-----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, CnvkEuvvFue+gKMAMzHL5Gds6dwQ4LGIXMJqM1iF5Kl1m4aTPEtcgzxvm6McNyCn AJN3zsDUxbujcp3Ni2wZSw== 0001083750-03-000013.txt : 20030513 0001083750-03-000013.hdr.sgml : 20030513 20030513110759 ACCESSION NUMBER: 0001083750-03-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030513 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: 03694323 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 edgarq303.txt CHANDLER USA 10-Q MARCH 2003 ============================================================================= UNITED STATES 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 MARCH 31, 2003 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, CHANDLER, OKLAHOMA 74834 (Address of principal executive offices and zip code) 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 --- --- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES NO X --- --- The number of common shares, $1.00 par value, of the registrant outstanding on April 30, 2003 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 March 31, 2003 and December 31, 2002 .... 1 Consolidated Statements of Operations for the three months ended March 31, 2003 and 2002 ........................................ 2 Consolidated Statements of Comprehensive Income for the three months ended March 31, 2003 and 2002 ................................. 3 Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and 2002 ........................................ 4 Notes to Interim Consolidated Financial Statements ........................ 5 ITEM 2. - ------- Management's Discussion and Analysis of Financial Condition and Results of Operations ................................................ 8 ITEM 4. - ------- Controls and Procedures ................................................... 11 PART II - OTHER INFORMATION - --------------------------- Item 1. Legal Proceedings ............................................. 11 Item 2. Changes in Securities ......................................... 11 Item 3. Defaults Upon Senior Securities ............................... 11 Item 4. Submission of Matters to a Vote of Security Holders ........... 11 Item 5. Other Information ............................................. 11 Item 6. Exhibits and Reports on Form 8-K .............................. 11 Signatures ................................................................ 12 PAGE 1 CHANDLER (U.S.A.), INC. CONSOLIDATED BALANCE SHEETS (Amounts in thousands except share amounts)
March 31, December 31, 2003 2002 ------------- ------------ (Unaudited) ASSETS Investments Fixed maturities available for sale, at fair value Restricted (amortized cost $6,720 and $6,737 in 2003 and 2002, respectively) ................................................ $ 6,908 $ 6,943 Unrestricted (amortized cost $43,547 and $48,362 in 2003 and 2002, respectively) ................................................ 45,268 50,096 Fixed maturities held to maturity, at amortized cost Restricted (fair value $393 and $394 in 2003 and 2002, respectively) ................................................ 380 374 Unrestricted (fair value $898 and $895 in 2003 and 2002, respectively) ................................................ 862 846 Equity securities available for sale, at fair value ........................ 1,782 681 ------------- ------------ Total investments ........................................................ 55,200 58,940 Cash and cash equivalents ($711 restricted in 2003 and 2002, respectively) .................................................... 12,025 9,336 Premiums receivable, less allowance for non-collection of $311 and $246 at 2003 and 2002, respectively ............................ 23,668 24,009 Reinsurance recoverable on paid losses, less allowance for non-collection of $2,383 and $2,275 at 2003 and 2002, respectively ......... 10,651 11,198 Reinsurance recoverable on paid losses from related parties .................. 263 80 Reinsurance recoverable on unpaid losses, less allowance for non-collection of $503 and $492 at 2003 and 2002, respectively ............. 41,227 50,377 Reinsurance recoverable on unpaid losses from related parties ................ 8,921 9,038 Prepaid reinsurance premiums ................................................. 19,370 19,202 Prepaid reinsurance premiums to related parties .............................. 10,551 8,680 Deferred policy acquisition costs ............................................ - 355 Property and equipment, net .................................................. 9,953 10,093 Amounts due from related parties ............................................. 10,536 10,582 State insurance licenses, net ................................................ 3,745 3,745 Other assets ................................................................. 