The following selected consolidated GAAP financial data of the Company as of and for the years ended December 31, 2012, 2011, 2010, 2009 and 2008, 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 51.9 million, 53.8 million, 56.6 million, 60.7 million and 61.7 million for 2012, 2011, 2010, 2009 and 2008, respectively.
Based on weighted average diluted common shares outstanding of 52.1 million, 56.8 million and 60.8 million for 2012, 2010, and 2009, respectively. Diluted calculation was not applicable for 2011 and 2008.
Premiums. Gross written premiums increased by 0.6% to $4,310.5 million in 2012, compared to $4,286.2 million in 2011, reflecting a $97.5 million increase in our insurance business, partially offset by a $73.1 million decrease in our reinsurance business. The increase in insurance premiums was primarily due to the growth in crop and primary A&H medical stop loss insurance, partially offset by the termination and runoff of several large casualty programs. The decrease in reinsurance premiums was primarily due to the non-renewal of a large Florida quota share reinsurance contract and a $42.5 million decline due to movement in foreign exchange rates, partially offset by increases in new business and rate increases on renewals, particularly for catastrophe exposed contracts. Eliminating the effects of reinstatement premiums, which
Gross written premiums increased by 2.0% to $4,286.2 million in 2011, compared to $4,200.7 million in 2010, reflecting a $110.3 million increase in our insurance business, partially offset by a $24.8 million decrease in our reinsurance business. The year over year increase in insurance premiums was primarily due to the acquisition of Heartland, which provided $169.6 million of new crop insurance business, our recent initiative in primary medical stop loss insurance, which added $54.0 million of premium and improved premium rates on our California workers’ compensation business, partially offset by our reduced participation on a large casualty program. The decrease in reinsurance premiums was due to the continued reduction in U.S. casualty business, the loss of several large crop reinsurance contracts, as well as the planned reduction of catastrophe exposed business in certain territories, partially offset by higher reinstatement premiums, $35.8 million, resulting from catastrophe losses and favorable foreign exchange impact year over year of $49.3 million. Net written premiums increased by 4.1% to $4,108.9 million in 2011 compared to $3,945.6 million in 2010. The larger increase in net written premiums relative to the change in gross written premiums was due to a lower level of ceded reinsurance in the Insurance segment due to the planned reduction in one casualty program. Premiums earned increased by 4.2% to $4,101.3 million in 2011, compared to $3,934.6 million in 2010. The change in premiums earned is consistent with the increase in net written premiums.
Net Investment Income. Net investment income decreased by 3.2% to $600.2 million in 2012 compared with net investment income of $620.0 million in 2011. Net pre-tax investment income, as a percentage of average invested assets, was 3.9% in 2012 compared to 4.1% in 2011. The decline in income and yield was primarily the result of lower reinvestment rates for the fixed income portfolio, partially offset by an increase in our limited partnership income.
Net investment income decreased by 5.1% to $620.0 million in 2011 compared with net investment income of $653.5 million in 2010, primarily as a result of a $13.9 million decrease in investment income from our limited partnership investments and the effects of lower reinvestment rates in 2011. Net pre-tax investment income, as a percentage of average invested assets, was 4.1% in 2011 compared to 4.5% in 2010. The variance in this yield was primarily the result of fluctuations in our limited partnership income.
Interest, Fees and Bond Issue Cost Amortization Expense. 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.
Interest, fees and other bond amortization expense was $52.3 million and $55.8 million in 2011 and 2010, respectively. The decrease was primarily due to the maturing of debt in March, 2010.
Income Tax Expense (Benefit). We had an income tax expense of $110.6 million in 2012 and income tax benefits of $153.5 million and $19.5 million in 2011 and 2010, respectively. Our income tax is primarily a function of the statutory tax rates and corresponding pre-tax income in the jurisdictions where we operate, coupled with the impact from tax-preferenced investment income. Variations in our effective tax rate generally result from changes in the relative levels of pre-tax income among jurisdictions with different tax rates. The increase in tax expense was mainly due to the improvement in taxable income resulting from lower catastrophe losses in 2012. The 2012 income tax expense also reflects tax benefits of $17.5 million realized due to corrections of understatements in the deferred tax asset account and $31.9 million of tax benefits from a reduction in our reserve for uncertain tax positions due to the re-measurement of our exposure following the closing of an IRS audit. The tax benefit in 2010 resulted primarily from a tax audit settlement.
