Underwriting Income. The Company did not earn any premium income from reinsurance contracts during the years ended December 31, 2000 and 1999. Due to excess capacity in the global reinsurance markets and the resulting lack of attractively priced reinsurance programs, the Company did not take on any new reinsurance business during either year, other than a quota share reinsurance contract entered into with SNCC in early 1999 which was rescinded in January 2000 and thus is excluded from the Company's financial results. During the third quarter of 2000, the Company effected three additional rent-a-captive programs for which it receives underwriting fee income.
Net Investment Income. Net investment income was $13.2 million for 2000 as compared to $22.3 million for 1999. Investment results during these periods are primarily derived from investment vehicles of independent investment managers, which are accounted for under the equity method, with earnings and losses included in net investment income, and from preferred dividends from the LLC, the assets of which are similarly invested with independent investment managers. The
managers' investment gains in 1999 primarily resulted from a recovery in numerous sectors of the global financial markets, which impacted positively upon the performance of the investment portfolios.
Underwriting Income. The Company did not earn any premium income from reinsurance contracts during the year ended December 31, 1999. Due to excess capacity in the global reinsurance markets and the resulting lack of attractively priced reinsurance programs, the Company did not take on any new reinsurance business during the year, other than a quota share reinsurance contract entered into with SNCC in early 1999 which was rescinded in January 2000 and thus is excluded from the Company's financial results. Premiums in the period ended December 31, 1998 were derived primarily from workers' compensation aggregate excess of loss reinsurance assumed from Safety National in the amount of $82.1 million, from the group long-term disability quota share reinsurance assumed from RSL in the amount of $39.8 million and from professional liability aggregate excess reinsurance assumed in the amount of $13.4 million.
Net Investment Income (Loss). Net investment income for the year ended December 31, 1999 was $22.3 million as compared to a net investment loss of $16.4 million for the period ended December 31, 1998. Investment results during these periods are primarily derived from investment vehicles of independent investment managers, which are accounted for under the equity method, with earnings and losses included in net investment income, and from preferred dividends from the LLC, the assets of which are similarly invested with independent investment managers. The managers' investment gains in 1999 primarily resulted from a recovery in numerous sectors of the global financial markets, which impacted positively upon the performance of the investment portfolios. The managers' investment losses in the 1998 period were primarily the result of extreme and adverse conditions affecting a number of sectors in the global financial markets.
The principal liquidity requirement of the Company's insurance subsidiary, Oracle Re, in addition to funding operating expenses, is the fulfillment of the obligations under its reinsurance agreements. The primary source of funding for these obligations, in addition to operating earnings, is the net cash flow from the investments included in Oracle Re's investment
In addition to Oracle Re's current liquidity requirements, Oracle Re is required to provide collateral security with respect to letters of credit outstanding under the LOC Agreement and otherwise. Under the LOC Agreement, depending on the type of collateral pledged, the collateral maintenance requirement is equal to up to 150% of the amount of the outstanding letters of credit. See "Other Transactions - Letter of Credit Agreement." In the event that sufficient collateral cannot be maintained relative to these requirements, Oracle Re may be required to negotiate with its reinsureds to reduce the size of the reinsurance transactions, thereby decreasing the amounts of letters of credit and related collateral requirements under the LOC Agreement. Moreover, if Oracle Re were unable to furnish sufficient collateral or otherwise were to fail to satisfy any covenant or requirement under the LOC Agreement, it may be required to liquidate all or a substantial portion of its investment portfolio or otherwise secure its obligations under its reinsurance agreements, which would likely have a material adverse effect on the business and operations of the Company. The banks under the LOC Agreement have given notice to Oracle Re that they will not renew such agreement at its expiration in January 2002. The Company intends to negotiate a replacement letter of credit arrangement with such banks or an alternative group of banks and to negotiate with its ceding companies regarding the implementation of alternative security arrangements with respect to all or a portion of its liabilities; however, there can be no assurance regarding the successful completion by the Company of such arrangements or the terms on which such arrangements can be concluded. Since letter of credit arrangements are presently required under the Company's reinsurance agreements with SNCC and RSL, the failure to complete such arrangements would likely have a material adverse effect on the Company.
Aside from the Company's investment in preferred securities of the LLC, 13.9% of the Company's investment portfolio at December 31, 2000 was invested in fixed maturity securities, which had a weighted average credit rating of "AAA" as rated by Standard & Poor's Corporation. At December 31, 2000, 91.4% of the Company's fixed maturity securities portfolio other than such preferred securities consisted of mortgage-backed securities. Mortgage-backed securities subject the Company to a degree of interest rate risk, including prepayment and extension risk, which is generally a function of the sensitivity of each security's underlying collateral to prepayments under varying interest rate environments and the repayment priority of the securities in the particular securitization structure. The Company seeks to limit the extent of this risk by emphasizing the more predictable payment classes and securities with stable collateral.
The Company's fixed maturity investments subject it to risks resulting from changes in interest rates. If interest rates were to increase by 10% from their December 31, 2000 levels, the fair value of the Company's fixed maturity investments, other than the preferred securities of the LLC, would decline by approximately $0.8 million as compared to a decline of approximately $1.0 million at December 31, 1999. This analysis incorporates numerous assumptions and estimates and assumes no changes in the Company's investment portfolio in reaction to such interest rate changes. Consequently, the results of this analysis will likely be materially different from the actual changes experienced under given interest rate scenarios.
The Company's Subordinated Notes were issued at a fixed interest rate. A hypothetical 10% decrease in market interest rates would cause a corresponding $2.2 million increase in the fair value of the Company's fixed rate corporate debt as compared to an increase of $2.1 million at December 31, 1999.