-----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, G4OGud2VRgmNs0SpnoQe1oJUwDBypPZwKyI1eLdLAI1gyy/f3E207RzDK44BVYZ2 c8uMPVWL8r6C+cWPkmmuhQ== 0000792854-96-000015.txt : 19961115 0000792854-96-000015.hdr.sgml : 19961115 ACCESSION NUMBER: 0000792854-96-000015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961113 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHANDLER INSURANCE CO LTD CENTRAL INDEX KEY: 0000792854 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15286 FILM NUMBER: 96660775 BUSINESS ADDRESS: STREET 1: 5TH FLR ANDERSON SQUARE STREET 2: PO BOX 1854 CITY: GRAND CAYMAN CAYMAN STATE: E9 ZIP: 00000 BUSINESS PHONE: 8099498177 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 September 30, 1996 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 October 31, 1996 was 6,941,708. This excludes 567,350 Common Shares owned by Chandler (U.S.A.), Inc., a subsidiary of registrant, which are eligible to vote. ================================================================================ PAGE 2 CHANDLER INSURANCE COMPANY, LTD. INDEX PART I - Financial Information ============================== Item 1 - ------ Consolidated Statements of Operations for the three months ended September 30, 1996 and 1995............................3 Consolidated Statements of Operations for the nine months ended September 30, 1996 and 1995.........................4 Consolidated Balance Sheets as of September 30, 1996 and December 31, 1995.....................................................5 Consolidated Statements of Cash Flows for the nine months ended September 30, 1996 and 1995..................................6 Notes to Interim Consolidated Financial Statements.............................7 Item 2 - ------ Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................9 PART II - Other Information =========================== Item 1 - Legal Proceedings....................................................12 Item 2 - Changes in Securities................................................12 Item 3 - Defaults Upon Senior Securities......................................12 Item 4 - Submission of Matters to a Vote of Security Holders..................12 Item 5 - Other Information....................................................12 Item 6 - Exhibits and Reports on Form 8-K.....................................12 Signatures....................................................................13 PAGE 3 CHANDLER INSURANCE COMPANY, LTD. Consolidated Statements of Operations (Unaudited) (Amounts in thousands except per share data)
For the three months ended September 30, ------------------------- 1996 1995 ---------- ---------- Premiums and other revenues Direct premiums written and assumed..................$ 37,058 $ 33,530 Reinsurance premiums ceded........................... (5,002) (3,363) ---------- ---------- Net premiums written and assumed................... 32,056 30,167 Increase in unearned premiums........................ (8,266) (8,105) ---------- ---------- Net premiums earned................................ 23,790 22,062 Net investment income.................................. 1,769 1,863 Commissions, fees and other income..................... 792 520 ---------- ---------- Total revenues..................................... 26,351 24,445 ---------- ---------- Operating costs and expenses Losses and loss adjustment expenses.................. 13,618 13,495 Policy acquisition costs............................. 9,641 6,283 General and administrative expenses.................. 3,339 2,966 Litigation expenses, net............................. (968) 330 ---------- ---------- Total operating expenses........................... 25,630 23,074 ---------- ---------- Income before income taxes............................. 721 1,371 Federal income tax provision of consolidated U.S. subsidiaries....................... (184) (511) ---------- ---------- Net income.............................................$ 537 $ 860 ========== ========== Net income per share...................................$ 0.08 $ 0.12 Weighted average common shares and common share equivalents outstanding........................ 6,942 6,942
See accompanying Notes to Interim Consolidated Financial Statements. PAGE 4 CHANDLER INSURANCE COMPANY, LTD. Consolidated Statements of Operations (Unaudited) (Amounts in thousands except per share data)
