-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ABuAVd24vnkHQjZzmXxRbTrCbeWtQnH6xLrSziYDhwZ6vn8g2uzPCoOBfRQaVgqY jESMPqv+SoXrHods38ZHoA== 0001083750-01-500016.txt : 20010813 0001083750-01-500016.hdr.sgml : 20010813 ACCESSION NUMBER: 0001083750-01-500016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010810 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHANDLER USA INC CENTRAL INDEX KEY: 0001083750 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 731325906 STATE OF INCORPORATION: OK FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15135 FILM NUMBER: 1703567 BUSINESS ADDRESS: STREET 1: 1010 MANVEL AVE CITY: CHANDLER STATE: OK ZIP: 74834 BUSINESS PHONE: 4052580804 MAIL ADDRESS: STREET 1: 1010 MANVEL AVE CITY: CHANDLER STATE: OK ZIP: 74834 10-Q 1 cusa2nd2001.txt JUNE 30, 2001 10-Q =============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------------------- FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE --- SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 2001 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: 1-15135 CHANDLER (U.S.A.), INC. (Exact name of registrant as specified in its charter) OKLAHOMA 73-1325906 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1010 MANVEL AVENUE 74834 CHANDLER, OK (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: 405-258-0804 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- The number of common shares, $1.00 par value, of the registrant outstanding on July 31, 2001 was 2,484, which are owned by Chandler Insurance (Barbados), Ltd., a wholly owned subsidiary of Chandler Insurance Company, Ltd. =============================================================================== PAGE i CHANDLER (U.S.A.), INC. INDEX ----- PART I - FINANCIAL INFORMATION - ------------------------------ ITEM 1 - ------ Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000..... 1 Consolidated Statements of Operations for the three months ended June 30, 2001 and 2000 ........................................... 2 Consolidated Statements of Operations for the six months ended June 30, 2001 and 2000 ........................................... 3 Consolidated Statements of Comprehensive Income for the three months ended June 30, 2001 and 2000 .................................... 4 Consolidated Statements of Comprehensive Income for the six months ended June 30, 2001 and 2000 .................................... 5 Consolidated Statements of Cash Flows for the six months ended June 30, 2001 and 2000 ........................................... 6 Notes to Interim Consolidated Financial Statements ....................... 7 ITEM 2. - ------- Management's Discussion and Analysis of Financial Condition and Results of Operations ..................................................10 PART II - OTHER INFORMATION - --------------------------- Item 1. Legal Proceedings ...............................................15 Item 2. Changes in Securities ...........................................15 Item 3. Defaults Upon Senior Securities .................................15 Item 4. Submission of Matters to a Vote of Security Holders .............15 Item 5. Other Information ...............................................15 Item 6. Exhibits and Reports on Form 8-K ................................15 Signatures ...............................................................16 PAGE 1 CHANDLER (U.S.A.), INC. CONSOLIDATED BALANCE SHEETS (Amounts in thousands except share amounts)
June 30, December 31, 2001 2000 ------------ ------------ ASSETS (Unaudited) Investments Fixed maturities available for sale, at fair value Restricted (amortized cost $5,547 and $5,446 in 2001 and 2000, respectively) ........................................ $ 5,689 $ 5,538 Unrestricted (amortized cost $69,237 and $85,693 in 2001 and 2000, respectively) ...................................... 69,482 85,746 Fixed maturities held to maturity, at amortized cost Restricted (fair value $190 and $186 in 2001 and 2000, respectively)....................................... 177 174 Unrestricted (fair value $993 and $953 in 2001 and 2000, respectively) ...................................... 918 882 Equity securities available for sale, at fair value .............. 442 442 ------------ ------------ Total investments .............................................. 76,708 92,782 Cash and cash equivalents .......................................... 7,180 11,978 Premiums receivable, less allowance for non-collection of $366 and $308 at 2001 and 2000, respectively .................. 25,943 33,519 Reinsurance recoverable on paid losses, less allowance for non-collection of $275 at 2001 and 2000 .......................... 6,967 3,283 Reinsurance recoverable on paid losses from related parties ........ 675 614 Reinsurance recoverable on unpaid losses, less allowance for non-collection of $390 and $397 at 2001 and 2000, respectively ... 43,490 39,387 Reinsurance recoverable on unpaid losses from related parties ...... 11,950 14,079 Prepaid reinsurance premiums ....................................... 25,689 32,699 Prepaid reinsurance premiums to related parties .................... 8,964 10,368 Deferred policy acquisition costs .................................. 