===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 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 July 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common shares which were rescinded through litigation and are held by a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 June 30, 2000 and December 31, 1999........1
Consolidated Statements of Operations for the three months
ended June 30, 2000 and 1999...............................................2
Consolidated Statements of Operations for the six months
ended June 30, 2000 and 1999...............................................3
Consolidated Statements of Comprehensive Income for the three
months ended June 30, 2000 and 1999........................................4
Consolidated Statements of Comprehensive Income for the six
months ended June 30, 2000 and 1999........................................5
Consolidated Statements of Cash Flows for the six months
ended June 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>
June 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS (Unaudited)
Investments
Fixed maturities available for sale, at fair value..............$ 107,631 $ 108,709
Fixed maturities held to maturity, at amortized cost (fair
value $1,074 and $1,039 in 2000 and 1999, respectively) ...... 1,020 984
Equity securities available for sale, at fair value ............ 306 306
------------ ------------
Total investments ............................................ 108,957 109,999
Cash and cash equivalents ........................................ 12,056 8,456
Premiums receivable, less allowance for non-collection
of $409 and $263 at 2000 and 1999, respectively ................ 35,452 47,721
Reinsurance recoverable on paid losses, less allowance for
non-collection of $275 at 2000 and 1999 ........................ 7,170 3,281
Reinsurance recoverable on unpaid losses, less allowance for
non-collection of $355 and $302 at 2000 and 1999, respectively.. 40,273 37,539
Prepaid reinsurance premiums ..................................... 22,233 19,960
Deferred policy acquisition costs ................................ 6,808 6,488
Property and equipment, net ...................................... 12,646 10,765
Licenses, net .................................................... 3,969 4,044
Excess of cost over net assets acquired, net ..................... 3,632 3,955
Other assets ..................................................... 19,147 16,912
------------ ------------
Total assets .....................................................$ 272,343 $ 269,120
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Unpaid losses and loss adjustment expenses .....................$ 102,077 $ 98,460
Unearned premiums .............................................. 68,994 67,769
Policyholder deposits .......................................... 5,307 5,135
Accrued taxes and other payables ............................... 6,695 6,796
Premiums payable ............................................... 6,941 7,312
Litigation liabilities ......................................... 9,163 8,905
Debentures ..................................................... 24,000 24,000
------------ ------------
Total liabilities ............................................ 223,177 218,377
------------ ------------
Shareholders' equity
Common stock, $1.67 par value, 10,000,000 shares
authorized; 4,428,033 shares issued and outstanding .......... 7,395 7,395
Paid-in surplus ................................................ 21,380 21,380
Capital redemption reserve ..................................... 947 947
Retained earnings .............................................. 28,719 30,479
Less: Stock rescinded through litigation (1,142,625 shares) ... (6,883) (6,883)
Accumulated other comprehensive loss:
Unrealized loss on investments available for sale,
net of deferred income taxes ............................... (2,392) (2,575)
------------ ------------
Total shareholders' equity ................................... 49,166 50,743
------------ ------------
Total liabilities and shareholders' equity .......................$ 272,343 $ 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 June 30,
------------------------
2000 1999
---------- ----------
<S> <C> <C>
Premiums and other revenues
Direct premiums written and assumed ....................$ 46,808 $ 39,708
Reinsurance premiums ceded ............................. (15,457) (17,474)
---------- ----------
Net premiums written and assumed ..................... 31,351 22,234
Increase in unearned premiums .......................... (1,212) (1,578)
---------- ----------
Net premiums earned .................................. 30,139 20,656
Interest income, net ..................................... 1,402 1,315
Commissions, fees and other income ....................... 365 416
---------- ----------
Total premiums and other revenues .................... 31,906 22,387
---------- ----------
Operating costs and expenses
Losses and loss adjustment expenses .................... 21,236 14,687
Policy acquisition costs ............................... 7,941 6,252
General and administrative expenses .................... 3,155 2,938
Interest expense ....................................... 565 213
Litigation expenses, net ............................... 205 191
---------- ----------
