The following table sets forth the selected consolidated financial data for ESG and its subsidiaries. The financial statements included in this periodic report represent the financial performance and
The following is a discussion and analysis of the financial condition, results of operations, liquidity and capital resources of ESG Re Limited and its subsidiaries. This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes.
Credit Ratings. On March 8, 2002, Fitch Ratings has assigned Insurer Financial Strength Ratings of BB+ to ESG Reinsurance Bermuda Ltd., ESG Reinsurance Ireland Ltd. and European Specialty Ruckversicherung AG, with a Rating Outlook of Stable. In November 2001, Standard and Poor's increased its counterparty credit and insurer financial strength rating for ESG from "B+" to "BB-" with a change in the rating outlook from "Stable" to "Positive." "Positive" means that the rating may be raised. According to S&P, its capital adequacy model placed us at the high end of the "BBB" rating but that it would like evidence of continued progress in fiscal year 2002 before adjusting the rating further. There can be no assurance that we will continue to maintain either of these ratings.
Effect of Terrorist Attacks. We previously reported that our estimated total exposure related to the September 11, 2001 terrorist attacks would be less than $1 million. Additional information regarding an outstanding claim, which we received in December 2001, increased our estimated gross exposure to approximately $1.2 million, before taking account of recoveries from our reinsurers. We review our exposures and liabilities as a result of the events of September 11, 2001 on an ongoing basis. We may have additional liabilities based on these events if additional claims are made.
The amount placed with co-reinsurers increased to 30.1% of total premiums managed in 2001 from 4.0% in 2000. This is the result of a 50% co-reinsurance arrangement with ACE for all North American medical business that we entered into, from January 2001. We expect to keep this arrangement in place throughout 2002. Reinsurance of risks related to the U.S. medical markets continues to be the largest portion of our total managed premiums. We receive a management fee for the premiums we manage on behalf of ACE under our co-reinsurance agreement, in respect of business managed in the 2001 financial year, but only to the extent ACE earns the premiums in the 2002 and 2003 financial years. We do not receive a management fee under the ACE co-reinsurance agreement for any premium earned in 2001.
Gross and net premiums written and net premiums earned during 2001 and 2000 were as follows:
We continue to implement stringent terms of trade, effect real rate increases, and are very selective on the business we underwrite. This is reflected in the improving loss and acquisition ratios in our medical reinsurance business from 109.8% in 2000 to 92.9% in 2001. In 2001, net earned premium in the medical line reduced by 37.0%, primarily as a result of our co-reinsurance arrangement with ACE. Net earned premium in respect of the accident line of business decreased by 36.2% as a result of adjustments to estimated premiums and more selective underwriting. Poor underwriting results on the accident account reflect adverse claims development, particularly on our Norwegian Portfolio, and this contributed to the loss and acquisition ratio of 131.1%.
We calculated the operating expense ratios for 2001 and 2000 by expressing total administrative expenses, net of corporate office expense, as a percentage of net premiums earned.
Underwriting results for 2001 and 2000, by line of business and in total, for the ESG Direct segment were as follows:
The distribution of gross premiums written by line of business for the years ended December 31, 2001 and 2000 is as follows:
For the year ending December 31, 2001, we earned $874,000 in management fee revenue. This represents a 51.4% reduction from the $1.8 million in management fees earned in the year ending December 31, 2000. The majority of management fee revenue in 2001 and 2000 consists of fees earned on those premiums managed on behalf of our co-reinsurers. Management fees declined in 2001, primarily due to fee income not attaching to business earned during 2001 on the ACE co-reinsurance business replacing co-reinsurance agreements which expired in 2000. Under the ACE agreement, fee income will be recognized on risks attaching to the 2001 underwriting year, as it earns in the 2002 and 2003 financial years.
(1)Net investment income is net of investment-related expenses and income on premium receivable and funds held by ceding companies.
(1)Net investment income is net of investment-related expenses and income on premium receivable and funds held by ceding companies. At December 31, 2001 and 2000, we had invested approximately $1.7 million and $12.7 million, respectively, primarily into companies with whom we have operating relationships. In addition, we have outstanding loans of approximately $4.5 million and $5.0 million with one of these related enterprises as of December 31, 2001 and 2000, respectively.
