Everest Re’s corporate offices are located in approximately 230,500 square feet of leased office space in Liberty Corner, New Jersey. The Company’s other twelve locations occupy a total of approximately 83,700 square feet, all of which are leased. Management believes that the above described office space is adequate for its current and anticipated needs.
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.
Starting in the latter part of 2007, throughout 2008 and into 2009, there has been a significant slowdown in the global economy, which has negatively impacted the financial resources of the industry. Excessive availability and use of credit, particularly by individuals, led to increased defaults on sub-prime mortgages in the U.S. and elsewhere, falling values for houses and many commodities and contracting consumer spending. The significant increase in default rates negatively impacted the value of asset-backed securities held by both foreign and domestic institutions. The defaults have led to a corresponding increase in foreclosures, which have driven down housing values, resulting in additional losses on asset-backed securities. During the third and fourth quarters of 2008, credit markets deteriorated dramatically, evidenced by widening credit spreads and dramatically reduced availability of credit. Many financial institutions, including some insurance entities, experienced liquidity crises due to immediate demands for funds for withdrawals or collateral, combined with falling asset values and their inability to sell assets to meet the increased demands. As a result, several financial institutions have failed or been acquired at distressed prices, while others have received loans from the U.S. government to continue operations. The liquidity crisis significantly increased the spreads on fixed maturity securities and, at the same time, had a dramatic and negative impact on the stock markets around the world. The combination of losses on securities from failed or impaired companies combined with the decline in values of fixed maturity and equity securities resulted in significant declines in the capital bases of most insurance and reinsurance companies. While there was significant improvement in the financial markets during 2009, it is too early to predict the timing and extent of impact the capital deterioration and subsequent partial recovery will have on insurance and reinsurance market conditions.
The reinsurance industry has experienced a period of falling rates and volume, particularly in the casualty lines of business. Profit opportunities have become generally less available over time; however, the unfavorable trends appear to have abated somewhat. We are now seeing smaller rate declines, pockets of stability and some increases in some markets and for some coverages. Both the primary insurers and reinsurers incurred very significant investment and catastrophe losses during 2008 resulting in capital depletion and increased rating agency scrutiny. Conversely in 2009, the financial markets partially rebounded and catastrophe losses were low, resulting in improved industry capital levels. It is too early to gauge the market impacts from these capital accumulations.
Gross written premiums decreased by $260.3 million, or 8.2%, in 2008 compared to 2007, reflecting a decline of $146.5 million in our reinsurance business and $113.8 million in our insurance business. The decline in our reinsurance business was primarily attributable to continued competitive conditions in both the property and casualty sectors of the market, especially in the U.S., partially offset by strong renewals and higher rates in international markets. Insurance segment premiums were also lower, as conditions for workers’ compensation, public entity and contractors business became increasingly competitive, which reduced the volume of business that met our underwriting and pricing criteria. Net written premiums decreased by $397.6 million, or 19.2%, in 2008 compared to 2007. The decrease in gross written premiums in conjunction with the increase in cessions under the affiliated quota share agreement, contributed to the decline. Correspondingly, premiums earned decreased by $297.1 million, or 13.6%, in 2008 compared to 2007.
Net Investment Income. Net investment income decreased by 27.8% in 2009 compared to 2008, primarily due to approximately $747.0 million of transferred investments at the end of 2008 in conjunction with a loss portfolio transfer agreement with an affiliate, lower yields on new money and an increase in losses from our limited partnership investments that principally invest in public and non-public securities, both equity and debt. As a result, net pre-tax investment income, as a percentage of average invested assets, was 3.4% for 2009 compared to 4.5% for 2008.
Net investment income decreased by 10.7% in 2008 compared to 2007, primarily due to the decrease in short-term investment income from both lower rates and decreased holdings, diminished limited partnership investment income, particularly from limited partnerships which were principally invested in public equities and decreased income from reduced holdings in equity securities. Partially offsetting these decreases was an increase in income from fixed maturity securities. Pre-tax investment income as a percentage of average invested assets was 4.5% for 2008 compared to 4.9% for 2007.
Net Realized Capital Gains (Losses). We recorded net realized capital gains of $56.9 million, net realized capital losses of $489.2 million and net realized capital gains of $80.9 million, in 2009, 2008 and 2007, respectively. In 2009, we had an $80.3 million gain due to fair value re-measurements, which were partially offset by $17.9 million of net realized capital losses from sales and $5.5 million in other-than-temporary impairments on our available for sale fixed maturity securities. In 2008, we had $193.5 million of net realized capital losses from the sale of fixed maturity and equity securities as we realigned our investment portfolios, $221.2 million loss in fair value re-measurements and $74.5 million in other-than-temporary impairments. In 2007, we had $96.6 million in fair value re-measurements, partially offset by $11.7 million of net realized capital losses from sales and $4.0 million in other-than-temporary impairments on our fixed maturity securities.
