=============================================================================
UNITED STATES
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, 2003
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, CHANDLER, OKLAHOMA 74834
(Address of principal executive offices and zip code)
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
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES NO X
--- ---
The number of common shares, $1.00 par value, of the registrant outstanding on
April 30, 2003 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, 2003 and December 31, 2002 .... 1
Consolidated Statements of Operations for the three months
ended March 31, 2003 and 2002 ........................................ 2
Consolidated Statements of Comprehensive Income for the three
months ended March 31, 2003 and 2002 ................................. 3
Consolidated Statements of Cash Flows for the three months
ended March 31, 2003 and 2002 ........................................ 4
Notes to Interim Consolidated Financial Statements ........................ 5
ITEM 2.
- -------
Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................ 8
ITEM 4.
- -------
Controls and Procedures ................................................... 11
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 31, December 31,
2003 2002
------------- ------------
(Unaudited)
ASSETS
Investments
Fixed maturities available for sale, at fair value
Restricted (amortized cost $6,720 and $6,737 in 2003
and 2002, respectively) ................................................ $ 6,908 $ 6,943
Unrestricted (amortized cost $43,547 and $48,362 in 2003
and 2002, respectively) ................................................ 45,268 50,096
Fixed maturities held to maturity, at amortized cost
Restricted (fair value $393 and $394 in 2003
and 2002, respectively) ................................................ 380 374
Unrestricted (fair value $898 and $895 in 2003
and 2002, respectively) ................................................ 862 846
Equity securities available for sale, at fair value ........................ 1,782 681
------------- ------------
Total investments ........................................................ 55,200 58,940
Cash and cash equivalents ($711 restricted in 2003
and 2002, respectively) .................................................... 12,025 9,336
Premiums receivable, less allowance for non-collection
of $311 and $246 at 2003 and 2002, respectively ............................ 23,668 24,009
Reinsurance recoverable on paid losses, less allowance for
non-collection of $2,383 and $2,275 at 2003 and 2002, respectively ......... 10,651 11,198
Reinsurance recoverable on paid losses from related parties .................. 263 80
Reinsurance recoverable on unpaid losses, less allowance for
non-collection of $503 and $492 at 2003 and 2002, respectively ............. 41,227 50,377
Reinsurance recoverable on unpaid losses from related parties ................ 8,921 9,038
Prepaid reinsurance premiums ................................................. 19,370 19,202
Prepaid reinsurance premiums to related parties .............................. 10,551 8,680
Deferred policy acquisition costs ............................................ - 355
Property and equipment, net .................................................. 9,953 10,093
Amounts due from related parties ............................................. 10,536 10,582
State insurance licenses, net ................................................ 3,745 3,745
Other assets ................................................................. 13,013 14,220
------------- ------------
Total assets ................................................................. $ 219,123 $ 229,855
============= ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities
Unpaid losses and loss adjustment expenses ................................. $ 81,667 $ 92,606
Unearned premiums .......................................................... 55,031 55,160
Policyholder deposits ...................................................... 4,412 4,244
Accrued taxes and other payables ........................................... 7,448 8,040
Premiums payable ........................................................... 2,712 2,805
Debentures ................................................................. 24,000 24,000
------------- ------------
Total liabilities ........................................................ 175,270 186,855
------------- ------------
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 ........................................................ (19,539) (19,316)
Accumulated other comprehensive income:
Unrealized gain on investments available for sale, net
of deferred income taxes ................................................. 2,806 1,730
------------- ------------
Total shareholder's equity ............................................... 43,853 43,000
------------- ------------
Total liabilities and shareholder's equity ................................... $ 219,123 $ 229,855
============= ============
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 March 31,
----------------------------
2003 2002
------------ ------------
Premiums and other revenues
Direct premiums written and assumed ............................ $ 33,108 $ 34,850
Reinsurance premiums ceded ..................................... (12,434) (12,066)
Reinsurance premiums ceded to related parties .................. (8,306) (6,317)
------------ ------------
Net premiums written and assumed ............................. 12,368 16,467
Decrease (increase) in unearned premiums ....................... 2,169 (242)
------------ ------------
Net premiums earned .......................................... 14,537 16,225
Interest income, net ............................................. 486 613
Interest income, net from related parties ........................ 110 82
Realized investment gains, net ................................... 151 16
Other income ..................................................... 209 43
------------ ------------
Total premiums and other revenues ............................ 15,493 16,979
------------ ------------
Operating costs and expenses
Losses and loss adjustment expenses, net of amounts
ceded to related parties of $3,170 and $3,223 in
2003 and 2002, respectively .................................. 8,709 10,804
Policy acquisition costs, net of ceding commissions
received from related parties of $2,747 and $2,171 in
2003 and 2002, respectively .................................. 2,897 2,650
General and administrative expenses ............................ 3,640 3,102
Interest expense ............................................... 558 559
------------ ------------
Total operating costs and expenses ........................... 15,804 17,115
------------ ------------
Loss from continuing operations before income taxes .............. (311) (136)
Federal income tax benefit (provision) ........................... 88 (21)
------------ ------------
Loss from continuing operations .................................. (223) (157)
Income from discontinued operations .............................. - 41
------------ ------------
Net loss ....................................................... $ (223) $ (116)
============ ============
See accompanying Notes to Interim Consolidated Financial Statements.
