-----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, RpFklxksEJ8l/gJWdbi/yQ7MCK6RTtYF5fdNJUQZcKiTs3TMeNQV/vuNljGpaIPn bypNyRnCBzBCu2Jx0b5J3g== 0000792854-00-000005.txt : 20000512 0000792854-00-000005.hdr.sgml : 20000512 ACCESSION NUMBER: 0000792854-00-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000511 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHANDLER INSURANCE CO LTD CENTRAL INDEX KEY: 0000792854 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15286 FILM NUMBER: 625651 BUSINESS ADDRESS: STREET 1: 5TH FLR ANDERSON SQUARE STREET 2: PO BOX 1854 CITY: GRAND CAYMAN CAYMAN STATE: E9 ZIP: 00000 BUSINESS PHONE: 3459498177 MAIL ADDRESS: STREET 1: 5TH FLOOR ANDERSON SQUARE STREET 2: P O BOX 1854 CITY: GRAND CAYMAN STATE: E9 10-Q 1 =============================================================================== 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, 2000 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: 0-15286 CHANDLER INSURANCE COMPANY, LTD. (Exact name of registrant as specified in its charter) CAYMAN ISLANDS NONE (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 5TH FLOOR ANDERSON SQUARE N/A P.O. BOX 1854 (Zip Code) GRAND CAYMAN, CAYMAN ISLANDS B.W.I. (Address of principal executive offices) Registrant's telephone number, including area code: 345-949-8177 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, $1.67 par value, of the registrant outstanding on April 30, 2000 was 4,428,033, which includes 1,142,625 common shares which were rescinded through litigation and are held by a court. =============================================================================== PAGE i CHANDLER INSURANCE COMPANY, LTD. INDEX PART I - FINANCIAL INFORMATION - ------------------------------ ITEM 1 - ------ Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999....1 Consolidated Statements of Operations for the three months ended March 31, 2000 and 1999........................................2 Consolidated Statements of Comprehensive Income for the three months ended March 31, 2000 and 1999.................................3 Consolidated Statements of Cash Flows for the three months ended March 31, 2000 and 1999........................................4 Notes to Interim Consolidated Financial Statements........................5 ITEM 2 - ------ Management's Discussion and Analysis of Financial Condition and Results of Operations................................................9 PART II - OTHER INFORMATION - --------------------------- Item 1 Legal Proceedings.............................................14 Item 2 Changes in Securities.........................................14 Item 3 Defaults Upon Senior Securities...............................14 Item 4 Submission of Matters to a Vote of Security Holders...........14 Item 5 Other Information.............................................14 Item 6 Exhibits and Reports on Form 8-K..............................14 Signatures...............................................................15 PAGE 1 CHANDLER INSURANCE COMPANY, LTD. CONSOLIDATED BALANCE SHEETS (Amounts in thousands except share amounts)
March 31, December 31, 2000 1999 ------------- -------------- ASSETS (Unaudited) Investments Fixed maturities available for sale, at fair value............... $ 113,606 $ 108,709 Fixed maturities held to maturity, at amortized cost (fair value $1,052 and $1,039 in 2000 and 1999, respectively) ............. 1,002 984 Equity securities available for sale, at fair value ............. 306 306 ------------- -------------- Total investments ............................................. 114,914 109,999 Cash and cash equivalents ......................................... 11,673 8,456 Premiums receivable, less allowance for non-collection of $310 and $263 at 2000 and 1999, respectively.................. 36,241 47,721 Reinsurance recoverable on paid losses, less allowance for non-collection of $275 at 2000 and 1999 ......................... 3,989 3,281 Reinsurance recoverable on unpaid losses, less allowance for non-collection of $322 and $302 at 2000 and 1999, respectively .. 38,035 37,539 Prepaid reinsurance premiums ...................................... 23,387 19,960 Deferred policy acquisition costs ................................. 6,069 6,488 Property and equipment, net ....................................... 11,634 10,765 Licenses, net ..................................................... 4,007 4,044 Excess of cost over net assets acquired, net ...................... 3,793 3,955 Other assets ...................................................... 18,023 16,912 ------------- -------------- Total assets ...................................................... $ 271,765 $ 269,120 ============= ============== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Unpaid losses and loss adjustment expenses ...................... $ 99,870 $ 98,460 Unearned premiums ............................................... 68,935 67,769 Policyholder deposits ........................................... 5,215 5,135 Accrued taxes and other payables ................................ 4,376 6,796 Premiums payable ................................................ 10,882 7,312 Litigation liabilities .......................................... 9,031 8,905 Debentures ...................................................... 24,000 24,000 ------------- -------------- Total liabilities ............................................. 