NIC leases and occupies 7,158 square feet of office space for the surety underwriting facility located at 2296 Henderson Mill Road, Atlanta, Georgia.
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.
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.
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.
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.
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.
"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
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.
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.
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.
The source of liquidity for claims payments consists of net premiums, after deduction for expenses, plus investment income on the balances of such premiums prior to their use to pay claims. These invested balances are also used for collateral to secure the ceding insurers' reinsurance reserves. The collateral requirements for reinsurance ceded to the Parent Company by INA is in trust balances. Commencing July 1989, the settlement of all claims and claims expenses was withdrawn from the trust account or deducted from net reinsurance settlements into the trust account.
The investment guidelines adopted by the Company in November 1989 established that the primary objective of the portfolio is to preserve principal and provide liquidity. The Parent Company's investment guidelines prescribe a portfolio structure of maturities to provide adequate liquidity to settle claims liabilities. See "Business - Investments."
United States insurance regulations require the ceding insurers to maintain approved collateral for reinsurance balances, including reserves for unearned premiums and unpaid claims and claims expenses ceded to non-admitted reinsurers. The collateral requirements for reinsurance ceded to the Parent 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."
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.
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.