiums increased by 5.4% to $774.3 million in 2013 compared to $734.4 million in 2012, primarily due to continued growth of new business and increased premium on existing business written in our Bermuda and Ireland offices. Net written premiums increased by 4.3% to $765.7 million in 2013 compared to $733.8 million in 2012, which is consistent with the change in gross written premiums. Premiums earned increased 8.4% to $738.0 million in 2013 compared to $680.9 million in 2012. 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.
Commission and brokerage increased by 5.9% to $184.4 million in 2012 compared to $174.0 million in 2011 reflecting higher contingent commissions in 2012. Segment other underwriting expenses increased to $30.6 million in 2012 compared to $26.3 million for the same period in 2011. The increases are primarily attributable to higher personnel benefit costs.
Premiums. Gross written premiums increased by 18.2% to $1,268.7 million in 2013 compared to $1,073.1 million in 2012. This increase was primarily driven by California workers’ compensation, crop and non-standard auto business. Net written premiums increased by 27.5% to $1,086.2 million in 2013 compared to $852.1 million in 2012. The larger increase in net written premiums compared to gross written premiums is mainly due to less use of reinsurance, particularly on the crop business. Premiums earned increased 21.7% to $1,037.4 million in 2013 compared to $852.4 million in 2012. 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 10.0% to $1,073.1 million in 2012 compared to $975.6 million in 2011. This increase was primarily driven by crop and primary A&H medical stop loss business, partially offset by the termination and runoff of several large casualty programs. Net written premiums increased by 3.9% to $852.1 million in 2012 compared to $820.5 million in 2011. The lower increase in net written premiums in comparison to gross written premiums is primarily attributable to a higher level of reinsurance employed for the crop business. Premiums earned increased 3.8% to $852.4 million in 2012 compared to $821.2 million in 2011. The change in premiums earned is relatively consistent with the increase in net written premiums.
Incurred losses and LAE increased by 33.0% to $931.5 million in 2013 compared to $700.3 million in 2012 mainly due to increases in current year attritional losses and higher unfavorable prior year development on attritional losses in 2013 compared to 2012. The current year attritional losses increased by $158.5 million primarily due to the impact of higher premiums earned and a higher current year attritional loss ratio on the crop book, which was impacted by a decline in corn commodity prices and lower yields in several of our key states. The prior year development on attritional losses was primarily related to workers’ compensation, construction liability and umbrella business. The construction liability and umbrella development related to programs that were discontinued several years ago. Current year catastrophe losses were $2.3 million in 2013, due to Canadian floods. The $6.7 million of current year catastrophe losses for 2012 were primarily due to Superstorm Sandy ($5.5 million).
Incurred losses and LAE decreased by 0.8% to $700.3 million in 2012 compared to $705.9 million in 2011. This was primarily due to a decrease of $9.5 million (4.3 points) in attritional losses resulting primarily from lower prior years’ losses in 2012 resulting from development on excess casualty and California workers’ compensation reserves, as well as a shift in the mix of business towards shorter-tail lines of business. This decrease was partially offset by a $4.2 million increase in current year catastrophe losses primarily due to Superstorm Sandy.
Segment Expenses Commission and brokerage increased by 13.7% to $133.7 million in 2013 compared to $117.6 million in 2012. The year over year increase was primarily driven by the growth in premiums earned, partially offset by the impact of the accounting change for acquisition costs, which had the impact of increasing expenses in 2012. Segment other underwriting expenses increased to $119.3 million in 2013 compared to $103.0 million for 2012. These increases were primarily the result of increased premiums earned and compensation costs.
Premiums. Gross written premiums were $20.2 million in 2013. Net written premiums were $18.4 million in 2013, which is comparable to gross written premiums since the segment retains most of the business written. Premiums earned were $17.3 million in 2013. 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.
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 (loss) 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.
It is more difficult to accurately estimate loss reserves for reinsurance liabilities than for insurance liabilities. At December 31, 2013, we had reinsurance reserves of $7,306.5 million and insurance loss reserves of $2,366.7 million, of which $323.1 million and $79.4 million, respectively, were loss reserves for A&E liabilities. A detailed discussion of additional considerations related to A&E exposures follows later in this section.
Our global portfolio included $1,780.8 million of foreign government securities at December 31, 2013, of which $816.0 million were European sovereign securities. Approximately 51.8%, 21.4%, 6.6% and 5.4% of European sovereign securities represented securities held in the governments of the United Kingdom, France, Austria and the Netherlands, respectively. No other countries represented more than 5% of the European sovereign securities. We held no sovereign securities of Portugal, Italy, Ireland, Greece or Spain at December 31, 2013.
Reinsurance receivables for both paid and recoverable on unpaid losses totaled $540.9 million and $659.1 million at December 31, 2013 and 2012, respectively. At December 31, 2013, $145.4 million, or 26.9%, was receivable from C.V. Starr; $95.3 million, or 17.6% was receivable from FCIC; $43.9 million, or 8.1%, was receivable from Transatlantic; $37.7 million, or 7.0% was receivable from Berkley; and $27.4 million, or 5.1%, was receivable from Munich Re. The receivable from C.V. Starr is fully collateralized by a trust agreement. No other retrocessionaire accounted for more than 5% of our receivables.
