<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 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 (I.R.S. Employer Identification No.)
incorporation or organization) N/A
DORCHESTER HOUSE, GROUND FLOOR (Zip Code)
7 CHURCH STREET WEST
HAMILTON, BERMUDA HM 11
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 441-292-7104
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.
/ /
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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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" shall refer to the U.S.A.-based insurer,
NIC (as hereafter defined); 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 $34,988,000 at
December 31, 1997.
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;
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(ii) Nobel Insurance Agency, Inc., ("NIA") a Texas corporation
that is the Nobel U.S. Group's commercial and personal lines
recording agency;
(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.
On December 19, 1997 Nobel Insurance Limited entered into a Stock
Purchase Agreement (the "Stock Purchase Agreement") to sell its United States
assets, consisting of the stock of its indirect wholly-owned subsidiaries
(including Nobel Insurance Company), which is held by Nobel Holdings, Inc.,
to a wholly owned subsidiary of RenaissanceRe Holdings, Ltd.
("RenaissanceRe"), for approximately $54.1 million in cash.
Following consummation of the sale, the Company expects to liquidate
Nobel Holdings, Inc., its non-operating U.S. holding company, and to begin
the process of liquidating the Company. Ultimately, the Company expects to
distribute cash proceeds to its shareholders equal to approximately $14 per
share, representing approximately $63 million in the aggregate, although
there can be no assurance as to the amount or timing of such distribution.
RenaissanceRe has agreed to make a limited recourse participating loan to the
Company of approximately $8.9 million to facilitate the liquidation process,
which will be governed by Bermuda law. The remaining assets, if any, after
payment of the liquidating distribution will be used to repay the loan from,
and make a participating payment to, RenaissanceRe.
Consummation of the sale and liquidation is subject to various consents and
approvals, including approval by the Company's shareholders and required
regulatory approvals.
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 programs primary coverages, which were the
Company's principal source of premium revenue prior to 1991, were assumed as
reinsurance by the Parent Company from Insurance Company of North America, a
subsidiary of CIGNA Corporation ("INA").
Reinsurance arrangements are utilized to limit maximum loss, provide
greater diversification of risk and minimize exposures on large or hazardous
risks. The Company purchased treaty reinsurance for limits $9,500,000 excess
of $500,000 per occurrence. The reinsurance program was placed effective
July 1, 1994 in equal shares with American Re-Insurance Company ("AmRe"), and
Employers Reinsurance Corporation. The reinsurance program was remarketed to
$9,750,000 excess of $250,000 effective August 1, 1997, with 50% with
AmRe, 35% with Zurich Re (North America), Inc. ("Zurich Re") and 15%
with Kemper
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Reinsurance Company. The Company purchased 80% quota share on subject
unearned premium reserves at December 31, 1996, from AmRe. On January 22,
1997, the Company purchased facultative reinsurance for 12 of its largest
inforce specialized haulers accounts, for $500,000 excess of $500,000 from
Winterthur Reinsurance Corporation of America (for commercial auto liability
only). On April 1, 1997 the Company purchased 75% quota share reinsurance,
for commercial auto liability for specialized haulers accounts produced by 4
large agents from Zurich Re. The Company markets its insurance products and
services to customers predominantly through independent 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, the Parent Company began writing aviation business through a
Dallas, Texas-based managing general agent ("MGA"). The program is 100%
reinsured by Employers Reinsurance Company, and NIC 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.
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 and trust fund with INA in an amount equal to or greater than
the total of the outstanding liabilities, including reserves for claims
incurred but not reported ("IBNR") and unearned permiums.
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.
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Effective October 1, 1993, NIC assumed the insurance run-off liabilities
from LPGRRG in consideration of a reinsurance premium in equal amount.
Effective December 1, 1993, LPGRRG was dissolved.
PERSONAL LINES PROGRAM
The Company, through NIC, writes a Personal Lines Program comprised of
homeowners and fire policies covering homes valued up to $140,000 but which
is predominated by lower value dwellings ("LVD Program"). NIC is a leading
provider of low-value dwelling insurance in South Carolina. NIC expanded the
LVD Program to North Carolina in 1991, Tennessee in 1992, Georgia in 1993,
Alabama in 1994, Kentucky in 1995 and Indiana in 1997 and is currently
working to promote its products in Mississippi, Ohio, Illinois and other
Midwestern states. During the period January 1, 1997 through December 31,
1997, the company ceded 50% of subject premiums and claims on a quota-share
basis and purchased a $27.5 million excess of $2.5 million catastrophe excess
of loss cover filling 50% at all five layers. The quota share treaty was
fully placed with Constitution Reinsurance (65%), and SCOR Reinsurance (35%).
The Catastrophe Excess of Loss Treaty was placed with RenaissanceRe (50%) and
CAT Limited (50%) participation on all layers. Effective January 1, 1998,
the company has remarketed the reinsurance program to cede 25% of the
premiums on a quota share basis, and purchased $27.5 million excess of $2.5
million catastrophe excess of loss cover for 75% of all five layers. The 25%
quota share treaty is placed with Constitution Reinsurance (50%) and with
SCOR Reinsurance (50%). The Catastrophe Excess of Loss Treaty is placed with
RenaissanceRe (66.7%) and with CAT Limited (33.3%).
NONSTANDARD PERSONAL AUTO
In 1995, NIC began writing nonstandard personal auto policies in Georgia
through a Memphis, Tennessee-based MGA. The underwriting is done by the MGA
and claims were adjusted by NIC personnel through February 28, 1997.
Effective March 1, 1997 claims are adjusted by the MGA. Effective August 1,
1997 this business is 100% reinsured with Everest Reinsurance Company.
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 currently 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. From January 1, 1997 through December 31, 1997, the Company renewed
its excess of loss cover to provide $5.8 million excess of $0.2 million per
principal, which is reinsured with Transatlantic Re (50.0%), Gerling Global
Reinsurance Corporation of America (15%), Hartford Fire Insurance Company
(7.5%), Sorema NA Reinsurance (7.5%) and SCOR Reinsurance (20%). NIC
remarketed the reinsurance program for January 1, 1998 through December 31,
1998, to purchase $7.25 million excess of $0.25 million per principal, with
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reinsurance provided by Transatlantic Reinsurance (52.5%), Chartwell Reinsurance
(15%), Hartford Fire (15%), and Gerling Global Reinsurance (17.5%).
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, 1997, all reported claims have been closed.
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 NIC. All known
reinsurance obligations are kept fully collateralized by FFG. First Extended
provides all of the servicing of policies issued by NIC, including collection
of premiums and all claims handling. NIC 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 1997, 1996 and 1995 written
premium for this program in NIC were insignificant. The Company discontinued
the program in December 1997.
BAIL BOND. In 1996 the Company began writing bail bond insurance through
four General Agents and continued to write bail bonds in 1997. The Company
is indemnified through collateral provided to the producing and General Agent
and as such retains all business written.
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 LVD Program
to catastrophic events.
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 Parent Company had also provided reinsurance for other risks in
other industries.
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COLLATERAL REQUIREMENT FOR ASSUMED REINSURANCE
In July 1988, the Parent Company 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 or greater than the
ceded reserves for unpaid claims, including IBNR plus 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
fair value of the investments in the trust account at December 31, 1997 was
$9,606,000. 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 net premiums earned by line of
insurance underwritten or reinsured by the Company for the years indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Lines of Business:
Automobile liability & physical damage. . . . 31.8% 56.4% 63.0% 58.2% 48.1%
Fidelity and surety . . . . . . . . . . . . . 36.4 21.9 16.1 15.9 12.5
Liability other than automobile . . . . . . . 8.9 6.9 13.6 15.5 17.6
Property and other. . . . . . . . . . . . . . 22.0 12.9 6.9 6.0 13.3
Excess liability. . . . . . . . . . . . . . . .9 1.7 0.4 3.8 5.4
Workers' compensation . . . . . . . . . . . . --- .2 --- 0.6 3.1
----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
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>
<CAPTION>
YEARS ENDED AND AT DECEMBER 31, 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net premiums written ($000) . . . . . . . . . $42,485 $43,195 $47,594 $40,502 $28,468
Total capital ($000). . . . . . . . . . . . . $55,617 $53,187 $64,908 $56,548 $54,479
Ratio . . . . . . . . . . . . . . . . . . . . 0.8 to 1 0.8 to 1 0.7 to 1 0.7 to 1 0.5 TO 1
</TABLE>
Bermuda insurance regulations include provisions requiring a minimum
solvency margin (or asset margin over liabilities) calculated as the greater of
20% of net premiums written up to $6,000,000, 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 $1,000,000 at December 31, 1997.
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
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amount of capital necessary to support specified elements of risk. The Company
has computed its risk based capital authorized control level to be $6,687,000.
NIC had statutory surplus of $34,988,000 at December 31, 1997.
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.
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 endeavored to maintain a conservative
reserving philosophy in light of available claims information to avoid
recurrence of the adverse reserve development experienced prior to 1989.
From 1989 through 1993, case reserves for policies written by the
Company were established by the Company's claims adjusters. The largest
portion of the case reserves, however, were from the explosives business
written by INA and assumed by the Company. These reserves were initially
established by INA claims adjusters and then increased supplementally by the
Company's claims adjusters based upon a review of the INA determinations.
The primary source of the reserve redundancies for this period relate to the
assumed explosives business as a result of an over-reaction by the various
claims adjusters to reserve deficiencies for this business during the
mid-1980s. These redundancies also led to an overstatement of the indicated
IBNR, which was projected using generally accepted actuarial procedures,
including the Reported Triangle Method. This method tended to overstate IBNR
because case reserves were strengthened for the more recent accident years.
The assumed explosives business went into runoff in 1993 when the reinsurance
agreement between INA and the Company terminated.
The Company began building an internal claims staff in 1991 for its
direct commercial casualty business. The development of a competent and
professional staff of claims adjusters enabled the Company to improve its
reserve analysis.
In 1995, the Company hired its first in-house actuary and began detailed
actuarial reviews of its loss reserves on a quarterly basis. The in-house
actuary began to calculate IBNR reserves on a more systematic basis using
five generally accepted actuarial techniques: Reported Triangle Method; Paid
Triangle Method; Expected Loss Ratio Method; Bornhuetter-Ferguson Paid; and
Reported Method. The Company also initiated studies to analyze the impact of
large losses, changes in reinsurance, a shift toward higher deductibles,
changes in classes of business written, changes in case reserve adequacy and
changes in claim settlement rates and their impact on the IBNR calculations.
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. In 1997 the Company experienced adverse
reserve development. At December 31, 1997, 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.
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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 1997. As a result
of this discount procedure, the reserves at December 31, 1993, 1994, 1995, 1996
and 1997 for unpaid claims and claims expenses, were reduced by $995,000;
$941,000; $844,000; $707,000; and $595,000, respectively.
The following table shows the provision for claims and claims expenses
including unallocated, 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>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
- -------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Reserve for claims
and claims
expenses:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gross $82,948 $88,397 $81,675 $64,297 $64,335 $68,521 $76,450 $84,368 $93,310 $80,954 $47,675
Ceded 33,986 22,262 19,205 12,846 8,727 7,139 3,496 2,033 656 1,107 4,131
------ ------ ------- ------ ------ ------ ------ ------ ------ ------ ------
Net 48,962 $66,135 $62,470 $51,451 $55,608 $61,382 $72,954 $82,335 $92,654 $79,847 $43,544
Reserves re-estimated as of:
1 year later 103% 98% 103% 84% 89% 79% 94% 99% 88% 128%
2 years later 96% 101% 83% 73% 69% 75% 93% 90% 110%
3 years later 98% 77% 71% 56% 68% 80% 83% 115%
4 years later 73% 66% 55% 58% 75% 79% 111%
5 years later 63% 51% 58% 67% 73% 109%
6 years later 49% 55% 67% 67% 107%
7 years later 53% 64% 68% 102%
8 years later 63% 64% 104%
9 years later 63% 100%
10 years later 99%
Redundancy (deficiency):
Percent (3%) 4% 2% 27% 37% 51% 47% 37% 37% 1%
Amount (2,176) 2,480 846 14,860 22,448 37,266 38,689 34,224 29,314 530
Percent Paid (cumulative) as of:
1 year later 50% 37% 23% 23% 21% 23% 21% 29% 25% 35%
2 years later 65% 52% 37% 33% 33% 34% 40% 38% 56%
3 years later 73% 51% 38% 40% 41% 49% 48% 72%
4 years later 57% 44% 43% 46% 54% 55% 82%
5 years later 46% 46% 47% 57% 58% 88%
6 years later 47% 49% 58% 60% 91%
7 years later 50% 60% 61% 92%
8 years later 60% 62% 93%
9 years later 63% 95%
10 years later 96%
</TABLE>
The upper section of the table 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, 1997. A redundancy means that the original estimate was high; a
deficiency means that the latest estimate is
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higher than the original estimate. The lower section of the table shows by
year the cumulative percentage paid on actual claims incurred that are included
in the original estimate.
The reserve redundancy experienced from 1987 to 1995 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
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 LVD 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 included
$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 LPGRRG 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 LPGRRG Insurance; $800,000 redundancy
for Fidelity Bank Bond business; $100,000 for Personal Lines business; and a
general reserve takedown of $1,000,000. The reserve redundancy in 1996 of
$1,089,000 included a deficiency of $4,193,000 for commercial casualty offset
by redundancies of $498,000 for fidelity and surety; $23,000 for personal
lines; $1,405,000 for the LPGRRG runoff, and $2,356,000 for reinsurance
assumed casualty reserves. In addition, a $1,000,000 general reserve was
released in 1996. The reserve deficiency in 1997 of $2,176,000 included a
deficiency of $2,404,000 for commercial casualty and $2,639,000 for surety,
partially offset by redundancies for unallocated loss adjustment expenses of
$787,000 and reinsurance assumed casualty reserves of $1,918,000. The
remaining slight deficiencies for LPGRRG runoff and personal auto, offset by
slight redundancies for personal lines and other businesses comprised the
remaining redundancy of $162,000.
The payment patterns in the lower section of the table 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,
1997, 1987--45%, 1988--35%, 1989--46%, 1990--37%, 1991--37%, 1992--29%,
1993--26%, 1994--24%, 1995--38%, and 1996 - 50%. 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.
10
<PAGE>
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>
<CAPTION>
YEARS ENDED DECEMBER 31, 1997 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Balance at January 1. . . . . . . . . . . . . $88,397 $ 81,675 $ 64,297
Less reinsurance recoverables . . . . . . . . 22,262 19,205 12,846
------ ------ ------
Net balance at January 1. . . . . . . . . . . 66,135 62,470 51,451
------ ------ ------
Incurred related to:
Current year. . . . . . . . . . . . . . . . 22,429 43,286 30,002
Prior years. . . . . . . . . . . . . . . . 2,176 (1,089) 1,700
------ ------ ------
24,605 42,197 31,702
------ ------ ------
Paid related to:
Current year. . . . . . . . . . . . . . . . 8,405 15,635 8,788
Prior years . . . . . . . . . . . . . . . . 33,373 22,897 11,895
------ ------ ------
41,778 38,532 20,683
------ ------ ------
Net balance at December 31. . . . . . . . . . 48,962 66,135 62,470
Plus reinsurance recoverables . . . . . . . . 33,986 22,262 19,205
------ ------ ------
Balance at December 31. . . . . . . . . . . $ 82,948 $ 88,397 $ 81,675
------ ------ ------
------ ------ ------
</TABLE>
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 insurance related operating expenses on a Generally Accepted Accounting
Principles ("GAAP") basis to net premiums earned ("underwriting expense
ratio").
11
<PAGE>
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 and loss adjustment expense. Underwriting expenses are not
allocated by line.
<TABLE>
<CAPTION>
Years Ended December 31, 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Auto liability and physical damage:
Net premiums earned. . . . . . . . . . . . . . . . $11,392 $31,187 $27,260 $20,277 $12,636
Claims ratio FY/AY . . . . . . . . . . . . . . . 104%/87% 93% / 93% 83% / 74% 66% / 71% 56% / 68%
Fidelity and surety:
Net premiums earned. . . . . . . . . . . . . . . . $13,059 $12,130 $6,944 $5,542 $ 3,288
Claims ratio FY/AY . . . . . . . . . . . . . . . 76%/42% 33% / 33% 60% / 55% 43% / 42% 34% / 24%
Liability other than automobile:
Net premiums earned. . . . . . . . . . . . . . . . $ 3,203 $3,834 $5,856 $5,414 $4,618
Claims ratio FY/AY . . . . . . . . . . . . . . . (19%)/96% 97% / 89% 65% / 64% (30%) / 74% 30% / 93%
Property and other:
Net premiums earned. . . . . . . . . . . . . . . . $ 7,882 $7,168 $2,984 $2,086 $3,504
Claims ratio FY/AY . . . . . . . . . . . . . . . 35%/51% 72% / 82% 82% / 58% 41% / 57% 47% / 58%
Excess liability:
Net premiums earned. . . . . . . . . . . . . . . . $ 328 $958 $154 $1,316 $1,411
Claims ratio FY/AY . . . . . . . . . . . . . . . 305%/0% 97% / 89% 14% / 268% (18%) / 40% (133%) /20%
Workers' compensation:
Net premiums earned. . . . . . . . . . . . . . . . $ --- $124 $--- $186 $839
Claims ratio FY/AY . . . . . . . . . . . . . . . N/A (388%) / 0% N/A (584%) /17% 15% /54%
Total:
Net premiums earned. . . . . . . . . . . . . . . . $35,865 $55,401 $43,198 $34,821 $26,296
Claims ratio FY/AY . . . . . . . . . . . . . . . 69%/63% 76% / 78% 73% / 69% 39% / 65% 36% / 63%
Underwriting expense ratio . . . . . . . . . . . . 37% 29% 27% 28% 42%
GAAP Combined claims
and expense ratio . . . . . . . . . . . . . . 106%/100% 105% / 107% 100% / 96% 67% / 93% 78% / 105%
--------- ----------- ---------- --------- ----------
</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 1993 included $1,021,000, relating to coverages excess of $1
million insured prior to July 1989. The fidelity and surety reserve
development deficiency in 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 LVD Program from the March
1993 winter storm and Hurricane Fran in September 1996. The auto reserve
deficiency in 1997 was primarily attributable to large loss emergence in the
specialty haulers class of business for accident years 1994 through 1996.
The surety reserve deficiency in 1997 resulted from large loss emergence in
the standard contractors business for accident year 1996. Reserve
redundancies emerged in 1997 for liability other than auto and property and
other.
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, 1997, the fair value of fixed
income investments under management was approximately $95,800,000. The Company
engaged Kayne Anderson Investment Management, Inc. ("Kayne Anderson") and Luther
King - Capital Management ("Luther King") to manage its trading portfolio under
more aggressive guidelines with investment emphasis on time-frame situations.
At December 31, 1997, the fair value of investments in the Company's trading
portfolio was approximately $2,960,000. 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 (14.6%), United States government securities (7.4%), United States
government guaranteed mortgage-backed securities (24.8%), Corporate Securities
(48.0%), and the remaining 5.2% equity securities and U.S. Bank Certificates of
Deposit.
At December 31, 1997, investments with a fair value of $15,779,000 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 254 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
14
<PAGE>
in Bermuda from any Bermuda taxes which might be imposed on profits, income or
any capital asset, gain or appreciation, until the year 2016.
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. Although the Parent Company's capital shares are
publicly traded and widely held, the Parent Company believes that
substantially less than 20% of the value or voting power of its 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
15
<PAGE>
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
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
1996 and anticipates filing a protective return for 1997. 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
16
<PAGE>
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.
Prior to April 1, 1990, the Nobel U.S. Group's domestic insurance
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
such domestic insurance 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 such domestic insurance companies. 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
such domestic insurance 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 such domestic insurance companies to the Nobel
Reinsurers exceeded an arm's length premium, such excess amount would
probably be characterized as a distribution by such domestic insurance
companies to the Nobel Reinsurers, with the result that such domestic
insurance 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 Nobel 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, 1997, the Nobel U.S. Group had consolidated net operating losses
of approximately $8,160,000 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 29,000 square feet is occupied by the
corporate and commercial lines insurance operations. This property is
subject to a lien in favor of Chase Bank of Texas National Association
currently in the amount of approximately $954,000. Approximately 10,000
square feet of this building is leased to unrelated tenants.
The Nobel U.S. Group owns a 24,000 square foot building at 6923 North
Trenholm Road, Columbia, South Carolina of which 22,300 square feet is occupied
by the personal lines insurance operation. Approximately 1,700 square feet of
the building is leased to unrelated tenants.
IAS, the claim adjusting operation, leases and occupies approximately 9,423
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..
NIC leases and occupies 7,158 square feet of office space for the surety
underwriting facility located at 2296 Henderson Mill Road, Atlanta, Georgia.
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 capital shares 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 Nasdaq Stock Market's
National Market ("NASDAQ") under the trading symbol "NOBLF."
At March 16, 1998, 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
capital shares as reported by NASDAQ for the periods indicated.
<TABLE>
<CAPTION>
1996 1997
HIGH LOW HIGH LOW
---------------------------------------------
<S> <C> <C> <C> <C>
1st Quarter $12 3/4 $11 1/4 $13 7/8 $11 7/8
2nd Quarter $11 3/4 $10 7/8 $15 1/4 $12 1/8
3rd Quarter $12 3/4 $11 $15 1/8 $14 1/8
4th Quarter $12 5/8 $11 1/4 $14 7/8 $12 1/2
</TABLE>
The Parent Company declared quarterly cash dividends of $ .05 per share
in 1997 and paid an aggregate of $900,000 as cash dividends, or $ .20 per
share. The Parent Company previously declared quarterly cash dividends on its
capital shares 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 in May 1994 reflected the positive operating results and financial
condition of the Company. As a result of the Stock Purchase Agreement to sell
the United States assets to RenaissanceRe, the payment of dividends has been
suspended. Under Bermuda law, the Parent Company has accumulated earnings
to pay dividends as of December 31, 1997 of $37,485,000 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. See "Business--Taxation."
