In light of our 2005 catastrophe experience, we have re-examined our risk management practices and concluded that our control framework operated generally as intended. We rebalanced our property portfolio, particularly within peak catastrophe zones, including the Southeast U.S., Mexico and Gulf of Mexico. This effort has enabled us to benefit from market dislocations by carefully shifting the mix of our writings toward the most profitable classes, lines, customers and territories and by enhancing our portfolio balance and diversification.
Premiums. Gross written premiums decreased by $30.9 million, or 1.0%, in 2007 compared to 2006, reflecting a decline of $50.2 million in the worldwide reinsurance business, partially offset by an increase of $19.3 million in the U.S. insurance business. Net written premiums decreased by $217.4 million, or 9.5%, in 2007 compared to 2006, due to the change in the mix of our program business and the resulting change in reinsurance. Net premiums earned decreased by $68.3 million, or 3.0%, in 2007 compared to 2006. The 3.0% decrease in net premiums earned relative to the 9.5% decrease in net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas net written premiums are reflected at the initiation of the coverage period.
Gross and net written premiums declined by 4.6% ($153.9 million) and 4.4% ($105.4 million), respectively, for 2006 compared to 2005, while net premiums earned declined by 7.4% ($178.9 million) in 2006 compared to 2005. The decrease in full year net premiums earned was primarily due to the decline in the U.S. Insurance segment of 9.8%, reflective of the reduction in credit business from an auto loan insurance program in run-off and continued reductions in the California workers’ compensation writings due to competitive market conditions. In addition, net premiums earned for the worldwide reinsurance segments in the aggregate decreased by 6.5% for 2006, reflecting a significant return premium for a Florida property quota share contract cancelled in 2006, the absence of sizable reinstatement premiums triggered in 2005 from severe catastrophic events, as well as the exercise of continued underwriting discipline which emphasizes potential profitability over volume.
Net Investment Income. Net investment income increased by 9.2% in 2007 compared to 2006, primarily due to the growth in invested assets. The growth in invested assets was principally driven by the $400.0 million of long term note issuance and $151.9 million of operating cash flows, partially offset by the redemption of $216.5 million of junior subordinated debt securities. The average pre-tax investment portfolio yield for 2007 was 4.9% compared to 4.8% for 2006.
Net Realized Capital Gains. Net realized capital gains were $80.9 million, $35.0 million and $64.6 million for 2007, 2006 and 2005, respectively. The increase in 2007 is primarily attributable to our adoption on January 1, 2007 of FAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment to FASB Statement No. 115” (“FAS 159”) for our actively managed equity security investment portfolio and equity shares of our parent. In 2007 we recorded $96.6 million of net realized capital gains due to fair value re-measurements. Other than fair value adjustments, realized capital gains and losses are mainly the result of normal portfolio management activities.
Incurred Losses and Loss Adjustment Expenses. The following table presents our incurred losses and loss and loss adjustment expenses (“LAE”) for the periods indicated.
Incurred losses and LAE decreased by $645.7 million, or 29.3% in 2006 compared to 2005, due to significantly reduced current year catastrophe losses and a reduction in current year attritional losses, partially offset by increased prior years reserve development on catastrophe and A&E losses. Catastrophe losses were $833.0 million in 2005, related principally to aggregate estimated losses from Hurricanes Katrina, Rita and Wilma.
Commission, Brokerage, Taxes and Fees. Commission, brokerage and tax expenses increased by $27.4 million, or 6.3% in 2007 compared to 2006. An increase in ceding commissions due to market conditions and higher commissions on new insurance programs were the principal drivers in this directly variable expense.
Commission, brokerage and tax expenses decreased by $74.9 million, or 14.6% in 2006 compared to 2005. The 7.4% decline in earned premiums in 2006 compared to 2005 was the principal driver of the decrease.
Other Underwriting Expenses. Other underwriting expenses for 2007 increased by $25.1 million, or 25.5%, compared to 2006, primarily due to higher compensation and benefits expense and an increased staff count, primarily in the U.S. Insurance segment. Included in other underwriting expenses were corporate expenses, which are expenses that are not allocated to segments, of $5.3 million for 2007 and $4.5 million for 2006.
