-----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, HCh7d8bz5mk6h8ysNKnr6zFBcVNjJtgd4SznKUpWPqLKlCajcIXcwnx+BKnzzak+ 9WLqJNgYZzWdnqSRn44PHg== 0000792854-97-000008.txt : 19970731 0000792854-97-000008.hdr.sgml : 19970731 ACCESSION NUMBER: 0000792854-97-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970730 SROS: NASD 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: 1934 Act SEC FILE NUMBER: 000-15286 FILM NUMBER: 97647712 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 June 30, 1997 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 July 31, 1997 was 6,561,237, (this is net of 380,471 Common Shares owned by a subsidiary of the 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 June 30, 1997 and 1996..........................3 Consolidated Statements of Operations for the six months ended June 30, 1997 and 1996............................4 Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996..................................................5 Consolidated Statements of Cash Flows for the six months ended June 30, 1997 and 1996....................................6 Notes to Interim Consolidated Financial Statements.............................7 Item 2 - ------ Management's Discussion and Analysis of Financial Condition and Results of Operations...................................10 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 CHANDLER INSURANCE COMPANY, LTD. PAGE 3 CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Amounts in thousands except per share data)
For the three months ended June 30, ------------------------- 1997 1996 ---------- ---------- Premiums and other revenues Direct premiums written and assumed.................$ 28,756 $ 24,771 Reinsurance premiums ceded.......................... (4,005) (2,646) ---------- ---------- Net premiums written and assumed................. 24,751 22,125 Decrease (increase) in unearned premiums............ 972 (190) ---------- ---------- Net premiums earned.............................. 25,723 21,935 Net investment income.................................. 1,808 1,826 Commissions, fees and other income..................... 620 1,130 ---------- ---------- Total revenues................................... 28,151 24,891 ---------- ---------- Operating costs and expenses Losses and loss adjustment expenses................. 15,549 13,456 Policy acquisition costs............................ 7,639 8,313 General and administrative expenses................. 3,359 3,490 Litigation expenses, net............................ 562 140 ---------- ---------- Total operating expenses......................... 27,109 25,399 ---------- ---------- Income (loss) before income taxes...................... 1,042 (508) Federal income tax benefit (provision) of consolidated U.S. subsidiaries...................... (504) 775 ---------- ---------- Net income.............................................$ 538 $ 267 ========== ========== Net income per share...................................$ 0.08 $ 0.04 Weighted average common shares outstanding (excludes effect of stock rescission)......................... 6,708 6,942
See accompanying Notes to Interim Consolidated Financial Statements. CHANDLER INSURANCE COMPANY, LTD. PAGE 4 CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Amounts in thousands except per share data)
For the six months ended June 30, ------------------------- 1997 1996 ---------- ---------- Premiums and other revenues Direct premiums written and assumed.................$ 56,915 $ 45,988 Reinsurance premiums ceded.......................... (7,712) (6,055) ---------- ---------- Net premiums written and assumed................. 49,203 39,933 Decrease in unearned premiums....................... 193 3,047 ---------- ---------- Net premiums earned.............................. 49,396 42,980 Net investment income.................................. 3,623 3,700 Commissions, fees and other income..................... 1,440 2,000 ---------- ---------- Total revenues................................... 54,459 48,680 ---------- ---------- Operating costs and expenses Losses and loss adjustment expenses................. 31,136 26,811 Policy acquisition costs............................ 14,235 14,445 General and administrative expenses................. 6,974 7,261 Litigation expenses, net............................ 10,922 207 ---------- ---------- Total operating expenses......................... 63,267 48,724 ---------- ---------- Loss before income taxes............................... (8,808) (44) Federal income tax benefit (provision) of consolidated U.S. subsidiaries................... (981) 974 ---------- ---------- Net income (loss)......................................$ (9,789) $ 930 ========== ========== Net income (loss) per share............................$ (1.43) $ 0.13 Weighted average common shares outstanding (excludes effect of stock rescission)......................... 6,824 6,942
See accompanying Notes to Interim Consolidated Financial Statements. CHANDLER INSURANCE COMPANY, LTD. PAGE 5 CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollars in thousands except per share amounts)
