-----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, VGOiuA+eEhD6ETZ1O13sF+aot908AO6VoDH/ePfm7Qlx3INtIFHNmZM9AXsQB4wH xgDHVXlUctfCqCz4Hv1QXA== 0001083750-02-000012.txt : 20020809 0001083750-02-000012.hdr.sgml : 20020809 20020809124711 ACCESSION NUMBER: 0001083750-02-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020809 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: 02724235 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 june2002q.txt JUNE 2002 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, 2002 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, 2002 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, 2002 and December 31, 2001..... 1 Consolidated Statements of Operations for the three months ended June 30, 2002 and 2001 ........................................... 2 Consolidated Statements of Operations for the six months ended June 30, 2002 and 2001 ........................................... 3 Consolidated Statements of Comprehensive Income for the three months ended June 30, 2002 and 2001 .................................... 4 Consolidated Statements of Comprehensive Income for the six months ended June 30, 2002 and 2001 .................................... 5 Consolidated Statements of Cash Flows for the six months ended June 30, 2002 and 2001 ........................................... 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)
June 30, December 31, 2002 2001 ------------ ------------ ASSETS (Unaudited) ASSETS Investments Fixed maturities available for sale, at fair value Restricted (amortized cost $6,975 and $5,419 in 2002 and 2001, respectively) .......................................$ 7,084 $ 5,501 Unrestricted (amortized cost $51,610 and $62,124 in 2002 and 2001, respectively) ....................................... 52,025 62,154 Fixed maturities held to maturity, at amortized cost Restricted (fair value $390 and $385 in 2002 and 2001, respectively) ....................................... 364 353 Unrestricted (fair value $876 and $854 in 2002 and 2001, respectively) ....................................... 813 782 Equity securities available for sale, at fair value ............... 514 464 ------------ ------------ Total investments ............................................... 60,800 69,254 Cash and cash equivalents ........................................... 8,114 4,124 Premiums receivable, less allowance for non-collection of $339 and $298 at 2002 and 2001, respectively ................... 23,252 24,185 Reinsurance recoverable on paid losses, less allowance for non-collection of $1,247 and $1,096 at 2002 and 2001, respectively .......................................... 11,988 11,756 Reinsurance recoverable on paid losses from related parties ......... 630 292 Reinsurance recoverable on unpaid losses ............................ 44,876 42,545 Reinsurance recoverable on unpaid losses from related parties ....... 7,567 9,399 Prepaid reinsurance premiums ........................................ 19,251 26,890 Prepaid reinsurance premiums to related parties ..................... 10,103 8,103 Deferred policy acquisition costs ................................... 802 - Property and equipment, net ......................................... 10,450 10,822 Amounts due from related parties .................................... 8,534 7,880 State insurance licenses, net ....................................... 3,745 3,745 Goodwill ............................................................ 2,350 2,350 Other assets ........................................................ 12,161 13,464 ------------ ------------ Total assets ........................................................$ 224,623 $ 234,809 ============ ============ LIABILITIES AND SHAREHOLDER'S EQUITY Liabilities Unpaid losses and loss adjustment expenses ........................$ 81,155 $ 84,756 Unearned premiums ................................................. 57,172 61,562 Policyholder deposits ............................................. 4,408 4,600 Accrued taxes and other payables .................................. 7,816 7,480 Premiums payable .................................................. 5,183 8,669 Debentures ........................................................ 24,000 24,000 ------------ ------------ Total liabilities ............................................... 179,734 191,067 ------------ ------------ Shareholder's equity Common stock, $1.00 par value, 50,000 shares authorized; 2,484 shares issued ............................................. 2 2 Paid-in surplus ................................................... 60,584 60,584 Accumulated deficit ............................................... (16,382) (17,225) Accumulated other comprehensive income: Unrealized gain on investments available for sale, net of deferred income taxes .................................. 685 381 ------------ ------------ Total shareholder's equity ...................................... 44,889 43,742 ------------ ------------ Total liabilities and shareholder's equity ........................$ 224,623 $ 234,809 ============ ============
