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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 September 30, 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 October 31, 2001 was 2,484, which are owned by Chandler
Insurance (Barbados), Ltd., a wholly owned subsidiary of Chandler Insurance
Company, Ltd.
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PAGE i
CHANDLER (U.S.A.), INC.
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1.
Consolidated Balance Sheets as of September 30, 2001
and December 31, 2000 .................................................1
Consolidated Statements of Operations for the three months
ended September 30, 2001 and 2000 .....................................2
Consolidated Statements of Operations for the nine months
ended September 30, 2001 and 2000 .....................................3
Consolidated Statements of Comprehensive Income for the three
months ended September 30, 2001 and 2000 ..............................4
Consolidated Statements of Comprehensive Income for the nine
months ended September 30, 2001 and 2000 ..............................5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2001 and 2000 .....................................6
Notes to Interim Consolidated Financial Statements .........................7
ITEM 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ...............................................16
Item 2. Changes in Securities ...........................................16
Item 3. Defaults Upon Senior Securities .................................16
Item 4. Submission of Matters to a Vote of Security Holders .............16
Item 5. Other Information ...............................................16
Item 6. Exhibits and Reports on Form 8-K ................................16
Signatures .................................................................17
PAGE 1
CHANDLER (U.S.A.), INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except share amounts)
September 30, December 31,
2001 2000
------------ ------------
ASSETS (Unaudited)
Investments
Fixed maturities available for sale, at fair value
Restricted (amortized cost $5,371 and $5,446 in 2001
and 2000, respectively) ..................................... $ 5,705 $ 5,538
Unrestricted (amortized cost $57,123 and $85,693 in 2001
and 2000, respectively) ..................................... 58,637 85,746
Fixed maturities held to maturity, at amortized cost
Restricted (fair value $383 and $186 in 2001
and 2000, respectively) ..................................... 348 174
Unrestricted (fair value $846 and $953 in 2001
and 2000, respectively) ..................................... 767 882
Equity securities available for sale, at fair value ............. 442 442
------------- ------------
Total investments ............................................. 65,899 92,782
Cash and cash equivalents ......................................... 15,834 11,978
Premiums receivable, less allowance for non-collection
of $407 and $308 at 2001 and 2000, respectively ................. 28,509 33,519
Reinsurance recoverable on paid losses, less allowance for
non-collection of $647 and $275 at 2001 and 2000, respectively .. 10,640 3,283
Reinsurance recoverable on paid losses from related parties ....... 497 614
Reinsurance recoverable on unpaid losses, less allowance for
non-collection of $397 at 2000 .................................. 51,235 39,387
Reinsurance recoverable on unpaid losses from related parties ..... 11,100 14,079
Prepaid reinsurance premiums ...................................... 29,591 32,699
Prepaid reinsurance premiums to related parties ................... 9,277 10,368
Property and equipment, net ....................................... 11,037 12,451
Amounts due from related parties .................................. 6,721 -
Licenses, net ..................................................... 3,782 3,894
Excess of cost over net assets acquired, net ...................... 2,503 2,963
Other assets ...................................................... 12,423 15,481
------------- ------------
Total assets ...................................................... $ 259,048 $ 273,498
============= ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities
Unpaid losses and loss adjustment expenses ...................... $ 98,658 $ 100,173
Unearned premiums ............................................... 68,674 74,198
Policyholder deposits ........................................... 5,131 5,062
Accrued taxes and other payables ................................ 5,902 6,690
Premiums payable ................................................ 10,996 17,807
Amounts due to related parties .................................. - 717
Debentures ...................................................... 24,000 24,000
------------- ------------
Total liabilities ............................................. 213,361 228,647
------------- ------------
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 ............................................. (16,411) (16,122)
Accumulated other comprehensive income:
Unrealized gain on investments available for sale,
net of deferred income taxes ................................ 1,512 387
------------- ------------
Total shareholder's equity .................................... 45,687 44,851
