<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM
________ TO ________
COMMISSION FILE NUMBER: 0-10071
NOBEL INSURANCE LIMITED
(Exact name of registrant as specified in its charter)
ISLANDS OF BERMUDA 98-0076395
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
FALCONER HOUSE GROUND LEVEL N/A
108 PITTS BAY ROAD (Zip Code)
HAMILTON, BERMUDA HMAX
(Address of principal
executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 809-292-7104
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Title of each class
Capital Shares, $1.00 Par Value
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
/X/ YES / / NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part II of this Form 10-K or any
amendment to this Form 10-K.
/X/
The aggregate market value of the voting stock held by nonaffiliates of the
registrant on March 14, 1997 was approximately
$31,546,190
The number of Capital Shares of the registrant outstanding on March 14, 1997
was 4,481,856.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part III of this Annual Report is
incorporated by reference from the registrant's definitive proxy statement
for its Annual Meeting of Shareholders to be held May 9, 1997.
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PART I
ITEM 1. BUSINESS
GENERAL
Nobel Insurance Limited (the "Parent Company") was incorporated on
December 15, 1978 under the Laws of the Islands of Bermuda and commenced
operations on January 1, 1979.
The Company's principal business is the service and underwriting of
commercial property, casualty and surety risks for specialized industries,
and personal lines property coverages for low-value dwellings. The Company's
principal commercial markets consist of distributors, manufacturers and users
of explosives; transporters of hazardous materials and general commodities;
marketers of propane; and small to medium-size businesses requiring all
forms of surety bonding. These customers are principally located in the
United States. The Company's principal personal markets are made up of
individual low and moderate value property primarily in the Southeastern
United States. In late 1992, the Company acquired two U.S.A.-based contract
claim adjusting businesses. The Parent Company conducts underwriting
operations as a Bermuda-based reinsurer. The Parent Company also owns a
U.S.A.-based property and casualty insurer, Nobel Insurance Company.
The Nobel U.S. Group conducts operations through one property and
casualty insurance company and four other operating entities that provide
various underwriting and service functions. See "Business: The Nobel U.S.
Group."
Unless otherwise indicated, the term "Nobel Reinsurers" means the Parent
Company; the term "Domestic Company(s)" shall refer to the U.S.A.-based
insurer(s); and the terms "Company" or "Nobel" shall refer to all entities,
including agency, service and management subsidiaries. All dollar references
are to the U.S. dollar unless, in the context, a reference to the Canadian
dollar would be more appropriate.
THE NOBEL U.S. GROUP
The Nobel U.S. Group is structured under Nobel Holdings, Inc. ("NHI"), a
Delaware corporation. The Nobel U.S. Group consists of one property and
casualty insurer and four other operating entities that provide various
underwriting and service functions. The insurer is:
Nobel Insurance Company ("NIC"), a Texas company admitted in 50 states
and the District of Columbia to write all insurance lines except life
insurance, with statutory surplus of $35,513,000 at December 31, 1996.
The four other operating entities are as follows:
(i) Nobel Managing Agents, Inc., (NMA) a Texas corporation that
provides insurance brokerage and risk management services;
(ii) Nobel Insurance Agency, Inc., (NIA) a Texas corporation that
is the Nobel U.S. Group's commercial and personal lines recording
agency;
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(iii) Nobel Service Corporation, (NSC) a Delaware corporation
formed in 1993 to provide paymaster and disbursement services
for the Nobel U.S. Group; and
(iv) IAS Claim Services, Inc. ("IAS"), a Delaware corporation
formed in 1994 to conduct the business of the claim adjusting
service division.
COMMERCIAL CASUALTY PROGRAMS
The commercial casualty insurance program offered by the Company
consists of: combined single limit automobile liability; automobile physical
damage; combined single limit comprehensive general liability; combined
single limit excess liability; and motor truck cargo coverage. The Company
assists insureds in placing workers' compensation coverages with various
state assigned risk pools and property coverages with unaffiliated insurers.
Policy limits are usually $1,000,000 for primary coverages and
$4,000,000 for excess coverages. Primary and excess coverages for the
explosives, specialized haulers and propane programs are written by NIC.
Until October 1993, the explosives program primary coverages, which were the
Company's principal source of premium revenue prior to 1991, were assumed as
reinsurance by the Parent Company from INA, a subsidiary of CIGNA Corporation.
Reinsurance arrangements are utilized to limit maximum loss, provide
greater diversification of risk and minimize exposures on large or hazardous
risks. The Company purchases treaty reinsurance for limits $9,500,000 excess
of $500,000 per occurrence. The reinsurance program was remarketed effective
July 1, 1994 and is placed 100% in equal shares with Employers Reinsurance
Corporation and American Re-Insurance Company.
The Company markets its insurance products and services to customers
predominantly through insurance agents. The specialized haulers program was
initiated in 1991 as a start-up and the propane program commenced in 1992
following the acquisition of LPG Insurance. See "Business: LP-Gas Program."
In 1995, Nobel began writing aviation business through a Dallas,
Texas-based MGA. The program is 100% reinsured by Employers Reinsurance
Company, and Nobel Insurance Company retains a fee for its services.
COMMERCIAL CASUALTY EXPLOSIVES PROGRAM INA-CONTRACT
Effective July 1, 1993 and October 1, 1993, the reinsurance agreements
between INA and the Parent Company were terminated on a run-off basis and
explosives program primary coverages previously written by INA and reinsured
by the Parent Company were written by NIC. As the primary insurer, INA
issued policies to insureds, monitored and processed audits by the Company of
the insureds' operations to adjust premiums at the expiration of each policy
period, and provided claims handling services.
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Since inception of the Parent Company's business in 1979, INA reinsured
with one or more of the Nobel Reinsurers' risks relating to insureds in the
explosives industry. The Nobel Reinsurers historically reinsured 100% of the
primary policy limits of casualty risks underwritten by INA.
In exchange for this reinsurance, INA ceded to the Nobel Reinsurers the
gross premiums received for risks reinsured less service fees. The Nobel
Reinsurers were charged service fees by INA based on a fixed percentage of
premiums plus a charge for any insurance risk retained by INA. These service
fees compensated INA for issuing and servicing the policies of insurance and
for retaining liability above certain limits. The Nobel Reinsurers maintain
an escrow fund with INA in an amount equal to approximately two months of
average claims paid.
LP-GAS PROGRAM
In April 1992, NHI acquired a majority of the outstanding shares of LPG
Risk Retention Group Holding Company, Inc. ("LPG Insurance") and merged LPG
Insurance into NHI. LPG Insurance through its subsidiary, LPG Risk Retention
Group Insurance Company ("LPGRRG"), operated as a risk retention group to
serve the liability needs of the LP-Gas industry.
NHI's acquisition resulted in the termination of LPGRRG's status as a
risk retention group, and accordingly, LPGRRG ceased writing insurance and
commenced the run-off of its insurance liabilities. NIC began to write
liability insurance for the former customers of LPGRRG through the commercial
casualty propane program.
Effective October 1, 1993, NIC assumed the insurance run-off liabilities
from LPG Risk Retention Group Insurance Company in consideration of a
reinsurance premium in equal amount. Effective December 1, 1993, LPGRRG was
dissolved.
LOW-VALUE DWELLING PROGRAM
The Company, through NIC, writes a program of homeowners and fire
policies insuring risks for low-value dwellings, defined as homes valued
under $130,000 (the "low-value dwelling" program). NIC is the leading
provider of low-value dwelling insurance in South Carolina. NIC expanded the
low-value dwelling program to North Carolina in 1991, Tennessee in 1992,
Georgia in 1993, Alabama in 1994 and Kentucky in 1995, and is currently
working to promote its products throughout the Southeast. Effective January
1, 1996, the reinsurance program for NIC ceded 50% of the premiums and claims
on a quota-share basis and purchased a $27.5 million excess of $2.5 million
catastrophe excess of loss cover. The quota share treaty is fully placed
with Constitution Re (65%), SCOR Re (35%). The Catastrophe Excess of Loss
Treaty is placed with Renaissance Re and CAT Limited participating equally on
all layers.
NONSTANDARD PERSONAL AUTO
In 1995, NIC began writing nonstandard personal auto in Georgia through
a Memphis, Tennessee-based general agent. The underwriting is done by the
general agent and claims are adjusted by NIC personnel.
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SPECIALTY LINES PROGRAMS
SURETY BONDS. This program, originally written through a general agent in
NIC, started in 1991 and initially consisted primarily of performance and
payment bonds guaranteed by the Small Business Administration ("SBA"), and
miscellaneous bonds, such as tax, license and permit bonds. In March 1992, a
specialty standard program was started for contractors who did not qualify
for SBA guaranteed bonds. The surety bond program is written through
independent agents and claims are supervised by the Company's claims
department. Effective January 1995, Nobel purchased the Atlanta,
Georgia-based surety underwriting operation assets from the general agent to
establish NIC's surety division. The Company implemented an excess of loss
reinsurance program for its standard surety business effective October 1,
1995. On January 1, 1997, the Company renewed its excess of loss cover and
now purchases $5.8 million excess of $0.2 million per principal, which is
reinsured with Transatlantic Re (50%), SCOR Re (20%), Gerling Global Re
Corporation of America (15%), Sorema (7.5%), and Hartford Fire Insurance
Company (7.5%).
BANK BONDS. This program, written through the Domestic Companies, was
started in 1986 to insure small banks with assets less than $100 million that
were having difficulty obtaining coverage through the standard market. In
consideration of the increased risk volatility resulting from lower premium
levels, the Company canceled the program effective March 1993. As of
December 31, 1996, all reported claims have been settled.
AUTOMOBILE EXTENDED WARRANTIES. Under this program, which is administered by
First Extended Service Corporation ("First Extended"), NIC insures the
responsibilities of automobile dealerships in the event the dealerships are
unable to perform their obligations under extended warranty contracts with
automobile purchasers. FFG Insurance Company ("FFG"), a Texas insurer,
reinsures 100% of the risk on the policies issued by the Domestic Company.
All known reinsurance obligations are kept fully collateralized by FFG.
First Extended provides all of the servicing of policies issued by the
Domestic Company, including collection of premiums and all claims handling.
The Domestic Company retains a fee for its service in issuing the policies.
Over time, FFG has become the insurer for the program as it was licensed in
the various states and in 1996 and 1995 written premium for this program in
NIC were insignificant.
CLAIM ADJUSTING SERVICE BUSINESS
Effective October 31, 1992, NHI acquired two affiliated Dallas,
Texas-based claim adjusting businesses. IAS offers a broad range of routine
and custom claims services tailored to the insurance carrier's
specifications. CAT Crew is a highly specialized team of professionals
developed to appraise and adjust unique catastrophic events on a nationwide
basis. The claim adjusting service businesses provide a revenue source with
predictable costs which counterbalances the risk exposure of the low-value
dwelling program to catastrophic events. During 1996, IAS and CAT Crew
combined produced revenue of $10.4 million and net income of $101 thousand.
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REINSURANCE COMPANIES
As of December 31, 1992, all reinsurance operations were consolidated in
the Parent Company. The reinsurance agreements between INA and the Parent
Company were terminated on a run-off basis in 1993. The Parent Company was
principally engaged in providing reinsurance of risks for businesses engaged
in the transportation, distribution, manufacture and use of explosives,
although the Nobel Reinsurers had also provided reinsurance for other risks
in other industries.
COLLATERAL REQUIREMENT FOR ASSUMED REINSURANCE
Foreign reinsurers are typically required to collateralize their
reinsurance obligations. The Parent Company has furnished domestic carriers
with irrevocable bank letters of credit aggregating $5,963,000 at December
31, 1996. The Parent Company has pledged assets with a market value of
$6,382,000 to secure these letters of credit. These letters of credit are
provided for the benefit of the ceding insurers so that they may recognize
reinsurance by the Parent Company for statutory reporting purposes even
though the Parent Company is not an admitted reinsurer in any United States
jurisdiction. The letters of credit secure the domestic carriers' claims and
claims expense reserves and unearned premium reserves ceded to the Nobel
Reinsurers. The Parent Company pays an annual fee of approximately .375% of
the face amount of the letters of credit.
In July 1988, the Nobel Reinsurers and INA established an alternative
collateral arrangement whereby the net reinsurance settlements were deposited
into a trust account. The cash balances and related investment income
accumulated in the trust account is an amount equal to 98% of the ceded
reserves for unpaid claims and unearned premiums. Commencing in July 1989,
the settlement of all claims and claims expenses for prior reinsurance
agreement periods was withdrawn from the trust account or deducted from the
net reinsurance settlements into the trust account. The market value of the
investments in the trust account at December 31, 1996 was $8,780,000. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources."
LINES OF INSURANCE UNDERWRITTEN
The following table shows the percentage of premiums earned by line of
insurance underwritten or reinsured by the Company for the years indicated.
<TABLE>
YEARS ENDED DECEMBER 31, 1992 1993 1994 1995 1996
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<S> <C> <C> <C> <C> <C>
Lines of business:
Automobile liability & physical damage 35.8% 48.1% 58.2% 63.0% 56.4%
Fidelity and surety 13.4 12.5 15.9 16.1 21.9
Liability other than automobile 21.6 17.6 15.5 13.6 6.9
Property and other 16.8 13.3 6.0 6.9 12.9
Excess liability 5.9 5.4 3.8 0.4 1.7
Workers' compensation 6.5 3.1 0.6 --- .2
----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
6
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PREMIUMS TO CAPITAL AND SURPLUS RATIO
The following table shows, for the years indicated, the Company's ratio
of net premiums written to capital and surplus on a GAAP basis.
<TABLE>
YEARS ENDED DECEMBER 31, 1992 1993 1994 1995 1996
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<S> <C> <C> <C> <C> <C>
Net premiums written ($000) $20,112 $28,468 $40,502 $47,594 $43,195
Total capital ($000) $46,114 $54,479 $56,548 $64,908 $53,187
Ratio 0.4 to 1 0.5 to 1 0.7 to 1 0.7 to 1 0.8 to 1
</TABLE>
The Bermuda insurance regulations include provisions requiring a minimum
solvency margin (or asset margin over liabilities) calculated as the greater
of $1,200,000, plus 15% of net written premiums in excess of $6,000,000 or
15% of net reserves for claims and claims expense. The minimum statutory
margin requirement is $1,408,000 at December 31, 1996. Insurers generally
limit the ratio of net premiums written to statutory capital to less than 3.0
to 1.
The Company has calculated the impact of the risk based capital
requirements adopted by the National Association of Insurance Commissioners.
The risk based capital formula requires an insurer to compute the amount of
capital necessary to support specified elements of risk. The Company has
computed its risk based capital authorized control level to be $10,250,000.
RESERVES
Insurance companies are required to provide loss reserves for the
settlement and expense of investigation of all reported and unreported
incurred claims. Such provisions are necessarily based on estimates. The
estimates, and the methods used to arrive at them, are reviewed quarterly by
the Company's professional actuary and changes in estimates are reflected in
current operations for the period in which they are determined. See Note 4
of Notes to Consolidated Financial Statements.
The Company estimates claims and claims expenses based on historical
experience and payment and reporting patterns for the type of risk involved.
The anticipated effect of inflation is implicitly considered when estimating
claims and claims expenses. Except for the effect of the gross-up to record
an asset for reinsurance recoverable on unpaid claims, the difference between
the U.S. insurance subsidiary reserves on a statutory basis and on the basis
of generally accepted accounting principles is not material.
Inherent in the estimates of ultimate claims are expected trends in
claim severity, frequency and other factors that may vary as claims are
settled. The amount of uncertainty in the estimates is affected by such
factors as the amount of historical claims experience relative to the
development period for the type of risk, knowledge of the actual facts and
circumstances, and the amount of insurance risk retained.
