The Company's head office is located in Hamilton, Bermuda. This facility currently serves as the headquarters for the financial and administrative departments of the Company and the Company's Bermuda subsidiaries. The following table sets forth additional information concerning the Company's facilities:
All of the Company's facilities are leased. Aggregate lease payments for 2001 were $1.9 million (2000 - $1.9 million). The Company anticipates that it will be able to extend these leases as they expire or, if necessary or desirable, locate substitute facilities on acceptable terms.
Results of Operations For the Years Ended December 31, 2001, 2000 and 1999.
Net loss from operations for 2001 was $21.3 million, compared to 2000 net loss from operations of $27.0 million and 1999 net loss from operations of $6.7 million.
Net loss from continuing operations before discontinued segments for 2001 was $15.1 million, compared to a net loss from continuing operations before discontinued segments of $16.0 million in 2000 and net loss from continuing operations before discontinued segments of $4.8 million in 1999. The results for the year for continuing operations were affected by a number of different factors. The U.S. workers' compensation market, in which the Company conducts most of its business, remained a difficult environment in which to operate. The Company's risk-taking insurance segment recorded increased underwriting losses for the year, primarily arising from programs which were discontinued in 2000. The program business segment suffered increased losses for the year, primarily due to costs and provisions pertaining to the consolidation of its Dallas MGA with its Boca Raton MGA and a charge of $2.9 million for future losses that the Company projects it will pay in connection with its indemnification of its major issuing company for losses in excess of a specific loss ratio on business produced by the MGA's during 2000. The brokerage segment also recorded a loss for the period, primarily due to a significant decrease in business being brokered following the substantially diminished reinsurance capacity for workers' compensation business. The Company is continuing with its restructuring program begun in 1999 in an effort to reduce expenses and increase efficiencies. The Company also continued to suffer from continuing costs and provisions pertaining to reinsurance-related disputes in which the Company and others were involved during the year, including certain litigation.
Basic net loss per share was $2.24 in 2001, as compared to basic net loss per share of $2.86 in 2000 and basic net loss per share of $0.71 in 1999. Diluted net loss per share was $2.24 in 2001, as compared to diluted net loss per share of $2.86 in 2000 and diluted net loss per share of $0.71 in 1999.
The Company's insurance segment consists of its wholly owned U.S.-based insurance company, Realm National Insurance Company. Insurance segment revenues of $29.9 million in 2001 represented an increase of $6.4 million from insurance segment revenues of $23.5 million in 2000, which reflected a $10.9 million increase from insurance segment revenues of $12.6 million in 1999. Gross written premiums were $40.0 million in 2001, which represented a $21.4 million decrease from $61.4 million in 2000, which in turn reflected a $14.2 million increase from $47.2 million in 1999. Net premiums earned were $27.8 million in 2001, which represented a $9.3 million increase from $18.5 million in 2000, which was a $9.0 million increase from $9.5 million in 1999. Policy issuance fees were $0.5 million in 2001, which represented a $2.7 million decrease from $3.2 million in 2000, which was a $0.7 million increase from $2.5 million in 1999. The increase in insurance segment revenues reflects an increase in net premium earned. Gross written premium decreased due to the decision to discontinue certain loss-making programs in 2000. Despite the decrease in gross premiums, net premiums written and earned increased as a result of reduced reinsurance ceded.
The World Trade Center disaster of September 11, 2001 had an immaterial effect on the results of operations of Realm National and the Company for the year ended December 31, 2001.
The Company's program business segment consists of subsidiaries that market insurance products and administer programs developed by the Company. Program business revenues of $11.4 million in 2001 represented a decrease of $3.9 million from program business revenues of $15.3 million in 2000, which had decreased $7.1 million from program business revenues of $22.4 million in 1999. This decrease was due to reduced fee margins on programs and a reduction in program business volume due to management's decision to impose more selective underwriting conditions on continuing programs.
