0001083750-01-500019.txt : 20011128 0001083750-01-500019.hdr.sgml : 20011128 ACCESSION NUMBER: 0001083750-01-500019 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011107 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: 1777352 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 cusa92001q.txt CUSA 9/30/2001 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 September 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 October 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 September 30, 2001 and December 31, 2000 .................................................1 Consolidated Statements of Operations for the three months ended September 30, 2001 and 2000 .....................................2 Consolidated Statements of Operations for the nine months ended September 30, 2001 and 2000 .....................................3 Consolidated Statements of Comprehensive Income for the three months ended September 30, 2001 and 2000 ..............................4 Consolidated Statements of Comprehensive Income for the nine months ended September 30, 2001 and 2000 ..............................5 Consolidated Statements of Cash Flows for the nine months ended September 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 .................................................12 PART II - OTHER INFORMATION Item 1. Legal Proceedings ...............................................16 Item 2. Changes in Securities ...........................................16 Item 3. Defaults Upon Senior Securities .................................16 Item 4. Submission of Matters to a Vote of Security Holders .............16 Item 5. Other Information ...............................................16 Item 6. Exhibits and Reports on Form 8-K ................................16 Signatures .................................................................17 PAGE 1 CHANDLER (U.S.A.), INC. CONSOLIDATED BALANCE SHEETS (Amounts in thousands except share amounts)
September 30, December 31, 2001 2000 ------------ ------------ ASSETS (Unaudited) Investments Fixed maturities available for sale, at fair value Restricted (amortized cost $5,371 and $5,446 in 2001 and 2000, respectively) ..................................... $ 5,705 $ 5,538 Unrestricted (amortized cost $57,123 and $85,693 in 2001 and 2000, respectively) ..................................... 58,637 85,746 Fixed maturities held to maturity, at amortized cost Restricted (fair value $383 and $186 in 2001 and 2000, respectively) ..................................... 348 174 Unrestricted (fair value $846 and $953 in 2001 and 2000, respectively) ..................................... 767 882 Equity securities available for sale, at fair value ............. 442 442 ------------- ------------ Total investments ............................................. 65,899 92,782 Cash and cash equivalents ......................................... 15,834 11,978 Premiums receivable, less allowance for non-collection of $407 and $308 at 2001 and 2000, respectively ................. 28,509 33,519 Reinsurance recoverable on paid losses, less allowance for non-collection of $647 and $275 at 2001 and 2000, respectively .. 10,640 3,283 Reinsurance recoverable on paid losses from related parties ....... 497 614 Reinsurance recoverable on unpaid losses, less allowance for non-collection of $397 at 2000 .................................. 51,235 39,387 Reinsurance recoverable on unpaid losses from related parties ..... 11,100 14,079 Prepaid reinsurance premiums ...................................... 29,591 32,699 Prepaid reinsurance premiums to related parties ................... 9,277 10,368 Property and equipment, net ....................................... 11,037 12,451 Amounts due from related parties .................................. 6,721 - Licenses, net ..................................................... 3,782 3,894 Excess of cost over net assets acquired, net ...................... 2,503 2,963 Other assets ...................................................... 12,423 15,481 ------------- ------------ Total assets ...................................................... $ 259,048 $ 273,498 ============= ============ LIABILITIES AND SHAREHOLDER'S EQUITY Liabilities Unpaid losses and loss adjustment expenses ...................... $ 98,658 $ 100,173 Unearned premiums ............................................... 68,674 74,198 Policyholder deposits ........................................... 5,131 5,062 Accrued taxes and other payables ................................ 5,902 6,690 Premiums payable ................................................ 10,996 17,807 Amounts due to related parties .................................. - 717 Debentures ...................................................... 24,000 24,000 ------------- ------------ Total liabilities ............................................. 213,361 228,647 ------------- ------------ 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 ............................................. (16,411) (16,122) Accumulated other comprehensive income: Unrealized gain on investments available for sale, net of deferred income taxes ................................ 1,512 387 ------------- ------------ Total shareholder's equity .................................... 45,687 44,851 ------------- ------------ Total liabilities and shareholder's equity ........................ $ 259,048 $ 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 September 30, -------------------------------- 2001 2000 -------------- -------------- Premiums and other revenues Direct premiums written and assumed ................... $ 50,214 $ 65,258 Reinsurance premiums ceded ............................ (22,465) (23,027) Reinsurance premiums ceded to related parties ......... (6,863) (12,065) -------------- -------------- Net premiums written and assumed .................... 20,886 30,166 Increase in unearned premiums ......................... (3,480) (6,811) -------------- -------------- Net premiums earned ................................. 17,406 23,355 Interest income, net .................................... 870 1,062 Realized investment gains, net .......................... 712 142 Commissions, fees and other income ...................... 605 431 -------------- -------------- Total premiums and other revenues ................... 19,593 24,990 -------------- -------------- Operating costs and expenses Losses and loss adjustment expenses, net of amounts ceded to related parties of $4,763 and $5,317 in 2001 and 2000, respectively ......................... 12,389 16,722 Policy acquisition costs, net of ceding commissions received from related parties of $2,317 and $4,207 in 2001 and 2000, respectively ......................... 2,621 4,566 General and administrative expenses ................... 3,595 3,253 Interest expense ...................................... 558 565 Litigation expenses, net .............................. 16 25 -------------- -------------- Total operating costs and expenses .................. 19,179 25,131 -------------- -------------- Income (loss) before income taxes ....................... 414 (141) Federal income tax provision ............................ (239) (75) -------------- -------------- Net income (loss) ....................................... $ 175 $ (216) ============== ==============
See accompanying Notes to Interim Consolidated Financial Statements. PAGE 3 CHANDLER (U.S.A.), INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Amounts in thousands)
Nine months ended September 30, ------------------------------- 2001 2000 -------------- -------------- Premiums and other revenues Direct premiums written and assumed .................. $ 127,731 $ 157,177 Reinsurance premiums ceded ........................... (55,336) (56,798) Reinsurance premiums ceded to related parties ........ (19,370) (32,109) -------------- -------------- Net premiums written and assumed ................... 53,025 68,270 Decrease (increase) in unearned premiums ............. 1,324 (2,610) -------------- -------------- Net premiums earned ................................ 54,349 65,660 Interest income, net ................................... 2,935 3,154 Realized investment gains, net ......................... 1,594 142 Commissions, fees and other income ..................... 1,393 1,096 -------------- -------------- Total premiums and other revenues .................. 60,271 70,052 -------------- -------------- Operating costs and expenses Losses and loss adjustment expenses, net of amounts ceded to related parties of $12,395 and $14,929 in 2001 and 2000, respectively ........................ 40,487 49,123 Policy acquisition costs, net of ceding commissions received from related parties of $6,655 and $11,152 in 2001 and 2000, respectively ..................... 7,908 14,268 General and administrative expenses .................. 10,178 9,265 Interest expense ..................................... 1,683 1,689 Litigation expenses, net ............................. 35 50 -------------- -------------- Total operating costs and expenses ................. 60,291 74,395 -------------- -------------- Loss before income taxes ............................... (20) (4,343) Federal income tax benefit (provision) ................. (269) 1,213 -------------- -------------- Net loss ............................................... $ (289) $ (3,130) ============== ==============
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 September 30, -------------------------------- 2001 2000 -------------- -------------- Net income (loss) ....................................... $ 175 $ (216) -------------- -------------- Other comprehensive income, before income tax: Unrealized gains on securities: Unrealized holding gains arising during period ...... 2,172 1,204 Less: Reclassification adjustment for gains included in net income (loss) .............................. (712) (142) -------------- -------------- Other comprehensive income, before income tax ........... 1,460 1,062 Income tax provision related to items of other comprehensive income .................................. (496) (361) -------------- -------------- Other comprehensive income, net of income tax ........... 964 701 -------------- -------------- Comprehensive income .................................... $ 1,139 $ 485 ============== ==============
See accompanying Notes to Interim Consolidated Financial Statements. PAGE 5 CHANDLER (U.S.A.), INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Amounts in thousands)