617 - Property and equipment, net ........................................ 11,129 12,451 Amounts due from related parties ................................... 8,298 - Licenses, net ...................................................... 3,819 3,894 Excess of cost over net assets acquired, net ....................... 2,657 2,963 Other assets ....................................................... 13,655 15,481 ------------ ------------ Total assets ....................................................... $ 247,741 $ 273,498 ============ ============ LIABILITIES AND SHAREHOLDER'S EQUITY Liabilities Unpaid losses and loss adjustment expenses ....................... $ 95,619 $ 100,173 Unearned premiums ................................................ 60,978 74,198 Policyholder deposits ............................................ 5,095 5,062 Accrued taxes and other payables ................................. 7,489 6,690 Premiums payable ................................................. 10,012 17,807 Amounts due to related parties ................................... - 717 Debentures ....................................................... 24,000 24,000 ------------ ------------ Total liabilities .............................................. 203,193 228,647 ------------ ------------ Shareholder's equity Common stock, $1.00 par value, 50,000 shares authorized; 2,484 shares issued and outstanding ............................ 2 2 Paid-in surplus .................................................. 60,584 60,584 Accumulated deficit .............................................. (16,586) (16,122) Accumulated other comprehensive income: Unrealized gain on investments available for sale, net of deferred income taxes ................................. 548 387 ------------ ------------ Total shareholder's equity ..................................... 44,548 44,851 ------------ ------------ Total liabilities and shareholder's equity ....................... $ 247,741 $ 273,498 ============ ============
See accompanying Notes to Interim Consolidated Financial Statements. PAGE 2 CHANDLER (U.S.A.), INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Amounts in thousands)
Three months ended June 30, ------------------------ 2001 2000 ---------- ---------- Premiums and other revenues Direct premiums written and assumed ................... $ 38,770 $ 46,798 Reinsurance premiums ceded ............................ (15,762) (15,457) Reinsurance premiums ceded to related parties ......... (6,517) (9,036) ---------- ---------- Net premiums written and assumed .................... 16,491 22,305 Decrease (increase) in unearned premiums .............. 1,576 (915) ---------- ---------- Net premiums earned ................................. 18,067 21,390 Interest income, net .................................... 903 972 Realized investment gains, net .......................... 266 - Commissions, fees and other income ...................... 416 315 ---------- ---------- Total premiums and other revenues ................... 19,652 22,677 ---------- ---------- Operating costs and expenses Losses and loss adjustment expenses, net of amounts ceded to related parties of $3,627 and $4,585 in 2001 and 2000, respectively ......................... 13,807 16,648 Policy acquisition costs, net of ceding commissions received from related parties of $2,298 and $3,155 in 2001 and 2000, respectively ......................... 2,364 4,875 General and administrative expenses ................... 3,305 2,795 Interest expense ...................................... 563 562 Litigation expenses, net .............................. 28 17 ---------- ---------- Total operating costs and expenses .................. 20,067 24,897 ---------- ---------- Loss before income taxes ................................ (415) (2,220) Federal income tax benefit .............................. 63 699 ---------- ---------- Net loss ................................................ $ (352) $ (1,521) ========== ==========
See accompanying Notes to Interim Consolidated Financial Statements. PAGE 3 CHANDLER (U.S.A.), INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Amounts in thousands)
Six months ended June 30, ------------------------ 2001 2000 ---------- ---------- Premiums and other revenues Direct premiums written and assumed ................... $ 77,517 $ 91,919 Reinsurance premiums ceded ............................ (32,871) (33,771) Reinsurance premiums ceded to related parties ......... (12,507) (20,044) ---------- ---------- Net premiums written and assumed .................... 32,139 38,104 Decrease in unearned premiums ......................... 4,804 4,201 ---------- ---------- Net premiums earned ................................. 36,943 42,305 Interest income, net .................................... 2,065 2,092 Realized investment gains, net .......................... 882 - Commissions, fees and other income ...................... 788 665 ---------- ---------- Total premiums and other revenues ................... 40,678 45,062 ---------- ---------- Operating costs and expenses Losses and loss adjustment expenses, net of amounts ceded to related parties of $7,632 and $9,612 in 2001 and 2000, respectively ......................... 28,098 32,401 Policy acquisition costs, net of ceding commissions received from related parties of $4,338 and $6,945 in 2001 and 2000, respectively ......................... 5,287 9,702 General and administrative expenses ................... 6,583 6,012 Interest expense ...................................... 1,125 1,124 Litigation expenses, net .............................. 19 25 ---------- ---------- Total operating costs and expenses .................. 41,112 49,264 ---------- ---------- Loss before income taxes ................................ (434) (4,202) Federal income tax benefit (provision)................... (30) 1,288 ---------- ---------- Net loss ................................................ $ (464) $ (2,914) ========== ==========
