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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
COMMISSION FILE NUMBER: 1-15135
CHANDLER (U.S.A.), INC.
(Exact name of registrant as specified in its charter)
OKLAHOMA 73-1325906
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1010 MANVEL AVENUE, CHANDLER, OKLAHOMA 74834
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (405) 258-0804
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
----------------------------------- -----------------------------------------
$24,000,000 8.75% SENIOR DEBENTURES AMERICAN STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. X
---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES NO X
--- ---
Aggregate market value of the voting stock held by non-affiliates of the
registrant on June 30, 2002 and February 28, 2003: None.
The number of common shares, $1.00 par value, of the registrant outstanding on
February 28, 2003 was 2,484, which are owned by Chandler Insurance (Barbados),
Ltd., a wholly owned subsidiary of Chandler Insurance Company, Ltd.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant does not incorporate by reference in this report any annual report,
proxy statement, or Rule 424 prospectus.
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PAGE 1
PART I
FORWARD-LOOKING STATEMENTS
Some of the statements made in this Form 10-K report, as well as
statements made by Chandler (U.S.A.), Inc. ("Chandler USA") in periodic press
releases and oral statements made by Chandler USA's officials 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 Chandler USA 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 Chandler USA and its
subsidiaries operate, including the ability to implement price increases; (iv)
claims frequency; (v) claims severity; (vi) catastrophic events of
unanticipated frequency or severity; (vii) the number of new and renewal
policy applications submitted to National American Insurance Company ("NAICO")
by its agents; (viii) the ability of NAICO to obtain adequate reinsurance in
amounts and at rates that will not adversely affect its competitive position;
(ix) the ability of NAICO to maintain favorable insurance company ratings; and
(x) various other factors.
ITEM 1. BUSINESS
GENERAL
Chandler USA is an insurance holding company that provides administrative
services to its wholly owned subsidiaries NAICO and Chandler Insurance
Managers, Inc. ("CIMI"). Chandler USA is an Oklahoma corporation which is
wholly owned by Chandler Insurance (Barbados), Ltd. ("Chandler Barbados"),
which, in turn, is wholly owned by Chandler Insurance Company, Ltd. ("Chandler
Insurance"), a privately owned Cayman Islands company. Chandler USA is
headquartered in Chandler, Oklahoma, in facilities also occupied by NAICO and
CIMI.
NAICO is one of the leading commercial business insurance writers in
Oklahoma, providing property and casualty coverage for businesses in various
industries. NAICO has a network of independent agents, totaling approximately
175 at December 31, 2002, that market NAICO's insurance products. Independent
agents originate substantially all of NAICO's business. NAICO is licensed to
write property and casualty coverage in 45 states and the District of Columbia
and is authorized by the United States Department of the Treasury to write
surety bonds for contractors on federal projects. NAICO is currently rated as
B++ (Very Good) by A.M. Best Company, an insurance rating agency. This rating
is an independent opinion of a company's financial strength, operating
performance and ability to meet its obligations to policyholders.
On December 20, 2002, Chandler USA completed the sale of its wholly owned
subsidiary, LaGere & Walkingstick Insurance Agency, Inc. ("L&W"), to Brown &
Brown, Inc. for $3,247,000 in cash and a $361,000 note receivable. Chandler
USA recorded an after-tax gain of $671,000 on the sale based on the minimum
purchase price for the transaction. This amount may be increased over the
next three years depending on certain adjustments as defined in the terms of
the transaction. The transaction was effective December 1, 2002. L&W is
expected to continue to be a significant producer of business for NAICO.
Retail business produced by L&W and placed with NAICO constituted approximately
8% of NAICO's direct premiums written and assumed in 2002. Chandler USA will
maintain certain wholesale operations related to NAICO's school districts and
trucking programs through CIMI, an underwriting manager that was established
in December 2002. L&W previously functioned as Chandler USA's agency segment
and is presented as discontinued operations. See Note 4 to Consolidated
Financial Statements for more information on the sale of L&W.
Chandler Barbados is a Barbados company and a wholly owned subsidiary of
Chandler Insurance that reinsures risks underwritten by NAICO. NAICO retains
a portion of each risk, then transfers the balance to reinsurance companies
including Chandler Barbados. Chandler Insurance reinsures Chandler Barbados
for a portion of the risk that it assumes from NAICO.
PAGE 2
INSURANCE PROGRAMS
NAICO writes various property and casualty insurance products through
three primary marketing programs. The programs are standard property and
casualty, political subdivisions and surety bonds.
STANDARD PROPERTY AND CASUALTY PROGRAM
NAICO offers workers compensation, automobile liability and physical
damage, general and umbrella liability and property coverages under its
standard property and casualty program. In marketing these products, NAICO
targets companies in the construction, manufacturing, wholesale, service, oil
and gas, and retail industries. NAICO writes this business principally in
Oklahoma and Texas.
POLITICAL SUBDIVISIONS PROGRAM
Under the political subdivisions program, NAICO writes insurance policies
primarily for school districts in Oklahoma. As of December 31, 2002, NAICO
insured 444 school districts primarily in Oklahoma. The coverages offered
include workers compensation, automobile liability, automobile physical damage,
general liability, property and school board legal liability. NAICO has also
written property and casualty insurance for municipalities, primarily in
Oklahoma. During 2002, NAICO significantly reduced its premium writings in
this portion of the program.
SURETY BOND PROGRAM
NAICO writes surety bonds, commonly referred to as contract performance
bonds, to secure the performance of contractors and suppliers on construction
projects. Individual bonds generally do not exceed $3.5 million, and an
individual contractor generally does not have "work in progress" for both
bonded and unbonded jobs in excess of $7 million. A substantial portion of
this business is written in Texas and Oklahoma. NAICO also writes bail
bonds, which guarantee that the principal will discharge obligations set by
the court, as well as other types of miscellaneous bonds. NAICO has reduced
the underwriting authority for the bail bond program for 2003, and expects to
discontinue the bail bond program by the end of 2003.
The following table shows gross premiums earned and net premiums earned
by insurance program for the years 2000, 2001 and 2002. The term "gross
premiums earned" means gross premiums written (before reductions for premiums
ceded to reinsurers) less the increases or plus the decreases in the gross
unearned premium reserve for the unexpired portion of the policy term beyond
the current accounting period. The term "net premiums earned" means gross
premiums earned less reductions for earned premiums ceded to reinsurers. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
GROSS PREMIUMS EARNED NET PREMIUMS EARNED
-------------------------- --------------------------
INSURANCE PROGRAMS 2000 2001 2002 2000 2001 2002
- ------------------------------------- -------- -------- -------- -------- -------- --------
(In thousands)
Standard property and casualty ...... $139,051 $128,554 $106,051 $ 62,823 $ 53,130 $ 49,570
Political subdivisions .............. 34,353 34,178 35,159 12,826 12,534 13,829
Surety bonds ........................ 13,691 8,796 5,104 6,467 4,125 3,310
Other (1) ........................... 3,672 71 249 3,403 196 248
-------- -------- -------- -------- -------- --------
TOTAL ............................... $190,767 $171,599 $146,563 $ 85,519 $ 69,985 $ 66,957
======== ======== ======== ======== ======== ========
- ------------------------------
(1) This category is comprised primarily of the run-off of discontinued programs and NAICO's
participation in various mandatory workers compensation pools and assigned risks.
PAGE 3
LINES OF INSURANCE
The lines of insurance written by NAICO through its programs are workers
compensation, automobile liability, surety, accident and health, automobile
physical damage, property, inland marine and other liability lines, which
include general and professional liability lines. The following table shows
net premiums earned as a percentage of total net premiums earned by each line
of insurance written by NAICO during the period indicated.
YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1999 2000 2001 2002
-------- -------- -------- -------- --------
Automobile liability .................. 22% 17% 20% 19% 25%
Other liability ....................... 22% 19% 25% 25% 25%
Workers compensation .................. 19% 34% 25% 24% 22%
Automobile physical damage ............ 9% 8% 13% 17% 14%
Property .............................. 4% 3% 4% 7% 8%
Surety ................................ 14% 9% 8% 6% 5%
Inland marine ......................... 1% 1% 1% 2% 1%
Accident and health ................... 9% 9% 4% -% -%
-------- -------- -------- -------- --------
Total ............................ 100% 100% 100% 100% 100%
======== ======== ======== ======== ========
UNDERWRITING AND CLAIMS
Independent insurance agents submit applications for insurance coverage
for prospective customers to NAICO. NAICO reviews a prospective risk in
accordance with its specific underwriting guidelines. If the risk is approved
and coverage is accepted by the insured, NAICO issues an insurance policy.
