<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A
AMENDMENT NO. 1
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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 of (IRS Employer Identification No.)
incorporation or organization)
DORCHESTER HOUSE, GROUND FLOOR N/A
7 CHURCH STREET WEST (zip code)
HAMILTON, BERMUDA HM 11
(Address of principal executive offices)
441-292-7104
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
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. Yes /X/ 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. / /
The aggregate market value of the voting stock held by nonaffiliates of the
registrant on March 16, 1998 was approximately $27,215,646.
The number of capital shares of the registrant outstanding on March 16, 1998
was 4,544,192.
DOCUMENTS INCORPORATED BY REFERENCE -- NONE
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<PAGE>
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
1997 VERSUS 1996
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 CHANGE
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
UNDERWRITING OPERATIONS
Premiums written.............................................................. $ 76,675 $ 83,703 $ (7,028)
Reinsurance purchased......................................................... 34,190 40,508 6,318
---------- ---------- ----------
Net premiums written.......................................................... $ 42,485 $ 43,195 $ (710)
---------- ---------- ----------
---------- ---------- ----------
Net premiums earned........................................................... $ 35,865 $ 55,401 $ (19,536)
Net claims and claims expenses................................................ (24,605) (42,197) 17,592
Service fees and commissions.................................................. (4,623) (10,401) 5,778
Reinsurance ceding commissions................................................ 9,874 11,551 (1,677)
Deferred policy acquisition cost amortization................................. (7,254) (8,909) 1,655
General and administrative expenses........................................... (13,673) (10,449) (3,224)
---------- ---------- ----------
Net loss on underwriting operations....................................... (4,416) (5,004) 588
---------- ---------- ----------
CLAIMS ADJUSTING OPERATIONS
Claims adjusting fees earned.................................................. 5,593 10,423 (4,830)
CLAIMS ADJUSTING EXPENSES
Service fees and commissions................................................ (2,857) (5,624) 2,767
General and administrative expenses......................................... (3,348) (4,611) 1,263
---------- ---------- ----------
(6,205) (10,235) 4,030
---------- ---------- ----------
Net income (loss) on claims adjusting operations.......................... (612) 188 (800)
---------- ---------- ----------
Net investment income and gains............................................... 8,248 7,034 1,214
Federal income tax (expense) benefit.......................................... (765) 2,069 (2,834)
---------- ---------- ----------
Net income.................................................................... $ 2,455 $ 4,287 $ (1,832)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
PREMIUMS WRITTEN. Premiums written decreased by $7,028,000, or 8%, due to
the following. Commercial casualty lines experienced reductions of $489,000 and
$11,517,000 in its explosives and haulers lines, respectively, due to
competitive market conditions, along with new more restrictive underwriting
criteria in the haulers line. These competitive market conditions included both
pricing competition from existing carriers as well as additional insurance
company competitors that entered this marketplace. The Company expects this
competition to continue in future periods. The restrictive additional
underwriting criteria imposed in the haulers line was a result of experience
gained in the marketplace as well as an analysis of claim trends and further
refinement of the Company's actuarial pricing models. In the haulers line, and
to a lesser extent the explosives and propane lines, the Company chose not to
lower its pricing to match competition, which resulted in less business written.
The propane line increased by $1,344,000 due to increased marketing emphasis and
strategic planning. It should be noted that the propane line written premiums
are significantly affected from year to year based on the marketing success with
certain large accounts, which often are written for policy periods of greater or
less than the standard 12 months. Specialty lines increased by $2,330,000 due to
management direction and planned growth of the Atlanta surety lines as well as
the continued development of the bail bond program commenced in 1996. The
specialty line written premium increase in 1997 was approximately 50% growth in
the Atlanta surety
2
<PAGE>
program and the remainder in the bail bond program. Management attention on the
specialty lines in 1997 was a result of positive results in 1996 as well as
perceived market opportunities. Personal lines increased by $1,304,000 through
planned growth in North Carolina and expansion into other strategically targeted
states during the year. The planned growth strategy included both steady and
moderate price increases and/or marketing emphasis on products and areas with
significant growth potential. The Company expects to continue a planned growth
strategy.