June 30, December 31, 1997 1996 ------------ ------------ ASSETS Investments Fixed maturities available for sale, at estimated fair value........................$ 108,419 $ 109,665 Fixed maturities held to maturity, at amortized cost (estimated fair value $1,647 and $1,675 in 1997 and 1996, respectively).................................. 1,574 1,582 Equity securities available for sale, at estimated fair value........................... 2,110 - ------------ ------------ Total investments........................... 112,103 111,247 Cash and cash equivalents............................ 4,680 7,889 Premiums receivable, less allowance for non-collection of $170 and $177 at 1997 and 1996, respectively.................... 26,847 30,413 Reinsurance recoverable on paid losses, less allowance for non-collection of $554 and $491 at 1997 and 1996, respectively............... 3,530 3,805 Reinsurance recoverable on unpaid losses............. 13,225 14,432 Prepaid reinsurance premiums......................... 5,421 5,470 Deferred policy acquisition costs.................... 5,464 4,993 Property and equipment, net.......................... 6,069 5,934 Other assets......................................... 14,469 11,517 Licenses, net........................................ 4,418 4,494 Excess of cost over net assets acquired, net......... 5,576 5,900 Covenants not to compete, net........................ 533 733 ------------ ------------ Total assets.........................................$ 202,335 $ 206,827 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Unpaid losses and loss adjustment expenses........$ 79,026 $ 79,639 Unearned premiums................................. 35,767 36,009 Policyholder deposits............................. 4,948 4,016 Notes payable..................................... 3,702 4,391 Accrued taxes and other payables.................. 3,615 7,777 Premiums payable.................................. 3,033 2,448 Litigation liabilities............................ 16,618 - ------------ ------------ Total liabilities........................... 146,709 134,280 ------------ ------------ Shareholders' equity Common stock, $1.67 par value, 10,000,000 shares authorized, 6,941,708 shares issued and outstanding......................... 11,593 11,593 Paid-in surplus................................... 34,942 34,942 Capital redemption reserve........................ 947 947 Retained earnings................................. 16,162 25,951 Unrealized loss on investments available for sale, net of tax................. (1,200) (886) Less: Common stock held by subsidiary, at cost (380,471 shares)....................... (1,902) - Less: Common stock rescinded through litigation (517,500 shares in 1997)......... (4,916) - ------------ ------------ Total shareholders' equity.................. 55,626 72,547 ------------ ------------ Total liabilities and shareholders' equity...........$ 202,335 $ 206,827 ============ ============
See accompanying Notes to Interim Consolidated Financial Statements. CHANDLER INSURANCE COMPANY, LTD. PAGE 6 CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Amounts in thousands)
For the six months ended June 30, ------------------------- 1997 1996 ---------- ---------- OPERATING ACTIVITIES: Net income (loss)......................................$ (9,789) $ 930 Add (deduct): Adjustments to reconcile net income to cash applied to operations: Net realized gains on sales of investments....... (32) (114) Net (gains) losses on sales of equipment......... 9 (6) Amortization and depreciation.................... 1,068 1,180 Provision for non-collection of premiums......... 60 116 Provision for non-collection of reinsurance recoverables...................... 300 1,340 Net change in non-cash balances relating to operations: Premiums receivable........................... (108) 2,708 Reinsurance recoverable on paid losses........ (101) (836) Reinsurance recoverable on unpaid losses...... 1,283 4,714 Prepaid reinsurance premiums.................. 49 682 Deferred policy acquisition costs............. (471) (186) Other assets.................................. (3,318) 1,238 Unpaid losses and loss adjustment expenses.... (613) (11,367) Unearned premiums............................. (242) (3,728) Policyholder deposits......................... 932 (236) Accrued taxes and other payables.............. (4,162) (1,708) Premiums payable.............................. 585 (789) Litigation liabilities........................ 11,701 - ---------- ---------- Cash applied to operations....................... (2,849) (6,062) ---------- ---------- INVESTING ACTIVITIES: Fixed maturities available for sale Purchases........................................ (10,357) (13,573) Sales............................................ 6,550 12,340 Maturities....................................... 4,691 8,546 Fixed maturities held to maturity Maturities....................................... - 2,300 Cost of property and equipment purchased............ (565) (311) Proceeds from sale of property and equipment........ 9 27 Other............................................... - (20) ---------- ---------- Cash provided by investing activities............ 328 9,309 ---------- ---------- FINANCING ACTIVITIES: Payments on notes payable........................... (688) - ---------- ---------- Cash applied to financing activities............. (688) - ---------- ---------- Increase (decrease) in cash and cash equivalents during the period.................... (3,209) 3,247 Cash and cash equivalents at beginning of period....... 7,889 8,524 ---------- ---------- Cash and cash equivalents at end of period.............$ 4,680 $ 11,771 ========== ==========
