===============================================================================
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, 2000
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 31, 2000 was 4,428,033, which includes 1,142,625
common shares which were rescinded through litigation and are held by a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 Balance Sheets as of September 30, 2000 and December 31, 1999..1
Consolidated Statements of Operations for the three months
ended September 30, 2000 and 1999.........................................2
Consolidated Statements of Operations for the nine months
ended September 30, 2000 and 1999.........................................3
Consolidated Statements of Comprehensive Income for the three
months ended September 30, 2000 and 1999..................................4
Consolidated Statements of Comprehensive Income for the nine
months ended September 30, 2000 and 1999..................................5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2000 and 1999.........................................6
Notes to Interim Consolidated Financial Statements..........................7
ITEM 2
------
Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................11
PART II - OTHER INFORMATION
---------------------------
Item 1 Legal Proceedings..................................................16
Item 2 Changes in Securities..............................................16
Item 3 Defaults Upon Senior Securities....................................16
Item 4 Submission of Matters to a Vote of Security Holders................16
Item 5 Other Information..................................................16
Item 6 Exhibits and Reports on Form 8-K...................................16
Signatures.................................................................17
<PAGE>
PAGE 1
CHANDLER INSURANCE COMPANY, LTD.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Investments
Fixed maturities available for sale, at fair value .............. $ 113,709 $ 108,709
Fixed maturities held to maturity, at amortized cost (fair
value $1,097 and $1,039 in 2000 and 1999, respectively) ....... 1,038 984
Equity securities available for sale, at fair value ............. 442 306
------------- ------------
Total investments ............................................. 115,189 109,999
Cash and cash equivalents ......................................... 16,363 8,456
Premiums receivable, less allowance for non-collection
of $463 and $263 at 2000 and 1999, respectively ................. 44,016 47,721
Reinsurance recoverable on paid losses, less allowance for
non-collection of $275 at 2000 and 1999 ......................... 2,362 3,281
Reinsurance recoverable on unpaid losses, less allowance for
non-collection of $355 and $302 at 2000 and 1999, respectively... 38,025 37,539
Prepaid reinsurance premiums ...................................... 27,702 19,960
Deferred policy acquisition costs ................................. 7,366 6,488
Property and equipment, net ....................................... 12,612 10,765
Licenses, net ..................................................... 3,932 4,044
Excess of cost over net assets acquired, net ...................... 3,296 3,955
Other assets ...................................................... 19,175 16,912
------------- ------------
Total assets ...................................................... $ 290,038 $ 269,120
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Unpaid losses and loss adjustment expenses ...................... $ 99,748 $ 98,460
Unearned premiums ............................................... 83,366 67,769
Policyholder deposits ........................................... 5,329 5,135
Accrued taxes and other payables ................................ 5,766 6,796
Premiums payable ................................................ 11,582 7,312
Litigation liabilities .......................................... 9,263 8,905
Debentures ...................................................... 24,000 24,000
------------- ------------
Total liabilities ............................................. 239,054 218,377
------------- ------------
Shareholders' equity
Common stock, $1.67 par value, 10,000,000 shares
authorized; 4,428,033 shares issued and outstanding ........... 7,395 7,395
Paid-in surplus ................................................. 21,380 21,380
Capital redemption reserve ...................................... 947 947
Retained earnings ............................................... 29,522 30,479
Less: Stock rescinded through litigation (1,142,625 shares) .... (6,883) (6,883)
Accumulated other comprehensive loss:
Unrealized loss on investments available for sale,
net of deferred income taxes ................................ (1,377) (2,575)
------------- ------------
Total shareholders' equity .................................... 50,984 50,743
------------- ------------
Total liabilities and shareholders' equity ........................ $ 290,038 $ 269,120
============= ============
</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 three months
ended September 30,
------------------------
2000 1999
---------- ----------
<S> <C> <C>
Premiums and other revenues
Direct premiums written and assumed ....................$ 65,265 $ 50,219
Reinsurance premiums ceded ............................. (23,027) (19,382)
---------- ----------