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The Company experienced rapid growth in premiums between 1985 and 1988,
particularly in the casualty coverages which have extended claim development
periods. During this period, the Company also increased the amount of
insurance risk it retained. The Company's reported casualty claims data for
reinsurance assumed reflected the claims payments and claims reserves
established by the ceding insurers and, additionally until December 31, 1990,
supplemental claims reserve adjustments by the Nobel U.S. Group's claims
staff. The Company believes that the negative trends evidenced by the
historical data as analyzed in 1988, were exaggerated by these supplemental
claims reserve adjustments resulting from inconsistent and increasingly
conservative evaluations of claims reserves requirements over time. In order
to eliminate the effect of these inconsistencies, the Company prepared claims
data for actuarial analysis at December 31, 1989 that reflected only the
claims reserves established by the ceding insurers.
Since 1989, the Company implemented strategies to reduce the amount of
underwriting risk and refine the claims data available for actuarial analysis
for its casualty coverages, and has maintained a conservative reserving
philosophy to avoid recurrence of the adverse reserve development experienced
prior to 1989. Between 1989 and 1994, the Company experienced favorable
development trends. In 1995, there was a slight net reserve deficiency for
the Company, and the Company strengthened reserves. In 1996, the Company
again experienced favorable reserve development. At December 31, 1996, the
Company has recorded reserves for incurred but not reported ("IBNR") and
development of known claims which represents the Company's best estimate of
the reserve for claims and claims expense.
Generally, workers' compensation reserves are estimated based on the
same factors as other kinds of claims with actuarial input, which may
include, where state law permits, inflation adjustments for rising benefits
over time. Claims expenses and development include claims in the workers'
compensation line with long-term fixed, periodic payment patterns. In
establishing the reserves for such workers' compensation claims, beginning in
1986, the Company discounted the liability reserves with respect to these
claims for mortality and for interest at the rate of 7.2% from 1988 to 1989
and 3.5% from 1990 to 1996. As a result of this discount procedure, the
reserves at December 31, 1992, 1993, 1994, 1995 and 1996 for unpaid claims
and claims expenses, were reduced by $1,100,000; $995,000; $941,000;
$844,000; and $707,000, respectively.
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The following table shows the provision for claims and claims expenses,
net of reinsurance recoverable, at the end of each year as recorded in the
Consolidated Balance Sheets of the Company, including the reserve for
incurred but not reported claims. The estimate changes as more information
becomes known about the frequency and severity of claims for individual
years. Changes in subsequent years from original claim estimates are
reflected in the year in which the adjustment to the claim is determined.
<TABLE>
YEARS ENDED DECEMBER 31,
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
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(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserve for claims
and claims expenses:
Gross $25,154 $47,675 $80,954 $93,310 $84,368 $76,450 $68,521 $64,335 $64,297 $81,675 $88,397
Ceded 1,574 4,131 1,107 656 2,033 3,496 7,139 8,727 12,846 19,205 22,262
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net $23,580 $43,544 $79,847 $92,654 $82,335 $72,954 $61,382 $55,608 $51,451 $62,470 $66,135
Reserves re-estimated
as of:
1 year later 113% 128% 88% 99% 94% 79% 89% 84% 103% 98%
2 years later 141% 110% 90% 93% 75% 69% 73% 83% 101%
3 years later 125% 115% 83% 80% 68% 56% 71% 77%
4 years later 131% 111% 79% 75% 58% 55% 66%
5 years later 132% 109% 73% 67% 58% 51%
6 years later 129% 107% 67% 67% 55%
7 years later 129% 102% 68% 64%
8 years later 126% 104% 64%
9 years later 127% 100%
10 years later 124%
Redundancy
(deficiency):
Percent (24%) (0%) 36% 36% 45% 49% 34% 23% (1%) 2%
Amount (5,675) (28) 28,393 33,320 37,378 35,864 20,702 12,781 (592) 1,089
Percent Paid
(cumulative) as of:
1 year later 38% 35% 25% 29% 21% 23% 21% 23% 23% 37%
2 years later 64% 56% 38% 40% 34% 33% 33% 37% 52%
3 years later 81% 72% 48% 49% 41% 40% 38% 51%
4 years later 94% 82% 55% 54% 46% 43% 44%
5 years later 105% 88% 58% 57% 47% 46%
6 years later 113% 91% 60% 58% 49%
7 years later 115% 92% 61% 60%
8 years later 116% 93% 62%
9 years later 117% 95%
10 years later 120%
</TABLE>
The upper section shows re-estimates in later years of incurred claims
as a percentage of the original estimate for the years indicated and the
cumulative redundancy (deficiency) amount as of December 31, 1996. A
redundancy means that the original estimate was high; a deficiency means
that the latest estimate is higher than the original estimate. The lower
section shows by year the cumulative percentage paid on actual claims
incurred that are included in the original estimate.
From 1986 through 1987, the Company has indicated deficiencies in its
loss reserves. The estimates were low principally because of (i) the
unavailability of adequate historical data for use in establishing reserves
and reserve development resulting in difficulty in evaluating claims IBNR,
and (ii) the changing legal and legislative climate relating to tort
liability. The reserve redundancy experienced from 1988 to 1993 reflects the
analysis of more consistent historical data as well as a further period of
claims experience for casualty coverages. The reserve redundancy recorded in
1989 also included $2,200,000 relating to excess liability coverages excess
of $1,000,000 primary policy limits resulting from adjustment of the IBNR
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provision to provide for probable reserve development on two claims events.
The reserve redundancy recorded in 1990 was net of $1,174,000 deficiency from
the low-value dwelling program for late reported claims from the Hurricane
Hugo catastrophe. Additionally, in 1990, the Company provided a reserve of
$1,000,000 for unallocated administrative claims adjusting expenses.
The reserve redundancy of $15,610,000 recorded in 1992 consisted of
$16,157,000 redundancy in reinsurance assumed casualty reserves offset by
$547,000 deficiency primarily from reserve strengthening in other programs.
The reserve redundancy of $6,992,000 recorded in 1993 reflected $5,955,000
redundancy in reinsurance assumed casualty reserves and $1,037,000 redundancy
in other reserves. Major sources of the net redundancy adjustment in other
reserves were a reduction of unallocated expense reserves of $1,096,000,
redundant reserves related to excess liability coverages insured prior to
July 1989 of $1,021,000, offset by reserve strengthening for the run-off of
purchased LPG RRG insurance business for $1,111,000. The reserve redundancy
of $8,900,000 recorded in 1994 included $8,319,000 redundancy in reinsurance
assumed casualty reserves and $684,000 deficiency from reserves assumed with
the LPG Insurance acquisition, with the balance accounted for by reduction of
unallocated expense reserves and IBNR reserves for other discontinued
insurance programs. The reserve deficiency in 1995 of $1,700,000 included
deficiencies of $3,300,000 for commercial casualty and $1,200,000 for surety.
This was partially offset by redundancies of $600,000 for reinsurance
assumed casualty reserves; $300,000 for LPG RRG Insurance; $800,000
redundancy for Fidelity Bank Bond business; $100,000 for Personal Lines
business; and a bulk reserve takedown of $1,000,000. The reserve redundancy
in 1996 of $1,089,000 included a deficiency of $3,987,000 for commercial
casualty offset by redundancies of $479,000 for fidelity and surety; $88,000
for personal lines; $1,404,000 for the LPG RRG runoff, and $2,021,000 for the
assumed specialty explosives business. In addition, a $1,000,000 bulk
reserve was released in 1996.
The payment patterns in the lower section are impacted to varying
degrees for comparison between years by the relative redundancy or deficiency
of the reserves for unpaid claims at each year end. The first year payments
as a percentage of the reserves as re-estimated at December 31, 1996 are
1986--31%, 1987--35%, 1988--39%, 1989--45%, 1990--38%, 1991--45%, 1992--32%,
1993--29% and 1994--23%, 1995--37%. The restated first year payment pattern
beginning in 1985 was affected by the addition of and growth in the group
medical coverages (discontinued in 1989), property coverages, and fidelity
and surety coverages, which have short claims development periods, and
beginning in 1992, by the growth of casualty coverages which have longer
claims development periods.
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The following table reconciles claims and claims expenses to year-end
reserves, net of reinsurance recoverable, by adding claims recorded in the
current year to the balance at the beginning of the year and deducting
payments made during the year.
<TABLE>
YEARS ENDED DECEMBER 31, 1994 1995 1996
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(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
January 1 balance in reserve for
claims and claims expenses $ 55,608 $ 51,451 $ 62,470
Claims and claims expenses incurred related to:
Current year 22,528 30,002 43,286
Prior years (8,900) 1,700 (1,089)
-------- -------- --------
Total 13,628 31,702 42,197
Paid claims and claims expenses attributable to:
Current year (5,166) (8,788) (15,635)
Prior years (12,619) (11,895) (22,897)
-------- -------- --------
Total (17,785) (20,683) (38,532)
-------- -------- --------
December 31 balance in reserves
for claims and claims expenses $ 51,451 $ 62,470 $ 66,135
-------- -------- --------
-------- -------- --------
</TABLE>
The reserve for claims and claims expenses in the Consolidated Balance
Sheets at December 31, 1994, 1995 and 1996 was grossed up to record an asset
for reinsurance recoverable on unpaid claims of $12,846,000; $19,205,000; and
$22,262,000, respectively.
CLAIMS AND EXPENSE RATIOS
The combined claims and expense ratio is the traditional measure of
underwriting experience for property and casualty insurance companies. It is
the combination of the ratios of (i) incurred claims and claims expenses to
net premiums earned ("claims ratio") and (ii) policy acquisition costs and
other operating expenses on a statutory basis to net premiums written
("underwriting expense ratio").
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The following table shows the underwriting experience of the Company for
the years indicated, by line of insurance written. Adjustments to reserves
that are made in subsequent years are reflected in the year of adjustment.
Two claims ratios are shown--F.Y. is the financial year and A.Y. is the
accident year claims only. Underwriting expenses are not allocated by line.
<TABLE>
YEARS ENDED DECEMBER 31, 1992 1993 1994 1995 1996
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(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Auto liability and physical damage:
Net premiums earned $ 6,609 $12,636 $ 20,277 $ 27,260 $ 31,187
Claims ratio FY/AY 10%/67% 56%/68% 66%/71% 83%/74% 93%/93%
Fidelity and surety:
Net premiums earned $ 2,468 $ 3,288 $ 5,542 $ 6,944 $ 12,130
Claims ratio FY/AY 67%/36% 34%/24% 43%/42% 60%/55% 33%/33%
Liability other than automobile:
Net premiums earned $ 3,994 $ 4,618 $ 5,414 $ 5,856 $ 3,834
Claims ratio FY/AY (33%)/121% 30%/93% (30%)/74% 65%/64% 97%/89%
Property and other:
Net premiums earned $ 3,111 $ 3,504 $ 2,086 $ 2,984 $ 7,168
Claims ratio FY/AY 36%/43% 47%/58% 41%/57% 82%/58% 72%/82%
Excess liability:
Net premiums earned $ 1,097 $ 1,411 $ 1,316 $ 154 $ 958
Claims ratio FY/AY (326%)/56% (133%)/20% (18%)/40% 14%/268% 97%/89%
Workers' compensation:
Net premiums earned $ 1,204 $ 839 $ 186 $ --- $ 124
Claims ratio FY/AY (96%)/76% 15%/54% (584%)/17% N/A (388%)/0%
Total:
Net premiums earned $ 18,483 $ 26,296 $ 34,821 $ 43,198 $ 55,401
Claims ratio FY/AY (14%)/71% 36%/63% 39%/65% 73%/69% 76%/78%
Underwriting expense ratio 42% 42% 28% 27% 29%
Combined claims
and expense ratio 28%/113% 78%/105% 67%/93% 100%/96% 105%/107%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
The comparability of the financial year claims ratios is impacted by the
adjustments to claims reserve estimates for prior accident years recorded in
the financial year. The comparability of the accident year claims ratios is
impacted by the adjustments to claims reserve estimates for the accident year
recorded in subsequent financial years. See "Business Reserves" for a
discussion of reserve development. The excess liability reserve development
redundancy in 1992 and 1993 included $1,209,000 and $1,021,000, respectively,
relating to coverages excess of $1 million insured prior to July 1989. The
fidelity and surety reserve development deficiency in 1992 and 1993 related
primarily to the specialty lines bank bonds program. The property and other
claims in 1993 through 1996 were impacted by catastrophic losses incurred in
the low-value dwelling program from the March 1993 winter storm and Hurricane
Fran in September 1996.
12
<PAGE>
INVESTMENTS
Funds available for investment include the Parent Company's present
capital as well as premiums received, after deduction for expenses, and
retained under the Company's insurance policies and reinsurance agreements.
Before these funds are required for the settlement of claims, they are
invested by the Company with the objective of preserving principal,
maintaining liquidity and generating income.
The Company engages professional fixed income managers to provide
investment advisory services. At December 31, 1996, the fair value of fixed
income investments under management was approximately $101,000,000. The
Company engaged Kayne Anderson Investment Management, Inc. ("Kayne Anderson")
to manage its trading portfolio under more aggressive guidelines with
investment emphasis on time-frame situations. At December 31, 1996, the fair
value of investments in the Company's trading portfolio was approximately
$5,394,000. The remaining fixed income investments are either short-term and
managed by the Company or are on deposit with various state insurance
departments. The investment guidelines adopted by the Company establish that
the primary objective of the portfolio is to preserve principal and provide
liquidity. The Parent Company's investment guidelines prescribe a portfolio
structure of maturities to provide adequate liquidity to settle claims
liabilities as they come due.
The Company's investment portfolio consists primarily of money market
securities (9.2%), United States government securities (9.9%), United States
government guaranteed mortgage-backed securities (23.6%), and Corporate
Securities (50.0%), with the remaining (7.3%) investment grade securities
issued by United States political subdivisions and corporations.
At December 31, 1996, investments with a carrying value of $20,887,000
were collateralized or pledged to secure the U.S. insurers that have ceded
reinsurance to the Parent Company, and to maintain security deposits in the
U.S. with various state insurance departments for the Domestic Companies.
COMPETITION
The insurance business is extremely competitive. The Company's
competitors include independent insurance and reinsurance companies as well
as subsidiaries or affiliates of major worldwide insurance companies. They
also include the reinsurance departments of some primary insurance companies
and underwriting syndicates.
Insurers compete on the basis of selling effort, product, price, service
and financial strength. The Company, as necessary, adjusts its overall
pricing and pricing to individual customers to achieve underwriting profits,
and, as a result, loses business to competition offering comparable insurance
products at lower prices. The Company believes that it is able to
effectively compete with other insurers on the basis of superior service, and
is willing to accept a lower volume of premiums in order to achieve
profitability at such lower volume. Also, the Company is continually
developing alternative profitable insurance markets that capitalize on its
business strengths.
13
<PAGE>
EMPLOYEES
The Nobel U.S. Group has 313 employees. The administration of the
Parent Company in Bermuda is performed by an insurance management company for
a fee.
REGULATION
The Parent Company is regulated by the Insurance Act 1978 of Bermuda
which requires the maintenance of minimum levels of capital and annual
preparation of financial statements, and establishes standards of solvency
that must be maintained.
The Parent Company is not subject to regulation by any insurance
authorities in the United States and, accordingly, shareholders will not
receive any benefits that such regulation might provide.
