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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1999
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, 1999 was 6,941,708, which includes 544,475
common shares 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to vote, and 1,660,125 common shares which were rescinded through litigation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, 1999 and 1998.........................................1
Consolidated Statements of Comprehensive Income for the three
months ended March 31, 1999 and 1998..................................2
Consolidated Balance Sheets as of March 31, 1999 and
December 31, 1998.....................................................3
Consolidated Statements of Cash Flows for the three months
ended March 31, 1999 and 1998.........................................4
Notes to Interim Consolidated Financial Statements....................5
ITEM 2
- ------
Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................9
PART II - OTHER INFORMATION
- ---------------------------
Item 1 Legal Proceedings.........................................14
Item 2 Changes in Securities.....................................14
Item 3 Defaults Upon Senior Securities...........................14
Item 4 Submission of Matters to a Vote of Security Holders.......14
Item 5 Other Information.........................................14
Item 6 Exhibits and Reports on Form 8-K..........................14
Signatures...........................................................15
PAGE 1
CHANDLER INSURANCE COMPANY, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands except per share data)
For the three months
ended March 31,
---------------------
1999 1998
---------- ----------
Premiums and other revenues
Direct premiums written and assumed...............$ 35,111 $ 29,400
Reinsurance premiums ceded........................ (14,053) (14,329)
---------- ----------
Net premiums written and assumed.............. 21,058 15,071
Decrease (increase) in unearned premiums.......... (20) 1,068
---------- ----------
Net premiums earned........................... 21,038 16,139
Interest income, net.................................. 1,383 1,669
Realized investment gains, net........................ 50 9
Commissions, fees and other income.................... 447 733
---------- ----------
Total premiums and other revenues............. 22,918 18,550
---------- ----------
Operating costs and expenses
Losses and loss adjustment expenses............... 13,451 9,614
Policy acquisition costs.......................... 5,047 4,207
General and administrative expenses............... 2,986 3,377
Interest expense.................................. 228 134
Litigation expenses, net.......................... 259 156
---------- ----------
Total operating costs and expenses............ 21,971 17,488
---------- ----------
Income before income taxes............................ 947 1,062
Federal income tax provision of consolidated
U.S. subsidiaries................................. (422) (88)
---------- ----------
Net income............................................$ 525 $ 974
========== ==========
Basic earnings per common share.......................$ 0.08 $ 0.15
Diluted earnings per common share.....................$ 0.08 $ 0.15
Basic weighted average common shares outstanding...... 6,417 6,447
Diluted weighted average common shares outstanding.... 6,435 6,447
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,
----------------------
1999 1998
---------- ----------
Net income............................................$ 525 $ 974
---------- ----------
Other comprehensive income, before income tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising
during period............................. (1,400) 128
Less: Reclassification adjustment for
gains included in net income.............. (50) (9)
---------- ----------
Other comprehensive income (loss), before
income tax........................................ (1,450) 119
Income tax benefit (provision) related to items
of other comprehensive income (loss).............. 416 (34)
---------- ----------
Other comprehensive income (loss), net of
income tax........................................ (1,034) 85
---------- ----------
Comprehensive income (loss)...........................$ (509) $ 1,059
========== ==========
See accompanying Notes to Interim Consolidated Financial Statements.
PAGE 3
CHANDLER INSURANCE COMPANY, LTD.
