===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 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, $1.67 par value, of the registrant outstanding
on April 30, 1997 was 6,941,708.
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<PAGE>
PAGE 2
CHANDLER INSURANCE COMPANY, LTD.
INDEX
-----------
PART I - FINANCIAL INFORMATION
==============================
ITEM 1
- ------
Consolidated Statements of Operations for the
three months ended March 31, 1997 and 1996.............................. 3
Consolidated Balance Sheets as of March 31, 1997
and December 31, 1996................................................... 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 1997 and 1996.................................... 5
Notes to Interim Consolidated Financial Statements........................... 6
ITEM 2
- ------
Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................... 9
PART II - OTHER INFORMATION
===========================
Item 1 - Legal Proceedings...................................................13
Item 2 - Changes in Securities...............................................13
Item 3 - Defaults Upon Senior Securities.....................................13
Item 4 - Submission of Matters to a Vote of Security Holders.................13
Item 5 - Other Information...................................................13
Item 6 - Exhibits and Reports on Form 8-K....................................13
Signatures...................................................................14
<PAGE>
PAGE 3
CHANDLER INSURANCE COMPANY, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands except per share data)
<TABLE>
<CAPTION>
For the three months
ended March 31,
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
Premiums and other revenues
Direct premiums written and assumed.................$ 28,159 $ 21,217
Reinsurance premiums ceded.......................... (3,707) (3,409)
---------- ----------
Net premiums written and assumed.................. 24,452 17,808
Decrease (increase) in unearned premiums............ (779) 3,237
---------- ----------
Net premiums earned............................... 23,673 21,045
Net investment income................................. 1,815 1,874
Commissions, fees and other income.................... 820 870
---------- ----------
Total revenues.................................... 26,308 23,789
---------- ----------
Operating costs and expenses
Losses and loss adjustment expenses................. 15,587 13,355
Policy acquisition costs............................ 6,596 6,132
General and administrative expenses................. 3,615 3,771
Litigation expenses, net............................ 10,360 67
---------- ----------
Total operating expenses.......................... 36,158 23,325
---------- ----------
Income (loss) before income taxes..................... (9,850) 464
Federal income tax benefit (provision) of
consolidated U.S. subsidiaries...................... (477) 199
---------- ----------
Net income (loss).....................................$ (10,327) $ 663
========== ==========
Net income (loss) per share...........................$ (1.49) $ 0.10
Weighted average common shares and common
share equivalents outstanding....................... 6,942 6,942
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
PAGE 4
CHANDLER INSURANCE COMPANY, LTD.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Investments
Fixed maturities available for sale,
at estimated fair value.........................$ 107,416 $ 109,665
Fixed maturities held to maturity, at
amortized cost (estimated fair value $1,615
and $1,675 in 1997 and 1996, respectively)...... 1,561 1,582
Equity securities available for sale, at
estimated fair value............................ 1,765 -
------------ ------------
Total investments............................... 110,742 111,247
Cash and cash equivalents........................... 9,501 7,889
Premiums receivable, less allowance for
non-collection of $198 and $177 at
1997 and 1996, respectively....................... 26,870 30,413
Reinsurance recoverable on paid losses, less
allowance for non-collection of $510 and
$491 at 1997 and 1996, respectively............... 4,194 3,805
Reinsurance recoverable on unpaid losses............ 14,065 14,432
Prepaid reinsurance premiums........................ 5,701 5,470
Deferred policy acquisition costs................... 5,155 4,993
Property and equipment, net......................... 5,992 5,934
Other assets........................................ 15,518 11,517
Licenses, net....................................... 4,456 4,494
Excess of cost over net assets acquired, net........ 5,738 5,900
Covenants not to compete, net....................... 633 733
------------ ------------
Total assets........................................$ 208,565 $ 206,827
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Unpaid losses and loss adjustment expenses........$ 79,746 $ 79,639
Unearned premiums................................. 37,020 36,009
Policyholder deposits............................. 4,581 4,016
Notes payable..................................... 4,048 4,391
Accrued taxes and other payables.................. 6,515 7,777
Premiums payable.................................. 4,424 2,448
Litigation liabilities............................ 16,618 -
------------ ------------
Total liabilities............................... 152,952 134,280
------------ ------------
Shareholders' equity
Common stock, $1.67 par value, 10,000,000
shares authorized, 6,941,708 shares
issued and outstanding.......................... 11,593 11,593
Paid-in surplus................................... 34,942 34,942
Capital redemption reserve........................ 947 947
