Everest Re’s corporate offices are located in approximately 129,700 square feet of leased office space in Liberty Corner, New Jersey. The Company’s other eleven locations occupy a total of approximately 70,800 square feet, all of which are leased. Management believes that the above-described office space is adequate for its current and anticipated needs.
were not able to fully place their reinsurance program and have been forced to raise retention levels and/or reduce catastrophe limit purchases. In turn, insurance companies continue to adjust limits and coverages and increase the premium rates they charge their customers. Together, these trends have generally resulted in insurance companies retaining more property risk exposure and being more prone to potential future earnings volatility than in past years. This trend reflects an imbalance between reinsurance supply and demand. As a result of this imbalance and higher rates, additional competition is entering the market in the form of new companies and alternative risk transfer mechanisms. In January 2007, the Florida legislature enacted insurance reform that increases insurer’s access to the Florida Hurricane Catastrophe Fund, thus potentially reducing the amount of reinsurance purchased from the private reinsurance market. The Company is unable to predict the impact on future market conditions from the increased competition and legislative reform. In addition to these market forces, reinsurers continue to reassess their risk appetites and rebalance their property portfolios to reflect improved price to exposure metrics against the backdrop of: (i) recent revisions to the industry’s catastrophe loss projection models, which are indicating significantly higher loss potentials and consequently higher pricing requirements and (ii) elevated rating agency scrutiny and capital requirements for many catastrophe exposed companies.
The Company’s management monitors and evaluates overall Company performance based upon financial results. The following table displays a summary of the consolidated net income, ratios and stockholder’s equity for the years indicated:
Gross written premiums declined for 2006 compared to 2005 as the Company continued its disciplined underwriting and risk management practices. In particular, the Company repositioned its U.S. property reinsurance portfolio resulting in improved pricing, but lower premium volume. The premium volume decline
also reflects much lower premiums due to the run-off insurance credit program business and a cut back in treaty casualty writings in response to market softening in many U.S. casualty reinsurance classes.
The Company’s stockholder’s equity increased by $0.4 billion to $2.2 billion in 2006, principally attributable to the net income generated during the year. This compares to an increase of $46.9 million to $1.8 billion in 2005.
Net investment income increased 14.5% for 2006 compared to 2005, reflecting continued year-over-year growth in invested assets from positive cash flow from operations and a $31.1 million increase in income from limited partnership investments. The average investment portfolio yields for 2006 were 4.6% pre-tax and 3.7% after-tax, slightly higher compared to the prior year.
The Company’s effective income tax rate for 2006 was 26.0% compared with the effective tax rate for 2005 of 107.2%, which was impacted by the large catastrophe losses.
UK Branch Sale. Effective January 1, 2004, Everest Re sold its UK branch to Bermuda Re (“UK Branch Sale”) and in conjunction with the sale, Everest Re provided a reserve indemnity agreement for adverse development on loss and loss adjustment expenses (“LAE”) reserve balances as of December 31, 2002, as well as made sale related adjustments for the 2003 and 2002 quota share cessions. For the year ended December 31, 2004, gross written premiums, net written premiums, premiums earned, incurred losses and LAE, commission, brokerage, taxes and fees and other underwriting expense related to the UK Branch Sale were $0.0 million, $139.8 million, $118.8 million, $118.6 million, $30.9 million and $0.0 million, respectively.
