Based on 44.7 million, 47.5 million, 51.4 million, 53.7 million and 54.4 million common shares outstanding for December 31, 2014, 2013, 2012, 2011 and 2010, respectively.
Rates tend to fluctuate by specific region and products, particularly areas recently impacted by large catastrophic events. During the second and third quarters of 2013, Canada experienced historic flooding in Alberta and Toronto, which resulted in higher catastrophe rates in these areas during 2014. Although there were flooding and wind storm events in Europe and Asia in the latter part of 2013, the overall 2013 catastrophe losses for the industry were lower than average. This lower level of losses, combined with increased competition resulted in downward pressure on rates in certain geographical areas during 2014. Catastrophe results during 2014 were also generally benign, which could have a negative impact on worldwide regional catastrophe markets during 2015.
Premiums. Gross written premiums increased by 10.2% to $5,749.0 million in 2014, compared to $5,218.6 million in 2013, reflecting a $462.5 million, or 11.8%, increase in our reinsurance business and a $118.2 million increase from the Mt. Logan Re segment, which commenced operations in the third quarter of 2013, partially offset by a $50.4 million, or 4.0%, decrease in our insurance business. The increase in reinsurance premiums was mainly due to new business: quota share contracts and contracts with catastrophe exposed risks, partially offset by a negative impact of $52.1 million from the movement in foreign exchange rates. The decrease in insurance premiums was primarily due to lower crop premiums, partially offset by an increase in non-standard auto business. Net written premiums increased by 5.0% to $5,256.9 million in 2014 compared to $5,004.8 million in 2013. The variance between the increase in gross written premiums
Net investment income decreased by 8.6% to $548.5 million in 2013 compared with net investment income of $600.2 million in 2012. Net pre-tax investment income, as a percentage of average invested assets, was 3.5% in 2013 compared to 3.9% in 2012. The decline in income and yield was primarily the result of lower reinvestment rates for the fixed income portfolios, less dividend income from equity investments and a decrease in our limited partnership income.
Other Income (Expense). We recorded other income of $18.4 million in 2014, other expense of $5.5 million in 2013 and other income of $3.3 million in 2012. 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 for 2013 (outlined above). 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. 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. Commission, brokerage, taxes and fees increased by 16.2% to $1,135.6 million for the year ended December 31, 2014 compared to $977.6 million for the year ended December 31, 2013. These changes were primarily due to the impact of the increase in premiums earned, changes in the mix of business and higher contingent commissions.
Other Underwriting Expenses. Other underwriting expenses were $240.4 million, $237.1 million and $207.7 million in 2014, 2013 and 2012, respectively. The increase in other underwriting expenses for 2014 compared to 2013 was mainly due to the impact of the increase in premiums earned. The increase in other underwriting expenses for 2013 compared to 2012 was mainly due to the impact of higher premiums earned and higher compensation expenses.
Interest, Fees and Bond Issue Cost Amortization Expense. Interest, fees and other bond amortization expense was $38.5 million and $46.1 million in 2014 and 2013, respectively. The decrease was primarily due to the redemption of $329.9 million of trust preferred securities in May 2013 and the maturity of $250.0 million of senior notes on October 15, 2014, partially offset by the impact of the issuance of $400.0 million of senior notes in June 2014.
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.
Income Tax Expense (Benefit). We had income tax expenses of $187.7 million, $289.7 million and $110.6 million in 2014, 2013 and 2012, respectively. Income tax expense is primarily a function of the geographic location of the Company’s pre-tax income and the statutory tax rates in those jurisdictions, as affected by tax-exempt investment income and as calculated under the annualized effective tax rate (“AETR”) method. Variations in the AETR generally result from changes in the relative levels of pre-tax income, including the impact of catastrophe losses and net capital gains (losses), among jurisdictions with different tax rates. The decrease in income tax expense for 2014 compared to 2013 is primarily due to lower net realized capital gains in the U.S. and the realization of additional foreign tax credits.
Our net income was $1,258.5 million, $1,265.3 million and $829.0 million in 2014, 2013 and 2012, respectively. The changes were primarily driven by the financial component fluctuations explained above.
Our net income attributable to Everest Re Group was $1,199.2 million, $1,259.4 million and $829.0 million in 2014, 2013 and 2012, respectively. The changes were primarily driven by the financial component fluctuations described above, as well as the impact of net income attributable to noncontrolling interests in 2014 and 2013.
