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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ________ to ________
Commission File Number: 0-15286
CHANDLER INSURANCE COMPANY, LTD.
(Exact name of registrant as specified in its charter)
CAYMAN ISLANDS NONE
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5TH FLOOR ANDERSON SQUARE N/A
P.O. BOX 1854 (Zip Code)
GRAND CAYMAN, CAYMAN ISLANDS B.W.I.
(Address of principal
executive offices)
Registrant's telephone number, including area code: 345-949-8177
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
----- -----
The number of common shares, $1.67 par value, of the registrant
outstanding on October 30, 1998 was 6,941,708, which includes 544,475
common shares owned by a subsidiary of the registrant which are eligible
to vote, and 1,660,125 common shares which were rescinded through litigation
and are held by a court.
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<PAGE>
PAGE i
CHANDLER INSURANCE COMPANY, LTD.
INDEX
---------
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1
- ------
Consolidated Statements of Operations for the three months
ended September 30, 1998 and 1997.........................................1
Consolidated Statements of Operations for the nine months
ended September 30, 1998 and 1997.........................................2
Consolidated Statements of Comprehensive Income for the three
months ended September 30, 1998 and 1997..................................3
Consolidated Statements of Comprehensive Income for the nine
months ended September 30, 1998 and 1997..................................4
Consolidated Balance Sheets as of September 30, 1998 and
December 31, 1997.........................................................5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1998 and 1997.........................................6
Notes to Interim Consolidated Financial Statements........................7
ITEM 2
- ------
Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................12
PART II - OTHER INFORMATION
- ---------------------------
Item 1 Legal Proceedings..............................................17
Item 2 Changes in Securities..........................................17
Item 3 Defaults Upon Senior Securities................................17
Item 4 Submission of Matters to a Vote of Security Holders............17
Item 5 Other Information..............................................17
Item 6 Exhibits and Reports on Form 8-K...............................17
Signatures................................................................18
<PAGE>
PAGE 1
CHANDLER INSURANCE COMPANY, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands except per share data)
<TABLE>
<CAPTION>
For the three months
ended September 30,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Premiums and other revenues
Direct premiums written and assumed..............$ 44,156 $ 38,851
Reinsurance premiums ceded....................... (17,322) (11,864)
---------- ----------
Net premiums written and assumed.............. 26,834 26,987
Increase in unearned premiums.................... (8,975) (4,632)
---------- ----------
Net premiums earned........................... 17,859 22,355
Net investment income............................... 1,941 1,853
Commissions, fees and other income.................. 448 623
---------- ----------
Total premiums and other revenues............. 20,248 24,831
---------- ----------
Operating costs and expenses
Losses and loss adjustment expenses.............. 12,265 12,860
Policy acquisition costs......................... 4,002 6,698
General and administrative expenses.............. 2,971 3,186
Interest expense................................. 286 100
Litigation expenses, net......................... 233 408
---------- ----------
Total operating costs and expenses............ 19,757 23,252
---------- ----------
Income before income taxes.......................... 491 1,579
Federal income tax benefit (provision) of
consolidated U.S. subsidiaries................... 114 (538)
---------- ----------
Net income..........................................$ 605 $ 1,041
========== ==========
Basic and diluted earnings per common share.........$ 0.09 $ 0.16
Basic weighted average common shares outstanding.... 6,417 6,561
Diluted weighted average common shares
outstanding...................................... 6,430 6,561
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
PAGE 2
CHANDLER INSURANCE COMPANY, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands except per share data)
<TABLE>
<CAPTION>
For the nine months
ended September 30,
------------------------
1998 1997
----------- ----------
<S> <C> <C>
Premiums and other revenues
Direct premiums written and assumed............$ 103,617 $ 95,766
Reinsurance premiums ceded..................... (44,129) (19,576)
----------- ----------
Net premiums written and assumed............ 59,488 76,190
Increase in unearned premiums.................. (8,015) (4,439)
----------- ----------
Net premiums earned......................... 51,473 71,751
Net investment income............................. 5,631 5,476
Commissions, fees and other income................ 1,547 2,063
----------- ----------
Total premiums and other revenues........... 58,651 79,290
----------- ----------
Operating costs and expenses
Losses and loss adjustment expenses............ 35,982 43,996
Policy acquisition costs....................... 13,052 20,933
General and administrative expenses............ 9,557 9,982
Interest expense............................... 687 278
Litigation expenses, net....................... (3,123) 11,330
----------- ----------
Total operating costs and expenses.......... 56,155 86,519
----------- ----------
Income (loss) before income taxes................. 2,496 (7,229)
Federal income tax benefit (provision) of
consolidated U.S. subsidiaries................. 114 (1,519)
----------- ----------
Net income (loss).................................$ 2,610 $ (8,748)
=========== ==========
Basic and diluted earnings (loss) per common
share..........................................$ 0.41 $ (1.30)
Basic weighted average common shares
outstanding.................................... 6,433 6,735
Diluted weighted average common shares
outstanding.................................... 6,443 6,735
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
PAGE 3
CHANDLER INSURANCE COMPANY, LTD.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
For the three months
ended September 30,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Net income..........................................$ 605 $ 1,041
---------- ----------
Other comprehensive income, before tax:
Unrealized gains on securities:
Unrealized holding gains arising during
period..................................... 2,075 1,175
Less: reclassification adjustment for gains
included in net income................. (371) (4)
---------- ----------
Other comprehensive income, before tax.............. 1,704 1,171
Income tax expense related to items of other
comprehensive income............................. (509) (329)
---------- ----------
Other comprehensive income, net of tax.............. 1,195 842
---------- ----------
Comprehensive income................................$ 1,800 $ 1,883
========== ==========
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
PAGE 4
CHANDLER INSURANCE COMPANY, LTD.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
For the nine months
ended September 30,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Net income (loss)..................................$ 2,610 $ (8,748)
