===============================================================================
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, 1997
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ________ to ________
Commission File Number: 0-15286
CHANDLER INSURANCE COMPANY, LTD.
(Exact name of registrant as specified in its charter)
Cayman Islands None
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5th Floor Anderson Square N/A
P.O. Box 1854 (Zip Code)
Grand Cayman, Cayman Islands, B.W.I.
(Address of principal executive offices)
Registrant's telephone number, including area code:
345-949-8177
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
The number of Common Shares, $1.67 par value, of the registrant outstanding on
October 31, 1997 was 6,561,237, (this is net of 380,471 Common Shares owned by
a subsidiary of the registrant which are eligible to vote).
==============-=================================================================
<PAGE>
PAGE 2
CHANDLER INSURANCE COMPANY, LTD.
INDEX
PART I - Financial Information
- ------------------------------
ITEM 1 Consolidated Statements of Operations for the
- ------ three months ended September 30, 1997 and 1996....................3
Consolidated Statements of Operations for the
nine months ended September 30, 1997 and 1996.....................4
Consolidated Balance Sheets as of September 30, 1997
and December 31, 1996.............................................5
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1997 and 1996.....................6
Notes to Interim Consolidated Financial Statements................7
ITEM 2 Management's Discussion and Analysis of Financial
- ------ Condition and Results of Operations..............................10
PART II - Other Information
- ---------------------------
ITEM 1 Legal Proceedings................................................15
- ------
ITEM 2 Change in Securities.............................................15
- ------
ITEM 3 Defaults Upon Senior Securities..................................15
- ------
ITEM 4 Submission of Matters to a Vote of Security Holders..............15
- ------
ITEM 5 Other Information................................................15
- ------
ITEM 6 Exhibits and Reports on Form 8-K.................................15
- ------
SIGNATURES...............................................................16
<PAGE>
CHANDLER INSURANCE COMPANY, LTD. PAGE 3
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands except per share data)
<TABLE>
<CAPTION>
For the three months
ended September 30,
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
Premiums and other revenues
Direct premiums written and assumed.................$ 38,851 $ 37,058
Reinsurance premiums ceded.......................... (11,864) (5,002)
---------- ----------
Net premiums written and assumed................. 26,987 32,056
Increase in unearned premiums....................... (4,632) (8,266)
---------- ----------
Net premiums earned.............................. 22,355 23,790
Net investment income.................................. 1,853 1,769
Commissions, fees and other income..................... 623 792
---------- ----------
Total revenues................................... 24,831 26,351
---------- ----------
Operating costs and expenses
Losses and loss adjustment expenses................. 12,860 13,618
Policy acquisition costs............................ 6,698 9,641
General and administrative expenses................. 3,286 3,339
Litigation expenses, net............................ 408 (968)
---------- ----------
Total operating expenses......................... 23,252 25,630
---------- ----------
Income before income taxes............................. 1,579 721
Federal income tax provision of
consolidated U.S. subsidiaries...................... (538) (184)
---------- ----------
Net income.............................................$ 1,041 $ 537
========== ==========
Net income per share...................................$ 0.16 $ 0.08
Weighted average common shares outstanding
(excludes effect of stock rescission)............... 6,561 6,942
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
CHANDLER INSURANCE COMPANY, LTD. PAGE 4
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands except per share data)
<TABLE>
<CAPTION>
For the nine months
ended September 30,
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
Premiums and other revenues
Direct premiums written and assumed.................$ 95,766 $ 83,046
Reinsurance premiums ceded.......................... (19,576) (11,057)
---------- ----------
Net premiums written and assumed................. 76,190 71,989
Increase in unearned premiums....................... (4,439) (5,219)
---------- ----------
Net premiums earned.............................. 71,751 66,770
Net investment income 5,476 5,469
Commissions, fees and other income 2,063 2,792
---------- ----------
Total revenues................................... 79,290 75,031
---------- ----------
Operating costs and expenses
Losses and loss adjustment expenses................. 43,996 40,429
Policy acquisition costs............................ 20,933 24,086
General and administrative expenses................. 10,260 10,600
Litigation expenses, net............................ 11,330 (761)
---------- ----------
Total operating expenses......................... 86,519 74,354
---------- ----------
Income (loss) before income taxes...................... (7,229) 677
Federal income tax benefit (provision)
of consolidated U.S. subsidiaries................... (1,519) 790
---------- ----------
Net income (loss)......................................$ (8,748) $ 1,467
========== ==========
Net income (loss) per share............................$ (1.30) $ 0.21
Weighted average common shares outstanding
(excludes effect of stock rescission)............... 6,735 6,942
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
CHANDLER INSURANCE COMPANY, LTD. PAGE 5
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Assets
Investments
Fixed maturities available for sale, at
estimated fair value...........................$ 108,530 $ 109,665
Fixed maturities held to maturity, at
amortized cost (estimated fair value $1,679
and $1,675 at 1997 and 1996, respectively...... 1,588 1,582
Equity securities available for sale, at
estimated fair value........................... 1,867 -
------------ ------------
Total investments.............................. 111,985 111,247
Cash and cash equivalents............................ 15,089 7,889
Premiums receivable, less allowance for
non-collection of $215 and $177 at
1997 and 1996, respectively....................... 31,465 30,413
Reinsurance recoverable on paid losses, less
allowance for non-collection of $567 and $491
at 1997 and 1996, respectively.................... 1,620 3,805
Reinsurance recoverable on unpaid losses, less
allowance for non-collection of $86 at 1997....... 14,784 14,432
Prepaid reinsurance premiums......................... 10,247 5,470
Deferred policy acquisition costs.................... 5,386 4,993
Property and equipment, net.......................... 5,986 5,934
Other assets......................................... 13,990 11,517
Licenses, net........................................ 4,381 4,494
Excess of cost over net assets acquired, net......... 5,414 5,900
Covenants not to compete, net........................ 433 733
------------ ------------
Total assets.........................................$ 220,780 $ 206,827
============ ============
Liabilities and Shareholders' Equity
Liabilities
Unpaid losses and loss adjustment expenses........$ 79,861 $ 79,639
Unearned premiums................................. 45,225 36,009
Policyholder deposits............................. 4,896 4,016
Notes payable..................................... 3,349 4,391
Accrued taxes and other payables.................. 5,168 7,777
Premiums payable.................................. 8,154 2,448
Litigation liabilities............................ 16,618 -
------------ ------------
Total liabilities.............................. 163,271 134,280
------------ ------------
Shareholders' equity
Common stock, $1.67 par value, 10,000,000
shares authorized, 6,941,708 shares
issued and outstanding......................... 11,593 11,593
Paid-in surplus................................... 34,942 34,942
Capital redemption reserve........................ 947 947
Retained earnings................................. 17,203 25,951
Unrealized loss on investments available
for sale, net of tax........................... (358) (886)
Less: Common stock held by subsidiary,
at cost (380,471 shares in 1997)............... (1,902) -
Less: Common stock rescinded through
litigation (517,500 shares in 1997)............ (4,916) -
------------ ------------
Total shareholders' equity..................... 57,509 72,547
------------ ------------
Total liabilities and shareholders' equity...........$ 220,780 $ 206,827
============ ============
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
PAGE 6
CHANDLER INSURANCE COMPANY, LTD.
