===============================================================================
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 March 31, 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 April 30, 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common shares which were rescinded through litigation and are held by a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 March 31, 2000 and December 31, 1999....1
Consolidated Statements of Operations for the three months
ended March 31, 2000 and 1999........................................2
Consolidated Statements of Comprehensive Income for the three
months ended March 31, 2000 and 1999.................................3
Consolidated Statements of Cash Flows for the three months
ended March 31, 2000 and 1999........................................4
Notes to Interim Consolidated Financial Statements........................5
ITEM 2
- ------
Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................9
PART II - OTHER INFORMATION
- ---------------------------
Item 1 Legal Proceedings.............................................14
Item 2 Changes in Securities.........................................14
Item 3 Defaults Upon Senior Securities...............................14
Item 4 Submission of Matters to a Vote of Security Holders...........14
Item 5 Other Information.............................................14
Item 6 Exhibits and Reports on Form 8-K..............................14
Signatures...............................................................15
<PAGE>
PAGE 1
CHANDLER INSURANCE COMPANY, LTD.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------- --------------
<S> <C> <C>
ASSETS (Unaudited)
Investments
Fixed maturities available for sale, at fair value............... $ 113,606 $ 108,709
Fixed maturities held to maturity, at amortized cost (fair value
$1,052 and $1,039 in 2000 and 1999, respectively) ............. 1,002 984
Equity securities available for sale, at fair value ............. 306 306
------------- --------------
Total investments ............................................. 114,914 109,999
Cash and cash equivalents ......................................... 11,673 8,456
Premiums receivable, less allowance for non-collection
of $310 and $263 at 2000 and 1999, respectively.................. 36,241 47,721
Reinsurance recoverable on paid losses, less allowance for
non-collection of $275 at 2000 and 1999 ......................... 3,989 3,281
Reinsurance recoverable on unpaid losses, less allowance for
non-collection of $322 and $302 at 2000 and 1999, respectively .. 38,035 37,539
Prepaid reinsurance premiums ...................................... 23,387 19,960
Deferred policy acquisition costs ................................. 6,069 6,488
Property and equipment, net ....................................... 11,634 10,765
Licenses, net ..................................................... 4,007 4,044
Excess of cost over net assets acquired, net ...................... 3,793 3,955
Other assets ...................................................... 18,023 16,912
------------- --------------
Total assets ...................................................... $ 271,765 $ 269,120
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Unpaid losses and loss adjustment expenses ...................... $ 99,870 $ 98,460
Unearned premiums ............................................... 68,935 67,769
Policyholder deposits ........................................... 5,215 5,135
Accrued taxes and other payables ................................ 4,376 6,796
Premiums payable ................................................ 10,882 7,312
Litigation liabilities .......................................... 9,031 8,905
Debentures ...................................................... 24,000 24,000
------------- --------------
Total liabilities ............................................. 222,309 218,377
------------- --------------
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 ............................................... 29,216 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 ................................ (2,599) (2,575)
------------- --------------
Total shareholders' equity .................................... 49,456 50,743
------------- --------------
Total liabilities and shareholders' equity ........................ $ 271,765 $ 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 March 31,
------------------------
2000 1999
---------- ----------
<S> <C> <C>
Premiums and other revenues
Direct premiums written and assumed................. $ 45,129 $ 35,111
Reinsurance premiums ceded.......................... (18,314) (14,053)
---------- -----------
Net premiums written and assumed.................. 26,815 21,058
Decrease (increase) in unearned premiums............ 2,260 (20)
---------- -----------
Net premiums earned............................... 29,075 21,038
Interest income, net.................................. 1,478 1,383
Realized investment gains, net........................ - 50
Commissions, fees and other income.................... 398 447
---------- ----------
Total premiums and other revenues................. 30,951 22,918
---------- ----------
Operating costs and expenses
Losses and loss adjustment expenses................. 20,800 13,451
Policy acquisition costs............................ 7,698 5,047
General and administrative expenses................. 3,512 2,986
Interest expense.................................... 566 228
Litigation expenses, net............................ 227 259
---------- ----------
Total operating costs and expenses................ 32,803 21,971
---------- ----------
Income (loss) before income taxes..................... (1,852) 947
Federal income tax benefit (provision) of consolidated
U.S. subsidiaries................................... 589 (422)
---------- ----------
Net income (loss)..................................... $ (1,263) $ 525
========== ==========
Basic earnings (loss) per common share................ $ (0.29) $ 0.08
Diluted earnings (loss) per common share.............. $ (0.28) $ 0.08
Basic weighted average common shares outstanding...... 4,428 6,417
Diluted weighted average common shares outstanding.... 4,445 6,435
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
PAGE 3
CHANDLER INSURANCE COMPANY, LTD.
