================================================================================
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 June 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 Identification No.)
incorporation or organization)
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 July 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).
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<PAGE>
PAGE 2
CHANDLER INSURANCE COMPANY, LTD.
INDEX
PART I - Financial Information
==============================
Item 1
- ------
Consolidated Statements of Operations for
the three months ended June 30, 1997 and 1996..........................3
Consolidated Statements of Operations for
the six months ended June 30, 1997 and 1996............................4
Consolidated Balance Sheets as of June 30, 1997
and December 31, 1996..................................................5
Consolidated Statements of Cash Flows for the six
months ended June 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.....................................................14
Item 2 Changes in Securities.................................................14
Item 3 Defaults Upon Senior Securities.......................................14
Item 4 Submission of Matters to a Vote of Security Holders...................14
Item 5 Other Information.....................................................14
Item 6 Exhibits and Reports on Form 8-K......................................14
Signatures....................................................................15
<PAGE>
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 June 30,
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
Premiums and other revenues
Direct premiums written and assumed.................$ 28,756 $ 24,771
Reinsurance premiums ceded.......................... (4,005) (2,646)
---------- ----------
Net premiums written and assumed................. 24,751 22,125
Decrease (increase) in unearned premiums............ 972 (190)
---------- ----------
Net premiums earned.............................. 25,723 21,935
Net investment income.................................. 1,808 1,826
Commissions, fees and other income..................... 620 1,130
---------- ----------
Total revenues................................... 28,151 24,891
---------- ----------
Operating costs and expenses
Losses and loss adjustment expenses................. 15,549 13,456
Policy acquisition costs............................ 7,639 8,313
General and administrative expenses................. 3,359 3,490
Litigation expenses, net............................ 562 140
---------- ----------
Total operating expenses......................... 27,109 25,399
---------- ----------
Income (loss) before income taxes...................... 1,042 (508)
Federal income tax benefit (provision) of
consolidated U.S. subsidiaries...................... (504) 775
---------- ----------
Net income.............................................$ 538 $ 267
========== ==========
Net income per share...................................$ 0.08 $ 0.04
Weighted average common shares outstanding (excludes
effect of stock rescission)......................... 6,708 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 six months
ended June 30,
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
Premiums and other revenues
Direct premiums written and assumed.................$ 56,915 $ 45,988
Reinsurance premiums ceded.......................... (7,712) (6,055)
---------- ----------
Net premiums written and assumed................. 49,203 39,933
Decrease in unearned premiums....................... 193 3,047
---------- ----------
Net premiums earned.............................. 49,396 42,980
Net investment income.................................. 3,623 3,700
Commissions, fees and other income..................... 1,440 2,000
---------- ----------
Total revenues................................... 54,459 48,680
---------- ----------
Operating costs and expenses
Losses and loss adjustment expenses................. 31,136 26,811
Policy acquisition costs............................ 14,235 14,445
General and administrative expenses................. 6,974 7,261
Litigation expenses, net............................ 10,922 207
---------- ----------
Total operating expenses......................... 63,267 48,724
---------- ----------
Loss before income taxes............................... (8,808) (44)
Federal income tax benefit (provision)
of consolidated U.S. subsidiaries................... (981) 974
---------- ----------
Net income (loss)......................................$ (9,789) $ 930
========== ==========
Net income (loss) per share............................$ (1.43) $ 0.13
Weighted average common shares outstanding (excludes
effect of stock rescission)......................... 6,824 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>
June 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Investments
Fixed maturities available for sale,
at estimated fair value........................$ 108,419 $ 109,665
Fixed maturities held to maturity, at
amortized cost (estimated fair value
$1,647 and $1,675 in 1997 and 1996,
respectively).................................. 1,574 1,582
Equity securities available for sale, at
estimated fair value........................... 2,110 -
------------ ------------
Total investments........................... 112,103 111,247
Cash and cash equivalents............................ 4,680 7,889
Premiums receivable, less allowance for
