Everest Re’s corporate offices are located in approximately 230,500 square feet of leased office space in Liberty Corner, New Jersey. Bermuda Re’s corporate offices are located in approximately 3,600 total square feet of leased office space in Hamilton, Bermuda. The Company’s other nineteen locations occupy a total of approximately 145,300 square feet, all of which are leased. Management believes that the above-described office space is adequate for its current and anticipated needs.
Based on 47.5 million, 51.4 million, 53.7 million, 54.4 million and 59.3 million common shares outstanding for December 31, 2013, 2012, 2011, 2010 and 2009, respectively.
Worldwide insurance and reinsurance market conditions continued to be very competitive, particularly in the casualty lines of business. Generally, there was ample insurance and reinsurance capacity relative to demand. Competition and its effect on rates, terms and conditions vary widely by market and coverage yet continued to be most prevalent in the U.S. casualty insurance and reinsurance markets and additional capacity from the capital markets is impacting worldwide catastrophe rates.
Catastrophe rates tend to fluctuate by global region, 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 will likely result in higher future catastrophe rates. 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 is putting downward pressure on rates in certain geographical areas.
Premiums. Gross written premiums increased by 21.1% to $5,218.6 million in 2013, compared to $4,310.5 million in 2012, reflecting a $692.3 million, or 21.4%, increase in our reinsurance business, a $195.6 million, or 18.2%, increase in our insurance business and $20.2 million from our new Mt. Logan Re segment. The increase in reinsurance premiums was mainly due to the impact of a Florida quota share reinsurance contract as well as new business, increased participations on existing business, and higher original rates on subject business. Excluding the year over year impact of the large Florida quota share reinsurance contract, gross written premiums increased 15.0% and reinsurance premiums increased 13.4%, compared to the prior year. The increase in insurance premiums was primarily due to the growth in California workers’ compensation, crop and non-standard auto business. Net written premiums increased by 22.6% to $5,004.8 million in 2013 compared to $4,081.1 million in 2012, which is consistent with the increase in
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 were higher in 2011 due to a higher level of catastrophe losses, and foreign currency fluctuations, gross written premiums were up 2% year over year. Net written premiums decreased 0.7% to $4,081.1 million in 2012 compared to $4,108.9 million in 2011. The variance between the changes in gross and net written premiums was primarily attributable to the growth in the crop business, for which the Company uses a higher level of reinsurance. Premiums earned increased by 1.5% to $4,164.6 million in 2012, compared to $4,101.3 million in 2011. The fluctuations in premiums earned in comparison to net written premiums were primarily attributable to changes in the mix of business, particularly crop insurance which has a different premiums earning pattern.
Net Investment Income. 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.
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 Realized Capital Gains (Losses). Net realized capital gains were $300.2 million, $164.4 million and $6.9 million in 2013, 2012 and 2011, respectively. The $300.2 million was comprised of $258.9 million of gains from fair value re-measurements and $42.4 million of net realized capital gains from sales on our fixed maturity and equity securities, which were partially offset by $1.1 million of other-than-temporary impairments. The net realized capital gains of $164.4 million in 2012 were the result of $118.1 million of gains from fair value re-measurements and $56.3 million of net realized capital gains from sales on our fixed maturity and equity securities, which were partially offset by $10.0 million of other-than-temporary impairments. The net realized capital gains of $6.9 million in 2011 were the result of $27.5 million of net realized capital gains from sales on our fixed maturity and equity securities which was partially offset by $4.4 million of losses from fair value re-measurements and $16.2 million of other-than-temporary impairments.
