===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------------
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1999
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 July 31, 1999 was 6,941,708, which includes 524,475
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to vote, and 1,660,125 common shares which were rescinded through litigation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 June 30, 1999 and 1998................................................1
Consolidated Statements of Operations for the six months
ended June 30, 1999 and 1998................................................2
Consolidated Statements of Comprehensive Income for the three
months ended June 30, 1999 and 1998.........................................3
Consolidated Statements of Comprehensive Income for the six
months ended June 30, 1999 and 1998.........................................4
Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998.......5
Consolidated Statements of Cash Flows for the six months
ended June 30, 1999 and 1998................................................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 June 30,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Premiums and other revenues
Direct premiums written and assumed..........................$ 39,708 $ 30,061
Reinsurance premiums ceded................................... (17,474) (12,478)
---------- ----------
Net premiums written and assumed.......................... 22,234 17,583
Increase in unearned premiums................................ (1,578) (108)
---------- ----------
Net premiums earned....................................... 20,656 17,475
Interest income, net............................................ 1,315 1,744
Realized investment gains, net.................................. - 268
Commissions, fees and other income.............................. 416 366
---------- ----------
Total premiums and other revenues......................... 22,387 19,853
---------- ----------
Operating costs and expenses
Losses and loss adjustment expenses.......................... 14,687 14,103
Policy acquisition costs..................................... 6,252 4,843
General and administrative expenses.......................... 2,938 3,209
Interest expense............................................. 213 267
Litigation expenses, net..................................... 191 (3,512)
---------- ----------
Total operating costs and expenses........................ 24,281 18,910
---------- ----------
Income (loss) before income taxes............................... (1,894) 943
Federal income tax benefit of consolidated U.S. subsidiaries.... 739 88
---------- ----------
Net income (loss)...............................................$ (1,155) $ 1,031
========== ==========
Basic and diluted earnings (loss) per common share..............$ (0.18) $ 0.16
Basic weighted average common shares outstanding................ 6,417 6,423
Diluted weighted average common shares outstanding.............. 6,435 6,437
</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 six months
ended June 30,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Premiums and other revenues
Direct premiums written and assumed...........................$ 74,819 $ 59,461
Reinsurance premiums ceded.................................... (31,527) (26,807)
---------- ----------
Net premiums written and assumed........................... 43,292 32,654
Decrease (increase) in unearned premiums................... (1,598) 960
---------- ----------
Net premiums earned........................................ 41,694 33,614
Investment income, net........................................... 2,698 3,413
Realized investment gains, net................................... 50 277
Commissions, fees and other income............................... 863 1,099
---------- ----------
Total premiums and other revenues.......................... 45,305 38,403
---------- ----------
Operating costs and expenses
Losses and loss adjustment expenses........................... 28,138 23,717
Policy acquisition costs...................................... 11,299 9,050
General and administrative expenses........................... 5,924 6,586
Interest expense.............................................. 441 401
Litigation expenses, net...................................... 450 (3,356)
---------- ----------
Total operating costs and expenses......................... 46,252 36,398
---------- ----------
Income (loss) before income taxes................................ (947) 2,005
Federal income tax benefit of consolidated U.S. subsidiaries..... 317 -
---------- ----------
Net income (loss)................................................$ (630) $ 2,005
========== ==========
Basic and diluted earnings (loss) per common share...............$ (0.10) $ 0.31
Basic weighted average common shares outstanding................. 6,417 6,441
Diluted weighted average common shares outstanding............... 6,435 6,450
</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 June 30,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Net income (loss)...........................................$ (1,155) $ 1,031
---------- ----------
Other comprehensive income, before income tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period.. (1,734) 375
Less: reclassification adjustment for gains
included in net income (loss).................. - (268)
---------- ----------
Other comprehensive income (loss), before income tax........ (1,734) 107
Income tax benefit related to items of other
comprehensive income (loss).............................. 468 (10)
---------- ----------
Other comprehensive income (loss), net of tax............... (1,266) 97
---------- ----------
Comprehensive income (loss).................................$ (2,421) $ 1,128
========== ==========
</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 six months