Loss and LAE Reserves. Gross loss and LAE reserves totaled $9,673.2 million and $10,069.1 million at December 31, 2013 and 2012, respectively.
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 8.0 years at December 31, 2013. 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.
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 December 31, 2013 and 2012, we held cash and short-term investments of $1,825.6 million and $1,397.4 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 December 31, 2013, we had $1,067.8 million of available for sale fixed maturity securities maturing within one year or less, $5,740.7 million maturing within one to five years and $3,101.1 million maturing after five years. Our $1,606.2 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 December 31, 2013 we had $241.5 million of net pre-tax unrealized appreciation, comprised of $414.7 million of pre-tax unrealized appreciation and $173.2 million of pre-tax unrealized depreciation.
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 $4,250.0 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, 2012 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 December 31, 2013, was $4,806.2 million. As of December 31, 2013, the Company was in compliance with all Group Credit Facility covenants.
Effective August 15, 2011, Holdings entered into a new three year, $150.0 million unsecured revolving credit facility with a syndicate of lenders, replacing the August 23, 2006 five year senior revolving credit facility. Both the August 15, 2011 and August 23, 2006 revolving credit agreements, which have similar terms, are referred to as the “Holdings Credit Facility”. Citibank N.A. is the administrative agent for the Holdings Credit Facility. The Holdings Credit Facility may be used for liquidity and general corporate purposes. The Holdings Credit Facility provides for the borrowing of up to $150.0 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 base rate, (b) 0.5% per annum above the Federal Funds Rate or (c) 1% above the one month LIBOR, in each case plus the applicable margin. The amount of margin and the fees payable for the Holdings Credit Facility depends upon Holdings’ senior unsecured debt rating.
The Holdings Credit Facility requires Holdings to maintain a debt to capital ratio of not greater than 0.35 to 1 and Everest Re to maintain its statutory surplus at $1,875.0 million plus 25% of future aggregate net income and 25% of future aggregate capital contributions after December 31, 2010, which at December 31, 2013, was $2,128.1 million. As of December 31, 2013, Holdings was in compliance with all Holdings Credit Facility covenants.
At December 31, 2013 and 2012, the Company had no outstanding short-term borrowings from the Holdings Credit Facility revolving credit line. The highest amount outstanding for the year ended December 31, 2013, was $40.0 million for the period from May 22, 2013 to July 24, 2013. There were no short-term borrowings outstanding for the year ended December 31, 2012. At December 31, 2013 and December 31, 2012, the Holdings Credit Facility had outstanding letters of credit of $0.9 million and $1.6 million, respectively.
Costs incurred in connection with the Group Credit Facility and the Holdings Credit Facility were $1.0 million and $2.9 million for December 31, 2013 and 2012, respectively.
On May 24, 2013, Holdings elected to redeem all of the outstanding $329.9 million of 6.2% junior subordinated debt securities. Funds to redeem the debt were from operating cash flows and $40.0 million of borrowings from Holdings Credit Facility, which was repaid on July 24, 2013.
Holdings $250.0 million of senior notes are due on October 15, 2014. These notes can either be retired with operating cash flows or refinanced, depending upon market conditions at the time of maturity.
We believe that our greatest worldwide 1 in 100 year exposure to a single catastrophic event is to a hurricane affecting the U.S. southeast coast, where we estimate we have a PML exposure, net of third party reinsurance and the noncontrolling interests of Mt. Logan Re, of $1,231.0 million. See also table under ITEM 1, “Business - Risk Management of Underwriting and Retrocession Arrangements”.
If such a single catastrophe loss were to occur, management estimates that the economic loss to us would be approximately $796.0 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.
Despite these safeguards, a significant cyber incident, including system failure, security breach, disruption by malware or other damage could interrupt or delay our operations. This type of incident may result in a violation of applicable privacy and other laws. Management is not aware of a cybersecurity incident that has had a material impact on our operations.
Loss and LAE reserves represent our best estimate of losses from claim and related settlement costs. Both the amounts and timing of such payments are estimates, and the inherent variability of resolving claims as well as changes in market conditions make the timing of cash flows uncertain. Therefore, the ultimate amount and timing of loss and LAE payments could differ from our estimates.
The tables below display the potential impact of market value fluctuations and after-tax unrealized appreciation on our fixed maturity portfolio (including $1,214.2 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 the various interest rate change scenarios.
We had $9,673.2 million and $10,069.1 million of gross reserves for losses and LAE as of December 31, 2013 and 2012, 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 3.7 years, which is reasonably consistent with our fixed income portfolio. If we were to discount our loss and LAE reserves, net of ceded reserves, the discount would be approximately $1.1 billion resulting in a discounted reserve balance of approximately $8.1 billion, representing approximately 58.1% of the value of the fixed maturity investment portfolio funds.
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 December 31, 2013, of $35.4 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.