NIC is a Texas company and is presently admitted in 50 states and the
District of Columbia. NIC can only conduct business in states in which it is
licensed or admitted. Insurance companies are subject to varying degrees of
regulation and supervision in the states in which they do business under laws
that delegate supervisory, regulatory and administrative powers to state
insurance commissioners. This regulation relates to such matters as rates,
rules and forms, the adequacy of reserves, the type and quality of
investments, minimum capital and surplus requirements, deposit of securities
with state insurance authorities for the benefit of policyholders,
restrictions on dividends, periodic examination of the insurer's affairs, and
annual and other reports required to be filed with the state insurance
commissioners on the financial and other conditions of these companies. See
"Business Premiums to Capital and Surplus Ratio" for a discussion of risk
based capital.
Bermuda currently does not have any restrictions or exchange controls
applicable to the Parent Company on the transfer of funds (other than the
national currency) in and out of the country.
Prior to any purchase that would cause a "person," which is defined as
any company or association or body of persons, to own beneficially 10% or
more of the outstanding capital shares of the Parent Company, the Controller
of Foreign Exchange of Bermuda (the "Controller") must approve the proposed
purchaser. Prior approval from the Controller would also be required if any
such persons desire to increase their holdings by an additional 2% or more of
the outstanding capital shares of the Parent Company or prior to any purchase
by a Bermuda resident. The Bermuda Monetary Authority (the "Authority")
requires any person who applies for the Controller's approval to first obtain
the approval of the Board of Directors of the Parent Company. Before the
Parent Company may issue or sell any additional capital shares, it must
obtain the prior written consent of the Controller.
TAXATION
FOREIGN TAXES. Under Bermuda law, the Parent Company is not obligated to pay
any taxes in Bermuda based upon income or gains. The Parent Company has
received an exemption from the Ministry of Finance in Bermuda from any
Bermuda taxes which might be imposed on profits, income or any capital asset,
gain or appreciation, until the year 2006.
14
<PAGE>
UNITED STATES TAXATION OF SHAREHOLDERS. Under Section 951(b) of Internal
Revenue Code of 1986, as amended (the "Code"), any United States corporation,
citizen, resident or other United States person who owns, directly or
indirectly, or is considered to own (by application of the rules of
constructive ownership set forth in Code Section 958(b), generally applying to
family members, partnerships, estates, trusts or controlled corporations) 10%
or more of the total combined voting power of all classes of stock of any
foreign company will be considered a "United States Shareholder" of such
foreign company for United States income tax purposes. If such "United States
Shareholders" collectively own more than 25% of the value or combined voting
power of all classes of such foreign company's stock for an uninterrupted
period of 30 days or more during any taxable year, such foreign company will be
considered a controlled foreign corporation ("CFC") for that year, and each
"United States Shareholder" will be required to include in gross income their
share of the company's "subpart F income" whether or not this income is
distributed. The Parent Company's "subpart F income" would include, among
other items, income derived from the reinsurance of risks located outside its
country of incorporation. The Parent Company has concluded, based on its
records and information available to it, that it does not have any "United
States Shareholder" for purposes of this Code provision, who owns more than 10%
of the value or combined voting power of the Parent Company's capital shares.
Under Section 953(c) of the Code, if 20% or more of the value or voting
power of all classes of stock of any foreign company is owned by persons who
are, or who are related to, persons who are insureds, directly or indirectly,
under any policy of insurance or reinsurance issued by such foreign company,
or a related person, and 20% or more of the company's insurance income for
any taxable year is insurance income attributable to policies of insurance or
reinsurance with respect to which the person directly or indirectly insured
is a United States person owning stock in the company, or a related person,
then such related party insurance income will be taxed annually to United
States persons owning stock in the foreign company (regardless of whether
they are "United States Shareholders" as defined above) whether or not this
income is distributed. Substantially less than 20% of the value or voting
power of the Parent Company's capital shares is presently owned by persons
who are, or who are related to, persons who are insureds, directly or
indirectly, under any policy of insurance or reinsurance issued by the Parent
Company. The Parent Company will continue to monitor these ratios carefully
and will attempt to ensure that no related party insurance income is taxable
to its shareholders under Code Section 953(c), although there can be no
assurances that this will not occur.
The Tax Reform Act of 1986 also introduced new provisions relating to
passive foreign investment companies ("PFICs"). These provisions apply to
the Parent Company for its fiscal years beginning during 1987 and thereafter.
If the Parent Company is a PFIC in such or later years, then, depending on
certain corporate and shareholder elections, either its income will be taxed
currently to United States persons owning its stock or its shareholders will
be required to pay an interest charge on the deferred tax when they sell
their shares or receive distributions from such company. The Parent Company
will be a PFIC for any fiscal year commencing during 1987, and thereafter, if
during such fiscal year, 75% or more of its gross income, and that of any 25%
(or more) owned subsidiaries, is "passive income," or 50% or more of its
assets, and those of any 25% (or more) owned subsidiaries, produced, or are
held for the production of "passive income." "Passive income" does not
include income "derived in the active conduct of an insurance business by a
corporation which is predominantly engaged in an insurance business and which
would be subject to tax under subchapter L (relating to insurance companies)
if it were a domestic corporation." The legislative history to the Technical
and Miscellaneous Revenue Act of 1988 ("TAMRA") indicates that the portion of
a
15
<PAGE>
company's investment income that will be deemed passive income will be income
earned on financial reserves that exceed the reasonable needs of the
insurance business. Under an analogous provision of the Internal Revenue Code
of 1954, income derived from investments made by an insurance company was
considered "active" income to the extent such income was earned on investment
assets not exceeding the sum of (i) the company's unearned premiums from
unrelated parties, (ii) its reserves ordinary and necessary for the proper
conduct of its insurance business, and (iii) one third of its premiums earned
from unrelated parties during the taxable year.
There can be no assurance that the Internal Revenue Service will
interpret the PFIC provisions in the manner described above or that the
Parent Company will not be deemed to be a PFIC. If the Parent Company is a
PFIC, each shareholder has the option to elect to have the Company treated,
for purposes of such shareholder's tax return, as a Qualified Electing Fund
("QEF"). Each shareholder who so elects either (i) will be taxable on one's
share of the Parent Company's income and gains for the taxable year even if
that Parent Company made no distributions to shareholders, or (ii) at one's
further election, could elect annually to defer payment of tax on these
earnings, subject to an interest charge. Since the law is unclear as to
whether the Parent Company will be classified as a PFIC, each shareholder
should consult with one's own independent tax counsel as to whether it is
advisable for one to make the QEF election. Any shareholder wishing to make
a QEF election should contact the Parent Company to obtain certain
information and statements from the Parent Company that must be attached to
the shareholder's income tax return pursuant to Internal Revenue Service
Notice 88-125.
UNITED STATES INCOME TAXATION OF THE PARENT COMPANY. The Parent Company
neither maintains offices nor owns any tangible property in the United States,
although the Nobel U.S. Group, which is subject to United States tax, does.
The Parent Company endeavors to conduct its business from Bermuda and not
within the United States. However, since neither the Internal Revenue Code,
court decisions or regulations definitively describe activities that constitute
being engaged in a trade or business in the United States, there can be no
assurance that the Internal Revenue Service will not successfully contend that
the Parent Company is engaged in a trade or business in the United States,
either through the Nobel U.S. Group's activities or otherwise on the basis that
the Parent Company's subsidiaries, consultants and affiliates or their
shareholders, employees, officers or directors are agents of the Parent
Company. If the Parent Company is deemed to be so engaged, it will be subject
to United States income tax on its income which is effectively connected with
the conduct of that trade or business. Such income tax, if imposed, would be
computed on the effectively connected income in a manner comparable to the
computation of income of a domestic insurance corporation, except that (i) the
Parent Company may be subject to an additional "branch profits tax" on deemed
dividend equivalents and interest payments, and (ii) the Parent Company's
applicable deductions and credits would be allowed only if it timely files a
United States income tax return or protective return. The Parent Company filed
a protective return for 1995 and anticipates filing a protective return for
1996. A penalty of up to 25% of the tax due may be assessed for failure to
file a return.
The Internal Revenue Service has the authority under Section 482 under
the Code to reallocate income, deductions and credits among related
taxpayers. Although the Parent Company intends and expects to maintain an
arm's length business relationship with the Nobel U.S. Group, there can be no
assurance that the Internal Revenue Service will not successfully contend
that the Parent Company's income or a portion thereof should be allocated to
the Nobel U.S. Group.
16
<PAGE>
Prior to April 1, 1990, the Nobel U.S. Group's United States Domestic
Companies, admitted to write property and casualty coverages, reinsured with
the Nobel Reinsurers a substantial amount of the risks underwritten by such
companies. The Internal Revenue Service may challenge the deductibility by
the Domestic Companies, for United States income tax purposes, of all
premiums paid to the Nobel Reinsurers on risks reinsured by them and, if such
a challenge is successful, may increase the United States income tax
liability of the Domestic Company. The Internal Revenue Service in Revenue
Ruling 77-316, has taken the position that where a United States parent
corporation and its domestic subsidiaries insure their risks with an offshore
subsidiary, the premiums paid to the offshore corporation are not deductible
by the United States corporations and, if paid by the United States
subsidiaries, are constructive distributions to the United States parent.
Certain court cases have supported the Internal Revenue Service position that
premiums paid by a parent to its subsidiary are not deductible. The Internal
Revenue Service might argue that premiums paid to the Nobel Reinsurers should
not be deductible and that instead, to the extent of each Domestic Company's
earnings and profits, they should be characterized as dividends subject to a
United States 30% withholding tax. If the Internal Revenue Service were to
contend successfully that a portion of the premium paid by the Domestic
Companies to the Nobel Reinsurers exceeded an arm's length premium, such
excess amount would probably be characterized as a distribution by the
Domestic Companies to the Nobel Reinsurers, with the result that the Domestic
Companies would not be permitted a deduction, and the Nobel Reinsurers would
be subject to a 30% withholding tax, with respect to such excess amount.
Assuming that the Parent Company is not considered to be engaged in a
trade or business in the United States, it is subject to United States income
tax only on certain "fixed or determinable annual or periodic gains, profits
and income" derived from sources within the United States as enumerated in
Section 881(a) of the Code (for example dividends and related party
interest). This tax is imposed at a fixed rate of 30% of the gross amount of
such income. The United States person responsible for payment of such items
of income to the Parent Company is obligated to withhold this 30% tax before
payment is made to the Parent Company. Since the Parent Company does not
invest in United States securities, other than bank certificates of deposit
and other fixed income securities which are exempt from this tax, there is no
income tax imposed by the United States on such income.
UNITED STATES EXCISE TAX. The United States imposes an excise tax on insurance
and reinsurance premiums paid to foreign insurers or reinsurers with respect to
risks located in the United States. The rates of the tax are as follows: 4% of
the premium paid on a casualty insurance policy; 1% of the premium paid on a
life, sickness or accident insurance policy; and 1% of the premium paid on a
reinsurance policy covering insurance of casualty, life, sickness or accident.
UNITED STATES INCOME TAXATION OF THE U.S. GROUP. The U.S. Group is domiciled
in the United States and is subject to United States taxes on income; however,
no significant liability has been incurred to date. At December 31, 1996, the
U.S. Group had consolidated net operating losses of approximately $4,452,000
which may be carried forward for U.S. federal income tax purposes. Such loss
carryforwards expire beginning in 2004.
17
<PAGE>
ITEM 2. PROPERTIES
The Nobel U.S. Group purchased a 39,000 square foot building at 8001 LBJ
Freeway, Dallas, Texas in 1995 of which 25,000 square feet is occupied by the
corporate and commercial lines insurance operations. Approximately 10,000
square feet of this building is leased to unrelated tenants with the
remaining 4,000 square feet available for lease.
The Nobel U.S. Group owns a 24,000 square foot building at 6923 North
Trenholm Road, Columbia, South Carolina of which 12,000 square feet is
occupied by the personal lines insurance operation. Approximately 6,000
square feet of the building is leased to unrelated tenants and 6,000 square
feet is available for lease.
IAS, the claim adjusting operation, leases and occupies approximately
10,000 square feet of office space for their home office and Dallas-based
service operation at 1485 Richardson Drive, Richardson, Texas. IAS leases
office space for their branch offices located in various cities in the U.S.
ITEM 3. LEGAL PROCEEDINGS
The Parent Company is not a party, either as plaintiff or defendant, to
a material proceeding other than those routinely encountered in claims
activity. It is the opinion of the Company's Management, after consulting
with counsel and reviewing the facts, that the ultimate liability, if any,
arising from a single contingency, will not have a material adverse effect on
the consolidated financial position of the Parent Company in excess of
amounts recorded.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
18
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Parent Company's securities were first publicly traded in November
1981. The Parent Company's capital shares are traded in the over-the-counter
market and are currently listed on the National Association of Securities
Dealers' Automated Quotations System (NASDAQ) under the trading symbol
"NOBLF."
At March 15, 1997, the Parent Company had approximately 2,000
shareholders, of which approximately 260 were shareholders of record.
The following table represents the high and low closing sales prices of
the Common Stock as reported by NASDAQ for the periods indicated.
1995 1996
HIGH LOW HIGH LOW
------------------------------------
1st Quarter $ 9 5/8 $ 8 1/8 $12 3/4 $11 1/4
2nd Quarter $10 3/4 $ 9 1/8 $11 3/4 $10 7/8
3rd Quarter $12 1/2 $10 1/8 $12 3/4 $11
4th Quarter $12 1/8 $11 1/2 $12 5/8 $11 1/4
The Parent Company declared quarterly cash dividends of $.05 per share
in 1996 and paid $903,000 as cash dividends, or $.20 per share. The Parent
Company previously declared quarterly cash dividends on its Common Stock
prior to 1989. On March 22, 1989, because of the fourth quarter 1988 loss,
the Parent Company's Board of Directors suspended the quarterly cash
dividend. The reinstatement of a quarterly cash dividend policy reflects the
continued positive operating results and financial condition of the Company.
Under Bermuda law, the Parent Company has accumulated earnings to pay
dividends as of December 31, 1996 of $35,930,000, after adjustment for prior
stock dividend transfers to contributed surplus in the amount of $5,934,000.
See Note 8 of the Notes to Consolidated Financial Statements.
There are no limitations under the Parent Company's Memorandum of
Association on the right of non-Bermudian citizens or residents to hold or
vote Parent Company securities. However, under the Exchange Control Act 1972
of Bermuda and regulations made thereunder, Bermuda residents may not acquire
shares in the Parent Company without having first obtained the permission of
the Authority. The Authority has imposed restrictions on persons seeking to
acquire beneficial ownership of 10% or more of the Parent Company's
outstanding shares, or to increase their beneficial ownership above 10%. Such
persons must first obtain the approval of the Board of Directors of the
Parent Company and the approval of the Authority.
19
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below for, and as of the
end of each of the years ended December 31, have been derived from the
consolidated financial statements of the Company which have been audited by
KPMG Peat Marwick, independent certified public accountants. The
consolidated balance sheets as of December 31, 1996 and 1995, and the
consolidated statements of operations, shareholders' equity and cash flows
for each of the years in the three-year period ended December 31, 1996, and
the report thereon are included elsewhere in this document. The information
presented below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations," consolidated
financial statements and the notes thereto, and the other financial
information included herein. The Parent Company's records are maintained in
United States dollars, and all amounts set forth in this Annual Report are
expressed in United States dollars except as otherwise indicated.
