In June 1999, the company launched a new business unit focused on the growing health care management and technology field. The health care division ("ESG Health") is aimed at developing and distributing disease management programs, cardiovascular and other telemedicine applications. This division will encompass the Company's on-going relationship with COMED, together with the activities of IPT and VBB. In February 2000, the Company incorporated VBB Bermuda Limited, a holding
The Company, through its German subsidiary, IPT, had $1.3 million in loans and prepaid expenses under a service contract with a company to supply heart-monitoring technology for resale to COMED and other healthcare providers. These prepaid expenses will not be recovered. Following the unsuccessful launch of this heart-monitoring technology service, the Company decided to exit this business in the fourth quarter of 1999. The Company provided a loan of $0.3 million to this supplier in the third quarter whilst the Company undertook due diligence on acquiring this entity. The Company decided against the acquisition and has provided in full for this loan amount.
Typically, the underwriting results of a reinsurance company are evaluated by its loss and loss expense ratio, acquisition cost ratio, administrative expense ratio and combined ratio. Management believes that it is not meaningful to evaluate the Company's 1997 performance with reference to the administrative expense ratio and combined ratio because of the Class B Warrant expense and other costs that were incurred by the Company as a result of the Offerings.
Prepaid reinsurance premiums increased from $2.3 million as at December 31, 1998 to $9.1 million as at December 31, 1999. During the year, the Company retroceded 6.3% of its gross written premiums to reinsurers compared to 2.2% in 1998, as the Company amended two of its co-reinsurance agreements to enable business from certain markets to be retroceded to the reinsurers. The Company has maintained the same levels of excess of loss protection in 1999 as was purchased in 1998.
Funds recoverable on incurred losses increased from $2.8 million as at December 31, 1998 to $11.5 million as at December 31, 1999. The increase was due to additional losses being incurred above the Company's net retention levels that enable the Company to make recoveries from its excess of loss reinsurers, plus the additional quota share cessions to two of its retrocessionaires.
Company's reinsurance business in 1999 and upward revision of incurred but not reported loss reserves on specific large contracts underwritten through the Company's Toronto and London offices in response to worsening loss experience. Where the Company determined that individual contracts would generate loss and acquisition ratios in excess of 100%, future losses applicable to the unearned premium reserve have been fully recognized in the current financial year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (D) DEFERRED ACQUISITION COSTS
On December 12, 1997, the Company adopted the 1997 Employees Stock Option Plan (the "Stock Option Plan") under which employees of the Company and its subsidiaries are eligible to participate. The Stock Option Plan is administered by the Board of Directors. Subject to the provisions of the Stock Option Plan, the Board of Directors has sole discretionary authority to interpret the Stock Option Plan and to determine the terms and conditions of the awards.
In 1997, Head Company provided support and assistance in connection with the planning, structuring and formation of the Company, as well as capital raising in connection with the Direct Sales and IPO. For advisory services rendered by Head Company, the Company incurred fees and expenses of $2.7 million of which $2.5 million was paid in January 1998. These expenses were reflected as a reduction of additional paid-in capital. In January 1998, the Company entered into an agreement with Head Company to provide financial advisory services as required by the Company for a monthly fee of $50 thousand. Under this agreement, the Company incurred fees and direct expenses of $378 thousand in 1998. The agreement was terminated in the second quarter of 1998. Certain former shareholders of ESG Germany that participated in the Formation have agreed to indemnify ESG Germany for certain contingent liabilities applicable to activity prior to 1997. Management believes that the likelihood of incurring a loss related to any of those contingent liabilities is remote.