The following selected consolidated GAAP financial data of the Company as of and for the years ended December 31, 2001, 2000, 1999, 1998 and 1997 were derived from the consolidated financial statements of the Company, which were audited by PricewaterhouseCoopers LLP. The following financial data should be read in conjunction with the Consolidated Financial Statements and accompanying notes.
ACQUISITIONS On September 19, 2000, Holdings completed the acquisition of all of the issued and outstanding capital stock of Gibraltar Casualty Company ("Gibraltar") from The Prudential Insurance Company of America ("The Prudential") for $51.8 million, which approximated book value. As a result of the acquisition, Gibraltar became a wholly owned subsidiary of Holdings and, immediately following the acquisition, its name was changed to Mt. McKinley Insurance Company ("Mt. McKinley"). In connection with the acquisition of Mt. McKinley, which has significant exposure to asbestos and environmental claims, Prudential Property and Casualty Insurance Company ("Prupac"), a subsidiary of The Prudential, provided reinsurance to Mt. McKinley covering 80% ($160.0 million) of the first $200.0 million of any adverse development of Mt. McKinley's reserves as of September 19, 2000 and The Prudential guaranteed Prupac's obligation to Mt. McKinley. There were $22.2 million of cessions under this reinsurance at December 31, 2001, reducing the limit available under this contract to $137.8 million.
These segments are managed in a carefully coordinated fashion with strong elements of central control, including with respect to capital, investments and support operations. As a result, management monitors and evaluates the financial performance of these operating segments principally based upon their underwriting results. The Company utilizes inter-affiliate reinsurance and such reinsurance does not impact segment results, since business is reported within the segment in which the business was first produced.
Net premiums written increased by 28.0% to $1,560.1 million in 2001 from $1,218.9 million in 2000. This increase was consistent with the increase in gross premiums written and the increase in ceded premiums.
PREMIUM REVENUES. Net premiums earned increased by 25.0% to $1,467.5 million in 2001 from $1,174.2 million in 2000. Contributing to this increase were a 189.7% ($192.6 million) increase in the U.S. Insurance operation, a 41.6% ($4.8 million) increase in the Bermuda operation, a 22.9% ($69.2 million) increase in the Specialty Underwriting operation, a 5.5% ($26.0 million) increase in the U.S. Reinsurance operation and a 0.2% ($0.7 million) increase in the International operation. All of these changes reflect period to period variability in gross written and ceded premiums, and business mix, together with normal variability in earnings patterns. Business mix changes occur not only as the Company shifts emphasis between products, lines of business, distribution channels and markets but also as individual contracts renew or non-renew, almost always with changes in coverage, structure, prices and/or terms, and as new contracts are accepted with coverages, structures, prices and/or terms different
modest strengthening of prior period reserves in select areas, including on a multi-year reinsurance treaty where such losses within the current experience band were accompanied by correspondingly lower commissions. The increase was partially offset by losses ceded under the Company's corporate retrocessional program and also reflects changes in the Company's mix of business. Incurred losses and LAE include catastrophe losses, which reflect the impact of both current period events and favorable and unfavorable development on prior period events and are net of reinsurance. Catastrophe losses, net of contract specific cessions but before cessions under the corporate retrocessional program in 2000, were $13.9 million, mainly reflecting modest net adverse development on 1999 catastrophe events, compared to $45.9 million in 1999. Net incurred losses and LAE in 2000 reflected ceded losses and LAE of $161.6 million, including $70.0 million ceded under the 1999 accident year aggregate excess of loss component of the Company's corporate retrocessional program. Ceded losses and LAE in 1999 were $7.4 million with no cessions under the accident year aggregate excess of loss component of the Company's corporate retrocessional program.