------------- ------------
Total liabilities and shareholder's equity ........................ $ 259,048 $ 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)
Three months ended September 30,
--------------------------------
2001 2000
-------------- --------------
Premiums and other revenues
Direct premiums written and assumed ................... $ 50,214 $ 65,258
Reinsurance premiums ceded ............................ (22,465) (23,027)
Reinsurance premiums ceded to related parties ......... (6,863) (12,065)
-------------- --------------
Net premiums written and assumed .................... 20,886 30,166
Increase in unearned premiums ......................... (3,480) (6,811)
-------------- --------------
Net premiums earned ................................. 17,406 23,355
Interest income, net .................................... 870 1,062
Realized investment gains, net .......................... 712 142
Commissions, fees and other income ...................... 605 431
-------------- --------------
Total premiums and other revenues ................... 19,593 24,990
-------------- --------------
Operating costs and expenses
Losses and loss adjustment expenses, net of amounts
ceded to related parties of $4,763 and $5,317 in
2001 and 2000, respectively ......................... 12,389 16,722
Policy acquisition costs, net of ceding commissions
received from related parties of $2,317 and $4,207 in
2001 and 2000, respectively ......................... 2,621 4,566
General and administrative expenses ................... 3,595 3,253
Interest expense ...................................... 558 565
Litigation expenses, net .............................. 16 25
-------------- --------------
Total operating costs and expenses .................. 19,179 25,131
-------------- --------------
Income (loss) before income taxes ....................... 414 (141)
Federal income tax provision ............................ (239) (75)
-------------- --------------
Net income (loss) ....................................... $ 175 $ (216)
============== ==============
See accompanying Notes to Interim Consolidated Financial Statements.
PAGE 3
CHANDLER (U.S.A.), INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands)
Nine months ended September 30,
-------------------------------
2001 2000
-------------- --------------
Premiums and other revenues
Direct premiums written and assumed .................. $ 127,731 $ 157,177
Reinsurance premiums ceded ........................... (55,336) (56,798)
Reinsurance premiums ceded to related parties ........ (19,370) (32,109)
-------------- --------------
Net premiums written and assumed ................... 53,025 68,270
Decrease (increase) in unearned premiums ............. 1,324 (2,610)
-------------- --------------
Net premiums earned ................................ 54,349 65,660
Interest income, net ................................... 2,935 3,154
Realized investment gains, net ......................... 1,594 142
Commissions, fees and other income ..................... 1,393 1,096
-------------- --------------
Total premiums and other revenues .................. 60,271 70,052
-------------- --------------
Operating costs and expenses
Losses and loss adjustment expenses, net of amounts
ceded to related parties of $12,395 and $14,929 in
2001 and 2000, respectively ........................ 40,487 49,123
Policy acquisition costs, net of ceding commissions
received from related parties of $6,655 and $11,152
in 2001 and 2000, respectively ..................... 7,908 14,268
General and administrative expenses .................. 10,178 9,265
Interest expense ..................................... 1,683 1,689
Litigation expenses, net ............................. 35 50
-------------- --------------
Total operating costs and expenses ................. 60,291 74,395
-------------- --------------
Loss before income taxes ............................... (20) (4,343)
Federal income tax benefit (provision) ................. (269) 1,213
-------------- --------------
Net loss ............................................... $ (289) $ (3,130)
============== ==============
See accompanying Notes to Interim Consolidated Financial Statements.
PAGE 4
CHANDLER (U.S.A.), INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Amounts in thousands)
Three months ended September 30,
--------------------------------
2001 2000
-------------- --------------
Net income (loss) ....................................... $ 175 $ (216)
-------------- --------------
Other comprehensive income, before income tax:
Unrealized gains on securities:
Unrealized holding gains arising during period ...... 2,172 1,204
Less: Reclassification adjustment for gains included
in net income (loss) .............................. (712) (142)
-------------- --------------
Other comprehensive income, before income tax ........... 1,460 1,062
Income tax provision related to items of other
comprehensive income .................................. (496) (361)
-------------- --------------
Other comprehensive income, net of income tax ........... 964 701
-------------- --------------
Comprehensive income .................................... $ 1,139 $ 485
============== ==============
See accompanying Notes to Interim Consolidated Financial Statements.