Total operating costs and expenses ................... 33,102 24,281
---------- ----------
Loss before income taxes ................................. (1,196) (1,894)
Federal income tax benefit of consolidated
U.S. subsidiaries ...................................... 699 739
---------- ----------
Net loss .................................................$ (497) $ (1,155)
========== ==========
Basic and diluted loss per common share ..................$ (0.11) $ (0.18)
Basic weighted average common shares outstanding ......... 4,428 6,417
Diluted weighted average common shares outstanding ....... 4,446 6,435
</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 six months
ended June 30,
------------------------
2000 1999
---------- ----------
<S> <C> <C>
Premiums and other revenues
Direct premiums written and assumed ....................$ 91,937 $ 74,819
Reinsurance premiums ceded ............................. (33,771) (31,527)
---------- ----------
Net premiums written and assumed ..................... 58,166 43,292
Decrease (increase) in unearned premiums ............... 1,048 (1,598)
---------- ----------
Net premiums earned .................................. 59,214 41,694
Interest income, net ..................................... 2,880 2,698
Realized investment gains, net ........................... - 50
Commissions, fees and other income ....................... 763 863
---------- ----------
Total premiums and other revenues .................... 62,857 45,305
---------- ----------
Operating costs and expenses
Losses and loss adjustment expenses .................... 42,036 28,138
Policy acquisition costs ............................... 15,639 11,299
General and administrative expenses .................... 6,667 5,924
Interest expense ....................................... 1,131 441
Litigation expenses, net ............................... 432 450
---------- ----------
Total operating costs and expenses ................... 65,905 46,252
---------- ----------
Loss before income taxes ................................. (3,048) (947)
Federal income tax benefit of consolidated
U.S. subsidiaries ...................................... 1,288 317
---------- ----------
Net loss .................................................$ (1,760) $ (630)
========== ==========
Basic and diluted loss per common share ..................$ (0.40) $ (0.10)
Basic weighted average common shares outstanding ......... 4,428 6,417
Diluted weighted average common shares outstanding ....... 4,446 6,435
</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 June 30,
------------------------
2000 1999
---------- ----------
<S> <C> <C>
Net loss ......................................................$ (497) $ (1,155)
---------- ----------
Other comprehensive income (loss), before income tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period ... 285 (1,734)
---------- ----------
Other comprehensive income (loss), before income tax .......... 285 (1,734)
Income tax benefit (provision) related to items of other
comprehensive income (loss) ................................. (78) 468
---------- ----------
Other comprehensive income (loss), net of tax ................. 207 (1,266)
---------- ----------
Comprehensive loss ............................................$ (290) $ (2,421)
========== ==========
</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 six months
ended June 30,
------------------------
2000 1999
---------- ----------
<S> <C> <C>
Net loss ......................................................$ (1,760) $ (630)
---------- ----------
Other comprehensive income (loss), before income tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period ... 257 (3,134)
Less: Reclassification adjustment for gains
included in net income .................................. - (50)
---------- ----------
Other comprehensive income (loss), before income tax .......... 257 (3,184)
Income tax benefit (provision) related to items of other
comprehensive income (loss) ................................. (74) 884
---------- ----------
Other comprehensive income (loss), net of income tax .......... 183 (2,300)
---------- ----------
Comprehensive loss ............................................$ (1,577) $ (2,930)
========== ==========
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
PAGE 6
CHANDLER INSURANCE COMPANY, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
For the six months
ended June 30,
------------------------
2000 1999
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss ............................................................$ (1,760) $ (630)
Add (deduct):
Adjustments to reconcile net loss to cash provided by
(applied to) operating activities:
Realized investment gains, net ................................... - (50)
Net losses on sale of equipment .................................. 3 6
Amortization and depreciation .................................... 1,189 1,130
Provision for non-collection of premiums ......................... 75 96
Net change in non-cash balances relating to operating activities:
Premiums receivable ............................................ 12,194 (4,957)
Reinsurance recoverable on paid losses ......................... (3,882) 591
Reinsurance recoverable on unpaid losses ....................... (2,741) (18,096)
Prepaid reinsurance premiums ................................... (2,273) (890)