ended June 30,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Net income (loss)..............................................$ (630) $ 2,005
---------- ----------
Other comprehensive income (loss), before tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period.. (3,134) 504
Less: reclassification adjustment for gains
included in net income (loss)..................... (50) (277)
---------- ----------
Other comprehensive income (loss), before tax.................. (3,184) 227
Income tax benefit (expense) benefit related to items of other
comprehensive income (loss)................................. 884 (45)
---------- ----------
Other comprehensive income (loss), net of tax.................. (2,300) 182
---------- ----------
Comprehensive income (loss)....................................$ (2,930) $ 2,187
========== ==========
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
PAGE 5
CHANDLER INSURANCE COMPANY, LTD.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands except share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Investments
Fixed maturities available for sale, at fair value..............$ 103,189 $ 109,055
Fixed maturities held to maturity, at amortized cost (fair
value $1,301 and $1,332 in 1999 and 1998, respectively)...... 1,215 1,183
Equity securities available for sale, at fair value............. 276 191
------------ ------------
Total investments............................................ 104,680 110,429
Cash and cash equivalents.......................................... 5,020 10,383
Premiums receivable, less allowance for non-collection
of $186 and $200 at 1999 and 1998, respectively................. 33,340 28,479
Reinsurance recoverable on paid losses, less allowance for
non-collection of $275 at 1999 and 1998......................... 2,062 2,760
Reinsurance recoverable on unpaid losses, less allowance for
non-collection of $323 and $330 at 1999 and 1998, respectively.. 47,173 28,970
Prepaid reinsurance premiums....................................... 23,338 22,448
Deferred policy acquisition costs.................................. 2,512 2,381
Property and equipment, net........................................ 8,394 8,124
Other assets....................................................... 15,352 13,253
Licenses, net...................................................... 4,119 4,194
Excess of cost over net assets acquired, net....................... 4,280 4,604
------------ ------------
Total assets.......................................................$ 250,270 $ 236,025
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Unpaid losses and loss adjustment expenses......................$ 95,420 $ 80,909
Unearned premiums............................................... 53,135 50,647
Policyholder deposits........................................... 5,221 4,936
Notes payable................................................... 8,452 9,410
Accrued taxes and other payables................................ 4,242 3,869
Premiums payable................................................ 11,047 10,961
Litigation liabilities.......................................... 13,618 13,228
------------ ------------
Total liabilities.................................................. 191,135 173,960
------------ ------------
Shareholders' equity
Common stock, $1.67 par value, 10,000,000 shares
authorized, 6,941,708 shares issued.......................... 11,593 11,593
Paid-in surplus................................................. 35,002 34,983
Common stock to be issued (20,000 shares in 1998)............... - 125
Capital redemption reserve...................................... 947 947
Retained earnings............................................... 27,698 28,328
Less: Stock held by subsidiary, at cost (524,475 and 544,475
shares in 1999 and 1998, respectively)................... (2,799) (2,905)
Less: Stock rescinded through litigation (1,660,125 shares).... (11,799) (11,799)
Accumulated other comprehensive income:
Unrealized gain (loss) on investments available for sale, net
of deferred income taxes................................... (1,507) 793
------------ ------------
Total shareholders' equity......................................... 59,135 62,065
------------ ------------
Total liabilities and shareholders' equity.........................$ 250,270 $ 236,025
============ ============
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
PAGE 6
CHANDLER INSURANCE COMPANY, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
For the six months
ended June 30,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)...................................................$ (630) $ 2,005
Add (deduct):
Adjustments to reconcile net income to cash applied to
operating activities:
Realized investment gains, net................................ (50) (277)
Net losses (gains) on sale of property and equipment.......... 6 (145)
Amortization and depreciation................................. 1,130 1,217
Provision for non-collection of premiums...................... 96 60
Provision for non-collection of reinsurance recoverables...... - 201
Earned compensation - outside director stock option
and stock grant plan....................................... - 272
Net change in non-cash balances relating to operations:
Premiums receivable........................................ (4,957) 1,167
Reinsurance recoverable on paid losses..................... 591 1,224
Reinsurance recoverable on unpaid losses................... (18,096) (10,083)
Prepaid reinsurance premiums............................... (890) 784
Deferred policy acquisition costs.......................... (131) (497)
Other assets............................................... (1,216) 895
Unpaid losses and loss adjustment expenses................. 14,511 4,930
Unearned premiums.......................................... 2,488 (1,743)
Policyholder deposits...................................... 285 127
Accrued taxes and other payables........................... 373 (574)