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, --------------------------- 2002 2001 ---------- ---------- Premiums and other revenues Direct premiums written and assumed ...................$ 36,339 $ 38,770 Reinsurance premiums ceded ............................ (10,938) (15,762) Reinsurance premiums ceded to related parties ......... (7,267) (6,517) ---------- ---------- Net premiums written and assumed .................... 18,134 16,491 Decrease (increase) in unearned premiums .............. (1,008) 1,576 ---------- ---------- Net premiums earned ................................. 17,126 18,067 Interest income, net .................................... 738 903 Interest income from related parties .................... 79 - Realized investment gains, net .......................... 388 266 Commissions, fees and other income ...................... 512 416 ---------- ---------- Total premiums and other revenues ..................... 18,843 19,652 ---------- ---------- Operating costs and expenses Losses and loss adjustment expenses, net of amounts ceded to related parties of $4,326 and $3,627 in 2002 and 2001, respectively ......................... 11,503 13,807 Policy acquisition costs, net of ceding commissions received from related parties of $2,463 and $2,298 in 2002 and 2001, respectively ......................... 2,179 2,364 General and administrative expenses ................... 3,076 3,305 Interest expense ...................................... 559 563 Litigation expenses, net .............................. 21 28 ---------- ---------- Total operating costs and expenses .................. 17,338 20,067 ---------- ---------- Income (loss) before income taxes ....................... 1,505 (415) Federal income tax benefit (provision) .................. (546) 63 ---------- ---------- Net income (loss) .......................................$ 959 $ (352) ========== ==========
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, --------------------------- 2002 2001 ---------- ---------- Premiums and other revenues Direct premiums written and assumed ...................$ 71,189 $ 77,517 Reinsurance premiums ceded ............................ (23,004) (32,871) Reinsurance premiums ceded to related parties ......... (13,584) (12,507) ---------- ---------- Net premiums written and assumed .................... 34,601 32,139 Decrease (increase) in unearned premiums .............. (1,250) 4,804 ---------- ---------- Net premiums earned ................................. 33,351 36,943 Interest income, net .................................... 1,370 2,065 Interest income from related parties .................... 161 - Realized investment gains, net .......................... 404 882 Commissions, fees and other income ...................... 954 788 ---------- ---------- Total premiums and other revenues ................... 36,240 40,678 ---------- ---------- Operating costs and expenses Losses and loss adjustment expenses, net of amounts ceded to related parties of $7,549 and $7,632 in 2002 and 2001, respectively ......................... 22,307 28,098 Policy acquisition costs, net of ceding commissions received from related parties of $4,634 and $4,338 in 2002 and 2001, respectively ......................... 4,586 5,287 General and administrative expenses ................... 6,727 6,583 Interest expense ...................................... 1,118 1,125 Litigation expenses, net .............................. 67 19 ---------- ---------- Total operating costs and expenses .................. 34,805 41,112 ---------- ---------- Income (loss) before income taxes ....................... 1,435 (434) Federal income tax provision ............................ (592) (30) ---------- ---------- Net income (loss) .......................................$ 843 $ (464) ========== ==========
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, --------------------------- 2002 2001 ---------- ---------- Net income (loss) ............................................$ 959 $ (352) ---------- ---------- Other comprehensive income (loss), before income tax: Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period .. 1,563 (555) Less: Reclassification adjustment for gains included in net income (loss) ................................... (388) (266) ---------- ---------- Other comprehensive income (loss), before income tax ......... 1,175 (821) Income tax benefit (provision) related to items of other comprehensive income (loss) ................................ (400) 279 ---------- ---------- Other comprehensive income (loss), net of income tax ......... 775 (542) ---------- ---------- Comprehensive income (loss) ..................................$ 1,734 $ (894) ========== ==========
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, --------------------------- 2002 2001 ---------- ---------- Net income (loss) .............................................$ 843 $ (464) ---------- ---------- Other comprehensive income, before income tax: Unrealized gains on securities: Unrealized holding gains arising during period ............ 865 1,126 Less: Reclassification adjustment for gains included in net income (loss) .................................... (404) (882) ---------- ---------- Other comprehensive income, before income tax ................. 461 244 Income tax provision related to items of other comprehensive income ........................................ (157) (83) ---------- ---------- Other comprehensive income, net of income tax ................. 304 161 ---------- ---------- Comprehensive income (loss) ...................................$ 1,147 $ (303) ========== ==========
