Based on $53.7 million, $54.4 million, 59.3 million, 61.4 million and 62.9 million common shares outstanding for December 31, 2011, 2010, 2009, 2008 and 2007, respectively.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
We compete in the U.S., Bermuda and international reinsurance and insurance markets with numerous global competitors. Our competitors include independent reinsurance and insurance companies, subsidiaries or affiliates of established worldwide insurance companies, reinsurance departments of certain insurance companies and domestic and international underwriting operations, including underwriting syndicates at Lloyd’s. Some of these competitors have greater financial resources than we do and have established long term and continuing business relationships, which can be a significant competitive advantage. In addition, the lack of strong barriers to entry into the reinsurance business and the potential for securitization of reinsurance and insurance risks through capital markets provide additional sources of potential reinsurance and insurance capacity and competition.
However, during 2011, the industry experienced significant losses from Australian floods, the New Zealand earthquake, the earthquake and tsunami in Japan, storms in the U.S., and the Thailand floods. It is too early to determine the impact on market conditions as a result of these events. While there have been meaningful rate increases for catastrophe coverages in some global catastrophe prone regions, particularly areas impacted by these losses, whether the magnitude of these losses is sufficient to increase rates and improve market conditions for other lines of business remains to be seen.
million. Net written premiums increased $163.3 million, or 4.1%, in 2011 compared to 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 $166.7 million, or 4.2%, in 2011, compared to 2010. The change in premiums earned is consistent with the increase in net written premiums.
Net Investment Income. Net investment income decreased $33.4 million, or 5.1%, 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.
Other Income (Expense). We recorded other expense of $23.1 million, other income of $16.9 million and other expense of $22.5 million in 2011, 2010 and 2009, respectively. The changes were primarily the result of fluctuations in foreign currency exchange rates for the corresponding periods.
Incurred losses and LAE increased by $780.5 million, or 26.5%, for the year ended December 31, 2011 compared to the same period in 2010. Of the $780.5 million increase, current year catastrophe losses represented $713.9 million, or 16.8 points, period over period, primarily due to losses from the Japan and New Zealand earthquakes, Thailand floods, U.S. storms, Australia floods and Hurricane Irene. In addition, the overall attritional losses increased $50.3 million due, in part, to higher earned premium in the current year, which generated higher attritional losses for the current year, as well as the impact of favorable development in 2010 without comparable favorable development in 2011.
Commission, Brokerage, Taxes and Fees. Commission, brokerage, taxes and fees increased by $18.7 million, or 2.0%, for the year ended December 31, 2011 compared to the same period in 2010 due primarily to the increase in premiums earned. Conversely, commissions, as a percentage of earned premium, are down for the year driven by a shift in distribution channels on the insurance book, with a greater proportion of the business being accessed directly, at lower commission rates, rather than through managing general agents. In addition, there was also an impact from a shift in the mix of business due to a higher level of excess loss business in the current year, which carries a lower commission than pro rata business.
Other Underwriting Expenses. Other underwriting expenses were $182.4 million, $166.3 million and $167.2 million in 2011, 2010 and 2009, respectively. The increase in other underwriting expenses for 2011 compared to 2010 was mainly due to expenses of Heartland, which was acquired in January, 2011.
Corporate Expenses. Corporate expenses, which are general operating expenses that are not allocated to segments, were $16.5 million, $14.9 million, and $17.6 million for the years ended December 31, 2011, 2010 and 2009, respectively. These expenses were previously included as underwriting expenses and therefore included in the other underwriting expense ratio. Effective January 1, 2010, these expenses were removed from the calculation of the other underwriting expense ratio and prior periods were recalculated to conform.
Interest, Fees and Bond Issue Cost Amortization Expense. 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.
Interest, fees and other bond amortization expense was $55.8 million and $72.1 million in 2010 and 2009, respectively. The decrease was primarily due to the combination of the repurchase of debt in March 2009 and the maturing of debt in March, 2010.