222,309 218,377 ------------- -------------- Shareholders' equity Common stock, $1.67 par value, 10,000,000 shares authorized; 4,428,033 shares issued and outstanding ....................... 7,395 7,395 Paid-in surplus ................................................. 21,380 21,380 Capital redemption reserve ...................................... 947 947 Retained earnings ............................................... 29,216 30,479 Less: Stock rescinded through litigation (1,142,625 shares) ..... (6,883) (6,883) Accumulated other comprehensive loss: Unrealized loss on investments, available for sale, net of deferred income taxes ................................ (2,599) (2,575) ------------- -------------- Total shareholders' equity .................................... 49,456 50,743 ------------- -------------- Total liabilities and shareholders' equity ........................ $ 271,765 $ 269,120 ============= ==============
See accompanying Notes to Interim Consolidated Financial Statements. PAGE 2 CHANDLER INSURANCE COMPANY, LTD. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Amounts in thousands except per share data)
For the three months ended March 31, ------------------------ 2000 1999 ---------- ---------- Premiums and other revenues Direct premiums written and assumed................. $ 45,129 $ 35,111 Reinsurance premiums ceded.......................... (18,314) (14,053) ---------- ----------- Net premiums written and assumed.................. 26,815 21,058 Decrease (increase) in unearned premiums............ 2,260 (20) ---------- ----------- Net premiums earned............................... 29,075 21,038 Interest income, net.................................. 1,478 1,383 Realized investment gains, net........................ - 50 Commissions, fees and other income.................... 398 447 ---------- ---------- Total premiums and other revenues................. 30,951 22,918 ---------- ---------- Operating costs and expenses Losses and loss adjustment expenses................. 20,800 13,451 Policy acquisition costs............................ 7,698 5,047 General and administrative expenses................. 3,512 2,986 Interest expense.................................... 566 228 Litigation expenses, net............................ 227 259 ---------- ---------- Total operating costs and expenses................ 32,803 21,971 ---------- ---------- Income (loss) before income taxes..................... (1,852) 947 Federal income tax benefit (provision) of consolidated U.S. subsidiaries................................... 589 (422) ---------- ---------- Net income (loss)..................................... $ (1,263) $ 525 ========== ========== Basic earnings (loss) per common share................ $ (0.29) $ 0.08 Diluted earnings (loss) per common share.............. $ (0.28) $ 0.08 Basic weighted average common shares outstanding...... 4,428 6,417 Diluted weighted average common shares outstanding.... 4,445 6,435
See accompanying Notes to Interim Consolidated Financial Statements. PAGE 3 CHANDLER INSURANCE COMPANY, LTD. Consolidated Statements of Comprehensive Income (Unaudited) (Amounts in thousands)
For the three months ended March 31, ------------------------ 2000 1999 ---------- ---------- Net income (loss)................................................. $ (1,263) $ 525 ---------- ---------- Other comprehensive loss, before income tax: Unrealized losses on securities: Unrealized holding losses arising during period............... (28) (1,400) Less: Reclassification adjustment for gains included in net income (loss)............................... - (50) ---------- ---------- Other comprehensive loss, before income tax....................... (28) (1,450) Income tax benefit related to items of other comprehensive loss... 4 416 ---------- ---------- Other comprehensive loss, net of income tax....................... (24) (1,034) ---------- ---------- Comprehensive loss................................................ $ (1,287) $ (509) ========== ==========
See accompanying Notes to Interim Consolidated Financial Statements. PAGE 4 CHANDLER INSURANCE COMPANY, LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Amounts in thousands)
For the three months ended March 31, ------------------------ 2000 1999 ---------- ---------- OPERATING ACTIVITIES Net income (loss).................................................... $ (1,263) $ 525 Add (deduct): Adjustments to reconcile net income (loss) to cash provided by (applied to) operating activities: Realized investment gains, net................................... - (50) Net (gains) losses on sale of equipment.......................... 3 (8) Amortization and depreciation.................................... 586 548 Provision for non-collection of premiums......................... 42 30 Net change in non-cash balances relating to operations: Premiums receivable............................................ 11,438 (2,636) Reinsurance recoverable on paid losses......................... (726) 775 Reinsurance recoverable on unpaid losses....................... (479) (4,172) Prepaid reinsurance premiums................................... (3,427) (105) Deferred policy acquisition costs.............................. 419 11 Other assets................................................... (1,135) (97) Unpaid losses and loss adjustment expenses..................... 1,410 2,281 Unearned premiums.............................................. 