Nine months ended September 30, ------------------------------- 2001 2000 -------------- -------------- Net loss ............................................... $ (289) $ (3,130) -------------- -------------- Other comprehensive income, before income tax: Unrealized gains on securities: Unrealized holding gains arising during period ..... 3,298 1,422 Less: Reclassification adjustment for gains included in net loss ............................. (1,594) (142) -------------- -------------- Other comprehensive income, before income tax .......... 1,704 1,280 Income tax provision related to items of other comprehensive income ................................. (579) (435) -------------- -------------- Other comprehensive income, net of income tax .......... 1,125 845 -------------- -------------- Comprehensive income (loss) ............................ $ 836 $ (2,285) ============== ==============
See accompanying Notes to Interim Consolidated Financial Statements. PAGE 6 CHANDLER (U.S.A.), INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Amounts in thousands)
Nine months ended September 30, ------------------------------- 2001 2000 -------------- -------------- OPERATING ACTIVITIES Net loss .................................................. $ (289) $ (3,130) Add (deduct): Adjustments to reconcile net loss to cash provided by (applied to) operating activities: Realized investment gains, net ........................ (1,594) (142) Net losses on sale of property and equipment .......... 22 5 Amortization and depreciation ......................... 1,580 1,856 Provision for non-collection of premiums .............. 153 249 Net change in non-cash balances relating to operating activities: Premiums receivable ................................. 4,857 3,456 Reinsurance recoverable on paid losses .............. (7,721) 903 Reinsurance recoverable on paid losses from related parties ................................... 117 - Reinsurance recoverable on unpaid losses ............ (11,484) (470) Reinsurance recoverable on unpaid losses from related parties ................................... 2,979 (4,066) Prepaid reinsurance premiums ........................ 3,108 (7,742) Prepaid reinsurance premiums to related parties ..... 1,091 (5,245) Deferred policy acquisition costs ................... - 791 Other assets ........................................ 2,395 (2,600) Unpaid losses and loss adjustment expenses .......... (1,515) 1,288 Unearned premiums ................................... (5,524) 15,597 Policyholder deposits ............................... 69 194 Accrued taxes and other payables .................... (2,827) (1,039) Premiums payable .................................... (6,811) 4,270 Premiums payable to related parties ................. - 446 -------------- -------------- Cash provided by (applied to) operating activities .. (21,394) 4,621 -------------- -------------- INVESTING ACTIVITIES Unrestricted fixed maturities available for sale: Purchases ............................................. (28,810) (25,776) Sales ................................................. 47,368 7,142 Maturities ............................................ 11,508 19,241 Cost of property and equipment purchased ................ (1,302) (2,718) Proceeds from sale of property and equipment ............ 3,924 21 -------------- -------------- Cash provided by (applied to) investing activities .... 32,688 (2,090) -------------- -------------- FINANCING ACTIVITIES Payments and loans from related parties ................. 3,914 834 Payments and loans to related parties ................... (11,352) (902) -------------- -------------- Cash applied to financing activities .................. (7,438) (68) -------------- -------------- Increase in cash and cash equivalents during the period ... 3,856 2,463 Cash and cash equivalents at beginning of period .......... 11,978 5,140 -------------- -------------- Cash and cash equivalents at end of period ................ $ 15,834 $ 7,603 ============== ==============
See accompanying Notes to Consolidated Financial Statements. PAGE 7 CHANDLER (U.S.A.), INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS Nine months ended September 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 nine month periods ended September 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 contend they are entitled to a total of $5 million under the applicable insurance policy to the extent they have advanced reimbursable expenses. The D&O Insurer contends that certain policy provisions exclude coverage for these claims. On August 22, 2001, Chandler Insurance and its subsidiaries, including the Company filed an action in the State District Court in Oklahoma City, Oklahoma ("Oklahoma State Court") alleging that the D&O policies should be rescinded and seeking repayment of more than $5 million in premiums they previously paid. Chandler Insurance and its subsidiaries are currently involved in litigation with the insurer for payment of the policy balance or rescission and repayment of premiums previously paid. The litigation is pending in the Oklahoma State 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 or the previously paid premiums 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 were 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 requested 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 alleged that all defendants have breached and are breaching fiduciary duties owed to the plaintiffs and other shareholders. In March 2001, Chandler Insurance completed the going private transaction (See Note 5). On October 5, 2001 the suits were dismissed. 