See accompanying Notes to Interim Consolidated Financial Statements. PAGE 4 CHANDLER (U.S.A.), INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Amounts in thousands)
Three months ended June 30, --------------------------- 2001 2000 ---------- ---------- Net loss ......................................................$ (352) $ (1,521) ---------- ---------- Other comprehensive income (loss), before income tax: Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period ... (555) 231 Less: Reclassification adjustment for gains included in net loss ............................................. (266) - ---------- ---------- Other comprehensive income (loss), before income tax .......... (821) 231 Income tax benefit (provision) related to items of other comprehensive income (loss) ................................. 279 (78) ---------- ---------- Other comprehensive income (loss), net of income tax .......... (542) 153 ---------- ---------- Comprehensive loss. ...........................................$ (894) $ (1,368) ========== ==========
See accompanying Notes to Interim Consolidated Financial Statements. PAGE 5 CHANDLER (U.S.A.), INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Amounts in thousands)
Six months ended June 30, --------------------------- 2001 2000 ---------- ---------- Net loss ......................................................$ (464) $ (2,914) ---------- ---------- Other comprehensive income, before income tax: Unrealized gains on securities: Unrealized holding gains arising during period ............ 1,126 218 Less: Reclassification adjustment for gains included in net loss .................................... (882) - ---------- ---------- Other comprehensive income, before income tax ................. 244 218 Income tax benefit related to items of other comprehensive income ........................................ (83) (74) ---------- ---------- Other comprehensive income, net of income tax ................. 161 144 ---------- ---------- Comprehensive loss. ...........................................$ (303) $ (2,770) ========== ==========
See accompanying Notes to Interim Consolidated Financial Statements. PAGE 6 CHANDLER (U.S.A.), INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Amounts in thousands)
Six months ended June 30, ------------------------- 2001 2000 ---------- ---------- OPERATING ACTIVITIES: Net loss ............................................................$ (464) $ (2,914) Add (deduct): Adjustments to reconcile net loss to cash applied to operating activities: Realized investment gains, net .................................. (882) - Net losses on sale of property and equipment .................... 20 3 Amortization and depreciation ................................... 1,046 1,114 Provision for non-collection of premiums ........................ 98 75 Net change in non-cash balances relating to operating activities: Premiums receivable ........................................... 7,478 12,195 Reinsurance recoverable on paid losses ........................ (3,765) (3,882) Reinsurance recoverable on paid losses from related parties ... (61) - Reinsurance recoverable on unpaid losses ...................... (4,022) (2,740) Reinsurance recoverable on unpaid losses from related parties.. 2,129 (2,715) Prepaid reinsurance premiums .................................. 7,010 (2,273) Prepaid reinsurance premiums to related parties ............... 1,404 (3,153) Deferred policy acquisition costs ............................. (617) 692 Other assets .................................................. 1,687 (2,290) Unpaid losses and loss adjustment expenses .................... (4,554) 3,617 Unearned premiums ............................................. (13,220) 1,225 Policyholder deposits ......................................... 33 172 Accrued taxes and other payables .............................. (1,240) (25) Premiums payable .............................................. (7,795) (371) Premiums payable to related parties ........................... - (240) ---------- ---------- Cash applied to operating activities ............................ (15,715) (1,510) ---------- ---------- INVESTING ACTIVITIES Unrestricted fixed maturities available for sale: Purchases ....................................................... (12,297) (9,262) Sales ........................................................... 20,381 - Maturities ...................................................... 