PAGE 5
CHANDLER (U.S.A.), INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Amounts in thousands)
Nine months ended September 30,
-------------------------------
2001 2000
-------------- --------------
Net loss ............................................... $ (289) $ (3,130)
-------------- --------------
Other comprehensive income, before income tax:
Unrealized gains on securities:
Unrealized holding gains arising during period ..... 3,298 1,422
Less: Reclassification adjustment for gains
included in net loss ............................. (1,594) (142)
-------------- --------------
Other comprehensive income, before income tax .......... 1,704 1,280
Income tax provision related to items of other
comprehensive income ................................. (579) (435)
-------------- --------------
Other comprehensive income, net of income tax .......... 1,125 845
-------------- --------------
Comprehensive income (loss) ............................ $ 836 $ (2,285)
============== ==============
See accompanying Notes to Interim Consolidated Financial Statements.
PAGE 6
CHANDLER (U.S.A.), INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
Nine months ended September 30,
-------------------------------
2001 2000
-------------- --------------
OPERATING ACTIVITIES
Net loss .................................................. $ (289) $ (3,130)
Add (deduct):
Adjustments to reconcile net loss to cash provided by
(applied to) operating activities:
Realized investment gains, net ........................ (1,594) (142)
Net losses on sale of property and equipment .......... 22 5
Amortization and depreciation ......................... 1,580 1,856
Provision for non-collection of premiums .............. 153 249
Net change in non-cash balances relating
to operating activities:
Premiums receivable ................................. 4,857 3,456
Reinsurance recoverable on paid losses .............. (7,721) 903
Reinsurance recoverable on paid losses from
related parties ................................... 117 -
Reinsurance recoverable on unpaid losses ............ (11,484) (470)
Reinsurance recoverable on unpaid losses from
related parties ................................... 2,979 (4,066)
Prepaid reinsurance premiums ........................ 3,108 (7,742)
Prepaid reinsurance premiums to related parties ..... 1,091 (5,245)
Deferred policy acquisition costs ................... - 791
Other assets ........................................ 2,395 (2,600)
Unpaid losses and loss adjustment expenses .......... (1,515) 1,288
Unearned premiums ................................... (5,524) 15,597
Policyholder deposits ............................... 69 194
Accrued taxes and other payables .................... (2,827) (1,039)
Premiums payable .................................... (6,811) 4,270
Premiums payable to related parties ................. - 446
-------------- --------------
Cash provided by (applied to) operating activities .. (21,394) 4,621
-------------- --------------
INVESTING ACTIVITIES
Unrestricted fixed maturities available for sale:
Purchases ............................................. (28,810) (25,776)
Sales ................................................. 47,368 7,142
Maturities ............................................ 11,508 19,241
Cost of property and equipment purchased ................ (1,302) (2,718)
Proceeds from sale of property and equipment ............ 3,924 21
-------------- --------------
Cash provided by (applied to) investing activities .... 32,688 (2,090)
-------------- --------------
FINANCING ACTIVITIES
Payments and loans from related parties ................. 3,914 834
Payments and loans to related parties ................... (11,352) (902)
-------------- --------------
Cash applied to financing activities .................. (7,438) (68)
-------------- --------------
Increase in cash and cash equivalents during the period ... 3,856 2,463
Cash and cash equivalents at beginning of period .......... 11,978 5,140
-------------- --------------
Cash and cash equivalents at end of period ................ $ 15,834 $ 7,603
============== ==============
See accompanying Notes to Consolidated Financial Statements.
PAGE 7
CHANDLER (U.S.A.), INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Nine months ended September 30, 2001 and 2000
(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 and nine month periods ended
September 30, 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.
PAGE 8
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 contend they are entitled to a total of $5 million under the
applicable insurance policy to the extent they have advanced reimbursable
expenses. The D&O Insurer contends that certain policy provisions exclude
coverage for these claims. On August 22, 2001, Chandler Insurance and its
subsidiaries, including the Company filed an action in the State District
Court in Oklahoma City, Oklahoma ("Oklahoma State Court") alleging that the
D&O policies should be rescinded and seeking repayment of more than $5
million in premiums they previously paid. Chandler Insurance and its
subsidiaries are currently involved in litigation with the insurer for
payment of the policy balance or rescission and repayment of premiums
previously paid. The litigation is pending in the Oklahoma State 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 or the previously paid premiums
and could incur significant costs in resolving this matter.