The Company's brokerage segment consists of subsidiaries that receive a fee or commission for brokering insurance and reinsurance contracts. Brokerage segment revenues of $5.8 million in 2001 represented a decrease of $5.4 million from brokerage segment revenues of $11.2 million in 2000, which had decreased $13.7 million from brokerage segment revenues of $24.9 million in 1999. This decrease in brokerage segment revenues was primarily the result of reduced business being brokered due to significantly diminished reinsurance capacity for workers' compensation business. In addition, the segment has been adversely affected by the disruption caused by widespread reinsurance market disputes and legal proceedings including those involving the Company.
The brokerage segment's loss before tax of $4.3 million in 2001 represented an improvement of $0.5 million from loss before tax of $4.8 million in 2000, which had decreased $7.5 million from income before tax of $2.7 million in 1999. The 2001 net loss reflects the decrease in revenues, which was offset by a decrease in brokerage segment expenses. Expenses for the segment continued to be impacted by significant costs and provisions associated with widespread reinsurance disputes involving the Company or its clients, including certain litigation.
Other revenues include primarily the Company's holding companies and other non-operating subsidiaries, as well as provisions against investments in non-consolidating affiliates. Other revenues of $2.9 million in 2001 represented an increase of $2.0 million from other revenues of $0.9 million in 2000, which in turn reflected an increase of $0.2 million from other revenues of $0.7 million in 1999. Loss before tax for the year was $1.9 million, compared to a loss before tax of $3.6 million in 2000 and income before tax of $5.7 million in 1999. The improvement in revenues and income from 2000 to 2001 was the result of a gain on sale of an investment of $1.1 million during the year, a write-back of a provision in an investment that was taken in the previous year, and partially offset by decreased interest income earned that was due to falling interest rates. The loss before tax for the year primarily reflects costs in respect of ongoing operating expenses.
Underwriting management loss before tax of $0.5 million in 2001 represented an improvement of $4.4 million from loss before tax of $4.9 million in 2000, which in turn reflected a $6.7 million decrease from income before tax of $1.8 million in 1999. In view of the reduction in underwriting management revenues, the resulting net loss, and the ongoing business prospects for the segment, the Company decided to discontinue the underwriting management segment effective December 31, 2000. The net loss for the year 2000 reflects the decreased revenues, together with a write-off of associated goodwill following the decision to discontinue these operations.
The Company's discontinued reinsurance segment consisted of its reinsurance subsidiary, CIRCL. CIRCL primarily reinsured workers' compensation and property and general liability risks. Reinsurance segment revenues of ($0.1) million in 2001 represented a decrease of $1.8 million from reinsurance segment revenues of $1.7 million in 2000, which in turn had decreased $1.4 million from reinsurance segment revenues of $3.1 million in 1999. Net premiums earned of ($0.3) million in 2001 represented a decrease of $1.2 million from net premiums earned of $0.9 million in 2000, which in turn reflected a $1.5 decrease from net premiums earned of $2.4 million in 1999.
Reinsurance segment loss before tax of $5.7 million in 2001 represented an improvement of $0.4 million from loss before tax of $6.1 million in 2000, which in turn was a increase in loss of $2.7 million from loss before tax of $3.4 million in 1999. The primary reason for the loss before tax during 2001 was a strengthening of reserves on discontinued programs, together with an increase of $1.0 million in provisions against reinsurance recoveries. CIRCL has experienced substantial delays in collection of reinsurance recoverables from certain of its reinsurers. CIRCL therefore has established a provision in the amount of $8.0 million against reinsurance contracts with projected reinsurance recoverables of a total of $61.0 million. This provision has been included in the balance sheet as a reduction of paid losses recoverable from reinsurers and outstanding losses recoverable from reinsurers. The above increases in loss reserves caused CIRCL's shareholder equity to become negative in the third quarter of 2001. It is the Company's intention not to pay additional funds to CIRCL for losses it has incurred. CIRCL's insolvency, therefore, will not have a material effect on the consolidated financial position of the Company.
