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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, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
-------- --------
Commission File Number: 1-15135
CHANDLER (U.S.A.), INC.
(Exact name of registrant as specified in its charter)
OKLAHOMA 73-1325906
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1010 MANVEL AVENUE 74834
CHANDLER, OK (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: 405-258-0804
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, $1.00 par value, of the registrant
outstanding on April 30, 2000 was 2,484, which are owned by Chandler
Insurance (Barbados), Ltd., a wholly owned subsidiary of Chandler Insurance
Company, Ltd.
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a)
AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED
DISCLOSURE FORMAT.
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PAGE i
CHANDLER (U.S.A.), INC.
INDEX
-----
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1
- ------
Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999.......1
Consolidated Statements of Operations for the three months
ended March 31, 2000 and 1999...........................................2
Consolidated Statements of Comprehensive Income for the three
months ended March 31, 2000 and 1999....................................3
Consolidated Statements of Cash Flows for the three months
ended March 31, 2000 and 1999...........................................4
Notes to Interim Consolidated Financial Statements...........................5
ITEM 2
- ------
Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................10
PART II - OTHER INFORMATION
- ---------------------------
Item 1 Legal Proceedings................................................14
Item 2 Changes in Securities............................................14
Item 3 Defaults Upon Senior Securities..................................14
Item 4 Submission of Matters to a Vote of Security Holders..............14
Item 5 Other Information................................................14
Item 6 Exhibits and Reports on Form 8-K.................................14
Signatures..................................................................15
PAGE 1
CHANDLER (U.S.A.), INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except share amounts)
March 31, December 31,
2000 1999
------------- --------------
ASSETS (Unaudited)
Investments
Fixed maturities available for sale, at fair value
Restricted............................................................... $ 6,821 $ 6,826
Unrestricted............................................................. 85,471 80,410
Fixed maturities held to maturity, at amortized cost
Restricted (fair value $177 and $176 in 2000 and 1999, respectively)..... 170 169
Unrestricted (fair value $875 and $863 in 2000 and 1999, respectively)... 832 815
Equity securities available for sale, at fair value........................ 306 306
------------- --------------
Total investments........................................................ 93,600 88,526
Cash and cash equivalents.................................................... 4,156 5,140
Premiums receivable, less allowance for non-collection
of $310 and $263 at 2000 and 1999, respectively............................ 36,249 47,717
Reinsurance recoverable on paid losses, less allowance for
non-collection of $275 at 2000 and 1999.................................... 3,989 3,281
Reinsurance recoverable on unpaid losses, less allowance for
non-collection of $322 and $302 at 2000 and 1999, respectively............. 38,035 37,540
Reinsurance recoverable on unpaid losses from related parties................ 11,511 9,542
Prepaid reinsurance premiums................................................. 23,387 19,960
Prepaid reinsurance premiums to related parties.............................. 12,460 9,604
Deferred policy acquisition costs............................................ 1,795 3,134
Property and equipment, net.................................................. 11,592 10,719
Licenses, net................................................................ 4,007 4,044
Excess of cost over net assets acquired, net................................. 3,794 3,956
Other assets................................................................. 14,688 13,673
------------- --------------
Total assets................................................................. $ 259,263 $ 256,836
============= ==============
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities
Unpaid losses and loss adjustment expenses................................. $ 99,870 $ 98,460
Unearned premiums.......................................................... 68,935 67,769
Policyholder deposits...................................................... 5,215 5,135
Accrued taxes and other payables........................................... 4,230 6,544
Premiums payable........................................................... 10,883 7,313
Premiums payable to related parties........................................ 793 343
Amounts due to affiliate................................................... - 533
Debentures................................................................. 24,000 24,000
------------- --------------
Total liabilities........................................................ 213,926 210,097
------------- --------------
Shareholder's equity
Common stock, $1.00 par value, 50,000 shares authorized;
2,484 shares issued and outstanding...................................... 2 2
Paid-in surplus............................................................ 60,584 60,584
Accumulated deficit........................................................ (13,520) (12,127)
Accumulated other comprehensive loss:
Unrealized loss on investments, available for sale,
net of deferred income taxes........................................... (1,729) (1,720)
------------- --------------
Total shareholder's equity............................................... 45,337 46,739
------------- --------------
Total liabilities and shareholder's equity................................... $ 259,263 $ 256,836
============= ==============
See accompanying Notes to Interim Consolidated Financial Statements.