---------- ----------
Other comprehensive income, before tax:
Unrealized gains on securities:
Unrealized holding gains arising during
period.................................... 2,578 769
Less: reclassification adjustment for gains
included in net income (loss)......... (648) (36)
---------- ----------
Other comprehensive income, before tax............. 1,930 733
Income tax expense related to items of other
comprehensive income............................ (553) (205)
---------- ----------
Other comprehensive income, net of tax............. 1,377 528
---------- ----------
Comprehensive income (loss)........................$ 3,987 $ (8,220)
========== ==========
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
PAGE 5
CHANDLER INSURANCE COMPANY, LTD.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Investments
Fixed maturities available for sale,
at fair value............................ $ 110,913 $ 111,718
Fixed maturities held to maturity, at
amortized cost (fair value $1,338 and
$1,330 in 1998 and 1997, respectively)... 1,167 1,222
Equity securities available for sale,
at fair value............................ 191 124
------------- ------------
Total investments........................ 112,271 113,064
Cash and cash equivalents...................... 12,884 11,999
Premiums receivable, less allowance for
non-collection of $118 and $115 at 1998
and 1997, respectively...................... 31,890 28,079
Reinsurance recoverable on paid losses, less
allowance for non-collection of $275 at
1998 and 1997............................... 2,040 3,069
Reinsurance recoverable on unpaid losses, less
allowance for non-collection of $334
and $390 at 1998 and 1997, respectively..... 27,566 10,876
Prepaid reinsurance premiums................... 11,811 9,662
Deferred policy acquisition costs.............. 6,856 5,312
Property and equipment, net.................... 7,904 5,907
Other assets................................... 12,236 12,893
Licenses, net.................................. 4,231 4,344
Excess of cost over net assets acquired, net... 4,766 5,252
Covenants not to compete, net.................. 33 333
------------- ------------
Total assets................................... $ 234,488 $ 210,790
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Unpaid losses and loss adjustment expenses.. $ 82,488 $ 74,929
Unearned premiums........................... 52,552 42,388
Policyholder deposits....................... 4,632 4,830
Notes payable............................... 9,944 2,796
Accrued taxes and other payables............ 4,202 6,340
Premiums payable............................ 5,563 4,554
Litigation liabilities...................... 13,037 16,618
------------- ------------
Total liabilities.............................. 172,418 152,455
------------- ------------
Shareholders' equity
Common stock, $1.67 par value, 10,000,000
shares authorized, 6,941,708 shares issued.. 11,593 11,593
Paid-in surplus............................. 34,982 34,942
Common stock to be issued (20,000 shares)... 125 -
Capital redemption reserve.................. 947 947
Retained earnings........................... 27,496 24,886
Less: Stock held by subsidiary, at cost
(544,475 and 494,617 shares in 1998 and
1997, respectively)...................... (2,904) (2,487)
Less: Stock rescinded through litigation
(1,660,125 shares)....................... (11,799) (11,799)
Accumulated other comprehensive income:
Unrealized gain on investments available
for sale, net of tax.................. 1,630 253
------------- ------------
Total shareholders' equity..................... 62,070 58,335
------------- ------------
Total liabilities and shareholders' equity..... $ 234,488 $ 210,790
============= ============
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
PAGE 6
CHANDLER INSURANCE COMPANY, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
For the nine months
ended September 30,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)..................................$ 2,610 $ (8,748)
Add (deduct):
Adjustments to reconcile net income (loss) to
cash from operations:
Net realized gains on sales of investments... (648) (36)
Net (gains) losses on sales of property
and equipment............................. (140) 2
Amortization and depreciation................ 1,841 1,622
Provision for non-collection of premiums..... 65 119
Provision for non-collection of reinsurance
recoverables.............................. 50 449
Earned compensation - outside director stock
option and stock grant plan............... 272 -
Net change in non-cash balances relating to
operations:
Premiums receivable....................... (3,876) (4,785)
Reinsurance recoverable on paid losses.... 659 1,716
Reinsurance recoverable on unpaid losses.. (16,370) (332)
Prepaid reinsurance premiums.............. (2,149) (4,777)
Deferred policy acquisition costs......... (1,544) (393)
Other assets.............................. 104 (3,168)
Unpaid losses and loss adjustment
expenses............................... 7,559 222
Unearned premiums......................... 10,164 9,216
Policyholder deposits..................... (198) 880
Accrued taxes and other payables.......... (2,138) (2,609)
Premiums payable.......................... 1,009 5,706
Litigation liabilities.................... (3,581) 11,702
---------- -----------
Cash (applied to) provided by operations..... (6,311) 6,786
---------- -----------
INVESTING ACTIVITIES:
Fixed maturities available for sale:
Purchases.................................... (46,452) (11,646)
Sales........................................ 27,909 7,568
Maturities................................... 21,638 6,221
Fixed maturities held to maturity:
Maturities................................... 100 -
Cost of property and equipment purchased........ (2,939) (733)
Proceeds from sale of property and equipment.... 316 45
---------- -----------
Cash provided by investing activities........ 572 1,455
---------- -----------
FINANCING ACTIVITIES:
Cost of stock purchased by subsidiary........... (524) -
Proceeds from notes payable..................... 8,548 -
Payments on notes payable....................... (1,400) (1,041)
---------- -----------
Cash provided by (applied to) financing
activities................................ 6,624 (1,041)
---------- -----------
Increase in cash and cash equivalents during the
period.......................................... 885 7,200
Cash and cash equivalents at beginning of period... 11,999 7,889
---------- -----------
Cash and cash equivalents at end of period......... $ 12,884 $ 15,089
========== ===========
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
PAGE 7
CHANDLER INSURANCE COMPANY, LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. They do not include all information and
footnotes required by generally accepted accounting principles for complete
financial statements. However, except as disclosed herein, there have been
no material changes in the information included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997. In the opinion of
management, all adjustments (consisting of normal recurring adjustments and
an unusual significant litigation liability adjustment described in Note 2)
considered necessary for a fair presentation have been included. The results
of operations for the three and nine month periods ended September 30, 1998
are not necessarily indicative of the results that may be expected for the
year. Certain reclassifications of prior years have been made to conform to
the 1998 presentation.