Income Tax Expense (Benefit). We had an income tax benefit of $153.5 million and $19.5 million in 2011 and 2010, respectively, and an income tax expense of $132.3 million in 2009. 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 decrease in taxes year over year was primarily attributable to the impact on taxable income from the previously mentioned catastrophe losses.
Our net loss was $80.5 million and our net income was $610.8 million in 2011 and 2010, respectively. The decrease was primarily driven by an increase in catastrophe losses in 2011 in addition to the other components discussed above.
Our net income was $610.8 million and $807.0 million in 2010 and 2009, respectively. The decrease was primarily driven by a few large catastrophe losses in 2010 compared to no similar catastrophe events in 2009, partially offset by an increase in net realized capital gains and a reduction in income taxes.
Our combined ratio increased by 13.7 points to 102.8% in 2010 compared to 89.1% in 2009. The loss ratio component increased 13.9 points in 2010 over 2009, principally due to the increase in current year catastrophe losses as a result of the Chilean earthquake, Australian hailstorms and floods, New Zealand earthquake and the Canadian hailstorm. Both the other underwriting expense ratio component and the commission and brokerage ratio component remained relatively flat compared to 2009.
Shareholders’ equity decreased by $212.1 million to $6,071.4 million at December 31, 2011 from $6,283.5 million at December 31, 2010, principally as a 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.
Shareholders’ equity increased by $181.8 million to $6,283.5 million at December 31, 2010 from $6,101.7 million at December 31, 2009, principally as a result of $610.8 million of net income, $60.2 million of unrealized appreciation, net of tax, on investments, share-based compensation transactions of $17.8 million and $1.9 million of foreign currency translation adjustments, partially offset by repurchases of 5.1 million common shares for $398.6 million, $108.5 million of shareholder dividends and $1.8 million of benefit plan obligation adjustments.
Net investment income decreased by 5.1% to $620.0 million in 2011 compared to $653.5 million in 2010, primarily due to a decrease in income from our limited partnership investments and a decline in income from our fixed maturities, reflective of reducing our municipal bond exposures and declining reinvestment rates. These decreases were partially offset by increased dividend income from equities due to our expanded public equity portfolio and emerging market debt mutual funds.
The pre-tax equivalent total return for the bond portfolio was approximately 5.1%, 5.7% and 10.1%, respectively, in 2011, 2010 and 2009. The pre-tax equivalent return adjusts the yield on tax-exempt bonds to the fully taxable equivalent.
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 have recently 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. 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.
impairments on fixed maturity securities, partially offset by $40.2 million of gains due to fair value re-measurements on fixed maturity and equity securities.
Segment Expenses. Commission and brokerage expenses decreased by 6.7% to $327.8 million in 2011 compared to $351.6 million in 2010, primarily due to the decline in premiums earned and a shift in the mix of business. Segment other underwriting expenses in 2011 decreased slightly to $39.3 million from $42.5 million in 2010.
Commission and brokerage expenses increased by 2.0% to $351.6 million in 2010 compared to $344.7 million in 2009, primarily due to a shift in the mix of business across lines with different commission rates. Segment other underwriting expenses in 2010 decreased slightly to $42.5 million from $44.9 million in 2009.
Segment Expenses. Commission and brokerage increased by 14.0% to $137.7 million in 2011 compared to $120.8 million in 2010. This increase was primarily the result of an increase in net premiums earned; however, due to changes in distribution and the mix of business, the commission ratio declined 2.0 points, year over year. Segment other underwriting expenses increased to $89.5 million in 2011 compared to $69.7 million for the same period in 2010. This increase was primarily due to the expenses of the newly acquired Heartland.
Commission and brokerage decreased by 2.9% to $120.8 million in 2010 compared to $124.4 million in 2009. This decrease was primarily the result of a decrease in net premiums earned and changes in the mix of business. Segment other underwriting expenses decreased to $69.7 million in 2010 compared to $74.6 million in 2009. This decrease was the result of management’s direct actions to reduce operating expenses.