PAGE 2
CHANDLER (U.S.A.), INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands)
For the three months
Ended March 31,
------------ ------------
2000 1999
------------ ------------
Premiums and other revenues
Direct premiums written and assumed................................. $ 45,121 $ 35,098
Reinsurance premiums ceded.......................................... (18,314) (14,053)
Reinsurance premiums ceded to related parties....................... (11,008) (4,563)
------------ ------------
Net premiums written and assumed.................................. 15,799 16,482
Decrease (increase) in unearned premiums............................ 5,116 (86)
------------ ------------
Net premiums earned............................................... 20,915 16,396
Interest income, net.................................................. 1,120 1,044
Realized investment gains, net........................................ - 52
Commissions, fees and other income.................................... 350 365
------------ ------------
Total premiums and other revenues................................. 22,385 17,857
------------ ------------
Operating costs and expenses
Losses and loss adjustment expenses net of amounts ceded to
related parties of $5,027 and $2,931 in 2000 and
1999, respectively.............................................. 15,753 10,521
Policy acquisition costs, net of ceding commissions received
from related parties of $3,790 and $1,636 in 2000
and 1999, respectively............................................ 4,827 3,365
General and administrative expenses................................. 3,217 2,660
Interest expense.................................................... 562 216
Litigation expenses, net............................................ 8 57
------------ ------------
Total operating costs and expenses................................ 24,367 16,819
------------ ------------
Income (loss) before income taxes..................................... (1,982) 1,038
Federal income tax benefit (provision)................................ 589 (422)
------------ ------------
Net income (loss)..................................................... $ (1,393) $ 616
============ ============
See accompanying Notes to Interim Consolidated Financial Statements.
PAGE 3
CHANDLER (U.S.A.), INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Amounts in thousands)
For the three months
Ended March 31,
------------ ------------
2000 1999
------------ ------------
Net income (loss)..................................................... $ (1,393) $ 616
------------ ------------
Other comprehensive loss, before income tax:
Unrealized losses on securities:
Unrealized holding losses arising during period................... (13) (1,170)
Less: Reclassification adjustment for gains included in
net income (loss)............................................... - (52)
------------ ------------
Other comprehensive loss, before income tax........................... (13) (1,222)
Income tax benefit related to items of other
comprehensive loss.................................................. 4 415
------------ ------------
Other comprehensive loss, net of income tax........................... (9) (807)
------------ ------------
Comprehensive loss.................................................... $ (1,402) $ (191)
============ ============
See accompanying Notes to Interim Consolidated Financial Statements.
PAGE 4
CHANDLER (U.S.A.), INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
For the three months
Ended March 31,
------------ ------------
2000 1999
------------ ------------
OPERATING ACTIVITIES
Net income (loss)..................................................... $ (1,393) $ 616
Add (deduct):
Adjustments to reconcile net income (loss) to cash provided by
(applied to) operating activities:
Realized investment gains, net.................................... - (52)
Net (gains) losses on sale of equipment........................... 3 (8)
Amortization and depreciation..................................... 545 517
Provision for non-collection of premiums.......................... 42 30
Net change in non-cash balances relating to operating activities:
Premiums receivable............................................. 11,425 (2,634)
Reinsurance recoverable on paid losses.......................... (725) 775
Reinsurance recoverable on unpaid losses........................ (478) (4,171)
Reinsurance recoverable on unpaid losses from related parties... (1,969) 876
Prepaid reinsurance premiums.................................... (3,427) (105)
Prepaid reinsurance premiums to related parties................. (2,856) 67
Deferred policy acquisition costs............................... 1,339 -
Other assets.................................................... (1,006) (84)
Unpaid losses and loss adjustment expenses...................... 1,410 2,281
Unearned premiums............................................... 1,166 125
Policyholder deposits........................................... 80 77
Accrued taxes and other payables................................ (2,314) (1,003)
Premiums payable................................................ 3,570 (841)
Premiums payable to related parties............................. 450 (1,202)
------------ ------------
Cash provided by (applied to) operating activities................ 5,862 (4,736)
------------ ------------
INVESTING ACTIVITIES
Unrestricted fixed maturities available for sale:
Purchases......................................................... (6,590) (4,044)
Sales............................................................. - 3,048
Maturities........................................................ 1,432 2,124
Cost of property and equipment purchased............................ (1,140) (257)
Proceeds from sale of property and equipment........................ 18 46
------------ ------------
Cash provided by (applied to) investing activities................ (6,280) 917
------------ ------------
FINANCING ACTIVITIES
Payments on notes payable........................................... - (476)
Proceeds from borrowing from affiliate.............................. 100 1,568
Payments on borrowing from affiliate................................ (666) (638)
------------ ------------
Cash provided by (applied to) financing activities................ (566) 454
------------ ------------
Decrease in cash and cash equivalents during the period............... (984) (3,365)
Cash and cash equivalents at beginning of period...................... 5,140 9,304
------------ ------------
Cash and cash equivalents at end of period............................ $ 4,156 $ 5,939
============ ============
See accompanying Notes to Consolidated Financial Statements.