Net investment income decreased by 8.6% to $548.5 million in 2013 compared to $600.2 million in 2012, primarily due to declines in income from our fixed maturities, reflective of declining reinvestment rates, from our equities, due to the partial liquidation of some mutual funds and from our limited partnership investments.
The U.S. Reinsurance operation writes property and casualty reinsurance and specialty lines of business, including Marine, Aviation, Surety and A&H business, on both a treaty and facultative basis, through reinsurance brokers, as well as directly with ceding companies primarily within the U.S. The International operation writes foreign property and casualty reinsurance through Everest Re’s branches in Canada and Singapore and through offices in Brazil, Miami and New Jersey. The Bermuda operation provides reinsurance and insurance to worldwide property and casualty markets through brokers and directly with ceding companies from its Bermuda office and reinsurance to the United Kingdom and European markets through its UK branch and Ireland Re. The Insurance operation writes property and casualty insurance directly and through general agents, brokers and surplus lines brokers within the U.S. and Canada. The Mt. Logan Re segment represents business written for the segregated accounts of Mt. Logan Re, which were formed on July 1, 2013. The Mt. Logan Re business represents a diversified set of catastrophe exposures, diversified by risk/peril and across different geographical regions globally.
Incurred losses decreased by 22.4% to $814.7 million in 2013 compared to $1,050.4 million in 2012, primarily due to the decrease in current year catastrophe losses for 2013 (outlined above), partially offset by an increase of $75.0 million in current year attritional losses due to the impact of the increase in premiums earned. The $372.6 million of current year catastrophe losses for 2012 related to Superstorm Sandy ($289.0 million), U.S. storms ($59.8 million) and Hurricane Isaac ($23.8 million). Despite the increase in current year attritional losses, the current year attritional loss ratio decreased 3.2 points due to the continued shift in business to excess of loss contracts which generally have lower attritional losses than pro rata contracts.
Premiums. Gross written premiums increased by 17.6% to $1,582.4 million in 2014 compared to $1,345.8 million in 2013, primarily due to new quota share contracts, partially offset by the negative impact of $47.9 million from the movement of foreign exchange rates. Net written premiums increased by 0.7% to $1,336.6 million in 2014 compared to $1,327.4 million in 2013. The variance of the change in gross written premiums compared to the change in net written premiums is due to a higher utilization of reinsurance related to the new quota share contracts. Premiums earned increased 1.7% to $1,310.9 million in 2014 compared to $1,289.3 million in 2013. 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.
Segment Expenses. Commission and brokerage increased 3.5% to $306.2 million in 2014 compared to $295.9 million in 2013. This increase was primarily due to the impact of the increase in premiums earned. Segment other underwriting expenses increased slightly to $34.6 million in 2014 compared to $33.9 million in 2013.
Segment Expenses. Commission and brokerage increased by 11.0% to $198.8 million in 2014 compared to $179.1 million in 2013. The increase was primarily due to higher commissions on business written through the U.K. branch of the Bermuda office and higher contingent commissions. Segment other underwriting expenses increased slightly to $34.9 million in 2014 compared to $34.7 million for the same period in 2013.
Premiums. Gross written premiums decreased by 4.0% to $1,218.4 million in 2014 compared to $1,268.7 million in 2013. This decrease was primarily driven by a decline in crop business, partially offset by an increase in the non-standard auto business. Net written premiums decreased by 1.7% to $1,067.3 million in 2014 compared to $1,086.2 million in 2013. The variance of the change in gross written premiums compared to the change in net written premiums is due to a lesser utilization of reinsurance, particularly on the crop business. Premiums earned decreased 0.7% to $1,030.3 million in 2014 compared to $1,037.4 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.
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.
Investment Valuation. Our fixed income investments are classified for accounting purposes as available for sale and are carried at market value or fair value in our consolidated balance sheets. Our equity securities are also held as available for sale and are carried at market or fair value. Most securities we own are traded on national exchanges where market values are readily available. Some of our commercial mortgage-backed securities (“CMBS”) are valued using cash flow models and risk-adjusted discount rates. We hold some privately placed securities, less than 0.10% of the portfolio, that are either valued by brokers or an investment advisor. At December 31, 2014 and 2013, our investment portfolio included $575.8 million and $469.1 million, respectively, of limited partnership investments whose values are reported pursuant to the equity method of accounting. We carry these investments at values provided by the managements of the limited partnerships and due to inherent reporting lags, the carrying values are based on values with “as of” dates from one month to one quarter prior to our financial statement date.