The consolidated financial statements include the accounts of Chandler
Insurance Company, Ltd. ("Chandler" or the "Company") and subsidiaries
including:
- Chandler Insurance (Barbados), Ltd. ("Chandler Barbados") and NAICO
Indemnity (Cayman), Ltd. ("NAICO Indemnity"), wholly owned
subsidiaries of the Company.
- Chandler (U.S.A.), Inc. ("Chandler USA"), a wholly owned subsidiary
of Chandler Barbados.
- National American Insurance Company ("NAICO"), LaGere & Walkingstick
Insurance Agency, Inc. and Network Administrators, Inc., wholly
owned subsidiaries of Chandler USA.
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, 1997 and Quarterly Reports on Form 10-Q for the periods ended March 31,
1998 and June 30, 1998, recent developments updating the CenTra, Inc.
("CenTra") litigation were described. The following supplements that
description.
CENTRA LITIGATION - OKLAHOMA
The Company has previously reported concerning the background and status
of litigation involving CenTra and certain of its affiliates, officers and
directors (the "CenTra Group") in the United States District Court for the
Western District of Oklahoma ("Oklahoma Federal Court").
As previously reported, the trial of that litigation concluded on April
22, 1997, when the Oklahoma Federal Court entered judgments on various jury
verdicts. One judgment against the Company requires the CenTra Group to
return stock it purchased in 1990 to the Company in return for 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. CenTra and Ammex were awarded $6,882,500 in
connection with a 1988 Stock Purchase Agreement. Both judgments related to
an alleged failure by the Company to adequately disclose the fact that
ownership of the Company's stock may be subject to regulation by the
Nebraska Department of Insurance under certain circumstances. Judgment was
also entered in favor of CenTra and against certain officers and/or directors
of the Company on securities claims relating to CenTra's 1990 purchases and
the failure to disclose the application of Nebraska insurance law, but the
judgments were $1 against each individual defendant on those claims. On ten
derivative claims brought by CenTra, the jury found in CenTra's favor on
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 $1
each against six officers and/or directors.
<PAGE>
PAGE 8
Judgment was also entered in favor of NAICO and NAICO Indemnity on
counterclaims against CenTra for CenTra's failure to pay insurance premiums.
Judgment was for the amount of $788,625. The judgment was paid by funds held
by the Oklahoma Federal Court aggregating, with interest, $820,185. A CenTra
affiliate, DuraRock Reinsurance, Ltd. claims $725,000 is owed to it by NAICO
and NAICO Indemnity under certain reinsurance treaties. NAICO and NAICO
Indemnity dispute that claim. The Oklahoma Federal Court's judgment also
upheld a resolution adopted by the Company's 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.
On March 10, 1998 the Oklahoma Federal Court modified the earlier
judgment for $6,882,500 to require the CenTra Group to deliver 1,142,625
shares of Chandler common stock they own or control upon payment of the
judgment by the Company and Chandler Barbados. On that same date, the
Oklahoma Federal Court also entered an order denying the CenTra Group's
request for prejudgment interest on the judgments entered in favor of the
CenTra Group. The Company recorded the Oklahoma Federal Court's judgment
requiring the return of the 1,142,625 shares of the Company's stock as a
decrease to shareholders' equity as of December 31, 1997, and reduced the
previous first quarter of 1997 net charge for litigation matters by
$6,882,500, during the fourth quarter of 1997.
On March 16, 1998 the CenTra Group filed motions for an award of costs
and attorney fees totaling approximately $4.7 million. On April 21, 1998,
the Oklahoma Federal Court denied the CenTra Group's request. The CenTra
Group did not appeal this decision within the time permitted by applicable
law. Accordingly, the Company reduced the previous first quarter of 1997
net charge for litigation matters by $3.8 million during the second quarter
of 1998. In subsequent papers filed with the appellate court, CenTra asserts
as error the Oklahoma Federal Court's denial of attorney fees.
On March 23, 1998 the CenTra Group filed a formal notice of intent to
appeal certain orders of the Oklahoma Federal Court and filed the initial
appellate brief on September 9, 1998. The CenTra Group's appeals are based
upon the Oklahoma Federal Court's failure to award prejudgment interest, the
Oklahoma Federal Court's refusal to permit the CenTra Group to amend certain
pleadings to assert new claims, the Oklahoma Federal Court's modification of
the judgment for $6,882,500 to require CenTra to return shares of the
Company's stock upon payment of the judgment, and the Oklahoma Federal
Court's entry of judgment in favor of NAICO and certain officers and
directors on CenTra's claim based upon cancellation of its insurance policies
by NAICO in 1992. The CenTra Group is also attempting to appeal the Oklahoma
Federal Court's denial of attorney fees but not the denial of costs. The
Company believes the appeal of this issue is untimely and therefore barred
by law. The Company has elected not to appeal any of the judgments. The
individual officers and directors against whom judgments were entered as
described above have all filed appeals.
The judgments on the derivative claims described above were all entered
in favor of Chandler USA. Chandler USA is, therefore, the judgment creditor
in connection with those derivative claim judgments. Chandler USA appointed
a Special Litigation Committee on April 25, 1997. That Special Litigation
Committee meets on a regular basis and has been delegated the authority of
the Chandler USA Board of Directors regarding all issues related to the
CenTra litigation in the Oklahoma Federal Court, including the derivative
claim judgments.
On April 28, 1997 the Company's Board of Directors appointed a Committee
of the Board (the "Committee") to deal with all matters arising from the
Oklahoma litigation. The Committee was delegated all authority of the Board
on these issues. The members of the Committee are Messrs. Jacoby, Maestri and
Davis, all of whom are non-parties to the CenTra litigation. That Committee
has retained independent counsel. The individual members of the Committee
review issues relating to litigation strategy, officer and director
indemnification, and claims made under the Company's director and officer
liability insurance policy on a regular basis in conjunction with a similar
committee composed of Chandler USA directors. The Committee conducts its
meetings outside the United States, but participates in telephone briefings
and discussions at least twice monthly.