PAGE 5
CHANDLER (U.S.A.), INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. They do not include all information and footnotes
required by generally accepted accounting principles for complete financial
statements. However, except as disclosed herein, there have been no material
changes in the information included in the Company's Annual Report on Form
10-K for the year ended December 31, 1999. In the opinion of management, all
adjustments (consisting of normal recurring adjustments and an unusual
significant litigation liability adjustment described in Note 2) considered
necessary for a fair presentation have been included. The results of
operations for the three-month period ended March 31, 2000 are not
necessarily indicative of the results that may be expected for the year.
The consolidated financial statements include the accounts of Chandler
(U.S.A.), Inc. ("Chandler USA" or the "Company") and all subsidiaries. The
following represents the significant subsidiaries:
- National American Insurance Company ("NAICO")
- LaGere & Walkingstick Insurance Agency, Inc.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
Chandler USA is wholly owned by Chandler Insurance (Barbados), Ltd.
("Chandler Barbados") which, in turn, is wholly owned by Chandler Insurance
Company, Ltd. ("Chandler Insurance"), a Cayman Islands company.
NOTE 2. LITIGATION
Chandler Insurance and certain of its subsidiaries and affiliates,
including Chandler USA, have been involved in various matters of litigation
with CenTra, Inc. ("CenTra") and certain of its affiliates, officers and
directors (the "CenTra Group") since 1992. The CenTra Group has been a
significant shareholder in Chandler Insurance owning 49.2% of Chandler
Insurance's stock in July 1992. Three present or former executive officers
of CenTra, Norman E. Harned, Ronald W. Lech and M. J. Moroun were directors
of Chandler Insurance until November 1999.
On March 25, 1997, the U.S. District Court for the District of Nebraska
("Nebraska Court") ordered CenTra and certain of its affiliates to divest all
Chandler Insurance shares owned by them. The CenTra defendants owned or
controlled 3,133,450 Chandler Insurance shares. The Nebraska Court approved
a divestiture plan submitted by NAICO (the "NAICO Plan") which called for
Chandler Insurance to acquire and cancel the shares of Chandler Insurance
stock owned by the CenTra Group. During December 1999, Chandler Insurance
acquired 1,989,200 shares of its stock in exchange for payment of
$15,204,758. These shares were canceled upon acquisition by Chandler
Insurance. The Nebraska Court continues to hold 1,142,625 shares pending
the outcome of CenTra's appeal of a judgment by the U.S. District Court in
Oklahoma City, Oklahoma ("Oklahoma Court") regarding these shares. Following
the conclusion of the appeal, the Nebraska Court will determine the method
of divestiture of these shares. Chandler Insurance cannot predict when the
appellate court will rule on the appeal.
PAGE 6
On April 1, 1997, the Oklahoma Court entered judgment in favor of NAICO
on CenTra's claims for alleged wrongful cancellation of CenTra's insurance
with NAICO and its affiliate NAICO Indemnity (Cayman), Ltd. ("NAICO
Indemnity") in 1992. The remaining issues were submitted to a jury. On
April 22, 1997, the Oklahoma Court entered judgments on the jury verdicts.