NAICO has maintained a continuous contractual relationship with an
underwriting manager for its bail bond program. During 2000, 2001 and 2002,
the gross written premiums in this program were $2.5 million, $2.3 million and
$2.3 million, respectively. This underwriting manager operates through a
network of bail bond agents who submit applications to the underwriting
manager. If the application meets the specific guidelines set by the
underwriting manager, a bail bond is issued. This underwriting manager is an
independent contractor and is responsible for collection of all premiums and
payment of all commissions to bail bond agents. Additionally, it is
responsible for all claims and recoveries and is required to maintain
collateral security for each bond.
NAICO's claim department reviews and administers all claims. When a
claim is received, it is reviewed and assigned to an in-house claim adjuster
based on the type and geographic location of the claim, its severity and its
class of business. NAICO's claim department is responsible for reviewing each
claim, obtaining necessary documentation and establishing loss and loss
adjustment expense reserves. NAICO's in-house claims staff handles and
supervises the claims, coordinates with outside legal counsel and independent
claims adjusters if necessary, and processes the claims to conclusion.
REINSURANCE
In the ordinary course of business, NAICO cedes insurance risks and a
portion of the insurance premiums to its reinsurers under various reinsurance
contracts that cover individual risks (facultative reinsurance) or entire
classes of business (treaty reinsurance). Reinsurance provides greater
diversification of insurance risk associated with business written and also
reduces NAICO's exposure from high policy limits or from catastrophic events
and hazards of an unusual nature. Amounts recoverable from reinsurers are
estimated in a manner consistent with the claim liability associated with the
reinsured policies. In formulating its reinsurance programs, NAICO considers
numerous factors, including the financial stability of the reinsurer, the
reinsurer's ability to provide sufficient collateral (if required), reinsurance
coverage offered and price.
Treaty reinsurance may be ceded under treaties on both a pro rata or
proportional basis (where the reinsurer shares proportionately in premiums and
losses) and an excess of loss basis (where only losses above a specific amount
are reinsured). The availability, costs and limits of reinsurance purchased
varies from year to year based upon prevailing market conditions, reinsurers'
underwriting results and NAICO's desired risk retention levels. A majority of
NAICO's reinsurance programs renew on January 1, April 1 or July 1 of each
year. NAICO renewed all January 1, 2003 reinsurance programs. At the present
time, NAICO expects to renew the reinsurance programs that renew on April 1 or
July 1, 2003, as applicable.
PAGE 4
NAICO has structured separate reinsurance programs for construction
surety bonds, property (including inland marine), workers compensation,
casualty (including automobile liability, general liability, umbrella
liability and related professional liability), and automobile physical
damage. Chandler Barbados reinsures NAICO for a portion of the risk on
NAICO's construction surety bonds, workers compensation and casualty
reinsurance programs. A portion of the risk that Chandler Barbados assumes
from NAICO is reinsured by Chandler Insurance.
Under the 2000 workers compensation reinsurance program, NAICO's net
retention was 42.5% of the first $10,000 of loss per occurrence plus 37.5% of
$90,000 excess of $10,000 of loss per occurrence. Effective October 1, 2000,
NAICO purchased quota share reinsurance which reduced NAICO's net retention to
34% of the first $10,000 of loss per occurrence plus 30% of $90,000 excess of
$10,000 of loss per occurrence. Effective July 1, 2001, NAICO added 28% of
the $100,000 excess of $100,000 of loss per occurrence layer to its net
retention. Effective January 1, 2002, NAICO's net retention increased to 50%
of the first $200,000 of loss per occurrence. Effective July 1, 2002, NAICO's
net retention increased to 50% of the first $250,000 of loss per occurrence.
Under the 2000 casualty reinsurance program, NAICO retained 80% of the
first $100,000 of loss per occurrence. Effective October 1, 2000, NAICO
purchased quota share reinsurance which reduced NAICO's net retention to 64%
of the first $100,000 of loss per occurrence. Effective July 1, 2001, NAICO's
net retention increased to 64% of the first $100,000 of loss per occurrence
plus 60% of $150,000 excess of $100,000 of loss per occurrence plus 40% of
$250,000 excess of $250,000 of loss per occurrence. Effective January 1,
2002, NAICO's net retention increased to 80% of the first $250,000 of loss per
occurrence plus 40% of $250,000 excess of $250,000 of loss per occurrence.
Effective July 1, 2002, NAICO's net retention increased to 80% of the first
$250,000 of loss per occurrence.
Under the construction surety bond reinsurance program, NAICO's net
retention was 50% of the first $250,000 plus 5% of $6,000,000 excess of
$4,000,000 per principal (e.g., contractor) during 2000. Effective April 1,
2001, NAICO's net retention increased to 50% of the first $350,000 plus 5% of
$6,000,000 excess of $4,000,000 per principal. Effective April 1, 2002,
NAICO's net retention increased to 50% of the first $1,000,000 plus 10% of
$4,000,000 excess of $1,000,000 per principal.
Under the 2000 property reinsurance program, NAICO retained 30% of the
first $500,000 of risk for each loss per risk or location. Effective January
1, 2001, NAICO retains 33% of the first $1,500,000 of risk for each loss per
risk or location.
NAICO purchases catastrophe protection for its automobile physical damage
and certain property coverages to limit its retention for single loss
occurrences involving multiple policies and/or policyholders resulting from
perils such as floods, winds and severe storms. This catastrophe protection
is purchased primarily from Lloyd's of London. Under its 2000 automobile
physical damage reinsurance program, NAICO retained the first $250,000 of loss
per occurrence, plus 5% of amounts exceeding $250,000 of loss per occurrence
up to $1 million of loss per occurrence. Effective January 1, 2001, NAICO
retains the first $500,000 of loss per occurrence, plus 5% of amounts exceeding
$500,000 of loss per occurrence up to $1 million of loss per occurrence. NAICO
has also purchased reinsurance which limits its net retained loss for both
automobile physical damage and property losses to $1,000,000 for each loss
occurrence. NAICO also purchases facultative reinsurance when it writes a risk
with limits of liability exceeding the maximum limits of its treaties or when
it otherwise considers such action appropriate.
On November 26, 2002, President Bush signed the Terrorism Risk Insurance
Act of 2002 (the "Act"), establishing a program for commercial property and
casualty losses, including workers compensation, resulting from foreign acts
of terrorism. The Act requires commercial insurers to offer terrorism coverage
immediately on its commercial property and casualty lines of business. Each
insurance company will be responsible for a deductible based on a percentage of
direct earned premiums from the previous calendar year, which rises from 1% for
losses occurring in 2002, to 7% in 2003, 10% in 2004 and 15% in 2005. The
Federal Government will pay 90% of covered terrorism losses that exceed company
deductibles. The Federal Government will be required to recoup the portion of
any federal compensation paid to the extent that industry retentions are less
than $10 billion for events in 2002 and 2003, $12.5 billion for 2004 and $15
billion for 2005. The recoupment will be accomplished through a surcharge on
all policyholders, not to exceed 3% of premiums in a given year. The Act is
scheduled to expire on December 31, 2005.
Effective January 1, 2003, NAICO purchased quota share reinsurance for its
deductible under the Act limiting NAICO's retention to 10% of such deductible
subject to a reinsurance limit of $9,450,000 for each loss occurrence. The
reinsurance coverage is also limited to $9,450,000 for all occurrences for any
year. NAICO also purchased excess of loss reinsurance covering acts of
terrorism that provides coverage of $20 million excess of $10 million of loss
per occurrence based on NAICO's net retention.
PAGE 5
The following table sets forth certain information related to NAICO's
five largest reinsurers determined on the basis of net reinsurance
recoverables as of December 31, 2002.
