===============================================================================
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, 2001
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, 2001 was 2,484, which are owned by Chandler
Insurance (Barbados), Ltd., a wholly owned subsidiary of Chandler Insurance
Company, Ltd.
===============================================================================
PAGE i
CHANDLER (U.S.A.), INC.
INDEX
-----
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1
- ------
Consolidated Balance Sheets as of March 31, 2001 and December 31, 2000..... 1
Consolidated Statements of Operations for the three months
ended March 31, 2001 and 2000......................................... 2
Consolidated Statements of Comprehensive Income for the three
months ended March 31, 2001 and 2000.................................. 3
Consolidated Statements of Cash Flows for the three months
ended March 31, 2001 and 2000 ........................................ 4
Notes to Interim Consolidated Financial Statements......................... 5
ITEM 2
- ------
Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................. 8
PART II - OTHER INFORMATION
- ---------------------------
Item 1 Legal Proceedings...............................................11
Item 2 Changes in Securities...........................................11
Item 3 Defaults Upon Senior Securities.................................11
Item 4 Submission of Matters to a Vote of Security Holders.............11
Item 5 Other Information...............................................11
Item 6 Exhibits and Reports on Form 8-K................................11
Signatures.................................................................12
PAGE 1
CHANDLER (U.S.A.), INC.
Consolidated Balance Sheets
(Amounts in thousands except share amounts)
March 30, December 31,
2001 2000
------------ ------------
ASSETS (Unaudited)
Investments
Fixed maturities available for sale, at fair value
Restricted (amortized cost $5,547 and $5,446 in 2001
and 2000, respectively) ............................................... $ 5,738 $ 5,538
Unrestricted (amortized cost $73,043 and $85,693 in 2001
and 2000, respectively) ............................................... 74,061 85,746
Fixed maturities held to maturity, at amortized cost
Restricted (fair value $190 and $186 in 2001 and 2000, respectively)..... 176 174
Unrestricted (fair value $982 and $953 in 2001 and 2000, respectively) .. 900 882
Equity securities available for sale, at fair value ...................... 442 442
------------ ------------
Total investments ....................................................... 81,317 92,782
Cash and cash equivalents ................................................. 13,411 11,978
Premiums receivable, less allowance for non-collection
of $312 and $308 at 2001 and 2000, respectively .......................... 28,751 33,519
Reinsurance recoverable on paid losses, less allowance for
non-collection of $275 at 2001 and 2000 .................................. 4,863 3,283
Reinsurance recoverable on paid losses from related parties ............... 474 614
Reinsurance recoverable on unpaid losses, less allowance for
non-collection of $385 and $397 at 2001 and 2000, respectively ........... 42,270 39,387
Reinsurance recoverable on unpaid losses from related parties ............. 13,403 14,079
Prepaid reinsurance premiums .............................................. 29,140 32,699
Prepaid reinsurance premiums to related parties ........................... 9,365 10,368
Deferred policy acquisition costs ......................................... 196 -
Property and equipment, net ............................................... 10,794 12,451
Amounts due from related parties .......................................... 1,797 -
Licenses, net ............................................................. 3,857 3,894
Excess of cost over net assets acquired, net .............................. 2,810 2,963
Other assets .............................................................. 14,469 15,481
------------ ------------
Total assets .............................................................. $ 256,917 $ 273,498
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities
Unpaid losses and loss adjustment expenses ............................... $ 98,912 $ 100,173
Unearned premiums ........................................................ 66,408 74,198
Policyholder deposits .................................................... 4,823 5,062
Accrued taxes and other payables ......................................... 6,833 6,690
Premiums payable ......................................................... 10,499 17,807
Amounts due to related parties ........................................... - 717
Debentures ............................................................... 24,000 24,000
------------ ------------
Total liabilities ....................................................... 211,475 228,647
------------ ------------
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 ...................................................... (16,234) (16,122)
Accumulated other comprehensive income:
Unrealized gain on investments available for sale,
net of deferred income taxes ........................................... 1,090 387
------------ ------------
Total shareholder's equity .............................................. 45,442 44,851
------------ ------------
Total liabilities and shareholder's equity ................................ $ 256,917 $ 273,498
============ ============
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,
------------------------
2001 2000
---------- ----------
Premiums and other revenues
Direct premiums written and assumed ......................... $ 38,747 $ 45,121
Reinsurance premiums ceded .................................. (17,109) (18,314)
Reinsurance premiums ceded to related parties ............... (5,990) (11,008)