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, ------------------------- 2002 2001 ---------- ---------- OPERATING ACTIVITIES Net income (loss) ...................................................$ 843 $ (464) Add (deduct): Adjustments to reconcile net income (loss) to cash applied to operating activities: Realized investment gains, net .................................. (404) (882) Net losses on sale of property and equipment .................... - 20 Amortization and depreciation expense ........................... 816 1,046 Provision for non-collection of premiums ........................ 143 98 Provision for non-collection of reinsurance recoverables ........ 173 - Net change in non-cash balances relating to operating activities: Premiums receivable ........................................... 790 7,478 Reinsurance recoverable on paid losses ........................ (424) (3,765) Reinsurance recoverable on paid losses from related parties ... (338) (61) Reinsurance recoverable on unpaid losses ...................... (2,312) (4,022) Reinsurance recoverable on unpaid losses from related parties.. 1,832 2,129 Prepaid reinsurance premiums .................................. 7,639 7,010 Prepaid reinsurance premiums to related parties ............... (2,000) 1,404 Deferred policy acquisition costs ............................. (802) (617) Other assets .................................................. 1,090 1,687 Unpaid losses and loss adjustment expenses .................... (3,601) (4,554) Unearned premiums ............................................. (4,390) (13,220) Policyholder deposits ......................................... (192) 33 Accrued taxes and other payables .............................. 336 (1,240) Premiums payable .............................................. (3,486) (7,795) ---------- ---------- Cash applied to operating activities ............................ (4,287) (15,715) ---------- ---------- INVESTING ACTIVITIES Unrestricted fixed maturities available for sale: Purchases ....................................................... (12,069) (12,297) Sales ........................................................... 19,481 20,381 Maturities ...................................................... 1,641 9,052 Cost of property and equipment purchased .......................... (158) (1,090) Proceeds from sale of property and equipment ...................... 36 3,886 ---------- ---------- Cash provided by investing activities ........................... 8,931 19,932 ---------- ---------- FINANCING ACTIVITIES Proceeds from borrowing from affiliate ............................ 1,804 2,134 Payments on borrowing from affiliate .............................. (2,458) (11,149) ---------- ---------- Cash applied to financing activities ............................ (654) (9,015) ---------- ---------- Increase (decrease) in cash and cash equivalents during the period .. 3,990 (4,798) Cash and cash equivalents at beginning of period .................... 4,124 11,978 ---------- ---------- Cash and cash equivalents at end of period ..........................$ 8,114 $ 7,180 ========== ==========
See accompanying Notes to Interim Consolidated Financial Statements. PAGE 7 CHANDLER (U.S.A.), INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (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, 2001. 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, 2002 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. Certain officers and directors of Chandler USA and Chandler Insurance were named as defendants in this litigation. 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 of $2,820,000 and $885,000 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 Chandler USA, filed an action in the State District Court in Oklahoma City, Oklahoma ("Oklahoma State Court") alleging that the director and officer liability insurance 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. The case is still in the early pleading stages and Chandler USA cannot predict the date of resolution or the outcome of this case. 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. PAGE 8 OTHER LITIGATION Transamerica Occidental Life Insurance Company ("Transamerica") reinsured NAICO for certain workers compensation risks during 1989, 1990 and 1991. Beginning in 1996, Transamerica refused to pay NAICO for balances that it owed under the reinsurance treaties. Transamerica owed NAICO approximately $1.5 million for reinsurance recoverables on paid losses and loss adjustment expenses as of June 30, 2002. NAICO is currently engaged in arbitration in order to enforce the terms of the reinsurance treaties. The ultimate outcome of the litigation described above could have a material adverse effect on Chandler USA and could negatively impact future earnings and cash flows. 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 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS No. 142 supercedes Accounting Principles Board ("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. Chandler USA adopted SFAS No. 142 effective January 1, 2002. Chandler USA has completed the required impairment tests of its state insurance licenses and goodwill and concluded that there has not been an impairment loss since the fair values of the licenses and goodwill exceeded their respective carrying values. The fair values were determined based on the present value of projected future net cash flows. All of Chandler USA's goodwill pertains to the agency operating segment. A reconciliation of the reported net income (loss) to the adjusted net income (loss) had SFAS No. 142 been applied as of January 1, 2001 follows:
Three months ended June Six months ended June 30, --------------------------- -------------------------- 2002 2001 2002 2001 ------------ ------------ ------------ ------------ (In thousands) (In thousands) Reported net income (loss) ...........$ 959 $ (352) $ 843 $ (464) Add back amortization: Goodwill ........................... - 154 - 307 State insurance licenses ........... - 37 - 75 ------------ ------------ ------------ ------------ Adjusted net income (loss) ...........$ 959 $ (161) $ 843 $ (82) ============ ============ ============ ============
In June 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS. 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. Chandler USA adopted SFAS No. 143 effective January 1, 2002. The adoption of SFAS No. 143 did not have a material impact on Chandler USA's consolidated financial condition, results of operations or cash flows. 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. Chandler USA adopted SFAS No. 144 effective January 1, 2002. The adoption of SFAS No. 144 did not have a material impact on Chandler USA's consolidated financial condition, results of operations or cash flows. In April 2002, the FASB issued SFAS No. 145, RESCISSION OF FASB STATEMENTS NO. 4, 44, AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL CORRECTIONS. SFAS No. 145 rescinds SFAS No. 4, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item. As a result, the criteria in APB Opinion No. 30 will now be used to classify those gains and losses. SFAS No. 64 amended SFAS No. 4, and is no longer necessary because SFAS No. 4 has been rescinded. SFAS No. 44 was issued to establish accounting requirements for the effects of transition to the provisions of the Motor Carrier Act of 1980. Because the transition has been completed, SFAS No. 44 is no longer necessary. SFAS No. 145 amends SFAS No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. SFAS No. 145 also makes technical corrections to other existing pronouncements. The provisions of SFAS No. 145 are generally applicable for fiscal years beginning or transactions occurring after May 15, 2002. Chandler USA plans to adopt the provisions of SFAS No. 145 based on the required effective dates and the impact is not believed to be material. PAGE 9 NOTE 4. SEGMENT INFORMATION The following table presents a summary of Chandler USA's operating segments for the three and six month periods ended June 30, 2002 and 2001:
Property and All Intersegment Reported Agency casualty other eliminations balances --------- ---------- --------- ------------ ---------- (In thousands) THREE MONTHS ENDED JUNE 30, 2002 Revenues from external customers (1)...$ 441 $ 17,197 $ - $ - $ 17,638 Intersegment revenues.................. 538 19 - (557) - Segment profit (loss) before income taxes (2)..................... 302 1,224 (21) - 1,505 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) SIX MONTHS ENDED JUNE 30, 2002 Revenues from external customers (1)...$ 852 $ 33,453 $ - $ - $ 34,305 Intersegment revenues.................. 1,302 30 - (1,332) - Segment profit (loss) before income taxes (2)..................... 368 1,134 (67) - 1,435 Segment assets......................... 5,083 228,932 - (9,392) 224,623 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 - --------------------------------------- (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, --------------------------- -------------------------- 2002 2001 2002 2001 ------------ ------------ ------------ ------------ (In thousands) INSURANCE PROGRAM - --------------------------------------- NET PREMIUMS EARNED Standard property and casualty ........$ 12,734 $ 13,683 $ 24,700 $ 28,354 Political subdivisions ................ 3,450 3,027 6,795 5,918 Surety bonds .......................... 868 1,402 1,690 2,438 Other (1) ............................. 74 (45) 166 233 ------------ ------------ ------------ ------------ $ 17,126 $ 18,067 $ 33,351 $ 36,943 ============ ============ ============ ============ LOSSES AND LOSS ADJUSTMENT EXPENSES Standard property and casualty ........$ 8,992 $ 9,566 $ 16,142 $ 20,888 Political subdivisions ................ 2,165 3,319 5,021 5,690 Surety bonds .......................... 270 571 939 772 Other (1) ............................. 76 351 205 748 ------------ ------------ ------------ ------------ $ 11,503 $ 13,807 $ 22,307 $ 28,098 ============ ============ ============ ============ - --------------------------------------- (1) This program is comprised primarily of the run-off of other discontinued programs and NAICO's participation in various mandatory workers compensation pools and assigned risks.