Consolidated Statements of Cash Flows
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
For the nine months
ended September 30,
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
Operating activities:
Net income (loss)......................................$ (8,748) $ 1,467
Add (deduct):
Adjustments to reconcile net income to cash
provided by (applied to) operations:
Net realized gains on sales of investments....... (36) (119)
Net (gains) losses on sales of equipment......... 2 (10)
Amortization and depreciation.................... 1,622 1,740
Provision for non-collection of premiums......... 119 1,165
Provision for non-collection of
reinsurance recoverables...................... 449 1,634
Net change in non-cash balances
relating to operations:
Premiums receivable........................... (4,785) (474)
Reinsurance recoverable on paid losses........ 1,716 (1,220)
Reinsurance recoverables on unpaid losses..... (332) 6,137
Prepaid reinsurance premiums.................. (4,777) (469)
Deferred policy acquisition costs............. (393) (1,073)
Other assets.................................. (3,168) (393)
Unpaid losses and loss adjustment expenses.... 222 (14,340)
Unearned premiums............................. 9,216 5,689
Policyholder deposits......................... 880 (252)
Accrued taxes and other payables.............. (2,609) (1,531)
Premiums payable.............................. 5,706 (165)
Litigation liabilities........................ 11,702 -
---------- ----------
Cash provided by (applied to) operations......... 6,786 (2,214)
---------- ----------
Investing activities:
Fixed maturities available for sale
Purchases........................................ (11,646) (29,412)
Sales............................................ 7,568 13,743
Maturities....................................... 6,221 10,328
Fixed maturities held to maturity
Purchases........................................ - -
Maturities....................................... - 4,300
Cost of property and equipment purchased............ (733) (575)
Proceeds from sale of property and equipment........ 45 36
Other............................................... - (20)
---------- ----------
Cash provided by (applied to)
investing activities.......................... 1,455 (1,600)
---------- ----------
Financing activities:
Proceeds from notes payable......................... - 4,500
Payments on notes payable........................... (1,041) -
---------- ----------
Cash provided by (applied to)
financing activities.......................... (1,041) 4,500
---------- ----------
Increase in cash and cash equivalents
during the period............................... 7,200 686
Cash and cash equivalents at beginning of period....... 7,889 8,524
---------- ----------
Cash and cash equivalents at end of period.............$ 15,089 $ 9,210
========== ==========
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
PAGE 7
CHANDLER INSURANCE COMPANY, LTD.
Notes To Interim Consolidated Financial Statements
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. They do not include all information and footnotes required by
generally accepted accounting principles for complete financial statements.
However, except as disclosed herein, there have been no material changes in the
information included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1996. In the opinion of management, all adjustments
(consisting of normal recurring adjustments and an unusual significant
litigation liability adjustment described in Note 2) considered necessary for a
fair presentation have been included. The results of operations for the three
and nine month periods ended September 30, 1997 are not necessarily indicative
of the results that may be expected for the year.
The consolidated financial statements include the accounts of Chandler Insurance
Company, Ltd. ("Chandler" or "the Company") and subsidiaries including:
- Chandler Insurance (Barbados), Ltd. ("Chandler Barbados") and NAICO
Indemnity (Cayman), Ltd. ("NAICO Indemnity"), wholly owned subsidiaries
of the Company.
- Chandler (U.S.A.), Inc. ("Chandler USA"), a wholly owned subsidiary of
Chandler Barbados.
- National American Insurance Company ("NAICO"), LaGere & Walkingstick
Insurance Agency, Inc. ("L&W") and Network Administrators, Inc.
("Network"), wholly owned subsidiaries of Chandler (U.S.A.), Inc.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
NOTE 2 - LITIGATION
In the Company's Annual Report on Form 10-K for the year ended December 31,
1996, Quarterly Reports on Form 10-Q for the quarters ended March 31, 1997 and
June 30, 1997 and Reports on Form 8-K dated August 17, 1997 and October 9, 1997,
recent developments updating the CenTra, Inc. ("CenTra") litigation were
described.
CenTra Litigation - Oklahoma
As previously reported, on February 13, 1997 trial commenced in the United
States District Court in Oklahoma City, Oklahoma (the "Court") in consolidated
cases involving CenTra and certain of its affiliates, officers and directors
(the "CenTra Group") and the Company and certain of its affiliates, officers and
directors. On April 1, 1997, at the close of all of the evidence, the Court
dismissed CenTra's claims against NAICO and an affiliate for alleged wrongful
cancellation of CenTra's insurance with NAICO and the affiliate in 1992 (see
CenTra Litigation - Other, below). The remaining issues were submitted to a
jury.
On April 9, 1997 the jury returned verdicts on all claims. On April 22, 1997,
the Court entered judgments on all verdicts returned. One judgment against the
Company requires the CenTra Group to return stock it purchased in 1990 to the
Company in return for a payment of $5,099,133 from the Company. Another
judgment was against both the Company and its affiliate Chandler Barbados and in
favor of CenTra and its affiliate Ammex, Inc. Based upon an alleged breach of a
stock purchase agreement in 1988, CenTra and Ammex were awarded $6,882,500.
Both judgments related to alleged failures by the Company to adequately disclose
the fact that ownership of the Company's stock may be subject to regulation by
the Nebraska Insurance Department under certain circumstances. The jury also
found in favor of CenTra and against certain officers and/or directors of the
Company on the securities claims relating to CenTra's 1990 purchases and the
failure to disclose the application of the Nebraska insurance law, but only
awarded damages of $1 against each individual defendant on those claims. On ten
derivative claims brought by CenTra, the jury found in CenTra's favor on only
three. Certain officers were directed to repay to Chandler USA bonuses received
for the years 1988 and 1989 totaling $711,629 and a total of $25,000 for
personal use of corporate aircraft. On the remaining claim relating to the
acquisition of certain insurance agencies in 1988, the jury awarded only $1 each
against six officers and/or directors.