13,013 14,220 ------------- ------------ Total assets ................................................................. $ 219,123 $ 229,855 ============= ============ LIABILITIES AND SHAREHOLDER'S EQUITY Liabilities Unpaid losses and loss adjustment expenses ................................. $ 81,667 $ 92,606 Unearned premiums .......................................................... 55,031 55,160 Policyholder deposits ...................................................... 4,412 4,244 Accrued taxes and other payables ........................................... 7,448 8,040 Premiums payable ........................................................... 2,712 2,805 Debentures ................................................................. 24,000 24,000 ------------- ------------ Total liabilities ........................................................ 175,270 186,855 ------------- ------------ 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 ........................................................ (19,539) (19,316) Accumulated other comprehensive income: Unrealized gain on investments available for sale, net of deferred income taxes ................................................. 2,806 1,730 ------------- ------------ Total shareholder's equity ............................................... 43,853 43,000 ------------- ------------ Total liabilities and shareholder's equity ................................... $ 219,123 $ 229,855 ============= ============
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 March 31, ---------------------------- 2003 2002 ------------ ------------ Premiums and other revenues Direct premiums written and assumed ............................ $ 33,108 $ 34,850 Reinsurance premiums ceded ..................................... (12,434) (12,066) Reinsurance premiums ceded to related parties .................. (8,306) (6,317) ------------ ------------ Net premiums written and assumed ............................. 12,368 16,467 Decrease (increase) in unearned premiums ....................... 2,169 (242) ------------ ------------ Net premiums earned .......................................... 14,537 16,225 Interest income, net ............................................. 486 613 Interest income, net from related parties ........................ 110 82 Realized investment gains, net ................................... 151 16 Other income ..................................................... 209 43 ------------ ------------ Total premiums and other revenues ............................ 15,493 16,979 ------------ ------------ Operating costs and expenses Losses and loss adjustment expenses, net of amounts ceded to related parties of $3,170 and $3,223 in 2003 and 2002, respectively .................................. 8,709 10,804 Policy acquisition costs, net of ceding commissions received from related parties of $2,747 and $2,171 in 2003 and 2002, respectively .................................. 2,897 2,650 General and administrative expenses ............................ 3,640 3,102 Interest expense ............................................... 558 559 ------------ ------------ Total operating costs and expenses ........................... 15,804 17,115 ------------ ------------ Loss from continuing operations before income taxes .............. (311) (136) Federal income tax benefit (provision) ........................... 88 (21) ------------ ------------ Loss from continuing operations .................................. (223) (157) Income from discontinued operations .............................. - 41 ------------ ------------ Net loss ....................................................... $ (223) $ (116) ============ ============
See accompanying Notes to Interim Consolidated Financial Statements. PAGE 3 CHANDLER (U.S.A.), INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Amounts in thousands)
Three months ended March 31, ---------------------------- 2003 2002 ------------ ------------ Net loss ......................................................... $ (223) $ (116) ------------ ------------ Other comprehensive income (loss), before income tax: Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period ...... 1,220 (698) Less: Reclassification adjustment for gains included in net loss ................................................... (151) (16) ------------ ------------ Other comprehensive income (loss), before income tax ............. 1,069 (714) Income tax benefit related to items of other comprehensive income (loss) .................................... 7 243 ------------ ------------ Other comprehensive income (loss), net of income tax ............. 1,076 (471) ------------ ------------ Comprehensive income (loss) ...................................... $ 853 $ (587) ============ ============
See accompanying Notes to Interim Consolidated Financial Statements. PAGE 4 CHANDLER (U.S.A.), INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Amounts in thousands)