Interest expense was $69.7 million and $74.2 million for 2006 and 2005, respectively. The decrease is primarily due to the retirement on March 15, 2005 of the 8.5% senior notes issued on March 14, 2000.
Income Tax Expense (Benefit). Our income tax expense was $100.1 million, which represented a 24.8% effective tax rate for 2007 compared to $117.1 million, which represented a 26.0% effective tax rate for 2006. The decrease in the effective tax rate is principally due to the decrease in pre-tax income with comparable tax-preferenced income. The Internal Revenue Service has challenged our foreign exchange treatment, and although we believe we have a strong chance of prevailing on this issue, we have provided for the potential additional tax for all years still open for examination. Aside from such discrete items, our income tax expense is primarily a function of the statutory tax rate, coupled with the impact from tax-preferenced investment income.
Our income tax expense was $117.1 million, which represented a 26.0% effective tax rate for 2006 compared to an income tax benefit of $70.2 million, which represented a 107.2% effective tax rate for 2005. The increased tax expense was primarily due to the significant change in pre-tax income in 2006 compared to the 2005 pre-tax loss as a result of the large catastrophe losses.
Our combined ratio decreased by 22.9 points to 93.2% in 2006 compared to 116.1% in 2005, reflective of the lower catastrophe and attritional losses.
Stockholder's equity increased by $349.1 million to $2,567.5 million in 2007 from $2,218.4 million in 2006, principally as a result of the $304.2 million of net income generated for the period.
Net investment income increased by 9.2% to $406.6 million in 2007 from $372.4 million in 2006, principally reflecting a growth in invested assets to $9.0 billion at December 31, 2007 from $8.5 billion at December 31, 2006. The asset growth emanated largely from positive cash flow from operations and the net proceeds from debt issuance and redemption.
Net investment income increased by 14.5% to $372.4 million in 2006 from $325.2 million in 2005, primarily reflecting the growth in invested assets to $8.5 billion at December 31, 2006 from $7.9 billion at December 31, 2005. In addition, growth in limited partnership income of $31.1 million contributed to the increase in net investment income period over period.
These segments are managed in a coordinated fashion 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.
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 claim experience and trends related to prior periods. Such re-evaluations are recorded in incurred losses in the period in which the re-evaluation is made.
Premiums. Gross written premiums decreased by 10.7% to $1,193.5 million in 2007 from $1,336.7 million in 2006, primarily due to a $202.6 million (37.9%) decrease in treaty casualty volume and a $70.5 million (32.7%) decrease in facultative volume, partially offset by a $126.8 million (21.6%) increase in treaty property volume. The increase in treaty property writings emanated principally from new quota share treaties. The more competitive environment for the U.S. casualty business resulted in reduced opportunities to write this business profitably. Net written premiums decreased by 13.9% to $854.8 million in 2007 compared to $992.8 million in 2006, primarily due to the decrease in gross written premiums. Net premiums earned decreased by 3.9% to $939.7 million for 2007 compared to $978.1 million for 2006. The change in net 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 decreased by 3.6% to $1,336.7 million in 2006 from $1,386.2 million in 2005, primarily due to a $72.7 million (12.0%) decrease in treaty casualty volume, partially offset by a $16.4 million (2.9%) increase in treaty property volume and an $11.6 million (5.7%) increase in facultative volume. Net written premiums decreased by 6.0% to $992.8 million in 2006 compared to $1,055.8 million in 2005, primarily due to the decrease in gross written premiums.Net premiums earned decreased by 9.5% to $978.1 million for 2006 compared to $1,080.5 million for 2005. The change in net 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.
Premiums. Gross written premiums increased by 2.2% to $885.6 million for 2007 from $866.3 million for 2006. The increase was primarily the result of a new program we assumed late in 2007 for approximately $76 million in gross written premium. Absent this new program gross written premiums would have decreased due to the further decline in our workers’ compensation and contractors liability writings in response to increased competition. Net written premiums decreased by 18.8% to $479.8 million for 2007 compared to $591.2 million for 2006, as our retention level decreased. Net premiums earned decreased 13.6% to $496.2 million for 2007 from $574.0 million for 2006. The change in net premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are reflected at the initiation of the coverage period.