<PAGE>
PAGE 8
On other claims asserted by the CenTra Group, the jury found in favor of the
Company and/or the individual defendants. The jury also found in favor of NAICO
and NAICO Indemnity on their counterclaims for CenTra's failure to pay insurance
premiums in the sum of $788,625 and further upheld a resolution adopted by the
Chandler Board of Directors in August 1992 pursuant to Article XI of the
Company's Articles of Association preventing CenTra and its affiliates from
voting their Chandler stock as a result of purchases made by the CenTra Group in
July 1992 as part of its efforts to acquire control of Chandler.
The jury found in favor of CenTra on the Company's claim against CenTra for
breach of a standstill agreement contained in a 1988 stock exchange agreement.
The jury denied the Company's claim against Messrs. Harned, Lech and Moroun
based upon their alleged breach of fiduciary duty as directors. The jury also
denied the Company's claim against Mr. Moroun individually for violation of
Section 16(b) of the Securities Exchange Act of 1934 regarding short swing
profits.
The Company's legal counsel, management and board of directors are reviewing the
Court rulings and the judgments and considering whether to appeal. Several
post-trial motions have been filed by all parties relating to the judgments and
prejudgment interest. The Court currently has these motions under advisement
and has given no indication regarding when the rulings may be expected. The
Court ordered that additional motions to tax costs and fix attorney fees be
filed within 20 days following rulings on these motions. However, on October
11, 1997 CenTra filed motions to tax costs and attorneys fees totaling $4.1
million. The Company has responded by contending that the motions were filed
prematurely and are, in any event, without merit.
Because the Court has not yet ruled on the post-trial motions, the Company is
unable to presently assess the ultimate outcome of these matters. However, the
Company has recorded a net charge for the litigation matters described above
during the first quarter of 1997 totaling approximately $8.3 million ($8.5
million including provision for federal income tax). In addition, the Company
has recorded the return of 517,500 shares of the Company's stock in conjunction
with the stock rescission judgment as a decrease to shareholders' equity in the
amount of approximately $4.9 million with the remaining amount included in the
charge for litigation matters. The charge includes approximately $4.6 million
as an estimate of interest, costs and related attorney fees. The ultimate
actual amounts allowed by the Court to all parties for these items could vary
significantly from the Company's estimate. The Court could deny all requests
for recovery of these items or could award the parties amounts which would be
much greater than the Company's estimate. The CenTra Group has requested
prejudgment interest of approximately $12 million. The charge includes an
estimated recovery of $2.7 million from the Company's directors and officers
policy insurer for costs associated with the defense and litigation of these
matters. The Company is entitled to a total of $5 million under the applicable
insurance policy. Some amounts have been previously paid without dispute and
the Company is negotiating with the insurer for payment of the policy balance.
The Company could recover the remaining policy limits or could compromise its
claim, and could incur significant costs in either case. The estimated
insurance recovery is based upon these variable factors. The charge also
includes the amount of judgments in favor of Chandler USA on the derivative
claims discussed above. Further unfavorable outcomes regarding these issues,
collection of the awards and advancement of litigation expenses to certain
Company defendants would have a material adverse effect on the Company and
negatively impact future earnings. Except for the recovery of a portion of the
litigation costs from the Company's directors and officers policy insurer, no
provision has been made in the accompanying consolidated financial statements
related to the advanced litigation expenses.
The Company's management believes that adequate financial resources are
available to post a supersedeas bond if the judgments are appealed, and the
Company is pursuing various financing arrangements in the event that the
judgments are not reduced or overturned. As a holding company, the Company may
receive cash through equity sales, borrowings and dividends from its
subsidiaries. Chandler Barbados and NAICO are subject to various regulations
which restrict their ability to pay shareholder dividends. A reduction in the
amount of invested assets, or an increase in borrowings resulting from potential
payment of these judgments would reduce investment earnings or increase
operating expenses in future periods. The Company also incurred approximately
$408,000 and $2.7 million in attorney fees and related litigation expenses in
the third quarter and first nine months of 1997. Litigation expenses were
credits of $968,000 and $761,000 in the third quarter and first nine months of
1996 which included an estimated recovery of $982,000 from the Company's
directors and officers liability insurer.
<PAGE>
PAGE 9
CenTra Litigation - Nebraska
As previously reported the United States District Court for the District of
Nebraska (the "Nebraska Court") has entered certain orders relating to
sequestration of shares of the Company's stock owned by CenTra. On March 25,
1997 the Nebraska Court, pursuant to the Nebraska Insurance Holding Company
Systems Act, ordered CenTra and certain of its affiliates to divest all Chandler
shares owned by them, regardless of when purchased. The CenTra defendants own
or control 3,131,825 Chandler shares. Of that number, 1,440,700 shares acquired
by CenTra and its affiliates in 1992 are currently in the possession of the
Nebraska Court pursuant to a 1995 order of the Nebraska Court. CenTra's shares
represent approximately 45% of the outstanding stock (excludes 1997 stock
rescission judgment and stock held by subsidiary). The Nebraska Court directed
NAICO, the CenTra defendants and the Nebraska Insurance Department to submit
proposals to the Nebraska Court by April 21, 1997 for the "orderly divestiture
and disposition of the stock". A hearing would then be scheduled to consider
the proposals.
CenTra has subsequently appealed the March 25, 1997 order of the Nebraska Court
to the United States Court of Appeals for the Eighth Circuit where the appeal is
now pending. CenTra's appeal of this order has resulted in a delay of the
deadlines for submitting the proposals and no new submission date has been set
at this time. On October 7, 1997 the Honorable Warren Urbom, U.S. District
Judge for the District of Nebraska, ordered CenTra, M.J. Moroun and others to
tender into the Registry of the Court by November 6, 1997 all shares of Chandler
stock owned or controlled by them or their affiliates not previously tendered,
to await the outcome of the appeal of his divestiture order. Because of the
uncertainty of the outcome of CenTra's appeal of the Nebraska Court's orders,
and until the final proposals are submitted and accepted, the Company is unable
to predict the effect of the divestiture order on the rights, limitations or
other regulation of ownership of the stock of any existing or prospective
holders of the Company's common stock, or the effect on the market price of the
Company's stock.
On March 27, 1997 the Nebraska Court declined to exercise jurisdiction over
550,329 shares of Chandler stock held as security by Chandler subsidiaries for
debts owed by two former agents but in which CenTra claimed to have option
rights. The Nebraska Court's ruling cleared the way for the Company's
subsidiaries to begin the process of disposing of these shares to retire the
agents' debts to the subsidiaries. CenTra did not appeal this order. During
the second quarter of 1997, ownership of 380,471 shares was transferred to a
Chandler subsidiary as payment for one of the agent's debts to Chandler's
subsidiaries in the amount of $1,902,355. This transfer had no impact on net
income. The shares are held as a reduction of stockholders' equity.