Three months ended March 31, ---------------------------- 2003 2002 ------------ ------------ OPERATING ACTIVITIES Net loss ............................................................. $ (223) $ (116) Add (deduct): Adjustments to reconcile net loss to cash provided by (applied to) operating activities: Realized investment gains, net ................................... (151) (16) Net (gains) losses on sale of equipment .......................... (136) 1 Amortization and depreciation .................................... 367 409 Provision for non-collection of premiums ......................... 75 50 Provision for non-collection of reinsurance recoverables ......... 138 91 Net change in non-cash balances relating to operating activities: Premiums receivable ............................................ 266 1,711 Reinsurance recoverable on paid losses ......................... 415 3,740 Reinsurance recoverable on paid losses from related parties .... (183) (430) Reinsurance recoverable on unpaid losses ....................... 9,142 (1,519) Reinsurance recoverable on unpaid losses from related parties .. 117 1,220 Prepaid reinsurance premiums ................................... (168) 4,008 Prepaid reinsurance premiums to related parties ................ (1,871) (651) Deferred policy acquisition costs .............................. 355 (156) Other assets ................................................... 1,185 262 Unpaid losses and loss adjustment expenses ..................... (10,939) (2,343) Unearned premiums .............................................. (129) (3,115) Policyholder deposits .......................................... 168 (222) Accrued taxes and other payables ............................... (450) (1,539) Premiums payable ............................................... (93) (191) ------------ ------------ Cash provided by (applied to) operating activities ............... (2,115) 1,194 ------------ ------------ INVESTING ACTIVITIES Unrestricted fixed maturities available for sale: Purchases ........................................................ (5,243) (6,222) Sales ............................................................ 8,480 6,601 Maturities ....................................................... 1,604 493 Cost of property and equipment purchased ........................... (117) (135) Proceeds from sale of property and equipment ....................... 34 31 ------------ ------------ Cash provided by investing activities ............................ 4,758 768 ------------ ------------ FINANCING ACTIVITIES Payments and loans from related parties ............................ 218 1,354 Payments and loans to related parties .............................. (172) (246) ------------ ------------ Cash provided by financing activities ............................ 46 1,108 ------------ ------------ Increase in cash and cash equivalents during the period .............. 2,689 3,070 Cash and cash equivalents at beginning of period ..................... 9,336 4,124 ------------ ------------ Cash and cash equivalents at end of period ........................... $ 12,025 $ 7,194 ============ ============
See accompanying Notes to Consolidated Financial Statements. PAGE 5 CHANDLER (U.S.A.), INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED MARCH 31, 2003 AND 2002 (Unaudited) NOTE 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of Chandler (U.S.A.), Inc. ("Chandler USA") 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 Chandler USA's Annual Report on Form 10-K for the year ended December 31, 2002. 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-month period ended March 31, 2003 are not necessarily indicative of the results that may be expected for the year. The consolidated financial statements include the accounts of Chandler USA and all wholly owned subsidiaries including National American Insurance Company ("NAICO"). Effective December 1, 2002, Chandler USA completed the sale of its wholly owned subsidiary LaGere and Walkingstick Insurance Agency, Inc. ("L&W"). L&W previously functioned as Chandler USA's agency segment. Prior periods have been restated to reflect the results of L&W as a discontinued operation. 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 Chandler Insurance and certain of its subsidiaries and affiliates, including Chandler USA, were previously involved in various matters of litigation with CenTra, Inc. ("CenTra"). 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 of $2,820,000 and $885,000 is included in other assets in Chandler Barbados' and Chandler USA's respective 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 6 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 $1.6 million for reinsurance recoverables on paid losses and loss adjustment expenses as of March 31, 2003. NAICO is currently engaged in arbitration in order to enforce the terms of the reinsurance treaties. Chandler USA and its subsidiaries are not parties to any other material litigation other than as is routinely encountered in their respective business activities. While the outcome of these matters cannot be predicted with certainty, Chandler USA does not expect these matters to have a material