Deferred policy acquisition costs .............................. (320) (131)
Other assets ................................................... (2,366) (1,216)
Unpaid losses and loss adjustment expenses ..................... 3,617 14,511
Unearned premiums .............................................. 1,225 2,488
Policyholder deposits .......................................... 172 285
Accrued taxes and other payables ............................... (101) 373
Premiums payable ............................................... (371) 86
Litigation liabilities ......................................... 258 390
---------- ----------
Cash provided by (applied to) operating activities ............... 4,919 (6,014)
---------- ----------
INVESTING ACTIVITIES:
Fixed maturities available for sale:
Purchases ....................................................... (14,153) (8,137)
Sales ........................................................... - 3,048
Maturities ...................................................... 15,253 7,498
Cost of property and equipment purchased .......................... (2,437) (873)
Proceeds from sale of property and equipment ...................... 18 73
---------- ----------
Cash provided by (applied to) investing activities .............. (1,319) 1,609
---------- ----------
FINANCING ACTIVITIES:
Payments on notes payable ......................................... - (958)
---------- ----------
Cash applied to financing activities ............................ - (958)
---------- ----------
Increase (decrease) in cash and cash equivalents during the period .. 3,600 (5,363)
Cash and cash equivalents at beginning of period .................... 8,456 10,383
---------- ----------
Cash and cash equivalents at end of period ..........................$ 12,056 $ 5,020
========== ==========
</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 six month periods ended June 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 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. The Nebraska Court continues to hold 1,142,625
shares pending the outcome of CenTra's appeal of a judgment by the U.S.
District Court in Oklahoma City, Oklahoma ("Oklahoma Court") regarding these
shares. Based on the April 22, 1997 judgment and subsequent actions by the
Oklahoma Court, the Company previously recorded the return of the 1,142,625
shares as a decrease to shareholders' equity during 1997. Following the
conclusion of the appeal, the Nebraska Court will determine the method of
divestiture of these shares. The Company cannot predict when the appellate
court will rule on the appeal.
<PAGE>
PAGE 8
On March 23, 1998, the CenTra Group filed a formal notice of intent to
appeal certain orders of the Oklahoma Court, and filed the initial appellate
brief on September 9, 1998. The appeals are being considered by the U.S.
Court of Appeals for the 10th Circuit. The CenTra Group's appeals are based
upon the Oklahoma Court's failure to award prejudgment interest, the Oklahoma
Court's refusal to permit the CenTra Group to amend certain pleadings to
assert new claims, the Oklahoma 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 Court's denial of attorney fees.
The Company believes the appeal of this last issue is untimely and therefore
barred by law. The Company elected not to appeal any of the judgments. The
individual officers and directors against whom judgments were entered have
all filed appeals.
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 Court entered a judgment against CenTra on
these claims. NAICO and NAICO Indemnity contend that the Oklahoma 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 Court. Dispositive motions filed by NAICO,
NAICO Indemnity and the other defendants are currently under consideration
by the Oklahoma 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 June 30, 2000. A portion
of these expenses relate to claims which 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 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.
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 remaining 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. The
Company has not yet responded to these lawsuits but plans to file timely
responses denying the allegations. 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 Court. The Company has responded, but
the Oklahoma 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 June 30, 2000 and 1999, respectively, which were rescinded
through litigation during 1997 but are still outstanding, and exclude 524,475
common shares held by a subsidiary of the Company at June 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 JUNE 30, SIX MONTHS ENDED JUNE 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 .......................... 18 18 18 18
------------ ------------ ------------ ------------
Denominator for diluted earnings per share-
Adjusted weighted average shares
and assumed conversions .............. 4,446 6,435 4,446 6,435
============ ============ ============ ============
</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 six-month periods ended June 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 JUNE 30, 2000
Revenues from external customers (1)...$ 298 $ 30,140 $ 66 $ - $ 30,504
Intersegment revenues.................. 1,616 73 41 (1,730) -
Segment profit (loss) before
income taxes (2)..................... (77) (757) (362) - (1,196)