non-collection of $170 and $177
at 1997 and 1996, respectively.................... 26,847 30,413
Reinsurance recoverable on paid losses, less
allowance for non-collection of $554 and
$491 at 1997 and 1996, respectively............... 3,530 3,805
Reinsurance recoverable on unpaid losses............. 13,225 14,432
Prepaid reinsurance premiums......................... 5,421 5,470
Deferred policy acquisition costs.................... 5,464 4,993
Property and equipment, net.......................... 6,069 5,934
Other assets......................................... 14,469 11,517
Licenses, net........................................ 4,418 4,494
Excess of cost over net assets acquired, net......... 5,576 5,900
Covenants not to compete, net........................ 533 733
------------ ------------
Total assets.........................................$ 202,335 $ 206,827
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Unpaid losses and loss adjustment expenses........$ 79,026 $ 79,639
Unearned premiums................................. 35,767 36,009
Policyholder deposits............................. 4,948 4,016
Notes payable..................................... 3,702 4,391
Accrued taxes and other payables.................. 3,615 7,777
Premiums payable.................................. 3,033 2,448
Litigation liabilities............................ 16,618 -
------------ ------------
Total liabilities........................... 146,709 134,280
------------ ------------
Shareholders' equity
Common stock, $1.67 par value, 10,000,000
shares authorized, 6,941,708 shares
issued and outstanding......................... 11,593 11,593
Paid-in surplus................................... 34,942 34,942
Capital redemption reserve........................ 947 947
Retained earnings................................. 16,162 25,951
Unrealized loss on investments
available for sale, net of tax................. (1,200) (886)
Less: Common stock held by subsidiary, at
cost (380,471 shares)....................... (1,902) -
Less: Common stock rescinded through
litigation (517,500 shares in 1997)......... (4,916) -
------------ ------------
Total shareholders' equity.................. 55,626 72,547
------------ ------------
Total liabilities and shareholders' equity...........$ 202,335 $ 206,827
============ ============
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
CHANDLER INSURANCE COMPANY, LTD. PAGE 6
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
For the six months
ended June 30,
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)......................................$ (9,789) $ 930
Add (deduct):
Adjustments to reconcile net income
to cash applied to operations:
Net realized gains on sales of investments....... (32) (114)
Net (gains) losses on sales of equipment......... 9 (6)
Amortization and depreciation.................... 1,068 1,180
Provision for non-collection of premiums......... 60 116
Provision for non-collection of
reinsurance recoverables...................... 300 1,340
Net change in non-cash balances relating
to operations:
Premiums receivable........................... (108) 2,708
Reinsurance recoverable on paid losses........ (101) (836)
Reinsurance recoverable on unpaid losses...... 1,283 4,714
Prepaid reinsurance premiums.................. 49 682
Deferred policy acquisition costs............. (471) (186)
Other assets.................................. (3,318) 1,238
Unpaid losses and loss adjustment expenses.... (613) (11,367)
Unearned premiums............................. (242) (3,728)
Policyholder deposits......................... 932 (236)
Accrued taxes and other payables.............. (4,162) (1,708)
Premiums payable.............................. 585 (789)
Litigation liabilities........................ 11,701 -
---------- ----------
Cash applied to operations....................... (2,849) (6,062)
---------- ----------
INVESTING ACTIVITIES:
Fixed maturities available for sale
Purchases........................................ (10,357) (13,573)
Sales............................................ 6,550 12,340
Maturities....................................... 4,691 8,546
Fixed maturities held to maturity
Maturities....................................... - 2,300
Cost of property and equipment purchased............ (565) (311)
Proceeds from sale of property and equipment........ 9 27
Other............................................... - (20)
---------- ----------
Cash provided by investing activities............ 328 9,309
---------- ----------
FINANCING ACTIVITIES:
Payments on notes payable........................... (688) -
---------- ----------
Cash applied to financing activities............. (688) -
---------- ----------
Increase (decrease) in cash and cash
equivalents during the period.................... (3,209) 3,247
Cash and cash equivalents at beginning of period....... 7,889 8,524
---------- ----------
Cash and cash equivalents at end of period.............$ 4,680 $ 11,771
========== ==========
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
CHANDLER INSURANCE COMPANY, LTD. PAGE 7
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 six month periods ended June 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., 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
and Quarterly Report on Form 10-Q for the quarter ended March 31, 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. 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 (Cayman), Ltd. 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.