The following table reflects the reconciliation from reported to proforma for the year indicated:
The following tables represent the relevant operating results for the operating segments for the three years ended December 31, 2006, 2005 and 2004:
The following table reconciles the underwriting results for the operating segments to income (loss) before tax as reported in the consolidated statements of operations and comprehensive income (loss) for the years ended December 31:
Interest, fee and bond issue cost amortization expense (69,696 ) (74,197 ) (76,610 )
Premiums Written. Gross written premiums decreased 4.6% to $3,186.0 million in 2006 from $3,339.9 million in 2005. The Specialty Underwriting operation decreased 20.2% ($63.4 million), driven by a $53.2 million reduction in A&H premiums, as pricing for this business continues to be difficult and a $23.6 million decrease in marine and aviation premiums, partially offset by a $13.4 million increase in surety premiums. The U.S. Insurance operation decreased 7.1% ($66.2 million), mainly reflecting continued reductions in the California workers’ compensation business and run-off of the credit business. The U.S. Reinsurance operation decreased 3.6% ($49.4 million), principally reflecting a $72.7 million decrease in treaty casualty business, partially offset by a $16.4 million increase in treaty property business and by an $11.6 million increase in facultative business. Partially offsetting these declines was a 3.6% ($25.2 million) increase in the International operation, primarily due to a $47.1 million increase in international business written through the Miami and New Jersey offices, representing primarily Latin American business and by a $22.8 million increase in Canadian business, offset by a $44.1 million decrease in Asian business. The Company endeavors to write only business that meets its profit criteria; generally, increases and decreases in a line of business or region are the result of changes in management’s perceptions of the profit opportunities in the various markets.
Incurred Losses and LAE. The Company’s loss and LAE reserves reflect estimates of ultimate claim liability. Such estimates are regularly re-evaluated including re-estimates of prior period reserves, taking into consideration all available information and in particular, recently reported loss and claim experience related to prior periods. The effect of such re-evaluations is recorded in incurred losses in the period in which the adjustment was made.
The U.S. Reinsurance segment’s incurred losses and LAE decreased 37.4%, or $431.3 million, for 2006 compared to 2005, primarily due to significantly reduced current year catastrophe losses, principally within the treaty property unit, and decreased earned premiums. The segment’s loss ratio improvement of 33.0 points from 2005 was primarily due to the 34.4 point decrease in catastrophe losses.
The following table shows the U.S. Insurance segment components of incurred losses and LAE for 2006 and 2005:
The following table shows the Specialty Underwriting segment components of incurred losses and LAE for 2006 and 2005:
The Specialty Underwriting segment’s incurred losses and LAE decreased 44.6%, or $100.6 million, for 2006 as compared to 2005, primarily due to a decrease in current year catastrophe losses and a reduction in earned premiums across all classes of business. Correspondingly, the segment’s loss ratio improved by 29.5 points over 2005.
The Company’s combined ratio, which is the sum of the loss and expense ratios, improved by 22.9 percentage points to 93.2% in 2006 as compared to 116.1% in 2005, primarily as a result of lower catastrophe and attritional losses.
Annualized after-tax yield on average cash and invested assets 3.8 % 3.6 %
Other expense in 2006 was $40.5 million as compared to other income in 2005 of $10.3 million. The change was primarily due to increased deferrals on retroactive reinsurance agreements with affiliates.
Income Taxes. The Company’s income tax expense is primarily a function of the U.S. statutory tax rates coupled with the impact from tax-preferenced investment income. The Company recorded income tax expense of $117.1 million in 2006 compared to a tax benefit of $70.2 million in 2005. The increased tax expense was primarily due to the significant change in pre-tax income in 2006 compared to the pre-tax loss in 2005.
Premiums Written. Gross written premiums decreased 12.6% to $3,339.9 million in 2005 from $3,820.7 million in 2004, reflecting a disciplined underwriting response to modest reinsurance market softening that affected all segments, resulting in an overall premium decline. Premiums declined 35.4% ($172.4 million) in the
Net written premiums decreased by 14.2% to $2,395.7 million in 2005 from $2,793.0 million in 2004, reflecting the $480.8 million decrease in gross written premiums and the $83.5 million decrease in ceded premiums.
The Company’s incurred losses and LAE increased by 7.3% to $2,202.8 million in 2005 from $2,053.8 million in 2004. The increase in incurred losses and LAE was principally attributable to the increase in estimated losses due to property catastrophes, partially offset by favorable attritional prior years reserve development and the impact of reduced earned premiums. Incurred losses and LAE in 2005 reflected ceded losses and LAE of $852.4 million compared to ceded losses and LAE in 2004 of $789.6 million.