Because all shares of the Company's stock owned by the CenTra Group are
held by the U.S. District Court for the District of Nebraska ("Nebraska
Federal Court"), it is unclear when or if the CenTra Group will be able to
comply with the Oklahoma Federal Court's order. The Company believes that it
is not required to pay the judgments until the CenTra Group can deliver the
shares to the Company. See CenTra Litigation - Nebraska.
The ultimate outcome of the appeals of the various parties as described
above could have a material adverse effect on the Company and could
negatively impact future earnings. The Company's management believes that
adequate financial resources are available to pay the judgments as they
currently exist or as they may be modified on appeal. 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 payments of these judgments would reduce investment
earnings or increase operating expenses in future periods.
<PAGE>
PAGE 9
CENTRA LITIGATION - NEBRASKA
The Company has previously reported regarding administrative proceedings
and decisions and court actions and decisions involving the Company and the
CenTra Group in the State of Nebraska. (See Annual Report on Form 10-K for
the fiscal year ended December 31, 1997.) The Nebraska Federal Court ordered
CenTra, M.J. Moroun, and others to deliver into the registry of the Nebraska
Federal Court all shares of Chandler stock owned or controlled by them or
their affiliates and not previously delivered to the Nebraska Federal Court
to await the outcome of the CenTra Group's appeal of a divestiture order
entered by the Nebraska Federal Court on March 25, 1997. On February 9, 1998,
CenTra deposited an additional 1,691,750 shares of the Company's stock making
the total number of shares on deposit with the Nebraska Federal Court
3,133,450 shares. In his March 25, 1997 order, the Honorable Warren K. Urbom,
U.S. District Judge for the Nebraska Federal Court, ordered the parties to
submit divestiture plans. The appeal of that order by CenTra resulted in a
delay of the deadlines for submitting the proposals.
On July 29, 1998, the U.S. Court of Appeals for the 8th Circuit affirmed
the Nebraska Federal Court's order that the CenTra Group will be divested of
ownership or control of its shares. This ruling allows the Nebraska Federal
Court to consider divestiture plans which may be submitted by NAICO, the
Nebraska Department of Insurance and the CenTra Group. All shares owned or
controlled by the CenTra Group remain in the Nebraska Federal Court's
possession pending further orders by that court. On October 28, 1998, the
CenTra Group filed pleadings in the Nebraska Federal Court requesting the
appointment of a special master to supervise the divestiture and an
independent trustee to hold and vote the Company's shares owned by the CenTra
Group in accordance with specific instructions pending the final
implementation of a divestiture plan. The specific instructions to the
trustee proposed by the CenTra Group include a direction that the trustee
vote the Company's shares to elect as directors of the Company only persons
who are unaffiliated with the CenTra Group or NAICO, its parent or
subsidiaries. The Nebraska Court has not directed the parties to submit
divestiture plans, nor has it directed them to respond to the filing made by
the CenTra Group. NAICO will respond to the CenTra Group's filing. Such
response could include NAICO's own plan of divestiture. The Company cannot
accurately predict when the Nebraska Federal Court will act upon the
submissions.
CENTRA LITIGATION - OTHER
The Company has previously reported regarding two separate lawsuits
filed against NAICO, NAICO Indemnity and certain NAICO officers during 1997
in State Court in Macomb County, Michigan. As stated in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997, NAICO,
NAICO Indemnity and the other defendants contend that the claims which are
the basis of these suits are the same claims which were prosecuted and
concluded in NAICO's and NAICO Indemnity's favor by the Oklahoma Federal
Court in April, 1997. On February 28, 1998, a Michigan Federal Court ordered
the lawsuits transferred to the Oklahoma Federal Court. They have now been
consolidated and have been assigned to the Honorable Vicki Miles-LaGrange,
the same judge who presided over the action concluded in April 1997 (see
CenTra Litigation - Oklahoma). Dispositive motions filed by NAICO, NAICO
Indemnity and the other defendants are currently under consideration by the
Oklahoma Federal Court.
At the present time, the Company is actively participating in court
proceedings, possible discovery actions and rights of appeal concerning these
various legal proceedings; therefore the Company is unable to predict the
outcome of such litigation with certainty or the effect of such ongoing
litigation on future operations.
OTHER LITIGATION
The Company and its subsidiaries are not parties to any other material
litigation other than as is routinely encountered in their respective
business activities.
NOTE 3. NOTES PAYABLE
During 1996, Chandler USA borrowed $4.5 million from a bank for a three
year term. During the fourth quarter of 1997, the related loan agreement was
amended to provide for additional borrowings up to $8.5 million and to revise
the term to five years with interest payable at a floating rate equal to 1%
over Wall Street Journal Prime, which was 8.25% at September 30, 1998.
During March 1998, Chandler USA borrowed an additional $6.2 million on the
note and the proceeds were used to repay intercompany advances from Chandler
Barbados. The outstanding balance of the note was $7.8 million at September
30, 1998. The funds received by Chandler Barbados may be used to discharge
litigation judgments. The bank note is collateralized by shares of NAICO
stock owned by Chandler USA.
In February 1998, Chandler USA entered into a five year loan agreement
with a bank having a principal amount of $2.3 million and an interest rate of
7.75%. Effective September 28, 1998, the interest rate was reduced to 7.5%.
Monthly payments are $46,482 including principal and interest. The loan is
collateralized by certain equipment which was purchased with the proceeds of
the loan. The equipment had previously been leased by Chandler USA.