9,052 12,147 Cost of property and equipment purchased .......................... (1,090) (2,436) Proceeds from sale of property and equipment ...................... 3,886 18 ---------- ---------- Cash provided by investing activities ........................... 19,932 467 ---------- ---------- FINANCING ACTIVITIES Proceeds from borrowing from related parties ...................... 2,134 714 Payments and loans to related parties ............................. (11,149) (784) ---------- ---------- Cash applied to financing activities ............................ (9,015) (70) ---------- ---------- Decrease in cash and cash equivalents during the period ............. (4,798) (1,113) Cash and cash equivalents at beginning of period .................... 11,978 5,140 ---------- ---------- Cash and cash equivalents at end of period ..........................$ 7,180 $ 4,027 ========== ==========
See accompanying Notes to Consolidated Financial Statements. PAGE 7 CHANDLER (U.S.A.), INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS Six months ended June 30, 2001 and 2000 (Unaudited) NOTE 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. They do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. However, except as disclosed herein, there have been no material changes in the information included in the Company's annual report on Form 10-K for the year ended December 31, 2000. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the three and six month periods ended June 30, 2001 are not necessarily indicative of the results that may be expected for the year. The consolidated financial statements include the accounts of Chandler (U.S.A.), Inc. ("Chandler USA" or the "Company") and all subsidiaries. The following represents the significant subsidiaries: - National American Insurance Company ("NAICO"). - LaGere & Walkingstick Insurance Agency, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation. Chandler USA is wholly owned by Chandler Insurance (Barbados), Ltd. ("Chandler Barbados") which in turn is wholly owned by Chandler Insurance Company, Ltd. ("Chandler Insurance"), a Cayman Islands company. NOTE 2. LITIGATION CENTRA LITIGATION Chandler Insurance and certain of its subsidiaries and affiliates, including Chandler USA, have been involved in various matters of litigation with CenTra, Inc. ("CenTra") and certain of its affiliates, officers and directors since 1992. In 1997, NAICO learned that several CenTra affiliates had filed two lawsuits against NAICO, NAICO Indemnity (Cayman), Ltd. ("NAICO Indemnity"), a wholly owned subsidiary of Chandler Insurance, and certain NAICO officers asserting some of the same claims made and tried in the U.S. District Court for the Western District of Oklahoma (the "Oklahoma Court") during 1997. Those claims were purportedly prosecuted by CenTra on its own behalf and on behalf of its subsidiaries and were based upon alleged wrongful cancellation of their insurance policies by NAICO and NAICO Indemnity. The Oklahoma Court entered a judgment against CenTra on these claims. NAICO and NAICO Indemnity contend that the Oklahoma Court's adjudication is conclusive as to all claims. The lawsuits have been consolidated and have been assigned to the same judge who presided over the action in the Oklahoma Court. Dispositive motions filed by NAICO, NAICO Indemnity and the other defendants are currently under consideration by the Oklahoma Court. PAGE 8 In the CenTra litigation, certain officers and directors of Chandler USA and Chandler Insurance were named as defendants. In accordance with its Articles of Association, Chandler Insurance and its subsidiaries have advanced the litigation expenses of these persons in exchange for undertakings to repay such expenses if those persons are later determined to have breached the standard of conduct provided in the Articles of Association. These expenses together with certain other expenses may be recovered from Chandler Insurance's director and officer liability insurance policy (the "D&O Insurer"). As a result of various events in 1995, 1996 and 1997, Chandler Barbados and Chandler USA recorded estimated recoveries of costs from its D&O Insurer totaling $3,456,000 and $1,044,000, respectively, for reimbursable amounts previously paid that relate to allowable defense and litigation costs for such parties. Chandler Barbados and Chandler USA received payment for a 1995 claim during 1996 in the amount of $636,000 and $159,000, respectively. The balance is included in other assets in Chandler Barbados' and Chandler USA's balance sheets. Chandler Insurance and its subsidiaries are entitled to a total of $5 million under the applicable insurance policy to the extent they have advanced reimbursable expenses. Chandler Insurance and its subsidiaries are currently involved in litigation with the insurer for payment of the policy balance. The litigation is pending in the Oklahoma Court and in State Court in Michigan. These separate cases are still in the early pleading stages and the Company cannot predict the date of resolution or the outcome of these cases. Chandler Insurance and its subsidiaries may or may not recover the remaining policy limits and could incur significant costs in resolving this matter. The ultimate outcome of the litigation