We and our subsidiaries operate out of leased premises, the most significant of which are in located in Bermuda, Milwaukee and Philadelphia.
The Company reported a net loss of $5.6 million or $0.14 per diluted share in 2000, as compared to net income of $50.4 million or $1.14 per diluted share in 1999 and $64.5 million or $1.42 per diluted share in 1998. The 2000 results include a fourth quarter after-tax charge of $46.1 million or $1.11 per diluted share to establish a reserve for reinsurance recoverables, add to provisions for terminated programs and increase the Company's net loss reserves. Earnings in 1999 were adversely affected by provisions related to net losses incurred on terminated programs of $8.0 million, net of tax, taken in the third quarter of 1999.
For the years ended December 31, 2000, 1999 and 1998, total revenues have grown primarily as a result of increased fee income and premiums earned. This growth is mainly attributable to the increase in gross premiums written in the Program Business segment, which offset the marginal decline in Corporate Risk Management business due to prolonged soft market conditions.
Program Business involves replacing traditional insurers and acting as the conduit between producers of specialty books of business and reinsurers wishing to write that business. Program Business accounted for 57% of total fees for 2000 compared to 53% in 1999 and 52% in 1998. This increase resulted from the growth of existing programs due to premium increases and decreased competition. Fees earned on individual Program Business accounts are more likely to grow compared to Corporate accounts because new policy holders are constantly being added in each program. Program Business also has historically had a higher retention rate than Corporate Risk Management. Pre-tax margins in this segment were 27% for 2000 compared to 28% in 1999 and 40% in 1998. The Company expects that the number of programs in its Program Business segment will decline during 2001, but that the remaining programs will be larger and more profitable due to increased pricing rates, decreased competition and the non-renewal of marginal and unprofitable programs both by the Company and its reinsurers.
Corporate Risk Management, the Company's original business segment, involves providing services to businesses and associations seeking to insure a portion of their risk in a loss sensitive alternative market structure. This segment, which accounted for 22% of total fee income for 2000 compared to 28% in 1999 and 33% in 1998, has been the most affected by the extremely soft insurance market cycle for commercial risks. The number of Corporate Risk Management accounts increased slightly in 2000 to 104 from 103 in 1999 both of which are down from 118 in 1998. Profit margins fell in 2000 to 26% from 32% in 1999 and 39% in 1998. The decline in the 2000 profit margins is primarily attributable to the overall decline in fees while the associated expenses have risen. The Company believes that profit margins will stabilize due to the continued firming of pricing, which should improve the sale of Corporate Risk Management accounts and associated fees. Strong unit sales during the last quarter of 2000 reinforced this belief.
The Financial Services business segment provides administrative services primarily to offshore mutual funds and other companies. This segment also includes the Company's family of proprietary mutual funds, asset accumulation life insurance products for the high net worth market and trust and private client services.
Financial Services accounted for 14% of total fee income for 2000, up from 11% for 1999 and 9% in 1998. Fees from Financial Services increased primarily as a result of an increase in mutual fund assets under administration from $12.2 billion in 1998 and $21.3 billion in 1999, to $36.7 billion at December 31, 2000. Profit margins improved from 4% in 1998 to 7% in 1999 and 18% in 2000 due to these increased fees. Margins in the Financial Services segment have been adversely affected by the executive incentive plan implemented in 1998. The effect of this executive incentive plan ended on December 31, 2000. Excluding the effect of the executive incentive plan, the profit margins in this segment would have been 18%, 17% and 22% for the years ended December 31, 1998, 1999 and 2000 respectively.
Included in premiums earned are assigned risk premiums of $1.2 million in 2000 as compared to $1.8 million in 1999 and $2.5 million in 1998. The underwriting losses associated with these assigned risk premiums, together with other charges imposed by certain states on voluntary insurers such as Legion to support involuntary market losses ("residual market loads"), are passed on by Legion to clients' accounts.