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, 1997 and 1996, and the consolidated statements
of operations, shareholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1997, 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>
<CAPTION>
YEARS ENDED AND AT DECEMBER 31, 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME DATA:
Premiums written . . . . . . . . . . . . . . . . . $76,675 $83,703 $70,515 $59,527 $44,073
Reinsurance purchased. . . . . . . . . . . . . . . (34,190) (40,508) (22,921) (19,025) (15,605)
------- ------- ------- ------- -------
Net premiums written . . . . . . . . . . . . . . . $42,485 $43,195 $47,594 $40,502 $28,468
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Net premiums earned. . . . . . . . . . . . . . . . $35,865 $55,401 $43,198 $34,821 $26,296
Net investment income. . . . . . . . . . . . . . . 5,637 6,272 7,302 5,543 5,956
Net investment gains . . . . . . . . . . . . . . . 2,611 762 1,412 489 253
Claim adjusting fees earned. . . . . . . . . . . . 5,593 10,423 9,357 9,400 5,159
Other income . . . . . . . . . . . . . . . . . . . --- --- --- --- 529
------- ------- ------- ------- -------
Total revenues. . . . . . . . . . . . . . . . 49,706 72,858 61,269 50,253 38,193
------- ------- ------- ------- -------
Net claims and claims expenses . . . . . . . . . . 24,605 42,197 31,702 13,628 9,505
Acquisition cost, net of amortization (1). . . . . 4,860 13,383 6,992 6,881 5,841
General and administrative expenses. . . . . . . . 17,021 15,060 18,843 14,369 12,919
------- ------- ------- ------- -------
Total expenses. . . . . . . . . . . . . . . . 46,486 70,640 57,537 34,878 28,265
------- ------- ------- ------- -------
Net income before income taxes. . . . . . . . 3,220 2,218 3,732 15,375 9,928
Income tax expense (benefit) . . . . . . . . . . . 765 (2,069) (2,500) --- ---
------- ------- ------- ------- -------
Net income. . . . . . . . . . . . . . . . . . $2,455 $ 4,287 $6,232 $15,375 $9,928
------- ------- ------- ------- -------
PER SHARE DATA:
Net income, per basic share. . . . . . . $.55 $.94 $1.08 $2.42 $ 1.48
Basic capital shares outstanding . . . . 4,496 4,555 5,764 6,341 6,717
Net income, per diluted share. . . . . . $.53 $.92 $1.06 $2.37 $ 1.43
Diluted capital shares outstanding . . . 4,615 4,659 5,901 6,478 6,947
GAAP OPERATING RATIOS (2):
Claims ratio . . . . . . . . . . . . . . 68.6 76.2 73.4 39.1 36.1
Expense ratio. . . . . . . . . . . . . . 37.4 29.2 27.2 28.0 42.0
------- ------- ------- ------- -------
Combined ratio . . . . . . . . . . . . . 106.0 105.4 100.6 67.3 78.1
BALANCE SHEET DATA:
Cash & investments . . . . . . . . . . . $119,383 $123,442 $128,866 $107,643 $108,148
Total assets . . . . . . . . . . . . . . $216,758 $222,778 $203,388 $168,173 $153,310
Total shareholders' equity . . . . . . . $ 55,617 $ 53,187 $ 64,908 $ 56,548 $ 54,479
</TABLE>
20
<PAGE>
NOTES:
(1) "Acquisition cost, net of amortization" is comprised of service fees and
commissions, Reinsurance ceding commissions, and Deferred policy acquisition
cost amortization.
(2) See "Business--Claims and Expense Ratios."
As discussed in Note 4 of the Notes to Consolidated Financial Statements at
December 31, 1997, the Company has reflected an IBNR reserve 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 $1,089,000, $8,900,000 and $6,992,000 to
earnings in 1996, 1994, and 1993, respectively. Deficiencies of $2,176,000 and
$1,700,000 reduced earnings in 1997 and 1995, respectively. See "Business--
Reserves" for a discussion of claims reserve development.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
1997 VERSUS 1996
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. The propane line increased by
$1,344,000 due to increased marketing emphasis and strategic planning.
Specialty lines increased by $2,330,000 due to management direction and
planned growth of the Atlanta surety lines. Personal lines increased by
$1,304,000 through planned growth in North Carolina and expansion into other
strategically targeted states during the year.
21
<PAGE>
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. 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. 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.
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).
22
<PAGE>
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.
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. 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. 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.
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. 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.
23
<PAGE>
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.
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)
------- ------- -------
24
<PAGE>
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%.
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
25
<PAGE>
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 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.
26
<PAGE>
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.
27
<PAGE>
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 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
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.
28
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A brief description of each director and each executive officer of the
Company is provided below. Directors hold office until the next Annual Meeting
of Shareholders or until their successors are elected and qualified. Executive
officers are elected by the Board of Directors at its annual meeting and hold
office at the pleasure of the Board or until its next annual meeting or until
their successors are elected and qualified.
DIRECTORS
JEFFRY K. AMSBAUGH. Mr. Amsbaugh, age 56, is the President and Chief
Executive Officer of the Company. He has served in such capacity and as a
director of the Company since April 1989. Mr. Amsbaugh is a member of the
Company's Investment Committee. From 1984 until April 1989, he was a
Vice President of various subsidiaries of the Progressive Corporation, an
insurance holding company specializing primarily in automobile coverages. In
his last position with Progressive, Mr. Amsbaugh was in charge of corporate
development and partnership investing. For five years prior to joining
Progressive, Mr. Amsbaugh was President of Ocean Mining Associates, an ocean
mining venture owned by USX Corporation, Sun Company, Inc., and two major
European companies.
ROBERT C. DUVALL. Mr. Duvall, age 55, has been a director of the Company
since February 1982 and was Vice Chairman of the Board from April 1989 through
May 1991. Mr. Duvall has served as Chairman of the Board since May 1991.
Mr. Duvall is a member of the Company's Audit Committee. Mr. Duvall is Vice
President of Finance of Wampum Hardware Co., a Pennsylvania and Ohio
explosives distributor, a position he has held for more than five years. In
October 1987, IRECO Midwest acquired Wampum Hardware Co. In connection with
such acquisition, Mr. Duvall became a shareholder, officer and director of
IRECO Midwest. Mr. Duvall became a director of First Western Bancorp, Inc.
in April 1995 and serves on the Compensation Committee of First Western.
GREGORY E. LEONARD. Mr. Leonard, age 50, has been a director of the
Company since May 1994. Mr. Leonard also serves as Chairman of the Company's
Audit Committee. Mr. Leonard is a specialist reinsurance broker/consulting
actuary and has been President and Chief Executive Officer of Pegasus
Advisors from 1989 to the present. Mr. Leonard was previously a principal
and director of Tillinghast, a Towers Perrin Company. Mr. Leonard is a
Fellow of the Casualty Actuarial Society and a member of the American Academy
of Actuaries.
THOMAS J. O'SHANE. Mr. O'Shane, age 50, has been a director of the Company
since May 1994. Mr. O'Shane also serves as a member of the Company's
Compensation and Investment Committees. Mr. O'Shane has served as Chief
Executive Officer of First Western Bancorp, Inc. since January of 1991 and
previously served as President since February of 1990. Prior to that time
Mr. O'Shane served in various executive positions with First Western Bancorp,
Inc. and First National for more than five years. Mr. O'Shane is a director
of First Western Bancorp, Inc.
ROGER T. RANKIN. Mr. Rankin, age 36, has been a director of the Company
since May 1995. Mr. Rankin also serves as a member of the Compensation and
Investment Committees. Mr. Rankin is affiliated with Cardinal Investment
Company, Inc. and assists in managing $75 million in public company
investment portfolios. Mr. Rankin has served as a director of Arcadia
Exploration Production Company, Inc., from 1993 to present.
ROBERT B. SANBORN. Mr. Sanborn, age 69, has been a director of the Company
since May 1995. Mr. Sanborn serves as a member of the Company's Audit
Committee. Mr. Sanborn currently serves as a Senior Executive Consultant
of Orion Capital Corporation and previously served as Vice Chairman of the Board
of Directors of Orion Capital Corporation from March 1994 to March 1995,
director since 1987, and President and Chief Operating Officer from 1987 to
1994. Mr. Sanborn has also served as Chairman of the American Insurance
Association from January 1993 to January 1994. He also serves currently as a
director of Guaranty National Corporation and Intercargo Corporation.
29
<PAGE>
EXECUTIVE OFFICERS
The current executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME TITLES
---- ------
<S> <C>
Jeffry K. Amsbaugh President and Chief Executive Officer
Thomas D. Nimmo Senior Vice President and Treasurer and Chief
Financial Officer of the U.S. Group
Bryan L. Martin Senior Vice President - Commercial Casualty
Division
</TABLE>
THOMAS D. NIMMO. Mr. Nimmo, age 59, has been Senior Vice President,
Treasurer and Chief Financial Officer of the Company since November 1995. Prior
to joining the Company, Mr. Nimmo was Vice President and Chief Financial Officer
of Ranger Insurance Company from June 1989 through November 1995. Prior to
Ranger, Mr. Nimmo was Chief Financial Officer of Gulf Insurance Company.
BRYAN L. MARTIN. Mr. Martin, age 47, has been Senior Vice President of
the Company's Commercial Casualty Division since November 1995. Prior to that
time, Mr. Martin was Senior Vice President and Treasurer of the Company and
the Chief Financial Officer of the U.S. Group. In Mr. Martin's role as
Senior Vice President of the Commercial Casualty Division, he directs the
business operations of the Commercial Casualty Division.
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and officers, and persons who own more than 10% of a
registered class of the Company's Common Stock to file initial reports of
ownership and reports of changes in ownership with the Securities and Exchange
Commission.
Based on review of such reports with respect to fiscal 1997, the Company
believes that all filing requirements applicable to such persons have been
observed during 1997 with the exception of one late filing for Messrs. Duvall,
Leonard, O'Shane, Rankin and Sanborn.
30
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following Summary Compensation Table shows compensation paid or awarded
by the Company for services rendered during years 1997, 1996, and 1995 for the
Chief Executive Officer and each of the Company's most highly compensated
executive officers whose salary and bonus in 1997 exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
NAME AND OTHER COMPENSATION
PRINCIPAL ANNUAL OPTIONS/SAR'S ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION (IN SHARES) COMPENSATION (1)
- ------------------ ----- -------- ------- ------------ ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
JEFFRY K. AMSBAUGH 1997 $309,831 -- -- 10,000 12,411
President, Chief 1996 $289,372 $3,687 -- 20,000 11,609
Executive Officer 1995 $280,035 $25,000 -- 36,618 6,000
BRYAN L. MARTIN 1997 $145,576 -- -- -- 5,823
Senior Vice 1996 $139,829 $3,000 -- 4,000 5,604
President - Commercial 1995 $135,574 $15,000 -- 12,000 5,420
Casualty Operations
THOMAS D. NIMMO(2) 1997 $128,378 -- -- 5,000 5,135
Senior Vice 1996 $120,000 -- -- -- 2,400
President, Treasurer 1995 $17,538 -- -- 4,000 --
& Chief Financial
Officer
</TABLE>
(1) Company matching contribution to 401-K plan (adopted 6-1-92).
(2) Mr. Nimmo commenced employment with the Company on 11-1-95.
31
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR (1997)
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
% OF TOTAL STOCK PRICE
NUMBER OF OPTIONS/SAR'S APPRECIATION FOR
OPTIONS/SAR'S GRANTED TO ALL EXERCISE OR BASE OPTION TERM
NAME OF EXECUTIVE GRANTED EMPLOYEES PRICE PER SHARE EXPIRATION DATE 5% ($) 10%
($) ------ -----
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
JEFFRY K. AMSBAUGH 10,000 19% $12.5625 January 2002 $34,708 $76,695
BRYAN L. MARTIN -- -- -- -- -- --
THOMAS D. NIMMO 5,000 10% $12.5625 January 2002 $17,354 $38,347
</TABLE>
AGGREGATED OPTION/SAR EXERCISED IN LAST
FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS/SAR'S AT 12-31-97 OPTIONS/SAR'S AT 12-31-97*
NAME OF EXECUTIVE EXERCISED IN 1997 EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------- ---------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
JEFFRY K. AMSBAUGH -- 67,007 17,147 $273,464 $72,810
BRYAN L. MARTIN -- 32,100 8,400 $194,605 $34,200
THOMAS D. NIMMO -- 3,400 5,600 $4,163 $4,650
</TABLE>
*Stock price at 12-31-97 was $13.125
32
<PAGE>
COMPENSATION OF DIRECTORS
Directors who are employees of the Company receive no compensation for
their services as directors or as members of committees. Non-employee
directors are paid $750 per day and are reimbursed for expenses incurred in
attending directors meetings or when otherwise acting on behalf of the Company
in their capacities as directors, and $250 for participation in meetings of
directors or committees via telephone conference calls. Non-employee
chairpersons of director committees receive $1,000 per day for attending
meetings. In addition, as an annual retainer, non-employee directors of the
Company are granted stock options valued at $10,000 pursuant to the Company's
Non-Employee Director Stock Option Plan.
An additional annual retainer of $12,000 is paid to the Chairman of the
Board. An additional annual retainer of $8,000 is paid to the Chairpersons of
the Audit and Compensation Committees.
EMPLOYMENT CONTRACTS
Mr. Amsbaugh, the Company's CEO, was employed pursuant to a three year
employment contract for the period January 1, 1993 through December 31, 1995.
Mr. Amsbaugh's employment contract was renewed effective January 1, 1996.
This employment agreement contains a clause automatically extending the
agreement on each December 31 for an additional one year period unless
terminated earlier per the terms of the agreement. This agreement was, in
fact, automatically extended for the one year periods commencing January 1,
1997 and 1998. Effective January 1, 1998 Mr. Amsbaugh's employment agreement
was renewed with a base salary of $310,473 subject to an annual adjustment for
inflation. Mr. Amsbaugh is entitled to receive a bonus of up to 100% of base
salary dependent on attaining corporate and individual goals agreed to
annually with the Board of Directors. Under certain conditions Mr. Amsbaugh
would be entitled to severance payments equal to one year's compensation if
the employment agreement is terminated.
The Company and Messrs. Amsbaugh, Martin and Nimmo have entered into
Severance Agreements pursuant to which such executive officers would receive
payments in the event of their termination or constructive discharge within
two years after a change of control. Mr. Amsbaugh's agreement provides for a
severance payment of three times base salary and Messrs. Martin and Nimmo's
severance agreements provide for a payment of two times salary. The
severance amounts payable would be reduced to the extent of continued
employment of such executive officer during the two year protection period.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of February 1, 1998 (the "Ownership
Date") (unless otherwise indicated) the amount and percentage of shares of
Common Shares that are deemed under the rules of the Commission to be
"beneficially owned" by (i) each person or "group" (as such term is used in
Section 13(d)(3) of the Exchange Act) known by the Company to be the beneficial
owner of more than 5% of the outstanding Common Shares, (ii) each director of
the Company, (iii) the named executive officers of the Company as of December
31, 1997, and (iv) all directors and executive officers of the Company as a
group:
<TABLE>
<CAPTION>
Amount and Nature
of Beneficial
Name and Address of Beneficial Owner Ownership(1) Percentage
- ------------------------------------ ----------------- ----------
<C> <C> <C>
Khimji Family Partnership II, Ltd.(2). . . . 447,647 9.9%
545 E. John Carpenter Freeway, Suite 1400
Irving, Texas 75062
Royce & Associates, Inc.(3). . . . . . . . . 444,812 9.8%
1414 Avenue of the Americas
New York, NY 10019
Munn, Bernhard & Associates(4) . . . . . . . 357,160 7.9%
6 East 43rd Street
New York, NY 10017
TSI Management, Inc.(5). . . . . . . . . . . 252,642 5.6%
1801 16th Avenue, S.W.
Seattle, WA 98134
Robert C. Duvall(6)(7) . . . . . . . . . . . 436,143 9.6%
Wampum Hardware Company
New Galilee, PA 16141
Jeffry K. Amsbaugh(8). . . . . . . . . . . . 438,981 9.6%
8001 LBJ Freeway, Suite 300
Dallas, TX 75251-1301
Thomas J. O'Shane(9) . . . . . . . . . . . . 14,800 *
Gregory E. Leonard(9). . . . . . . . . . . . 14,500 *
Robert B. Sanborn(10). . . . . . . . . . . . 11,500 *
Roger T. Rankin(10). . . . . . . . . . . . . 10,500 *
Bryan L. Martin(11). . . . . . . . . . . . . 57,096 1.3%
Thomas D. Nimmo(12). . . . . . . . . . . . . 4,400 *
All directors and executive officers as a
group (8 persons) (6)(7)(8)(9)(10)(11)(12). 987,920 21.1%
</TABLE>
33
<PAGE>
- --------------------------
* Less than 1% of the outstanding Common Shares.
(1) Under the rules of the Commission, a person is deemed to be the beneficial
owner of a security if such person, directly or indirectly, has or shares
the power to vote or direct the voting of such security or the power to
dispose or direct the disposition of such security. A person is also
deemed to be a beneficial owner of any securities if that person has the
right to acquire beneficial ownership within 60 days of the Ownership Date.
Accordingly, more than one person may be deemed to be a beneficial owner of
the same securities. Unless otherwise indicated by footnote, the named
individuals have sole voting and investment power with respect to the
Common Shares beneficially owned.
(2) Mahmood Khimji, Mehdi Khimji, and Jaffer Khimji (all Canadian citizens), as
managers of Grosvenor, L.C., the general partner of Khimji Family
Partnership II, Ltd., may be deemed the beneficial owners of 447,647 Common
Shares as reflected in the Statement of Beneficial Ownership on Schedule
13D filed by such partnership on April 15, 1997.
(3) Includes 362,312 shares held in the name of Royce & Associates, Inc.
(formerly known as Quest Advisory Corporation) and 82,500 shares held in
the name of Royce Management Company (formerly
34
<PAGE>
known as Quest Management Company) subject to a common Schedule 13G
filing. Royce & Associates and Royce Management are each investment
advisors registered under Section 203 of the Investment Advisors Act of
1940 as reflected in the amended Statement of Beneficial Ownership on
Schedule 13G filed by such investment advisor on February 5, 1998. Mr.
Charles M. Royce may be deemed to be a controlling person of Royce &
Associates and Royce Management, and, as such, may be deemed to
beneficially own the shares owned by such persons.
(4) Includes 317,260 shares the owners for which Munn, Bernhard & Associates
acts as an investment advisor without voting control. In addition to such
shares, the following shares are owned individually and subject to a common
Schedule 13G filing: 5,000 shares held by Mr. Bernhard, individually,
30,400 shares held by Orson D. Munn, individually, 2,000 shares held by
Christine Munn, individually, and 2,500 shares held by Henry S. Langworthy,
individually, as reflected in the Statement of Beneficial Ownership on
Schedule 13G filed by such investment advisor on February 7, 1997.
(5) Includes 245,642 shares held in the name of TSI Management, Inc., 5,000
shares held by a trust for the benefit of Brent Baird (a Director of TSI)
and 2,000 shares held by Cinnamon Investments, Ltd., a corporation
controlled by Patrick Hodgson, Chairman and CEO of TSI, as reflected in the
Statement of Beneficial Ownership on Schedule 13D filed by such company on
December 13, 1996.
(6) Includes 143,364 shares held by Mr. Duvall and 275,779 shares held by
Wampum Hardware Company. Mr. Duvall shares the power to vote and dispose
of these latter shares.
(7) Includes 17,000 shares issuable under outstanding stock options currently
exercisable or exercisable within 60 days of the Ownership Date.
(8) Includes 344,681 shares held by Mr. Amsbaugh, 28,000 shares held jointly
with his wife, and 7,006 shares beneficially owned by other family members
of Mr. Amsbaugh which he has the sole or shared power to dispose of or
vote. Also includes 59,294 shares issuable under outstanding stock options
currently exercisable or exercisable within 60 days of the Ownership Date.
(9) Includes 14,500 shares issuable under outstanding stock options currently
exercisable or exercisable within 60 days of the Ownership Date.
(10) Includes 10,500 shares issuable under outstanding stock options currently
exercisable or exercisable within 60 days of the Ownership Date.
(11) Includes 36,500 shares issuable under outstanding stock options currently
exercisable or exercisable within 60 days of the Ownership Date.
(12) Includes 4,400 shares issuable under outstanding stock options currently
exercisable or exercisable within 60 days of the Ownership Date.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year ended December 31, 1997, officers and directors of the
Company and companies of which they are officers, directors or principal
shareholders purchased from the Company insurance on their respective explosives
manufacturing or distributing businesses on terms that management believes to be
no more favorable to the insureds than could have been obtained from
nonaffiliated sources. Management proposes to continue to sell insurance to
these persons and their affiliates in 1998.
35
<PAGE>
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).
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).
36
<PAGE>
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).
10.12 401(K) Profit Sharing Plan (8).
10.13 Amendment No. 4 to the Company's 1984 Incentive Stock Option Plan (9).
10.14 Amendment No. 2 to the Company's Non-Employee Directors' Stock Option
Plan (9).
10.15 Employment Agreement, dated January 1, 1995, by and between the
Company and Jeffry K. Amsbaugh (9).
10.16 Stock Purchase Agreement dated December 19, 1997 between the
Company, NHI, RenaissanceRe, and Renaissance U.S. Holdings, Inc. (10).
10.17 Severance Agreement dated as of May 9, 1997 among the Company, Nobel
Service Corporation, and Jeffry K. Amsbaugh (11).
10.18 Severance Agreement dated as of May 9, 1997 among the Company,
Nobel Service Corporation, and Bryan L. Martin (11).
10.19 Severance Agreement dated as of May 9, 1997 among the Company,
Nobel Service Corporation, and Thomas D. Nimmo (11).
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 (11).
27 Financial Data Schedule (11).
(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.
37
<PAGE>
(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 as an exhibit to the Current Report on Form 8-K filed on
January 6, 1998, by RenaissanceRe (Commission File No. 34-0-26512)
and incorporated by reference.
(11) 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.
Form 8-K filed January 12, 1998 reporting that on December 19, 1997
the Company entered into the Stock Purchase Agreement.
38
<PAGE>
NOBEL INSURANCE LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULES
(ITEM 14(a))
<TABLE>
<CAPTION>
Page
- -------------------------------------------------------------------------------
<S> <C>
Consolidated Financial Statements
Report of Chartered Accountants. . . . . . . . . . . . . . . . . . . . . . .40
Consolidated balance sheets as of December 31, 1997 and 1996 . . . . . . . .41
Consolidated statements of income for each of the years in
the three-year period ended December 31, 1997. . . . . . . . . . . . . . . .43
Consolidated statements of shareholders' equity for each of the years in
the three-year period ended December 31, 1997. . . . . . . . . . . . . . . .44
Consolidated statements of cash flows for each of the years in
the three-year period ended December 31, 1997. . . . . . . . . . . . . . . .45
Notes to consolidated financial statements,
December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . .47
Financial Statement Schedules
I Consolidated Summary of Investments. . . . . . . . . . . . . . . .66
II Condensed Financial Information of Registrant. . . . . . . . . . .67
III Supplementary Insurance Information . . . . . . . . . . . . . . .71
IV Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . .72
VI Supplemental Information . . . . . . . . . . . . . . . . . . . . .73
Supplementary Information (Unaudited)
Financial Highlights and Quarterly Results . . . . . . . . . . . . . . . . .75
</TABLE>
39
<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, 1997 and 1996, and the results of
their operations and cash flows for each of the years in the three-year period
ended December 31, 1997, 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.