<PAGE>
PAGE 10
NOTE 4. RECENT SUBORDINATED DEBENTURE OFFERING
Chandler USA is currently offering by private placement subordinated
debentures in the aggregate principal amount of $22,000,000 (the
"Debentures"). The terms of the Debentures provide for payment of interest
semiannually at the rate of 8.5% per annum commencing June 1, 1999. The
Debentures must be redeemed on December 1, 2028. Chandler USA plans to use
the proceeds of the offering to facilitate the acquisition by subsidiaries
of the Company of the Company's common shares currently owned or controlled
by the CenTra Group and which are the subject of certain rescission judgments
and a court ordered divestiture (see Note 2-Litigation); to retire a portion
of the bank debt described above; and for general corporate purposes.
The Debentures are subject to certain transfer restrictions and Chandler
USA does not plan to apply for listing on any securities exchange or The
Private Offerings, Resales and Trading through Automated Linkages ("PORTAL")
market system. By their terms, the Debentures are unsecured and subordinated
in right of payment to all of Chandler USA's existing and future liabilities
and obligations. Neither the Company nor any of its subsidiaries, other than
Chandler USA, are obligated by the Debentures. Accordingly, the Debentures
are effectively subordinated to all existing and future liabilities and
obligations of Chandler USA's existing and future subsidiaries.
NOTE 5. DIRECTORS' STOCK OPTION AND STOCK GRANT PLAN
During the second quarter of 1998 the Company's directors approved the
Directors' Stock Option and Stock Grant Plan (the "Plan"). The Plan provides
that the non-employee directors of the Company, other than Norman Harned,
Ronald Lech and M.J. Moroun, are eligible for grants of stock options and
stock grants in accordance with the terms of the Plan. Options and stock
grants may not be granted under the Plan for more than 260,000 shares of
common stock of the Company, but this number may be adjusted to reflect, if
deemed appropriate by the board of directors, any stock dividend, stock
split, share combination, recapitalization or the like, of or by the Company.
The exercise price of the stock options shall generally be equal to the
average closing price of common stock of the Company for the 30 calendar days
preceding the date the options are granted. The option period begins on the
effective date of the option grant and terminates on the tenth anniversary of
that date.
The aggregate number of shares of stock awarded to an eligible director
as a stock grant shall total 20,000 shares of common stock of the Company.
The award shall be divided into two equal installments. The first
installment of 10,000 shares shall automatically be awarded as of the first
regular board meeting after an eligible director completes ten continuous
years of service on the board. The second installment of 10,000 shares shall
automatically be awarded as of the first anniversary of the initial stock
grant, regardless of whether the director is still a member of the board.
During the second quarter of 1998, a total of 40,000 shares valued at
$250,000 were awarded to two directors, and this amount is included in
general and administrative expenses in the Company's consolidated statements
of operations. During the third quarter of 1998, the Company issued 20,000
of the 40,000 shares to the two directors as required under the Plan from the
Company's stock held by subsidiary. The difference between the average cost
of the shares issued and the share price at the date of the stock grant was
credited to paid-in surplus.
Each eligible director shall automatically be granted options to
purchase 1,500 shares of common stock of the Company as of the first regular
board meeting in each year the director serves on the board. Each eligible
director shall also automatically be granted options to purchase 30,000
shares of common stock of the Company effective as of the first regular board
meeting after the director completes ten continuous years of service on the
board. During the second quarter of 1998, options for 66,000 shares were
awarded with an exercise price of $5.92 per share, which resulted in
approximately $22,000 of compensation expense which is included in general
and administrative expenses in the Company's consolidated statements of
operations.
NOTE 6. EARNINGS PER SHARE
Basic earnings per share is computed based upon net income (loss)
divided by the weighted average number of common shares outstanding during
each period. Diluted earnings per common share is computed based upon net
income (loss) divided by the weighted average number of common shares
outstanding during each period adjusted for the effect of dilutive potential
common shares calculated using the treasury stock method. Weighted average
shares include 1,660,125 shares rescinded through litigation but still
outstanding, and exclude 544,475 shares held by a subsidiary of the Company.
The numerator for basic and diluted earnings per share for the three and nine
months ended September 30, 1998 and 1997 is equal to the net income (loss)
for the respective period. As of September 30, 1998 and 1997, there were no
antidilutive options to purchase common shares.
<PAGE>
PAGE 11
The following table sets forth the computation of the denominator for
basic and diluted earnings per share:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Denominator for basic earnings per
share - Weighted average shares... 6,417 6,561 6,433 6,735
Effect of dilutive securities -
Stock options..................... 13 - 10 -
-------- -------- -------- --------
Denominator for dilutive earnings per
share - Adjusted weighted average
shares and assumed conversions.. 6,430 6,561 6,443 6,735
======== ======== ======== ========
</TABLE>
NOTE 7. RECENTLY ADOPTED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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
separate financial statement or as a component of the statement of operations
or the statement of shareholders' equity and display the accumulated balance
of other comprehensive income separately in the shareholders' equity section
of the consolidated balance sheets. The Company adopted SFAS No. 130 on
January 1, 1998 as required. The adoption of SFAS No. 130 resulted in
revised and additional disclosures but had no effect on the financial
position, results of operations or liquidity of the Company.
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 and related information.
Operating segments are components of a company about which separate financial
information is available that is regularly evaluated by the chief operating
decision maker(s) 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 adopted SFAS No. 131 on January 1, 1998 as required.
NOTE 8. ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED
In February 1998, the FASB issued SFAS No. 132, EMPLOYERS' DISCLOSURES
ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS - AN AMENDMENT OF FASB
STATEMENTS NO. 87, 88 AND 106. SFAS No. 132 revises employers' disclosures
about pension and other postretirement benefit plans. It does not change the
measurement of recognition of those plans. It standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer considered
useful. SFAS No. 132 is effective for fiscal years beginning after December
15, 1998. The adoption is not expected to have a material impact on the
Company's consolidated financial position or results of operations. The
Company does not offer defined benefit plans or other postretirement benefit
plans to its employees; therefore, the adoption of SFAS No. 132 will not
affect the Company's financial statement disclosures.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that the Company
recognize all derivatives as either assets or liabilities in the statement of
financial condition and measure those instruments at fair value. The
accounting for changes in the fair value of a derivative (that is, gains and
losses) depends on the intended use of the derivative and the resulting
designation. The Company will adopt SFAS No. 133 on January 1, 2000 as
required. Management of the Company believes that adoption of SFAS No. 133
will not have a material impact on the Company's consolidated financial
condition or results of operations.