For the nine months ended September 30, ------------------------- 1996 1995 ---------- ---------- Premiums and other revenues Direct premiums written and assumed..................$ 83,046 $ 76,784 Reinsurance premiums ceded........................... (11,057) (11,248) ---------- ---------- Net premiums written and assumed................... 71,989 65,536 Increase in unearned premiums........................ (5,219) (4,912) ---------- ---------- Net premiums earned................................ 66,770 60,624 Net investment income.................................. 5,469 5,725 Commissions, fees and other income..................... 2,792 2,159 ---------- ---------- Total revenues..................................... 75,031 68,508 ---------- ---------- Operating costs and expenses Losses and loss adjustment expenses.................. 40,429 37,876 Policy acquisition costs............................. 24,086 17,488 General and administrative expenses.................. 10,600 9,579 Litigation expenses, net............................. (761) 860 ---------- ---------- Total operating expenses........................... 74,354 65,803 ---------- ---------- Income before income taxes............................. 677 2,705 Federal income tax benefit (provision) of consolidated U.S. subsidiaries.................... 790 (239) ---------- ---------- Net income.............................................$ 1,467 $ 2,466 ========== ========== Net income per share...................................$ 0.21 $ 0.36 Weighted average common shares and common share equivalents outstanding........................ 6,942 6,942
See accompanying Notes to Interim Consolidated Financial Statements. PAGE 5 CHANDLER INSURANCE COMPANY, LTD. Consolidated Balance Sheets (Unaudited) (Dollars in thousands except per share amounts)
September 30, December 31, 1996 1995 ------------ ------------ ASSETS Investments Fixed maturities available for sale, at estimated fair value..........................$ 106,570 $ 108,096 Fixed maturities held to maturity, at amortized cost (estimated fair value $1,753 and $6,147 in 1996 and 1995, respectively)....... 1,677 5,941 Short-term investments............................. 2,952 - ------------ ------------ Total investments................................ 111,199 114,037 Cash and cash equivalents............................ 9,210 8,524 Premiums receivable, less allowance for non-collection of $1,175 and $177 at 1996 and 1995, respectively........................ 34,366 35,058 Reinsurance recoverable on paid losses, less allowance for non-collection of $470 and $307 at 1996 and 1995, respectively................ 4,048 4,485 Reinsurance recoverable on unpaid losses, less allowance for non-collection of $185 and $307 at 1996 and 1995, respectively................ 40,663 46,777 Prepaid reinsurance premiums......................... 5,639 5,170 Deferred policy acquisition costs.................... 4,873 3,800 Property and equipment, net.......................... 6,097 6,188 Other assets......................................... 12,015 10,617 Licenses, net........................................ 4,531 4,643 Excess of cost over net assets acquired, net......... 6,062 6,517 Covenants not to compete, net........................ 833 1,133 ------------ ------------ Total assets.........................................$ 239,536 $ 246,949 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Unpaid losses and loss adjustment expenses.........$ 114,454 $ 128,794 Unearned premiums.................................. 36,969 31,280 Policyholder deposits.............................. 4,232 4,484 Notes payable...................................... 4,800 300 Accrued taxes and other payables................... 4,138 5,669 Premiums payable................................... 2,807 2,972 ------------ ------------ Total liabilities................................ 167,400 173,499 ------------ ------------ Shareholders' equity Common stock, $1.67 par value, 10,000,000 shares authorized, 7,509,058 shares issued.............. 12,540 12,540 Paid-in surplus.................................... 36,143 36,143 Retained earnings.................................. 27,393 25,926 Unrealized gain (loss) on investments available for sale, net of tax................... (1,792) 989 Less: Stock held by subsidiary, at cost (567,350 shares)................................. (2,148) (2,148) ------------ ------------ Total shareholders' equity..................... 72,136 73,450 ------------ ------------ Total liabilities and shareholders' equity...........$ 239,536 $ 246,949 ============ ============
See accompanying Notes to Interim Consolidated Financial Statements. PAGE 6 CHANDLER INSURANCE COMPANY, LTD. Consolidated Statements of Cash Flows (Unaudited) (Amounts in thousands)
For the nine months ended September 30, ------------------------- 1996 1995 ---------- ---------- OPERATING ACTIVITIES: Net income.............................................$ 1,467 $ 2,466 Add (deduct): Adjustments to reconcile net income to cash applied to operations: Net realized gains on sales of investments......... (119) (9) Net (gains) losses on sales of equipment........... (10) 2 Amortization and depreciation...................... 1,740 1,685 Provision for non-collection of premiums........... 1,165 47 Provision for non-collection of reinsurance recoverables......................... 1,634 320 Net change in non-cash balances relating to operations: Premiums receivable.............................. (474) (3,390) Reinsurance recoverable on paid losses........... (1,220) (433) Reinsurance recoverable on unpaid losses......... 6,137 7,605 Prepaid reinsurance premiums..................... (469) (1,313) Deferred policy acquisition costs................ (1,073) 121 Other assets..................................... (393) 2,887 Unpaid losses and loss adjustment expenses....... (14,340) (22,674) Unearned premiums................................ 