Hamilton, Bermuda
March 25, 1998 KPMG Peat Marwick
40
<PAGE>
NOBEL INSURANCE LIMITED
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
- ---------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Investments (Note 2):
Trading portfolio, at fair value:
Fixed maturity securities (amortized cost:
1997-$69; 1996-$487) . . . . . . . . . . . . $ 75 $ 502
Equity securities (cost: 1997-$2,830; 1996-$2,611) 2,858 4,057
Other investments (cost: 1997-$37; 1996-$722) . 27 835
Securities available for sale, at fair value:
Fixed maturity securities
(amortized cost: 1997-$94,519; 1996-$100,340) . 95,725 100,970
Equity securities (cost: 1997 - $1,000;
1996-$2,045). . . . . . . . . . . . . . . . . . 1,806 2,293
Short-term investments, at cost, which
approximates fair value . . . . . . . . . . . . 18,892 12,880
------- -------
Total investments. . . . . . . . . . . . . . 119,383 121,537
Cash . . . . . . . . . . . . . . . . . . . . . . . -- 1,905
Funds held by reinsurance companies. . . . . . . . 1,640 1,702
Premiums and other receivables less allowance for
doubtful accounts ($249 in 1997 and $298
in 1996). . . . . . . . . . . . . . . . . . . . 23,003 30,693
Accrued interest income. . . . . . . . . . . . . . 1,228 1,484
Reinsurance recoverable on paid and unpaid
claims (Notes 4 and 5). . . . . . . . . . . . . 42,962 26,361
Prepaid reinsurance premiums (Note 5). . . . . . . 15,141 27,316
Property and equipment less accumulated
depreciation ($2,174 in 1997 and
$2,119 in 1996) . . . . . . . . . . . . . . . . 3,309 4,045
Deferred policy acquisition costs (Note 3) . . . . 4,445 700
Net deferred tax asset (Note 7). . . . . . . . . . 3,702 4,774
Other assets . . . . . . . . . . . . . . . . . . . 1,945 2,261
----- -----
Total assets . . . . . . . . . . . . . . . . $ 216,758 $ 222,778
------- -------
------- -------
</TABLE>
(See Accompanying Notes to Consolidated Financial Statements)
41
<PAGE>
NOBEL INSURANCE LIMITED
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN UNITED STATES DOLLARS)
(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
- ---------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
LIABILITIES
Reserve for claims and claims expenses (Note 4). . $ 82,948 $ 88,397
Unearned premiums. . . . . . . . . . . . . . . . . 34,834 40,389
Reinsurance premiums payable . . . . . . . . . . . 24,997 22,733
Accounts payable and accrued liabilities . . . . . 12,558 13,180
Cash overdraft . . . . . . . . . . . . . . . . . . 1,034 --
Other liabilities (Note 6) . . . . . . . . . . . . 4,770 4,892
------- -------
Total liabilities. . . . . . . . . . . . . . 161,141 169,591
------- -------
SHAREHOLDERS' EQUITY
Capital shares (Authorized 20,000,000 shares;
$1 par value; issued 7,808,928 shares in 1997
and 7,743,458 shares in 1996; outstanding
4,506,156 shares in 1997 and 4,471,106
shares in 1996) . . . . . . . . . . . . . . . . 7,809 7,743
Contributed surplus. . . . . . . . . . . . . . . . 44,841 44,499
Unrealized gain on investments . . . . . . . . . . 1,379 551
Retained earnings. . . . . . . . . . . . . . . . . 31,551 29,996
Treasury stock, at cost (3,302,772 shares
in 1997 and 3,272,352 shares in 1996) . . . . . (29,963) (29,602)
------- -------
Total shareholders' equity (Note 8). . . . . 55,617 53,187
------- -------
Commitments and Contingencies (Notes 2, 4, 5 and 9)
Total liabilities and shareholders' equity . $ 216,758 $ 222,778
------- -------
------- -------
</TABLE>
(See Accompanying Notes to Consolidated Financial Statements)
42
<PAGE>
NOBEL INSURANCE LIMITED
CONSOLIDATED STATEMENTS OF INCOME
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
REVENUES:
Premiums written. . . . . . . . . . . . . . . . $ 76,675 $ 83,703 $ 70,515
Reinsurance purchased . . . . . . . . . . . . . (34,190) (40,508) (22,921)
------- ------- -------
Net premiums written. . . . . . . . . . . . . . $ 42,485 $ 43,195 $ 47,594
------- ------- -------
------- ------- -------
Premiums earned . . . . . . . . . . . . . . . . $ 81,861 $ 81,420 $ 63,561
Premiums ceded. . . . . . . . . . . . . . . . . (45,996) (26,019) (20,363)
------- ------- -------
Net premiums earned . . . . . . . . . . . . . . 35,865 55,401 43,198
Net investment income (Note 2) . . . . . . . . 5,637 6,272 7,302
Net investment gains (Note 2). . . . . . . . . 2,611 762 1,412
Claim adjusting fees earned . . . . . . . . . . 5,593 10,423 9,357
------- ------- -------
Total revenues. . . . . . . . . . . . . . . . . 49,706 72,858 61,269
------- ------- -------
EXPENSES:
Claims and claims expenses (Note 4) . . . . . . 60,194 54,183 44,935
Reinsurance recoveries. . . . . . . . . . . . . 35,589 11,986 13,233
------- ------- -------
Net claims and claims expenses. . . . . . . . . 24,605 42,197 31,702
Service fees and commissions. . . . . . . . . . 7,480 16,025 10,640
Reinsurance ceding commissions. . . . . . . . . (9,874) (11,551) (8,002)
Deferred policy acquisition cost amortization . 7,254 8,909 4,354
General and administrative expenses . . . . . . 17,021 15,060 18,843
------- ------- -------
Total expenses. . . . . . . . . . . . . . . . . 46,486 70,640 57,537
------- ------- -------
Net income before income taxes. . . . . . . . . 3,220 2,218 3,732
Income tax expense (benefit) (Note 7)
Current . . . . . . . . . . . . . . . . . . . -- -- 130
Deferred. . . . . . . . . . . . . . . . . . . 765 (2,069) (2,630)
------- ------- -------
Income tax expense (benefit). . . . . . . . . 765 (2,069) (2,500)
------- ------- -------
Net income. . . . . . . . . . . . . . . . . . . $ 2,455 $ 4,287 $ 6,232
------- ------- -------
------- ------- -------
PER SHARE DATA: (Note 1)
Earnings per share:
Basic . . . . . . . . . . . . . . . . . . . . $ .55 $ .94 $ 1.08
------- ------- -------
------- ------- -------
Diluted . . . . . . . . . . . . . . . . . . . $ .53 $ .92 $ 1.06
------- ------- -------
------- ------- -------
</TABLE>
(See Accompanying Notes to Consolidated Financial Statements)
43
<PAGE>
NOBEL INSURANCE LIMITED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
UNREALIZED
GAIN TOTAL
CAPITAL SHARES CONTRIBUTED (LOSS) ON RETAINED TREASURY SHAREHOLDERS'
(IN THOUSANDS, EXCEPT SHARE DATA) OUTSTANDING AMOUNT SURPLUS INVESTMENTS EARNINGS STOCK EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1995:
Balances, beginning of year. . . . . . . . . . . 5,916,830 $7,535 $43,870 $(5,750) $ 21,536 $(10,643) $56,548
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
Year ended December 31, 1997:
Net income. . . . . . . . . . . . . . . . . . -- -- -- -- 2,455 -- 2,455
Treasury stock purchases (Note 8) . . . . . . (30,420) -- -- -- -- (361) (361)
Shares issued - exercise of stock options . . 65,470 66 342 -- -- -- 408
Change in unrealized gain (loss). . . . . . . -- -- -- 828 -- -- 828
Dividends paid stockholders . . . . . . . . . -- -- -- -- (900) -- (900)
--------- ------ ------- ------ ------- -------- -------
Balances, end of year. . . . . . . . . . . . . . 4,506,156 $ 7,809 $ 44,841 $ 1,379 $ 31,551 $(29,963) $ 55,617
--------- ------ ------- ------ ------- -------- -------
--------- ------ ------- ------ ------- -------- -------
</TABLE>
(See Accompanying Notes to Consolidated Financial Statements)
44
<PAGE>
NOBEL INSURANCE LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . $ 2,455 $ 4,287 $ 6,232
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation and amortization . . . . . . . . . . 1,666 1,296 3,990
Net realized investment gains . . . . . . . . . . (2,611) (762) (1,412)
(Gains) losses on disposal of other assets. . . . (6) 8 60
Change in deferred policy acquisition costs . . . (3,745) 2,429 (1,091)
Deferred tax expense (benefit). . . . . . . . . . 765 (2,069) (2,630)
Increase (decrease) in reserve for claims
and claims expenses. . . . . . . . . . . . . . (5,449) 6,722 17,378
Increase (decrease) in unearned premiums. . . . . (5,555) 2,283 6,954
Increase (decrease) in accounts payable and
accrued liabilities . . . . . . . . . . . . . (622) 3,277 178
Decrease in net premiums receivable . . . . . . . 9,984 8,832 1,979
(Increase) decrease in accrued interest income. . 256 (66) (199)
Increase in reinsurance recoverables. . . . . . . (16,601) (3,773) (8,183)
(Increase) decrease in prepaid reinsurance
premiums . . . . . . . . . . . . . . . . . . . 12,175 (14,490) (2,557)
(Increase) decrease in other assets . . . . . . . (7) 40 481
(Increase) decrease in funds held by
reinsurance companies. . . . . . . . . . . . . 62 1,639 (75)
Net dispositions from
trading portfolio investments. . . . . . . . . 7,317 3,098 3,236
------ ------- ------
Net cash provided from operating
activities. . . . . . . . . . . . . . . . . 84 12,751 24,341
------ ------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from investments sold or matured:
Fixed maturities, available for sale. . . . . . . 105,973 40,664 51,832
Equity securities, available for sale . . . . . . 573 -- --
Purchase of investments:
Fixed maturities, available for sale. . . . . . . (98,977) (38,365) (63,300)
Equity securities, available for sale . . . . . . (3,021) (2,045) --
Payments on acquisitions . . . . . . . . . . . . . . (6) (3) (1,222)
Purchase of software, property and equipment . . . . (588) (2,293) (3,832)
------- ------- ------
Net cash provided from (used by)
investing activities . . . . . . . . . . . . . 3,954 (2,042) (16,522)
------- ------- ------
</TABLE>
(See Accompanying Notes to Consolidated Financial Statements)
45
<PAGE>
NOBEL INSURANCE LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN UNITED STATES DOLLARS)
(CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of capital shares . . . . . 408 534 303
Proceeds from notes payable. . . . . . . . . . . . -- 3,642 1,487
Repayment of notes payable and capital
lease obligation. . . . . . . . . . . . . . . . (112) (405) (762)
Purchase of treasury stock . . . . . . . . . . . . (361) (14,097) (4,862)
Dividends paid shareholders. . . . . . . . . . . . (900) (903) (1,156)
---------- ---------- ---------
Net cash used by financing activities . . . . . (965) (11,229) (4,990)
---------- ---------- ---------
Net increase (decrease) in cash and
cash equivalents. . . . . . . . . . . . . . . . 3,073 (520) 2,829
Cash and cash equivalents
at beginning of year. . . . . . . . . . . . . . 14,785 15,305 12,476
---------- ---------- ---------
Cash and cash equivalents
at end of year. . . . . . . . . . . . . . . . . $ 17,858 $ 14,785 $ 15,305
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
(See Accompanying Notes to Consolidated Financial Statements)
46
<PAGE>
NOBEL INSURANCE LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
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-owned 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.
47
<PAGE>
NOBEL INSURANCE LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(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, 1997 and 1996. 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. (See Note 6)
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 include
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. (See Note 6.)
PREMIUMS AND RELATED EXPENSES
Premiums earned are included in earnings evenly over the terms of the
policies. Premiums are reviewed annually for each customer when renewal
quotations are prepared based on that customer's experience. The Company does
not have policies that provide for retroactive premium adjustments.
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.
48
<PAGE>
NOBEL INSURANCE LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(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
The Company adopted the requirements of Statement of Financial Accounting
Standards No. 128 "Earnings Per Share" (FAS 128) in 1997. In accordance with
FAS 128, prior year per share amounts have been adjusted to reflect earnings
per share as defined in the statement.
49
<PAGE>
NOBEL INSURANCE LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(CONTINUED)
Basic earnings per capital share were determined by dividing net income by
the average capital shares outstanding. Diluted earnings per capital share
was determined by dividing net income by diluted shares outstanding which, in
1997, 1996 and 1995, included capital and capital equivalent shares
outstanding attributable to outstanding stock options as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Basic Capital Shares Outstanding................... 4,496 4,555 5,764
Shares Applicable to Capital
Stock Equivalents................................ 119 104 137
----- ----- -----
Diluted Capital Shares Outstanding................. 4,615 4,659 5,901
----- ----- -----
----- ----- -----
</TABLE>
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 $806,000, $720,000, and $590,000 for the years ended
December 31, 1997, 1996 and 1995, 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 $837,000, $435,000, and
$892,000 for the years ended December 31, 1997, 1996, and 1995, 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
50
<PAGE>
NOBEL INSURANCE LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(CONTINUED)
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 years ending 1997 and 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.
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 reclassified
to conform to the current year presentation adopted in 1997.
51
<PAGE>
NOBEL INSURANCE LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(CONTINUED)
2. INVESTMENTS
The following is the amortized cost and estimated fair values of the
Company's trading and available for sale portfolios at December 31, 1997 and
1996 (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
1997 COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investments, Trading Portfolio:
Redeemable Preferred Stock. . . . . . . . . . . $ 69 $ 6 $ -- $ 75
Equity Securities . . . . . . . . . . . . . . . 2,830 157 129 2,858
Other Investments . . . . . . . . . . . . . . . 37 -- 10 27
------- ------ ----- -------
Total Investments, Trading Portfolio. . . $ 2,936 $ 163 $ 139 $ 2,960
------- ------ ----- -------
------- ------ ----- -------
Investments, Available for Sale:
U.S. Treasury Securities and Obligations
of U.S. Government Agencies. . . . . . . . . $ 8,627 $ 350 $ 169 $ 8,808
U.S. Government Agencies--
Mortgage-Backed Securities . . . . . . . . . 29,121 503 52 29,572
Corporate Securities. . . . . . . . . . . . . . 56,771 593 19 57,345
Equity Securities . . . . . . . . . . . . . . . 1,000 806 -- 1,806
------- ------ ----- -------
Total Investments, Available for Sale . . $95,519 $2,252 $ 240 $97,531
------- ------ ----- -------
------- ------ ----- -------
</TABLE>
<TABLE>
<CAPTION>
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
-------- ------- ----- --------
-------- ------- ----- --------
</TABLE>
52
<PAGE>
NOBEL INSURANCE LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(CONTINUED)
The amortized cost and estimated fair value of the bonds by contractual
maturity dates for the trading portfolio and the investments available for
sale as of December 31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------- ---------
<S> <C> <C>
Investments, Available for Sale:
Due in one year or less . . . . . . . . . . . . $ 575 $ 588
Due after one year through five years . . . . . 20,930 20,892
Due after five years through ten years. . . . . 34,273 34,638
Due after ten years . . . . . . . . . . . . . . 9,620 10,035
------- -------
65,398 66,153
Mortgage-Backed Securities. . . . . . . . . . . 29,121 29,572
------- -------
Total Investments Available for Sale . . $94,519 $95,725
------- -------
------- -------
</TABLE>
Equity securities and other investments included in the Company's trading
and available for sale portfolios at December 31, 1997 have no contractual
maturity.
Net investment gains and losses are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Realized, Fixed Maturities. . . . . . . $ 1,246 $ 274 $ 168
Realized, Equity Securities . . . . . . 2,809 1,085 142
Realized, Other Investments . . . . . . 106 40 41
Unrealized, Trading Portfolio . . . . . (1,550) (637) 1,061
------- ------ ------
Net Gains . . . . . . . . . . . . . . $ 2,611 $ 762 $1,412
------- ------ ------
------- ------ ------
</TABLE>
Proceeds from sales of investments classified as available for sale
during 1997, 1996, and 1995 were $106,546,000, $40,664,000, and $51,832,000,
respectively. Gross gains of $1,765,000, $546,000, and $730,000, and gross
losses of $474,000, $272,000, and $562,000 were realized on those sales in
1997, 1996, and 1995, 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):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Income On:
Fixed Maturities. . . . . . . . . . . $ 6,385 $ 6,509 $6,676
Equity Securities . . . . . . . . . . 71 223 322
Short Term Investments. . . . . . . . 629 399 532
Other . . . . . . . . . . . . . . . . 118 205 300
------- ------- ------
7,203 7,336 7,830
Investment Expenses. . . . . . . . . . . . (1,566) (1,064) (528)
------- ------- ------
Net Investment Income . . . . . . . $ 5,637 $ 6,272 $7,302
------- ------- ------
------- ------- ------
</TABLE>
53
<PAGE>
NOBEL INSURANCE LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(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):
<TABLE>
<CAPTION>
INVESTMENTS
AMORTIZED COST FAIR VALUE
-------------- ----------
<S> <C> <C>
December 31, 1997
Letters of Credit Issued $200 . . . . . . . $ 200 $ 200
Reinsurance Trust Account . . . . . . . . . . 9,455 9,606
U.S. State Insurance Deposits . . . . . . . . 5,568 5,973
------- -------
$15,223 $15,779
------- -------
------- -------
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
------- -------
------- -------
</TABLE>
54
<PAGE>
NOBEL INSURANCE LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(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):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year . . . . . . . . . . . . $ 700 $ 3,129 $ 2,038
Costs deferred during year:
Commissions and insurance taxes . . . . . . . . 16,047 14,066 10,064
Reinsurance ceding commissions. . . . . . . . . (9,874) (11,551) (8,002)
Salaries and other costs. . . . . . . . . . . . 4,826 3,965 3,383
Amortization and charge-off during year. . . . . . (7,254) (8,909) (4,354)
------- -------- --------
Balance, end of year . . . . . . . . . . . . . . . $ 4,445 $ 700 $ 3,129
------- -------- --------
------- -------- --------
</TABLE>
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.
For the years 1992 through 1994, the Company established a general IBNR
reserve to provide for possible adverse development in any of its lines of
business due to unavailability of adequate historical data and the changing
legal and legislative climate relating to tort liability. This general IBNR
reserve has been released (including releases of $1,000,000 in each of 1995
and 1996) based upon refined actuarial data and analysis and increased
claims experience.
Since 1989, the Company has 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 through 1994. In 1995, the Company strengthened its reserves
because of loss development in the current writings of its haulers program.
This strengthening was in excess of redundancies experienced on the runoff
business. In 1996, the Company again experienced favorable development. In
1997 the Company experienced adverse reserve development.
55
<PAGE>
NOBEL INSURANCE LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(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):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance at January 1. . . . . . . . . . . $88,397 $81,675 $64,297
Less reinsurance recoverables . . . . . . 22,262 19,205 12,846
------- ------- -------
Net balance at January 1. . . . . . . . . 66,135 62,470 51,451
------- ------- -------
Incurred related to:
Current year. . . . . . . . . . . . . . 22,429 43,286 30,002
Prior years. . . . . . . . . . . . . . 2,176 (1,089) 1,700
------- ------- -------
24,605 42,197 31,702
------- ------- -------
Paid related to:
Current year. . . . . . . . . . . . . . 8,405 15,635 8,788
Prior years . . . . . . . . . . . . . . 33,373 22,897 11,895
------- ------- -------
41,778 38,532 20,683
------- ------- -------
Net balance at December 31. . . . . . . . 48,962 66,135 62,470
Plus reinsurance recoverables . . . . . . 33,986 22,262 19,205
------- ------- -------
Balance at December 31. . . . . . . . . . $82,948 $88,397 $81,675
------- ------- -------
------- ------- -------
</TABLE>
The reserve deficiency in 1997 of $2,176,000 included a deficiency of
$2,404,000 for commercial casualty, and additional deficiencies of $2,639,000
for specialty surety offset by redundancy for unallocated loss adjustment
expense of $787,000, and assumed explosives business of $1,918,000. The
remaining slight deficiency for LPG runoff and personal auto, offset by
slight redundancies for personal lines and other business comprise the
remaining redundancy of $162,000.
The reserve redundancy in 1996 of $1,089,000 included a deficiency of
$4,193,000 for commercial casualty, which was offset by redundancies of
$498,000 for specialty surety, $23,000 for personal lines, $1,405,000 for
propane runoff, and $2,356,000 for the assumed explosives business. In
addition, a $1,000,000 general 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 LPGRRG Insurance, $800,000 redundancy for Fidelity
Bank Bond business, $100,000 for Personal Lines business and a general IBNR
reserve release of $1,000,000.
56
<PAGE>
NOBEL INSURANCE LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(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):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1997 1996 1995
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Direct premiums earned . . . . . . . . . . . $ 81,711 $ 81,099 $ 63,425
Assumed from other companies . . . . . . . . 150 321 136
Reinsurance purchased from
other companies . . . . . . . . . . . . . (45,996) (26,019) (20,363)
-------- -------- --------
Net premiums earned. . . . . . . . . . . . . $ 35,865 $ 55,401 $ 43,198
-------- -------- --------
-------- -------- --------
Percent of amount assumed to net . . . . . . 0.4% 0.6% 0.3%
-------- -------- --------
-------- -------- --------
</TABLE>
The reserve for claims and claim expenses at December 31, 1997 and 1996 is
shown gross of estimated amounts recoverable from other insurers of
$33,986,000 and $22,262,000, respectively; unearned premiums at December 31,
1997 and 1996 are shown gross of amounts ceded of $15,141,000 and $27,316,000
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, 1997
and 1996, reinsurance recoverables with a carrying value of approximately
$24,900,000 and $19,400,000, respectively, were associated with three
reinsurers. At December 31, 1997, reinsurance recoverable and prepaid
reinsurance balances of $1,412,000 were collateralized by funds held, trust
assets or letters of credit. During 1997 approximately $617,000 of interest
was paid to the reinsurers on the funds held by the company and not
distributed to the reinsurers under the reinsurance agreement.
57
<PAGE>
NOBEL INSURANCE LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(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 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.
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 1997, and 1996 the
Company paid the lender approximately $59,000 and $29,000 respectively, under
the swap arrangements. The Company is permitted to terminate the swap
arrangements by paying the lender the fair market value thereof. As of
December 31, 1997 the Company would have had to pay approximately $100,000 to
terminate the swap agreement. As of December 31, 1997, 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):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 1996
--------------------------------------------------------------------
<S> <C> <C>
Real Estate $ 954 $1,032
Credit Agreement Term Loan Facility 3,538 3,538
Obligations Under Capital Lease & Other -- 35
------ ------
$4,492 $4,605
------ ------
------ ------
</TABLE>
Interest expense of $336,000, $362,000, and $146,000 in 1997, 1996 and 1995,
respectively, approximated interest paid.
58
<PAGE>
NOBEL INSURANCE LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(CONTINUED)
7. INCOME TAXES
The effect of income taxes on operations is presented below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1997 1996 1995
- ------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net income before income taxes . . . . . . . $3,220 $ 2,218 $ 3,732
Non U.S. source - not subject to tax . . . . 800 4,449 2,018
------ ------- -------
U.S. source - subject to tax . . . . . . . . $2,420 $(2,231) $ 1,714
------ ------- -------
------ ------- -------
Computed "expected" tax expense
(benefit) @ 34%. . . . . . . . . . . . . . $ 823 $ (758) $ 583
Reduction for tax exempt interest. . . . . . (196) (417) --
Change in deferred tax
valuation allowance. . . . . . . . . . . . . -- (907) (4,497)
Writedown for impairment
of intangible assets . . . . . . . . . . . . -- -- 863
Amortization of goodwill . . . . . . . . . . -- -- 157
Others . . . . . . . . . . . . . . . . . . . 138 13 394
------ ------- -------
Income Tax Expense (Benefit) . . . . . . . . $ 765 $(2,069) $(2,500)
------ ------- -------
------ ------- -------
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1997 and 1996 are presented below:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 1996
- ----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to
allowance for doubtful accounts . . . . . . . . . $ 34 $ 49
Claims reserves, principally due to discounting
for tax . . . . . . . . . . . . . . . . . . . . . 1,839 2,887
Unearned premium adjustment . . . . . . . . . . . . 1,339 889
Net operating loss carryforwards. . . . . . . . . . 2,774 1,514
Other . . . . . . . . . . . . . . . . . . . . . . . 754 847
------- -------
Total gross deferred tax assets . . . . . . . . . 6,740 6,186
Deferred tax liabilities:
Deferred policy acquisition costs . . . . . . . . . (1,511) (238)
Unrealized gains bonds available for sale . . . . . (634) (327)
Other . . . . . . . . . . . . . . . . . . . . . . . (893) (847)
------- -------
Total gross deferred tax liabilities. . . . . . . (3,038) (1,412)
------- -------
Net deferred tax asset. . . . . . . . . . . . . $ 3,702 $ 4,774
------- -------
------- -------
</TABLE>
The Company made tax payments of $4,000, $50,000, and $130,000 in 1997,
1996 and 1995 respectively. At December 31, 1997, the U. S. Group had
consolidated net operating losses of approximately $8,160,000, which may be
carried forward for U. S. federal income tax purposes. Such loss
carryforwards expire beginning in 2004.
