Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The following is a discussion and analysis of our results of operations and financial condition. It should be read in conjunction with the Consolidated Financial Statements and accompanying notes thereto presented under ITEM 8, “Financial Statements and Supplementary Data”.

Industry Conditions.

The worldwide reinsurance and insurance businesses are highly competitive, as well as cyclical by product and market. As such, financial results tend to fluctuate with periods of constrained availability, high rates and strong profits followed by periods of abundant capacity, low rates and constrained profitability. Competition in the types of reinsurance and insurance business that we underwrite is based on many factors, including the perceived overall financial strength of the reinsurer or insurer, ratings of the reinsurer or insurer by A.M. Best and/or Standard & Poor’s, underwriting expertise, the jurisdictions where the reinsurer or insurer is licensed or otherwise authorized, capacity and coverages offered, premiums charged, other terms and conditions of the reinsurance and insurance business offered, services offered, speed of claims payment and reputation and experience in lines written. Furthermore, the market impact from these competitive factors related to reinsurance and insurance is generally not consistent across lines of business, domestic and international geographical areas and distribution channels.

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.

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.

Overall, we believe that current marketplace conditions, particularly for catastrophe coverages, provide profit opportunities for us given our strong ratings, distribution system, reputation and expertise. We continue to employ our strategy of targeting business that offers the greatest profit potential, while maintaining balance and diversification in our overall portfolio.

Financial Summary.

We monitor and evaluate our overall performance based upon financial results. The following table displays a summary of the consolidated net income (loss), ratios and shareholders’ equity for the periods indicated.

Years Ended December 31,Percentage Increase/(Decrease)
(Dollars in millions)2013201220112013/20122012/2011
Gross written premiums$5,218.6$4,310.5$4,286.221.1%0.6%
Net written premiums5,004.84,081.14,108.922.6%-0.7%
REVENUES:
Premiums earned$4,753.5$4,164.6$4,101.314.1%1.5%
Net investment income548.5600.2620.0-8.6%-3.2%
Net realized capital gains (losses)300.2164.46.982.6%NM
Net derivative gain (loss)44.0(9.7)(11.3)NM-13.5%
Other income (expense)(5.5)3.3(23.1)NM-114.4%
Total revenues5,640.84,922.84,694.014.6%4.9%
CLAIMS AND EXPENSES:
Incurred losses and loss adjustment expenses2,800.32,745.33,726.22.0%-26.3%
Commission, brokerage, taxes and fees977.6952.7950.52.6%0.2%
Other underwriting expenses237.1207.7182.414.2%13.8%
Corporate expenses24.824.016.53.5%45.7%
Interest, fees and bond issue cost amortization expense46.153.752.3-14.1%2.6%
Total claims and expenses4,085.93,983.34,927.92.6%-19.2%
INCOME (LOSS) BEFORE TAXES1,555.0939.5(233.9)65.5%NM
Income tax expense (benefit)289.7110.6(153.5)162.0%-172.1%
NET INCOME (LOSS)$1,265.3$829.0$(80.5)52.6%NM
Net (income) loss attributable to noncontrolling interests(5.9)--NMNM
NET INCOME (LOSS) ATTRIBUTABLE TO EVEREST RE GROUP$1,259.4$829.0$(80.5)51.9%NM
RATIOS:Point Change
Loss ratio58.9%65.9%90.9%(7.0)(25.0)
Commission and brokerage ratio20.6%22.9%23.2%(2.3)(0.3)
Other underwriting expense ratio5.0%5.0%4.4%-0.6
Combined ratio84.5%93.8%118.5%(9.3)(24.7)
At December 31,Percentage Increase/(Decrease)
(Dollars in millions, except per share amounts)2013201220112013/20122012/2011
Balance sheet data:
Total investments and cash$16,596.5$16,576.2$15,797.40.1%4.9%
Total assets19,808.019,777.918,893.60.2%4.7%
Loss and loss adjustment expense reserves9,673.210,069.110,123.2-3.9%-0.5%
Total debt488.3818.2818.1-40.3%0.0%
Total liabilities12,746.413,044.412,822.2-2.3%1.7%
Redeemable noncontrolling interests - Mt. Logan Re93.4--NMNM
Shareholders' equity6,968.36,733.56,071.43.5%10.9%
Book value per share146.57130.96112.9911.9%15.9%
(NM, not meaningful)
(Some amounts may not reconcile due to rounding.)

Revenues.

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. Premiums earned increased by 14.1% to $4,753.5 million in 2013, compared to $4,164.6 million in 2012. Unlike written premiums, premiums earned were minimally impacted by the Florida quota share reinsurance contract. The change in premiums earned was comparable to net written premiums, excluding the impact of the Florida quota share reinsurance contract.

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.

Net Derivative Gain (Loss). In 2005 and prior, we sold seven equity index put option contracts, which remain outstanding. These contracts meet the definition of a derivative in accordance with FASB guidance and as such, are fair valued each quarter with the change recorded as net derivative gain or loss in the consolidated statements of operations and comprehensive income (loss). As a result of these adjustments in value, we recognized net derivative gains of $44.0 million in 2013 and net derivative losses of $9.7 million and $11.3 million in 2012 and 2011, respectively. The change in the fair value of these equity index put option contracts is indicative of the change in the equity markets and interest rates over the same periods.

Other Income (Expense). We recorded other expense of $5.5 million in 2013, other income of $3.3 million in 2012 and other expense of $23.1 million in 2011. The changes were primarily the result of fluctuations in foreign currency exchange rates for the corresponding periods.

Claims and Expenses.

Incurred Losses and Loss Adjustment Expenses. The following table presents our incurred losses and loss adjustment expenses (“LAE”) for the periods indicated.

Years Ended December 31,
CurrentRatio %/PriorRatio %/TotalRatio %/
(Dollars in millions)YearPt ChangeYearsPt ChangeIncurredPt Change
2013
Attritional (a)$2,623.555.2%$(18.2)-0.4%$2,605.354.8%
Catastrophes195.04.1%-0.0%195.04.1%
Total$2,818.559.3%$(18.2)-0.4%$2,800.358.9%
2012
Attritional (a)$2,338.956.2%$(3.7)-0.1%$2,335.256.1%
Catastrophes410.09.8%-0.0%410.09.8%
Total$2,748.966.0%$(3.7)-0.1%$2,745.365.9%
2011
Attritional (a)$2,422.159.1%$3.70.1%$2,425.859.2%
Catastrophes1,300.431.7%-0.0%1,300.431.7%
Total$3,722.590.8%$3.70.1%$3,726.290.9%
Variance 2013/2012
Attritional (a)$284.6(1.0)pts$(14.5)(0.3)pts$270.1(1.3)pts
Catastrophes(215.0)(5.7)pts--pts(215.0)(5.7)pts
Total$69.6(6.7)pts$(14.5)(0.3)pts$55.0(7.0)pts
Variance 2012/2011
Attritional (a)$(83.2)(2.9)pts$(7.4)(0.2)pts$(90.6)(3.1)pts
Catastrophes(890.4)(21.9)pts--pts(890.4)(21.9)pts
Total$(973.6)(24.8)pts$(7.4)(0.2)pts$(980.9)(25.0)pts
(a) Attritional losses exclude catastrophe losses.
(Some amounts may not reconcile due to rounding.)

Incurred losses and LAE increased by 2.0% to $2,800.3 million for the year ended December 31, 2013 compared to $2,745.3 million for the year ended December 31, 2012, primarily due to increases in current year attritional losses, partially offset by the decline in current year catastrophe losses. The increase in current year attritional losses of $284.6 million is primarily due to the impact of the increase in premiums earned. Despite the increase in current year attritional losses, the current year attritional loss ratio decreased by 1.0 points due to the shift in the mix of business towards excess of loss business, which generally results in lower loss ratios. Current year catastrophe losses for the year ended December 31, 2013 were $195.0 million, or 4.1 points, due to Canadian floods ($79.7 million), U.S. storms ($44.8 million), Typhoon Fitow ($30.0 million), German hailstorms ($20.5 million) and European floods ($20.0 million). The $410.0 million of current year catastrophe losses for 2012 represented 9.8 points and related to Superstorm Sandy ($325.0 million), U.S. storms ($60.0 million) and Hurricane Isaac ($25.0 million).

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.

Commission, Brokerage, Taxes and Fees. Commission, brokerage, taxes and fees increased by 2.6% to $977.6 million for the year ended December 31, 2013 compared to $952.7 million for the year ended December 31, 2012. The year over year changes were primarily due to the impact of the increase in premiums earned, partially offset by an increase in excess of loss business in 2013 which carries a lower commission rate than pro rata business.

Commission, brokerage, taxes and fees increased by 0.2% to $952.7 million for the year ended December 31, 2012 compared to $950.5 million in 2011. The increase is due primarily to the one-time effect of the non-renewal of a Florida quota share contract and the adoption of new accounting standards concerning the accounting for acquisition costs, which increased expenses in 2012. The increased expenses resulting from these two factors were partially offset by an increase in excess of loss business which carries a lower commission than pro rata business.

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.

Corporate Expenses. Corporate expenses, which are general operating expenses that are not allocated to segments, were $24.8 million, $24.0 million and $16.5 million for the years ended December 31, 2013, 2012 and 2011, respectively. The increase in corporate expenses were mainly due to higher share-based compensation expense.

Interest, Fees and Bond Issue Cost Amortization Expense. Interest, fees and other bond amortization expense was $46.1 million and $53.7 million in 2013 and 2012, respectively. The decrease was primarily due to the redemption of $329.9 million of trust preferred securities in May 2013. The year over year decrease was partially offset by $7.7 million of amortization expense on remaining capitalized issuance costs related to the redeemed securities.

Interest, fees and other bond amortization expense was $53.7 million and $52.3 million in 2012 and 2011, respectively. The increase was primarily due to additional costs for the new Group Credit Facility signed in June, 2012.

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.

Net Income (Loss).

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 was $829.0 million in 2012 and our net loss was $80.5 in 2011. The increase was primarily driven by the decline in catastrophe losses in 2012.