The increase of $168.0 million in insurance and reinsurance balances receivable, and the corresponding increase of $141.3 million in insurance and reinsurance balances payable, primarily reflects the growth in clients' claims balances recorded in the Company's broking subsidiaries. As a result of various disputes between insurers and reinsurers on various reinsurance contracts, a number of the reinsurers have suspended paying claims due under the contracts. The Company's brokerage and underwriting management segment subsidiaries experienced a significant growth in client balances receivable and payable recorded at the end of the year, reflecting this accumulation of claims due from one party to another. These balances are reflected as an asset or liability, as the case may be, on the Company's balance sheet.
Losses and loss expenses; Losses and related loss adjustment expenses are charged to income as they are incurred and are net of losses recovered and recoverable. Amounts recoverable from reinsurers are estimated in a manner consistent with the underlying liability associated with the reinsured policy. Outstanding losses recoverable are shown separately on the consolidated balance sheets. The Company establishes reserves for losses and loss adjustment expenses related to reported claims on the basis of the evaluations of independent claims adjusters and the Company's own claims staff. In addition, reserves are established for losses which have occurred but have not yet been reported and for adverse development of reserves on reported losses. The Company's independent actuaries estimate claims and claim expenses arising for losses that have occurred but not yet been reported based upon the Company's and the insurance industry's experience, together with the statistical information with respect to the probable number and nature of such claims. The program business established an accrual in 2001 in connection with an indemnification to its major issuing company. While the liability is not included in loss reserves, it is based on losses and is subject to the same estimation processes discussed above. The Company believes that the provision for outstanding losses and loss expenses is adequate to cover the ultimate net cost of losses and loss expenses incurred; however, such a provision is an estimate and may ultimately be significantly greater or less than the provision established. The Company has limited historical loss experience available to serve as a basis for the estimation of ultimate losses. It is possible that management will revise the estimate of outstanding losses and loss expenses in the future.
Premiums written, assumed and ceded; Premiums written and assumed are recorded on an accrual basis and included in income on a pro-rata basis over the life of the policies or reinsurance agreements to which they relate, with the unearned portion deferred in the consolidated balance sheets. Adjustment premiums arising from premium audits are recorded in the period in which they are determined. Reinsurance premiums ceded are similarly pro-rated over the terms of the reinsurance contract with the unearned portion being deferred in the consolidated balance sheets as deferred reinsurance premiums ceded.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS No. 141 eliminates the pooling-of-interest method of accounting for business combinations, requiring all business combinations to be accounted for under the purchase method. Accordingly, net assets acquired are recorded at fair value, with any excess of cost over net assets assigned to goodwill. SFAS No. 141 also requires that certain intangible assets acquired in a business combination be recognized apart from goodwill. The provisions of SFAS No. 141 apply to all business combinations intiated after June 30, 2001. Use of the pooling-of-interest method of accounting for those transactions is prohibited. Adoption of SFAS No. 141 will not have a material impact on the Company's financial condition or results of operations.
Reference is made to the cautionary statements contained in Exhibit 99 to this Form 10-K for a discussion of the factors that may cause actual results to differ from any results expressed or implied by these forward-looking statements.
The Board of Directors and Shareholders of Stirling Cooke Brown Holdings Limited
Stirling Cooke Brown Holdings Limited was incorporated in Bermuda on December 12, 1995. Stirling Cooke Brown Holdings Limited and its majority-owned subsidiaries (collectively referred to as the "Company") provide insurance services and products. The Company provides its range of services and products to insurance and reinsurance companies, insurance agents, and insureds. The Company is involved primarily in the workers compensation, occupational accident and health and property/casualty insurance markets through its subsidiaries based in London, Bermuda and the United States. In January 1996, the Company acquired all the outstanding common shares of Realm Investments Ltd. in exchange for 1,999,980 of its newly issued ordinary shares. The Company also acquired, in September 1996, its own United States domiciled insurance company, Realm National Insurance Company ("Realm National"), which writes insurance business in the workers compensation and property/casualty insurance markets.