59
<PAGE>
NOBEL INSURANCE LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(CONTINUED)
Under current Bermuda law the Company is not obligated to pay any taxes
on income or gains, as such taxes in Bermuda do not exist. Further in 1987
the Company received an exemption from the Ministry of Finance in Bermuda,
that in the event of there being enacted legislation imposing tax computed on
profits, income, or capital asset gain or appreciation, or any tax in the
nature of estate duty or inheritance tax, then the imposition of such tax
shall not be applicable to the Company. This exemption shall be in effect
until March 28, 2016. There is no effect of this exemption on the financial
statements since Bermuda does not presently impose such taxes.
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, 1997, the statutory
minimum requirement was approximately $1,000,000, which was satisfied by
share capital and contributed surplus. At December 31, 1997, the Company has
accumulated earnings available to pay dividends of $37,485,000, after
adjustment for prior stock dividend transfers to contributed surplus of
$5,934,000.
Retained earnings of the property and 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 subsidiary,
as filed with regulatory authorities on the basis of statutory accounting
practices, are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1997 1996 1995
---------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory net income . . . . . . . . $ 899,000 $ 268,000 $3,806,000
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997 1996
---------------------------------------------------------------
<S> <C> <C>
Statutory shareholder's equity . . . $34,988,000 $35,513,000
</TABLE>
60
<PAGE>
NOBEL INSURANCE LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(CONTINUED)
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 1997, the Board of Directors had the authorization to purchase 336,000
Nobel shares in open market transactions. At December 31, 1997, the Company
had remaining authority to buy back up to 306,000 Nobel shares when the price
is attractive and cash is available. During 1997, the Company acquired
30,400 shares at a cost of $361,000, or an average cost of $11.875 per share.
In 1996, the Company acquired 1,188,000 shares at a cost of $14,097,000, or
an average cost of $11.87 per share. The shares purchased reduced the
capital shares outstanding and the cost of shares purchased has been deducted
from shareholders' equity. The Company is precluded from any further share
repurchase under the terms of the Stock Purchase Agreement.
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.
61
<PAGE>
NOBEL INSURANCE LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(CONTINUED)
A summary of the status of the Company's stock option plans as of
December 31, 1997, 1996 and 1995 and changes during the years ending on those
dates is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
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 385,584 $ 8.03 439,742 $ 6.57 387,900 $ 5.04
Granted 75,775 12.49 65,450 11.38 150,243 8.49
Exercised (69,340) 6.28 (119,033) 4.48 (96,444) 3.40
Forfeited (16,610) 9.01 (575) 8.03 (1,957) 5.45
------- -------- -------
Options outstanding at end of year 375,409 9.21 385,584 8.03 439,742 6.57
------- -------- -------
------- -------- -------
Options exercisable at end of year 273,493 8.74 242,477 7.32 288,394 5.77
------- -------- -------
------- -------- -------
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1997.
<TABLE>
<CAPTION>
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 - $7.625 111,491 $ 6.66 .66 107,430 $6.62
$8.00 - $12.563 263,918 10.29 2.80 166,063 10.11
------- -------
$4.00 - $12.563 375,409 9.21 2.16 273,493 8.74
------- -------
------- -------
</TABLE>
In 1997, 1996 and 1995, employee options covering 3,870, 2,300, and 4,857
shares, respectively, were exercised and the Company elected to pay the stock
appreciation value of $22,801, $15,000, and $31,400, respectively. As a
result of the exercise of employee and director options in 1997, capital
shares were increased $66,000 and contributed surplus was increased $342,000.
62
<PAGE>
NOBEL INSURANCE LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(CONTINUED)
The Company implemented Statement of Financial Accounting Standards No.
123 (FAS 123) at December 31, 1996. As provided for in FAS 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 1997, 1996 or 1995 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 FAS 123 been used:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C> <C>
Net income As reported $ 2,455 $ 4,287 $ 6,232
------- ------- -------
------- ------- -------
Pro forma $ 2,386 $ 4,224 $ 6,186
------- ------- -------
------- ------- -------
Net income per share As reported:
Basic $ 0.55 $ 0.94 $ 1.08
------- ------- -------
------- ------- -------
Diluted $ 0.53 $ 0.92 $ 1.06
------- ------- -------
------- ------- -------
Pro forma:
Basic $ 0.53 $ 0.93 $ 1.07
------- ------- -------
------- ------- -------
Diluted $ 0.52 $ 0.91 $ 1.05
------- ------- -------
------- ------- -------
</TABLE>
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 1997, 1996 and 1995, as well as the
weighted-average of the significant assumptions used in the calculation, are
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Grant-date fair value of options granted
during the year $ 1.49 $ 1.16 $ 1.27
Risk-free interest rate 5.76% 5.31% 7.10%
Expected life in years 1.32 1.10 1.82
Expected volatility 25% 25% 25%
Expected dividends $ .20 $ .20 $ .20
</TABLE>
63
<PAGE>
NOBEL INSURANCE LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
The Company rents office space under various operating leases. Rent
expense was approximately $387,000, $441,000, and $607,000 in 1997, 1996 and
1995, respectively. Future minimum lease payments under the leases are
approximately $307,000, $280,000, $256,000, $263,000, $21,000 in 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 years 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
$315,000, $305,000, and $291,000 in 1997, 1996 and 1995, respectively.
11. SUBSEQUENT EVENTS
On December 19, 1997 Nobel Insurance Limited entered into a Stock
Purchase Agreement to sell its United States assets, consisting of the stock
of its indirect wholly-owned subsidiaries (including Nobel Insurance
Company), which is held by Nobel Holdings, Inc., to a wholly owned subsidiary
of Renaissance Re Holdings, Ltd. ("Renaissance Re"), for approximately $54.1
million in cash.
Following consummation of the sale, the Company expects to liquidate
Nobel Holdings, Inc., its non-operating U.S. holding company, and to begin
the process of liquidating the Company. Ultimately, the Company expects to
distribute cash proceeds to its shareholders equal to approximately $14 per
share, representing approximately $63 million in the aggregate. Renaissance
Re has agreed to make a limited recourse loan to the Company of approximately
$8.9 million to facilitate the liquidation process, which will be governed
64
<PAGE>
NOBEL INSURANCE LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(CONTINUED)
by Bermuda law. The remaining assets, if any, after payment of the
liquidating distribution will be used to repay the loan from Renaissance Re.
Consummation of the sale and liquidation is subject to various consents
and approvals, including approval by the Company's shareholders and required
regulatory approvals.
65
<PAGE>
NOBEL INSURANCE LIMITED SCHEDULE I
CONSOLIDATED SUMMARY OF INVESTMENTS
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
AMOUNT
AT WHICH
SHOWN IN
AMORTIZED FAIR THE
TYPE OF INVESTMENT COST VALUE BALANCE SHEET
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Investments, trading portfolio:
Redeemable preferred stock. . . . . . . . $ 69 $ 75 $ 75
Equity securities . . . . . . . . . . . . 2,830 2,858 2,858
Other investments . . . . . . . . . . . . 37 27 27
----- ----- -----
Total investments, trading portfolio . $ 2,936 $ 2,960 $ 2,960
----- ----- -----
----- ----- -----
Investments, available for sale:
U.S. Treasury securities and obligations
of U.S. Government agencies. . . . . . $ 8,627 $ 8,808 $ 8,808
U.S. Government agencies
Mortgage-backed securities . . . . . . 29,121 29,572 29,572
Corporate securities. . . . . . . . . . . 56,771 57,345 57,345
Equity securities . . . . . . . . . . . . 1,000 1,806 1,806
----- ----- -----
Total investments, available for sale. $ 95,519 $ 97,531 $ 97,531
------ ------ ------
------ ------ ------
Short-term investments:
U.S. banks. . . . . . . . . . . . . . . . $ 1,466 $ 1,466 $ 1,466
Money market mutual funds . . . . . . . . 17,426 17,426 17,426
------ ------ ------
Total short term investments . . . . . $ 18,892 $ 18,892 $ 18,892
------ ------ ------
------ ------ ------
Total investments. . . . . . . . . . . $117,347 $119,383 $119,383
------- ------- -------
------- ------- -------
</TABLE>
66
<PAGE>
NOBEL INSURANCE LIMITED SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
- --------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and short-term investments. . . . . . . $ 1,458 $ 3,251
Bonds and notes available for sale . . . . . 13,443 13,674
Equity securities, trading portfolio . . . . -- 985
Investments in and equity in net assets
of subsidiaries. . . . . . . . . . . . . . 11,094 8,844
Advances to affiliates . . . . . . . . . . . 34,733 34,052
Net premiums receivable. . . . . . . . . . . 1,089 1,246
Other receivables and assets . . . . . . . . 1,784 2,138
------- --------
Total assets. . . . . . . . . . . . . . . $ 63,601 $ 64,190
------- --------
------- --------
LIABILITIES
Reserves for claims and claims expenses. . . $ 6,958 $ 10,346
Unearned premiums. . . . . . . . . . . . . . -- 1
Accounts payable and accrued liabilities . . 1,026 656
------- --------
Total liabilities . . . . . . . . . . . . 7,984 11,003
------- --------
SHAREHOLDERS' EQUITY
Capital shares . . . . . . . . . . . . . . . 7,809 7,743
Contributed surplus. . . . . . . . . . . . . 44,841 44,499
Unrealized gains on investments. . . . . . . 1,379 551
Retained earnings. . . . . . . . . . . . . . 31,551 29,996
Treasury stock . . . . . . . . . . . . . . . (29,963) (29,602)
------- --------
Total shareholders' equity. . . . . . . . 55,617 53,187
------- --------
Total liabilities and shareholders' equity $ 63,601 $ 64,190
------- --------
------- --------
</TABLE>
(See Accompanying Notes to Condensed Financial Statements.)
67
<PAGE>
NOBEL INSURANCE LIMITED SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
PARENT COMPANY ONLY STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Premiums and fees earned. . . . . . . . . $ 151 $ 124 $ 155
Net investment and other income . . . . . 1,014 1,473 2,838
----- ----- -----
Total. . . . . . . . . . . . . . . . . 1,165 1,597 2,993
----- ----- -----
EXPENSES:
Claims and claims expense . . . . . . . . (1,958) (3,171) (526)
Operating expenses. . . . . . . . . . . . 2,323 319 1,501
----- ----- -----
Total. . . . . . . . . . . . . . . . . 365 (2,852) 975
----- ----- -----
Income before equity
in earnings of subsidiaries. . . . . . . . 800 4,449 2,018
Equity in earnings of subsidiaries . . . . . 1,655 (162) 4,214
----- ----- -----
Net income . . . . . . . . . . . . . . . . . $ 2,455 $ 4,287 $ 6,232
----- ----- -----
----- ----- -----
</TABLE>
(See Accompanying Notes to Condensed Financial Statements)
68
<PAGE>
NOBEL INSURANCE LIMITED SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
PARENT COMPANY ONLY STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . $ 2,455 $ 4,287 $ 6,232
Adjustments to reconcile net income to net
cash used by operating activities:
Depreciation and amortization . . . . . . (19) (32) 2
Change in deferred acquisition costs. . . -- 1 421
Equity in undistributed (earnings) loss
of subsidiaries. . . . . . . . . . . . (1,655) 162 (4,214)
Decrease in reserve for claims
and claims expenses. . . . . . . . . . (3,388) (7,738) (4,917)
Decrease in unearned premiums . . . . . . (1) (10) (9)
Increase (decrease) in accounts payable and
accrued liabilities. . . . . . . . . . 404 (45) (39)
Realized investment and foreign
currency (gains) losses. . . . . . . . (136) (139) 18
Other-net . . . . . . . . . . . . . . . . 513 1,111 166
------ ------ ------
Net cash used by operating activities. . . . (1,827) (2,403) (2,340)
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of investments . . . . . . . . . . . 8,606 10,412 16,943
Purchase of investments. . . . . . . . . . (7,004) -- (4,170)
Advances (to) from subsidiaries. . . . . . (681) 2,468 (1,220)
------ ------ ------
Net cash provided from investing activities. 921 12,880 11,553
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in notes payable . . . . . . . . -- 103 106
Repayment of notes payable. . . . . . . . (34) (92) (107)
Purchase of treasury stock. . . . . . . . (361) (14,097) (4,862)
Dividends paid to shareholders. . . . . . (900) (903) (1,156)
Proceeds from issuance of capital shares. 408 534 303
------ ------ ------
Net cash used by
financing activities. . . . . . . . . . . (887) (14,455) (5,716)
------ ------ ------
Net increase (decrease) in cash and
cash equivalents. . . . . . . . . . . . . (1,793) (3,978) 3,497
Cash and cash equivalents at
beginning of year . . . . . . . . . . . . 3,251 7,229 3,732
------ ------ ------
Cash and cash equivalents
at end of year. . . . . . . . . . . . . . $ 1,458 $ 3,251 $ 7,229
------ ------ ------
------ ------ ------
</TABLE>
(See Accompanying Notes to Condensed Financial Statements)
69
<PAGE>
NOBEL INSURANCE LIMITED SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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 fair value in 1997 and 1996 (cost of $13,294,000 -- 1997 and
$13,756,000 -- 1996). Unrealized gain of $149,000 in 1997 and $82,000 of
unrealized loss in 1996 are recognized as a separate component of
shareholders'equity.
B. Investment and other income in 1997 and 1996 includes $302,000 and
$756,000, respectively of unrealized losses from the trading portfolio
investments.
C. Claims and claims expense shown in the statements of income for the three
years ended December 31, 1997 reflect the continued favorable runoff
experience of the Company's assumed reinsurance casualty reserves for all
years.
70
<PAGE>
NOBEL INSURANCE LIMITED SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
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>
1997
Property and casualty insurance $ 4,445 $82,948(3) $34,834(4) $41,458 $8,248(1) $24,605 $7,254(2) $14,627 $42,485
------- ---------- ---------- ------- --------- ------- --------- ------- -------
------- ---------- ---------- ------- --------- ------- --------- ------- -------
1996
Property and casualty insurance $ 700 $88,397(3) $40,389(4) $65,824 $7,034(1) $42,197 $8,909(2) $19,534 $43,195
------- ---------- ---------- ------- --------- ------- --------- ------- -------
------- ---------- ---------- ------- --------- ------- --------- ------- -------
1995
Property and casualty insurance $ 3,129 $81,675(3) $38,106(4) $52,555 $8,714(1) $31,702 $4,354(2) $21,481 $47,594
------- ---------- ---------- ------- --------- ------- --------- ------- -------
------- ---------- ---------- ------- --------- ------- --------- ------- -------
</TABLE>
(1) Includes $2,611, $762, and $1,412 in 1997, 1996 and 1995, respectively, of
net investment gains.
(2) Included in Deferred Policy Acquisition Cost Amortization in the
Consolidated Statements of Income.
(3) Gross of estimated amounts recoverable from other insurers of $33,986,
$22,262, and $19,205 in 1997, 1996 and 1995, respectively.
(4) Gross of amounts ceded of $15,141, $27,316, and $12,826 in 1997, 1996 and
1995, respectively.
71
<PAGE>
NOBEL INSURANCE LIMITED SCHEDULE IV
REINSURANCE
YEARS ENDED DECEMBER 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
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>
1997
Property and casualty insurance $81,711 $ 150 $45,996 $35,865 0.4%
-------- ---------- ---------- --------
-------- ---------- ---------- --------
1996
Property and casualty insurance $81,099 $ 321 $26,019 $55,401 0.6%
-------- ---------- ---------- --------
-------- ---------- ---------- --------
1995
Property and casualty insurance $63,425 $ 136 $20,363 $43,198 0.3%
-------- ---------- ---------- --------
-------- ---------- ---------- --------
</TABLE>
72
<PAGE>
NOBEL INSURANCE LIMITED SCHEDULE VI
SUPPLEMENTAL INFORMATION
YEARS ENDED DECEMBER 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
RESERVE
FOR DISCOUNT INCURRED PAID
CLAIMS DEDUCTED LOSSES CLAIMS
AND FROM ------------------- AND
CLAIM CLAIM CURRENT PRIOR CLAIM
EXPENSES RESERVES YEAR YEAR EXPENSES
------------ -------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
1997 (1)$ 82,948 $ 595 $ 22,999 $ 1,606 $ 41,778
------------ -------- -------- --------- ----------
------------ -------- -------- --------- ----------
1996 (1)$ 88,397 $ 707 $ 43,286 $ (1,089) $ 38,532
------------ -------- -------- --------- ----------
------------ -------- -------- --------- ----------
1995 (1)$ 81,675 $ 844 $ 30,002 $ 1,700 $ 20,683
------------ -------- -------- --------- ----------
------------ -------- -------- --------- ----------
</TABLE>
(1) Gross of estimated amounts recoverable from other insurers of $33,986,
$22,262, and $19,205 in 1997, 1996 and 1995, respectively.
(2) Other information required to be presented in Schedule VI is presented in
Schedule III and not included here.
73
<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 25, 1998
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 25, 1998 /s/ Robert C. Duvall
--------------------------
Robert C. Duvall,
Chairman of the Board and Director
Date: March 25, 1998 /s/ Jeffry K. Amsbaugh
--------------------------
Jeffry K. Amsbaugh,
President, Chief Executive
Officer and Director
(principal executive officer)
Date: March 25, 1998 /s/ Thomas D. Nimmo
--------------------------
Thomas D. Nimmo,
Senior Vice President
(principal financial officer)
Date: March 25, 1998 /s/ Gregory E. Leonard
--------------------------
Gregory E. Leonard,
Director
Date: March 25, 1998 /s/ Thomas J. O'Shane
--------------------------
Thomas J. O'Shane,
Director
Date: March 25, 1998 /s/ Roger T. Rankin
--------------------------
Roger T. Rankin,
Director
Date: March 25, 1998 /s/ Robert B. Sanborn
--------------------------
Robert B. Sanborn,
Director
74
<PAGE>
FINANCIAL HIGHLIGHTS (UNAUDITED)
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE) 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- -------------------------------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues *...................... $49,706 $72,858 $61,269 $50,253 $38,193 $26,590 $22,775 $31,209 $56,459 $69,671
Expenses **..................... 46,486 70,640 57,537 34,878 28,265 7,518 13,915 26,517 67,119 87,288
Net income (loss)............... 2,455 4,287 6,232 15,375 9,928 19,072 8,860 4,692 (10,660) (17,617)
Net income (loss) per diluted
capital share.................. .53 .92 1.06 2.37 1.43 2.89 1.30 .75 (2.02) (3.30)
Diluted - average capital shares
outstanding.................... 4,615 4,659 5,901 6,478 6,947 6,599 6,802 6,228 5,283 5,341
Year-end shareholders'..........
equity......................... 55,617 53,187 64,908 56,548 54,479 46,114 25,711 18,378 8,866 19,624
Return on average
shareholders' equity........... 4%(1) 8% (1) 10% 28% 20% 53% 40% 34% (75%) (59%)
Book value per
capital share.................. 12.34 11.90 11.71 9.56 8.32 6.81 3.92 2.63 1.68 3.69
*Includes net investment
gains (losses)................. 2,611 762 1,412 489 253 418 3,607 83 (1,015) 1,254
Diluted - per capital share..... .57 .16 .24 .08 .04 .06 .53 .01 (.19) .23
**Includes redundancy (deficiency)
from revisions to estimates
of prior years' claims........ (2,176) 1,089 (1,700) 8,900 6,992 15,610 4,922 1,221 9,491 (12,406)
Diluted - per capital share..... (.48) .23 (.29) 1.37 1.01 2.37 .72 .20 1.80 (2.32)
</TABLE>
(1) Computation method changed from beginning and ending balances divided by
two to the average of twelve individual months.
QUARTERLY RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
(IN THOUSANDS, EXCEPT PER SHARE) 1997 1996 1997 1996 1997 1996 1997 1996
- -------------------------------------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues *............................ $11,458 $18,763 $12,042 $18,085 $14,584 $22,416 $11,622 $13,594
Expenses **........................... 9,600 17,235 11,550 15,935 12,365 21,939 12,971 15,531
Net income (loss)..................... 1,210 1,406 397 1,961 1,574 650 (726) 270
Diluted net income (loss) per
capital share....................... .26 .29 .08 .42 .34 .14 (.16) .06
* Includes net realized investment
gains (losses).................... 131 212 412 188 1,339 101 729 261
Diluted - per capital share.......... .03 .04 .09 .04 .28 .02 .16 .06
**Includes redundancy (deficiency)
from revisions to estimates of
prior years' claims reserves....... 204 (626) (1,274) (766) (574) 2,842 (532) (361)
Diluted - per capital share.......... .04 (.13) (.28) (.16) (.12) .62 (.12) (.08)
</TABLE>
75
<PAGE>
INDEX TO EXHIBITS
10.17 Severance Agreement dated as of May 9, 1997 among the Company, Nobel
Service Corporation, and Jeffry K. Amsbaugh.
10.18 Severance Agreement dated as of May 9, 1997 among the Company, Nobel
Service Corporation, and Bryan L. Martin.
10.19 Severance Agreement dated as of May 9, 1997 among the Company, Nobel
Service Corporation, and Thomas D. Nimmo.
23 Consents of independent auditors to incorporation by reference of
certain reports into the Registrant's Registration Statement on
Form S-8.
27 Financial Data Schedule.
76
<PAGE>
EXHIBIT 10.17
<PAGE>
SEVERANCE AGREEMENT
THIS AGREEMENT, dated as of May 9, 1997, is made by and between Nobel
Insurance Limited, a Bermuda corporation ("Nobel"), Nobel Service Corporation, a
Delaware corporation (the "Company"), and Jeffry K. Amsbaugh (the "Executive").
WHEREAS, the Company and Nobel consider it essential to their best
interests and the best interests of Nobel's stockholders to foster the continued
employment of key Company management personnel; and
WHEREAS, the Board of Directors of the Company and the Board of
Directors of Nobel (together, the "Boards") recognize that, as is the case with
many publicly held corporations like Nobel, the possibility of a Change in
Control (as defined in the last Section hereof) exists and that such
possibility, and the uncertainty and questions which it may raise among
management, may result in the departure or distraction of management personnel
to the detriment of the Company and of Nobel and its stockholders; and
WHEREAS, the Boards have determined that appropriate steps should be
taken to reinforce and encourage the continued attention and dedication of
members of the Company's management, including the Executive, to their assigned
duties without distraction in the face of potentially disturbing circumstances
arising from the possibility of a Change in Control;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, Nobel, the Company and the Executive hereby agree as
follows:
1. DEFINED TERMS. The definitions of capitalized terms used in this
Agreement are provided in the last Section hereof.
