Commission, brokerage and tax expense for the years ended December 31, 2004, 2003 and 2002 were $546.5 million, $534.3 million and $464.1 million, respectively, increasing principally as a result of premium volume changes, as these expenses generally vary in direct proportion to premiums earned. However, the percentage increase in expenses primarily reflected the impact of changes in the Company’s business mix.
The Company, through its subsidiaries, operates 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 agent relationships 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 property and casualty reinsurance through Everest Re’s branches in Canada and Singapore, in addition to foreign business written through Everest Re’s Miami and New Jersey offices.
The following table shows the net prior period reserve adjustments for each of the Company’s operating segments for 2004 and 2003.
The segment components of the increase in incurred losses and LAE in 2004 from 2003 were a 42.2% ($94.0 million) increase in the International operation, a 23.9% ($182.7 million) increase in the U.S. Reinsurance operation and a 3.9% ($20.4 million) increase in the U.S. Insurance operation. These increases were partially offset by a 13.9% ($40.2 million) decrease in the Specialty Underwriting operation. These changes reflect variability in premiums earned and changes in the loss expectation assumptions for business written, as well as the net prior period reserve development and catastrophe losses discussed above. Incurred losses and LAE for each operation were also impacted by generally improved pricing of the underlying business, as well as variability relating to changes in the mix of business by class and type, which in general reflected a more favorable mix.
underlying business. The Company’s expense ratio, which is calculated by dividing underwriting expenses by net premiums earned, was 23.3% in 2004 compared to 24.8% in 2003.
Investments. Net investment income increased 15.6% to $329.2 million in 2004 from $284.8 million in 2003, principally reflecting the effects of investing $921.6 million of cash flow from operations for the twelve months ended December 31, 2004, as well as $320.0 of net proceeds from the issuance of junior subordinated debt securities in March 2004 and $246.7 of net proceeds from the issuance of senior notes in October 2004, all partially offset by the effects of the lower interest rate environment and a $6.0 million decrease from the impact of the UK branch sale. The increase also reflected $32.7 million representing an atypical increase in the carrying value of a limited partnership investment.
If the Company is unable or chooses not to purchase reinsurance and transfer risk to reinsurers, its net income could be reduced or it could incur a net loss in the event of an unusual loss experience.