<PAGE>
PAGE 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Some of the statements made in this Form 10-Q Report, as well as
statements made by Chandler Insurance Company, Ltd. (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 involving a significant
concentration of ownership of common stock.
RESULTS OF OPERATIONS
PURCHASE OF ADDITIONAL REINSURANCE
During the first quarter of 1998, National American Insurance Company
("NAICO") purchased additional reinsurance under its workers compensation
and casualty reinsurance programs that substantially reduced the combined
net retentions in these lines of business. The purchase of the additional
reinsurance coverages in 1998 substantially reduces the risk of loss for
NAICO's workers compensation and casualty insurance lines of business, but
results in significantly lower net premiums earned, losses and loss
adjustment expenses and policy acquisition costs.
PREMIUMS EARNED
The following tables set forth premiums earned on a gross basis (before
reductions for premiums ceded to unaffiliated reinsurers) and a net basis for
the three and nine month periods ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, GROSS PREMIUMS EARNED NET PREMIUMS EARNED
- -------------------------------- --------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Standard property-casualty...... $ 19,975 $ 16,912 $ 10,616 $ 14,999
Political subdivisions.......... 6,491 5,501 3,368 3,943
Surety bonds.................... 3,158 2,900 2,721 2,489
Nonstandard private-passenger
automobile................... 1,097 3,515 52 700
Other........................... 1,503 566 1,102 224
--------- --------- --------- ---------
TOTAL........................... $ 32,224 $ 29,394 $ 17,859 $ 22,355
========= ========= ========= =========
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, GROSS PREMIUMS EARNED NET PREMIUMS EARNED
- -------------------------------- --------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Standard property-casualty...... $ 55,576 $ 46,125 $ 30,354 $ 40,726
Political subdivisions.......... 18,203 15,867 9,499 11,136
Surety bonds.................... 8,751 9,131 7,205 8,331
Nonstandard private-passenger
automobile................... 5,639 11,222 475 8,407
Other........................... 5,260 4,206 3,940 3,151
--------- --------- --------- ---------
TOTAL........................... $ 93,429 $ 86,551 $ 51,473 $ 71,751
========= ========= ========= =========
</TABLE>
<PAGE>
PAGE 13
Gross premiums earned, before reductions for premiums ceded to
unaffiliated reinsurers, increased $2.8 million or 10% in the quarter ended
September 30, 1998 compared to the prior year, and increased $6.9 million or
8% for the nine months ended September 30, 1998 compared to the 1997 period.
Net premiums earned decreased $4.5 million or 20% in the 1998 quarter
compared to the prior year, and decreased $20.3 million or 28% for the nine
months ended September 30, 1998 compared to the 1997 period. The reduction
in net premiums earned was due to the purchase of additional reinsurance for
NAICO's workers compensation and casualty insurance programs described
previously, and to a reinsurance arrangement for a large portion of NAICO's
nonstandard private-passenger automobile program which was effective July 1,
1997.
Gross premiums earned in the standard property-casualty program
increased $3.1 million or 18% in the current quarter versus the prior year,
and increased $9.5 million or 20% for the nine months ended September 30,
1998 compared to the 1997 period. This increase is primarily attributable to
increased production in Oklahoma and contiguous states, principally Texas.
Net premiums earned decreased $4.4 million or 29% in the current quarter
versus the prior year, and decreased $10.4 million or 25% in the nine months
ended September 30, 1998 compared to the 1997 period due to the purchase of
additional reinsurance described previously.
Gross premiums earned in the political subdivisions program increased
$990,000 or 18% in the current quarter versus the prior year, and increased
$2.3 million or 15% for the nine months ended September 30, 1998 compared to
the 1997 period due primarily to expansion of the school districts program in
Texas and increased production in Oklahoma. Net premiums earned decreased
$575,000 or 15% in the current quarter versus the prior year, and decreased
$1.6 million or 15% for the nine months ended September 30, 1998 compared to
the 1997 period due to the purchase of additional reinsurance described
previously.
Net premiums earned in the surety bond program increased $232,000 or 9%
in the current quarter versus the prior year, and decreased $1.1 million or
14% for the nine months ended September 30, 1998 compared to the 1997 period.
Net premiums earned from surety bonds produced by LaGere & Walkingstick
Insurance Agency, Inc. ("L&W") decreased $38,000 or 2% in the current quarter
versus the prior year, and decreased $559,000 or 9% for the nine months ended
September 30, 1998 compared to the 1997 period. Increased competition and
higher reinsurance costs contributed to the decline in the 1998 periods. The
remaining change in the quarter and nine month periods was attributable to
production and reinsurance adjustments related to the runoff of the Midwest
Indemnity Corp. ("Midwest") program. NAICO and Midwest agreed to terminate
the underwriting and production contract effective December 31, 1995.
During 1997, NAICO discontinued the Oklahoma and Arizona portions of the
nonstandard private-passenger automobile program. During the second quarter
of 1997, management reviewed the underwriting performance of the California
portion of the program and concluded that it would be in the Company's best
interest to substantially reduce its underwriting risk. Effective July 1,
1997, NAICO entered into a 100% quota share reinsurance agreement to fully
reinsure the risk in the California portion of the program.
During 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 (included in Other in the preceding table)
were $1.3 million in the third quarter of 1998 versus $567,000 in the 1997
quarter, and $3.5 million in the first nine months of 1998 versus $1.3
million in the 1997 period.