Incurred losses and LAE include catastrophe losses, which include the impact of both current period events and favorable and unfavorable development on prior years events and are net of reinsurance. Individual catastrophe losses are reported net of specific reinsurance, but before recoveries under corporate level reinsurance and potential incurred but not reported (“IBNR”) loss reserve offsets. The Company defines a catastrophe as a property event with expected reported losses of at least $5.0 million before corporate level reinsurance and taxes. Effective for the third quarter 2005, industrial risk losses have been excluded from catastrophe losses with prior periods adjusted for comparison purposes. Catastrophe losses, net of contract specific cessions, were $833.0 million in 2005, related principally to aggregate estimated losses driven by Hurricanes Katrina, Rita and Wilma with catastrophe losses of $406.7 million, $74.4 million and $236.0 million, respectively, but also reflected catastrophe losses related to Hurricanes Emily ($14.9 million) and Dennis ($5.3 million), floods in India ($9.9 million) and Calgary ($3.6 million) and storms in Ontario ($4.9 million). The 2005 results also reflect net unfavorable reserve development on 2004 and prior catastrophes of $77.6 million. Catastrophe losses, net of contract specific cessions, were $256.3 million in 2004, related principally to aggregate estimated losses of $290.9 million from Hurricanes Charley, Frances, Ivan and Jeanne, Pacific typhoons, Edmonton hailstorms and the Asian tsunami, which were partially offset by $32.7 million of reserve reductions related to the 2001 World Trade Center losses.
adjustments of $11.5 million. For the year ended December 31, 2004, the unfavorable prior years reserve adjustments included net unfavorable attritional adjustments of $198.5 million related primarily to casualty reinsurance and net unfavorable A&E adjustments of $10.3 million. Partially offsetting the 2004 unfavorable development was $34.6 million of favorable catastrophe development, principally related to the reduction of reserves for the 2001 World Trade Center losses and other catastrophe events. It is important to note that non-A&E accident year reserve development arises from the re-evaluation of accident year results and that such re-evaluations may also impact premiums and commissions attributed by accident year, generally mitigating, in part, the impact of loss development and that such impacts are recorded as part of the overall reserve evaluation process.
The U.S. Reinsurance segment’s incurred losses and LAE increased 21.6%, or $205.0 million, for 2005 compared to 2004. The segment’s loss ratio increased 24.7 points over 2004 period due to current year catastrophe losses and unfavorable prior years catastrophe reserve development, partially offset by favorable attritional prior years loss development.
The prior years unfavorable loss development for the year ended December 31, 2004 was primarily attributable to a proliferation of claims related to bankruptcies and other financial management improprieties during the late 1990‘s and early 2000. This increased number of claims, combined with larger claims, had significantly increased incurred losses on the professional liability policies. In the general casualty area, the Company continued to experience losses greater than historical trends for accident years 1998 through 2001.
The following table shows the Specialty Underwriting segment components of incurred losses and LAE for 2005 and 2004:
The Specialty Underwriting segment’s incurred losses and LAE decreased 9.4%, or $23.3 million, for 2005 as compared to 2004, due to the decrease in attritional losses from reduced earned premiums and favorable prior years reserve development, partially offset by an increase in current year catastrophe losses in 2005 and development of catastrophes from prior years. The segment’s loss ratio increased by 30.7 points over 2004.
The following table shows the International segment components of incurred losses and LAE for 2005 and 2004:
Underwriting Expenses. The Company’s expense ratio, which is calculated by dividing underwriting expenses by net premiums earned, was 25.3% in 2005 compared to 23.5% in 2004.