On December 2, 1997, the Company and certain selling shareholders consummated an initial public offering of 3,421,250 ordinary shares. Of these shares, 1,375,000 were sold by the Company and 2,046,250 were sold by selling shareholders. Net proceeds of $26,832 were received by the Company upon consummation of the initial public offering.
In early 2001, following a review of its operations, the Company decided to discontinue its reinsurance and underwriting management segments, as discussed in Note 3. In addition, the Company consolidated its Dallas, Texas Managing General Agency ("MGA") office with its Boca Raton, Florida MGA office, effective December 31, 2001.
Marketable securities comprise investments in debt and equity securities and short-term investments. All investments are classified as available for sale in accordance with SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities". Accordingly, these securities are carried at fair value, with the difference between fair value and cost or amortized cost being recorded as accumulated other comprehensive income as a separate component of shareholders' equity, net of applicable deferred income taxes. Bond discounts and premiums are amortized over the remaining term of the securities. Such amortization is included as a component of net investment income in the consolidated statements of income. Realized gains and losses are determined on the basis of specific identification. Investment income is recorded as earned and accrued to the balance sheet date.
Losses and related loss adjustment expenses are charged to income as they are incurred and are net of losses recovered and recoverable of $53,863, $50,040 and $25,272 for the years ended December 31, 1999, 2000 and 2001 respectively. Amounts recoverable from reinsurers are estimated in a manner consistent with the underlying liability associated with the reinsured policy. Outstanding losses recoverable are shown separately on the consolidated balance sheets.
The Company establishes reserves for losses and loss adjustment expenses related to reported claims on the basis of the evaluations of independent claims adjusters and the Company's own claims staff. In addition, reserves are established for losses which have occurred but have not yet been reported and for adverse development of reserves on reported losses. The Company's independent actuaries estimate claims and claims expenses arising for losses that have occurred but not yet been reported based upon the Company's and the insurance industry's experience, together with statistical information with respect to the probable number and nature of such claims. The Company believes that the provision for outstanding losses and loss expenses is adequate to cover the ultimate net cost of losses and loss expenses incurred; however, such a provision is an estimate and losses may ultimately be significantly greater or less than the provision established. The Company has limited historical loss experience available to serve as a basis for the estimation of ultimate losses. It is possible that management will revise the estimate of outstanding losses and loss expenses in the future.
FOR THE YEARS ENDED ------------------- DECEMBER 31, ------------ 1999 2000 2001 ------- -------- -------- Brokerage fees and commissions............... $24,577 $ 8,920 $ 4,771 Managing general agency fees................. 10,164 8,974 6,240 Program and captive management fees.......... 2,298 483 151 Loss control and audit fees.................. 7,577 5,358 4,883 Policy issuance fees......................... 2,495 3,230 461 ------- -------- -------- Total risk management fees.... $47,111 $ 26,965 $ 16,506 ======= ======== ========
Underwriting management fees from discontinued segment................. $ 3,900 $ 1,281 $ 599 ======= ======== ========
(iv) Loss control and audit fees are included within program business segment revenue, and comprise claims administration handling, loss and safety control fees and premium audit fees. Such fees are recorded as the fees are billed and are recognized in income over the period that services are performed in accordance with the Company's contractual obligations, typically ranging up to five years, depending on the type of service provided, and based on the Company's estimation of expected claims handling requirements in each accounting period. Such estimation is based upon industry standards. The proportion that will be earned in the future is deferred and reported as deferred income in the consolidated balance sheets.
The Company's investments in affiliated companies that are not majority owned or controlled are accounted for using the equity method if the Company is able to exert significant influence upon such companies. Other investments in affiliates are carried at cost. Investments in affiliates of $248 and $171 as of December 31, 2000 and 2001, respectively, are recorded in other assets. The Company's equity share in the net income of affiliates, for the years ended December 31, 1999, 2000 and 2001 was $Nil. In addition, for 1999, the Company recorded a write-down of $2,018 in Other income (loss) to recognize a decrease in the value of several of its equity holdings. Dividends received from affiliated companies were $Nil during 1999, 2000 and 2001.
