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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, 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 Identification No.)
incorporation or organization)
5TH FLOOR ANDERSON SQUARE N/A
P.O. BOX 1854 (Zip Code)
GRAND CAYMAN, CAYMAN ISLANDS B.W.I.
(Address of principal executive offices)
Registrant's telephone number, including area code: 345-949-8177
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
--- ---
The number of common shares, $1.67 par value, of the registrant
outstanding on October 29, 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and 1,660,125 common shares which were rescinded through litigation and are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 September 30, 1999 and 1998......................................1
Consolidated Statements of Operations for the nine months
ended September 30, 1999 and 1998......................................2
Consolidated Statements of Comprehensive Income for the three
months ended September 30, 1999 and 1998...............................3
Consolidated Statements of Comprehensive Income for the nine
months ended September 30, 1999 and 1998...............................4
Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998..5
Consolidated Statements of Cash Flows for the nine months
ended September 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 September 30,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Premiums and other revenues
Direct premiums written and assumed........................$ 50,219 $ 44,156
Reinsurance premiums ceded................................. (19,382) (17,322)
---------- ----------
Net premiums written and assumed...................... 30,837 26,834
Increase in unearned premiums.............................. (8,472) (8,975)
---------- ----------
Net premiums earned................................... 22,365 17,859
Interest income, net............................................ 1,373 1,570
Realized investment gains, net.................................. 5 371
Commissions, fees and other income.............................. 499 448
---------- ----------
Total premiums and other revenues..................... 24,242 20,248
---------- ----------
Operating costs and expenses
Losses and loss adjustment expenses........................ 16,382 12,265
Policy acquisition costs................................... 4,863 4,002
General and administrative expenses........................ 3,086 2,971
Interest expense........................................... 514 286
Litigation expenses, net................................... 233 233
---------- ----------
Total operating costs and expenses.................... 25,078 19,757
---------- ----------
Income (loss) before income taxes............................... (836) 491
Federal income tax benefit of consolidated U.S. subsidiaries.... 513 114
---------- ----------
Net income (loss)...............................................$ (323) $ 605
========== ==========
Basic and diluted earnings (loss) per common share..............$ (0.05) $ 0.09
Basic weighted average common shares outstanding................ 6,417 6,417
Diluted weighted average common shares outstanding.............. 6,433 6,430
</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,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Premiums and other revenues
Direct premiums written and assumed........................$ 125,038 $ 103,617
Reinsurance premiums ceded................................. (50,909) (44,129)
---------- ----------
Net premiums written and assumed...................... 74,129 59,488
Increase in unearned premiums.............................. (10,070) (8,015)
---------- ----------
Net premiums earned................................... 64,059 51,473
Interest income, net............................................ 4,071 4,983
Realized investment gains, net.................................. 55 648
Commissions, fees and other income.............................. 1,362 1,547
---------- ----------
Total premiums and other revenues..................... 69,547 58,651
---------- ----------
Operating costs and expenses
Losses and loss adjustment expenses........................ 44,520 35,982
Policy acquisition costs................................... 16,162 13,052
General and administrative expenses........................ 9,010 9,557
Interest expense........................................... 955 687
Litigation expenses, net................................... 683 (3,123)
---------- ----------
Total operating costs and expenses.................... 71,330 56,155
---------- ----------
Income (loss) before income taxes............................... (1,783) 2,496
Federal income tax benefit of consolidated U.S. subsidiaries.... 830 114
---------- ----------
Net income (loss)...............................................$ (953) $ 2,610
========== ==========
Basic and diluted earnings (loss) per common share..............$ (0.15) $ 0.41
Basic weighted average common shares outstanding................ 6,417 6,433
Diluted weighted average common shares outstanding.............. 6,434 6,443
</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,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Net income (loss).....................................................$ (323) $ 605
---------- ----------
Other comprehensive income (loss), before income tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period..... (297) 2,075
Less: reclassification adjustment for gains
included in net income (loss)........................ (5) (371)
---------- ----------
Other comprehensive income (loss), before income tax.................. (302) 1,704
Income tax benefit (provision) related to items of other