Net premiums written and assumed ..................... 42,238 30,837
Increase in unearned premiums .......................... (8,903) (8,472)
---------- ----------
Net premiums earned .................................. 33,335 22,365
Interest income, net ..................................... 1,599 1,373
Realized investment gains, net ........................... 178 5
Commissions, fees and other income ....................... 479 499
---------- ----------
Total premiums and other revenues .................... 35,591 24,242
---------- ----------
Operating costs and expenses
Losses and loss adjustment expenses .................... 22,039 16,382
Policy acquisition costs ............................... 8,117 4,863
General and administrative expenses .................... 3,833 3,086
Interest expense ....................................... 571 514
Litigation expenses, net ............................... 153 233
---------- ----------
Total operating costs and expenses ................... 34,713 25,078
---------- ----------
Income (loss) before income taxes ........................ 878 (836)
Federal income tax benefit (provision) of consolidated
U.S. subsidiaries ...................................... (75) 513
---------- ----------
Net income (loss) ........................................$ 803 $ (323)
========== ==========
Basic and diluted earnings (loss) per common share .......$ 0.18 $ (0.05)
Basic weighted average common shares outstanding ......... 4,428 6,417
Diluted weighted average common shares outstanding ....... 4,444 6,433
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
PAGE 3
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,
------------------------
2000 1999
---------- ----------
<S> <C> <C>
Premiums and other revenues
Direct premiums written and assumed ....................$ 157,202 $ 125,038
Reinsurance premiums ceded ............................. (56,798) (50,909)
---------- ----------
Net premiums written and assumed ..................... 100,404 74,129
Increase in unearned premiums .......................... (7,855) (10,070)
---------- ----------
Net premiums earned .................................. 92,549 64,059
Interest income, net ..................................... 4,479 4,071
Realized investment gains, net ........................... 178 55
Commissions, fees and other income ....................... 1,242 1,362
---------- ----------
Total premiums and other revenues .................... 98,448 69,547
---------- ----------
Operating costs and expenses
Losses and loss adjustment expenses .................... 64,075 44,520
Policy acquisition costs ............................... 23,756 16,162
General and administrative expenses .................... 10,500 9,010
Interest expense ....................................... 1,702 955
Litigation expenses, net ............................... 585 683
---------- ----------
Total operating costs and expenses ................... 100,618 71,330
---------- ----------
Loss before income taxes ................................. (2,170) (1,783)
Federal income tax benefit of consolidated
U.S. subsidiaries ...................................... 1,213 830
---------- ----------
Net loss .................................................$ (957) $ (953)
========== ==========
Basic and diluted loss per common share ..................$ (0.22) $ (0.15)
Basic weighted average common shares outstanding ......... 4,428 6,417
Diluted weighted average common shares outstanding ....... 4,445 6,434
</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 three months
ended September 30,
------------------------
2000 1999
---------- ----------
<S> <C> <C>
Net income (loss) .............................................$ 803 $ (323)
---------- ----------
Other comprehensive income (loss), before income tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period ... 1,554 (297)
Less: Reclassification adjustment for gains included
in net income ........................................... (178) (5)
---------- ----------
Other comprehensive income (loss), before income tax .......... 1,376 (302)
Income tax benefit (provision) related to items of other
comprehensive income (loss) ................................. (361) 71
---------- ----------
Other comprehensive income (loss), net of tax ................. 1,015 (231)
---------- ----------
Comprehensive income (loss) ...................................$ 1,818 $ (554)
========== ==========
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
PAGE 5
CHANDLER INSURANCE COMPANY, LTD.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
For the nine months
ended September 30,
------------------------
2000 1999
---------- ----------
<S> <C> <C>
Net loss ......................................................$ (957) $ (953)
---------- ----------
Other comprehensive income (loss), before income tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period ... 1,811 (3,431)
Less: Reclassification adjustment for gains included
in net income......... .................................. (178) (55)
---------- ----------
Other comprehensive income (loss), before income tax .......... 1,633 (3,486)
Income tax benefit (provision) related to items of other
comprehensive income (loss) ................................. (435) 955
---------- ----------
Other comprehensive income (loss), net of income tax .......... 1,198 (2,531)
---------- ----------