Consolidated Balance Sheets
(Unaudited)
(Amounts in thousands except share amounts)
March 31, December 31,
1999 1998
----------- ------------
ASSETS
Investments
Fixed maturities available for sale, at
fair value..................................$ 105,074 $ 109,055
Fixed maturities held to maturity, at amortized
cost (fair value $1,316 and $1,332 in 1999
and 1998, respectively)..................... 1,199 1,183
Equity securities available for sale, at
fair value.................................. 191 191
----------- ------------
Total investments........................ 106,464 110,429
Cash and cash equivalents.......................... 7,808 10,383
Premiums receivable, less allowance for non-
collection of $200 at 1999 and 1998............. 31,085 28,479
Reinsurance recoverable on paid losses, less
allowance for non-collection of $275 at 1999
and 1998........................................ 1,915 2,760
Reinsurance recoverable on unpaid losses, less
allowance for non-collection of $297 and
$330 at 1999 and 1998, respectively............. 33,212 28,970
Prepaid reinsurance premiums....................... 22,553 22,448
Deferred policy acquisition costs.................. 2,370 2,381
Property and equipment, net........................ 8,091 8,124
Other assets....................................... 13,767 13,253
Licenses, net...................................... 4,156 4,194
Excess of cost over net assets acquired, net....... 4,442 4,604
----------- ------------
Total assets.......................................$ 235,863 $ 236,025
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Unpaid losses and loss adjustment expenses......$ 83,190 $ 80,909
Unearned premiums............................... 50,772 50,647
Policyholder deposits........................... 5,013 4,936
Notes payable................................... 8,934 9,410
Accrued taxes and other payables................ 2,864 3,869
Premiums payable................................ 10,116 10,961
Litigation liabilities.......................... 13,418 13,228
----------- ------------
Total liabilities.................................. 174,307 173,960
----------- ------------
Shareholders' equity
Common stock, $1.67 par value, 10,000,000
shares authorized; 6,941,708 shares issued.. 11,593 11,593
Paid-in surplus................................. 34,983 34,983
Common stock to be issued (20,000 shares)....... 125 125
Capital redemption reserve...................... 947 947
Retained earnings............................... 28,853 28,328
Less: Stock held by subsidiary, at cost
(544,475 shares)............................ (2,905) (2,905)
Less: Stock rescinded through litigation
(1,660,125 shares).......................... (11,799) (11,799)
Accumulated other comprehensive income:
Unrealized gain (loss) on investments
available for sale, net of deferred
income taxes............................. (241) 793
----------- ------------
Total shareholders' equity......................... 61,556 62,065
----------- ------------
Total liabilities and shareholders' equity.........$ 235,863 $ 236,025
=========== ============
See accompanying Notes to Interim Consolidated Financial Statements.
PAGE 4
CHANDLER INSURANCE COMPANY, LTD.
Consolidated Statements of Cash Flows
(Unaudited)
(Amounts in thousands)
For the three months
ended March 31,
-----------------------
1999 1998
----------- -----------
OPERATING ACTIVITIES
Net income..........................................$ 525 $ 974
Add (deduct):
Adjustments to reconcile net income to cash
provided by (applied to) operating
activities:
Realized investment gains, net............... (50) (9)
Net gains on sale of equipment............... (8) (145)
Amortization and depreciation................ 548 599
Provision for non-collection of premiums..... 30 67
Provision for non-collection of reinsurance
recoverables............................. - 150
Net change in non-cash balances relating
to operations:
Premiums receivable...................... (2,636) (1,848)
Reinsurance recoverable on paid losses... 775 1,059
Reinsurance recoverable on unpaid
losses................................ (4,172) (3,815)
Prepaid reinsurance premiums............. (105) (421)
Deferred policy acquisition costs........ 11 (279)
Other assets............................. (97) 199
Unpaid losses and loss adjustment
expenses.............................. 2,281 (457)
Unearned premiums........................ 125 (647)
Policyholder deposits.................... 77 284
Accrued taxes and other payables......... (1,005) (1,225)
Premiums payable......................... (845) 7,175
Litigation liabilities................... 190 -
----------- -----------
Cash provided by (applied to) operating
activities............................... (4,356) 1,661
----------- -----------
INVESTING ACTIVITIES
Fixed maturities available for sale:
Purchases.................................... (5,042) (17,597)
Sales........................................ 3,048 -
Maturities................................... 4,467 14,007
Fixed maturities held to maturity:
Maturities................................... - 100
Cost of property and equipment purchased......... (262) (2,377)
Proceeds from sale of property and equipment..... 46 300
----------- -----------
Cash provided by (applied to) investing
activities........................... 2,257 (5,567)
----------- -----------
FINANCING ACTIVITIES
Proceeds from notes payable...................... - 8,548
Payments on notes payable........................ (476) (538)
----------- -----------
Cash provided by (applied to)financing
activities........................... (476) 8,010
----------- -----------
Increase (decrease) in cash and cash equivalents
during the period................................ (2,575) 4,104
Cash and cash equivalents at beginning of period.... 10,383 11,999
----------- -----------
Cash and cash equivalents at end of period..........$ 7,808 $ 16,103
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
PAGE 5
CHANDLER INSURANCE COMPANY, LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. They do not include all information and
footnotes required by generally accepted accounting principles for complete
financial statements. However, except as disclosed herein, there have been
no material changes in the information included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1998. 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, 1999 are not
necessarily indicative of the results that may be expected for the year.