Premiums. Gross written premiums increased by 2.6% to $1,238.4 million in 2011 compared to $1,207.0 million in 2010, primarily due to the effects of foreign exchange. Eliminating this effect, premiums were essentially flat. Growth from increased rate levels, particularly in regions recently affected by catastrophe losses was offset by the termination of business that did not meet our current pricing targets. Net written premiums increased by 1.6% to $1,218.6 million in 2011 compared to $1,199.6 million for the same period in 2010, principally as a result of the increase in gross written premiums. Premiums earned increased 6.5% to $1,244.5 million in 2011 compared to $1,168.1 million for the same period 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.
Gross written premiums increased by 11.3% to $1,207.0 million in 2010 compared to $1,084.5 million in 2009, due to continued strong growth in premiums written through the Brazil, Miami and New Jersey offices, a $42.7 million increase; Asia, a $55.7 million increase; and Canada, a $24.2 million increase; resulting from a combination of new business, rate increases in select areas, and economic and insurance growth in some markets. Also contributing to the increase was $16.0 million in reinstatement premiums from the Chilean earthquake and Calgary hailstorm. Net written premiums increased by 10.9% to $1,199.6 million in 2010 compared to $1,081.3 million in 2009, principally as a result of the increase in gross written premiums. Premiums earned increased 10.9% to $1,168.1 million in 2010 compared to $1,053.5 million in 2009, consistent with the trend noted for net written premiums.
Segment Expenses. Commission and brokerage increased 7.8% to $311.0 million in 2011 compared to $288.4 million in 2010. This variance was principally due to an increase in premiums earned. Segment other underwriting expenses decreased slightly to $27.3 million in 2011 compared to $27.6 million in 2010.
Gross written premiums decreased 7.8% to $733.0 million in 2010 compared to $794.8 million in 2009. Bermuda home office business was down 4.4%, or $12.8 million, due to lower property catastrophe excess of loss business. Premiums written by the U.K. branch and Ireland subsidiary in the U.K. and continental Europe, decreased $49.0 million, or 9.7% in response to softening market conditions. Net written premiums decreased 7.8% to $733.0 million in 2010 compared to $795.1 million in 2009, in line with the decrease in gross written premiums. Premiums earned decreased 5.9% to $738.4 million in 2010 compared to $784.6 million in 2009. 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 increased 34.0% to $613.9 million in 2011 compared to $457.9 million in 2010. The increase was principally due to a $96.1 million (13.6 points) increase in current year catastrophe losses, primarily for the Japan and New Zealand earthquakes, the Thailand floods, the Australian floods and Hurricane Irene and the absence of favorable reserve development in 2011 as occurred in 2010.
Commission and brokerage decreased 10.9% to $171.1 million in 2010 compared to $192.1 million in 2009. The decrease was due to a combination of lower premiums earned, an increased mix of lower commission business and higher reinstatement premiums, which do not have corresponding commission expense. Segment other underwriting expenses increased to $26.4 million in 2010 compared to $24.6 million in 2009. The increase was primarily the result of expanded operations in Ireland.
It is more difficult to accurately estimate loss reserves for reinsurance liabilities than for insurance liabilities. At December 31, 2011, we had reinsurance reserves of $7,806.3 million and insurance loss reserves of $2,316.9 million, of which $398.6 million and $101.3 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.
We sort both our reinsurance and insurance reserves into exposure groupings for actuarial analysis. We assign our business to exposure groupings so that the underlying exposures have reasonably homogeneous loss development characteristics and are large enough to facilitate credible estimation of ultimate losses. We periodically review our exposure groupings and we may change our groupings over time as our business changes. We currently use over 200 exposure groupings to develop our reserve estimates. One of the key selection characteristics for the exposure groupings is the historical duration of the claims settlement process. Business in which claims are reported and settled relatively quickly are commonly referred to as short tail lines, principally property lines. On the other hand, casualty claims tend to take longer to be reported and settled and casualty lines are generally referred to as long tail lines. Our estimates of ultimate losses for shorter tail lines, with the exception of loss estimates for large catastrophic events, generally exhibit less volatility than those for the longer tail lines.
