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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1998
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
incorporation or organization) Identification No.)
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, 1998 was 6,941,708, which includes 564,475 common
shares (494,617 common shares as of March 31, 1998) owned by a subsidiary of
the registrant which are eligible to vote, and 1,660,125 common shares which
were rescinded through litigation and are held by a court.
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PAGE i
CHANDLER INSURANCE COMPANY, LTD.
INDEX
---------
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1
- ------
Consolidated Statements of Operations for the three months
ended March 31, 1998 and 1997............................................1
Consolidated Statements of Comprehensive Income for the three
months ended March 31, 1998 and 1997.....................................2
Consolidated Balance Sheets as of March 31, 1998 and December 31, 1997........3
Consolidated Statements of Cash Flows for the three months
ended March 31, 1998 and 1997............................................4
Notes to Interim Consolidated Financial Statements............................5
ITEM 2
- ------
Management's Discussion and Analysis of Financial
Condition and Results of Operations......................................8
PART II - OTHER INFORMATION
- ---------------------------
Item 1 Legal Proceedings..................................................11
Item 2 Changes in Securities..............................................11
Item 3 Defaults Upon Senior Securities....................................11
Item 4 Submission of Matters to a Vote of Security Holders................11
Item 5 Other Information..................................................11
Item 6 Exhibits and Reports on Form 8-K...................................11
Signatures...................................................................12
PAGE 1
CHANDLER INSURANCE COMPANY, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands except per share data)
For the three months
ended March 31,
-------------------------
1998 1997
---------- ----------
Premiums and other revenues
Direct premiums written and assumed................$ 29,400 $ 28,159
Reinsurance premiums ceded......................... (14,329) (3,707)
---------- ----------
Net premiums written and assumed................ 15,071 24,452
Decrease (increase) in unearned premiums........... 1,068 (779)
---------- ----------
Net premiums earned............................. 16,139 23,673
Net investment income................................. 1,678 1,815
Commissions, fees and other income.................... 733 820
---------- ----------
Total revenues.................................. 18,550 26,308
---------- ----------
Operating costs and expenses
Losses and loss adjustment expenses................ 9,614 15,587
Policy acquisition costs........................... 4,207 6,596
General and administrative expenses................ 3,377 3,529
Interest expense................................... 134 86
Litigation expenses, net........................... 156 10,360
---------- ----------
Total operating expenses........................ 17,488 36,158
---------- ----------
Income (loss) before income taxes..................... 1,062 (9,850)
Federal income tax provision of
consolidated U.S. subsidiaries..................... (88) (477)
---------- ----------
Net income (loss).....................................$ 974 $ (10,327)
========== ==========
Basic and diluted earnings (loss) per common share....$ 0.15 $ (1.49)
Weighted average common shares outstanding............ 6,447 6,942
See accompanying Notes to Interim Consolidated Financial Statements.
PAGE 2
CHANDLER INSURANCE COMPANY, LTD.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Amounts in thousands)
For the three months
ended March 31,
-------------------------
1998 1997
---------- ----------
Net income (loss).....................................$ 974 $ (10,327)
---------- ----------
Other comprehensive income (loss), before tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during period........................ 128 (2,384)
Less: reclassification adjustment for gains
included in net income (loss)............ (9) (14)
---------- ----------
Other comprehensive income (loss), before tax......... 119 (2,398)
Income tax (expense) benefit related to items
of other comprehensive income...................... (34) 707
---------- ----------
Other comprehensive income (loss), net of tax......... 85 (1,691)
---------- ----------
Comprehensive income (loss)...........................$ 1,059 $ (12,018)
========== ==========
See accompanying Notes to Interim Consolidated Financial Statements.