Net Income (Loss) Attributable to Everest Re Group.

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.

Ratios.

Our combined ratio decreased by 9.3 points to 84.5% in 2013 compared to 93.8% in 2012. The loss ratio component decreased 7.0 points in 2013, over the same period last year primarily due to the $215.0 million decrease in current year catastrophe losses, which lowered the loss ratio by 5.7 points. The commission and brokerage ratio components decreased 2.3 points in 2013 due to the one time impact of the termination of the Florida quota share contract in 2012 and the increase in excess of loss business which carries a lower commission than pro rata business. The other underwriting expense ratio components remained flat in 2013 over the same period last year.

Our combined ratio decreased by 24.7 points to 93.8% in 2012 compared to 118.5% in 2011. The loss ratio component decreased 25.0 points in 2012 over the same period last year primarily due to the decline in catastrophe losses in 2012 compared to 2011. The commission and brokerage ratio component slightly decreased over the same period last year due to an increase in excess of loss business which carries a lower commission than pro rata business, partially offset by the one-time effect of the non-renewal of the Florida quota share and the adoption of new accounting standards concerning the accounting for acquisition costs. Eliminating the impact of reinstatement premiums, contingent commissions, and these one-time items, the commission and brokerage ratio improved 1.5 points to 21.2% driven by the shift in the mix of business. The other underwriting expense ratio component increased slightly from the same period last year due to higher employee benefit costs.

Shareholders’ Equity.

Shareholders’ equity increased by $234.8 million to $6,968.3 million at December 31, 2013 from $6,733.5 million at December 31, 2012, principally as a 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.

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.

Consolidated Investment Results

Net Investment Income.

Net investment income decreased by 8.6% to $548.5 million in 2013 compared to $600.2 million in 2012, primarily due to declines in income from our fixed maturities, reflective of declining reinvestment rates, from our equities, due to the partial liquidation of some mutual funds and from our limited partnership investments.

Net investment income decreased by 3.2% to $600.2 million in 2012 compared to $620.0 million in 2011, primarily due to declines in income from our fixed maturities, reflective of declining reinvestment rates, partially offset by an increase in income from our limited partnership investments.

The following table shows the components of net investment income for the periods indicated.

Years Ended December 31,
(Dollars in millions)201320122011
Fixed maturities$473.5$489.8$522.0
Equity securities45.459.257.6
Short-term investments and cash1.31.31.3
Other invested assets
Limited partnerships46.964.956.9
Other7.33.92.7
Gross investment income before adjustments574.4619.0640.4
Funds held interest income (expense)10.610.62.3
Future policy benefit reserve income (expense)(2.8)(2.9)(3.0)
Gross investment income582.3626.6639.8
Investment expenses(33.8)(26.4)(19.7)
Net investment income$548.5$600.2$620.0
.
(Some amounts may not reconcile due to rounding.)

The following tables show a comparison of various investment yields for the periods indicated.

201320122011
Imbedded pre-tax yield of cash and invested assets at December 313.2%3.5%3.9%
Imbedded after-tax yield of cash and invested assets at December 312.8%3.0%3.4%
Annualized pre-tax yield on average cash and invested assets3.5%3.9%4.1%
Annualized after-tax yield on average cash and invested assets2.9%3.3%3.6%
201320122011
Fixed income portfolio total return0.4%4.8%4.7%
Barclay's Capital - U.S. aggregate index-2.0%4.2%7.8%
Common equity portfolio total return22.4%13.8%2.7%
S&P 500 index32.4%16.0%2.1%
Other invested asset portfolio total return16.9%16.0%13.5%

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.

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.

As indicated above, there is a relatively large variation between the total return on our fixed income portfolio for the year ended December 31, 2011 versus the Barclay’s - U.S. aggregate index for the same period. One of the reasons is that the duration of our portfolio is much shorter than the duration of the index. Historically, our duration has been shorter than the index because we align our investment portfolio with our liabilities. In addition, we shortened our duration in anticipation of a reversing trend in interest rate movements. With interest rates continuing to decline in 2011, the index benefited from its longer duration; however, in the longer term, there will be a benefit from a reduced exposure to unrealized market valuation losses on our fixed income portfolio if interest rates rise. Our total return was more comparable to the index in 2013 and 2012 as interest rates remained fairly steady. The composition of the index is also different from our portfolio as we hold foreign securities to match our foreign liabilities, while the index is comprised of only U.S. securities.

Net Realized Capital Gains (Losses).

The following table presents the composition of our net realized capital gains (losses) for the periods indicated.

Years Ended December 31,2013/20122012/2011
(Dollars in millions)201320122011VarianceVariance
Gains (losses) from sales:
Fixed maturity securities, market value:
Gains$37.7$31.9$85.5$5.8$(53.6)
Losses(30.9)(17.2)(65.1)(13.7)47.9
Total6.814.720.4(7.9)(5.7)
Fixed maturity securities, fair value:
Gains0.56.31.1(5.8)5.2
Losses(0.3)(0.6)(2.0)0.31.4
Total0.25.7(0.9)(5.5)6.6
Equity securities, market value:
Gains3.016.70.2(13.7)16.5
Losses(0.3)(1.8)(0.2)1.5(1.6)
Total2.614.9-(12.3)14.9
Equity securities, fair value:
Gains41.841.116.10.725.0
Losses(9.0)(20.1)(8.1)11.1(12.0)
Total32.721.08.011.713.0
Total net realized capital gains (losses) from sales:
Gains82.896.0102.9(13.2)(6.9)
Losses(40.5)(39.6)(75.4)(0.9)35.8
Total42.456.327.5(13.9)28.8
Other-than-temporary impairments:(1.1)(10.0)(16.2)8.96.2
Gains (losses) from fair value adjustments:
Fixed maturities, fair value0.31.9(15.5)(1.6)17.4
Equity securities, fair value258.6116.211.1142.4105.1
Total258.9118.1(4.4)140.8122.5
Total net realized capital gains (losses)$300.2$164.4$6.9$135.8$157.5
(Some amounts may not reconcile due to rounding.)

Net realized capital gains were $300.2 million in 2013 compared to net realized capital gains of $164.4 million and $6.9 million in 2012 and 2011, respectively. In 2013, we recorded $258.9 million of net realized capital gains due to fair value re-measurements on fixed maturity and equity securities and $42.4 million of net realized capital gains from sales of fixed maturity and equity securities, partially offset by $1.1 million of other-than-temporary impairments. The fixed maturity and equity sales in 2013 related primarily to adjusting the portfolios for overall market changes and individual credit shifts along with maintaining a balanced foreign currency exposure. In 2012, we recorded $118.1 million of net realized capital gains due to fair value re-measurements on fixed maturity and equity securities and $56.3 million of net realized capital gains from sales of fixed maturity and equity securities, partially offset by $10.0 million of other-than-temporary impairments. The fixed maturity sales in 2012 related primarily to maintaining a balanced foreign currency exposure and the equity sales related primarily to reducing our equity exposure. In 2011, we recorded $27.5 million of net realized capital gains from sales of fixed maturity and equity securities, partially offset by $16.2 million of other-than-temporary impairments and $4.4 million of net realized capital losses due to fair value re-measurements on fixed maturity and equity securities. The gains and losses on the sales of fixed maturity securities included the impact of selling part of our municipal bond portfolio as credit concerns arose in this market sector.

Segment Results.

The U.S. Reinsurance operation writes property and casualty reinsurance and specialty lines of business, including Marine, Aviation, Surety and A&H business, on both a treaty and facultative basis, through reinsurance brokers, as well as directly with ceding companies primarily within the U.S. The International operation writes foreign property and casualty reinsurance through Everest Re’s branches in Canada and Singapore and through offices in Brazil, Miami and New Jersey. The Bermuda operation provides reinsurance and insurance to worldwide property and casualty markets through brokers and directly with ceding companies from its Bermuda office and reinsurance to the United Kingdom and European markets through its UK branch and Ireland Re. The Insurance operation writes property and casualty insurance, including medical stop loss insurance, directly and through general agents, brokers and surplus lines brokers within the U.S. and Canada. The Mt. Logan Re segment represents business written for the segregated accounts of Mt. Logan Re, which were formed on July 1, 2013. The Mt. Logan Re business represents a diversified set of catastrophe exposures, diversified by risk/peril and across different geographical regions globally.

These segments, with the exception of Mt. Logan Re, are managed independently, but conform with corporate guidelines with respect to pricing, risk management, control of aggregate catastrophe exposures, capital, investments and support operations. Management generally monitors and evaluates the financial performance of these operating segments based upon their underwriting results. The Mt. Logan Re segment is managed independently and seeks to write a diverse portfolio of catastrophe risks for each segregated account to achieve desired risk and return criteria.

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.

Mt. Logan Re’s business is sourced through operating subsidiaries of the Company; however, the activity is only reflected in the Mt. Logan Re segment. For other inter-affiliate reinsurance, business is generally reported within the segment in which the business was first produced, consistent with how the business is managed.

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.

Our loss and LAE reserves are our best estimate of our ultimate liability for unpaid claims. We re-evaluate our estimates on an ongoing basis, including all prior period reserves, taking into consideration all available information and, in particular, recently reported loss claim experience and trends related to prior periods. Such re-evaluations are recorded in incurred losses in the period in which re-evaluation is made.

The following discusses the underwriting results for each of our segments for the periods indicated.

U.S. Reinsurance.

The following table presents the underwriting results and ratios for the U.S. Reinsurance segment for the periods indicated.

Years Ended December 31,2013/20122012/2011
(Dollars in millions)201320122011Variance% ChangeVariance% Change
Gross written premiums$1,809.7$1,310.7$1,346.8$499.038.1%$(36.1)-2.7%
Net written premiums1,807.11,306.51,344.3500.638.3%(37.8)-2.8%
Premiums earned$1,671.5$1,416.4$1,312.7$255.118.0%$103.77.9%
Incurred losses and LAE814.71,050.41,034.1(235.7)-22.4%16.31.6%
Commission and brokerage366.9350.6327.816.34.6%22.87.0%
Other underwriting expenses47.244.839.32.45.4%5.514.0%
Underwriting gain (loss)$442.8$(29.4)$(88.5)$472.2NM$59.1-66.8%
Point ChgPoint Chg
Loss ratio48.7%74.2%78.8%(25.5)(4.6)
Commission and brokerage ratio21.9%24.8%25.0%(2.9)(0.2)
Other underwriting expense ratio2.9%3.1%2.9%(0.2)0.2
Combined ratio73.5%102.1%106.7%(28.6)(4.6)
(NM, not meaningful)
(Some amounts may not reconcile due to rounding.)