Retained earnings................................. 15,624 25,951
Unrealized loss on investments
available for sale, net of tax.................. (2,577) (886)
Less: Common stock rescinded through
litigation (517,500 shares in 1997)............. (4,916) -
------------ ------------
Total shareholders' equity.................... 55,613 72,547
------------ ------------
Total liabilities and shareholders' equity..........$ 208,565 $ 206,827
============ ============
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
PAGE 5
CHANDLER INSURANCE COMPANY, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
For the three months
ended March 31,
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss).....................................$ (10,327) $ 663
Add (deduct):
Adjustments to reconcile net income to cash
provided by (applied to) operations:
Net realized gains on sales of investments........ (14) (113)
Amortization and depreciation..................... 527 593
Provision for non-collection of premiums.......... 30 100
Provision for non-collection of
reinsurance recoverables........................ 164 200
Net change in non-cash balances
relating to operations:
Premiums receivable............................. 846 2,210
Reinsurance recoverable on paid losses.......... (529) (347)
Reinsurance recoverable on unpaid losses........ 343 (1,835)
Prepaid reinsurance premiums.................... (231) 250
Deferred policy acquisition costs............... (162) 283
Other assets.................................... (2,828) (1,587)
Unpaid losses and loss adjustment expenses...... 107 919
Unearned premiums............................... 1,011 (3,486)
Policyholder deposits........................... 565 (67)
Accrued taxes and other payables................ (1,262) (791)
Premiums payable................................ 1,976 (306)
Litigation liabilities.......................... 11,701 -
---------- ----------
Cash provided by (applied to) operations.......... 1,917 (3,314)
---------- ----------
INVESTING ACTIVITIES:
Fixed maturities available for sale
Purchases......................................... (4,801) (12,203)
Sales............................................. 1,452 5,211
Maturities........................................ 3,648 6,571
Fixed maturities held to maturity
Maturities........................................ - 1,150
Cost of property and equipment purchased............ (262) (202)
Proceeds from sale of property and equipment........ - 9
---------- ----------
Cash provided by investing activities............. 37 536
---------- ----------
FINANCING ACTIVITIES:
Payments on notes payable........................... (342) -
---------- ----------
Cash applied to financing activities.............. (342) -
---------- ----------
Increase (decrease) in cash and cash
equivalents during the period..................... 1,612 (2,778)
Cash and cash equivalents at beginning of period.... 7,889 8,524
---------- ----------
Cash and cash equivalents at end of period..........$ 9,501 $ 5,746
========== ==========
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
PAGE 6
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 month period ended March 31, 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, 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. One verdict
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 verdict 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 verdicts 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 7
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 jury verdicts and considering whether to appeal. Several
motions have been filed by all parties relating to the verdicts and prejudgment
interest. Additional requests to tax costs and fix attorney fees will be filed
following rulings on these motions. Final rulings on such motions and the
related ultimate judgments are not likely to occur until after June 30, 1997.
Because the verdicts are so recent and the final judgments are not yet
defined, 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 verdict 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 verdicts are appealed, and the
Company is pursuing various financing arrangements in the event that the
verdicts 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 verdicts would reduce investment earnings or increase operating
expenses in future periods. The Company also incurred approximately $1.8
million in attorney fees and related litigation expenses in the first quarter of
1997 due to the trial which began on February 13, 1997. Litigation expenses
were $67,000 in the first quarter of 1996.
<PAGE>
PAGE 8
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, representing approximately 45% of the
outstanding stock. 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. CenTra's appeal of this order has resulted in a delay of the deadlines
for submitting the proposals. 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.
CenTra Litigation - Other
During the first quarter of 1997 the Company concluded an arbitration
proceeding regarding an affiliate of CenTra and recorded approximately $315,000
in litigation expenses related to this matter.
Other Litigation
Midwest Indemnity Corp. ("Midwest") was the principal underwriting manager
for NAICO's surety bond program. NAICO and Midwest agreed to terminate the
underwriting and production contract effective December 31, 1995. During 1996,
Midwest made demand upon NAICO for binding arbitration of certain alleged claims
against NAICO relating to the contractual relationship. NAICO filed certain
counterclaims against Midwest and others related to the contract and related
matters. On January 6, 1997, the legal disputes among the parties were settled.