Certain reclassifications of prior years have been made to conform to the 1999
presentation.
The consolidated financial statements include the accounts of Chandler
Insurance Company, Ltd. ("Chandler" or the "Company") and all subsidiaries.
The following represents the significant subsidiaries:
- Chandler Insurance (Barbados), Ltd. ("Chandler Barbados") and NAICO
Indemnity (Cayman), Ltd. ("NAICO Indemnity"), wholly owned subsidiaries
of the Company.
- Chandler (U.S.A.), Inc. ("Chandler USA"), a wholly owned subsidiary of
Chandler Barbados.
- National American Insurance Company ("NAICO") and LaGere & Walkingstick
Insurance Agency, Inc., wholly owned subsidiaries of Chandler USA.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
NOTE 2. LITIGATION
In the Company's Annual Report on Form 10-K for the year ended December
31, 1998, 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 Department of Insurance under certain circumstances. Judgment was
also entered in favor of CenTra and against certain officers and/or directors
of the Company on the securities claims relating to CenTra's 1990 purchases
and the failure to disclose the application of Nebraska insurance law, but
the judgments were $1 against each individual defendant on those claims. On
ten derivative claims brought by CenTra, the jury found in CenTra's favor on
three. Certain officers were directed to repay to Chandler USA bonuses
received for the years 1988 and 1989 totaling $711,629 and a total of $25,000
for personal use of corporate aircraft. These amounts are included in other
assets in the accompanying consolidated balance sheets. On the remaining
claim relating to the acquisition of certain insurance agencies in 1988, the
jury awarded $1 each against six officers and/or directors.
Judgment was also entered in favor of NAICO and NAICO Indemnity on
counterclaims against CenTra for CenTra's failure to pay insurance premiums.
Judgment was for the amount of $788,625. During 1998, the judgment was paid
by funds held by the Oklahoma Federal Court aggregating, with interest,
$820,185. DuraRock Reinsurance, Ltd. ("DuraRock"), a CenTra affiliate, claims
$725,000 is owed to it by NAICO and NAICO Indemnity under certain reinsurance
treaties. NAICO and NAICO Indemnity dispute that claim. In November 1998,
DuraRock demanded arbitration and NAICO and NAICO Indemnity responded by
appointing an arbitrator. No arbitration hearings have been held. The
Oklahoma Federal Court's judgment also upheld a resolution adopted by the
Company's Board of Directors in August 1992 pursuant to Article XI of the
Company's Articles of Association preventing CenTra and its affiliates from
voting their Chandler stock.
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. The CenTra Group
did not appeal this decision within the time permitted by applicable law.
Accordingly, the Company reduced the previous first quarter of 1997 net charge
for litigation matters by $3.8 million during the second quarter of 1998. In
subsequent papers filed with the appellate court, CenTra asserts as error the
Oklahoma Federal Court's denial of attorney fees.
On March 23, 1998, the CenTra Group filed a formal notice of intent to
appeal certain orders of the Oklahoma Federal Court and filed the initial
appellate brief on September 9, 1998. All briefing was completed on January
4, 1999 and the appeals are being considered by the U.S. Court of Appeals for
the 10th Circuit. The Company cannot predict when a decision on the appeals
will be made. The CenTra Group's appeals are 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. The CenTra Group is
also attempting to appeal the Oklahoma Federal Court's denial of attorney fees
but not the denial of costs. The Company believes the appeal of this issue
is untimely and therefore barred by law. 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 filed 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 three
directors to comprise 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 meets regularly
and participates in telephone briefings and discussions at least 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
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. 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, 1998.) The Nebraska Court ordered CenTra,
M.J. Moroun, and others to deliver into the registry of the Nebraska Court
all shares of Chandler stock owned or controlled by them or their affiliates
and not previously delivered to the Nebraska Court to await the outcome of the
CenTra Group's appeal of a divestiture order entered by the Nebraska 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 Court 3,133,450 shares. In his March 25, 1997 order, the
Honorable Warren K. Urbom, U.S. District Judge for the Nebraska Court, ordered
the parties to submit divestiture plans. The appeal of that order by CenTra
resulted in a delay of the deadlines for submitting the proposals.