5,689 6,225 Policyholder deposits............................ (252) (287) Accrued taxes and other payables................. (1,531) (1,044) Premiums payable................................. (165) 184 ---------- ---------- Cash applied to operations......................... (2,214) (7,608) ---------- ---------- INVESTING ACTIVITIES: Short-term investments Purchases.......................................... (2,944) (12,436) Maturities......................................... - 14,500 Fixed maturities available for sale Purchases.......................................... (26,468) (9,769) Sales.............................................. 13,743 1,030 Maturities......................................... 10,328 1,254 Fixed maturities held to maturity Purchases.......................................... - (35) Maturities......................................... 4,300 13,471 Cost of property and equipment purchased............. (575) (629) Proceeds from sale of property and equipment......... 36 117 Other................................................ (20) - ---------- ---------- Cash provided by investing activities.............. (1,600) 7,503 ---------- ---------- FINANCING ACTIVITIES: Proceeds from note payable........................... 4,500 - ---------- ---------- Cash provided by financing activities.............. 4,500 - ---------- ---------- Increase (decrease) in cash and cash equivalents during the period...................... 686 (105) Cash and cash equivalents at beginning of period..... 8,524 8,420 ---------- ---------- Cash and cash equivalents at end of period...........$ 9,210 $ 8,315 ========== ==========
See accompanying Notes to Interim Consolidated Financial Statements. PAGE 7 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, 1995. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the three and nine month periods ended September 30, 1996 are not necessarily indicative of the results that may be expected for the year. Certain reclassifications of the consolidated balance sheets for the 1995 period have been made to conform to the 1996 presentation. The consolidated financial statements include the accounts of Chandler Insurance Company, Ltd. ("Chandler" or "the Company") and subsidiaries including: - Chandler Insurance (Barbados), Ltd. ("Chandler Barbados") and NAICO Indemnity (Cayman), Ltd., 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"), LaGere & Walkingstick Insurance Agency, Inc. ("L&W") and Network Administrators, Inc. ("Network"), wholly owned subsidiaries of Chandler (U.S.A.), Inc. All significant intercompany accounts and transactions have been eliminated in consolidation. Accounting Pronouncements SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" establishes accounting standards for such assets. SFAS 123, "Accounting for Stock-Based Compensation" establishes a fair value method and disclosure standards for stock-based employee compensation arrangements, such as stock purchase plans and stock options. As allowed by SFAS 123, the Company will continue to follow the provisions of Accounting Principles Board Opinion 25 for such stock-based compensation arrangements and disclose the proforma effects of applying SFAS 123, if any, in the financial statements. The Company adopted these new standards effective January 1, 1996, the required effective date. The adoption of these standards had no material impact on the Company's financial position, results of operations or related disclosures to the Notes to Consolidated Financial Statements. NOTE 2 - LITIGATION In the Company's Annual Report on Form 10-K for the year ended December 31, 1995, various matters in litigation were described. In Item 3 of such Form 10-K, the Company reported on certain legal proceedings pending in the United States District Court for the Western District of Oklahoma involving the CenTra Group as well as an action pending involving Diane Semon. Such legal proceedings have been scheduled for trial in the first quarter of 1997. In Item 3 and Item 12 of such Form 10-K, the Company reported that on December 1, 1995 the Nebraska Supreme Court had upheld a ruling by a lower court denying the CenTra Group's attempt to obtain control of NAICO. On April 3, 1996 the CenTra Group filed a Petition for Writ of Certiorari in the United States Supreme Court requesting that court to assume jurisdiction to review the Nebraska Supreme Court decision. On May 13, 1996 the U.S. Supreme Court denied the Petition for Writ of Certiorari. In the third quarter of 1996, the Company recorded a $982,000 estimated recovery of costs from its directors and officers liability insurer related to the Company's claim for reimbursable amounts previously paid for defense and litigation costs associated with the litigation involving the CenTra Group. On October 16, 1996 the CenTra Group filed another Form A with the Nebraska Insurance Department. The Form A requests consent to a transfer of the Company's shares owned or controlled by the CenTra Group to the trustees of a trust established for that purpose. No final hearing