Incurred losses and LAE decreased by 26.3% to $2,745.3 million for the year ended December 31, 2012 compared to $3,726.2 million in 2011, representing 25.0 loss ratio points. Current year 2012 catastrophe losses discussed above were lower by $890.4 million, or 21.9 points, period over period. The $1,300.4 million of current year catastrophe losses for 2011 related primarily to the Japanese earthquake and tsunami ($531.7 million), the 2011 New Zealand earthquake ($305.8 million), the Thailand floods ($225.0 million), U.S. storms ($60.6 million), the 2011 Australian floods ($56.1 million) and Hurricane Irene ($38.0 million) as well as $50.0 million of IBNR reserves for these 2011 catastrophe events collectively, which were not allocated to a specific event. During 2012 and 2013, $41.0 million and $3.9 million, respectively, of the IBNR reserve was allocated to specific 2011 catastrophes, leaving $5.1 million of unallocated IBNR reserves at December 31, 2013. Current year attritional losses decreased $83.2 million, representing 2.9 loss ratio points, due to a shift in mix of business towards excess of loss business, which generally has lower attritional losses.
Other Underwriting Expenses. Other underwriting expenses were $237.1 million, $207.7 million and $182.4 million in 2013, 2012 and 2011, respectively. 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. The increase in other underwriting expenses for 2012 compared to 2011 was mainly due to higher share-based compensation expenses and employee benefit plan expenses.
Income Tax Expense (Benefit). We had income tax expenses of $289.7 million and $110.6 million in 2013 and 2012, respectively, and income tax benefits of $153.5 million in 2011. 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 the tax expense/(benefit) between 2013 and 2012, as well as 2012 versus 2011, is primarily due to higher taxable income from improved underwriting margins and capital gains in each successive year. The income tax expense for year ended December 31, 2012, 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.
Our net income was $1,265.3 million and $829.0 million in 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 $1,259.4 million and $829.0 million in 2013 and 2012, respectively, and our net loss attributable to Everest Re Group was $80.5 million in 2011. 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 2013.
The pre-tax equivalent total return for the bond portfolio was approximately 0.6%, 5.0% and 5.1%, respectively, in 2013, 2012 and 2011. The pre-tax equivalent return adjusts the yield on tax-exempt bonds to the fully taxable equivalent.
Except for Mt. Logan Re, the Company does not maintain separate balance sheet data for its operating segments. Accordingly, the Company does not review and evaluate the financial results of its operating segments based upon balance sheet data.
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, partially offset by an increase of $75.0 million in current year attritional losses due to the impact of the increase in premiums earned. Current year catastrophe losses for 2013, were $51.8 million, mainly due to U.S. Storms ($44.8 million) , the European floods ($5.0 million) and the Canadian Floods ($2.0 million), compared to $372.6 million of current year catastrophe losses for 2012, which 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.
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 for 2012 (outlined above) compared to 2011. 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.
Gross written premiums decreased by 3.7% to $1,192.3 million in 2012 compared to $1,238.4 million in 2011, primarily due to a shift in the mix of business towards excess of loss business, which generates a lower premium rate commensurate with lower loss exposure, a $25.0 million decline due to the impact of foreign exchange rate movement and a lower level of reinstatement premiums in 2012. Net written premiums decreased by 2.4% to $1,188.7 million in 2012 compared to $1,218.6 million in 2011, principally as a result of the decrease in gross written premiums. Premiums earned decreased 2.4% to $1,214.8 million 2012 compared to $1,244.5 million in 2011. The change in premiums earned is comparable to the change in net written premiums.
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 for 2012 (outlined above) compared to 2011. 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 1.4% to $295.9 million in 2013 compared to $300.1 million in 2012. This decrease was primarily due to the shift in the mix of business towards property catastrophe and excess of loss business, which have lower commission rates, partially offset by the impact of the increase in premiums earned. Segment other underwriting expenses increased to $33.9 million in 2013 compared to $29.3 million in 2012. These increases relate to higher compensation 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.