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 were 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 requested 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 alleged
that all defendants have breached and are breaching fiduciary duties owed to
the plaintiffs and other shareholders. In March 2001, Chandler Insurance
completed the going private transaction (See Note 5). On October 5, 2001
the suits were dismissed.
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 STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") 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.
In June 2001, the FASB issued SFAS No. 141, BUSINESS COMBINATIONS,
which supercedes Accounting Principles Board ("APB") Opinion No. 16,
BUSINESS COMBINATIONS. The most significant changes made by SFAS No. 141
are requiring the purchase method of accounting for all business
combinations initiated after June 30, 2001, establishing specific criteria
for the recognition of intangible assets separately from goodwill, and
requiring that unallocated negative goodwill be written off immediately as
an extraordinary gain. The provisions of SFAS No. 141 apply to all business
combinations initiated after June 30, 2001, and to all business combinations
accounted for using the purchase method for which the date of acquisition is
July 1, 2001 or later. The adoption of SFAS No. 141 did not have a material
impact on the Company's consolidated financial condition, results of
operations or cash flows since the Company has not entered into a business
combination subsequent to June 30, 2001.
PAGE 9
NOTE 4. ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED
In June 2001, the FASB issued SFAS No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS, and SFAS No. 143, ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS.
SFAS No. 142 supercedes APB Opinion No. 17, INTANGIBLE ASSETS, and
primarily addresses accounting for goodwill and intangible assets subsequent
to acquisition. Under SFAS No. 142, goodwill and separately identified
intangible assets with indefinite lives will no longer be amortized but
reviewed annually (or more frequently if impairment indicators arise) for
impairment. Separately identified intangible assets not deemed to have
indefinite lives will continue to be amortized over their useful lives.
SFAS No. 142 applies to all goodwill and intangible assets acquired after
June 30, 2001. For goodwill and intangible assets acquired prior to July
1, 2001, the Company is required to adopt SFAS No. 142 effective January 1,
2002. The Company is currently evaluating the impact of SFAS No. 142 on its
consolidated financial statements.
SFAS No. 143 requires that entities record as a liability obligations
associated with the retirement of a tangible long-lived asset when such
obligations are incurred, and capitalize the cost by increasing the carrying
amount of the related long-lived asset. SFAS No. 143 will be effective for
fiscal years beginning after June 15, 2002, however, earlier application is
encouraged. The Company, which will adopt SFAS No. 143 on January 1, 2002,
does not expect a material impact from the adoption of SFAS No. 143 on its
consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. SFAS No. 144 supercedes SFAS
No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF, and APB Opinion No. 30, REPORTING THE
RESULTS OF OPERATIONS - REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A
BUSINESS, AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND
TRANSACTIONS. SFAS No. 144 establishes an accounting model based on SFAS
No. 121 for long-lived assets to be disposed of by sale, previously accounted
for under APB Opinion No. 30. This Statement is effective for fiscal years
beginning after December 15, 2001. The Company, which will adopt SFAS No.
144 on January 1, 2002, does not expect a material impact from the adoption
of SFAS No. 144 on its consolidated financial statements.
NOTE 5. 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 financed 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 loaned
approximately $10.7 million to Chandler Barbados. Chandler USA's
intercompany loan to Chandler Barbados was financed by a $3.8 million sale
and leaseback transaction for certain equipment owned by Chandler USA and a
$7.0 million dividend declared and paid by NAICO.
NOTE 6. 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
6.0% at September 30, 2001. The Company has the option to repurchase the
equipment at the end of the lease for $3,002,000.