NOTE 5. 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 and Reliance rescinded two reinsurance treaties which had been in effect since January 1, 1999. NAICO received a return of ceded premiums and reassumed certain losses as a result of the rescission. The reinsurer also paid NAICO a fee of $10 million as additional compensation for rescinding the treaties. At June 30, 2002, NAICO had reinsurance recoverables from Reliance for paid and unpaid losses relating to the 1998 treaties of approximately $2.5 million. 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 Chandler USA; consequently, adjustments to ceded losses and loss adjustment expenses are made for amounts deemed uncollectible. NAICO did not incur any charges for uncollectible reinsurance recoverables from reinsurers in the first six months of 2001. NAICO incurred charges of $82,000 and $173,000 in adjustments to ceded losses and loss adjustment expenses for amounts deemed uncollectible in the second quarter and first six months of 2002 and has reduced the carrying value of such amounts by approximately $1.2 million as of June 30, 2002. NAICO is subject to a variety of assessments related to insurance activities, including those by state guaranty funds and workers compensation second-injury funds. The amounts and timing of such assessments are beyond the control of NAICO. NAICO provides for these charges on a current basis by applying historical factors to premiums earned. Actual results may vary from these values and adjustments therefrom are necessary to maintain an adequate reserve for these assessments. The reserve for unpaid assessments was approximately $514,000 and $921,000 at June 30, 2002 and December 31, 2001, respectively. In certain cases, NAICO is permitted to recover a portion of its assessments generally as a reduction to premium taxes paid to certain states. NAICO has recorded receivables in the amount that it expects to recover of approximately $1,026,000 and $798,000 at June 30, 2002 and December 31, 2001, respectively. NAICO may receive additional guaranty fund assessments in the future related to Reliance or other insolvent insurance companies. At this time, NAICO is unable to estimate the amount of such assessments. PAGE 11 During March 2001, Chandler USA entered into a $3.8 million sale and leaseback transaction for certain owned equipment. Chandler USA 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 4.75% at June 30, 2002. The sale and leaseback transaction resulted in a reduction of property and equipment of $1.9 million and a deferred gain of $2.0 million which is included in accrued taxes and other payables. Chandler USA has the option to repurchase the equipment at the end of the lease for approximately $3.0 million, or may elect to have the lessor sell the equipment. If the election to sell the equipment is made, Chandler USA would retain any proceeds exceeding $3.0 million. If the proceeds were less than approximately $2.4 million, Chandler USA would be required to pay the difference between the proceeds and $2.4 million. 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 Chandler USA'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 Chandler USA 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 Chandler USA and its subsidiaries operate; (iv) claims frequency; (v) claims severity; (vi) the number of new and renewal policy applications submitted to National American Insurance Company ("NAICO") by its agents; (vii) the ability of NAICO to obtain adequate reinsurance in amounts and at rates that will not adversely affect its competitive position; (viii) the ability of NAICO to maintain favorable insurance company ratings; and (ix) other factors including ongoing litigation matters. 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, 2002 and 2001:
GROSS PREMIUMS EARNED NET PREMIUMS EARNED --------------------------- -------------------------- THREE MONTHS ENDED JUNE 30, 2002 2001 2002 2001 - ------------------------------------ ------------ ------------ ------------ ------------ (In thousands) Standard property and casualty ..... $ 27,426 $ 33,233 $ 12,734 $ 13,683 Political subdivisions ............. 8,815 8,488 3,450 3,027 Surety bonds ....................... 1,300 2,525 868 1,402 Other .............................. 74 (46) 74 (45) ------------ ------------ ------------ ------------ TOTAL .............................. $ 37,615 $ 44,200 $ 17,126 $ 18,067 ============ ============ ============ ============
GROSS PREMIUMS EARNED NET PREMIUMS EARNED --------------------------- -------------------------- SIX MONTHS ENDED JUNE 30, 2002 2001 2002 2001 - ------------------------------------ ------------ ------------ ------------ ------------ (In thousands) Standard property and casualty ..... $ 55,322 $ 68,547 $ 24,700 $ 28,354 Political subdivisions ............. 17,432 17,121 6,795 5,918 Surety bonds ....................... 2,654 4,808 1,690 2,438 Other .............................. 171 261 166 233 ------------ ------------ ------------ ------------ TOTAL .............................. $ 75,579 $ 90,737 $ 33,351 $ 36,943 ============ ============ ============ ============