Other Income (Expense). We recorded other income of $0.4 million and $57.9 million in 2009 and 2008, respectively, and other expense of $73.6 million in 2007. The variances were primarily due to changes in foreign currency exchange rates and the deferrals on retroactive reinsurance agreements with affiliates for the corresponding periods.
Incurred losses and LAE were lower by $42.0 million, or 2.8%, in 2008 compared to 2007 as increases in attritional prior years’ and catastrophe losses were more than offset by a reduction in A&E reserve
Catastrophe losses in 2008, at $202.4 million, were $129.2 million higher than in 2007, driven by Hurricanes Gustav and Ike and a major snowstorm in China. While 2008 ranks as one of the costliest years on record for insured natural catastrophe losses, our losses were generally in line with our modeled expected annual aggregate catastrophe losses as developed through our enterprise risk and catastrophe exposure management processes.
Commission, brokerage, taxes and fees decreased by $67.3 million, or 14.4%, in 2008 compared to 2007. This directly variable expense was influenced by the decline in net earned premiums, lower contingent commissions and increased cessions under the affiliated quota share agreement, partially offset by higher commission rates on new insurance programs.
Other underwriting expenses were $129.9 million in 2008 compared to $123.9 million in 2007. The increase is primarily due to higher compensation and benefits expense resulting from increased staff, primarily in the U.S. Insurance segment. Included in other underwriting expenses were corporate expenses of $5.6 million and $5.3 million for 2008 and 2007, respectively.
Interest, Fees and Bond Issue Cost Amortization Expense. Interest and other expense was $70.9 million and $79.0 million for 2009 and 2008, respectively. The decrease, period over period, was primarily due to the partial repurchase of our long term subordinated notes in March 2009.
Interest and other expense was $79.0 million and $91.1 million for 2008 and 2007, respectively. The decrease was primarily due to the acceleration of amortization of the bond issue costs for the junior subordinated debt securities, which were retired in November, 2007, with no such expense in 2008. In addition, the interest reduction on the retired junior subordinated notes was partially offset by the interest on the new long term notes.
Income Tax Expense (Benefit). We had an income tax expense of $129.4 million in 2009 and an income tax benefit of $134.7 million in 2008. The period over period variance was primarily due to the increase in pre-tax net income in 2009 versus pre-tax net losses in 2008. We had an income tax expense of $100.1 million in 2007, primarily due to income from operations and net realized gains for the period. Our income tax is primarily a function of the statutory tax rate coupled with the impact from tax-preferenced investment income.
Our net loss was $124.8 million in 2008 compared to net income of $304.2 million in 2007. This decrease was primarily driven by after-tax net realized capital losses and increased catastrophe losses in 2008 compared to after-tax net realized capital gains and fewer catastrophe losses in 2007.
Net investment income decreased 10.7% to $363.1 million in 2008 from $406.6 million in 2007, primarily due to the decrease in short-term investment income from both lower rates and decreased holdings, diminished limited partnerships’ investment income, particularly from limited partnerships which were principally invested in public equity securities, and decreased dividend income from reduced holdings in equity securities. Partially offsetting these decreases was an increase in fixed maturity securities income.
Net realized capital gains were $56.9 million and net realized capital losses were $489.2 million in 2009 and 2008, respectively, compared to $80.9 million of net realized capital gains in 2007. In 2009, we recorded an $80.3 million gain in fair value re-measurements, partially offset by $17.9 million of net realized capital losses from sales and $5.5 million in other-than-temporary impairments on our available for sale fixed maturity securities. In contrast, in 2008, we recorded $221.2 million in losses due to fair value re-measurements, primarily on equity securities as a result of the global financial markets credit crisis, $193.5 million of losses from sales and $74.5 million of other-than-temporary impairments. In 2007, net realized capital gains included $96.6 million of fair value re-measurements, partially offset by $11.7 million of net realized capital losses from sales and $4.0 million in other-than-temporary impairments on our available for sale fixed maturity securities.
Incurred Losses and LAE. The following table presents the incurred losses and LAE for the U.S. Reinsurance segment for the periods indicated.