---------- ----------
Net premiums written and assumed .......................... 15,648 15,799
Decrease in unearned premiums ............................... 3,228 5,116
---------- ----------
Net premiums earned ....................................... 18,876 20,915
Interest income, net .......................................... 1,162 1,120
Realized investment gains, net ................................ 616 -
Commissions, fees and other income ............................ 372 350
---------- ----------
Total premiums and other revenues ......................... 21,026 22,385
---------- ----------
Operating costs and expenses
Losses and loss adjustment expenses, net of amounts ceded to
related parties of $4,005 and $5,027 in 2001 and
2000, respectively ........................................ 14,291 15,753
Policy acquisition costs, net of ceding commissions received
from related parties of $2,040 and $3,790 in 2001
and 2000, respectively .................................... 2,923 4,827
General and administrative expenses ......................... 3,278 3,217
Interest expense ............................................ 562 562
Litigation expenses, net .................................... (9) 8
---------- ----------
Total operating costs and expenses ........................ 21,045 24,367
---------- ----------
Loss before income taxes ...................................... (19) (1,982)
Federal income tax benefit (provision) ........................ (93) 589
---------- ----------
Net loss ...................................................... $ (112) $ (1,393)
========== ==========
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,
------------------------
2001 2000
---------- ----------
Net loss ..................................................... $ (112) $ (1,393)
---------- ----------
Other comprehensive income (loss), before income tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period .. 1,681 (13)
Less: Reclassification adjustment for gains included in
net loss ............................................... (616) -
---------- ----------
Other comprehensive income (loss), before income tax ......... 1,065 (13)
Income tax benefit (provision) related to items of other
comprehensive income (loss) ................................. (362) 4
---------- ----------
Other comprehensive income (loss), net of income tax .......... 703 (9)
---------- ----------
Comprehensive income (loss) ...................................$ 591 $ (1,402)
========== ==========
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,
------------------------
2001 2000
---------- ----------
OPERATING ACTIVITIES:
Net loss ............................................................ $ (112) $ (1,393)
Add (deduct):
Adjustments to reconcile net loss to cash provided by
(applied to) operating activities:
Realized investment gains, net .................................. (616) -
Net (gains) losses on sale of equipment ......................... (2) 3
Amortization and depreciation ................................... 531 545
Provision for non-collection of premiums ........................ 38 42
Net change in non-cash balances relating to operating activities:
Premiums receivable ........................................... 4,730 11,425
Reinsurance recoverable on paid losses ........................ (1,593) (725)
Reinsurance recoverable on paid losses from related parties ... 140 -
Reinsurance recoverable on unpaid losses ...................... (2,870) (478)
Reinsurance recoverable on unpaid losses from related parties.. 676 (1,969)
Prepaid reinsurance premiums .................................. 3,559 (3,427)
Prepaid reinsurance premiums to related parties ............... 1,003 (2,856)
Deferred policy acquisition costs ............................. (196) 1,339
Other assets .................................................. 621 (1,006)
Unpaid losses and loss adjustment expenses .................... (1,261) 1,410
Unearned premiums ............................................. (7,790) 1,166
Policyholder deposits ......................................... (239) 80
Accrued taxes and other payables .............................. (1,896) (2,314)
Premiums payable .............................................. (7,308) 3,570
Premiums payable to related parties ........................... - 450
---------- ----------
Cash provided by (applied to) operating activities .............. (12,585) 5,862
---------- ----------
INVESTING ACTIVITIES
Unrestricted fixed maturities available for sale:
Purchases ....................................................... (8,126) (6,590)
Sales ........................................................... 12,720 -
Maturities ...................................................... 8,520 1,432
Cost of property and equipment purchased .......................... (384) (1,140)
Proceeds from sale of property and equipment ...................... 3,802 18
---------- ----------
Cash provided by (applied to) investing activities .............. 16,532 (6,280)
---------- ----------
FINANCING ACTIVITIES
Proceeds from borrowing from related parties ...................... 1,290 100
Payments and loans to related parties ............................. (3,804) (666)
---------- ----------
Cash applied to financing activities ............................ (2,514) (566)
---------- ----------
Increase (decrease) in cash and cash equivalents during the period .. 1,433 (984)
Cash and cash equivalents at beginning of period .................... 11,978 5,140
---------- ----------
Cash and cash equivalents at end of period .......................... $ 13,411 $ 4,156
========== ==========
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, 2000. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. The results of operations for
the three-month period ended March 31, 2001 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
CENTRA 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 since 1992.