Consolidated Statements of Comprehensive Income
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
For the three months
ended March 31,
------------------------
2000 1999
---------- ----------
<S> <C> <C>
Net income (loss)................................................. $ (1,263) $ 525
---------- ----------
Other comprehensive loss, before income tax:
Unrealized losses on securities:
Unrealized holding losses arising during period............... (28) (1,400)
Less: Reclassification adjustment for gains
included in net income (loss)............................... - (50)
---------- ----------
Other comprehensive loss, before income tax....................... (28) (1,450)
Income tax benefit related to items of other comprehensive loss... 4 416
---------- ----------
Other comprehensive loss, net of income tax....................... (24) (1,034)
---------- ----------
Comprehensive loss................................................ $ (1,287) $ (509)
========== ==========
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
PAGE 4
CHANDLER INSURANCE COMPANY, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
For the three months
ended March 31,
------------------------
2000 1999
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss).................................................... $ (1,263) $ 525
Add (deduct):
Adjustments to reconcile net income (loss) to cash provided by
(applied to) operating activities:
Realized investment gains, net................................... - (50)
Net (gains) losses on sale of equipment.......................... 3 (8)
Amortization and depreciation.................................... 586 548
Provision for non-collection of premiums......................... 42 30
Net change in non-cash balances relating to operations:
Premiums receivable............................................ 11,438 (2,636)
Reinsurance recoverable on paid losses......................... (726) 775
Reinsurance recoverable on unpaid losses....................... (479) (4,172)
Prepaid reinsurance premiums................................... (3,427) (105)
Deferred policy acquisition costs.............................. 419 11
Other assets................................................... (1,135) (97)
Unpaid losses and loss adjustment expenses..................... 1,410 2,281
Unearned premiums.............................................. 1,166 125
Policyholder deposits.......................................... 80 77
Accrued taxes and other payables............................... (2,420) (1,005)
Premiums payable............................................... 3,570 (845)
Litigation liabilities......................................... 126 190
---------- ----------
Cash provided by (applied to) operating activities............... 9,390 (4,356)
---------- ----------
INVESTING ACTIVITIES
Fixed maturities available for sale:
Purchases........................................................ (6,589) (5,042)
Sales............................................................ - 3,048
Maturities....................................................... 1,538 4,467
Cost of property and equipment purchased........................... (1,140) (262)
Proceeds from sale of property and equipment....................... 18 46
---------- ----------
Cash provided by (applied to) investing activities............... (6,173) 2,257
---------- ----------
FINANCING ACTIVITIES
Payments on notes payable.......................................... - (476)
---------- ----------
Cash applied to financing activities............................. - (476)
---------- ----------
Increase (decrease) in cash and cash equivalents during the period... 3,217 (2,575)
Cash and cash equivalents at beginning of period..................... 8,456 10,383
---------- ----------
Cash and cash equivalents at end of period........................... $ 11,673 $ 7,808
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
PAGE 5
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 and
an unusual significant litigation liability adjustment described in Note 2)
considered necessary for a fair presentation have been included. The results
of operations for the three-month period ended March 31, 2000 are not
necessarily indicative of the results that may be expected for the year.