Our combined ratio increased by 15.7 points to 118.5% in 2011 compared to 102.8% in 2010. The loss ratio component increased 16.0 points in 2011 over the same period last year, principally due to higher current year catastrophe losses as a result of the Japan earthquake, New Zealand earthquake, Thailand floods, U.S. storms, the Australia floods and Hurricane Irene. The other underwriting expense ratio component increased slightly and the commission and brokerage ratio component decreased slightly over the same period last year due to the mix of business.
Shareholders’ equity increased by $662.1 million to $6,733.5 million at December 31, 2012 from $6,071.4 million at December 31, 2011, principally as a result of $829.0 million of net income, $154.3 million of unrealized appreciation on investments, net of tax, share-based compensation transactions of $53.5 million, $22.7 million of net foreign currency translation adjustments, partially offset by repurchases of 3.0 million common shares for $290.0 million, $100.4 million of shareholder dividends and $7.0 million of net benefit plan obligation adjustments.
Net realized capital gains were $164.4 million in 2012 compared to net realized capital gains of $6.9 million and $101.9 million in 2011 and 2010, respectively. 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. In 2010, we recorded $70.4 million of gains due to fair value re-measurements on fixed maturity and equity securities and $34.5 million of net realized capital gains from sales of fixed maturity and equity securities, partially offset by $3.0 million of other-than-temporary impairments on fixed maturity securities. The gains on the sales of fixed maturity securities included selling securities in foreign currencies, which reduced our exposure to future currency fluctuations. The losses included the impact of selling part of our municipal bond portfolio in the latter part of the year as credit concerns arose in this market sector. We were able to carry these realized losses back for income tax purposes to offset previously realized gains. This carry back availability expired at the end of 2010.
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 non-U.S. 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, including medical stop loss insurance, directly and through general agents, brokers and surplus lines brokers within the U.S. and Canada.
Underwriting results include earned premium less losses and LAE incurred, commission and brokerage expenses and other underwriting expenses. We measure our underwriting results using ratios, in particular loss, commission and brokerage and other underwriting expense ratios, which respectively, divide incurred losses, commissions and brokerage and other underwriting expenses by premiums earned. We utilize inter-affiliate reinsurance, although such reinsurance does not materially impact segment results, as business is generally reported within the segment in which the business was first produced.
Premiums. Gross written premiums decreased by 2.7% to $1,310.7 million for 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 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.
Gross written premiums decreased by 3.5% to $1,346.8 million in 2011 from $1,395.4 million in 2010, primarily due to reduced reinsurance premiums for A&H, crop and marine business partially offset by a $24.4 million increase in reinstatement premiums due to higher catastrophe loss activity in the period. Net written premiums decreased 3.5% to $1,344.3 million in 2011 compared to $1,392.6 million for the same period in 2010, which is in line with the decrease in gross written premiums for the year. Premiums earned decreased by 5.4% to $1,312.7 million in 2011 compared to $1,387.0 million in 2010. 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.
Incurred losses increased by 1.6% to $1,050.4 million in 2012 compared to $1,034.1 in 2011, primarily as a result of the $98.0 million (5.4 points) increase in catastrophe losses. The $372.6 million of current year catastrophe losses for 2012 related primarily to Superstorm Sandy ($289.0 million), U.S. storm losses ($59.8 million) and Hurricane Isaac ($23.8 million). The $262.0 million of current year catastrophe losses for 2011 related primarily to the Japanese earthquake and tsunami ($71.5 million), the 2011 New Zealand earthquake ($63.0 million), U.S. tornadoes ($58.2 million), Hurricane Irene ($27.5 million) and the Thailand floods ($17.0 million). The current year attritional losses decreased $13.5 million due primarily to a shift in business to excess of loss contracts which generally have lower attritional losses than pro rata contracts.
Incurred losses were $133.2 million (13.8 points) higher at $1,034.1 million in 2011 compared to $900.9 million in 2010, primarily as a result of the $230.7 million (17.7 points) increase in current year catastrophe losses, largely due to the 2011 catastrophe losses discussed above. The $31.3 million of current year catastrophe losses for 2010 related primarily to the Chile earthquake ($16.1 million) and the New Zealand earthquake ($15.0 million). The current year attritional losses decreased $76.2 million (2.5 points), primarily due to a shift in the mix of business, with a higher level of excess of loss business in the current year, which carries a lower attritional loss ratio than pro rata business, coupled with a decline in earned premiums.