described above could have a material adverse effect on Chandler USA and Chandler Insurance and could negatively impact future earnings and cash flows. GOING PRIVATE LITIGATION On June 5 and 6, 2000, three civil lawsuits were filed against Chandler Insurance, Chandler USA and all of Chandler Insurance's directors. All three suits have now been consolidated into a single proceeding. The suit alleges that the plans announced on June 1, 2000 to take Chandler Insurance private are detrimental to certain shareholders of Chandler Insurance that would be subject to a reverse stock split. Each suit also requests that it be certified as a class action and that the court enter a temporary restraining order to prevent completion of the announced plan. The suit also alleges that all defendants have breached and are breaching fiduciary duties owed to the plaintiffs and other shareholders. The plaintiffs have been granted leave to amend their petitions but have not yet amended them. As a result, Chandler Insurance has not yet responded to the lawsuit but plans to file timely responses denying the allegations. On June 27, 2000, CenTra made similar allegations in an already pending case in the Oklahoma Court. The Oklahoma Court dismissed CenTra's motion on April 11, 2001. On March 5, 2001, shareholders of Chandler Insurance approved the going private transaction. On March 28, 2001, the reverse stock split was completed. OTHER LITIGATION Chandler USA and its subsidiaries are not parties to any other material litigation other than as is routinely encountered in their respective business activities. NOTE 3. NEW ACCOUNTING STANDARD In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that the Company recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. The Company adopted SFAS No. 133 effective January 1, 2001. The adoption of SFAS No. 133 did not have a material impact on the Company's consolidated financial condition, results of operations or cash flows since the Company has no derivative instruments. NOTE 4. GOING PRIVATE TRANSACTION - PARENT COMPANY A special meeting of shareholders of the Company's indirect parent, Chandler Insurance, was held on March 5, 2001. Three proposals which constitute a going private transaction were approved at the meeting. Together these proposals constitute the "Recapitalization Plan." The Oklahoma Department of Insurance has approved the change of control resulting from the Recapitalization Plan. PAGE 9 Chandler Insurance financed the Recapitalization Plan through (i) a $2.4 million sale of Chandler Insurance Class A Common Shares to Messrs. LaGere and Paden, (ii) a $10.7 million intercompany loan from Chandler Barbados, and (iii) proceeds of approximately $735,000 from the exercise of outstanding Chandler Insurance options. Chandler USA loaned approximately $10.7 million to Chandler Barbados. Chandler USA's intercompany loan to Chandler Barbados was financed by a $3.8 million sale and leaseback transaction for certain equipment owned by Chandler USA and a $7.0 million dividend declared and paid by NAICO. NOTE 5. SALE AND LEASEBACK TRANSACTION During March 2001, the Company entered into a $3.8 million sale and leaseback transaction for certain owned equipment. The Company agreed to lease the equipment for three years with monthly rental installments equal to the sum of (i) $22,167 plus (ii) interest on the unpaid lease balance at a floating interest rate of 1% over Chase Manhattan Bank Prime, which was 6.75% at June 30, 2001. The Company has the option to repurchase the equipment at the end of the lease for $3,002,000. NOTE 6. SEGMENT INFORMATION The following table presents a summary of the Company's operating segments for the three and six month periods ended June 30, 2001 and 2000:
Property and All Intersegment Reported Agency casualty other eliminations balances --------- ---------- --------- ------------ ---------- (In thousands) THREE MONTHS ENDED JUNE 30, 2001 Revenues from external customers (1)...$ 426 $ 18,057 $ - $ - $ 18,483 Intersegment revenues.................. 1,374 16 - (1,390) - Segment profit (loss) before income taxes (2)..................... 92 (325) (182) - (415) THREE MONTHS ENDED JUNE 30, 2000 Revenues from external customers (1)...$ 298 $ 21,407 $ - $ - $ 21,705 Intersegment revenues.................. 1,616 73 - (1,689) - Segment profit (loss) before income taxes (2)..................... (77) (1,963) (180) - (2,220) SIX MONTHS ENDED JUNE 30, 2001 Revenues from external customers (1)...$ 785 $ 36,946 $ - $ - $ 37,731 Intersegment revenues.................. 3,001 33 - (3,034) - Segment profit (loss) before income taxes (2)..................... (144) 36 (326) - (434) Segment assets......................... 4,853 252,253 - (9,365) 247,741 SIX MONTHS ENDED JUNE 30, 2000 Revenues from external customers (1)...$ 612 $ 42,358 $ - $ - $ 42,970 Intersegment revenues.................. 3,408 110 - (3,518) - Segment profit (loss) before income taxes (2)..................... (333) (3,519) (350) - (4,202) Segment assets......................... 5,439 262,826 - (9,891) 258,374 - --------------------------------------- (1) Consists of net premiums earned and commissions, fees and other income. (2) Includes net realized investment gains.