PAGE 10
NOTE 7. SEGMENT INFORMATION
The following table presents a summary of the Company's operating
segments for the three and nine month periods ended September 30, 2001 and
2000:
Property
and All Intersegment Reported
Agency casualty Other eliminations balances
--------- ---------- --------- ------------ ----------
(In thousands)
THREE MONTHS ENDED SEPTEMBER 30, 2001
Revenues from external customers (1) .. $ 597 $ 17,414 $ - $ - $ 18,011
Intersegment revenues ................. 1,922 19 - (1,941) -
Segment profit (loss) before
income taxes (2) .................... 171 412 (169) - 414
THREE MONTHS ENDED SEPTEMBER 30, 2000
Revenues from external customers (1) .. $ 399 $ 23,387 $ - $ - $ 23,786
Intersegment revenues ................. 2,917 44 - (2,961) -
Segment profit (loss) before
income taxes (2) .................... (5) 223 (359) - (141)
NINE MONTHS ENDED SEPTEMBER 30, 2001
Revenues from external customers (1) .. $ 1,382 $ 54,360 $ - $ - $ 55,742
Intersegment revenues ................. 4,923 52 - (4,975) -
Segment profit (loss) before
income taxes (2) .................... 27 448 (495) - (20)
Segment assets ........................ 7,177 262,838 - (10,967) 259,048
NINE MONTHS ENDED SEPTEMBER 30, 2000
Revenues from external customers (1) .. $ 1,011 $ 65,745 $ - $ - $ 66,756
Intersegment revenues ................. 6,325 155 - (6,480) -
Segment profit (loss) before
income taxes (2) .................... (338) (3,296) (709) - (4,343)
Segment assets ........................ 6,636 279,641 - (11,038) 275,239
<FN>
---------------------------------------
(1) Consists of net premiums earned and commissions, fees and other income.
(2) Includes net realized investment gains.
PAGE 11
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(In thousands)
INSURANCE PROGRAM
------------------------------------------
NET PREMIUMS EARNED
Standard property and casualty ........... $ 12,920 $ 17,950 $ 41,274 $ 48,258
Political subdivisions ................... 3,319 3,228 9,236 9,752
Surety bonds ............................. 1,166 1,446 3,604 4,951
Group accident and health ................ - 762 319 2,519
Other .................................... 1 (31) (84) 180
---------- ---------- ---------- ----------
$ 17,406 $ 23,355 $ 54,349 $ 65,660
========== ========== ========== ==========
LOSSES AND LOSS ADJUSTMENT EXPENSES
Standard property and casualty ........... $ 8,165 $ 12,885 $ 29,054 $ 36,264
Political subdivisions ................... 3,489 2,478 9,179 8,127
Surety bonds ............................. 593 335 1,365 1,141
Group accident and health ................ (62) 1,065 897 3,887
Other .................................... 204 (41) (8) (296)
---------- ---------- ---------- ----------
$ 12,389 $ 16,722 $ 40,487 $ 49,123
========== ========== ========== ==========
NOTE 8. COMMITMENTS AND CONTINGENCIES
Reliance Insurance Company ("Reliance") reinsured NAICO for certain
workers compensation risks during 1998 and 1999. During the fourth quarter
of 1999, NAICO agreed to rescind two reinsurance treaties which had been in
effect since January 1, 1999. At September 30, 2001, NAICO had reinsurance
recoverables from Reliance for paid and unpaid losses relating to the 1998
treaties of approximately $2.2 million. Reliance had been under state
supervision since May 2001. During October 2001, the Commonwealth of
Pennsylvania placed Reliance in liquidation. At this time, NAICO is unable
to determine the amount of its reinsurance recoverables from Reliance that
will ultimately be collected.
Reinsurance contracts do not relieve an insurer from its obligation to
policyholders. Failure of reinsurers to honor their obligations could
result in losses to the Company; consequently, allowances are established
for amounts deemed uncollectible. NAICO did not incur any charges for
uncollectible reinsurance recoverables from unaffiliated reinsurers in 2000
or in the nine months ended September 30, 2001. At September 30, 2001,
NAICO's allowance for uncollectible reinsurance recoverables was
approximately $647,000.