PAGE 3
CHANDLER INSURANCE COMPANY, LTD.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands except per share amounts)
March 31, December 31,
1998 1997
------------ ------------
ASSETS
Investments
Fixed maturities available for sale,
at fair value................................$ 115,372 $ 111,718
Fixed maturities held to maturity, at
amortized cost (fair value $1,244 and
$1,330 in 1998 and 1997, respectively)....... 1,137 1,222
Equity securities available for sale,
at fair value................................ 124 124
------------ ------------
Total investments............................ 116,633 113,064
Cash and cash equivalents.......................... 16,103 11,999
Premiums receivable, less allowance
for non-collection of $183 and $115
at 1998 and 1997, respectively.................. 29,860 28,079
Reinsurance recoverable on paid losses,
less allowance for non-collection of
$275 at 1998 and 1997........................... 1,670 3,069
Reinsurance recoverable on unpaid losses,
less allowance for non-collection of $447
and $390 at 1998 and 1997, respectively......... 14,881 10,876
Prepaid reinsurance premiums....................... 10,083 9,662
Deferred policy acquisition costs.................. 5,591 5,312
Property and equipment, net........................ 7,878 5,907
Other assets....................................... 12,661 12,893
Licenses, net...................................... 4,306 4,344
Excess of cost over net assets acquired, net....... 5,090 5,252
Covenants not to compete, net...................... 233 333
------------ ------------
Total assets.......................................$ 224,989 $ 210,790
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Unpaid losses and loss adjustment expenses......$ 74,472 $ 74,929
Unearned premiums............................... 41,741 42,388
Policyholder deposits........................... 5,114 4,830
Notes payable................................... 10,806 2,796
Accrued taxes and other payables................ 5,115 6,340
Premiums payable................................ 11,729 4,554
Litigation liabilities.......................... 16,618 16,618
------------ ------------
Total liabilities.................................. 165,595 152,455
------------ ------------
Shareholders' equity
Common stock, $1.67 par value,
10,000,000 shares authorized,
6,941,708 shares issued...................... 11,593 11,593
Paid-in surplus................................. 34,942 34,942
Capital redemption reserve...................... 947 947
Retained earnings............................... 25,860 24,886
Less: Stock held by subsidiary,
at cost (494,617 shares)..................... (2,487) (2,487)
Less: Stock rescinded through
litigation (1,660,125 shares)................ (11,799) (11,799)
Accumulated other comprehensive income:
Unrealized gain on investments available
for sale, net of tax...................... 338 253
------------ ------------
Total shareholders' equity......................... 59,394 58,335
------------ ------------
Total liabilities and shareholders' equity.........$ 224,989 $ 210,790
============ ============
See accompanying Notes to Interim Consolidated Financial Statements.
PAGE 4
CHANDLER INSURANCE COMPANY, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
For the three months
ended March 31,
-------------------------
1998 1997
---------- ----------
OPERATING ACTIVITIES:
Net income (loss).....................................$ 974 $ (10,327)
Add (deduct):
Adjustments to reconcile net income (loss)
to cash provided by operations:
Net realized gains on sales of investments...... (9) (14)
Net gains on sales of equipment................. (145) -
Amortization and depreciation................... 599 527
Provision for non-collection of premiums........ 67 30
Provision for non-collection of
reinsurance recoverables..................... 150 164
Net change in non-cash balances relating
to operations:
Premiums receivable.......................... (1,848) 846
Reinsurance recoverable on paid losses....... 1,059 (529)
Reinsurance recoverable on unpaid losses..... (3,815) 343
Prepaid reinsurance premiums................. (421) (231)
Deferred policy acquisition costs............ (279) (162)
Other assets................................. 199 (2,828)
Unpaid losses and loss adjustment expenses... (457) 107
Unearned premiums............................ (647) 1,011
Policyholder deposits........................ 284 565
Accrued taxes and other payables............. (1,225) (1,262)
Premiums payable............................. 7,175 1,976
Litigation liabilities....................... - 11,701
---------- ----------
Cash provided by operations..................... 1,661 1,917
---------- ----------
INVESTING ACTIVITIES:
Fixed maturities available for sale
Purchases....................................... (17,597) (4,801)
Sales........................................... - 1,452
Maturities...................................... 14,007 3,648
Fixed maturities held to maturity
Maturities...................................... 100 -
Cost of property and equipment purchased........... (2,377) (262)
Proceeds from sale of property and equipment....... 300 -
---------- ----------
Cash provided by (applied to)
investing activities......................... (5,567) 37
---------- ----------
FINANCING ACTIVITIES:
Proceeds from notes payable........................ 8,548 -
Payments on notes payable.......................... (538) (342)
---------- ----------
Cash provided by (applied to)
financing activities......................... 8,010 (342)
---------- ----------
Increase in cash and cash equivalents
during the period.................................. 4,104 1,612
Cash and cash equivalents at beginning of period...... 11,999 7,889
---------- ----------
Cash and cash equivalents at end of period............$ 16,103 $ 9,501
========== ==========
See accompanying Notes to Interim 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, 1997. 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, 1998 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. ("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"), LaGere & Walkingstick
Insurance Agency, Inc. and Network Administrators, Inc., wholly owned
subsidiaries of Chandler USA.