NET INVESTMENT INCOME
Net investment income excluding net realized gains on the sale of
investments was $1.6 million and $5.0 million in the three and nine month
periods ended September 30, 1998, respectively, compared to $1.8 million and
$5.4 million in the year ago periods. During the fourth quarter of 1997,
NAICO shifted a portion of its fixed maturities portfolio from taxable to tax
exempt bonds resulting in income from tax exempt securities of $278,000 and
$821,000 in the three and nine month periods ended September 30, 1998. NAICO
had no tax exempt income in the corresponding 1997 periods.
Net realized gains on the sale of investments were $371,000 and $648,000
in the third quarter and first nine months of 1998, respectively, compared to
$4,000 and $36,000 in the year ago periods. Net investment income including
net realized gains on the sale of investments was $1.9 million and $5.6
million in the three and nine month periods ended September 30, 1998,
respectively, compared to $1.9 million and $5.5 million in the year ago
periods.
<PAGE>
PAGE 14
COMMISSIONS, FEES AND OTHER INCOME
L&W's brokerage commissions and fees before intercompany eliminations
were $2.8 million and $6.4 million in the three and nine months ended
September 30, 1998, respectively, compared to $2.9 million and $6.9 million
in the year ago periods. The decrease in L&W's brokerage commissions and
fees in the 1998 periods is primarily a result of increased competition and
general declines in premium rates. 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 $93,000
and $452,000 in the third quarter and first nine months of 1997. Network no
longer functions as a third-party administrator and did not generate any
income in the 1998 periods.
Chandler (U.S.A.), Inc. ("Chandler USA") disposed of certain equipment
in the first quarter of 1998 that resulted in a gain of $145,000 before
provision for federal income tax.
LOSSES AND LOSS ADJUSTMENT EXPENSES
The percentage of losses and loss adjustment expenses to net premiums
earned ("loss ratio") was 68.7% and 69.9% for the quarter and nine months
ended September 30, 1998 compared to 57.5% and 61.3% in the comparable year
ago periods.
The increase in the 1998 loss ratio was primarily a result of additional
loss development from prior accident years recognized in 1998 and an increase
in storm-related losses. The prior year loss development totaled $748,000
and $5.0 million in the third quarter and first nine months, respectively,
and increased the loss ratio for the three and nine months ended September
30, 1998 by 4.2 and 9.8 percentage points. Storm-related losses from wind
and hail totaled approximately $559,000 and $117,000 in the third quarter of
1998 and 1997, respectively, and were approximately $1,334,000 in the first
nine months of 1998 versus $361,000 in the 1997 period.
POLICY ACQUISITION COSTS
Policy acquisition costs consist of costs associated with the
acquisition of new and renewal business and generally include direct costs
such as premium taxes, commissions to agents and ceding companies, and
premium-related assessments, and indirect costs such as salaries and expenses
of personnel who perform and support underwriting activities. NAICO also
receives ceding commissions from reinsurers who assume premiums from NAICO
under certain reinsurance contracts and the ceding commissions are accounted
for as a reduction of policy acquisition costs. Direct policy acquisition
costs and ceding commissions are deferred and amortized over the terms of the
policies. Recoverability of such deferred costs is dependent on the related
unearned premiums on the policies being more than expected claim losses.
The following table sets forth the Company's policy acquisition costs
for each of the three and nine month periods ended September 30, 1998 and
1997:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------- --------------------
1998 1997 1998 1997
--------- -------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Commissions expense................ $ 4,294 $ 4,097 $ 11,811 $ 12,148
Other premium related assessments,
net............................. 499 (125) 1,391 561
Premium taxes...................... 1,037 884 2,783 2,335
Excise taxes....................... 69 52 175 120
Dividends to policyholders, net.... (43) 694 107 792
Other expense...................... 5 58 65 118
--------- -------- --------- ---------
Total direct expenses.............. 5,861 5,660 16,332 16,074
Indirect underwriting expenses..... 3,994 3,907 10,138 9,940
Commissions received from
reinsurers...................... (4,806) (2,946) (11,874) (4,688)
Adjustment for deferred acquisition
costs........................... (1,047) 77 (1,544) (393)
--------- -------- --------- ---------
Net policy acquisition costs....... $ 4,002 $ 6,698 $ 13,052 $ 20,933
========= ======== ========= =========
</TABLE>
<PAGE>
PAGE 15
Total gross direct and indirect expenses as a percentage of direct
written and assumed premiums were 22.3% and 25.5% in the third quarter and
first nine months of 1998 compared to 24.6% and 27.2% in the corresponding
year ago periods. The average commission rates were 9.7% and 11.4% in the
third quarter and first nine months of 1998 versus 10.5% and 12.7% in the
year ago periods.
Indirect expenses were 9.0% and 9.8% of total direct written and assumed
premiums in the third quarter and first nine months of 1998, respectively,
compared to 10.1% and 10.4% in the corresponding year ago periods. Indirect
expenses include general overhead and administrative costs associated with
the acquisition of new and renewal business, some of which is relatively
fixed in nature, thus, the percentage of such expenses to direct written and
assumed premiums will vary depending on the Company's overall premium volume.
Commissions received from reinsurers increased $1.9 million or 63% in the
third quarter of 1998 compared to the 1997 quarter, and increased $7.2
million or 153% in the first nine months of 1998 compared to 1997, due to the
purchase of additional reinsurance discussed previously which increased
premiums ceded to reinsurers by 46% and 125% in the third quarter and first
nine months of 1998 over the 1997 periods.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were 9.1% and 10.1% of gross
premiums earned and commissions, fees and other income for the quarter and
nine month period ended September 30, 1998, compared to 10.6% and 11.3% for
the corresponding periods in 1997. During the second quarter of 1998, the
Company adopted a stock option and stock grant plan (the "Plan") for certain
non-employee directors of the Company. See Note 5 - Directors' Stock Option
and Stock Grant Plan in Notes to Interim Consolidated Financial Statements
for information concerning the Plan. Compensation expense related to the
Plan in the amount of $272,000 is included in general and administrative
expenses in the second quarter of 1998. Excluding the expense related to the
Plan, general and administrative expenses declined 7% in the quarter and nine
months ended September 30, 1998 compared to the 1997 periods.