PAGE 7
On July 29, 1998, the U.S. Court of Appeals for the 8th Circuit affirmed
the Nebraska Court's order that the CenTra Group will be divested of ownership
or control of its shares. This ruling allows the Nebraska Court to consider
divestiture plans which may be submitted by NAICO, the Nebraska Department of
Insurance and the CenTra Group. All Chandler shares owned or controlled by
the CenTra Group remain in the Nebraska Court's possession pending further
orders by that court. On October 28, 1998, the CenTra Group filed pleadings
in the Nebraska Court requesting the appointment of a special master to
supervise the divestiture and an independent trustee to hold and vote the
Company's shares owned by the CenTra Group in accordance with specific
instructions pending the final implementation of a divestiture plan. NAICO
objected to the CenTra proposal on November 25, 1998 and responded with a
divestiture plan of its own (the "NAICO Plan"). The Nebraska Court rejected
the CenTra proposal and CenTra responded to the NAICO Plan on December 28,
1998. The Nebraska Court has made no ruling on the NAICO Plan. NAICO's
Plan includes a proposal whereby the Company would acquire and cancel the
shares of Chandler stock owned or acquired by the CenTra Group. The NAICO
Plan has been approved by the Company's executive committee of the board of
directors and the boards of directors of Chandler USA and NAICO. The
Nebraska Department of Insurance generally supports the NAICO Plan. The
Nebraska Court has given no indication regarding when it will rule on the
NAICO Plan.
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, 1998, 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 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. Ruling on those motions has been stayed pending
the ruling on CenTra's appeal of the April 1, 1997 judgment on the same claims
(see CenTra Litigation - Oklahoma).
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. DEBENTURE OFFERING
Chandler USA intends to offer debentures in the aggregate principal
amount of $24 million. The terms of the debentures including the interest
rate and redemption date have not been determined. Chandler USA plans to use
the proceeds of the offering to repay amounts due to Chandler Barbados; to
retire its current bank debt; and for general corporate purposes. Chandler
USA's subsidiaries and affiliates will not be obligated by the debentures.
Accordingly, the debentures will be effectively subordinated to all existing
and future liabilities and obligations of Chandler USA's existing and future
subsidiaries.
NOTE 4. EARNINGS PER COMMON SHARE
Basic earnings per common share is computed based upon net income divided
by the weighted average number of common shares outstanding during each period.
Diluted earnings per common share is computed based upon net income divided by
the weighted average number of common shares outstanding during each period
adjusted for the effect of dilutive potential common shares calculated using
the treasury stock method. Weighted average shares include 1,660,125 common
shares which were rescinded through litigation during 1997 but are still
outstanding, and exclude 544,475 common shares held by a subsidiary of the
Company. The numerator for basic and diluted earnings per share is equal to
the net income for the respective period.
PAGE 8
The following table sets forth the computation of the denominator for
basic and diluted earnings per share:
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
(In thousands)
Denominator for basic earnings per common share
- weighted average shares...................... 6,417 6,429
Effect of dilutive securities - non-employee
director stock options......................... 18 9
------------ ------------
Denominator for diluted earnings per common share
- adjusted weighted average shares and assumed
conversions.................................... 6,435 6,438
============ ============
NOTE 5. ACCOUNTING STANDARD ISSUED BUT NOT YET ADOPTED
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No.133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that the Company
recognize all derivatives as either assets or liabilities in the statement
of financial condition and measure those instruments at fair value. The
accounting for changes in the fair value of a derivative (that is, gains and
losses) depends on the intended use of the derivative and the resulting
designation. The Company will adopt SFAS No. 133 on January 1, 2000 as
required. Management of the Company believes that adoption of SFAS No. 133
will not have a material impact on the Company's consolidated financial
condition or results of operations.