Gross premiums earned decreased $6.6 million or 15% and $15.2 million or 17% in the second quarter and first six months of 2002, respectively, compared to the 2001 periods. The decreases are primarily the result of NAICO's efforts to focus on improving underwriting profitability in its core programs by re-underwriting and re-pricing the business and discontinuing certain classes of business. Net premiums earned decreased $941,000 or 5% and $3.6 million or 10% for the second quarter and first six months of 2002, respectively. During 2001, NAICO had additional quota share reinsurance in effect that reduced its net retention for its casualty and workers compensation lines of business, and also reduced net premiums earned. This quota share reinsurance expired effective January 1, 2002 and NAICO elected not to renew it. PAGE 13 Gross premiums earned in the standard property and casualty program decreased $5.8 million or 17% and $13.2 million or 19% in the second quarter and first six months of 2002, respectively, compared to the 2001 periods. The decreases were primarily due to discontinuing certain accounts and classes of business where rates were not believed to be adequate. Gross premiums earned in Texas decreased $3.7 million and $7.9 million in the second quarter and first six months of 2002, respectively, and gross premiums earned in Oklahoma decreased $1.9 million and $4.6 million in the same periods. Net premiums earned in this program decreased $949,000 or 7% and $3.7 million or 13% in the second quarter and first six months of 2002, respectively. Gross premiums earned in the political subdivisions program increased $327,000 or 4% and $311,000 or 2% in the second quarter and first six months of 2002, respectively, compared to the 2001 periods. Gross premiums earned in the school districts portion of the program increased $1.2 million and $1.9 million in the second quarter and first six months of 2002, respectively, due primarily to increased premium rates in Oklahoma. This was largely offset by a decrease in gross premiums earned for municipalities. Net premiums earned in this program increased $423,000 or 14% and $877,000 or 15% in the second quarter and first six months of 2002, respectively. Gross premiums earned in the surety bond program decreased $1.2 million or 49% and $2.2 million or 45% in the second quarter and first six months of 2002, respectively, compared to the 2001 periods. The decreases are primarily due to stricter underwriting policies and a reduction in the number of appointed agents that produce this business as NAICO focuses on improving underwriting profitability in this program. Net premiums earned in this program decreased $534,000 or 38% and $748,000 or 31% in the second quarter and first six months of 2002, respectively. NET INTEREST INCOME AND NET REALIZED INVESTMENT GAINS At June 30, 2002, Chandler USA's investment portfolio consisted primarily of fixed income U.S. Government and high-quality corporate bonds, with approximately 12% invested in cash and money market instruments. Income generated from this portfolio is largely dependent upon prevailing levels of interest rates. Chandler USA's portfolio contains no non-investment grade bonds or real estate investments. Chandler USA also receives interest income from Chandler Insurance (Barbados), Ltd. ("Chandler Barbados") on intercompany loans. Net interest income, excluding interest income from Chandler Barbados, decreased $165,000 or 18% in the second quarter of 2002 compared to the second quarter of 2001, and decreased $695,000 or 34% for the six months ended June 30, 2002. The decreases were due primarily to lower interest rates in 2002 and a reduction in invested assets. Cash and invested assets were $68.9 million at June 30, 2002 compared to $83.9 million at June 30, 2001. This decrease resulted primarily from the reduction in premiums written during 2001 and 2002 and to the payment of claims for prior years. Net interest income from Chandler Barbados was $79,000 and $161,000 in the second quarter and first six months of 2002, respectively. Chandler USA did not have any interest income from Chandler Barbados in the 2001 periods. Net realized investment gains were $388,000 and $404,000 during the second quarter and first six months of 2002, respectively, compared to $266,000 and $882,000 during the second quarter and first six months of 2001. COMMISSIONS, FEES AND OTHER INCOME Commissions, fees and other income increased $96,000 or 23% in the second quarter of 2002 compared to the second quarter of 2001, and increased $166,000 or 21% for the six months ended June 30, 2002 compared to the 2001 period. The majority of Chandler USA's income from commissions, fees and other income is