PAGE 10 The following supplemental information pertaining to each insurance program's net premiums earned and losses and loss adjustment expenses is presented for the property and casualty segment.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- -------------------------- 2001 2000 2001 2000 ------------ ------------ ------------ ------------ (In thousands) INSURANCE PROGRAM - --------------------------------------- NET PREMIUMS EARNED Standard property and casualty ........$ 13,683 $ 15,612 $ 28,354 $ 30,309 Political subdivisions ................ 3,027 3,187 5,918 6,524 Surety bonds .......................... 1,402 1,639 2,438 3,504 Group accident and health ............. 4 810 319 1,756 Other ................................. (49) 142 (86) 212 ------------ ------------ ------------ ------------ $ 18,067 $ 21,390 $ 36,943 $ 42,305 ============ ============ ============ ============ LOSSES AND LOSS ADJUSTMENT EXPENSES Standard property and casualty ........$ 9,566 $ 12,452 $ 20,888 $ 23,379 Political subdivisions ................ 3,319 2,803 5,690 5,649 Surety bonds .......................... 571 379 772 806 Group accident and health ............. 448 1,140 960 2,822 Other ................................. (97) (126) (212) (255) ------------ ------------ ------------ ------------ $ 13,807 $ 16,648 $ 28,098 $ 32,401 ============ ============ ============ ============
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS Some of the statements made in this Form 10-Q Report, as well as statements made by Chandler (U.S.A.), Inc. ("Chandler USA" or the "Company") in periodic press releases and oral statements made by the Company's officials constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such factors include, among other things, (i) general economic and business conditions; (ii) interest rate changes; (iii) competition and regulatory environment in which the Company operates; (iv) claims frequency; (v) claims severity; (vi) the number of new and renewal policy applications submitted by the Company's agents; (vii) the ability of the Company to obtain adequate reinsurance in amounts and at rates that will not adversely affect its competitive position; (viii) the ability of National American Insurance Company ("NAICO") to maintain favorable insurance company ratings; and (ix) other factors including the ongoing litigation matters involving the Company's indirect parent. PAGE 11 RESULTS OF OPERATIONS PREMIUMS EARNED The following table sets forth premiums earned on a gross basis (before reductions for premiums ceded to reinsurers) and on a net basis (after such reductions) for each insurance program for the three and six month periods ended June 30, 2001 and 2000:
GROSS PREMIUMS EARNED NET PREMIUMS EARNED --------------------------- -------------------------- THREE MONTHS ENDED JUNE 30, 2001 2000 2001 2000 - ------------------------------------ ------------ ------------ ------------ ------------ (In thousands) Standard property and casualty ..... $ 33,233 $ 33,887 $ 13,683 $ 15,612 Political subdivisions ............. 8,488 8,527 3,027 3,187 Surety bonds ....................... 2,525 3,313 1,402 1,639 Group accident and health .......... 14 858 4 810 Other .............................. (60) 154 (49) 142 ------------ ------------ ------------ ------------ TOTAL .............................. $ 44,200 $ 46,739 $ 18,067 $ 21,390 ============ ============ ============ ============
GROSS PREMIUMS EARNED NET PREMIUMS EARNED --------------------------- -------------------------- SIX MONTHS ENDED JUNE 30, 2001 2000 2001 2000 - ------------------------------------ ------------ ------------ ------------ ------------ (In thousands) Standard property and casualty ..... $ 68,547 $ 64,594 $ 28,354 $ 30,309 Political subdivisions ............. 17,121 16,679 5,918 6,524 Surety bonds ....................... 4,808 7,322 2,438 3,504 Group accident and health .......... 342 1,860 319 1,756 Other .............................. (81) 238 (86) 212 ------------ ------------ ------------ ------------ TOTAL .............................. $ 90,737 $ 90,693 $ 36,943 $ 42,305 ============ ============ ============ ============
Gross premiums earned, before reductions for premiums ceded to reinsurers, decreased $2.5 million or 5% in the second quarter of 2001 compared to the second quarter of 2000. Gross premiums earned for the first six months of 2001 increased $44,000 compared to the first six months of 2000. Net premiums earned decreased $3.3 million or 16% in the second quarter of 2001 compared to the second quarter of 2000, and decreased $5.4 million or 13% for the six months ended June 30, 2001 compared to the 2000 period. The decrease in net premiums earned was due to a decrease in written premium production, and to the purchase of quota share reinsurance during the fourth quarter of 2000 which reduced NAICO's net retention for its casualty and workers compensation lines of business. The decrease in written premium production was partially offset by increases in premium rates. Gross premiums earned in the standard property and casualty program decreased $654,000 or 2% in the second quarter of 2001 compared to the second quarter of 2000, and increased $4.0 million or 6% for the six months ended June 30, 2001 compared to the 2000 period. The increase in the six month period is primarily attributable to increased written premium production in Texas during 2000, and to increases in premium rates. Net premiums earned in the standard property and casualty program decreased $1.9 million or 12% in the second quarter of 2001 compared to the second quarter of 2000, and decreased $2.0 million or 6% for the six months ended June 30, 2001 compared to the 2000 period. The decrease in net premiums earned was due primarily to the purchase of the quota share reinsurance discussed above. Gross