ACGL maintains its principal offices in Hamilton, Bermuda. ACGL occupies approximately 4,200 square feet of office space in a building located in Greenwich, Connecticut, under a sublease agreement expiring in October 2002. ACGL sub-subleases to MMC Capital the balance of the office space in the building for a term also expiring in October 2002.
Hales leases an aggregate of approximately 7,500 square feet of office space in Chicago, Illinois, New York, New York, Hartford, CT, Mercer Island, Washington and San Francisco, California under leases that expire from June 2002 through February 2009, and American Independent leases approximately 18,000 square feet of office space in Plymouth Meeting, Pennsylvania under a lease that expires in July 2002.
On November 8, 2000, following the approval of Arch-U.S.'s shareholders, Arch-U.S. completed an internal reorganization that resulted in Arch-U.S. becoming a wholly owned subsidiary of ACGL. ACGL performs the holding company functions previously conducted by Arch-U.S., and the shareholders of Arch-U.S. have become the shareholders of ACGL. Prior to the reorganization, ACGL had no significant assets or capitalization and had not engaged in any business or prior activities other than in connection with the reorganization. Arch-U.S. remains the holding company for Hales, Arch Re and Cross River Insurance Company, our U.S. subsidiaries.
We are a holding company whose assets primarily consist of the stock of our subsidiaries and invested assets totaling $220 million at December 31, 2000, which assets were distributed to us by Arch-U.S. in connection with our Bermuda redomestication. We continuously investigate possible acquisitions of new businesses in support of our strategy and evaluate the retention or disposition of our existing subsidiaries and investments. Accordingly, while we do not currently have any material arrangements or commitments with respect thereto (except as disclosed in this report), we intend to make further acquisitions, and it is possible that divestitures and changes in capital structure could occur. We depend on our available cash resources, liquid investments and dividends or other distributions from our subsidiaries to make payments, including the payment of operating expenses we may incur and for any dividends our board of directors may determine. Our board does not currently intend to declare any dividends or make any other distributions. See "Market for Registrant's Common Equity and Related Shareholder Matters--Dividends" and "Risk Factors."
The ability of our insurance subsidiaries, American Independent and Arch Re, to pay dividends or make distributions is dependent on their ability to meet applicable regulatory standards. Based on 2000 results, American Independent may not pay any dividends or make other distributions during 2001 without prior regulatory approval. Due to the distributions made by Arch Re in connection with the XL Capital share repurchase and our redomestication to Bermuda in 2000, Arch Re may not make any distributions without prior regulatory approval until December 2001. See "Business--Regulatory Considerations" and note 11 of the notes accompanying our consolidated financial statements.
On December 4, 2000, we acquired Hales & Company, a merchant banking firm specializing in the insurance industry. See "Business--Acquisitions" above. In addition to providing us with a growing franchise in the insurance services sector, the employees of Hales assist us in finding acquisition candidates, evaluating them, conducting due diligence and monitoring acquired businesses.
Our aggregate invested assets, including cash and short-term investments, totaled $279.1 million at December 31, 2000, compared to $585.9 million at December 31, 1999. The decrease in cash and invested
assets from 1999 to 2000 resulted from the transfers of (1) $248.2 million of fixed maturities and short-term investments to Folksamerica at the closing of the sale of Arch Re's reinsurance operations and (2) $59.2 million of privately held securities in consideration for the shares repurchased from XL Capital.
Prior to the sale of our reinsurance operations on May 5, 2000, our investment goals had been to support Arch Re's reinsurance activities. Following the asset sale, we have sought to acquire operating companies in support of our business plan of building a diversified financial services holding company. See "Business--General--Strategy" and "Business--Acquisitions" above.
At December 31, 2000, our private equity portfolio consisted of 11 investments, with additional investment portfolio commitments in an aggregate amount of approximately $22.6 million.
SFAS No. 131 requires certain disclosures about operating segments in a manner that is consistent with how management evaluates the performance of the segment.
