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 fourteen locations occupy a total of approximately 122,600 square feet, all of which are leased. Management believes that the above described office space is adequate for its current and anticipated needs.
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 competitors is putting downward pressure on rates in certain geographical areas.
Gross written premiums increased by 24.3% to $4,437.5 million in 2013 compared to $3,569.4 million in 2012, reflecting a $676.5 million, or 26.8%, increase in our reinsurance business and a $191.6 million, or 18.3%, increase in our insurance business. 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 16.9% and reinsurance premiums increased 16.4%, compared to the prior year. The increase in insurance premiums was primarily
Net investment income decreased by 2.2% to $306.1 million in 2012 compared with net investment income of $312.9 million in 2011. Net pre-tax investment income, as a percentage of average invested assets was 3.7% in 2012 compared to 3.9% in 2011. The decline in income and yield was primarily the result of lower reinvestment rates for the fixed income portfolio, partially offset by additional dividend income from equity investments.
Net Realized Capital Gains (Losses). Net realized capital gains were $723.1 million and $391.7 million and net realized capital losses were $41.1 million in 2013, 2012 and 2011, respectively. Of the $723.1 million, there were $687.6 million of gains from fair value re-measurements and $35.6 million of net realized capital gains from sales on our fixed maturity and equity securities. The net realized capital gains of $391.7 million in 2012 were the result of $364.5 million of gains from fair value re-measurements and $33.9 million of net realized capital gains from sales on our fixed maturity and equity securities, partially offset by $6.6 million of other-than-temporary impairments on our available for sale fixed maturity securities. The net realized capital losses of $41.1 million in 2011 were the result of $16.7 million of losses from fair value re-measurements, $14.5 million of other-than-temporary impairments on our available for sale fixed maturity securities and $9.9 million of net realized capital losses from sales on our fixed maturity and equity securities.
Other Underwriting Expenses. Other underwriting expenses were $193.5 million, $170.6 million and $154.3 million in 2013, 2012 and 2011, respectively. The increase in other underwriting expense for 2013 compared to 2012 was mainly due to the impact of higher premiums earned and higher compensation expenses. The increase in other underwriting expense for 2012 compared to 2011 was mainly due to higher employee benefit plan expenses.
Corporate Expenses. Corporate expenses, which are general operating expenses that are not allocated to segments, were $8.3 million, $8.8 million and $6.1 million for the years ended December 31, 2013, 2012 and 2011, respectively. The movement in corporate expenses was primarily due to changes in employee benefit plan expenses.
Interest, Fees and Bond Issue Cost Amortization Expense. Interest, fees and other bond amortization expense was $45.5 million, $50.7 million and $50.8 million in 2013, 2012 and 2011, respectively. The decrease was primarily due to the redemption of the $329.9 million of trust preferred securities in May, 2013, partially offset by $7.3 million of amortization expense on remaining capitalized issuance costs related to the redeemed securities.
Income Tax Expense (Benefit). Income tax expense was $407.2 million and $173.0 million in 2013 and 2012, respectively, and income tax benefit of $170.7 million in 2011. Our income tax is primarily a function of the statutory tax rates 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. The increases in 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 2012 income tax expense also reflects tax benefits of $17.5 million realized due to corrections of understatement 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 Internal Revenue Service (“IRS”) audit.
Our net income was $798.3 million and $520.3 million in 2013 and 2012, respectively. The variance was primarily driven by the financial component fluctuations explained above.
Our combined ratio decreased by 34.6 points to 97.6% in 2012 compared to 132.2% in 2011. The loss ratio component decreased 34.2 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 decreased slightly over the same period last year due to an increase in excess of loss business which carries a lower commission than pro rata business, and growth in crop insurance on a direct distribution basis, which has lower acquisition costs, 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. The other underwriting expense ratio component increased slightly from the same period last year due to higher employee benefit costs.
Stockholder's equity increased by $537.2 million to $3,478.6 million at December 31, 2012 from $2,941.4 million at December 31, 2011, principally as a result of $520.3 million of net income, $10.0 million of unrealized appreciation on investments, net of tax, $7.0 million of net foreign currency translation adjustments, and $6.8 million of share-based compensation transactions, partially offset by $7.0 million of net benefit plan obligation adjustments.
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, Singapore and through offices in Brazil, Miami and New Jersey. 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.
Premiums. Gross written premiums increased by 39.3% to $1,826.0 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 18.9%. Net written premiums increased by 37.9% to $909.6 million in 2013 compared to $659.7 million in 2012, which is in line with the increase in gross written premiums. Premiums earned increased 16.6% to $842.3 million in 2013 compared to $722.4 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 impact from the Florida quota share reinsurance contract.
Incurred losses decreased 6.5% to $582.4 million in 2012 compared to $623.1 million in 2011, primarily due to a decrease in attritional losses of $86.3 million (14.1 points) partially offset by the $58.7 million (7.3 points) increase in current year catastrophe losses for 2012 (outlined above) compared to 2011. The current year attritional losses decreased $49.9 million due primarily to a shift in business to excess of loss contracts which generally have lower attritional losses than pro rata contracts and prior years’ attritional losses decreased by $36.3 million due to less reserve development in 2012. The $176.6 million of current year catastrophe losses for 2011 related primarily to the Japanese earthquake and tsunami ($48.3 million), the 2011 New Zealand earthquake ($42.4 million), U.S. storms ($39.6 million), Hurricane Irene ($18.4 million), the Thailand floods ($11.4 million) and the 2011 Australian floods ($3.9 million).
Premiums. Gross written premiums increased by 13.3% to $1,370.6 million in 2013 compared to $1,209.5 million in 2012, primarily due to growth in Latin and South America business. Net written premiums increased by 10.8% to $610.1 million in 2013 compared to $550.7 million in 2012, which is consistent with the increase in gross written premiums. Premiums earned increased 3.4% to $591.7 million in 2013 compared to $572.5 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.
Segment Expenses. Commission and brokerage decreased 8.2% to $114.3 million in 2013 compared to $124.6 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 related primarily to the impact of higher premiums earned and higher compensation costs.
Commission and brokerage expenses decreased 12.5% to $124.6 million in 2012 compared to $142.3 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 in 2011. The increases relate to higher personnel benefit costs.
Incurred losses and LAE increased by 1.9% to $405.8 million in 2012 compared to $398.4 million in 2011. This was primarily due to an increase of $4.8 million in attritional losses resulting primarily from higher prior years’ losses in 2012 resulting from development on excess casualty and workers’ compensation reserves and a $2.8 million increase in current year catastrophe losses primarily due to Superstorm Sandy.
Segment Expenses. Commission and brokerage increased 13.1% to $19.8 million in 2013 compared to $17.5 million in 2012. The increase was primarily due to the impact of higher premiums earned, partially offset by the impact of the adoption of new accounting standards concerning the accounting for acquisition costs, which had the impact of increasing expenses in 2012. Segment other underwriting expenses increased to $112.4 million in 2013 compared to $96.5 million in 2012. These increases were primarily the result of increased premiums earned and higher compensation costs.