For the portion needed to satisfy global outstanding liabilities, we generally invest in taxable and tax-preferenced fixed income securities with an average credit quality of A1. For the U.S. portion of this portfolio, our mix of taxable and tax-preferenced investments is adjusted periodically, consistent with our current and projected U.S. operating results, market conditions and our tax position. This global fixed maturity securities portfolio is externally managed by an independent, professional investment manager using portfolio guidelines approved by internal management.
There can be no assurance that reserves for, and losses from, claim obligations will not increase in the future, possibly by a material amount. However, we believe that our existing reserves and reserving methodologies lessen the probability that any such increase would have a material adverse effect on our financial condition, results of operations or cash flows. In this context, we note that over the past 10 years, our calendar year operations have been affected by effects from prior period reserve re-estimates, ranging from a favorable $39.9 million in 2014, representing 0.4% of the net prior period reserves for the year in which the adjustment was made, to an unfavorable $206.5 million in 2007, representing 2.6% of the net prior period reserves for the year in which the adjustment was made.
Depending on the specific segment, the range derived for the loss reserves, excluding reserves for Mt. Logan Re and A&E exposures, ranges from minus 9.7% to minus 15.2% for the low range and from plus 9.7% to plus 15.2% for the high range. Both the higher and lower ranges are associated with the Insurance segment. The size of the range is dependent upon the level of confidence associated with the outcome. Within each range, our best estimate of loss reserves is based upon the point estimate derived by our actuaries in detailed reserve studies. Such ranges are necessarily subjective due to the lack of generally accepted actuarial standards with respect to their development. For the above presentation, we have assumed what we believe is a reasonable confidence level but note that there can be no assurance that our claim obligations will not vary outside of these ranges.
With respect to asbestos only, at December 31, 2014, we had gross asbestos loss reserves of $454.5 million, or 95.5%, of total A&E reserves, of which $350.3 million was for assumed business and $104.2 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 8.7 years at December 31, 2014. 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.
Shareholders’ Equity. Our shareholders’ equity increased to $7,451.1 million as of December 31, 2014 from $6,968.3 million as of December 31, 2013. This increase was result of $1,199.2 million of net income attributable to Everest Re Group, share-based compensation transactions of $39.0 million and $22.1 million of unrealized appreciation on investments, net of tax, partially offset by repurchases of 3.2 million common shares for $500.0 million, $145.9 million of shareholder dividends, $95.4 million of net foreign currency translation adjustments and $36.1 million of net benefit plan obligation adjustments.
Our shareholders’ equity increased to $6,968.3 million as of December 31, 2013 from $6,733.5 million as of December 31, 2012. This increase was result of $1,259.4 million of net income attributable to Everest Re Group, share-based compensation transactions of $83.3 million, and $23.6 million of net benefit plan obligation adjustments, partially offset by repurchases of 4.7 million common shares for $621.9 million, $402.8 million of unrealized depreciation on investments, net of tax, $106.7 million of shareholder dividends and $0.2 million of net foreign currency translation adjustments.
We maintain our own economic capital models to monitor and project our overall capital, as well as, the capital at our operating subsidiaries. A key input to the economic models is projected income and this input is continually compared to actual results, which may require a change in the capital strategy. For example, if catastrophe losses are higher than expected, we may scale back our share buybacks to offset the impact on capital from the reduced income.
During 2014, we repurchased $3.2 million shares for $500.0 million in the open market and paid $145.9 million in dividends to adjust our capital position and enhance long term expected returns to our shareholders. On November 19, 2014, our existing Board authorization to purchase up to 25 million of our shares was amended to authorize the purchase of up to 30 million shares. As of December 31, 2014, we had repurchased 23.7 million shares under this authorization.
On July 9, 2014, we renewed our shelf registration statement on Form S-3ASR with the Securities and Exchange Commission (“SEC”), as a Well Known Seasoned Issuer. This shelf registration statement can be used by Group to register common shares, preferred shares, debt securities, warrants, share purchase contracts and share purchase units; by Holdings to register debt securities and by Everest Re Capital Trust III (“Capital Trust III”) to register trust preferred securities.
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, 2014 and 2013, we held cash and short-term investments of $2,143.4 million and $1,825.6 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, 2014, we had $1,189.4 million of available for sale fixed maturity securities maturing within one year or less, $5,726.3 million maturing within one to five years and $3,416.6 million maturing after five years. Our $1,588.0 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, 2014 we had $261.8 million of net pre-tax unrealized appreciation, comprised of $430.8 million of pre-tax unrealized appreciation and $169.0 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, 2014, was $5,115.8 million. As of December 31, 2014, the Company was in compliance with all Group Credit Facility covenants.