CenTra Litigation - Other
On September 25, 1997, NAICO learned that several CenTra affiliates had filed
two lawsuits in state court in Macomb County Michigan against NAICO, NAICO
Indemnity and certain NAICO officers asserting some of the same claims made and
tried in the Oklahoma lawsuit described above. Those claims were purportedly
prosecuted by CenTra on its own behalf and on behalf of its subsidiaries. The
trial court entered a judgment against CenTra on these claims. The damages
sought are unspecified but the claims are based upon NAICO's cancellation of
CenTra's insurance in 1992. NAICO and NAICO Indemnity contend that the Oklahoma
Court's adjudication is conclusive as to all claims. The lawsuits have been
removed to the U.S. District Court for the Eastern District of Michigan,
Southern Division.
During the first quarter of 1997 the Company concluded an arbitration proceeding
involving DuraRock Underwriters, Ltd., an affiliate of CenTra, and recorded
approximately $315,000 in litigation and settlement expenses related to this
matter.
NOTE 3 - RECENTLY ADOPTED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 129, Disclosure of
Information about Capital Structure. SFAS No. 129 establishes standards for
disclosure of information regarding an entity's capital structure. The adoption
of SFAS No. 129 did not affect the Company's consolidated financial position or
results of operations.
NOTE 4 - ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED
In February 1997, the FASB issued SFAS No. 128, Earnings Per Share, which
establishes standards for computing and presenting earnings per share. SFAS No.
128 is effective for periods ending after December 15, 1997. Management
believes that SFAS No. 128 will not have a significant effect on the Company's
calculation of earnings per share considering its current capital structure.
<PAGE>
PAGE 10
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
which establishes standards for reporting and displaying comprehensive income
and its components (revenues, expenses, gains and losses) in financial
statements. In addition, SFAS No. 130 requires the Company to classify items of
other comprehensive income by their nature in a financial statement and display
the accumulated balance of other comprehensive income separately in the
shareholders' equity section of the statement of financial condition. The
Company will adopt SFAS No. 130 on January 1, 1998 as required.
Also in June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. SFAS No. 131 establishes reporting
standards for public companies concerning annual and interim financial
statements of their operating segments. Operating segments are components of a
company about which separate financial information is available that is
regularly evaluated by the chief operating decision maker in deciding how to
allocate resources and assess performance. The standard sets criteria for
reporting disclosures about a company's products and services, geographic areas
and major customers. The Company will adopt SFAS No. 131 on January 1, 1998 as
required.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net Premiums Earned
The following table sets forth net premiums earned for each of the three and
nine month periods ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
---------------------- ----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Standard property-casualty........$ 14,999 $ 10,799 $ 40,726 $ 27,999
Political subdivisions............ 3,943 3,553 11,136 10,496
Surety bonds...................... 2,489 2,737 8,331 6,989
Non-standard private
passenger automobile........... 700 4,278 8,407 12,870
Transportation.................... (116) 431 (120) 1,555
Other............................. 340 1,992 3,271 6,861
---------- ---------- ---------- ----------
TOTAL..........................$ 22,355 $ 23,790 $ 71,751 $ 66,770
========== ========== ========== ==========
</TABLE>
Net premiums earned decreased 6% for the three months ended September 30, 1997
and increased 7% for the first nine months of 1997 compared to the year ago
periods.
Net premiums earned in the standard property-casualty program increased $4.2
million and $12.7 million (39% and 45%) for the current quarter and the first
nine months compared to the prior year periods. Net premiums earned for workers
compensation accounted for $1.9 million and $7.2 million of the increase,
respectively, while other property-casualty coverages accounted for the balance.
The increase is primarily attributable to continued expansion in Oklahoma and
surrounding states, principally Texas.
Net premiums earned from the political subdivisions program increased 11% and
6%, respectively, in the three and nine month periods ended September 30, 1997
compared to a year ago. Expansion of the school districts program in Texas
accounted for most of the increase.
Net premiums earned in the surety bond program decreased 9% in the current
quarter compared to a year ago while increasing 19% for the first nine months of
1997 compared to the same period in 1996. Increased competition to write surety
bonds for small to medium sized contractors accounted for the decreased premium
volume in the current quarter. The increase for the current year to date is
primarily a result of expansion in New Mexico and California.
<PAGE>
PAGE 11
Net premiums earned in the non-standard private passenger automobile programs
declined 84% and 35% in the current quarter and first nine months of 1997
compared to the year ago periods. Net premiums earned for the Oklahoma portion
of the program decreased to $296,000 and $1.4 million for the third quarter and
first nine months of 1997 compared to $1.1 million and $3.5 million in the
comparable 1996 periods. Net premiums earned for the Arizona portion of the
program decreased to $116,000 and $884,000 in the current quarter and first nine
months of 1997 compared to $732,000 and $2.0 million in the year ago periods.
These decreases are a result of premium rate increases and reductions in the
number of retail agents offering these programs. Net premiums earned are
expected to decline further in future periods.
Net premiums earned for the California portion of the program decreased to
$288,000 and $6.2 million for the three and nine month periods ended September
30, 1997, respectively, compared to $2.5 million and $7.3 million in the 1996
periods. During the second quarter of 1997, management reviewed the
underwriting performance of the California portion of the program relative to
the Company's other insurance programs and concluded that it would be in the
Company's best interest to substantially reduce its underwriting risk.
Effective July 1, 1997, National American Insurance Company ("NAICO") entered
into a 100% quota share reinsurance agreement with Underwriters Reinsurance
Company to fully reinsure the risk. Net premiums earned in the current quarter
represent NAICO's share of policy related fees that are classified as premiums.
Net premiums earned from direct assignments of workers compensation policies and
participation in voluntary and involuntary pools ("Pools") covering workers
compensation, included in Other above, decreased to ($393,000) and $1.2 million
in the third quarter and first nine months of 1997 compared to $1.5 million and
$5.3 million in the year ago periods. The decreases are generally a result of
decreased activity from the Pools, which decreased by $1.5 million and $3.0
million from the respective periods. The negative net premiums earned in the
third quarter 1997 results from a reapportionment of NAICO's share of the 1996
Pool activity based on NAICO's 1996 premium volume in various states. The
administrators of the Pools reapportion each Pool's premiums, losses and
expenses annually after the prior years participation percentages for each
participating insurer are determined. The effect of such reapportionment is
generally reported to the participating companies in the third quarter following
the year end.