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 by 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 8.3% to $374.4 million in 2013 compared to $408.2 million in 2012 primarily due to favorable prior year development in 2013 compared to 2012 for both attritional and catastrophe losses, partially offset by increases in current year catastrophe losses and current year attritional losses. The favorable prior year development on attritional losses was primarily related to the outcome of reserve studies on property business. Current year catastrophe losses were $35.5 million in 2013, due to the German hailstorms ($20.5 million) and the European floods ($15.0 million), which was partially offset by a $13.1 million reduction to prior year catastrophe loss estimates, largely attributable to the 2011 Japan earthquake. The $14.1 million of current year catastrophe losses for 2012 related primarily to Superstorm Sandy ($14.0 million). The current year attritional losses increased by $5.1 million due to the impact of higher premiums earned, but the current year attritional loss ratio declined by 3.9 points. This is primarily due to a shift in the mix of business to excess of loss contracts which generally results in lower loss ratios.
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 for 2012 (outlined above) compared to 2011. 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.
Segment Expenses. Commission and brokerage decreased by 2.8% to $179.1 million in 2013 compared to $184.4 million in 2012 reflecting the impact from the change in the mix of business to contracts with lower commission rates and higher contingent commission payouts in 2012, mitigated by the impact of higher premiums earned. Segment other underwriting expenses increased to $34.7 million in 2013 compared to $30.6 million for the same period in 2012. The year over year increase was primarily attributable to higher premiums earned in 2013.
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.
Incurred Losses and LAE. The following table presents the incurred losses and LAE for the Mt. Logan Re segment for the periods indicated.
Incurred losses and LAE were $4.4 million in 2013. Current year catastrophe losses were $1.0 million in 2013, due to Typhoon Fitow ($0.8 million) and the Canadian floods ($0.2 million). Current year attritional losses were $3.3 million in 2013.
Segment Expenses Commission and brokerage was $2.0 million in 2013. Segment other underwriting expenses were $2.1 million in 2013.
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, 2013 and 2012, 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 13 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 0.04% of the portfolio, that are either valued by brokers or an investment advisor. At December 31, 2013 and 2012, our investment portfolio included $469.1 million and $548.9 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, 2013, we had net unrealized gains, net of tax, of $201.2 million compared to $603.9 million at December 31, 2012. 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). 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.
Our principal investment objectives are to ensure funds are available to meet our insurance and reinsurance obligations and to maximize after-tax investment income while maintaining a high quality diversified investment portfolio. Considering these objectives, we view our investment portfolio as having two components: 1) the investments needed to satisfy outstanding liabilities (our core fixed maturities portfolio) and 2) investments funded by our shareholders’ equity.
Over the past several years, 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, as well as individual holdings, 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, 2013, the market value of investments in these investment market sectors, carried at both market and fair value, approximated 62% of shareholders’ equity.
The following table provides a comparison of our total return by asset class relative to broadly accepted industry benchmarks for the periods indicated.
Our fixed income and equity portfolios have different compositions than the benchmark indexes. Our equity portfolios reflect an emphasis on dividend yield and growth equities, while the index is comprised of the largest 500 equities by market capitalization.
The following tables summarize gross outstanding loss and LAE reserves by segment, classified by case reserves and IBNR reserves, for the periods indicated.
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 9.4% to minus 15.3% for the low range and from plus 9.4% to plus 15.3% 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, 2013, we had gross asbestos loss reserves of $382.4 million, or 95.0%, of total A&E reserves, of which $306.8 million was for assumed business and $75.6 million was for direct business.
Shareholders’ Equity. 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.
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.
Liquidity. Our principal investment objectives are to ensure funds are available to meet our insurance and reinsurance obligations and to maximize after-tax investment income while maintaining a high quality diversified investment portfolio. Considering these objectives, we view our investment portfolio as having two components: 1) the investments needed to satisfy outstanding liabilities (our core fixed maturities portfolio) and 2) investments funded by our shareholders’ equity.
Over the past several years, 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 as well as individual holdings, 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, 2013, the market value of investments in these investment market sectors, carried at both market and fair value, approximated 62% of shareholders’ equity.