CEDED REINSURANCE
NET PREMIUMS FOR A.M. BEST
REINSURANCE THE YEAR ENDED COMPANY
NAME OF REINSURER RECOVERABLE (1) DECEMBER 31, 2002 RATING
- ----------------------------------------------------------- --------------- ----------------- ---------
(Dollars in thousands)
Swiss Reinsurance America Corporation ..................... $ 34,661 $ 10,264 A++
Chandler Barbados ......................................... 17,798 24,115 -(2)
GE Reinsurance Corporation ................................ 11,090 1,958 A+
Employers Reinsurance Corporation ......................... 6,869 10,151 A+
Red River Reinsurance, Ltd. ............................... 5,798 5,674 -(3)
--------------- -----------------
Top five reinsurers .................................. $ 76,216 $ 52,162
=============== =================
All reinsurers ....................................... $ 98,575 $ 72,495
=============== =================
Percentage of total represented by top five reinsurers .... 77% 72%
- -------------------------------------------------------------
(1) Includes losses and loss adjustment expenses paid and outstanding, unpaid losses and loss
adjustment expenses and prepaid reinsurance premiums recoverable from reinsurers as of
December 31, 2002.
(2) Chandler Barbados owns 100% of the common stock of Chandler USA, which in turn owns 100% of
the common stock of NAICO. Although Chandler Barbados is not subject to the minimum
capital, audit, reporting and other requirements imposed by regulation upon United States
reinsurance companies, as a foreign reinsurer, it is required to secure its reinsurance
obligations by depositing acceptable securities in trust for NAICO's benefit. At December
31, 2002, Chandler Barbados had cash and investments with a fair value of $18.7 million
deposited in a trust account for the benefit of NAICO.
(3) Red River Reinsurance, Ltd. ("Red River") is required to secure its reinsurance obligations
by depositing acceptable securities in trust for NAICO's benefit. At December 31, 2002,
Red River's reinsurance recoverables were collateralized by cash and investments with a
fair value of $5.9 million deposited in a trust account for the benefit of NAICO and by
premiums payable to Red River of approximately $766,000.
Transamerica Occidental Life Insurance Company ("Transamerica") reinsured
NAICO for certain workers compensation risks during 1989, 1990 and 1991.
Beginning in 1996, Transamerica refused to pay NAICO for balances that it owed
under the reinsurance treaties. Transamerica owed NAICO approximately $1.5
million for reinsurance recoverables on paid losses and loss adjustment
expenses as of December 31, 2002. NAICO is currently engaged in arbitration
in order to enforce the terms of the reinsurance treaties.
Reliance Insurance Company ("Reliance") reinsured NAICO for certain
workers compensation risks during 1998. At December 31, 2002, NAICO had
reinsurance recoverables from Reliance for paid and unpaid losses of
approximately $2.8 million. During October 2001, the Commonwealth of
Pennsylvania placed Reliance in liquidation. At this time, NAICO is unable to
determine the amount of its reinsurance recoverables from Reliance that will
ultimately be collected and has fully reserved the carrying value of such
amounts as of December 31, 2002.
Reinsurance contracts do not relieve an insurer from its obligation to
policyholders. Failure of reinsurers to honor their obligations could result
in losses to Chandler USA; consequently, adjustments to ceded losses and loss
adjustment expenses are made for amounts deemed uncollectible. NAICO did not
incur any charges for uncollectible reinsurance recoverables from unaffiliated
reinsurers in 2000. During 2001 and 2002, NAICO incurred charges of $454,000
and $1.7 million, respectively, in adjustments to ceded losses and loss
adjustment expenses for amounts deemed uncollectible.
PAGE 6
LOSS AND UNDERWRITING EXPENSE RATIOS
The combined loss and underwriting expense ratio ("Combined Ratio") is
the traditional measure of underwriting experience for property and casualty
insurance companies. It is the sum of the ratios of (i) incurred losses and
loss adjustment expenses to net premiums earned ("loss ratio") and (ii)
underwriting expenses to net premiums written and assumed ("underwriting
expense ratio").
The following table shows the underwriting experience of Chandler USA for
the periods indicated by line of insurance written. Adjustments to reserves
made in subsequent periods are reflected in the year of adjustment. In the
following table, incurred losses include paid losses and loss adjustment
expenses, net changes in case reserves for losses and loss adjustment expenses
and net changes in reserves for incurred but not reported losses and loss
adjustment expenses. See also "Reserves" and "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1999 2000 2001 2002
-------- -------- -------- -------- --------
(Dollars in thousands)
Automobile liability:
Net premiums earned ................ $ 11,419 $ 15,027 $ 17,517 $ 13,386 $ 16,526
Loss ratio ......................... 75% 78% 78% 70% 81%
Other liability:
Net premiums earned ................ $ 11,357 $ 15,785 $ 20,992 $ 17,470 $ 16,458
Loss ratio ......................... 66% 70% 56% 57% 80%
Workers compensation (1):
Net premiums earned ................ $ 9,937 $ 29,244 $ 21,161 $ 16,449 $ 14,808
Loss ratio ......................... 66% 77% 70% 105% 99%
Automobile physical damage:
Net premiums earned ................ $ 4,702 $ 7,039 $ 11,434 $ 12,174 $ 9,552
Loss ratio ......................... 86% 104% 85% 52% 35%
Property:
Net premiums earned ................ $ 2,332 $ 2,972 $ 3,377 $ 4,806 $ 5,543
Loss ratio ......................... 136% 203% 179% 93% 50%
Surety:
Net premiums earned ................ $ 7,619 $ 8,061 $ 6,760 $ 4,125 $ 3,310
Loss ratio ......................... 18% 6% 33% 57% 59%
Inland marine:
Net premiums earned ................ $ 448 $ 775 $ 1,088 $ 1,256 $ 760
Loss ratio ......................... 126% 138% 142% 143% 100%
Accident and health:
Net premiums earned ................ $ 4,610 $ 8,195 $ 3,190 $ 319 $ -
Loss ratio ......................... 91% 104% 161% 281% -%
Total (1):
Net premiums earned ................ $ 52,424 $ 87,098 $ 85,519 $ 69,985 $ 66,957
Loss ratio ......................... 69% 79% 76% 75% 76%
Underwriting expense ratio (2) ..... 33% 32% 30% 33% 34%
-------- -------- -------- -------- --------
Combined ratio (2) ................. 102% 111% 106% 108% 110%
======== ======== ======== ======== ========
- -----------------------------------------
(1) The rescission of two reinsurance treaties during 1999 increased net premiums earned for
workers compensation by $19.6 million and increased the workers compensation loss ratio by
20 percentage points. The rescission of the reinsurance treaties also increased the total
1999 loss ratio by 2 percentage points and the 1999 combined ratio by 4 percentage points.
(2) Interest expense and litigation expenses are not considered underwriting expenses;
therefore, such costs have been excluded from these ratios.
PAGE 7
RESERVES
Insurance companies provide in their financial statements reserves for
unpaid losses and loss adjustment expenses which are estimates of the expense
of investigation and settlement of all reported and incurred but not reported
losses under their previously issued insurance policies and/or reinsurance
contracts. In estimating reserves, insurance companies use various
standardized methods based on historical experience and payment and reporting
patterns for the type of risk involved. The application of these methods
involves subjective determinations by the personnel of the insurance company.
Inherent in the estimates of the ultimate liability for unpaid claims are
expected trends in claim severity, claim frequency and other factors that may
vary as claims are settled. The amount of and uncertainty in the estimates is
affected by such factors as the amount of historical claims experience relative
to the development period for the type of risk, knowledge of the actual facts
and circumstances and the amount of insurance risk retained. The ultimate cost
of insurance claims can be adversely affected by increased costs, such as
medical expenses, repair expenses, costs of providing legal defense for
policyholders, increased jury awards and court decisions and legislation that
expand insurance coverage after the insurance policy was priced and sold.
Accordingly, the loss and loss adjustment expense reserves may not accurately
predict an insurance company's ultimate liability for unpaid claims.
NAICO periodically reviews the reserve estimates relating to insurance
business written or assumed by NAICO, and the methods used to arrive at such
reserve estimates. NAICO also retains independent professional actuaries who
review such reserve estimates and methods. Any changes in the estimates are
reflected in current operating results. Salvage and subrogation recoverables
are accrued using the "case basis" method for large recoverables and
statistical estimates based on historical experience for smaller recoverables.