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, 1997, recent developments updating the CenTra, Inc. ("CenTra") litigation
were described. The following supplements that description.
CENTRA LITIGATION - OKLAHOMA
The Company has previously reported concerning the background and status
of litigation involving CenTra and certain of its affiliates, officers and
directors (the "CenTra Group") in the United States District Court for the
Western District of Oklahoma ("Oklahoma Federal Court").
As previously reported, the trial of that litigation concluded on April
22, 1997, when the Oklahoma Federal Court entered judgments on various jury
verdicts. One judgment against the Company requires the CenTra Group to return
stock it purchased in 1990 to the Company in return for 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. CenTra and Ammex were awarded $6,882,500 in connection with a 1988 Stock
Purchase Agreement. Both 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 Insurance Department under certain
circumstances. Judgment was also entered in favor of CenTra and against certain
officers and/or directors of the Company on securities claims relating to
CenTra's 1990 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. 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. The Oklahoma Federal Court's judgment
also 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.
PAGE 6
On March 10, 1998 the Oklahoma Federal Court modified the earlier judgment
for $6,882,500 to require the CenTra Group to deliver 1,142,625 shares of
Chandler common stock they own or control upon payment of the judgment by the
Company and Chandler Barbados. On that same date, the Oklahoma Federal Court
also entered an order denying the CenTra Group's request for prejudgment
interest on the judgments entered in favor of the CenTra Group. The Company
recorded the Oklahoma Federal Court's judgment requiring the return of the
1,142,625 shares of the Company's stock as a decrease to shareholder's equity
as of December 31, 1997, and reduced the previous first quarter of 1997 net
charge for litigation matters by $6,882,500, during the fourth quarter of 1997.
On March 16, 1998 the CenTra Group filed motions for an award of costs and
attorney fees totaling approximately $4.7 million. On April 21, 1998, the
Oklahoma Federal Court denied the CenTra Group's request. On March 23, 1998 the
CenTra Group filed a formal notice of intent to appeal certain orders of the
Oklahoma Federal Court. From papers filed with both the Oklahoma Federal Court
and the United States Court of Appeals for the 10th Circuit it appears that the
CenTra Group's appeals will be based upon the Oklahoma Federal Court's failure
to award prejudgment interest, the Oklahoma Federal Court's refusal to permit
the CenTra Group to amend certain pleadings to assert new claims, the Oklahoma
Federal 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 Federal Court's entry of judgment in favor of NAICO and certain
officers and directors on CenTra's claim based upon cancellation of its
insurance policies by NAICO in 1992. There may be other issues on appeal which
are not readily apparent to the Company at this time. The Company has elected
not to appeal any of the judgments. The individual officers and directors
against whom judgments were entered as described above have all perfected
appeals.
The judgments on the derivative claims described above were all entered in
favor of Chandler USA. Chandler USA is, therefore, the judgment creditor in
connection with those derivative claim judgments. Chandler USA appointed a
Special Litigation Committee on April 25, 1997. That Special Litigation
Committee meets on a regular basis and has been delegated the authority of the
Chandler USA Board of Directors regarding all issues related to the CenTra
litigation in the Oklahoma Federal Court, including the derivative claim
judgments.
On April 28, 1997 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 Committee was delegated all authority of the Board on
these issues. The members of the Committee are Messrs. Jacoby, Maestri and
Davis, all of whom are non-parties to the CenTra litigation. That Committee has
retained independent counsel. The individual members of the Committee review
issues relating to litigation strategy, officer and director indemnification,
and claims made under the Company's director and officer liability insurance
policy on a regular basis in conjunction with a similar committee composed of
Chandler USA directors. The Committee conducts its meetings outside the United
States, but participates in telephone briefings and discussions at least twice
monthly.
Because all shares of the Company's stock owned by the CenTra Group are
held by the U.S. District Court for the District of Nebraska ("Nebraska Federal
Court"), it is unclear when or if the CenTra Group will be able to comply with
the Oklahoma Federal Court's order. The Company believes that it is not
required to pay the judgments until the CenTra Group can deliver the shares to
the Company. The Company has requested the Nebraska Federal Court to release
all shares it holds which are affected by the judgments of the Oklahoma Federal
Court. See CenTra Litigation - Nebraska.
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.