PAGE 12
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 each insurance program for the three and nine month periods
ended September 30, 2001 and 2000:
GROSS PREMIUMS EARNED NET PREMIUMS EARNED
--------------------------- --------------------------
THREE MONTHS ENDED SEPTEMBER 30, 2001 2000 2001 2000
------------------------------------ ------------ ------------ ------------ ------------
(In thousands)
Standard property and casualty ..... $ 31,564 $ 37,913 $ 12,920 $ 17,950
Political subdivisions ............. 8,633 8,760 3,319 3,228
Surety bonds ....................... 2,363 3,405 1,166 1,446
Group accident and health .......... - 828 - 762
Other .............................. (42) (20) 1 (31)
------------ ------------ ------------ ------------
TOTAL .............................. $ 42,518 $ 50,886 $ 17,406 $ 23,355
============ ============ ============ ============
GROSS PREMIUMS EARNED NET PREMIUMS EARNED
--------------------------- --------------------------
NINE MONTHS ENDED SEPTEMBER 30, 2001 2000 2001 2000
------------------------------------ ------------ ------------ ------------ ------------
(In thousands)
Standard property and casualty ..... $ 100,111 $ 102,507 $ 41,274 $ 48,258
Political subdivisions ............. 25,754 25,439 9,236 9,752
Surety bonds ....................... 7,170 10,727 3,604 4,951
Group accident and health .......... 343 2,688 319 2,519
Other .............................. (123) 218 (84) 180
------------ ------------ ------------ ------------
TOTAL .............................. $ 133,255 $ 141,579 $ 54,349 $ 65,660
============ ============ ============ ============
Gross premiums earned decreased $8.4 million or 16% in the third quarter
of 2001 compared to the third quarter of 2000 and decreased $8.3 million or
6% for the nine months ended September 30, 2001 compared to the 2000 period.
The decrease in gross premiums earned was due to a decrease in written
premium production in Texas and Oklahoma, that was partially offset by
increases in premium rates. Net premiums earned decreased $5.9 million or
25% in the third quarter of 2001 compared to the third quarter of 2000, and
decreased $11.3 million or 17% for the nine months ended September 30, 2001
compared to the 2000 period. The purchase of quota share reinsurance during
the fourth quarter of 2000 reduced NAICO's net retention and net premiums
earned for its casualty and workers compensation lines of business.
PAGE 13
Gross premiums earned in the standard property and casualty program
decreased $6.3 million or 17% in the third quarter of 2001 compared to the
third quarter of 2000, and decreased $2.4 million or 2% for the nine months
ended September 30, 2001 compared to the 2000 period. The decreases are
primarily attributable to decreased written premium production in Oklahoma
and Texas during 2001 that was partially offset by increases in premium
rates. Net premiums earned in the standard property and casualty program
decreased $5.0 million or 28% in the third quarter of 2001 compared to the
third quarter of 2000, and decreased $7.0 million or 14% for the nine months
ended September 30, 2001 compared to the 2000 period. The purchase of the
quota share reinsurance discussed above accounted for a portion of the
decrease in net premiums earned in the 2001 periods.
Gross premiums earned in the political subdivisions program decreased
$127,000 or 1% in the third quarter of 2001 compared to the third quarter of
2000, and increased $315,000 or 1% for the nine months ended September 30,
2001 compared to the 2000 period. Net premiums earned in the political
subdivisions program increased $91,000 or 3% in the third quarter of 2001
compared to the third quarter of 2000, and decreased $516,000 or 5% for the
nine months ended September 30, 2001 compared to the 2000 period. The
purchase of the quota share reinsurance discussed above accounted for a
portion of the decrease in net premiums earned in the nine months ended
September 30, 2001.
Gross premiums earned in the surety bond program decreased $1.0 million
or 31% in the third quarter of 2001 compared to the third quarter of 2000,
and decreased $3.6 million or 33% for the nine months ended September 30,
2001 compared to the 2000 period. The decreases were primarily due to
decreases in premium production in California, Louisiana and Wisconsin. 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 $280,000 or 19% in the third quarter of 2001
compared to the third quarter of 2000, and decreased $1.3 million or 27% for
the nine months ended September 30, 2001 compared to the 2000 period.
Gross premiums earned in the group accident and health program decreased
$828,000 and $2.3 million in the third quarter and first nine months of 2001,
respectively, and net premiums earned decreased $762,000 and $2.2 million in
the third quarter and first nine months of 2001, due to the discontinuation
of this program during 2000.
NET INTEREST INCOME AND NET REALIZED INVESTMENT GAINS
At September 30, 2001, the Company's investment portfolio consisted
primarily of fixed income U.S. Government and high-quality corporate bonds,
with approximately 19% invested in cash and money market instruments. The
Company's portfolio contains no non-investment grade bonds or real estate
investments.