date has been set. PAGE 8 On June 28, 1996 the Company filed a report on Form 8-K reporting a dispute with Midwest Indemnity Corporation ("Midwest"). On May 24, 1996 Midwest, a Skokie, Illinois based surety bond producer made a demand upon NAICO for binding arbitration of certain claims against NAICO. The claims are allegedly based upon a contractual relationship dating back to 1987 and accused NAICO of libeling Midwest and attempting to wrongfully appropriate business belonging to Midwest. In the arbitration demand Midwest alleges its corporate value has been diminished by approximately $20 million and that security it gave NAICO in the form of a letter of credit in the face amount of $200,000 and a surety bond issued by Century Surety Company with the remaining penal sum of $1,500,000 should be released. On June 20, 1996 NAICO filed a lawsuit in state court in Chandler, Oklahoma against Midwest and certain affiliates seeking a stay of the arbitration and asserting claims against Midwest for debts owed to NAICO, breach of fiduciary duty by Midwest and certain of its officers, various declaratory judgements and seeking further relief in connection with those claims. The state court granted an immediate temporary restraining order staying the requested arbitration pending further hearing. On June 25, 1996 the action was removed to U.S. District Court in Oklahoma City, Oklahoma. No trial date has been set. On June 17, 1996 Century Surety Company filed an action in the Common Pleas Court of Cuyahoga County, Ohio against NAICO and Midwest alleging that the bond which it had given to NAICO to secure Midwest's obligations to NAICO is void and requesting cancellation of the bond. On July 30, 1996 the action was removed to U.S. District Court in Cleveland, Ohio. No trial date has been set. Midwest currently owes NAICO approximately $5.4 million related to a commission arrangement contingent on the loss experience on the NAICO/Midwest Surety Bond Program. Pursuant to NAICO's agreement with Midwest, the obligation is scheduled to be reduced by $1.5 million during the remainder of 1996 (at September 30, 1996 $1.0 million is past due) with the balance due in January, 1997. In addition, Midwest owes approximately $782,000 for premiums it collected in 1995 and 1996 but which have not been paid to NAICO. NAICO intends to seek payment of all amounts due. However, the Company recorded a reserve of $1.0 million as of September 30, 1996 with respect to amounts recoverable from Midwest and the pending legal proceedings. In view of the large amounts due from Midwest and the early stages of the various related legal proceedings, an unfavorable result, if any, could have an additional material impact on the Company. In Item 8, Item 10 and Note 10 of the Company's Annual Report on Form 10-K for the year ended December 31, 1995 a contingency relating to reinsurance arbitration among NAICO, New York Life Insurance Company, Security Benefit Life Insurance Company and Standard Insurance Company (the "reinsurers") was discussed. On May 23, 1996 an arbitration award was made against the reinsurers and in favor of NAICO but for $1.1 million less than had been expected. A final award was made by the arbitration panel on July 19, 1996 but on July 30, 1996 the reinsurers requested that the arbitrators reconsider the award and, accordingly, have not yet paid the amounts ordered to be paid under the award. On August 9, 1996 NAICO filed suit in the U.S. District Court for the District of Nebraska against the reinsurers to enforce the arbitration award. PAGE 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Net Premiums Earned The following table sets forth net premiums earned for each of the three and nine month periods ended September 30, 1996 and 1995:
For the three months For the nine months ended September 30, ended September 30, ---------------------- ---------------------- 1996 1995 1996 1995 ---------- ---------- ---------- ---------- (In thousands) Standard property-casualty........$ 10,799 $ 8,194 $ 27,999 $ 21,082 Non-standard private passenger automobile........... 4,278 3,926 12,870 11,387 Political subdivisions............ 3,553 3,776 10,496 9,273 Surety bonds...................... 2,737 3,617 6,989 11,145 Transportation.................... 431 558 1,555 2,785 Other............................. 1,992 1,991 6,861 4,952 ---------- ---------- ---------- ---------- TOTAL..............$ 23,790 $ 22,062 $ 66,770 $ 60,624 ========== ========== ========== ==========
Net premiums earned increased 8% and 10% in the quarter and nine months ended September 30, 1996 compared to the prior year periods. During the third quarter of 1995, NAICO elected to commute the unpaid losses and loss adjustment expenses related to reinsurance contracts covering certain business written in 1993, 1994 and 1995 which resulted in an increase in net premiums earned of $2,175,000. There was no increase in net unpaid losses and loss adjustment expenses for this commutation. In 1996 NAICO reviewed the historical results for reinsurance contracts with similar commutation provisions and began accruing for such commutations where a commutation election was considered likely. Excluding the effects of the commutation accruals and election in the 1996 and 1995 periods, net premiums earned increased 14% and 13% for the quarter and nine months ended September 30, 1996, respectively. The effect of the commutation accruals and elections on net premiums earned for each insurance program is set forth as follows:
For the three months For the nine months ended September 30, ended September 30, ---------------------- ---------------------- 1996 1995 1996 1995 ---------- ---------- ---------- ---------- (In thousands) Standard property-casualty........$ 106 $ 1,184 $ 514 $ 1,184 Political subdivisions............ 19 593 116 593 Other programs.................... 4 398 24 398 ---------- ---------- ---------- ---------- TOTAL..............$ 129 $ 2,175 $ 654 $ 2,175 ========== ========== ========== ==========
Net premiums earned in the standard property-casualty program increased 32% and 33% in the three and nine months ended June 30, 1996, respectively, versus the prior year. Net premiums earned for workers compensation accounted for $1.7 million and $4.1 million of the respective increases while other property- casualty coverages accounted for the balance. The increases are primarily attributable to continued expansion in Oklahoma and surrounding states. PAGE 10 Net premiums earned in the political subdivisions program decreased 6% and increased 13% in the current quarter and first nine months of 1996 compared to the year ago periods. Excluding the effects of the commutations described above, net premiums earned increased 11% and 20% over the same periods. The expansion of the municipalities portion of the program to include workers compensation, the addition of property-casualty coverages for Oklahoma counties in mid-1995 and continued expansion in Oklahoma accounted for most of the increases. Net premiums earned in the surety bond program decreased 24% and 37% in the three and nine months ended September 30, 1996 compared to the year ago periods. NAICO and Midwest Indemnity Corporation ("Midwest"), the underwriting manager for a large portion of the surety bond program, agreed to terminate the underwriting and production contract effective December 31, 1995. See Note 2 - Litigation - to the Notes to Interim Consolidated Financial Statements regarding legal proceedings involving Midwest. Net premiums earned from surety bonds produced by LaGere & Walkingstick Insurance Agency, Inc. ("L&W") increased to $1.9 million in the current quarter and $4.5 million in the first nine months of 1996 compared to $1.0 million and $2.9 million in the respective 1995 periods. Net premiums earned from the nonstandard private-passenger automobile programs increased 9% and 13% for the quarter and nine months ended September 30, 1996 compared to the year ago periods. Increased premium volume from the California portion of the program accounted for most of the increase and was partially offset by a decrease in premium volume for the Arizona portion of the program. Net premiums earned from direct assignments of workers compensation policies and participation in certain voluntary and involuntary pools ("Pools") covering workers compensation were $1.5 million and $5.3 million in the three and nine month periods ended September 30, 1996 compared to $2.4 million and $5.5 million in the year ago periods. The decreases are primarily attributable to a decrease in premium volume for certain Pools and a decrease in NAICO's premium volume in certain states using such Pools. Commissions, Fees and Other Income Brokerage commissions and fees before intercompany eliminations were $2.9 million and $6.4 million in the third quarter and first nine months of 1996 compared to $2.6 million and $6.0 million in the year ago periods. A large portion of the brokerage commissions and fees for L&W is incurred by NAICO and thus eliminated in the consolidation of the Company's subsidiaries. Commissions and fees generated by Network Administrators, Inc. ("Network") were $187,000 and $524,000 in the current quarter and first nine months of 1996. Network is a third-party administrator of partially self-insured group accident and health plans. Network was acquired by the Company in the fourth quarter of 1995. Losses and Loss Adjustment Expenses The percentage of losses and loss adjustment expenses to net premiums earned was 57.2% and 60.5% for the three and nine months ended September 30, 1996, respectively, compared to 61.2% and 62.5% in the 1995 periods. Policy Acquisition Costs Policy acquisition costs as a percentage of net premiums earned were 40.5% and 36.1% for the current quarter and first nine months of 1996 compared to 28.5% and 28.8% in the year ago periods. In the current quarter, the Company incurred a $1.0 million charge with respect to a reserve established for amounts recoverable from Midwest and the related pending legal proceedings. In the second quarter of 1996, NAICO concluded an arbitration process with three reinsurers of its truckers workers compensation program relating to business written from 1988 