The maximum effective maturity for any single security in our investment portfolio is set at 30 years for U.S. government and U.S. government agency securities with full faith and credit guarantees and at 10 years for all other issues, measured from the date of settlement. The duration of the portfolio varies according to decisions taken by the investment advisor on the outlook for interest rate movements. The benchmark for such duration is approximately 3 years.
As of December 31, 2001, total investments and cash were $154.9 million, compared to $212.2 million at December 31, 2000. All fixed maturity securities in our investment portfolio are classified as available for sale and are carried at fair value.
The fixed maturity investment portfolios as of December 31, 2001 and 2000 were as follows:
In 2002, we will continue to follow our investment policy and guidelines while seeking to improve long-term value by continuing to invest in selected strategic investments in accordance with our current commitments as set out in Discontinued Operations below. A strategic investment is defined as an investment in a reinsurance-related enterprise, ceding company or distribution channel that is expected to generate or secure additional profitable business for us.
We are a party to several Investment Advisory Agreements with Head Asset Management LLC, an affiliate of Head & Company, L.L.C. Under these agreements, Head Asset Management supervises and directs the investment of our asset portfolio in accordance with investment objectives and guidelines that we have established. Mr. Head, the Chairman of our Board of Directors and our former CEO, controls Head Asset Management. ESG is the principal client of Head Asset Management. Under our Investment Advisory Agreement with Head Asset Management, we pay fees quarterly in arrears equal to:
•0.20% per year of the first $150 million or less of the market value of the managed assets, and
•0.15% per year of the managed assets in excess of $150 million.
investment guidelines are approved by the Audit Committee to ensure appropriate levels of portfolio liquidity, credit quality, diversification and volatility. In addition, beginning in 2002, the Audit Committee will review the portfolio's exposure to capture any potential violations of investment guidelines. The Audit Committee will also review our investment advisory relationship with Head Asset Management LLC in the context of our other banking relationships to determine whether changes should be made to any of these relationships.
We made stringent efforts to reduce overheads in the year 2001. To that end, we made cost savings across all categories, but in particular in personnel costs, professional services and travel expenses. Personnel costs decreased by $1.2 million from $13.1 million in 2000 to $11.9 million in 2001. Although the number of full-time employees increased from 135 at December 31, 2000 to 162 at December 31, 2001, labor costs are on average lower due to the weighting of employees being greater now in lower operating-cost economies, than in prior years. We have also recognized economies of scale as a result of our centralized underwriting, claims and finance operations.
Professional service fees decreased by $3.4 million from $10.3 million in 2000 to $6.9 million in 2001. Professional fees included $3.2 million in legal fees in respect of corporate compliance, standardization of policy contracts and management agreements, acquisitions and forensic audits and legal disputes. Audit and accountancy costs of $1.4 million were incurred in audit, accounting, tax advisory and corporate reporting services. Consulting expenses of $2.6 million were incurred in actuarial support, computer systems improvements, recruitment, due diligence and corporate communications.
Under current Bermuda law, we are not required to pay taxes in Bermuda on either income or capital gains. Provision for income taxes consists of corporate and other applicable income taxes payable in the various jurisdictions in which we conduct our business including, but not limited to, Germany, Ireland, Canada and the United Kingdom. We have a tax credit of $1.3 million resulting from the recognition of a tax asset on the books of ESG Reinsurance Ireland Ltd., our principal underwriting entity. This is in relation to the expected use of carry forward losses in offsetting future taxable profits. Realization of the deferred tax asset is dependent on generating sufficient taxable income in the future. During 2001, a valuation allowance of $11.4 million to reduce the deferred tax asset was recorded in accordance with the provisions of SFAS109. The valuation allowance is necessary because of uncertainly regarding the realizability of certain net operating loss carryforwards. We have loss carryforwards of $57.0 million available to offset future foreign taxable income. Such tax loss carryforwards do not have an expiration date.