1,166 125 Policyholder deposits.......................................... 80 77 Accrued taxes and other payables............................... (2,420) (1,005) Premiums payable............................................... 3,570 (845) Litigation liabilities......................................... 126 190 ---------- ---------- Cash provided by (applied to) operating activities............... 9,390 (4,356) ---------- ---------- INVESTING ACTIVITIES Fixed maturities available for sale: Purchases........................................................ (6,589) (5,042) Sales............................................................ - 3,048 Maturities....................................................... 1,538 4,467 Cost of property and equipment purchased........................... (1,140) (262) Proceeds from sale of property and equipment....................... 18 46 ---------- ---------- Cash provided by (applied to) investing activities............... (6,173) 2,257 ---------- ---------- FINANCING ACTIVITIES Payments on notes payable.......................................... - (476) ---------- ---------- Cash applied to financing activities............................. - (476) ---------- ---------- Increase (decrease) in cash and cash equivalents during the period... 3,217 (2,575) Cash and cash equivalents at beginning of period..................... 8,456 10,383 ---------- ---------- Cash and cash equivalents at end of period........................... $ 11,673 $ 7,808 ========== ==========
See accompanying Notes to Consolidated Financial Statements. PAGE 5 CHANDLER INSURANCE COMPANY, LTD. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (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, 1999. In the opinion of management, all adjustments (consisting of normal recurring adjustments and an unusual significant litigation liability adjustment described in Note 2) considered necessary for a fair presentation have been included. The results of operations for the three-month period ended March 31, 2000 are not necessarily indicative of the results that may be expected for the year. The consolidated financial statements include the accounts of Chandler Insurance Company, Ltd. ("Chandler" or the "Company") and all subsidiaries. The following represents the significant subsidiaries: - Chandler Insurance (Barbados), Ltd. ("Chandler Barbados") and NAICO Indemnity (Cayman), Ltd. ("NAICO Indemnity"), wholly owned subsidiaries of the Company. - Chandler (U.S.A.), Inc. ("Chandler USA"), a wholly owned subsidiary of Chandler Barbados. - National American Insurance Company ("NAICO") and LaGere & Walkingstick Insurance Agency, Inc., wholly owned subsidiaries of Chandler USA. All significant intercompany accounts and transactions have been eliminated in consolidation. NOTE 2. LITIGATION The Company and certain of its subsidiaries and affiliates have been involved in various matters of litigation with CenTra, Inc. ("CenTra") and certain of its affiliates, officers and directors (the "CenTra Group") since 1992. The CenTra Group has been a significant shareholder in the Company owning 49.2% of the Company's stock in July 1992. Three present or former executive officers of CenTra, Norman E. Harned, Ronald W. Lech and M. J. Moroun were directors of the Company until November 1999. On March 25, 1997, the U.S. District Court for the District of Nebraska ("Nebraska Court") ordered CenTra and certain of its affiliates to divest all Chandler shares owned by them. The CenTra defendants owned or controlled 3,133,450 Chandler shares. The Nebraska Court approved a divestiture plan submitted by NAICO (the "NAICO Plan") which called for the Company to acquire and cancel the shares of Chandler stock owned by the CenTra Group. During December 1999, the Company acquired 1,989,200 shares of its stock in exchange for payment of $15,204,758. These shares were canceled upon acquisition by the Company. The Nebraska Court continues to hold 1,142,625 shares pending the outcome of CenTra's appeal of a judgment by the U.S. District Court in Oklahoma City, Oklahoma ("Oklahoma Court") regarding these shares. Following the conclusion of the appeal, the Nebraska Court will determine the method of divestiture of these shares. The Company cannot predict when the appellate court will rule on the appeal. PAGE 6 On April 1, 1997, the Oklahoma Court entered judgment in favor of NAICO on CenTra's claims for alleged wrongful cancellation of CenTra's insurance with NAICO and NAICO Indemnity in 1992. The remaining issues were submitted to a jury. On April 22, 1997, the Oklahoma Court entered judgments on the jury verdicts. One judgment against the Company required the CenTra Group to return stock it purchased in 1990 to the Company in return for a payment of $5,099,133 from the Company. Payment was made and the stock was returned to the Company and canceled in December 1999 as a part of the acquisition of shares described previously. Another judgment was against both the Company and Chandler Barbados. CenTra and an affiliate, Ammex, Inc., were awarded $6,882,500 in connection with a 1988 stock purchase agreement. On March 10, 1998, the Oklahoma Court modified its judgment to require CenTra and its affiliates to deliver 1,142,625 shares of Chandler stock they owned upon payment of the $6,882,500 judgment which was entered in April 1997. Both of these judgments related to an alleged failure by the Company to adequately disclose the fact that ownership of the