Recoverable amounts deducted from Chandler USA's net liability for losses and
loss adjustment expenses were approximately $5.0 million and $5.6 million at
December 31, 2001 and 2002, respectively. NAICO's statutory-based reserves
(reserves calculated in accordance with an insurer's domiciliary state
insurance regulatory authorities) do not differ from its reserves reported on
the basis of accounting principles generally accepted in the United States of
America ("GAAP"). NAICO does not discount its reserves for unpaid losses or
loss adjustment expenses.
NAICO participates in various pools covering workers compensation risks
for insureds who were unable to purchase this coverage from an insurance
company on a voluntary basis. In addition, NAICO receives direct assignments
to write workers compensation for such insureds in lieu of participating in
the pools. The consolidated financial statements reflect the reserves for
unpaid losses and loss adjustment expenses and net premiums earned from its
participation in the pools and from these direct assignments.
There may be significant reporting lags between the occurrence of the
insured loss and the time it is actually reported to the insurer. The
inherent uncertainties in estimating insurance reserves are generally greater
for casualty coverages, such as workers compensation, general and automobile
liability, than for property coverages primarily due to the longer period of
time that typically elapses before a definitive determination of ultimate
loss can be made, which is also affected by changing theories of legal
liability and changing political climates.
There are significant additional uncertainties in estimating the amount
of reserves required for environmental, asbestos-related and other latent
exposure claims, including a lack of historical data, long reporting delays
and complex unresolved legal issues regarding policy coverage and the extent
and timing of any such contractual liability. Courts have reached different
and frequently inconsistent conclusions as to when the loss occurred, what
claims are covered, under what circumstances the insurer has an obligation to
defend, how policy limits are determined and how policy exclusions are applied
and interpreted.
The loss settlement period on insurance claims for property damage is
relatively short. The more severe losses for bodily injury and workers
compensation claims have a much longer loss settlement period and may be paid
out over several years. It is often necessary to adjust estimates of liability
on a loss either upward or downward from the time a claim arises to the time of
payment. Workers compensation indemnity benefit reserves are determined based
on statutory benefits described by state law and are estimated based on the
same factors generally discussed above which may include, where state law
permits, inflation adjustments for rising benefits over time. Generally, the
more costly automobile liability claims involve one or more severe bodily
injuries or deaths. The ultimate cost of these types of claims is dependent on
various factors including the relative liability of the parties involved, the
number and severity of injuries and the legal jurisdiction where the incident
occurred.
PAGE 8
The following table sets forth a reconciliation of the beginning and
ending reserves for losses and loss adjustment expenses which are net of
reinsurance deductions for the years indicated.
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1998 1999 2000 2001 2002
--------- --------- --------- --------- ---------
(In thousands)
Net balance before provision for uncollectible
reinsurance at beginning of year ............ $ 53,345 $ 39,570 $ 51,123 $ 46,588 $ 32,743
--------- --------- --------- --------- ---------
Net losses and loss adjustment expenses
incurred related to:
Current year .............................. 34,313 65,139 60,020 39,881 34,928
Prior years ............................... 1,737 3,520 4,979 12,669 15,784
--------- --------- --------- --------- ---------
Total ................................... 36,050 68,659 64,999 52,550 50,712
--------- --------- --------- --------- ---------
Net paid losses and loss adjustment expenses
related to:
Current year .............................. (19,495) (33,210) (33,525) (22,596) (13,246)
Prior years ............................... (30,330) (23,896) (36,009) (43,799) (37,050)
--------- --------- --------- --------- ---------
Total .................................. (49,825) (57,106) (69,534) (66,395) (50,296)
--------- --------- --------- --------- ---------
Net balance before provision for uncollectible
reinsurance at end of year .................. 39,570 51,123 46,588 32,743 33,159
Adjustments to reinsurance recoverables on
unpaid losses for uncollectible reinsurance.. 351 255 119 69 32
--------- --------- --------- --------- ---------
Net balance at end of year ................... $ 39,921 $ 51,378 $ 46,707 $ 32,812 $ 33,191
========= ========= ========= ========= =========
During 2001, NAICO experienced adverse loss development related to prior
accident years totaling $12.7 million due primarily to increased loss severity
in the standard property and casualty and political subdivisions programs. A
substantial part of this loss development was for workers compensation losses
in the 1999 accident year. NAICO's net retention for workers compensation
losses increased substantially in 1999 due to the rescission of certain
reinsurance treaties covering this line of business. Also contributing to the
adverse loss development were provisions for potentially uncollectible
reinsurance and deductibles of approximately $1.2 million during 2001, an
increase in losses in the surety bond program and approximately $878,000 in
losses for the runoff of the discontinued group accident and health program.
During 2002, NAICO experienced adverse loss development related to prior
accident years totaling $15.8 million primarily in the standard property and
casualty program including both liability lines and workers compensation. This
adverse development is generally the result of ongoing analysis of recent loss
development trends that reflect an increase in loss severity within the
1997-2000 accident years. The adverse loss development included approximately
$2.0 million for provisions for potentially uncollectible reinsurance and
deductibles.
The following table represents the development of net balance sheet
reserves for 1993 through 2002. The top line of the table shows the net
reserves at the balance sheet date for each of the indicated years. This
represents the estimated amounts of claims and claim expenses, net of
reinsurance deductions, arising in the current and all prior years that are
unpaid at the balance sheet date, including the net reserve for incurred but
not reported claims. The upper portion of the table shows the cumulative net
amounts paid as of successive years with respect to that reserve liability.
The estimate for unpaid losses and loss adjustment expenses changes as more
information becomes known about the frequency and severity of claims for
individual years. The next portion of the table shows the revised estimated
amount of the previously recorded net reserve based on experience as of the end
of each succeeding year. The heading "net cumulative (deficiency) redundancy"
represents the cumulative aggregate change in the estimates over all prior
years. The last portion of the table provides a reconciliation of the net
amounts to the gross amounts before any deductions for reinsurance. The gross
cumulative deficiency or redundancy results from the same factors as those
described above for the net amounts, and is also impacted by development of
large claims that exceed NAICO's net retention including umbrella and surety
per principal losses where NAICO has little or no net retention.
PAGE 9
In evaluating the information in the following table, it should be
noted that each amount includes the effects of all changes in amounts for
prior periods. For example, the amount of the deficiency recorded in 1996
for claims that occurred in 1993 will be included in the cumulative deficiency
amount for years 1993, 1994, 1995 and 1996. This table does not present
accident or policy year development data. Conditions and trends that have
affected development of the liability in the past may not necessarily occur in
the future. Accordingly, it may not be appropriate to extrapolate future
deficiencies or redundancies based on this table.