2. TERM OF AGREEMENT. The Term of this Agreement shall commence on the
date hereof and shall continue in effect through the second anniversary of its
commencement date; provided, however, that if, without the prior occurrence of a
Change in Control of Nobel, Nobel shall
<PAGE>
cease to own the majority of the outstanding shares of the Company's common
stock, the Agreement shall terminate on the date of such cessation; and further
provided, however, that if a Change in Control shall have occurred during the
Term, this Agreement shall continue in effect for a period of not less than
twenty-four (24) months beyond the month in which such Change in Control
occurred (or, if later, twenty-four (24) months beyond the consummation of the
transaction the approval of which by Nobel's stockholders constitutes a Change
in Control under Section 15(G)(III) or (IV) hereof).
3. COMPANY'S COVENANTS SUMMARIZED. In order to induce the Executive to
remain in the employ of the Company and in consideration of the Executive's
covenants set forth in Section 4 hereof, the Company and Nobel agree, under the
conditions described herein, to pay the Executive the Severance Payments and the
other payments and benefits described herein. Except as provided in Section 9.1
hereof, no amount or benefit shall be payable under this Agreement unless there
shall have been (or, under the terms of the second sentence of Section 6.1
hereof, there shall be deemed to have been) a termination of the Executive's
employment with the Company following a Change in Control and during the Term.
This Agreement shall not be construed as creating an express or implied contract
of employment and, except as otherwise agreed in writing between the Executive
and the Company, the Executive shall not have any right to be retained in the
employ of the Company.
4. THE EXECUTIVE'S COVENANTS. The Executive agrees that, subject to
the terms and conditions of this Agreement, in the event of a Potential Change
in Control during the Term, the Executive will remain in the employ of the
Company until the earliest of (i) a date which is six (6) months from the date
of such Potential Change of Control, (ii) the date of a Change in Control, (iii)
the date of termination by the Executive of the Executive's employment for Good
Reason or by reason of death, Disability or Retirement, or (iv) the termination
by the Company of the Executive's employment for any reason.
2
<PAGE>
5. COMPENSATION OTHER THAN SEVERANCE PAYMENTS.
5.1 Following a Change in Control and during the Term, during any
period that the Executive fails to perform the Executive's full-time duties with
the Company as a result of incapacity due to physical or mental illness, the
Company (and/or Nobel) shall pay the Executive's full salary to the Executive at
the rate in effect at the commencement of any such period, together with all
compensation and benefits payable to the Executive under the terms of any
compensation or benefit plan, program or arrangement maintained by the Company
or Nobel during such period, until the Executive's employment is terminated by
the Company for Disability.
5.2 If the Executive's employment shall be terminated for any reason
following a Change in Control and during the Term, the Company (and/or Nobel)
shall pay the Executive's full salary to the Executive through the Date of
Termination at the rate in effect at the time the Notice of Termination is
given, together with all compensation and benefits payable to the Executive
through the Date of Termination under the terms of the Company's (and Nobel's)
compensation and benefit plans, programs or arrangements.
5.3 If the Executive's employment shall be terminated for any reason
following a Change in Control and during the Term, the Company (and/or Nobel)
shall pay to the Executive the Executive's normal post-termination compensation
and benefits as such payments become due. Such post-termination compensation and
benefits shall be determined under, and paid in accordance with, the Company's
(and Nobel's) retirement, insurance and other compensation or benefit plans,
programs and arrangements as in effect immediately prior to the Change in
Control or, to the extent more favorable to the Executive, as in effect
immediately prior to the Date of Termination.
6. SEVERANCE PAYMENTS.
6.1 Subject to Section 6.2 hereof, the Company or Nobel shall pay the
Executive the payments described in this Section 6.1 (the "Severance Payments")
upon the termination of the Executive's employment following a Change in Control
and during the Term, in addition to any payments and benefits to which the
Executive is entitled under Section 5 hereof, unless such termination is (i) by
the Company for Cause, (ii) by reason of death, Disabili
3
<PAGE>
ty, or (iii) by the Executive without Good Reason. For purposes of this
Agreement, the Executive's employment shall be deemed to have been terminated
following a Change in Control by the Company without Cause or by the Executive
with Good Reason, if (i) the Executive's employment is terminated by the Company
without Cause prior to a Change in Control (which actually occurs during the
Term of this Agreement) and such termination was at the request or direction of
a Person who has entered into an agreement with the Company the consummation of
which would constitute a Change in Control, (ii) the Executive terminates his
employment with Good Reason prior to a Change in Control (which actually occurs
during the Term of this Agreement) and the circumstance or event which
constitutes Good Reason occurs at the request or direction of such Person, or
(iii) the Executive's employment is terminated by the Company without Cause
prior to a Change in Control and the Executive reasonably demonstrates that such
termination is otherwise in connection with or in anticipation of a Change in
Control which actually occurs during the term of this Agreement. For purposes of
any determination regarding the applicability of the immediately preceding
sentence, any position taken by the Executive shall be presumed to be correct
unless the Company establishes to the Committee by clear and convincing evidence
that such position is not correct. In lieu of any further salary payments to the
Executive for periods subsequent to the Date of Termination and in lieu of any
severance benefit otherwise payable to the Executive (whether under any
employment agreement, severance plan or otherwise), the Company or Nobel shall
pay to the Executive a lump sum severance payment, in cash, equal to three times
the higher of the Executive's annual base salary in effect immediately prior to
the occurrence of the event or circumstance upon which the Notice of Termination
is based and the Executive's annual base salary in effect immediately prior to
the Change in Control.
The multiple of "three" used in calculating the lump sum severance payment
under the immediately preceding paragraph shall be subject to reduction as
follows:
The "three" shall stand for a deemed severance period of three years, which
shall be reduced for any period of the Executive's employment by the
Company which follows a Change in Control up to and including the Date of
Termination hereunder (even if the Date of Termination is an extended Date
of
4
<PAGE>
Termination pursuant to Section 7.3 hereof). For example, if the Executive
terminates his employment for Good Reason and his Date of Termination is
364 days after the Change in Control, the multiple of "three" will be
reduced to a multiple of "two and 1/365".
6.2 (A) Notwithstanding any other provisions of this Agreement, in
the event that any payment or benefit received or to be received by the
Executive in connection with a Change in Control or the termination of the
Executive's employment (whether pursuant to the terms of this Agreement or
any other plan, arrangement or agreement with Nobel, the Company, any Person
whose actions result in a Change in Control or any Person affiliated with
Nobel, the Company or such Person) (all such payments and benefits, including
the Severance Payments, being hereinafter called "Total Payments") would not
be deductible (in whole or part), by Nobel, the Company, an affiliate or
Person making such payment or providing such benefit as a result of section
280G of the Code, then, to the extent necessary to make such portion of the
Total Payments deductible (and after taking into account any reduction in the
Total Payments provided by reason of section 280G of the Code in such other
plan, arrangement or agreement), the Severance Payments shall be reduced (if
necessary, to zero).
(B) For purposes of this limitation, (i) no portion of the Total
Payments the receipt or enjoyment of which the Executive shall have effectively
waived in writing at such time and in such manner that such portion does not
constitute a "payment" within the meaning of section 280G(b) of the Code shall
be taken into account, (ii) no portion of the Total Payments shall be taken into
account which, in the opinion of tax counsel ("Tax Counsel") reasonably
acceptable to the Executive and selected by the accounting firm which was,
immediately prior to the Change in Control, the Company's or Nobel's independent
auditor (the "Auditor"), does not constitute a "parachute payment" within the
meaning of section 280G(b)(2) of the Code, including by reason of section
280G(b)(4)(A) of the Code, (iii) the Severance Payments shall be reduced only to
the extent necessary so that the Total Payments (other than those referred to in
clauses (i) or (ii)) in their entirety constitute reasonable compensation for
services actually rendered within the meaning of section 280G(b)(4)(B) of the
Code or are otherwise not subject to disallowance as deductions by
5
<PAGE>
reason of section 280G of the Code, in the opinion of Tax Counsel, and (iv) the
value of any noncash benefit or any deferred payment or benefit included in the
Total Payments shall be determined by the Auditor in accordance with the
principles of sections 280G(d)(3) and (4) of the Code.
(C) If it is established pursuant to a final determination of a
court or an Internal Revenue Service proceeding that, notwithstanding the good
faith of the Executive, Nobel and the Company in applying the terms of this
Section 6.2, the aggregate "parachute payments" paid to or for the Executive's
benefit are in an amount that would result in any portion of such "parachute
payments" not being deductible by reason of section 280G of the Code, then the
Executive shall have an obligation to pay the Company (or Nobel, whichever is
the lender) upon demand an amount equal to the lesser of the Severance Payments
or the sum of (i) the excess of the aggregate "parachute payments" paid to or
for the Executive's benefit over the aggregate "parachute payments" that could
have been paid to or for the Executive's benefit without any portion of such
"parachute payments" not being deductible by reason of section 280G of the Code;
and (ii) interest on the amount set forth in clause (i) of this sentence at the
rate provided in section 1274(b)(2)(B) of the Code from the date of the
Executive's receipt of such excess until the date of such payment.
6.3 The payments provided in Section 6.1 hereof shall be made not
later than the fifth day following the Date of Termination; provided, however,
that if the amounts of such payments, and the limitation on such payments set
forth in Section 6.2 hereof, cannot be finally determined on or before such day,
Nobel or the Company shall pay to the Executive on such day an estimate, as
determined in good faith by Nobel or the Company, as the case may be, of the
minimum amount of such payments to which the Executive is clearly entitled and
shall pay the remainder of such payments (together with interest on the unpaid
remainder (or on all such payments to the extent Nobel and the Company fail to
make such payments when due) at 120` of the rate provided in section
1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but
in no event later than the thirtieth (30th) day after the Date of Termination.
In the event that the amount of the estimated payments exceeds the amount
subsequently determined to have been
6
<PAGE>
due, such excess shall constitute a loan by Nobel (or the Company, as the case
may be) to the Executive, payable on the fifth (5th) business day after demand
by the Company (together with interest at 120% of the rate provided in section
1274(b)(2)(B) of the Code). At the time that payments are made under this
Section, Nobel (or the Company, as the case may be) shall provide the Executive
with a written statement setting forth the manner in which such payments were
calculated and the basis for such calculations including, without limitation,
any opinions or other advice Nobel (or the Company, as the case may be) has
received from Tax Counsel, the Auditor or other advisors or consultants (and any
such opinions or advice which are in writing shall be attached to the
statement).
6.4 The Company or Nobel also shall pay to the Executive all legal
fees and expenses incurred by the Executive in disputing in good faith any issue
hereunder relating to the termination of the Executive's employment, in seeking
in good faith to obtain or enforce any benefit or right provided by this
Agreement or in connection with any tax audit or proceeding to the extent
attributable to the application of section 4999 of the Code to any payment or
benefit provided hereunder; provided, however, that such payment shall be made
only if the Executive shall ultimately prevail on one or more of the substantive
issues involved in the controversy. Such payments shall be made within five (5)
business days after delivery of the Executive's written requests for payment
accompanied with such evidence of fees and expenses incurred (and the ultimate
disposition of the controversy) as the Company reasonably may require.
6.5 Any obligation to pay, or to provide a benefit for, the Executive
under the provisions of this Agreement which is stated to be the obligation of
either Nobel or the Company shall be the joint and several obligation of both
Nobel and the Company.
7. TERMINATION PROCEDURES AND COMPENSATION DURING DISPUTE.
7.1 NOTICE OF TERMINATION. After a Change in Control and during the
Term, any purported termination of the Executive's employment (other than by
reason of death) shall be communicated by written Notice of Termination from the
Executive or the Company to both of the other parties hereto in accordance with
Section 10 here
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of. For purposes of this Agreement, a "Notice of Termination" shall mean a
notice which shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Executive's employment under
the provision so indicated. Further, a Notice of Termination for Cause is
required to include a copy of a resolution duly adopted by the affirmative vote
of not less than three-quarters (3/4) of the entire membership of the Board at a
meeting of the Board which was called and held for the purpose of considering
such termination (after reasonable notice to the Executive and an opportunity
for the Executive, together with the Executive's counsel, to be heard before the
Board) finding that, in the good faith opinion of the Board, the Executive was
guilty of conduct set forth in clause (i) or (ii) of the definition of Cause
herein, and specifying the particulars thereof in detail.
7.2 DATE OF TERMINATION. "Date of Termination," with respect to any
purported termination of the Executive's employment after a Change in Control
and during the Term, shall mean (i) if the Executive's employment is terminated
for Disability, thirty (30) days after Notice of Termination is given (provided
that the Executive shall not have returned to the full-time performance of the
Executive's duties during such thirty (30) day period), and (ii) if the
Executive's employment is terminated for any other reason, the date specified in
the Notice of Termination (which, in the case of a termination by the Company,
shall not be less than thirty (30) days (except in the case of a termination for
Cause) and, in the case of a termination by the Executive, shall not be less
than fifteen (15) days nor more than sixty (60) days, respectively, from the
date such Notice of Termination is given).
7.3 DISPUTE CONCERNING TERMINATION. If within fifteen (15) days after
any Notice of Termination is given, or, if later, prior to the Date of
Termination (as determined without regard to this Section 7.3), the party
receiving such Notice of Termination notifies the other parties that a dispute
exists concerning the termination, the Date of Termination shall be extended
until the date on which the dispute is finally resolved, either by mutual
written agreement of the parties or by a final judgment, order or decree of an
arbitrator or a court of competent jurisdiction (which is not appealable or with
respect to which the time for appeal therefrom
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has expired and no appeal has been perfected); provided, however, that the Date
of Termination shall be extended by a notice of dispute given by the Executive
only if such notice is given in good faith and the Executive pursues the
resolution of such dispute with reasonable diligence.
7.4 COMPENSATION DURING DISPUTE. If a purported termination occurs
following a Change in Control and during the Term and the Date of Termination is
extended in accordance with Section 7.3 hereof, Nobel or the Company shall
continue to pay the Executive the full compensation in effect when the notice
giving rise to the dispute was given (including, but not limited to, salary) and
continue the Executive as a participant in all compensation, benefit and
insurance plans in which the Executive was participating when the notice giving
rise to the dispute was given, until the Date of Termination, as determined in
accordance with Section 7.3 hereof. Amounts paid under this Section 7.4 are in
addition to all other amounts due under this Agreement (other than those due
under Section 5.2 hereof) and shall not be offset against or reduce any other
amounts due under this Agreement.
8. NO MITIGATION. Nobel and the Company agrees that, if the
Executive's employment with the Company terminates during the Term, the
Executive is not required to seek other employment or to attempt in any way to
reduce any amounts payable to the Executive by Nobel or the Company pursuant to
Section 6 hereof or Section 7.4 hereof. Further, the amount of any payment or
benefit provided for in this Agreement shall not be reduced by any compensation
earned by the Executive as the result of employment by another employer, by
retirement benefits, by offset against any amount claimed to be owed by the
Executive to Nobel or the Company, or otherwise.
9. SUCCESSORS; BINDING AGREEMENT.
9.1 In addition to any obligations imposed by law upon any successor
to Nobel or the Company, Nobel and the Company will require any successor
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of either corporation to
expressly assume and agree to perform this Agreement in the same manner and to
the same extent that such corporation would be required to perform it if no such
succession had taken place.
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Failure of Nobel or the Company to obtain such assumption and agreement prior to
the effectiveness of any such succession shall be a breach of this Agreement and
shall entitle the Executive to compensation from Nobel or the Company in the
same amount and on the same terms as the Executive would be entitled to
hereunder if the Executive were to terminate the Executive's employment for Good
Reason after a Change in Control, except that, for purposes of implementing the
foregoing, the date on which any such succession becomes effective shall be
deemed the Date of Termination.
9.2 This Agreement shall inure to the benefit of and be enforceable by
the Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If the Executive shall
die while any amount would still be payable to the Executive hereunder (other
than amounts which, by their terms, terminate upon the death of the Executive)
if the Executive had continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement to
the executors, personal representatives or administrators of the Executive's
estate.
10. NOTICES. For the purpose of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed, if to the
Executive, to the address inserted below the Executive's signature on the final
page hereof and, if to Nobel or the Company, to the respective address set forth
below, or to such other address as any party may have furnished to the others in
writing in accordance herewith, except that notice of change of address shall be
effective only upon actual receipt:
To Nobel:
Nobel Insurance Limited
108 Pitts Bay Road
Hamilton, Bermuda HMAX
Attention: President
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To the Company:
Nobel Service Corporation
8001 LBJ Freeway, Suite 300
Dallas, TX 75251-1301
Attention: President
11. MISCELLANEOUS. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing and signed by the Executive and such officers of Nobel and the
Company as may be specifically designated by the respective Boards. No waiver by
any party hereto at any time of any breach by any other party hereto of, or of
any lack of compliance with, any condition or provision of this Agreement to be
performed by such other party shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or subsequent time. This
Agreement supersedes any other agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof which have been
made by either party. The validity, interpretation, construction and performance
of this Agreement shall be governed by the laws of the State of Texas. All
references to sections of the Exchange Act or the Code shall be deemed also to
refer to any successor provisions to such sections. Any payments provided for
hereunder shall be paid net of any applicable withholding required under
federal, state or local law and any additional withholding to which the
Executive has agreed. The obligations of Nobel, the Company and the Executive
under this Agreement which by their nature may require either partial or total
performance after the expiration of the Term (including, without limitation,
those under Sections 6 and 7 hereof) shall survive such expiration.
12. VALIDITY. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
13. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
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14. SETTLEMENT OF DISPUTES: ARBITRATION.
14.1 All claims by the Executive for benefits under this Agreement
shall be directed to and determined by the Committee and shall be in writing.
Any denial by the Committee of a claim for benefits under this Agreement shall
be delivered to the Executive in writing and shall set forth the specific
reasons for the denial and the specific provisions of this Agreement relied
upon. The Committee shall afford a reasonable opportunity to the Executive for a
review of the decision denying a claim and shall further allow the Executive to
appeal to the Committee a decision of the Committee within sixty (60) days after
notification by the Committee that the Executive's claim has been denied.
14.2 Any further dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
Dallas, Texas in accordance with the rules of the American Arbitration
Association then in effect; provided, however, that the evidentiary standards
set forth in this Agreement shall apply. Judgment may be entered on the
arbitrator's award in any court having jurisdiction. Notwithstanding any
provision of this Agreement to the contrary, the Executive shall be entitled to
seek specific performance of the Executive's right to be paid until the Date of
Termination during the pendency of any dispute or controversy arising under or
in connection with this Agreement.
15. DEFINITIONS. For purposes of this Agreement, the following terms
shall have the meanings indicated below:
(A) "Affiliate" shall have the meaning set forth in Rule 12b-2
promulgated under Section 12 of the Exchange Act.
(B) "Auditor" shall have the meaning set forth in Section 6.2 hereof.
(C) "Base Amount" shall have the meaning set forth in section
280G(b)(3) of the Code.
(D) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3
under the Exchange Act.
(E) "Boards" shall mean the Board of Directors of the Company and the
Board of Directors of Nobel.
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(F) "Cause" for termination by the Company of the Executive's
employment shall mean (i) the willful and continued failure by the Executive to
substantially perform the Executive's duties with the Company (other than any
such failure resulting from the Executive's incapacity due to physical or mental
illness or any such actual or anticipated failure after the issuance of a Notice
of Termination for Good Reason by the Executive pursuant to Section 7.1 hereof)
after a written demand for substantial performance is delivered to the Executive
by the Board of Directors of the Company, which demand specifically identifies
the manner in which the Board believes that the Executive has not substantially
performed the Executive's duties, or (ii) the willful engaging by the Executive
in conduct which is demonstrably and materially injurious to Nobel, the Company
or their subsidiaries, monetarily or otherwise. For purposes of clauses (i) and
(ii) of this definition, (x) no act, or failure to act, on the Executive's part
shall be deemed "willful" unless done, or omitted to be done, by the Executive
not in good faith and without reasonable belief that the Executive's act, or
failure to act, was in the best interest of Nobel and the Company and (y) in the
event of a dispute concerning the application of this provision, no claim by the
Company that Cause exists shall be given effect unless the Company establishes
to the Committee by clear and convincing evidence that Cause exists.
(G) A "Change in Control" shall mean a change in control of Nobel,
which shall be deemed to have occurred if the event set forth in any one of the
following paragraphs shall have occurred:
(I) any Person is or becomes the Beneficial Owner, directly
or indirectly, of securities of Nobel (not including in the securities
beneficially owned by such Person any securities acquired directly
from Nobel or its affiliates) representing 25% or more of the combined
voting power of Nobel's then outstanding securities, excluding any
Person who becomes such a Beneficial Owner in connection with a
transaction described in clause (i) of paragraph (III) below; or
(II) the following individuals cease for any reason to
constitute a majority of the number of directors then serving on the
Board of Directors of Nobel: individuals who, on the
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date hereof, constitute such Board and any new director (other than a
director whose initial assumption of office is in connection with an
actual or threatened election contest, including but not limited to a
consent solicitation, relating to the election of directors of Nobel)
whose appointment or election by the Board of Directors of Nobel or
nomination for election by Nobel's stockholders was approved or
recommended by a vote of at least two-thirds (2/3) of the directors of
Nobel then still in office who either were directors on the date
hereof or whose appointment, election or nomination for election was
previously so approved or recommended; or
(III) the stockholders of Nobel approve a merger or
consolidation of Nobel with any other corporation or the issuance of
voting securities of Nobel in connection with a merger or
consolidation of Nobel (or any direct or indirect subsidiary of Nobel)
pursuant to applicable stock exchange requirements, other than (i) a
merger or consolidation which would result in the voting securities of
Nobel outstanding immediately prior to such merger or consolidation
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity or any parent
thereof), in combination with the ownership of any trustee or other
fiduciary holding securities under an employee benefit plan of Nobel
or any subsidiary of Nobel, at least 75% of the combined voting power
of the securities of Nobel or such surviving entity or any parent
thereof outstanding immediately after such merger or consolidation, or
(ii) a merger or consolidation effected to implement a
recapitalization of Nobel (or similar transaction) in which no Person
is or becomes the Beneficial Owner, directly or indirectly, of
securities of Nobel (not including in the securities Beneficially
Owned by such Person any securities acquired directly from Nobel or
its Affiliates other than in connection with the acquisition by Nobel
or its Affiliates of a business) representing 25% or more of the
combined voting power of Nobel's then outstanding securities; or
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(IV) the stockholders of Nobel approve a plan of complete
liquidation or dissolution of Nobel or an agreement for the sale or
disposition by Nobel of all or substantially all of Nobel's assets,
other than a sale or disposition by Nobel of all or substantially all
of Nobel's assets to an entity, at least 75% of the combined voting
power of the voting securities of which are owned by stockholders of
Nobel in substantially the same proportions as their ownership of
Nobel immediately prior to such sale.
(H) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
(I) "Committee" shall mean (i) the individuals (not fewer than three
in number) who, on the date six months before a Change in Control, constitute
the Compensation Committee of the Board of Directors of Nobel, plus (ii) in the
event that fewer than three individuals are available from the group specified
in clause (i) above for any reason, such individuals as may be appointed by the
individual or individuals so available (including for this purpose any
individual or individuals previously so appointed under this clause (ii));
provided, however, that the maximum number of individuals constituting the
Committee shall not exceed five.
(J) "Company" shall mean Nobel Service Corporation and shall include
any successor to its business and/or assets which assumes and agrees to perform
this Agreement by operation of law, or otherwise.
(K) "Date of Termination" shall have the meaning set forth in Section
7.2 hereof.