NOTE 6. SEGMENT INFORMATION
The following table presents a summary of the Company's operating
segments for the three-month periods ended March 31, 1999 and 1998:
Property
and All Intersegment Reported
Agency casualty other eliminations balances
-------- --------- -------- ------------ ---------
(In thousands)
THREE MONTHS ENDED
MARCH 31, 1999
Revenues from external
customers (1)............$ 350 $ 21,049 $ 86 $ - $ 21,485
Intersegment revenues....... 1,653 51 39 (1,743) -
Segment profit (loss) before
income taxes (2)......... (113) 1,459 (399) - 947
Segment assets.............. 5,069 243,090 4,920 (17,216) 235,863
THREE MONTHS ENDED
MARCH 31, 1998
Revenues from external
customers (1)............$ 607 16,200 $ 65 $ - $ 16,872
Intersegment revenues....... 1,323 51 36 (1,410) -
Segment profit (loss) before
income taxes (2)......... (3) 1,469 (404) - 1,062
Segment assets.............. 5,032 231,905 2,675 (14,623) 224,989
- ----------------------------
(1) Consists of net premiums earned and commissions, fees and other income.
(2) Includes net realized investment gains.
PAGE 9
The following supplemental information pertaining to each insurance
program's net premiums earned and losses and loss adjustment expenses is
presented for the property and casualty segment.
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
------------ ------------
(In thousands)
Insurance program
- --------------------------------------------------
NET PREMIUMS EARNED
Standard property and casualty....................$ 12,115 $ 9,325
Political subdivisions............................ 3,782 3,080
Surety bonds...................................... 2,881 2,144
Group accident and health......................... 2,286 1,021
Other............................................. (26) 569
------------ ------------
$ 21,038 $ 16,139
============ ============
LOSSES AND LOSS ADJUSTMENT EXPENSES
Standard property and casualty....................$ 8,929 $ 6,339
Political subdivisions............................ 2,836 1,889
Surety bonds...................................... 310 395
Group accident and health......................... 1,556 1,160
Other............................................. (180) (169)
------------ ------------
$ 13,451 $ 9,614
============ ============
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Some of the statements made in this Form 10-Q Report, as well as
statements made by Chandler Insurance Company, Ltd. (the "Company") in
periodic press releases, oral statements made by the Company's officials to
analysts and shareholders in the course of presentations about the Company
and conference calls following earnings releases, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by the
forward-looking statements. Such factors include, among other things, (i)
general economic and business conditions; (ii) interest rate changes; (iii)
competition and regulatory environment in which the Company operates; (iv)
claims frequency; (v) claims severity; (vi) the number of new and renewal
policy applications submitted by the Company's agents; (vii) the ability of
the Company and its third party providers, agents and reinsurers to adequately
address year 2000 issues; (viii) other factors including the ongoing
litigation matters involving a significant concentration of ownership of
common stock.
RESULTS OF OPERATIONS
NET PREMIUMS EARNED
The following table sets forth net premiums earned for the three month
periods ended March 31, 1999 and 1998:
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
------------ ------------
(In thousands)
Standard property and casualty....................$ 12,115 $ 9,325
Political subdivisions............................ 3,782 3,080
Surety bonds...................................... 2,881 2,144
Group accident and health......................... 2,286 1,021
Other............................................. (26) 569
------------ ------------
TOTAL.............................................$ 21,038 $ 16,139
============ ============
Net premiums earned increased $4.9 million or 30% in the first quarter of
1999 compared to the first quarter of 1998. The increase is primarily
attributable to increased premium production in Oklahoma and Texas.
PAGE 10
Net premiums earned in the standard property and casualty program
increased $2.8 million or 30% in the first quarter of 1999 versus the first
quarter of 1998. The increase is primarily attributable to increased
production in Texas.
Net premiums earned in the political subdivisions program increased
$702,000 or 23% in the first quarter of 1999 versus the first quarter of 1998
due primarily to expansion of the school districts program in Texas and
Missouri and increased production in Oklahoma.
Net premiums earned in the surety bond program increased $737,000 or 34%
in the first quarter of 1999 versus the first quarter of 1998 due primarily
to increased production in California and New Mexico.