In November 2001, we committed to make an additional capital infusion in 4Sigma of $1.8 million, in increments of $100,000 as funds are needed by 4Sigma, in exchange for 1.8 million shares of Series E preferred stock. As at December 31, 2001 we had invested $1.2 million of this commitment. Mr. Head has also committed to invest an additional $1.2 million in cash in 4Sigma on these same terms and conditions. We evaluate our investment in 4Sigma periodically.
On December 31, 2001, we wrote off the Series A preferred stock representing our initial $8.0 million investment in 4Sigma. For a further discussion of our investment in 4Sigma, see Note 11 to our 2001 Consolidated Audited Financial Statements.
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH YEAR ENDED DECEMBER 31, 1999
We have restated all information for 2000 to conform to the our new segment structure.
For the year ended December 31, 2000, we managed, on our own behalf and behalf of our co-reinsurers, total premiums of $255.0 million, of which we placed $10.0 million with co-reinsurers and retroceded $33.1 million, resulting in $211.9 million net premiums written. For the year ended December 31, 1999, we managed, on our own behalf and on behalf of our co-reinsurers, total premiums of $347.9 million, of which we placed $14.9 million with co-reinsurers and retroceded $19.8 million, resulting in $313.2 million net premiums written. The amount placed with co-reinsurers declined to 3.9% of total premiums managed in 2000 compared to 4.3% of total premiums managed in 1999. The ESG Direct segment did not operate during 1999.
•New Business-approximately $130.5 million, or 51.1%, of total premiums managed was generated from new business.
During 2000, we had reductions in total premiums managed on the 1998 and 1999 underwriting years of $37.1 million, equivalent to 6.6% of gross premium written in these years. This represents differences between estimates made at the time contracts were written and actual amounts reported by ceding companies. Such changes are recorded in the period in which the actual amounts are determined.
Underwriting results for 2000 and 1999, by line of business and in total, for the ESG Reinsurance segment were as follows:
The operating ratios for 2000 and 1999, by line of business and in total, for the ESG Reinsurance segment were as follows:
Poor underwriting results across the two major lines of business contributed to the increase in our loss and acquisition ratio from 106.5% in 1999 to 112.3% in 2000. The 2000 results are comprised of three underwriting years, with the 2000 underwriting year contributing earned premium of $106.5 million, carrying a loss and acquisition ratio of 104.1%. The 1999 underwriting year contributed $117.8 million of earned premium with a loss and acquisition ratio of 105.4%. The 1998 underwriting year contributed $3.7 million to net earned premium with $17.1 million of loss and acquisition expense attached.
The operating ratios for 2000 for the ESG Direct segment were as follows:
We commenced the ESG Direct business during 2000 by writing business in the Asia region and the above results reflect the early development of this business. Initial set-up costs together with low premium volumes contributed to the high expense ratio.
(1)Other investments include $7.8 million of equity investment and loads provided to three companies that we expect will generate or secure profitable reinsurance business for us.
Our investment portfolio in 1999 was hurt by a general decrease in prices in the U.S. bond markets, which resulted in investment losses on sales of fixed income securities during the year.
We continued to incur significant expenses for professional services and for travel expenses in the development of our business. Personnel costs increased by $4.1 million from $9.0 million in 1999 to $13.1 million in 2000. The number of full time employees increased from 121 at December 31, 1999 to 135 at December 31, 2000. The increase in employees was primarily in Direct Marketing, Bancassurance and in the centralized underwriting and claims operations.
Reference is made to Note 11 to our Consolidated Financial Statements concerning the divestiture, effective June 30, 2000, of our health care division.
Deferred acquisition costs decreased from $46.6 million at December 31, 2000 to $40.3 million at December 31, 2001, which was a function of the decline in written premiums over the year.
We expect that our financial and operational needs for the foreseeable future will be met by funds generated from operations and the proceeds from the sale of investments. As we rely on cash flows from operations, a reduction in the demand for our services could reduce the availability of funds. Additionally, although we primarily invest in high quality assets, a diminution in the value of our portfolio could restrict our ability to continue financing our operations.