NAICO received approximately $1.8 million cash, 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. This amount
was included in premiums receivable at December 31, 1996. The remaining
receivable balances approximate $500,000 at March 31, 1997 which the Company
expects to collect.
NOTE 3. RECENTLY ADOPTED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standard ("SFAS") No. 129, Disclosure
of Information About Capital Structure. SFAS No. 129 establishes standards for
disclosure of information regarding an entity's capital structure. The adoption
of SFAS No. 129 did not affect the Company's consolidated financial position or
results of operations.
NOTE 4. ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED
In February 1997, the FASB issued SFAS No. 128, Earnings Per Share, which
establishes standards for computing and presenting earnings per share. SFAS No.
128 is effective for periods ending after December 15, 1997. Management
believes that SFAS No. 128 will not have a significant effect on the Company's
calculation of earnings per share considering its current capital structure.
<PAGE>
PAGE 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NET PREMIUMS EARNED
The following table sets forth net premiums earned for each of the three
month periods ended March 31, 1997 and 1996:
<TABLE>
<CAPTION>
For the three months
ended March 31,
----------------------
1997 1996
---------- ----------
(In thousands)
<S> <C> <C>
Standard property-casualty........$ 11,816 $ 8,267
Non-standard private
passenger automobile........... 3,924 3,834
Political subdivisions............ 3,535 3,485
Surety bonds...................... 2,913 1,824
Transportation.................... 96 528
Other............................. 1,389 3,107
---------- ----------
TOTAL..............$ 23,673 $ 21,045
========== ==========
</TABLE>
Net premiums earned increased 12% in the quarter ended March 31, 1997
compared to the prior year.
Net premiums earned in the standard property-casualty program increased $3.5
million or 43% in the current quarter versus the prior year. Net premiums
earned for workers compensation accounted for $2.4 million of the increase 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 60% in the first
quarter of 1997 compared to the year ago quarter. Net premiums earned from
surety bonds produced by LaGere & Walkingstick Insurance Agency, Inc. ("L&W")
increased to $2.0 million in the current quarter from $1.2 million in the 1996
period. The increase in business produced by L&W is primarily as a result of
expansion in New Mexico and California.
Net premiums earned from direct assignments of workers compensation policies
and participation in certain voluntary and involuntary pools ("Pools") covering
workers compensation, included in Other above, decreased to $727,000 in the
three months ended March 31, 1997 compared to $2.5 million a year ago. The
decrease is primarily attributable to decreased activity from the Pools which
decreased by $1.4 million from the 1996 quarter. During the second quarter of
1996, the Company 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 $308,000 in the first quarter of 1997.
COMMISSIONS, FEES AND OTHER INCOME
Brokerage commissions and fees before intercompany eliminations were $2.0
million in the quarter ended March 31, 1997 compared to $1.8 million in the 1996
quarter. A large portion of the brokerage commissions and fees for L&W is
incurred by National American Insurance Company ("NAICO") and thus eliminated in
the consolidation of the Company's subsidiaries.
Fees generated by Network Administrators, Inc. ("Network") were $156,000 in
the current quarter versus $151,000 in the 1996 quarter. Network is a third-
party administrator of partially self-insured group accident and health plans.
<PAGE>
PAGE 10
LOSSES AND LOSS ADJUSTMENT EXPENSES
The percentage of losses and loss adjustment expenses to net premiums earned
was 65.8% and 63.5% for the quarters ended March 31, 1997 and 1996,
respectively. In the first quarter of 1996, the Company decreased the estimated
ultimate loss ratio of a substantial portion of the surety bond program which
decreased the loss ratio by 1.5 percentage points. This decrease was offset by
corresponding adjustments to policy acquisition costs.
POLICY ACQUISITION COSTS
Policy acquisition costs as a percentage of net premiums earned were 27.9%
and 29.1% for the quarters ended March 31, 1997 and 1996, respectively. Prior
to 1997, the commission rate for a substantial portion of the surety bond
program varied inversely with the loss ratio pursuant to a commission
arrangement contingent on the loss experience of the program. The expected loss
ratio for that portion of the surety bond program was lowered in the first
quarter of 1996 and that decrease increased the percentage of net policy
acquisition costs to net premiums earned by 1.5 percentage points.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were 14.8% and 17.2% of revenues
exclusive of net investment income for the quarters ended March 31, 1997 and
1996, respectively. General and administrative expenses have historically not
varied in direct proportion to the Company's revenues. A portion of such
expenses is allocated to policy acquisition costs and loss and loss adjustment
expenses based on various factors including employee counts, salaries, occupancy
and specific identification. The 1996 quarter was increased by approximately
0.9 percentage points due to legal expenses related to a reinsurance arbitration
matter.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated $1.9 million of cash in operations in the first quarter
of 1997 compared to cash used of $3.3 million in the year ago quarter. 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 $1.5 million of fixed-income
securities available for sale prior to their maturities in the first quarter of
1997, versus $5.2 million in the 1996 quarter. 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
Indemnity Corp. ("Midwest"), which is described in Note 2 of Notes to Interim
Consolidated Financial Statements. 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. This total amount was included in premiums
receivable at December 31, 1996. The Company and its subsidiaries have
historically not purchased equity securities in their investment portfolios.