Goodwill in the amounts of $1,969 and $1,041 at December 31, 2000, and 2001, respectively, represents the excess of purchase price over fair value of net assets acquired. Goodwill is amortized on a straight-line basis over the expected periods to be benefited, generally 5 to 20 years. Accumulated amortization at December 31, 2000 and 2001 was $9,399 and $10,327, respectively. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. The Company consolidated its Dallas, Texas Managing General Agency ("MGA") office with its Boca Raton MGA office effective December 31, 2001. In light of this decision, the Company took a charge of $654 against operations in 2001 in respect of a write-off of goodwill. In addition, following a review of its operations, the Company decided on March 6, 2001 to discontinue its reinsurance and underwriting management segments. In light of this decision and following a comprehensive review of the value of all of its intangible assets, the Company took a charge against operations in the year 2000 in respect of the write-off of a significant portion of its goodwill. The write-off of goodwill, together with the annual amortization, resulted in a total charge against operations for the year 2000 of $6,695, the majority of which related to the write-off of goodwill in respect of discontinued segments.
The United States Dollar is the Company's functional currency. Foreign currency monetary assets and liabilities are translated at exchange rates in effect at the balance sheet date. Fixed assets and deferred income are translated at their historical exchange rates. Foreign currency revenues and expenses are translated at exchange rates in effect at the date of the transaction. Net exchange losses of ($117), ($392) and ($333) were recorded for the years ended December 31, 1999, 2000 and 2001, respectively.
During the year, the Company was a party to transactions in certain derivative financial instruments, specifically, forward foreign exchange contracts which are used to manage foreign currency exposures on non-U.S. dollar denominated assets and liabilities. The Company does not engage in derivatives for any other purpose. The Company's policy on such derivatives is that forward foreign exchange contracts are recorded at their fair value, and the fair values of open contracts are based on the quoted market prices of forward contracts with similar maturities. Changes in fair values are recognized in other income as appropriate in the period in which the changes occur. Amounts receivable or payable on open positions are recorded in other assets or accounts payable and accrued liabilities as appropriate. See Note 15(c).
During 1998, the AICPA Accounting Standards Executive Committee issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-up Activities". The accounting guidance of this SOP requires that the costs of start-up activities be expensed as incurred and any costs that are carried as an asset prior to adoption of SOP 98-5 would be written off by reporting a cumulative effect of a change in accounting principle in the statement of income as of January 1, 1999. The cumulative effect of a change in accounting principle that was recorded in the statement of income for the first quarter of 1999 was approximately $307 (net of tax of $188).
In June 1999, the Financial Accounting Standards Board ("FASB") issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133". This statement amends SFAS No. 133 to defer its effective date for one year, to fiscal years beginning after June 15, 2000. In June 2000, the Financial Accounting Standards Board issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." This statement is an amendment of SFAS No. 133 with respect to the accounting and reporting standards for certain derivative instruments and certain hedging activities. The Company adopted this standard effective January 1, 2001, and it did not have a significant impact on the Company's financial position or results of operations.
Certain amounts in 1999 and 2000 have been reclassified to conform with the current-year presentation. These reclassifications had no impact on net income or shareholders' equity.
Deferred tax liabilities of $24 and $61 at December 31, 2000 and 2001, respectively, have been provided against unrealized gains on marketable securities held as "available for sale", which have been presented net as accumulated other comprehensive income within shareholders' equity.
b) The amortized cost and estimated fair value of debt securities by contractual maturity are shown in the following table. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
e) At December 31, 2000 and 2001, there were no individual investments, other than investments in U.S. Government securities, which exceeded 10% of shareholders' equity.