Segment Expenses. 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.
Incurred losses and LAE decreased by 57.3% to $586.3 million in 2012 compared to $1,372.3 million in 2011, representing 62.0 loss ratio points. The decrease was principally due to an $828.7 million (66.5 points) decrease in current year catastrophe losses. The $16.6 million of 2012 current year catastrophes related primarily to Superstorm Sandy ($16.5 millions). The $845.3 million of 2011 current year catastrophes related primarily to the Japanese earthquake and tsunami ($372.3 million), the 2011 Thailand floods ($180.0 million), the 2011 New Zealand earthquake ($177.0 million) and the 2011 Australian floods ($47.1 million). Current years’ attritional losses decreased by $51.3 million (3.0 points) due to rate increases in the Asian markets, particularly for catastrophe-exposed risks and a shift in the mix of business towards property catastrophe and excess of loss business, which generally have lower loss ratios.
Segment Expenses. Commission and brokerage decreased 3.5% to $300.1 million in 2012 compared to $311.0 million in 2011. This is consistent with the reduction in earned premium and a shift in the mix of business towards property catastrophe and excess of loss business which have lower commission rates. Segment other underwriting expenses increased to $29.3 million in 2012 compared to $27.3 million for the same period in 2011. The increase relates to higher personnel benefit costs.
Premiums. Gross written premiums increased 1.3% to $734.4 million in 2012 compared to $725.3 million in 2011, primarily due to continued growth of new business and increased premium on existing business written in our Bermuda office, partially offset by lower premiums from our European operations due to combined competitive conditions and a negative $14.7 million impact from movement in foreign exchange rates. Net written premiums increased 1.1% to $733.8 million in 2012 compared to $725.5 million in 2011, in line with the increase in gross written premiums. Premiums earned decreased 5.8% to $680.9 million in 2012 compared to $723.0 million in 2011. 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.
Incurred losses and LAE decreased by 33.5% to $408.2 million in 2012 compared to $613.9 million in 2011. The decrease was principally due to a $176.5 million (24.3 points) decrease in current year catastrophe losses. The $14.1 million of current year catastrophe losses for 2012 related primarily to Superstorm Sandy ($14.0 million). The $190.6 million of 2011 current year catastrophe losses related primarily to the Japanese earthquake and tsunami ($88.0 million), the 2011 New Zealand earthquake ($65.8 million) and the Thailand floods ($28.0 million). The current year attritional losses also decreased by $17.1 million (1.2 points), which is primarily due to the decline in premiums earned.
Gross written premiums increased by 12.7% to $975.6 million in 2011 compared to $865.4 million in 2010. This was due to strategic portfolio changes with growth in short-tail business, primarily driven by the acquisition of Heartland, which provided $169.6 million of new crop insurance premium in 2011 and $54.0 million growth in A&H primary business, partially offset by the reduction of a large casualty program. Net written premiums increased 32.3% to $820.5 million in 2011 compared to $620.3 million for the same period in 2010 due to higher gross premiums and reduced levels of ceded reinsurance, primarily due to the reduction of the large casualty program. Premiums earned increased 28.1% to $821.2 million in 2011 compared to $641.1 million in 2010. The change in premiums earned is relatively consistent with the increase in net written premiums.
Segment Expenses Commission and brokerage decreased by 14.6% to $117.6 million in 2012 compared to $137.7 million in 2011, driven by growth in direct distribution business, which has lower acquisition costs. Segment other underwriting expenses increased to $103.0 million in 2012 compared to $89.5 million for the same period in 2011. These increases are primarily the result of increased personnel benefit costs.
It is more difficult to accurately estimate loss reserves for reinsurance liabilities than for insurance liabilities. At December 31, 2012, we had reinsurance reserves of $7,633.8 million and insurance loss reserves of $2,435.3 million, of which $356.3 million and $86.5 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.