Other than the risks discussed above, the Company's principal exposure to underwriting loss exists in relation to the premium associated with:
In connection with its main reinsurance treaty participation, the Company may experience volatility in the underwriting results. The portion of the Company's premiums earned which relate to this risk was $4.1 million in 2000 as compared to $2.4 million in 1999 and $2.1 million in 1998. The Company incurred an underwriting loss of $15.2 million in 2000, $1.6 million in 1999 and $2.4 million in 1998 related to this risk.
The Company generally requires each Corporate Risk Management client to indemnify it against an underwriting loss. The client normally provides collateral for at least the difference between the funds available in that client's account and the level of expected losses as actuarially determined by the Company, although in certain circumstances the collateral level is below the level of expected losses. This is also the case for Program Business clients who participate in an IPC Program. For Program Business that does not involve an IPC Program, reinsurance protection is purchased by the Company to minimize its underwriting risk. The Company faces a credit exposure in the event that losses exceed their expected level and the client is unable or unwilling to honor its indemnity to the Company. The Company also faces credit exposure on both Program and Corporate Risk Business if its clients or brokers fail to pay the premium due, through failure of the program manager or broker to properly administer the program and through the failure of reinsurers to honor their obligations. Lastly, the Company is exposed to underwriting risk if losses incurred under programs exceed their reinsurance limits or where there is a gap in purchased reinsurance cover.
$503.6 million in 2000 from $527.1 million in 1999 and $439.3 million in 1998. The yield on these assets was 7.6% in 2000, up from 6.9% in 1999 and 1998. The Company's investment income is produced through the investment of its capital funds, long term debt, other funds held representing amounts due others and reserves held by the Company for unearned premiums and unpaid losses.
The underwriting loss increased to $82.9 million for 2000, as compared to $17.5 million in 1999 and $2.4 million in 1998. The 2000 underwriting loss includes a provision related primarily to reinsurance recoverables in the amount of $69.0 million, pre-tax. Except for this provision, the fluctuations in total insurance costs are the direct result of fluctuations in premiums earned. This resulted in a $60.0 million increase in losses and loss expenses incurred and a $9.0 million increase in acquisition costs, offset by a $22.9 million reduction in income taxes. The 1999 amount includes a provision related to net losses incurred on a number of terminated programs of $12.3 million, pre-tax. Losses incurred also increased in 1999 and 2000 as a result of the decreased use of large deductible policies and the increase in Program Business. Acquisition costs were higher in 2000 due to legal expenses related to reinsurance disputes and increased payroll audit expenses.
. the effect of acquisitions, including Avreco, Compfirst's TPA operations, Professional Risk Management Services, Inc., expansion of captive management operations to the Cayman Islands and of Financial Services in the U.S. and Ireland.
Interest expense increased by $12.4 million to $19.2 million for the year over $6.8 million in both 1999 and 1998 as a result of increased debt, higher interest rates and Endeavour interest, offset in part by a reduction in debenture interest.
The charges for income taxes represent effective tax rates of 11.7%, (0.7)% and 104.0% in 1998 through 2000 respectively. The reduced tax rate in 1998 and 1999 is due to increased earnings outside of the United States. The tax rate in 2000 reflects the net loss incurred during the year as a result of provisions established on reinsurance recoverables. The Legion Companies, as insurance companies in the United States, are subject to income tax on an accelerated basis and, as a result, a deferred tax benefit was carried on the Consolidated Balance Sheets of $34.5 million in 2000 and $4.2 million in 1999.
At December 31, 2000, the market value of the Company's total marketable investments was $573.1 million, as compared to $607.3 million at December 31, 1999. In accordance with SFAS 115, investments held as available for sale are reported at fair market value with unrealized gains and losses included as a separate component of shareholders' equity. These investments generally consist of investment grade fixed-income securities that the Company believes are readily marketable and could be liquidated to meet cash requirements, if necessary.
The Company completed the refinancing of its former bridge loan facility in the third quarter of 2000. Amounts outstanding under the bridge loan facility were refinanced with a $180.0 million, three year syndicated bank facility and a private placement of $40.0 million of 33-month floating rate trust preferred securities, known as Rhinos, with a trust organized by Banc of America Securities LLC. The Company is required to make quarterly interest payments on the bank facility and Rhinos at contractually agreed upon rates.