Premiums. Gross written premiums increased by 38.1% to $1,809.7 million in 2013 from $1,310.7 million in 2012, primarily due to the impact of a large Florida quota share reinsurance contract, new business opportunities, particularly for contracts with catastrophe exposed risks and higher subject premium on casualty quota share business as rates began to rise in these markets. Excluding the impact of the Florida quota share reinsurance contract, gross written premiums increased 17.8%. Net written premiums increased by 38.3% to $1,807.1 million in 2013 compared to $1,306.5 million in 2012, which is in line with the increase in gross written premiums. Premiums earned increased 18.0% to $1,671.5 million in 2013 compared to $1,416.4 million in 2012. Premiums earned were only minimally impacted by the Florida quota share reinsurance contract that affected written premiums. The change in premiums earned was relatively comparable to net written premiums, excluding the Florida quota share reinsurance contract.

Gross written premiums decreased by 2.7% to $1,310.7 million in 2012 from $1,346.8 million in 2011, primarily due to the non-renewal of a large Florida quota share reinsurance contract, partially offset by increased new business and higher premium rates on renewals, particularly for contracts with catastrophe exposed risks. Net written premiums decreased by 2.8% to $1,306.5 million in 2012 compared to $1,344.3 million in 2011, which is in line with the decrease in gross written premiums. Premiums earned increased by 7.9% to $1,416.4 million in 2012 compared to $1,312.7 million in 2011. The variance difference between premiums earned and net written premiums is primarily attributable to the non-renewal of the large Florida quota share reinsurance contract, which had a larger negative impact on gross and net written premiums, increases in new business, rate increases on renewals, particularly for catastrophe exposed contracts and changes in the mix of business.

Incurred Losses and LAE. The following table presents the incurred losses and LAE for the U.S. Reinsurance segment for the periods indicated.

Years Ended December 31,
CurrentRatio %/PriorRatio %/TotalRatio %/
(Dollars in millions)YearPt ChangeYearsPt ChangeIncurredPt Change
2013
Attritional$781.846.7%$(36.7)-2.2%$745.244.5%
Catastrophes51.83.1%17.71.1%69.54.2%
Total segment$833.649.8%$(18.9)-1.1%$814.748.7%
2012
Attritional$706.849.9%$(27.2)-1.9%$679.648.0%
Catastrophes372.626.3%(1.8)-0.1%370.826.2%
Total segment$1,079.476.2%$(29.0)-2.0%$1,050.474.2%
2011
Attritional$720.354.9%$41.03.1%$761.358.0%
Catastrophes262.020.0%10.80.8%272.820.8%
Total segment$982.374.9%$51.83.9%$1,034.178.8%
Variance 2013/2012
Attritional$75.0(3.2)pts$(9.5)(0.3)pts$65.6(3.5)pts
Catastrophes(320.8)(23.2)pts19.51.2pts(301.3)(22.0)pts
Total segment$(245.8)(26.4)pts$10.10.9pts$(235.7)(25.5)pts
Variance 2012/2011
Attritional$(13.5)(5.0)pts$(68.2)(5.0)pts$(81.7)(10.0)pts
Catastrophes110.66.3pts(12.6)(0.9)pts98.05.4pts
Total segment$97.11.3pts$(80.8)(5.9)pts$16.3(4.6)pts
(Some amounts may not reconcile due to rounding.)

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.

Segment Expenses. Commission and brokerage expenses increased by 4.6% to $366.9 million in 2013 compared to $350.6 million in 2012. The year over year change was primarily due to the impact of the increase in premiums earned, partially offset by the impact of the termination of the large Florida quota share reinsurance contract in second quarter 2012 as well as the adoption of new accounting standards concerning the accounting for acquisition costs, which increased expenses in 2012. Segment other underwriting expenses increased to $47.2 million in 2013 from $44.8 million in 2012, primarily due to increased compensation expenses and higher premiums earned.

Commission and brokerage expenses increased by 7.0% to $350.6 million in 2012 compared to $327.8 million in 2011. These variances were primarily due to the increase in premiums earned and the effect on commissions resulting from the non-renewal of a Florida quota share contract. Segment other underwriting expenses increased to $44.8 million in 2012 from $39.3 million in 2011. These increases were primarily due to higher share-based compensation and employee benefit plan expenses.

International.

The following table presents the underwriting results and ratios for the International segment for the periods indicated.

Years Ended December 31,2013/20122012/2011
(Dollars in millions)201320122011Variance% ChangeVariance% Change
Gross written premiums$1,345.8$1,192.3$1,238.4$153.512.9%$(46.1)-3.7%
Net written premiums1,327.41,188.71,218.6138.711.7%(29.8)-2.4%
Premiums earned$1,289.3$1,214.8$1,244.5$74.56.1%$(29.7)-2.4%
Incurred losses and LAE675.4586.31,372.389.015.2%(786.0)-57.3%
Commission and brokerage295.9300.1311.0(4.2)-1.4%(10.9)-3.5%
Other underwriting expenses33.929.327.34.615.8%2.07.3%
Underwriting gain (loss)$284.2$299.1$(466.1)$(14.9)-5.0%$765.2-164.2%
Point ChgPoint Chg
Loss ratio52.4%48.3%110.3%4.1(62.0)
Commission and brokerage ratio22.9%24.7%25.0%(1.8)(0.3)
Other underwriting expense ratio2.7%2.4%2.2%0.30.2
Combined ratio78.0%75.4%137.5%2.6(62.1)
(Some amounts may not reconcile due to rounding.)

Premiums. Gross written premiums increased by 12.9% to $1,345.8 million in 2013 compared to $1,192.3 million in 2012, primarily due to growth in Latin and South America business. Net written premiums increased by 11.7% to $1,327.4 million in 2013 compared to $1,188.7 million in 2012, which is consistent with the increase in gross written premiums. Premiums earned increased 6.1% to $1,289.3 million in 2013 compared to $1,214.8 million in 2012. The change in premiums earned relative to net written premiums is primarily the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.

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. The following table presents the incurred losses and LAE for the International segment for the periods indicated.

Years Ended December 31,
CurrentRatio %/PriorRatio %/TotalRatio %/
(Dollars in millions)YearPt ChangeYearsPt ChangeIncurredPt Change
2013
Attritional$631.649.0%$(57.3)-4.4%$574.344.6%
Catastrophes104.48.1%(3.3)-0.3%101.17.8%
Total segment$736.057.1%$(60.6)-4.7%$675.452.4%
2012
Attritional$589.048.5%$(12.2)-1.0%$576.847.5%
Catastrophes16.61.4%(7.1)-0.6%9.50.8%
Total segment$605.649.9%$(19.3)-1.6%$586.348.3%
2011
Attritional$640.351.5%$(108.2)-8.7%$532.142.8%
Catastrophes845.367.9%(5.1)-0.4%840.267.5%
Total segment$1,485.6119.4%$(113.3)-9.1%$1,372.3110.3%
Variance 2013/2012
Attritional$42.60.5pts$(45.1)(3.4)pts$(2.5)(2.9)pts
Catastrophes87.86.7pts3.80.3pts91.67.0pts
Total segment$130.47.2pts$(41.3)(3.1)pts$89.04.1pts
Variance 2012/2011
Attritional$(51.3)(3.0)pts$96.07.7pts$44.74.7pts
Catastrophes(828.7)(66.5)pts(2.0)(0.2)pts(830.7)(66.7)pts
Total segment$(880.0)(69.5)pts$94.07.5pts$(786.0)(62.0)pts
(Some amounts may not reconcile due to rounding.)

Incurred losses and LAE increased by 15.2% to $675.4 million in 2013 compared to $586.3 million in 2012, representing 4.1 loss ratio points. Current year catastrophe losses were $104.4 million in 2013, due to the Canadian floods ($75.2 million) and Typhoon Fitow ($29.2 million). The current year catastrophe losses of $16.6 million in 2012 related primarily to Superstorm Sandy ($16.5 million). The current year attritional losses increased by $42.6 million primarily due to the increase in premiums earned as the current year attritional loss ratio was relatively flat period over period.

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.

Bermuda.

The following table presents the underwriting results and ratios for the Bermuda segment for the periods indicated.

Years Ended December 31,2013/20122012/2011
(Dollars in millions)201320122011Variance% ChangeVariance% Change
Gross written premiums$774.3$734.4$725.3$39.95.4%$9.11.3%
Net written premiums765.7733.8725.531.94.3%8.21.1%
Premiums earned$738.0$680.9$723.0$57.08.4%$(42.0)-5.8%
Incurred losses and LAE374.4408.2613.9(33.9)-8.3%(205.6)-33.5%
Commission and brokerage179.1184.4174.0(5.2)-2.8%10.35.9%
Other underwriting expenses34.730.626.34.013.2%4.316.4%
Underwriting gain (loss)$149.8$57.8$(91.2)$92.1159.4%$149.0-163.3%
Point ChgPoint Chg
Loss ratio50.7%60.0%84.9%(9.3)(24.9)
Commission and brokerage ratio24.3%27.1%24.1%(2.8)3.0
Other underwriting expense ratio4.7%4.4%3.6%0.30.8
Combined ratio79.7%91.5%112.6%(11.8)(21.1)
(Some amounts may not reconcile due to rounding.)

Premiums. Gross written premiums increased by 5.4% to $774.3 million in 2013 compared to $734.4 million in 2012, primarily due to continued growth of new business and increased premium on existing business written in our Bermuda and Ireland offices. Net written premiums increased by 4.3% to $765.7 million in 2013 compared to $733.8 million in 2012, which is consistent with the change in gross written premiums. Premiums earned increased 8.4% to $738.0 million in 2013 compared to $680.9 million in 2012. The change in premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.