Comprehensive income (loss) ...................................$ 241 $ (3,484)
========== ==========
</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,
------------------------
2000 1999
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss ............................................................ $ (957) $ (953)
Add (deduct):
Adjustments to reconcile net loss to cash provided by
operating activities:
Realized investment gains, net .................................. (178) (55)
Net losses on sale of equipment ................................. 5 1
Amortization and depreciation ................................... 1,949 1,746
Provision for non-collection of premiums ........................ 249 166
Net change in non-cash balances relating to operating activities:
Premiums receivable ........................................... 3,456 (8,476)
Reinsurance recoverable on paid losses ........................ 903 352
Reinsurance recoverable on unpaid losses ...................... (470) (20,589)
Prepaid reinsurance premiums .................................. (7,742) (4,731)
Deferred policy acquisition costs ............................. (878) (752)
Other assets .................................................. (2,783) (1,233)
Unpaid losses and loss adjustment expenses .................... 1,288 15,685
Unearned premiums ............................................. 15,597 14,801
Policyholder deposits ......................................... 194 756
Accrued taxes and other payables .............................. (1,030) 243
Premiums payable .............................................. 4,270 4,497
Litigation liabilities ........................................ 358 592
---------- ----------
Cash provided by operating activities ........................... 14,231 2,050
---------- ----------
INVESTING ACTIVITIES:
Fixed maturities available for sale:
Purchases ....................................................... (35,156) (16,654)
Sales ........................................................... 9,184 4,159
Maturities ...................................................... 22,348 15,820
Fixed maturities held to maturity:
Maturities....................................................... - 1,000
Cost of property and equipment purchased .......................... (2,721) (1,841)
Proceeds from sale of property and equipment ...................... 21 96
---------- ----------
Cash provided by (applied to) investing activities .............. (6,324) 2,580
---------- ----------
FINANCING ACTIVITIES:
Proceeds from debentures........................................... - 24,000
Payments on notes payable ......................................... - (9,410)
Debt issue costs................................................... - (1,692)
---------- ----------
Cash provided by financing activities ........................... - 12,898
---------- ----------
Increase in cash and cash equivalents during the period ............. 7,907 17,528
Cash and cash equivalents at beginning of period .................... 8,456 10,383
---------- ----------
Cash and cash equivalents at end of period .......................... $ 16,363 $ 27,911
========== ==========
</TABLE>
See accompanying Notes to 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, 1999. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. The results
of operations for the three and nine month periods ended September 30, 2000
are not necessarily indicative of the results that may be expected for the
year. Certain reclassifications of prior year amounts have been made to
conform to the 2000 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"), a wholly
owned subsidiary 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
CENTRA LITIGATION
The Company and certain of its subsidiaries and affiliates have been
involved in various matters of litigation with CenTra, Inc. ("CenTra") and
certain of its affiliates, officers and directors (the "CenTra Group") since
1992. The CenTra Group has been a significant shareholder in the Company
owning 49.2% of the Company's stock in July 1992. Three present or former
executive officers of CenTra, Norman E. Harned, Ronald W. Lech and M. J.
Moroun were directors of the Company until November 1999. On April 22, 1997,
the U.S. District Court in Oklahoma City, Oklahoma (the "Oklahoma Federal
Court") entered judgments in that litigation. Various appeals were taken
from those judgments, but the judgments were affirmed on appeal.
On March 25, 1997, the U.S. District Court for the District of Nebraska
("Nebraska Court") ordered CenTra and certain of its affiliates to divest all
Chandler shares owned by them. The CenTra defendants owned or controlled
3,133,450 Chandler shares. The Nebraska Court approved a divestiture plan
submitted by NAICO (the "NAICO Plan") which called for the Company to acquire
and cancel the shares of Chandler stock owned by the CenTra Group. During
December 1999, the Company acquired 1,989,200 shares of its stock in
exchange for payment of $15,204,758. These shares were canceled upon
acquisition by the Company. On November 1, 2000, the Nebraska Court ordered
that all remaining shares owned by CenTra be transferred to the Company by
November 15, 2000 and that the Company simultaneously pay $6,882,500 in
exchange for the shares. The Company previously recorded the return of the
1,142,625 shares as a decrease to shareholders' equity during 1997.
