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United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 2
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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 (I.R.S. Employer
Incorporation or Organization) Identification No.)
DORCHESTER HOUSE NONE
GROUND FLOOR (Zip Code)
7 CHURCH STREET WEST HM 11
HAMILTON, BERMUDA
(Address of Principal Executive Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (441) 292-7104.
Indicate by 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 the
filing requirements for the past 90 days.
YES /X/ NO
Number of Common Shares, $1.00 Par Value, outstanding
At November 10, 1997
4,503,856
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PART I
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The principal cash requirements of the Company consist of claims payments,
operating expenses, payment of dividends, and the acquisition of the companies
treasury stock in the open market.
The Nobel U.S. Group's non-insurance operations incur substantially all of
the administrative expenses. The principal sources of funds 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 cash for claims payments consists of net premiums, after
deduction for expenses, plus investment income received on the balances of such
premiums prior to their use to pay claims. These invested balances are also
used for collateral to secure certain ceding insurers' reinsurance reserves.
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 reinsures.
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. The settlement of all claims and claims expenses is being withdrawn
from the trust account. The combined amount of letters of credit and market
value of trust assets at September 30, 1997 is $14,452,000.
The terms of the Parent Company's letter of credit facility requires
collateral equal to the amount of letters of credit issued plus a negotiated
market value margin for investments other than short-term investments. At
September 30, 1997, the collateral consisted of short-term bank deposits and
AAA-rated fixed income securities which require a 5% margin. At September 30,
1997, the Company had cash and investments of $120,702,000 of which $20,237,000
was collateralized or pledged to secure the U.S. insurers that have ceded
reinsurance to the Company, and to maintain security deposits in the U.S. with
various state insurance departments.
Effective January 1, 1994, the Company adopted Financial Accounting
Standard 115. The Company carries its investments designated as trading
portfolio investments at market value. Effective June 30, 1997, certain equity
securities were transferred from available for sale portfolio to the trading
portfolio. In conjunction with this transfer, as of September 30, 1997
unrealized investment gains of $960,000, or $.21 per share, were included in
current earnings. Year to date as of September 30, 1997, the Company sold
$4,715,000 of trading portfolio investments with a $881,000 gain realized. The
Company classified its fixed income security investments, principally bonds, as
available for
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sale, and accordingly, carries these investments at market value. The
Company's investment guidelines prescribe a portfolio structure of maturates
to provide adequate liquidity to settle claims liabilities. The portfolio
continues to be conservatively invested in high quality securities.
Net cash used by operating activities for the first nine months of 1997 was
$(1,334,000) compared to net cash provided of $12,972,000 for the first nine
months of 1996. Net cash provided from investing activities was $3,879,000 for
the first nine months of 1997, as opposed to net cash (used) $(1,130,000) for
the same period of 1996. Cash used by financing activities included the
purchase of 30,420 shares of treasury stock for $361,000 or an average cost of
$11.875, plus repayment of $93,000 in notes payable and dividends paid
shareholders of $675,000, less proceeds received from exercise of stock options
of $393,000 to produce net financing cash (used) of $(736,000), compared to
cash (used) of $(10,940,000) for the first nine months of 1996.
The insurance operations require capital to support premium writings. The
Company believes that its insurance subsidiary may need additional capital to
support planned business activities. Management has a term loan facility
available of $11,462,000 to meet additional business opportunities in 1997.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 VERSUS
NINE MONTHS SEPTEMBER 30, 1996
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NINE MONTHS ENDED
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SEPTEMBER 30
1997 1996 CHANGE
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(Dollars in thousands)
<S> <C> <C> <C>
UNDERWRITING OPERATIONS
Premiums written.................................... $ 58,872 $ 64,329 $ (5,457)
Reinsurance purchased............................... (25,475) (14,465) (11,010)
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Net premiums written................................ $ 33,397 $ 49,864 $(16,467)
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Net premiums earned................................. $ 27,233 $ 45,328 $(18,095)
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Net claims and claims expenses...................... (16,578) (30,162) 13,584
Service fees and commissions........................ (2,363) (6,758) 4,395
General and administrative expenses................. (9,647) (9,822) 175
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Net loss on underwriting operations............ (1,355) (1,414) 59
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CLAIMS ADJUSTING OPERATIONS
Claims adjusting fees earned........................ 4,555 8,726 (4,171)
CLAIMS ADJUSTING EXPENSES
Service fees and commissions...................... (2,339) (4,723) 2,384
General and administrative expenses............... (2,588) (3,644) 1,056
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(4,927) (8,367) 3,440
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Net income (loss) on claims adjusting
operations.................................... (372) 359 (731)
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Net investment income and gains..................... 6,296 5,210 1,086
Federal income tax (expense) benefit................ (1,388) (138) (1,250)
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Net income.......................................... $ 3,181 $ 4,017 $ (836)
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PREMIUMS WRITTEN. Written premiums decreased $5,457,000 or 8% due to the
following. Commercial casualty decreased by $8,407,000, due to planned
expansion in explosives and propane of $1,440,000 and $1,746,00, while the
haulers decreased by $11,593,000 due to enhanced underwriting criteria,
increased competition, and guarded marketing efforts. The specialty lines
increased written premiums by $1,494,000. As a result of anticipated growth
in the bail bond area $1,304,000 and continued development of the contract
surety line $190,000. Personal lines grew $1,456,000 through price increase
and expansion into Indiana.