<TABLE>
YEARS ENDED AND AT DECEMBER 31, 1992 1993 1994 1995 1996
- -----------------------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME DATA:
Gross premiums written $ 34,467 $ 44,073 $ 59,527 $ 70,515 $ 83,703
Ceded premiums written (14,355) (15,605) 19,025 22,921 40,508
--------- --------- --------- --------- ---------
Net premiums written 20,112 28,468 40,502 47,594 43,195
Change in unearned premiums 1,629 (2,172) (5,681) (4,398) 12,206
--------- --------- --------- --------- ---------
Net premiums earned 18,483 26,296 34,821 43,198 55,401
Net investment income 6,313 5,956 5,543 7,302 6,272
Net realized gains 418 253 489 1,412 762
Claim adjuster fees 1,110 5,159 9,400 9,357 10,423
Other income 266 529 --- --- ---
--------- --------- --------- --------- ---------
Total revenues 26,590 38,193 50,253 61,269 72,858
--------- --------- --------- --------- ---------
Claims and claim adjustment expenses (2,578) 9,505 13,628 31,702 42,197
Service fees and commissions 1,850 5,841 6,881 6,992 13,383
Underwriting and operating expenses 8,246 12,919 14,369 18,843 15,060
--------- --------- --------- --------- ---------
Total expenses 7,518 28,265 34,878 57,537 70,640
--------- --------- --------- --------- ---------
Income before income taxes 19,072 9,928 15,375 3,732 2,218
Income tax benefit --- --- --- (2,500) (2,069)
--------- --------- --------- --------- ---------
Net income $ 19,072 $ 9,928 $ 15,375 $ 6,232 $ 4,287
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
PER SHARE DATA:
Net income $ 2.89 $ 1.43 $ 2.37 $ 1.06 $ .92
Average number capital shares 6,599 6,947 6,478 5,901 4,659
GAAP OPERATING RATIOS:
Claims ratio (13.9) 36.1 39.1 73.3 76.2
Expense ratio 42.0 42.0 28.0 27.2 29.2
--------- --------- --------- --------- ---------
Combined ratio 28.1 78.1 67.3 100.5 105.4
BALANCE SHEET DATA:
Cash & investments $ 105,365 $ 108,148 $ 107,643 $ 128,866 $ 123,442
Total assets $ 143,873 $ 153,310 $ 168,173 $ 203,388 $ 222,778
Total shareholders' equity $ 46,114 $ 54,479 $ 56,548 $ 64,908 $ 53,187
</TABLE>
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<PAGE>
As discussed in Note 4 of the Notes to Consolidated Financial Statements
at December 31, 1996, the Company has reflected a reserve for claims incurred
but not reported ("IBNR") and provision for claims development on certain
casualty lines which represented the Company's best estimate of the reserve
for claims and claims expense. Redundancy resulting from revisions to
estimates of prior years' claims reserves contributed $4,922,000;
$15,610,000; $6,992,000; $8,900,000 and $1,089,000 to earnings in 1991, 1992,
1993, 1994, and 1996, respectively. See "Business: Reserves" for a
discussion of claims reserve development.
In 1996, the Company reduced the valuation allowance on its deferred tax
asset which generated a deferred tax benefit to the statement of income of
$907,000.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
1995 VERSUS 1996
The composition of the net income for 1995 as compared to the net income
for 1996 by type of operation is as follows:
YEARS ENDED DECEMBER 31, 1995 1996
--------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Underwriting operations $(4,652) $(5,004)
Claim adjusting operations (330) 188
Investment and other income 8,714 7,034
Federal income tax benefit 2,500 2,069
------- -------
Net income $ 6,232 $ 4,287
------- -------
------- -------
UNDERWRITING OPERATIONS. Direct 1996 premiums written increased $13,188,000
or 19%, over 1995. Reinsurance purchased increased $17,587,000 or 77% over
1995. Net written premiums in 1996 decreased $4,400,000, or 9% over 1995.
Premium gains from new business continued in all of the Company's insurance
programs. The comparability of reinsurance purchased is affected by changes
in the major reinsurance programs. Effective October 1, 1995, the Company
purchased excess of loss cover for the surety program. Effective January 1,
1996, the low-value dwelling reinsurance program was renewed to provide
catastrophe protection through a combination of quota share and catastrophe
excess of loss reinsurance. Effective July 1, 1994, the commercial casualty
reinsurance program was remarketed and restructured with a $500,000
retention. On December 31, 1996, the commercial casualty purchased an
additional quota share of approximately $15,400,000.
21
<PAGE>
The net financial year claims ratio of 76% for 1996 compares to 73% for
1995 and is analyzed as follows:
<TABLE>
YEARS ENDED DECEMBER 31, 1995 1996
FINANCIAL ACCIDENT FINANCIAL ACCIDENT
YEAR YEAR YEAR YEAR
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Reported claims and allocated expense 66% 42% 73% 55%
IBNR provision 6% 26% 0% 21%
Unallocated claims adjusting expenses 1% 1% 3% 2%
-- -- -- --
Total claims expense 73% 69% 76% 78%
-- -- -- --
-- -- -- --
</TABLE>
The comparability of the financial year claims ratios is impacted by the
changes in claim payments and claims reserve estimates for prior accident
years. See "Business: Reserves" and "Business: Claims and Expense Ratios"
for a discussion of prior years' reserve development. The comparability of
the claims ratios is also influenced by the effect on net premiums earned for
the commercial casualty explosives and trucking programs of premium audits
recorded in one year but earned in a prior year and from a custom insurance
program for which the expenses normally included in premiums are earned as
service fees. The accident year claims ratios are 78% for 1996 and 69% for
1995. The increase in the 1996 accident year loss ratio over 1995 was
primarily attributable to losses arising out of Hurricane Fran and the
increased frequency of large commercial casualty losses reported for accident
year 1996.
Expenses, which consist of net service fees and commissions and all
general and administrative expenses, excluding the claim adjusting
operations, were 27% and 29% of net earned premiums for 1995 and 1996,
respectively. The following table shows the components of net service fees
and commissions:
YEARS ENDED DECEMBER 31, 1995 1996
------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Commissions, fronting, and taxes expense $11,714 $ 17,090
Ceding commission income (8,265) (11,760)
Service fee income (309) ---
Change in deferred acquisition costs (1,090) 2,429
------- --------
2,050 7,759
Claim adjusting commission paid 4,942 5,624
------- --------
$ 6,992 $ 13,383
------- --------
------- --------
Increased commissions, fronting and taxes expense in 1996 versus 1995
was primarily attributable to writing a larger proportion of surety and
personal lines business and a lower proportion of commercial casualty
business in 1996. The commission rates for surety and personal lines business
are significantly higher than commission rates for commercial casualty
business. The principal causes for the increased ceding commission income in
1996 were increased ceding commissions of approximately $4,000,000 resulting
from the new commercial casualty quota share treaty purchased on December 31,
1996. This was partially offset by the loss of ceding commissions of
approximately $750,000 from the low-value dwelling program quota share treaty
due to the poor claims experience as the result of Hurricane Fran in 1996.
22
<PAGE>
CLAIMS ADJUSTING OPERATIONS. Claims adjusting fees earned were $10,423,000
in 1996, compared to $9,357,000 in 1995, was primarily due to increased
catastrophe business in 1996. Net income for 1996 was $101,000 as compared
to a loss of $330,000 in 1995.
INVESTMENT INCOME. Net investment gains in 1996 consisted of $6,272,000 of
interest income and $762,000 in net realized capital gains, compared to
$7,302,000 of interest income and $1,412,000 in net realized capital gains in
1995. The decrease was due to the purchase of $14,100,000 of treasury stock
in 1996 and decreased yield rates in the bond market.
In 1996, the Company recognized a net tax benefit of $2,069,000 compared
to $2,500,000 in 1995.
RESULTS OF OPERATIONS
1994 VERSUS 1995
The composition of the net income for 1995 as compared to the net income
for 1994 by type of operation is as follows:
YEARS ENDED DECEMBER 31, 1994 1995
------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Underwriting operations $10,336 $(4,652)
Claim adjusting operations (993) (330)
Investment and other income 6,032 8,714
Federal income tax benefit --- 2,500
------- -------
Net income $15,375 $ 6,232
------- -------
------- -------
UNDERWRITING OPERATIONS. Premiums written increased $10,988,000 or 18%, over
1994. Reinsurance purchased increased $3,896,000 or 20%. Premium gains from
new business continued in all of the Company's insurance programs. The
comparability of reinsurance purchased is affected by changes in two major
reinsurance programs in 1994. Effective January 1, the low-value dwelling
reinsurance program was restructured to provide catastrophe protection
through increased quota share combined with the CAT excess. The financial
effect was increased premiums ceded accompanied by increased claims
recoveries and ceding commissions. Effective July 1, the commercial casualty
reinsurance program was remarketed and restructured a $500,000 retention.
The financial effect was decreased premiums ceded accompanied by decreased
claims recoveries and increased ceding commissions. All of the above noted
reinsurance program changes applied to the unearned premiums on the effective
date.
23
<PAGE>
The claims ratio of 73% for 1995 compares to 39% for 1994 and is analyzed as
follows:
<TABLE>
YEARS ENDED DECEMBER 31, 1994 1995
FINANCIAL ACCIDENT FINANCIAL ACCIDENT
YEAR YEAR YEAR YEAR
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Reported claims 54% 42% 66% 42%
IBNR provision (17)% 19% 6% 26%
Unallocated claims adjusting expenses 2% 4% 1% 1%
-- -- -- --
Total claims expense 39% 65% 73% 69%
-- -- -- --
-- -- -- --
</TABLE>
The comparability of the financial year claims ratios is impacted by the
changes in claims reserve estimates for prior accident years. See "Business:
Reserves" and "Business: Claims and Expense Ratios" for a discussion of
prior years' reserve development. The comparability of the claims ratios is
also influenced by the effect on net premiums earned for the commercial
casualty explosives and trucking program of premium audits recorded in one
year but earned in a prior year and from a custom insurance program for which
the expenses normally included in premiums are earned as service fees. The
accident year claims ratios adjusted for this effect are 65% for 1994 and 69%
for 1995.
Expenses, which consist of net service fees and commissions and all
general and administrative expenses, excluding the claim adjusting
operations, were 28% and 27% of net written premiums for 1994 and 1995,
respectively. The following table shows the components of net service fees
and commissions:
YEARS ENDED DECEMBER 31, 1994 1995
------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Commissions, fronting, and taxes expense $10,378 $11,714
Ceding commission income (7,812) (8,265)
Service fee income (400) (309)
Change in deferred acquisition costs (423) (1,090)
------- -------
1,743 2,050
Claim adjusting commission paid 5,138 4,942
------- -------
$ 6,881 $ 6,992
------- -------
------- -------
Increased commissions, fronting and taxes expense resulted from writing
a large proportion of surety business at a higher commission rate. The
principal causes of the increased ceding commission income relative to
reinsurance purchased were increased ceding commission rates resulting from
changes in the major reinsurance programs effective in 1995 in combination
with the contingent commission adjustment for the low-value dwelling program
quota share resulting from improved claims experience as compared to the
prior year.
The decrease associated with the claims adjusting businesses is the
result of reduced business and reduced commission payments.
24
<PAGE>
INVESTMENT INCOME. While the aggregate yield rate of the portfolio increased
approximately .02%, increased interest income of $1,759,000 is due to
positive cash flow. Net investment gains in 1995 consisted of $1,061,000
unrealized gain from trading portfolio securities and $351,000 net realized
gains from available for sale portfolio. This compares to $1,152,000
unrealized gain from trading portfolio and $663,000 net realized losses from
available for sale portfolio in 1994.
In 1995, the Company recognized a $2,500,000 tax benefit primarily due
to the change in the valuation allowance on the deferred tax asset.
LIQUIDITY AND CAPITAL RESOURCES
The principal cash requirements of the Company consist of claims
payments and operating expenses.
The Nobel U.S. Group's non-insurance operations incur substantially all
of the administrative expenses. The principal sources of cash to pay the
expenses for the non-insurance operations are claim adjusting fees and
administrative service fees from the Domestic Company and the Parent Company.
The source of liquidity for claims payments consists of net premiums,
after deduction for expenses, plus investment income on the balances of such
premiums prior to their use to pay claims. These invested balances are also
used for collateral to secure the ceding insurers' reinsurance reserves. The
collateral requirements for reinsurance ceded to the Parent Company by INA is
being satisfied by a combination of letters of credit and trust balances.
Commencing July 1989, the settlement of all claims and claims expenses was
withdrawn from the trust account or deducted from net reinsurance settlements
into the trust account. The terms of the Parent Company's letter of credit
facility requires collateral with qualifying investments, which if other than
short-term investments, must have a market value of 105% of the amount of
letters of credit issued.
The investment guidelines adopted by the Company in November 1989
established that the primary objective of the portfolio is to preserve
principal and provide liquidity. The Parent Company's investment guidelines
prescribe a portfolio structure of maturities to provide adequate liquidity
to settle claims liabilities. See "Business: Investments."
United States insurance regulations require the ceding insurers to
maintain approved collateral for reinsurance balances, including reserves for
unearned premiums and unpaid claims and claims expenses ceded to non-admitted
reinsurers. The collateral requirements for reinsurance ceded to the Parent
Company by INA is being satisfied by a combination of letters of credit and
trust fund balances. The combined amount of letters of credit and market
value of trust assets at December 31, 1996 was $14,974,000. See "Business:
Collateral Requirements for Assumed Reinsurance."
At December 31, 1996, the Company had cash and investments of
$123,442,000, of which $20,887,000 was collateralized or pledged to secure
the insurers that have ceded reinsurance to the Company, and to maintain
security deposits in the U.S. with various state insurance departments.
25
<PAGE>
Net cash provided from operating activities for 1996 was $12,751,000
compared to $24,341,000 for 1995. The 1996 net cash provided from operations
was positively adjusted by dispositions from the trading portfolio of
$3,098,000 compared to $3,236,000, in 1995. Net cash used by financing
activities in 1996 was $11,229,000 principally due to the purchase of
treasury stock. The Company acquired 1,188,000 shares during 1996 for
$14,097,000, or an average cost of $11.87 per share. At December 31, 1995,
the Company had authority to buy back up to 1,274,000 Nobel shares when the
price is attractive and cash is available. During 1996, Nobel received
authority from the Board of Directors to purchase (under the same terms) an
additional 250,000 shares.
The insurance operations require capital to support premium writings.
The Company believes that its insurance subsidiary has sufficient capital to
support planned business activities. Management is challenged to deploy
present capital levels into profitable business opportunities. During 1996,
NIL and NHI executed a credit agreement for a five (5) year term loan
facility commitment in the amount of $15,000,000. Term loans are evidenced
by a Term Note with interest payable with respect to the unpaid principal
amount of each Term Note at a base rate (Prime) or at the adjusted London
Interbank Eurodollars rate (LIBOR) depending on what interest basis the loan
is made. The uses of the term loan facility commitment are to repay existing
bank indebtedness at the time of closing, to make contributions to the equity
of Nobel Insurance Company, and to meet other business expansion
opportunities. As of December 31, 1996, the company has borrowed $3,538,000
under this loan facility commitment.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
26
<PAGE>
PART III
The information required by all items of Part III is incorporated by
reference from the indicated headings in the Parent Company's definitive
proxy statement for its annual meeting of shareholders to be held on Friday,
May 9, 1997.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
"DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS."
ITEM 11. EXECUTIVE COMPENSATION
"REMUNERATION OF DIRECTORS AND OFFICERS."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
"OUTSTANDING CAPITAL STOCK."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
"CERTAIN TRANSACTIONS."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements
The financial statements listed in the accompanying index to consolidated
financial statements and financial statement schedules are filed as part of
this Annual Report.
(2) Financial Statement Schedules
The financial statement schedules listed in the accompanying index to
consolidated financial statements and financial statement schedules are
filed as part of this Annual Report.
(3) Exhibits:
3.1 Certificate of Incorporation and Memorandum of Association of the
Company (1).