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 STANDARDS In June 1998, the Financial Accounting Standards Board ("FASB") 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. In June 2001, the FASB issued SFAS No. 141, BUSINESS COMBINATIONS, which supercedes Accounting Principles Board ("APB") Opinion No. 16, BUSINESS COMBINATIONS. The most significant changes made by SFAS No. 141 are requiring the purchase method of accounting for all business combinations initiated after June 30, 2001, establishing specific criteria for the recognition of intangible assets separately from goodwill, and requiring that unallocated negative goodwill be written off immediately as an extraordinary gain. The provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001, and to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001 or later. The adoption of SFAS No. 141 did not have a material impact on the Company's consolidated financial condition, results of operations or cash flows since the Company has not entered into a business combination subsequent to June 30, 2001. PAGE 9 NOTE 4. ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED In June 2001, the FASB issued SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, and SFAS No. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS. SFAS No. 142 supercedes APB Opinion No. 17, INTANGIBLE ASSETS, and primarily addresses accounting for goodwill and intangible assets subsequent to acquisition. Under SFAS No. 142, goodwill and separately identified intangible assets with indefinite lives will no longer be amortized but reviewed annually (or more frequently if impairment indicators arise) for impairment. Separately identified intangible assets not deemed to have indefinite lives will continue to be amortized over their useful lives. SFAS No. 142 applies to all goodwill and intangible assets acquired after June 30, 2001. For goodwill and intangible assets acquired prior to July 1, 2001, the Company is required to adopt SFAS No. 142 effective January 1, 2002. The Company is currently evaluating the impact of SFAS No. 142 on its consolidated financial statements. SFAS No. 143 requires that entities record as a liability obligations associated with the retirement of a tangible long-lived asset when such obligations are incurred, and capitalize the cost by increasing the carrying amount of the related long-lived asset. SFAS No. 143 will be effective for fiscal years beginning after June 15, 2002, however, earlier application is encouraged. The Company, which will adopt SFAS No. 143 on January 1, 2002, does not expect a material impact from the adoption of SFAS No. 143 on its consolidated financial statements. In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. SFAS No. 144 supercedes SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, and APB Opinion No. 30, REPORTING THE RESULTS OF OPERATIONS - REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS. SFAS No. 144 establishes an accounting model based on SFAS No. 121 for long-lived assets to be disposed of by sale, previously accounted for under APB Opinion No. 30. This Statement is effective for fiscal years beginning after December 15, 2001. The Company, which will adopt SFAS No. 144 on January 1, 2002, does not expect a material impact from the adoption of SFAS No. 144 on its consolidated financial statements. NOTE 5. 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. 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 6. 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 6.0% at September 30, 2001. The Company has the option to repurchase the equipment at the end of the lease for $3,002,000. PAGE 10 NOTE 7. SEGMENT INFORMATION The following table presents a summary of the Company's operating segments for the three and nine month periods ended September 30, 2001 and 2000:
Property and All Intersegment Reported Agency casualty Other eliminations balances --------- ---------- --------- ------------ ---------- (In thousands) THREE MONTHS ENDED SEPTEMBER 30, 2001 Revenues from external customers (1) .. $ 597 $ 17,414 $ - $ - $ 18,011 Intersegment revenues ................. 1,922 19 - (1,941) - Segment profit (loss) before income taxes (2) .................... 171 412 (169) - 414 THREE MONTHS ENDED SEPTEMBER 30, 2000 Revenues from external customers (1) .. $ 399 $ 23,387 $ - $ - $ 23,786 Intersegment revenues ................. 2,917 44 - (2,961) - Segment profit (loss) before income taxes (2) .................... (5) 223 (359) - (141) NINE MONTHS ENDED SEPTEMBER 30, 2001 Revenues from external customers (1) .. $ 1,382 $ 54,360 $ - $ - $ 55,742 Intersegment revenues ................. 4,923 52 - (4,975) - Segment profit (loss) before income taxes (2) .................... 27 448 (495) - (20) Segment assets ........................ 7,177 262,838 - (10,967) 259,048 NINE MONTHS ENDED SEPTEMBER 30, 2000 Revenues from external customers (1) .. $ 1,011 $ 65,745 $ - $ - $ 66,756 Intersegment revenues ................. 6,325 155 - (6,480) - Segment profit (loss) before income taxes (2) .................... (338) (3,296) (709) - (4,343) Segment assets ........................ 6,636 279,641 - (11,038) 275,239 --------------------------------------- (1) Consists of net premiums earned and commissions, fees and other income. (2) Includes net realized investment gains.