Our global portfolio included $1,668.2 million of foreign government securities at December 31, 2011, of which $756.8 million were European sovereign securities. Approximately 59%, 21% and 8% represented securities held in the governments of the United Kingdom, France and Austria, 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, 2011.
The Company’s limited partnership investments are comprised of limited partnerships that invest in private equities. Generally, the limited partnerships are reported on a quarter lag. All of the limited partnerships are required to report using fair value accounting in accordance with FASB guidance. We receive annual audited financial statements for all of the limited partnerships. For the quarterly reports, the Company’s staff performs reviews of the financial reports for any unusual changes in carrying value. If the Company becomes aware of a significant decline in value during the lag reporting period, the loss will be recorded in the period in which the Company identifies the decline.
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 have recently 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
Reinsurance Receivables. Reinsurance receivables for both paid and recoverable on unpaid losses totaled $580.3 million and $684.7 million at December 31, 2011 and 2010, respectively. At December 31, 2011, $213.6 million, or 36.8%, was receivable from C.V. Starr; $66.3 million, or 11.4% was receivable from Transatlantic; $56.9 million, or 9.8%, was receivable from Berkley and $39.9 million, or 6.9%, 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.
Our loss and LAE reserves represent our best estimate of our ultimate liability for unpaid claims. We continuously re-evaluate our reserves, including re-estimates of prior period reserves, taking into consideration all available information and, in particular, newly reported loss and claim experience. Changes in reserves resulting from such re-evaluations are reflected in incurred losses in the period when the re-evaluation is made. Our analytical methods and processes operate at multiple levels including individual contracts, groupings of like contracts, classes and lines of business, internal business units, segments, legal entities, and in the aggregate. In order to set appropriate reserves, we make qualitative and quantitative analyses and judgments at these various levels. Additionally, the attribution of reserves, changes in reserves and incurred losses among accident years requires qualitative and quantitative adjustments and allocations at these various levels. We utilize actuarial science, business expertise and management judgment in a manner intended to ensure the accuracy and consistency of our reserving practices. Nevertheless, our reserves are estimates, which are subject to variation, which may be significant.
There can be no assurance that reserves will not ultimately exceed the indicated ranges requiring additional income (loss) statement expense.
Depending on the specific segment, the range derived for the loss reserves, excluding reserves for A&E exposures, ranges from minus 9.9% to minus 18.4% for the low range and from plus 9.9% to plus 18.4% 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.
Because the survival ratio was developed as a comparative measure of reserve strength and does not indicate absolute reserve adequacy, we consider, but do not rely on, the survival ratio when evaluating our reserves. In particular, we note that year to year loss payment variability can be material. This is due, in part, to our orientation to negotiated settlements, particularly on our Mt. McKinley exposures, which significantly reduces the credibility and utility of this measure as an analytical tool. In 2011, we made asbestos net claim payments of $1.1 million to Mt McKinley high profile claimants where the claim was either closed or a settlement had been reached. Such payments, which are non-repetitive, distort downward our three year survival ratio. Adjusting for such settlements, recognizing that total settlements are generally considered fully reserved to an agreed settlement, we consider that our adjusted asbestos survival ratio for net unsettled claims is 8.9 years, which is better than prevailing industry norms.
Our shareholders’ equity increased to $6,283.5 million as of December 31, 2010 from $6,101.7 million as of December 31, 2009. This increase was the result of $610.8 million in net income, unrealized appreciation on investments, net of tax, of $60.2 million, share-based compensation transactions of $17.8 million and $1.9 million of foreign currency translation adjustments, partially offset by repurchasing 5.1 million common shares for $398.6 million, $108.5 million of shareholder dividends and $1.8 million of benefit plan obligation adjustments.