comprehensive income (loss)...................................... 71 (509)
---------- ----------
Other comprehensive income (loss), net of tax......................... (231) 1,195
---------- ----------
Comprehensive income (loss)...........................................$ (554) $ 1,800
========== ==========
</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,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Net income (loss).....................................................$ (953) $ 2,610
---------- ----------
Other comprehensive income (loss), before tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period..... (3,431) 2,578
Less: reclassification adjustment for gains
included in net income (loss)........................ (55) (648)
---------- ----------
Other comprehensive income (loss), before tax......................... (3,486) 1,930
Income tax benefit (provision) related to items of other
comprehensive income (loss)...................................... 955 (553)
---------- ----------
Other comprehensive income (loss), net of tax......................... (2,531) 1,377
---------- ----------
Comprehensive income (loss)...........................................$ (3,484) $ 3,987
========== ==========
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
PAGE 5
CHANDLER INSURANCE COMPANY, LTD.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Investments
Fixed maturities available for sale, at fair value..............$ 100,848 $ 109,055
Fixed maturities held to maturity, at amortized cost (fair
value $1,309 and $1,332 in 1999 and 1998, respectively).... 1,232 1,183
Equity securities available for sale, at fair value............. 276 191
------------- ------------
Total investments.......................................... 102,356 110,429
Cash and cash equivalents............................................ 27,911 10,383
Premiums receivable, less allowance for non-collection
of $213 and $200 at 1999 and 1998, respectively................. 36,789 28,479
Reinsurance recoverable on paid losses, less allowance for
non-collection of $275 at 1999 and 1998......................... 2,289 2,760
Reinsurance recoverable on unpaid losses, less allowance for
non-collection of $308 and $330 at 1999 and 1998, respectively.. 49,678 28,970
Prepaid reinsurance premiums......................................... 27,179 22,448
Deferred policy acquisition costs.................................... 3,133 2,381
Property and equipment, net.......................................... 9,061 8,124
Other assets......................................................... 17,109 13,253
Licenses, net........................................................ 4,082 4,194
Excess of cost over net assets acquired, net......................... 4,118 4,604
------------- ------------
Total assets.........................................................$ 283,705 $ 236,025
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Unpaid losses and loss adjustment expenses......................$ 96,594 $ 80,909
Unearned premiums............................................... 65,448 50,647
Policyholder deposits........................................... 5,692 4,936
Notes payable................................................... - 9,410
Accrued taxes and other payables................................ 4,112 3,869
Premiums payable................................................ 15,458 10,961
Litigation liabilities.......................................... 13,820 13,228
Debentures...................................................... 24,000 -
------------- ------------
Total liabilities.................................................... 225,124 173,960
------------- ------------
Shareholders' equity
Common stock, $1.67 par value, 10,000,000 shares
authorized, 6,941,708 shares issued........................ 11,593 11,593
Paid-in surplus................................................. 35,002 34,983
Common stock to be issued (20,000 shares in 1998)............... - 125
Capital redemption reserve...................................... 947 947
Retained earnings............................................... 27,375 28,328
Less: Stock held by subsidiary, at cost (524,475 and 544,475
shares in 1999 and 1998, respectively)..................... (2,799) (2,905)
Less: Stock rescinded through litigation (1,660,125 shares).... (11,799) (11,799)
Accumulated other comprehensive income:
Unrealized gain (loss) on investments available for sale, net
of deferred income taxes.............................. (1,738) 793
------------- ------------
Total shareholders' equity........................................... 58,581 62,065
------------- ------------
Total liabilities and shareholders' equity...........................$ 283,705 $ 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 nine months
ended September 30,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................................$ (953) $ 2,610
Add (deduct):
Adjustments to reconcile net income (loss) to cash provided by
(applied to) operating activities:
Realized investment gains, net................................. (55) (648)
Net losses (gains) on sale of property and equipment........... 1 (140)
Amortization and depreciation.................................. 1,746 1,841
Provision for non-collection of premiums....................... 166 65
Provision for non-collection of reinsurance recoverables....... - 50
Earned compensation - outside director stock option
and stock grant plan...................................... - 272
Net change in non-cash balances relating to operations:
Premiums receivable....................................... (8,476) (3,876)
Reinsurance recoverable on paid losses.................... 352 659
Reinsurance recoverable on unpaid losses.................. (20,589) (16,370)