The consolidated financial statements include the accounts of Chandler
Insurance Company, Ltd. ("Chandler" or the "Company") and all subsidiaries.
The following represents the significant subsidiaries:
- Chandler Insurance (Barbados), Ltd. ("Chandler Barbados") and NAICO
Indemnity (Cayman), Ltd. ("NAICO Indemnity"), wholly owned subsidiaries
of the Company.
- Chandler (U.S.A.), Inc. ("Chandler USA"), a wholly owned subsidiary of
Chandler Barbados.
- National American Insurance Company ("NAICO") and LaGere & Walkingstick
Insurance Agency, Inc., wholly owned subsidiaries of Chandler USA.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
NOTE 2. 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. 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 6
On April 1, 1997, the Oklahoma Court entered judgment in favor of NAICO
on CenTra's claims for alleged wrongful cancellation of CenTra's insurance
with NAICO and NAICO Indemnity in 1992. The remaining issues were submitted
to a jury. On April 22, 1997, the Oklahoma Court entered judgments on the
jury verdicts. One judgment against the Company required the CenTra Group
to return stock it purchased in 1990 to the Company in return for a payment
of $5,099,133 from the Company. Payment was made and the stock was returned
to the Company and canceled in December 1999 as a part of the acquisition
of shares described previously. Another judgment was against both the
Company and Chandler Barbados. CenTra and an affiliate, Ammex, Inc., were
awarded $6,882,500 in connection with a 1988 stock purchase agreement. On
March 10, 1998, the Oklahoma Court modified its judgment to require CenTra
and its affiliates to deliver 1,142,625 shares of Chandler stock they owned
upon payment of the $6,882,500 judgment which was entered in April 1997.
Both of these judgments related to an alleged failure by the Company to
adequately disclose the fact that ownership of the Company's stock may be
subject to regulation by the Nebraska Department of Insurance under certain
circumstances. Judgment was also entered in favor of CenTra and against
certain officers and/or directors of the Company on the securities claims
relating to CenTra's 1990 stock purchases and the failure to disclose the
application of Nebraska insurance law, but the judgments were $1 against
each individual defendant on those claims. On ten derivative claims
brought by CenTra, the jury found in CenTra's favor on three. Certain
officers were directed to repay to Chandler USA bonuses received for the
years 1988 and 1989 totaling $711,629 and a total of $25,000 for personal
use of corporate aircraft. These amounts are included in other assets in
the accompanying consolidated balance sheets. On the remaining claim
relating to the acquisition of certain insurance agencies in 1988, the jury
awarded $1 each against six officers and/or directors.
Judgment was also entered in favor of NAICO and NAICO Indemnity on
counterclaims against CenTra for CenTra's failure to pay insurance premiums.
Judgment was for the amount of $788,625. During 1998, the judgment was paid
by funds held by the Oklahoma Court aggregating, with interest, $820,185.
DuraRock Underwriters, Ltd. ("DuraRock"), an affiliate of CenTra, claimed
$725,000 was owed to it under certain reinsurance treaties. That claim was
settled in January 2000 with NAICO and NAICO Indemnity paying $137,500 to
DuraRock. The settlement was accrued for by NAICO and NAICO Indemnity in
1999.
The Oklahoma Court's judgment also upheld a resolution adopted by the
Company's Board of Directors in August 1992 pursuant to Article XI of the
Company's Articles of Association preventing CenTra and its affiliates from
voting their Chandler stock.
As a result of the Oklahoma Court judgments and subsequent decisions,
the Company recorded a net charge for the litigation matters during 1997
totaling approximately $1.4 million ($1.6 million including provision for
federal income tax). The Company recorded the return of 1,660,125 shares
of the Company's stock in connection with the rescission judgments as a
decrease to shareholders' equity in the amount of approximately $12.0
million. On April 21, 1998, the Oklahoma Court denied the CenTra Group's
request for costs and attorney fees. The CenTra Group did not appeal this
decision within the time permitted by applicable law. Accordingly, the
Company reduced the previous 1997 net charge for litigation matters by $3.8
million during the second quarter of 1998.