PAGE 11 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 NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- ----------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- (In thousands) INSURANCE PROGRAM ------------------------------------------ NET PREMIUMS EARNED Standard property and casualty ........... $ 12,920 $ 17,950 $ 41,274 $ 48,258 Political subdivisions ................... 3,319 3,228 9,236 9,752 Surety bonds ............................. 1,166 1,446 3,604 4,951 Group accident and health ................ - 762 319 2,519 Other .................................... 1 (31) (84) 180 ---------- ---------- ---------- ---------- $ 17,406 $ 23,355 $ 54,349 $ 65,660 ========== ========== ========== ========== LOSSES AND LOSS ADJUSTMENT EXPENSES Standard property and casualty ........... $ 8,165 $ 12,885 $ 29,054 $ 36,264 Political subdivisions ................... 3,489 2,478 9,179 8,127 Surety bonds ............................. 593 335 1,365 1,141 Group accident and health ................ (62) 1,065 897 3,887 Other .................................... 204 (41) (8) (296) ---------- ---------- ---------- ---------- $ 12,389 $ 16,722 $ 40,487 $ 49,123 ========== ========== ========== ==========
NOTE 8. COMMITMENTS AND CONTINGENCIES Reliance Insurance Company ("Reliance") reinsured NAICO for certain workers compensation risks during 1998 and 1999. During the fourth quarter of 1999, NAICO agreed to rescind two reinsurance treaties which had been in effect since January 1, 1999. At September 30, 2001, NAICO had reinsurance recoverables from Reliance for paid and unpaid losses relating to the 1998 treaties of approximately $2.2 million. Reliance had been under state supervision since May 2001. During October 2001, the Commonwealth of Pennsylvania placed Reliance in liquidation. At this time, NAICO is unable to determine the amount of its reinsurance recoverables from Reliance that will ultimately be collected. Reinsurance contracts do not relieve an insurer from its obligation to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company; consequently, allowances are established for amounts deemed uncollectible. NAICO did not incur any charges for uncollectible reinsurance recoverables from unaffiliated reinsurers in 2000 or in the nine months ended September 30, 2001. At September 30, 2001, NAICO's allowance for uncollectible reinsurance recoverables was approximately $647,000. PAGE 12 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. 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 nine month periods ended September 30, 2001 and 2000:
GROSS PREMIUMS EARNED NET PREMIUMS EARNED --------------------------- -------------------------- THREE MONTHS ENDED SEPTEMBER 30, 2001 2000 2001 2000 ------------------------------------ ------------ ------------ ------------ ------------ (In thousands) Standard property and casualty ..... $ 31,564 $ 37,913 $ 12,920 $ 17,950 Political subdivisions ............. 8,633 8,760 3,319 3,228 Surety bonds ....................... 2,363 3,405 1,166 1,446 Group accident and health .......... - 828 - 762 Other .............................. (42) (20) 1 (31) ------------ ------------ ------------ ------------ TOTAL .............................. $ 42,518 $ 50,886 $ 17,406 $ 23,355 ============ ============ ============ ============
GROSS PREMIUMS EARNED NET PREMIUMS EARNED --------------------------- -------------------------- NINE MONTHS ENDED SEPTEMBER 30, 2001 2000 2001 2000 ------------------------------------ ------------ ------------ ------------ ------------ (In thousands) Standard property and casualty ..... $ 100,111 $ 102,507 $ 41,274 $ 48,258 Political subdivisions ............. 25,754 25,439 9,236 9,752 Surety bonds ....................... 7,170 10,727 3,604 4,951 Group accident and health .......... 343 2,688 319 2,519 Other .............................. (123) 218 (84) 180 ------------ ------------ ------------ ------------ TOTAL .............................. $ 133,255 $ 141,579 $ 54,349 $ 65,660 ============ ============ ============ ============
Gross premiums earned decreased $8.4 million or 16% in the third quarter of 2001 compared to the third quarter of 2000 and decreased $8.3 million or 6% for the nine months ended September 30, 2001 compared to the 2000 period. The decrease in gross premiums earned was due to a decrease in written premium production in Texas and Oklahoma, that was partially offset by increases in premium rates. Net premiums earned decreased $5.9 million or 25% in the third quarter of 2001 compared to the third quarter of 2000, and decreased $11.3 million or 17% for the nine months ended September 30, 2001 compared to the 2000 period. The purchase of quota share reinsurance during the fourth quarter of 2000 reduced NAICO's net retention and net premiums earned for its casualty and workers compensation lines of business. PAGE 13 Gross premiums earned in the standard property and casualty program decreased $6.3 million or 17% in the third quarter of 2001 compared to the third quarter of 