Net premiums earned in the group accident and health program increased
$1.3 million or 124% in the first quarter of 1999 versus the first quarter of
1998 due primarily to a new program covering Oklahoma employers on a fully
insured basis which was effective January 1, 1999. Net premiums earned for
this program were $1.2 million in the 1999 quarter. National American
Insurance Company ("NAICO") discontinued writing new policies for the excess
portion of its group accident and health program effective April 1, 1999.
NET INTEREST INCOME AND NET REALIZED INVESTMENT GAINS
At March 31, 1999, the Company's investment portfolio consisted primarily
of fixed income U.S. Government, high-quality corporate and tax exempt bonds,
with approximately 7% invested in cash and money market instruments. The
Company's portfolio contains no junk bonds or real estate investments.
Net interest income decreased $286,000 or 17% in the first quarter of
1999 versus the first quarter of 1998 due to a reduction in invested assets.
Invested assets declined from $132.7 million at March 31, 1998 to $114.3
million at March 31, 1999 due primarily to the purchase of additional
reinsurance coverages in 1998.
COMMISSIONS, FEES AND OTHER INCOME
The Company's income from commissions, fees and other income decreased
$286,000 or 39% in the first quarter of 1999 versus the first quarter of
1998. The majority of the Company's income from commissions, fees and other
income are from LaGere and Walkingstick Insurance Agency, Inc.'s ("L&W")
brokerage commissions and fees.
L&W's brokerage commissions and fees before intercompany eliminations
were $2.0 million in the first quarter of 1999 versus $1.8 million in the
first quarter of 1998. 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.
L&W disposed of certain equipment in the first quarter of 1998 that
resulted in a gain of approximately $145,000 which was included in other
income.
LOSSES AND LOSS ADJUSTMENT EXPENSES
The percentage of losses and loss adjustment expenses to net premiums
earned ("loss ratio") was 63.9% for the first quarter of 1999 versus 59.6%
in the first quarter of 1998. The higher loss ratio in the 1999 quarter was
due primarily to increased competition and an increase in weather-related
losses. Weather-related losses from wind and hail totaled $441,000 in the
first quarter of 1999 and increased the loss ratio by 2.1 percentage points.
Weather-related losses totaled $115,000 in the first quarter of 1998, and
increased the 1998 loss ratio by 0.7 percentage points.
POLICY ACQUISITION COSTS
Policy acquisition costs consist of costs associated with the
acquisition of new and renewal business and generally include direct costs
such as premium taxes, commissions to agents and ceding companies and
premium-related assessments and indirect costs such as salaries and expenses
of personnel who perform and support underwriting activities. NAICO also
receives ceding commissions from certain of the reinsurers who assume premiums
from NAICO under certain reinsurance contracts and the ceding commissions are
accounted for as a reduction of policy acquisition costs. Direct policy
acquisition costs and ceding commissions are deferred and amortized over the
terms of the policies. Recoverability of such deferred costs is dependent on
the related unearned premiums on the policies being more than expected claim
losses.
PAGE 11
The following table sets forth the Company's policy acquisition costs for
each of the three month periods ended March 31, 1999 and 1998:
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
------------ ------------
(In thousands)
Commissions expense...............................$ 4,438 $ 3,580
Other premium related assessments................. 400 506
Premium taxes..................................... 426 827
Excise taxes...................................... 46 65
Dividends to policyholders........................ 87 75
Other expense..................................... 30 68
------------ ------------
Total direct expenses............................. 5,427 5,121
Indirect underwriting expenses.................... 3,824 2,989
Commission received from reinsurers............... (4,215) (3,624)
Adjustment for deferred acquisition costs......... 11 (279)
------------ ------------
Net policy acquisition costs......................$ 5,047 $ 4,207
============ ============
Total gross direct and indirect expenses as a percentage of direct
written and assumed premiums were 26.3% for the first quarter of 1999 versus
27.6% for the first quarter of 1998. Commission expense as a percentage of
gross written and assumed premiums was 12.6% for the first quarter of 1999
versus 12.2% for the 1998 quarter. The 1999 commission rate increased due
primarily to a higher proportion of surety bond direct written and assumed
premiums to total direct written and assumed premiums in the 1999 quarter.