Premiums payable........................................... 86 (420)
Litigation liabilities..................................... 390 (3,771)
---------- ----------
Cash applied to operating activities.......................... (6,014) (4,628)
---------- ----------
INVESTING ACTIVITIES:
Fixed maturities available for sale:
Purchases..................................................... (8,137) (18,595)
Sales......................................................... 3,048 10,784
Maturities.................................................... 7,498 17,095
Fixed maturities held to maturity:
Maturities.................................................... - 100
Cost of property and equipment purchased......................... (873) (2,634)
Proceeds from sale of property and equipment..................... 73 300
---------- ----------
Cash provided by investing activities......................... 1,609 7,050
---------- ----------
FINANCING ACTIVITIES:
Cost of stock purchased by subsidiary............................ - (524)
Proceeds from notes payable...................................... - 8,548
Payments on notes payable........................................ (958) (965)
---------- ----------
Cash provided by (applied to) financing activities............ (958) 7,059
---------- ----------
Increase (decrease) in cash and cash equivalents during the period.. (5,363) 9,481
Cash and cash equivalents at beginning of period.................... 10,383 11,999
---------- ----------
Cash and cash equivalents at end of period..........................$ 5,020 $ 21,480
========== ==========
</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, 1998. In the opinion of management,
all adjustments (consisting of normal recurring adjustments and an unusual
significant litigation liability adjustment described in Note 2) considered
necessary for a fair presentation have been included. The results of
operations for the three and six month periods ended June 30, 1999 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
1999 presentation.
The consolidated financial statements include the accounts of Chandler
Insurance Company, Ltd. ("Chandler" or the "Company") and all subsidiaries.
The following represents the significant subsidiaries:
- 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") and LaGere &
Walkingstick Insurance Agency, Inc. ("L&W"), 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, 1998 and Quarterly Report on Form 10-Q for the period ended March 31,
1999, 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. These amounts are included in other assets in the accompanying
consolidated balance sheets. 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. During 1998, the judgment was paid
by funds held by the Oklahoma Federal Court aggregating, with interest,
$820,185. DuraRock Reinsurance, Ltd. ("DuraRock"), a CenTra affiliate, claims
$725,000 is owed to it by NAICO and NAICO Indemnity under certain reinsurance
treaties. NAICO and NAICO Indemnity dispute that claim. In November 1998,
DuraRock demanded arbitration and NAICO and NAICO Indemnity responded by
appointing an arbitrator. No arbitration hearings have been held. 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. All briefing was completed on January
4, 1999 and the appeals are being considered by the U.S. Court of Appeals for
the 10th Circuit. The Company cannot predict when a decision on the appeals
will be made. 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
three directors to comprise 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 meets regularly
and participates in telephone briefings and discussions at least 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
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, 1998.) The Nebraska Court ordered CenTra,
M.J. Moroun, and others to deliver into the registry of the Nebraska Court all
shares of Chandler stock owned or controlled by them or their affiliates and
not previously delivered to the Nebraska Court to await the outcome of the
CenTra Group's appeal of a divestiture order entered by the Nebraska 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 Court 3,133,450 shares. In his March 25, 1997 order, the
Honorable Warren K. Urbom, U.S. District Judge for the Nebraska 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 Court's order that the CenTra Group will be divested of ownership
or control of its shares. This ruling allows Judge Urbom to consider
divestiture plans which may be submitted by NAICO, the Nebraska Department of
Insurance and the CenTra Group. All Chandler shares owned or controlled by
the CenTra Group remain in the Nebraska Court's possession pending further
orders by that court. On October 28, 1998, the CenTra Group filed pleadings
in the Nebraska 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. NAICO
objected to the CenTra proposal on November 25, 1998 and responded with a
divestiture plan of its own (the "NAICO Plan"). The Nebraska Court rejected
the CenTra proposal and CenTra responded to the NAICO Plan on December 28,
1998. The Nebraska Court has made no ruling on the NAICO Plan. NAICO's Plan
includes a proposal whereby the Company would acquire and cancel the shares of
Chandler stock owned or acquired by the CenTra Group. The NAICO Plan has been
approved by the Company's executive committee of the board of directors and
the boards of directors of Chandler USA and NAICO. The Nebraska Department of
Insurance generally supports the NAICO Plan. The Nebraska Court has given no
indication regarding when it will rule on the NAICO Plan.
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, 1998, 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 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. Ruling on those motions has been stayed pending
the ruling on CenTra's appeal of the April 1, 1997 judgment on the same claims
(see CenTra Litigation - Oklahoma).