(L) "Disability" shall be deemed the reason for the termination by the
Company of the Executive's employment, if, as a result of the Executive's
incapacity due to physical or mental illness, the Executive shall have been
absent from the full-time performance of the Executive's duties with the Company
for a period of six (6) consecutive months, the Company shall have given the
Executive a Notice of Termination for Disability, and, within thirty (30) days
after such Notice of Termination is given, the Executive shall not have returned
to the full-time performance of the Executive's duties.
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(M) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
(N) "Executive" shall mean the individual named in the first paragraph
of this Agreement.
(O) "Good Reason" for termination by the Executive of the Executive's
employment shall mean the occurrence (without the Executive's express prior
written consent) after any Change in Control, or prior to a Change in Control
under the circumstances described in clause (ii) of the second sentence of
Section 6.1 hereof (treating all references in paragraphs (I) through (VII)
below to a "Change in Control" as references to a "Potential Change in
Control"), of any one of the following acts by Nobel or the Company, or failures
by Nobel or the Company to act, unless, in the case of any act or failure to act
described in paragraph (I), (V), (VI) or (VII) below, such act or failure to act
is corrected prior to the Date of Termination specified in the Notice of
Termination given in respect thereof:
(I) the assignment to the Executive of any duties
inconsistent with the Executive's status as an executive officer of
the Company or a substantial adverse alteration in the nature or
status of the Executive's responsibilities from those in effect
immediately prior to the Change in Control (other than any such
alteration primarily attributable to the fact that Nobel may no longer
be a public company);
(II) a reduction by the Company in the Executive's annual
base salary as in effect on the date hereof or as the same may be
increased from time to time;
(III) the relocation of the Executive's principal place of
employment to a location more than fifty (50) miles from the
Executive's principal place of employment immediately prior to the
Change in Control or the Company's requiring the Executive to be based
anywhere other than such principal place of employment (or permitted
relocation thereof) except for required travel on the Company's
business to an extent substantially consistent with the Executive's
present business travel obligations;
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(IV) the failure by Nobel or the Company to pay to the
Executive any portion of the Executive's current compensation, or to
pay to the Executive any portion of an installment of deferred
compensation under any deferred compensation program of Nobel or the
Company, within seven (7) days of the date such compensation is due;
(V) the failure by Nobel or the Company to continue in
effect any compensation plan in which the Executive participates
immediately prior to the Change in Control which is material to the
Executive's total compensation or any substitute plans adopted prior
to the Change in Control, unless an equitable arrangement (embodied in
an ongoing substitute or alternative plan) has been made with respect
to such plan, or the failure by the Company to continue the
Executive's participation therein (or in such substitute or
alternative plan) on a basis not materially less favorable, both in
terms of the amount or timing of payment of benefits provided and the
level of the Executive's participation relative to other participants,
as existed immediately prior to the Change in Control;
(VI) the failure by Nobel or the Company to continue to
provide the Executive with benefits substantially similar to those
enjoyed by the Executive under any of the pension, savings, life
insurance, medical, health and accident, or disability plans of Nobel
or the Company in which the Executive was participating immediately
prior to the Change in Control, the taking of any action by the
Company which would directly or indirectly materially reduce any of
such benefits or deprive the Executive of any material fringe benefit
enjoyed by the Executive at the time of the Change in Control, or the
failure by the Company to provide the Executive with the number of
paid vacation days to which the Executive is entitled on the basis of
years of service with the Company in accordance with the Company's
normal vacation policy in effect at the time of the Change in Control;
or
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(VII) any purported termination of the Executive's
employment which is not effected pursuant to a Notice of Termination
satisfying the requirements of Section 7.1 hereof; for purposes of
this Agreement, no such purported termination shall be effective.
The Executive's right to terminate the Executive's employment for Good
Reason shall not be affected by the Executive's incapacity due to physical or
mental illness. The Executive's continued employment shall not constitute
consent to, or a waiver of rights with respect to, any act or failure to act
constituting Good Reason hereunder.
For purposes of any determination regarding the existence of Good
Reason, any claim by the Executive that Good Reason exists shall be presumed to
be correct unless Nobel or the Company establishes to the Committee by clear and
convincing evidence that Good Reason does not exist.
(P) "Nobel" shall mean Nobel Insurance Limited and, except in
determining under Section 15(E) hereof whether or not any Change in Control has
occurred, shall include any successor to its business and/or assets which
assumes and agrees to perform this Agreement by operation of law, or otherwise.
(Q) "Notice of Termination" shall have the meaning set forth in
Section 7.1 hereof.
(R) "Person" shall have the meaning given in Section 3(a)(9) of the
Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except
that such term shall not include (i) Nobel, the Company or any of their
subsidiaries, (ii) a trustee or other fiduciary holding securities under an
employee benefit plan of Nobel, the Company or any of their Affiliates, (iii) an
underwriter temporarily holding securities pursuant to an offering of such
securities, or (iv) a corporation owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions as their
ownership of stock of the Company.
(S) "Potential Change in Control" shall be deemed to have occurred if
the event set forth in any one of the following paragraphs shall have occurred:
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(I) Nobel or the Company enters into an agreement, the
consummation of which would result in the occurrence of a Change in
Control;
(II) Nobel, the Company or any Person publicly announces an
intention to take or to consider taking actions which, if consummated,
would constitute a Change in Control;
(III) any Person becomes the Beneficial Owner, directly or
indirectly, of securities of the Company representing fifteen percent
(15%) or more of either the then outstanding shares of common stock of
the Company or the combined voting power of the Company's then
outstanding securities (not including in the securities beneficially
owned by such Person any securities acquired directly from the Company
or its affiliates); or
(IV) the Board adopts a resolution to the effect that, for
purposes of this Agreement, a Potential Change in Control has
occurred.
(T) "Retirement" shall be deemed the reason for the termination by the
Company or the Executive of the Executive's employment if such employment is
terminated in accordance with the Company's retirement policy, not including
early retirement, generally applicable to its salaried employees, as in effect
immediately prior to the Change in Control, or in accordance with any retirement
arrangement established with the Executive's prior written consent with respect
to the Executive.
(U) "Severance Payments" shall mean those payments so described in
Section 6.1 hereof.
(V) "Tax Counsel" shall have the meaning set forth in Section 6.2
hereof.
(W) "Term" shall mean the period of time described in Section 2 hereof
(including any extension,
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continuation or termination described therein).
(X) "Total Payments" shall mean those payments so described in Section
6.2 hereof.
NOBEL INSURANCE LIMITED
By: /s/ Thomas J. O'Shane
--------------------------------
Thomas J. O'Shane
Chairman of
Compensation Committee
NOBEL SERVICE CORPORATION
By: /s/ Douglas W. Caudill
--------------------------------
Douglas W. Caudill
Vice President, Secretary
and General Counsel
` /s/ Jeffry K. Amsbaugh
--------------------------------
Jeffry K. Amsbaugh
Address:
Jeffry K. Amsbaugh
7606 Underwood Lane
Plano, TX 75025
(Please print carefully)
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EXHIBIT 10.18
<PAGE>
SEVERANCE AGREEMENT
THIS AGREEMENT, dated as of May 9, 1997, is made by and between Nobel
Insurance Limited, a Bermuda corporation ("Nobel"), Nobel Service Corporation, a
Delaware corporation (the "Company"), and Bryan L. Martin (the "Executive").
WHEREAS, the Company and Nobel consider it essential to their best
interests and the best interests of Nobel's stockholders to foster the continued
employment of key Company management personnel; and
WHEREAS, the Board of Directors of the Company and the Board of
Directors of Nobel (together, the "Boards") recognize that, as is the case with
many publicly held corporations like Nobel, the possibility of a Change in
Control (as defined in the last Section hereof) exists and that such
possibility, and the uncertainty and questions which it may raise among
management, may result in the departure or distraction of management personnel
to the detriment of the Company and of Nobel and its stockholders; and
WHEREAS, the Boards have determined that appropriate steps should be
taken to reinforce and encourage the continued attention and dedication of
members of the Company's management, including the Executive, to their assigned
duties without distraction in the face of potentially disturbing circumstances
arising from the possibility of a Change in Control;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, Nobel, the Company and the Executive hereby agree as
follows:
1. DEFINED TERMS. The definitions of capitalized terms used in this
Agreement are provided in the last Section hereof.
2. TERM OF AGREEMENT. The Term of this Agreement shall commence on the
date hereof and shall continue in effect through the second anniversary of its
commencement date; provided, however, that if, without the prior occurrence of a
Change in Control of Nobel, Nobel shall
<PAGE>
cease to own the majority of the outstanding shares of the Company's common
stock, the Agreement shall terminate on the date of such cessation; and further
provided, however, that if a Change in Control shall have occurred during the
Term, this Agreement shall continue in effect for a period of not less than
twenty-four (24) months beyond the month in which such Change in Control
occurred (or, if later, twenty-four (24) months beyond the consummation of the
transaction the approval of which by Nobel's stockholders constitutes a Change
in Control under Section 15(G)(III) or (IV) hereof).
3. COMPANY'S COVENANTS SUMMARIZED. In order to induce the Executive to
remain in the employ of the Company and in consideration of the Executive's
covenants set forth in Section 4 hereof, the Company and Nobel agree, under the
conditions described herein, to pay the Executive the Severance Payments and the
other payments and benefits described herein. Except as provided in Section 9.1
hereof, no amount or benefit shall be payable under this Agreement unless there
shall have been (or, under the terms of the second sentence of Section 6.1
hereof, there shall be deemed to have been) a termination of the Executive's
employment with the Company following a Change in Control and during the Term.
This Agreement shall not be construed as creating an express or implied contract
of employment and, except as otherwise agreed in writing between the Executive
and the Company, the Executive shall not have any right to be retained in the
employ of the Company.
4. THE EXECUTIVE'S COVENANTS. The Executive agrees that, subject to
the terms and conditions of this Agreement, in the event of a Potential Change
in Control during the Term, the Executive will remain in the employ of the
Company until the earliest of (i) a date which is six (6) months from the date
of such Potential Change of Control, (ii) the date of a Change in Control, (iii)
the date of termination by the Executive of the Executive's employment for Good
Reason or by reason of death, Disability or Retirement, or (iv) the termination
by the Company of the Executive's employment for any reason.
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5. COMPENSATION OTHER THAN SEVERANCE PAYMENTS.
5.1 Following a Change in Control and during the Term, during any
period that the Executive fails to perform the Executive's full-time duties with
the Company as a result of incapacity due to physical or mental illness, the
Company (and/or Nobel) shall pay the Executive's full salary to the Executive at
the rate in effect at the commencement of any such period, together with all
compensation and benefits payable to the Executive under the terms of any
compensation or benefit plan, program or arrangement maintained by the Company
or Nobel during such period, until the Executive's employment is terminated by
the Company for Disability.
5.2 If the Executive's employment shall be terminated for any reason
following a Change in Control and during the Term, the Company (and/or Nobel)
shall pay the Executive's full salary to the Executive through the Date of
Termination at the rate in effect at the time the Notice of Termination is
given, together with all compensation and benefits payable to the Executive
through the Date of Termination under the terms of the Company's (and Nobel's)
compensation and benefit plans, programs or arrangements.
5.3 If the Executive's employment shall be terminated for any reason
following a Change in Control and during the Term, the Company (and/or Nobel)
shall pay to the Executive the Executive's normal post-termination compensation
and benefits as such payments become due. Such post-termination compensation and
benefits shall be determined under, and paid in accordance with, the Company's
(and Nobel's) retirement, insurance and other compensation or benefit plans,
programs and arrangements as in effect immediately prior to the Change in
Control or, to the extent more favorable to the Executive, as in effect
immediately prior to the Date of Termination.
6. SEVERANCE PAYMENTS.
6.1 Subject to Section 6.2 hereof, the Company or Nobel shall pay the
Executive the payments described in this Section 6.1 (the "Severance Payments")
upon the termination of the Executive's employment following a Change in Control
and during the Term, in addition to any payments and benefits to which the
Executive is entitled under Section 5 hereof, unless such termination is (i) by
the Company for Cause, (ii) by reason of death, Disabili
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ty, or (iii) by the Executive without Good Reason. For purposes of this
Agreement, the Executive's employment shall be deemed to have been terminated
following a Change in Control by the Company without Cause or by the Executive
with Good Reason, if (i) the Executive's employment is terminated by the Company
without Cause prior to a Change in Control (which actually occurs during the
Term of this Agreement) and such termination was at the request or direction of
a Person who has entered into an agreement with the Company the consummation of
which would constitute a Change in Control, (ii) the Executive terminates his
employment with Good Reason prior to a Change in Control (which actually occurs
during the Term of this Agreement) and the circumstance or event which
constitutes Good Reason occurs at the request or direction of such Person, or
(iii) the Executive's employment is terminated by the Company without Cause
prior to a Change in Control and the Executive reasonably demonstrates that such
termination is otherwise in connection with or in anticipation of a Change in
Control which actually occurs during the term of this Agreement. For purposes of
any determination regarding the applicability of the immediately preceding
sentence, any position taken by the Executive shall be presumed to be correct
unless the Company establishes to the Committee by clear and convincing evidence
that such position is not correct. In lieu of any further salary payments to the
Executive for periods subsequent to the Date of Termination and in lieu of any
severance benefit otherwise payable to the Executive (whether under any
employment agreement, severance plan or otherwise), the Company or Nobel shall
pay to the Executive a lump sum severance payment, in cash, equal to two times
the higher of the Executive's annual base salary in effect immediately prior to
the occurrence of the event or circumstance upon which the Notice of Termination
is based and the Executive's annual base salary in effect immediately prior to
the Change in Control.
The multiple of "two" used in calculating the lump sum severance payment
under the immediately preceding paragraph shall be subject to reduction as
follows:
The "two" shall stand for a deemed severance period of two years, which
shall be reduced for any period of the Executive's employment by the
Company which follows a Change in Control up to and including the Date of
Termination hereunder (even if the Date of Termination is an extended Date
of
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Termination pursuant to Section 7.3 hereof). For example, if the Executive
terminates his employment for Good Reason and his Date of Termination is
364 days after the Change in Control, the multiple of "two" will be reduced
to a multiple of "one and 1/365".
6.2 (A) Notwithstanding any other provisions of this
Agreement, in the event that any payment or benefit received or to be
received by the Executive in connection with a Change in Control or the
termination of the Executive's employment (whether pursuant to the terms of
this Agreement or any other plan, arrangement or agreement with Nobel, the
Company, any Person whose actions result in a Change in Control or any Person
affiliated with Nobel, the Company or such Person) (all such payments and
benefits, including the Severance Payments, being hereinafter called "Total
Payments") would not be deductible (in whole or part), by Nobel, the Company,
an affiliate or Person making such payment or providing such benefit as a
result of section 280G of the Code, then, to the extent necessary to make
such portion of the Total Payments deductible (and after taking into account
any reduction in the Total Payments provided by reason of section 280G of the
Code in such other plan, arrangement or agreement), the Severance Payments
shall be reduced (if necessary, to zero).
(B) For purposes of this limitation, (i) no portion of the Total
Payments the receipt or enjoyment of which the Executive shall have effectively
waived in writing at such time and in such manner that such portion does not
constitute a "payment" within the meaning of section 280G(b) of the Code shall
be taken into account, (ii) no portion of the Total Payments shall be taken into
account which, in the opinion of tax counsel ("Tax Counsel") reasonably
acceptable to the Executive and selected by the accounting firm which was,
immediately prior to the Change in Control, the Company's or Nobel's independent
auditor (the "Auditor"), does not constitute a "parachute payment" within the
meaning of section 280G(b)(2) of the Code, including by reason of section
280G(b)(4)(A) of the Code, (iii) the Severance Payments shall be reduced only to
the extent necessary so that the Total Payments (other than those referred to in
clauses (i) or (ii)) in their entirety constitute reasonable compensation for
services actually rendered within the meaning of section 280G(b)(4)(B) of the
Code or are otherwise not subject to disallowance as deductions by
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reason of section 280G of the Code, in the opinion of Tax Counsel, and (iv) the
value of any noncash benefit or any deferred payment or benefit included in the
Total Payments shall be determined by the Auditor in accordance with the
principles of sections 280G(d)(3) and (4) of the Code.
(C) If it is established pursuant to a final determination of a
court or an Internal Revenue Service proceeding that, notwithstanding the good
faith of the Executive, Nobel and the Company in applying the terms of this
Section 6.2, the aggregate "parachute payments" paid to or for the Executive's
benefit are in an amount that would result in any portion of such "parachute
payments" not being deductible by reason of section 280G of the Code, then the
Executive shall have an obligation to pay the Company (or Nobel, whichever is
the lender) upon demand an amount equal to the lesser of the Severance Payments
or the sum of (i) the excess of the aggregate "parachute payments" paid to or
for the Executive's benefit over the aggregate "parachute payments" that could
have been paid to or for the Executive's benefit without any portion of such
"parachute payments" not being deductible by reason of section 280G of the Code;
and (ii) interest on the amount set forth in clause (i) of this sentence at the
rate provided in section 1274(b)(2)(B) of the Code from the date of the
Executive's receipt of such excess until the date of such payment.
6.3 The payments provided in Section 6.1 hereof shall be made not
later than the fifth day following the Date of Termination; provided, however,
that if the amounts of such payments, and the limitation on such payments set
forth in Section 6.2 hereof, cannot be finally determined on or before such day,
Nobel or the Company shall pay to the Executive on such day an estimate, as
determined in good faith by Nobel or the Company, as the case may be, of the
minimum amount of such payments to which the Executive is clearly entitled and
shall pay the remainder of such payments (together with interest on the unpaid
remainder (or on all such payments to the extent Nobel and the Company fail to
make such payments when due) at 120` of the rate provided in section
1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but
in no event later than the thirtieth (30th) day after the Date of Termination.
In the event that the amount of the estimated payments exceeds the amount
subsequently determined to have been
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due, such excess shall constitute a loan by Nobel (or the Company, as the case
may be) to the Executive, payable on the fifth (5th) business day after demand
by the Company (together with interest at 120% of the rate provided in section
1274(b)(2)(B) of the Code). At the time that payments are made under this
Section, Nobel (or the Company, as the case may be) shall provide the Executive
with a written statement setting forth the manner in which such payments were
calculated and the basis for such calculations including, without limitation,
any opinions or other advice Nobel (or the Company, as the case may be) has
received from Tax Counsel, the Auditor or other advisors or consultants (and any
such opinions or advice which are in writing shall be attached to the
statement).
6.4 The Company or Nobel also shall pay to the Executive all legal
fees and expenses incurred by the Executive in disputing in good faith any issue
hereunder relating to the termination of the Executive's employment, in seeking
in good faith to obtain or enforce any benefit or right provided by this
Agreement or in connection with any tax audit or proceeding to the extent
attributable to the application of section 4999 of the Code to any payment or
benefit provided hereunder; provided, however, that such payment shall be made
only if the Executive shall ultimately prevail on one or more of the substantive
issues involved in the controversy. Such payments shall be made within five (5)
business days after delivery of the Executive's written requests for payment
accompanied with such evidence of fees and expenses incurred (and the ultimate
disposition of the controversy) as the Company reasonably may require.
6.5 Any obligation to pay, or to provide a benefit for, the Executive
under the provisions of this Agreement which is stated to be the obligation of
either Nobel or the Company shall be the joint and several obligation of both
Nobel and the Company.
7. TERMINATION PROCEDURES AND COMPENSATION DURING DISPUTE.
7.1 NOTICE OF TERMINATION. After a Change in Control and during the
Term, any purported termination of the Executive's employment (other than by
reason of death) shall be communicated by written Notice of Termination from the
Executive or the Company to both of the other parties hereto in accordance with
Section 10 here
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of. For purposes of this Agreement, a "Notice of Termination" shall mean a
notice which shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Executive's employment under
the provision so indicated. Further, a Notice of Termination for Cause is
required to include a copy of a resolution duly adopted by the affirmative vote
of not less than three-quarters (3/4) of the entire membership of the Board at a
meeting of the Board which was called and held for the purpose of considering
such termination (after reasonable notice to the Executive and an opportunity
for the Executive, together with the Executive's counsel, to be heard before the
Board) finding that, in the good faith opinion of the Board, the Executive was
guilty of conduct set forth in clause (i) or (ii) of the definition of Cause
herein, and specifying the particulars thereof in detail.
7.2 DATE OF TERMINATION. "Date of Termination," with respect to any
purported termination of the Executive's employment after a Change in Control
and during the Term, shall mean (i) if the Executive's employment is terminated
for Disability, thirty (30) days after Notice of Termination is given (provided
that the Executive shall not have returned to the full-time performance of the
Executive's duties during such thirty (30) day period), and (ii) if the
Executive's employment is terminated for any other reason, the date specified in
the Notice of Termination (which, in the case of a termination by the Company,
shall not be less than thirty (30) days (except in the case of a termination for
Cause) and, in the case of a termination by the Executive, shall not be less
than fifteen (15) days nor more than sixty (60) days, respectively, from the
date such Notice of Termination is given).
7.3 DISPUTE CONCERNING TERMINATION. If within fifteen (15) days after
any Notice of Termination is given, or, if later, prior to the Date of
Termination (as determined without regard to this Section 7.3), the party
receiving such Notice of Termination notifies the other parties that a dispute
exists concerning the termination, the Date of Termination shall be extended
until the date on which the dispute is finally resolved, either by mutual
written agreement of the parties or by a final judgment, order or decree of an
arbitrator or a court of competent jurisdiction (which is not appealable or with
respect to which the time for appeal therefrom
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has expired and no appeal has been perfected); provided, however, that the Date
of Termination shall be extended by a notice of dispute given by the Executive
only if such notice is given in good faith and the Executive pursues the
resolution of such dispute with reasonable diligence.
7.4 COMPENSATION DURING DISPUTE. If a purported termination occurs
following a Change in Control and during the Term and the Date of Termination is
extended in accordance with Section 7.3 hereof, Nobel or the Company shall
continue to pay the Executive the full compensation in effect when the notice
giving rise to the dispute was given (including, but not limited to, salary) and
continue the Executive as a participant in all compensation, benefit and
insurance plans in which the Executive was participating when the notice giving
rise to the dispute was given, until the Date of Termination, as determined in
accordance with Section 7.3 hereof. Amounts paid under this Section 7.4 are in
addition to all other amounts due under this Agreement (other than those due
under Section 5.2 hereof) and shall not be offset against or reduce any other
amounts due under this Agreement.
8. NO MITIGATION. Nobel and the Company agrees that, if the
Executive's employment with the Company terminates during the Term, the
Executive is not required to seek other employment or to attempt in any way to
reduce any amounts payable to the Executive by Nobel or the Company pursuant to
Section 6 hereof or Section 7.4 hereof. Further, the amount of any payment or
benefit provided for in this Agreement shall not be reduced by any compensation
earned by the Executive as the result of employment by another employer, by
retirement benefits, by offset against any amount claimed to be owed by the
Executive to Nobel or the Company, or otherwise.
9. SUCCESSORS; BINDING AGREEMENT.
9.1 In addition to any obligations imposed by law upon any successor
to Nobel or the Company, Nobel and the Company will require any successor
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of either corporation to
expressly assume and agree to perform this Agreement in the same manner and to
the same extent that such corporation would be required to perform it if no such
succession had taken place.
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Failure of Nobel or the Company to obtain such assumption and agreement
prior to the effectiveness of any such succession shall be a breach of this
Agreement and shall entitle the Executive to compensation from Nobel or the
Company in the same amount and on the same terms as the Executive would be
entitled to hereunder if the Executive were to terminate the Executive's
employment for Good Reason after a Change in Control, except that, for purposes
of implementing the foregoing, the date on which any such succession becomes
effective shall be deemed the Date of Termination.