Net interest income decreased $192,000 or 18% in the third quarter of
2001 compared to the third quarter of 2000, and decreased $219,000 or 7% for
the nine months ended September 30, 2001. Lower interest rates and a
decrease in the Company's invested assets contributed to the decrease in net
interest income. Net realized investment gains increased $570,000 in the
third quarter of 2001 compared to the third quarter of 2000, and increased
$1.5 million for the nine months ended September 30, 2001 compared to the
2000 period. The net realized investment gains in the 2001 periods resulted
primarily from sales of fixed maturities available for sale to provide cash
for operating activities due to the decrease in written premiums.
COMMISSIONS, FEES AND OTHER INCOME
The Company's income from commissions, fees and other income increased
$174,000 or 40% in the third quarter of 2001 compared to the third quarter
of 2000, and increased $297,000 or 27% for the nine months ended September
30, 2001 compared to the 2000 period. The majority of the Company's income
from commissions, fees and other income are from the Company's subsidiary
LaGere & Walkingstick Insurance Agency, Inc. ("L&W").
L&W's brokerage commissions and fees before intercompany eliminations
were $2.5 million and $6.3 million in the third quarter and first nine months
of 2001, respectively, compared to $3.3 million and $7.3 million in the year
ago periods. A large portion of the brokerage commissions and fees for L&W
is incurred by NAICO and thus eliminated in the consolidation of the
Company's subsidiaries.
LOSSES AND LOSS ADJUSTMENT EXPENSES
The percentage of losses and loss adjustment expenses to net premiums
earned ("loss ratio") was 71.2% and 74.5% for the quarter and nine months
ended September 30, 2001, compared to 71.6% and 74.8% in the comparable 2000
periods. A decrease in the standard property and casualty program loss ratio
was offset by an increase in the loss ratio for the political subdivisions
program and surety bonds program. Weather-related losses from wind and hail
totaled $761,000 and $1.8 million for the third quarter and first nine months
of 2001, respectively, and increased the respective loss ratios by 4.4 and
3.2 percentage points. Weather-related losses totaled $579,000 and $2.4
million for the third quarter and first nine months of 2000, respectively,
and increased the respective loss ratios by 2.5 and 3.6 percentage points.
PAGE 14
At this time, NAICO has not received any claims related to the
September 11, 2001 terrorist attacks on the World Trade Center and does
not believe that it has any significant exposure to these and related
losses. While several of NAICO's reinsurers did experience significant
losses related to these attacks, it currently does not appear that these
losses will impair the reinsurers' ability to pay claims.
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 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.
The following table sets forth the Company's policy acquisition
costs for each of the three and nine month periods ended September 30,
2001 and 2000:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(In thousands)
Commissions expense ........................ $ 4,714 $ 6,840 $ 13,551 $ 17,828
Other premium related assessments .......... 310 334 640 1,147
Premium taxes .............................. 883 1,101 2,902 3,316
Excise taxes ............................... 69 121 194 321
Dividends to policyholders ................. 36 (1) 138 200
Other expense .............................. 53 173 143 245
---------- ---------- ---------- ----------
Total direct expenses ...................... 6,065 8,568 17,568 23,057
Indirect underwriting expenses ............. 4,118 5,230 11,742 13,283
Commissions received from reinsurers ....... (8,575) (9,331) (21,786) (22,863)
Adjustment for deferred acquisition costs .. 1,013 99 384 791
---------- ---------- ---------- ----------
Net policy acquisition costs ............... $ 2,621 $ 4,566 $ 7,908 $ 14,268
========== ========== ========== ==========
Total gross direct and indirect expenses as a percentage of direct
written and assumed premiums were 20.3% and 22.9% for the third quarter and
first nine months of 2001, respectively, compared to 21.1% and 23.1% in the
corresponding year ago periods. Commission expense as a percentage of gross
written and assumed premiums was 9.4% and 10.6% in the third quarter and the
first nine months of 2001, respectively, compared to 10.5% and 11.3% in the
corresponding 2000 periods.