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. The following table presents the incurred losses and LAE for the Bermuda segment for the periods indicated.

Years Ended December 31,
CurrentRatio %/PriorRatio %/TotalRatio %/
(Dollars in millions)YearPt ChangeYearsPt ChangeIncurredPt Change
2013
Attritional$408.155.3%$(56.1)-7.6%$352.047.7%
Catastrophes35.54.8%(13.1)-1.8%22.43.0%
Total segment$443.660.1%$(69.2)-9.4%$374.450.7%
2012
Attritional$403.059.2%$(17.8)-2.6%$385.256.6%
Catastrophes14.12.1%8.91.3%23.03.4%
Total segment$417.161.3%$(8.9)-1.3%$408.260.0%
2011
Attritional$420.158.0%$9.21.3%$429.459.3%
Catastrophes190.626.4%(6.1)-0.8%184.525.6%
Total segment$610.784.4%$3.10.5%$613.984.9%
Variance 2013/2012
Attritional$5.1(3.9)pts$(38.3)(5.0)pts$(33.2)(8.9)pts
Catastrophes21.42.7pts(22.0)(3.1)pts(0.6)(0.4)pts
Total segment$26.5(1.2)pts$(60.3)(8.1)pts$(33.9)(9.3)pts
Variance 2012/2011
Attritional$(17.1)1.2pts$(27.0)(3.9)pts$(44.2)(2.7)pts
Catastrophes(176.5)(24.3)pts15.02.1pts(161.5)(22.2)pts
Total segment$(193.6)(23.1)pts$(12.0)(1.8)pts$(205.6)(24.9)pts
(Some amounts may not reconcile due to rounding.)

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 increased by 5.9% to $184.4 million in 2012 compared to $174.0 million in 2011 reflecting higher contingent commissions in 2012. Segment other underwriting expenses increased to $30.6 million in 2012 compared to $26.3 million for the same period in 2011. The increases are primarily attributable to higher personnel benefit costs.

Insurance.

The following table presents the underwriting results and ratios for the Insurance segment for the periods indicated.

Years Ended December 31,2013/20122012/2011
(Dollars in millions)201320122011Variance% ChangeVariance% Change
Gross written premiums$1,268.7$1,073.1$975.6$195.618.2%$97.510.0%
Net written premiums1,086.2852.1820.5234.127.5%31.63.9%
Premiums earned$1,037.4$852.4$821.2$185.021.7%$31.33.8%
Incurred losses and LAE931.5700.3705.9231.233.0%(5.6)-0.8%
Commission and brokerage133.7117.6137.716.113.7%(20.1)-14.6%
Other underwriting expenses119.3103.089.516.315.8%13.515.1%
Underwriting gain (loss)$(147.0)$(68.5)$(111.9)$(78.6)114.8%$43.5-38.8%
Point ChgPoint Chg
Loss ratio89.8%82.2%86.0%7.6(3.8)
Commission and brokerage ratio12.9%13.8%16.8%(0.9)(3.0)
Other underwriting expense ratio11.5%12.0%10.8%(0.5)1.2
Combined ratio114.2%108.0%113.6%6.2(5.6)
(Some amounts may not reconcile due to rounding.)

Premiums. Gross written premiums increased by 18.2% to $1,268.7 million in 2013 compared to $1,073.1 million in 2012. This increase was primarily driven by California workers’ compensation, crop and non-standard auto business. Net written premiums increased by 27.5% to $1,086.2 million in 2013 compared to $852.1 million in 2012. The larger increase in net written premiums compared to gross written premiums is mainly due to less use of reinsurance, particularly on the crop business. Premiums earned increased 21.7% to $1,037.4 million in 2013 compared to $852.4 million in 2012. The change in premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.

Gross written premiums increased by 10.0% to $1,073.1 million in 2012 compared to $975.6 million in 2011. This increase was primarily driven by crop and primary A&H medical stop loss business, partially offset by the termination and runoff of several large casualty programs. Net written premiums increased by 3.9% to $852.1 million in 2012 compared to $820.5 million in 2011. The lower increase in net written premiums in comparison to gross written premiums is primarily attributable to a higher level of reinsurance employed for the crop business. Premiums earned increased 3.8% to $852.4 million in 2012 compared to $821.2 million in 2011. The change in premiums earned is relatively consistent with the increase in net written premiums.

Incurred Losses and LAE. The following table presents the incurred losses and LAE for the Insurance segment for the periods indicated.

Years Ended December 31,
CurrentRatio %/PriorRatio %/TotalRatio %/
(Dollars in millions)YearPt ChangeYearsPt ChangeIncurredPt Change
2013
Attritional$798.677.0%$131.912.7%$930.589.7%
Catastrophes2.30.2%(1.3)-0.1%1.00.1%
Total segment$800.977.2%$130.612.6%$931.589.8%
2012
Attritional$640.175.1%$53.56.3%$693.681.4%
Catastrophes6.70.8%-0.0%6.70.8%
Total segment$646.875.9%$53.56.3%$700.382.2%
2011
Attritional$641.478.2%$61.77.5%$703.185.7%
Catastrophes2.50.3%0.30.0%2.80.3%
Total segment$643.978.5%$62.07.5%$705.986.0%
Variance 2013/2012
Attritional$158.51.9pts$78.46.4pts$236.98.3pts
Catastrophes(4.4)(0.6)pts(1.3)(0.1)pts(5.7)(0.7)pts
Total segment$154.11.3pts$77.16.3pts$231.27.6pts
Variance 2012/2011
Attritional$(1.3)(3.1)pts$(8.2)(1.2)pts$(9.5)(4.3)pts
Catastrophes4.20.5pts(0.3)-pts3.90.5pts
Total segment$2.9(2.6)pts$(8.5)(1.2)pts$(5.6)(3.8)pts
(Some amounts may not reconcile due to rounding.)

Incurred losses and LAE increased by 33.0% to $931.5 million in 2013 compared to $700.3 million in 2012 mainly due to increases in current year attritional losses and higher unfavorable prior year development on attritional losses in 2013 compared to 2012. The current year attritional losses increased by $158.5 million primarily due to the impact of higher premiums earned and a higher current year attritional loss ratio on the crop book, which was impacted by a decline in corn commodity prices and lower yields in several of our key states. The prior year development on attritional losses was primarily related to workers’ compensation, construction liability and umbrella business. The construction liability and umbrella development related to programs that were discontinued several years ago. Current year catastrophe losses were $2.3 million in 2013, due to Canadian floods. The $6.7 million of current year catastrophe losses for 2012 were primarily due to Superstorm Sandy ($5.5 million).

Incurred losses and LAE decreased by 0.8% to $700.3 million in 2012 compared to $705.9 million in 2011. This was primarily due to a decrease of $9.5 million (4.3 points) in attritional losses resulting primarily from lower prior years’ losses in 2012 resulting from development on excess casualty and California workers’ compensation reserves, as well as a shift in the mix of business towards shorter-tail lines of business. This decrease was partially offset by a $4.2 million increase in current year catastrophe losses primarily due to Superstorm Sandy.

Segment Expenses Commission and brokerage increased by 13.7% to $133.7 million in 2013 compared to $117.6 million in 2012. The year over year increase was primarily driven by the growth in premiums earned, partially offset by the impact of the accounting change for acquisition costs, which had the impact of increasing expenses in 2012. Segment other underwriting expenses increased to $119.3 million in 2013 compared to $103.0 million for 2012. These increases were primarily the result of increased premiums earned and compensation costs.

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.

Mt. Logan Re.

The following table presents the underwriting results and ratios for the Mt. Logan Re segment for the year ended 2013. The initial reporting period for this segment began in the third quarter of 2013.

Years Ended December 31,2013/20122012/2011
(Dollars in millions)201320122011Variance% ChangeVariance% Change
Gross written premiums$20.2$-$-$20.2NM$-NM
Net written premiums18.4--18.4NM-NM
Premiums earned$17.3$-$-$17.3NM$-NM
Incurred losses and LAE4.4--4.4NM-NM
Commission and brokerage2.0--2.0NM-NM
Other underwriting expenses2.1--2.1NM-NM
Underwriting gain (loss)$8.8$-$-$8.8NM$-NM
Point ChgPoint Chg
Loss ratio25.4%--25.4-
Commission and brokerage ratio11.3%--11.3-
Other underwriting expense ratio12.1%--12.1-
Combined ratio48.8%--48.8-
(NM, not meaningful)
(Some amounts may not reconcile due to rounding.)

Premiums. Gross written premiums were $20.2 million in 2013. Net written premiums were $18.4 million in 2013, which is comparable to gross written premiums since the segment retains most of the business written. Premiums earned were $17.3 million in 2013. The change in premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.

Incurred Losses and LAE. The following table presents the incurred losses and LAE for the Mt. Logan Re segment for the periods indicated.

Years Ended December 31,
CurrentRatio %/PriorRatio %/TotalRatio %/
(Dollars in millions)YearPt ChangeYearsPt ChangeIncurredPt Change
2013
Attritional$3.319.4%$-0.0%$3.319.4%
Catastrophes1.06.0%-0.0%1.06.0%
Total segment$4.425.4%$-0.0%$4.425.4%
2012
Attritional$--$--$--
Catastrophes------
Total segment$--$--$--
2011
Attritional$--$--$--
Catastrophes------
Total segment$--$--$--
Variance 2013/2012
Attritional$3.319.4pts$--pts$3.319.4pts
Catastrophes1.06.0pts--pts1.06.0pts
Total segment$4.425.4pts$--pts$4.425.4pts
Variance 2012/2011
Attritional$--pts$--pts$--pts
Catastrophes--pts--pts--pts
Total segment$--pts$--pts$--pts
(Some amounts may not reconcile due to rounding.)

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.

Critical Accounting Policies

The following is a summary of the critical accounting policies related to accounting estimates that (1) require management to make assumptions about highly uncertain matters and (2) could materially impact the consolidated financial statements if management made different assumptions.

