Shareholders' equity decreased by $27.9 million, to $56.9 million, at December 31, 2000 from $84.8 million at December 31, 1999, due primarily to the net loss incurred for the year.
PAGE # Reports of Independent Public Accountants....................... 23 Consolidated Balance Sheets..................................... 25 Consolidated Statements of Income and Comprehensive Income....................................................... 26 Consolidated Statements of Changes in Shareholders' Equity...... 27 Consolidated Statements of Cash Flows........................... 28 Notes to Consolidated Financial Statements...................... 29-50
Losses and related loss adjustment expenses are charged to income as they are incurred and are net of losses recovered and recoverable of $44,312, $53,863 and $50,040 for the years ended December 31, 1998, 1999 and 2000 respectively. Amounts recoverable from reinsurers are estimated in a manner consistent with the underlying liability associated with the reinsured policy. Outstanding losses recoverable are shown separately on the consolidated balance sheets.
In addition, deposit liabilities and related assets include $2,980 and $2,629 of deposits received from customers as security for the timely payment of premiums for workers' compensation insurance at December 31, 1999 and 2000, respectively. The deposit is restricted from use by the Company, and is the property of the customer. The deposit is refunded to the customer after the policy expires or is canceled and all claims related to the insurance policy have been settled. The interest income earned by these restricted deposit accounts is the property of the customer, and is therefore excluded from the Company's operating results.
With respect to 1999 and prior years, one of the programs was subject to quota share reinsurance whereby Realm National retained 25% of the first $1,000 on any one risk and purchased excess of loss per occurrence reinsurance for limits above $1,000. A portion of Realm National's retention under its quota share treaties was further protected through the use of common account excess coverage that reduced Realm National's net retention to under $20. In addition, Realm National purchased excess of loss reinsurance above the quota share treaty with limits of at least $100,000. For the year 2000, Realm National purchased excess of loss reinsurance above $250. The excess of Loss limit is $50,000. In addition, Realm National purchased an 80% reinsurance cover to further protect the $250 net retention that reduced Realm National's net retention to $50.
In the first quarter of 1999, the Company purchased a further 356,400 of its ordinary shares on the open market for a total cost of $4,423. These shares were held as treasury stock at cost at December 31, 1999 and 2000.
On March 7, 2000, the Company granted 25,000 options to an officer. The options have an exercise price of $3.25 per share, which reflected the estimated fair value of the shares at the grant date. The options vest ratably over a three-year period and may be exercised at any time prior to March 7, 2010. All of these options remained outstanding at December 31, 2000.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1999 and 2000, are presented below:
d) The Company's Bermuda reinsurance subsidiary, CIRCL, is required by its license to maintain capital and surplus greater than a minimum statutory amount determined as the greater of a percentage of outstanding losses and loss expenses (net of reinsurance recoverable) or a given fraction of net written premiums. At December 31, 1999 and 2000, respectively, CIRCL was required to maintain a minimum statutory capital and surplus of $2,024 and $1,272. Accordingly, a further $520 of capital was required to be contributed to CIRCL at the end of 2000 to meet the minimum statutory requirements. Subsequent to the year end, the Company contributed $600 to CIRCL to enable it to meet its minimum statutory requirements.
CIRCL's total surplus and net loss determined on a Bermuda statutory basis is as follows:
During 1998 and 1999 certain of the reinsurers and reinsureds that are parties to the arbitrations described above issued proceedings in the English courts against one or more of the Company's brokerage subsidiaries and one underwriting management subsidiary, apparently for the primary purpose of tolling the statute of limitations pending the outcome of the arbitration. In one proceeding against the same subsidiaries, three former officers of the subsidiaries were also named. In none of these proceedings did the complainant specify an amount of damages sought. If one or more reinsurers succeed in avoiding its contracts in the pending arbitrations, it is possible that ceding insurer clients, on whose behalf the Company's broker subsidiaries placed the reinsurance, may seek to pursue a claim for indemnification or other claims against one or more of those subsidiaries. Similarly, if one or more of the reinsurers fail to avoid its contracts in the pending arbitrations, it also is possible that those reinsurers may seek to pursue some type of claim against one or more of those subsidiaries.