See accompanying Notes to Interim Consolidated Financial Statements. CHANDLER INSURANCE COMPANY, LTD. PAGE 7 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, 1996. 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 and six month periods ended June 30, 1997 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 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. NOTE 2 - LITIGATION In the Company's Annual Report on Form 10-K for the year ended December 31, 1996 and Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, recent developments updating the CenTra, Inc. ("CenTra") litigation were described. CenTra Litigation - Oklahoma As previously reported, on February 13, 1997 trial commenced in the United States District Court in Oklahoma City, Oklahoma (the "Court") in consolidated cases involving CenTra and certain of its affiliates, officers and directors (the "CenTra Group") and the Company and certain of its affiliates, officers and directors. On April 1, 1997, at the close of all of the evidence, the Court dismissed CenTra's claims against NAICO and an affiliate for alleged wrongful cancellation of CenTra's insurance with NAICO and the affiliate in 1992. The remaining issues were submitted to a jury. On April 9, 1997 the jury returned verdicts on all claims. On April 22, 1997, the Court entered judgments on all verdicts returned. One judgment against the Company requires 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. Another judgment was against both the Company and its affiliate Chandler Barbados and in favor of CenTra and its affiliate Ammex, Inc. Based upon an alleged breach of a stock purchase agreement in 1988, CenTra and Ammex were awarded $6,882,500. Both judgments related to alleged failures by the Company to adequately disclose the fact that ownership of the Company's stock may be subject to regulation by the Nebraska Insurance Department under certain circumstances. The jury also found in favor of CenTra and against certain officers and/or directors of the Company on the securities claims relating to CenTra's 1990 purchases and the failure to disclose the application of the Nebraska insurance law, but only awarded damages of $1 against each individual defendant on those claims. On ten derivative claims brought by CenTra, the jury found in CenTra's favor on only 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. On the remaining claim relating to the acquisition of certain insurance agencies in 1988, the jury awarded only $1 each against six officers and/or directors. PAGE 8 On other claims asserted by the CenTra Group, the jury found in favor of the Company and/or the individual defendants. The jury also found in favor of NAICO and NAICO Indemnity (Cayman), Ltd. on their counterclaims for CenTra's failure to pay insurance premiums in the sum of $788,625 and further upheld a resolution adopted by the Chandler 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 purchases made by the CenTra Group in July 1992 as part of its efforts to acquire control of Chandler. The jury found in favor of CenTra on the Company's claim against CenTra for breach of a standstill agreement contained in a 1988 stock exchange agreement. The jury denied the Company's claim against Messrs. Harned, Lech and Moroun based upon their alleged breach of fiduciary duty as directors. The jury also denied the Company's claim against Mr. Moroun individually for violation of Section 16(b) of the Securities Exchange Act of 1934 regarding short swing profits. The Company's legal counsel, management and board of directors are reviewing the Court rulings and the judgments and considering whether to appeal. Several post-trial motions have been filed by all parties relating to the judgments and prejudgment interest. The Court currently has these motions under advisement and has given no indication regarding when the rulings may be expected. Additional motions to tax costs and fix attorney fees will be filed following rulings on these motions. Because the judgments are so recent and the Court has not yet ruled on the post- trial motions, the Company is unable to presently assess the ultimate outcome of these matters. However, the Company has recorded a net charge for the litigation matters described above during the first quarter of 1997 totaling approximately $8.3 million ($8.5 million including provision for federal income tax). In addition, the Company has recorded the return of 517,500 shares of the Company's