DEVELOPMENT OF RESERVES
AS OF DECEMBER 31,
---------------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
(In thousands)
Net reserve for unpaid losses and
loss adjustment expenses (1) .. $ 51,648 $ 64,308 $ 58,340 $ 53,845 $ 54,035 $ 39,921 $ 51,378 $ 46,707 $ 32,812 $ 33,191
Net paid (cumulative) as of
One year later ................ 26,469 30,771 31,768 28,572 30,330 23,896 36,009 43,799 37,050
Two years later ............... 38,655 45,321 44,471 40,857 42,934 34,966 58,979 66,141
Three years later ............. 45,357 51,985 49,262 45,668 49,735 45,390 72,052
Four years later .............. 48,385 54,825 51,101 47,995 56,306 51,364
Five years later .............. 49,116 55,691 52,126 50,700 58,843
Six years later ............... 49,399 56,278 54,040 51,878
Seven years later ............. 49,681 57,826 54,574
Eight years later ............. 50,291 58,378
Nine years later .............. 50,403
Net liability re-estimated as of (1)
One year later ................ 52,058 62,757 59,644 55,713 55,772 43,441 56,357 59,376 48,596
Two years later ............... 50,135 61,924 59,605 55,599 56,362 45,373 67,469 74,325
Three years later ............. 50,492 62,737 59,155 54,528 58,176 50,146 77,842
Four years later .............. 51,022 62,636 58,247 54,834 61,096 55,303
Five years later .............. 50,981 62,195 58,445 55,615 62,750
Six years later ............... 50,954 62,295 58,567 56,347
Seven years later ............. 50,832 62,630 59,013
Eight years later ............. 50,932 63,026
Nine years later .............. 50,987
Net cumulative (deficiency)
redundancy .................... $ 661 $ 1,282 $ (673) $ (2,502) $ (8,715) $(15,382) $(26,464) $(27,618) $(15,784) $ -
Supplemental gross data:
Gross liability after
reclassification of pools -
end of year ................. $167,187 $143,437 $116,149 $ 78,114 $ 73,721 $ 80,701 $ 98,460 $100,173 $ 84,756 $ 92,606
Reclassification of pool
liabilities ................. (15,694) - - - - - - - - -
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Gross liability before
reclassification of pools -
end of year (1) ............. $151,493 $143,437 $116,149 $ 78,114 $ 73,721 $ 80,701 $ 98,460 $100,173 $ 84,756 $ 92,606
Reinsurance recoverable ....... 99,845 79,129 57,809 24,269 19,686 40,780 47,082 53,466 51,944 59,415
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Net liability - end of
year (1) .................... $ 51,648 $ 64,308 $ 58,340 $ 53,845 $ 54,035 $ 39,921 $ 51,378 $ 46,707 $ 32,812 $ 33,191
========= ========= ========= ========= ========= ========= ========= ========= ========= =========
Gross re-estimated
liability - latest .......... $149,556 $144,029 $121,140 $ 94,216 $ 96,020 $117,529 $159,378 $179,078 $145,968
Re-estimated recoverable -
latest ...................... 98,569 81,003 62,127 37,869 33,270 62,226 81,536 104,753 97,372
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Net re-estimated liability -
latest (1) .................. $ 50,987 $ 63,026 $ 59,013 $ 56,347 $ 62,750 $ 55,303 $ 77,842 $ 74,325 $ 48,596
========= ========= ========= ========= ========= ========= ========= ========= =========
Gross cumulative (deficiency)
redundancy .................. $ 1,937 $ (592) $ (4,991) $(16,102) $(22,299) $(36,828) $(60,918) $(78,905) $(61,212)
========= ========= ========= ========= ========= ========= ========= ========= =========
- --------------------------------------------------
(1) The December 31, 1993 amounts do not include the reclassification of pool liabilities.
PAGE 10
INVESTMENTS
Funds available for investment include Chandler USA's present capital as
well as premiums received and retained under insurance policies and reinsurance
agreements issued by NAICO. Until these funds are required to be used for the
settlement of claims and the payment of operating expenses, they are invested
with the objective of generating income, preserving principal and maintaining
liquidity.
Fixed-maturity investments are purchased to support the investment
strategies of Chandler USA and its subsidiaries, which are developed based on
many factors including rate of return, maturity, credit risk, tax
considerations, regulatory requirements and their mix of business. At the
time of purchase, investments in debt securities that Chandler USA has the
positive intent and ability to hold to maturity are classified as held to
maturity and reported at amortized cost; all other debt securities are reported
at fair value. Investments classified as trading are actively and frequently
bought and sold with the objective of generating income on short-term
differences in price. Realized and unrealized gains and losses on securities
classified as trading account assets are recognized in current operations.
Chandler USA has not classified any investments as trading account assets.
Securities not classified as held to maturity or trading are classified as
available for sale, with the related unrealized gains and losses excluded from
earnings and reported net of deferred income tax as a separate component of
other comprehensive income until realized. Realized gains and losses on sales
of securities are based on the specific identification method. Declines in the
fair value of investment securities below their carrying value that are other
than temporary are recognized in earnings.
As of December 31, 2002, all of the investments of NAICO were in
fixed-maturity investments (rated Aa3 or AA or better by Moody's Investors
Service, Inc. or Standard & Poor's, respectively), interest-bearing money
market accounts, a collateralized repurchase agreement and common stock
received in connection with two unaffiliated entities' conversion to for-profit
corporations. NAICO's investment portfolio is managed by the Investment
Committee of its Board of Directors. For additional information, see Notes to
Consolidated Financial Statements.
DEBENTURES
On July 16, 1999, Chandler USA completed a public offering of $24 million
principal amount of senior debentures with a maturity date of July 16, 2014.
The debentures were priced at $1,000 each with an interest rate of 8.75% and
are redeemable by Chandler USA on or after July 16, 2009 without penalty or
premium. Chandler USA's subsidiaries and affiliates are not obligated by the
debentures. Accordingly, the debentures are effectively subordinated to all
existing and future liabilities and obligations of Chandler USA's existing and
future subsidiaries.
EMPLOYEES AND ADMINISTRATION
At December 31, 2002, Chandler USA and its subsidiaries had approximately
336 full-time employees. Chandler USA and its subsidiaries generally have
enjoyed good relations with their employees.
COMPETITION
NAICO operates in a highly competitive industry and faces competition
from domestic and foreign insurers, many of which are larger, have greater
financial, marketing and management resources, have more favorable ratings by
ratings agencies and offer more diversified insurance coverages than NAICO.
A company's capacity to write insurance policies is dependent on a variety
of factors including its net worth or "surplus," the lines of business written,
the types of risk insured and its profitability. Since the late 1980's, the
industry has generally had excess underwriting capacity. This condition
resulted in depressed premium rates and expanded policy terms, which generally
occur when excess underwriting capacity exists. NAICO continues to experience
competition, however, NAICO was able to increase its pricing for most coverages
during 2001 and 2002, which has generally been the trend industry wide.
NAICO's underwriting philosophy is to forego underwriting risks from which it
is unable to obtain what it believes to be adequate premium rates.
PAGE 11
REGULATION
REGULATION IN GENERAL
NAICO is subject to regulation by government agencies in the jurisdictions
in which it does business. The nature and extent of such regulation vary from
jurisdiction to jurisdiction, but typically involve prior approval of the
acquisition of control of an insurance company or of any company controlling an
insurance company, regulation of certain transactions entered into by an
insurance company with any of its affiliates, approval of premium rates, forms
and policies used for many lines of insurance, standards of solvency and
minimum amounts of capital and surplus which must be maintained, establishment
of reserves required to be maintained for unearned premiums, unpaid losses and
loss adjustment expenses or for other purposes, limitations on types and
amounts of investments, restrictions on the size of risks which may be insured
by a single company, licensing of insurers and agents, deposits of securities
for the benefit of policyholders and the filing of periodic reports with
respect to financial condition and other matters. In addition, regulatory
examiners perform periodic financial and market conduct examinations of
insurance companies. Such regulation is generally intended for the protection
of policyholders rather than shareholders or creditors.
NAICO is required to deposit securities with regulatory agencies in
several states in which it is licensed as a condition of conducting operations
in those states.
In addition to the regulatory oversight of NAICO, Chandler Insurance is
also subject to regulation under the laws of the Cayman Islands and Chandler
USA and all of its affiliates are subject to regulation under the insurance
laws of Oklahoma (the "Oklahoma Insurance Code"). The Oklahoma Insurance Code
contains certain reporting requirements including those requiring Chandler
Insurance, as the ultimate parent company, to file information relating to its
capital structure, ownership, and financial condition and the general business
operations of its insurance subsidiaries. The Oklahoma Insurance Code contains
special reporting and prior approval requirements with respect to transactions
among affiliates.
NAICO is also affected by a variety of state and federal legislative and
regulatory measures and judicial decisions that define and extend the risks
and benefits for which insurance is sought and provided. These include
redefinitions of risk exposure in areas such as product liability,
environmental damage and workers compensation. In addition, individual state
insurance departments may prevent premium rates for some classes of insureds
from reflecting the level of risk assumed by the insurer for those classes.
Such developments may adversely affect the profitability of various lines of
insurance. In some cases, these adverse effects on profitability can be
minimized through re-pricing, if permitted by applicable regulations, of
coverages or limitations or cessation of the affected business.