2000, and decreased $2.4 million or 2% for the nine months ended September 30, 2001 compared to the 2000 period. The decreases are primarily attributable to decreased written premium production in Oklahoma and Texas during 2001 that was partially offset by increases in premium rates. Net premiums earned in the standard property and casualty program decreased $5.0 million or 28% in the third quarter of 2001 compared to the third quarter of 2000, and decreased $7.0 million or 14% for the nine months ended September 30, 2001 compared to the 2000 period. The purchase of the quota share reinsurance discussed above accounted for a portion of the decrease in net premiums earned in the 2001 periods. Gross premiums earned in the political subdivisions program decreased $127,000 or 1% in the third quarter of 2001 compared to the third quarter of 2000, and increased $315,000 or 1% for the nine months ended September 30, 2001 compared to the 2000 period. Net premiums earned in the political subdivisions program increased $91,000 or 3% in the third quarter of 2001 compared to the third quarter of 2000, and decreased $516,000 or 5% for the nine months ended September 30, 2001 compared to the 2000 period. The purchase of the quota share reinsurance discussed above accounted for a portion of the decrease in net premiums earned in the nine months ended September 30, 2001. Gross premiums earned in the surety bond program decreased $1.0 million or 31% in the third quarter of 2001 compared to the third quarter of 2000, and decreased $3.6 million or 33% for the nine months ended September 30, 2001 compared to the 2000 period. The decreases were primarily due to decreases in premium production in California, Louisiana and Wisconsin. 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 $280,000 or 19% in the third quarter of 2001 compared to the third quarter of 2000, and decreased $1.3 million or 27% for the nine months ended September 30, 2001 compared to the 2000 period. Gross premiums earned in the group accident and health program decreased $828,000 and $2.3 million in the third quarter and first nine months of 2001, respectively, and net premiums earned decreased $762,000 and $2.2 million in the third quarter and first nine months of 2001, due to the discontinuation of this program during 2000. NET INTEREST INCOME AND NET REALIZED INVESTMENT GAINS At September 30, 2001, the Company's investment portfolio consisted primarily of fixed income U.S. Government and high-quality corporate bonds, with approximately 19% 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 $192,000 or 18% in the third quarter of 2001 compared to the third quarter of 2000, and decreased $219,000 or 7% for the nine months ended September 30, 2001. Lower interest rates and a decrease in the Company's invested assets contributed to the decrease in net interest income. Net realized investment gains increased $570,000 in the third quarter of 2001 compared to the third quarter of 2000, and increased $1.5 million for the nine months ended September 30, 2001 compared to the 2000 period. The net realized investment gains in the 2001 periods resulted primarily from sales of fixed maturities available for sale to provide cash for operating activities due to the decrease in written premiums. COMMISSIONS, FEES AND OTHER INCOME The Company's income from commissions, fees and other income increased $174,000 or 40% in the third quarter of 2001 compared to the third quarter of 2000, and increased $297,000 or 27% for the nine months ended September 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 $2.5 million and $6.3 million in the third quarter and first nine months of 2001, respectively, compared to $3.3 million and $7.3 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 71.2% and 74.5% for the quarter and nine months ended September 30, 2001, compared to 71.6% and 74.8% in the comparable 2000 periods. A decrease in the standard property and casualty program loss ratio was offset by an increase in the loss ratio for the political subdivisions program and surety bonds program. Weather-related losses from wind and hail totaled $761,000 and $1.8 million for the third quarter and first nine months of 2001, respectively, and increased the respective loss ratios by 4.4 and 3.2 percentage points. Weather-related losses totaled $579,000 and $2.4 million for the third quarter and first nine months of 2000, respectively, and increased the respective loss ratios by 2.5 and 3.6 percentage points. PAGE 14 At this time, NAICO has not received any claims related to the September 11, 2001 terrorist attacks on the World Trade Center and does not believe that it has any significant exposure to these and related losses. While several of NAICO's reinsurers did experience significant losses related to these attacks, it currently does not appear that these losses will impair the reinsurers' ability to pay claims. 