At December 31, 2014 and 2013, the Company had no outstanding short-term borrowings from the Group Credit Facility revolving credit line. There were no short-term borrowings outstanding for the year ended December 31, 2014. The highest amount outstanding for year ended December 31, 2013, was $50.0 million for the period from October 31, 2013 to December 2, 2013. At December 31, 2014, the Group Credit Facility had no outstanding letters of credit under tranche one and $444.0 million outstanding letters of credit under tranche two. At December 31, 2013, the Group Credit Facility had no outstanding letters of credit under tranche one and $502.1 million outstanding letters of credit under tranche two.
Effective August 15, 2011, the Company entered into a three year three year, $150.0 million unsecured revolving credit facility, referred to as the “Holdings Credit Facility”, which expired on August 15, 2014. The Company decided not to renew the Holdings Credit Facility at expiration. There were no short-term borrowings outstanding during 2014. At December 31, 2013, 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. At December 31, 2013, the Holdings Credit Facility had outstanding letters of credit of $0.9 million.
Costs incurred in connection with the Group Credit Facility and the Holdings Credit Facility were $0.7 million and $1.0 million for December 31, 2014 and 2013, respectively.
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 $1,371.0 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 $852.0 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.
During 2014, 2013 and 2012, we declared and paid shareholder dividends of $145.9 million, $106.7 million and $100.4 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 either Bermuda Re or Everest International 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, Bermuda Re and Everest International will have the ability to declare and pay dividends sufficient to support Group’s general corporate needs. For the years ended December 31, 2014, 2013 and 2012, Everest Re paid dividends to Holdings of $155.0 million, $359.0 million and $100.0 million, respectively. For the years ended December 31, 2014, 2013 and 2012, Bermuda Re paid dividends to Group of $645.0 million, $575.0 million and $425.0 million, respectively, and Everest International paid dividends to Group of $45.0 million, $90.0 million and $40.0 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.
Presentation of Comprehensive Income. In June 2011, FASB issued amendments to existing guidance to provide two alternatives for the presentation of comprehensive income. Components of net income and comprehensive income can either be presented within a single, continuous financial statement or be presented in two separate but consecutive financial statements. The Company has chosen to present the components of net income and comprehensive income in a single, continuous financial statement. The guidance is effective for reporting periods beginning after December 15, 2011. The Company implemented this guidance as of January 1, 2012. In February, 2013, the FASB issued an additional amendment for the presentation of amounts reclassified out of accumulated other comprehensive income by component. The Company implemented the proposed guidance as of January 1, 2013.
The SEC’s Financial Reporting Release #48 requires registrants to clarify and expand upon the existing financial statement disclosure requirements for derivative financial instruments, derivative commodity instruments and other financial instruments (collectively, “market sensitive instruments”). We do not generally enter into market sensitive instruments for trading purposes.
Interest Rate Risk. Our $17.4 billion investment portfolio, at December 31, 2014, is principally comprised of fixed maturity securities, which are generally subject to interest rate risk and some foreign currency exchange rate risk, and some equity securities, which are subject to price fluctuations and some foreign exchange rate risk. The overall economic impact of the foreign exchange risks on the investment portfolio is partially mitigated by changes in the dollar value of foreign currency denominated liabilities and their associated income statement impact.
The tables below display the potential impact of market value fluctuations and after-tax unrealized appreciation on our fixed maturity portfolio (including $1,705.9 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.
Foreign Currency Risk. Foreign currency risk is the potential change in value, income and cash flow arising from adverse changes in foreign currency exchange rates. Each of our non-U.S./Bermuda (“foreign”) operations maintains capital in the currency of the country of its geographic location consistent with local regulatory guidelines. Each foreign operation may conduct business in its local currency, as well as the currency of other countries in which it operates. The primary foreign currency exposures for these foreign operations are the Canadian Dollar, the Singapore Dollar, the British Pound Sterling and the Euro. We mitigate foreign exchange exposure by generally matching the currency and duration of our assets to our corresponding operating liabilities. In accordance with FASB guidance, we translate the assets, liabilities and income of non-U.S. dollar functional currency legal entities to the U.S. dollar. This translation amount is reported as a component of other comprehensive income. As of December 31, 2014, there has been no material change in exposure to foreign exchange rates as compared to December 31, 2013.