premiums earned in the political subdivisions program decreased $39,000 in the second quarter of 2001 compared to the second quarter of 2000, and increased $442,000 or 3% for the six months ended June 30, 2001 compared to the 2000 period. Net premiums earned in the political subdivisions program decreased $160,000 or 5% in the second quarter of 2001 compared to the second quarter of 2000, and decreased $606,000 or 9% for the six months ended June 30, 2001 compared to the 2000 period. The decrease in net premiums earned was due primarily to the purchase of the quota share reinsurance discussed above. PAGE 12 Gross premiums earned in the surety bond program decreased $788,000 or 24% in the second quarter of 2001 compared to the second quarter of 2000, and decreased $2.5 million or 34% for the six months ended June 30, 2001 compared to the 2000 period. The decreases were primarily due to decreases in premium production in Wisconsin, California and Indiana. A portion of the decrease resulted from the termination of a program that was 100% reinsured by an unaffiliated reinsurer. Net premiums earned in the surety bond program decreased $237,000 or 14% in the second quarter of 2001 compared to the second quarter of 2000, and decreased $1.1 million or 30% for the six months ended June 30, 2001 compared to the 2000 period. Gross premiums earned in the group accident and health program decreased $844,000 and $1.5 million in the second quarter and first six months of 2001, respectively, and net premiums earned decreased $806,000 and $1.4 million in the second quarter and first six months of 2001, due to the discontinuation of this program during 2000. NET INTEREST INCOME AND NET REALIZED INVESTMENT GAINS At June 30, 2001, the Company's investment portfolio consisted primarily of fixed income U.S. Government, high-quality corporate and tax exempt bonds, with approximately 9% invested in cash and money market instruments. The Company's portfolio contains no non-investment grade bonds or real estate investments. Net interest income decreased $69,000 or 7% in the second quarter of 2001 compared to the second quarter of 2000, and decreased $27,000 or 1% for the six months ended June 30, 2001. Net realized investment gains were $266,000 and $882,000 during the second quarter and first six months of 2001, respectively. The Company had no net realized investment gains during the 2000 periods. COMMISSIONS, FEES AND OTHER INCOME The Company's income from commissions, fees and other income increased $101,000 or 32% in the second quarter of 2001 compared to the second quarter of 2000, and increased $123,000 or 18% for the six months ended June 30, 2001 compared to the 2000 period. The majority of the Company's income from commissions, fees and other income are from the Company's subsidiary LaGere & Walkingstick Insurance Agency, Inc. ("L&W"). L&W's brokerage commissions and fees before intercompany eliminations were $1.8 million and $3.8 million in the second quarter and first six months of 2001, respectively, compared to $1.9 million and $4.0 million in the year ago periods. A large portion of the brokerage commissions and fees for L&W is incurred by NAICO and thus eliminated in the consolidation of the Company's subsidiaries. LOSSES AND LOSS ADJUSTMENT EXPENSES The percentage of losses and loss adjustment expenses to net premiums earned ("loss ratio") was 76.4% and 76.1% for the quarter and six months ended June 30, 2001, compared to 77.8% and 76.6% in the comparable 2000 periods. Weather-related losses from wind and hail totaled $793,000 and $994,000 for the second quarter and first six months of 2001, respectively, and increased the respective loss ratios by 4.4 and 2.7 percentage points. Weather-related losses totaled $1.2 million and $1.8 million for the second quarter and first six months of 2000, respectively, and increased the respective loss ratios by 5.6 and 4.2 percentage points. The decrease in weather-related losses in the 2001 periods was offset by adverse loss experience in the group accident and health program and by increased losses and loss adjustment expenses in the standard property and casualty and political subdivision programs. POLICY ACQUISITION COSTS Policy acquisition costs consist of costs associated with the acquisition of new and renewal business and generally include direct costs such as premium taxes, commissions to agents and ceding companies and premium-related assessments and indirect costs such as salaries and expenses of personnel who perform and support underwriting activities. NAICO also receives ceding commissions from the reinsurers who assume premiums from NAICO under certain reinsurance contracts and the ceding commissions are accounted for as a reduction of policy acquisition costs. Direct policy acquisition costs and ceding commissions are deferred and amortized over the terms of the policies. When the sum of anticipated losses, loss adjustment expenses and unamortized policy acquisition costs exceeds the related unearned premiums, including anticipated investment income, a provision for the indicated deficiency is recorded. PAGE 13 The following table sets forth the Company's policy acquisition costs for each of the three and six month periods ended June 30, 2001 and 2000:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------- ---------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- (In thousands) Commissions expense ........................ $ 4,446 $ 5,730 $ 8,837 $ 10,987 Other premium related assessments .......... 280 410 330 813 Premium taxes .............................. 1,058 1,240 2,019 2,215 Excise taxes ............................... 65 90 125 200 Dividends to policyholders ................. 63 100 102 201 Other expense .............................. 60 30 90 72 ---------- ---------- ---------- ---------- Total direct expenses ...................... 5,972 7,600 11,503 14,488 Indirect underwriting expenses ............. 3,490 3,975 7,624 8,053 Commissions received from reinsurers ....... (6,678) (6,053) (13,211) (13,531) Adjustment for deferred acquisition costs .. (420) (647) (629) 692 ---------- ---------- ---------- ---------- Net policy acquisition costs ............... $ 2,364 $ 4,875 $ 5,287 $ 9,702 ========== ========== ========== ==========
