ACGL, a Bermuda company formed in September 2000, is a diversified financial services holding company, with an emphasis on the insurance sector. In November 2000, ACGL became the sole shareholder of Arch-U.S. pursuant to the internal reorganization transaction described below. Arch-U.S. commenced operations in September 1995 following the completion of its initial public offering. Prior to May 5, 2000, Arch-U.S. provided reinsurance and other forms of capital for insurance companies through its wholly owned subsidiary, Arch Re. On May 5, 2000, Arch-U.S. sold the reinsurance operations of Arch Re to Folksamerica Reinsurance Company in an asset sale. See note 2 of the notes accompanying our consolidated financial statements and "Business--Significant 2000 Developments--Sale of Reinsurance Operations." Following the asset sale, we have made two acquisitions and have announced a third acquisition in furtherance of our strategy.
We expect that our operational needs for the foreseeable future will be met by our balance of cash and short-term investments, as well as by funds generated from investment income and proceeds on the sale or maturity of our investments. We will continue to pursue and investigate possible business combinations and ventures with new operating businesses in furtherance of our strategy. In that connection, we may need to secure additional financing to carry out our business plan. We cannot assure you that we will be successful in obtaining any such financing or in the implementation of our business plan. See "Risk Factors."
As a significant portion of our investment portfolio consists of equity securities issued by insurance and reinsurance companies and companies providing services to the insurance industry, our equity portfolio lacks industry diversification and will be particularly subject to the performance of the insurance industry. Unlike fixed income securities, equity securities such as common stocks, including the equity securities in which we have invested, generally are not and will not be rated by any nationally recognized rating service. The values of equity securities generally are more dependent on the financial condition of the issuer and less dependent on fluctuations in interest rates than are the values of fixed income securities. The market value of equity securities generally is regarded as more volatile than the market value of fixed income securities. Since the realization of gains and losses on equity investments is not generally predictable, such gains and losses have differed and will differ significantly from period to period. Variability and declines in our results of operations could be further exacerbated by private equity investments in start-up companies which are accounted for under the equity method. Such start-up companies may be expected initially to generate operating losses. The effects of such volatility on our equity portfolio could be exacerbated to the extent that such portfolio is concentrated in the insurance industry and in relatively few issuers. For additional discussion, see "--Market Sensitive Instruments and Risk Management" below.
Prior to the sale of our reinsurance operations, we had consolidated comprehensive losses of $17.5 million, $52.3 million and $4.4 million for the years ended December 31, 2000, 1999 and 1998, respectively. Our comprehensive income or loss is composed of net income and the change in unrealized appreciation of investments. Net loss for the years ended December 31, 2000 and 1999 was $8.7 million and $32.4 million, respectively, and net income for the year ended December 31, 1998 was $3.1 million. Such financial results include the underwriting results of our divested reinsurance operations and are not indicative of future results. Other comprehensive loss for the years ended December 31, 2000, 1999 and 1998 was $8.8 million, $19.9 million and $7.5 million, respectively. For 2000, 1999 and 1998, net income (loss) included after-tax realized investment gains of $9.5 million, $11.2 million and $16.4 million, respectively, and equity in the net income (loss) of investee companies accounted for under the equity method of accounting of $1.3 million, $0.7 million and ($1.1 million), respectively.
In connection with the sale of Arch Re's reinsurance operations to Folksamerica on May 5, 2000, we placed $20 million of the purchase price in escrow for a period of five years. These funds will be used to reimburse Folksamerica if the loss reserves (which were $32.3 million at May 5, 2000) transferred to it in the asset sale relating to business produced on behalf of Arch Re by a certain managing underwriting agency are deficient as measured at the end of such five-year period or to satisfy certain indemnity claims Folksamerica may have during such period. In connection with the escrow arrangement, we will record a loss in an amount equal to any probable deficiency in the related reserve that may become known during or at the end of the five-year period. If such loss reserves are redundant, all of the escrowed funds will be released from escrow to us and Folksamerica will pay us an amount equal to such redundancy. As required under the agreement, Folksamerica reported to us that adverse development had occurred in the loss reserves subject to the escrow agreement for the period from May 5, 2000 to December 31, 2000. Based on such information and an independent actuarial analysis, we recorded in the 2000 fourth quarter a loss contingency of $15 million, on a pre-tax basis, to recognize an estimated probable deficiency in such reserves. The actuarial analysis was based on estimates of claims and claims expenses incurred as of December 31, 2000 and, therefore, the amount ultimately paid may be more or less than such estimate. See "Business--Significant 2000 Developments--Sale of Reinsurance Operations" and note 2 of the notes accompanying our consolidated financial statements.
The 1998 underwriting loss included an after-tax underwriting loss of $3.3 million for a property loss on a finite risk treaty.
See note 3 of the notes accompanying our consolidated financial statements for a description of recent accounting pronouncements. The impact of adopting new accounting pronouncements will not materially affect our financial condition and/or results of operations.
From time to time various regulatory and legislative changes have been proposed in the insurance and reinsurance industry. Among the proposals that have in the past been, or are at present being considered, are (1) the possible introduction of federal regulation in addition to, or in lieu of, the current system of state regulation of insurers and (2) proposals in various state legislatures (some of which proposals have been enacted) to conform portions of their insurance laws and regulations to various model acts adopted by the NAIC. We are unable to predict whether any of such laws and regulations will be adopted, the form in which any such laws and regulations would be adopted, or the effect, if any, these developments would have on our operations and financial condition. See "Business--Regulatory Considerations."