In the second quarter of 1996, NAICO began writing excess accident and health
coverage for small and medium sized employers generally in Oklahoma and Texas.
Net premiums earned in this program were $567,000 and $1.3 million in the third
quarter and first nine months of 1997 compared to $128,000 and $140,000 for the
comparable 1996 periods.
COMMISSIONS, FEES AND OTHER INCOME
LaGere & Walkingstick Insurance Agency, Inc.'s ("L&W") brokerage commissions and
fees before intercompany eliminations were $2.9 million and $6.9 million in the
three and nine months ended September 30, 1997, respectively, compared to $2.9
million and $6.4 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.
Fees generated by Network Administrators, Inc. ("Network") were $92,000 and
$451,000 in the third quarter and first nine months of 1997 compared to $187,000
and $524,000 in the comparable 1996 periods. Network is a third-party
administrator of partially self-insured group accident and health plans.
Network's operations will be consolidated into a joint venture managed by a
third party during the fourth quarter. Network will have a one-third interest
in the joint venture.
LOSSES AND LOSS ADJUSTMENT EXPENSES
The percentage of losses and loss adjustment expenses to net premiums earned was
57.5% and 61.3% for the quarter and nine months ended September 30, 1997
compared to 57.2% and 60.5% in the comparable year ago periods.
POLICY ACQUISITION COSTS
Policy acquisitions costs as a percentage of net premiums earned were 30.0% and
29.2% for the third quarter and first nine months of 1997, respectively,
compared to 40.5% and 36.1% in the 1996 periods. In the third quarter of 1996,
the Company incurred a $1.0 million charge with respect to a reserve established
for the amounts then recoverable from Midwest Indemnity Corp. ("Midwest"), a
former surety bond underwriting manager for NAICO. In the second quarter of
1996, NAICO concluded an arbitration process with three reinsurers of its
truckers workers compensation program relating to business written from 1988
through 1991. NAICO received an arbitration award that was $1.1 million smaller
than expected. These charges increased policy acquisition costs as a percentage
of net premiums earned by approximately 4.3 and 3.1 percentage points for the
three and nine months ended September 30, 1996.
<PAGE>
PAGE 12
The commission rate for a substantial portion of the surety bond program
produced by Midwest varied inversely with the loss ratio pursuant to a
commission arrangement contingent on the loss experience of the program. The
expected loss ratio for this portion of the program was decreased in 1996 and
such decrease increased the percentage of net policy acquisition costs to net
premiums earned by 7.0 and 4.2 percentage points, respectively, for the quarter
and nine months ended September 30, 1996.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were 14.3% and 13.9% of revenues exclusive
of net investment income for the quarter and nine months ended September 30,
1997 compared to 13.6% and 15.2% in the comparable 1996 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 and losses and loss adjustment expenses based on various
factors including employee counts, salaries, occupancy and specific
identification.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations in the first nine months of 1997 was $6.8 million
compared to cash used in operations of $2.2 million in the year ago period. The
use of cash in the 1996 period generally reflects the reductions in premium
volume from earlier years and the payment of losses and loss adjustment expenses
incurred in those years. The Company sold $7.6 million of fixed-income
securities available for sale prior to their maturities in the first nine months
of 1997 compared to $13.7 million in the comparable 1996 period. See Litigation
and Litigation Expenses for information concerning certain liabilities regarding
legal proceedings.
The Company received cash totaling $1.8 million in payment of premiums
receivable in the first quarter of 1997 as a part of a settlement with Midwest.
In connection with the Midwest settlement, the Company also received notes
receivable from International Alliance Services, Inc. ("IASI") recorded at
approximately $465,000 and IASI common stock valued at approximately $2.2
million for a total consideration of approximately $4.5 million at the
settlement date. The total amount was included in premiums receivable at
December 31, 1996. The Company and its subsidiaries have historically not
purchased equity securities in their portfolios.
LITIGATION AND LITIGATION EXPENSES
In the Company's Annual Report on Form 10-K for the year ended December 31,
1996, Quarterly Reports on Form 10-Q for the quarters ended March 31, 1997 and
June 30, 1997 and Reports on Form 8-K dated August 17, 1997 and October 9, 1997,
recent developments updating the CenTra, Inc. ("CenTra") litigation were
described.
CenTra Litigation - Oklahoma
As previously reported, on February 13, 1997 trial commenced in the United
States District Court in Oklahoma City, Oklahoma (the "Court") in consolidated
cases involving CenTra and certain of its affiliates, officers and directors
(the "CenTra Group") and the Company and certain of its affiliates, officers and
directors. On April 1, 1997, at the close of all of the evidence, the Court
dismissed CenTra's claims against NAICO and an affiliate for alleged wrongful
cancellation of CenTra's insurance with NAICO and the affiliate in 1992 (see
CenTra Litigation - Other, below). The remaining issues were submitted to a
jury.
On April 9, 1997 the jury returned verdicts on all claims. On April 22, 1997,
the Court entered judgments on all verdicts returned. One judgment against the
Company requires the CenTra Group to return stock it purchased in 1990 to the
Company in return for a payment of $5,099,133 from the Company. Another
judgment was against both the Company and its affiliate Chandler Insurance
(Barbados), Ltd. ("Chandler Barbados") and in favor of CenTra and its affiliate
Ammex, Inc. Based upon an alleged breach of a stock purchase agreement in 1988,
CenTra and Ammex were awarded $6,882,500. Both judgments related to alleged
failures by the Company to adequately disclose the fact that ownership of the
Company's stock may be subject to regulation by the Nebraska Insurance
Department under certain circumstances. The jury also found in favor of CenTra
and against certain officers and/or directors of the Company on the securities
claims relating to CenTra's 1990 purchases and the failure to disclose the
application of the Nebraska insurance law, but only awarded damages of $1
against each individual defendant on those claims. On ten derivative claims
brought by CenTra, the jury found in CenTra's favor on only three. Certain
officers were directed to repay to Chandler (U.S.A.), Inc. ("Chandler USA")
bonuses received for the years 1988 and 1989 totaling $711,629 and a total of
$25,000 for personal use of corporate aircraft. On the remaining claim relating
to the acquisition of certain insurance agencies in 1988, the jury awarded only
$1 each against six officers and/or directors.
