IAS, the claim adjusting operation, leases and occupies approximately 10,000 square feet of office space for their home office and Dallas-based service operation at 1485 Richardson Drive, Richardson, Texas. IAS leases office space for their branch offices located in various cities in the U.S.
As discussed in Note 4 of the Notes to Consolidated Financial Statements at December 31, 1996, the Company has reflected a reserve for claims incurred but not reported ("IBNR") and provision for claims development on certain casualty lines which represented the Company's best estimate of the reserve for claims and claims expense. Redundancy resulting from revisions to estimates of prior years' claims reserves contributed $4,922,000; $15,610,000; $6,992,000; $8,900,000 and $1,089,000 to earnings in 1991, 1992, 1993, 1994, and 1996, respectively. See "Business: Reserves" for a discussion of claims reserve development.
In 1996, the Company reduced the valuation allowance on its deferred tax asset which generated a deferred tax benefit to the statement of income of $907,000.
The composition of the net income for 1995 as compared to the net income for 1996 by type of operation is as follows:
Underwriting operations $(4,652) $(5,004) Claim adjusting operations (330) 188 Investment and other income 8,714 7,034 Federal income tax benefit 2,500 2,069 ------- ------- Net income $ 6,232 $ 4,287 ------- ------- ------- -------
The net financial year claims ratio of 76% for 1996 compares to 73% for 1995 and is analyzed as follows:
The composition of the net income for 1995 as compared to the net income for 1994 by type of operation is as follows:
YEARS ENDED DECEMBER 31, 1994 1995 ------------------------------------------------------------------------ (DOLLARS IN THOUSANDS) Underwriting operations $10,336 $(4,652) Claim adjusting operations (993) (330) Investment and other income 6,032 8,714 Federal income tax benefit --- 2,500 ------- ------- Net income $15,375 $ 6,232 ------- ------- ------- -------
The decrease associated with the claims adjusting businesses is the result of reduced business and reduced commission payments.
INVESTMENT INCOME. While the aggregate yield rate of the portfolio increased approximately .02%, increased interest income of $1,759,000 is due to positive cash flow. Net investment gains in 1995 consisted of $1,061,000 unrealized gain from trading portfolio securities and $351,000 net realized gains from available for sale portfolio. This compares to $1,152,000 unrealized gain from trading portfolio and $663,000 net realized losses from available for sale portfolio in 1994.
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.
United States insurance regulations require the ceding insurers to maintain approved collateral for reinsurance balances, including reserves for unearned premiums and unpaid claims and claims expenses ceded to non-admitted reinsurers. The collateral requirements for reinsurance ceded to the Parent Company by INA is being satisfied by a combination of letters of credit and trust fund balances. The combined amount of letters of credit and market value of trust assets at December 31, 1996 was $14,974,000. See "Business: Collateral Requirements for Assumed Reinsurance."
At December 31, 1996, the Company had cash and investments of $123,442,000, of which $20,887,000 was collateralized or pledged to secure the insurers that have ceded reinsurance to the Company, and to maintain security deposits in the U.S. with various state insurance departments.
Net cash provided from operating activities for 1996 was $12,751,000 compared to $24,341,000 for 1995. The 1996 net cash provided from operations was positively adjusted by dispositions from the trading portfolio of $3,098,000 compared to $3,236,000, in 1995. Net cash used by financing activities in 1996 was $11,229,000 principally due to the purchase of treasury stock. The Company acquired 1,188,000 shares during 1996 for $14,097,000, or an average cost of $11.87 per share. At December 31, 1995, the Company had authority to buy back up to 1,274,000 Nobel shares when the price is attractive and cash is available. During 1996, Nobel received authority from the Board of Directors to purchase (under the same terms) an additional 250,000 shares.
The insurance operations require capital to support premium writings. The Company believes that its insurance subsidiary has sufficient capital to support planned business activities. Management is challenged to deploy present capital levels into profitable business opportunities. During 1996, NIL and NHI executed a credit agreement for a five (5) year term loan facility commitment in the amount of $15,000,000. Term loans are evidenced by a Term Note with interest payable with respect to the unpaid principal amount of each Term Note at a base rate (Prime) or at the adjusted London Interbank Eurodollars rate (LIBOR) depending on what interest basis the loan is made. The uses of the term loan facility commitment are to repay existing bank indebtedness at the time of closing, to make contributions to the equity of Nobel Insurance Company, and to meet other business expansion opportunities. As of December 31, 1996, the company has borrowed $3,538,000 under this loan facility commitment.