9.2 This Agreement shall inure to the benefit of and be enforceable by
the Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If the Executive shall
die while any amount would still be payable to the Executive hereunder (other
than amounts which, by their terms, terminate upon the death of the Executive)
if the Executive had continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement to
the executors, personal representatives or administrators of the Executive's
estate.
10. NOTICES. For the purpose of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed, if to the
Executive, to the address inserted below the Executive's signature on the final
page hereof and, if to Nobel or the Company, to the respective address set forth
below, or to such other address as any party may have furnished to the others in
writing in accordance herewith, except that notice of change of address shall be
effective only upon actual receipt:
To Nobel:
Nobel Insurance Limited
108 Pitts Bay Road
Hamilton, Bermuda HMAX
Attention: President
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To the Company:
Nobel Service Corporation
8001 LBJ Freeway, Suite 300
Dallas, TX 75251-1301
Attention: President
11. MISCELLANEOUS. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing and signed by the Executive and such officers of Nobel and the
Company as may be specifically designated by the respective Boards. No waiver by
any party hereto at any time of any breach by any other party hereto of, or of
any lack of compliance with, any condition or provision of this Agreement to be
performed by such other party shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or subsequent time. This
Agreement supersedes any other agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof which have been
made by either party. The validity, interpretation, construction and performance
of this Agreement shall be governed by the laws of the State of Texas. All
references to sections of the Exchange Act or the Code shall be deemed also to
refer to any successor provisions to such sections. Any payments provided for
hereunder shall be paid net of any applicable withholding required under
federal, state or local law and any additional withholding to which the
Executive has agreed. The obligations of Nobel, the Company and the Executive
under this Agreement which by their nature may require either partial or total
performance after the expiration of the Term (including, without limitation,
those under Sections 6 and 7 hereof) shall survive such expiration.
12. VALIDITY. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
13. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
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14. SETTLEMENT OF DISPUTES: ARBITRATION.
14.1 All claims by the Executive for benefits under this Agreement
shall be directed to and determined by the Committee and shall be in writing.
Any denial by the Committee of a claim for benefits under this Agreement shall
be delivered to the Executive in writing and shall set forth the specific
reasons for the denial and the specific provisions of this Agreement relied
upon. The Committee shall afford a reasonable opportunity to the Executive for a
review of the decision denying a claim and shall further allow the Executive to
appeal to the Committee a decision of the Committee within sixty (60) days after
notification by the Committee that the Executive's claim has been denied.
14.2 Any further dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
Dallas, Texas in accordance with the rules of the American Arbitration
Association then in effect; provided, however, that the evidentiary standards
set forth in this Agreement shall apply. Judgment may be entered on the
arbitrator's award in any court having jurisdiction. Notwithstanding any
provision of this Agreement to the contrary, the Executive shall be entitled to
seek specific performance of the Executive's right to be paid until the Date of
Termination during the pendency of any dispute or controversy arising under or
in connection with this Agreement.
15. DEFINITIONS. For purposes of this Agreement, the following terms
shall have the meanings indicated below:
(A) "Affiliate" shall have the meaning set forth in Rule 12b-2
promulgated under Section 12 of the Exchange Act.
(B) "Auditor" shall have the meaning set forth in Section 6.2 hereof.
(C) "Base Amount" shall have the meaning set forth in section
280G(b)(3) of the Code.
(D) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3
under the Exchange Act.
(E) "Boards" shall mean the Board of Directors of the Company and the
Board of Directors of Nobel.
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(F) "Cause" for termination by the Company of the Executive's
employment shall mean (i) the willful and continued failure by the Executive to
substantially perform the Executive's duties with the Company (other than any
such failure resulting from the Executive's incapacity due to physical or mental
illness or any such actual or anticipated failure after the issuance of a Notice
of Termination for Good Reason by the Executive pursuant to Section 7.1 hereof)
after a written demand for substantial performance is delivered to the Executive
by the Board of Directors of the Company, which demand specifically identifies
the manner in which the Board believes that the Executive has not substantially
performed the Executive's duties, or (ii) the willful engaging by the Executive
in conduct which is demonstrably and materially injurious to Nobel, the Company
or their subsidiaries, monetarily or otherwise. For purposes of clauses (i) and
(ii) of this definition, (x) no act, or failure to act, on the Executive's part
shall be deemed "willful" unless done, or omitted to be done, by the Executive
not in good faith and without reasonable belief that the Executive's act, or
failure to act, was in the best interest of Nobel and the Company and (y) in the
event of a dispute concerning the application of this provision, no claim by the
Company that Cause exists shall be given effect unless the Company establishes
to the Committee by clear and convincing evidence that Cause exists.
(G) A "Change in Control" shall mean a change in control of Nobel,
which shall be deemed to have occurred if the event set forth in any one of the
following paragraphs shall have occurred:
(I) any Person is or becomes the Beneficial Owner, directly
or indirectly, of securities of Nobel (not including in the securities
beneficially owned by such Person any securities acquired directly
from Nobel or its affiliates) representing 25% or more of the combined
voting power of Nobel's then outstanding securities, excluding any
Person who becomes such a Beneficial Owner in connection with a
transaction described in clause (i) of paragraph (III) below; or
(II) the following individuals cease for any reason to
constitute a majority of the number of directors then serving on the
Board of Directors of Nobel: individuals who, on the
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date hereof, constitute such Board and any new director (other than a
director whose initial assumption of office is in connection with an
actual or threatened election contest, including but not limited to a
consent solicitation, relating to the election of directors of Nobel)
whose appointment or election by the Board of Directors of Nobel or
nomination for election by Nobel's stockholders was approved or
recommended by a vote of at least two-thirds (2/3) of the directors of
Nobel then still in office who either were directors on the date
hereof or whose appointment, election or nomination for election was
previously so approved or recommended; or
(III) the stockholders of Nobel approve a merger or
consolidation of Nobel with any other corporation or the issuance of
voting securities of Nobel in connection with a merger or
consolidation of Nobel (or any direct or indirect subsidiary of Nobel)
pursuant to applicable stock exchange requirements, other than (i) a
merger or consolidation which would result in the voting securities of
Nobel outstanding immediately prior to such merger or consolidation
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity or any parent
thereof), in combination with the ownership of any trustee or other
fiduciary holding securities under an employee benefit plan of Nobel
or any subsidiary of Nobel, at least 75% of the combined voting power
of the securities of Nobel or such surviving entity or any parent
thereof outstanding immediately after such merger or consolidation, or
(ii) a merger or consolidation effected to implement a
recapitalization of Nobel (or similar transaction) in which no Person
is or becomes the Beneficial Owner, directly or indirectly, of
securities of Nobel (not including in the securities Beneficially
Owned by such Person any securities acquired directly from Nobel or
its Affiliates other than in connection with the acquisition by Nobel
or its Affiliates of a business) representing 25% or more of the
combined voting power of Nobel's then outstanding securities; or
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(IV) the stockholders of Nobel approve a plan of complete
liquidation or dissolution of Nobel or an agreement for the sale or
disposition by Nobel of all or substantially all of Nobel's assets,
other than a sale or disposition by Nobel of all or substantially all
of Nobel's assets to an entity, at least 75% of the combined voting
power of the voting securities of which are owned by stockholders of
Nobel in substantially the same proportions as their ownership of
Nobel immediately prior to such sale.
(H) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
(I) "Committee" shall mean (i) the individuals (not fewer than three
in number) who, on the date six months before a Change in Control, constitute
the Compensation Committee of the Board of Directors of Nobel, plus (ii) in the
event that fewer than three individuals are available from the group specified
in clause (i) above for any reason, such individuals as may be appointed by the
individual or individuals so available (including for this purpose any
individual or individuals previously so appointed under this clause (ii));
provided, however, that the maximum number of individuals constituting the
Committee shall not exceed five.
(J) "Company" shall mean Nobel Service Corporation and shall include
any successor to its business and/or assets which assumes and agrees to perform
this Agreement by operation of law, or otherwise.
(K) "Date of Termination" shall have the meaning set forth in Section
7.2 hereof.
(L) "Disability" shall be deemed the reason for the termination by
the Company of the Executive's employment, if, as a result of the Executive's
incapacity due to physical or mental illness, the Executive shall have been
absent from the full-time performance of the Executive's duties with the Company
for a period of six (6) consecutive months, the Company shall have given the
Executive a Notice of Termination for Disability, and, within thirty (30) days
after such Notice of Termination is given, the Executive shall not have returned
to the full-time performance of the Executive's duties.
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(M) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
(N) "Executive" shall mean the individual named in the first
paragraph of this Agreement.
(O) "Good Reason" for termination by the Executive of the Executive's
employment shall mean the occurrence (without the Executive's express prior
written consent) after any Change in Control, or prior to a Change in Control
under the circumstances described in clause (ii) of the second sentence of
Section 6.1 hereof (treating all references in paragraphs (I) through (VII)
below to a "Change in Control" as references to a "Potential Change in
Control"), of any one of the following acts by Nobel or the Company, or failures
by Nobel or the Company to act, unless, in the case of any act or failure to act
described in paragraph (I), (V), (VI) or (VII) below, such act or failure to act
is corrected prior to the Date of Termination specified in the Notice of
Termination given in respect thereof:
(I) the assignment to the Executive of any duties
inconsistent with the Executive's status as an executive officer of
the Company or a substantial adverse alteration in the nature or
status of the Executive's responsibilities from those in effect
immediately prior to the Change in Control (other than any such
alteration primarily attributable to the fact that Nobel may no longer
be a public company);
(II) a reduction by the Company in the Executive's annual
base salary as in effect on the date hereof or as the same may be
increased from time to time;
(III) the relocation of the Executive's principal place of
employment to a location more than fifty (50) miles from the
Executive's principal place of employment immediately prior to the
Change in Control or the Company's requiring the Executive to be based
anywhere other than such principal place of employment (or permitted
relocation thereof) except for required travel on the Company's
business to an extent substantially consistent with the Executive's
present business travel obligations;
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(IV) the failure by Nobel or the Company to pay to the
Executive any portion of the Executive's current compensation, or to
pay to the Executive any portion of an installment of deferred
compensation under any deferred compensation program of Nobel or the
Company, within seven (7) days of the date such compensation is due;
(V) the failure by Nobel or the Company to continue in
effect any compensation plan in which the Executive participates
immediately prior to the Change in Control which is material to the
Executive's total compensation or any substitute plans adopted prior
to the Change in Control, unless an equitable arrangement (embodied in
an ongoing substitute or alternative plan) has been made with respect
to such plan, or the failure by the Company to continue the
Executive's participation therein (or in such substitute or
alternative plan) on a basis not materially less favorable, both in
terms of the amount or timing of payment of benefits provided and the
level of the Executive's participation relative to other participants,
as existed immediately prior to the Change in Control;
(VI) the failure by Nobel or the Company to continue to
provide the Executive with benefits substantially similar to those
enjoyed by the Executive under any of the pension, savings, life
insurance, medical, health and accident, or disability plans of Nobel
or the Company in which the Executive was participating immediately
prior to the Change in Control, the taking of any action by the
Company which would directly or indirectly materially reduce any of
such benefits or deprive the Executive of any material fringe benefit
enjoyed by the Executive at the time of the Change in Control, or the
failure by the Company to provide the Executive with the number of
paid vacation days to which the Executive is entitled on the basis of
years of service with the Company in accordance with the Company's
normal vacation policy in effect at the time of the Change in Control;
or
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(VII) any purported termination of the Executive's
employment which is not effected pursuant to a Notice of Termination
satisfying the requirements of Section 7.1 hereof; for purposes of
this Agreement, no such purported termination shall be effective.
The Executive's right to terminate the Executive's employment for Good
Reason shall not be affected by the Executive's incapacity due to physical or
mental illness. The Executive's continued employment shall not constitute
consent to, or a waiver of rights with respect to, any act or failure to act
constituting Good Reason hereunder.
For purposes of any determination regarding the existence of Good
Reason, any claim by the Executive that Good Reason exists shall be presumed to
be correct unless Nobel or the Company establishes to the Committee by clear and
convincing evidence that Good Reason does not exist.
(P) "Nobel" shall mean Nobel Insurance Limited and, except in
determining under Section 15(E) hereof whether or not any Change in Control has
occurred, shall include any successor to its business and/or assets which
assumes and agrees to perform this Agreement by operation of law, or otherwise.
(Q) "Notice of Termination" shall have the meaning set forth in
Section 7.1 hereof.
(R) "Person" shall have the meaning given in Section 3(a)(9) of the
Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except
that such term shall not include (i) Nobel, the Company or any of their
subsidiaries, (ii) a trustee or other fiduciary holding securities under an
employee benefit plan of Nobel, the Company or any of their Affiliates, (iii) an
underwriter temporarily holding securities pursuant to an offering of such
securities, or (iv) a corporation owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions as their
ownership of stock of the Company.
(S) "Potential Change in Control" shall be deemed to have occurred if
the event set forth in any one of the following paragraphs shall have occurred:
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(I) Nobel or the Company enters into an agreement, the
consummation of which would result in the occurrence of a Change in
Control;
(II) Nobel, the Company or any Person publicly announces an
intention to take or to consider taking actions which, if consummated,
would constitute a Change in Control;
(III) any Person becomes the Beneficial Owner, directly or
indirectly, of securities of the Company representing fifteen percent
(15%) or more of either the then outstanding shares of common stock of
the Company or the combined voting power of the Company's then
outstanding securities (not including in the securities beneficially
owned by such Person any securities acquired directly from the Company
or its affiliates); or
(IV) the Board adopts a resolution to the effect that, for
purposes of this Agreement, a Potential Change in Control has
occurred.
(T) "Retirement" shall be deemed the reason for the termination by the
Company or the Executive of the Executive's employment if such employment is
terminated in accordance with the Company's retirement policy, not including
early retirement, generally applicable to its salaried employees, as in effect
immediately prior to the Change in Control, or in accordance with any retirement
arrangement established with the Executive's prior written consent with respect
to the Executive.
(U) "Severance Payments" shall mean those payments so described in
Section 6.1 hereof.
(V) "Tax Counsel" shall have the meaning set forth in Section 6.2
hereof.
(W) "Term" shall mean the period of time described in Section 2 hereof
(including any extension,
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continuation or termination described therein).
(X) "Total Payments" shall mean those payments so described in Section
6.2 hereof.
NOBEL INSURANCE LIMITED
By: /s/ Thomas J. O'Shane
--------------------------------
Thomas J. O'Shane
Chairman of
Compensation Committee
NOBEL INSURANCE COMPANY
By: /s/ Jeffry K. Amsbaugh
--------------------------------
Jeffry K. Amsbaugh
President
/s/ Bryan L. Martin
--------------------------------
Bryan L. Martin
Address:
3404 Michael Drive
Plano, TX 75023
(Please print carefully)
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EXHIBIT 10.19
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SEVERANCE AGREEMENT
THIS AGREEMENT, dated as of May 9, 1997, is made by and between Nobel
Insurance Limited, a Bermuda corporation ("Nobel"), Nobel Service Corporation, a
Delaware corporation (the "Company"), and Thomas D. Nimmo (the "Executive").
WHEREAS, the Company and Nobel consider it essential to their best
interests and the best interests of Nobel's stockholders to foster the continued
employment of key Company management personnel; and
WHEREAS, the Board of Directors of the Company and the Board of
Directors of Nobel (together, the "Boards") recognize that, as is the case with
many publicly held corporations like Nobel, the possibility of a Change in
Control (as defined in the last Section hereof) exists and that such
possibility, and the uncertainty and questions which it may raise among
management, may result in the departure or distraction of management personnel
to the detriment of the Company and of Nobel and its stockholders; and
WHEREAS, the Boards have determined that appropriate steps should be
taken to reinforce and encourage the continued attention and dedication of
members of the Company's management, including the Executive, to their assigned
duties without distraction in the face of potentially disturbing circumstances
arising from the possibility of a Change in Control;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, Nobel, the Company and the Executive hereby agree as
follows:
1. DEFINED TERMS. The definitions of capitalized terms used in this
Agreement are provided in the last Section hereof.
2. TERM OF AGREEMENT. The Term of this Agreement shall commence on the
date hereof and shall continue in effect through the second anniversary of its
commencement date; provided, however, that if, without the prior occurrence of a
Change in Control of Nobel, Nobel shall
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cease to own the majority of the outstanding shares of the Company's common
stock, the Agreement shall terminate on the date of such cessation; and further
provided, however, that if a Change in Control shall have occurred during the
Term, this Agreement shall continue in effect for a period of not less than
twenty-four (24) months beyond the month in which such Change in Control
occurred (or, if later, twenty-four (24) months beyond the consummation of the
transaction the approval of which by Nobel's stockholders constitutes a Change
in Control under Section 15(G)(III) or (IV) hereof).
3. COMPANY'S COVENANTS SUMMARIZED. In order to induce the Executive to
remain in the employ of the Company and in consideration of the Executive's
covenants set forth in Section 4 hereof, the Company and Nobel agree, under the
conditions described herein, to pay the Executive the Severance Payments and the
other payments and benefits described herein. Except as provided in Section 9.1
hereof, no amount or benefit shall be payable under this Agreement unless there
shall have been (or, under the terms of the second sentence of Section 6.1
hereof, there shall be deemed to have been) a termination of the Executive's
employment with the Company following a Change in Control and during the Term.
This Agreement shall not be construed as creating an express or implied contract
of employment and, except as otherwise agreed in writing between the Executive
and the Company, the Executive shall not have any right to be retained in the
employ of the Company.
4. THE EXECUTIVE'S COVENANTS. The Executive agrees that, subject to
the terms and conditions of this Agreement, in the event of a Potential Change
in Control during the Term, the Executive will remain in the employ of the
Company until the earliest of (i) a date which is six (6) months from the date
of such Potential Change of Control, (ii) the date of a Change in Control, (iii)
the date of termination by the Executive of the Executive's employment for Good
Reason or by reason of death, Disability or Retirement, or (iv) the termination
by the Company of the Executive's employment for any reason.
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5. COMPENSATION OTHER THAN SEVERANCE PAYMENTS.
5.1 Following a Change in Control and during the Term, during any
period that the Executive fails to perform the Executive's full-time duties with
the Company as a result of incapacity due to physical or mental illness, the
Company (and/or Nobel) shall pay the Executive's full salary to the Executive at
the rate in effect at the commencement of any such period, together with all
compensation and benefits payable to the Executive under the terms of any
compensation or benefit plan, program or arrangement maintained by the Company
or Nobel during such period, until the Executive's employment is terminated by
the Company for Disability.
5.2 If the Executive's employment shall be terminated for any reason
following a Change in Control and during the Term, the Company (and/or Nobel)
shall pay the Executive's full salary to the Executive through the Date of
Termination at the rate in effect at the time the Notice of Termination is
given, together with all compensation and benefits payable to the Executive
through the Date of Termination under the terms of the Company's (and Nobel's)
compensation and benefit plans, programs or arrangements.
5.3 If the Executive's employment shall be terminated for any reason
following a Change in Control and during the Term, the Company (and/or Nobel)
shall pay to the Executive the Executive's normal post-termination compensation
and benefits as such payments become due. Such post-termination compensation and
benefits shall be determined under, and paid in accordance with, the Company's
(and Nobel's) retirement, insurance and other compensation or benefit plans,
programs and arrangements as in effect immediately prior to the Change in
Control or, to the extent more favorable to the Executive, as in effect
immediately prior to the Date of Termination.
6. SEVERANCE PAYMENTS.
6.1 Subject to Section 6.2 hereof, the Company or Nobel shall pay the
Executive the payments described in this Section 6.1 (the "Severance Payments")
upon the termination of the Executive's employment following a Change in Control
and during the Term, in addition to any payments and benefits to which the
Executive is entitled under Section 5 hereof, unless such termination is (i) by
the Company for Cause, (ii) by reason of death, Disabili
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ty, or (iii) by the Executive without Good Reason. For purposes of this
Agreement, the Executive's employment shall be deemed to have been terminated
following a Change in Control by the Company without Cause or by the Executive
with Good Reason, if (i) the Executive's employment is terminated by the Company
without Cause prior to a Change in Control (which actually occurs during the
Term of this Agreement) and such termination was at the request or direction of
a Person who has entered into an agreement with the Company the consummation of
which would constitute a Change in Control, (ii) the Executive terminates his
employment with Good Reason prior to a Change in Control (which actually occurs
during the Term of this Agreement) and the circumstance or event which
constitutes Good Reason occurs at the request or direction of such Person, or
(iii) the Executive's employment is terminated by the Company without Cause
prior to a Change in Control and the Executive reasonably demonstrates that such
termination is otherwise in connection with or in anticipation of a Change in
Control which actually occurs during the term of this Agreement. For purposes of
any determination regarding the applicability of the immediately preceding
sentence, any position taken by the Executive shall be presumed to be correct
unless the Company establishes to the Committee by clear and convincing evidence
that such position is not correct. In lieu of any further salary payments to the
Executive for periods subsequent to the Date of Termination and in lieu of any
severance benefit otherwise payable to the Executive (whether under any
employment agreement, severance plan or otherwise), the Company or Nobel shall
pay to the Executive a lump sum severance payment, in cash, equal to two times
the higher of the Executive's annual base salary in effect immediately prior to
the occurrence of the event or circumstance upon which the Notice of Termination
is based and the Executive's annual base salary in effect immediately prior to
the Change in Control.
The multiple of "two" used in calculating the lump sum severance payment
under the immediately preceding paragraph shall be subject to reduction as
follows:
The "two" shall stand for a deemed severance period of two years, which
shall be reduced for any period of the Executive's employment by the
Company which follows a Change in Control up to and including the Date of
Termination hereunder (even if the Date of Termination is an extended Date
of
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Termination pursuant to Section 7.3 hereof). For example, if the Executive
terminates his employment for Good Reason and his Date of Termination is
364 days after the Change in Control, the multiple of "two" will be reduced
to a multiple of "one and 1/365".
6.2 (A) Notwithstanding any other provisions of this Agreement, in the
event that any payment or benefit received or to be received by the Executive in
connection with a Change in Control or the termination of the Executive's
employment (whether pursuant to the terms of this Agreement or any other plan,
arrangement or agreement with Nobel, the Company, any Person whose actions
result in a Change in Control or any Person affiliated with Nobel, the Company
or such Person) (all such payments and benefits, including the Severance
Payments, being hereinafter called "Total Payments") would not be deductible (in
whole or part), by Nobel, the Company, an affiliate or Person making such
payment or providing such benefit as a result of section 280G of the Code, then,
to the extent necessary to make such portion of the Total Payments deductible
(and after taking into account any reduction in the Total Payments provided by
reason of section 280G of the Code in such other plan, arrangement or
agreement), the Severance Payments shall be reduced (if necessary, to zero).