<PAGE>
PAGE 8
In 1997, NAICO learned that several CenTra affiliates had filed two
lawsuits against NAICO, NAICO Indemnity (Cayman), Ltd. ("NAICO Indemnity"),
a wholly owned subsidiary of the Company, and certain NAICO officers
asserting some of the same claims made and tried in the Oklahoma lawsuit
described previously. Those claims were purportedly prosecuted by CenTra on
its own behalf and on behalf of its subsidiaries and were based upon alleged
wrongful cancellation of their insurance policies by NAICO and NAICO
Indemnity. The Oklahoma Federal Court entered a judgment against CenTra on
these claims. NAICO and NAICO Indemnity contend that the Oklahoma Federal
Court's adjudication is conclusive as to all claims. The lawsuits have been
consolidated and have been assigned to the same judge who presided over the
action in the Oklahoma Federal Court. Dispositive motions filed by NAICO,
NAICO Indemnity and the other defendants are currently under consideration by
the Oklahoma Federal Court.
In the CenTra litigation, certain officers and directors of the Company
were named as defendants. In accordance with its Articles of Association,
the Company has advanced the litigation expenses of these persons in exchange
for undertakings to repay such expenses if those persons are later determined
to have breached the standard of conduct provided in the Articles of
Association. The Company has paid expenses on behalf of these officers and
directors totaling approximately $2.3 million as of September 30, 2000. Some
of these expenses relate to claims decided adversely to the officers and
directors and a portion of these expenses relate to claims which are pending,
have been dismissed or which were decided in favor of the officers and
directors. These expenses together with certain other expenses may be
recovered from the Company's director and officer liability insurance policy
("D&O Insurer"). As a result of various events in 1995, 1996 and 1997, the
Company recorded estimated recoveries of costs from its D&O Insurer totaling
$4,500,000 for reimbursable amounts previously paid that relate to allowable
defense and litigation costs for such parties. The Company received payment
for a 1995 claim during 1996 in the amount of $795,000. The balance is
included in other assets in the Company's consolidated balance sheets. The
Company is entitled to a total of $5 million under the applicable insurance
policy to the extent it has advanced reimbursable expenses. The Company is
negotiating with the insurer for payment of the policy balance. The Company
could recover the remaining policy limits or could compromise its claim, and
could incur significant costs in either case.
The ultimate outcome of the litigation 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.
At the present time the Company is actively participating in court
proceedings and rights of appeal concerning these 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.
The Company is also unable to predict the effect of the divestiture order on
the rights, limitations or other regulation of ownership of the stock of any
existing or prospective holders of the Company's common stock, or the effect
on the market price of the Company's stock.
<PAGE>
PAGE 9
GOING PRIVATE LITIGATION
On June 1, 2000, Brent LaGere, Chairman and CEO of the Company, announced
a plan led by senior company management and key stockholders of the Company
which would result in the Company becoming privately held. At a regularly
scheduled meeting of the Company's board of directors held on June 5, 2000,
Robert L. Rice, James M. Jacoby and Paul A. Maestri were appointed as a
special committee of the board for the purpose of considering the concept and
fairness of the announced plan. On June 30, 2000, the Company announced that
three civil lawsuits were filed against the Company, its indirect subsidiary
Chandler USA, and all of the Company's directors on June 5 and 6, 2000. The
suits allege that the plans announced on June 1, 2000 to take the Company
private are detrimental to the public shareholders. The suits also request
that they be certified as class actions and that the court enter a temporary
restraining order to prevent completion of the announced plan. The suits also
allege that all defendants have breached and are breaching fiduciary duties
owed to the plaintiffs and other shareholders. All three suits have been
consolidated into a single action pending before a State District Judge in
Oklahoma City. The plaintiffs, who are represented by one law firm have been
granted leave to amend their claims and are expected to do so by November 13,
2000. The Company will file a timely response and will vigorously defend the
suit. On June 12, 2000, CenTra made similar allegations in an already pending
lawsuit in the Nebraska Court involving a court-ordered divestiture of the
Company's shares owned by CenTra. CenTra requested that the court enjoin and
restrain Mr. LaGere and others from completing the announced plans. On July
20, 2000, the Nebraska Court denied CenTra's request. On June 27, 2000,
CenTra filed a similar request in an already pending case in the Oklahoma
Federal Court. The Company has responded, but the Oklahoma Federal Court has
not ruled.