In 1997, NAICO learned that several CenTra affiliates had filed two
lawsuits against NAICO, NAICO Indemnity (Cayman), Ltd. ("NAICO Indemnity"),
a wholly owned subsidiary of Chandler Insurance, and certain NAICO officers
asserting some of the same claims made and tried in the U.S. District Court
for the Western District of Oklahoma (the "Oklahoma Court") during 1997.
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. These
expenses together with certain other expenses may be recovered from Chandler
Insurance's director and officer liability insurance policy (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 and its subsidiaries
are currently involved in litigation with the insurer for payment of the
policy balance. The litigation is pending in the Oklahoma Court and in State
Court in Michigan. These separate cases are still in the early pleading
stages and the Company cannot predict the date of resolution or the outcome of
these cases. Chandler Insurance and its subsidiaries may or may not recover
the remaining policy limits and could incur significant costs in resolving this
matter.
PAGE 6
The ultimate outcome of the litigation described above could have a
material adverse effect on Chandler USA and Chandler Insurance and could
negatively impact future earnings and cash flows.
GOING PRIVATE LITIGATION
On June 5 and 6, 2000, three civil lawsuits were filed against Chandler
Insurance, Chandler USA and all of Chandler Insurance's directors. All three
suits have now been consolidated into a single proceeding. The suit alleges
that the plans announced on June 1, 2000 to take Chandler Insurance private
are detrimental to certain shareholders of Chandler Insurance that would be
subject to a reverse stock split. Each suit also requests that it be
certified as a class action and that the court enter a temporary restraining
order to prevent completion of the announced plan. The suit also alleges that
all defendants have breached and are breaching fiduciary duties owed to the
plaintiffs and other shareholders. The plaintiffs have been granted leave to
amend their petitions but have not yet amended them. As a result, Chandler
Insurance has not yet responded to the lawsuit but plans to file timely
responses denying the allegations. On June 27, 2000, CenTra made similar
allegations in an already pending case in the Oklahoma Court. The Oklahoma
Court dismissed CenTra's motion on April 11, 2001. On March 5, 2001,
shareholders of Chandler Insurance approved the going private transaction. On
March 28, 2001, the reverse stock split was completed.
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. NEW ACCOUNTING STANDARD
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 adopted SFAS No. 133 effective January 1, 2001. The
adoption of SFAS No. 133 did not have a material impact on the Company's
consolidated financial condition, results of operations or cash flows since
the Company has no derivative instruments.
NOTE 4. GOING PRIVATE TRANSACTION - PARENT COMPANY
A special meeting of shareholders of the Company's indirect parent,
Chandler Insurance was held on March 5, 2001. Three proposals which
constitute a going private transaction were approved at the meeting. Together
these proposals constitute the "Recapitalization Plan." The Oklahoma
Department of Insurance has approved the change of control resulting from the
Recapitalization Plan.
Chandler Insurance will finance the Recapitalization Plan through (i) a
$2.4 million sale of Chandler Insurance Class A Common Shares to Messrs.