(B) For purposes of this limitation, (i) no portion of the Total
Payments the receipt or enjoyment of which the Executive shall have effectively
waived in writing at such time and in such manner that such portion does not
constitute a "payment" within the meaning of section 280G(b) of the Code shall
be taken into account, (ii) no portion of the Total Payments shall be taken into
account which, in the opinion of tax counsel ("Tax Counsel") reasonably
acceptable to the Executive and selected by the accounting firm which was,
immediately prior to the Change in Control, the Company's or Nobel's independent
auditor (the "Auditor"), does not constitute a "parachute payment" within the
meaning of section 280G(b)(2) of the Code, including by reason of section
280G(b)(4)(A) of the Code, (iii) the Severance Payments shall be reduced only to
the extent necessary so that the Total Payments (other than those referred to in
clauses (i) or (ii)) in their entirety constitute reasonable compensation for
services actually rendered within the meaning of section 280G(b)(4)(B) of the
Code or are otherwise not subject to disallowance as deductions by
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reason of section 280G of the Code, in the opinion of Tax Counsel, and (iv) the
value of any noncash benefit or any deferred payment or benefit included in the
Total Payments shall be determined by the Auditor in accordance with the
principles of sections 280G(d)(3) and (4) of the Code.
(C) If it is established pursuant to a final determination of a
court or an Internal Revenue Service proceeding that, notwithstanding the good
faith of the Executive, Nobel and the Company in applying the terms of this
Section 6.2, the aggregate "parachute payments" paid to or for the Executive's
benefit are in an amount that would result in any portion of such "parachute
payments" not being deductible by reason of section 280G of the Code, then the
Executive shall have an obligation to pay the Company (or Nobel, whichever is
the lender) upon demand an amount equal to the lesser of the Severance Payments
or the sum of (i) the excess of the aggregate "parachute payments" paid to or
for the Executive's benefit over the aggregate "parachute payments" that could
have been paid to or for the Executive's benefit without any portion of such
"parachute payments" not being deductible by reason of section 280G of the Code;
and (ii) interest on the amount set forth in clause (i) of this sentence at the
rate provided in section 1274(b)(2)(B) of the Code from the date of the
Executive's receipt of such excess until the date of such payment.
6.3 The payments provided in Section 6.1 hereof shall be made not
later than the fifth day following the Date of Termination; provided, however,
that if the amounts of such payments, and the limitation on such payments set
forth in Section 6.2 hereof, cannot be finally determined on or before such day,
Nobel or the Company shall pay to the Executive on such day an estimate, as
determined in good faith by Nobel or the Company, as the case may be, of the
minimum amount of such payments to which the Executive is clearly entitled and
shall pay the remainder of such payments (together with interest on the unpaid
remainder (or on all such payments to the extent Nobel and the Company fail to
make such payments when due) at 120` of the rate provided in section
1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but
in no event later than the thirtieth (30th) day after the Date of Termination.
In the event that the amount of the estimated payments exceeds the amount
subsequently determined to have been
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due, such excess shall constitute a loan by Nobel (or the Company, as the case
may be) to the Executive, payable on the fifth (5th) business day after demand
by the Company (together with interest at 120% of the rate provided in section
1274(b)(2)(B) of the Code). At the time that payments are made under this
Section, Nobel (or the Company, as the case may be) shall provide the Executive
with a written statement setting forth the manner in which such payments were
calculated and the basis for such calculations including, without limitation,
any opinions or other advice Nobel (or the Company, as the case may be) has
received from Tax Counsel, the Auditor or other advisors or consultants (and any
such opinions or advice which are in writing shall be attached to the
statement).
6.4 The Company or Nobel also shall pay to the Executive all legal
fees and expenses incurred by the Executive in disputing in good faith any issue
hereunder relating to the termination of the Executive's employment, in seeking
in good faith to obtain or enforce any benefit or right provided by this
Agreement or in connection with any tax audit or proceeding to the extent
attributable to the application of section 4999 of the Code to any payment or
benefit provided hereunder; provided, however, that such payment shall be made
only if the Executive shall ultimately prevail on one or more of the substantive
issues involved in the controversy. Such payments shall be made within five (5)
business days after delivery of the Executive's written requests for payment
accompanied with such evidence of fees and expenses incurred (and the ultimate
disposition of the controversy) as the Company reasonably may require.
6.5 Any obligation to pay, or to provide a benefit for, the Executive
under the provisions of this Agreement which is stated to be the obligation of
either Nobel or the Company shall be the joint and several obligation of both
Nobel and the Company.
7. TERMINATION PROCEDURES AND COMPENSATION DURING DISPUTE.
7.1 NOTICE OF TERMINATION. After a Change in Control and during the
Term, any purported termination of the Executive's employment (other than by
reason of death) shall be communicated by written Notice of Termination from the
Executive or the Company to both of the other parties hereto in accordance with
Section 10 here
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of. For purposes of this Agreement, a "Notice of Termination" shall mean a
notice which shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Executive's employment under
the provision so indicated. Further, a Notice of Termination for Cause is
required to include a copy of a resolution duly adopted by the affirmative vote
of not less than three-quarters (3/4) of the entire membership of the Board at a
meeting of the Board which was called and held for the purpose of considering
such termination (after reasonable notice to the Executive and an opportunity
for the Executive, together with the Executive's counsel, to be heard before the
Board) finding that, in the good faith opinion of the Board, the Executive was
guilty of conduct set forth in clause (i) or (ii) of the definition of Cause
herein, and specifying the particulars thereof in detail.
7.2 DATE OF TERMINATION. "Date of Termination," with respect to any
purported termination of the Executive's employment after a Change in Control
and during the Term, shall mean (i) if the Executive's employment is terminated
for Disability, thirty (30) days after Notice of Termination is given (provided
that the Executive shall not have returned to the full-time performance of the
Executive's duties during such thirty (30) day period), and (ii) if the
Executive's employment is terminated for any other reason, the date specified in
the Notice of Termination (which, in the case of a termination by the Company,
shall not be less than thirty (30) days (except in the case of a termination for
Cause) and, in the case of a termination by the Executive, shall not be less
than fifteen (15) days nor more than sixty (60) days, respectively, from the
date such Notice of Termination is given).
7.3 DISPUTE CONCERNING TERMINATION. If within fifteen (15) days after
any Notice of Termination is given, or, if later, prior to the Date of
Termination (as determined without regard to this Section 7.3), the party
receiving such Notice of Termination notifies the other parties that a dispute
exists concerning the termination, the Date of Termination shall be extended
until the date on which the dispute is finally resolved, either by mutual
written agreement of the parties or by a final judgment, order or decree of an
arbitrator or a court of competent jurisdiction (which is not appealable or with
respect to which the time for appeal therefrom
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has expired and no appeal has been perfected); provided, however, that the Date
of Termination shall be extended by a notice of dispute given by the Executive
only if such notice is given in good faith and the Executive pursues the
resolution of such dispute with reasonable diligence.
7.4 COMPENSATION DURING DISPUTE. If a purported termination occurs
following a Change in Control and during the Term and the Date of Termination is
extended in accordance with Section 7.3 hereof, Nobel or the Company shall
continue to pay the Executive the full compensation in effect when the notice
giving rise to the dispute was given (including, but not limited to, salary) and
continue the Executive as a participant in all compensation, benefit and
insurance plans in which the Executive was participating when the notice giving
rise to the dispute was given, until the Date of Termination, as determined in
accordance with Section 7.3 hereof. Amounts paid under this Section 7.4 are in
addition to all other amounts due under this Agreement (other than those due
under Section 5.2 hereof) and shall not be offset against or reduce any other
amounts due under this Agreement.
8. NO MITIGATION. Nobel and the Company agrees that, if the
Executive's employment with the Company terminates during the Term, the
Executive is not required to seek other employment or to attempt in any way to
reduce any amounts payable to the Executive by Nobel or the Company pursuant to
Section 6 hereof or Section 7.4 hereof. Further, the amount of any payment or
benefit provided for in this Agreement shall not be reduced by any compensation
earned by the Executive as the result of employment by another employer, by
retirement benefits, by offset against any amount claimed to be owed by the
Executive to Nobel or the Company, or otherwise.
9. SUCCESSORS; BINDING AGREEMENT.
9.1 In addition to any obligations imposed by law upon any successor
to Nobel or the Company, Nobel and the Company will require any successor
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of either corporation to
expressly assume and agree to perform this Agreement in the same manner and to
the same extent that such corporation would be required to perform it if no such
succession had taken place.
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Failure of Nobel or the Company to obtain such assumption and agreement prior to
the effectiveness of any such succession shall be a breach of this Agreement and
shall entitle the Executive to compensation from Nobel or the Company in the
same amount and on the same terms as the Executive would be entitled to
hereunder if the Executive were to terminate the Executive's employment for Good
Reason after a Change in Control, except that, for purposes of implementing the
foregoing, the date on which any such succession becomes effective shall be
deemed the Date of Termination.
9.2 This Agreement shall inure to the benefit of and be enforceable by
the Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If the Executive shall
die while any amount would still be payable to the Executive hereunder (other
than amounts which, by their terms, terminate upon the death of the Executive)
if the Executive had continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement to
the executors, personal representatives or administrators of the Executive's
estate.
10. NOTICES. For the purpose of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed, if to the
Executive, to the address inserted below the Executive's signature on the final
page hereof and, if to Nobel or the Company, to the respective address set forth
below, or to such other address as any party may have furnished to the others in
writing in accordance herewith, except that notice of change of address shall be
effective only upon actual receipt:
To Nobel:
Nobel Insurance Limited
108 Pitts Bay Road
Hamilton, Bermuda HMAX
Attention: President
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To the Company:
Nobel Service Corporation
8001 LBJ Freeway, Suite 300
Dallas, TX 75251-1301
Attention: President
11. MISCELLANEOUS. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing and signed by the Executive and such officers of Nobel and the
Company as may be specifically designated by the respective Boards. No waiver by
any party hereto at any time of any breach by any other party hereto of, or of
any lack of compliance with, any condition or provision of this Agreement to be
performed by such other party shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or subsequent time. This
Agreement supersedes any other agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof which have been
made by either party. The validity, interpretation, construction and performance
of this Agreement shall be governed by the laws of the State of Texas. All
references to sections of the Exchange Act or the Code shall be deemed also to
refer to any successor provisions to such sections. Any payments provided for
hereunder shall be paid net of any applicable withholding required under
federal, state or local law and any additional withholding to which the
Executive has agreed. The obligations of Nobel, the Company and the Executive
under this Agreement which by their nature may require either partial or total
performance after the expiration of the Term (including, without limitation,
those under Sections 6 and 7 hereof) shall survive such expiration.
12. VALIDITY. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
13. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
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14. SETTLEMENT OF DISPUTES: ARBITRATION.
14.1 All claims by the Executive for benefits under this Agreement
shall be directed to and determined by the Committee and shall be in writing.
Any denial by the Committee of a claim for benefits under this Agreement shall
be delivered to the Executive in writing and shall set forth the specific
reasons for the denial and the specific provisions of this Agreement relied
upon. The Committee shall afford a reasonable opportunity to the Executive for a
review of the decision denying a claim and shall further allow the Executive to
appeal to the Committee a decision of the Committee within sixty (60) days after
notification by the Committee that the Executive's claim has been denied.
14.2 Any further dispute or controversy arising under or in connection
with this Agreement shall be settled exclusively by arbitration in Dallas, Texas
in accordance with the rules of the American Arbitration Association then in
effect; provided, however, that the evidentiary standards set forth in this
Agreement shall apply. Judgment may be entered on the arbitrator's award in any
court having jurisdiction. Notwithstanding any provision of this Agreement to
the contrary, the Executive shall be entitled to seek specific performance of
the Executive's right to be paid until the Date of Termination during the
pendency of any dispute or controversy arising under or in connection with this
Agreement.
15. DEFINITIONS. For purposes of this Agreement, the following terms
shall have the meanings indicated below:
(A) "Affiliate" shall have the meaning set forth in Rule 12b-2
promulgated under Section 12 of the Exchange Act.
(B) "Auditor" shall have the meaning set forth in Section 6.2 hereof.
(C) "Base Amount" shall have the meaning set forth in section
280G(b)(3) of the Code.
(D) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3
under the Exchange Act.
(E) "Boards" shall mean the Board of Directors of the Company and the
Board of Directors of Nobel.
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(F) "Cause" for termination by the Company of the Executive's
employment shall mean (i) the willful and continued failure by the Executive to
substantially perform the Executive's duties with the Company (other than any
such failure resulting from the Executive's incapacity due to physical or mental
illness or any such actual or anticipated failure after the issuance of a Notice
of Termination for Good Reason by the Executive pursuant to Section 7.1 hereof)
after a written demand for substantial performance is delivered to the Executive
by the Board of Directors of the Company, which demand specifically identifies
the manner in which the Board believes that the Executive has not substantially
performed the Executive's duties, or (ii) the willful engaging by the Executive
in conduct which is demonstrably and materially injurious to Nobel, the Company
or their subsidiaries, monetarily or otherwise. For purposes of clauses (i) and
(ii) of this definition, (x) no act, or failure to act, on the Executive's part
shall be deemed "willful" unless done, or omitted to be done, by the Executive
not in good faith and without reasonable belief that the Executive's act, or
failure to act, was in the best interest of Nobel and the Company and (y) in the
event of a dispute concerning the application of this provision, no claim by the
Company that Cause exists shall be given effect unless the Company establishes
to the Committee by clear and convincing evidence that Cause exists.
(G) A "Change in Control" shall mean a change in control of Nobel,
which shall be deemed to have occurred if the event set forth in any one of the
following paragraphs shall have occurred:
(I) any Person is or becomes the Beneficial Owner, directly
or indirectly, of securities of Nobel (not including in the securities
beneficially owned by such Person any securities acquired directly
from Nobel or its affiliates) representing 25% or more of the combined
voting power of Nobel's then outstanding securities, excluding any
Person who becomes such a Beneficial Owner in connection with a
transaction described in clause (i) of paragraph (III) below; or
(II) the following individuals cease for any reason to
constitute a majority of the number of directors then serving on the
Board of Directors of Nobel: individuals who, on the
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date hereof, constitute such Board and any new director (other than a
director whose initial assumption of office is in connection with an
actual or threatened election contest, including but not limited to a
consent solicitation, relating to the election of directors of Nobel)
whose appointment or election by the Board of Directors of Nobel or
nomination for election by Nobel's stockholders was approved or
recommended by a vote of at least two-thirds (2/3) of the directors of
Nobel then still in office who either were directors on the date
hereof or whose appointment, election or nomination for election was
previously so approved or recommended; or
(III) the stockholders of Nobel approve a merger or
consolidation of Nobel with any other corporation or the issuance of
voting securities of Nobel in connection with a merger or
consolidation of Nobel (or any direct or indirect subsidiary of Nobel)
pursuant to applicable stock exchange requirements, other than (i) a
merger or consolidation which would result in the voting securities of
Nobel outstanding immediately prior to such merger or consolidation
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity or any parent
thereof), in combination with the ownership of any trustee or other
fiduciary holding securities under an employee benefit plan of Nobel
or any subsidiary of Nobel, at least 75% of the combined voting power
of the securities of Nobel or such surviving entity or any parent
thereof outstanding immediately after such merger or consolidation, or
(ii) a merger or consolidation effected to implement a
recapitalization of Nobel (or similar transaction) in which no Person
is or becomes the Beneficial Owner, directly or indirectly, of
securities of Nobel (not including in the securities Beneficially
Owned by such Person any securities acquired directly from Nobel or
its Affiliates other than in connection with the acquisition by Nobel
or its Affiliates of a business) representing 25% or more of the
combined voting power of Nobel's then outstanding securities; or
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(IV) the stockholders of Nobel approve a plan of complete
liquidation or dissolution of Nobel or an agreement for the sale or
disposition by Nobel of all or substantially all of Nobel's assets,
other than a sale or disposition by Nobel of all or substantially all
of Nobel's assets to an entity, at least 75% of the combined voting
power of the voting securities of which are owned by stockholders of
Nobel in substantially the same proportions as their ownership of
Nobel immediately prior to such sale.
(H) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
(I) "Committee" shall mean (i) the individuals (not fewer than three
in number) who, on the date six months before a Change in Control, constitute
the Compensation Committee of the Board of Directors of Nobel, plus (ii) in the
event that fewer than three individuals are available from the group specified
in clause (i) above for any reason, such individuals as may be appointed by the
individual or individuals so available (including for this purpose any
individual or individuals previously so appointed under this clause (ii));
provided, however, that the maximum number of individuals constituting the
Committee shall not exceed five.
(J) "Company" shall mean Nobel Service Corporation and shall include
any successor to its business and/or assets which assumes and agrees to perform
this Agreement by operation of law, or otherwise.
(K) "Date of Termination" shall have the meaning set forth in Section
7.2 hereof.
(L) "Disability" shall be deemed the reason for the termination by the
Company of the Executive's employment, if, as a result of the Executive's
incapacity due to physical or mental illness, the Executive shall have been
absent from the full-time performance of the Executive's duties with the Company
for a period of six (6) consecutive months, the Company shall have given the
Executive a Notice of Termination for Disability, and, within thirty (30) days
after such Notice of Termination is given, the Executive shall not have returned
to the full-time performance of the Executive's duties.
15
<PAGE>
(M) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
(N) "Executive" shall mean the individual named in the first paragraph
of this Agreement.
(O) "Good Reason" for termination by the Executive of the Executive's
employment shall mean the occurrence (without the Executive's express prior
written consent) after any Change in Control, or prior to a Change in Control
under the circumstances described in clause (ii) of the second sentence of
Section 6.1 hereof (treating all references in paragraphs (I) through (VII)
below to a "Change in Control" as references to a "Potential Change in
Control"), of any one of the following acts by Nobel or the Company, or failures
by Nobel or the Company to act, unless, in the case of any act or failure to act
described in paragraph (I), (V), (VI) or (VII) below, such act or failure to act
is corrected prior to the Date of Termination specified in the Notice of
Termination given in respect thereof:
(I) the assignment to the Executive of any duties
inconsistent with the Executive's status as an executive officer of
the Company or a substantial adverse alteration in the nature or
status of the Executive's responsibilities from those in effect
immediately prior to the Change in Control (other than any such
alteration primarily attributable to the fact that Nobel may no longer
be a public company);
(II) a reduction by the Company in the Executive's annual
base salary as in effect on the date hereof or as the same may be
increased from time to time;
(III) the relocation of the Executive's principal place of
employment to a location more than fifty (50) miles from the
Executive's principal place of employment immediately prior to the
Change in Control or the Company's requiring the Executive to be based
anywhere other than such principal place of employment (or permitted
relocation thereof) except for required travel on the Company's
business to an extent substantially consistent with the Executive's
present business travel obligations;
16
<PAGE>
(IV) the failure by Nobel or the Company to pay to the
Executive any portion of the Executive's current compensation, or to
pay to the Executive any portion of an installment of deferred
compensation under any deferred compensation program of Nobel or the
Company, within seven (7) days of the date such compensation is due;
(V) the failure by Nobel or the Company to continue in
effect any compensation plan in which the Executive participates
immediately prior to the Change in Control which is material to the
Executive's total compensation or any substitute plans adopted prior
to the Change in Control, unless an equitable arrangement (embodied in
an ongoing substitute or alternative plan) has been made with respect
to such plan, or the failure by the Company to continue the
Executive's participation therein (or in such substitute or
alternative plan) on a basis not materially less favorable, both in
terms of the amount or timing of payment of benefits provided and the
level of the Executive's participation relative to other participants,
as existed immediately prior to the Change in Control;
(VI) the failure by Nobel or the Company to continue to
provide the Executive with benefits substantially similar to those
enjoyed by the Executive under any of the pension, savings, life
insurance, medical, health and accident, or disability plans of Nobel
or the Company in which the Executive was participating immediately
prior to the Change in Control, the taking of any action by the
Company which would directly or indirectly materially reduce any of
such benefits or deprive the Executive of any material fringe benefit
enjoyed by the Executive at the time of the Change in Control, or the
failure by the Company to provide the Executive with the number of
paid vacation days to which the Executive is entitled on the basis of
years of service with the Company in accordance with the Company's
normal vacation policy in effect at the time of the Change in Control;
or
17
<PAGE>
(VII) any purported termination of the Executive's
employment which is not effected pursuant to a Notice of Termination
satisfying the requirements of Section 7.1 hereof; for purposes of
this Agreement, no such purported termination shall be effective.
The Executive's right to terminate the Executive's employment for Good
Reason shall not be affected by the Executive's incapacity due to physical or
mental illness. The Executive's continued employment shall not constitute
consent to, or a waiver of rights with respect to, any act or failure to act
constituting Good Reason hereunder.
For purposes of any determination regarding the existence of Good
Reason, any claim by the Executive that Good Reason exists shall be presumed to
be correct unless Nobel or the Company establishes to the Committee by clear and
convincing evidence that Good Reason does not exist.
(P) "Nobel" shall mean Nobel Insurance Limited and, except in
determining under Section 15(E) hereof whether or not any Change in Control has
occurred, shall include any successor to its business and/or assets which
assumes and agrees to perform this Agreement by operation of law, or otherwise.
(Q) "Notice of Termination" shall have the meaning set forth in
Section 7.1 hereof.
(R) "Person" shall have the meaning given in Section 3(a)(9) of the
Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except
that such term shall not include (i) Nobel, the Company or any of their
subsidiaries, (ii) a trustee or other fiduciary holding securities under an
employee benefit plan of Nobel, the Company or any of their Affiliates, (iii) an
underwriter temporarily holding securities pursuant to an offering of such
securities, or (iv) a corporation owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions as their
ownership of stock of the Company.
(S) "Potential Change in Control" shall be deemed to have occurred if
the event set forth in any one of the following paragraphs shall have occurred:
18
<PAGE>
(I) Nobel or the Company enters into an agreement, the
consummation of which would result in the occurrence of a Change in
Control;
(II) Nobel, the Company or any Person publicly announces an
intention to take or to consider taking actions which, if consummated,
would constitute a Change in Control;
(III) any Person becomes the Beneficial Owner, directly or
indirectly, of securities of the Company representing fifteen percent
(15%) or more of either the then outstanding shares of common stock of
the Company or the combined voting power of the Company's then
outstanding securities (not including in the securities beneficially
owned by such Person any securities acquired directly from the Company
or its affiliates); or
(IV) the Board adopts a resolution to the effect that, for
purposes of this Agreement, a Potential Change in Control has
occurred.
(T) "Retirement" shall be deemed the reason for the termination by the
Company or the Executive of the Executive's employment if such employment is
terminated in accordance with the Company's retirement policy, not including
early retirement, generally applicable to its salaried employees, as in effect
immediately prior to the Change in Control, or in accordance with any retirement
arrangement established with the Executive's prior written consent with respect
to the Executive.
(U) "Severance Payments" shall mean those payments so described in
Section 6.1 hereof.
(V) "Tax Counsel" shall have the meaning set forth in Section 6.2
hereof.
(W) "Term" shall mean the period of time described in Section 2 hereof
(including any extension,
19
<PAGE>
continuation or termination described therein).
(X) "Total Payments" shall mean those payments so described in Section
6.2 hereof.
NOBEL INSURANCE LIMITED
By: /s/ Thomas J. O'Shane
--------------------------------
Thomas J. O'Shane
Chairman of
Compensation Committee
NOBEL SERVICE CORPORATION
By: /s/ Jeffry K. Amsbaugh
--------------------------------
Jeffry K. Amsbaugh
President
/s/ Thomas D. Nimmo
--------------------------------
Thomas D. Nimmo
Address:
________________________________
________________________________
________________________________
(Please print carefully)
20
<PAGE>
EXHIBIT 23
<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 25,
1998, relating to the consolidated balance sheets of Nobel Insurance Limited and
subsidiaries as of December 31, 1997 and 1996, 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, 1997.
Hamilton, Bermuda
March 25, 1998
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<PERIOD-END> DEC-31-1997
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