We and our subsidiaries lease office space in Bermuda, Dublin, London, Lisbon, Toronto, Miami, Hong Kong, Rome, Madrid, Sydney and Bangkok and own an office located in the former Soviet State of Georgia. The owned property is currently valued at $290,000. We believe that our space is adequate to meet our current and expected needs.
results of ESG as an insurer and a reinsurer for the years ended December 31, 2001, 2000, 1999 and 1998 and as a reinsurer and reinsurance management company for the year ended December 31, 1997.
(1)1997 stock prices are for the period from December 12, 1997, the date of the initial public offering, to December 31, 1997. The initial public offering price was $20.00 per share.
Our principal activities include providing accident, health, credit, life, special risk reinsurance, direct insurance and related product marketing and development services. We also manage premiums on behalf of co-reinsurers on North American medical contracts. We report the results of our business activities under two segments: ESG Reinsurance and ESG Direct. We evaluate the results of these segments based on business written by each of our producing offices. ESG Reinsurance provides traditional reinsurance products, primarily in the U.S. medical insurance market, and ESG Direct provides direct marketing services, bancassurance services, and supporting technologies, as well as targeted reinsurance products for credit life and other special risks.
Departure of Senior Financial Officer. Our Senior Financial Officer, Mark E. Oleksik, a U.S. citizen, decided to return to the U.S. for personal reasons at the end of March 2002. The Board of Directors has appointed Joe A. Quinn as Acting Senior Financial Officer until such time as a permanent Senior Financial Officer is named. In addition, our Controller, Conor Heery, was promoted to Chief Accounting Officer. Both of these appointments were effective March 15, 2002.
We estimate and recognize premiums at the inception of the reinsurance contract based upon information received from intermediaries and ceding companies. We compare estimated written premiums to actual premiums as reported by ceding companies on a periodic basis. The timeliness and frequency of ceding company reports vary considerably by ceding company, line of business, and geographic area, which means that the actual ultimate premium written may not be known with certainty for prolonged periods following the expiration of the reinsurance contracts. We record the differences between our estimates and actual amounts as reported by ceding companies in the period in which the actual amounts are determined.
The reinsurance contracts which we enter are primarily of short duration. For retroactive contracts the amount by which the amount paid for reinsurance coverage exceeds the recorded liabilities is charged to earnings. If the liabilities exceed the amount paid the excess is deferred and amortized into income over the remaining settlement period. Premiums written are recognized as earned over the coverage period in proportion to the amount of protection provided. Unearned premium reserves are established to cover the unexpired contract period.
We classify fixed maturity securities as available for sale, and we report them at estimated fair value. We expect to hold investments available for sale for an indefinite period but may sell them depending on interest rates and other considerations. We account for other investments at the lower of cost or estimated realizable value. We report unrealized investment gains and losses on investments available for sale, net of applicable deferred income tax, as a separate component of "accumulated other comprehensive income." We determine realized gains or losses on the sale of investments on the basis of average cost. We adjust the carrying values of both investments available for sale and other investments by any impairment in value that we consider to be other than temporary.
We defer costs relating to the production of new business, primarily commissions for all business and telemarketing costs from of our ESG Direct business, and include them in the deferred acquisition cost asset to the extent that they are recoverable from future related policy revenues. We amortize the deferred acquisition costs in respect of commissions over the periods in which the related premiums are earned. We amortize the deferred acquisition costs in relation to telemarketing over the expected life of the policies. We review our deferred costs to determine if they are recoverable from future income, including investment income, and, if they are not, we charge them as an expense.
We report reinsurance premiums ceded as prepaid reinsurance premiums and amortize them over the respective contract or policy periods in proportion to the amount of insurance protection provided. We defer commissions on reinsurance ceded over the duration of the contracts of reinsurance to which they relate and amortize them in proportion to the amount of insurance protection provided.