LaGere and Paden, (ii) a $10.7 million intercompany loan from Chandler
Barbados, and (iii) proceeds of approximately $735,000 from the exercise of
outstanding Chandler Insurance options. Chandler USA will loan approximately
$10.7 million to Chandler Barbados. Chandler USA's intercompany loan to
Chandler Barbados will be financed by a $3.8 million sale and leaseback
transaction for certain equipment owned by Chandler USA and a $7.0 million
dividend declared by NAICO. The sale and leaseback transaction was completed
and $3.7 million was loaned to Chandler Barbados during March 2001. By
resolution effective April 4, 2001, NAICO's Board of Directors approved the
$7.0 million shareholder dividend that was paid to Chandler USA on April 5,
2001. Chandler USA loaned this amount to Chandler Barbados during April 2001.
NOTE 5. SALE AND LEASEBACK TRANSACTION
During March 2001, the Company entered into a $3.8 million sale and
leaseback transaction for certain owned equipment. The Company agreed to
lease the equipment for three years with monthly rental installments equal to
the sum of (i) $22,167 plus (ii) interest on the unpaid lease balance at a
floating interest rate of 1% over Chase Manhattan Bank Prime, which was 8%
at March 31, 2001. The Company has the option to repurchase the equipment
at the end of the lease for $3,002,000.
PAGE 7
NOTE 6. SEGMENT INFORMATION
The following table presents a summary of the Company's operating
segments for the three-month periods ended March 31, 2001 and 2000:
Property
and All Intersegment Reported
Agency casualty other eliminations balances
--------- ---------- --------- ------------ ----------
(In thousands)
THREE MONTHS ENDED MARCH 31, 2001
Revenues from external customers (1).. $ 359 $ 18,889 $ - $ - $ 19,248
Intersegment revenues................. 1,626 17 - (1,643) -
Segment profit (loss) before
income taxes (2).................... (236) 361 (144) - (19)
Segment assets........................ $ 5,597 $ 261,301 $ - $ (9,981) $ 256,917
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
<FN>
- ---------------------------------------
(1) Consists of net premiums earned and commissions, fees and other income.
(2) Includes net realized investment gains.
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,
----------------------------
2001 2000
------------ ------------
(In thousands)
INSURANCE PROGRAM
- ----------------------------------------------
NET PREMIUMS EARNED
Standard property and casualty ............... $ 14,671 $ 14,697
Political subdivisions ....................... 2,891 3,337
Surety bonds ................................. 1,036 1,865
Group accident and health .................... 316 946
Other ........................................ (38) 70
------------ ------------
$ 18,876 $ 20,915
============ ============
LOSSES AND LOSS ADJUSTMENT EXPENSES
Standard property and casualty ............... $ 11,322 $ 10,928
Political subdivisions ....................... 2,371 2,846
Surety bonds ................................. 201 427
Group accident and health .................... 512 1,682
Other ........................................ (115) (130)
------------ ------------
$ 14,291 $ 15,753
============ ============
PAGE 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Some of the statements made in this Form 10-Q Report, as well as
statements made by Chandler (U.S.A.), Inc. ("Chandler USA" or the "Company")
in periodic press releases and oral statements made by the Company's officials
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; and (ix) other factors including
the ongoing litigation matters involving the Company's indirect parent.
RESULTS OF OPERATIONS
PREMIUMS EARNED
The following table sets forth premiums earned on a gross basis (before
reductions for premiums ceded to reinsurers) and on a net basis (after such
reductions) for the three month periods ended March 31, 2001 and 2000:
GROSS PREMIUMS EARNED NET PREMIUMS EARNED
--------------------------- --------------------------
THREE MONTHS ENDED MARCH 31, 2001 2000 2001 2000
- ------------------------------------ ------------ ------------ ------------ ------------
(In thousands)
Standard property and casualty ..... $ 35,314 $ 30,707 $ 14,671 $ 14,697
Political subdivisions ............. 8,633 8,152 2,891 3,337
Surety bonds ....................... 2,283 4,009 1,036 1,865
Group accident and health .......... 329 1,002 316 946
Other .............................. (22) 84 (38) 70
------------ ------------ ------------ ------------
TOTAL .............................. $ 46,537 $ 43,954 $ 18,876 $ 20,915
============ ============ ============ ============
Gross premiums earned, before reductions for premiums ceded to
reinsurers, increased $2.6 million or 6% in the first quarter of 2001 compared
to the first quarter of 2000. Net premiums earned, after such reductions,
decreased $2.0 million or 10% in the first quarter of 2001 compared to the
first quarter of 2000 due primarily to the purchase of quota share reinsurance
during the fourth quarter of 2000 which reduced NAICO's net retention for its
casualty and workers compensation lines of business.