With respect to asbestos claims in particular, several additional factors have emerged in recent years that further compound the difficulty in estimating our liability. These developments include: (a) a changing mix of claim types represented in new filings, with the relative percentage of claims by individuals with no functional impairment first increasing then decreasing over the past several years; (b) the growth in the number of claims where coverage is sought under the general liability portion of insurance policies rather than the product liability portion; (c) an increase in settlement values being paid to asbestos claimants, especially those with cancer or functional impairment; (d) the slow development of asbestos bankruptcy cases, as a result of which many of the critical legal issues arising in those cases are still unresolved at the appellate level; (e) measures adopted by specific courts to ameliorate the worst procedural abuses; (f) legislation in some states to address asbestos litigation issues; and (g) the potential that other states may adopt legislation on asbestos litigation. Anecdotal evidence suggests that new claims filing rates have decreased, that new filings of asbestos-driven bankruptcies have decreased and that various procedural and legislative reforms are beginning to diminish the potential ultimate liability for asbestos losses; however, some studies indicate that thus far aggregate payments for asbestos claims have not decreased.
Reinsurance Receivables. We have purchased reinsurance to reduce our exposure to adverse claim experience, large claims and catastrophic loss occurrences. Our ceded reinsurance provides for recovery from reinsurers of a portion of losses and loss expenses under certain circumstances. Such reinsurance does not relieve us of our obligation to our policyholders. In the event our reinsurers are unable to meet their obligations under these agreements or are able to successfully challenge losses ceded by us under the contracts, we will not be able to realize the full value of the reinsurance receivable balance. To minimize exposure from uncollectible reinsurance receivables, we have a reinsurance security committee that evaluates the financial strength of each reinsurer prior to our entering into a reinsurance arrangement. In some cases, we may hold full or partial collateral for the receivable, including letters of credit, trust assets and cash. Additionally, creditworthy foreign reinsurers of business written in the U.S. are generally required to secure their obligations. We have established reserves for uncollectible balances based on our assessment of the collectability of the outstanding balances. As of December 31, 2012 and 2011, the reserve for uncollectible balances was $21.6 million. Actual uncollectible amounts may vary, perhaps substantially, from such reserves, impacting income (loss) in the period in which the change in reserves is made. See also ITEM 8, “Financial Statements and Supplementary Data” - Note 12 of Notes to the Consolidated Financial Statements and “Financial Condition - Reinsurance Receivables” below.
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 0.33% of the portfolio, that are either valued by brokers or an investment advisor. At December 31, 2012 and 2011, our investment portfolio included $548.9 million and $515.5 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.
At December 31, 2012, we had net unrealized gains, net of tax, of $603.9 million compared to $449.6 million at December 31, 2011. Gains and losses from market fluctuations for investments held at market value are reflected as comprehensive income (loss) in the consolidated balance sheets. Gains and losses from market fluctuations for investments held at fair value are reflected as net realized capital gains and losses in the consolidated statements of operations and comprehensive income (loss) in accordance with FASB guidance. Market value declines for the fixed income portfolio, which are considered credit other-than-temporary impairments, are reflected in our consolidated statements of operations and comprehensive income (loss), as realized capital losses. We consider many factors when determining whether a market value decline is other-than-temporary, including: (1) we have no intent to sell and, more likely than not, will not be required to sell prior to recovery, (2) the length of time the market value has been below book value, (3) the credit strength of the issuer, (4) the issuer’s market sector, (5) the length of time to maturity and (6) for asset-backed securities, changes in prepayments, credit enhancements and underlying default rates. If management’s assessments change in the future, we may ultimately record a realized loss after management originally concluded that the decline in value was temporary. See also ITEM 8, “Financial Statements and Supplementary Data” - Note 1 of Notes to the Consolidated Financial Statements.
Cash and Invested Assets. Aggregate invested assets, including cash and short-term investments, were $16,576.2 million at December 31, 2012, an increase of $778.8 million compared to $15,797.4 million at December 31, 2011. This increase was primarily the result of $663.9 million of cash flows from operations, $161.0 million of unrealized appreciation, $122.9 million due to fluctuations in foreign currencies, $118.1 million in fair value re-measurements, $63.8 million in equity adjustments of our limited partnership investments and $35.1 million of unsettled securities, partially offset by $290.0 million paid for share repurchases and $100.4 million paid out in dividends to shareholders.