Our functional and reporting currency is the U.S. Dollar. We translate foreign currency receivables or payables denominated in a currency other than U.S. dollars into U.S. dollars at the rates of exchange in effect at the balance sheet date. We include the resulting exchange gains or losses in the results of operations. We include exchange gains and losses related to the conversion of investments available for sale in the net unrealized appreciation or depreciation of the investments, net of deferred income taxes, and list them as a separate component of "accumulated other comprehensive income." We translate assets and liabilities related to foreign operations into U.S. dollars at the exchange rate in effect at the balance sheet date; we convert revenues and expenses into U.S. dollars using weighted average rates for the period. We exclude from income gains and losses that result from translating foreign currency financial statements, net of deferred income taxes, and include them as a separate component of "accumulated other comprehensive income."
We reported a net loss of approximately $16.4 million for 2001, compared to a net loss of approximately $61.8 million for 2000. Included in the 2000 results were net losses of approximately $5.2 million from discontinued operations, which are described more fully under the caption "Discontinued Operations" and in Note 11 to our Consolidated Financial Statements.
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000
Our total revenues for 2001 were $160.5 million, compared with total revenues of $249.0 million for 2000. The reduction in revenues reflects our new focus on improved underwriting and a greater selectivity in our assumption of risk.
For the year ended December 31, 2001, we managed, on our own behalf and on behalf of our co-reinsurers, total gross premiums of $181.7 million, of which we placed $47.3 million with co-reinsurers and retroceded $20.8 million, resulting in $113.6 million net premiums written. For the year ended December 31, 2000, we managed, on our own behalf and on 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. The 29% decrease in gross premiums and 46% decrease in net premiums written during 2001 is a result of our strategy to become more selective with our underwriting.
Of $113.6 million net premiums written in 2001, $89.0 million was attributable to the ESG Reinsurance segment, and $24.6 million was attributable to the ESG Direct segment. For the year ended December 31, 2000, net premiums written was $211.9 million, of which $205.9 million was attributable to the ESG Reinsurance segment, and $6.0 million was attributable to the ESG Direct segment.
•New Business. Approximately $46.5 million, or 25.6%, of total premiums managed was generated from new business.
•Renewal Business. Approximately $135.2 million, or 74.4% of total premiums managed was generated from renewal business.
Underwriting results for 2001 and 2000, by line of business and in total, for the ESG Reinsurance segment were as follows:
Our 2001 underwriting results are comprised of four underwriting years, with the 2001 underwriting year contributing net earned premium of $26.2 million, carrying a loss and acquisition ratio of 89.2%. The 2000 underwriting year contributed $95.2 million of net earned premium, carrying a loss and acquisition ratio of 97.6%. The 1999 underwriting year contributed $8.9 million of net earned premium, carrying a loss and acquisition ratio of 190.4%. The 1998 underwriting year contributed $(1.1) million of net earned premium with a loss and acquisition ratio of (105.1)%.
During 2001, we reduced gross premiums written for the 2000, 1999, and 1998 underwriting years by $105 million, a large portion of which relates to the 2000 underwriting year, on the business in Western Europe. Because we agree to reinsurance contracts with ceding companies before those companies know what their insurance premiums will be for that year, we must rely on estimates of the amount of premiums the ceding companies will write. The premiums we recognize from the ceding companies under our reinsurance contracts with them are dependent on the underlying premiums received by the ceding company. At the time we underwrite and record the contract, we include premium written on an estimated basis. We reassess our premium estimates as information becomes available, and adjust our written premium if appropriate.
The operating ratios for 2001 and 2000, by line of business and in total, for the ESG Direct segment were as follows:
The 2001 underwriting results for our Direct Segment are comprised of two underwriting years, with the 2001 underwriting year contributing net earned premium of $18.1 million, carrying a loss and acquisition ratio of 74.1%. The 2000 underwriting year contributed $5.8 million of earned premium, carrying a loss and acquisition ratio of 59.8%. The increase of $12.3 million in premiums written in 2001 is a result of our increasing investment in the ESG Direct segment in both Asia and Continental Europe.