One judgment against Chandler Insurance required the CenTra Group to return
stock it purchased in 1990 to Chandler Insurance in return for a payment of
$5,099,133 from Chandler Insurance. Payment was made and the stock was
returned to Chandler Insurance and canceled in December 1999 as a part of
the acquisition of shares described previously. Another judgment was
against both Chandler Insurance and Chandler Barbados. CenTra and an
affiliate, Ammex, Inc., were awarded $6,882,500 in connection with a 1988
stock purchase agreement. On March 10, 1998, the Oklahoma Court modified
its judgment to require CenTra and its affiliates to deliver 1,142,625
shares of Chandler Insurance stock they owned upon payment of the $6,882,500
judgment which was entered in April 1997. Both of these judgments related
to an alleged failure by Chandler Insurance to adequately disclose the fact
that ownership of Chandler Insurance'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 Chandler Insurance on the securities claims
relating to CenTra's 1990 stock purchases and the failure to disclose the
application of Nebraska insurance law, but the judgments were $1 against
each individual defendant on those claims. On ten derivative claims
brought by CenTra, the jury found in CenTra's favor on three. Certain
officers were directed to repay to Chandler USA bonuses received for the
years 1988 and 1989 totaling $711,629 and a total of $25,000 for personal
use of corporate aircraft. These amounts are included in other assets in
the accompanying consolidated balance sheets. On the remaining claim
relating to the acquisition of certain insurance agencies in 1988, the jury
awarded $1 each against six officers and/or directors.
Judgment was also entered in favor of NAICO and NAICO Indemnity on
counterclaims against CenTra for CenTra's failure to pay insurance premiums.
Judgment was for the amount of $788,625. During 1998, the judgment was
paid by funds held by the Oklahoma Court aggregating, with interest,
$820,185. DuraRock Underwriters, Ltd. ("DuraRock"), an affiliate of CenTra,
claimed $725,000 was owed to it under certain reinsurance treaties. That
claim was settled in January 2000 with NAICO paying $52,617 and NAICO
Indemnity paying $84,883 to DuraRock. The settlement was accrued for by
NAICO and NAICO Indemnity in 1999.
The Oklahoma Court's judgment also upheld a resolution adopted by
Chandler Insurance's Board of Directors in August 1992 pursuant to Article
XI of Chandler Insurance's Articles of Association preventing CenTra and
its affiliates from voting their Chandler Insurance stock.
As a result of the Oklahoma Court judgments and subsequent decisions,
Chandler Insurance recorded a net charge for the litigation matters during
1997 totaling approximately $1.4 million ($1.6 million including provision
for federal income tax). Chandler Insurance recorded the return of 1,660,125
shares of Chandler Insurance's stock in connection with the rescission
judgments as a decrease to shareholders' equity in the amount of
approximately $12.0 million. On April 21, 1998, the Oklahoma Court denied
the CenTra Group's request for costs and attorney fees. The CenTra Group did
not appeal this decision within the time permitted by applicable law.
Accordingly, Chandler Insurance reduced the previous 1997 net charge for
litigation matters by $3.8 million during the second quarter of 1998.
On March 23, 1998, the CenTra Group filed a formal notice of intent to
appeal certain orders of the Oklahoma Court, and filed the initial appellate
brief on September 9, 1998. The appeals are being considered by the U.S.
Court of Appeals for the 10th Circuit. The CenTra Group's appeals are based
upon the Oklahoma Court's failure to award prejudgment interest, the Oklahoma
Court's refusal to permit the CenTra Group to amend certain pleadings to
assert new claims, the Oklahoma Court's modification of the judgment for
$6,882,500 to require CenTra to return shares of Chandler Insurance's stock
upon payment of the judgment, and the Oklahoma Court's denial of attorney
fees. Chandler Insurance believes the appeal of this last issue is untimely
and therefore barred by law. Chandler Insurance elected not to appeal any
of the judgments. The individual officers and directors against whom
judgments were entered have all filed appeals.
PAGE 7
Chandler Insurance's board of directors appointed a committee of the
board (the "Committee") to deal with all matters arising from the Oklahoma
litigation. The members of the Committee are Messrs. Jacoby, Maestri and
Davis, all of whom are non-parties to the CenTra litigation. The Committee
is empowered by the board to make decisions on behalf of Chandler Insurance
regarding issues relating to litigation strategy, officer and director
indemnification and claims made under Chandler Insurance's director and
officer liability insurance policy (the "D&O Insurer"). A similar committee
composed of Chandler USA directors is authorized to deal with those same
issues regarding Chandler USA.
In 1997, NAICO learned that several CenTra affiliates had filed two
lawsuits against NAICO, NAICO Indemnity and certain NAICO officers asserting
some of the same claims made and tried in the Oklahoma lawsuit described
previously. Those claims were purportedly prosecuted by CenTra on its own
behalf and on behalf of its subsidiaries and were based upon alleged
wrongful cancellation of their insurance policies by NAICO and NAICO
Indemnity. The Oklahoma Court entered a judgment against CenTra on these
claims. NAICO and NAICO Indemnity contend that the Oklahoma Court's
adjudication is conclusive as to all claims. The lawsuits have been
consolidated and have been assigned to the same judge who presided over the
action in the Oklahoma Court. Dispositive motions filed by NAICO, NAICO
Indemnity and the other defendants are currently under consideration by the
Oklahoma Court.