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.
The Company's board of directors appointed a committee of the board
(the "Committee") to deal with all matters arising from the Oklahoma
litigation. The members of the Committee are Messrs. Jacoby, Maestri and
Davis, all of whom are non-parties to the CenTra litigation. The Committee
is empowered by the board to make decisions on behalf of the Company
regarding issues relating to litigation strategy, officer and director
indemnification and claims made under the Company's director and officer
liability insurance policy (the "D&O Insurer"). A similar committee
composed of Chandler USA directors is authorized to deal with those same
issues regarding Chandler USA.
<PAGE>
PAGE 7
In 1997, NAICO learned that several CenTra affiliates had filed two
lawsuits against NAICO, NAICO Indemnity 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 March 31, 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 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.
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 March 31, 2000 and 1999, respectively, which were
rescinded through litigation during 1997 but are still outstanding, and
exclude 544,475 common shares held by a subsidiary of the Company on
March 31, 1999. The numerator for basic and diluted earnings per share is
equal to the net income (loss) for the respective period.
<PAGE>
PAGE 8
The following table sets forth the computation of the denominator for
basic and diluted earnings (loss) per share:
<TABLE>
<CAPTION>
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
(In thousands)
<S> <C> <C>
Denominator for basic earnings (loss) per
common share - weighted average shares.................. 4,428 6,417
Effect of dilutive securities -
non-employee director stock options..................... 17 18
-------------- --------------
Denominator for diluted earnings (loss) per
common share - adjusted weighted average
shares and assumed conversions.......................... 4,445 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.
NOTE 5. SEGMENT INFORMATION
The following table presents a summary of the Company's operating
segments for the three-month periods ended March 31, 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 MARCH 31, 2000
Revenues from external customers (1).. $ 314 $ 29,093 $ 66 $ - $ 29,473
Intersegment revenues................. 1,792 37 41 (1,870) -
Segment profit (loss) before
income taxes (2).................... (256) (1,213) (383) - (1,852)
Segment assets........................ $ 5,121 $ 275,949 $ 460 $ (9,765) $ 271,765
THREE MONTHS ENDED MARCH 31, 1999
Revenues from external customers (1).. $ 350 $ 21,049 $ 86 $ - $ 21,485
Intersegment revenues................. 1,653 51 39 (1,743) -
Segment profit (loss) before
income taxes (2).................... (113) 1,459 (399) - 947
Segment assets........................ $ 5,069 $ 243,090 $ 4,920 $ (17,216) $ 235,863
<FN>
(1) Consists of net premiums earned and commissions, fees and other income.
(2) Includes net realized investment gains.
</TABLE>
<PAGE>
PAGE 9
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 MARCH 31,
----------------------------
2000 1999
------------ ------------
(In thousands)
<S> <C> <C>
INSURANCE PROGRAM
- -----------------
NET PREMIUMS EARNED
Standard property and casualty........................... $ 20,817 $ 12,115
Political subdivisions................................... 4,388 3,782
Surety bonds............................................. 2,837 2,881
Group accident and health................................ 955 2,299
Other.................................................... 78 (39)
------------ ------------
$ 29,075 $ 21,038
============ ============
LOSSES AND LOSS ADJUSTMENT EXPENSES
Standard property and casualty........................... $ 15,118 $ 8,929
Political subdivisions................................... 3,370 2,836
Surety bonds............................................. 691 310
Group accident and health................................ 1,702 1,556
Other.................................................... (81) (180)
------------ ------------
$ 20,800 $ 13,451
============ ============
</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; (ix) the ability
of the Company and its third party providers, agents and reinsurers to
adequately address year 2000 issues; (x) other factors including the ongoing
litigation matters involving a significant concentration of ownership of
common stock.