from LaGere & Walkingstick Insurance Agency, Inc. ("L&W"). A large portion of the brokerage commissions and fees for L&W is incurred by NAICO and thus eliminated in the consolidation of Chandler USA's subsidiaries. LOSSES AND LOSS ADJUSTMENT EXPENSES Chandler USA estimates losses and loss adjustment expenses based on historical experience and payment and reporting patterns for the type of risk involved. These estimates are based on data available at the time of the estimate and are periodically reviewed by independent professional actuaries. Although such estimates are management's best estimates of the expected values, the ultimate liability for unpaid claims may vary from these values. PAGE 14 The percentage of losses and loss adjustment expenses to net premiums earned ("loss ratio") was 67.2% and 66.9% for the second quarter and first six months of 2002, compared to 76.4% and 76.1% in the corresponding 2001 periods. The decrease in the 2002 loss ratios resulted primarily from NAICO's efforts to re-underwrite and re-price its business during 2001 and 2002. These results were partially offset by adverse development of prior accident year losses primarily in the standard property and casualty program and are generally the result of ongoing analysis of recent loss development trends. Weather-related losses from wind and hail totaled $516,000 and $1,012,000 in the second quarter and first six months of 2002 and increased the respective loss ratios by 3.0 percentage points. Weather-related losses totaled $793,000 and $994,000 in the second quarter and first six months of 2001, and increased the respective 2001 loss ratios by 4.4 and 2.7 percentage points. At this time, NAICO has not received any claims related to the September 11, 2001 terrorist attacks on the World Trade Center and does not believe that it has any significant exposure to these and related losses. While several of NAICO's reinsurers did experience significant losses related to these attacks, it currently does not appear that these losses will impair the reinsurers' ability to pay claims. POLICY ACQUISITION COSTS Policy acquisition costs consist of costs associated with the acquisition of new and renewal business and generally include direct costs such as premium taxes, commissions to agents and ceding companies and premium-related assessments and indirect costs such as salaries and expenses of personnel who perform and support underwriting activities. NAICO also receives ceding commissions from the reinsurers who assume premiums from NAICO under certain reinsurance contracts and the ceding commissions are accounted for as a reduction of policy acquisition costs. Direct policy acquisition costs and ceding commissions are deferred and amortized over the terms of the policies. When the sum of anticipated losses, loss adjustment expenses and unamortized policy acquisition costs exceeds the related unearned premiums, including anticipated investment income, a provision for the indicated deficiency is recorded. The following table sets forth Chandler USA's policy acquisition costs for each of the three and six month periods ended June 30, 2002 and 2001:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------- ---------------------- 2002 2001 2002 2001 ---------- ---------- ---------- ---------- (In thousands) Commissions expense ........................$ 5,112 $ 4,446 $ 9,174 $ 8,837 Other premium related assessments .......... 342 280 766 330 Premium taxes .............................. 1,016 1,058 1,790 2,019 Excise taxes ............................... 73 65 136 125 Dividends to policyholders ................. 27 63 38 102 Other expense .............................. 233 60 283 90 ---------- ---------- ---------- ---------- Total direct expenses ...................... 6,803 5,972 12,187 11,503 Indirect underwriting expenses ............. 2,395 3,490 5,125 7,624 Commissions received from reinsurers ....... (6,374) (6,678) (11,469) (13,211) Adjustment for deferred acquisition costs .. (645) (420) (1,257) (629) ---------- ---------- ---------- ---------- Net policy acquisition costs ...............$ 2,179 $ 2,364 $ 4,586 $ 5,287 ========== ========== ========== ==========
Total gross direct and indirect expenses as a percentage of direct written and assumed premiums were 25.3% and 24.3% for the second quarter and first six months of 2002, respectively, compared to 24.4% and 24.7% in the corresponding year ago periods. Commission expense as a percentage of gross written and assumed premiums was 14.1% and 12.9% in the second quarter and the first six months of 2002, respectively, compared to 11.5% and 11.4% in the corresponding 2001 periods. The increase in commission expense was primarily due to an increase in contingent commissions to agents that resulted from lower loss ratios than had been projected for these agents. Indirect underwriting expenses were 6.6% and 7.2% of total direct written and assumed premiums in