In support of our business, we enter into Letters of Credit and Trust Account arrangements with ceding companies. As at December 31, 2001, we had in total $91.0 million of outstanding Letters of Credit and Trust Accounts of which $27.0 million related to Letters of Credit issued and $64.0 million in Trust Accounts. These arrangements were secured against our fixed maturity investment portfolio. Effective January 1, 2001, the total Letters of Credit issued was decreased from $73.4 million to $50.1 million due to historical letters of credit expiring December 31, 2000. Further, in accordance with local regulatory requirements in Ireland, we placed $20 million in a Trust Agreement in February 2001.
We manage our underwriting risk exposures primarily through an excess of loss reinsurance program. For 2002, this program provides reinsurance protection up to a known accumulation of $5,000,000 for personal accident exposures and up to $5,000,000 per person for medical expense exposure.
•our continuing ability to increase premium rates and strengthen terms of trade in the North and Latin American markets without major loss of business;
•the impact of rate increases on premiums written over the 2001 underwriting year.
•Economic Recession. An economic slowdown worldwide, or in any of our key markets, could reduce demand for our products and services. If the general economic downturn continues or
•Inadequate Loss Reserves. We maintain reserves to cover the estimated liability for reported and unreported claims. Inadequate reserves could be caused by our failure to value accurately the risks of certain business, inaccurate information from ceding clients, or extraordinary events. If our reserves prove insufficient to cover the actual losses we incur, we would have to increase our reserves and incur a charge to our earnings.
•Investment Risks. We have contracted with Head Asset Management L.L.C. to supervise and direct the investment of our asset portfolio. Poor performance on the part of this investment manager could have an adverse impact on our financial performance.
•Foreign Currency Exchange Risks. Because we conduct business in numerous geographic regions and currencies around the world, fluctuations in currency exchange rates can affect our earnings. We maintain investments in currencies in which we will collect premiums and pay claims, thus creating a partial natural hedge against exchange rate fluctuations. While we do not expect our exposure to foreign currency risk to materially affect our profitability, volatility in exchange rates could affect our business adversely.
•Inflation. We provide reinsurance in certain geographical markets, such as Latin America, that have experienced sustained periods of high inflation. In an inflationary cycle, there is a risk that the amounts we will owe on our coverage obligations will exceed the amounts we received as premiums.
•Tax Exposure. For purposes of many countries, including the United States, ESG is not engaged in the conduct of any trade or business in such country, and, as a result, is not subject to corporate income tax therein. If, however, any country, including the United States were to contend successfully that our operations subject us to corporate income tax, we would be liable for tax on net income received by ESG to the extent it had been received at a permanent place of business. If corporate income taxes did apply to income received by ESG, it would reduce our net income, if any.
We were incorporated under the laws of Bermuda on August 21, 1997. Our principal activities conducted through our subsidiaries, are to provide accident, health, credit, life and special risk reinsurance and to provide underwriting management services for these lines.
All material intercompany balances and transactions have been eliminated in consolidation.
The reserve for unpaid losses and loss adjustment expenses includes an estimate of reported case reserves and an estimate for losses incurred but not reported. Case reserves are estimated based on ceding company reports and other data considered relevant to the estimation process. We have some specific historical experience on a significant number of our programs on which to base our estimate of losses incurred but not reported. There is a reliance on the expectations of ceding companies about
Fixed maturity securities are classified as available for sale and are reported at estimated fair value. Investments that are available for sale are expected to be held for an indefinite period but may be sold depending on interest rates and other considerations. Other investments over which we exercise significant influence are accounted for under the equity method. Otherwise these investments are accounted for at cost. Unrealized investment gains and losses on investments available for sale, net of applicable deferred income tax, are reported as a separate component of "accumulated other comprehensive income". Realized gains or losses on sale of investments are determined on the basis of average cost. The carrying values of investments available for sale and other investments are adjusted for impairments in value that are considered to be other than temporary.
