In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income". This statement establishes rules for the reporting of comprehensive income and its components. Comprehensive income consists of net income and unrealized gains and losses on available for sale investments, and is presented in the Consolidated Statement of Income and Comprehensive Income. The adoption of SFAS 130 had no impact on total shareholders' equity. Prior year financial statements have been reclassified to conform to the SFAS 130 requirements.
on the basis of specific identification. Investment income is recorded as earned and accrued to the balance sheet date.
(iv) Program and captive management fees are included within Program Business revenue, and are initially recorded as of the effective date of the insurance policy or, in the case of installment premiums, when the installment is billed and are recognized in income over the period of the underlying policy (which is typically one year) in proportion to the level of services provided in accordance with the Company's contractual obligations. Any subsequent adjustments are recognized in income when advised by the client or agent. The portion of recorded management fees that will be earned in the future is deferred and reported as deferred income in the consolidated balance sheets.
In December 1997, the AICPA Accounting Standards Executive Committee issued Statement of Position (SOP) 97-3. "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments." The accounting guidance of this SOP focuses on the timing of recognition and measurement of liabilities for insurance- related assessments. Guidance is also provided on recording assets representing future recoveries of assessments through premium tax offsets or policy surcharges. The SOP is effective for fiscal years beginning after December 15, 1998. The Company does not anticipate the statement to have a significant impact on the Company's financial position or results of operations.
The adverse development during 1998 on prior years reflects primarily an increase in claims frequency on one particular program that covers bodily injury and property risks in the construction industry, and the provision for doubtful recoveries of $2,500 discussed in Note 8. The adverse development during 1997 on prior years primarily represents an increase in claims frequency on one particular program that covers bodily injury and property risks in the construction industry.
In April 1997, the Company purchased a further 213,732 of its ordinary shares from a founding shareholder for a total cost of $1,141. Such shares were recorded as treasury stock at cost.
Employees have been granted options to purchase Ordinary Shares in the Company. These options have been issued in two series:
Realm National did not have any earned surplus available for the payment of dividends in 1997 and 1998 due to its statutory-basis accumulated deficit. Additionally, $21 and $21 of statutory surplus has been segregated as special funds as of December 31, 1997 and 1998 and will not become available for dividend payments until earned.
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 calculation specifies various formulas and weighting factors that are applied to financial balances or various levels of activity based on the perceived degree of risk and are set forth in the RBC requirements. The capital of Realm National as of December 31, 1997 and 1998 exceeded the amount calculated using the RBC requirements.
CIRCL is also required to maintain a minimum liquidity ratio whereby the value of its relevant assets are 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, 1997 and 1998, respectively, CIRCL was required to maintain relevant assets of at least $17,900 and $25,000. At that date relevant assets were approximately $23,900 and $35,600 and the minimum liquidity ratio was therefore met.
The reinsurers have alleged that they sustained losses due to a spiral in the LMX market which was not disclosed to them by the ceding insurers or their reinsurance brokers. As a consequence, these reinsurers have asserted that they are no longer obliged to honor their reinsurance agreements and have ceased paying claims. If one or more reinsurers prevail in the pending arbitration, it is possible that one or more ceding insurers that are reinsurance brokerage clients of the Company's subsidiaries or for whom a subsidiary performs the role of underwriting manager, may assert a claim against a subsidiary and in the case of the one exception the subsidiary would be unable to recover under certain contracts of reinsurance.