THREE MONTHS ENDED JUNE 30, 1999
Revenues from external customers (1)...$ 356 $ 20,652 $ 64 $ - $ 21,072
Intersegment revenues.................. 1,672 71 43 (1,786) -
Segment profit (loss) before
income taxes (2)..................... 7 (1,547) (337) (17) (1,894)
SIX MONTHS ENDED JUNE 30, 2000
Revenues from external customers (1)...$ 612 $ 59,233 $ 132 $ - $ 59,977
Intersegment revenues.................. 3,408 110 82 (3,600) -
Segment profit (loss) before
income taxes (2)..................... (333) (1,970) (745) - (3,048)
Segment assets......................... 5,439 276,737 462 (10,295) 272,343
SIX MONTHS ENDED JUNE 30, 1999
Revenues from external customers (1)...$ 707 $ 41,700 $ 150 $ - $ 42,557
Intersegment revenues.................. 3,325 121 82 (3,528) -
Segment profit (loss) before
income taxes (2)..................... (105) (89) (736) (17) (947)
Segment assets......................... 5,045 256,273 4,359 (15,407) 250,270
<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 JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- --------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C>
INSURANCE PROGRAM
------------------------------------------
NET PREMIUMS EARNED
Standard property and casualty ...........$ 22,271 $ 12,112 $ 43,089 $ 24,227
Political subdivisions ................... 4,305 3,714 8,693 7,495
Surety bonds ............................. 2,588 2,562 5,425 5,443
Group accident and health ................ 820 2,317 1,775 4,616
Other .................................... 155 (49) 232 (87)
------------ ------------ ------------ ------------
$ 30,139 $ 20,656 $ 59,214 $ 41,694
============ ============ ============ ============
LOSSES AND LOSS ADJUSTMENT EXPENSES
Standard property and casualty ...........$ 15,877 $ 8,524 $ 30,994 $ 17,453
Political subdivisions ................... 3,390 4,489 6,760 7,325
Surety bonds ............................. 769 (38) 1,460 272
Group accident and health ................ 1,145 1,929 2,846 3,485
Other .................................... 55 (217) (24) (397)
------------ ------------ ------------ ------------
$ 21,236 $ 14,687 $ 42,036 $ 28,138
============ ============ ============ ============
</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 six month periods
ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
GROSS PREMIUMS EARNED NET PREMIUMS EARNED
--------------------------- --------------------------
THREE MONTHS ENDED JUNE 30, 2000 1999 2000 1999
------------------------------------ ------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C>
Standard property and casualty ..... $ 33,887 $ 24,004 $ 22,271 $ 12,112
Political subdivisions ............. 8,527 7,314 4,305 3,714
Surety bonds ....................... 3,313 3,399 2,588 2,562
Group accident and health .......... 868 2,600 820 2,317
Other .............................. 154 28 155 (49)
------------ ------------ ------------ ------------
TOTAL .............................. $ 46,749 $ 37,345 $ 30,139 $ 20,656
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
GROSS PREMIUMS EARNED NET PREMIUMS EARNED
--------------------------- --------------------------
SIX MONTHS ENDED JUNE 30, 2000 1999 2000 1999
------------------------------------ ------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C>
Standard property and casualty ..... $ 64,594 $ 45,639 $ 43,089 $ 24,227
Political subdivisions ............. 16,679 14,495 8,693 7,495
Surety bonds ....................... 7,322 6,953 5,425 5,443
Group accident and health .......... 1,879 5,208 1,775 4,616
Other .............................. 238 36 232 (87)
------------ ------------ ------------ ------------
TOTAL .............................. $ 90,712 $ 72,331 $ 59,214 $ 41,694
============ ============ ============ ============
</TABLE>
Gross premiums earned, before reductions for premiums ceded to
reinsurers, increased $9.4 million or 25% in the second quarter of 2000
compared to the second quarter of 1999. Gross premiums earned for the first
six months of 2000 increased $18.4 million or 25% compared to the first six
months of 1999. The increases are primarily attributable to increased
written premium production in Texas and Oklahoma. Net premiums earned
increased $9.5 million or 46% in the second quarter of 2000 compared to the
second quarter of 1999, and increased $17.5 million or 42% for the six months
ended June 30, 2000 compared to the 1999 period. The increase in net
premiums earned was due to the increase in written 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 $9.9 million or 41% in the second quarter of 2000 compared to the
second quarter of 1999, and increased $19.0 million or 42% for the six months
ended June 30, 2000 compared to the 1999 period. The increases are primarily
attributable to increased written premium production in Texas along with rate
increases. Net premiums earned in the standard property and casualty program
increased $10.2 million or 84% in the second quarter of 2000 compared to the
second quarter of 1999, and increased $18.9 million or 78% for the six months
ended June 30, 2000 compared to the 1999 period. The increase in net
premiums earned was due to the increase in written premium production, and to
the increase in the amount of risk retained for the workers compensation
portion of the program along with rate increases.