Our functional and reporting currency is the U.S. Dollar. Foreign currency receivables or payables that are denominated in a currency other than U.S. dollars are translated into U.S. dollars at the rates of exchange in effect at the balance sheet date. Revenues and expenses are translated into U.S. dollars using weighted average exchange rates for the period. The resulting exchange gains or losses are included in the results of operations. Exchange gains and losses related to the translation of investments available for sale are included in the net unrealized appreciation (depreciation) of investments, net of deferred income taxes, as a separate component of "accumulated other comprehensive income." Assets and liabilities related to foreign operations are translated into U.S. dollars at the exchange rate in effect at the balance sheet date; revenues and expenses are translated into U.S. dollars using weighted average exchange rates for the period. Gains and losses resulting from translating foreign currency financial statements, net of deferred income taxes, are excluded from income and included as a separate component of "accumulated other comprehensive income."
Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per common share reflect the maximum dilution that would have resulted from the exercise of stock options and warrants to purchase common shares. Diluted earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding and the dilutive potential common shares outstanding during the period of calculation.
In June 2001, the FASB issued Statement of Financial Accounting Standard (SFAS) No. 141, Business Combinations. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. Management does not expect the adoption of SFAS No. 141 to have an impact on our financial position, results of operations, or cash flows.
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard (SFAS) No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives not be amortized, but rather be tested at least annually for impairment. Management does not expect the adoption of SFAS No. 142 to have an impact on our financial position, results of operations, or cash flows.
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144). SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, and some provisions of Accounting Principles Board Opinion 30. SFAS No. 144 sets new criteria for determining when an asset can be classified as held-for-sale as well as modifying the financial statement presentation requirements of operating losses from discontinued operations. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. We are currently evaluating the provisions of SFAS No. 144. Management does not expect the adoption of SFAS No. 144 to have an impact on our financial position, results of operations, or cash flows.
The amortized cost and fair value of fixed maturities by contractual maturity are shown in the following table:
The components of net investment income are presented in the table below:
Activity in deferred acquisition costs for the years ended December 31, 2001, and 2000 is summarized as follows:
The negative prior year movement in incurred losses is as a result of a reduction in estimated loss reserves arising from write-downs in estimated written premiums of $105 million in 2001, with an equivalent reduction in net earned premiums of $30.3 million.
The actual income tax expense attributable to income for the three years in the period ended December 31, 2001 differed from the amount computed by applying the combined effective rate of 0% under Bermuda law for 2001 and 1999 to income before income taxes, as a result of the following:
Deferred income taxes reflect the tax effect of the temporary differences between the value of assets and liabilities for financial statement purposes and such values as measured by the tax laws and regulations. The principal items in the net deferred income tax asset (liability) are as follows:
We utilize retrocessional agreements to reduce our exposure to large claims and catastrophic loss occurrences. These agreements provide for recovery from retrocessionaires of a portion of our losses and loss expenses under certain circumstances. They do not discharge our primary liability. In the event retrocessionaires were unable to meet their obligations under the retrocession agreements, we would be liable for such defaulted amounts. We believe that we have minimized our credit risk with respect to our reinsurance by monitoring our retrocessionaires and avoiding concentrations with any single company.
Class A warrants to purchase 1,381,200 common shares at $20 per share were outstanding as of December 31, 2000 and 2001. Options to purchase up to 1,680,328 common shares, issued at exercise prices between $2.01 and $26.00, were outstanding as of December 31, 2000. Options to purchase up to 2,315,409 common shares, issued at exercise prices between $2.01 and $26.00, were outstanding as of December 31, 2001. The incremental shares from assumed exercise of options and warrants have not been included in the above computation for 2001 and 2000 as they have an anti-dilutive effect on the net loss per common share.
We and our subsidiaries have various lease obligations. Rental expenses are amortized on the straight-line basis over the term of the lease. Total rental expense was approximately $1.4 million, $1.5 million and $0.9 million for the years ended December 31, 2001, 2000 and 1999, respectively. We have leased premises in Bermuda, Ireland, United Kingdom, Portugal, Hong Kong, Australia, Thailand, United States, Canada, Italy and Spain.