Company's stock may be subject to regulation by the Nebraska Department of Insurance under certain circumstances. Judgment was also entered in favor of CenTra and against certain officers and/or directors of the Company on the securities claims relating to CenTra's 1990 stock purchases and the failure to disclose the application of Nebraska insurance law, but the judgments were $1 against each individual defendant on those claims. On ten derivative claims brought by CenTra, the jury found in CenTra's favor on three. Certain officers were directed to repay to Chandler USA bonuses received for the years 1988 and 1989 totaling $711,629 and a total of $25,000 for personal use of corporate aircraft. These amounts are included in other assets in the accompanying consolidated balance sheets. On the remaining claim relating to the acquisition of certain insurance agencies in 1988, the jury awarded $1 each against six officers and/or directors. Judgment was also entered in favor of NAICO and NAICO Indemnity on counterclaims against CenTra for CenTra's failure to pay insurance premiums. Judgment was for the amount of $788,625. During 1998, the judgment was paid by funds held by the Oklahoma Court aggregating, with interest, $820,185. DuraRock Underwriters, Ltd. ("DuraRock"), an affiliate of CenTra, claimed $725,000 was owed to it under certain reinsurance treaties. That claim was settled in January 2000 with NAICO and NAICO Indemnity paying $137,500 to DuraRock. The settlement was accrued for by NAICO and NAICO Indemnity in 1999. The Oklahoma Court's judgment also upheld a resolution adopted by the Company's Board of Directors in August 1992 pursuant to Article XI of the Company's Articles of Association preventing CenTra and its affiliates from voting their Chandler stock. As a result of the Oklahoma Court judgments and subsequent decisions, the Company recorded a net charge for the litigation matters during 1997 totaling approximately $1.4 million ($1.6 million including provision for federal income tax). The Company recorded the return of 1,660,125 shares of the Company's stock in connection with the rescission judgments as a decrease to shareholders' equity in the amount of approximately $12.0 million. On April 21, 1998, the Oklahoma Court denied the CenTra Group's request for costs and attorney fees. The CenTra Group did not appeal this decision within the time permitted by applicable law. Accordingly, the Company reduced the previous 1997 net charge for litigation matters by $3.8 million during the second quarter of 1998. On March 23, 1998, the CenTra Group filed a formal notice of intent to appeal certain orders of the Oklahoma Court, and filed the initial appellate brief on September 9, 1998. The appeals are being considered by the U.S. Court of Appeals for the 10th Circuit. The CenTra Group's appeals are based upon the Oklahoma Court's failure to award prejudgment interest, the Oklahoma Court's refusal to permit the CenTra Group to amend certain pleadings to assert new claims, the Oklahoma Court's modification of the judgment for $6,882,500 to require CenTra to return shares of the Company's stock upon payment of the judgment, and the Oklahoma Court's denial of attorney fees. The Company believes the appeal of this last issue is untimely and therefore barred by law. The Company elected not to appeal any of the judgments. The individual officers and directors against whom judgments were entered have all filed appeals. The Company's board of directors appointed a committee of the board (the "Committee") to deal with all matters arising from the Oklahoma litigation. The members of the Committee are Messrs. Jacoby, Maestri and Davis, all of whom are non-parties to the CenTra litigation. The Committee is empowered by the board to make decisions on behalf of the Company regarding issues relating to litigation strategy, officer and director indemnification and claims made under the Company's director and officer liability insurance policy (the "D&O Insurer"). A similar committee composed of Chandler USA directors is authorized to deal with those same issues regarding Chandler USA. PAGE 7 In 1997, NAICO learned that several CenTra affiliates had filed two lawsuits against NAICO, NAICO Indemnity and certain NAICO officers asserting some of the same claims made and tried in the Oklahoma lawsuit described previously. Those claims were purportedly prosecuted by CenTra on its own behalf and on behalf of its subsidiaries and were based upon alleged wrongful cancellation of their insurance policies by NAICO and NAICO Indemnity. The Oklahoma Court entered a judgment against CenTra on these claims. NAICO and NAICO Indemnity contend that the Oklahoma Court's adjudication is conclusive as to all claims. The lawsuits have been consolidated and have been assigned to the same judge who presided over the action in the Oklahoma Court. Dispositive motions filed by NAICO, NAICO Indemnity and the other defendants are currently under consideration by the Oklahoma Court. In the CenTra litigation, certain officers and directors of the Company were named as defendants. In accordance with its Articles of Association, the Company has 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. The Company has paid expenses on behalf of these officers and directors totaling approximately $2.3 million as of March 31, 2000. A portion of these expenses relate to claims which have been dismissed or which were decided in favor