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. DEBENTURE OFFERING
On July 16, 1999, Chandler USA completed a public offering of $24 million
principal amount of senior debentures with a maturity date of July 16, 2014.
The debentures were priced at $1,000 each with an interest rate of 8.75% and
are redeemable by Chandler USA on or after July 16, 2009 without penalty or
premium. The debentures have been approved for listing on the American Stock
Exchange. Standard & Poor's has assigned the debentures a rating of "BBB".
The proceeds to Chandler USA before expenses but after the underwriter's
discount were $23.16 million. The proceeds of the offering were used to repay
existing bank debt, to repay amounts owed by Chandler USA to its parent
Chandler Barbados, and for general corporate purposes. Chandler USA's
subsidiaries and affiliates will not be obligated by the debentures.
Accordingly, the debentures will be effectively subordinated to all existing
and future liabilities and obligations of Chandler USA's existing and future
subsidiaries.
<PAGE>
PAGE 10
NOTE 4. EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per common share is computed based upon net income
(loss) divided by the weighted average number of common shares outstanding
during each period. Diluted earnings (loss) 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 common shares which were rescinded through
litigation during 1997 but still outstanding, and exclude 524,475 and 544,475
common shares held by a subsidiary of the Company at June 30, 1999 and 1998,
respectively. The numerator for basic and diluted earnings per share is equal
to the net income (loss) for the respective period.
The following table sets forth the computation of the denominator for
basic and diluted earnings per common share:
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Denominator for basic earnings per share-
Weighted average shares................ 6,417 6,423 6,417 6,441
Effect of dilutive securities-
Stock options.......................... 18 14 18 9
---------- ---------- ---------- ----------
Denominator for dilutive earnings per share-
Adjusted weighted average shares
and assumed conversions............. 6,435 6,437 6,435 6,450
========== ========== ========== ==========
</TABLE>
NOTE 5. ACCOUNTING STANDARD ISSUED BUT NOT YET ADOPTED
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("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 when 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 11
NOTE 6. SEGMENT INFORMATION
The following table presents a summary of the Company's operating
segments for the three and six month periods ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Property
and All Intersegment Reported
Agency casualty other eliminations balances
---------- ---------- --------- ------------ ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED JUNE 30, 1999
Revenues from external customers (1)............$ 356 $ 20,652 $ 64 $ - $ 21,072
Intersegment revenues........................... 1,672 71 43 (1,786) -
Segment profit (loss) before income taxes (2)... 7 (1,547) (337) (17) (1,894)
THREE MONTHS ENDED JUNE 30, 1998
Revenues from external customers (1)............$ 258 $ 17,530 $ 53 $ - $ 17,841
Intersegment revenues........................... 1,455 45 36 (1,536) -
Segment profit (loss) before income taxes (2)... (12) (2,029) 2,984 - 943
SIX MONTHS ENDED JUNE 30, 1999
Revenues from external customers (1)............$ 707 $ 41,700 $ 150 $ - $ 42,557
Intersegment revenues........................... 3,325 121 82 (3,528) -
Segment profit (loss) before income taxes (2)... (105) (89) (736) (17) (947)
Segment assets..................................$ 5,045 $ 256,273 $ 4,359 $ (15,407) $ 250,270
SIX MONTHS ENDED JUNE 30, 1998
Revenues from external customers (1)............$ 865 $ 33,730 $ 118 $ - $ 34,713
Intersegment revenues........................... 2,779 96 72 (2,947) -
Segment profit (loss) before income taxes (2)... (15) (560) 2,580 - 2,005
Segment assets..................................$ 4,237 $ 226,034 $ 4,381 $ (15,796) $ 218,856
- ------------------------------------------------
</TABLE>
(1) Consists of net premiums earned and commissions, fees and other income.
(2) Includes net realized investment gains.