Underwriting expenses decreased by 3.8% to $324.1 million in 2000 from $337.0 million in 1999. Commission, brokerage, taxes and fees decreased by $13.5 million, principally reflecting the Company's reassessment of the expected losses on the multi-year reinsurance treaty noted above that led to a $33.8 million decrease in contingent commissions with a corresponding increase to losses, partially offset by increases in premiums written and also reflecting changes in the mix of business. Other underwriting expenses increased by $0.6 million. Contributing to the underwriting expense decrease were a 26.5% ($34.5 million) decrease in the U.S. Reinsurance operation, which included the impact of the contingent commission adjustment noted above, and a 2.0% ($1.9 million) decrease in the International operation. These decreases were partially offset
LOSS AND LAE RESERVES. Gross loss and LAE reserves totaled $4,278.3 million at December 31, 2001, $3,786.2 million at December 31, 2000 and $3,647.0 million at December 31, 1999. The increase in 2001 was primarily attributable to increased catastrophe losses resulting from the September 11 attacks, together with increased earned premiums and normal variability in claim settlements. The increase in 2000 was primarily attributable to the acquisition of Mt. McKinley together with increased earned premiums and normal variability in claim settlements. Reinsurance receivables totaled $895.1 million at December 31, 2001, $509.0 million at December 31, 2000 and $742.5 million at December 31, 1999, with the changes in 2001 principally reflecting the increase in losses ceded under the accident year aggregate excess of loss element of the Company's corporate retrocessional program. At December 31, 2001, $339.0 million, or 37.9%, was receivable from subsidiaries of London Reinsurance Group ("London Life"), which is fully secured by a combination of letters of credit and funds held arrangements whereby the Company has retained the premium payments due the retrocessionaires, recognized liabilities for such amounts and reduced such liabilities as payments are due from the retrocessionaire and $145.0 million, or 16.2%, was receivable from Continental Insurance Company ("Continental), which are partially secured by funds held arrangements. No other retrocessionaire accounted for more than 5% of the Company's receivables.
Recently, some members of Congress have introduced legislation designed to curb the expatriation of U.S. corporations to low-tax jurisdictions, such as Bermuda, in transactions which leave a substantial percentage of the former U.S. corporation's activities in the U.S. and in which the former U.S. corporation has very little activity in its new home jurisdiction. At least one of these proposals would apply to corporations, such as the Company, which expatriated several years ago. The legislation, if adopted, would treat the Company as subject to tax in the United States as if it were a U.S. corporation. The Company does not know whether this legislation or any similar legislation will ever be enacted into law. If it were enacted and applied retroactively to the Company, the Company could become subject to U.S. taxes, which could reduce the Company's net income.
Bermuda Re was engaged in a trade or business in the United States, Bermuda Re would be required to pay U.S. corporate income tax on any income that is subject to the taxing jurisdiction of the United States, and possibly the U.S. branch profits tax. Even if the IRS successfully contended that Bermuda Re was engaged in a U.S. trade or business, the U.S.-Bermuda tax treaty would preclude the IRS from taxing Bermuda Re's income except to the extent that its income were attributable to a permanent establishment maintained by that subsidiary. The Company does not believe that Bermuda Re has a permanent establishment in the United States or any material income attributable to a permanent establishment in the United States. If the IRS successfully contended that Bermuda Re did have income attributable to a permanent establishment in the United States, it would be subject to U.S. tax on that income.
Group has obtained an international business company license under the Barbados International Business Companies Act, 1991-24. Based on this license, Group is entitled to special tax benefits, including a preferred rate of tax on profits and gains and an exemption from withholding tax in respect of any dividends, interest, royalties, fees or management fees deemed to be paid to another international business company or to a person not resident in Barbados. Group has also obtained from the Ministry of Economic Development a fifteen year guarantee in accordance with Section 27 of the International Business Companies Act with respect to its continued eligibility for this preferred status. This guarantee is applicable until 2014 and is subject to negative resolution, which means that this guarantee can be revoked at any time. In addition, there are currently no procedures for extending this guarantee. As a result, Group could be ineligible for these benefits after that period, which could reduce the Company's net income.