stock in conjunction with the stock rescission judgment as a decrease to shareholders' equity in the amount of approximately $4.9 million with the remaining amount included in the charge for litigation matters. The charge includes approximately $4.6 million as an estimate of interest, costs and related attorney fees. The ultimate actual amounts allowed by the Court to all parties for these items could vary significantly from the Company's estimate. The Court could deny all requests for recovery of these items or could award the parties amounts which would be much greater than the Company's estimate. The CenTra Group has requested prejudgment interest of approximately $12 million. The charge includes an estimated recovery of $2.7 million from the Company's directors and officers policy insurer for costs associated with the defense and litigation of these matters. The Company is entitled to a total of $5 million under the applicable insurance policy. Some amounts have been previously paid without dispute and 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 estimated insurance recovery is based upon these variable factors. The charge also includes the amount of judgments in favor of Chandler USA on the derivative claims discussed above. Further unfavorable outcomes regarding these issues, collection of the awards and advancement of litigation expenses to certain Company defendants would have a material adverse effect on the Company and negatively impact future earnings. Except for the recovery of a portion of the litigation costs from the Company's directors and officers policy insurer, no provision has been made in the accompanying consolidated financial statements related to the advanced litigation expenses. The Company's management believes that adequate financial resources are available to post a supersedeas bond if the judgments are appealed, and the Company is pursuing various financing arrangements in the event that the judgments are not reduced or overturned. 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 payment of these judgments would reduce investment earnings or increase operating expenses in future periods. The Company also incurred approximately $550,000 and $2.3 million in attorney fees and related litigation expenses in the second quarter and first half of 1997. Litigation expenses were $140,000 and $207,000 in the second quarter and first half of 1996. CenTra Litigation - Nebraska As previously reported the United States District Court for the District of Nebraska (the "Nebraska Court") has entered certain orders relating to sequestration of shares of the Company's stock owned by CenTra. On March 25, 1997 the Nebraska Court, pursuant to the Nebraska Insurance Holding Company Systems Act, ordered CenTra and certain of its affiliates to divest all Chandler shares owned by them, regardless of when purchased. The CenTra defendants own or control 3,131,825 Chandler shares. CenTra's shares represent approximately 45% of the outstanding stock (excludes 1997 stock rescission judgment and stock held by subsidiary). The Nebraska Court directed NAICO, the CenTra defendants and the Nebraska Insurance Department to submit proposals to the Nebraska Court by April 21, 1997 for the "orderly divestiture and disposition of the stock". A hearing would then be scheduled to consider the proposals. PAGE 9 CenTra has subsequently appealed the March 25, 1997 order of the Nebraska Court to the United States Court of Appeals for the Eighth Circuit where the appeal is now pending. CenTra's appeal of this order has resulted in a delay of the deadlines for submitting the proposals and no new submission date has been set at this time. Because of the uncertainty of the outcome of CenTra's appeal of the Nebraska Court's orders, and until the final proposals are submitted and accepted, the Company is unable to predict the effect of the 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. On March 27, 1997 the Nebraska Court declined to exercise jurisdiction over 550,329 shares of Chandler stock held as security by Chandler subsidiaries for debts owed by two former agents but in which CenTra claimed to have option rights. The Nebraska Court's ruling cleared the way for the Company's subsidiaries to begin the process of disposing of these shares to retire the agents' debts to the subsidiaries. CenTra did not appeal this order. During the second quarter of 1997, ownership of 380,471 shares was transferred to a Chandler subsidiary as payment for one of the agent's debts to Chandler's subsidiaries in the amount of $1,902,355. This transfer had no impact on net income. The shares are held as a reduction of stockholders' equity. CenTra Litigation - Other During the first quarter of 1997 the Company concluded an arbitration proceeding involving DuraRock Underwriters, Ltd., an affiliate of CenTra, and recorded approximately $315,000 in litigation and settlement expenses related to this matter. NOTE 3 - RECENTLY ADOPTED ACCOUNTING STANDARDS In February 1997, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 129, Disclosure of