3.2 Bylaws of the Company (2).
4 Specimen Capital Share Certificate (3).
27
<PAGE>
10.1 The Company's 1984 Incentive Stock Option Plan (3).
10.2 Form of the Company's Incentive Stock Option Agreement (4).
10.3 Amendment No. 1 to the Company's 1984 Incentive Stock Option Plan (1).
10.4 Amendment No. 2 to the Company's 1984 Incentive Stock Option Plan (4).
10.5 Amendment No. 3 to the Company's 1984 Incentive Stock Option Plan (6).
10.6 The Company's 1990 Non-Employee Directors' Stock Option Plan (6).
10.7 Form of the Company's Non-Employee Directors' Stock Option Agreement
[Annual Grant] (6).
10.8 Form of the Company's Non-Employee Directors' Stock Option Agreement
[Grant Following Second Fiscal Quarter] (6).
10.9 Form of the Company's Non-Employee Directors' Stock Option Agreement
[Grant Following Third Fiscal Quarter] (6).
10.10 Form of the Company's Non-Employee Directors' Stock Option Agreement
[Grant Following Fourth Fiscal Quarter] (6).
10.11 Amendment No. 1 to the Company's Non-Employee Directors' Stock Option
Plan (7).
10.12 Option Agreement, dated November 20, 1987, between the Company and
William P. Daves, Jr. (5).
10.13 Employment Agreement, dated January 1, 1993, by and between the
Company and Jeffry K. Amsbaugh (8).
10.14 401(K) Profit Sharing Plan (8).
10.15 Amendment No. 4 to the Company's 1984 Incentive Stock Option Plan (9).
10.16 Amendment No. 2 to the Company's Non-Employee Directors' Stock Option
Plan (9).
10.17 Employment Agreement, dated January 1, 1995, by and between the
Company and Jeffry K. Amsbaugh (9).
21 Subsidiaries of the Company (9).
23 Consents of independent auditors to incorporation by reference of certain
reports into the Registrant's Registration Statement on Form S-8 (10).
28
<PAGE>
(1) Filed as an exhibit to registration statement No. 33-4331 on Form S-1
and incorporated by reference.
(2) Filed as an exhibit to the Company's Annual Report on Form 10-K for
the year ended December 31, 1985 and incorporated by reference.
(3) Filed as an exhibit to registration statement No. 2-73328 on Form S-1
and incorporated by reference.
(4) Filed as an exhibit to the Company's Annual Report on Form 10-K for
the year ended December 31, 1986 and incorporated by reference.
(5) Filed as an exhibit to the Company's Annual Report on Form 10-K for
the year ended December 31, 1988 and incorporated by reference.
(6) Filed as an exhibit to the Company's Annual Report on Form 10-K for
the year ended December 31, 1990 and incorporated by reference.
(7) Filed as an exhibit to registration statement No. 33-51342 on Form S-8
and incorporated by reference.
(8) Filed as an exhibit to the Company's Annual Report on Form 10-K for
the year ended December 31, 1992 and incorporated by reference.
(9) Filed as an exhibit to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994 and incorporated by reference.
(10) Filed herewith.
Copies of the foregoing exhibits filed with this Annual Report are
available from the Company upon written request and payment of a $.20 per
page charge.
(b) Reports on Form 8-K.
No reports or Form 8-K were filed during the last quarter of the
period covered by this report.
29
<PAGE>
NOBEL INSURANCE LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULES
(ITEM 14(a))
Page
- ------------------------------------------------------------------------------
Consolidated Financial Statements
Report of Chartered Accountants 31
Consolidated balance sheets as of December 31, 1996 and 1995 32
Consolidated statements of income for each of the years in
the three-year period ended December 31, 1996 34
Consolidated statements of shareholders' equity for each of the years
in the three-year period ended December 31, 1996 35
Consolidated statements of cash flows for each of the years in
the three-year period ended December 31, 1996 36
Notes to consolidated financial statements, December 31, 1996, 1995
and 1994 38
Financial Statement Schedules
I Consolidated Summary of Investments 56
II Condensed Financial Information of Registrant 57
III Supplementary Insurance Information 61
IV Reinsurance 62
VI Supplemental Information 63
Supplementary Information (Unaudited)
Financial Highlights and Quarterly Results 65
30
<PAGE>
REPORT OF CHARTERED ACCOUNTANTS
The Board of Directors and Shareholders
Nobel Insurance Limited:
We have audited the accompanying consolidated financial statements of Nobel
Insurance Limited and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedules as listed in the accompanying
index. These consolidated financial statements and financial statement
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Nobel Insurance
Limited and subsidiaries as of December 31, 1996 and 1995, and the results of
their operations and cash flows for each of the years in the three-year period
ended December 31 1996, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
materials respects, the information set forth therein.
As discussed in Note 1 to the Consolidated Financial Statements, in 1995 the
Company adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of."
Hamilton, Bermuda
March 7, 1997 KPMG Peat Marwick
31
<PAGE>
NOBEL INSURANCE LIMITED
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN UNITED STATES DOLLARS)
DECEMBER 31,
1996 1995
- ------------------------------------------------------------------------------
(IN THOUSANDS)
ASSETS
Investments (Note 2):
Trading portfolio, at fair value:
Fixed maturity securities (amortized cost:
1996-$487; 1995-$105) $ 502 $ 188
Equity securities (cost: 1996-$2,611;
1995-$4,881) 4,057 6,847
Other investments (cost: 1996-$722; 1995-$763) 835 925
Securities available for sale, at fair value:
Fixed maturity securities
(amortized cost: 1996-$100,340; 1995-$102,588) 100,970 105,601
Equity securities (cost: 1996-$2,045) 2,293 --
Short-term investments, at cost, which
approximates fair value 12,880 13,798
-------- --------
Total investments 121,537 127,359
Cash 1,905 1,507
Funds held by reinsurance companies 1,702 3,341
Premiums and other receivables less allowance for
doubtful accounts ($298 in 1996 and $398 in 1995) 30,693 23,897
Accrued interest income 1,484 1,418
Reinsurance recoverable on paid and unpaid claims
(Notes 4 and 5) 26,361 22,588
Prepaid reinsurance premiums (Note 5) 27,316 12,826
Property and equipment less accumulated
depreciation ($2,119 in 1996 and $1,840 in 1995) 4,045 3,642
Deferred policy acquisition costs (Note 3) 700 3,129
Net deferred tax asset (Note 7) 4,774 2,112
Other assets 2,261 1,569
-------- --------
Total assets $222,778 $203,388
-------- --------
-------- --------
(See Accompanying Notes to Consolidated Financial Statements)
32
<PAGE>
NOBEL INSURANCE LIMITED
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN UNITED STATES DOLLARS)
(CONTINUED)
DECEMBER 31,
1996 1995
- ------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT
SHARE DATA)
LIABILITIES
Reserve for claims and claims expenses (Note 4) $ 88,397 $ 81,675
Unearned premiums 40,389 38,106
Reinsurance premiums payable 22,733 7,138
Accounts payable and accrued liabilities 13,180 9,907
Other liabilities (Note 6) 4,892 1,654
-------- --------
Total liabilities 169,591 138,480
-------- --------
SHAREHOLDERS' EQUITY
Capital shares (Authorized 20,000,000 shares; $1 par
value; issued 7,743,458 shares in 1996 and 7,626,725
shares in 1995; outstanding 4,471,106 shares in 1996
and 5,542,363 shares in 1995) 7,743 7,627
Contributed surplus 44,499 44,081
Unrealized gain on investments 551 2,093
Retained earnings 29,996 26,612
Treasury stock, at cost (3,272,352 shares in 1996
and 2,084,362 shares in 1995) (29,602) (15,505)
-------- --------
Total shareholders' equity (Note 8) 53,187 64,908
-------- --------
Commitments and Contingencies (Notes 2, 4, 5 and 9)
Total liabilities and shareholders' equity $222,778 $203,388
-------- --------
-------- --------
(See Accompanying Notes to Consolidated Financial Statements)
33
<PAGE>
NOBEL INSURANCE LIMITED
CONSOLIDATED STATEMENTS OF INCOME
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
YEARS ENDED DECEMBER 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
REVENUES:
Premiums written $ 83,703 $ 70,515 $ 59,527
Reinsurance purchased (40,508) (22,921) (19,025)
--------- --------- ---------
Net premiums written $ 43,195 $ 47,594 $ 40,502
--------- --------- ---------
--------- --------- ---------
Premiums earned $ 81,420 $ 63,561 $ 53,916
Premiums ceded 26,019 20,363 19,095
--------- --------- ---------
Net premiums earned 55,401 43,198 34,821
Net investment income 6,272 7,302 5,543
Net investment gains (Note 2) 762 1,412 489
Claim adjusting fees earned 10,423 9,357 9,400
--------- --------- ---------
Total revenues 72,858 61,269 50,253
--------- --------- ---------
EXPENSES:
Claims and claims expenses (Note 4) 54,183 44,935 23,879
Reinsurance recoveries 11,986 13,233 10,251
--------- --------- ---------
Net claim and claim expenses 42,197 31,702 13,628
Service fees and commissions 13,383 6,992 6,881
General and administrative expenses 15,060 18,843 14,369
--------- --------- ---------
Total expenses 70,640 57,537 34,878
--------- --------- ---------
Net income before income taxes 2,218 3,732 15,375
Income tax expense (benefit) (Note 7)
Current --- 130 ---
Deferred (2,069) (2,630) ---
--------- --------- ---------
Income tax benefit (2,069) (2,500) ---
--------- --------- ---------
Net income $ 4,287 $ 6,232 $ 15,375
--------- --------- ---------
--------- --------- ---------
PER SHARE DATA: (Note 1)
Net income per share $ .92 $ 1.06 $ 2.37
--------- --------- ---------
--------- --------- ---------
Average number of capital
shares outstanding 4,659 5,901 6,478
--------- --------- ---------
--------- --------- ---------
</TABLE>
(See Accompanying Notes to Consolidated Financial Statements)
34
<PAGE>
NOBEL INSURANCE LIMITED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
UNREALIZED
GAIN RETAINED TOTAL
CAPITAL SHARES CONTRIBUTED (LOSS) ON EARNINGS TREASURY SHAREHOLDERS'
(IN THOUSANDS, EXCEPT SHARE DATA) OUTSTANDING AMOUNT SURPLUS INVESTMENTS (DEFICIT) STOCK EQUITY
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1994:
Balances, beginning of year 6,546,146 $7,322 $43,475 $ 369 $ 7,097 $ (3,784) $ 54,479
Net income --- --- --- --- 15,375 --- 15,375
Cumulative effect of change in
accounting for investments --- --- --- 1,245 --- --- 1,245
Treasury stock purchases (Note 8) (842,542) --- --- --- --- (6,859) (6,859)
Shares issued--exercise of stock options 213,226 213 395 --- --- --- 608
Change in unrealized gain (loss) --- --- --- (7,364) --- --- (7,364)
Dividends paid shareholders --- --- --- --- (936) --- (936)
---------- ------ ------- -------- ------- -------- --------
Balances, end of year 5,916,830 $7,535 $43,870 $(5,750) $21,536 $(10,643) $ 56,548
Year ended December 31, 1995:
Net income --- --- --- --- 6,232 --- 6,232
Treasury stock purchases (Note 8) (466,054) --- --- --- --- (4,862) (4,862)
Shares issued - exercise of stock
options 91,587 92 211 --- --- --- 303
Change in unrealized gain (loss) --- --- --- 7,843 --- --- 7,843
Dividends paid stockholders --- --- --- --- (1,156) --- (1,156)
---------- ------ ------- -------- ------- -------- --------
Balances, end of year 5,542,363 $7,627 $44,081 $ 2,093 $26,612 $(15,505) $ 64,908
Year ended December 31, 1996:
Net income --- --- --- --- 4,287 --- 4,287
Treasury stock purchases (Note 8) (1,187,990) --- --- --- --- (14,097) (14,097)
Shares issued--exercise of stock
options 116,733 116 418 --- --- --- 534
Change in unrealized gain (loss) --- --- --- (1,542) --- --- (1,542)
Dividends paid stockholders --- --- --- --- (903) --- (903)
---------- ------ ------- -------- ------- -------- --------
Balances, end of year 4,471,106 $7,743 $44,499 $ 551 $29,996 $(29,602) $ 53,187
---------- ------ ------- -------- ------- -------- --------
---------- ------ ------- -------- ------- -------- --------
</TABLE>
(See Accompanying Notes to Consolidated Financial Statements)
35
<PAGE>
NOBEL INSURANCE LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
YEARS ENDED DECEMBER 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,287 $ 6,232 $ 15,375
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation and amortization 1,296 3,990 1,445
Net realized investment gains (762) (1,412) (489)
Losses on disposal of other assets 8 60 4
Change in deferred acquisition costs 2,429 (1,091) (423)
Deferred tax benefit (2,069) (2,630) ---
Increase (decrease) in reserve for claims
and claims expenses 6,722 17,378 (38)
Increase in unearned premiums 2,283 6,954 5,612
Increase in accounts payable and
accrued liabilities 3,277 178 1,934
(Increase) decrease in net premiums receivable 8,832 1,979 (6,359)
(Increase) in accrued interest income (66) (199) (256)
(Increase) in reinsurance recoverables (3,773) (8,183) (3,266)
(Increase) decrease in prepaid reinsurance
premiums (14,490) (2,557) 68
(Increase) decrease in other assets 40 481 (230)
(Increase) decrease in funds held by
reinsurance companies 1,639 (75) 248
Net (additions to) dispositions from
trading portfolio investments 3,098 3,236 (6,133)
-------- ------- --------
Net cash provided from operating
activities 12,751 24,341 7,492
-------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from investments sold or matured:
Fixed maturities, available for sale 40,664 51,832 37,383
Purchase of investments:
Fixed maturities, available for sale (38,365) (63,300) (55,476)
Equity securities available for sale (2,045) --- ---
Payments on acquisitions (3) (1,222) (16)
Purchase of software, property and equipment (2,293) (3,832) (859)
-------- ------- --------
Net cash (used by) investing activities (2,042) (16,522) (18,967)
-------- ------- --------
(See Accompanying Notes to Consolidated Financial Statements)
36
<PAGE>
NOBEL INSURANCE LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN UNITED STATES DOLLARS)
(CONTINUED)
YEARS ENDED DECEMBER 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of capital shares 534 303 608
Proceeds from notes payable 3,642 1,487 1,698
Repayment of notes payable and capital
lease obligation (405) (762) (1,893)
Purchase of treasury stock (14,097) (4,862) (6,859)
Dividends paid shareholders (903) (1,156) (936)
-------- ------- --------
Net cash (used by) financing activities (11,229) (4,990) (7,382)
-------- ------- --------
Net increase (decrease) in cash and
cash equivalents (520) 2,829 (18,857)
Cash and cash equivalents
at beginning of year 15,305 12,476 31,333
-------- ------- --------
Cash and cash equivalents
at end of year $ 14,785 $15,305 $ 12,476
-------- ------- --------
-------- ------- --------
</TABLE>
(See Accompanying Notes to Consolidated Financial Statements)
37
<PAGE>
NOBEL INSURANCE LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Nobel Insurance Limited (the "Parent Company") was incorporated on
December 15, 1978 under the Laws of the Islands of Bermuda and commenced
operations on January 1, 1979. The Parent Company and its subsidiaries'
operations consist of reinsuring and insuring certain property, fidelity,
surety, general and automobile liability and automobile physical damage risks
and providing services in connection therewith, which constitute one industry
segment (property and casualty insurance).