Gross premiums earned in the political subdivisions program increased
$1.2 million or 17% in the second quarter of 2000 compared to the second
quarter of 1999, and increased $2.2 million or 15% for the six months ended
June 30, 2000 compared to the 1999 period. The increases are primarily
attributable to increased written premium production resulting from new
business as well as rate increases in the school districts portion of the
program in Oklahoma. Net premiums earned in the political subdivisions
program increased $591,000 or 16% in the second quarter of 2000 compared to
the second quarter of 1999, and increased $1.2 million or 16% for the six
months ended June 30, 2000 compared to the 1999 period.
<PAGE>
PAGE 13
Gross premiums earned in the surety bond program decreased $86,000 or
2.5% in the second quarter of 2000 compared to the second quarter of 1999,
and increased $369,000 or 5.3% for the six months ended June 30, 2000
compared to the 1999 period. Approximately $140,000 and $769,000 of the
gross premiums earned in the second quarter and first six 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 $226,000 and $400,000 in the second quarter and first six months of
2000, respectively, compared to the corresponding 1999 periods. Net
premiums earned in the surety bond program were $2.6 million in the second
quarter of 2000 and 1999, and were $5.4 million for the six month periods
ended June 30, 2000 and 1999.
Gross premiums earned in the group accident and health program decreased
$1.7 million or 67% in the second quarter of 2000 compared to the second
quarter of 1999, and decreased $3.3 million or 64% for the six months ended
June 30, 2000 compared to the 1999 period. Net premiums earned in this
program decreased $1.5 million or 65% in the second quarter of 2000 compared
to the second quarter of 1999, and decreased $2.8 million or 62% for the six
months ended June 30, 2000 compared to the 1999 periods. NAICO discontinued
writing new policies for the excess portion of the group accident and health
program effective April 1, 1999. NAICO is continuing to monitor this program
and will increase rates and may discontinue the program.
NET INTEREST INCOME AND NET REALIZED INVESTMENT GAINS
At June 30, 2000, the Company's investment portfolio consisted primarily
of fixed income U.S. Government, high-quality corporate and tax exempt bonds,
with approximately 10% 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 $87,000 or 7% in the second quarter of
2000 compared to the second quarter of 1999, and increased $182,000 or 7% for
the six months ended June 30, 2000 compared to the 1999 period, due primarily
to an increase in invested assets. Invested assets increased from $109.7
million at June 30, 1999 to $121.0 million at June 30, 2000 due primarily to
the collection of $12.9 million in January 2000 related to two reinsurance
treaties which were rescinded in the fourth quarter of 1999. The Company had
no net realized investment gains or losses in the second quarter of 2000 and
1999, and had no net realized investment gains in the first six months of
2000 compared to $50,000 in the first six months of 1999.
COMMISSIONS, FEES AND OTHER INCOME
The Company's income from commissions, fees and other income decreased
$51,000 or 12% in the second quarter of 2000 compared to the second quarter
of 1999, and decreased $100,000 or 12% for the six months ended June 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 $1.9 million and $4.0 million in the second quarter and first six months
of 2000, respectively, compared to $2.0 million and $4.0 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 70.5% and 71.0% for the quarter and six months
ended June 30, 2000, compared to 71.1% and 67.5% in the comparable 1999
periods. Weather-related losses from wind and hail totaled $1.2 million and
$1.8 million for the second quarter and first six months of 2000,
respectively, and increased the respective loss ratios by 4.0 and 3.0
percentage points. Weather-related losses totaled $2.8 million and $3.2
million for the second quarter and first six months of 1999, respectively,
and increased the respective loss ratios by 13.4 and 7.7 percentage points.