Additional motions to tax costs and fix attorney fees will be filed following
rulings on these motions.
Because the judgments are so recent and 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
$550,000 and $2.3 million in attorney fees and related litigation expenses
in the second quarter and first half of 1997. Litigation expenses were $140,000
and $207,000 in the second quarter and first half of 1996.
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. 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.
<PAGE>
PAGE 9
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. 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
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.
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.
<PAGE>
PAGE 10
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 six
month periods ended June 30, 1997 and 1996:
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
---------------------- ----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Standard property-casualty........$ 13,911 $ 8,933 $ 25,727 $ 17,200
Non-standard private
passenger automobile........... 3,783 4,758 7,707 8,592
Political subdivisions............ 3,658 3,458 7,193 6,943
Surety bonds...................... 2,929 2,428 5,842 4,252
Transportation.................... (100) 596 (4) 1,124
Other............................. 1,542 1,762 2,931 4,869
---------- ---------- ---------- ----------
TOTAL..............$ 25,723 $ 21,935 $ 49,396 $ 42,980
========== ========== ========== ==========
</TABLE>
Net premiums earned increased 17% and 15% for the three and six months ended
June 30, 1997 compared to the prior year.
Net premiums earned in the standard property-casualty program increased $5.0
million and $8.5 million (or 56% and 50%) for the current quarter and first
half, respectively, compared to the year ago periods. Net premiums earned for
workers compensation accounted for $2.9 million and $5.3 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.
Net premiums earned in the surety bond program increased 21% and 37% in the
three and six months ended June 30, 1997 compared to the 1996 periods. Net
premiums earned from surety bonds produced by LaGere & Walkingstick Insurance
Agency, Inc. ("L&W") increased to $2.0 million and $4.0 million for the 1997
periods compared to $1.4 million and $2.6 million in the comparable 1996
periods. The increase in business produced by L&W is primarily a result of
expansion in New Mexico and California.
Net premiums earned in the non-standard private passenger automobile programs
declined 20% and 10% in the current quarter and first half of 1997 compared to
the year ago periods. Net premiums earned for the Oklahoma portion of the
program decreased to $463,000 and $1.1 million for the second quarter and first
half of 1997 compared to $1.3 million and $2.4 million in the comparable 1996
periods. Net premiums earned from the Arizona portion of the program decreased
to $258,000 and $768,000 in the current quarter and first half of 1997 compared
to $785,000 and $1.3 million in the year ago periods. These decreases are
primarily 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 in the California portion of the program increased to $3.1
million and $5.9 million for the three and six month periods ended June 30,
1997, respectively, compared to $2.7 million and $4.8 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 for the California
portion of the program were $9.6 million and $6.7 million for the years ended
December 31, 1996 and 1995.
<PAGE>
PAGE 11
Net premiums earned from the political subdivisions program increased 6% and 4%,
respectively, in the three and six month periods ended June 30, 1997 compared to
a year ago. Expansion of the school districts portion of the program in Texas
accounted for most of the increase.
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 $847,000 and $1.6 million in
the second quarter and first half of 1997 compared to $1.3 million and $3.8
million in the comparable 1996 periods. The decrease is primarily attributable
to decreased activity from the Pools, which decreased by $141,000 and $1.5
million from the respective 1996 periods.
During the second quarter of 1996, NAICO began writing excess accident and
health coverage for small to medium sized employers generally in Oklahoma and
Texas. Net premiums earned in this program were $451,000 and $758,000 in the
second quarter and first half of 1997 compared to $12,000 for both periods in
1996.