Our global portfolio included $1,912.2 million of foreign government securities at December 31, 2012, of which $862.5 million were European sovereign securities. Approximately 51.7%, 19.1%, 6.7% and 5.1% 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, 2012.
Reinsurance receivables for both paid and recoverable on unpaid losses totaled $659.1 million and $580.3 million at December 31, 2012 and 2011, respectively. At December 31, 2012, $181.5 million, or 27.5%, was receivable from C.V. Starr; $79.9 million, or 12.1%, was receivable from FCIC; $65.2 million, or 9.9%, was receivable from XL; $58.0 million, or 8.8%, was receivable from Berkley; and $54.1 million, or 8.2%, was receivable from Transatlantic. The receivable from C.V. Starr is fully collateralized by a trust agreement. No other retrocessionaire accounted for more than 5% of our receivables.
Depending on the specific segment, the range derived for the loss reserves, excluding reserves for A&E exposures, ranges from minus 9.3% to minus 17.9% for the low range and from plus 9.3% to plus 17.9% 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.
Asbestos and Environmental Exposures. A&E exposures represent a separate exposure group for monitoring and evaluating reserve adequacy. The following table summarizes incurred losses and outstanding loss reserves with respect to A&E reserves on both a gross and net of retrocessions basis for the periods indicated.
Shareholders’ Equity. Our shareholders’ equity increased to $6,733.5 million as of December 31, 2012 from $6,071.4 million as of December 31, 2011. This increase was the result of $829.0 million of net income, $154.3 million of unrealized appreciation on investments, net of tax, share-based compensation transactions of $53.5 million, $22.7 million of net foreign currency translation adjustments, partially offset by repurchases of 3.0 million common shares for $290.0 million, $100.4 million of shareholder dividends and $7.0 million of net benefit plan obligation adjustments.
Our shareholders’ equity decreased to $6,071.4 million as of December 31, 2011 from $6,283.5 million as of December 31, 2010. This decrease was the result of $103.8 million of shareholder dividends, repurchases of 1.1 million common shares for $92.5 million, $80.5 million of net loss, $29.5 million of net benefit plan obligation adjustments and $16.0 million of net foreign currency translation adjustments, partially offset by $80.1 million of unrealized appreciation on investments, net of tax, and share-based compensation transactions of $30.0 million.
Capital. Our business operations are in part dependent on our financial strength and financial strength ratings, and the market’s perception of our financial strength, as measured by shareholders’ equity, which was $6,733.5 million at December 31, 2012 and $6,071.4 million at December 31, 2011. On March 13, 2009, Everest Re and Everest National, wholly-owned indirect subsidiaries of the Company, received notification of a one level ratings downgrade by Standard & Poor’s. On April 7, 2010, Standard & Poor’s upgraded the Company’s debt ratings one level. On January 24, 2012, Moody’s affirmed the ratings of the Company’s operating subsidiaries but changed the outlook on the ratings from stable to negative reflecting their opinion of the potential direction of the ratings over the medium term (12 to 18 months). Management will continue to work with Moody’s over this time to address their concerns but it is not possible to predict the potential outcome. Management does not believe that a one notch downgrade would have a material adverse affect on the Company’s business. We continue to possess significant financial flexibility and access to the debt and equity markets as a result of our perceived financial strength, as evidenced by the financial strength ratings as assigned by independent rating agencies.
On October 14, 2011, 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.
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, 2012 we had $708.6 million of net pre-tax unrealized appreciation, comprised of $740.7 million of pre-tax unrealized appreciation and $32.1 million of pre-tax unrealized depreciation.
Effective June 22, 2012, Group, Bermuda Re and Everest International entered into a four year, $800.0 million senior credit facility with a syndicate of lenders, which amended and restated in its entirety the July 27, 2007, five year, $850.0 million senior credit facility. Both the June 22, 2012 and July 27, 2007 senior credit facilities, which have similar terms, are referred to as the “Group Credit Facility”. Wells Fargo Corporation (“Wells Fargo Bank”) is the administrative agent for the Group Credit Facility, which consists of two tranches. Tranche one provides up to $200.0 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 Wells Fargo Bank, (b) the Federal Funds Rate plus 0.5% per annum or (c) the one month LIBOR Rate plus 1.0% 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 $600.0 million for the issuance of standby letters of credit on a collateralized basis.