<PAGE>
PAGE 13
On other claims asserted by the CenTra Group, the jury found in favor of the
Company and/or the individual defendants. The jury also found in favor of NAICO
and NAICO Indemnity (Cayman), Ltd. ("NAICO Indemnity") on their counterclaims
for CenTra's failure to pay insurance premiums in the sum of $788,625 and
further upheld a resolution adopted by the Chandler Board of Directors in August
1992 pursuant to Article XI of the Company's Articles of Association preventing
CenTra and its affiliates from voting their Chandler stock as a result of
purchases made by the CenTra Group in July 1992 as part of its efforts to
acquire control of Chandler.
The jury found in favor of CenTra on the Company's claim against CenTra for
breach of a standstill agreement contained in a 1988 stock exchange agreement.
The jury denied the Company's claim against Messrs. Harned, Lech and Moroun
based upon their alleged breach of fiduciary duty as directors. The jury also
denied the Company's claim against Mr. Moroun individually for violation of
Section 16(b) of the Securities Exchange Act of 1934 regarding short swing
profits.
The Company's legal counsel, management and board of directors are reviewing the
Court rulings and the judgments and considering whether to appeal. Several
post-trial motions have been filed by all parties relating to the judgments and
prejudgment interest. The Court currently has these motions under advisement
and has given no indication regarding when the rulings may be expected. The
Court ordered that additional motions to tax costs and fix attorney fees be
filed within 20 days following rulings on these motions. However, on October
11, 1997 CenTra filed motions to tax costs and attorneys fees totaling $4.1
million. The Company has responded by contending that the motions were filed
prematurely and are, in any event, without merit.
Because the Court has not yet ruled on the post-trial motions, the Company is
unable to presently assess the ultimate outcome of these matters. However, the
Company has recorded a net charge for the litigation matters described above
during the first quarter of 1997 totaling approximately $8.3 million ($8.5
million including provision for federal income tax). In addition, the Company
has recorded the return of 517,500 shares of the Company's stock in conjunction
with the stock rescission judgment as a decrease to shareholders' equity in the
amount of approximately $4.9 million with the remaining amount included in the
charge for litigation matters. The charge includes approximately $4.6 million
as an estimate of interest, costs and related attorney fees. The ultimate
actual amounts allowed by the Court to all parties for these items could vary
significantly from the Company's estimate. The Court could deny all requests
for recovery of these items or could award the parties amounts which would be
much greater than the Company's estimate. The CenTra Group has requested
prejudgment interest of approximately $12 million. The charge includes an
estimated recovery of $2.7 million from the Company's directors and officers
policy insurer for costs associated with the defense and litigation of these
matters. The Company is entitled to a total of $5 million under the applicable
insurance policy. Some amounts have been previously paid without dispute and
the Company is negotiating with the insurer for payment of the policy balance.
The Company could recover the remaining policy limits or could compromise its
claim, and could incur significant costs in either case. The estimated
insurance recovery is based upon these variable factors. The charge also
includes the amount of judgments in favor of Chandler USA on the derivative
claims discussed above. Further unfavorable outcomes regarding these issues,
collection of the awards and advancement of litigation expenses to certain
Company defendants would have a material adverse effect on the Company and
negatively impact future earnings. Except for the recovery of a portion of the
litigation costs from the Company's directors and officers policy insurer, no
provision has been made in the accompanying consolidated financial statements
related to the advanced litigation expenses.
The Company's management believes that adequate financial resources are
available to post a supersedeas bond if the judgments are appealed, and the
Company is pursuing various financing arrangements in the event that the
judgments are not reduced or overturned. As a holding company, the Company may
receive cash through equity sales, borrowings and dividends from its
subsidiaries. Chandler Barbados and NAICO are subject to various regulations
which restrict their ability to pay shareholder dividends. A reduction in the
amount of invested assets, or an increase in borrowings resulting from potential
payment of these judgments would reduce investment earnings or increase
operating expenses in future periods. The Company also incurred approximately
$408,000 and $2.7 million in attorney fees and related litigation expenses in
the third quarter and first nine months of 1997. Litigation expenses were
credits of $968,000 and $761,000 in the third quarter and first nine months of
1996 which included an estimated recovery of $982,000 from the Company's
directors and officers liability insurer.
<PAGE>
PAGE 14
CenTra Litigation - Nebraska
As previously reported the United States District Court for the District of
Nebraska (the "Nebraska Court") has entered certain orders relating to
sequestration of shares of the Company's stock owned by CenTra. On March 25,
1997 the Nebraska Court, pursuant to the Nebraska Insurance Holding Company
Systems Act, ordered CenTra and certain of its affiliates to divest all Chandler
shares owned by them, regardless of when purchased. The CenTra defendants own
or control 3,131,825 Chandler shares. Of that number, 1,440,700 shares acquired
by CenTra and its affiliates in 1992 are currently in the possession of the
Nebraska Court pursuant to a 1995 order of the Nebraska Court. CenTra's shares
represent approximately 45% of the outstanding stock (excludes 1997 stock
rescission judgment and stock held by subsidiary). The Nebraska Court directed
NAICO, the CenTra defendants and the Nebraska Insurance Department to submit
proposals to the Nebraska Court by April 21, 1997 for the "orderly divestiture
and disposition of the stock". A hearing would then be scheduled to consider
the proposals.
CenTra has subsequently appealed the March 25, 1997 order of the Nebraska Court
to the United States Court of Appeals for the Eighth Circuit where the appeal is
now pending. CenTra's appeal of this order has resulted in a delay of the
deadlines for submitting the proposals and no new submission date has been set
at this time. On October 7, 1997 the Honorable Warren Urbom, U.S. District
Judge for the District of Nebraska, ordered CenTra, M.J. Moroun, and others to
tender into the Registry of the Court by November 6, 1997, all shares of
Chandler stock owned or controlled by them or their affiliates not previously
tendered, to await the outcome of the appeal of his divestiture order. Because
of the uncertainty of the outcome of CenTra's appeal of the Nebraska Court's
orders, and until the final proposals are submitted and accepted, the Company is
unable to predict the effect of the divestiture order on the rights, limitations
or other regulation of ownership of the stock of any existing or prospective
holders of the Company's common stock, or the effect on the market price of the
Company's stock.
On March 27, 1997 the Nebraska Court declined to exercise jurisdiction over
550,329 shares of Chandler stock held as security by Chandler subsidiaries for
debts owed by two former agents but in which CenTra claimed to have option
rights. The Nebraska Court's ruling cleared the way for the Company's
subsidiaries to begin the process of disposing of these shares to retire the
agents' debts to the subsidiaries. CenTra did not appeal this order. During
the second quarter of 1997, ownership of 380,471 shares was transferred to a
Chandler subsidiary as payment for one of the agent's debts to Chandler
subsidiaries in the amount of $1,902,355. This transfer had no impact on net
income. The shares are held as a reduction of stockholders' equity.