General and administrative expenses have historically not varied in
direct proportion to the Company's revenues. A portion of such expenses is
allocated to policy acquisition costs and losses and loss adjustment expenses
based on various factors including employee counts, salaries, occupancy and
specific identification. Because certain types of expenses are fixed in
nature, the percentage of such expenses to revenues will vary depending on
the Company's overall premium volume.
LIQUIDITY AND CAPITAL RESOURCES
The Company used $6.3 million of cash for operations in the first nine
months of 1998 compared to cash provided by operations of $6.8 million in the
first nine months of 1997. The 1998 use of cash was due primarily to the
purchase of additional reinsurance described previously. See Note 3 - Notes
Payable in Notes to Interim Consolidated Financial Statements for information
concerning bank loans and the purchase of certain equipment which had
previously been leased by Chandler USA.
In April 1998, a subsidiary of the Company acquired 69,858 shares of the
Company's common stock from an agent for approximately $524,000. These
shares had previously been pledged to NAICO to secure certain obligations
resulting from insurance business produced by another agent.
Chandler USA is currently offering by private placement subordinated
debentures in the aggregate principal amount of $22,000,000. See Note 4 -
Recent Subordinated Debenture Offering in Notes to Interim Consolidated
Financial Statements for information concerning the offering.
LITIGATION AND LITIGATION EXPENSES
See Note 2 - Litigation in Notes to Interim Consolidated Financial
Statements for information concerning various litigation matters.
<PAGE>
PAGE 16
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.
YEAR 2000 READINESS DISCLOSURES
Computer software, hardware, microprocessor chips and other computer
equipment use two digits to identify a particular year, and therefore may not
recognize the number "00" or may recognize it as a year prior to 1999.
Unless computer equipment and software programs are modified to correct these
data recognition problems ("Year 2000 Problems"), errors could result. These
errors could cause damage to personal property and disrupt business practices
and functions. In addition to potential problems from computer systems,
potential problems could arise from equipment with embedded chips, such as
vaults, elevators, aircraft and other systems not generally classified as
information technology systems.
The Company has taken action to understand the nature and extent of the
work required to minimize data recognition difficulties with respect to its
systems, products and infrastructures. The Company began work in 1995 to
prepare its financial, information and other computer-based systems for the
year 2000, including updating existing legacy systems, and such work is
substantially complete at this time. The Company estimates the cost of
updating these systems to be approximately $350,000, and such costs were
expensed as they were incurred, primarily in the 1996 and 1997 years. The
Company continues to evaluate the estimated costs associated with future
efforts on actual experience. These efforts may involve additional costs.
An independent evaluation of the Company's efforts to address Year 2000
Problems is ongoing. The Company estimates the cost of the independent
evaluation to be approximately $225,000 which will be expensed as incurred.
It is currently anticipated that this evaluation will be completed in the
first quarter of 1999. This estimate is based on currently available
information. Contingency plans are also being studied and formulated, with
completion expected by mid-1999.
The Company continues to study the complex issues related to insurance
coverage for losses arising from the myriad potential fact situations
connected with Year 2000 Problems and its liability to its insureds. The
Company believes that the coverages NAICO provides do not extend to the types
of losses which are most likely to occur as a result of Year 2000 Problems.
The Company has made no provisions for reserves based on potential Year 2000
Problems. NAICO expects to utilize coverage exclusion endorsements based on
the individual underwriting of commercial accounts, and has adopted
endorsements to its policies based on forms provided and filed for approval
with various regulatory authorities by Insurance Services Office, Inc.
("ISO"). Use of these special endorsements is governed by the law and
regulatory policies of states in which NAICO is authorized to do business.
ISO may, from time to time modify such forms and NAICO may or may not modify
its coverages accordingly.
It is possible, however, that future court interpretations of policy
language based on specific facts, or legislation mandating coverage, could
result in coverage for losses attributable to Year 2000 Problems. Such
decisions or legislation could have a material adverse impact on the
Company's results of operations and financial condition. It is also possible
that the Company may incur expenses defending claims for which it is
ultimately determined there is no insurance coverage.
Likewise, the Company cannot predict the adverse impact, if any, of Year
2000 Problems upon its agents, customers, reinsurers and others who are or
may be indebted to the Company. It is possible that the credit or ability of
others with whom the Company maintains commercial relationships may be
adversely affected by one or more unforeseen circumstances caused by Year
2000 Problems.
<PAGE>
PAGE 17
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 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 6, 1998 CHANDLER INSURANCE COMPANY, LTD.
By: /s/ W. Brent LaGere
--------------------------------------
W. Brent LaGere
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Mark C. Hart
--------------------------------------
Mark C. Hart
Vice President & Treasurer
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from Chandler
Insurance Company, Ltd.'s September 30, 1998 Form 10-Q and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 110,913
<DEBT-CARRYING-VALUE> 1,167
<DEBT-MARKET-VALUE> 1,338
<EQUITIES> 191
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 112,271
<CASH> 12,884
<RECOVER-REINSURE> 2,040
<DEFERRED-ACQUISITION> 6,856
<TOTAL-ASSETS> 234,488
<POLICY-LOSSES> 82,488
<UNEARNED-PREMIUMS> 52,552
<POLICY-OTHER> 4,632
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 9,944
0
0
<COMMON> 11,593
<OTHER-SE> 50,477
<TOTAL-LIABILITY-AND-EQUITY> 234,488
51,473
<INVESTMENT-INCOME> 5,631
<INVESTMENT-GAINS> 648
<OTHER-INCOME> 1,547
<BENEFITS> 35,982
<UNDERWRITING-AMORTIZATION> 13,052
<UNDERWRITING-OTHER> 7,121
<INCOME-PRETAX> 2,496
<INCOME-TAX> (114)
<INCOME-CONTINUING> 2,610
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,610
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0.41
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