INSURANCE REGULATION CONCERNING CHANGE OR ACQUISITION OF CONTROL
NAICO is a domestic property and casualty insurance company organized
under the Oklahoma Insurance Code. The Oklahoma Insurance Code provides that
the acquisition or change of "control" of a domestic insurer or of any person
that controls a domestic insurer cannot be consummated without the prior
approval of the Oklahoma Department of Insurance. A person seeking to acquire
control, directly or indirectly, of a domestic insurance company or of any
person controlling a domestic insurance company must generally file with the
relevant insurance regulatory authority an application for change of control
containing certain information required by statute and published regulations
and provide a copy of such to the domestic insurer. In Oklahoma, control is
generally presumed to exist if any person, directly or indirectly, owns,
controls, holds with the power to vote or holds proxies representing 10% or
more of the voting securities of the insurance company or of any other person
or entity controlling the insurance company. The 10% presumption is not
conclusive and control may be found to exist at less than 10%.
In addition, many state insurance regulatory laws contain provisions that
require pre-notification to state agencies of a change in control of a non-
domestic insurance company admitted in that state. While such pre-notification
statutes do not authorize the state agency to disapprove the change of control,
such statutes do authorize issuance of a cease and desist order with respect
to the non-domestic insurer if certain conditions exist such as undue market
concentration.
Any future transactions that would constitute a change in control of
Chandler Insurance, Chandler Barbados or Chandler USA would also generally
require prior approval by the Oklahoma Department of Insurance and would
require pre-acquisition notification in those states which have adopted
pre-acquisition notification provisions and in which the insurers are admitted.
Because such requirements are primarily for the benefit of policyholders, they
may deter, delay or prevent certain transactions that could be advantageous to
the shareholders or creditors of Chandler USA.
PAGE 12
RESTRICTIONS ON SHAREHOLDER DIVIDENDS
A significant portion of Chandler USA's consolidated assets represents
assets of NAICO that may not be immediately transferable to Chandler USA in
the form of shareholder dividends, loans, advances or other payments.
Statutes and regulations governing NAICO and other insurance companies
domiciled in Oklahoma regulate the payment of shareholder dividends and other
payments by NAICO to Chandler USA. Under applicable Oklahoma statutes and
regulations, NAICO is permitted to pay shareholder dividends only out of
statutory earned surplus. To the extent NAICO has statutory earned surplus,
NAICO may pay shareholder dividends only to the extent that such dividends are
not defined as extraordinary dividends or distributions. If the dividends are,
under applicable statutes and regulations, extraordinary dividends or
distributions, regulatory approval must be obtained. Under the applicable
Oklahoma statute, and subject to the availability of statutory earned surplus,
the maximum shareholder dividend that may be declared (or cash or property
distribution that may be made) by NAICO in any one calendar year without
regulatory approval is the greater of (i) NAICO's statutory net income,
excluding realized capital gains, for the preceding calendar year; or (ii) 10%
of NAICO's statutory policyholders' surplus as of the preceding calendar year
end, not to exceed NAICO's statutory earned surplus.
As of December 31, 2002, NAICO had statutory earned surplus of $11.4
million. Applying the Oklahoma statutory limits described above, the maximum
shareholder dividend NAICO may pay in 2003 without the approval of the Oklahoma
Department of Insurance is $4.4 million. NAICO paid shareholder dividends
totaling $7.0 million and $3.5 million to Chandler USA in 2001 and 2002,
respectively. The Oklahoma Department of Insurance approved the payment of the
extraordinary dividend by NAICO to Chandler USA in 2001.
In addition to the statutory limits described above, the amount of
shareholder dividends and other payments to affiliates permitted can be further
limited by contractual or regulatory restrictions or other agreements with
regulatory authorities restricting dividends and other payments, including
regulatory restrictions that are imposed as a matter of administrative policy.
If insurance regulators determine that payment of a shareholder dividend or
other payments to an affiliate (such as payments under a tax sharing agreement,
payments for employee or other services, or payments pursuant to a surplus
note) would be hazardous to such insurance company's policyholders or
creditors, the regulators may block such payments that would otherwise be
permitted without prior approval.
RISK-BASED CAPITAL
The National Association of Insurance Commissioners has adopted a
methodology for assessing the adequacy of statutory surplus of domestic
property and casualty insurers. This methodology is described in the Risk
Based Capital Model Act (the "RBC Model Act"). The RBC Model Act includes a
risk-based capital requirement that requires insurance companies to calculate
and report information under a risk-based formula which attempts to measure
statutory capital and surplus needs based on the risks in the insurance
company's mix of products and investment portfolio. The formula is designed
to allow state insurance regulators to identify potential under-capitalized
companies. Under the formula, an insurer determines its "risk-based capital"
("RBC") by taking into account certain risks related to the insurer's assets
(including risks related to its investment portfolio and ceded reinsurance)
and the insurer's liabilities (including underwriting risks related to the
nature and experience of its insurance business). The RBC rules provide for
different levels of regulatory attention depending on the ratio of a company's
total adjusted capital to its "authorized control level" of RBC. Insurers
below the specific ratios are classified within certain levels, each of which
requires specific corrective action. The levels and ratios are as follows:
Ratio of Total Adjusted Capital to
Authorized Control Level RBC
(Less than or equal to)
----------------------------------
Regulatory Event (1)
--------------------
Company Action Level (2) ....... 2.0
Regulatory Action Level (3) .... 1.5
Authorized Control Level (4) ... 1.0
Mandatory Control Level (5) .... 0.7
- ---------------------------------
(1) When an insurer's ratio exceeds 2.0, it is not subject to regulatory
attention under the RBC Model Act.
(2) "Company Action Level" requires an insurer to prepare and submit an RBC
Plan to the insurance commissioner of its state of domicile. After review,
the insurance commissioner will notify the insurer if the Plan is satisfactory.
PAGE 13
(3) "Regulatory Action Level" requires the insurer to submit an RBC Plan, or if
applicable, a Revised RBC Plan to the insurance commissioner of its state of
domicile. After examination or analysis, the insurance commissioner will
issue an order specifying corrective actions to be taken.
(4) "Authorized Control Level" authorizes the insurance commissioner to take such
regulatory actions considered necessary to protect the best interest of the
policyholders and creditors of an insurer which may include the actions necessary
to cause the insurer to be placed under regulatory control (i.e., rehabilitation
or liquidation).
(5) "Mandatory Control Level" authorizes the insurance commissioner to take actions
necessary to place the insurer under regulatory control (i.e., rehabilitation or
liquidation).
The ratios of total adjusted capital to authorized control level RBC for NAICO
were 6.6:1 and 5.8:1 at December 31, 2001 and 2002, respectively. Therefore,
NAICO's total adjusted capital exceeds the level that would trigger regulatory
attention pursuant to the risk-based capital requirement.
NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS-IRIS RATIOS
The National Association of Insurance Commissioners Insurance Regulatory
Information System ("IRIS") was developed by a committee of state insurance
regulators and is primarily intended to assist state insurance departments in
executing their statutory mandates to oversee the financial condition of
insurance companies operating in their respective states. IRIS identifies 12
industry ratios and specifies "usual values" for each ratio. Departure from the
"usual values," which fluctuate annually, on four or more ratios generally
leads to inquiries from individual state insurance commissioners. NAICO had
five 2002 ratios that were outside of the "usual values," four of which
resulted primarily from adverse loss development as explained below.
NAICO's "two-year overall operating ratio" for 2002 was 102% compared to a
usual value of less than 100%. Factors that contributed to NAICO's ratio
include a decrease in the ratio of investment income to net premiums earned due
primarily to lower interest rates experienced during 2002, and to adverse loss
development recorded during 2001 and 2002 for accident years prior to 2001.
Excluding this loss development, the two-year overall operating ratio would
have been 81% for 2002.
NAICO's "investment yield" as calculated using the IRIS formula was 2.1%
during 2002 compared to a usual value of greater than 4.5% and less than 10.0%.
NAICO maintains a high-quality investment portfolio, with no non-investment
grade bonds, derivative instruments or real estate investments (other than real
estate occupied by the company), and NAICO holds only a small investment in
equity securities. NAICO's investment yield is largely dependent upon
prevailing levels of interest rates. The significant decline in interest rates
during 2001 and 2002 had a significant impact on NAICO's investment yield.
Moreover, in periods of relatively low interest rates, NAICO generally shortens
maturities and accepts lower yields to reduce market risk for future rate
increases.