PAGE 3
CHANDLER (U.S.A.), INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Amounts in thousands)
Three months ended March 31,
----------------------------
2003 2002
------------ ------------
Net loss ......................................................... $ (223) $ (116)
------------ ------------
Other comprehensive income (loss), before income tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period ...... 1,220 (698)
Less: Reclassification adjustment for gains included in
net loss ................................................... (151) (16)
------------ ------------
Other comprehensive income (loss), before income tax ............. 1,069 (714)
Income tax benefit related to items of other
comprehensive income (loss) .................................... 7 243
------------ ------------
Other comprehensive income (loss), net of income tax ............. 1,076 (471)
------------ ------------
Comprehensive income (loss) ...................................... $ 853 $ (587)
============ ============
See accompanying Notes to Interim Consolidated Financial Statements.
PAGE 4
CHANDLER (U.S.A.), INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
Three months ended March 31,
----------------------------
2003 2002
------------ ------------
OPERATING ACTIVITIES
Net loss ............................................................. $ (223) $ (116)
Add (deduct):
Adjustments to reconcile net loss to cash provided by
(applied to) operating activities:
Realized investment gains, net ................................... (151) (16)
Net (gains) losses on sale of equipment .......................... (136) 1
Amortization and depreciation .................................... 367 409
Provision for non-collection of premiums ......................... 75 50
Provision for non-collection of reinsurance recoverables ......... 138 91
Net change in non-cash balances relating to operating activities:
Premiums receivable ............................................ 266 1,711
Reinsurance recoverable on paid losses ......................... 415 3,740
Reinsurance recoverable on paid losses from related parties .... (183) (430)
Reinsurance recoverable on unpaid losses ....................... 9,142 (1,519)
Reinsurance recoverable on unpaid losses from related parties .. 117 1,220
Prepaid reinsurance premiums ................................... (168) 4,008
Prepaid reinsurance premiums to related parties ................ (1,871) (651)
Deferred policy acquisition costs .............................. 355 (156)
Other assets ................................................... 1,185 262
Unpaid losses and loss adjustment expenses ..................... (10,939) (2,343)
Unearned premiums .............................................. (129) (3,115)
Policyholder deposits .......................................... 168 (222)
Accrued taxes and other payables ............................... (450) (1,539)
Premiums payable ............................................... (93) (191)
------------ ------------
Cash provided by (applied to) operating activities ............... (2,115) 1,194
------------ ------------
INVESTING ACTIVITIES
Unrestricted fixed maturities available for sale:
Purchases ........................................................ (5,243) (6,222)
Sales ............................................................ 8,480 6,601
Maturities ....................................................... 1,604 493
Cost of property and equipment purchased ........................... (117) (135)
Proceeds from sale of property and equipment ....................... 34 31
------------ ------------
Cash provided by investing activities ............................ 4,758 768
------------ ------------
FINANCING ACTIVITIES
Payments and loans from related parties ............................ 218 1,354
Payments and loans to related parties .............................. (172) (246)
------------ ------------
Cash provided by financing activities ............................ 46 1,108
------------ ------------
Increase in cash and cash equivalents during the period .............. 2,689 3,070
Cash and cash equivalents at beginning of period ..................... 9,336 4,124
------------ ------------
Cash and cash equivalents at end of period ........................... $ 12,025 $ 7,194
============ ============
See accompanying Notes to Consolidated Financial Statements.