Segment underwriting expenses decreased by 4.6% to $608.5 million in 2005 from $637.6 million in 2004. Commission, brokerage, taxes and fees decreased by $33.1 million, principally reflecting decreases in premium volume and changes in the mix and distribution channel of business. Segment other underwriting expenses increased by $4.0 million as the Company continued to expand operations. Contributing to the segment underwriting expense decreases were a 38.8% ($39.4 million) decrease in the Specialty Underwriting operation, a 4.7% ($14.0 million) decrease in the U.S. Reinsurance operation and a 0.7% ($0.8 million) decrease in the International operation, partially offset by a 21.0% ($25.2 million) increase in the U.S. Insurance operation. The changes for each operation’s expenses principally resulted from changes in commission expenses related to changes in premium volume and business mix by class and type and in some cases, changes in the use of specific reinsurance, as well as the underwriting performance of the underlying business.
The Company’s combined ratio, which is the sum of the loss and expense ratios, increased by 15.8 points to 116.1% in 2005 as compared to 100.3% in 2004, with the increase principally resulting from elevated catastrophe losses, partially offset by improved prior years development.
Imbedded after-tax yield of cash and invested assets at December 31 3.6 % 3.6 %
Annualized pre-tax yield on average cash and invested assets 4.4 % 5.0 %
Annualized after-tax yield on average cash and invested assets 3.6 % 3.9 %
The Company’s net realized capital gains were $64.6 million in 2005, which reflected realized capital gains on the Company’s investments of $75.9 million, including $25.3 million on the sale of interest only strips investments, partially offset by $11.3 million of realized capital losses, which included $4.1 million related to the write-downs in the value of interest only strips deemed to be impaired on an other than temporary basis in accordance with EITF 99-20. Net realized capital gains were $56.7 million in 2004, which reflected realized capital gains on the Company’s investments of $107.4 million, including $77.6 million on the sale of interest only strips investments, partially offset by $50.7 million of realized capital losses, which included $43.9 million related to the write-downs in the value of interest only strips deemed to be impaired on an other than temporary basis in accordance with EITF 99-20.
Interest, fees and bond issue cost amortization expense for 2005 was $74.2 million compared to $76.6 million in 2004. Interest, fees and bond issue cost amortization expense in 2005 included $35.5 million related to the senior notes, $37.4 million related to the junior subordinated debt securities, $1.0 million related to the bond issue cost amortization and $0.2 million related to the credit line under the Company’s revolving credit facility. Interest expense and fees in 2004 included $42.0 million related to senior notes, $32.4 million related to the junior subordinated debt securities, $1.1 million related to the bond issue cost amortization and $1.2 million related to borrowings under the Company’s revolving credit facility. Interest expense on senior notes decreased due to the retirement on March 15, 2005 of the 8.5% senior notes issued on March 14, 2000.
Other income in 2005 was $10.3 million compared to other expense of $67.9 million in 2004. The change in net other income for 2005 from net other expense in 2004 was primarily due to decreased deferrals on retroactive reinsurance agreements with affiliates.
Income Taxes. The Company’s income tax expense is primarily a function of the U.S. statutory tax rate and the impact from tax preferenced investment income. The Company recognized an income tax benefit of $70.2 million in 2005, primarily due to the significant incurred losses related to catastrophes, which resulted in a pre-tax loss for the year. The Company recognized an income tax expense of $56.1 million in 2004, primarily due to pre-tax income of $231.6 million and the impact of various tax issues giving rise to net tax expense in conjunction with the transfer of the Company’s UK branch to Bermuda Re.
This report contains forward-looking statements within the meaning of the U.S. federal securities laws. The Company intends 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 the Company’s reserves for losses and LAE, the adequacy of the Company’s provision for uncollectible balances, estimates of the Company’s catastrophe exposure, and the effects of catastrophic events on the Company’s financial statements and the ability of the Company’s subsidiaries to pay dividends. Forward-looking statements only reflect the Company’s expectations and are not guarantees of performance. These statements involve risks, uncertainties and assumptions. Actual events or results may differ materially from the Company’s expectations. Important factors that could cause the Company’s actual events or results to be materially different from the Company’s expectations include those discussed under the caption ITEM 1A, “Risk Factors”. The Company undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.