Total expenses from continuing operations excluding insurance costs for the year 2001 were $39.5 million, versus $46.8 million in 2000 and $57.9 million in 1999. This decrease in expenses from continuing operations reflects the effects of the restructuring program begun in 1999, together with a general reduction in administrative costs as a result of reduced business volume. This decrease in expenses from continuing operations was partially offset by costs and provisions pertaining to its Dallas MGA. In a continuing effort to streamline operations and reduce ongoing costs, the Company consolidated its Dallas MGA office with its Boca Raton MGA office. The Company recognized restructuring costs of $1.1 million associated with this merger, and those expenses were charged to fourth-quarter and full-year results. Consistent with this decision, the Company wrote off $0.7 million of remaining goodwill associated with the Dallas MGA. Finally, there was a charge of $2.9 million for future losses that the Company projects it will pay in connection with its indemnification of its major issuing company for losses in excess of a specific loss ratio on business produced by the MGA's during 2000. In addition, expenses from continuing operations continued to be impacted by costs and provisions pertaining to reinsurance-related disputes in which the Company is involved, including certain litigation.
The program business segment loss before tax of $7.6 million in 2001 represented an increase in loss before tax of $2.1 million from loss before tax of $5.1 million in 2000, which had increased $2.4 million from loss before tax of $2.7 million in 1999. In a continuing effort to streamline operations and reduce ongoing costs, the Company consolidated its Dallas MGA office with its Boca Raton MGA office. The Company recognized restructuring costs of $1.1 million associated with this merger, and those expenses were charged to fourth-quarter and full-year results. Consistent with this decision, the Company wrote off $0.7 million of remaining goodwill associated with the Dallas MGA. Finally, there was a charge of $2.9 million for future losses that the Company projects it will pay in connection with its indemnification of its major issuing company for losses in excess of a specific loss ratio on business produced by the MGA's during 2000.
During the year ended December 31, 2001, the Company's operating activities used $29.2 million of net cash, compared to using $7.8 million of net cash during 2000 and $4.1 million in 1999. The cash used by operating activities varies according to the Company's net loss and the timing of collections and payments of the Company's insurance and reinsurance balances. In light of continuing losses, the Company is continuing to review all operations and take steps to restructure those operations in an attempt to reduce cash usage.
The Company does not believe its operations have been materially affected by inflation. The potential adverse impacts of inflation include: (a) a decline in the market value of the Company's fixed maturity investment portfolio; (b) an increase in the ultimate cost of settling claims which remain unresolved for a significant period of time; and (c) an increase in the Company's operating expenses. However, the Company generally holds its fixed maturity investments to maturity and currently believes that an acceptable amount is included in the yield to compensate the Company for the risk of inflation. Any increase in the cost of settling claims should be offset by increases in investment income earned and, generally, an increase in operating expenses resulting from inflation should be matched by similar increases in investment income earned on the Company's general surplus funds.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS No. 141 eliminates the pooling-of-interest method of accounting for business combinations, requiring all business combinations to be accounted for under the purchase method. Accordingly, net assets acquired are recorded at fair value with any excess of cost over net assets assigned to goodwill. SFAS No. 141 also requires that certain intangible assets acquired in a business combination be recognized apart from goodwill. The provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001. Use of the pooling-of-interest method of accounting for those transactions is prohibited. Adoption of SFAS No. 141 will not have a material impact on the Company's financial condition or results of operations.
As a result of the planned run-off of operations of the underwriting management and reinsurance segments, the operating results of the underwriting management and reinsurance segments in the accompanying financial statements have been reported as discontinued operations for all periods presented, and, accordingly, the operating results for periods prior to 2000 have been restated.
DECEMBER 31, 20001 ------------------------ AMORTIZED ESTIMATED --------- --------- COST FAIR VALUE ---- ---------- Due in one year or less.................. $182 $183 Due after one year through five years.... 11,712 12,077 Due after five years through ten years... 10,031 10,189 Due after ten years through twenty years. 2,339 2,375 ------------------------ $24,264 $24,824
With respect to its other main workers' compensation program for 1998 and prior, the business 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 by excess coverage that reduced Realm National's net retention to under $3 on any one risk. In addition, Realm National purchased excess of loss reinsurance above the quota share treaty with limits of $100,000 or higher. For the years 1999 and 2000 Realm National purchased excess of loss reinsurance above $1,000 up to limits of $50,000. In addition, Realm National purchased a 75% reinsurance cover to further protect part of the $1,000 net retention. This business was substantially reduced in 2001 as it was put into runoff. Catastrophy coverage in excess of $1,000 was purchased.
With respect to its general liability risks prior to 2000, Realm National purchased a reinsurance program whereby it retained 25% of the first $300 on any one risk and purchased facultative per-risk excess reinsurance for limits above $300. In 2000 and 2001, Realm National retained the first $300 for any one loss and purchased an excess-of-loss treaty providing limits of $700 excess of $300.
Management decided in early 1999 to cease underwriting any new programs in CIRCL due to unfavourable results, and a number of existing contracts were not renewed for the 1999 year. In early 2001, following a review of its operations, the Company decided to completely discontinue its reinsurance segment, as discussed in Note 3.
Effective November, 2000, the Company issued 100,000 restricted shares to Mr. Stephen A. Crane. The shares issued are subject to certain transfer restrictions which lapsed with respect to 33 1/3% of these shares on the date of their issuance and 33 1/3% of these shares in November 2001. Restrictions on the balance of the shares lapse in November 2002, contingent on Mr. Crane's continued employment with the Company.
To manage the Company's exposure to these risks, the Company enters into forward foreign exchange contracts in the currencies to which the Company is exposed. These contracts generally involve the exchange of one currency for another at some future date. The Company had one notional principal amount outstanding at December 31, 2000, relating to contracts to buy British Pounds Sterling in the future. This contract had a cost of $2,305, a fair value of $2,230, and an unrealized net loss of $70. The Company had no notional principal amounts outstanding at December 31, 2001 relating to contracts to buy British Pounds Sterling in the future. Net realized gains (losses) of $Nil, ($132) and $Nil have been recorded in the consolidated statements of income in respect of such contracts during the years ended December 31, 1999, 2000 and 2001, respectively.
The Company's ability to pay dividends is subject to certain restrictions, including the following:
No dividends were declared or paid from 1999 to 2001 due to its statutory basis accumulated deficit.
The Company understands that awards already have been made in favor of the reinsurer in two arbitrations. However, based on the Company's understanding of the reasons given by the arbitration panels for their awards in favor of the reinsurer in two of those cases, the Company does not believe there is any valid basis for its ceding insurer clients in those cases to assert a claim against the Company or its broker subsidiaries. The Company has insufficient information to make a valid assessment in relation to the third.
One result of this market disruption has been that certain reinsurers with whom the Company's broker subsidiaries placed business on behalf of ceding insurer clients suspended claims payments to those clients, as well as to the Company's insurance and reinsurance subsidiaries, in certain instances also claiming a right to rescind the reinsurance contracts. As a result, a number of arbitrations were commenced between Company clients and their reinsurers. The Company has endeavored consistently to provide support to its clients in connection with these proceedings. In one ongoing arbitration involving the Company's insurer subsidiary, Realm National, that company has succeeded in obtaining $4.8 million in interim relief from a reinsurer by order of the arbitration panel pending a final determination of the matters in issue, which is expected in the second quarter of the year.