Gross written premiums decreased by 7.1% to $866.3 million for 2006 from $932.5 million for 2005. The decrease was primarily the result of declines in our workers’ compensation and run-off of an auto loan credit insurance program. Net written premiums decreased by 4.5% to $591.2 million for 2006 compared to $618.8 million for 2005, primarily due to the decrease in gross written premiums. Net premiums earned decreased by 9.8% to $574.0 million for 2006 from $636.7 million for 2005. The change in net premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are reflected at the initiation of the coverage period.
The adverse development in 2007 was the result of $60 million of adverse reserve run-off on a canceled auto loan credit insurance program, partially offset by favorable development on the remainder of the reserves. The 2007 accident year loss ratio was 72.7%, which was 11.0 points lower than in 2006. The 2006 accident year ratio was negatively impacted by 14.7 points due to the auto loan credit insurance program referenced above.
Commission and brokerage expenses decreased 22.3% to $72.7 million for 2006 from $93.6 million in 2005, principally due to a decrease in written and earned premiums. Segment other underwriting expenses for 2006 decreased to $48.9 million as compared to $51.7 million for 2005.
Premiums. Gross written premiums increased by 7.5% to $270.1 million for 2007 from $251.2 million for 2006. This decrease was the result of a $36.9 million (58.7%) increase in marine writings and a $12.2 million (14.7%) increase in A&H writings, partially offset by a $24.6 million (34.9%) decrease in surety writings and a $5.7 million (16.5%) decrease in aviation writings. The increased marine premium growth emanated from growth in existing quota share business as well as new quota share contracts. We continued to decrease our aviation and surety writings in response to more competitive market conditions. Net written premiums increased by 6.3% to $185.4 million for 2007 compared to $174.4 million for 2006, as a result of the increase in gross written premiums. Net premiums earned increased by 4.9% to $184.9 million for 2007 compared to $176.3 million for 2006, generally in line with the growth in net written premiums. The change in net premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are reflected at the initiation of the coverage period.
Gross written premiums decreased by 20.2% to $251.2 million for 2006 from $314.6 million for 2005. This decrease was the result of a $53.2 million (39.0%) decrease in A&H writings, a $14.8 million (19.0%) decrease in marine writings and an $8.9 million (20.5%) decrease in aviation writings, partially offset by a $13.4 million (23.5%) increase in surety writings. Net written premiums decreased by 21.6% to $174.4 million for 2006 compared to $222.5 million for 2005, due to the decrease in gross written premiums. Net premiums earned decreased by 21.5% to $176.3 million for 2006 compared to $224.6 million for 2005, generally in line with the decline in net written premiums.
Commission and brokerage decreased by 19.2% to $44.9 million in 2006 from $55.6 million in 2005 primarily due to the reduction in premiums earned. Segment other underwriting expenses decreased by 2.9% to $6.6 million for 2006 from $6.8 million for 2005.
Premiums. Gross written premiums increased by 10.1% to $805.9 million for 2007 from $731.7 million for 2006. Approximately half of this increase was attributable to the impact of other currencies strengthening against the U.S. dollar. We wrote reinsurance contracts in multiple currencies and as these currencies strengthened and were converted to U.S. dollars for financial reporting, they converted to higher dollar values. Business written through the Miami and New Jersey offices increased by $35.0 million (8.0%), business written through the Asian branch increased by $22.3 million (15.6%) and business written through the Canadian branch increased by $17.9 million (11.8%). We have experienced strong fundamental growth in geographic areas where economic growth and demand for reinsurance is strong. Net written premiums increased by 4.0% to $553.0 million for 2007 compared to $531.8 million for 2006, primarily as a result of the increase in gross written premiums. Net premiums earned increased by 7.6% to $558.2 million for 2007 compared to $518.8 million for 2006. The change in net premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are reflected at the initiation of the coverage period.
Commission and brokerage expense increased by 13.0% to $118.1 million for 2006 from $104.5 million in 2005 primarily driven by the increase in premiums earned. Segment other underwriting expenses increased by 9.5% to $13.8 million for 2006 compared to $12.6 million for 2005.
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 our provision for uncollectible balances, estimates of our catastrophe exposure, the effects of catastrophic events on our financial statements and the ability of our subsidiaries to pay dividends. 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.