Prepaid reinsurance premiums.............................. (4,731) (2,149)
Deferred policy acquisition costs......................... (752) (1,544)
Other assets.............................................. (1,233) 104
Unpaid losses and loss adjustment expenses................ 15,685 7,559
Unearned premiums......................................... 14,801 10,164
Policyholder deposits..................................... 756 (198)
Accrued taxes and other payables.......................... 243 (2,138)
Premiums payable.......................................... 4,497 1,009
Litigation liabilities.................................... 592 (3,581)
---------- ----------
Cash provided by (applied to) operating activities............. 2,050 (6,311)
---------- ----------
INVESTING ACTIVITIES:
Fixed maturities available for sale:
Purchases...................................................... (16,654) (46,452)
Sales.......................................................... 4,159 27,909
Maturities..................................................... 15,820 21,638
Fixed maturities held to maturity:
Maturities..................................................... 1,000 100
Cost of property and equipment purchased............................ (1,841) (2,939)
Proceeds from sale of property and equipment........................ 96 316
---------- ----------
Cash provided by investing activities.......................... 2,580 572
---------- ----------
FINANCING ACTIVITIES:
Cost of stock purchased by subsidiary............................... - (524)
Proceeds from debentures and notes payable.......................... 24,000 8,548
Payments on notes payable........................................... (9,410) (1,400)
Debt issue costs.................................................... (1,692) -
---------- ----------
Cash provided by financing activities.......................... 12,898 6,624
---------- ----------
Increase in cash and cash equivalents during the period.................. 17,528 885
Cash and cash equivalents at beginning of period......................... 10,383 11,999
---------- ----------
Cash and cash equivalents at end of period...............................$ 27,911 $ 12,884
========== ==========
</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 nine month periods ended September 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 Reports on Form 10-Q for the periods ended March 31,
1999 and June 30, 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. Preliminary and organizational hearings have been
held, but no decision is expected from the arbitration panel during 1999.
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 ("10th Circuit"). Oral argument is scheduled for November
15, 1999. 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. 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.
On November 3, 1999, Judge Urbom of the Nebraska Court issued an order
to implement the divestiture of all Chandler shares owned or controlled by
CenTra. The Nebraska Court's order provides for a repurchase of those shares
by the Company at an amount equivalent to the price originally paid by CenTra
for those shares. The order provides for the immediate repurchase of 517,500
Chandler shares at a cost to the Company of $5,099,133 ($9.85 per share).
This amount was previously recorded as a decrease to shareholders' equity
during the first quarter of 1997, based on a judgment by the Oklahoma Federal
Court on April 22, 1997. The Nebraska Court will receive evidence to be
submitted by the parties by November 24, 1999 regarding the price paid by
CenTra for two other groups of Chandler shares totaling 1,441,700 and 30,000
shares, respectively. The Nebraska Court will then supplement its order to
provide for the repurchase of these shares at the price it determines was
CenTra's actual cost. As to the 1,441,700 shares, NAICO contends that
CenTra's cost was $6.93 per share and CenTra has stated it was $6.99 per
share. As to the 30,000 shares, there appears to be no dispute that the
total was $177,313 for an average per share cost of $5.91 per share. These
two groups of shares were not a part of the judgments by the Oklahoma
Federal Court, and until the November 3, 1999 order by the Nebraska Court,
the Company was unable to determine what actions would be taken by the court
with respect to these shares. The repurchase of these two groups of shares
will reduce shareholders' equity by approximately $10 million, and will reduce
the number of outstanding shares of the Company by 1,471,700 shares. An
additional 1,625 shares are owned by an affiliate of CenTra and are not
included with any of the other groups of shares. The Nebraska Court has
directed the parties to submit briefs dealing with the treatment of these
shares.
Another group of Chandler shares acquired by CenTra in 1987 and 1988 is
also the subject of a separate court decision by the Oklahoma Federal Court.
That court ruled that in exchange for payment by the Company of CenTra's cost
of $6,882,500, CenTra must redeliver and transfer to the Company 1,142,625
Chandler shares. This amount was previously recorded as a decrease to
shareholders' equity as of December 31, 1997. CenTra has appealed that ruling
and the appeal is now pending in the 10th Circuit. The Nebraska Court has
directed the parties to submit their plans for divestiture of those shares
within 21 days of the ruling on that appeal by the 10th Circuit.
CenTra may appeal the Nebraska Court's order. When the CenTra owned or
controlled shares are reacquired by the Company they will be cancelled. The
Company expects to finance the repurchase of these shares from its existing
cash and investments.
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).