Loss and LAE Reserves. Our most critical accounting policy is the determination of our loss and LAE reserves. We maintain reserves equal to our estimated ultimate liability for losses and LAE for reported and unreported claims for our insurance and reinsurance businesses. Because reserves are based on estimates of ultimate losses and LAE by underwriting or accident year, we use a variety of statistical and actuarial techniques to monitor reserve adequacy over time, evaluate new information as it becomes known and adjust reserves whenever an adjustment appears warranted. We consider many factors when setting reserves including: (1) our exposure base and projected ultimate premiums earned; (2) our expected loss ratios by product and class of business, which are developed collaboratively by underwriters and actuaries; (3) actuarial methodologies which analyze our loss reporting and payment experience, reports from ceding companies and historical trends, such as reserving patterns, loss payments and product mix; (4) current legal interpretations of coverage and liability; (5) economic conditions; and (6) uncertainties discussed below regarding our liability for A&E claims. Our insurance and reinsurance loss and LAE reserves represent our best estimate of our ultimate liability. Actual losses and LAE ultimately paid may deviate, perhaps substantially, from such reserves. Our net income (loss) will be impacted in a period in which the change in estimated ultimate losses and LAE is recorded. See also ITEM 8, “Financial Statements and Supplementary Data” - Note 1 of Notes to the Consolidated Financial Statements.

It is more difficult to accurately estimate loss reserves for reinsurance liabilities than for insurance liabilities. At December 31, 2013, we had reinsurance reserves of $7,306.5 million and insurance loss reserves of $2,366.7 million, of which $323.1 million and $79.4 million, respectively, were loss reserves for A&E liabilities. A detailed discussion of additional considerations related to A&E exposures follows later in this section.

The detailed data required to evaluate ultimate losses for our insurance business is accumulated from our underwriting and claim systems. Reserving for reinsurance requires evaluation of loss information received from ceding companies. Ceding companies report losses to us in many forms dependent on the type of contract and the agreed or contractual reporting requirements. Generally, proportional/quota share contracts require the submission of a monthly/quarterly account, which includes premium and loss activity for the period with corresponding reserves as established by the ceding company. This information is recorded into our records. For certain proportional contracts, we may require a detailed loss report for claims that exceed a certain dollar threshold or relate to a particular type of loss. Excess of loss and facultative contracts generally require individual loss reporting with precautionary notices provided when a loss reaches a significant percentage of the attachment point of the contract or when certain causes of loss or types of injury occur. Our experienced claims staff handles individual loss reports and supporting claim information. Based on our evaluation of a claim, we may establish additional case reserves (ACRs) in addition to the case reserves reported by the ceding company. To ensure ceding companies are submitting required and accurate data, the Underwriting, Claim, Reinsurance Accounting and Internal Audit departments of the Company perform various reviews of our ceding companies, particularly larger ceding companies, including on-site audits.

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.

We use similar actuarial methodologies, such as expected loss ratio, chain ladder reserving methods and Borhuetter Ferguson, supplemented by judgment where appropriate, to estimate our ultimate losses and LAE for each exposure group. Although we use similar actuarial methodologies for both short tail and long tail lines, the faster reporting of experience for the short tail lines allows us to have greater confidence in our estimates of ultimate losses for short tail lines at an earlier stage than for long tail lines. As a result, we utilize, as well, exposure-based methods to estimate our ultimate losses for longer tail lines, especially for immature accident years. For both short and long tail lines, we supplement these general approaches with analytically based judgments. We cannot estimate losses from widespread catastrophic events, such as hurricanes and earthquakes, using traditional actuarial methods. We estimate losses for these types of events based on information derived from catastrophe models, quantitative and qualitative exposure analyses, reports and communications from ceding companies and development patterns for historically similar events. Due to the inherent uncertainty in estimating such losses, these estimates are subject to variability, which increases with the severity and complexity of the underlying event.

Our key actuarial assumptions contain no explicit provisions for reserve uncertainty nor do we supplement the actuarially determined reserves for uncertainty.

Our carried reserves at each reporting date are our best estimate of ultimate unpaid losses and LAE at that date. We complete detailed reserve studies for each exposure group annually for our reinsurance and insurance operations. The completed annual reinsurance reserve studies are “rolled forward” for each accounting period until the subsequent reserve study is completed. Analyzing the roll-forward process involves comparing actual reported losses to expected losses based on the most recent reserve study. We analyze significant variances between actual and expected losses and post adjustments to our reserves as warranted.

Given the inherent variability in our loss reserves, we have developed an estimated range of possible gross reserve levels. A table of ranges by segment, accompanied by commentary on potential and historical variability, is included in “Financial Condition - Loss and LAE Reserves”. The ranges are statistically developed using the exposure groups used in the reserve estimation process and aggregated to the segment level. For each exposure group, our actuaries calculate a range for each accident year based principally on two variables. The first is the historical changes in losses and LAE incurred but not reported (“IBNR”) for each accident year over time; the second is volatility of each accident year’s held reserves related to estimated ultimate losses, also over time. Both are measured at various ages from the end of the accident year through the final payout of the year’s losses. Ranges are developed for the exposure groups using statistical methods to adjust for diversification; the ranges for the exposure groups are aggregated to the segment level, likewise, with an adjustment for diversification. Our estimates of our reserve variability may not be comparable to those of other companies because there are no consistently applied actuarial or accounting standards governing such presentations. Our recorded reserves reflect our best point estimate of our liabilities and our actuarial methodologies focus on developing such point estimates. We calculate the ranges subsequently, based on the historical variability of such reserves.

Asbestos and Environmental Exposures. We continue to receive claims under expired insurance and reinsurance contracts asserting injuries and/or damages relating to or resulting from environmental pollution and hazardous substances, including asbestos. Environmental claims typically assert liability for (a) the mitigation or remediation of environmental contamination or (b) bodily injury or property damage caused by the release of hazardous substances into the land, air or water. Asbestos claims typically assert liability for bodily injury from exposure to asbestos or for property damage resulting from asbestos or products containing asbestos.

Our reserves include an estimate of our ultimate liability for A&E claims. Our A&E liabilities emanate from Mt. McKinley’s direct insurance business and Everest Re’s assumed reinsurance business. There are significant uncertainties surrounding our estimates of our potential losses from A&E claims. Among the uncertainties are: (a) potentially long waiting periods between exposure and manifestation of any bodily injury or property damage; (b) difficulty in identifying sources of asbestos or environmental contamination; (c) difficulty in properly allocating responsibility and/or liability for asbestos or environmental damage; (d) changes in underlying laws and judicial interpretation of those laws; (e) the potential for an asbestos or environmental claim to involve many insurance providers over many policy periods; (f) questions concerning interpretation and application of insurance and reinsurance coverage; and (g) uncertainty regarding the number and identity of insureds with potential asbestos or environmental exposure.

Due to the uncertainties discussed above, the ultimate losses attributable to A&E, and particularly asbestos, may be subject to more variability than are non-A&E reserves and such variation could have a material adverse effect on our financial condition, results of operations and/or cash flows. See also ITEM 8, “Financial Statements and Supplementary Data” - Notes 1 and 3 of Notes to the Consolidated Financial Statements.

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.

Premiums Written and Earned. Premiums written by us are earned ratably over the coverage periods of the related insurance and reinsurance contracts. We establish unearned premium reserves to cover the unexpired portion of each contract. Such reserves, for assumed reinsurance, are computed using pro rata methods based on statistical data received from ceding companies. Premiums earned, and the related costs, which have not yet been reported to us, are estimated and accrued. Because of the inherent lag in the reporting of written and earned premiums by our ceding companies, we use standard accepted actuarial methodologies to estimate earned but not reported premium at each financial reporting date. These earned but not reported premiums are combined with reported earned premiums to comprise our total premiums earned for determination of our incurred losses and loss and LAE reserves. Commission expense and incurred losses related to the change in earned but not reported premium are included in current period company and segment financial results. See also ITEM 8, “Financial Statements and Supplementary Data” - Note 1 of Notes to the Consolidated Financial Statements.

The following table displays the estimated components of earned but not reported premiums by segment for the periods indicated.

At December 31,
(Dollars in millions)201320122011
U.S. Reinsurance$336.0$246.6$308.2
International231.5211.0216.8
Bermuda207.8194.0196.9
Insurance---
Mt. Logan0.3--
Total$775.6$651.6$722.0
(Some amounts may not reconcile due to rounding.)

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.

FINANCIAL CONDITION

Cash and Invested Assets. Aggregate invested assets, including cash and short-term investments, were $16,596.5 million at December 31, 2013, an increase of $20.3 million compared to $16,576.2 million at December 31, 2012. This increase was primarily the result of $1,098.3 million of cash flows from operations, $258.9 million in fair value re-measurements, $143.0 million of subscription advances for third party investment into Mt. Logan Re, $87.5 million from external third party capital investment into Mt. Logan Re, $51.5 million from common share issuance under share based compensation plans, net of expense incurred, and $45.9 million in equity adjustments of our limited partnership investments, partially offset by $621.9 million paid for share repurchases, $467.2 million of pre-tax unrealized depreciation, $329.9 million paid to redeem junior subordinated debt securities, $106.7 million paid out in dividends to shareholders, $66.5 million of amortization bond premium, $54.2 million due to fluctuations in foreign currencies and $2.8 million of unsettled securities.

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.

For the portion needed to satisfy global outstanding liabilities, we generally invest in taxable and tax-preferenced fixed income securities with an average credit quality of Aa3. For the U.S. portion of this portfolio, our mix of taxable and tax-preferenced investments is adjusted periodically, consistent with our current and projected U.S. operating results, market conditions and our tax position. This global fixed maturity securities portfolio is externally managed by an independent, professional investment manager using portfolio guidelines approved by internal management.

Our global portfolio included $1,780.8 million of foreign government securities at December 31, 2013, of which $816.0 million were European sovereign securities. Approximately 51.8%, 21.4%, 6.6% and 5.4% of European sovereign securities represented securities held in the governments of the United Kingdom, France, Austria and the Netherlands, respectively. No other countries represented more than 5% of the European sovereign securities. We held no sovereign securities of Portugal, Italy, Ireland, Greece or Spain at December 31, 2013.