In March, 1986, the Parent Company formed a holding company, Nobel
Holdings, Inc. ("NHI"), a Delaware corporation, and subsequently restructured
its U.S. Subsidiaries under NHI (collectively the "U.S. Group.") The holding
company consists of:
Nobel Insurance Company, a Texas corporation admitted in 50 states and
the District of Columbia to write all insurance lines except life
insurance; and providing commercial property, casualty and surety
coverages for specialized industries and personal property coverages for
low-value dwellings.
Nobel Managing Agents, Inc., a Texas corporation that provides insurance
brokerage and risk management services.
Nobel Insurance Agency, Inc., a Texas corporation that is the U.S.
Group's commercial and personal lines recording agency.
Nobel Service Corporation, a Delaware corporation formed in 1993 to
provide paymaster and disbursement services for the U.S. Group.
IAS Claim Services, Inc., a Delaware corporation formed in 1994 to
conduct the claim adjusting service business.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Parent
Company and the U.S. Group of wholly owed subsidiaries. All intercompany
transactions and balances have been eliminated. The term "Company" in the
notes to the consolidated financial statements includes the Parent Company
and the U.S. Group.
38
<PAGE>
NOBEL INSURANCE LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(CONTINUED)
These consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States.
Significant accounting policies are:
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of all financial instruments approximated the carrying
value at December 31, 1996 and 1995. The fair value of the Company's
investment securities are disclosed in Note 2 and are based upon dealer
quotes or published market rates. Cash and cash equivalents approximate fair
value due to their short-term nature. Loans payable approximate fair value
due to their variable rate.
INVESTMENTS
The Company carries its investments designated as trading portfolio
investments at fair value and unrealized gains and losses are included in
earnings. The Company carries its remaining fixed maturity investments
designated as available for sale, at fair value. Unrealized gains and losses
are excluded from earnings and reported as a separate component of
shareholders' equity net of tax effect. Short-term investments includes
investments with an original maturity of one year or less and are carried at
cost which approximates fair value. Realized gains and losses on disposal of
investments, determined by the specific identification method, are included
in income.
PREMIUMS AND RELATED EXPENSES
Premiums earned are included in earnings evenly over the terms of the
policies. Certain premiums are subject to periodic adjustment based on loss
ratio calculations and other data. Estimations of such adjustments are
included in the consolidated financial statements.
Acquisition costs, consisting of commissions, premium taxes and other
costs that vary with and are directly related to the production of business,
net of ceding commissions are deferred and amortized over the terms of the
policies, but only to the extent that unearned premiums are sufficient to
cover all related costs and expenses (See Note 3).
An allowance for uncollectible premiums receivable is established when
it becomes evident collection is doubtful.
39
<PAGE>
NOBEL INSURANCE LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(CONTINUED)
CLAIMS
Claims and claim adjustment expenses, less related reinsurance, are
provided for as claims are incurred. The provision for unpaid claims and
claim adjustment expenses includes: (1) the accumulation of individual case
estimates for claims and claim adjustment expenses reported prior to the
close of the accounting period; (2) estimates for unreported claims based on
past experience modified for current trends; and (3) estimates of expenses
for investigating and adjusting claims based on past experience.
Liabilities for unpaid claims and claim adjustment expenses are based on
estimates of ultimate cost of settlement. Changes in claim estimates
resulting from the continuous review process and differences between
estimates and ultimate payments are reflected in expense for the year in
which the revision of these estimates first became known.
INCOME TAXES
Deferred tax assets and liabilities are established at the balance sheet
date in amounts that are expected to be recoverable or payable when the
differences in the tax basis and financial reporting basis of assets and
liabilities ("temporary differences") reverse.
The Parent Company is, in management's opinion, a foreign corporation
not engaged in a trade or a business within the United States and accordingly
does not presently file a United States income tax return. The Parent Company
has filed protective United States income tax returns which report no gross
income which is effectively connected with a U.S. trade or business. The
U.S. Group is domiciled in the United States and is subject to United States
taxes on income (See Note 7).
PER SHARE AMOUNT
Net income per capital share was determined by dividing net income by the
weighted average primary shares outstanding which, in 1996, 1995 and 1994,
included capital and capital equivalent shares outstanding attributable to
outstanding stock options as follows (in thousands):
1996 1995 1994
----- ----- -----
Average Common Shares Outstanding 4,555 5,764 6,341
Shares Applicable to Common
Stock Equivalents 104 137 137
----- ----- -----
Average Primary Shares Outstanding 4,659 5,901 6,478
----- ----- -----
----- ----- -----
40
<PAGE>
NOBEL INSURANCE LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(CONTINUED)
DEPRECIATION AND AMORTIZATION
Depreciation of property and equipment is provided over the estimated
useful lives of the respective assets by the straight-line method.
Depreciation expense was $720,000, $590,000 and $373,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
Goodwill (excess of total acquisition cost over the fair value of net
assets acquired) and other intangible assets are being amortized on a
straight-line basis over the estimated years to be benefited ranging from six
months to seven years. Amortization expense was $435,000, $892,000, and
$729,000 for the years ended December 31, 1996, 1995, and 1994, respectively.
In March 1995, the Financial Accounting Standards Board issued FAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for the
Long-Lived Assets to Be Disposed Of." FAS 121 requires, among other things,
that long-lived assets and certain identifiable intangibles to be held and
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Impairment is measured as the difference between the carrying
value of an asset and its fair value.
FAS 121 is effective for financial statements for fiscal years beginning
after December 15, 1995; however, the Company elected to early adopt FAS 121
for the year ended December 31, 1995. An impairment loss for long-lived
assets to be held and used of approximately $2,537,000 resulted from the
implementation of FAS 121. This impairment loss was determined as of
December 31, 1995 and is included in general and administrative expenses.
There was no impairment loss for the year ending 1996.
The Company assessed the recoverability of long-lived assets by
determining whether the asset balance could be recovered over its remaining
life through undiscounted future operating cash flows. Fair value, for
purposes of calculating any impairment, was measured based on discounted
future operating cash flows. The impaired assets identified as of December
31, 1995 were certain intangible assets related to various acquired
businesses.
CASH AND CASH EQUIVALENTS
In presentation of the consolidated statements of cash flows, the
Company considers all short-term investments with a maturity date, at the
time of purchase, of three (3) months or less to be cash equivalents.
41
<PAGE>
NOBEL INSURANCE LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(CONTINUED)
THE USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported period. Actual results could differ from those
estimates.
RECLASSIFICATION
Certain prior period amounts presented for comparison have been restated
to conform to the presentation adopted in 1996.
42
<PAGE>
NOBEL INSURANCE LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(CONTINUED)
2. INVESTMENTS
The following is the amortized cost and estimated market values of the
Company's trading and available for sale portfolios at December 31, 1996 and
1995 (in thousands):
<TABLE>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
1996 COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investments, Trading Portfolio:
Corporate Securities $ 487 $ 15 $--- $ 502
Equity Securities 2,611 1,541 95 4,057
Other Investments 722 146 33 835
-------- ------ ---- --------
Total Investments, Trading Portfolio $ 3,820 $1,702 $128 $ 5,394
-------- ------ ---- --------
-------- ------ ---- --------
Investments, Available for Sale:
U.S. Treasury Securities and Obligations
of U.S. Government Agencies $ 11,790 $ 383 $ 39 $ 12,134
U.S. Government Agencies--
Mortgage-Backed Securities 28,568 323 262 28,629
Corporate Securities 59,982 581 356 60,207
Equity Securities 2,045 254 6 2,293
-------- ------ ---- --------
Total Investments, Available for Sale $102,385 $1,541 $663 $103,263
-------- ------ ---- --------
-------- ------ ---- --------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
1995 COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------------------------
Investments, Trading Portfolio:
Redeemable Preferred Stock $ 105 $ 83 $--- $ 188
Equity Securities 4,881 1,966 --- 6,847
Other Investments 763 162 --- 925
-------- ------ ---- --------
Total Investments, Trading Portfolio $ 5,749 $2,211 $--- $ 7,960
-------- ------ ---- --------
-------- ------ ---- --------
Investments, Available for Sale:
U.S. Treasury Securities and Obligations
of U.S. Government Agencies $ 25,597 $1,163 $ 14 $ 26,746
U.S. Government Agencies--
Mortgage-Backed Securities 26,679 559 60 27,178
Corporate Securities 50,312 1,419 54 51,677
-------- ------ ---- --------
Total Investments, Available for Sale $102,588 $3,141 $128 $105,601
-------- ------ ---- --------
-------- ------ ---- --------
</TABLE>
43
<PAGE>
NOBEL INSURANCE LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(CONTINUED)
The amortized cost and estimated market value of the bonds by
contractual maturity dates for the trading portfolio and the investments
available for sale as of December 31, 1996 are as follows (in thousands):
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------- ---------
Trading Portfolio:
Due after one year through five years $ 224 $ 232
Due after five years through ten years 263 270
-------- --------
Total Trading Portfolio $ 487 $ 502
-------- --------
-------- --------
Investments, Available for Sale:
Due in one year or less $ 1,518 $1,537
Due after one year through five years 27,159 27,323
Due after five years through ten years 35,567 35,784
Due after ten years 7,528 7,697
-------- --------
71,772 72,341
Mortgage-Backed Securities 28,568 28,629
-------- --------
Total Investments Available for Sale $100,340 $100,970
-------- --------
-------- --------
Equity securities and other investments included in the Company's
trading portfolio and the investments available for sale portfolio at
December 31, 1996 have no contractual maturity.
Net investment gains and losses are summarized as follows (in thousands):
1996 1995 1994
------ ------ ------
Realized, Fixed Maturities $ 274 $ 168 $ (714)
Realized, Equity Securities 1,085 142 46
Realized, Other Investments 40 41 5
Unrealized, Trading Portfolio (637) 1,061 1,152
------ ------ ------
Net Gain (Loss) $ 762 $1,412 $ 489
------ ------ ------
------ ------ ------
Proceeds from sales of investments classified as available for sale
during 1996, 1995, and 1994 were $40,664,000, $51,832,000 and $37,383,000,
respectively. Gross gains of $546,000, $730,000, and $75,000, and gross
losses of $272,000, $562,000 and $789,000 were realized on those sales in
1996, 1995, and 1994, respectively, and are included in the net investment
gains in the income statement.
The following schedule summarizes the components of net investment
income (in thousands):
YEARS ENDED DECEMBER 31, 1996 1995 1994
- --------------------------------------------------------------------
Investment Income On:
Fixed Maturities $ 6,509 $6,676 $5,458
Equity Securities 223 322 330
Short Term Investments 399 532 495
Other 205 300 227
------- ------ ------
7,336 7,830 6,510
Investment Expenses (1,064) (528) (967)
------- ------ ------
Net Investment Income $ 6,272 $7,302 $5,543
------- ------ ------
------- ------ ------
44
<PAGE>
NOBEL INSURANCE LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(CONTINUED)
In accordance with provisions of various assumed reinsurance agreements,
the Company must collateralize reinsurance liabilities with letters of credit
or trust arrangements. The letters of credit are, in turn, secured by
investments. Further, the U.S. Group insurance companies are required to
maintain security deposits with various state insurance departments.
The following table presents the investments collateralized and pledged
(in thousands):
INVESTMENTS
AMORTIZED COST FAIR VALUE
-------------- ----------
December 31, 1996
Letters of Credit--Issued $5,963 $ 6,487 $ 6,382
Reinsurance Trust Account 8,757 8,780
U.S. State Insurance Deposits 5,508 5,725
------- -------
$20,752 $20,887
------- -------
------- -------
December 31, 1995
Letters of Credit--Issued $12,289 $12,995 $13,046
Reinsurance Trust Account 10,160 10,422
U.S. State Insurance Deposits 5,173 5,595
------- -------
$28,328 $29,063
------- -------
------- -------
45
<PAGE>
NOBEL INSURANCE LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(CONTINUED)
3. POLICY ACQUISITION COSTS
Policy acquisition costs deferred, net of ceding commission allowance
recoveries, and the related amortization charged to income for insurance
written and retained by the U.S. Group insurers and the reinsurance assumed
by the foreign insurance companies were as follows (in thousands):
1996 1995 1994
-------- -------- --------
Balance, beginning of year $ 3,129 $ 2,038 $ 1,615
Cost deferred during year:
Commissions and taxes, net of ceding
commission allowance recoveries 10,729 8,981 7,720
Salaries and other costs 3,965 3,383 3,205
Amortization and charge-off during year (17,123) (11,273) (10,502)
-------- -------- --------
Balance, end of year $ 700 $ 3,129 $ 2,038
-------- -------- --------
-------- -------- --------
4. CLAIMS AND CLAIMS EXPENSES
The Company estimates claims and claims expenses based on historical
experience and payment and reporting patterns for the type of risk involved.
These estimates are reviewed quarterly by the Company's professional actuary
and any resulting adjustments are reflected in operations for the period in
which they are determined.
Inherent in the estimates of ultimate claims are expected trends in
claim severity, frequency and other factors that may vary as claims are
settled. The amount of uncertainty in the estimates for casualty coverage is
significantly affected by such factors as the amount of historical claims
experience relative to the development period, knowledge of the actual facts
and circumstances, and the amount of insurance risk retained.
Since 1989, the Company implemented strategies to reduce the amount of
underwriting risk and refine the claims data available for actuarial analysis
for its casualty coverages, and has maintained a conservative reserving
philosophy to avoid recurrence of the adverse reserve development experienced
prior to 1989. The Company has experienced favorable reserve development
from 1989-1994. In 1995, the Company strengthened its reserves. In 1996,
the Company again experienced favorable development.
46
<PAGE>
NOBEL INSURANCE LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(CONTINUED)
The following table reconciles claims and claims expenses to year-end
reserves by adding claims recorded in the current year to the balance at the
beginning of the year and deducting payments made during the year (in
thousands):
1996 1995 1994
------- ------- -------
Balance at January 1 $81,675 $64,297 $64,335
Less reinsurance recoverables 19,205 12,846 8,727
------- ------- -------
Net balance at January 1 62,470 51,451 55,608
------- ------- -------
Incurred related to:
Current year 43,286 30,002 22,528
Prior years (1,089) 1,700 (8,900)
------- ------- -------
42,197 31,702 13,628
------- ------- -------
Paid related to:
Current year 15,635 8,788 5,166
Prior years 22,897 11,895 12,619
------- ------- -------
38,532 20,683 17,785
------- ------- -------
Net balance at December 31 66,135 62,470 51,451
Plus reinsurance recoverables 22,262 19,205 12,846
------- ------- -------
Balance at December 31 $88,397 $81,675 $64,297
------- ------- -------
------- ------- -------
The reserve redundancy in 1996 of $1,089,000 included a deficiency of
$3,987,000 for commercial casualty, which was offset by redundancies of
$479,000 for specialty surety, $88,000 for personal lines, $1,404,000 for the
propane runoff, and $2,021,000 for the assumed explosives business. In
addition, a $1,000,000 bulk IBNR reserve was released in 1996.
The reserve deficiency in 1995 of $1,700,000 included deficiencies of
$3,300,000 for commercial casualty and $1,200,000 for surety. This was
partially offset by redundancies of $600,000 for reinsurance assumed casualty
reserves, $300,000 for LPG RRG Insurance, $800,000 redundancy for Fidelity
Bank Bond business, $100,000 for Personal Lines business and a bulk reserve
release of $1,000,000.
The reserve redundancy of $8,900,000 recorded in 1994 included
$8,319,000 redundancy in reinsurance assumed casualty reserves and $684,000
deficiency from reserves assumed with the LPG Insurance acquisition, with the
balance accounted for by reduction of unallocated expense reserves and IBNR
reserves for other discontinued insurance programs.