<PAGE>
PAGE 10
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 month periods ended
March 31, 2000 and 1999:
<TABLE>
<CAPTION>
GROSS PREMIUMS EARNED NET PREMIUMS EARNED
--------------------- ---------------------
THREE MONTHS ENDED MARCH 31, 2000 1999 2000 1999
---------------------------- ---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Standard property and casualty........ $ 30,707 $ 21,635 $ 20,817 $ 12,115
Political subdivisions................ 8,152 7,181 4,388 3,782
Surety bonds.......................... 4,009 3,555 2,837 2,881
Group accident and health............. 1,011 2,609 955 2,299
Other................................. 84 6 78 (39)
---------- ---------- ---------- ----------
TOTAL................................. $ 43,963 $ 34,986 $ 29,075 $ 21,038
========== ========== ========== ==========
</TABLE>
Gross premiums earned, before reductions for premiums ceded to
reinsurers, increased $9.0 million or 26% in the first quarter of 2000
compared to the first quarter of 1999. The increase is primarily
attributable to increased written premium production in Texas and Oklahoma,
as NAICO continues to expand its programs in these states. Net premiums
earned, after such reductions, increased $8.0 million or 38% in the first
quarter of 2000 compared to the first quarter of 1999 due to the increase
in written premium production, and to an increase in the amount of risk
retained in the 2000 quarter for the Company's workers compensation line of
business.
Gross premiums earned in the standard property and casualty program
increased $9.1 million or 42% in the first quarter of 2000 compared to the
first quarter of 1999. The increase is primarily attributable to increased
written premium production in Texas. Net premiums earned increased $8.7
million or 72% in the first quarter of 2000 versus the first quarter of
1999 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.
Gross premiums earned in the political subdivisions program increased
$971,000 or 14% in the first quarter of 2000 compared to the first quarter
of 1999. The increase is primarily attributable to increased written
premium production in the school districts portion of the program in
Oklahoma. Net premiums earned in the political subdivisions program
increased $606,000 or 16% in the first quarter of 2000 versus the first
quarter of 1999.
Gross premiums earned in the surety bond program increased $454,000 or
13% in the first quarter of 2000 compared to the first quarter of 1999.
Approximately $629,000 of the gross premiums earned in the first quarter of
2000 relates to a new program that is 100% reinsured by an unaffiliated
reinsurer. Excluding this new program, gross premiums earned decreased
$175,000 or 5% from the 1999 quarter. Net premiums earned in the surety
bond program decreased $44,000 or 2% in the first quarter of 2000 versus
the first quarter of 1999.
Gross premiums earned in the group accident and health program
decreased $1.6 million or 61% in the first quarter of 2000 versus the first
quarter of 1999. Net premiums earned for this program decreased $1.3
million or 58% in the first quarter of 2000 versus the first quarter of
1999. NAICO discontinued writing new policies for the excess portion of
the group accident and health program effective April 1, 1999. NAICO is
currently evaluating the fully insured portion of the program and may
modify or discontinue it during 2000.
NET INTEREST INCOME AND NET REALIZED INVESTMENT GAINS
At March 31, 2000, the Company's investment portfolio consisted
primarily of fixed income U.S. Government, high-quality corporate and tax
exempt bonds, with approximately 9% invested in cash and money market
instruments. The Company's portfolio contains no junk bonds or real
estate investments.
<PAGE>
PAGE 11
Net interest income increased $95,000 or 7% in the first quarter of 2000
versus the first quarter of 1999 due primarily to an increase in invested
assets. Invested assets increased from $114.3 million at March 31, 1999 to
$126.6 million at March 31, 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 during the first quarter of 2000, compared to a
net realized gain of $50,000 in the first quarter of 1999.