Information about Capital Structure. SFAS No. 129 establishes standards for disclosure of information regarding an entity's capital structure. The adoption of SFAS No. 129 did not affect the Company's consolidated financial position or results of operations. NOTE 4 - ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED In February 1997, the FASB issued SFAS No. 128, Earnings Per Share, which establishes standards for computing and presenting earnings per share. SFAS No. 128 is effective for periods ending after December 15, 1997. Management believes that SFAS No. 128 will not have a significant effect on the Company's calculation of earnings per share considering its current capital structure. In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income, which establishes standards for reporting and displaying comprehensive income and its components (revenues, expenses, gains and losses) in financial statements. In addition, SFAS No. 130 requires the Company to classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately in the shareholders' equity section of the statement of financial condition. The Company will adopt SFAS No. 130 on January 1, 1998 as required. Also in June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 establishes reporting standards for public companies concerning annual and interim financial statements of their operating segments. Operating segments are components of a company about which separate financial information is available that is regularly evaluated by the chief operating decision maker in deciding how to allocate resources and assess performance. The standard sets criteria for reporting disclosures about a company's products and services, geographic areas and major customers. The Company will adopt SFAS No. 131 on January 1, 1998 as required. PAGE 10 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 six month periods ended June 30, 1997 and 1996:
For the three months For the six months ended June 30, ended June 30, ---------------------- ---------------------- 1997 1996 1997 1996 ---------- ---------- ---------- ---------- (In thousands) Standard property-casualty........$ 13,911 $ 8,933 $ 25,727 $ 17,200 Non-standard private passenger automobile........... 3,783 4,758 7,707 8,592 Political subdivisions............ 3,658 3,458 7,193 6,943 Surety bonds...................... 2,929 2,428 5,842 4,252 Transportation.................... (100) 596 (4) 1,124 Other............................. 1,542 1,762 2,931 4,869 ---------- ---------- ---------- ---------- TOTAL..............$ 25,723 $ 21,935 $ 49,396 $ 42,980 ========== ========== ========== ==========
Net premiums earned increased 17% and 15% for the three and six months ended June 30, 1997 compared to the prior year. Net premiums earned in the standard property-casualty program increased $5.0 million and $8.5 million (or 56% and 50%) for the current quarter and first half, respectively, compared to the year ago periods. Net premiums earned for workers compensation accounted for $2.9 million and $5.3 million of the increase, respectively, while other property-casualty coverages accounted for the balance. The increase is primarily attributable to continued expansion in Oklahoma and surrounding states. Net premiums earned in the surety bond program increased 21% and 37% in the three and six months ended June 30, 1997 compared to the 1996 periods. Net premiums earned from surety bonds produced by LaGere & Walkingstick Insurance Agency, Inc. ("L&W") increased to $2.0 million and $4.0 million for the 1997 periods compared to $1.4 million and $2.6 million in the comparable 1996 periods. The increase in business produced by L&W is primarily a result of expansion in New Mexico and California. Net premiums earned in the non-standard private passenger automobile programs declined 20% and 10% in the current quarter and first half of 1997 compared to the year ago periods. Net premiums earned for the Oklahoma portion of the program decreased to $463,000 and $1.1 million for the second quarter and first half of 1997 compared to $1.3 million and $2.4 million in the comparable 1996 periods. Net premiums earned from the Arizona portion of the program decreased to $258,000 and $768,000 in the current quarter and first half of 1997 compared to $785,000 and $1.3 million in the year ago periods. These decreases are primarily a result of premium rate increases and reductions in the number of retail agents offering these programs. Net premiums earned are expected to decline further in future periods. Net premiums earned in the California portion of the program increased to $3.1 million and $5.9 million for the three and six month periods ended June 30, 1997, respectively, compared to $2.7 million and $4.8 million in the 1996 periods. During the second quarter of 1997, management reviewed the underwriting performance of the California portion of the program relative to the Company's other insurance programs and concluded that it would be in the Company's best interest to substantially reduce its underwriting risk. Effective July 1, 1997, National American