<PAGE>
PAGE 10
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 listed 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 are not 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 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 are still outstanding, and exclude 524,475 and
544,475 common shares held by a subsidiary of the Company at September 30,
1999 and 1998, respectively. The numerator for basic and diluted earnings
(loss) 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 (loss) per common share:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ -------------------
1999 1998 1999 1998
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Denominator for basic earnings (loss) per share-
Weighted average shares......................... 6,417 6,417 6,417 6,433
Effect of dilutive securities-
Stock options................................... 16 13 17 10
-------- -------- -------- --------
Denominator for dilutive earnings (loss) per share-
Adjusted weighted average shares
and assumed conversions.................... 6,433 6,430 6,434 6,443
======== ======== ======== ========
</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 nine month periods ended September 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 SEPTEMBER 30, 1999
Revenues from external customers (1)......$ 441 $ 22,367 $ 56 $ - $ 22,864
Intersegment revenues..................... 2,720 35 41 (2,796) -
Segment profit (loss) before
income taxes (2)..................... 106 (557) (385) - (836)
THREE MONTHS ENDED SEPTEMBER 30, 1998
Revenues from external customers (1)......$ 349 $ 17,901 $ 57 $ - $ 18,307
Intersegment revenues..................... 2,422 57 39 (2,518) -
Segment profit (loss) before
income taxes (2)..................... 145 828 (465) (17) 491
NINE MONTHS ENDED SEPTEMBER 30, 1999
Revenues from external customers (1)......$ 1,147 $ 64,068 $ 206 $ - $ 65,421
Intersegment revenues..................... 6,046 157 123 (6,326) -
Segment profit (loss) before
income taxes (2)..................... 1 (646) (1,122) (16) (1,783)
Segment assets............................$ 6,127 $ 290,550 $ 4,094 $ (17,066) $ 283,705
NINE MONTHS ENDED SEPTEMBER 30, 1998
Revenues from external customers (1)......$ 1,214 $ 51,632 $ 174 $ - $ 53,020
Intersegment revenues..................... 5,201 153 111 (5,465) -
Segment profit (loss) before
income taxes (2)..................... 129 268 2,116 (17) 2,496
Segment assets............................$ 6,079 $ 241,424 $ 3,967 $ (16,982) 234,488
- ------------------------------------------
</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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Insurance program (In thousands)
<S> <C> <C> <C> <C>
NET PREMIUMS EARNED
Standard property and casualty.......................$ 13,746 $ 10,616 $ 37,973 $ 30,354
Political subdivisions............................... 3,933 3,368 11,429 9,499
Surety bonds......................................... 2,598 2,721 8,041 7,205
Group accident and health............................ 2,040 1,286 6,620 3,482
Other................................................ 48 (132) (4) 933
---------- ---------- ---------- ----------
$ 22,365 $ 17,859 $ 64,059 $ 51,473
========== ========== ========== ==========
LOSSES AND LOSS ADJUSTMENT EXPENSES
Standard property and casualty.......................$ 9,750 $ 8,824 $ 27,202 $ 23,652
Political subdivisions............................... 4,241 2,456 11,566 7,364
Surety bonds......................................... 85 122 357 1,046
Group accident and health............................ 2,047 928 5,532 3,320
Other................................................ 259 (65) (137) 600
---------- ---------- ---------- ----------
$ 16,382 $ 12,265 $ 44,520 $ 35,982
========== ========== ========== ==========
</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) National American
Insurance Company's ("NAICO") 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 nine
month periods ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Standard property and casualty...................$ 13,746 $ 10,616 $ 37,973 $ 30,354
Political subdivisions........................... 3,933 3,368 11,429 9,499
Surety bonds..................................... 2,598 2,721 8,041 7,205
Group accident and health........................ 2,040 1,286 6,620 3,482
Other............................................ 48 (132) (4) 933
---------- ---------- ---------- ----------
TOTAL............................................$ 22,365 $ 17,859 $ 64,059 $ 51,473
========== ========== ========== ==========
</TABLE>
Net premiums earned were $22.4 million in the third quarter of 1999, an
increase of $4.5 million or 25% compared to the third quarter of 1998. Net
premiums earned for the first nine months of 1999 were $64.1 million, an
increase of $12.6 million or 24% compared to the 1998 period. The increases
are primarily attributable to increased written premium production in Texas
and Oklahoma.