Gross premiums earned in the standard property and casualty program
increased $4.6 million or 15% in the first quarter of 2001 compared to the
first quarter of 2000. The increase is primarily attributable to increased
written premium production in Texas during 2000, and to increases in premium
rates. Net premiums earned decreased $26,000 in the first quarter of 2001
versus the first quarter of 2000 due primarily to the purchase of the quota
share reinsurance discussed above.
Gross premiums earned in the political subdivisions program increased
$481,000 or 6% in the first quarter of 2001 compared to the first quarter of
2000. The increase is primarily attributable to rate increases in the school
districts portion of the program. Net premiums earned in the political
subdivisions program decreased $446,000 or 13% in the first quarter of 2001
versus the first quarter of 2000 due primarily to the purchase of the quota
share reinsurance discussed above.
Gross premiums earned in the surety bond program decreased $1.7 million
or 43% in the first quarter of 2001 compared to the first quarter of 2000.
The decreases were primarily due to decreases in premium production in
Wisconsin, California and Indiana. A portion of the decrease resulted from
the termination of a program that was 100% reinsured by an unaffiliated
reinsurer. Net premiums earned in the surety bond program decreased $829,000
or 44% in the first quarter of 2001 versus the first quarter of 2000.
Gross premiums earned in the group accident and health program decreased
$673,000 or 67% in the first quarter of 2001 versus the first quarter of 2000.
Net premiums earned for this program decreased $630,000 or 67% in the first
quarter of 2001 versus the first quarter of 2000. NAICO discontinued this
program during 2000.
PAGE 9
NET INTEREST INCOME AND NET REALIZED INVESTMENT GAINS
At March 31, 2001, the Company's investment portfolio consisted primarily
of fixed income U.S. Government, high-quality corporate and tax exempt bonds,
with approximately 14% invested in cash and money market instruments. The
Company's portfolio contains no non-investment grade bonds or real estate
investments.
Net interest income increased $42,000 or 4% in the first quarter of 2001
versus the first quarter of 2000. Net realized investment gains were $616,000
during the first quarter of 2001 which resulted from the sale of $12.7 million
in investments available for sale. The Company had no net realized investment
gains or losses during the first quarter of 2000.
COMMISSIONS, FEES AND OTHER INCOME
The Company's income from commissions, fees and other income increased
$22,000 or 6% in the first quarter of 2001 versus the first quarter of 2000.
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 $2.0 million in the first quarter of 2001 versus $2.1 million in the
first quarter of 2000. A large portion of the brokerage commissions and fees
for L&W is incurred by NAICO and thus eliminated in the Company's consolidated
financial statements.
LOSSES AND LOSS ADJUSTMENT EXPENSES
The percentage of losses and loss adjustment expenses to net premiums
earned ("loss ratio") was 75.7% for the first quarter of 2001 versus 75.3% in
the first quarter of 2000. Weather-related losses from wind and hail totaled
$201,000 in the first quarter of 2001 and increased the loss ratio by 1.1
percentage points. Weather-related losses totaled $594,000 in the first
quarter of 2000, and increased the 2000 loss ratio by 2.8 percentage points.
The decrease in weather-related losses was offset by adverse loss experience
in the group accident and health program and by increased losses and loss
adjustment expenses in the standard property and casualty program. In
addition, a lower proportion of net premiums earned in the surety bond program
resulted in a higher loss ratio in the 2001 quarter. Surety bonds have
historically had a lower loss ratio than the Company's other lines of
business, which is normal for the industry.
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.
When the sum of the anticipated losses, loss adjustment expenses and
unamortized policy acquisition costs exceeds the related unearned premiums,
including anticipated investment income, a provision for the indicated
deficiency is recorded.