of the officers and directors. These expenses together with certain other expenses may be recovered from the D&O Insurer. As a result of various events in 1995, 1996 and 1997, the Company recorded estimated recoveries of costs from its D&O Insurer totaling $4,500,000 for reimbursable amounts previously paid that relate to allowable defense and litigation costs for such parties. The Company received payment for a 1995 claim during 1996 in the amount of $795,000. The balance is included in other assets in the Company's consolidated balance sheets. The Company is entitled to a total of $5 million under the applicable insurance policy to the extent it has advanced reimbursable expenses. The Company is negotiating with the insurer for payment of the policy balance. The Company could recover the remaining policy limits or could compromise its claim, and could incur significant costs in either case. The ultimate outcome of the appeals of the various parties as described above could have a material adverse effect on the Company and could negatively impact future earnings. The Company's management believes that adequate financial resources are available to pay the judgments as they currently exist or as they may be modified on appeal. As a holding company, the Company may receive cash through equity sales, borrowings and dividends from its subsidiaries. Chandler Barbados and NAICO are subject to various regulations which restrict their ability to pay shareholder dividends. A reduction in the amount of invested assets, or an increase in borrowings resulting from potential payments of these judgments would reduce investment earnings or increase operating expenses in future periods. At the present time the Company is actively participating in court proceedings and rights of appeal concerning these legal proceedings; therefore, the Company is unable to predict the outcome of such litigation with certainty or the effect of such ongoing litigation on future operations. The Company is also unable to predict the effect of the remaining divestiture order on the rights, limitations or other regulation of ownership of the stock of any existing or prospective holders of the Company's common stock, or the effect on the market price of the Company's stock. OTHER LITIGATION The Company and its subsidiaries are not parties to any other material litigation other than as is routinely encountered in their respective business activities. NOTE 3. EARNINGS (LOSS) PER COMMON SHARE Basic earnings (loss) per common share is computed based upon net income (loss) divided by the weighted average number of common shares outstanding during each period. Diluted earnings (loss) per common share is computed based upon net income (loss) divided by the weighted average number of common shares outstanding during each period adjusted for the effect of dilutive potential common shares calculated using the treasury stock method. Weighted average shares include 1,142,625 and 1,660,125 common shares at March 31, 2000 and 1999, respectively, which were rescinded through litigation during 1997 but are still outstanding, and exclude 544,475 common shares held by a subsidiary of the Company on March 31, 1999. The numerator for basic and diluted earnings per share is equal to the net income (loss) for the respective period. PAGE 8 The following table sets forth the computation of the denominator for basic and diluted earnings (loss) per share:
MARCH 31, 2000 MARCH 31, 1999 -------------- -------------- (In thousands) Denominator for basic earnings (loss) per common share - weighted average shares.................. 4,428 6,417 Effect of dilutive securities - non-employee director stock options..................... 17 18 -------------- -------------- Denominator for diluted earnings (loss) per common share - adjusted weighted average shares and assumed conversions.......................... 4,445 6,435 ============== ==============
NOTE 4. ACCOUNTING STANDARD ISSUED BUT NOT YET ADOPTED In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that the Company recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. The Company will adopt SFAS No. 133 when required. Management of the Company does not expect that adoption of SFAS No. 133 will have a material impact on the Company's consolidated financial condition or results of operations. NOTE 5. SEGMENT INFORMATION The following table presents a summary of the Company's operating segments for the three-month periods ended March 31, 2000 and 1999:
Property and All Intersegment Reported Agency casualty Other eliminations balances --------- ---------- --------- ------------ ---------- (In thousands) THREE MONTHS ENDED MARCH 31, 2000 Revenues from external customers (1).. $ 314 $ 29,093 $ 66 $ - $ 29,473 Intersegment revenues................. 1,792 37 41 (1,870) - Segment profit (loss) before income taxes (2).................... (256) (1,213) (383) - (1,852) Segment assets........................ $ 5,121 $ 275,949 $ 460 $ (9,765) $ 271,765 THREE MONTHS ENDED MARCH 31, 1999 Revenues from external customers (1).. $ 350 $ 21,049 $ 86 $ - $ 21,485 Intersegment revenues................. 1,653 51 39 (1,743) - Segment profit (loss) before income taxes (2).................... (113) 1,459 (399) - 947 Segment assets........................ $ 5,069 $ 243,090 $ 4,920 $ (17,216) $ 235,863 (1) Consists of net premiums earned and commissions, fees and other income. (2) Includes net realized investment gains.