Insurance Company ("NAICO") entered into a 100% quota share reinsurance agreement with Underwriters Reinsurance Company to fully reinsure the risk. Net premiums earned for the California portion of the program were $9.6 million and $6.7 million for the years ended December 31, 1996 and 1995. PAGE 11 Net premiums earned from the political subdivisions program increased 6% and 4%, respectively, in the three and six month periods ended June 30, 1997 compared to a year ago. Expansion of the school districts portion of the program in Texas accounted for most of the increase. Net premiums earned from direct assignments of workers compensation policies and participation in voluntary and involuntary pools ("Pools") covering workers compensation, included in Other above, decreased to $847,000 and $1.6 million in the second quarter and first half of 1997 compared to $1.3 million and $3.8 million in the comparable 1996 periods. The decrease is primarily attributable to decreased activity from the Pools, which decreased by $141,000 and $1.5 million from the respective 1996 periods. During the second quarter of 1996, NAICO began writing excess accident and health coverage for small to medium sized employers generally in Oklahoma and Texas. Net premiums earned in this program were $451,000 and $758,000 in the second quarter and first half of 1997 compared to $12,000 for both periods in 1996. Commissions, Fees and Other Income L&W's brokerage commissions and fees before intercompany eliminations were $2.0 million and $4.0 million in the three and six months ended June 30, 1997, respectively, compared to $1.7 million and $3.5 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. Fees generated by Network Administrators, Inc. ("Network") were $146,000 and $359,000 in the second quarter and first half of 1997 compared to $186,000 and $337,000 in the comparable 1996 periods. Network is a third-party administrator of partially self-insured group accident and health plans. A portion of the fees for Network 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 was 60.4% and 63.0% for the quarter and six months ended June 30, 1997 compared to 61.3% and 62.4% in the comparable year ago periods. Policy Acquisition Costs Policy acquisition costs as a percentage of net premiums earned were 29.7% and 28.8% for the second quarter and first half of 1997, respectively, compared to 37.9% and 33.6% in the 1996 periods. The percentages for the second quarter and first six months of 1996 were increased by approximately 5.1 and 2.5 percentage points due to a lower than expected award from a reinsurance arbitration proceeding concluded in the second quarter of 1996. General and Administrative Expenses General and administrative expenses were 12.8% and 13.7% of revenues exclusive of net investment income for the quarter and six months ended June 30, 1997 compared to 15.1% and 16.1% in the comparable 1996 periods. General and administrative expenses have historically not varied in direct proportion to the Company's revenues. A portion of such expenses is allocated to policy acquisition costs and loss and loss adjustment expenses based on various factors including employee counts, salaries, occupancy and specific identification. The percentages for the second quarter and first six months of 1996 were increased by approximately 1.2 and 1.1 percentage points due to legal expenses related to a reinsurance arbitration matter. Liquidity and Capital Resources The Company used $2.8 million of cash for operations in the first half of 1997 compared to cash used of $6.1 million in the year ago period. The use of cash in 1997 includes approximately $3.4 million in premium and loss payments related to various CenTra insurance programs. The use of cash in the 1996 period generally reflects the reductions in premium volume from earlier years and the payment of losses and loss adjustment expenses incurred in those years. The Company sold $6.6 million of fixed-income securities available for sale prior to their maturities in the first half of 1997 compared to $12.3 million in the first half of 1996. See Litigation Expenses for information concerning certain liabilities regarding legal proceedings. PAGE 12 The Company received cash totaling $1.8 million in payment of premiums receivable in the first quarter of 1997 as a part of a settlement with Midwest Indemnity Corp. ("Midwest"). In connection with the Midwest settlement, the Company also received notes receivable from International Alliance Services, Inc. ("IASI") recorded at approximately $465,000 and IASI common stock valued at approximately $2.2 million for a total consideration of approximately $4.5 million at the settlement date. The total amount was included in premiums receivable at December 31, 1996. The Company and its subsidiaries have historically not purchased equity securities in their portfolios. Litigation and Litigation Expenses In the Company's Annual Report on Form 10-K for the year ended December 31, 1996 and Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, recent developments updating the