CenTra Litigation - Other
On September 25, 1997, NAICO learned that several CenTra affiliates had filed
two lawsuits in state court in Macomb County Michigan against NAICO, NAICO
Indemnity and certain NAICO officers asserting some of the same claims made and
tried in the Oklahoma lawsuit described above. Those claims were purportedly
prosecuted by CenTra on its own behalf and on behalf of its subsidiaries. The
trial court entered a judgment against CenTra on these claims. The damages
sought are unspecified but the claims are based upon NAICO's cancellation of
CenTra's insurance in 1992. NAICO and NAICO Indemnity contend that the Oklahoma
Court's adjudication is conclusive as to all claims. The lawsuits have been
removed to the U.S. District Court for the Eastern District of Michigan,
Southern Division.
During the first quarter of 1997 the Company concluded an arbitration proceeding
involving DuraRock Underwriters, Ltd., an affiliate of CenTra, and recorded
approximately $315,000 in litigation and settlement expenses related to this
matter.
INCOME TAX PROVISION
The provision for or benefit from federal income taxes of the consolidated U.S.
subsidiaries varies with the level of income or loss before income taxes of such
subsidiaries. The provision or benefit relative to the consolidated income
before income taxes will also vary dependent on the contribution to income
before income taxes by the consolidated U.S. subsidiaries.
<PAGE>
PAGE 15
FORWARD LOOKING STATEMENTS
Some of the statements made in this Form 10-Q Report, as well as statements made
by the Company in periodic press releases, oral statements made by the Company's
officials to analysts and shareholders in the course of presentations about the
Company and conference calls following earnings releases, constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors that may cause the actual results,
performance or achievements of the Company to be materially different from any
future results, performance or achievements expressed or implied by the forward-
looking statements. Such factors include, among other things, (i) general
economic and business conditions; (ii) interest rate changes; (iii) competition
and regulatory environment in which the Company operates; (iv) claims frequency;
(v) claims severity; (vi) the number of new and renewal policy applications
submitted by the Company's agents; and (vii) other factors including the ongoing
litigation matters over which the Company has little or no control.
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
- -------
Prior to May 1, 1997, Benjamin T. Walkingstick was an employee of
Chandler (U.S.A.), Inc., pursuant to an employment agreement dated
October 28, 1988, (the "Employment Agreement") and served as an
executive officer and director of the Company and certain of its
subsidiaries. Effective May 1, 1997, Mr. Walkingstick resigned these
positions and ceased to be an employee of Chandler (U.S.A.), Inc. He
continues to serve as a consultant to Chandler USA and its subsidiaries
pursuant to the Employment Agreement and continues to be paid monthly
under the agreement through October, 2000 at which time he reaches age
70.
On September 18, 1997, Mr. Walkingstick and LaGere & Walkingstick
Insurance Agency, Inc. ("L&W") entered into an agreement providing that
Mr. Walkingstick will write insurance business only through L&W as an
independent contractor (the "Insurance Agreement"). Mr. Walkingstick
will receive one-half of all commissions upon any business he produces
which was not previously written by L&W and is liable for payment of
all premiums due upon such business. The Insurance Agreement may be
terminated at any time upon thirty (30) days written notice. Upon
termination, the expirations or renewal rights (ownership) of the
insurance business written by Mr. Walkingstick shall remain the
property of L&W. Mr. Walkingstick is required to maintain his own
support staff. A copy of the Insurance Agreement is filed as Exhibit
10.3 to this quarterly report on Form 10-Q.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits: 10.3 Agreement for Placement of Insurance Business.
Forms 8-K: The Company filed two current reports on Form 8-K dated
August 17, 1997 and October 9, 1997, responding to Item 5
of Form 8-K.
<PAGE>
PAGE 16
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 3, 1997 CHANDLER INSURANCE COMPANY, LTD.
By: /s/ W. Brent LaGere
----------------------------------------
W. Brent LaGere
Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Mark T. Paden
----------------------------------------
Mark T. Paden
Director, Vice President - Finance
Chief Financial Officer and Treasurer
(Principal Accounting and Financial
Officer)
<PAGE>
EXHIBIT 10.3
Page One
AGREEMENT FOR PLACEMENT OF INSURANCE BUSINESS
This agreement is made and entered into on this 18th day of September, 1997
by and between LaGere & Walkingstick Insurance Agency, Inc. an Oklahoma
corporation hereinafter referred to as L&W and Ben T. Walkingstick, hereinafter
referred to as BTW.
WHEREAS, BTW warrants that BTW is authorized to conduct business as a
licensed insurance broker and agent in the State of Oklahoma; and
WHEREAS, BTW desires L&W to place risks of BTW's clients (hereinafter
referred to as the INSURED) with and for acceptance by admitted companies and or
non-admitted companies, in compliance with the laws, rules and regulations
pertaining thereto, regarding the placement of such business; and
WHEREAS, L&W agrees to allow BTW a commission on such business, if and when
placed, at such rates as provided hereinafter and, from time-to-time by the
parties.
NOW, THEREFORE, IT IS AGREED AS FOLLOWS:
1. (a) BTW shall be primarily liable to L&W for the full amount of the
premium and applicable state taxes, less commission, including,
but not limited to, additional premiums developed under audits or
retrospective penalties on every insurance contract placed for BTW
except as provided in Paragraph (c) of this section 1. L&W will
invoice BTW on each risk where coverage is effective at the
request of BTW. Such invoice will be due and payable as indicated
in the invoice and may vary based upon the credit terms of the
issuing company. Otherwise, premiums are to be remitted no later
than the 15th day of the first succeeding month after the
effective date of such insurance contract. BTW agrees that
payment of any minimum earned premium required by the issuing
company will be the responsibility of BTW. BTW shall be and
remain liable to L&W for all earned premiums whether or not
collected from the INSURED by BTW. Any credit extended to the
INSURED shall be the sole risk and responsibility of BTW.
(b) L&W will bill INSUREDS for premiums, applicable state taxes and
additional premiums developed under audits or retrospective
penalties on every insurance contract placed for L&W. BTW shall
not be entitled to commission except to the extent that premium
required to be paid by every insured is, in fact, paid. Except to
the extent that the parties agree to a different commission, BTW
shall be entitled to one-half (1/2) of the commission received by
L&W on all business produced by BTW through L&W. Such commission
shall be paid not later than the 15th day following the month in
which L&W receives the commission.