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. 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 1,142,625 and 1,660,125 common shares at September 30,
2000 and 1999, respectively, which were rescinded through litigation during
1997 but were still outstanding, and exclude 524,475 common shares held by a
subsidiary of the Company at September 30, 1999. 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 (loss) per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C>
Denominator for basic earnings per share-
Weighted average shares ................ 4,428 6,417 4,428 6,417
Effect of dilutive securities -
Stock options .......................... 16 16 17 17
------------ ------------ ------------ ------------
Denominator for diluted earnings per share-
Adjusted weighted average shares
and assumed conversions .............. 4,444 6,433 4,445 6,434
============ ============ ============ ============
</TABLE>
NOTE 4. 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, 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 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 does not expect that adoption of SFAS No. 133 will have a
material impact on the Company's consolidated financial condition or results
of operations.
<PAGE>
PAGE 10
NOTE 5. SEGMENT INFORMATION
The following table presents a summary of the Company's operating
segments for the three and nine month periods ended September 30, 2000
and 1999:
<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, 2000
Revenues from external customers (1)...$ 399 $ 33,346 $ 69 $ - $ 33,814
Intersegment revenues.................. 2,917 44 39 (3,000) -
Segment profit (loss) before
income taxes (2)..................... (5) 1,364 (481) - 878
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)
NINE MONTHS ENDED SEPTEMBER 30, 2000
Revenues from external customers (1)...$ 1,011 $ 92,579 $ 201 $ - $ 93,791
Intersegment revenues.................. 6,325 155 121 (6,601) -
Segment profit (loss) before
income taxes (2)..................... (338) (605) (1,227) - (2,170)
Segment assets......................... 6,636 294,377 465 (11,440) 290,038
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
<FN>
---------------------------------------
(1) Consists of net premiums earned and commissions, fees and other income.
(2) Includes net realized investment gains.
</TABLE>
<PAGE>
PAGE 11
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,
------------------------- --------------------------
2000 1999 2000 1999
------------ ----------- ------------ ------------
(In thousands)
<S> <C> <C> <C> <C>
INSURANCE PROGRAM
------------------------------------------
NET PREMIUMS EARNED
Standard property and casualty ...........$ 26,005 $ 13,746 $ 69,094 $ 37,973
Political subdivisions ................... 4,270 3,933 12,963 11,429
Surety bonds ............................. 2,332 2,598 7,758 8,041
Group accident and health ................ 770 2,056 2,544 6,673
Other .................................... (42) 32 190 (57)
------------ ------------ ------------ ------------
$ 33,335 $ 22,365 $ 92,549 $ 64,059
============ ============ ============ ============
LOSSES AND LOSS ADJUSTMENT EXPENSES
Standard property and casualty ...........$ 17,574 $ 9,750 $ 48,568 $ 27,202
Political subdivisions ................... 2,892 4,241 9,652 11,566
Surety bonds ............................. 437 85 1,897 357
Group accident and health ................ 1,065 2,047 3,911 5,532
Other .................................... 71 259 47 (137)
------------ ------------ ------------ ------------
$ 22,039 $ 16,382 $ 64,075 $ 44,520
============ ============ ============ ============
</TABLE>
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) the ability of National American Insurance Company ("NAICO") to
maintain favorable insurance company ratings; and (ix) other factors
including the ongoing litigation matters involving a significant
concentration of ownership of common stock.