CENTRA LITIGATION - NEBRASKA
The Company has previously reported regarding administrative proceedings
and decisions and court actions and decisions involving the Company and the
CenTra Group in the State of Nebraska. (See Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.) The Nebraska Federal Court ordered
CenTra, M.J. Moroun, and others to deliver into the registry of the Nebraska
Federal Court all shares of Chandler stock owned or controlled by them or their
affiliates and not previously delivered to the Court to await the outcome of
the CenTra Group's appeal of a divestiture order entered by the Nebraska
Federal Court on March 25, 1997. On February 9, 1998, CenTra deposited an
additional 1,691,750 shares of the Company's stock making the total number of
shares on deposit with the Nebraska Federal Court 3,133,450 shares. In his
March 25, 1997 order, the Honorable Warren K. Urbom, U.S. District Judge for
the Nebraska Federal Court, ordered the parties to submit divestiture plans.
The appeal of that order by CenTra has resulted in a delay of the deadlines for
submitting the proposals and no new submission date has been set at this time.
Oral argument on CenTra's appeal in the U.S. Court of Appeals for the 8th
Circuit occurred on April 13, 1998. The Company cannot accurately predict
either the outcome of the appeal or the date upon which an order regarding the
appeal will be entered.
PAGE 7
On March 27, 1998 NAICO notified the Nebraska Federal Court of the
Oklahoma Federal Court's March 10, 1998 order regarding CenTra's return of the
1,660,125 shares which were the subject of the two money judgments (see CenTra
Litigation - Oklahoma) and requested the Nebraska Federal Court to release
those shares to the Company and Chandler Barbados upon their tender of amounts
sufficient to satisfy the two judgments. The Company and Chandler Barbados then
requested the Oklahoma Federal Court to stay execution upon the two judgments
until such time as the Nebraska Federal Court rules on NAICO's request to
release the shares. On April 23, 1998, the Oklahoma Federal Court granted the
stay motion pending the Nebraska Federal Court's ruling on the request for
release of the shares. If the Company and Chandler Barbados obtain the rulings
they have requested, the Company and Chandler Barbados will pay approximately
$12 million to satisfy the judgments and will receive the 1,660,125 shares of
the Company's stock held by the Nebraska Federal Court. The Company and its
subsidiaries are considering various options regarding ultimate disposition of
any shares returned to the Company as a result of either the judgments of the
Oklahoma Federal Court or any divestiture plan implemented by the Nebraska
Federal Court.
CENTRA LITIGATION - OTHER
The Company has previously reported regarding two separate lawsuits filed
against NAICO, NAICO Indemnity and certain NAICO officers during 1997 in State
Court in Macomb County, Michigan. As stated in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997 NAICO, NAICO Indemnity
and the other defendants contend that the claims which are the basis of these
suits are the same claims which were prosecuted and concluded in NAICO's and
NAICO Indemnity's favor by the Oklahoma Federal Court in April, 1997. On
February 28, 1998, a Michigan Federal Court ordered the lawsuits transferred to
the Oklahoma Federal Court. They have now been consolidated and have been
assigned to the Honorable Vicki Miles-LaGrange, the same judge who presided
over the action concluded in April 1997 (see CenTra Litigation - Oklahoma).
Dispositive motions filed by NAICO, NAICO Indemnity and the other defendants
are currently under consideration by the Oklahoma Federal Court.
At the present time, the Company is actively participating in court
proceedings, possible discovery actions and rights of appeal concerning these
various 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.
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. RECENTLY ADOPTED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 separate
financial statement or as a component of the statement of operations or the
statement of shareholders' equity and display the accumulated balance of other
comprehensive income separately in the shareholders' equity section of the
consolidated balance sheets. The Company adopted SFAS No. 130 on January 1,
1998 as required. The adoption of SFAS No. 130 resulted in revised and
additional disclosures but had no effect on the financial position, results of
operations or liquidity of the Company.
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 and related information.
Operating segments are components of a company about which separate financial
information is available that is regularly evaluated by the chief operating
decision maker(s) 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 adopted SFAS
No. 131 on January 1, 1998 as required.
PAGE 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Some of the statements made in this Form 10-Q Report, as well as
statements made by Chandler 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; and (vii) other factors including the
ongoing litigation matters involving a significant concentration of ownership
of common stock.
RESULTS OF OPERATIONS
PURCHASE OF ADDITIONAL REINSURANCE
During the first quarter of 1998, National American Insurance Company
("NAICO") purchased additional reinsurance under its workers compensation and
casualty reinsurance programs that substantially reduced the combined net
retentions in these lines of business. The purchase of the additional
reinsurance coverages in 1998 substantially reduce the risk of loss for NAICO's
workers compensation and casualty insurance lines of business, but result in
significantly lower net premiums earned, loss and loss adjustment expenses and
policy acquisition costs.