Net premiums earned in the standard property and casualty program were
$13.7 million in the third quarter of 1999, an increase of $3.1 million or
29% compared to the third quarter of 1998. Net premiums earned for the first
nine months of 1999 were $38.0 million, an increase of $7.6 million or 25%
compared to the 1998 period. The increases are primarily attributable to
increased written premium production in Texas.
Net premiums earned in the political subdivisions program were $3.9
million in the third quarter of 1999, an increase of $565,000 or 17% compared
to the third quarter of 1998. Net premiums earned for the first nine months
of 1999 were $11.4 million, an increase of $1.9 million or 20% compared to the
1998 period. The increases are primarily attributable to 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 were $2.6 million in the
third quarter of 1999, a decrease of $123,000 or 5% compared to the third
quarter of 1998. Net premiums earned for the first nine months of 1999 were
$8.0 million, an increase of $836,000 or 12% compared to the 1998 period. The
increase in the nine month period was due primarily to increased written
premium production in California.
Net premiums earned in the group accident and health program were $2.0
million in the third quarter of 1999, an increase of $754,000 or 59% compared
to the third quarter of 1998. Net premiums earned for the first nine months
of 1999 were $6.6 million, an increase of $3.1 million or 90% 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 $1.7 million and $4.3
million for the third quarter and first nine months of 1999, respectively.
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 September 30, 1999, the Company's investment portfolio consisted
primarily of fixed income U.S. Government, high-quality corporate and tax
exempt bonds, with approximately 21% invested in cash and money market
instruments. The Company's portfolio contains no junk bonds or real estate
investments.
Net interest income decreased $197,000 or 13% in the third quarter of
1999 compared to the third quarter of 1998, and decreased $912,000 or 18% for
the nine months ended September 30, 1999 compared to the 1998 period, due
primarily to the purchase of additional reinsurance coverages in 1998. The
Company had net realized investment gains in the third quarter of 1999 of
$5,000 compared to $371,000 in the third quarter of 1998. Net realized
investment gains were $55,000 and $648,000 in the first nine months of 1999
and 1998, respectively.
COMMISSIONS, FEES AND OTHER INCOME
The Company's income from commissions, fees and other income increased
$51,000 or 11% in the third quarter of 1999 compared to the third quarter of
1998, and decreased $185,000 or 12% for the nine months ended September 30,
1999 compared to the 1998 period. The majority of the Company's income from
commissions, fees and other income are from the Company's subsidiary LaGere
and Walkingstick Insurance Agency, Inc. ("L&W").
L&W's brokerage commissions and fees before intercompany eliminations
were $3.2 million and $7.2 million in the third quarter and first nine months
of 1999, respectively, compared to $2.8 million and $6.3 million in the year
ago periods. A large portion of the brokerage commissions and fees for L&W
is incurred by NAICO and thus eliminated in the consolidation of the Company's
subsidiaries.
Other income during the first nine 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 73.2% and 69.5% for the quarter and nine months
ended September 30, 1999, compared to 68.7% and 69.9% in the comparable 1998
periods. Weather-related losses (net of applicable reinsurance) from wind
and hail totaled $803,000 and $4.0 million for the third quarter and first
nine months of 1999, respectively, and increased the respective loss ratios
by 3.6 and 6.3 percentage points. Weather-related losses totaled $558,000
and $1.3 million for the third quarter and first nine months of 1998,
respectively, and increased the respective loss ratios by 3.1 and 2.6
percentage points. In addition, increased loss activity in the Company's
political subdivisions and group accident and health programs adversely
affected the loss ratio for the third quarter of 1999.
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 from the storms at approximately $26.3 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 $1.8 million which was recorded in the second
quarter of 1999.
POLICY ACQUISITION COSTS
Policy acquisition costs consist of costs associated with the
acquisition of new and renewal business and generally include direct costs
such as premium taxes, commissions to agents and ceding companies and
premium-related assessments and indirect costs such as salaries and
expenses of personnel who perform and support underwriting activities.
NAICO also receives ceding commissions from certain of the reinsurers who
assume premiums from NAICO under certain reinsurance contracts and the
ceding commissions are accounted for as a reduction of policy acquisition
costs. Direct policy acquisition costs and ceding commissions are deferred
and amortized over the terms of the policies. Recoverability of such deferred
costs is dependent on the related unearned premiums on the policies being more
than expected claim losses.