<PAGE>
PAGE 12
RESULTS OF OPERATIONS
PREMIUMS EARNED
The following table sets forth premiums earned on a gross basis (before
reductions for premiums ceded to reinsurers) and on a net basis (after such
reductions) for each insurance program for the three and nine month periods
ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
GROSS PREMIUMS EARNED NET PREMIUMS EARNED
--------------------------- --------------------------
THREE MONTHS ENDED SEPTEMBER 30, 2000 1999 2000 1999
------------------------------------ ------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C>
Standard property and casualty ..... $ 37,913 $ 24,536 $ 26,005 $ 13,746
Political subdivisions ............. 8,760 7,669 4,270 3,933
Surety bonds ....................... 3,405 3,430 2,332 2,598
Group accident and health .......... 835 2,233 770 2,056
Other .............................. (20) 37 (42) 32
------------ ------------ ------------ ------------
TOTAL .............................. $ 50,893 $ 37,905 $ 33,335 $ 22,365
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
GROSS PREMIUMS EARNED NET PREMIUMS EARNED
--------------------------- --------------------------
NINE MONTHS ENDED SEPTEMBER 30, 2000 1999 2000 1999
------------------------------------ ------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C>
Standard property and casualty ..... $ 102,507 $ 70,175 $ 69,094 $ 37,973
Political subdivisions ............. 25,439 22,164 12,963 11,429
Surety bonds ....................... 10,727 10,384 7,758 8,041
Group accident and health .......... 2,714 7,442 2,544 6,673
Other .............................. 218 72 190 (57)
------------ ------------ ------------ ------------
TOTAL .............................. $ 141,605 $ 110,237 $ 92,549 $ 64,059
============ ============ ============ ============
</TABLE>
Gross premiums earned, before reductions for premiums ceded to
reinsurers, increased $13.0 million or 34% in the third quarter of 2000
compared to the third quarter of 1999. Gross premiums earned for the first
nine months of 2000 increased $31.4 million or 28% compared to the first
nine months of 1999. The increases are primarily attributable to increases
in premium rates and premium production in Texas and Oklahoma. Net premiums
earned increased $11.0 million or 49% in the third quarter of 2000 compared
to the third quarter of 1999, and increased $28.5 million or 44% for the nine
months ended September 30, 2000 compared to the 1999 period. The increase in
net premiums earned was due to the increases in premium rates and premium
production, and to an increase in the amount of risk retained in the 2000
periods for the Company's workers compensation line of business.
Gross premiums earned in the standard property and casualty program
increased $13.4 million or 55% in the third quarter of 2000 compared to the
third quarter of 1999, and increased $32.3 million or 46% for the nine months
ended September 30, 2000 compared to the 1999 period. The increases are
primarily attributable to increases in premium rates and premium production.
Net premiums earned in the standard property and casualty program increased
$12.3 million or 89% in the third quarter of 2000 compared to the third
quarter of 1999, and increased $31.1 million or 82% for the nine months ended
September 30, 2000 compared to the 1999 period. The increase in net premiums
earned was due to the increases in premium rates and premium production, and
to the increase in the amount of risk retained for the workers compensation
portion of the program.
Gross premiums earned in the political subdivisions program increased
$1.1 million or 14% in the third quarter of 2000 compared to the third
quarter of 1999, and increased $3.3 million or 15% for the nine months ended
September 30, 2000 compared to the 1999 period. The increases are primarily
attributable to rate increases in the school districts portion of the
program. Net premiums earned in the political subdivisions program increased
$337,000 or 9% in the third quarter of 2000 compared to the third quarter of
1999, and increased $1.5 million or 13% for the nine months ended September
30, 2000 compared to the 1999 period.
<PAGE>
PAGE 13
Gross premiums earned in the surety bond program decreased $25,000 or 1%
in the third quarter of 2000 compared to the third quarter of 1999, and
increased $343,000 or 3% for the nine months ended September 30, 2000 compared
to the 1999 period. Approximately $227,000 and $995,000 of the gross premiums
earned in the third quarter and first nine months of 2000, respectively,
relates to a new program that is 100% reinsured by an unaffiliated reinsurer.
Excluding this new program, gross premiums earned decreased $252,000 and
$652,000 in the third quarter and first nine months of 2000, respectively,
compared to the corresponding 1999 periods. Net premiums earned in the surety
bond program decreased $266,000 or 10% in the third quarter of 2000 compared
to the third quarter of 1999, and decreased $283,000 or 4% for the nine months
ended September 30, 2000 compared to the 1999 period.
Gross premiums earned in the group accident and health program decreased
$1.4 million or 63% in the third quarter of 2000 compared to the third quarter
of 1999, and decreased $4.7 million or 64% for the nine months ended September
30, 2000 compared to the 1999 period. Net premiums earned in this program
decreased $1.3 million or 63% in the third quarter of 2000 compared to the
third quarter of 1999, and decreased $4.1 million or 62% for the nine months
ended September 30, 2000 compared to the 1999 periods. NAICO plans to
discontinue this program during the first quarter of 2001.