At December 31, 2012 and 2011, the Company had no outstanding short-term borrowings from the Holdings Credit Facility revolving credit line. At December 31, 2012 and 2011, the Holdings Credit Facility had outstanding letters of credit of $1.6 million and $5.0 million, respectively.
Exposure to Catastrophes. Like other insurance and reinsurance companies, we are exposed to multiple insured losses arising out of a single occurrence, whether a natural event, such as a hurricane or an earthquake, or other catastrophe, such as an explosion at a major factory. A large catastrophic event can be expected to generate insured losses to multiple reinsurance treaties, facultative certificates and across lines of business.
If such a single catastrophe loss were to occur, management estimates that the economic loss to us would be approximately $671 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.
We may purchase reinsurance to cover specific business written or the potential accumulation or aggregation of exposures across some or all of our operations. Reinsurance purchasing decisions consider both the potential coverage and market conditions including the pricing, terms, conditions and availability of coverage, with the aim of securing cost effective protection. The amount of reinsurance purchased has varied over time, reflecting our view of our exposures and the cost of reinsurance.
During 2012, 2011 and 2010, we declared and paid shareholder dividends of $100.4 million, $103.8 million and $108.5 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, 2012, 2011 and 2010, Everest Re paid dividends to Holdings of $100.0 million, $75.0 million and $590.0 million, respectively. For the years ended December 31, 2012, 2011 and 2010, Bermuda Re paid dividends to Group of $425.0 million, $190.0 million and $215.0 million, respectively, and Everest International paid dividends to Group of $40.0 million, $0.0 million and $0.0 million, respectively. See ITEM 1, “Business - Regulatory Matters - Dividends” and ITEM 8, “Financial Statements and Supplementary Data” - Note 15 of Notes to Consolidated Financial Statements.
Intangibles-Goodwill or Other. In September 2011, FASB amended the authoritative guidance for disclosures on Goodwill Impairment. The amendment allows an entity first to assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis in determining whether it is necessary to perform the two-step goodwill impairment test. This guidance is effective for periods beginning after December 15, 2011. The Company implemented this guidance as of January 1, 2012.
Treatment of Insurance Contract Acquisition Costs. In October 2010, the FASB issued authoritative guidance for the accounting for costs associated with acquiring or renewing insurance contracts. The guidance identifies the incremental direct costs of contract acquisition and costs directly related to acquisition activities that should be capitalized. This guidance is effective for reporting periods beginning after December 15, 2011. The Company implemented this guidance as of January 1, 2012 and determined that $13.5 million of previously deferrable acquisition costs will be expensed during 2012 and the first quarter of 2013, including $10.9 million of previously deferrable acquisition costs expensed in 2012. If the guidance had been applicable for the prior periods, the Company would have expensed $13.9 million of deferrable acquisition costs in 2011.
We had $10,069.1 million and $10,123.2 million of gross reserves for losses and LAE as of December 31, 2012 and 2011, 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 3.5 years, which is reasonably consistent with our fixed income portfolio. If we were to discount our loss and LAE reserves,
We sold six equity index put option contracts, based on the S&P 500 index, for total consideration, net of commissions, of $22.5 million. At December 31, 2012, fair value for these equity index put option contracts was $69.8 million. These equity index put option contracts each have a single exercise date, with maturities ranging from 12 to 30 years and strike prices ranging from $1,141.21 to $1,540.63. The S&P 500 index value at December 31, 2012 was $1,426.19. No amounts will be payable under these equity index put option contracts if the S&P 500 index is at, or above, the strike prices on the exercise dates, which fall between June 2017 and March 2031. If the S&P 500 index is lower than the strike price on the applicable exercise date, the amount due would vary proportionately with the percentage by which the index is below the strike price. Based on historical index volatilities and trends and the December 31, 2012 S&P 500 index value, we estimate the probability that each equity index put option contract of the S&P 500 index falling below the strike price on the exercise date to be less than 44%. The theoretical maximum payouts under these six equity index put option contracts would occur if on each of the exercise dates the S&P 500 index value were zero. At December 31, 2012, the present value of these theoretical maximum payouts using a 3% discount factor was $395.9 million. Conversely, if the contracts had all expired on December 31, 2012, with the S&P index at $1,426.19, the settlement amount would have been $11.0 million.