The following supplemental information pertaining to each insurance
program's net premiums earned and losses and loss adjustment expenses is
presented for the property and casualty segment.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1999 1998 1999 1998
------------ ------------ ----------- -----------
Insurance program (In thousands)
<S> <C> <C> <C> <C>
NET PREMIUMS EARNED
Standard property and casualty...............$ 12,112 $ 10,413 $ 24,227 $ 19,738
Political subdivision........................ 3,714 3,051 7,495 6,131
Surety bonds................................. 2,562 2,340 5,443 4,484
Group accident and health.................... 2,293 1,175 4,579 2,196
Other........................................ (25) 496 (50) 1,065
------------ ------------ ----------- -----------
$ 20,656 $ 17,475 $ 41,694 $ 33,614
============ ============ =========== ===========
LOSSES AND LOSS ADJUSTMENT EXPENSES
Standard property and casualty...............$ 8,524 $ 8,491 $ 17,453 $ 14,829
Political subdivision........................ 4,489 3,019 7,325 4,908
Surety bonds................................. (38) 528 272 924
Group accident and health.................... 1,929 1,232 3,485 2,392
Other........................................ (217) 833 (397) 664
------------ ------------ ----------- -----------
$ 14,687 $ 14,103 $ 28,138 $ 23,717
============ ============ =========== ===========
</TABLE>
<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; (vii) the ability of the
Company to obtain adequate reinsurance in amounts and at rates that will not
adversely affect its competitive position; (viii) NAICO's ability to maintain
favorable insurance company ratings; (ix) the ability of the Company and its
third party providers, agents and reinsurers to adequately address year 2000
issues; and (x) other factors including the ongoing litigation matters
involving a significant concentration of ownership of the Company's common
stock.
RESULTS OF OPERATIONS
NET PREMIUMS EARNED
The following table sets forth net premiums earned for the three and six
month periods ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Standard property and casualty.........$ 12,112 $ 10,413 $ 24,227 $ 19,738
Political subdivisions................. 3,714 3,051 7,495 6,131
Surety bonds........................... 2,562 2,340 5,443 4,484
Group accident and health.............. 2,293 1,175 4,579 2,196
Other.................................. (25) 496 (50) 1,065
---------- ---------- ---------- ----------
TOTAL..................................$ 20,656 $ 17,475 $ 41,694 $ 33,614
========== ========== ========== ==========
</TABLE>
Net premiums earned increased $3.2 million or 18% in the second quarter of
1999 compared to the second quarter of 1998, and increased $8.1 million or 24%
for the six months ended June 30, 1999 compared to the 1998 period. The
increase is primarily attributable to increased written premium production in
Texas and Oklahoma.
Net premiums earned in the standard property and casualty program
increased $1.7 million or 16% in the second quarter of 1999 compared to the
second quarter of 1998, and increased $4.5 million or 23% for the six months
ended June 30, 1999 compared to the 1998 period. The increase is primarily
attributable to increased written premium production in Texas.
Net premiums earned in the political subdivisions program increased
$663,000 or 22% in the second quarter of 1999 compared to the second quarter
of 1998, and increased $1.4 million or 22% for the six months ended June 30,
1999 compared to the 1998 period. The increase is primarily due to the
expansion of the school districts program in Texas and Missouri and increased
written premium production in Oklahoma.
Net premiums earned in the surety bond program increased $222,000 or 9%
in the second quarter of 1999 compared to the second quarter of 1998, and
increased $959,000 or 21% for the six months ended June 30, 1999 compared to
the 1998 period due primarily to increased written premium production in
California.
Net premiums earned in the group accident and health program increased
$1.1 million or 95% in the second quarter of 1999 compared to the second
quarter of 1998, and increased $2.4 million or 109% for the six months ended
June 30, 1999 compared to the 1998 period. The increases are due primarily
to a new program covering Oklahoma employers on a fully insured basis which
was effective January 1, 1999. Net premiums earned for this program were $1.4
million and $2.7 million for the second quarter and first six months of 1999,
respectively. National American Insurance Company ("NAICO") discontinued
writing new policies for the excess portion of its group accident and health
program effective April 1, 1999.
<PAGE>
PAGE 13
NET INTEREST INCOME AND NET REALIZED INVESTMENT GAINS
At June 30, 1999, the Company's investment portfolio consisted primarily
of fixed income U.S. Government, high-quality corporate and tax exempt bonds,
with approximately 5% invested in cash and money market instruments. The
Company's portfolio contains no junk bonds or real estate investments.
Net interest income decreased $429,000 or 25% in the second quarter of
1999 compared to the second quarter of 1998, and decreased $715,000 or 21% for
the six months ended June 30, 1999 compared to the 1998 period, due primarily
to the purchase of additional reinsurance coverages in 1998.
The Company had no net realized investment gains in the second quarter of
1999 compared to $268,000 in the second quarter of 1998. Net realized
investments gains were $50,000 and $277,000 in the first six months of 1999 and
1998, respectively.