PAGE 9 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, ---------------------------- 2000 1999 ------------ ------------ (In thousands) INSURANCE PROGRAM - ----------------- NET PREMIUMS EARNED Standard property and casualty........................... $ 20,817 $ 12,115 Political subdivisions................................... 4,388 3,782 Surety bonds............................................. 2,837 2,881 Group accident and health................................ 955 2,299 Other.................................................... 78 (39) ------------ ------------ $ 29,075 $ 21,038 ============ ============ LOSSES AND LOSS ADJUSTMENT EXPENSES Standard property and casualty........................... $ 15,118 $ 8,929 Political subdivisions................................... 3,370 2,836 Surety bonds............................................. 691 310 Group accident and health................................ 1,702 1,556 Other.................................................... (81) (180) ------------ ------------ $ 20,800 $ 13,451 ============ ============
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 Insurance Company, Ltd. (the "Company") in periodic press releases, oral statements made by the Company's officials to analysts and shareholders in the course of presentations about the Company and conference calls following earnings releases, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such factors include, among other things, (i) general economic and business conditions; (ii) interest rate changes; (iii) competition and regulatory environment in which the Company operates; (iv) claims frequency; (v) claims severity; (vi) the number of new and renewal policy applications submitted by the Company's agents; (vii) the ability of the Company to obtain adequate reinsurance in amounts and at rates that will not adversely affect its competitive position; (viii) the ability of National American Insurance Company ("NAICO") to maintain favorable insurance company ratings; (ix) the ability of the Company and its third party providers, agents and reinsurers to adequately address year 2000 issues; (x) other factors including the ongoing litigation matters involving a significant concentration of ownership of common stock. PAGE 10 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, 2000 and 1999:
GROSS PREMIUMS EARNED NET PREMIUMS EARNED --------------------- --------------------- THREE MONTHS ENDED MARCH 31, 2000 1999 2000 1999 ---------------------------- ---------- ---------- ---------- ---------- (In thousands) Standard property and casualty........ $ 30,707 $ 21,635 $ 20,817 $ 12,115 Political subdivisions................ 8,152 7,181 4,388 3,782 Surety bonds.......................... 4,009 3,555 2,837 2,881 Group accident and health............. 1,011 2,609 955 2,299 Other................................. 84 6 78 (39) ---------- ---------- ---------- ---------- TOTAL................................. $ 43,963 $ 34,986 $ 29,075 $ 21,038 ========== ========== ========== ==========
Gross premiums earned, before reductions for premiums ceded to reinsurers, increased $9.0 million or 26% in the first quarter of 2000 compared to the first quarter of 1999. The increase is primarily attributable to increased written premium production in Texas and Oklahoma, as NAICO continues to expand its programs in these states. Net premiums earned, after such reductions, increased $8.0 million or 38% in the first quarter of 2000 compared to the first quarter of 1999 due to the increase in written premium production, and to an increase in the amount of risk retained in the 2000 quarter for the Company's workers compensation line of business. Gross premiums earned in the standard property and casualty program increased $9.1 million or 42% in the first quarter of 2000 compared to the first quarter of 1999. The increase is primarily attributable to increased written premium production in Texas. Net premiums earned increased $8.7 million or 72% in the first quarter of 2000 versus the first quarter of 1999 due to the increase in written premium production, and to the increase in the amount of risk retained for the workers compensation portion of the program. Gross premiums earned in the political subdivisions program increased $971,000 or 14% in the first quarter of 2000 compared to the first quarter of 1999. The increase is primarily attributable to increased written premium production in the school districts portion of the program in Oklahoma. Net premiums earned in the political subdivisions program increased $606,000 or 16% in the first quarter of 2000 versus the first quarter of 1999. Gross premiums earned in the surety bond program increased $454,000 or 13% in the first quarter of 2000 compared to the first quarter of 1999. Approximately $629,000 of the gross premiums earned in the first quarter of 2000 relates to a new program that is 100% reinsured by an unaffiliated reinsurer. Excluding this new program, gross premiums earned decreased $175,000 or 5% from the 1999 quarter. Net premiums earned in the surety bond program decreased $44,000 or 2% in the first quarter of 2000 versus the first quarter of 1999. Gross premiums earned in the group accident and health program decreased $1.6 million or 61% in the first quarter of 2000 versus the first quarter of 1999. Net premiums earned for this program decreased $1.3 million or 58% in the first quarter of 2000 versus the first quarter of 1999. NAICO discontinued writing new policies for the excess portion of the group accident and health program effective