PREMIUMS EARNED
The following table sets forth premiums earned on a gross basis (before
reductions for premiums ceded to unaffiliated reinsurers) and a net basis for
the three month periods ended March 31, 1998 and 1997:
Gross premiums earned Net premiums earned
---------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(In thousands)
Standard property-casualty...$ 17,177 $ 13,409 $ 9,325 $ 11,816
Political subdivisions....... 5,810 5,065 3,080 3,535
Surety bonds................. 2,674 3,003 2,144 2,913
Nonstandard private-
passenger automobile...... 2,586 3,924 286 3,924
Other........................ 1,801 1,748 1,304 1,485
---------- ---------- ---------- ----------
TOTAL........................$ 30,048 $ 27,149 $ 16,139 $ 23,673
========== ========== ========== ==========
Gross premiums earned, before reductions for premiums ceded to
unaffiliated reinsurers, increased $2.9 million or 11% in the quarter ended
March 31, 1998 compared to the prior year. Net premiums earned decreased $7.5
million or 32% in the 1998 quarter compared to the prior year. The reduction
in net premiums earned was due to the purchase of additional reinsurance for
NAICO's workers compensation and casualty insurance programs described above,
and to a reinsurance arrangement for a large portion of NAICO's nonstandard
private-passenger automobile program which was effective July 1, 1997.
Gross premiums earned in the standard property-casualty program increased
$3.8 million or 28% in the current quarter versus the prior year. This
increase is primarily attributable to increased marketing activity in Oklahoma
and contiguous states, principally Texas. Net premiums earned decreased $2.5
million or 21% in the current quarter versus the prior year due to the purchase
of additional reinsurance described above.
Gross premiums earned in the political subdivisions program increased
$745,000 or 15% in the current quarter versus the prior year due primarily to
expansion of the school districts program in Texas and increased production in
Oklahoma. Net premiums earned decreased $455,000 or 13% due to the purchase of
additional reinsurance described above.
Net premiums earned in the surety bond program decreased $769,000 or 26%
in the current quarter versus the prior year. Net premiums earned from surety
bonds produced by Midwest Indemnity Corp. ("Midwest") during the runoff portion
of that program decreased by $594,000 or 173% in the current quarter versus the
prior year. NAICO and Midwest agreed to terminate the underwriting and
production contract effective December 31, 1995. Net premiums earned from
surety bonds produced by LaGere & Walkingstick Insurance Agency, Inc. ("L&W")
decreased to $1.7 million in the current quarter from $2.0 million in the 1997
quarter. Increased competition and higher reinsurance costs contributed to the
decline in the 1998 quarter.
During 1997, NAICO discontinued the Oklahoma and Arizona portions of the
nonstandard private-passenger automobile program. During the second quarter of
1997, management reviewed the underwriting performance of the California
portion of the program and concluded that it would be in the Company's best
interest to substantially reduce its underwriting risk. Effective July 1,
1997, NAICO entered into a 100% quota share reinsurance agreement to fully
reinsure the risk.
During 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 (included in Other in the table above) were $1.0 million
in the 1998 quarter versus $308,000 in the first quarter of 1997.
COMMISSIONS, FEES AND OTHER INCOME
L&W's brokerage commissions and fees before intercompany eliminations were
$1.9 million in the quarter ended March 31, 1998 compared to $2.0 million in
the 1997 quarter. 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 $156,000 in the 1997 quarter. Network no longer functions as a
third-party administrator and did not generate any income in the 1998 period.
Chandler (U.S.A.), Inc. ("Chandler USA") disposed of certain equipment in
the first quarter of 1998 that resulted in a gain of $145,000 before provision
for federal income tax.
NET INVESTMENT INCOME
Net investment income in the first quarter of 1998 was $1.7 million versus
$1.8 million in the 1997 quarter. During the fourth quarter of 1997, NAICO
shifted a portion of its fixed maturities portfolio from taxable to tax exempt
bonds resulting in income from tax exempt securities of $262,000 (of which
$223,000 is exempt from federal income tax) in the first quarter of 1998.
NAICO had no tax exempt income in the first quarter of 1997.
LOSSES AND LOSS ADJUSTMENT EXPENSES
The percentage of losses and loss adjustment expenses to net premiums
earned was 59.6% for the quarter ended March 31, 1998 versus 65.8% for the 1997
quarter. The purchase of additional reinsurance accounted for substantially
all of the 38% decrease in loss and loss adjustment expenses in the current
quarter versus a year ago.
