Everest Re’s corporate offices are located in approximately 172,500 square feet of leased office space in Liberty Corner, New Jersey. The Company’s other thirteen locations occupy a total of approximately 72,000 square feet, all of which are leased. Management believes that the above described office space is adequate for its current and anticipated needs.
Our U.S. and international casualty lines experienced weaker market conditions led by the medical stop loss and D&O reinsurance classes, as well as the California workers’ compensation insurance line. Increased primary price competition and cedants’ increased appetite for retaining more profitable business net, following several highly profitable years, resulted in modestly softer, but still profitable, reinsurance pricing during the year. Our U.S. insurance operation was also affected by these primary casualty insurance market conditions; however, given the specialty nature of our business, we believe the impact on us to be less severe than on the market generally.
We monitor and evaluate our overall performance based upon financial results. The following table displays a summary of the consolidated net income, ratios and stockholder’s equity for the periods indicated:
Net investment income increased by 14.5% in 2006 compared to 2005, reflecting continued year-over-year growth in invested assets from the $356.8 million cash flow from operations and a $31.1 million increase in income from limited partnership investments. The average pre-tax investment portfolio yield for 2006 was 4.8% compared to the average investment portfolio yield of 4.4% for 2005.
Incurred losses and LAE decreased by $49.5 million, or 3.2% in 2007 compared to the same period in 2006, primarily due to a $152.1 million decrease in attritional losses and a $136.3 million decrease in catastrophe losses, which were partially offset by a $239.0 million increase in A&E loss reserve strengthening. The decrease in catastrophe losses reflects the non-recurrence in 2007 of significant prior years’ development experienced in 2006 on catastrophe loss reserves. The increase in A&E reserves emanated from actions taken in response to an extensive in-house study of our asbestos exposures by our actuarial and claim units.
Our current year attritional loss ratios for 2007, 2006 and 2005 were 53.9%, 65.7% and 62.4%, respectively, reflective of generally favorable market conditions and our business production and risk selection practices.
We have recorded favorable development on our attritional loss reserves aggregating $320.3 million over the past three years. The $197.2 million of adverse development on catastrophe loss reserves experienced in 2006 largely emanated from Hurricanes Katrina, Rita and Wilma. The unprecedented size and widespread damage from these events, particularly Katrina, made it extremely difficult to estimate ultimate losses at year end 2005.
Other underwriting expenses for 2006 decreased by $2.6 million, or 2.6%, compared to 2005, primarily due to a decrease in corporate non-allocated expenses.
Interest Expense. Interest expense was $91.1 million and $69.7 million for 2007 and 2006, respectively. The increase was due to the new long term notes we issued in April, 2007 and the acceleration of the bond amortization costs associated with the November 15, 2007 early retirement of the 7.85% junior subordinated debt securities.
Net income was $304.2 million for 2007 compared to $332.9 million for 2006, principally the result of the changes in the various statement lines discussed above.
Net income increased significantly to $332.9 million in 2006 compared to $4.7 million for 2005. This improvement reflected the favorable effect of a benign U.S. hurricane season relative to unprecedented Company and industry hurricane losses experienced in 2005, as well as favorable underlying underwriting fundamentals.
Stockholder's equity increased by $427.7 million to $2,218.4 million in 2006 from $1,790.7 million in 2005, principally as a result of the $332.9 million of net income generated for the period and an increase in unrealized gains on investments during 2006.
Effective January 1, 2007, we adopted and implemented FAS 159 for our actively managed equity securities and equity shares of our parent. Accordingly, we recorded $96.6 million of net realized gains from fair value re-measurements in our consolidated statements of operations and comprehensive income for 2007.
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 accident and health (“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.
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 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.
Incurred losses and LAE decreased by 37.4% to $721.2 million for 2006 compared to $1,152.4 million for 2005, primarily due to significantly reduced catastrophe losses, principally within the treaty property unit. The segment loss ratio improved by 33.0 points for 2006 compared to 2005 primarily driven by a favorable 34.4 point decrease in catastrophe losses.
Segment Expenses. Commission and brokerage expenses increased by 13.7% to $230.5 million for 2007 from $202.8 million in 2006, principally driven by an increase in ceding commissions due to market conditions. Segment other underwriting expenses for 2007 increased to $33.3 million from $24.9 million for 2006, principally due to the allocation of certain corporate charges to segments that had been previously retained in corporate expenses.
Commission and brokerage expenses decreased by 21.9% to $202.8 million in 2006 from $259.8 million in 2005, principally due to decreased earned premium volume and the mix of business. Segment other underwriting expenses for 2006 increased nominally to $24.9 million from $24.0 million for 2005.
Incurred losses and LAE increased 4.0% to $432.2 million for 2006 from $415.4 million for 2005, primarily due to higher losses on the auto loan credit insurance program.
Segment Expenses. Commission and brokerage expenses decreased by 11.6% to $64.3 million for 2007 from $72.7 million in 2006, which was in line with the decrease in earned premiums. Segment other underwriting expenses for 2007 increased to $58.2 million as compared to $48.9 million for 2006, primarily due to increased compensation costs associated with increased staff and the allocation of certain corporate charges to segments, which had been previously retained in corporate expenses.
Incurred losses and LAE decreased by 44.6% to $125.2 million for 2006 compared to $225.7 million for 2005. The segment loss ratio was 29.5 points lower for 2006 than in 2005, principally due to the absence of current year catastrophe losses in 2006.
Segment Expenses. Commission and brokerage decreased by 1.3% to $44.3 million in 2007 from $44.9 million in 2006, primarily due to the mix of business earned. Segment other underwriting expenses increased by 28.8% 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.
Gross written premiums increased by 3.6% to $731.7 million for 2006 from $706.6 million for 2005. Business written through the Miami and New Jersey offices increased by $47.1 million (12.1%) and business written through the Canadian branch increased by $22.8 million (17.7%). These increases were partially offset by a decrease of $44.1 million (23.5%) in premiums written through the Asian branch. Net written premiums increased by 6.7% to $531.8 million for 2006 compared to $498.6 million for 2005, mainly driven by the increase in gross written premiums. Net premiums earned increased by 7.1% to $518.8 million for 2006 compared to $484.4 million for 2005, consistent with the increase in net written premiums.
Incurred losses and LAE increased by 22.0% to $339.7 million for 2007 compared to $278.5 million for 2006. The segment loss ratio increased by 7.2 points year over year, principally due to a 9.1 point increase in the current year catastrophe losses. In 2007, catastrophe losses included Tabasco, Mexico floods, $16.5 million; New South Wales storm, $15.8 million; Peruvian earthquake, $7.5 million; Hurricane Dean, $6.8 million; Jakarta flood, $5.1 million and Sydney hailstorm, $4.9 million.
Incurred losses and LAE decreased by 32.0% to $278.5 million for 2006 compared to $409.3 million for 2005. The segment loss ratio decreased by 30.8 points, principally due to reduced current year catastrophe losses in Canada, Asia and International. The catastrophe losses for 2005 included the impact from Hurricanes Katrina, Rita and Wilma.
Segment Expenses. Commission and brokerage expense increased by 7.3% to $126.7 million for 2007 from $118.1 million in 2006, which was in line with the increase in premiums earned. Segment other underwriting expenses for 2007 increased to $18.6 million compared to $13.8 million for 2006, primarily due to the allocation of certain corporate charges to segments, which had been previously retained in corporate expenses.