April 1, 1999. NAICO is currently evaluating the fully insured portion of the program and may modify or discontinue it during 2000. NET INTEREST INCOME AND NET REALIZED INVESTMENT GAINS At March 31, 2000, the Company's investment portfolio consisted primarily of fixed income U.S. Government, high-quality corporate and tax exempt bonds, with approximately 9% invested in cash and money market instruments. The Company's portfolio contains no junk bonds or real estate investments. PAGE 11 Net interest income increased $95,000 or 7% in the first quarter of 2000 versus the first quarter of 1999 due primarily to an increase in invested assets. Invested assets increased from $114.3 million at March 31, 1999 to $126.6 million at March 31, 2000 due primarily to the collection of $12.9 million in January 2000 related to two reinsurance treaties which were rescinded in the fourth quarter of 1999. The Company had no net realized investment gains or losses during the first quarter of 2000, compared to a net realized gain of $50,000 in the first quarter of 1999. COMMISSIONS, FEES AND OTHER INCOME The Company's income from commissions, fees and other income decreased $49,000 or 11% in the first quarter of 2000 versus the first quarter of 1999. The majority of the Company's income from commissions, fees and other income are from LaGere and Walkingstick Insurance Agency, Inc. ("L&W"). L&W's brokerage commissions and fees before intercompany eliminations were $2.1 million in the first quarter of 2000 versus $2.0 million in the first quarter of 1999. A large portion of the brokerage commissions and fees for L&W is incurred by NAICO and thus eliminated in the consolidation of the Company's subsidiaries. LOSSES AND LOSS ADJUSTMENT EXPENSES The percentage of losses and loss adjustment expenses to net premiums earned ("loss ratio") was 71.5% for the first quarter of 2000 versus 63.9% in the first quarter of 1999. The increase in the 2000 loss ratio was primarily the result of adverse loss experience in the group accident and health program. Excluding the underwriting results of the group accident program, the loss ratio for the first quarter of 2000 was 67.9% versus 63.5% in the year ago quarter. In addition, a lower proportion of net premiums earned in the surety bond program resulted in a higher loss ratio in the 2000 quarter. Surety bonds have historically had a lower loss ratio than the Company's other lines of business, which is normal for the industry. Weather-related losses from wind and hail totaled $594,000 in the first quarter of 2000 and increased the loss ratio by 2.0 percentage points. Weather-related losses totaled $441,000 in the first quarter of 1999, and increased the 1999 loss ratio by 2.1 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. Recoverability of such deferred costs is dependent on the related unearned premiums on the policies being more than expected claim losses. The following table sets forth the Company's policy acquisition costs for each of the three month periods ended March 31, 2000 and 1999:
THREE MONTHS ENDED MARCH 31, ---------------------------- 2000 1999 ------------ ------------ (In thousands) Commissions expense............................... $ 5,259 $ 4,438 Other premium related assessments................. 403 400 Premium taxes..................................... 975 426 Excise taxes...................................... 110 46 Dividends to policyholders........................ 101 87 Other expense..................................... 42 30 ------------ ------------ Total direct expenses............................. 6,890 5,427 Indirect underwriting expenses.................... 4,078 3,824 Commission received from reinsurers............... (3,689) (4,215) Adjustment for deferred acquisition costs......... 419 11 ------------ ------------ Net policy acquisition costs...................... $ 7,698 $ 5,047 ============ ============
PAGE 12 Total gross direct and indirect expenses as a percentage of direct written and assumed premiums were 24.3% for the first quarter of 2000 versus 26.3% for the first quarter of 1999. Commission expense as a percentage of gross written and assumed premiums was 11.7% for the first quarter of 2000 versus 12.6% for the 1999 quarter. Premium taxes increased $549,000 or 129% in the first quarter of 2000 compared to the 1999 quarter due to the increase in written premiums and to a refund of $392,000 which was received in the 1999 quarter for premium taxes paid in a prior year. Indirect underwriting expenses were 9.0% and 10.9% of total direct written and assumed premiums in the three month periods ended March 31, 2000 and 1999, 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 the Company's overall premium volume. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses were 7.9% and 8.4% of gross premiums earned and commissions, fees and other income in the first quarter of 2000 and 1999, 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 the Company's overall premium volume. INTEREST EXPENSE Interest expense increased $338,000 or 148% in the first quarter of 2000 versus the first quarter of 1999. The increase was primarily due to interest expense on the $24 million debenture offering which was completed on July 16, 1999 by the Company's subsidiary Chandler (U.S.A.), Inc. LITIGATION EXPENSES Litigation expenses reflect expenses related to the on-going legal proceedings involving CenTra, Inc. and certain of its affiliates ("CenTra"). Litigation expenses decreased $32,000 or 12% in the first quarter of 2000 compared to the first quarter of 1999. Increased or renewed activity could result in greater litigation expenses in 2000 or future years. See Note 2 to Interim Consolidated Financial Statements. INCOME TAX PROVISION OR BENEFIT The provision for or benefit from federal income taxes of the consolidated U.S. subsidiaries varies with the level of income or loss before income taxes of such subsidiaries. The provision or benefit relative to the consolidated income before income taxes will also vary dependent on the contribution to income before income taxes by the consolidated U.S. subsidiaries. LIQUIDITY AND CAPITAL RESOURCES In the first quarter of 2000, the Company provided $9.4 million in cash from operations due primarily to the collection of certain receivables totaling approximately $12.9 million in the 2000 quarter that were related to the rescission of two reinsurance treaties during the fourth quarter of 1999. In the first quarter of 1999, the Company used $4.4 million in cash from operations due primarily to increases in premiums receivable and reinsurance recoverables, less an increase in unpaid losses and loss adjustment expenses, which generally correspond to the increase in written premiums in the 1999 quarter and to the purchase of additional reinsurance coverages in 1998. Book value per share was $15.06 at March 31, 2000 based on 3,285,408 shares (after giving effect to 1,142,625 shares rescinded through litigation) compared to $15.45 at December 31, 1999. PAGE 13 YEAR 2000 READINESS DISCLOSURES The Company began work in 1995 to prepare its financial, information and other computer-based systems for the year 2000, including updating existing legacy systems, and such work was completed prior to the end of 1999. Through the first four months of the year 2000, the Company had not experienced any significant problems or disruptions related to year 2000 problems. The Company is currently not aware of any significant disruptions experienced by its customers, vendors and service providers that would materially affect their ability to do business with the Company. While it is possible that certain year 2000 problems may exist but have not yet materialized, the Company does not currently expect any year 2000 problems to be encountered in the future that would have a material adverse effect on the operating results of the Company. The Company continues to study the complex issues related to insurance coverage for losses arising from the myriad potential fact situations connected with year 2000 problems and NAICO's liability to its insureds. The Company believes that the coverages NAICO provides do not extend to the types of losses which are most likely to occur as a result of year 2000 problems. No claims for year 2000 problems have been reported to NAICO and NAICO has made no provisions for loss reserves based on potential year 2000 problems. It is possible that future court interpretations of policy language based on specific facts, or legislation mandating coverage, could result in coverage for losses attributable to year 2000 problems. Such decisions or legislation could have a material adverse impact on the Company. It is also possible that NAICO may incur expenses defending claims for which it is ultimately determined there is no insurance coverage. PAGE 14 PART II. OTHER INFORMATION ----------------- Item 1. Legal Proceedings ----------------- In response to this item, the Company incorporates by reference to Note 2. Litigation to its Interim Consolidated Financial Statements contained elsewhere in this report. Item 2. Changes in Securities --------------------- None Item 3. Defaults Upon Senior Securities ------------------------------- None Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- None Item 5. Other Information ----------------- The Annual Meeting of Shareholders of Chandler Insurance Company, Ltd., will be held at the Marriott Hotel in Grand Cayman, Cayman Islands, on Monday, June 5, 2000 at 10:00 a.m. local time, for the following purposes: 1. To elect eight directors to serve until the next annual meeting of shareholders; 2. To approve the Company's Directors Stock Option and Stock Grant Plan, which authorizes up to 260,000 Common Shares of the Company to be issued upon stock grants and exercises of options granted under that plan; and 3. To transact such other business as may properly come before the Annual Meeting or any adjournment or postponement thereof. Only shareholders of record at the close of business on April 24, 2000 are entitled to notice of, and to vote at, the meeting or any adjournments or postponements thereof. Item 6. Exhibits and Reports on Form 8-K -------------------------------- None PAGE 15 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 9, 2000 CHANDLER INSURANCE COMPANY, LTD. By: /s/ W. Brent LaGere --------------------------------------- W. Brent LaGere Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) By: /s/ Mark C. Hart --------------------------------------- Mark C. Hart Vice President - Accounting & Treasurer (Principal Accounting Officer) EX-27 2
7 This schedule contains summary financial information extracted from Chandler Insurance Company, Ltd.'s March 31, 2000 Form 10-Q and is qualified in its entirety by reference to such financial statements. 3-MOS DEC-31-2000 MAR-31-2000 113,606 1,002 1,052 306 0 0 114,914 11,673 3,989 6,069 271,765 99,870 68,935 5,215 0 24,000 0 0 7,395 42,061 271,765 29,075 1,478 0 398 20,800 7,698 4,305 (1,852) (589) (1,263) 0 0 0 (1,263) (0.29) (0.28) 0 0 0 0 0 0 0
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