COMMISSIONS, FEES AND OTHER INCOME
The Company's income from commissions, fees and other income increased
$50,000 or 14% in the second quarter of 1999 compared to the second quarter of
1998, and decreased $236,000 or 21% for the six months ended June 30, 1999
compared to the 1998 period. The majority of the Company's income from
commissions, fees and other income are from LaGere & Walkingstick Insurance
Agency, Inc. ("L&W").
L&W's brokerage commissions and fees before intercompany eliminations were
$2.0 million and $4.0 million in the three and six months ended June 30, 1999,
respectively, compared to $1.7 million and $3.5 million in the year ago
periods. A large portion of the brokerage commissions and fees for L&W is
incurred by NAICO and thus eliminated in consolidation of the Company's
subsidiaries.
Other income during the first six months of 1998 included a gain of
approximately $145,000 that resulted from L&W's disposal of certain equipment.
LOSSES AND LOSS ADJUSTMENT EXPENSES
The percentage of losses and loss adjustment expenses to net premiums
earned ("loss ratio") was 71.1% and 67.5% for the quarter and six months ended
June 30, 1999, compared to 80.7% and 70.6% in the comparable year ago periods.
During the second quarter of 1998, the Company recorded additional loss
development from prior accident years totaling approximately $3.7 million which
increased the loss ratio for the three and six month periods ended June 30,
1998 by 21.0 and 10.9 percentage points, respectively.
Weather-related losses (net of applicable reinsurance) from wind and hail
totaled $2.8 million and $3.2 million for the second quarter and first six
months of 1999, respectively, and increased the respective loss ratio by 13.4
and 7.7 percentage points. Weather-related losses totaled $660,000 and
$775,000 for the second quarter and first six months of 1998, respectively,
and increased the respective loss ratios by 3.8 and 2.3 percentage points.
NAICO is a major insurer of property owned by businesses, cities, towns,
and school districts in Oklahoma. As a result, NAICO incurs weather-related
losses. On May 3, 1999, tornadoes, hail and strong winds caused severe damage
to property owned or used by NAICO insureds. NAICO estimates total insured
damages at approximately $22.7 million. Giving effect to NAICO's applicable
reinsurance, all of which is with unaffiliated reinsurers, NAICO estimates its
net loss before income tax benefit resulting from the May 3 storms at $1.9
million which was recorded in the second quarter of 1999.
POLICY ACQUISITION COSTS
Policy acquisition costs consist of costs associated with the
acquisition of new and renewal business and generally include direct costs such
as premium taxes, commissions to agents and ceding companies and
premium-related assessments and indirect costs such as salaries and expenses
of personnel who perform and support underwriting activities. NAICO also
receives ceding commissions from certain of the reinsurers who assume premiums
from NAICO under certain reinsurance contracts and the ceding commissions are
accounted for as a reduction of policy acquisition costs. Direct policy
acquisition costs and ceding commissions are deferred and amortized over the
terms of the policies. Recoverability of such deferred costs is dependent on
the related unearned premiums on the policies being more than expected claim
losses.
<PAGE>
PAGE 14
The following table sets forth the Company's policy acquisition costs for
each of the three and six month periods ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Commissions expense........................$ 5,704 $ 3,937 $ 10,142 $ 7,517
Other premium related assessments.......... 288 386 688 892
Premium taxes.............................. 941 920 1,367 1,746
Excise taxes............................... 53 41 99 106
Dividends to policyholders................. 70 75 157 150
Other expense.............................. 55 (8) 85 60
---------- ---------- --------- ----------
Total direct expenses...................... 7,111 5,351 12,538 10,471
Indirect underwriting expenses............. 3,970 3,154 7,794 6,143
Commissions received from reinsurers....... (4,687) (3,444) (8,902) (7,068)
Adjustment for deferred acquisition costs.. (142) (218) (131) (496)
---------- ---------- --------- ----------
Net policy acquisition costs...............$ 6,252 $ 4,843 $ 11,299 $ 9,050
========== ========== ========= ==========
</TABLE>
Total gross direct and indirect expenses as a percentage of direct written
and assumed premiums were 27.9% and 27.2% in the second quarter and first six
months of 1999, respectively, compared to 28.3% and 27.9% in the corresponding
year ago periods. Commission expense as a percentage of gross written and
assumed premiums was 14.4% and 13.6% in the second quarter and the first six
months of 1999, respectively, compared to 13.1% and 12.6% in the corresponding
year ago periods. The commission rate for a portion of the surety bond program
varies inversely with the loss ratio pursuant to a commission arrangement
contingent on the loss experience of the program. In the 1998 periods, the
commission rate was lowered due to an increase in the expected loss ratio which
reduced the percentage of commission expense to gross written and assumed
premiums by 1.0 and 1.3 percentage points for the second quarter and first six
months of 1998, respectively.