REINSURANCE PURCHASED. The company purchases reinsurance to reduce risk,
limit maximum loss exposure and minimize large loss exposure. During the
first three quarters of 1997 versus the same period for 1996 the Company
increased reinsurance purchased by $11,010,000, due to implementing the
strategy of reducing commercial auto risk through utilization of reinsurance.
The commercial casualty has increased purchases of reinsurance by $8,320,000
or 112% over the first nine months of 1996. The specialty line has increased
its purchase of reinsurance by $131,000 to keep pace with written premium
growth. The personal lines has increased its purchase of reinsurance by
$2,559,000 through growth of written premium and change in the reinsurance
quota share program.
NET PREMIUMS EARNED. Premiums are earned on a pro rata basis over the
life of the policy period, usually one year. For the first nine months of
1997, over the same period of 1996 the company earned decreased by
$18,095,000. The cause of the decrease was commercial casualty which
decreased earnings by $21,653,000 due to earnings on the Am Re quota share
and other reinsurance treaties, the specialty lines increased earnings by
$2,890,000 due to growth in written premium. The personal lines increased by
$668,000 due to growth in written.
NET CLAIMS AND CLAIMS EXPENSES. On an aggregate basis claims and claims
expense reduced $13,584,000 as follows: (i) Claim and claim expense reduction
due to decreased exposure resulting from decreased earned premium
$12,576,000; (ii) Decreased losses due to decreased incurred claim and claim
adjustment ratio of $1,504,000,and incurred loss due to change in prior years
estimated reserves provisions an increase of $496,000. On a by line basis
commercial casualty produced a reduction of $16,522,000, caused by reductions
of exposure due to reduced earned premiums of $18,708,000, increase in losses
due to increased claim and claim expense ratio of $4,200,000, and decrease in
losses due to prior years reserve changes of $2,014,000. The specialty lines
increased claim and claim expense by $1,902,000, due to increased exposure to
claim and claim expense by increased earned premiums $1,040,000, and
increased claim and claim expense due to deterioration of rate $862,000. The
personal lines decreased claim and claim expense by $1,474,000 which
consisted of increased exposure due to increased earnings $529,000, and
decreased expense due to improved claim ratio $2,003,000 caused by improved
weather conditions. Increased claim and claim expense due to changes in prior
years reserve estimates was $2,510,000.
ACQUISITION COST, NET OF AMORTIZATION (UNDERWRITING OPERATIONS).
Acquisition cost, net of amortization attributable to underwriting operations
(which is included in "service fees and commission" on the Company's
Statement of Income) consisted of service fees and commissions expense of
$12,707,000 (a decrease of $366,000), reinsurance ceding commissions income
of $8,085,000 (a increase of $3,446,000) and deferred policy acquisition cost
income of $2,359,000 (a increase of $582,000) for a net expense decrease of
$4,395,000. Commercial Casualty net expense decreased $3,663,000 due
primarily to the earnings of ceding commissions of $1,128,000 associated with
the Am Re 80% quota share premiums. Other changes associated with reduced
premium writings, increased deferral rates and decreased service fees
accounted for the balance. Specialty lines net expense increased by $32,000.
Increased commission expense associated with increased premium writings was
offset by increased reinsurance ceding commissions. Personal lines net
expense decreased by $763,000 due primarily to increases in contingent ceding
commissions as a result of lower loss ratios.