CenTra, Inc. ("CenTra") litigation were described. CenTra Litigation - Oklahoma As previously reported, on February 13, 1997 trial commenced in the United States District Court in Oklahoma City, Oklahoma (the "Court") in consolidated cases involving CenTra and certain of its affiliates, officers and directors (the "CenTra Group") and the Company and certain of its affiliates, officers and directors. On April 1, 1997, at the close of all of the evidence, the Court dismissed CenTra's claims against NAICO and an affiliate for alleged wrongful cancellation of CenTra's insurance with NAICO and the affiliate in 1992. The remaining issues were submitted to a jury. On April 9, 1997 the jury returned verdicts on all claims. On April 22, 1997, the Court entered judgments on all verdicts returned. One judgment against the Company requires 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. Another judgment was against both the Company and its affiliate Chandler Barbados and in favor of CenTra and its affiliate Ammex, Inc. Based upon an alleged breach of a stock purchase agreement in 1988, CenTra and Ammex were awarded $6,882,500. Both judgments related to alleged failures by the Company to adequately disclose the fact that ownership of the Company's stock may be subject to regulation by the Nebraska Insurance Department under certain circumstances. The jury also found in favor of CenTra and against certain officers and/or directors of the Company on the securities claims relating to CenTra's 1990 purchases and the failure to disclose the application of the Nebraska insurance law, but only awarded damages of $1 against each individual defendant on those claims. On ten derivative claims brought by CenTra, the jury found in CenTra's favor on only 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. On the remaining claim relating to the acquisition of certain insurance agencies in 1988, the jury awarded only $1 each against six officers and/or directors. On other claims asserted by the CenTra Group, the jury found in favor of the Company and/or the individual defendants. The jury also found in favor of NAICO and NAICO Indemnity (Cayman), Ltd. on their counterclaims for CenTra's failure to pay insurance premiums in the sum of $788,625 and further upheld a resolution adopted by the Chandler 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 purchases made by the CenTra Group in July 1992 as part of its efforts to acquire control of Chandler. The jury found in favor of CenTra on the Company's claim against CenTra for breach of a standstill agreement contained in a 1988 stock exchange agreement. The jury denied the Company's claim against Messrs. Harned, Lech and Moroun based upon their alleged breach of fiduciary duty as directors. The jury also denied the Company's claim against Mr. Moroun individually for violation of Section 16(b) of the Securities Exchange Act of 1934 regarding short swing profits. The Company's legal counsel, management and board of directors are reviewing the Court rulings and the judgments and considering whether to appeal. Several post-trial motions have been filed by all parties relating to the judgments and prejudgment interest. The Court currently has these motions under advisement and has given no indication regarding when the rulings may be expected. Additional motions to tax costs and fix attorney fees will be filed following rulings on these motions. PAGE 13 Because the judgments are so recent and the Court has not yet ruled on the post- trial motions, the Company is unable to presently assess the ultimate outcome of these matters. However, the Company has recorded a net charge for the litigation matters described above during the first quarter of 1997 totaling approximately $8.3 million ($8.5 million including provision for federal income tax). In addition, the Company has recorded the return of 517,500 shares of the Company's stock in conjunction with the stock rescission judgment as a decrease to shareholders' equity in the amount of approximately $4.9 million with the remaining amount included in the charge for litigation matters. The charge includes approximately $4.6 million as an estimate of interest, costs and related attorney fees. The ultimate actual amounts allowed by the Court to all parties for these items could vary significantly from the Company's estimate. The Court could deny all requests for recovery of these items or could award the parties amounts which would be much greater than the Company's estimate. The CenTra Group has requested prejudgment interest of approximately $12 million. The charge includes an estimated recovery of $2.7 million from the Company's directors and officers policy insurer for costs associated with the defense and litigation of these matters. The Company is entitled to a total of $5 million under the applicable insurance policy. Some amounts have been previously paid without dispute and 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 estimated insurance recovery is based upon these variable factors. The charge also includes the amount of judgments in favor of Chandler