The Nobel U.S. Group purchased a 39,000 square foot building at 8001 LBJ Freeway, Dallas, Texas in 1995 of which 25,000 square feet is occupied by the corporate and commercial lines insurance operations. Approximately 10,000 square feet of this building is leased to unrelated tenants with the remaining 4,000 square feet available for lease.
The Nobel U.S. Group owns a 24,000 square foot building at 6923 North Trenholm Road, Columbia, South Carolina of which 12,000 square feet is occupied by the personal lines insurance operation. Approximately 6,000 square feet of the building is leased to unrelated tenants and 6,000 square feet is available for lease.
The selected consolidated financial data presented below for, and as of the end of each of the years ended December 31, have been derived from the consolidated financial statements of the Company which have been audited by KPMG Peat Marwick, independent certified public accountants. The consolidated balance sheets as of December 31, 1996 and 1995, and the consolidated statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996, and the report thereon are included elsewhere in this document. The information presented below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," consolidated financial statements and the notes thereto, and the other financial information included herein. The Parent Company's records are maintained in United States dollars, and all amounts set forth in this Annual Report are expressed in United States dollars except as otherwise indicated.
UNDERWRITING OPERATIONS. Direct 1996 premiums written increased $13,188,000 or 19%, over 1995. Reinsurance purchased increased $17,587,000 or 77% over 1995. Net written premiums in 1996 decreased $4,400,000, or 9% over 1995. Premium gains from new business continued in all of the Company's insurance programs. The comparability of reinsurance purchased is affected by changes in the major reinsurance programs. Effective October 1, 1995, the Company purchased excess of loss cover for the surety program. Effective January 1, 1996, the low-value dwelling reinsurance program was renewed to provide catastrophe protection through a combination of quota share and catastrophe excess of loss reinsurance. Effective July 1, 1994, the commercial casualty reinsurance program was remarketed and restructured with a $500,000 retention. On December 31, 1996, the commercial casualty purchased an additional quota share of approximately $15,400,000.
The comparability of the financial year claims ratios is impacted by the changes in claim payments and claims reserve estimates for prior accident years. See "Business: Reserves" and "Business: Claims and Expense Ratios" for a discussion of prior years' reserve development. The comparability of the claims ratios is also influenced by the effect on net premiums earned for the commercial casualty explosives and trucking programs of premium audits recorded in one year but earned in a prior year and from a custom insurance program for which the expenses normally included in premiums are earned as service fees. The accident year claims ratios are 78% for 1996 and 69% for 1995. The increase in the 1996 accident year loss ratio over 1995 was primarily attributable to losses arising out of Hurricane Fran and the increased frequency of large commercial casualty losses reported for accident year 1996.
Expenses, which consist of net service fees and commissions and all general and administrative expenses, excluding the claim adjusting operations, were 27% and 29% of net earned premiums for 1995 and 1996, respectively. The following table shows the components of net service fees and commissions:
YEARS ENDED DECEMBER 31, 1995 1996 ------------------------------------------------------------------------ (DOLLARS IN THOUSANDS) Commissions, fronting, and taxes expense $11,714 $ 17,090 Ceding commission income (8,265) (11,760) Service fee income (309) --- Change in deferred acquisition costs (1,090) 2,429 ------- -------- 2,050 7,759 Claim adjusting commission paid 4,942 5,624 ------- -------- $ 6,992 $ 13,383 ------- -------- ------- --------
CLAIMS ADJUSTING OPERATIONS. Claims adjusting fees earned were $10,423,000 in 1996, compared to $9,357,000 in 1995, was primarily due to increased catastrophe business in 1996. Net income for 1996 was $101,000 as compared to a loss of $330,000 in 1995.
INVESTMENT INCOME. Net investment gains in 1996 consisted of $6,272,000 of interest income and $762,000 in net realized capital gains, compared to $7,302,000 of interest income and $1,412,000 in net realized capital gains in 1995. The decrease was due to the purchase of $14,100,000 of treasury stock in 1996 and decreased yield rates in the bond market.
UNDERWRITING OPERATIONS. Premiums written increased $10,988,000 or 18%, over 1994. Reinsurance purchased increased $3,896,000 or 20%. Premium gains from new business continued in all of the Company's insurance programs. The comparability of reinsurance purchased is affected by changes in two major reinsurance programs in 1994. Effective January 1, the low-value dwelling reinsurance program was restructured to provide catastrophe protection through increased quota share combined with the CAT excess. The financial effect was increased premiums ceded accompanied by increased claims recoveries and ceding commissions. Effective July 1, the commercial casualty reinsurance program was remarketed and restructured a $500,000 retention. The financial effect was decreased premiums ceded accompanied by decreased claims recoveries and increased ceding commissions. All of the above noted reinsurance program changes applied to the unearned premiums on the effective date.
The claims ratio of 73% for 1995 compares to 39% for 1994 and is analyzed as follows:
The comparability of the financial year claims ratios is impacted by the changes in claims reserve estimates for prior accident years. See "Business: Reserves" and "Business: Claims and Expense Ratios" for a discussion of prior years' reserve development. The comparability of the claims ratios is also influenced by the effect on net premiums earned for the commercial casualty explosives and trucking program of premium audits recorded in one year but earned in a prior year and from a custom insurance program for which the expenses normally included in premiums are earned as service fees. The accident year claims ratios adjusted for this effect are 65% for 1994 and 69% for 1995.
Expenses, which consist of net service fees and commissions and all general and administrative expenses, excluding the claim adjusting operations, were 28% and 27% of net written premiums for 1994 and 1995, respectively. The following table shows the components of net service fees and commissions:
YEARS ENDED DECEMBER 31, 1994 1995 ------------------------------------------------------------------ (DOLLARS IN THOUSANDS) Commissions, fronting, and taxes expense $10,378 $11,714 Ceding commission income (7,812) (8,265) Service fee income (400) (309) Change in deferred acquisition costs (423) (1,090) ------- ------- 1,743 2,050 Claim adjusting commission paid 5,138 4,942 ------- ------- $ 6,881 $ 6,992 ------- ------- ------- -------
In 1995, the Company recognized a $2,500,000 tax benefit primarily due to the change in the valuation allowance on the deferred tax asset.
The principal cash requirements of the Company consist of claims payments and operating expenses.
The source of liquidity for claims payments consists of net premiums, after deduction for expenses, plus investment income on the balances of such premiums prior to their use to pay claims. These invested balances are also used for collateral to secure the ceding insurers' reinsurance reserves. The collateral requirements for reinsurance ceded to the Parent Company by INA is being satisfied by a combination of letters of credit and trust balances. Commencing July 1989, the settlement of all claims and claims expenses was withdrawn from the trust account or deducted from net reinsurance settlements into the trust account. The terms of the Parent Company's letter of credit facility requires collateral with qualifying investments, which if other than short-term investments, must have a market value of 105% of the amount of letters of credit issued.
The investment guidelines adopted by the Company in November 1989 established that the primary objective of the portfolio is to preserve principal and provide liquidity. The Parent Company's investment guidelines prescribe a portfolio structure of maturities to provide adequate liquidity to settle claims liabilities. See "Business: Investments."