Indirect underwriting expenses were 10.0% and 10.4% of total direct
written and assumed premiums in the second quarter and first six months of
1999, respectively, compared to 10.5% and 10.3% 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 business to direct
written and assumed premiums will vary depending on the Company's overall
premium volume.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were 7.8% and 8.1% of gross premiums
earned and commissions, fees, and other income in the second quarter and first
six months of 1999, respectively, compared to 10.2% and 10.6% for the
corresponding periods in 1998. During the second quarter of 1998, the Company
adopted a stock option and stock grant plan for certain non-employee directors
of the Company. Compensation expense related to the plan in the amount of
$272,000 was included in general and administrative expenses in the second
quarter of 1998. General and administrative expenses have historically not
varied in direct proportion to the Company's revenues. A portion of such
expenses is allocated to policy acquisition costs (indirect underwriting
expenses) and loss adjustment expenses based on various factors including
employee counts, salaries, occupancy and specific identification. Because
certain types of expenses are fixed in nature, the percentage of such expenses
to revenues will vary depending on the Company's overall premium volume.
<PAGE>
PAGE 15
LITIGATION EXPENSES
Litigation expenses reflect expenses related to the ongoing legal
proceedings involving CenTra, Inc. ("CenTra") and certain of their affiliates.
In April 1998, the Oklahoma Federal Court in which the CenTra litigation is
pending ordered all parties to pay their own costs and attorney's fees in the
case thus denying CenTra's request of approximately $4.7 million for those
expenses. CenTra did not appeal this decision. Accordingly, the Company
reduced the previous first quarter 1997 net charge for CenTra litigation
matters by $3.8 million during the second quarter of 1998. Increased or
renewed activity could result in greater litigation expenses in 1999 or future
years.
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.
LIQUIDITY AND CAPITAL RESOURCES
In the first six months of 1999, the Company used $6.0 million in cash
from operations due primarily to increases in premiums receivable and
reinsurance recoverables, less an increase in unpaid losses and loss adjustment
expenses, all of which generally result from the increase in written premiums
in the 1999 period and to the purchase of additional reinsurance coverages in
1998. The Company used $4.6 million in cash from operations during the first
six months of 1998.
On July 16, 1999, the Company announced that its subsidiary Chandler
(U.S.A.), Inc. ("Chandler USA") completed a public offering of $24 million
principal amount of senior debentures with a maturity date of July 16, 2014.
The debentures were priced at $1,000 each with an interest rate of 8.75% and
are redeemable by Chandler USA on or after July 16, 2009 without penalty or
premium. The debentures have been approved for listing on the American Stock
Exchange. Standard & Poor's has assigned the debentures a rating of "BBB". The
proceeds to Chandler USA before expenses but after the underwriter's discount
were $23.16 million. The proceeds of the offering were used to repay existing
bank debt, to repay amounts owed by Chandler USA to its parent Chandler
Insurance (Barbados), Ltd. (which is a subsidiary of the Company), and for
general corporate purposes.
Book value per share was $12.43 at June 30, 1999 based on 4,757,108 shares
(after giving effect to 1,660,125 shares rescinded through litigation and
524,475 shares that are held by a subsidiary of the Company) compared to $13.05
at December 31, 1998.
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 (the "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 is heavily dependent upon complex information technology
computer systems for its operations. The Company has taken action to attempt
to identify the nature and extent of the work required to assess and remediate
Year 2000 Problems with respect to its systems, products and infrastructures,
including non-information technology systems, none of which are considered
critical to operations. 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 as currently planned
is substantially complete at this time. The Company estimates that it has
spent $350,000 updating these systems to address Year 2000 Problems, and such
costs were expensed as they were incurred, primarily in 1996 and 1997.
<PAGE>
PAGE 16
During the fourth quarter of 1998, the Company retained an independent
consultant to prepare a plan for testing its information technology systems.
In late 1998, the Company determined that the testing would be performed by its
employees, and this testing was completed during the first half of 1999.