Incurred losses were $76.9 million (14.0 points) lower in 2008 compared to 2007, primarily due to no reserve adjustments in 2008 for A&E losses, which experienced $266.4 million adverse development in 2007. Partially offsetting the decrease were catastrophe losses, principally from Hurricanes Gustav and Ike and unfavorable reserve development on prior years’ losses for 2008 compared to favorable development in 2007.
Segment Expenses. Commission and brokerage expenses decreased 11.0% to $142.1 million in 2009 compared to $159.7 million in 2008, primarily due to the change in the mix and type of business written and the increased cessions under the affiliated quota share agreement. Segment other underwriting expenses were $36.2 million and $32.2 million in 2009 and 2008, respectively. The increase was due to growth in staff and related benefits.
The following table presents the underwriting results and ratios for the U.S. Insurance segment for the periods indicated.
Gross written premiums decreased by 12.9% to $771.8 million in 2008 compared to $885.6 million for 2007. Conditions for workers’ compensation, contractors and public entity business were increasingly competitive, which reduced the volume of business that met our underwriting and pricing criteria. A little less than half of the shortfall compared to last year was from the C.V. Starr program, where we lost some public entity accounts because we did not match market pricing and terms. In addition, the $76.3 million of gross written premium we assumed on a new program in 2007 did not recur in 2008. Net written premiums decreased by 16.9% to $398.7 million in 2008 compared to $479.8 million for 2007. The decrease in net written premiums was larger than the decline in gross written premiums primarily due to increased reinsurance purchases on select larger new programs and an increase in the ceding percentage for 2008 in the affiliated quota share agreement. Premiums earned decreased 2.7% to $482.7 million in 2008 compared to $496.2 million for 2007, as a result of timing.
Segment Expenses. Commission and brokerage expenses decreased by 56.3% to $29.8 million in 2009 compared to $68.2 million in 2008. The variance was primarily due to the change in the mix of business written and additional cessions under the affiliated quota share agreement. Segment other underwriting expenses were $74.6 million and $64.3 million for 2009 and 2008, respectively. The increase was primarily due to costs associated with the expanded infrastructure in support of expanding our direct lines of business.
Incurred losses and LAE decreased by 1.7% to $116.3 million in 2008 compared to $118.3 million in 2007, primarily due to lower catastrophe losses in 2008 as compared to 2007, partially offset by slightly higher attritional losses in 2008.
Segment Expenses. Commission and brokerage expenses remained flat at $40.9 million for 2009 compared to 2008 despite the decline in earned premiums, primarily due to the mix in business, period over period. Segment other underwriting expenses were $8.7 million and $8.1 million for 2009 and 2008, respectively.
Gross written premiums increased by 12.3% to $904.7 million in 2008 compared to $805.9 million in 2007. Due to the strong financial strength ratings in 2008, we obtained increased participations on treaties in most regions. As well, we benefited from new business writings as some insurers sought to increase the financial strength ratings of their reinsurance panels. In addition, we obtained some preferential signings including preferential terms and conditions, and benefited from higher rates in some markets. Premiums written through the Miami and New Jersey offices increased by $106.0 million (22.5%), the Asian branch increased by $24.2 million (14.6%), while premiums for the Canadian branch decreased by $31.8 million (18.7%). Net written premiums decreased by 2.5% to $539.1 million in 2008 compared to $553.0 million in 2007, primarily due to the increased cessions under the affiliated quota share agreement. Premiums earned decreased by 2.3% to $545.6 million in 2008 compared to $558.2 million in 2007, generally consistent with the decrease in net written premiums.
Incurred losses and LAE decreased by 9.2% to $333.2 million in 2009 compared to $367.1 million in 2008. Fluctuations in the current year attritional loss ratio between 2009 and 2008 were the result of changes in the mix of business written coupled with the changes in ceding percentages from the affiliated quota share agreements. In addition, the segment had lower 2009 current year catastrophe losses. Offsetting the decrease was unfavorable prior years’ loss development in 2009 compared to favorable development in 2008, which had a 4.1 point impact on the loss ratio.
Incurred losses and LAE increased by 8.1% to $367.1 million in 2008 compared to $339.7 million in 2007. The segment loss ratio increased by 6.4 points for 2008 compared to 2007, primarily due to higher attritional losses in 2008 compared to 2007, partially offset by lower catastrophe losses.
Segment Expenses. Commission and brokerage expenses increased 1.5% to $131.7 million in 2009 compared to $129.7 million in 2008. The increase was primarily due to the growth in premiums earned in conjunction with the blend of business mix. Segment other underwriting expenses were $23.1 million and $19.8 million for 2009 and 2008, respectively.