NET INTEREST INCOME AND NET REALIZED INVESTMENT GAINS
At September 30, 2000, the Company's investment portfolio consisted
primarily of fixed income U.S. Government, high-quality corporate and tax
exempt bonds, with approximately 12% invested in cash and money market
instruments. The Company's portfolio contains no non-investment grade bonds
or real estate investments.
Net interest income increased $226,000 or 16% in the third quarter of
2000 compared to the third quarter of 1999, and increased $408,000 or 10%
for the nine months ended September 30, 2000 compared to the 1999 period,
due primarily to an increase in average invested assets and an increase in
the average net yield on the portfolio. The average annualized net yield,
excluding net realized investment gains, for the three months ended
September 30, 2000 and 1999 was 5.0% and 4.5%, respectively. For the nine
months ended September 30, 2000 and 1999, the average annualized net yield
was 4.7% and 4.5%, respectively. The Company had net realized investment
gains of $178,000 and $5,000 in the third quarter of 2000 and 1999,
respectively, and had net realized investment gains in the first nine months
of 2000 of $178,000 compared to $55,000 in the first nine months of 1999.
COMMISSIONS, FEES AND OTHER INCOME
The Company's income from commissions, fees and other income decreased
$20,000 or 4% in the third quarter of 2000 compared to the third quarter of
1999, and decreased $120,000 or 9% for the nine months ended September 30,
2000 compared to the 1999 period. The majority of the Company's income from
commissions, fees and other income are from the Company's subsidiary LaGere
& Walkingstick Insurance Agency, Inc. ("L&W").
L&W's brokerage commissions and fees before intercompany eliminations
were $3.3 million and $7.3 million in the third quarter and first nine months
of 2000, respectively, compared to $3.2 million and $7.2 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.
LOSSES AND LOSS ADJUSTMENT EXPENSES
The percentage of losses and loss adjustment expenses to net premiums
earned ("loss ratio") was 66.1% and 69.2% for the quarter and nine months
ended September 30, 2000, compared to 73.2% and 69.5% in the comparable 1999
periods. Weather-related losses from wind and hail totaled $579,000 and
$2.4 million for the third quarter and first nine months of 2000,
respectively, and increased the respective loss ratios by 1.7 and 2.6
percentage points. Weather-related losses 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. The
nine month period ending September 30, 1999 included $1.8 million in
weather-related losses which resulted from the tornadoes, strong winds and
hail that caused significant damage in Oklahoma on May 3, 1999. The decrease
in weather-related losses in the 2000 periods was largely offset by adverse
loss experience in the group accident and health program and higher than
normal losses in the Company's surety bond program.
<PAGE>
PAGE 14
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 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.
When the sum of the anticipated losses, loss adjustment expenses and
unamortized policy acquisition costs exceeds the related unearned premiums,
including anticipated investment income, a provision for the indicated
deficiency is recorded.
The following table sets forth the Company's policy acquisition costs
for each of the three and nine month periods ended September 30, 2000
and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Commissions expense ........................ $ 6,841 $ 4,807 $ 17,832 $ 14,949
Other premium related assessments .......... 334 378 1,147 1,065
Premium taxes .............................. 1,101 814 3,316 2,181
Excise taxes ............................... 121 70 321 169
Dividends to policyholders ................. (1) 90 200 247
Other expense .............................. 173 70 246 155
---------- ---------- ---------- ----------
Total direct expenses ...................... 8,569 6,229 23,062 18,766
Indirect underwriting expenses ............. 5,230 4,582 13,283 12,377
Commissions received from reinsurers ....... (5,124) (5,327) (11,710) (14,230)
Adjustment for deferred acquisition costs .. (558) (621) (879) (751)
---------- ---------- ---------- ----------
Net policy acquisition costs ............... $ 8,117 $ 4,863 $ 23,756 $ 16,162
========== ========== ========== ==========
</TABLE>
Total gross direct and indirect expenses as a percentage of direct
written and assumed premiums were 21.1% and 23.1% for the third quarter and
first nine months of 2000, respectively, compared to 21.5% and 24.9% in the
corresponding year ago periods. Commission expense as a percentage of gross
written and assumed premiums was 10.5% and 11.3% in the third quarter and the
first nine months of 2000, respectively, compared to 9.6% and 12.0% in the
corresponding 1999 periods. Premium taxes increased $287,000 and
$1.1 million in the third quarter and nine months ended September 30, 2000,
respectively, over the corresponding 1999 periods due to the increase in
written premiums and to a refund of $392,000 which was received in the first
quarter of 1999 for premium taxes paid in a prior year.