adverse effect on its financial condition, results of operations or cash flows. NOTE 3. SEGMENT INFORMATION Chandler USA has one reportable operating segment for property and casualty insurance. In December 2002, Chandler USA sold L&W, which had previously been reported as Chandler USA's agency segment. The agency segment and certain items related to L&W have been restated and reported as discontinued operations for all periods presented. Net premiums earned and losses and loss adjustment expenses within the property and casualty segment can be identified to Chandler USA designated insurance programs. Chandler USA's chief operating decision makers review net premiums earned and losses and loss adjustment expenses in assessing the performance of an insurance program. In addition, Chandler USA's chief operating decision makers consider many other factors such as the lines of business offered within an insurance program and the states in which the insurance programs are offered. Certain discrete financial information is not readily available by insurance program, including assets, interest income, and investment gains or losses, allocated to each insurance program. Chandler USA does not consider its insurance programs to be reportable segments, however, 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 MARCH 31, ---------------------------- 2003 2002 ---------- ---------- (In thousands) INSURANCE PROGRAM - ------------------------------------------ NET PREMIUMS EARNED Standard property and casualty ........... $ 11,690 $ 11,966 Political subdivisions ................... 2,349 3,345 Surety bonds ............................. 407 822 Other (1) ................................ 91 92 ---------- ---------- $ 14,537 $ 16,225 ========== ========== LOSSES AND LOSS ADJUSTMENT EXPENSES Standard property and casualty ........... $ 6,751 $ 7,149 Political subdivisions ................... 1,808 2,856 Surety bonds ............................. (46) 669 Other (1) ................................ 196 130 ---------- ---------- $ 8,709 $ 10,804 ========== ========== - ---------------------------------------- (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.
PAGE 7 NOTE 4. INCOME TAXES Chandler USA's effective tax rate for the three months ended March 31, 2003 is less than the statutory tax rate in both the consolidated statements of operations and the consolidated statements of comprehensive income due principally to the utilization of Chandler USA's capital loss carryforward. NOTE 5. COMMITMENTS AND CONTINGENCIES 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 4.25% at March 31, 2003. 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 exercised its option to repurchase the equipment at the end of the lease for approximately $3.0 million and will amortize the deferred gain into income over the final year of the lease. NOTE 6. SUBSEQUENT EVENTS At March 31, 2003, NAICO owned 19,371 shares of common stock of Insurance Services Office, Inc. ("ISO") that it received in 1997 as a result of ISO converting to a for-profit corporation. In April 2003, NAICO accepted ISO's offer to redeem these shares for a price of $88.80 per share, which will result in a realized investment gain of $1.7 million that will be recognized in the second quarter of 2003. At March 31, 2003, NAICO adjusted the carrying value of these shares to $1.7 million, which represents the estimated fair value of the shares, and has reflected this amount as an unrealized gain on investments available for sale, net of deferred income taxes. PAGE 8 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") 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, including the ability to implement price increases; (iv) claims frequency; (v) claims severity; (vi) catastrophic events of unanticipated frequency or severity; (vii) the number of new and renewal policy applications submitted to National American Insurance Company ("NAICO") by its agents; (viii) the ability of NAICO to obtain adequate reinsurance in amounts and at rates that will not adversely affect its competitive position; (ix) the ability of NAICO to maintain favorable insurance company ratings; and (x) various other factors. 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 month periods ended March 31, 2003 and 2002:
Gross premiums earned Net premiums earned --------------------------- --------------------------- THREE MONTHS ENDED MARCH 31, 2003 2002 2003 2002 ---------------------------------- ------------ ------------ ------------ ------------ (In thousands) Standard property and casualty ... $ 24,091 $ 27,896 $ 11,690 $ 11,966 Political subdivisions ........... 8,179 8,617 2,349 3,345 Surety bonds ..................... 875 1,354 407 822 Other ............................ 92 97 91 92 ------------ ------------ ------------ ------------ TOTAL ............................ $ 33,237 $ 37,964 $ 14,537 $ 16,225 ============ ============ ============ ============