In the CenTra litigation, certain officers and directors of Chandler
USA and Chandler Insurance were named as defendants. In accordance with its
Articles of Association, Chandler Insurance and its subsidiaries have
advanced the litigation expenses of these persons in exchange for
undertakings to repay such expenses if those persons are later determined
to have breached the standard of conduct provided in the Articles of
Association. Chandler Barbados has paid expenses on behalf of these officers
and directors totaling approximately $2.3 million as of March 31, 2000. A
portion of these expenses relate to claims which have been dismissed or
which were decided in favor of the officers and directors. These expenses
together with certain other expenses may be recovered from the D&O Insurer.
As a result of various events in 1995, 1996 and 1997, Chandler Barbados and
Chandler USA recorded estimated recoveries of costs from its D&O Insurer
totaling $3,456,000 and $1,044,000, respectively, for reimbursable amounts
previously paid that relate to allowable defense and litigation costs for
such parties. Chandler Barbados and Chandler USA received payment for a
1995 claim during 1996 in the amount of $636,000 and $159,000, respectively.
The balance is included in other assets in Chandler Barbados' and Chandler
USA's balance sheets. Chandler Insurance and its subsidiaries are entitled
to a total of $5 million under the applicable insurance policy to the extent
they have advanced reimbursable expenses. Chandler Insurance is negotiating
with the insurer for payment of the policy balance. Chandler Insurance and
its subsidiaries could recover the remaining policy limits or could
compromise their claim, and could incur significant costs in either case.
The ultimate outcome of the appeals of the various parties as described
above could have a material adverse effect on Chandler USA and Chandler
Insurance and could negatively impact future earnings. Chandler USA'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, Chandler USA may receive cash through equity sales,
borrowings and dividends from its subsidiaries. Chandler Barbados and
NAICO are subject to various regulations which restrict their ability to
pay shareholder dividends. A reduction in the amount of invested assets,
or an increase in borrowings resulting from potential payments of these
judgments would reduce investment earnings or increase operating expenses
in future periods.
At the present time Chandler USA and its affiliates are actively
participating in court proceedings and rights of appeal concerning these
legal proceedings; therefore, Chandler USA and its affiliates are unable to
predict the outcome of such litigation with certainty or the effect of such
ongoing litigation on future operations. Chandler USA and its affiliates
are also unable to predict the effect of the remaining divestiture order on
the rights, limitations or other regulation of ownership of the stock of any
existing or prospective holders of Chandler Insurance's common stock, or the
effect on the market price of Chandler Insurance's stock.
PAGE 8
OTHER LITIGATION
Chandler USA and its subsidiaries are not parties to any other material
litigation other than as is routinely encountered in their respective
business activities.
NOTE 3. ACCOUNTING STANDARD ISSUED BUT NOT YET ADOPTED
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires that the Company recognize all derivatives as either assets or
liabilities in the statement of financial condition and measure those
instruments at fair value. The accounting for changes in the fair value of
a derivative depends on the intended use of the derivative and the resulting
designation. The Company will adopt SFAS No. 133 when required. Management
of the Company does not expect that adoption of SFAS No. 133 will have a
material impact on the Company's consolidated financial condition or results
of operations.
NOTE 4. SEGMENT INFORMATION
The following table presents a summary of the Company's operating
segments for the three-month periods ended March 31, 2000 and 1999:
Property
and All Intersegment Reported
Agency casualty Other eliminations balances
--------- ---------- --------- ------------ ----------
(In thousands)
THREE MONTHS ENDED MARCH 31, 2000
Revenues from external customers (1).. $ 314 $ 20,951 $ - $ - $ 21,265
Intersegment revenues................. 1,792 37 - (1,829) -
Segment profit (loss) before
income taxes (2).................... (256) (1,556) (170) - (1,982)
Segment assets........................ $ 5,121 $ 263,504 $ - $ (9,362) $ 259,263
THREE MONTHS ENDED MARCH 31, 1999
Revenues from external customers (1).. $ 350 $ 16,411 $ - $ - $ 16,761
Intersegment revenues................. 1,653 54 - (1,707) -
Segment profit (loss) before
income taxes (2).................... (113) 1,369 (218) - 1,038
Segment assets........................ $ 5,069 $ 227,602 $ - $ (9,620) $ 223,051
- --------------------------------------
<FN>
(1) Consists of net premiums earned and commissions, fees and other income.