(c) BTW shall be liable to L&W for any and all additional premiums
which may become due (e.g., as a result of an audit) unless within
thirty (30) days following the date that notice of such
additional premiums is sent to BTW, he notifies L&W that he
waives his right to commission upon such additional premiums and
does not intend to undertake collection thereof.
(d) In the event BTW collects the premiums or any part thereof from
the INSURED, BTW shall pay or remit the same to L&W within five
(5) business days following collection of the premiums.
(e) To the extent that L&W is required to repay or reimburse any
INSURED for premiums received, for any reason, BTW shall refund
his proportionate share of the commission based upon such premiums
to L&W within thirty (30) days following demand therefore by L&W.
L&W may offset against sums owing to BTW from L&W any sums owing
from BTW to L&W.
<PAGE>
EXHIBIT 10.3
Page Two
2. The parties hereto understand and agree that in no event, nor under any
circumstances whatsoever, shall this agreement ever be interpreted or
construed to the effect that BTW may bind L&W or any company or
underwriter represented by L&W. Nothing contained herein shall be
deemed to alter or modify the terms and provisions of that certain
employment agreement between Chandler (U.S.A.), Inc. (Chandler USA) and
BTW so as to allow or permit the said BTW or any entity with which he is
affiliated to compete against L&W or its affiliates. BTW hereby agrees
and acknowledges that he is bound by the terms and conditions of the
said employment agreement and specifically, the provisions concerning
competition against Chandler USA, L&W and their affiliates. L&W will not
accept agent or broker of record letters from BTW on any L&W or National
American Insurance Company accounts on which L&W or any National
American Insurance Company agents are then agents or brokers of record.
It is also agreed and understood that the expirations or "renewal
rights" (ownership) of any business placed under this Agreement will
become and remain the sole property of L&W and that BTW will not compete
for such business either directly or in any manner indirectly, even in
the event of termination of this Agreement.
3. L&W shall be under no obligation to give BTW advance notice of
expiration of any policies of insurance which BTW from time-to-time
procures through L&W. L&W agrees, however, that it shall endeavor to so
notify BTW.
4. BTW shall indemnify and hold L&W harmless against any claims,
liabilities or costs (including attorney's fees and expenses) which L&W
may incur or become obligated to pay as a result of loss to INSUREDS
caused directly by an error or omission of BTW in the processing of any
business placed and/or attempted to be placed by BTW with L&W. In
addition, L&W shall indemnify and hold BTW harmless against any claims,
liabilities or costs (including attorney's fees and expenses) which BTW
may become obligated to pay as a result of loss to INSUREDS caused
directly by an error or omission of L&W in the processing of any
business placed or attempted to be placed by L&W for BTW. BTW shall
procure (and provide proof thereof to L&W) a policy of Errors and
Omissions insurance satisfactory to L&W with annual aggregate limits of
not less than $2,000,000.
5. L&W shall provide to BTW at one location designated by BTW a computer
terminal with such access to L&W's data processing system as is possible
pertaining only to accounts or customers for which BTW is the servicing
agent. Access to such system shall be available only through the use
of a password assigned to BTW by L&W. BTW may access such system
through a CSR employed by him but otherwise may not have multiple users
of the system. BTW is an independent contractor, not an employee, and
shall not be entitled to the services of a CSR at L&W's expense;
provided, however, that business written by BTW shall be assigned to an
L&W team and customer service (e.g., reporting of accidents and issuing
of certificates of insurance) shall be handled in the same manner as
other business produced through L&W. L&W shall provide marketing
assistance to BTW consistent with its practices and policies related to
providing such assistance to other independent contractors. In
accordance with that certain employment agreement between BTW and
Chandler (U.S.A.), Inc. life, accident and health and property-casualty
business and all other lines of insurance produced by BTW (whether
directly or in directly) must be placed solely through L&W. BTW may not
place business or receive commission directly or indirectly for the
sale, placement, or servicing insurance through any agency or insurer
not owned or controlled by Chandler (U.S.A.), Inc. without the written
consent of L&W, nor shall BTW place, service or sell the services of any
other risk spreading business association, e.g., a self-insurance group
without the consent of L&W.
6. This agreement may not be changed or modified except in writing and
signed by the parties hereto. It is intended to be effective July 1,
1997 but only if approved by L&W's Board of Directors. It may be
terminated at any time, by either party, upon thirty (30) days written
notice to the other. Such termination, however, shall in no event
affect the respective rights or liabilities of either party accruing up
to the date of termination and, shall in no wise impact separate
agreements including, but not limited to, the employment agreement and
the surviving terms thereof between Chandler USA and BTW.
7. BTW's rights hereunder may be assigned, but only with L&W's consent
which consent shall not be unreasonably withheld.
<PAGE>
EXHIBIT 10.3
Page Three
8. BTW further agrees that he shall, at his own expense, provide support
(e.g., personal conference) for marketing when reasonably requested by
L&W.
9. To the extent that any portion of this agreement is not in conformity
with state or local laws, this agreement is hereby amended to conform to
those laws but only to the extent that such an amendment is necessary to
save and assure the validity of this agreement.
By: /s/ Ben T. Walkingstick
----------------------------------------
Ben T. Walkingstick
LaGERE & WALKINGSTICK INSURANCE
AGENCY, INC.
By: /s/ R. Patrick Gilmore
----------------------------------------
R. Patrick Gilmore, Vice President
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from Chandler
Insurance Company, Ltd.'s September 30, 1997 Form 10-Q and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 108,530
<DEBT-CARRYING-VALUE> 1,588
<DEBT-MARKET-VALUE> 1,679
<EQUITIES> 1,867
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 111,985
<CASH> 15,089
<RECOVER-REINSURE> 1,620
<DEFERRED-ACQUISITION> 5,386
<TOTAL-ASSETS> 220,780
<POLICY-LOSSES> 79,861
<UNEARNED-PREMIUMS> 45,225
<POLICY-OTHER> 4,896
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 3,349
0
0
<COMMON> 11,593
<OTHER-SE> 45,916
<TOTAL-LIABILITY-AND-EQUITY> 220,780
71,751
<INVESTMENT-INCOME> 5,476
<INVESTMENT-GAINS> 36
<OTHER-INCOME> 2,063
<BENEFITS> 43,996
<UNDERWRITING-AMORTIZATION> 20,933
<UNDERWRITING-OTHER> 21,590
<INCOME-PRETAX> (7,229)
<INCOME-TAX> 1,519
<INCOME-CONTINUING> (8,748)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,748)
<EPS-PRIMARY> (1.30)
<EPS-DILUTED> (1.30)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