Prior to the sale of our reinsurance operations, we operated in one reportable business segment, which was providing property and casualty reinsurance and other forms of capital to insurance and reinsurance companies and making investments in insurance and insurance-related entities on a global basis. This segment included the results of Arch Re and Cross River, and consisted primarily of the premiums, claims and claims expenses, other operating expenses and investment results.
Since the sale of our reinsurance operations, we have operated in one reportable business segment during 2000. The financial results of Hales, which was acquired during December 2000, were not material for the year ended December 31, 2000. See note 12 of the notes accompanying our consolidated financial statements for information concerning the company's business.
A table of per share data for the years ended December 31, 2000, 1999 and 1998 on an after-tax basis follows. As detailed below, our consolidated net loss for the year ended December 31, 2000 has been affected by (1) net realized after-tax investment gains of $9.5 million, which include $9.8 million in after-tax realized losses resulting primarily from restructuring our investment portfolio in connection with our redomestication to Bermuda on November 8, 2000; (2) the loss on the sale of Arch Re's reinsurance operations to Folksamerica on May 5, 2000; (3) the recording of a loss contingency of $15 million, on a pre-tax basis, against the $20 million of assets held in escrow in connection with the sale of Arch Re's reinsurance operations to recognize a probable deficiency in the related reserves; and (4) poor underwriting results from our divested reinsurance operations prior to the sale on May 5, 2000. Each of these items is discussed below.
At December 31, 2000, approximately 53% of our invested assets consisted of fixed maturity and short-term investments, exclusive of securities held in escrow, compared to 59% at December 31, 1999. Net investment income was approximately $15.9 million in 2000, compared to $20.2 million and $15.7 million in 1999 and 1998, respectively. Such amounts for 2000, 1999 and 1998 are net of investment expenses of $858,000, $5.5 million and $3.6 million, respectively. The investment expense amounts include investment advisory fees of $0.8 million, $2.0 million and $3.3 million, respectively. The 2000 net investment expenses are offset by advisory fee income that we received from MMC Capital in the amount of $1.25 million. Please refer to note 5 of the notes accompanying our consolidated financial statements for additional information about our investment advisory agreement with MMC Capital. The 1999 net investment income is also net of $1.1 million for the payment of interest expense in connection with the settlement of satellite losses.
The decrease in net investment income in 2000 compared with 1999 primarily reflected the decline in our average invested asset base resulting from the sale of Arch Re's reinsurance operations, partially offset by the decrease in investment expenses described above and a higher interest rate environment. The increase in net investment income in 1999 compared with 1998 reflected an increase in our average invested asset base and an increase in the annualized effective yield on our portfolio.
Our investment yields reflect a significant allocation of the total investment portfolio in equity securities, which yield less current income than fixed maturity investments. At December 31, 2000, 1999 and 1998, investments in public and private equity securities approximated 40%, 41% and 49%, respectively, of total cash and invested assets. Additionally, such investment yields exclude the equity in the net income or loss of private equity investments accounted for under the equity method.
ACGL will be subject to U.S. federal income tax only to the extent that it derives U.S. source income that is subject to U.S. withholding tax or income that is effectively connected with the conduct of a trade or business within the United States and is not exempt from U.S. tax under an applicable income tax treaty with the United States. ACGL will be subject to a withholding tax on dividends from U.S. investments and interest from certain U.S. payors. ACGL does not consider itself to be engaged in a trade or business within the United States and, consequently, does not expect to be subject to direct U.S. income taxation. ACGL's U.S. subsidiaries will continue to be subject to U.S. income taxes on their worldwide income.
Arch-U.S.'s 2000 income tax expense was $5.4 million, compared with an income tax benefit of $19.6 million in 1999 and an income tax expense of $235,000 in 1998. In 2000, income tax expense on our pre-tax net loss included a charge to establish a valuation allowance of $5.7 million that adjusted Arch U.S.'s deferred income tax asset to its estimated realizable value. Income tax expense for 2000 also included the write-off of a deferred tax asset of $1.7 million relating to an investee company in connection with our redomestication to Bermuda. In addition, Arch-U.S.'s effective tax rate in 2000 of 49% on equity in net income of investees differs from the U.S. federal statutory rate of 35%. This higher effective rate primarily reflects the write-off of a deferred tax asset of $374,000 relating to an investee company recorded under the equity method of accounting in connection with our redomestication. In 1999, Arch Re's underwriting results had significantly deteriorated resulting in a pre-tax net loss that generated an income tax benefit for the year. In 1998, income tax expense was less than the U.S. federal statutory rate due to tax-exempt dividends and interest income.