PAGE 10
The following table sets forth the Company's policy acquisition costs for
each of the three month periods ended March 31, 2001 and 2000:
THREE MONTHS ENDED MARCH 31,
----------------------------
2001 2000
---------- ----------
(In thousands)
Commissions expense ........................ $ 4,391 $ 5,258
Other premium related assessments .......... 50 403
Premium taxes .............................. 961 975
Excise taxes ............................... 60 110
Dividends to policyholders ................. 39 101
Other expense .............................. 30 42
---------- ----------
Total direct expenses ...................... 5,531 6,889
Indirect underwriting expenses ............. 4,134 4,078
Commissions received from reinsurers ....... (6,533) (7,479)
Adjustment for deferred acquisition costs .. (209) 1,339
---------- ----------
Net policy acquisition costs ............... $ 2,923 $ 4,827
========== ==========
Total gross direct and indirect expenses as a percentage of direct
written and assumed premiums were 24.9% for the first quarter of 2001 versus
24.3% for the first quarter of 2000. Commission expense as a percentage of
gross written and assumed premiums was 11.3% for the first quarter of 2001
versus 11.7% for the 2000 quarter.
Indirect underwriting expenses were 10.7% and 9.0% of total direct
written and assumed premiums in the three month periods ended March 31, 2001
and 2000, 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 7.0% and 7.3% of gross premiums
earned and commissions, fees and other income in the first quarter of 2001 and
2000, 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 of $562,000 in the first quarter of 2001 was unchanged
from the year-ago quarter. Substantially all of the Company's interest
expense is related to the $24 million of outstanding debentures.
LITIGATION EXPENSES
Litigation expenses reflect expenses related to the ongoing legal
proceedings involving CenTra, Inc. and certain of its affiliates ("CenTra").
Litigation expenses were a credit of $9,000 in the first quarter of 2001
compared to expense of $8,000 in the first quarter of 2000. Increased or
renewed activity could result in greater litigation expenses in the future.
See Note 2 to Interim Consolidated Financial Statements.
PAGE 11
LIQUIDITY AND CAPITAL RESOURCES
In the first quarter of 2001, the Company used $12.6 million in cash from
operations due primarily to decreases in unearned premiums and premiums
payable, less decreases in premiums receivable and prepaid reinsurance
premiums. 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 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 in the 2000 quarter 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.
On March 5, 2001, shareholders of the Company's indirect parent, Chandler
Insurance Company, Ltd. ("Chandler Insurance") approved a going private
transaction. Chandler Insurance will finance the Recapitalization Plan
through (i) a $2.4 million sale of Chandler Insurance Class A Common Shares to
Messrs. LaGere and Paden, (ii) a $10.7 million intercompany loan from Chandler
Insurance (Barbados), Ltd. ("Chandler Barbados"), and (iii) proceeds of
approximately $735,000 from the exercise of outstanding Chandler Insurance
options. Chandler USA will loan approximately $10.7 million to Chandler
Barbados. Chandler USA's intercompany loan to Chandler Barbados will be
financed by a $3.8 million sale and leaseback transaction for certain
equipment owned by Chandler USA and a $7.0 million dividend declared by
NAICO. The sale and leaseback transaction was completed and $3.7 million was
loaned to Chandler Barbados during March 2001. By resolution effective April
4, 2001, NAICO's Board of Directors approved the $7.0 million shareholder
dividend that was paid to Chandler USA on April 5, 2001. Chandler USA loaned
this amount to Chandler Barbados during April 2001.
INSURANCE COMPANY RATINGS
NAICO is rated as "B+ (Very Good)" by A.M. Best Company, an insurance
rating agency. NAICO is also rated "BBB (Good)" by Standard & Poor's rating
agency. These ratings are independent opinions of a company's financial
strength, operating performance and ability to meet its obligations to
policyholders.
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
-----------------
Effective May 1, 2001, the Company's soles shareholder, Chandler
Barbados, elected the following individuals to serve on its
board of directors:
W. Brent LaGere W. Scott Martin
Mark T. Paden Robert L. Rice
R. Patrick Gilmore K. R. Price
Richard L. Evans William Thomas Keele
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
The Company filed one current report on Form 8-K dated March 5, 2001
responding to Item 5 of Form 8-K.
PAGE 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 11, 2001 CHANDLER (U.S.A.), INC.
By: /s/ W. Brent LaGere
----------------------------------------
W. Brent LaGere
Chairman of the Board, and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Mark C. Hart
----------------------------------------
Mark C. Hart
Vice President - Finance, Chief
Financial Officer and Treasurer
(Principal Accounting Officer)