Gross premiums earned decreased $4.7 million or 12% in the first quarter of 2003 compared to the first quarter of 2002. Gross premiums earned in Texas and Oklahoma decreased $2.9 million and $2.3 million, respectively, from the first quarter of 2002. These decreases were primarily the result of NAICO's efforts to focus on improving underwriting profitability in its core programs by re-underwriting the business. Net premiums earned decreased $1.7 million or 10% in the first quarter of 2003 compared to the first quarter of 2002. Gross premiums earned in the standard property and casualty program decreased $3.8 million or 14% in the first quarter of 2003 compared to the first quarter of 2002. Gross premiums earned in Texas and Oklahoma decreased by $2.8 million and $2.0 million, respectively, in the first quarter of 2003 compared to the first quarter of 2002 due primarily to NAICO's efforts to focus on improving underwriting profitability by discontinuing certain accounts where rates were not believed to be adequate. Approximately $3.3 million or 87% of the total decrease was in the workers compensation line of business. Net premiums earned decreased $276,000 or 2% in the first quarter of 2003 versus the first quarter of 2002. Net premiums earned decreased less than gross premiums earned due to quota share reinsurance that expired on January 1, 2002 and that was in runoff during the 2002 quarter. Gross premiums earned in the political subdivisions program decreased $438,000 or 5% in the first quarter of 2003 compared to the first quarter of 2002. Gross premiums earned in the school districts portion of the program increased $390,000 due primarily to increased premium rates in Oklahoma. This was offset by a decrease in gross premiums earned for municipalities. Net premiums earned in the political subdivisions program decreased $996,000 or 30% in the first quarter of 2003 versus the first quarter of 2002 due to the decrease in gross premiums earned and to reinsuring a portion of the property lines of coverage with Chandler Insurance (Barbados), Ltd. ("Chandler Barbados") on a quota share basis effective January 1, 2003. PAGE 9 Gross premiums earned in the surety bond program decreased $479,000 or 35% in the first quarter of 2003 compared to the first quarter of 2002. The decrease was 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 the surety bond program decreased $415,000 or 50% in the first quarter of 2003 versus the first quarter of 2002 due primarily to the decrease in gross premiums earned and to an increase in the cost of reinsurance. NAICO elected not to renew its surety bond reinsurance program effective April 1, 2003 due to the decreased premium volume in this program and to the current market for this reinsurance. NET INTEREST INCOME AND NET REALIZED INVESTMENT GAINS At March 31, 2003, Chandler USA's investment portfolio consisted primarily of fixed income U.S. Government and high-quality corporate bonds, with approximately 18% 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 Barbados on intercompany loans. Net interest income from continuing operations, excluding interest income from Chandler Barbados, decreased $127,000 or 21% in the first quarter of 2003 versus the first quarter of 2002 due primarily to lower interest rates and a reduction in invested assets. Cash and invested assets were $67.2 million at March 31, 2003 compared to $74.7 million at March 31, 2002. This decrease resulted primarily from the reduction in premiums written during 2002, the payment of claims for prior years and an increase in intercompany loans to Chandler Barbados. Net interest income from Chandler Barbados was $110,000 in the first quarter of 2003 compared to $82,000 in the first quarter of 2002. Net realized investment gains were $151,000 for the first quarter of 2003 compared to $16,000 during the first quarter of 2002. 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. The percentage of losses and loss adjustment expenses to net premiums earned ("loss ratio") was 59.9% for the first quarter of 2003 versus 66.6% in the first quarter of 2002. The decrease in the 2003 loss ratio resulted primarily from NAICO's past efforts to re-underwrite and re-price its business. Weather-related losses from wind and hail totaled $89,000 in the first quarter of 2003 and increased the loss ratio by 0.6 percentage points. Weather-related losses totaled $496,000 in the first quarter of 2002, and increased the 2002 loss ratio by 3.1 percentage points. 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 the 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. Chandler USA's deferred ceding commissions exceeded the deferred policy acquisition costs related to direct and assumed business by $63,000 at March 31, 2003 and are recorded in accrued taxes and other payables. PAGE 10 The following table sets forth Chandler USA's policy acquisition costs from continuing operations for each of the three month periods ended March 31, 2003 and 2002:
THREE MONTHS ENDED MARCH 31, ---------------------------- 2003 2002 ---------- ---------- (In thousands) Commissions expense ........................ $ 4,954 $ 4,808 Other premium related assessments .......... 350 424 Premium taxes .............................. 761 774 Excise taxes ............................... 83 63 Dividends to policyholders ................. 5 11 Other expense .............................. 145 50 ---------- ---------- Total direct expenses ...................... 6,298 6,130 Indirect underwriting expenses ............. 2,040 2,227 Commissions received from reinsurers ....... (5,860) (5,095) Adjustment for deferred acquisition costs .. 419 (612) ---------- ---------- Net policy acquisition costs ............... $ 2,897 $ 2,650 ========== ==========
Total gross direct and indirect expenses as a percentage of direct written and assumed premiums were 25.2% for the first quarter of 2003 versus 24.0% for the first quarter of 2002. Commission expense as a percentage of gross written and assumed premiums was 15.0% for the first quarter of 2003 versus 13.8% for the 2002 quarter due primarily 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 6.2% and 6.4% of total direct written and assumed premiums in the three month periods ended March 31, 2003 and 2002, respectively. 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. Commissions received from reinsurers increased in the first quarter of 2003 due primarily to the increase in reinsurance premiums ceded to Chandler Barbados. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses from continuing operations were 11.0% and 8.2% of gross premiums earned in the first quarter of 2003 and 2002, respectively. 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 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 $558,000 in the first quarter of 2003 compared to $559,000 in the year-ago quarter. Substantially all of Chandler USA's interest expense is related to the $24 million of outstanding debentures. LIQUIDITY AND CAPITAL RESOURCES In the first quarter of 2003, Chandler USA used $2.1 million in cash from operations due primarily to a reduction in unpaid losses and loss adjustment expenses, less a decrease in reinsurance recoverable on unpaid losses. In the first quarter of 2002, Chandler USA provided $1.2 million in cash from operations. At March 31, 2003, Chandler Barbados owed approximately $10.5 million to Chandler USA versus $10.6 million at December 31, 2002 under 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. 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 4.25% at March 31, 2003. 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 exercised its option to repurchase the equipment at the end of the lease for approximately $3.0 million and will amortize the deferred gain into income over the final year of the lease. PAGE 11 ITEM 4. CONTROLS AND PROCEDURES Chandler USA's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of Chandler USA's disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of a date within 90 days prior to the filing date of this quarterly report. Based on such evaluation, such officers have concluded that Chandler USA's disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to Chandler USA (including its consolidated subsidiaries) required to be included in Chandler USA's periodic filings under the Exchange Act. There have not been any significant changes in Chandler USA's internal controls or in other factors that could significantly affect such controls subsequent to the date of this evaluation. 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 and Use of Proceeds ----------------------------------------- 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 -------------------------------- 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 12 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: May 13, 2003 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) PAGE 13 CERTIFICATIONS - -------------- I, W. Brent LaGere, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Chandler (U.S.A.), Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 13, 2003 /s/ W. Brent LaGere ------------------------------------ W. Brent LaGere Chairman of the Board and Chief Executive Officer PAGE 14 I, Mark C. Hart, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Chandler (U.S.A.), Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 13, 2003 /s/ Mark C. Hart ------------------------------------ Mark C. Hart Vice President - Finance, Chief Financial Officer and Treasurer PAGE 15 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 March 31, 2003 as filed with the Securities and Exchange Commission (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 May 13, 2003 /s/ Mark C. Hart ------------------------------------ Mark C. Hart Chief Financial Officer May 13, 2003 A signed original of this written statement required by Section 906 has been provided to Chandler (U.S.A.), Inc. and will be retained by Chandler (U.S.A.), Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----