PAGE 5
CHANDLER (U.S.A.), INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Chandler
(U.S.A.), Inc. ("Chandler USA") 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 Chandler USA's Annual Report on Form 10-K for the year ended
December 31, 2002. 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, 2003 are not necessarily indicative of the results that may be
expected for the year.
The consolidated financial statements include the accounts of Chandler
USA and all wholly owned subsidiaries including National American Insurance
Company ("NAICO").
Effective December 1, 2002, Chandler USA completed the sale of its wholly
owned subsidiary LaGere and Walkingstick Insurance Agency, Inc. ("L&W"). L&W
previously functioned as Chandler USA's agency segment. Prior periods have
been restated to reflect the results of L&W as a discontinued operation.
Chandler USA is wholly owned by Chandler Insurance (Barbados), Ltd.
("Chandler Barbados") which, in turn, is wholly owned by Chandler Insurance
Company, Ltd. ("Chandler Insurance"), a Cayman Islands company.
NOTE 2. LITIGATION
Chandler Insurance and certain of its subsidiaries and affiliates,
including Chandler USA, were previously involved in various matters of
litigation with CenTra, Inc. ("CenTra"). 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 of $2,820,000 and
$885,000 is included in other assets in Chandler Barbados' and Chandler USA's
respective 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 Chandler USA, filed an action in the State District Court in
Oklahoma City, Oklahoma ("Oklahoma State Court") alleging that the director
and officer liability insurance 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. The case is still in the early pleading stages and Chandler USA cannot
predict the date of resolution or the outcome of this case. 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.
PAGE 6
Transamerica reinsured NAICO for certain workers compensation risks
during 1989, 1990 and 1991. Beginning in 1996, Transamerica refused to pay
NAICO for balances that it owed under the reinsurance treaties. Transamerica
owed NAICO approximately $1.6 million for reinsurance recoverables on paid
losses and loss adjustment expenses as of March 31, 2003. NAICO is currently
engaged in arbitration in order to enforce the terms of the reinsurance
treaties.
Chandler USA and its subsidiaries are not parties to any other material
litigation other than as is routinely encountered in their respective business
activities. While the outcome of these matters cannot be predicted with
certainty, Chandler USA does not expect these matters to have a material
adverse effect on its financial condition, results of operations or cash flows.
NOTE 3. SEGMENT INFORMATION
Chandler USA has one reportable operating segment for property and
casualty insurance. In December 2002, Chandler USA sold L&W, which had
previously been reported as Chandler USA's agency segment. The agency segment
and certain items related to L&W have been restated and reported as
discontinued operations for all periods presented.
Net premiums earned and losses and loss adjustment expenses within the
property and casualty segment can be identified to Chandler USA designated
insurance programs. Chandler USA's chief operating decision makers review net
premiums earned and losses and loss adjustment expenses in assessing the
performance of an insurance program. In addition, Chandler USA's chief
operating decision makers consider many other factors such as the lines of
business offered within an insurance program and the states in which the
insurance programs are offered. Certain discrete financial information is not
readily available by insurance program, including assets, interest income, and
investment gains or losses, allocated to each insurance program. Chandler USA
does not consider its insurance programs to be reportable segments, however,
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,
----------------------------
2003 2002
---------- ----------
(In thousands)
INSURANCE PROGRAM
- ------------------------------------------
NET PREMIUMS EARNED
Standard property and casualty ........... $ 11,690 $ 11,966
Political subdivisions ................... 2,349 3,345
Surety bonds ............................. 407 822
Other (1) ................................ 91 92
---------- ----------
$ 14,537 $ 16,225
========== ==========
LOSSES AND LOSS ADJUSTMENT EXPENSES
Standard property and casualty ........... $ 6,751 $ 7,149
Political subdivisions ................... 1,808 2,856
Surety bonds ............................. (46) 669
Other (1) ................................ 196 130
---------- ----------
$ 8,709 $ 10,804
========== ==========
<FN>
- ----------------------------------------
(1) This program is comprised primarily of the run-off of other
discontinued programs and NAICO's participation in various mandatory
workers compensation pools and assigned risks.
PAGE 7
NOTE 4. INCOME TAXES
Chandler USA's effective tax rate for the three months ended March 31,
2003 is less than the statutory tax rate in both the consolidated statements
of operations and the consolidated statements of comprehensive income due
principally to the utilization of Chandler USA's capital loss carryforward.