Reinsurance contracts do not relieve the Company of its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company; consequently, allowances are established for amounts deemed uncollectible. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk to minimize its exposure to significant losses from reinsurer insolvencies. The Company has experienced substantial delays in collection of reinsurance recoverables from certain of its reinsurers. Realm National, a subsidiary of the Company, has commenced arbitration against two of these reinsurers. Management believes that approximately $9,342 and $10,537 of paid and outstanding losses recoverable from reinsurers for 2000 and 2001 respectively may prove uncollectible and has established a provision for doubtful recoveries accordingly. This provision of $9,342 for 2000 and $10,537 for 2001 against reinsurance recoveries of $34,964 in 2000 and $34,281 in 2001 represents management's best estimate at this time of a shortfall in recoveries. This provision is included in the balance sheet as an offset against paid and outstanding losses recoverable from reinsurers. The provision is an estimate and amounts not collectible from reinsurers may ultimately be significantly greater or less than the provision established. It is possible that management will revise this estimate in the future. Any subsequent differences arising will be recorded in the period in which they occur.
At December 31, 2000 there were amounts due from seven reinsurers that totaled $82,383, each in excess of 10% of the Company's shareholders' equity. At December 31, 2001 there were amounts due from twelve reinsurers that totaled $100,521, each in excess of 10% of the Company's shareholders' equity. These reinsurers are rated `Superior' by A.M. Best.
Realm National ceded business to reinsurance companies for the following programs:
Realm National writes property business and purchased a property reinsurance program related to 2000 and prior years whereby it retained 25% of the first $1,000 on any one risk and purchased facultative reinsurance for limits above $1,000. In addition, Realm National's net retention was further protected with excess catastrophe limits to $10,000.
Comp Indemnity Reinsurance Company Limited ("CIRCL"), a subsidiary of the Company, assumed various quota share reinsurance of workers' compensation and employers' liability on both a primary and excess basis. CIRCL's exposure under the reinsurance contracts assumed is limited in most instances to between $25 to $300 for workers' compensation and $1,000 per occurrence for employers' liability and in some instances is subject to an annual aggregate limit based on various percentages of original gross written premium income. CIRCL further limited its exposure through the purchase of reinsurance protection for certain risks covering losses in excess of $1 to $3 for workers' compensation and $50 per occurrence for employers' liability.
CIRCL also assumed bodily injury, difference in conditions, and property risks through a general liability treaty covering risks in the construction industry. CIRCL's exposure under the reinsurance contracts assumed is limited in most instances to $250 per occurrence. In most instances, CIRCL further limited this exposure through the purchase of reinsurance covering losses in excess of $63 per occurrence. In addition, CIRCL purchased aggregate reinsurance with limits based on various percentages of original gross written premium income.
The Company's authorized share capital at December 31, 2000 and 2001 comprised 20,000,000 ordinary shares of par value $0.25 each, of which 9,963,372 ordinary shares were issued and fully paid at December 31, 2000 and 2001. Outstanding shares at December 31, 2000 and 2001 were 9,519,972 and 9,519,972, respectively, which were net of 443,400 treasury shares at each date.
In December 1997, under a put and call option originally granted in April 1997, the Company purchased 40,000 ordinary shares for a total cost of $667. These shares were held as treasury stock at December 31, 2000 and 2001.
In the first quarter of 1999, the Company purchased a further 356,400 of its ordinary shares on the open market for a total cost of $4,423. These shares were held as treasury stock at cost at December 31, 2000 and 2001.
On May 25, 2000, the Company granted 30,000 options to certain non-executive directors. The options have an exercise price of $2.50 per share, which reflected the estimated fair value of the shares at the grant date. The options vest ratably over a three-year period and may be exercised at any time prior to August 8, 2010. All of these options were outstanding at December 31, 2001.
On August 8, 2000, the Company granted 357,500 options to certain employees. The options have an exercise price of $2.0625 per share, which reflected the estimated fair value of the shares at the grant date. The options vest ratably over a three-year period and may be exercised at any time prior to August 8, 2010. At December 31, 2000 and 2001, 337,500 and 312,500 of these options remained outstanding. The balance of the options were forfeited.
On May 7, 2001 the Company granted 57,500 options to certain employees. The options have an exercise price of $1.42 per share, which reflected the estimated fair value of the shares at the grant date. The options vest ratably over a three-year period and may be exercised at any time prior to May 7, 2011. All of these options were outstanding at December 31, 2001.