the second quarter and first six months of 2002, respectively, compared to 9.0% and 9.8% in the corresponding 2001 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 Chandler USA's overall premium volume. PAGE 15 GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses were 8.1% and 8.8% of gross premiums earned and commissions, fees and other income in the second quarter and first six months of 2002, respectively, compared to 7.4% and 7.2% for the corresponding 2001 periods. General and administrative expenses included $220,000 in the first six months of 2002 for a settlement of certain litigation with a former agent. Amortization of Chandler USA's state insurance licenses and goodwill was discontinued effective January 1, 2002 due to the implementation of Statement of Financial Accounting Standard No. 142. Amortization expense was $191,000 and $382,000 in the second quarter and first six months of 2001, respectively, for these items. 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 Chandler USA's overall premium volume. INTEREST EXPENSE Interest expense was $559,000 and $1.1 million in the second quarter and first six months of 2002, respectively, and decreased less than 1% from the year-ago periods. Substantially all of Chandler USA'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 $7,000 in the second quarter of 2002 compared to the second quarter of 2001, and increased $48,000 for the six months ended June 30, 2002 compared to the 2001 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 six months of 2002, Chandler USA used $4.3 million in cash from operations due primarily to decreases in premiums payable and unpaid losses and loss adjustment expenses (net of reinsurance recoverables), which generally resulted from the decrease in written premium production during 2002. Chandler USA used $15.7 million in cash from operations during the first six months of 2001 due primarily to decreases in premiums payable, unpaid losses and loss adjustment expenses (net of reinsurance recoverable) and unearned premiums (net of prepaid reinsurance premiums) less a decrease in premiums receivable, all of which generally resulted from the decrease in written premium production during 2001. During 2001, Chandler USA and Chandler Barbados entered an Intercompany Credit Agreement (the "Credit Agreement") covering intercompany loans between the parties. The Credit Agreement requires interest to be paid at the prime interest rate published in the Wall Street Journal each month, and balances owed by either party are payable at any time upon demand. At June 30, 2002, Chandler Barbados owed approximately $8.5 million to Chandler USA versus $7.9 million at December 31, 2001. During March 2001, Chandler USA entered into a $3.8 million sale and leaseback transaction for certain owned equipment. Chandler USA 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 4.75% at June 30, 2002. The sale and leaseback transaction resulted in a reduction of property and equipment of $1.9 million and a deferred gain of $2.0 million which is included in accrued taxes and other payables. Chandler USA has the option to repurchase the equipment at the end of the lease for approximately $3.0 million, or may elect to have the lessor sell the equipment. If the election to sell the equipment is made, Chandler USA would retain any proceeds exceeding $3.0 million. If the proceeds were less than approximately $2.4 million, Chandler USA would be required to pay the difference between the proceeds and $2.4 million. 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 --------------------------------------------------- Effective May 7, 2002, the Company's sole shareholder, Chandler Barbados, re-elected the following individuals to serve on the Company's Board of Directors: W. Brent LaGere W. Scott Martin Mark T. Paden Robert L. Rice R. Patrick Gilmore K.R. Price Richard L. Evans William Thomas Keele 5. Other Information ----------------- None. Item 6. Exhibits and Reports on Form 8-K -------------------------------- 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002. 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: August 9, 2002 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) EX-99.1 3 junexh.txt CERTIFICATION OF CEO AND CFO EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES - OXLEY ACT OF 2002 In connection with the Quarterly Report of Chandler (U.S.A.), Inc. (the "Company") on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), W. Brent LaGere, as Chief Executive Officer of the Company, and Mark C. Hart, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002, to the best of his knowledge, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ W. Brent LaGere ------------------------------- W. Brent LaGere Chief Executive Officer August 9, 2002 /s/ Mark C. Hart ------------------------------- Mark C. Hart Chief Financial Officer August 9, 2002 -----END PRIVACY-ENHANCED MESSAGE-----