COMMISSIONS, FEES AND OTHER INCOME
The Company's income from commissions, fees and other income decreased
$49,000 or 11% in the first quarter of 2000 versus the first quarter of
1999. The majority of the Company's income from commissions, fees and other
income are from LaGere and Walkingstick Insurance Agency, Inc. ("L&W").
L&W's brokerage commissions and fees before intercompany eliminations
were $2.1 million in the first quarter of 2000 versus $2.0 million in the
first quarter of 1999. 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 71.5% for the first quarter of 2000 versus 63.9%
in the first quarter of 1999. The increase in the 2000 loss ratio was
primarily the result of adverse loss experience in the group accident and
health program. Excluding the underwriting results of the group accident
program, the loss ratio for the first quarter of 2000 was 67.9% versus
63.5% in the year ago quarter. In addition, a lower proportion of net
premiums earned in the surety bond program resulted in a higher loss ratio
in the 2000 quarter. Surety bonds have historically had a lower loss ratio
than the Company's other lines of business, which is normal for the
industry. Weather-related losses from wind and hail totaled $594,000 in
the first quarter of 2000 and increased the loss ratio by 2.0 percentage
points. Weather-related losses totaled $441,000 in the first quarter of
1999, and increased the 1999 loss ratio by 2.1 percentage points.
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. Recoverability of such deferred costs is
dependent on the related unearned premiums on the policies being more than
expected claim losses.
The following table sets forth the Company's policy acquisition costs
for each of the three month periods ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
------------ ------------
(In thousands)
<S> <C> <C>
Commissions expense............................... $ 5,259 $ 4,438
Other premium related assessments................. 403 400
Premium taxes..................................... 975 426
Excise taxes...................................... 110 46
Dividends to policyholders........................ 101 87
Other expense..................................... 42 30
------------ ------------
Total direct expenses............................. 6,890 5,427
Indirect underwriting expenses.................... 4,078 3,824
Commission received from reinsurers............... (3,689) (4,215)
Adjustment for deferred acquisition costs......... 419 11
------------ ------------
Net policy acquisition costs...................... $ 7,698 $ 5,047
============ ============
</TABLE>
<PAGE>
PAGE 12
Total gross direct and indirect expenses as a percentage of direct
written and assumed premiums were 24.3% for the first quarter of 2000 versus
26.3% for the first quarter of 1999. Commission expense as a percentage of
gross written and assumed premiums was 11.7% for the first quarter of 2000
versus 12.6% for the 1999 quarter. Premium taxes increased $549,000 or 129%
in the first quarter of 2000 compared to the 1999 quarter due to the
increase in written premiums and to a refund of $392,000 which was received
in the 1999 quarter for premium taxes paid in a prior year.
Indirect underwriting expenses were 9.0% and 10.9% of total direct
written and assumed premiums in the three month periods ended March 31, 2000
and 1999, respectively. 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 7.9% and 8.4% of gross
premiums earned and commissions, fees and other income in the first quarter
of 2000 and 1999, respectively. General and administrative expenses have
historically not varied in direct proportion to the Company's revenues. A
portion of such expenses is allocated to policy acquisition costs (indirect
underwriting expenses) and loss adjustment expenses based on various
factors including employee counts, salaries, occupancy and specific
identification. Because certain types of expenses are fixed in nature, the
percentage of such expenses to revenues will vary depending on the Company's
overall premium volume.
INTEREST EXPENSE
Interest expense increased $338,000 or 148% in the first quarter of
2000 versus the first quarter of 1999. The increase was primarily due to
interest expense on the $24 million debenture offering which was completed
on July 16, 1999 by the Company's subsidiary Chandler (U.S.A.), Inc.