REINSURANCE PURCHASED. The Company purchases reinsurance to limit maximum
loss, diversify risk and to minimize exposure on large or hazardous risks. In
1997 the Company experienced a reduction of $6,318,000, or 16%, in reinsurance
ceded, as a result of changes to certain of the Company's reinsurance programs.
The Company's purchase of 80% quota share coverage (AmRe 80% quota share
reinsurance), that amounted to $15,343,000 at December 31, 1996, was not renewed
during 1997. The AmRe quota share purchased in 1996 reflected the desire to
employ surplus utilization strategies. Due to the significant decline in
commercial casualty business expected in 1997 as a result of the new restrictive
underwriting criteria, it was determined that this additional surplus capacity
was not needed in 1997. In addition, premiums associated with the primary
casualty excess reinsurance treaty decreased by $2,544,000 due to changes in the
structure of the agreement. These decreases were partially offset by the
purchase of additional facultative reinsurance amounting to $6,419,000 on
business written by four of the commercial auto agents and on twelve of the
largest commercial auto risks. As part of the strategy to write less business
and to minimize disruption to the Company's agency force during the transition,
the Company arranged facultative reinsurance on a quota share basis to support
renewal of business produced by certain key agents. With respect to the
reinsurance placed for twelve of the Company's largest in-force auto accounts,
the Company purchased this facultative reinsurance on an excess of loss basis to
secure a favorable fixed reinsurance cost. In addition, specialty lines incurred
a reinstatement premium of $2.2 million, as a result of large reinsured losses
experienced by the line, plus an increase of $473,000 due to increase written
premiums. The personal lines increased $2,476,000 due to a new reinsurance
contract and increased direct writings.
NET PREMIUMS EARNED. Premiums are earned on a pro rata basis over the
policy period, usually one year, and decreased $19,536,000 or 35% during 1997.
Commercial casualty lines decreased by $21,409,000 due primarily to the earnings
of $13,248,000 on the AmRe quota share premium, along with the reduction in
direct written premiums. Specialty lines increased by $930,000 or 8% due to
direct premium growth offset by the reinstatement premium. Personal lines
increased $943,000 or 13% due to the direct premium growth.
NET CLAIMS AND CLAIMS EXPENSES. The net financial year claims ratio of 69%
for 1997 compares to 76% for 1996 and is analyzed as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
1997 1996
---------------------------- -----------------------------
FINANCIAL ACCIDENT FINANCIAL ACCIDENT
YEAR YEAR YEAR YEAR
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Reported claims and allocated expense........................ 88% 40% 73% 55%
IBNR provision............................................... (21)% 21% 0% 21%
Unallocated claims adjusting expenses........................ 2% 2% 3% 2%
-- -- -- --
Total claims expense......................................... 69% 63% 76% 78%
-- -- -- --
-- -- -- --
</TABLE>
"Financial Year" is the total claims and claims expense incurred for the
period under review, and includes the current accident year estimate of the
incurred claims and claims expense, as well as the current period change in the
estimate for all prior accident years claims and claims expense. The "Accident
Year" is the estimate of incurred claims and claims expense for the current
accident year only.
3
<PAGE>
For the "Financial Year" ended December 31, 1997, the Company experienced a
net increase in reserves for prior accident years of $2,176,000. For a detailed
explanation of reserve redundancies and deficiencies by year and line, see
"Business--Reserves". When such deficiency of $2,176,000 is divided by earned
premiums for 1997 of $35,865,000 it produces a 6% claims deficiency. This
percentage is subtracted from the "Financial Year" current claims expense ratio
of 69% ($24,605,000 divided by $35,865,000) to produce the 1997 "Accident Year"
total claims expense ratio of 63% (($24,605,000 less $2,176,000) divided by
$35,865,000).
For the "Financial Year" ended December 31, 1996, the Company experienced a
net decrease in reserves for prior accident years of $1,089,000. When this
redundancy is divided by the earned premiums for 1996 of $55,401,000 it produces
a 2% redundancy. This is the percentage added to the "Financial Year" current
claims expense ratio of 76% ($42,197,000 divided by $55,401,000) to produce the
"Accident Year" total claims expense ratio of 78% (($42,197,000 plus 1,089)
divided by $55,401,000).