The 2001 results suffer because of the operating costs that reflect the investment into Continental Europe and new start up operations in Asia Pacific. As can be seen loss and acquisition costs are significantly lower than the reinsurance segment. Operating expense ratios will decrease as we write more premium and achieve operating economies of scale.
The distribution of gross written premiums for years ended December 31, 2001 and 2000, is as follows:
Net investment income on our invested assets constituted approximately 7.6%, 5.2%, and 5.1% of our revenues in 2001, 2000. and 1999, respectively. As of December 31, 2001, our cash and invested assets totaled approximately $154.9 million, compared with cash and invested assets of approximately $212.2 million as of December 31, 2000. This decrease in our cash and invested assets is primarily due to negative operating cash flows and developing the ESG Direct infrastructure. Net investment income decreased by approximately $0.7 million from approximately $12.9 million in 2000 to approximately $12.2 million in 2001.
The following table reflects the investment results for the year ended December 31, 2001:
The Audit Committee of our Board of Directors reviews our investment policies and arrangements to ensure that they are consistent with our overall goals, strategies and objectives. Overall investment guidelines have been approved by the Audit Committee to ensure appropriate levels of portfolio liquidity, credit quality, diversification and volatility. In addition, the Audit Committee will review the portfolio's exposure to capture any potential violations of investment guidelines.
The minimum average credit quality of our investment portfolio is AA.
Our investment policy is to allow up to 10% of our investment assets to be held in equity securities. We do not intend to invest in real estate other than for our own use.
No more than 3% of our investment portfolio may be invested in the securities of any single issuer, with the exception of sovereign governments or agencies, including supranational agencies, with an AA rating or better.
We may terminate the Investment Advisory Agreements upon five days written notice, and Head Asset Management may terminate the agreement upon 90 days written notice. We paid $321,637 in fees to Head Asset Management LLC in 2001, and $404,000 in 2000.
The Audit Committee of our Board of Directors periodically reviews our investment policies and arrangements to ensure that they are consistent with our overall goals, strategies and objectives. Overall
Total administrative expenses, which includes personnel costs, professional service fees, interest expense and other expenses, decreased by $11.9 million, or 29.9%, from $39.8 million in 2000 to $27.9 million in 2001. This decrease is primarily due to a legal reserve of $8.4 million which was established in 2000 for costs associated with resolving disputes in respect of certain contracts. As related legal costs have been incurred in 2001, this reserve has reduced to $6.7 million at December 31, 2001. Management reviews this reserve for adequacy on a quarterly basis.
Foreign exchange losses in total were $0.3 million in 2001, compared to $1.3 million in 2000. These losses are primarily unrealized and were incurred on the revaluation of assets and liabilities denominated in foreign currencies for reporting purposes. As we maintain a partial natural hedge, whereby foreign currency assets are held in the same currencies in which we must pay liabilities, the impact on cash flows from foreign exchange movements is reduced.
ESG does not have voting control of, or does it exercise operational control over, this company.
Gross and net premiums written and net premiums earned for 2000 and 1999 were as follows:
•Renewal Business-approximately $124.5 million, or 48.9%, of total premiums managed was generated from renewal business.
After rapid growth in 1999 in our medical portfolio, we recognized in the second quarter of 2000 that much of this business was not profitable. We centralized underwriting, ceased writing North American medical business from our London office, strengthened our terms of trade, increased rates and became more selective on business accepted. As a result, gross premiums written on medical business declined 31% during the year.
Gross written premiums on accident business declined 18.6% to $54.1 million for the year ended December 31, 2000, in line with our selectivity on writing new and renewal business. Adverse claims development, particularly on our Norwegian portfolio, contributed to the increase in the loss and acquisition expense ratio from 99.6% in 1999 to 122.0% in 2000.
Underwriting results for 2000, by line of business and in total, for the ESG Direct segment were as follows:
As a consequence of a reduction in premiums written, selectivity in business being written, and growth in the ESG Direct segment, more business was being sourced outside of the North American market in 2000 when compared to 1999.