On August 7, 2001, the Company granted 10,000 options to certain employees. The options have an exercise price of $2.00 per share, which reflected the estimated fair value of the shares at the grant date. The options vest ratably over a three-year period and may be exercised at any time prior to August 7, 2011. All of these options were outstanding at December 31, 2001.
In accordance with the provisions of FASB Statement No. 123, the Company applies APB Opinion 25 and related interpretations in accounting for its stock option plans and, accordingly, recognizes compensation cost based on the intrinsic value of the options at the grant date. If the Company had elected to recognize compensation cost based on the fair value of the options granted at the grant date, as prescribed by SFAS 123, net loss and loss per share would have been adjusted to the pro forma amounts indicated in the table below:
The weighted average fair value of options granted during 2001 was $1.38 per share. The weighted average fair value of options granted during 2000 was $1.09 per share. The fair value of options granted during 1999 was $1.25 per share.
Under current Bermuda law, the Company is not required to pay any taxes in Bermuda on either income or capital gains. The Company has received an undertaking from the Minister of Finance in Bermuda that, in the event of any such taxes being imposed the Company will be exempted from taxation until the year 2016.
Total income tax benefit attributable to income from continuing operations for the years ended December 31, 1999, 2000 and 2001 was allocated as follows:
Income tax benefit attributable to loss from continuing operations and change in accounting method was ($2,771), ($2,523) and ($1,268) for the years ended December 31, 1999, 2000 and 2001 respectively, and differed from the amounts computed by applying the U.S. federal income tax rate of 34% and U.S. state tax at an effective rate of 2.64% to income before taxation as a result of the following:
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2000 and 2001 are presented below:
Cash and cash equivalents and fiduciary funds: The carrying values for cash and cash equivalents and fiduciary funds approximated fair market values due to the short-term maturities of these instruments.
The estimates of fair values presented herein are subjective in nature and are not necessarily indicative of the amounts that the Company would actually realize in a current market exchange. Any differences would not be expected to be material. Certain amounts such as prepaid expenses, other assets, goodwill and deferred expenses, deferred fee income, outstanding losses recoverable from reinsurers, and outstanding losses and loss expenses are excluded from fair value disclosure. Thus the total fair value amounts cannot be aggregated to determine the underlying economic value of the Company.
Concentrations of credit risk with respect to other financial instruments are to some extent limited due to the number of reinsurers, agents and customers comprising the Company's receivable base. At December 31, 2000 there were amounts due from seven reinsurers that totaled $82,383, and at December 31, 2001 there were amounts due from twelve reinsurers that totaled $100,521, as discussed in Note 9. At December 31, 2000 and 2001, management believes that approximately $9,342 and $10,537 of paid and outstanding losses recoverable from reinsurers may prove uncollectible and has established a provision for doubtful accounts accordingly, as discussed in Note 9.
(c) The Company's Program Business subsidiaries market and manage insurance products and programs developed by the Company on behalf of independent insurance carriers. In addition, the Company, through its brokerage operations, provides additional business and services to certain of these independent insurance carriers in respect of these products and other insurance and reinsurance policies. For the years ended December 31, 1999, 2000 and 2001 revenues received from one independent insurance carrier accounted for approximately the following percentage of total revenues.
The loss of this carrier could have a material adverse effect on the Company. However, the Company believes that, subject to market conditions, the availability of alternative underwriting capacity at Realm National and other independent insurance carriers would reduce the impact of such a loss.
Future minimum lease payments under non-cancelable operating property leases as at December 31, 2001 are as follows:
b) Under New York law, Realm National may pay cash dividends only from earned surplus determined on a statutory basis. Further, Realm National is restricted (on the basis of the lower of 10% of statutory surplus at the end of the preceding twelve-month period, or 100% of the adjusted net investment income for the preceding twelve-month period) as to the amount of dividends it may declare or pay in any twelve- month period without the approval of the Insurance Department of the State of New York.
c) The NAIC has a model law which establishes certain minimum risk-based capital ("RBC") requirements for property-casualty insurance companies. The RBC calculation serves as a benchmark for the regulation of insurance companies by state insurance regulators. The Authorized Control Level RBC is equal to 200% of the RBC requirement. Realm National total Adjusted Capital at December 31, 2001 was $13,840, compared to the Authorized Control Level RBC requirement of $5,265.