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 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. We receive annual audited financial statements for all of the limited partnerships which are prepared using fair value accounting in accordance with FASB guidance. 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.

The tables below summarize the composition and characteristics of our investment portfolio as of the dates indicated.

At December 31,
(Dollars in millions)20132012
Fixed maturities, market value$12,636.976.1%$13,141.779.3%
Fixed maturities, fair value19.40.1%41.50.2%
Equity securities, market value144.10.9%143.50.9%
Equity securities, fair value1,462.18.8%1,255.67.6%
Short-term investments1,214.27.3%860.45.2%
Other invested assets508.43.1%596.63.6%
Cash611.43.7%537.13.2%
Total investments and cash$16,596.5100.0%$16,576.2100.0%
(Some amounts may not reconcile due to rounding.)
At December 31,
20132012
Fixed income portfolio duration (years)3.23.0
Fixed income composite credit qualityAa3Aa3
Imbedded end of period yield, pre-tax3.2%3.5%
Imbedded end of period yield, after-tax2.8%3.0%

The following table provides a comparison of our total return by asset class relative to broadly accepted industry benchmarks for the periods indicated.

201320122011
Fixed income portfolio total return0.4%4.8%4.7%
Barclay's Capital - U.S. aggregate index-2.0%4.2%7.8%
Common equity portfolio total return22.4%13.8%2.7%
S&P 500 index32.4%16.0%2.1%
Other invested asset portfolio total return16.9%16.0%13.5%

The pre-tax equivalent total return for the bond portfolio was approximately 0.6%, 5.0% and 5.1%, respectively, for 2013, 2012 and 2011. The pre-tax equivalent return adjusts the yield on tax-exempt bonds to the fully taxable equivalent.

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.

As indicated above, there is a relatively large variation between the total return on our fixed income portfolio for the year ended December 31, 2011 versus the Barclay’s - U.S. aggregate index for the same period. One of the reasons is that the duration of our portfolio is much shorter than the duration of the index. Historically, our duration has been shorter than the index because we align our investment portfolio with our liabilities. In addition, we shortened our duration in anticipation of a reversing trend in interest rate movements. With interest rates continuing to decline in 2011, the index benefited from its longer duration; however, in the longer term, there will be a benefit from a reduced exposure to unrealized market valuation losses on our fixed income portfolio if interest rates rise. Our total return was more comparable to the index in 2013 and 2012 as interest rates remained fairly steady. The composition of the index is also different from our portfolio as we hold foreign securities to match our foreign liabilities, while the index is comprised of only U.S. securities.

Reinsurance Receivables.

Reinsurance receivables for both paid and recoverable on unpaid losses totaled $540.9 million and $659.1 million at December 31, 2013 and 2012, respectively. At December 31, 2013, $145.4 million, or 26.9%, was receivable from C.V. Starr; $95.3 million, or 17.6% was receivable from FCIC; $43.9 million, or 8.1%, was receivable from Transatlantic; $37.7 million, or 7.0% was receivable from Berkley; and $27.4 million, or 5.1%, was receivable from Munich Re. The receivable from C.V. Starr is fully collateralized by a trust agreement. No other retrocessionaire accounted for more than 5% of our receivables.

Loss and LAE Reserves. Gross loss and LAE reserves totaled $9,673.2 million and $10,069.1 million at December 31, 2013 and 2012, respectively.

The following tables summarize gross outstanding loss and LAE reserves by segment, classified by case reserves and IBNR reserves, for the periods indicated.

At December 31, 2013
CaseIBNRTotal% of
(Dollars in millions)ReservesReservesReservesTotal
U.S. Reinsurance$1,522.5$1,819.0$3,341.534.5%
International1,007.4686.51,694.017.5%
Bermuda885.31,166.32,051.521.2%
Insurance967.31,212.22,179.522.5%
Mt. Logan Re1.82.54.30.1%
Total excluding A&E4,384.34,886.59,270.895.8%
A&E250.3152.2402.54.2%
Total including A&E$4,634.6$5,038.6$9,673.2100.0%
(Some amounts may not reconcile due to rounding.)
At December 31, 2012
CaseIBNRTotal% of
(Dollars in millions)ReservesReservesReservesTotal
U.S. Reinsurance$1,538.6$2,082.6$3,621.236.0%
International1,121.5695.31,816.818.0%
Bermuda826.11,135.91,962.019.5%
Insurance1,098.11,128.12,226.222.1%
Mt. Logan Re---0.0%
Total excluding A&E4,584.35,041.99,626.295.6%
A&E265.8177.1442.94.4%
Total including A&E$4,850.1$5,219.0$10,069.1100.0%
(Some amounts may not reconcile due to rounding.)

Changes in premiums earned and business mix, reserve re-estimations, catastrophe losses and changes in catastrophe loss reserves and claim settlement activity all impact loss and LAE reserves by segment and in total.

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 for, and losses from, claim obligations will not increase in the future, possibly by a material amount. However, we believe that our existing reserves and reserving methodologies lessen the probability that any such increase would have a material adverse effect on our financial condition, results of operations or cash flows. In this context, we note that over the past 10 years, our calendar year operations have been affected by effects from prior period reserve re-estimates, ranging from a favorable $30.9 million in 2010, representing 0.4% of the net prior period reserves for the year in which the adjustment was made, to an unfavorable $249.4 million in 2004, representing 4.8% of the net prior period reserves for the year in which the adjustment was made.

We have included ranges for loss reserve estimates determined by our actuaries, which have been developed through a combination of objective and subjective criteria. Our presentation of this information may not be directly comparable to similar presentations of other companies as there are no consistently applied actuarial or accounting standards governing such presentations. Our recorded reserves are an aggregation of our best point estimates for approximately 200 reserve groups and reflect our best point estimate of our liabilities. Our actuarial methodologies develop point estimates rather than ranges and the ranges are developed subsequently based upon historical and prospective variability measures.

The following table below represents the reserve levels and ranges for each of our business segments for the period indicated.

Outstanding Reserves and Ranges By Segment (1)
At December 31, 2013
AsLowLowHighHigh
(Dollars in millions)ReportedRange % (2)Range (2)Range % (2)Range (2)
Gross Reserves By Segment
U.S. Reinsurance$3,341.5-12.2%$2,932.312.2%$3,750.6
International1,694.0-9.4%1,534.89.4%1,853.1
Bermuda2,051.5-9.7%1,851.99.7%2,251.2
Insurance2,179.5-15.3%1,845.815.3%2,513.1
Mt. Logan Re4.30.0%4.30.0%4.3
Total Gross Reserves (excluding A&E)9,270.8-8.9%8,446.28.9%10,095.4
A&E (All Segments)402.5-13.7%347.313.7%457.6
Total Gross Reserves$9,673.2-8.8%8,820.28.8%10,526.3
(Some amounts may not reconcile due to rounding.)
(1)There can be no assurance that reserves will not ultimately exceed the indicated ranges requiring additional income (loss) statement expense.
(2)Although totals are displayed for both the low and high range amounts, it should be noted that statistically the range of the total is not equal to the sum of the ranges of the segments.

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.

Additional losses, including those relating to latent injuries, and other exposures, which are as yet unrecognized, the type or magnitude of which cannot be foreseen by us or the reinsurance and insurance industry generally, may emerge in the future. Such future emergence, to the extent not covered by existing retrocessional contracts, could have material adverse effects on our future financial condition, results of operations and cash flows.

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.

Years Ended December 31,
(Dollars in millions)201320122011
Gross reserves$402.5$442.8$499.9
Reinsurance receivable(15.8)(17.1)(19.8)
Net reserves$386.7$425.7$480.2
(Some amounts may not reconcile due to rounding.)

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.

Ultimate loss projections for A&E liabilities cannot be accomplished using standard actuarial techniques. We believe that our A&E reserves represent our best estimate of the ultimate liability; however, there can be no assurance that ultimate loss payments will not exceed such reserves, perhaps by a significant amount.

Industry analysts use the “survival ratio” to compare the A&E reserves among companies with such liabilities. The survival ratio is typically calculated by dividing a company’s current net reserves by the three year average of annual paid losses. Hence, the survival ratio equals the number of years that it would take to exhaust the current reserves if future loss payments were to continue at historical levels. Using this measurement, our net three year asbestos survival ratio was 8.0 years at December 31, 2013. These metrics can be skewed by individual large settlements occurring in the prior three years and therefore, may not be indicative of the timing of future payments.

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 AND CAPITAL RESOURCES

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 $6,968.3 million at December 31, 2013 and $6,733.5 million at December 31, 2012. On March 25, 2013, Moody’s downgraded the Company and its subsidiaries, including the senior debt of Everest Reinsurance Holdings, Inc., by one level. While Moody’s believes that our profitability, fixed charge coverage and market position are very good, the rating agency concluded that our business franchise and diversity and predictability of earnings position us more appropriately with peers at the adjusted rating level. A.M. Best and Standard & Poor’s affirmed ratings for the Company and its subsidiaries on July 25, 2013 and May 23, 2013, respectively. 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.

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 May 15, 2013, our existing Board authorization to purchase up to 20 million of our shares was amended to authorize the purchase of up to 25 million shares. As of December 31, 2013, we had repurchased 20.4 million shares under this authorization.

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.

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.

For the portion needed to satisfy global outstanding liabilities, we generally invest in taxable and tax-preferenced fixed income securities with an average credit quality of Aa3. For the U.S. portion of this portfolio, our mix of taxable and tax-preferenced investments is adjusted periodically, consistent with our current and projected U.S. operating results, market conditions and our tax position. This global fixed maturity securities portfolio is externally managed by an independent, professional investment manager using portfolio guidelines approved by internal management.

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.