The distribution of gross written premiums for 2000 and 1999 is as follows:
The majority of management fee revenue in 2000 and 1999 consists of fees earned on those premiums managed for our co-reinsurers.
The following table reflects the investment results for the year ended December 31, 2000:
(1)Net investment income is net of investment-related expenses and income on premium receivable and funds held by ceding companies. Our investment portfolio in 2000 was reduced, in part, as a result of the share buy back, and our investment results were negatively impacted by realized losses from the sale of bonds that fell outside our investment guidelines following their respective downgrade.
Net investment income is net of investment-related expenses and income on premium receivable and funds held by ceding companies.
Total administrative expenses, which includes personnel costs, professional service fees, interest expense and other expenses, increased by $14.1 million, or 55%, from $25.7 million in 1999 to $39.8 million in 2000. The majority of the increase was due to a legal reserve of $8.4 million we established for costs associated with resolving disputes in respect of certain contracts and our investment in the Direct Response Marketing and Bancassurance lines of business.
Professional service fees increased by $2.1 million from $8.2 million in 1999 to $10.3 million in 2000. Professional fees included $4.1 million in legal fees in respect of corporate compliance, standardization of policy contracts and management agreements, acquisitions, forensic audits and legal disputes. We incurred audit and accounting costs of $2.0 million. We incurred consulting expenses of $4.1 million in actuarial support, computer systems improvements, recruitment, due diligence and corporate communications.
Foreign exchange losses were $1.3 million in the 2000 compared to foreign exchange losses of $11 thousand for 1999. These gains or losses are primarily unrealized and were incurred on the revaluation of assets and liabilities denominated in foreign currencies for reporting purposes. As we maintain a partial natural hedge, whereby foreign currency assets are held in the same currencies in which it must pay liabilities, the impact on cash flows from foreign exchange movements is reduced.
Operating activities contributed a net cash outflow of $42.5 million and $1.5 million for the years ended December 31, 2001 and 2000 respectively. Cash flows from operations in future years may differ substantially from net income. As reinsurance contracts mature, we will be required to pay out a higher percentage of incurred losses in loss payments, which may affect cash flows.
Reinsurance balances receivable decreased from $241.6 million as of December 31, 2000 to $190.5 million as of December 31, 2001 because we wrote less gross insurance premiums. We recognize these premiums at the inception of the reinsurance contract, based upon information received from intermediaries and ceding companies. Every quarter we compare estimated written premiums to actual premiums as reported by ceding companies and revise our estimates of written premium if appropriate.
At December 31, 2001, reserves for unpaid losses and loss expenses were $146.4 million compared to $179.6 million at December 31, 2000. This decrease is also a function of reduced underwritings in 2001.
At December 31, 2001, unearned premium reserves were $104.4 million compared to $148.1 million at December 31, 2000. Unearned premium reserves are established to cover the unexpired period of contracts of reinsurance that we have written. At December 31, 2001, acquisition costs payable were $43.1 million compared to $64.6 million at December 31, 2000. The balance represents acquisition expenses due on gross reinsurance premiums that we have written and is consistent with the decrease in written premiums.
Shareholders' equity as of December 31, 2001 was $95.1 million, compared to $113.6 million at December 31, 2000. The major factor causing the reduction in shareholders' equity in 2001 was our net operating loss. Book value per common share declined to $8.03 as of December 31, 2001 from $9.64 as of December 31, 2000.
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. We do 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. We do 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.
worsens, the market for many insurance products may also diminish. We obtain a significant portion of our business from selling reinsurance, and if the primary insurance market declines, there could be an equal effect on the reinsurance market.
•Medical Cost Increases. Our medical reinsurance premiums reflect certain assumptions regarding increases in the cost of medical care. Medical costs (particularly prescription costs) are difficult to gauge, especially in the United States. Changes or advances in medical technology could increase our costs. Legislative or judicial developments that are adverse to medical providers also might increase costs. An increase in costs that eclipses the assumptions reflected in our premiums could result in losses for us.