On an aggregate basis, net claims and claims adjusting expenses decreased by
$17,592,000 in 1997 as follows: (i) a decrease in earned premium of $12,169,000;
(ii) a deficiency in reserves for prior years of $2,176,000 for 1997 versus a
redundancy of $1,089,000 for 1996, and (iii) a decrease in the current year loss
ratio of $2,158,000.
The decrease in net claims and claims adjusting expenses may also be
analyzed by line. Commercial casualty decreased by $14,476,000 as follows: (i) a
decrease in earned premium of $13,058,000; (ii) a deficiency in reserves for
prior years of $652,000 for 1997 versus a deficiency of $4,193,000 for 1996; and
(iii) a decrease in the current year loss ratio of $4,959,000. The timing and
reporting of large commercial casualty losses impacts reserves when the IBNR
reserve for these types of losses is found to be deficient. If there is an
increase in the ultimate loss projection for the Accident Year and the Financial
Year, the incurred loss ratios would also increase. The decrease in the 1997
loss ratio is primarily attributed to the implementation of the more restrictive
underwriting criteria in the haulers line.
Specialty lines increased by $1,249,000 as follows: (i) an increase in
earned premium $418,000; (ii) a deficiency in reserves for prior years of
$2,639,000 for 1997 versus a redundancy of $498,000 for 1996; and (iii) an
increase in the current year loss ratio $3,968,000. The increase in the loss
ratio for specialty lines was primarily a result of poor claims experience and
severity of loss with certain large claims. Personal lines decreased by $579,000
as follows: (i) an increase in earned premium of $471,000; (ii) a redundancy in
reserves for prior years of $140,000 for 1997 versus a redundancy of $23,000 for
1996; and (iii) a decrease in the current year loss ratio $1,167,000. The
decrease in the loss ratio for the personal lines division reflected more
favorable weather conditions in 1997 versus 1996, which included the claims
associated with Hurricane Fran. Runoff lines decreased by $3,786,000 as a result
of a redundancy in reserves for prior years of $975,000 in 1997 versus a
redundancy of $4,761,000 in 1996.
All of the lines of business the Company currently writes are subject to
market competition. The actions the Company has taken in each of its business
lines to improve underwriting profitability are expected to produce better
results in the future, but there can be no guarantee of the ultimate success of
these strategies. The Company continues to try and identify business
opportunities in its core business lines and to implement underwriting
strategies which are designed to have a positive impact on the Company's
financial results. Given the level of competition and uncertainties inherent in
the insurance underwriting process, it is difficult to predict the ultimate
result of such strategies.
ACQUISITION COST, NET OF AMORTIZATION (UNDERWRITING
OPERATIONS). Acquisition cost, net of amortization attributable to underwriting
operations consisted of service fees and commissions (which decreased
$5,778,000), reinsurance ceding commissions (which decreased $1,677,000) and
deferred policy acquisition cost amortization (which decreased $1,655,000) for a
net expense decrease of $5,756,000. Commercial casualty net expense decreased
$3,733,000 due primarily to the earnings of ceding commissions of $3,836,000
associated with the AmRe 80% quota share premiums. Other changes associated with
reduced premium writings, increased deferral rates and increased reinsurance
purchased accounted for the balance.
4
<PAGE>
Specialty lines net expense decreased by $219,000. Increased commission expense
associated with increased premium writings were offset by increased reinsurance
ceding commissions. Personal lines net expense decreased by $1,804,000 due
primarily to increases in contingent ceding commissions as a result of lower
loss ratios.
GENERAL AND ADMINISTRATIVE EXPENSES (UNDERWRITING OPERATIONS). General and
administrative expenses attributable to underwriting operations increased by
$3,224,000 in 1997. During 1997, the Company incurred costs of $680,000
associated with the sale of its operating subsidiaries (see "--Liquidity and
Capital Resources"). The Company wrote off premium and deductible receivables
amounting to $343,000 when it was determined that they were uncollectible. In
addition, the Company recorded nonrecurring costs of $406,000 associated with
the implementation of its premiums and claims system. The remaining increase is
primarily due to the absence of offsetting, nonrecurring other income items
amounting to $1,795,000, which were recorded in 1996.