Total gross direct and indirect expenses as a percentage of direct written and assumed premiums were 24.4% and 24.7% for the second quarter and first six months of 2001, respectively, compared to 24.7% and 24.5% in the corresponding year ago periods. Commission expense as a percentage of gross written and assumed premiums was 11.5% and 11.4% in the second quarter and the first six months of 2001, respectively, compared to 12.2% and 12.0% in the corresponding 2000 periods. Indirect underwriting expenses were 9.0% and 9.8% of total direct written and assumed premiums in the second quarter and first six months of 2001, respectively, compared to 8.5% and 8.8% in the corresponding 2000 periods. Indirect expenses include general overhead and administrative costs associated with the acquisition of new and renewal business, some of which is relatively fixed in nature, thus, the percentage of such expenses to direct written and assumed premiums will vary depending on the Company's overall premium volume. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses were 7.4% and 7.2% of gross premiums earned and commissions, fees and other income in the second quarter and first six months of 2001, respectively, compared to 5.9% and 6.6% for the corresponding 2000 periods. General and administrative expenses have historically not varied in direct proportion to the Company's revenues. A portion of such expenses is allocated to policy acquisition costs (indirect underwriting expenses) and loss and loss adjustment expenses based on various factors including employee counts, salaries, occupancy and specific identification. Because certain types of expenses are fixed in nature, the percentage of such expenses to revenues will vary depending on the Company's overall premium volume. INTEREST EXPENSE Interest expense of $563,000 and $1.1 million in the second quarter and first six months of 2001 was unchanged from the year-ago periods. Substantially all of the Company's interest expense is related to the $24 million of outstanding debentures. LITIGATION AND LITIGATION EXPENSES Litigation expenses reflect expenses related to the ongoing legal proceedings involving CenTra, Inc. and certain of its affiliates ("CenTra"). Litigation expenses increased $11,000 in the second quarter of 2001 compared to the second quarter of 2000, and decreased $6,000 for the six months ended June 30, 2001 compared to the 2000 period. Increased or renewed activity could result in greater litigation expenses in the future. See Note 2 to Interim Consolidated Financial Statements. PAGE 14 LIQUIDITY AND CAPITAL RESOURCES In the first six months of 2001, the Company used $15.7 million in cash from operations due primarily to decreases in premiums payable, unpaid losses and loss adjustment expenses (net of reinsurance recoverables) and unearned premiums (net of prepaid reinsurance premium) less a decrease in premiums receivable, all of which generally resulted from the decrease in written premium production during 2001. The Company used $1.5 million in cash from operations during the first six months of 2000 due primarily to the net loss In the first six months of 2000 and increases in reinsurance recoverables and prepaid reinsurance premiums, less a decrease in premiums receivable which was due to the collection of approximately $12.9 million related to the rescission of two reinsurance treaties. On March 5, 2001, shareholders of the Company's indirect parent, Chandler Insurance Company, Ltd. ("Chandler Insurance"), approved a going private transaction. Chandler Insurance financed the Recapitalization Plan through (i) a $2.4 million sale of Chandler Insurance Class A Common Shares to Messrs. LaGere and Paden, (ii) a $10.7 million intercompany loan from Chandler Insurance (Barbados), Ltd. ("Chandler Barbados"), and (iii) proceeds of approximately $735,000 from the exercise of outstanding Chandler Insurance options. Chandler USA loaned approximately $10.7 million to Chandler Barbados. Chandler USA's intercompany loan to Chandler Barbados was financed by a $3.8 million sale and leaseback transaction for certain equipment owned by Chandler USA and a $7.0 million dividend declared and paid by NAICO. PAGE 15 PART II. OTHER INFORMATION ----------------- Item 1. Legal Proceedings ----------------- In response to this item, the Company incorporates by reference to Note 2. Litigation to its Interim Consolidated Financial Statements contained elsewhere in this report. Item 2. Changes in Securities --------------------- None. Item 3. Defaults Upon Senior Securities ------------------------------- None. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- None. Item 5. Other Information ----------------- None Item 6. Exhibits and Reports on Form 8-K -------------------------------- The Company filed one current report on Form 8-K dated June 11, 2001 responding to Item 4 of Form 8-K. PAGE 16 SIGNATURES ---------- Pursuant to the requirements 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. Date: August 6, 2001 CHANDLER (U.S.A.), INC. By: /s/ W. Brent LaGere ------------------------------- W. Brent LaGere Chairman of the Board and Chief Executive Officer (Principal Executive Officer) By: /s/ Mark C. Hart ------------------------------- Mark C. Hart Vice President - Finance, Chief Financial Officer and Treasurer (Principal Accounting Officer) -----END PRIVACY-ENHANCED MESSAGE-----