From time to time, we have used open market share repurchases to adjust our capital position and enhance long term expected returns to our shareholders. On July 21, 2008, our existing authorization to purchase up to 5 million of our shares was amended to authorize the purchase of up to 10 million shares. On February 24, 2010, our existing authorization to purchase up to 10 million of our shares was amended to authorize the purchase of up to 15 million shares. On February 22, 2012, our existing authorization to purchase up to 15 million of our shares was amended to authorize the purchase of up to 20 million shares. As of December 31, 2011, we had repurchased 12.7 million shares under this authorization.
Over the past few years and particularly in 2010 and 2011, we have expanded the allocation of our investments funded by shareholders’ equity to include: 1) a greater percentage of publicly traded equity securities, 2) emerging market fixed maturities through mutual fund structures, 3) high yield fixed maturities, 4) bank loan securities and 5) private equity limited partnership investments. The objective of this portfolio diversification is to enhance the risk-adjusted total return of the investment portfolio by allocating a prudent portion of the portfolio to higher return asset classes, which are also less subject to changes in value with movements in interest rates. We limit our allocation to these asset classes because of 1) the potential for volatility in their values and 2) the impact of these investments on regulatory and rating agency capital adequacy models. We use investment managers experienced in these markets and adjust our allocation to these investments based upon market conditions. At December 31, 2011, the market value of investments in these investment market sectors, carried at both market and fair value, approximated 57% of shareholders’ equity.
Our liquidity requirements are generally met from positive cash flow from operations. Positive cash flow results from reinsurance and insurance premiums being collected prior to disbursements for claims, which disbursements generally take place over an extended period after the collection of premiums, sometimes a period of many years. Collected premiums are generally invested, prior to their use in such disbursements, and investment income provides additional funding for loss payments. Our net cash flows from operating activities were $659.5 million, $918.5 million and $784.7 million for the years ended December 31, 2011, 2010 and 2009, respectively. Additionally, these cash flows reflected net tax refunds of $44.5 million and $31.0 million and net tax payments of $111.8 million for the years ended December 31, 2011, 2010 and 2009, respectively; net catastrophe loss payments of $559.2 million, $410.8 million and $235.3 million for the years ended December 31, 2011, 2010 and 2009, respectively; and net A&E payments of $53.5 million, $80.2 million and $136.4 million for the years ended December 31, 2011, 2010 and 2009, respectively.
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, 2011 and 2010, we held cash and short-term investments of $1,134.0 million and $1,043.7 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, 2011, we had $494.9 million of available for sale fixed maturity securities maturing within one year or less, $5,268.7 million maturing within one to five years and $3,679.4 million maturing after five
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 $3,575.4 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, 2007 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, 2011, was $4,292.5 million. As of December 31, 2011, the Company was in compliance with all Group Credit Facility covenants.
At December 31, 2011, the Company had no outstanding short-term borrowings from the Holdings Credit Facility revolving credit line and had $50.0 million outstanding on the credit line at December 31, 2010. Short-term borrowings can be paid either through renewal with a one, two, three or six month term; or out of available liquidity. The highest amounts outstanding in short-term borrowings during 2011 and 2010 were $50.0 million and $133.0 million for the periods from January 1, 2011 to January 18, 2011 and June 15, 2010 to August 9, 2010, respectively. In addition, at December 31, 2011 and 2010, the Holdings Credit Facility had outstanding letters of credit of $5.0 million and $9.5 million, respectively.
Projected catastrophe losses are generally summarized in terms of the PML. We define PML as our anticipated loss, taking into account contract terms and limits, caused by a single catastrophe affecting a broad contiguous geographic area, such as that caused by a hurricane or earthquake. The PML will vary depending upon the modeled simulated losses and the make-up of the in force book of business. The projected severity levels are described in terms of “return periods”, such as “100-year events” and “250-year events”. For example, a 100-year PML is the estimated loss to the current in-force portfolio from a single event which has a 1% probability of being exceeded in a twelve month period. In other words, it corresponds to a 99% probability that the loss from a single event will fall below the indicated PML. It is important to note that PMLs are estimates. Modeled events are hypothetical events produced by a stochastic model. As a
result, there can be no assurance that any actual event will align with the modeled event or that actual losses from events similar to the modeled events will not vary materially from the modeled event PML.