NOTE 5. COMMITMENTS AND CONTINGENCIES
During March 2001, Chandler USA entered into a $3.8 million sale and
leaseback transaction for certain owned equipment. Chandler USA 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 4.25%
at March 31, 2003. The sale and leaseback transaction resulted in a reduction
of property and equipment of $1.9 million and a deferred gain of $2.0 million
which is included in accrued taxes and other payables. Chandler USA has
exercised its option to repurchase the equipment at the end of the lease for
approximately $3.0 million and will amortize the deferred gain into income
over the final year of the lease.
NOTE 6. SUBSEQUENT EVENTS
At March 31, 2003, NAICO owned 19,371 shares of common stock of Insurance
Services Office, Inc. ("ISO") that it received in 1997 as a result of ISO
converting to a for-profit corporation. In April 2003, NAICO accepted ISO's
offer to redeem these shares for a price of $88.80 per share, which will
result in a realized investment gain of $1.7 million that will be recognized
in the second quarter of 2003. At March 31, 2003, NAICO adjusted the carrying
value of these shares to $1.7 million, which represents the estimated fair
value of the shares, and has reflected this amount as an unrealized gain on
investments available for sale, net of deferred income taxes.
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") in periodic press
releases and oral statements made by Chandler USA'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 Chandler USA 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 Chandler USA
and its subsidiaries operate, including the ability to implement price
increases; (iv) claims frequency; (v) claims severity; (vi) catastrophic
events of unanticipated frequency or severity; (vii) the number of new and
renewal policy applications submitted to National American Insurance Company
("NAICO") by its agents; (viii) the ability of NAICO to obtain adequate
reinsurance in amounts and at rates that will not adversely affect its
competitive position; (ix) the ability of NAICO to maintain favorable
insurance company ratings; and (x) various other factors.
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 month periods ended
March 31, 2003 and 2002:
Gross premiums earned Net premiums earned
--------------------------- ---------------------------
THREE MONTHS ENDED MARCH 31, 2003 2002 2003 2002
---------------------------------- ------------ ------------ ------------ ------------
(In thousands)
Standard property and casualty ... $ 24,091 $ 27,896 $ 11,690 $ 11,966
Political subdivisions ........... 8,179 8,617 2,349 3,345
Surety bonds ..................... 875 1,354 407 822
Other ............................ 92 97 91 92
------------ ------------ ------------ ------------
TOTAL ............................ $ 33,237 $ 37,964 $ 14,537 $ 16,225
============ ============ ============ ============
Gross premiums earned decreased $4.7 million or 12% in the first quarter
of 2003 compared to the first quarter of 2002. Gross premiums earned in Texas
and Oklahoma decreased $2.9 million and $2.3 million, respectively, from the
first quarter of 2002. These decreases were primarily the result of NAICO's
efforts to focus on improving underwriting profitability in its core programs
by re-underwriting the business. Net premiums earned decreased $1.7 million
or 10% in the first quarter of 2003 compared to the first quarter of 2002.
Gross premiums earned in the standard property and casualty program
decreased $3.8 million or 14% in the first quarter of 2003 compared to the
first quarter of 2002. Gross premiums earned in Texas and Oklahoma decreased
by $2.8 million and $2.0 million, respectively, in the first quarter of 2003
compared to the first quarter of 2002 due primarily to NAICO's efforts to
focus on improving underwriting profitability by discontinuing certain
accounts where rates were not believed to be adequate. Approximately $3.3
million or 87% of the total decrease was in the workers compensation line of
business. Net premiums earned decreased $276,000 or 2% in the first quarter
of 2003 versus the first quarter of 2002. Net premiums earned decreased less
than gross premiums earned due to quota share reinsurance that expired on
January 1, 2002 and that was in runoff during the 2002 quarter.
Gross premiums earned in the political subdivisions program decreased
$438,000 or 5% in the first quarter of 2003 compared to the first quarter of
2002. Gross premiums earned in the school districts portion of the program
increased $390,000 due primarily to increased premium rates in Oklahoma. This
was offset by a decrease in gross premiums earned for municipalities. Net
premiums earned in the political subdivisions program decreased $996,000 or
30% in the first quarter of 2003 versus the first quarter of 2002 due to the
decrease in gross premiums earned and to reinsuring a portion of the property
lines of coverage with Chandler Insurance (Barbados), Ltd. ("Chandler
Barbados") on a quota share basis effective January 1, 2003.