LITIGATION EXPENSES
Litigation expenses reflect expenses related to the on-going legal
proceedings involving CenTra, Inc. and certain of its affiliates
("CenTra"). Litigation expenses decreased $32,000 or 12% in the first
quarter of 2000 compared to the first quarter of 1999. 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 quarter of 2000, the Company provided $9.4 million in
cash from operations due primarily to the collection of certain receivables
totaling approximately $12.9 million in the 2000 quarter that were related
to the rescission of two reinsurance treaties during the fourth quarter of
1999. In the first quarter of 1999, the Company used $4.4 million in cash
from operations due primarily to increases in premiums receivable and
reinsurance recoverables, less an increase in unpaid losses and loss
adjustment expenses, which generally correspond to the increase in written
premiums in the 1999 quarter and to the purchase of additional reinsurance
coverages in 1998.
Book value per share was $15.06 at March 31, 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.
<PAGE>
PAGE 13
YEAR 2000 READINESS DISCLOSURES
The Company began work in 1995 to prepare its financial, information and
other computer-based systems for the year 2000, including updating existing
legacy systems, and such work was completed prior to the end of 1999.
Through the first four months of the year 2000, the Company had 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.
The Company continues to study the complex issues related to insurance
coverage for losses arising from the myriad potential fact situations
connected with year 2000 problems and NAICO's liability to its insureds. The
Company believes that the coverages NAICO provides do not extend to the types
of losses which are most likely to occur as a result of year 2000 problems.
No claims for year 2000 problems have been reported to NAICO and NAICO has
made no provisions for loss reserves based on potential year 2000 problems.
It is possible that future court interpretations of policy language based on
specific facts, or legislation mandating coverage, could result in coverage
for losses attributable to year 2000 problems. Such decisions or legislation
could have a material adverse impact on the Company. It is also possible
that NAICO may incur expenses defending claims for which it is ultimately
determined there is no insurance coverage.
<PAGE>
PAGE 14
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
-----------------
In response to this item, the Company incorporates by reference to
Note 2. Litigation to its Interim Consolidated Financial Statements
contained elsewhere in this report.
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
The Annual Meeting of Shareholders of Chandler Insurance Company,
Ltd., will be held at the Marriott Hotel in Grand Cayman, Cayman
Islands, on Monday, June 5, 2000 at 10:00 a.m. local time, for
the following purposes:
1. To elect eight directors to serve until the next annual meeting
of shareholders;
2. To approve the Company's Directors Stock Option and Stock Grant
Plan, which authorizes up to 260,000 Common Shares of the
Company to be issued upon stock grants and exercises of options
granted under that plan; and
3. To transact such other business as may properly come before the
Annual Meeting or any adjournment or postponement thereof.
Only shareholders of record at the close of business on April 24,
2000 are entitled to notice of, and to vote at, the meeting or any
adjournments or postponements thereof.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
None
<PAGE>
PAGE 15
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 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> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from Chandler
Insurance Company, Ltd.'s March 31, 2000 Form 10-Q and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<DEBT-HELD-FOR-SALE> 113,606
<DEBT-CARRYING-VALUE> 1,002
<DEBT-MARKET-VALUE> 1,052
<EQUITIES> 306
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 114,914
<CASH> 11,673
<RECOVER-REINSURE> 3,989
<DEFERRED-ACQUISITION> 6,069
<TOTAL-ASSETS> 271,765
<POLICY-LOSSES> 99,870
<UNEARNED-PREMIUMS> 68,935
<POLICY-OTHER> 5,215
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 24,000
0
0
<COMMON> 7,395
<OTHER-SE> 42,061
<TOTAL-LIABILITY-AND-EQUITY> 271,765
29,075
<INVESTMENT-INCOME> 1,478
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 398
<BENEFITS> 20,800
<UNDERWRITING-AMORTIZATION> 7,698
<UNDERWRITING-OTHER> 4,305
<INCOME-PRETAX> (1,852)
<INCOME-TAX> (589)
<INCOME-CONTINUING> (1,263)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,263)
<EPS-BASIC> (0.29)
<EPS-DILUTED> (0.28)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