(2) Includes net realized investment gains.
PAGE 9
The following supplemental information pertaining to each insurance
program's net premiums earned and losses and loss adjustment expenses is
presented for the property and casualty segment.
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
------------ ------------
(In thousands)
INSURANCE PROGRAM
- -----------------
NET PREMIUMS EARNED
Standard property and casualty........................... $ 14,697 $ 8,774
Political subdivisions................................... 3,337 3,042
Surety bonds............................................. 1,865 2,344
Group accident and health................................ 946 2,286
Other.................................................... 70 (50)
------------ ------------
$ 20,915 $ 16,396
============ ============
LOSSES AND LOSS ADJUSTMENT EXPENSES
Standard property and casualty........................... $ 10,928 $ 6,881
Political subdivisions................................... 2,846 2,373
Surety bonds............................................. 427 305
Group accident and health................................ 1,682 1,556
Other.................................................... (130) (594)
------------ ------------
$ 15,753 $ 10,521
============ ============
PAGE 10
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 (U.S.A.), Inc. ("Chandler USA" or the "Company")
in periodic press releases, oral statements made by the Company's officials
to analysts and shareholders in the course of presentations about the Company
and conference calls following earnings releases, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors that may cause the actual results,
performance or achievements of the Company to be materially different from
any future results, performance or achievements expressed or implied by the
forward-looking statements. Such factors include, among other things, (i)
general economic and business conditions; (ii) interest rate changes; (iii)
competition and regulatory environment in which the Company operates; (iv)
claims frequency; (v) claims severity; (vi) the number of new and renewal
policy applications submitted by the Company's agents; (vii) the ability of
the Company to obtain adequate reinsurance in amounts and at rates that will
not adversely affect its competitive position; (viii) the ability of National
American Insurance Company ("NAICO") to maintain favorable insurance company
ratings; (ix) the ability of the Company and its third party providers,
agents and reinsurers to adequately address year 2000 issues; (x) other
factors including the ongoing litigation matters involving a significant
concentration of ownership of the Company's indirect parent's common stock.
RESULTS OF OPERATIONS
NET PREMIUMS EARNED
The following table sets forth net premiums earned for the three month
periods ended March 31, 2000 and 1999:
GROSS PREMIUMS EARNED NET PREMIUMS EARNED
--------------------- ---------------------
THREE MONTHS ENDED MARCH 31, 2000 1999 2000 1999
---------------------------- ---------- ---------- ---------- ----------
(In thousands)
Standard property and casualty........ $ 30,707 $ 21,635 $ 14,697 $ 8,774
Political subdivisions................ 8,152 7,181 3,337 3,042
Surety bonds.......................... 4,009 3,555 1,865 2,344
Group accident and health............. 1,002 2,596 946 2,286
Other................................. 84 6 70 (50)
---------- ---------- ---------- ----------
TOTAL................................. $ 43,954 $ 34,973 $ 20,915 $ 16,396
========== ========== ========== ==========
Gross premiums earned, before reductions for premiums ceded to
reinsurers, increased $9.0 million or 26% in the first quarter of 2000
compared to the first quarter of 1999. The increase is primarily
attributable to increased written premium production in Texas and Oklahoma,
as NAICO continues to expand its programs in these states. Net premiums
earned, after such reductions, increased $4.5 million or 28% in the first
quarter of 2000 compared to the first quarter of 1999 due to the increase
in written premium production, and to an increase in the amount of risk
retained in the 2000 quarter for the Company's workers compensation line of
business.
Gross premiums earned in the standard property and casualty program
increased $9.1 million or 42% in the first quarter of 2000 compared to the
first quarter of 1999. The increase is primarily attributable to increased
written premium production in Texas. Net premiums earned increased $5.9
million or 68% in the first quarter of 2000 versus the first quarter of 1999
due to the increase in written premium production, and to the increase in the
amount of risk retained for the workers compensation portion of the program.
Gross premiums earned in the political subdivisions program increased
$971,000 or 14% in the first quarter of 2000 compared to the first quarter of
1999. The increase is primarily attributable to increased written premium
production in the school districts portion of the program in Oklahoma. Net
premiums earned in the political subdivisions program increased $295,000 or
10% in the first quarter of 2000 versus the first quarter of 1999.
PAGE 11
Gross premiums earned in the surety bond program increased $454,000 or
13% in the first quarter of 2000 compared to the first quarter of 1999.