Indirect underwriting expenses were 8.2% and 9.2% of total direct
written and assumed premiums in the third quarter and first nine months of
2001, respectively, compared to 8.0% and 8.5% in the corresponding 2000
periods. 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 8.3% and 7.6% of gross
premiums earned and commissions, fees and other income in the third quarter
and first nine months of 2001, respectively, compared to 6.3% and 6.5% for
the corresponding 2000 periods. General and administrative expenses have
historically not varied in direct proportion to the Company's revenues. A
portion of such expenses is allocated to policy acquisition costs (indirect
underwriting expenses) and loss and loss adjustment expenses based on
various factors including employee counts, salaries, occupancy and specific
identification. Because certain types of expenses are fixed in nature, the
percentage of such expenses to revenues will vary depending on the Company's
overall premium volume.
PAGE 15
INTEREST EXPENSE
Interest expense was $558,000 and $1.7 million in the third quarter and
first nine months of 2001 compared to $565,000 and $1.7 million in the
corresponding 2000 periods. Substantially all of the Company's interest
expense is related to the $24 million of outstanding debentures.
LITIGATION AND LITIGATION EXPENSES
Litigation expenses reflect expenses related to the ongoing legal
proceedings involving CenTra, Inc. and certain of its affiliates ("CenTra"),
and related litigation with the Company's director and officer liability
insurer. Litigation expenses decreased $9,000 in the third quarter of 2001
compared to the third quarter of 2000, and decreased $15,000 for the nine
months ended September 30, 2001 compared to the 2000 period. Increased or
renewed activity could result in greater litigation expenses in the future.
See Note 2 to Interim Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
In the first nine months of 2001, the Company used $21.4 million in cash
from operations due primarily to an increase in reinsurance recoverables on
paid and unpaid losses which resulted from the purchase of additional
reinsurance in October 2000 and increased loss activity within the Company's
other reinsurance treaties. In the first nine months of 2000, the Company
provided $4.6 million in cash from operations due primarily to the collection
of certain receivables totaling approximately $12.9 million in January 2000
that were related to the rescission of two reinsurance treaties during the
fourth quarter of 1999. Cash provided from operations in the 2000 period
also increased due to an increase in unearned premiums and premiums payable,
less increases in prepaid reinsurance premiums, reinsurance recoverable on
unpaid losses from related parties, and premiums receivable other than the
collections described above, which generally resulted from an increase in
written premiums.
On March 5, 2001, shareholders of the Company's indirect parent,
Chandler Insurance Company, Ltd. ("Chandler Insurance"), approved a going
private transaction. Chandler Insurance financed 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 loaned approximately $10.7 million to Chandler
Barbados. Chandler USA's intercompany loan to Chandler Barbados was financed
by a $3.8 million sale and leaseback transaction for certain equipment owned
by Chandler USA and a $7.0 million dividend declared and paid by NAICO.
Reliance Insurance Company ("Reliance") reinsured NAICO for certain
workers compensation risks during 1998 and 1999. During the fourth quarter
of 1999, NAICO agreed to rescind two reinsurance treaties which had been in
effect since January 1, 1999. At September 30, 2001, NAICO had reinsurance
recoverables from Reliance for paid and unpaid losses relating to the 1998
treaties of approximately $2.2 million. Reliance had been under state
supervision since May 2001. During October 2001, the Commonwealth of
Pennsylvania placed Reliance in liquidation. At this time, NAICO is unable
to determine the amount of its reinsurance recoverables from Reliance that
will ultimately be collected.
Reinsurance contracts do not relieve an insurer from its obligation to
policyholders. Failure of reinsurers to honor their obligations could result
in losses to the Company; consequently, allowances are established for
amounts deemed uncollectible. NAICO did not incur any charges for
uncollectible reinsurance recoverables from unaffiliated reinsurers in 2000
or in the nine months ended September 30, 2001. At September 30, 2001,
NAICO's allowance for uncollectible reinsurance recoverables was
approximately $647,000.
PAGE 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
In response to this item, the Company incorporates by reference to
Note 2. Litigation to its Interim Consolidated Financial Statements
contained elsewhere in this report.
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
None
PAGE 17
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: November 6, 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)