LITIGATION AND LITIGATION EXPENSES
In the Company's Annual Report on Form 10-K for the year ended December 31,
1996, 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.
<PAGE>
PAGE 11
On April 9, 1997 the jury returned verdicts on all claims. One verdict
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 verdict 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 verdicts
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 jury verdicts and considering whether to appeal. Several
motions have been filed by all parties relating to the verdicts and prejudgment
interest. Additional requests to tax costs and fix attorney fees will be filed
following rulings on these motions. Final rulings on such motions and the
related ultimate judgments are not likely to occur until after June 30, 1997.
Because the verdicts are so recent and the final judgments are not yet
defined, 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 verdict 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.
<PAGE>
PAGE 12
The Company's management believes that adequate financial resources are
available to post a supersedeas bond if the verdicts are appealed, and the
Company is pursuing various financing arrangements in the event that the
verdicts 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 verdicts would reduce investment earnings or increase operating
expenses in future periods. The Company also incurred approximately $1.8
million in attorney fees and related litigation expenses in the first quarter of
1997 due to the trial which began on February 13, 1997. Litigation expenses
were $67,000 in the first quarter 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, representing approximately 45% of the
outstanding stock. 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. CenTra's appeal of this order has resulted in a delay of the deadlines
for submitting the proposals. 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.
CenTra Litigation - Other
During the first quarter of 1997 the Company concluded an arbitration
proceeding regarding an affiliate of CenTra and recorded approximately $315,000
in litigation expenses related to this matter.
Other Litigation
Midwest Indemnity Corp. ("Midwest") was the principal underwriting manager
for NAICO's surety bond program. NAICO and Midwest agreed to terminate the
underwriting and production contract effective December 31, 1995. During 1996,
Midwest made demand upon NAICO for binding arbitration of certain alleged claims
against NAICO relating to the contractual relationship. NAICO filed certain
counterclaims against Midwest and others related to the contract and related
matters. On January 6, 1997, the legal disputes among the parties were settled.
NAICO received approximately $1.8 million cash, 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. This amount
was included in premiums receivable at December 31, 1996. The remaining
receivable balances approximate $500,000 at March 31, 1997 which the Company
expects to collect.
<PAGE>
PAGE 13
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. CHANGE 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 14
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: CHANDLER INSURANCE COMPANY, LTD.
By:
---------------------------------------------
W. Brent LaGere
Chairman of the Board of Directors and
Chief Executive Officer
(Principal Executive Officer)
By:
---------------------------------------------
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 March 31, 1997 Form 10-Q and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 107,416
<DEBT-CARRYING-VALUE> 1,561
<DEBT-MARKET-VALUE> 1,615
<EQUITIES> 1,765
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 110,742
<CASH> 9,501
<RECOVER-REINSURE> 4,194
<DEFERRED-ACQUISITION> 5,155
<TOTAL-ASSETS> 208,565
<POLICY-LOSSES> 79,746
<UNEARNED-PREMIUMS> 37,020
<POLICY-OTHER> 4,581
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 4,048
0
0
<COMMON> 11,593
<OTHER-SE> 44,020
<TOTAL-LIABILITY-AND-EQUITY> 208,565
23,673
<INVESTMENT-INCOME> 1,815
<INVESTMENT-GAINS> 14
<OTHER-INCOME> 820
<BENEFITS> 15,587
<UNDERWRITING-AMORTIZATION> 6,596
<UNDERWRITING-OTHER> 13,975
<INCOME-PRETAX> (9,850)
<INCOME-TAX> 477
<INCOME-CONTINUING> (10,327)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,327)
<EPS-PRIMARY> (1.49)
<EPS-DILUTED> (1.49)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