Included in NAICO's investments, under statutory accounting principles, is
real estate occupied by the company of $7,708,000 at December 31, 2002. In
accordance with statutory accounting principles, NAICO records investment
income for its occupancy of the company owned real estate, and corresponding
charges for rental expense and other real estate related expenses are recorded
as a reduction of investment income. NAICO also incurred $244,000 in
investment expenses to subsidize a premium finance program for certain insureds
of NAICO during 2002. While these expenses reduced NAICO's investment yield,
the premium finance program enhances cash flow by providing cash that is
available for investment earlier than conventional deferred payment plans.
NAICO's investment yield excluding the investment income and expenses related
to the real estate and investment expenses to subsidize the premium finance
program was 4.0% during 2002.
NAICO's "one-year reserve development to policyholders' surplus" and
"two-year reserve development to policyholders' surplus" for 2002 were 30%
and 53%, respectively, compared to usual values of less than 20% for both
ratios. The primary reason for these unusual values was adverse loss
development experienced during 2001 and 2002 related to the 1997 - 2000
accident years. This adverse loss development was due primarily to
increased loss severity in NAICO's standard property and casualty and
political subdivisions programs. A substantial part of this loss
development was for workers compensation losses in the 1999 accident year.
NAICO's net retention for workers compensation losses increased substantially
in 1999 due to the rescission of certain reinsurance treaties covering this
line of business. Also contributing to the adverse loss development were
provisions for potentially uncollectible reinsurance recoverables and
deductibles of $888,000 and $1,926,000 during 2001 and 2002, respectively.
Statutory accounting requires that these write-downs of receivables and
recoverables be reflected as prior year loss development. Adverse loss
development in NAICO's discontinued group accident and health program was
$900,000 and $522,000 during 2001 and 2002, respectively. This program was
discontinued during 2000 due to poor underwriting results.
PAGE 14
NAICO's "estimated current reserve deficiency to policyholders' surplus"
was 40% at December 31, 2002 compared to a usual value of less than 25%. The
adverse loss development experienced in 2001 and 2002 related to prior
accident years was primarily responsible for this ratio being outside of the
normal range. NAICO experienced significant growth from 1996 through 2000,
with gross premiums written increasing from $108 million in 1996 to $197
million in 2000. Despite the growth in written premiums, pricing competition
and expansion of coverages was prevalent throughout the industry, resulting in
a much lower premium for the exposures insured. At the same time, claim costs,
especially medical, increased at a much faster pace. Now that the results have
shown how underpriced the business was during this time, NAICO has re-priced
and re-underwritten this business. During 2001 and 2002, NAICO implemented
substantial price increases on every line of business that it writes, and
reduced the overall written premiums to $159 million and $140 million in 2001
and 2002, respectively. Further, NAICO exited some classes of business and
non-renewed accounts with severity and/or frequency exposure. Management
believes that while the insured exposure base has been significantly reduced,
the premium for that exposure has increased significantly. The calculation of
this ratio assumes that factors that led to past under reserving will cause
current under reserving without regard to changes in premium volume, premium
rates, product mix, the amount of risk retained by NAICO and current reserving
practices.
EFFECT OF FEDERAL LEGISLATION
Although the Federal Government does not directly regulate the business
of insurance, federal initiatives often affect the insurance business in a
variety of ways. Current and proposed federal measures which may significantly
affect the insurance business include Federal Government participation in
asbestos and other product liability claims, claims related to acts of
terrorism, pension and other employee benefit plan regulation (ERISA),
examination of the taxation of insurers and reinsurers, minimum levels of
liability insurance and automobile safety regulations. Federal regulation of
the health care industry may directly and indirectly impact the business of
insurance.
ITEM 2. PROPERTIES
Chandler USA and its subsidiaries own and occupy four office buildings
with approximately 127,000 square feet of usable space in Chandler, Oklahoma.
Chandler USA's subsidiaries also lease approximately 1,500 square feet in the
aggregate for its branch offices. Chandler USA believes such space is
sufficient for its operations for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
Chandler Insurance and certain of its subsidiaries and affiliates,
including Chandler USA, are involved in litigation with their director and
officer liability insurer. See Note 10 to Consolidated Financial Statements
for a discussion of this and other litigation matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended December 31, 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
All of the common stock of Chandler USA, its sole class of common equity
on the date hereof, is owned by Chandler Barbados, which is a wholly owned
subsidiary of Chandler Insurance. Chandler USA has never paid cash dividends
on its common shares.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data has been derived from the consolidated
financial statements of Chandler USA and its subsidiaries, which appear in
Item 14(a). The consolidated balance sheets of Chandler USA and its
subsidiaries as of December 31, 2000, and the related consolidated statement
of operations, comprehensive income, shareholder's equity and cash flows for
the years ended December 31, 2000 were audited by Deloitte & Touche LLP,
independent auditors, whose independent auditors' report expressed an
unqualified opinion and included an explanatory paragraph relating to
litigation. The consolidated balance sheets of Chandler USA and its
subsidiaries as of December 31, 2001 and 2002 and the related consolidated
statements of operations, comprehensive income, shareholder's equity and cash
flows for the years ended December 31, 2001 and 2002 have been audited by
Tullius Taylor Sartain & Sartain LLP, independent auditors, whose independent
auditors' report expresses an unqualified opinion. The selected financial data
should be read in conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and the consolidated financial
statements of Chandler USA and the notes thereto appearing in Item 14(a). All
periods have been restated to reflect the results of L&W as a discontinued
operation.
PAGE 15
ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1998 1999 2000 2001 2002
---------- ---------- ---------- ---------- ----------
OPERATING DATA (1) (Dollars in thousands)
Revenues
Direct premiums written and assumed ............. $ 134,293 $ 169,569 $ 197,196 $ 158,964 $ 140,162
========== ========== ========== ========== ==========
Net premiums earned ............................. $ 52,424 $ 87,098 $ 85,519 $ 69,985 $ 66,957
Interest income, net ............................ 4,849 3,927 4,281 3,632 2,540
Interest income, net from related parties ....... - - - 371 380
Realized investment gains, net .................. 1,036 57 144 2,654 794
Fee for rescinded reinsurance treaties .......... - 10,000 - - -
Other income .................................... 278 164 301 101 261
---------- ---------- ---------- ---------- ----------
Total revenues .................................... 58,587 101,246 90,245 76,743 70,932
---------- ---------- ---------- ---------- ----------
Operating expenses
Losses and loss adjustment expenses ............. 36,050 68,659 64,999 52,550 50,712
Policy acquisition costs ........................ 10,673 21,195 16,882 10,869 10,239
General and administrative expenses ............. 9,474 9,126 10,557 11,549 12,473
Interest expense ................................ 885 1,494 2,255 2,240 2,234
---------- ---------- ---------- ---------- ----------
Total operating expenses .......................... 57,082 100,474 94,693 77,208 75,658
---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations before
income taxes .................................... 1,505 772 (4,448) (465) (4,726)
Federal income tax benefit (provision) ............ (278) (326) 1,347 (16) 1,680
---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations .......... 1,227 446 (3,101) (481) (3,046)
Income (loss) from discontinued operations ........ (794) (533) (894) (622) 284
Gain on sale of subsidiary ........................ - - - - 671
---------- ---------- ---------- ---------- ----------
Net income (loss) ................................. $ 433 $ (87) $ (3,995) $ (1,103) $ (2,091)
========== ========== ========== ========== ==========
Combined loss and underwriting expense ratio (2) .. 102% 111% 106% 108% 110%
BALANCE SHEET DATA
Cash and investments .............................. $ 94,947 $ 93,666 $ 104,760 $ 73,378 $ 68,276
Amounts due from related parties .................. - - - 7,880 10,582
Total assets ...................................... 223,351 256,836 273,498 234,809 229,855
Unpaid losses and loss adjustment expenses ........ 80,701 98,460 100,173 84,756 92,606
Notes payable ..................................... 9,410 - - - -
Amounts due to related parties .................... 12,219 533 717 - -
Debentures ........................................ - 24,000 24,000 24,000 24,000
Total liabilities ................................. 174,090 210,097 228,647 191,067 186,855
Shareholder's equity .............................. 49,261 46,739 44,851 43,742 43,000
- -----------------------------------------------------
(1) All periods have been restated to reflect the results of L&W as a discontinued operation. See Note 4
to Consolidated Financial Statements for more information.