•Credit Risks. From time to time, we may cede a portion of our reinsurance risk to other insurers or reinsurers. If these companies do not fulfill their obligations to us, we may be exposed to a greater risk than we had anticipated.
•Loss of Key Clients. Our contracts with our customers are generally short term. We can make no assurance that any customer will retain our services after its contract has ended. Though our business does not depend solely on any one customer, we have several customers that generate substantial revenues, including the Companion Insurance Company account, which accounted for 17% of our total revenues in 2001. The loss of this customer could adversely affect our revenues. If one of our customers is acquired or merges with another company, our contract with that customer may terminate early.
•Direct Marketing Risks. Our direct marketing business must gauge the credit, life, and accident risks faced by customers in multiple geographic regions. If we fail to accurately price the risks we assume, including the estimated life of the policies we reinsure, we may have to pay out more than we have taken in as premiums.
•Competition. Our reinsurance business competes with other international reinsurers, most notably American Re, Everest Re, Latin America Re, Swiss Re, Hanover Re, and Lloyd's. ESG Direct competes primarily with GE Capital, AIG, and ACE. These competitors have greater financial resources than we do, have been operating longer, and have established long-term relationships with others in the industry, all of which may be significant competitive advantages.
•Credit Rating Downgrade. In our reinsurance and direct marketing businesses, the rating assigned to our credit by agencies such as Standard and Poor's and Fitch can affect our business opportunities. Any downgrade in our rating could make it more difficult for us to attract and retain customers.
•Loss of Key Employees. As a small company, our success is dependent on our ability to retain our existing executive officers and attract additional qualified personnel in the future. The loss of the services of an executive officer would affect adversely our ability to conduct business.
•Interest Rate Fluctuations. We invest the majority of the money we receive as premiums in fixed rate instruments such as government and corporate bonds. Typically, the fair market value of a fixed rate instrument varies inversely with the fluctuations in interest rates. While our investments can fall in value, our liabilities tend to remain fixed. Consequently, a decline in the value of our investment portfolio could reduce our net income or lead to a loss.
•Cyclical Changes in the Market. The reinsurance market is affected by fluctuations in the investment environment and extraordinary events. If we fail to anticipate these cyclical trends, we may incur losses in our contracts.
Our consolidated financial statements include both our accounts and those of the following majority owned subsidiaries: European Specialty Reinsurance (Bermuda) Limited, ESG Reinsurance Ireland Limited, Accent Europe Insurance Company Limited, European Specialty Group (United Kingdom) Limited, ESG Re London Limited, ESG (London) Limited, ESG Direct Italy, ESG Direct Spain, European Specialty Latin America Inc., ESG Re North America Limited, European Specialty Group Holding AG, European Specialty Group Management GmbH, European Specialty Group Underwriting Management GmbH, Sportsecure AG, European Specialty Ruckversicherung AG, IPT GmbH, Health Benefits Consultants Company Limited, ESG Direct Hong Kong Limited, ESG Direct Asia Pte Limited, ESG Direct Australia Pty Limited, Imedi-L Holding Georgia and IMEDI L International Insurance Company Limited.
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). Our significant accounting policies include the following:
ultimate loss ratios at the inception of the contracts, supplemented by industry experience, which increases the uncertainty involved in the loss estimation process. The reserves as established by management are reviewed quarterly and adjustments are made in the periods in which they become known. Although management believes that an adequate provision has been made for the liability for losses and loss expenses based on all available information, there can be no assurance that the ultimate losses will not differ significantly from the amounts provided.
Reinsurance premiums ceded are reported as prepaid reinsurance premiums and amortized over the respective contract or policy periods in proportion to the amount of insurance protection provided. Commissions on reinsurance ceded are deferred over the terms of the contracts of reinsurance to which they relate and amortized in proportion to the amount of insurance protection provided.
