Everest Re’s corporate offices are located in approximately 203,800 square feet of leased office space in Liberty Corner, New Jersey. The Company’s other thirteen locations occupy a total of approximately 76,000 square feet, all of which are leased. Management believes that the above described office space is adequate for its current and anticipated needs.
We compete in the U.S. 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.
During the latter part of 2007 and throughout 2008, there has been a significant slowdown in the global economy. 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 the asset-backed securities. During the third and fourth quarters of 2008, the 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
The reinsurance industry has experienced a period of falling rates and volume. 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. As a result of very significant investment and catastrophe losses incurred by both primary insurers and reinsurers over the past year, but principally in the most recent six months, industry-wide capital has declined and rating agency scrutiny has increased. There is an expectation that given the rate softening that has occurred over the past several quarters, the industry-wide decline in capital combined with volatile and unreceptive markets and a looming recession, will lead to a hardening of insurance and reinsurance marketplace rates, terms and conditions. It is too early to gauge the extent of hardening, if any, that will occur; however, it appears that much of the redundant capital has been wrung out of the industry, and the stage is set for firmer markets.
January 2009, renewal rates, particularly for property catastrophes and retrocessional covers and in international markets were generally firmer compared to a year ago.
We monitor and evaluate our overall performance based upon financial results. The following table displays a summary of the consolidated net (loss) income, ratios and stockholder’s equity for the periods indicated:
Premiums. 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 equity 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 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 fixed maturity securities income. 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 (Losses) Gains. Net realized capital losses were $489.2 million for 2008, while in 2007 and 2006 we had net realized capital gains of $80.9 million and $35.0 million, respectively.
Net realized gains in 2007 consisted of $96.6 million in changes in fair value of the equity securities and other invested asset investment portfolios, partially offset by $11.7 million of losses from sales of equity and fixed maturity securities and $4.0 million of other-than-temporary impairments of the fixed maturity securities. Net realized gains in 2006 were the result of sales from equity securities of $26.6 million and fixed maturity securities of $8.4 million.
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 period over period. Prior years’ attritional losses increased $135.3 million, principally as a result of $85.3 million of development on loss reserves for a run-off auto loan credit insurance program.
Commission, Brokerage, Taxes and Fees. 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. Other underwriting expenses for 2008 were $129.9 million compared to $123.9 million for 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, which are expenses that are not allocated to segments, of $5.6 million and $5.3 million for 2008 and 2007, respectively.
Income Tax (Benefit) Expense. Our income tax was a benefit of $134.7 million for 2008, principally as a result of net realized capital losses due to fair value re-measurements, other-than-temporary impairments and losses on sales of public equity securities. We had income tax expense of $100.1 million and $117.1 million for 2007 and 2006, respectively, primarily due to income from operations and net realized capital gains in both periods. Our income tax benefit/expense is primarily a function of the statutory tax rate reduced by the impact of tax-preferenced investment income.
Our combined ratio increased by 3.1 points to 96.3% in 2007 compared to 93.2% in 2006, principally driven by the 1.9 point increase in the commission and brokerage ratio and the 1.3 point increase in the other underwriting expense ratio.
Net investment income increased 9.2% to $406.6 million in 2007 from $372.4 million in 2006, primarily due to a growth in invested assets to $9.0 billion at December 31, 2007 from $8.5 billion at December 31, 2006. The invested asset growth emanated largely from continued positive cash flow from operations and the net proceeds from debt issuance and redemption.
The following table presents the composition of our net realized capital (losses) gains for the periods indicated:
Through our subsidiaries, we operate in four segments: U.S. Reinsurance, U.S. Insurance, Specialty Underwriting and International. The U.S. Reinsurance operation writes property and casualty reinsurance, on both a treaty and facultative basis, through reinsurance brokers, as well as directly with ceding companies within the U.S. The U.S. Insurance operation writes property and casualty insurance primarily through general agents and surplus lines brokers within the U.S. The Specialty Underwriting operation writes A&H, marine, aviation and surety business within the U.S. and worldwide through brokers and directly with ceding companies. The International operation writes non-U.S. property and casualty reinsurance through Everest Re’s branches in Canada and Singapore and offices in Miami and New Jersey.
Incurred losses were lower by $84.3 million (5.9 points) for 2007 compared to 2006. The current year’s attritional loss ratio improved by 16.0 points due to positive results from increased property quota share business. We experienced $136.3 million of prior years’ catastrophe loss development in 2006 which did not recur in 2007 that improved the loss ratio by 14.3 points. These favorable factors were partially mitigated by a 25.6 point increase in the loss ratio driven by asbestos reserve strengthening.
the allocation of certain corporate charges to segments, which had been previously retained in corporate expenses.
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 with 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. Premiums earned decreased 13.6% to $496.2 million for 2007 from $574.0 million for 2006, generally in line with the decrease in net written premiums.
Incurred losses and LAE increased by 2.3% to $422.2 million for 2008 from $412.7 million for 2007. In 2008, we strengthened our reserves for an auto loan credit insurance program by $85.3 million as the deterioration in general economic conditions adversely impacted loan performance resulting in unforeseen increases in loan default rates and claim amounts. We had also strengthened the reserves for this program by $64.7 million in 2007. In 2008, we commuted our remaining liability on this program with the largest policyholder representing approximately one third of the remaining loss exposure. Given the magnitude of our current reserves, the maturity of the remaining insured portfolio and the reduced principal exposure, we believe the future loss development, if any, related to this program will not be material. Other than as related to this program, the segment experienced negligible reserve development in 2008 and favorable reserve development in 2007.
Segment Expenses. Commission and brokerage expenses increased by 6.0% to $68.2 million for 2008 from $64.3 million in 2007, principally due to higher commissions on two new programs. Segment other underwriting expenses for 2008 increased to $64.3 million as compared to $58.2 million for 2007, primarily due to increased compensation costs associated with increased staff.
Incurred losses and LAE decreased by 5.5% to $118.3 million for 2007 compared to $125.2 million for 2006. The loss ratio for the current accident year was lower by 5.0 points in 2007 compared to 2006. We experienced 6.9 points of adverse development in 2007 compared to 8.9 points in 2006. Catastrophe loss development, principally within the marine business related to the 2005 hurricanes, was the principal driver of the overall development in both 2007 and 2006.
Segment Expenses. Commission and brokerage expenses decreased 7.5% to $40.9 million in 2008 from $44.3 million in 2007 due primarily to the increased cessions under the affiliated quota share agreement. Segment other underwriting expenses decreased slightly to $8.1 million for 2008 from $8.5 million for 2007.
Commission and brokerage expense decreased 1.3% to $44.3 million in 2007 from $44.9 million in 2006, primarily due to the mix of premiums earned. Segment other underwriting expenses increased 29.0% to $8.5 million for 2007 from $6.6 million for 2006, primarily due to the allocation of certain corporate charges to segments, which had been previously retained in corporate expenses.
Premiums. Gross written premiums increased by 12.3% to $904.7 million for 2008 from $805.9 million for 2007. We obtained increased participations on treaties in most regions over the course of the past twelve months. As well, we benefited as some insurers sought to further diversify their reinsurance panels by reducing exposures to certain other reinsurers, which created opportunities for us, given our strong financial strength ratings. In addition, we have 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 for 2008 compared to $553.0 million for 2007, primarily due to the increased cessions under the affiliated quota share agreement. Premiums earned decreased by 2.3% to $545.6 million for 2008 compared to $558.2 million for 2007, generally consistent with the decrease in net written premiums.
Incurred losses and LAE increased by 8.1% to $367.1 million for 2008 compared to $339.7 million for 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.