Upon our redomestication to Bermuda, Arch-U.S. distributed substantially all of its public equity portfolio to its Bermuda parent, ACGL, at the current market values and realized gains for tax purposes of $21,044,000. The associated income tax expense of $7,365,000 reduced Arch-U.S.'s net operating loss carryforwards by such amount. However, for financial reporting purposes, since the securities have not been sold to an unrelated third party, the realized gain has been deferred and is reported as unrealized appreciation in our consolidated financial statements. Accordingly, the income tax expense is also deferred and reduces unrealized appreciation in the consolidated financial statements.
Premiums written for the year ended December 31, 2000 include business written through May 5, 2000, the closing date of the sale of Arch Re's reinsurance operations and, consequently, comparisons with prior periods are not meaningful. Set forth below are Arch Re's assumed and ceded premiums written for the period January 1, 2000 through the closing of the sale of its reinsurance operations on May 5, 2000, and for the years ended December 31, 1999 and 1998:
For the period January 1, 2000 through the sale of Arch Re's reinsurance operations on May 5, 2000, 26.3% of premiums written were from the accident and health class of business and 28% were from the property and multi-line classes of business. Retrocessional premium for aviation business exceeded assumed premiums written by $1.9 million.
Net premiums written in 1999 for other business was reduced by $10.6 million for the retrocession of a treaty which covered future multiple rocket launches that was recorded in 1996. The reduction of net premiums written resulting from this retrocession increased the commission and operating expense ratio components of the statutory composite ratio by 1.1 percentage points, but had no impact on operating results.
In connection with the sale of Arch Re's reinsurance operations, we purchased additional reinsurance protection to reduce the net financial loss to Folksamerica on any large commercial airline catastrophe to $5.4 million, net of reinstatement premiums. Although we believe that any such net financial loss will not exceed $5.4 million, we have agreed to reimburse Folksamerica for a net financial loss it may incur that is in excess of $5.4 million for aviation losses under certain circumstances prior to May 5, 2003. See "Business--Significant 2000 Developments--Sale of Reinsurance Operations" and note 2 of the notes accompanying our consolidated financial statements.
Estimates of prior accident year claims were increased by approximately $3 million in 2000 primarily relating to Arch Re's aviation and property business. Estimates of prior accident year claims were increased by approximately $30 million in 1999, which added 10.2 points to the 1999 combined ratio. A substantial portion of the 1999 increase resulted from (1) business produced by the managing underwriting agency, (2) notification of additional satellite losses received in 1999 pertaining to 1998, (3) aviation losses, principally the previously discussed 1998 Swiss Air crash, and (4) property losses reported on several international treaties that were in run-off.
Commissions and brokerage expenses are acquisition costs that generally vary by the type of treaty and line of business, and were considered by Arch Re's underwriting and actuarial staff in evaluating the adequacy of premium writings prior to the sale of Arch Re's reinsurance operations. In a number of reinsurance treaties, provisional commissions were initially paid and subsequently increased or decreased, subject to a minimum and maximum amount, depending upon the claims and claims expenses experience of the assumed business. Arch Re recorded the commission increase or decrease in accordance with contractual terms based on the expected ultimate experience of the contract. The claims and commissions and brokerage ratios reflected Arch Re's business mix.
The aggregate hypothetical loss generated from an immediate adverse shift in the treasury yield curve of 100 basis points would result in a decrease in total return of 2.2%, which would produce a decrease in market value of $1.3 million on our fixed maturity investment portfolio valued at $59.5 million (including securities held in escrow) at December 31, 2000. There would be no material impact on our short-term investments.