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. The following table sets forth the Company's policy acquisition costs for each of the three and nine month periods ended September 30, 2001 and 2000:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------- ---------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- (In thousands) Commissions expense ........................ $ 4,714 $ 6,840 $ 13,551 $ 17,828 Other premium related assessments .......... 310 334 640 1,147 Premium taxes .............................. 883 1,101 2,902 3,316 Excise taxes ............................... 69 121 194 321 Dividends to policyholders ................. 36 (1) 138 200 Other expense .............................. 53 173 143 245 ---------- ---------- ---------- ---------- Total direct expenses ...................... 6,065 8,568 17,568 23,057 Indirect underwriting expenses ............. 4,118 5,230 11,742 13,283 Commissions received from reinsurers ....... (8,575) (9,331) (21,786) (22,863) Adjustment for deferred acquisition costs .. 1,013 99 384 791 ---------- ---------- ---------- ---------- Net policy acquisition costs ............... $ 2,621 $ 4,566 $ 7,908 $ 14,268 ========== ========== ========== ==========
Total gross direct and indirect expenses as a percentage of direct written and assumed premiums were 20.3% and 22.9% for the third quarter and first nine months of 2001, respectively, compared to 21.1% and 23.1% in the corresponding year ago periods. Commission expense as a percentage of gross written and assumed premiums was 9.4% and 10.6% in the third quarter and the first nine months of 2001, respectively, compared to 10.5% and 11.3% in the corresponding 2000 periods. Indirect underwriting expenses were 8.2% and 9.2% of total direct written and assumed premiums in the third quarter and first nine months of 2001, respectively, compared to 8.0% and 8.5% 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 8.3% and 7.6% of gross premiums earned and commissions, fees and other income in the third quarter and first nine months of 2001, respectively, compared to 6.3% and 6.5% 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. PAGE 15 INTEREST EXPENSE Interest expense was $558,000 and $1.7 million in the third quarter and first nine months of 2001 compared to $565,000 and $1.7 million in the corresponding 2000 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"), and related litigation with the Company's director and officer liability insurer. Litigation expenses decreased $9,000 in the third quarter of 2001 compared to the third quarter of 2000, and decreased $15,000 for the nine months ended September 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. LIQUIDITY AND CAPITAL RESOURCES In the first nine months of 2001, the Company used $21.4 million in cash from operations due primarily to an increase in reinsurance recoverables on paid and unpaid losses which resulted from the purchase of additional reinsurance in October 2000 and increased loss activity within the Company's other reinsurance treaties. In the first nine months of 2000, the Company provided $4.6 million in cash from operations due primarily to the collection of certain receivables totaling approximately $12.9 million in January 2000 that were related to the rescission of two reinsurance treaties during the fourth quarter of 1999. Cash provided from operations in the 2000 period also increased due to an increase in unearned premiums and premiums payable, less increases in prepaid reinsurance premiums, reinsurance recoverable on unpaid losses from related parties, and premiums receivable other than the collections described above, which generally resulted from an increase in written premiums. 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. Reliance Insurance Company ("Reliance") reinsured NAICO for certain workers compensation risks during 1998 and 1999. During the fourth quarter of 1999, NAICO agreed to rescind two reinsurance treaties which had been in effect since January 1, 1999. At September 30, 2001, NAICO had reinsurance recoverables from Reliance for paid and unpaid losses relating to the 1998 treaties of approximately $2.2 million. Reliance had been under state supervision since May 2001. During October 2001, the Commonwealth of Pennsylvania placed Reliance in liquidation. At this time, NAICO is unable to determine the amount of its reinsurance recoverables from Reliance that will ultimately be collected. Reinsurance contracts do not relieve an insurer from its obligation to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company; consequently, allowances are established for amounts deemed uncollectible. NAICO did not incur any charges for uncollectible reinsurance recoverables from unaffiliated reinsurers in 2000 or in the nine months ended September 30, 2001. At September 30, 2001, NAICO's allowance for uncollectible reinsurance recoverables was approximately $647,000. PAGE 16 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 -------------------------------- None PAGE 17 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: November 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)