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 $1,098.3 million, $694.6 million and $717.7 million for the years ended December 31, 2013, 2012 and 2011, respectively. Additionally, these cash flows reflected net tax payments of $69.3 million and $59.8 million and a net tax refund of $44.5 million for the years ended December 31, 2013, 2012 and 2011, respectively and net catastrophe loss payments of $490.7 million, $551.3 million and $559.2 million for the years ended December 31, 2013, 2012 and 2011, respectively.

If disbursements for claims and benefits, policy acquisition costs and other operating expenses were to exceed premium inflows, cash flow from reinsurance and insurance operations would be negative. The effect on cash flow from insurance operations would be partially offset by cash flow from investment income. Additionally, cash inflows from investment maturities and dispositions, both short-term investments and longer term maturities are available to supplement other operating cash flows.

As the timing of payments for claims and benefits cannot be predicted with certainty, we maintain portfolios of long term invested assets with varying maturities, along with short-term investments that provide additional liquidity for payment of claims. At December 31, 2013 and 2012, we held cash and short-term investments of $1,825.6 million and $1,397.4 million, respectively. All of our short-term investments are readily marketable and can be converted to cash. In addition to these cash and short-term investments, at December 31, 2013, we had $1,067.8 million of available for sale fixed maturity securities maturing within one year or less, $5,740.7 million maturing within one to five years and $3,101.1 million maturing after five years. Our $1,606.2 million of equity securities are comprised primarily of publicly traded securities that can be easily liquidated. We believe that these fixed maturity and equity securities, in conjunction with the short-term investments and positive cash flow from operations, provide ample sources of liquidity for the expected payment of losses in the near future. We do not anticipate selling securities or using available credit facilities to pay losses and LAE but have the ability to do so. Sales of securities might result in realized capital gains or losses. At December 31, 2013 we had $241.5 million of net pre-tax unrealized appreciation, comprised of $414.7 million of pre-tax unrealized appreciation and $173.2 million of pre-tax unrealized depreciation.

Management expects annual positive cash flow from operations, which in general reflects the strength of overall pricing, to persist over the near term, absent any unusual catastrophe activity. In the intermediate and long term, our cash flow from operations will be impacted to the extent by which competitive pressures affect overall pricing in our markets and by which our premium receipts are impacted from our strategy of emphasizing underwriting profitability over premium volume.

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.

The Group Credit Facility requires Group to maintain a debt to capital ratio of not greater than 0.35 to 1 and to maintain a minimum net worth. Minimum net worth is an amount equal to the sum of $4,250.0 million plus 25% of consolidated net income for each of Group’s fiscal quarters, for which statements are available ending on or after January 1, 2012 and for which consolidated net income is positive, plus 25% of any increase in consolidated net worth during such period attributable to the issuance of ordinary and preferred shares, which at December 31, 2013, was $4,806.2 million. As of December 31, 2013, the Company was in compliance with all Group Credit Facility covenants.

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.

Effective August 15, 2011, Holdings entered into a new three year, $150.0 million unsecured revolving credit facility with a syndicate of lenders, replacing the August 23, 2006 five year senior revolving credit facility. Both the August 15, 2011 and August 23, 2006 revolving credit agreements, which have similar terms, are referred to as the “Holdings Credit Facility”. Citibank N.A. is the administrative agent for the Holdings Credit Facility. The Holdings Credit Facility may be used for liquidity and general corporate purposes. The Holdings Credit Facility provides for the borrowing of up to $150.0 million with interest at a rate selected by Holdings equal to either, (1) the Base Rate (as defined below) or (2) a periodic fixed rate equal to the Eurodollar Rate plus an applicable margin. The Base Rate means a fluctuating interest rate per annum in effect from time to time to be equal to the higher of (a) the rate of interest publicly announced by Citibank as its base rate, (b) 0.5% per annum above the Federal Funds Rate or (c) 1% above the one month LIBOR, in each case plus the applicable margin. The amount of margin and the fees payable for the Holdings Credit Facility depends upon Holdings’ senior unsecured debt rating.

The Holdings Credit Facility requires Holdings to maintain a debt to capital ratio of not greater than 0.35 to 1 and Everest Re to maintain its statutory surplus at $1,875.0 million plus 25% of future aggregate net income and 25% of future aggregate capital contributions after December 31, 2010, which at December 31, 2013, was $2,128.1 million. As of December 31, 2013, Holdings was in compliance with all Holdings Credit Facility covenants.

At December 31, 2013 and 2012, the Company had no outstanding short-term borrowings from the Holdings Credit Facility revolving credit line. The highest amount outstanding for the year ended December 31, 2013, was $40.0 million for the period from May 22, 2013 to July 24, 2013. There were no short-term borrowings outstanding for the year ended December 31, 2012. At December 31, 2013 and December 31, 2012, the Holdings Credit Facility had outstanding letters of credit of $0.9 million and $1.6 million, respectively.

Costs incurred in connection with the Group Credit Facility and the Holdings Credit Facility were $1.0 million and $2.9 million for December 31, 2013 and 2012, respectively.

On May 24, 2013, Holdings elected to redeem all of the outstanding $329.9 million of 6.2% junior subordinated debt securities. Funds to redeem the debt were from operating cash flows and $40.0 million of borrowings from Holdings Credit Facility, which was repaid on July 24, 2013.

Holdings $250.0 million of senior notes are due on October 15, 2014. These notes can either be retired with operating cash flows or refinanced, depending upon market conditions at the time of maturity.

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.

We focus on potential losses that could result from any single event, or series of events as part of our evaluation and monitoring of our aggregate exposures to catastrophic events. Accordingly, we employ various techniques to estimate the amount of loss we could sustain from any single catastrophic event or series of events in various geographic areas. These techniques range from deterministic approaches, such as tracking aggregate limits exposed in catastrophe-prone zones and applying reasonable damage factors, to modeled approaches that attempt to scientifically measure catastrophe loss exposure using sophisticated Monte Carlo simulation techniques that forecast frequency and severity of expected losses on a probabilistic basis.

No single universal model or group of models is currently capable of projecting the amount and probability of loss in all global geographic regions in which we conduct business. In addition, the form, quality and granularity of underwriting exposure data furnished by ceding companies is not uniformly compatible with the data requirements for our licensed models, which adds to the inherent imprecision in the potential loss projections. Further, the results from multiple models and analytical methods must be combined and interpolated to estimate potential losses by and across business units. Also, while most models have been updated to incorporate claim information from recent catastrophic events, catastrophe model projections are still inherently imprecise. In addition, uncertainties with respect to future climatic patterns and cycles add to the already significant uncertainty of loss projections from models using historic long term frequency and severity data.

Nevertheless, when combined with traditional risk management techniques and sound underwriting judgment, catastrophe models are a useful tool for underwriters to price catastrophe exposed risks and for providing management with quantitative analyses with which to monitor and manage catastrophic risk exposures by zone and across zones for individual and multiple events.

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.

From an enterprise risk management perspective, management sets limits on the levels of catastrophe loss exposure we may underwrite. The limits are revised periodically based on a variety of factors, including but not limited to our financial resources and expected earnings and risk/reward analyses of the business being underwritten.

Management estimates that the projected net economic loss from its largest 100-year event in a given zone represents approximately 11% of its projected 2014 shareholders’ equity. Economic loss is the PML exposure, net of third party reinsurance and the noncontrolling interests of Mt. Logan Re, 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.

Our catastrophe loss projections, segmented by risk zones, are updated quarterly and reviewed as part of a formal risk management review process.

We believe that our greatest worldwide 1 in 100 year exposure to a single catastrophic event is to a hurricane affecting the U.S. southeast coast, where we estimate we have a PML exposure, net of third party reinsurance and the noncontrolling interests of Mt. Logan Re, of $1,231.0 million. See also table under ITEM 1, “Business - Risk Management of Underwriting and Retrocession Arrangements”.

If such a single catastrophe loss were to occur, management estimates that the economic loss to us would be approximately $796.0 million. The estimate involves multiple variables, including which Everest entity would experience the loss, and as a result there can be no assurance that this amount would not be exceeded.

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.

Information Technology. Our information technology is a key component of our business operations and is supported by a team of knowledgeable professionals. The majority of our information technology platform is located at our service processing center in New Jersey but processing is performed at the office locations of our operating subsidiaries and branches. In addition, our main-frame processing is performed by a third party vendor at a separate location. We have implemented procedures that seek to ensure that our key business systems are protected (or secured) and data are backed up and stored at off-site locations so that they can be restored promptly if necessary. We have documented business continuity plans to provide uninterrupted services for minor service issues and disaster recovery plans with alternative secure data centers for broader outages.

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.

Despite these safeguards, a significant cyber incident, including system failure, security breach, disruption by malware or other damage could interrupt or delay our operations. This type of incident may result in a violation of applicable privacy and other laws. Management is not aware of a cybersecurity incident that has had a material impact on our operations.

Contractual Obligations. The following table shows our contractual obligations for the period indicated.

Payments due by period
Less thanMore than
(Dollars in millions)Total1 year1-3 years3-5 years5 years
5.40% Senior notes$250.0$250.0$-$-$-
6.6% Long term notes238.4---238.4
Interest expense (1)856.029.231.531.5763.8
Employee benefit plans62.117.53.94.436.3
Operating lease agreements83.511.624.321.226.4
Gross reserve for losses and LAE (2)9,673.22,413.13,767.01,210.32,282.9
Total$11,163.2$2,721.4$3,826.7$1,267.4$3,347.8
(Some amounts may not reconcile due to rounding.)
______________________________________________________________________
(1)Interest expense on 6.6% long term notes is assumed to be fixed through contractual term.
(2)Loss and LAE reserves represent our best estimate of losses from claim and related settlement costs. Both the amounts and timing of such payments are estimates, and the inherent variability of resolving claims as well as changes in market conditions make the timing of cash flows uncertain. Therefore, the ultimate amount and timing of loss and LAE payments could differ from our estimates.

The contractual obligations for senior notes and long term notes are the responsibility of Holdings. We have sufficient cash flow, liquidity, investments and access to capital markets to satisfy these obligations. Holdings generally depends upon dividends from Everest Re, its operating insurance subsidiary for its funding, capital contributions from Group or access to the capital markets. Our various operating insurance and reinsurance subsidiaries have sufficient cash flow, liquidity and investments to settle outstanding reserves for losses and LAE. Management believes that we, and each of our entities, have sufficient financial resources or ready access thereto, to meet all obligations.