47
<PAGE>
NOBEL INSURANCE LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(CONTINUED)
5. REINSURANCE
Reinsurance arrangements are utilized to limit maximum loss, provide
greater diversification of risk and minimize exposures on large or hazardous
risks. A large portion of the reinsurance is effected under reinsurance
contracts known as treaties and in some instances by negotiation on
individual risks.
The impact of reinsurance assumed and purchased on premiums earned was
as follows (in thousands):
YEARS ENDED DECEMBER 31, 1996 1995 1994
- -----------------------------------------------------------------------------
Direct premiums earned $ 81,099 $ 63,425 $ 52,516
Assumed from other companies 321 136 1,400
Reinsurance purchased from
other companies (26,019) (20,363) (19,095)
-------- -------- --------
Net premiums earned $ 55,401 $ 43,198 $ 34,821
-------- -------- --------
-------- -------- --------
Percent of amount assumed to net 0.6% 0.3% 4.0%
-------- -------- --------
-------- -------- --------
The reserve for claims and claim expenses at December 31, 1996 and 1995
is shown gross of estimated amounts recoverable from other insurers of
$22,262,000 and $19,205,000, respectively; unearned premiums at December 31,
1996 and 1995 are shown gross of amounts ceded of $27,316,000 and
$12,826,000, respectively. The reinsurance balances have been reported as
assets in accordance with the gross reporting provisions of FAS 113. To the
extent that reinsuring companies are later unable to meet obligations under
reinsuring agreements, the Company would remain liable. To minimize its
exposure to significant losses from reinsurer insolvencies, the Company
evaluates the financial condition of its reinsurers. At December 31, 1996,
reinsurance recoverable and prepaid reinsurance balances of $1,123,000 were
collateralized by funds held, trust assets or letters of credit.
48
<PAGE>
NOBEL INSURANCE LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(CONTINUED)
6. MORTGAGE AND LOANS PAYABLE
Included in other liabilities are mortgage loans and other bank loans
payable. During 1996, the Company executed a credit agreement for a five (5)
year term loan facility commitment in the amount of $15,000,000. Term loans
are evidenced by a Term Note with interest payable with respect to the unpaid
principal amount of each Term Note at a base rate (Prime) or at the adjusted
London Interbank Eurodollars rate (LIBOR) depending on what interest basis
the loan is made. The uses of the term loan facility commitment are to repay
existing bank indebtedness at the time of closing, to make contributions to
the equity of Nobel Insurance Company, and to meet other business expansion
opportunities. The credit agreement is secured by all the outstanding stock
of NHI and its subsidiaries.
The credit agreement imposes certain financial covenants including
consolidated net worth amount, capitalization ratio, earnings coverage ratio,
capital expenditures amounts, statutory surplus amount, operating leverage
ratios, fixed change coverage ratios and risk base capital amount. As of
December 31, 1996, the company had not met the domestic earnings ratio and
the capital expenditures limit. The Company has received from the lender a
waiver of any events of default arising from noncompliance with these
covenants for the year ended December 31, 1996.
The Company entered into an interest rate swap agreement with the lender
which terminates October 1, 2001. Under this agreement, the Company pays a
fixed rate of 6.8% on $5,000,000 of the credit agreement. If the current
rates are less than 6.8% the lender receives the difference between the fixed
rate and the current rate. If the rate goes above the 6.8% the lender will
pay the company the difference. During 1996, the Company paid the lender
approximately $29,000 under the swap arrangements. As of December 31, 1996,
the Company has borrowed $3,538,000 under this loan facility commitment.
Mortgages, notes payable and obligations under capital leases are as
follows (in thousands):
DECEMBER 31, 1996 1995
-------------------------------------------------------------
Real Estate $1,032 $1,110
Credit Agreement Term Loan Facility 3,538 ---
Obligations Under Capital Lease & Other 35 258
------ ------
$4,605 $1,368
------ ------
------ ------
Interest expense of $362,000, $146,000, and $125,000 in 1996, 1995 and
1994, respectively, approximated interest paid.
49
<PAGE>
NOBEL INSURANCE LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(CONTINUED)
7. INCOME TAXES
The effect of income taxes on operations is presented below:
YEARS ENDED DECEMBER 31, 1996 1995 1994
- -----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Net income before income taxes $ 2,218 $ 3,732 $15,375
Non U.S. source - not subject to tax 4,449 2,018 10,690
------- ------- -------
U.S. source - subject to tax $(2,231) $ 1,714 $ 4,685
------- ------- -------
------- ------- -------
Computed "expected" tax expense
(benefit) @ 34% $ (758) $ 583 $ 1,593
Reduction for tax exempt interest (417) --- ---
Change in deferred tax valuation
allowance (907) (4,497) (1,681)
Writedown for impairment of
intangible assets --- 863 ---
Amortization of goodwill --- 157 97
Others 13 394 (9)
------- ------- -------
Income Tax (Benefit) $(2,069) $(2,500) $ ---
------- ------- -------
------- ------- -------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1996 and 1995 are presented below:
DECEMBER 31, 1996 1995
- ------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Deferred tax assets:
Accounts receivable, principally due to
allowance for doubtful accounts $ 49 $ 83
Claims reserves, principally due to
discounting for tax 2,887 2,243
Unearned premium adjustment 889 1,719
Net operating loss carryforwards 1,853 717
Other 508 378
------- -------
Total gross deferred tax assets 6,186 5,140
Less valuation allowance --- (907)
------- -------
Net deferred tax assets 6,186 4,233
Deferred tax liabilities:
Deferred policy acquisition costs (238) (1,064)
Unrealized gains bonds available for sale (327) (920)
Other (847) (137)
------- -------
Total gross deferred tax liabilities (1,412) (2,121)
------- -------
Net deferred tax asset $ 4,774 $ 2,112
------- -------
------- -------
The valuation allowance for deferred tax assets as of December 31, 1995
was $907,000. The net change in the total valuation allowance for the year
ended December 31, 1996 was a decrease of $907,000 on the anticipated
transition of the U.S. Group to profitable operations. Future changes in
estimate of this valuation
50
<PAGE>
NOBEL INSURANCE LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(CONTINUED)
allowance will be reflected in operations in the period in which they are
determined. The Company made tax payments of $50,000 and $130,000 in 1996
and 1995 and received income tax refunds of $30,000 in 1994.
At December 31, 1996, the U. S. Group had consolidated net operating
losses of approximately $4,452,000 which may be carried forward for U. S.
federal income tax purposes. Such loss carryforwards expire beginning in
2004.
8. SHAREHOLDERS' EQUITY AND RESTRICTIONS
Under the Bermuda Insurance Act of 1978 and related regulations, the
Parent Company is required to meet minimum solvency margins. Accordingly, the
distribution of earnings by declaration of dividends is limited to the lower
of the amount of retained earnings or the excess of shareholders' equity over
the statutory minimum requirements. At December 31, 1996, the statutory
minimum requirement was approximately $1,408,000, which was satisfied by
share capital and contributed surplus. At December 31, 1996, the Company has
accumulated earnings available to pay dividends of $35,930,000, after
adjustment for prior stock dividend transfers to contributed surplus of
$5,934,000.
Retained earnings of the property-casualty subsidiaries available for
distribution as dividends is limited by law to insurance regulatory approval
in certain cases. Approval is required for the payment of any dividend which
exceeds the greater of either 10% of property and casualty statutory capital
stock and surplus as of the preceding December 31 or net income of the
preceding calendar year on a statutory basis. The Company has calculated the
impact of the risk based capital requirements of the National Association of
Insurance Commissioners. The risk based capital formula requires an insurer
to compute the amount of capital necessary to support specified elements of
risk. The Company has concluded that current capital levels significantly
exceed the regulatory risk based capital requirements.
Net income and shareholders' equity of the U.S. insurance subsidiaries,
as filed with regulatory authorities on the basis of statutory accounting
practices, are as follows:
YEARS ENDED DECEMBER 31, 1996 1995 1994
-----------------------------------------------------------------------
Statutory net income $ 268,000 $ 3,806,000 $7,134,000
DECEMBER 31, 1996 1995
-----------------------------------------------------------------------
Statutory shareholder's equity $35,513,000 $33,615,000
51
<PAGE>
NOBEL INSURANCE LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(CONTINUED)
The Nobel Insurance Company, domiciled in Texas, prepares statutory
financial statements in accordance with the accounting practices prescribed
or permitted by the insurance department of that state. Prescribed statutory
accounting practices include a variety of publications of the National
Association of Insurance Commissioners as well as state laws, regulations,
and general administrative rules. Permitted statutory accounting practices
encompass all accounting practices not so prescribed.
In 1996, the Board of Directors increased the authorization to purchase
Nobel shares in open market transactions by 250,000 shares. In 1995, they
increased the authorization by 1,500,000 shares. At December 31, 1996, the
Company had remaining authority to buy back up to 336,000 Nobel shares when
the price is attractive and cash is available. During 1996, the Company
acquired 1,188,000 shares at a cost of $14,097,000, or an average cost of
$11.87 per share. In 1995, the Company acquired 466,000 shares at a cost of
$4,862,000, or an average cost of $10.43 per share. The shares purchased
reduced the capital shares outstanding and the cost of shares purchased has
been deducted from shareholders' equity.
The Parent Company has an Incentive Stock Option Plan (the "ISO Plan"),
covering 800,000 capital shares of the Company. Unless terminated earlier by
action of the Board of Directors of the Company, the ISO Plan will terminate
in March 2001. The exercise price of all options granted pursuant to the ISO
Plan must be equal to at least the fair market value of the capital shares on
the date of grant. The options generally vest over a period of from one to
four years, with terms which range from three to ten years. The options are
granted with stock appreciation rights ("SAR") which gives the Company the
right to pay, upon exercise of an option, the difference between the fair
market value of the optional shares and the option exercise price in shares,
cash or a combination of both. The Company, adopted a policy which allows
option holders to purchase stock under the ISO Plan, except at the Company's
discretion, an individual option holder could redeem up to 1,000 option
shares by cash payment under the SAR. The financial statements include a
liability of approximately $66,000 for this benefit.
Also, the Company has granted stock options to non-employees pursuant to
the Non-Employee Directors' Stock Option Plan, as amended in 1995 covering up
to 300,000 shares, or based on the approval of the Board of Directors. These
options generally vest over a period of one year, with terms which range from
five to ten years. Unless terminated earlier by action of the Board of
Directors, the Directors' Plan will terminate May 2001.
52
<PAGE>
NOBEL INSURANCE LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(CONTINUED)
A summary of the status of the Company's stock option plans as of
December 31, 1996, 1995 and 1994 and changes during the years ending on those
dates is presented below:
<TABLE>
1996 1995 1994
----------------------- ----------------------- -----------------------
Weighted - Weighted - Weighted -
average average average
exercise exercise exercise
Shares Price Shares Price Shares Price
--------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning of year 439,742 $ 6.57 387,900 $5.04 541,119 $3.86
Granted 65,450 11.38 150,243 8.49 64,500 7.66
Exercised (119,033) 4.48 (96,444) 3.40 (217,469) 2.86
Forfeited (575) 8.03 (1,957) 5.45 (250) 2.00
-------- ------- --------
Options outstanding at end of year 385,584 8.03 439,742 6.57 387,900 5.04
-------- ------- --------
-------- ------- --------
Options exercisable at end of year 242,477 7.32 288,394 5.77 300,214 4.64
-------- ------- --------
-------- ------- --------
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1996.
<TABLE>
Options Outstanding Options Exercisable
------------------------------------------ ------------------------
Weighted-
Weighted- average Weighted-
Number of average remaining Number of average
Range of options exercise contractual options exercise
exercise prices outstanding price life (in years) exercisable price
--------------- ----------- --------- --------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$4.00 - $7.625 165,141 $6.29 1.43 146,124 $6.15
$8.00 - $11.375 220,443 9.33 3.28 96,353 9.09
------- -------
$4.00 - $11.375 385,584 8.03 2.49 242,477 7.32
------- -------
------- -------
</TABLE>
In 1996, 1995 and 1994 employee options covering 2,300, 4,857 and 4,243
shares, respectively, were exercised and the Company elected to pay the stock
appreciation value of $15,000, $31,400 and $47,000, respectively. As a
result of the exercise of employee and director options in 1996, capital
shares were increased $116,000 and contributed surplus was increased $418,000.
53
<PAGE>
NOBEL INSURANCE LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(CONTINUED)
The Company implemented Statement of Financial Accounting Standards No.
123 (SFAS 123) at December 31, 1996. As provided for in SFAS 123, the Company
has elected to continue to apply the intrinsic value method to recognize
compensation cost related to stock options. Under this method, no
compensation cost related to stock options granted in 1996, 1995 or 1994 has
been reflected in the accompanying consolidated financial statements. The
following pro forma amounts reflect the difference between compensation cost
included in net income, as reported, and the related cost that would have
been recognized had the fair value method introduced in SFAS 123 been used:
1996 1995
--------- ---------
Net income As reported $ 4,287 $ 6,232
--------- ---------
--------- ---------
Pro forma $ 4,224 $ 6,186
--------- ---------
--------- ---------
Net income per share As reported $ 0.92 $ 1.06
--------- ---------
--------- ---------
Pro forma $ 0.91 $ 1.05
--------- ---------
--------- ---------
Average number of capital shares outstanding 4,659,208 5,901,190
--------- ---------
--------- ---------
During the initial phase-in period, the effects indicated above may not
be representative of the effects on net income and net income per share for
future years.
The Company uses the Black-Scholes option pricing model to estimate the
fair values of options. Under this method, the weighted-average grant-date
fair value of options granted during 1995 and 1996, as well as the
weighted-average of the significant assumptions used in the calculation, are
as follows:
1996 1995
----- -----
Grant-date fair value of options
granted during the year $1.16 $1.27
Risk-free interest rate 5.31% 7.10%
Expected life in years 1.10 1.82
Expected volatility 25% 25%
Expected dividends $ .05 $ .05
54
<PAGE>
NOBEL INSURANCE LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
The Company rents office space under various operating leases. Rent
expense was approximately $441,000, $607,000 and $800,000 in 1996, 1995 and
1994, respectively. Future minimum lease payments under the leases are
approximately $352,000, $288,000, $272,000, $256,000, $263,000, $21,000 in
1997, 1998, 1999, 2000, 2001 and 2002, respectively.
The Company is not a party, either as plaintiff or defendant, to a
material proceeding other than those routinely encountered in claims
activity. It is management's opinion, after consulting with counsel and a
review of the facts that the ultimate liability, if any, arising from a
single contingency and in the aggregate, will not have any material adverse
effect on the Company's consolidated financial position or results from
operations.
10. 401k PROFIT SHARING PLAN
The Company sponsors a 401k Profit Sharing Plan for eligible employees.
The basic plan provisions for the 401k include participation after six months
of service; vesting over five years at 20% per year; 100% employer matching
up to 4% of base compensation; and prior year's of service counting towards
the vesting requirement. Funding for the 401k is provided at each pay period.
The amount funded and expensed by the Company for employer matching was
$305,000, $291,000 and $267,000 in 1996, 1995 and 1994, respectively.