Management estimates that the projected economic loss from its largest 100-year event in a given zone represents approximately 10% of its projected 2012 shareholders’ equity. Economic loss is the gross PML reduced by estimated reinstatement premiums to renew coverage and estimated income taxes. The impact of income taxes on the PML depends on the distribution of the losses by corporate entity, which is also affected by inter-affiliate reinsurance. Management also monitors and controls its largest PMLs at multiple points along the loss distribution curve, such as loss amounts at the 20, 50, 100, 250, 500 and 1,000 year return periods. This process enables management to identify and control exposure accumulations and to integrate such exposures into enterprise risk, underwriting and capital management decisions.
During 2011, 2010 and 2009, we declared and paid shareholder dividends of $103.8 million, $108.5 million and $116.9 million, respectively. As an insurance holding company, we are partially dependent on dividends and other permitted payments from our subsidiaries to pay cash dividends to our shareholders. The payment of dividends to Group by Holdings Ireland is subject to Irish corporate and regulatory restrictions; the payment of dividends to Holdings Ireland by Holdings and to Holdings by Everest Re is subject to Delaware regulatory restrictions; and the payment of dividends to Group by Bermuda Re is subject to Bermuda insurance regulatory restrictions. Management expects that, absent extraordinary catastrophe losses, such restrictions should not affect Everest Re’s ability to declare and pay dividends sufficient to support Holdings’ general corporate needs and that Holdings Ireland and Bermuda Re will have the ability to declare and pay dividends sufficient to support Group’s general corporate needs. For the years ended December 31, 2011, 2010 and 2009, Everest Re paid dividends to Holdings of $75.0 million, $590.0 million and $60.0 million, respectively. For the years ended December 31, 2011, 2010 and 2009, Bermuda Re paid dividends to Group of $190.0 million, $215.0 million and $245.0 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.
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 will either be presented within a single, continuous financial statement or be presented in two separate but consecutive financial statements. The guidance is effective for reporting periods beginning after December 15, 2011. The Company will adopt this guidance as of January 1, 2012 and expects to present net income and comprehensive income in a single, continuous financial statement.
Common Fair Value Measurement. In May 2011, FASB issued amendments to existing guidance to achieve common fair value measurement and disclosure requirements between GAAP and International Financial Reporting Standards. The amendments change wording used to describe many GAAP fair value measurement requirements and disclosures. FASB does not intend for the amendments to cause a change in application of fair value accounting guidance. The guidance is effective for reporting periods beginning after December 15, 2011. The Company will adopt this guidance prospectively as of January 1, 2012.
Our current investment strategy seeks to maximize after-tax income through a high quality, diversified, taxable and tax-preferenced fixed maturity portfolio, while maintaining an adequate level of liquidity. Our mix of taxable and tax-preferenced investments is adjusted periodically, consistent with our current and projected operating results, market conditions and our tax position. The fixed maturity securities in the investment portfolio are comprised of non-trading available for sale securities. Additionally, we have invested in equity securities. We have also written a small number of equity index put option contracts.
Interest Rate Risk. Our $15.8 billion investment portfolio, at December 31, 2011, 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.
Interest rate risk is the potential change in value of the fixed maturity securities portfolio, including short-term investments, from a change in market interest rates. In a declining interest rate environment, it includes prepayment risk on the $2,657.1 million of mortgage-backed securities in the $12,407.1 million fixed maturity portfolio. Prepayment risk results from potential accelerated principal payments that shorten the average life and thus the expected yield of the security.
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 47%. The theoretical maximum payouts under the 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, 2011, the present value of these theoretical maximum payouts using a 6% discount factor was $285.4 million.
Because the equity index put option contracts meet the definition of a derivative, we report the fair value of these instruments in our consolidated balance sheets as a liability and record any changes to fair value in our consolidated statements of operations and comprehensive income (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, 2011, of $69.7 million and at December 31, 2010, of $58.5 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.