The future minimum commitments under operating leases, employment contracts and other commitments are as follows:
As of December 31, 2001, Secured Letters of Credit and Trust Accounts in the aggregate amount of $91.0 million have been issued in favor of ceding companies with $27.0 million related to Letters of Credit issued and $64.0 million related to Trust Accounts in force. The Letters of Credit and Trust Accounts are secured by a lien on our fixed maturities investment portfolio, equal to 120% of the amount of the outstanding letters of credit, and 102% of the amount of the outstanding Trust Accounts. As of December 31, 2000, Secured Letters of Credit and Trust Accounts in the aggregate amount of $95.8 million have been issued in favor of ceding companies with $73.4 million related to Letters of Credit issued and $22.4 million related to Trust Accounts in force.
From December 1998 through June 2000, we operated IPT GmbH and later VBB Bermuda Limited, subsidiaries that provided disease management services in Germany. These services, which included physician referrals, a medical information hotline, second opinion services, cardiac rehabilitation and access to disease management advisors, comprised the health care segment of our business.
Effective as of June 30, 2000, we transferred all the assets of our health care segment to 4Sigma. These assets had a book value of $8 million at the time of transfer. In exchange for the transferred assets, we received 8,000,000 shares of Series A preferred stock, representing a 69% equity interest in 4Sigma. In addition, affiliates of John C Head III, the Chairman of our Board of Directors, invested $3.0 million in cash in exchange for a 28% equity interest in 4Sigma. Dr. Gerald Moeller, a director of ESG from July 1999 to August 2000 and the president of our health care division from July 1999 to June 2000, also invested $400,000 in cash in exchange for a minority equity interest in 4Sigma. The board members of 4Sigma include John C Head III, Dr. Gerald Moeller and Dr. Herbert Palmberger, who also serves as outside counsel to ESG in Germany.
In February 2000, Odyssey Re instituted an action in England against a broker, Stirling Cooke Brown, alleging fraud and conspiracy on the reinsurance placement of 1997 and 1998 Personal Accident and Workers Compensation "carve out" business with Odyssey Re. These proceedings mirror earlier proceedings commenced in New York, which were dismissed on jurisdictional grounds. During 1998, ESG accepted a 25% quota share reinsurance treaty with Odyssey Re (UK) retroactive to January 1, 1998. This treaty covers various insurance companies involved in the litigation Odyssey Re instituted in New York over 1997 and 1998 business. This treaty terminated as of December 31, 1998, but we renewed our participation for 1999 directly with one of those ceding companies. In December 1999, we gave notice to rescind our contract with Odyssey Re (UK) for misrepresentation and failure to disclose material facts. On November 29, 2000, we filed suit in the High Court to seek a judicial confirmation of our rescission. On February 5, 2001, Odyssey Re filed a response. On March 21, 2001, we filed a motion for summary judgment. The motion was substantially based on an admission by Odyssey Re (UK) that a misrepresentation had been made to us in connection with the quota share, and was supported by evidence from fact and expert witnesses. Our intention was to re-evaluate the motion if Odyssey Re (UK) served any evidence. Subsequently, Odyssey Re (UK) withdrew their admission, and, less than a week before the date scheduled for the hearing, and in violation of the applicable rules of court, they served their evidence, in which they made it clear, for the first time, that they intended to plead a positive case that the representation was true. Odyssey Re's evidence also raised other factual issues by way of defense, which had not been contained in their initial pleading.
We recognized that the court was unlikely to give a summary judgment on the evidence as it stood and accordingly withdrew our motion. This withdrawal is in no way an acknowledgement that our prospects of success in our litigation with Odyssey Re (UK) are any less good than they were, but simply an acceptance that the issues, which have been raised, require a trial. Indeed, we remain confident that we will prevail in that litigation, and intend to pursue the litigation aggressively. We may reissue our motion for summary judgment at any time if justified by the state of the evidence and the pleadings. This matter will be heard no earlier than early 2003.
We have also given notice we intend to rescind the 1999 account. This matter is now set for arbitration in early 2003.