CIRCL's total surplus (deficit) and net loss determined on a Bermuda statutory basis is as follows:
CIRCL is also required to maintain a minimum liquidity ratio whereby the value of its relevant assets is not less than 75% of the amount of its relevant liabilities. Certain categories of assets do not qualify as relevant assets under the statute. At December 31, 2000 and 2001, respectively, CIRCL was required to maintain relevant assets of at least $17,234 and $5,808. At those dates relevant assets were approximately $23,718 and $3,370 and the minimum liquidity ratio was therefore not met at December 31, 2001.
On July 2, 2001, the third-party complaint filed by defendant AXA Corporate Solutions (U.K.) Ltd. ("ACS") against the Company, one of its London subsidiaries and a former employee of that subsidiary (the "SCB Defendants") in an existing action originally brought by the insured Silicon Valley Bank was dismissed without prejudice. The third party complaint had alleged fraudulent and/or wrongful inducement to contract allegedly resulting in exposure to liability for claims under another Film Finance Cover brokered by the Company's London subsidiary. ACS filed a motion seeking reconsideration of that decision, which motion was denied by the Court on March 18, 2002. Two of the Company's London subsidiaries were served with a separate third-party complaint in this action alleging claims for fraudulent inducement, negligent misrepresentation and fraud and deceit by a different insurer defendant, NHIC. The London subsidiaries have entered into a tolling agreement with NHIC that will suspend for the time being the prosecution of NHIC's claims as well as the running of the statute of limitations pertaining thereto.
Certain of the Company's subsidiaries acted as brokers in connection with other Film Finance Covers which either have become the subject of inquiry by one or more of the parties involved therein, or which have given rise to disputes not directly involving the Company or its subsidiaries. Although no assurances can be given as to the outcome of these disputes or of other potential proceedings related to the Film Finance Covers and their effect on the Company, the Company believes, based on the information presently available to it, that any such effect should not have a material adverse effect on the Company's financial condition.
During 1998 and 1999 certain of the reinsurers and reinsureds that are parties to the arbitrations described above issued proceedings in the English courts against one or more of the Company's brokerage subsidiaries and one underwriting management subsidiary, apparently for the primary purpose of tolling the statute of limitations pending the outcome of the arbitrations. In one proceeding against the same subsidiaries, three former officers of the subsidiaries were also named. In none of these proceedings did the complainant specify an amount of damages sought. If one or more reinsurers succeed in avoiding its contracts in the pending arbitrations, it is possible that ceding insurer clients, on whose behalf the Company's broker subsidiaries placed the reinsurance, may seek to pursue a claim for indemnification or other claims against one or more of those subsidiaries. Similarly, if one or more of the reinsurers fail to avoid its contracts in the pending arbitrations, it also is possible that those reinsurers may seek to pursue some type of claim against one or more of those subsidiaries.
With the exception of: (a) one inactive proceeding which the subsidiaries have been informed will be withdrawn; and (b) two related proceedings pending against certain subsidiaries of the Company, and certain current and former officers of these subsidiaries, each of which is in an early procedural stage, all judicial proceedings against the Company's subsidiaries relating to these matters have been stayed or held in abeyance pursuant to standstill agreements or court order.
The Company understands that substantial progress has been and continues to be made by various market participants in settling ongoing reinsurance disputes, including many of the market participants that are parties to the arbitrations and other proceedings described above. The Company understands that a settlement by certain market participants of reinsurance disputes arising in the 1994 year of account (the "1994 Year of Account Settlement") has been executed. The Company further understands that working groups have been established to attempt to arrive at similar settlements in respect of the 1995 and 1996 years of account.