Management fee revenue consists primarily of fees earned as compensation for underwriting and managing the reinsurance portfolio on behalf of our co-reinsurers. These fees are estimated and recognized at the inception of the contracts with the co-reinsurers and amortized over the life of the contracts.
We and our subsidiaries file income tax returns as required by the laws of each country in which it has operations. We account for income tax expenses and liabilities under the asset and liability method in accordance with Statement of Financial Accounting Standards Board ("SFAS") No. 109, "Accounting for Income Taxes." Deferred income taxes arise from the recognition of temporary differences between income reported for financial statement purposes and income for income tax purposes. These deferred taxes are measured by applying currently enacted tax rates. In addition, SFAS No. 109 requires the recognition of future benefits, such as for net operating loss carryforwards, to the extent that realization of such benefits is more likely than not.
SFAS No. 123, "Accounting for Stock-Based Compensation" defines a fair value based method of accounting for stock-based employee compensation plans. Under SFAS No. 123, companies are encouraged, but are not required, to adopt the fair value method for all employee awards granted. Companies are permitted to account for such transactions under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," but must disclose in a note to the financial statements, pro forma net income and earnings per share as if SFAS No. 123 had been applied. We account for stock-based compensation under APB No. 25 and provides the fair value method disclosures required by SFAS No. 123.
For purposes of the consolidated statement of cash flows, we consider all time deposits and commercial paper with original maturity dates of 90 days or less to be cash equivalents.
The carrying value of our investments approximates their fair value and is based on quoted market prices. Due to the uncertainty with respect to both the timing and amount of the proceeds to be realized from our other investments, it is not practicable to determine the fair value of these other
investments. The carrying values of other financial instruments, including cash and cash equivalents, accrued investment income, and other receivables and payables approximate their estimated fair value due to the short term nature of the balances.
Our investment portfolio at December 31, 2001 and 2000 is comprised of the following:
The amortized cost, fair value and gross unrealized gains and losses of fixed maturities as of December 31, 2001 and 2000 are presented in the tables below:
Proceeds from the sales of investments available for sale for the years ended December 31, 2001 and 2000 were $318.7 million and $223.1 million, respectively. Realized investment gains and losses for the years ended December 31, 2001 and 2000 were as follows:
Other investments represents equity investments in, and loans to, reinsurance-related enterprises, ceding companies or distribution channels that are expected to generate or secure additional profitable business for us. The loans bear interest at rates between 6% and 9% and are repayable between one and five years. There was a write-down in our investment in 4Sigma Limited of $8 million in 2001, leaving a net written down value of $1.2 million as at December 31, 2001.
Management fees receivable represents management fee and related revenues that are primarily due from co-reinsurers and quota share retrocessionnaires to whom a portion of our gross managed premium is allocated. Management fees receivable at December 31, 2001, and 2000 consist of the following:
Activity in the reserve for unpaid losses and loss expenses for the years ended December 31, 2001 and 2000 is summarized as follows:
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. The components of income taxes for the years presented are as follows:
Realization of the deferred tax asset is dependent on generating sufficient taxable income in the future. During both 2001 and 2000, a valuation allowance of $11.4 million was recorded to reduce the deferred tax asset in accordance with the provisions of SFAS109. The valuation allowance is necessary because sufficient uncertainly exist regarding the realizability of certain net operating loss carryforwards. We have loss carryforwards of $57.0 million and $65.0 million, available to offset future foreign taxable income, as of December 2001 and 2000, respectively. Such tax loss carryforwards do not have an expiration date.
Losses and loss expenses incurred and earned premiums as reported in the statement of operations are after deduction for retrocessions. Written and earned premiums and losses incurred for the years ended December 31, 2001, 2000 and 1999 are comprised of the following:
We have entered into various employment contracts with fixed terms of up to three years that have total minimum commitments of $0.6 million, excluding any performance bonuses that are determined by our Board of Directors. The contracts include various non-compete clauses following termination of employment. As of December 31, 2000, the minimum employee commitments were $3.1 million.