As part of our prior underwriting pool management services, we collect premiums and pay claims on behalf of the pool participants. In addition to fees received for the underwriting services, we also earn interest income on funds we are authorized to hold in accordance with the underwriting management agreements between us and the pool participants. We are authorized to retain 25% of gross premiums as a claims fund held in bank accounts having trustee status.
Twenty percent of the Class B Warrants are available for vesting during each of the first five years following the closing date of the IPO of the Company in December 1997, and will vest only if, for any 20 consecutive trading days during the one-year vesting period, the percentage change in the market price of the common shares since the closing date of the IPO exceeds the percentage change in the Wilshire 5000 Stock Price Index by at least 500 basis points. The Class B Warrants are exercisable for a period of 10 years from the date of vesting. The exercise price per Common Share was originally $20 and was reduced by $1.50 on September 1, 2001 under the terms of the original Warrant. As of December 31, 2001 and 2000, 276,240 of the Class B Warrants are vested and are exercisable.
We have adopted the 1997 Stock Option Plan (the "Stock Option Plan") under which our employees and employees of our subsidiaries are eligible to participate. The Stock Option Plan is administered by the Compensation Committee of our 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. The Stock Option Plan was approved by shareholders in December 1997.
To date all non-management directors have elected to receive their fees as options to purchase shares. Options granted under the Directors' Plan vest 100% at the date of grant. All options are exercisable at fair market value of the stock at the date of grant and expire 10 years after the date of grant. As of December 31, 2001, options to purchase a total of 754,428 shares of common stock had been granted, net of forfeitures, of which options for 754,428 shares were vested and exercisable, and no shares had been issued upon exercise. As of December 31, 2000, options to purchase a total of 622,128 shares of common stock had been granted, net of forfeitures, of which options for 622,128 shares were vested and exercisable, and no shares had been issued upon exercise.
The fair value of each option grant was estimated using the Black/Scholes option pricing model with the following assumptions: (i) dividend yield of 0.0%; (ii) expected volatility of 28.1%; (iii) risk-free rate of 4.5%; and (iv) expected life of 4.7 years.
described in SFAS No. 123, our net loss and earnings per share would have been adjusted to the pro forma amounts indicated below:
The weighted average remaining contractual life of options outstanding at December 31, 2001, is presented below:
On February 25, 2000, the Board of Directors approved the 2000 Restricted Stock Plan (the "RSA Plan"). The purpose of the RSA Plan is to promote the interests of the Company and its shareholders by (i) enhancing our ability and our affiliates' ability to attract and retain qualified individuals upon whom, in large measure, our progress, growth and profitability depend and (ii) providing an incentive to these individuals to encourage them to contribute to our future success and prosperity by enabling such individuals to participate in the long-term growth and financial success of the Company through stock ownership. This is a broad-based plan under which grants can be made to employees at most levels. The Compensation Committee has discretionary authority to interpret the RSA Plan and to determine the terms of any awards, when, if and to whom awards are granted, and the number of common shares covered by each award. An S-8 Registration Statement was filed and effective on March 13, 2000 covering this Plan.
Upon issuance of restricted shares, unearned compensation is charged to shareholders' equity for the cost of the restricted stock and is amortized to expense over the vesting period. The amount of
earned compensation recognized as expense with respect to restricted stock awards was $0.6 million and $1.1 million for 2001 and 2000, respectively. No expense was recognized in 1999.
We do not maintain separate balance sheet data for our operating segments. Accordingly we do not review and evaluate the financial results of the operating segments based upon balance sheet data.
The following tables provide summary financial information by our lines of business of the reinsurance segment.
The following tables provide summary financial information of earned premiums of the ESG Reinsurance segment, on the basis of where the underlying risk is located
For the year ended December 31, 2001, one significant client contributed $27.9 million to total revenue. For the year ended December 31, 2000 no client contributed more than 10% of total revenue. For the year ended December 31, 1999, one significant client relationship contributed $64.1 million to total revenue.
Under Bermuda law, we are prohibited from declaring or paying a dividend if such payment would reduce the realizable value of our assets to an amount less than the aggregate value of our liabilities, issued share capital (common share capital) and share premium (additional paid-in capital) accounts.