<PAGE>
PAGE 14
The following table sets forth the Company's policy acquisition costs for
each of the three and nine month periods ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Commissions expense..............................$ 4,807 $ 4,294 $ 14,949 $ 11,811
Other premium related assessments................ 378 499 1,065 1,391
Premium taxes.................................... 814 1,037 2,181 2,783
Excise taxes..................................... 70 69 169 175
Dividends to policyholders....................... 90 (43) 247 107
Other expense.................................... 70 5 155 65
---------- ---------- ---------- ----------
Total direct expenses............................ 6,229 5,861 18,766 16,332
Indirect underwriting expenses................... 4,582 3,994 12,377 10,138
Commissions received from reinsurers............. (5,327) (4,806) (14,230) (11,874)
Adjustment for deferred acquisition costs........ (621) (1,047) (751) (1,544)
---------- ---------- ---------- ----------
Net policy acquisition costs.....................$ 4,863 $ 4,002 $ 16,162 $ 13,052
========== ========== ========== ==========
</TABLE>
Total gross direct and indirect expenses as a percentage of direct
written and assumed premiums were 21.5% and 24.9% for the third quarter and
first nine months of 1999, respectively, compared to 22.3% and 25.5% in the
corresponding year ago periods. Commission expense as a percentage of gross
written and assumed premiums was 9.6% and 12.0% in the third quarter and the
first nine months of 1999, respectively, compared to 9.7% and 11.4% in the
corresponding 1998 periods.
Indirect underwriting expenses were 9.1% and 9.9% of total direct written
and assumed premiums in the third quarter and first nine months of 1999,
respectively, compared to 9.0% and 9.8% in the corresponding 1998 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.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were 8.0% and 8.1% of gross premiums
earned and commissions, fees and other income in the third quarter and first
nine months of 1999, respectively, compared to 9.1% and 10.1% for the
corresponding 1998 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 (indirect
underwriting expenses) and loss 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.
INTEREST EXPENSE
Interest expense increased $228,000 in the third quarter of 1999 compared
to the 1998 quarter, and increased $268,000 in the nine months ended September
30, 1999 compared to the 1998 period. The increase was primarily due to
interest expense on the debenture offering which was completed on July 16,
1999 by the Company's subsidiary Chandler (U.S.A.), Inc. ("Chandler USA").
See LIQUIDITY AND CAPITAL RESOURCES.
LITIGATION EXPENSES
Litigation expenses reflect expenses related to the ongoing legal
proceedings involving CenTra, Inc. and certain of its affiliates ("CenTra").
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 initially 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. In later papers filed with the appellate court, CenTra has attempted
to appeal this decision. The Company believes CenTra's appeal of the
decision is barred. Increased or renewed activity could result in greater
litigation expenses in 1999 or future years.
See Note 2 to the Interim Consolidated Financial Statements for recent
developments.
<PAGE>
PAGE 15
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 nine months of 1999, the Company provided $2.1 million in
cash from operations compared to cash used in operations of $6.3 million
during the first nine months of 1998. The 1998 use of cash was due primarily
to the purchase of additional reinsurance during 1998.
On July 16, 1999, the Company announced that 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 listed 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 $12.31 at September 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.
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 six months 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 has established a contingency plan for all critical business
operations. The contingency plan includes possible manual operations and
the implementation of alternative information processing procedures.
<PAGE>
PAGE 16
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.
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.
<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
-----------------
The Company learned on November 9, 1999 that M.J. Moroun, Norman E.
Harned, and Ronald W. Lech had resigned as directors of the Company.
Messrs. Moroun and Harned resigned effective November 2, 1999 and Mr.
Lech resigned effective November 8, 1999. All three resignations
were formally accepted by the Company's Board of Directors on
November 10, 1999. Messrs. Moroun, Harned and Lech are current or
former directors and officers of CenTra, Inc. At its November 10,
1999 meeting, the Company's Board of Directors voted to reduce its
total membership from 11 to 9 and appointed W. Scott Martin to serve
as a director, subject to his qualification and acceptance by the
Cayman Islands Monetary Authority. Except for the resignations of
Moroun, Harned and Lech, and the appointment of Mr. Martin, the
membership of the Board of Directors is unchanged.
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: November 10, 1999 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 - Accounting & 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, 1999 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 100,848
<DEBT-CARRYING-VALUE> 1,232
<DEBT-MARKET-VALUE> 1,309
<EQUITIES> 276
<MORTGAGE> 0
<REAL-ESTATE> 0
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0
0
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64,059
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</TABLE>