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GENERAL AND ADMINISTRATIVE EXPENSES (UNDERWRITING OPERATIONS). General and
administrative expenses attributable to underwriting operations decreased
$175,000 in the first nine months of 1997 versus same period of 1996. The
direct expense decreased by $1,413,000 while corporate overhead and indirect
expenses increased by $1,238,000. Commercial casualty direct expenses
decreased by $1,864,000 primarily in personnel expenses associated with head
count reduction, indirect expenses increased by $351,000 due primarily to
increased system expenses. The specialty lines direct expenses increased by
$253,000, primarily in personnel expenses and facility charges associated
with expanded head count. The indirect expense increased $216,000 due to MIS
development and maintenance. Personal lines direct expenses increased by
$199,000 due to personnel expenses, and related increases due to increased
head count. The indirect expenses were increased by $594,000 due to MIS
development and installation. Corporate overhead increased by $77,000 during
the period due to expenses associated with the sale of its operating
subsidiary of $228,000 and other expense savings.
CLAIMS ADJUSTING OPERATIONS. The claim adjusting service fee is
$4,171,000 less than the first nine months of 1996 due to reduced revenues
resulting from reduced catastrophic related business. The related service
fee and commissions reduced by $2,384,000 due to less variable storm related
expenses. The General and Administrative expenses have been reduced by
$1,056,000. The direct expenses have reduced by $1,156,000 in personnel
expenses and facility related expenses due to head count reduction. The
indirect expenses increased by $100,000 due to increased home office charges.
NET INVESTMENT INCOME AND GAINS. Interest and dividend income net of
expenses (which increased by $247,000) reduced by $296,000 caused by overhead
expense increase and negative cash provided from operating activities of
$1,334,000 for the first nine months of 1997 versus the same period of 1996
when the company had positive cash flow of $12,972,000. The net investment
gains increased by $1,382,000 due to favorable market conditions and
portfolio positions during the period. Which in total provided an increase of
$1,080,000 during the period.
FEDERAL INCOME TAXES. The company increased taxes by $1,250,000 as the
U.S. operations produced more taxable income during the first nine months of
1997, as opposed to the same period in 1996.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 VERSUS
THREE MONTHS ENDED SEPTEMBER 30, 1996
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THREE MONTHS ENDED
SEPTEMBER 30
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1997 1996 CHANGE
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(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
UNDERWRITING OPERATIONS
Premiums written $19,597 $ 21,697 $(2,100)
Reinsurance purchased (7,035) (3,230) (3,805)
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Net premiums written $12,562 $ 18,467 $(5,905)
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Net premiums earned $10,149 $ 17,818 $(7,669)
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Net claims and claims expenses (6,380) (11,454) 5,074
Service fees and commissions (1,050) (3,855) 2,805
General and administrative expenses (3,293) (3,799) 506
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Net loss on underwriting operations (574) (1,290) 716
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CLAIMS ADJUSTING OPERATIONS
Claims adjusting fees earned 1,599 2,980 (1,381)
CLAIMS ADJUSTING EXPENSES
Service fees and commissions (821) (1,641) 820
General and administrative expenses (821) (1,190) 369
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(1,642) (2,831) 1,189
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Net income (loss) from claims adjusting operations (43) 149 192
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Net investment income and gains 2,836 1,618 1,218
Federal income tax benefit (645) 173 (818)
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Net income $ 1,574 $ 650 $ 924
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PREMIUMS WRITTEN. Premiums written decreased by $2,100,000 or 10% for the
three months ended September 30, 1997 versus the same period of 1996 due to
the following. Commercial casualty reduced by $4,371,000, with primary
reduction in haulers of $2,700,000 due to planned underwriting enhancements,
and guarded marketing efforts. The explosive line reduced by $1,412,000 and
the propane line reduced by $259,000 due to increased competition corporate
pricing strategies. The specialty lines increased by $1,044,000 due to
planned growth in contract surety and the bail bond area. The personal lines
grew $1,227,000 through pricing increases and expansion into Indiana.
REINSURANCE PURCHASED. The Company purchased reinsurance to reduce risk,
limit maximum loss exposure and minimize large loss exposures. During the
quarter ended September 30, 1997 the company increased its purchase of
reinsurance by $3,805,000 in the following areas. Commercial casualty
increased by $2,908,000 due to implementing the strategy of reducing
commercial auto risk through utilization of reinsurance. The specialty line
has increased its purchase of reinsurance by $295,000 in proportion to its
premium growth. The personal lines have increased its purchase of
reinsurance by $602,000, which is in proportion to growth.