At December 31, 2013 and 2012, the Company had no outstanding short-term borrowings from the Group Credit Facility revolving credit line. 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. There were no short-term borrowings outstanding for the year ended December 31, 2012. 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. At December 31, 2012, the Group Credit Facility had no outstanding letters of credit under tranche one and $463.2 million outstanding letters of credit under tranche two.
Our business operations depend on the proper functioning and availability of our information technology platform, which includes data processing and related electronic communications. We communicate electronically internally and with our brokers, program managers and third party vendors. Some of these electronic communications involve personal, confidential and proprietary information. We seek to ensure that all of our systems, data and electronic transmissions are appropriately protected from cybersecurity attacks with the latest technology safeguards. These include, but are not limited to, requiring an independent assessment of outside vendor’s computing environment relative to the services they are providing us.
During 2013, 2012 and 2011, we declared and paid shareholder dividends of $106.7 million, $100.4 million and $103.8 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, 2013, 2012 and 2011, Everest Re paid dividends to Holdings of $359.0 million, $100.0 million and $75.0 million, respectively. For the years ended December 31, 2013, 2012 and 2011, Bermuda Re paid dividends to Group of $575.0 million, $425.0 million and $190.0 million, respectively, and Everest International paid dividends to Group of $90.0 million, $40.0 million and $0.0 million, respectively. See ITEM 1, “Business - Regulatory Matters - Dividends” and ITEM 8, “Financial Statements and Supplementary Data” - Note 16 of Notes to Consolidated Financial Statements.
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 would be expensed, including $10.9 million and $2.6 million expensed in 2012 and 2013, respectively. If the guidance had been applicable for 2011, the Company would have expensed $13.9 million of deferrable acquisition costs. No additional expense will be incurred related to this guidance implementation in future periods.
Interest Rate Risk. Our $16.6 billion investment portfolio, at December 31, 2013, 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 $2,554.3 million of mortgage-backed securities in the $12,656.3 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.
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, 2013, there has been no material change in exposure to foreign exchange rates as compared to December 31, 2012.
Equity Index Put Option Contracts. Although not considered material in the context of our aggregate exposure to market sensitive instruments, we have issued six equity index put option contracts based on the Standard & Poor’s 500 (“S&P 500”) index and one equity index put option contract based on the FTSE 100 index, that are market sensitive and sufficiently unique to warrant supplemental disclosure.
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, 2013, fair value for these equity index put option contracts was $29.3 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, 2013 was $1,848.36. 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, 2013 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 25%. 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, 2013, the present value of these theoretical maximum payouts using a 3% discount factor was $407.8 million. Conversely, if the contracts had all expired on December 31, 2013, with the S&P index at $1,848.36, there would be no settlement amount.
We sold one equity index put option contract based on the FTSE 100 index for total consideration, net of commissions, of $6.7 million. At December 31, 2013, fair value for this equity index put option contract was $6.1 million. This equity index put option contract has an exercise date of July 2020 and a strike price of ₤5,989.75. The FTSE 100 index value at December 31, 2013 was ₤6,749.10. No amount will be payable under this equity index put option contract if the FTSE 100 index is at, or above, the strike price on the exercise date. If the FTSE 100 index is lower than the strike price on the exercise date, the amount due will vary proportionately with the percentage by which the index is below the strike price. Based on historical index volatilities and trends and the December 31, 2013 FTSE 100 index value, we estimate the probability that the equity index put option contract of the FTSE 100 index will fall below the strike price on the exercise date to be less than 37%. The theoretical maximum payout under the equity index put option contract would occur if on the exercise date the FTSE 100 index value was zero. At December 31, 2013, the present value of the theoretical maximum payout using a 3% discount factor and current exchange rate was $44.7 million. Conversely, if the contract had expired on December 31, 2013, with the FTSE index at ₤6,749.10, there would be no settlement amount.