Dividends.

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.

Application of Recently Issued Accounting Guidance.

Intangibles-Goodwill or Other. In September 2011, the 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.

Presentation of Comprehensive Income. In June 2011, FASB issued amendments to existing guidance to provide two alternatives for the presentation of comprehensive income. Components of net income and comprehensive income can either be presented within a single, continuous financial statement or be presented in two separate but consecutive financial statements. The Company has chosen to present the components of net income and comprehensive income in a single, continuous financial statement. The guidance is effective for reporting periods beginning after December 15, 2011. The Company implemented this guidance as of January 1, 2012. In February, 2013, the FASB issued an additional amendment for the presentation of amounts reclassified out of accumulated other comprehensive income by component. The Company implemented the proposed guidance as of January 1, 2013.

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 implemented this guidance prospectively 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 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.

Market Sensitive Instruments.

The SEC’s Financial Reporting Release #48 requires registrants to clarify and expand upon the existing financial statement disclosure requirements for derivative financial instruments, derivative commodity instruments and other financial instruments (collectively, “market sensitive instruments”). We do not generally enter into market sensitive instruments for trading purposes.

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.

The overall investment strategy considers the scope of present and anticipated Company operations. In particular, estimates of the financial impact resulting from non-investment asset and liability transactions, together with our capital structure and other factors, are used to develop a net liability analysis. This analysis includes estimated payout characteristics for which our investments provide liquidity. This analysis is considered in the development of specific investment strategies for asset allocation, duration and credit quality. The change in overall market sensitive risk exposure principally reflects the asset changes that took place during the period.

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.

The tables below display the potential impact of market value fluctuations and after-tax unrealized appreciation on our fixed maturity portfolio (including $1,214.2 million of short-term investments) for the period indicated based on upward and downward parallel and immediate 100 and 200 basis point shifts in interest rates. For legal entities with a U.S. dollar functional currency, this modeling was performed on each security individually. To generate appropriate price estimates on mortgage-backed securities, changes in prepayment expectations under different interest rate environments were taken into account. For legal entities with a non-U.S. dollar functional currency, the effective duration of the involved portfolio of securities was used as a proxy for the market value change under the various interest rate change scenarios.

Impact of Interest Rate Shift in Basis Points
At December 31, 2013
-200-1000100200
(Dollars in millions)
Total Market/Fair Value$14,628.1$14,264.1$13,870.5$13,458.9$13,045.0
Market/Fair Value Change from Base (%)5.5%2.8%0.0%-3.0%-6.0%
Change in Unrealized Appreciation
After-tax from Base ($)$640.8$333.2$-$(348.3)$(698.6)
Impact of Interest Rate Shift in Basis Points
At December 31, 2012
-200-1000100200
(Dollars in millions)
Total Market/Fair Value$14,788.1$14,417.9$14,043.5$13,645.7$13,228.2
Market/Fair Value Change from Base (%)5.3%2.7%0.0%-2.8%-5.8%
Change in Unrealized Appreciation
After-tax from Base ($)$627.5$315.5$-$(335.5)$(687.5)

We had $9,673.2 million and $10,069.1 million of gross reserves for losses and LAE as of December 31, 2013 and 2012, respectively. These amounts are recorded at their nominal value, as opposed to present value, which would reflect a discount adjustment to reflect the time value of money. Since losses are paid out over a period of time, the present value of the reserves is less than the nominal value. As interest rates rise, the present value of the reserves decreases and, conversely, as interest rates decline, the present value increases. These movements are the opposite of the interest rate impacts on the fair value of investments. While the difference between present value and nominal value is not reflected in our financial statements, our financial results will include investment income over time from the investment portfolio until the claims are paid. Our loss and loss reserve obligations have an expected duration of approximately 3.7 years, which is reasonably consistent with our fixed income portfolio. If we were to discount our loss and LAE reserves, net of ceded reserves, the discount would be approximately $1.1 billion resulting in a discounted reserve balance of approximately $8.1 billion, representing approximately 58.1% of the value of the fixed maturity investment portfolio funds.

Equity Risk. Equity risk is the potential change in fair and/or market value of the common stock, preferred stock and mutual fund portfolios arising from changing prices. Our equity investments consist of a diversified portfolio of individual securities and mutual funds, which invest principally in high quality common and preferred stocks that are traded on the major exchanges, and mutual fund investments in emerging market debt. The primary objective of the equity portfolio is to obtain greater total return relative to our core bonds over time through market appreciation and income.

The tables below display the impact on fair/market value and after-tax change in fair/market value of a 10% and 20% change in equity prices up and down for the period indicated.

Impact of Percentage Change in Equity Fair/Market Values
At December 31, 2013
(Dollars in millions)-20%-10%0%10%20%
Fair/Market Value of the Equity Portfolio$1,284.9$1,445.5$1,606.2$1,766.8$1,927.4
After-tax Change in Fair/Market Value$(223.4)$(111.7)$-$111.7$223.4
Impact of Percentage Change in Equity Fair/Market Values
At December 31, 2012
(Dollars in millions)-20%-10%0%10%20%
Fair/Market Value of the Equity Portfolio$1,119.2$1,259.1$1,399.1$1,539.0$1,678.9
After-tax Change in Fair/Market Value$(191.1)$(95.6)$-$95.6$191.1

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.

The tables below display the potential impact of a parallel and immediate 10% and 20% increase and decrease in foreign exchange rates on the valuation of invested assets subject to foreign currency exposure for the periods indicated. This analysis includes the after-tax impact of translation from transactional currency to functional currency as well as the after-tax impact of translation from functional currency to the U.S. dollar reporting currency.

Change in Foreign Exchange Rates in Percent
At December 31, 2013
(Dollars in millions)-20%-10%0%10%20%
Total After-tax Foreign Exchange Exposure$(378.9)$(189.5)$-$189.5$378.9
Change in Foreign Exchange Rates in Percent
At December 31, 2012
(Dollars in millions)-20%-10%0%10%20%
Total After-tax Foreign Exchange Exposure$(389.2)$(194.6)$-$194.6$389.2

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.

Because the equity index put option contracts meet the definition of a derivative, we report the fair value of these instruments in our consolidated balance sheets as a liability and record any changes to fair value in our consolidated statements of operations and comprehensive income (loss) as a net derivative gain (loss). Our financial statements reflect fair values for our obligations on these equity index put option contracts at December 31, 2013, of $35.4 million; even though it may not be likely that the ultimate settlement of these transactions would require a payment that would exceed the initial consideration received, or any payment at all.

As there is no active market for these instruments, the determination of their fair value is based on an industry accepted option pricing model, which requires estimates and assumptions, including those regarding volatility and expected rates of return.

The tables below display the impact of potential movements in interest rates and the equity indices, which are the principal factors affecting fair value of these instruments, looking forward from the fair value for the period indicated. As these are estimates, there can be no assurance regarding future market performance. The asymmetrical results of the interest rate and S&P 500 and FTSE 100 indices shift reflect that the liability cannot fall below zero whereas it can increase to its theoretical maximum.

Equity Indices Put Options Obligation – Sensitivity Analysis
(Dollars in millions)At December 31, 2013
Interest Rate Shift in Basis Points:-200-1000100200
Total Fair Value$61.3$46.7$35.4$26.8$20.3
Fair Value Change from Base (%)-73.1%-31.7%0.0%24.2%42.7%
Equity Indices Shift in Points (S&P 500/FTSE 100):-500/-2000-250/-10000250/1000500/2000
Total Fair Value$72.3$50.2$35.4$25.5$18.7
Fair Value Change from Base (%)-104.1%-41.7%0.0%28.1%47.1%
Combined Interest Rate /-200/-100/100/200/
Equity Indices Shift (S&P 500/FTSE 100):-500/-2000-250/-10000/0250/1000500/2000
Total Fair Value$112.0$64.3$35.4$18.8$9.6
Fair Value Change from Base (%)-216.2%-81.6%0.0%47.0%72.8%
Equity Indices Put Options Obligation – Sensitivity Analysis
(Dollars in millions)At December 31, 2012
Interest Rate Shift in Basis Points:-200-1000100200
Total Fair Value$129.0$101.4$79.5$62.1$48.4
Fair Value Change from Base (%)-62.3%-27.6%0.0%21.8%39.1%
Equity Indices Shift in Points (S&P 500/FTSE 100):-500/-2000-250/-10000250/1000500/2000
Total Fair Value$149.9$108.7$79.5$58.9$44.3
Fair Value Change from Base (%)-88.6%-36.8%0.0%25.9%44.3%
Combined Interest Rate /-200/-100/100/200/
Equity Indices Shift (S&P 500/FTSE 100):-500/-2000-250/-10000/0250/1000500/2000
Total Fair Value$219.1$135.1$79.5$44.8$24.4
Fair Value Change from Base (%)-175.7%-70.0%0.0%43.6%69.3%

Safe Harbor Disclosure.

This report contains forward-looking statements within the meaning of the U.S. federal securities laws. We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in the federal securities laws. In some cases, these statements can be identified by the use of forward-looking words such as “may”, “will”, “should”, “could”, “anticipate”, “estimate”, “expect”, “plan”, “believe”, “predict”, “potential” and “intend”. Forward-looking statements contained in this report include information regarding our reserves for losses and LAE, the adequacy of capital in relation to regulatory required capital, the adequacy of our provision for uncollectible balances, estimates of our catastrophe exposure, the effects of catastrophic events on our financial statements, the ability of Everest Re, Holdings, Holdings Ireland and Bermuda Re to pay dividends and the settlement costs of our specialized equity index put option contracts. Forward-looking statements only reflect our expectations and are not guarantees of performance. These statements involve risks, uncertainties and assumptions. Actual events or results may differ materially from our expectations. Important factors that could cause our actual events or results to be materially different from our expectations include those discussed under the caption ITEM 1A, “Risk Factors”. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

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