Approximately $629,000 of the gross premiums earned in the first quarter of
2000 relates to a new program that is 100% reinsured by an unaffiliated
reinsurer. Excluding this new program, gross premiums earned decreased
$175,000 or 5% from the 1999 quarter. Net premiums earned in the surety bond
program decreased $479,000 or 20% in the first quarter of 2000 versus the
first quarter of 1999.
Gross premiums earned in the group accident and health program decreased
$1.6 million or 61% in the first quarter of 2000 versus the first quarter of
1999. Net premiums earned for this program decreased $1.3 million or 59% in
the first quarter of 2000 versus the first quarter of 1999. NAICO
discontinued writing new policies for the excess portion of the group
accident and health program effective April 1, 1999. NAICO is currently
evaluating the fully insured portion of the program and may modify or
discontinue it during 2000.
NET INTEREST INCOME AND NET REALIZED INVESTMENT GAINS
At March 31, 2000, the Company's investment portfolio consisted
primarily of fixed income U.S. Government, high-quality corporate and tax
exempt bonds, with approximately 4% invested in cash and money market
instruments. The Company's portfolio contains no junk bonds or real estate
investments.
Net interest income increased $76,000 or 7% in the first quarter of 2000
versus the first quarter of 1999 due primarily to an increase in invested
assets. Invested assets increased from $89.2 million at March 31, 1999 to
$97.8 million at March 31, 2000 due primarily to the collection of $12.9
million in January 2000 related to two reinsurance treaties which were
rescinded in the fourth quarter of 1999. The Company had no net realized
investment gains or losses during the first quarter of 2000, compared to a
net realized gain of $52,000 in the first quarter of 1999.
COMMISSIONS, FEES AND OTHER INCOME
The Company's income from commissions, fees and other income decreased
$15,000 or 4% in the first quarter of 2000 versus the first quarter of 1999.
The majority of the Company's income from commissions, fees and other income
are from LaGere and Walkingstick Insurance Agency, Inc. ("L&W").
L&W's brokerage commissions and fees before intercompany eliminations
were $2.1 million in the first quarter of 2000 versus $2.0 million in the
first quarter of 1999. A large portion of the brokerage commissions and
fees for L&W is incurred by NAICO and thus eliminated in the consolidation
of the Company's subsidiaries.
LOSSES AND LOSS ADJUSTMENT EXPENSES
The percentage of losses and loss adjustment expenses to net premiums
earned ("loss ratio") was 75.3% for the first quarter of 2000 versus 64.2%
in the first quarter of 1998. The increase in the 2000 loss ratio was
primarily the result of adverse loss experience in the group accident and
health program. Excluding the underwriting results of the group accident
program, the loss ratio for the first quarter of 2000 was 70.5% versus 63.5%
in the year ago quarter. In addition, a lower proportion of net premiums
earned in the surety bond program resulted in a higher loss ratio in the
2000 quarter. Surety bonds have historically had a lower loss ratio than
the Company's other lines of business, which is normal for the industry.
Weather-related losses from wind and hail totaled $594,000 in the first
quarter of 2000 and increased the loss ratio by 2.8 percentage points.
Weather-related losses totaled $441,000 in the first quarter of 1999, and
increased the 1999 loss ratio by 2.7 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 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 12
The following table sets forth the Company's policy acquisition costs
for each of the three month periods ended March 31, 2000 and 1999:
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
------------ ------------
(In thousands)
Commissions expense............................... $ 5,258 $ 4,436
Other premium related assessments................. 403 400
Premium taxes..................................... 975 426
Excise taxes...................................... 110 46
Dividends to policyholders........................ 101 87
Other expense..................................... 42 30
------------ ------------
Total direct expenses............................. 6,889 5,425
Indirect underwriting expenses.................... 4,078 3,824
Commission received from reinsurers............... (7,479) (5,852)
Adjustment for deferred acquisition costs......... 1,339 (32)
------------ ------------
Net policy acquisition costs...................... $ 4,827 $ 3,365
============ ============
Total gross direct and indirect expenses as a percentage of direct
written and assumed premiums were 24.3% for the first quarter of 2000 versus
26.4% for the first quarter of 1999. Commission expense as a percentage of
gross written and assumed premiums was 11.7% for the first quarter of 2000
versus 12.6% for the 1999 quarter. Premium taxes increased $549,000 or 129%
in the first quarter of 2000 compared to the 1999 quarter due to the
increase in written premiums and to a refund of $392,000 which was received
in the 1999 quarter for premium taxes paid in a prior year.