Surety bonds have historically had a higher commission rate than the Company's
other lines of business which is normal for the industry.
Indirect underwriting expenses were 10.9% and 10.2% of total direct
written and assumed premiums in the three month periods ended March 31, 1999
and 1998, respectively. Indirect expenses include general overhead and
administrative costs associated with the acquisition of new and renewal
business, some of which is relatively fixed in nature, thus, the percentage
of such expenses to direct written and assumed premiums will vary depending
on the Company's overall premium volume.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were 8.4% and 11.0% of gross
premiums earned and commissions, fees and other income in the first quarter
of 1999 and 1998, respectively. General and administrative expenses have
historically not varied in direct proportion to the Company's revenues. A
portion of such expenses is allocated to policy acquisition costs (indirect
underwriting expenses) and loss adjustment expenses based on various factors
including employee counts, salaries, occupancy and specific identification.
Because certain types of expenses are fixed in nature, the percentage of such
expenses to revenues will vary depending on the Company's overall premium
volume.
INTEREST EXPENSE
Interest expense increased 70% in the first quarter of 1999 versus the
first quarter of 1998, due primarily to increased levels of bank debt during
the 1999 quarter.
LITIGATION EXPENSES
While the Company's litigation expenses related to CenTra, Inc. ("CenTra")
have generally decreased since the first quarter of 1997, continued or
renewed actions by CenTra or its affiliates could cause the Company to incur
significant litigation expenses in future periods. See Note 2 to Interim
Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
In the first quarter of 1999, the Company used $4.4 million in cash from
operations due primarily to increases in premiums receivable and reinsurance
recoverables, less an increase in unpaid losses and loss adjustment expenses,
which generally correspond to the increase in written premiums in the 1999
quarter and to the purchase of additional reinsurance coverages in 1998. Cash
provided by operations in the first quarter of 1998 was $1.7 million.
PAGE 12
Chandler (U.S.A.), Inc. ("Chandler USA"), a wholly owned subsidiary of
the Company, intends to offer debentures in the aggregate principal amount of
$24 million. The terms of the debentures including the interest rate and
redemption date have not been determined. Chandler USA plans to use the
proceeds of the offering to repay amounts due to its direct parent Chandler
Insurance (Barbados), Ltd.; to retire its current bank debt; and for general
corporate purposes. Chandler USA's subsidiaries and affiliates will not be
obligated by the debentures. Accordingly, the debentures will be effectively
subordinated to all existing and future liabilities and obligations of
Chandler USA's existing and future subsidiaries.
Book value per share was $12.94 at March 31, 1999 based on 4,757,108
shares (includes total common shares outstanding and common stock to be
issued, less 1,660,125 shares rescinded through litigation and 544,475 shares
that are held by a subsidiary of the Company) compared to $13.05 at December
31, 1998.
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.
YEAR 2000 READINESS DISCLOSURES
Computer software, hardware, microprocessor chips and other computer
equipment use two digits to identify a particular year, and therefore may not
recognize the number "00" or may recognize it as a year prior to 1999. Unless
computer equipment and software programs are modified to correct these data
recognition problems (the "Year 2000 Problems"), errors could result. These
errors could cause damage to personal property and disrupt business practices
and functions. In addition to potential problems from computer systems,
potential problems could arise from equipment with embedded chips, such as
vaults, elevators, aircraft and other systems not generally classified as
information technology systems.
The Company is heavily dependent upon complex information technology
computer systems for its operations. The Company has taken action to attempt
to identify the nature and extent of the work required to assess and remediate
Year 2000 Problems with respect to its systems, products and infrastructures,
including non-information technology systems, none of which are considered
critical to operations. The Company began work in 1995 to prepare its
financial, information and other computer-based systems for the year 2000,
including updating existing legacy systems, and such work as currently planned
is substantially complete at this time. The Company estimates that it has
spent $350,000 updating these systems to address Year 2000 Problems, and such
costs were expensed as they were incurred, primarily in 1996 and 1997.
During the fourth quarter of 1998, the Company retained an independent
consultant to prepare a plan for testing its information technology systems.