through 1991. NAICO received an arbitration award that was $1.1 million smaller than expected. These charges increased policy acquisition costs as a percentage of net premiums earned by 4.3 and 3.1 percentage points in the three and nine months ended September 30, 1996. The commission rate for a substantial portion of the surety bond program varies inversely with the loss ratio pursuant to a commission arrangement contingent on the loss experience of the program. The expected loss ratio for this portion of the program was decreased in 1996 and such decrease increased the percentage of net policy acquisition costs to net premiums earned by 7.0 and 4.2 percentage points, respectively, for the three and nine months ended September 30, 1996. PAGE 11 General and Administrative Expenses General and administrative expenses were 13.6% and 15.2% of revenues exclusive of net investment income for the three and nine month periods ended September 30, 1996 compared to 13.1% and 15.3% in the respective 1995 periods. The Company incurred $200,000 and $720,000 in expenses in the 1996 periods related to the reinsurance arbitration and the Midwest legal proceedings discussed above. See Note 2 - Litigation - to the Notes to Interim Consolidated Financial Statements regarding such legal proceedings. 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 and loss and loss adjustment expenses based on various factors including employee counts, salaries, occupancy and specific identification. Liquidity and Capital Resources The Company used $2.2 million of cash in operations in the first nine months of 1996 compared to $7.6 million in the first nine months of 1995. These uses of cash generally reflect the reductions in premium volume from earlier years and the payment of losses and loss adjustment expenses incurred in those years. The Company sold $13.7 million of fixed-income securities available for sale prior to their maturities in the first nine months of 1996. The Company sold $1.7 million of fixed-income securities prior to their maturities during the same period in the prior year. During the third quarter of 1996, Chandler USA borrowed $4.5 million from a bank on a three year note payable. The note has a floating interest rate at Wall Street Journal prime, and principal and interest are payable monthly. The note is collateralized by the shares of NAICO stock owned by Chandler USA. Proceeds from the note were used to repay intercompany advances from Chandler USA's parent company Chandler Insurance (Barbados), Ltd., a wholly owned subsidiary of the Company. Litigation Expenses In 1992, the Company became involved in certain legal proceedings beyond the ordinary course of business. In the third quarter of 1996, the Company recorded a $982,000 estimated recovery of costs from its directors and officers liability insurer related to the Company's claim for reimbursable amounts previously paid for defense and litigation costs associated with the litigation involving the CenTra Group. These proceedings generally involve CenTra, Inc., a shareholder, and certain of its affiliates ("CenTra"). The Company does not expect an immediate resolution of these legal proceedings. However, a substantial portion of such legal proceedings are scheduled for trial in the first quarter of 1997. Accordingly, the Company expects to incur additional legal costs in future periods. Due to the inherent uncertainties of such legal proceedings and the unpredictability of CenTra's future actions, the Company cannot predict the outcome of such litigation with certainty or the rate at which such defense and litigation costs will be incurred in the future. Income Tax Provision 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. The net income tax benefit resulting from the reinsurance arbitration and related expenses, the Midwest legal proceedings and the estimated recovery of litigation costs described above was $113,000 and $650,000 in the three and nine months ended September 30, 1996. PAGE 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings In response to this item, the Company incorporates by reference to Note 2 - Litigation - to its Interim Consolidated Financial Statements contained elsewhere in this report. Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K None PAGE 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: November 12, 1996 CHANDLER INSURANCE COMPANY, LTD. By: /s/ Brent LaGere -------------------------------- Brent LaGere Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer) By: /s/ Mark T. Paden -------------------------------- Mark T. Paden Vice President - Finance and Chief Financial Officer (Principal Accounting and Financial Officer) EX-27 2
7 This schedule contains summary financial information extracted from Chandler Insurance Company, Ltd.'s September 30, 1996 Form 10-Q and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 106,570 1,677 1,753 0 0 0 111,199 9,210 4,048 4,873 239,536 114,454 36,969 4,232 0 4,800 0 0 12,540 59,596 239,536 66,770 5,350 119 2,792 40,429 24,086 9,839 677 (790) 1,467 0 0 0 1,467 .21 .21 0 0 0 0 0 0 0
-----END PRIVACY-ENHANCED MESSAGE-----