Indirect underwriting expenses were 8.0% and 8.4% of total direct written
and assumed premiums in the third quarter and first nine months of 2000,
respectively, compared to 9.1% and 9.9% in the corresponding 1999 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 7.5% and 7.4% of gross premiums
earned and commissions, fees and other income in the third quarter and first
nine months of 2000, respectively, compared to 8.0% and 8.1% for the
corresponding 1999 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 $57,000 or 11% in the third quarter of 2000
compared to the third quarter of 1999, and increased $747,000 or 78% for the
first nine months of 2000 compared to the 1999 period. The increase was
primarily due to interest expense on the $24 million debenture offering which
was completed on July 16, 1999 by Chandler USA.
<PAGE>
PAGE 15
LITIGATION EXPENSES
Litigation expenses reflect expenses related to the ongoing legal
proceedings involving CenTra, Inc. and certain of its affiliates. Litigation
expenses decreased $80,000 or 34% in the third quarter of 2000 compared to
the third quarter of 1999, and decreased $98,000 or 14% for the nine months
ended September 30, 2000 compared to the 1999 period. Increased or renewed
activity could result in greater litigation expenses in the future. See
Note 2 to Interim Consolidated Financial Statements.
INCOME TAX PROVISION OR BENEFIT
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 2000, the Company provided $14.2 million in
cash from operations due primarily to the collection of certain receivables
totaling approximately $12.9 million in January of 2000 that were related to
the rescission of two reinsurance treaties during the fourth quarter of 1999.
Cash provided from operations also increased due to an increase in unearned
premiums and premiums payable, less an increase in prepaid reinsurance
premiums and premiums receivable other than the collections described above,
which generally resulted from the increase in written premiums. The Company
provided $2.1 million in cash from operations during the first nine months
of 1999.
Book value per share was $15.52 at September 30, 2000 based on 3,285,408
shares (after giving effect to 1,142,625 shares rescinded through litigation)
compared to $15.45 at December 31, 1999.
A.M. BEST RATING
On November 3, 2000, the Company learned that A.M. Best Company had
downgraded its rating of NAICO from "A- (Excellent)" to "B+ (Very Good)".
Premium growth and slippage in the Company's underwriting results created
greater financial leverage which was the primary basis for the downgrade.
NAICO is rated "A (Strong)" by Standard and Poor's rating agency.
REGULATION - NAICO REDOMESTICATION
Effective May 19, 2000, NAICO transferred its domicile from Nebraska to
Oklahoma. NAICO's executive and administrative offices have been located in
Chandler, Oklahoma since its acquisition by the Company in January 1987.
Approximately 48% and 47% of NAICO's written premiums during 1999 and the
first nine months of 2000, respectively, were in the state of Oklahoma. As
an Oklahoma corporation, NAICO and any person controlling NAICO, directly or
indirectly, are subject to the insurance laws of Oklahoma including laws
concerning the change or acquisition of control and payment of shareholder
and policyholder dividends by NAICO, which are similar to the insurance laws
of Nebraska. See Regulation in the Company's Annual Report on Form 10-K for
the year ended December 31, 1999.
YEAR 2000 READINESS DISCLOSURES
Through the first nine months of the year 2000, the Company has not
experienced any significant problems or disruptions related to year 2000
problems. The Company is currently not aware of any significant disruptions
experienced by its customers, vendors and service providers that would
materially affect their ability to do business with the Company. While it is
possible that certain year 2000 problems may exist but have not yet
materialized, the Company does not currently expect any year 2000 problems to
be encountered in the future that would have a material adverse effect on the
operating results of the Company.
<PAGE>
PAGE 16
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 September
14, 2000 responding to Item 5 of Form 8-K.
<PAGE>
PAGE 17
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.
<TABLE>
<CAPTION>
<S> <C>
Date: November 9, 2000 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>