During the fourth quarter of 1998, the Company incurred approximately $150,000
in additional expenses to evaluate its information systems and in preparation
of plans to test its information systems.
The Company incurred additional costs of $125,000 to complete its testing
during the first half of 1999, of which approximately $65,000 was incurred in
the second quarter of 1999. These costs included the use of internal
employees, cost of external software to enhance testing efforts and computer
rental costs. These costs were expensed during 1999 as incurred. The Company
could incur costs in the future if additional efforts are needed to perform
modifications to the Company's information technology systems. The Company is
establishing a contingency plan for all critical business operations. The
Company expects to finalize the contingency plan during the third quarter of
1999. The contingency plan includes possible manual operations and the
implementation of alternative information processing procedures.
The Company believes, based on the information currently available, that
the most reasonably likely worst case scenarios resulting from Year 2000
Problems include:
- Legal risks arising from failure of NAICO or L&W to provide contracted
services, deal with claims on a timely basis, provide pertinent data to
those dependent upon the data and similar risks;
- Increased operational costs due to manual processing, data corruption or
disaster recovery;
- Inability to bill or invoice;
- Lost revenue resulting from the inability to render accurate billing and
from the inability to efficiently market insurance products;
- Increased legal and accounting expenses;
- Fines and associated expenses resulting from inability to comply with
regulatory requirements; and
- Failure of management controls.
Any previously mentioned Year 2000 Problems could have a material adverse
effect on the Company, including the financial condition of the Company's
subsidiaries and their ability to pay dividends or other payments to the
Company and its subsidiaries.
It is possible that the credit or operating ability of agents, reinsurers
and others with whom the Company maintains commercial relationships may be
adversely affected by one or more unforeseen circumstances caused by Year 2000
Problems. However, the Company does not have control over these third parties
and, as a result, it cannot currently determine to what extent future operating
results may be adversely affected by the failure of these third parties to
successfully address their Year 2000 Problems. However, the Company is
developing plans to attempt to minimize identified third-party exposures. The
Company has requested information from its major vendors and service providers
to assess their year 2000 readiness. The Company is currently evaluating this
information. The Company cannot predict the adverse impact, if any, of Year
2000 Problems upon parties with whom it does business.
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 NAICO's 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, and NAICO
has made no provisions for loss reserves based on potential Year 2000 Problems.
NAICO expects to utilize coverage exclusion endorsements based on the
individual underwriting of commercial accounts, and it has adopted endorsements
to its policies based on forms provided and filed for approval with various
regulatory authorities by Insurance Services Office, Inc., an insurance
services company which provides regulatory research and filing support to
insurance companies. Use of these special endorsements is governed by the laws
and regulatory policies of states in which NAICO is authorized to do business.
<PAGE>
PAGE 17
It is possible 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. It is also possible that
NAICO may incur expenses defending claims for which it is ultimately determined
there is no insurance coverage.
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
--------------------------------
The Company filed one current report on Form 8-K dated July 16, 1999
responding to Item 5 of Form 8-K.
<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: August 10, 1999 CHANDLER INSURANCE COMPANY, LTD.
By: /s/ W. Brent LaGere
---------------------------------------
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Mark C. Hart
---------------------------------------
Vice President - Accounting & Treasurer
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from Chandler
Insurance Company, Ltd.'s June 30, 1999 Form 10-Q and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 103,189
<DEBT-CARRYING-VALUE> 1,215
<DEBT-MARKET-VALUE> 1,301
<EQUITIES> 276
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 104,680
<CASH> 5,020
<RECOVER-REINSURE> 2,062
<DEFERRED-ACQUISITION> 2,512
<TOTAL-ASSETS> 250,270
<POLICY-LOSSES> 95,420
<UNEARNED-PREMIUMS> 53,135
<POLICY-OTHER> 5,221
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 8,452
0
0
<COMMON> 11,593
<OTHER-SE> 47,542
<TOTAL-LIABILITY-AND-EQUITY> 250,270
41,694
<INVESTMENT-INCOME> 2,698
<INVESTMENT-GAINS> 50
<OTHER-INCOME> 863
<BENEFITS> 28,138
<UNDERWRITING-AMORTIZATION> 11,299
<UNDERWRITING-OTHER> 6,815
<INCOME-PRETAX> (947)
<INCOME-TAX> 317
<INCOME-CONTINUING> (630)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (630)
<EPS-BASIC> (0.10)
<EPS-DILUTED> (0.10)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