55
<PAGE>
SCHEDULE I
NOBEL INSURANCE LIMITED
CONSOLIDATED SUMMARY OF INVESTMENTS
DECEMBER 31, 1996
(IN THOUSANDS)
AMOUNT AT
WHICH SHOWN
IN THE
AMORTIZED FAIR BALANCE
TYPE OF INVESTMENT COST VALUE SHEET
- -------------------------------------------------------------------------------
Investments, trading portfolio:
Corporate securities $ 487 $ 502 $ 502
Equity securities 2,611 4,057 4,057
Other investments 722 835 835
-------- -------- --------
Total investments trading portfolio $ 3,820 $ 5,394 $ 5,394
-------- -------- --------
-------- -------- --------
Investments, available for sale:
U.S. Treasury securities and obligations
of U.S. Government agencies $ 11,790 $ 12,134 $ 12,134
U.S. Government agencies
Mortgage-backed securities 28,568 28,629 28,629
Corporate securities 59,982 60,207 60,207
Equity securities 2,045 2,293 2,293
-------- -------- --------
Total investments available
for sale $102,385 $103,263 $103,263
-------- -------- --------
-------- -------- --------
Short-term investments:
U.S. banks $ 1,720 $ 1,720 $ 1,720
U.S. Treasury notes and bills 3 3 3
Money market mutual funds 11,157 11,157 11,157
-------- -------- --------
Total short term investments $ 12,880 $ 12,880 $ 12,880
-------- -------- --------
-------- -------- --------
Total investments $119,085 $121,537 $121,537
-------- -------- --------
-------- -------- --------
56
<PAGE>
SCHEDULE II
NOBEL INSURANCE LIMITED
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
1996 1995
- -------------------------------------------------------------------------------
ASSETS
Cash and short-term investments $ 3,251 $ 7,229
Bonds and notes available for sale 13,674 20,703
Equity securities, trading portfolio 985 4,588
Investments in and equity in net assets
of subsidiaries 8,844 10,156
Advances to affiliates 34,052 36,520
Net premiums receivable 1,246 813
Other receivables and assets 2,138 3,695
-------- --------
Total assets $ 64,190 $ 83,704
-------- --------
-------- --------
LIABILITIES
Reserves for claims and claims expenses $ 10,346 $ 18,084
Unearned premiums 1 11
Accounts payable and accrued liabilities 656 701
-------- --------
Total liabilities 11,003 18,796
-------- --------
SHAREHOLDERS' EQUITY
Capital shares 7,743 7,627
Contributed surplus 44,499 44,081
Unrealized gains on investments 551 2,093
Retained earnings 29,996 26,612
Treasury stock (29,602) (15,505)
-------- --------
Total shareholders' equity 53,187 64,908
-------- --------
Total liabilities and shareholders' equity $ 64,190 $ 83,704
-------- --------
-------- --------
(See Accompanying Notes to Condensed Financial Statements)
57
<PAGE>
SCHEDULE II
(CONTINUED)
NOBEL INSURANCE LIMITED
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
1996 1995 1994
- ---------------------------------------------------------------------------
REVENUES:
Premiums and fees earned $ 124 $ 155 $ 1,408
Investment and other income 1,473 2,838 2,412
------- ------ -------
Total 1,597 2,993 3,820
------- ------ -------
EXPENSES:
Claims and claims expense (3,171) (526) (8,483)
Operating expenses 319 1,501 1,613
------- ------ -------
Total (2,852) 975 (6,870)
------- ------ -------
Income before equity in earnings
of subsidiaries 4,449 2,018 10,690
Equity in earnings of subsidiaries (162) 4,214 4,685
------- ------ -------
Net income $ 4,287 $6,232 $15,375
------- ------ -------
------- ------ -------
(See Accompanying Notes to Condensed Financial Statements)
58
<PAGE>
SCHEDULE II
(CONTINUED)
NOBEL INSURANCE LIMITED
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
1996 1995 1994
- -------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,287 $ 6,232 $ 15,375
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization (32) 2 108
Change in deferred acquisition costs 1 421 198
Equity in undistributed (earnings) loss
of subsidiaries 162 (4,214) (4,685)
(Decrease) in reserve for claims
and claims expenses (7,738) (4,917) (14,078)
(Decrease) in unearned premiums (10) (9) (900)
Increase (decrease) in accounts payable
and accrued liabilities (45) (39) 37
Realized investment and foreign
currency gains/losses (139) 18 113
Other-net 1,111 166 225
-------- ------- --------
Net cash provided from (used by)
operating activities (2,403) (2,340) (3,607)
-------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of investments 10,412 16,943 31,340
Purchase of investments --- (4,170) (29,142)
Advances (to) subsidiaries 2,468 (1,220) (2,117)
-------- ------- --------
Net cash provided from investing activities 12,880 11,553 81
-------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in notes payable 103 106 1,512
Repayment of notes payable (92) (107) (1,511)
Purchase of treasury stock (14,097) (4,862) (9,469)
Dividends paid shareholders (903) (1,156) (936)
Proceeds from issuance of capital shares 534 303 608
-------- ------- --------
Net cash (used by) financing activities (14,455) (5,716) (9,796)
-------- ------- --------
Net increase (decrease) in cash and
cash equivalents (3,978) 3,497 (13,322)
Cash and cash equivalents at beginning
of year 7,229 3,732 17,054
-------- ------- --------
Cash and cash equivalents at end of year $ 3,251 $ 7,229 $ 3,732
-------- ------- --------
-------- ------- --------
(See Accompanying Notes to Condensed Financial Statements)
59
<PAGE>
SCHEDULE II
(CONTINUED)
NOBEL INSURANCE LIMITED
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The accompanying condensed financial statements should be read in
conjunction with the consolidated financial statements and notes thereto of
Nobel Insurance Limited.
A. Bonds and notes available for sale on the parent only balance sheet are
carried at market value in 1996 and 1995 (cost of $13,756,000--1996 and
$20,395,000--1995). $82,000 of unrealized gain in 1996 and $308,000 of
unrealized gains in 1995 are recognized as a separate component of
shareholders' equity.
B. Investment and other income in 1996 and 1995 includes ($756,000) and
$644,000 respectively of unrealized gains (losses) from the trading
portfolio investment.
60
<PAGE>
SCHEDULE III
NOBEL INSURANCE LIMITED
SUPPLEMENTARY INSURANCE INFORMATION
(IN THOUSANDS)
<TABLE>
AMORTI-
BENEFITS, ZATION
FUTURE CLAIMS, OF
DEFERRED POLICY LOSSES DEFERRED
POLICY BENEFITS, NET AND POLICY OTHER
ACQUISI- CLAIMS, PREMIUM INVEST- SETTLE- ACQUISI- OPERAT- NET
TION CLAIMS UNEARNED AND FEE MENT MENT TION ING PREMIUMS
SEGMENTS COST EXPENSES PREMIUMS REVENUE INCOME EXPENSES COST EXPENSES WRITTEN
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996
Property and casualty insurance $ 700 $88,397(3) $40,389(4) $65,824 $7,034(1) $42,197(2) $17,123 $11,320 $43,195
------ ------- ------- ------- ------ ------- ------- ------- -------
------ ------- ------- ------- ------ ------- ------- ------- -------
1995
Property and casualty insurance $3,129 $81,675(3) $38,106(4) $52,555 $8,714(1) $31,702(2) $11,273 $14,562 $47,594
------ ------- ------- ------- ------ ------- ------- ------- -------
------ ------- ------- ------- ------ ------- ------- ------- -------
1994
Property and casualty insurance $2,038 $64,297(3) $31,152(4) $44,221 $6,032(1) $13,628(2) $10,502 $10,748 $40,502
------ ------- ------- ------- ------ ------- ------- ------- -------
------ ------- ------- ------- ------ ------- ------- ------- -------
</TABLE>
(1) Includes $762, $1,412, and $489 in 1996, 1995 and 1994, respectively, of
net investment gains.
(2) Included in Service Fees and Commissions and Other General and
Administrative Expenses in the Consolidated Statements of Income.
(3) Gross of estimated amounts recoverable from other insurers of $22,262,
$19,205, and $12,846 in 1996, 1995 and 1994, respectively.
(4) Gross of amounts ceded of 27,316, $12,826, and $10,269 in 1996, 1995 and
1994, respectively.
61
<PAGE>
SCHEDULE IV
NOBEL INSURANCE LIMITED
REINSURANCE
YEARS ENDED DECEMBER 31,
(IN THOUSANDS)
<TABLE>
ASSUMED REINSURANCE PERCENTAGE
DIRECT FROM PURCHASED NET OF AMOUNT
PREMIUM OTHER FROM OTHER PREMIUMS ASSUMED TO
LINE OF BUSINESS EARNED COMPANIES COMPANIES EARNED NET
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
Property and casualty insurance $81,099 $ 321 $26,019 $55,401 0.6%
------- ------ ------- ------- ---
------- ------ ------- ------- ---
1995
Property and casualty insurance $63,425 $ 136 $20,363 $43,198 0.3%
------- ------ ------- ------- ---
------- ------ ------- ------- ---
1994
Property and casualty insurance $52,516 $1,400 $19,095 $34,821 4.0%
------- ------ ------- ------- ---
------- ------ ------- ------- ---
</TABLE>
62
<PAGE>
SCHEDULE VI
NOBEL INSURANCE LIMITED
SUPPLEMENTAL INFORMATION
YEARS ENDED DECEMBER 31,
(IN THOUSANDS)
RESERVE
FOR DISCOUNT PAID
CLAIMS DEDUCTED INCURRED CLAIMS
AND FROM LOSES AND
CLAIM CLAIM CURRENT PRIOR CLAIM
EXPENSES RESERVES YEAR YEAR EXPENSES
- ---------------------------------------------------------------
1996 (1)$88,397 $707 $43,286 $(1,089) $38,532
------- ---- ------- ------- -------
------- ---- ------- ------- -------
1995 (1)$81,675 $844 $30,002 $ 1,700 $20,683
------- ---- ------- ------- -------
------- ---- ------- ------- -------
1994 (1)$64,297 $941 $22,528 $(8,900) $17,785
------- ---- ------- ------- -------
------- ---- ------- ------- -------
(1) Gross of estimated amounts recoverable from other insurers of $22,262,
$19,205 and $12,846 in 1996, 1995 and 1994, respectively.
(2) Other information required to be presented in Schedule VI is presented in
Schedule III and not included here.
63
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
NOBEL INSURANCE LIMITED
By: /s/ Robert C. Duvall
---------------------------
Robert C. Duvall,
Chairman of the Board
Date: March 14, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 14, 1997 /s/ Robert C. Duvall
-------------------------------------------------
Robert C. Duvall,
Chairman of the Board and Director
Date: March 14, 1997 /s/ Jeffry K. Amsbaugh
-------------------------------------------------
Jeffry K. Amsbaugh,
President, Chief Executive Officer and Director
(principal executive officer)
Date: March 14, 1997 /s/ Thomas D. Nimmo
-------------------------------------------------
Thomas D. Nimmo,
Senior Vice President
(principal financial officer)
Date: March 14, 1997 /s/ Gregory E. Leonard
-------------------------------------------------
Gregory E. Leonard,
Director
Date: March 14, 1997 /s/ Thomas J. O'Shane
-------------------------------------------------
Thomas J. O'Shane,
Director
Date: March 14, 1997 /s/ Roger T. Rankin
-------------------------------------------------
Roger T. Rankin,
Director
Date: March 14, 1997 /s/ Robert B. Sanborn
-------------------------------------------------
Robert B. Sanborn,
Director
64
<PAGE>
FINANCIAL HIGHLIGHTS (UNAUDITED)
<TABLE>
(IN THOUSANDS, EXCEPT PER SHARE) 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues * $54,090 $69,671 $56,459 $31,209 $22,775 $26,590 $38,193 $50,253 $61,269 $72,858
Expenses ** 58,239 87,288 67,119 26,517 13,915 7,518 28,265 34,878 57,537 70,640
Net income (loss) (4,149) (17,617) (10,660) 4,692 8,860 19,072 9,928 15,375 6,232 4,287
Net income (loss) per
capital share (.80) (3.30) (2.02) .75 1.30 2.89 1.43 2.37 1.06 .92
Average capital shares
outstanding 5,120 5,341 5,283 6,228 6,802 6,599 6,947 6,478 5,901 4,659
Year-end shareholders'
equity 39,715 19,624 8,866 18,378 25,711 46,114 54,479 56,548 64,908 53,187
Return on average
shareholders' equity (10%) (59%) (75%) 34% 40% 53% 20% 28% 10% 8%(1)
Book value per
capital share 7.43 3.69 1.68 2.63 3.92 6.81 8.32 9.56 11.71 11.90
*Includes net investment
gains (losses) 538 1,254 (1,015) 83 3,607 418 253 489 1,412 762
Per capital share .11 .23 (.19) .01 .53 .06 .04 .08 .24 .16
**Includes redundancy (deficiency)
from revisions to estimates
of prior years' claims 2,974) (12,406) 9,491 1,221 4,922 15,610 6,992 8,900 (1,700) 1,089
Per capital share (.58) (2.32) 1.80 .20 .72 2.37 1.01 1.37 (.29) .23
(1) Computation method changed from beginning and ending balances divided by two to the average of twelve individual months.
</TABLE>
QUARTERLY RESULTS (UNAUDITED)
<TABLE>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
(IN THOUSANDS, EXCEPT PER SHARE) 1995 1996 1995 1996 1995 1996 1995 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues * $14,112 $18,763 $15,332 $18,085 $15,150 $22,416 $16,675 $13,594
Expenses ** 12,964 17,235 12,441 15,935 14,957 21,939 17,175 15,531
Net income 1,148 1,406 2,891 1,961 193 650 2,000 270
Net income per capital share .19 .29 .48 .42 .03 .14 .35 .06
*Includes net realized investment
gains (losses) --- 212 694 188 354 101 364 261
Per capital share --- .04 .12 .04 .06 .02 .06 .06
**Includes redundancy (deficiency)
from revisions to estimates of
prior years' claims reserves --- (626) (850) (766) (1,350) 2,842 500 (361)
Per capital share --- (.13) (.14) (.16) (.23) .62 .09 (.08)
</TABLE>
65
<PAGE>
INDEX TO EXHIBITS
23 Consents of independent auditors to incorporation by reference of
certain reports into the Registrant's Registration Statement on
Form S-8(10).
<PAGE>
INDEPENDENT AUDITORS' CONSENT
Nobel Insurance Limited
Hamilton, Bermuda
Ladies and Gentlemen:
We consent to incorporation by reference in the registration statement (No.
33-51342) on Form S-8 of Nobel Insurance Limited of our report dated March 7,
1997, relating to the consolidated balance sheets of Nobel Insurance Limited
and subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the years
in the three-year period ended December 31, 1996. Our report on the consolidated
financial statements refers to a change in the method of accounting for
impairment of long-lived assets.
/s/ KPMG PEAT MARWICK
Hamilton, Bermuda
March 26, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 101,472
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 6,350
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 121,537
<CASH> 14,785
<RECOVER-REINSURE> 26,361
<DEFERRED-ACQUISITION> 700
<TOTAL-ASSETS> 222,778
<POLICY-LOSSES> 88,397
<UNEARNED-PREMIUMS> 40,389
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 4,605
0
0
<COMMON> 7,743
<OTHER-SE> 45,444
<TOTAL-LIABILITY-AND-EQUITY> 222,778
55,401
<INVESTMENT-INCOME> 6,272
<INVESTMENT-GAINS> 762
<OTHER-INCOME> 10,423
<BENEFITS> 42,197
<UNDERWRITING-AMORTIZATION> 13,383
<UNDERWRITING-OTHER> 15,060
<INCOME-PRETAX> 2,218
<INCOME-TAX> (2,069)
<INCOME-CONTINUING> 4,287
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,287
<EPS-PRIMARY> .92
<EPS-DILUTED> 0
<RESERVE-OPEN> 81,675
<PROVISION-CURRENT> 27,651
<PROVISION-PRIOR> (23,986)
<PAYMENTS-CURRENT> 15,635
<PAYMENTS-PRIOR> 22,897
<RESERVE-CLOSE> 88,397
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