PAGE 9
Gross premiums earned in the surety bond program decreased $479,000 or
35% in the first quarter of 2003 compared to the first quarter of 2002. The
decrease was primarily due to stricter underwriting policies and a reduction
in the number of appointed agents that produce this business as NAICO focuses
on improving underwriting profitability in this program. Net premiums earned
in the surety bond program decreased $415,000 or 50% in the first quarter of
2003 versus the first quarter of 2002 due primarily to the decrease in gross
premiums earned and to an increase in the cost of reinsurance. NAICO elected
not to renew its surety bond reinsurance program effective April 1, 2003 due
to the decreased premium volume in this program and to the current market for
this reinsurance.
NET INTEREST INCOME AND NET REALIZED INVESTMENT GAINS
At March 31, 2003, Chandler USA's investment portfolio consisted
primarily of fixed income U.S. Government and high-quality corporate bonds,
with approximately 18% invested in cash and money market instruments. Income
generated from this portfolio is largely dependent upon prevailing levels of
interest rates. Chandler USA's portfolio contains no non-investment grade
bonds or real estate investments. Chandler USA also receives interest income
from Chandler Barbados on intercompany loans.
Net interest income from continuing operations, excluding interest income
from Chandler Barbados, decreased $127,000 or 21% in the first quarter of 2003
versus the first quarter of 2002 due primarily to lower interest rates and a
reduction in invested assets. Cash and invested assets were $67.2 million at
March 31, 2003 compared to $74.7 million at March 31, 2002. This decrease
resulted primarily from the reduction in premiums written during 2002, the
payment of claims for prior years and an increase in intercompany loans to
Chandler Barbados. Net interest income from Chandler Barbados was $110,000 in
the first quarter of 2003 compared to $82,000 in the first quarter of 2002.
Net realized investment gains were $151,000 for the first quarter of 2003
compared to $16,000 during the first quarter of 2002.
LOSSES AND LOSS ADJUSTMENT EXPENSES
Chandler USA estimates losses and loss adjustment expenses based on
historical experience and payment and reporting patterns for the type of risk
involved. These estimates are based on data available at the time of the
estimate and are periodically reviewed by independent professional actuaries.
Although such estimates are management's best estimates of the expected
values, the ultimate liability for unpaid claims may vary from these values.
The percentage of losses and loss adjustment expenses to net premiums
earned ("loss ratio") was 59.9% for the first quarter of 2003 versus 66.6% in
the first quarter of 2002. The decrease in the 2003 loss ratio resulted
primarily from NAICO's past efforts to re-underwrite and re-price its
business. Weather-related losses from wind and hail totaled $89,000 in the
first quarter of 2003 and increased the loss ratio by 0.6 percentage points.
Weather-related losses totaled $496,000 in the first quarter of 2002, and
increased the 2002 loss ratio by 3.1 percentage points.
POLICY ACQUISITION COSTS
Policy acquisition costs consist of costs associated with the acquisition
of new and renewal business and generally include direct costs such as premium
taxes, commissions to agents and ceding companies and premium-related
assessments and indirect costs such as salaries and expenses of personnel who
perform and support underwriting activities. NAICO also receives ceding
commissions from the reinsurers who assume premiums from NAICO under certain
reinsurance contracts and the ceding commissions are accounted for as a
reduction of policy acquisition costs. Direct policy acquisition costs and
ceding commissions are deferred and amortized over the terms of the policies.
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. Chandler USA's deferred ceding commissions exceeded
the deferred policy acquisition costs related to direct and assumed business
by $63,000 at March 31, 2003 and are recorded in accrued taxes and other
payables.
PAGE 10
The following table sets forth Chandler USA's policy acquisition costs
from continuing operations for each of the three month periods ended March
31, 2003 and 2002:
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
---------- ----------
(In thousands)
Commissions expense ........................ $ 4,954 $ 4,808
Other premium related assessments .......... 350 424
Premium taxes .............................. 761 774
Excise taxes ............................... 83 63
Dividends to policyholders ................. 5 11
Other expense .............................. 145 50
---------- ----------
Total direct expenses ...................... 6,298 6,130
Indirect underwriting expenses ............. 2,040 2,227
Commissions received from reinsurers ....... (5,860) (5,095)
Adjustment for deferred acquisition costs .. 419 (612)
---------- ----------
Net policy acquisition costs ............... $ 2,897 $ 2,650
========== ==========
Total gross direct and indirect expenses as a percentage of direct
written and assumed premiums were 25.2% for the first quarter of 2003 versus
24.0% for the first quarter of 2002. Commission expense as a percentage of
gross written and assumed premiums was 15.0% for the first quarter of 2003
versus 13.8% for the 2002 quarter due primarily to an increase in contingent
commissions to agents that resulted from lower loss ratios than had been
projected for these agents.