Commissions, Fees and Other Income
L&W's brokerage commissions and fees before intercompany eliminations were $2.0
million and $4.0 million in the three and six months ended June 30, 1997,
respectively, compared to $1.7 million and $3.5 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 $146,000 and
$359,000 in the second quarter and first half of 1997 compared to $186,000 and
$337,000 in the comparable 1996 periods. Network is a third-party administrator
of partially self-insured group accident and health plans. A portion of the
fees for Network is incurred by NAICO and thus eliminated in the consolidation
of the Company's subsidiaries.
Losses and Loss Adjustment Expenses
The percentage of losses and loss adjustment expenses to net premiums earned was
60.4% and 63.0% for the quarter and six months ended June 30, 1997 compared to
61.3% and 62.4% in the comparable year ago periods.
Policy Acquisition Costs
Policy acquisition costs as a percentage of net premiums earned were 29.7% and
28.8% for the second quarter and first half of 1997, respectively, compared to
37.9% and 33.6% in the 1996 periods. The percentages for the second quarter and
first six months of 1996 were increased by approximately 5.1 and 2.5 percentage
points due to a lower than expected award from a reinsurance arbitration
proceeding concluded in the second quarter of 1996.
General and Administrative Expenses
General and administrative expenses were 12.8% and 13.7% of revenues exclusive
of net investment income for the quarter and six months ended June 30, 1997
compared to 15.1% and 16.1% 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 loss and loss adjustment expenses based on various factors
including employee counts, salaries, occupancy and specific identification. The
percentages for the second quarter and first six months of 1996 were increased
by approximately 1.2 and 1.1 percentage points due to legal expenses related to
a reinsurance arbitration matter.
Liquidity and Capital Resources
The Company used $2.8 million of cash for operations in the first half of 1997
compared to cash used of $6.1 million in the year ago period. The use of cash
in 1997 includes approximately $3.4 million in premium and loss payments related
to various CenTra insurance programs. 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 $6.6 million of fixed-income securities available for sale prior to
their maturities in the first half of 1997 compared to $12.3 million in the
first half of 1996. See Litigation Expenses for information concerning certain
liabilities regarding legal proceedings.
<PAGE>
PAGE 12
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
Indemnity Corp. ("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
and Quarterly Report on Form 10-Q for the quarter ended March 31, 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. 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.
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. 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.
Additional motions to tax costs and fix attorney fees will be filed following
rulings on these motions.
<PAGE>
PAGE 13
Because the judgments are so recent and 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
$550,000 and $2.3 million in attorney fees and related litigation expenses
in the second quarter and first half of 1997. Litigation expenses were $140,000
and $207,000 in the second quarter and first half of 1996.
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. 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. 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.
<PAGE>
PAGE 14
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
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.
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
None
Item 6. Exhibits and Reports on Form 8-K
None
<PAGE>
PAGE 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: July 29, 1997 CHANDLER INSURANCE COMPANY, LTD.
By: /s/ W. Brent LaGere
--------------------------------
W. Brent LaGere
Chairman of the Board of
Directors 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)
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from Chandler
Insurance Company, Ltd.'s June 30, 1997 Form 10-Q and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 108,419
<DEBT-CARRYING-VALUE> 1,574
<DEBT-MARKET-VALUE> 1,647
<EQUITIES> 2,110
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 112,103
<CASH> 4,680
<RECOVER-REINSURE> 3,530
<DEFERRED-ACQUISITION> 5,464
<TOTAL-ASSETS> 202,335
<POLICY-LOSSES> 79,026
<UNEARNED-PREMIUMS> 35,767
<POLICY-OTHER> 4,948
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 3,702
0
0
<COMMON> 11,593
<OTHER-SE> 44,033
<TOTAL-LIABILITY-AND-EQUITY> 202,335
49,396
<INVESTMENT-INCOME> 3,623
<INVESTMENT-GAINS> 32
<OTHER-INCOME> 1,440
<BENEFITS> 31,136
<UNDERWRITING-AMORTIZATION> 14,235
<UNDERWRITING-OTHER> 17,896
<INCOME-PRETAX> (8,808)
<INCOME-TAX> 981
<INCOME-CONTINUING> (9,789)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,789)
<EPS-PRIMARY> (1.43)
<EPS-DILUTED> (1.43)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