Indirect underwriting expenses were 9.0% and 10.9% of total direct
written and assumed premiums in the three month periods ended March 31, 2000
and 1999, respectively. Indirect expenses include general overhead and
administrative costs associated with the acquisition of new and renewal
business, some of which is relatively fixed in nature, thus, the percentage
of such expenses to direct written and assumed premiums will vary depending
on the Company's overall premium volume.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were 7.3% and 7.5% of gross premiums
earned and commissions, fees and other income in the first quarter of 2000
and 1999, respectively. General and administrative expenses have
historically not varied in direct proportion to the Company's revenues. A
portion of such expenses is allocated to policy acquisition costs (indirect
underwriting expenses) and loss adjustment expenses based on various factors
including employee counts, salaries, occupancy and specific identification.
Because certain types of expenses are fixed in nature, the percentage of
such expenses to revenues will vary depending on the Company's overall
premium volume.
INTEREST EXPENSE
Interest expense increased $346,000 or 160% in the first quarter of 2000
versus the first quarter of 1999. The increase was primarily due to interest
expense on the $24 million debenture offering which was completed on July
16, 1999 by the Company.
LITIGATION EXPENSES
Litigation expenses reflect expenses related to the on-going legal
proceedings involving CenTra, Inc. and certain of its affiliates
("CenTra"). Litigation expenses decreased $49,000 or 86% in the first
quarter of 2000 compared to the first quarter of 1999. Increased or renewed
activity could result in greater litigation expenses in 2000 or future
years. See Note 2 to Interim Consolidated Financial Statements.
PAGE 13
LIQUIDITY AND CAPITAL RESOURCES
In the first quarter of 2000, the Company provided $5.9 million in cash
from operations due primarily to the collection of certain receivables
totaling approximately $12.9 million in the 2000 quarter that were related to
the rescission of two reinsurance treaties during the fourth quarter of 1999.
The cash flow from the collection of premiums receivable was partially offset
by increases to reinsurance recoverables and prepaid reinsurance premiums,
net of premiums payable to reinsurers, and by a reduction in accrued taxes
and other payables. The increase in the respective reinsurance balances is
due primarily to the increase in ceded written premiums in the first quarter
of 2000 in comparison to the fourth quarter of 1999. In the first quarter
of 1999, the Company used $4.7 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.
YEAR 2000 READINESS DISCLOSURES
The Company began work in 1995 to prepare its financial, information and
other computer-based systems for the year 2000, including updating existing
legacy systems, and such work was completed prior to the end of 1999.
Through the first four months of the year 2000, the Company had not
experienced any significant problems or disruptions related to year 2000
problems. The Company is currently not aware of any significant disruptions
experienced by its customers, vendors and service providers that would
materially affect their ability to do business with the Company. While it
is possible that certain year 2000 problems may exist but have not yet
materialized, the Company does not currently expect any year 2000 problems
to be encountered in the future that would have a material adverse effect on
the operating results of the Company.
The Company continues to study the complex issues related to insurance
coverage for losses arising from the myriad potential fact situations
connected with year 2000 problems and NAICO's liability to its insureds.
The Company believes that the coverages NAICO provides do not extend to the
types of losses which are most likely to occur as a result of year 2000
problems. No claims for year 2000 problems have been reported to NAICO and
NAICO has made no provisions for loss reserves based on potential year 2000
problems. It is possible that future court interpretations of policy
language based on specific facts, or legislation mandating coverage, could
result in coverage for losses attributable to year 2000 problems. Such
decisions or legislation could have a material adverse impact on the
Company. It is also possible that NAICO may incur expenses defending claims
for which it is ultimately determined there is no insurance coverage.
PAGE 14
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
-----------------
In response to this item, the Company incorporates by reference to
Note 2. Litigation to its Interim Consolidated Financial Statements
contained elsewhere in this report.
Item 2. Changes in Securities
---------------------
Omitted
Item 3. Defaults Upon Senior Securities
-------------------------------
Omitted
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Omitted
Item 5. Other Information
-----------------
At its March 7, 2000 board meeting, the Company's board of directors
voted to increase its total membership from 7 to 8 and appointed W.
Scott Martin to serve as a director.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
None
PAGE 15
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 9, 2000 CHANDLER (U.S.A.), INC.
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 - Finance & Treasurer
(Principal Accounting Officer)