USA on the derivative claims discussed above. Further unfavorable outcomes regarding these issues, collection of the awards and advancement of litigation expenses to certain Company defendants would have a material adverse effect on the Company and negatively impact future earnings. Except for the recovery of a portion of the litigation costs from the Company's directors and officers policy insurer, no provision has been made in the accompanying consolidated financial statements related to the advanced litigation expenses. The Company's management believes that adequate financial resources are available to post a supersedeas bond if the judgments are appealed, and the Company is pursuing various financing arrangements in the event that the judgments are not reduced or overturned. 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 payment of these judgments would reduce investment earnings or increase operating expenses in future periods. The Company also incurred approximately $550,000 and $2.3 million in attorney fees and related litigation expenses in the second quarter and first half of 1997. Litigation expenses were $140,000 and $207,000 in the second quarter and first half of 1996. CenTra Litigation - Nebraska As previously reported the United States District Court for the District of Nebraska (the "Nebraska Court") has entered certain orders relating to sequestration of shares of the Company's stock owned by CenTra. On March 25, 1997 the Nebraska Court, pursuant to the Nebraska Insurance Holding Company Systems Act, ordered CenTra and certain of its affiliates to divest all Chandler shares owned by them, regardless of when purchased. The CenTra defendants own or control 3,131,825 Chandler shares. CenTra's shares represent approximately 45% of the outstanding stock (excludes 1997 stock rescission judgment and stock held by subsidiary). The Nebraska Court directed NAICO, the CenTra defendants and the Nebraska Insurance Department to submit proposals to the Nebraska Court by April 21, 1997 for the "orderly divestiture and disposition of the stock". A hearing would then be scheduled to consider the proposals. CenTra has subsequently appealed the March 25, 1997 order of the Nebraska Court to the United States Court of Appeals for the Eighth Circuit where the appeal is now pending. CenTra's appeal of this order has resulted in a delay of the deadlines for submitting the proposals and no new submission date has been set at this time. Because of the uncertainty of the outcome of CenTra's appeal of the Nebraska Court's orders, and until the final proposals are submitted and accepted, the Company is unable to predict the effect of the 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. PAGE 14 On March 27, 1997 the Nebraska Court declined to exercise jurisdiction over 550,329 shares of Chandler stock held as security by Chandler subsidiaries for debts owed by two former agents but in which CenTra claimed to have option rights. The Nebraska Court's ruling cleared the way for the Company's subsidiaries to begin the process of disposing of these shares to retire the agents' debts to the subsidiaries. CenTra did not appeal this order. During the second quarter of 1997, ownership of 380,471 shares was transferred to a Chandler subsidiary as payment for one of the agent's debts to Chandler subsidiaries in the amount of $1,902,355. This transfer had no impact on net income. The shares are held as a reduction of stockholders' equity. CenTra Litigation - Other During the first quarter of 1997 the Company concluded an arbitration proceeding involving DuraRock Underwriters, Ltd., an affiliate of CenTra, and recorded approximately $315,000 in litigation and settlement expenses related to this matter. 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. FORWARD LOOKING STATEMENTS Some of the statements made in this Form 10-Q Report, as well as statements made by 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; and (vii) other factors including the ongoing litigation matters over which the Company has little or no control. 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 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: July 29, 1997 CHANDLER INSURANCE COMPANY, LTD. By: /s/ W. Brent LaGere -------------------------------- W. Brent LaGere Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer) By: /s/ Mark T. Paden -------------------------------- Mark T. Paden Director, Vice President - Finance, Chief Financial Officer and Treasurer (Principal Accounting and Financial Officer) EX-27 2
7 This schedule contains summary financial information extracted from Chandler Insurance Company, Ltd.'s June 30, 1997 Form 10-Q and is qualified in its entirety by reference to such financial statements. 1000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 108,419 1,574 1,647 2,110 0 0 112,103 4,680 3,530 5,464 202,335 79,026 35,767 4,948 0 3,702 0 0 11,593 44,033 202,335 49,396 3,623 32 1,440 31,136 14,235 17,896 (8,808) 981 (9,789) 0 0 0 (9,789) (1.43) (1.43) 0 0 0 0 0 0 0
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