The 1999 periods included $1.9 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 the 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 six month periods ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Commissions expense ........................ $ 5,731 $ 5,704 $ 10,990 $ 10,142
Other premium related assessments .......... 410 288 813 688
Premium taxes .............................. 1,240 941 2,215 1,367
Excise taxes ............................... 90 53 201 99
Dividends to policyholders ................. 100 70 201 157
Other expense .............................. 30 55 72 85
---------- ---------- ---------- ----------
Total direct expenses ...................... 7,601 7,111 14,492 12,538
Indirect underwriting expenses ............. 3,975 3,970 8,053 7,794
Commissions received from reinsurers ....... (2,897) (4,687) (6,586) (8,902)
Adjustment for deferred acquisition costs .. (738) (142) (320) (131)
---------- ---------- ---------- ----------
Net policy acquisition costs ............... $ 7,941 $ 6,252 $ 15,639 $ 11,299
========== ========== ========== ==========
</TABLE>
Total gross direct and indirect expenses as a percentage of direct
written and assumed premiums were 24.7% and 24.5% for the second quarter and
first six months of 2000, respectively, compared to 27.9% and 27.2% in the
corresponding year ago periods. Commission expense as a percentage of gross
written and assumed premiums was 12.2% and 12.0% in the second quarter and
the first six months of 2000, respectively, compared to 14.4% and 13.6% in
the corresponding 1999 periods. Premium taxes increased $299,000 and
$848,000 in the second quarter and six months ended June 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 8.5% and 8.8% of total direct
written and assumed premiums in the second quarter and first six months of
2000, respectively, compared to 10.0% and 10.4% 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 6.7% and 7.3% of gross
premiums earned and commissions, fees and other income in the second quarter
and first six months of 2000, respectively, compared to 7.8% 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 $352,000 or 165% in the second quarter of
2000 compared to the second quarter of 1999, and increased $690,000 or 156%
for the first six 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 AND LITIGATION EXPENSES
Litigation expenses reflect expenses related to the ongoing legal
proceedings involving CenTra. Litigation expenses increased $14,000 or 7.3%
in the second quarter of 2000 compared to the second quarter of 1999, and
decreased $18,000 or 4.0% for the six months ended June 30, 2000 compared to
the 1999 period. Increased or renewed activity could result in greater
litigation expenses in 2000 or future years. 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 six months of 2000, the Company provided $4.9 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 was reduced by an increase in reinsurance
recoverables, less an increase in unpaid losses and loss adjustment expenses,
during the period which generally result from the increase in written
premiums. The Company used $6.0 million in cash from operations during the
first six months of 1999 due primarily to increases in premiums receivable
and reinsurance recoverables, less an increase in unpaid losses, which
generally resulted from the increase in written premiums in the 1999 period
and to the purchase of additional reinsurance coverages in 1998.
Book value per share was $14.97 at June 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.
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 42% of NAICO's written premiums during 1999 and the
first six 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 six 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
---------------------------------------------------
(a) The Registrant's 2000 Annual Meeting of Shareholders was held
on June 5, 2000 in Grand Cayman, Cayman Islands.
(b) See (c)(i) below
(c) (i) The following eight directors were elected to serve until
the next annual meeting of the shareholders to be held in 2001:
NAME FOR WITHHELD
------------------------------------------------------
W. Brent LaGere 3,155,895 21,425
Mark T. Paden 3,155,895 21,425
Brenda B. Watson 3,147,732 29,588
Richard L. Evans 3,155,895 21,425
James M. Jacoby 3,152,795 24,525
Paul A. Maestri 3,155,795 21,525
Robert L. Rice 3,155,795 21,525
W. Scott Martin 3,155,895 21,425
(ii) The Directors Stock Option and Stock Grant Plan ("Plan"),
which authorizes up to 260,000 Common Shares of the Company to
be issued upon stock grants and exercises of options granted
under the Plan was approved by the shareholders. The holders
of 2,398,169 shares voted in favor of the Plan; the holders of
116,647 shares voted against the Plan; and the holders of
10,387 shares abstained. There were 652,117 broker non-votes.
The Company had 3,283,333 common shares issued and outstanding
and entitled to be voted at the annual meeting.
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
The Company filed two current reports on Form 8-K dated June 6, 2000
and June 30, 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: August 8, 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>