NET PREMIUMS EARNED. Premiums are earned on a pro rata basis over the
policy period, usually one year. For the three months ended September 30,
1997 versus the same period of 1996 the company decreased earned premiums by
$7,669,000 or 43% due to the following line changes. Commercial casualty
decreased earnings by $8,380,000, due to decreased direct written premiums
and increased ceded premiums primarily in the haulers line. The Surety line
has increased earned by $522,000 due to increased writings. The personal
lines has
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increased by $191,000 due to increased writings.
NET CLAIMS AND CLAIMS EXPENSES. On an aggregate basis claims and claims
expenses reduced by $5,074,000, due to volume decreases of earned premium
causing an exposure decrease of 5,154,000, and an overall incurred claim
ratio improvement to reduce losses by $1,893,000. The change in prior period
reserve estimate caused an increase in losses of $1,972,000. On a by line
basis, Commercial casualty reduced by $7,784,000 due to decreased exposures
of $7,734,000 and rate increase of $908,000.and prior year reserve change of
a decrease of $958,000. Specialty line had claim increases of $874,000 due to
increased exposure of $172,000 and rate increases of $702,000 as a result of
increased current year ultimate loss picks. The personal lines decreased
claim and claim expenses by $1,095,000 due to an improvement in loss ratio of
$1,329,000 resulting from reduced large loss and decreased storm activity in
the third quarter of 1997 over the third quarter of 1996. The exposures
increased by $234,000 due to increased earnings. The run-off of prior
business recorded increased claims and claims expense of $2,390,000 from
reduced redundancy.
ACQUISITION COST, NET OF AMORTIZATION (UNDERWRITING OPERATIONS).
Acquisition cost, net of amortization attributable to underwriting operations
(which is included in "service fees and commission" on the Company's
Statement of Income) consisted of service fees and commissions expense of
$3,941,000 (a decrease of $362,000), reinsurance ceding commissions income of
$2,216,000 (a increase of $1,745,000) and deferred policy acquisition cost
income of $675,000 (a increase of $696,000) for a net expense decrease of
$2,803,000. Commercial casualty net expense decreased $2,132,000 due
primarily to earnings of ceding commissions associated with the AmRe 80%
quota share premiums. Other changes associated with reduced premiums,
increased deferral rates and increased reinsurance purchased accounted for
the balance. Specialty lines net expense decreased by $188,000. Increased
commission expense, associated with increased premium writings, were offset
by increased reinsurance ceding commissions and increased DAC. Personal
lines net expenses decreased by $483,000 due primarily to increase 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 decreased
by $506,000 in the three months ended in September 30, 1997 versus same
period of 1996. Commercial casualty direct expenses reduced by $743,000 in
personnel expenses associated with head count reduction. The indirect
expenses reduced by $71,000. The Specialty lines increased by $73,000. The
direct increased by $39,000 and the indirect by $34,000. The personal lines
increased by $356,000 due to direct increases of $61,000 due to growth and
indirect of $295,000 due to system installation. The corporate overhead
reduced by $121,000 due to head count reduction.
CLAIMS ADJUSTING OPERATIONS. The claim adjusting service fee reduced by
$1,381,000 due to reduced revenues associated with less catastrophic related
business. The related service fees and commissions reduced by $820,000 due
to the variable relationship to revenues. The general and administrative
expenses reduced by $369,000 due to direct reductions of $424,000 in
personnel and facility type expenses related to head count reductions. The
indirect expenses increased by $55,000.
NET INVESTMENT INCOME AND GAINS. Net dividend and interest income
decreased by $20,000 less expense increase of $39,000 which results in a net
increase in income of $19,000 due to positive cash flow from operations of
$1,936,000 for the third quarter of 1997. Net investment gains increased
$1,238,000, due to favorable market conditions and portfolio positions
prevailing during the period.
FEDERAL INCOME TAXES. The Company increased federal income tax incurred
by $818,000 during the third quarter of 1997 versus the same period of 1996.
Result of taxable incomes of the U.S. operations as opposed to losses for the
same period in 1996.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1994, the
registrant has duly caused this amended report to be signed on its behalf by
the undersigned thereunto duly authorized.
May 11, 1998
NOBEL INSURANCE LIMITED
/s/ Thomas D. Nimmo
------------------------
Thomas D. Nimmo
Senior Vice President and
Treasurer
(principal financial officer)