Indirect underwriting expenses were 6.2% and 6.4% of total direct written
and assumed premiums in the three month periods ended March 31, 2003 and 2002,
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 Chandler USA's
overall premium volume. Commissions received from reinsurers increased in the
first quarter of 2003 due primarily to the increase in reinsurance premiums
ceded to Chandler Barbados.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses from continuing operations were
11.0% and 8.2% of gross premiums earned in the first quarter of 2003 and 2002,
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 Chandler USA's overall premium volume.
INTEREST EXPENSE
Interest expense was $558,000 in the first quarter of 2003 compared to
$559,000 in the year-ago quarter. Substantially all of Chandler USA's
interest expense is related to the $24 million of outstanding debentures.
LIQUIDITY AND CAPITAL RESOURCES
In the first quarter of 2003, Chandler USA used $2.1 million in cash from
operations due primarily to a reduction in unpaid losses and loss adjustment
expenses, less a decrease in reinsurance recoverable on unpaid losses. In the
first quarter of 2002, Chandler USA provided $1.2 million in cash from
operations.
At March 31, 2003, Chandler Barbados owed approximately $10.5 million to
Chandler USA versus $10.6 million at December 31, 2002 under an Intercompany
Credit Agreement (the "Credit Agreement") covering intercompany loans between
the parties. The Credit Agreement requires interest to be paid at the prime
interest rate published in The Wall Street Journal each month, and balances
owed by either party are payable at any time upon demand.
During March 2001, Chandler USA entered into a $3.8 million sale and
leaseback transaction for certain owned equipment. Chandler USA 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 4.25%
at March 31, 2003. The sale and leaseback transaction resulted in a reduction
of property and equipment of $1.9 million and a deferred gain of $2.0 million
which is included in accrued taxes and other payables. Chandler USA has
exercised its option to repurchase the equipment at the end of the lease for
approximately $3.0 million and will amortize the deferred gain into income
over the final year of the lease.
PAGE 11
ITEM 4. CONTROLS AND PROCEDURES
Chandler USA's Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of Chandler USA's disclosure controls and
procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of a date
within 90 days prior to the filing date of this quarterly report. Based on
such evaluation, such officers have concluded that Chandler USA's disclosure
controls and procedures are effective in alerting them on a timely basis to
material information relating to Chandler USA (including its consolidated
subsidiaries) required to be included in Chandler USA's periodic filings under
the Exchange Act. There have not been any significant changes in Chandler
USA's internal controls or in other factors that could significantly affect
such controls subsequent to the date of this evaluation.
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 and Use of Proceeds
-----------------------------------------
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
--------------------------------
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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 13, 2003 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)
PAGE 13
CERTIFICATIONS
- --------------
I, W. Brent LaGere, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Chandler (U.S.A.),
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 13, 2003
/s/ W. Brent LaGere
------------------------------------
W. Brent LaGere
Chairman of the Board and
Chief Executive Officer
PAGE 14
I, Mark C. Hart, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Chandler (U.S.A.),
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 13, 2003
/s/ Mark C. Hart
------------------------------------
Mark C. Hart
Vice President - Finance,
Chief Financial Officer
and Treasurer
PAGE 15
EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES - OXLEY ACT OF 2002
In connection with the Quarterly Report of Chandler (U.S.A.), Inc. (the
"Company") on Form 10-Q for the period ending March 31, 2003 as filed with the
Securities and Exchange Commission (the "Report"), W. Brent LaGere, as Chief
Executive Officer of the Company, and Mark C. Hart, as Chief Financial Officer
of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002, to the
best of his knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ W. Brent LaGere
------------------------------------
W. Brent LaGere
Chief Executive Officer
May 13, 2003
/s/ Mark C. Hart
------------------------------------
Mark C. Hart
Chief Financial Officer
May 13, 2003
A signed original of this written statement required by Section 906 has been
provided to Chandler (U.S.A.), Inc. and will be retained by Chandler (U.S.A.),
Inc. and furnished to the Securities and Exchange Commission or its staff upon
request.