CLAIMS ADJUSTING OPERATIONS. Adjusting fees earned decreased by $4,830,000,
and service fees and commissions expenses decreased by $2,767,000 due to the
decline in storm activity. General and administrative expenses decreased by
$1,263,000 due primarily to expense reduction strategies implemented to improve
profitability.
NET INVESTMENT INCOME AND GAINS. Investment gains increased by $1,849,000,
offset by a decrease in investment income of $635,000. During 1997, as a result
of its transition to a taxable status, the Company changed the composition of
its investment portfolio to include a higher proportion of tax-advantaged bonds.
In order to effect this change, the Company sold a portion of its securities
classified as available for sale. Additional sales of investments were made in
order to fund negative cash flow. An increase in realized gains amounting to
$2,762,000 resulted primarily from the sale of these investments. This increase
was offset by an increase in unrealized losses of $913,000 in the Company's
trading portfolio. The decrease in investment income resulted principally from
the decrease in invested assets.
FEDERAL INCOME TAXES. Federal income tax expense of $765,000 was recognized
during 1997, primarily related to the income not taxed in the United States and
tax exempt interest income. During 1996, the Company recognized a Federal income
tax benefit of $2,069,000 in connection with the elimination of the deferred tax
asset valuation allowance and the Nobel U.S. Group incurring a taxable loss.
5
<PAGE>
RESULTS OF OPERATIONS
1996 VERSUS 1995
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 CHANGE
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
UNDERWRITING OPERATIONS
Premiums written............................................................ $ 83,703 $ 70,515 $ 13,188
Reinsurance purchased....................................................... 40,508 22,921 17,587
---------- ---------- ----------
Net premiums written........................................................ 43,195 47,594 (4,399)
---------- ---------- ----------
---------- ---------- ----------
Net premiums earned......................................................... 55,401 43,198 12,203
---------- ---------- ----------
Net claims and claims expenses.............................................. (42,197) (31,702) (10,495)
Service fees and commissions................................................ (10,401) (5,698) (4,703)
Reinsurance ceding commissions.............................................. 11,551 8,002 3,549
Deferred policy aquisition cost amortization................................ (8,909) (4,354) (4,555)
General and administrative expenses......................................... (10,449) (14,098) 3,649
---------- ---------- ----------
Net loss on underwriting operations....................................... (5,004) (4,652) (352)
---------- ---------- ----------
CLAIMS ADJUSTING OPERATIONS
Claims adjusting fees earned................................................ 10,423 9,357 1,066
CLAIMS ADJUSTING EXPENSES
Service fees and commissions................................................ (5,624) (4,942) (682)
General and administrative expenses......................................... (4,611) (4,745) 134
---------- ---------- ----------
(10,235) (9,687) (548)
---------- ---------- ----------
Net income (loss) from claims adjusting operations........................ 188 (330) 518
Net investment income and gains............................................... 7,034 8,714 (1,680)
Federal income tax benefit.................................................... 2,069 2,500 (431)
---------- ---------- ----------
Net income.................................................................... $ 4,287 $ 6,232 $ (1,945)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
PREMIUMS WRITTEN. The Company realized an increase of $13,188,000, or 19%
due to the following. Commercial casualty lines increased $2,450,000, due to
increases in the explosives and haulers lines, a combined increase of
$5,900,000, due to the implementation of planned marketing strategies, offset by
a decrease of $3,450,000 in the propane line caused by changing market and
competitive conditions. Specialty lines experienced an increase of $8,031,000,
primarily due to growth in the contractor's surety operation purchased in 1995.
Personal lines grew $2,707,000, through the expansion into several states,
including North Carolina.
REINSURANCE PURCHASED. The Company purchases reinsurance to limit maximum
loss, diversify risk and to minimize exposure on large or hazardous risks. In
1996 the company realized an increase of $17,587,000, or 77%, as follows.
Commercial casualty lines increased by $19,047,000, due primarily to the
acquisition of 80% quota share coverage (AmRe 80% quota share reinsurance),
effective December 31, 1996. This treaty covers the outstanding unearned premium
reserve on subject premium in the auto and general liability lines of business,
and amounted to $15,343,000. The remaining increase of $3,704,000 was a result
of growth in gross premium written. Specialty lines increased by $1,589,000 as a
result of the direct premium growth. Personal lines decreased by $3,049,000,
primarily as a result of the restructuring of the quota share treaty from 75% to
50%.