POLICY ACQUISITION COSTS
Policy acquisition costs consist of costs associated with the acquisition
of new and renewal business and generally include direct costs such as premium
taxes, commissions to agents and ceding companies, and premium-related
assessments, and indirect costs such as salaries and expenses of personnel who
perform and support underwriting activities. NAICO also receives ceding
commissions from reinsurers who assume premiums from NAICO under certain
reinsurance contracts and the ceding commissions are accounted for as a
reduction of policy acquisition costs. Direct policy acquisition costs and
ceding commissions are deferred and amortized over the terms of the policies.
Recoverability of such deferred costs is dependent on the related unearned
premiums on the policies being more than expected claim losses.
PAGE 10
The following table sets forth the Company's policy acquisition costs for
each of the three-month periods ended March 31, 1998 and 1997:
For the three months
ended March 31,
-------------------------
1998 1997
---------- ----------
(In thousands)
Commissions expense...................................$ 3,580 $ 3,688
Other premium related assessments..................... 506 294
Premium taxes......................................... 827 689
Excise taxes.......................................... 65 34
Dividends to policyholders............................ 75 50
Other expense......................................... 68 75
---------- ----------
Total direct expenses................................. 5,121 4,830
Indirect underwriting expenses........................ 2,989 2,913
Commissions received from reinsurers.................. (3,624) (985)
Adjustment for deferred acquisition costs............. (279) (162)
---------- ----------
Net policy acquisition costs..........................$ 4,207 $ 6,596
========== ==========
Total gross direct and indirect expenses as a percentage of direct written
and assumed premiums were 27.6% in the first quarter of 1998 compared to 27.5%
in the first quarter of 1997. For these periods, the average commission rates
were 12.2% and 13.1%.
Indirect expenses were 10.2% and 10.3% of total direct written and assumed
premiums in the first quarter of 1998 and 1997, 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.
Commissions received from reinsurers increased $2.6 million or 268% in the
first quarter of 1998 to $3.6 million due to the purchase of additional
reinsurance discussed previously which increased premiums ceded to reinsurers
by 287% in the 1998 quarter.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were 11.0% and 12.6% of gross premiums
earned and commissions, fees and other income for the quarters ended March 31,
1998 and 1997, 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 and loss and
loss adjustment expenses based on various factors including employee counts,
salaries, occupancy and specific identification. Because certain types of
expenses are fixed in nature, the percentage of such expenses to revenues will
vary depending on the Company's overall premium volume.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated $1.7 million of cash in operations in the first
quarter of 1998 compared to $1.9 million in the 1997 quarter. During 1996,
Chandler USA borrowed $4.5 million from a bank on a three year note payable.
During the fourth quarter of 1997, the related loan agreement was amended to
provide for additional borrowings up to $8.5 million and to revise the term to
five years with interest payable at a floating rate equal to 1% over Wall
Street Journal Prime, which was 8.5% at March 31, 1998. During March 1998,
Chandler USA borrowed an additional $6.2 million on the note and the proceeds
were used to repay intercompany advances from Chandler Barbados. The
outstanding balance of the note was $8.5 million at March 31, 1998. The funds
received by Chandler Barbados may be used to discharge litigation judgments.
The bank note is collateralized by shares of NAICO stock owned by Chandler USA.
PAGE 11
In February 1998, Chandler USA entered into a five year loan agreement
with a bank having a principal amount of $2.3 million and an interest rate of
7.75%. Monthly payments are $46,482 including principal and interest. The
loan is collateralized by certain equipment which was purchased with the
proceeds of the loan. The equipment had previously been leased by Chandler
USA.
In April 1998, a subsidiary of the Company acquired 69,858 shares of the
Company's common stock from an agent for approximately $524,000. These shares
had previously been pledged to NAICO to secure certain obligations resulting
from insurance business produced by another agent.
LITIGATION AND LITIGATION EXPENSES
See Note 2 - Litigation in Notes to Interim Consolidated Financial
Statements for information concerning various litigation matters.
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.
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
The Company filed one current report on Form 8-K dated March 17, 1998
responding to Item 5 of Form 8-K.
PAGE 12
SIGNATURES
------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 7, 1998 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 T. Paden
--------------------------------------
Mark T. Paden
Vice President - Finance, Chief
Financial Officer, Treasurer and
Director (Principal Accounting and
Financial Officer)