In late 1998, the Company determined that the testing would be performed by
its employees, and this testing is anticipated to be completed during the
first half of 1999. During the fourth quarter of 1998, the Company incurred
approximately $150,000 in additional expenses to evaluate its information
systems and in preparation of plans to test its information systems.
Evaluation and testing of the Company's efforts to address Year 2000
Problems is ongoing. The Company estimates the additional cost of the testing
to be approximately $115,000, of which approximately $60,000 was incurred
during the first quarter of 1999, which includes the use of internal
employees, cost of external software to enhance testing efforts and computer
rental costs. These costs will be expensed during 1999 as incurred. This
estimate is based on currently available information. The Company continues
to evaluate the estimated costs associated with future efforts based on actual
experience. These efforts may involve additional costs. The Company is also
formulating and studying contingency plans with completion expected by
mid-1999.
The Company believes, based on the information currently available, that
the most reasonably likely worst case scenarios resulting from Year 2000
Problems include:
- Legal risks arising from failure of NAICO or L&W to provide contracted
services, deal with claims on a timely basis, provide pertinent data to
those dependent upon the data and similar risks;
- Increased operational costs due to manual processing, data corruption
or disaster recovery;
- Inability to bill or invoice;
- Lost revenue resulting from the inability to render accurate billing
and from the inability to efficiently market insurance products;
- Increased legal and accounting expenses;
- Fines and associated expenses resulting from inability to comply with
regulatory requirements; and
- Failure of management controls.
PAGE 13
Any previously mentioned Year 2000 Problems could have a material adverse
effect on the Company, including the financial condition of the Company's
subsidiaries and their ability to pay dividends or other payments to the
Company and its subsidiaries.
It is possible that the credit or operating ability of agents, reinsurers
and others with whom the Company maintains commercial relationships may be
adversely affected by one or more unforeseen circumstances caused by Year
2000 Problems. However, the Company does not have control over these third
parties and, as a result, it cannot currently determine to what extent future
operating results may be adversely affected by the failure of these third
parties to successfully address their Year 2000 Problems. However, the
Company is developing plans to attempt to minimize identified third-party
exposures. The Company has requested information from its major vendors and
service providers to assess their year 2000 readiness. The Company currently
is evaluating this information. The Company cannot predict the adverse
impact, if any, of Year 2000 Problems upon parties with whom it does business.
The Company continues to study the complex issues related to insurance
coverage for losses arising from the myriad potential fact situations
connected with Year 2000 Problems and NAICO's liability to its insureds. The
Company believes that the coverages NAICO provides do not extend to the types
of losses which are most likely to occur as a result of Year 2000 Problems,
and NAICO has made no provisions for loss reserves based on potential Year
2000 Problems. NAICO expects to utilize coverage exclusion endorsements based
on the individual underwriting of commercial accounts, and it has adopted
endorsements to its policies based on forms provided and filed for approval
with various regulatory authorities by Insurance Services Office, Inc., an
insurance services company which provides regulatory research and filing
support to insurance companies. Use of these special endorsements is governed
by the law and regulatory policies of states in which NAICO is authorized to
do business.
It is possible that future court interpretations of policy language based
on specific facts, or legislation mandating coverage, could result in coverage
for losses attributable to Year 2000 Problems. Such decisions or legislation
could have a material adverse impact on the Company. It is also possible that
NAICO may incur expenses defending claims for which it is ultimately
determined there is no insurance coverage.
PAGE 14
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In response to this item, the Company incorporates by reference to
Note 2. Litigation to its Interim Consolidated Financial Statements
contained elsewhere in this report.
Item 2. CHANGES IN SECURITIES
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. Other Information
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
The Company filed one current report on Form 8-K dated March 11, 1999
responding to Item 5 of Form 8-K.
PAGE 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 11, 1999 CHANDLER INSURANCE COMPANY, LTD.
By: /s/ W. Brent LaGere
----------------------------
W. Brent LaGere
Chairman of the Board,
President and Chief
Executive Officer
(Principal Executive Officer)
By: /s/ Mark C. Hart
----------------------------
Mark C. Hart
Vice President - Accounting
& Treasurer
(Principal Accounting Officer)