6
<PAGE>
NET PREMIUMS EARNED. Premiums are earned on a pro rata basis over the
policy period, usually one year, and increased $12,203,000, or 28%, during 1996.
The primary cause was the growth in net written premium in both 1995 and 1996.
NET CLAIMS AND CLAIMS EXPENSES. The claims ratio of 76% for 1996 compares
to 73% for 1995 and is analyzed as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1996 1995
----------------------------- -----------------------------
FINANCIAL ACCIDENT FINANCIAL ACCIDENT
YEAR YEAR YEAR YEAR
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Reported claims.............................................. 73% 55% 66% 42%
IBNR provision............................................... -- 21% 6% 26%
Unallocated claims adjusting expenses........................ 3% 2% 1% 1%
-- -- -- --
Total claims expense......................................... 76% 78% 73% 69%
-- -- -- --
-- -- -- --
</TABLE>
"Financial Year" is the total claims and claims expense incurred for the
period under review, and includes the current accident year estimate of the
incurred claims and claims expense, as well as the current period change in the
estimate for all prior accident years claims and claims expense. The "Accident
Year" is the estimate of incurred claims and claims expense for the current
accident year only.
For the "Financial Year" ended December 31, 1996, the Company experienced a
net decrease in reserves for prior accident years of $1,089,000. For a detailed
explanation of reserve redundancies and deficiencies by year and line, see
"Business--Reserves". When the $1,089,000 redundancy is divided by the earned
premiums for 1996 of $55,401,000 it produces 2% redundancy. When this percentage
is added to the "Financial Year" current claims expense ratio of 76%, the sum is
the "Accident Year" claims expense ratio of 78%.
For the "Financial Year" ended December 31, 1995, the Company experienced a
net increase in reserves for prior accident years of $1,700,000. When such
deficiency of $1,700,000 is divided by earned premiums for 1997 of $43,198,000
it produces 4% claims deficiency. This percentage is subtracted from the
"Financial Year" current claims expense ratio of 73% ($31,702,000 divided by
$43,198,000) to produce the 1995 "Accident Year" total claims expense ratio of
69% (($31,702,000 less 1,700,000) divided by $43,198,000).
On an aggregate basis, net claims and claims adjusting expenses increased by
$10,495,000 in 1997 as follows: (i) an increase in earned premium of $7,395,000;
(ii) a redundancy in reserves for prior years of $1,089,000 for 1996 versus a
deficiency of $1,700,000 for 1995; and (iii) an increase in the current year
loss ratio of $5,889,000.
The decrease in net claims and claims adjusting expenses may also be
analyzed by line. Commercial casualty increased by $12,362,000 as follows: (i)
an increase in earned premium of $2,638,000; (ii) a deficiency in reserves for
prior years of $4,193,000 for 1996 versus a deficiency of $2,339,000 for 1995;
and (iii) an increase in the current year loss ratio of $7,870,000. The timing
and reporting of large commercial casualty losses impacts reserves when the IBNR
reserve for these types of losses is found to be deficient. If there is an
increase in the ultimate loss projection for the Accident Year and the Financial
Year, the incurred loss ratios would also increase.
Specialty lines decreased by $1,831,000 as follows: (i) an increase in
earned premimum of $1,879,000; (ii) a redundancy in reserves for prior years of
$498,000 for 1996; and (iii) a decrease in the current year loss ratio
$3,212,000. Personal lines increased by $4,086,000 as follows: (i) an increase
in earned premium of $2,878,000; (ii) a redundancy in reserves for prior years
of $23,000 for 1996; and (iii) an increase in the
7
<PAGE>
current year loss ratio of $1,231,000. Runoff lines decreased by $4,122,000 as a
result of a redundancy in reserves for prior years of $4,761,000 in 1996 versus
a redundancy of $639,000 in 1995.