One of these arbitration proceedings involves a series of accident and health programs written by the Company from 1997 through 1999 and accounted for $37.4 million of the unreimbursed paid losses and an estimated $7.0 million of the unpaid losses. The Company received a good-faith payment from the reinsurers of $12.3 million in February 2001. This dispute involves a number of syndicates at Lloyd's, as well as a number of other reinsurers, and is presently in non-binding mediation. If this mediation does not resolve the dispute, it will be arbitrated in Philadelphia, Pennsylvania.
Two of the arbitration proceedings, involving a number of reinsurance treaties, are with U.S. life insurance companies that wrote workers' compensation reinsurance. These life insurance companies are no longer writing workers' compensation reinsurance and are believed by the Company to be disputing similar obligations to other property casualty insurers. Both of these disputes will be arbitrated in Philadelphia, Pennsylvania. The first arbitration is scheduled for April 2001 and the second for July 2001. At December 31, 2000, these disputes involved $13.6 million in paid claims and an estimated $47.6 million in unpaid claims.
The two remaining arbitration proceedings involve claims under individual reinsurance agreements with two reinsurers and involve $5.1 million of paid claims and an estimated $28.7 million of unpaid claims. In each of these disputes, the Company is in settlement discussions with the reinsurers and arbitration panels have not yet been selected.
In response to the concerns of the rating agencies, the Company has engaged investment banking firms to review strategic capital raising alternatives.
Shareholders' equity decreased by 2% to $351.5 million at December 31, 2000 from $358.1 million at December 31, 1999. This decrease was attributable to the net loss in 2000 and dividends paid, less the value of shares issued on the exercise of employee stock options. During 2000, the total number of common shares outstanding increased to 41,614,649 from the 1999 level of 41,205,191, mainly as a result of the exercise of employee stock options.
Market risk generally represents the risk of loss that may result from potential changes in the value of a financial instrument due to a variety of market conditions. The Company's exposure to market risk is generally limited to potential losses arising from changes in the level or volatility of interest rates on market values of investment holdings and on a credit facility. The Company's exposure to movements in exchange rates and equity prices is limited. The Company does not hold or issue significant derivative financial instruments for trading or speculative purposes.
Interest rate risk results from the Company' holdings in interest-rate- sensitive instruments. The Company is exposed to potential losses arising from changes in the level or volatility of interest rates on fixed rate instruments held. The Company is also exposed to credit spread risk resulting from possible changes in the issuer's credit rating. To manage its exposure to interest rate risk, the Company attempts to select investments with characteristics that match the characteristics of the related insurance and contract holder liabilities. Additionally, the Company generally only invests in higher-grade interest bearing instruments.
The Company is also exposed to interest rate risk on the $180.0 million credit facility, which bears interest at LIBOR plus 0.95%, and on the $40.0 million of floating rate trust preferred securities, on which distributions are payable at LIBOR plus 1.50%. The proceeds of the credit facility were used to refinance the $217.0 million outstanding under a bridge loan facility.
The above Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that reflect management's current views with respect to future events and financial performance and are made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. In some cases, readers can identify forward-looking statements by terminology such as "may," "will," "should," "could," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential" or "continue." In particular, these statements include our expectations regarding growth of our Program Business during 2001, the size and profitability of existing programs, pricing rates, competition and renewals of programs, our beliefs regarding profit margins in our Corporate Risk Management segment, pricing, the sale of Corporate Risk Management accounts and associated fees, our beliefs regarding the volatility of underwriting profit or loss, the probability of experiencing a severe underwriting loss and the impact of fluctuations in premiums earned on net income, the sufficiency of our loss reserves, the outcome of disputes and arbitrations and our beliefs regarding the impact of inflation. These statements involve known and unknown risks, uncertainties and other factors that could cause actual results, performance or achievements to differ materially from those in the forward-looking statements. Although management believes that the expectations reflected in the forward- looking statements are reasonable, we cannot guarantee future results, performance or achievements. The factors that could cause results, performance and achievements to differ materially from these forward looking statements are discussed in "Business--Risk Factors."