Certain subsidiaries of ours are obligated to make defined contributions to pension plans for their employees. As of December 31, 2001 and 2000, there were outstanding liabilities for pension contributions of $645 thousand and $568 thousand respectively. Pension contribution expenses were $760 thousand, $732 thousand, and $590 thousand, for the years ended December 31, 2001, 2000, and 1999, respectively.
As of December 31, 2001, we had written off the Series A preferred stock representing our initial $8.0 million investment in 4Sigma.
At this time, we are unable to determine the amount of our exposure and the possible effect upon our business, financial condition or results of operation from these two contracts.
In connection with the Direct Sales (the private sale of securities-Common, A Warrants and B Warrants), we issued Class A Warrants to purchase up to 1,381,200 common shares and Class B Warrants to purchase up to 1,381,200 common shares if certain performance criteria are satisfied. The Class A Warrants are vested and are exercisable at $20 per share at any time prior to December 2007.
The exercise price of an option is determined by the Compensation Committee when the options are granted. The vesting schedule of an option is determined by the Compensation Committee when an option is granted. The most common vesting schedule calls for an option to vest 25% at the date of grant and 25% on each of the second, third and fourth anniversaries of the date of grant. All options are exercisable at the fair market value of the stock at the date of the grant and expire 10 years after the date of the grant. Options granted under the Stock Option Plan are assignable subject to certain limitations. We have reserved 2,000,000 common shares for issuance under the Stock Option Plan.
As of December 31, 2001, options to purchase a total of 1,565,694 shares of common stock had been granted, net of forfeitures, of which options for 656,975 shares were vested and exercisable, and 166,139 shares had been issued upon exercise. As of December 31, 2000, options to purchase a total of 1,057,900 shares of common stock had been granted, net of forfeitures, of which options for 679,648 shares were vested and exercisable, and no shares had been issued upon exercise.
We have adopted the ESG Re Limited Non-Management Directors' Compensation and Option Plan (the "Directors' Plan"), under which non-management directors are compensated for their service on the Board. Each non-management director receives fees for services as a member of the Board of Directors and its committees, in amounts determined by the Board of Directors, to be paid in a
combination of cash and common shares, as determined by the Board. A Director may elect to receive all or a portion of such fees in the form of options to purchase common shares equal to two times the fees that would otherwise be payable. A director may also elect to defer receipt of the fees, and if so deferred, will receive deferred compensation indexed to the greater of (i) the total return on the common shares; or (ii) the one-year U.S. Treasury bill rate. If a director does not elect the payment in options or deferred compensation alternatives, the fees will be paid in a combination of cash and shares as determined by the Board. Shares granted under the Directors' Plan will not be transferable for six months after receipt. We have reserved 1,000,000 common shares for issuance under the Directors' Plan. The Directors' Plan was approved by shareholders in December 1997.
Compensation expense related to these grants of $62 thousand, $173 thousand and $232 thousand were recognized for the years ending December 31, 2001, 2000 and 1999, respectively.
We apply APB Opinion 25 and Related Interpretations in accounting for stock based compensation. Had the compensation expense for our stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method
In 1997, we entered into several agreements with Head Asset Management L.L.C. ("Head Asset Management"), an affiliate of Head & Company L.L.C. ("Head Company"), relating to the provision of investment management services. The Chairman of our Board of Directors and Chief Executive Officer is a Managing Member of Head Company. Under these agreements, which we amended July 1, 2000, and which are subject to our investment guidelines and other restrictions, we will pay Head Asset Management a fee equal to the sum of (i) 0.20% per annum of the first $150 million of assets under management, and (ii) 0.15% per annum of assets under management in excess of $150 million. We incurred expenses of $297 thousand, $397 thousand and $495 thousand under this agreement for the years ended December 31, 2001, 2000 and 1999, respectively.
The following tables provide summary financial information by our lines of business of the direct segment. The ESG Direct segment did not operate during 1999.
The following tables provide summary financial information of earned premiums of the ESG Direct segment, on the basis of where the underlying risk is located