ACQUISITION COST, NET OF AMORTIZATION (UNDERWRITING
OPERATIONS). Acquisition cost, net of amortization attributable to underwriting
operations consisted of service fees and commissions (which increased
$4,703,000), reinsurance ceding commissions (which increased $3,549,000) and
deferred policy acquisition cost amortization (which increased $4,555,000) for a
net expense increase of $5,709,000. Commercial casualty net expense increased
$503,000 consistent with increased levels of net earned premiums. Specialty
lines net expense increased $2,530,000 primarily due to increased premiums.
Personal lines net expense increased $2,676,000 due primarily to decreased
contingent ceding commissions as a result of catastrophe claims in 1996.
GENERAL AND ADMINISTRATIVE EXPENSES (UNDERWRITING OPERATIONS). General and
administrative expenses attributable to underwriting operations decreased by
$3,649,000 due primarily to the recognition in 1995 of an impairment loss of
$2,537,000 related to certain long-lived assets, combined with the recognition
in 1996 of nonrecurring other income items amounting to $1,850,000. These
decreases were partially offset by an increase of $738,000, primarily related to
premium growth.
CLAIMS ADJUSTING OPERATIONS. Adjusting fees increased by $1,066,000, or
11%, due to increased storm activity. Service fees and commissions increased
$682,000, or 13% due to increased business activity. General and administrative
expenses decreased by $134,000 due to decreases in headcount during the year.
NET INVESTMENT INCOME AND GAINS. Certain investments were sold during 1996
in order to finance, along with operating cash flow, the repurchase of
$14,097,000 of treasury stock. This reduction in invested balances, along with
reduced yield rates, contributed to a decrease in net investment income of
$1,030,000. Net investment gains decreased by $650,000 due to gains on the sale
of equity securities classified as available for sale, offset by unrealized
losses in the trading portfolio.
FEDERAL INCOME TAXES. Federal income tax benefit decreased by $431,000. A
benefit of $2,069,000 was recorded in 1996, due to the elimination of the
valuation allowance related to the deferred tax asset, upon the return of the
taxable group to profitable operations.
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 in 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 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
8
<PAGE>
Company by INA is being satisfied by trust fund balances. The fair value of
trust assets at December 31, 1997 was $9,606,000. See "Business--Collateral
Requirements for Assumed Reinsurance."
At December 31, 1997, the Company had cash and investments of $119,383,000,
of which $15,779,000 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.
Net cash provided from operating activities for 1997 was $84,000 compared to
$12,751,000 for 1996. The 1997 net cash provided from operations was positively
adjusted by dispositions from the trading portfolio of $7,317,000 compared to
$3,098,000 in 1996. Net cash used by financing activities in 1997 was $965,000
principally due to the payment of dividends to shareholders. The Company
acquired treasury stock of 30,400 shares during 1997 for $361,000 or an average
cost of $11.875 per share. At December 31, 1996, the Company had authority to
buy back up to 306,000 Nobel shares when the price is attractive and cash is
available.
During 1996, the Company executed a credit agreement for a five-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 or at the adjusted London Interbank Eurodollars
rate 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 NIC, 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 amount, operating leverage ratios, fixed
change coverage ratios and risk based capital amount. As of December 31, 1997,
the Company had not met the earnings coverage ratio. The Company has received
from the lender a waiver of the event of default for the year ended December 31,
1997.
YEAR 2000
Certain computer programs and/or software may recognize a date using "00" as
the year 1900 rather than the year 2000, which could result in miscalculations
or system failures. The Company has completed an assessment of its business
applications and computer systems, and believes that all critical business
applications and systems will function properly with respect to dates in the
year 2000 and thereafter.
During 1995 and 1996 the Company replaced its old systems with modern,
Windows-based, client server systems. The financial systems, policy and claims
systems, and the desktop systems are all prepared to handle the year 2000 and
beyond.
There can be no assurance that the systems of our customers, reinsurers or
vendors will be timely converted and would not have an effect on the Company.
The Company believes that the potential for a loss due to this exposure would be
minimal, if any.
9
<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 amended report to be
signed on its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
NOBEL INSURANCE LIMITED
By: /s/ THOMAS D. NIMMO
-----------------------------------------
Thomas D. Nimmo
SENIOR VICE PRESIDENT AND TREASURER
(PRINCIPAL FINANCIAL OFFICER)
</TABLE>
Date: May 11, 1998
10