(2) Interest expense is not considered an underwriting expense and has been excluded from this ratio. The
rescission of two reinsurance treaties during 1999 increased the 1999 combined loss and underwriting expense
ratio by four percentage points. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS."
PAGE 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
References to Chandler USA which follow within this Item 7 refer to
Chandler USA and its subsidiaries on a consolidated basis unless otherwise
indicated.
Chandler USA is engaged in various property and casualty insurance
operations through its wholly owned subsidiaries, NAICO and CIMI. NAICO writes
various property and casualty insurance products through three separate
marketing programs: standard property and casualty, political subdivisions and
surety bonds (including both bail bonds and construction bonds). The lines of
insurance written by NAICO are commercial coverages consisting of automobile
liability, workers compensation, surety, automobile physical damage, property,
inland marine and other liability lines, which include general and professional
liability lines. CIMI maintains certain wholesale operations related to
NAICO's school districts and trucking programs.
Many factors determine the profitability of an insurance company including
regulation and rate competition; the frequency and severity of claims; the
cost, availability and collectibility of reinsurance; interest rates;
inflation; general business conditions; and jury awards, court decisions and
legislation expanding the extent of coverage and the amount of compensation due
for injuries and losses.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with GAAP requires
the application of accounting policies that often involve a significant degree
of judgment. Management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the periods. If management determines, as a result of its consideration of
facts and circumstances, that changes in estimates and assumptions are
appropriate, results of operations and financial position as reported in the
consolidated financial statements may change significantly. Management has
identified the following accounting policies as critical in understanding
Chandler USA's reported financial results:
RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
Insurance companies provide in their financial statements reserves for
unpaid losses and loss adjustment expenses which are estimates of the expense
of investigation and settlement of all reported and incurred but not reported
losses under their previously issued insurance policies and reinsurance
contracts. In estimating reserves, insurance companies use various
standardized methods based on historical experience and payment and reporting
patterns for the type of risk involved. The application of these methods
necessarily involves subjective determinations by the personnel of the
insurance company. Inherent in the estimates of the ultimate liability for
unpaid claims are expected trends in claim severity, claim frequency and other
factors that may vary as claims are settled. The amount of and uncertainty in
the estimates is affected by such factors as the amount of historical claims
experience relative to the development period for the type of risk, knowledge
of the actual facts and circumstances, and the amount of insurance risk
retained. The ultimate cost of insurance claims can be adversely affected by
increased costs, such as medical expenses, repair expenses, costs of providing
legal defense for policyholders, increased jury awards and court decisions and
legislation that expand insurance coverage after the insurance policy was
priced and sold. Accordingly, the loss and loss adjustment expense reserves
may not accurately predict an insurance company's ultimate liability for unpaid
claims.
NAICO periodically reviews the reserve estimates relating to insurance
business written or assumed by NAICO and the methods used to arrive at such
reserve estimates. NAICO also retains independent professional actuaries who
review such reserve estimates and methods. Any changes in the estimates are
reflected in current operating results. See Notes to Consolidated Financial
Statements.
The loss settlement period on insurance claims for property damage is
relatively short. The more severe losses for bodily injury and workers
compensation claims have a much longer loss settlement period and may be paid
out over several years. It is often necessary to adjust estimates of liability
on a loss either upward or downward between the time a claim arises and the
time of payment. Workers compensation indemnity benefit reserves are
determined based on statutory benefits prescribed by state law and are
estimated based on the same factors generally discussed above which may
include, where state law permits, inflation adjustments for rising benefits
over time. Generally, the more costly automobile liability claims involve one
or more severe bodily injuries or deaths. The ultimate cost of these types of
claims is dependent on various factors including the relative liability of the
parties involved, the number and severity of injuries and the legal
jurisdiction where the incident occurred.
PAGE 17
NAICO does not ordinarily insure against environmental matters as that
term is commonly used. However, in some cases, regulatory filings made on
behalf of an insured can make NAICO directly liable to the regulatory authority
for property damage, which could include environmental pollution. In those
cases, NAICO ordinarily has recourse against the insured or the surety bond
principal for amounts paid. NAICO has insured certain trucking companies and
pest control operators who are required to provide proof of insurance which in
some cases assures payment for cleanup and restoration of damage resulting from
sudden and accidental release or discharge of contaminants or other substances
which may be classified as pollutants. NAICO also provides surety bonds for
construction contractors who use or have control of such substances and for
contractors who remove and dispose of asbestos as a part of their contractual
obligations.
NAICO also insures independent oil and gas producers who may purchase
coverage for the escape of oil, saltwater, or other substances which may be
harmful to persons or property, but may not generally be classified as
pollutants. NAICO maintains claims records which segregate this type of risk
for the purpose of evaluating environmental risk exposure. Based upon the
nature of such lines of business with NAICO's insureds, and current data
regarding the limited severity and infrequency of such matters, it appears
that potential environmental risks are not a significant portion of claim
reserves and therefore would not likely have a material adverse impact, if any,
on the financial condition of Chandler USA.
NAICO's statutory-based reserves (reserves calculated in accordance with
accounting practices prescribed or permitted by an insurer's domiciliary state
insurance regulatory authorities for purposes of financial reporting to
regulators) do not differ from its reserves reported on the basis of GAAP.
NAICO does not discount its reserves for unpaid losses and loss adjustment
expenses.
REINSURANCE RECOVERABLES
Reinsurance recoverables on unpaid losses and loss adjustment expenses are
similarly subject to changes in estimates and assumptions. Amounts recoverable
from reinsurers are estimated in a manner consistent with the claim liability
associated with the reinsured policies. In addition to factors noted above,
estimates of reinsurance recoverables may prove uncollectible if the reinsurer
is unable or unwilling to meet its responsibilities under the reinsurance
contracts. Reinsurance contracts do not relieve an insurer from its obligation
to policyholders.
OTHER
See Note 1 to Consolidated Financial Statements for information related to
other accounting and reporting policies.
ECONOMIC CONDITIONS
The impact of a recession on Chandler USA would depend on its duration and
severity. A prolonged downturn in the economy could result in decreased demand
for NAICO's insurance products and an increase in uncollectible premiums and/or
reinsurance recoverables. In addition, an economic downturn could result in an
increase in the number of insurance claims if insureds decrease expenditures
that promote safety. Much of NAICO's insurance business is concentrated in the
Southwest and Midwest areas of the United States. Approximately $127 million,
or 90%, of NAICO's direct written premiums in 2002 were in the states of
Oklahoma and Texas. An economic downturn in these states could have a
significant adverse impact on Chandler USA. A recession might also cause
defaults on fixed-income securities owned by NAICO. During 2002, the market
value of NAICO's available for sale investments increased by $2.8 million due
primarily to lower interest rates experienced during this time. Management
believes it has mitigated the impact of a recession by employing conservative
underwriting practices and strict credit policies and maintaining a high-
quality investment portfolio.
Periods of inflation have varying effects on Chandler USA and its
subsidiaries as well as other companies in the insurance industry. Inflation
contributes to higher claims and related costs and operating costs as well as
higher interest rates which generally provide for potentially higher interest
rates on investable cash flow and decreases in the market value of existing
fixed-income securities. Premium rates and commissions, however, are not
significantly affected by inflation since competitive forces generally control
such rates. NAICO's underwriting philosophy is to forego underwriting risks
from which it is unable to obtain what it believes to be adequate premium rates.
PAGE 18
REGULATION
NAICO is subject to regulation by government agencies in the jurisdictions
in which it does business. The nature and extent of such regulations vary from
jurisdiction to jurisdiction, but typically involve prior approval of the
acquisition of control of an insurance company or of any company controlling an
insurance company, regulation of certain transactions entered into by an
insurance company with any of its affiliates, approval of premium rates, forms
and policies used for many lines of insurance, standards of solvency and
minimum amounts of capital and surplus which must be maintained, establishment
of reserves required to be maintained for unearned premiums, unpaid losses and
loss adjustment expenses or for other purposes, limitations on types and
amounts of investments, restrictions on the size of risks which may be insured
by a single company, licensing of insurers and agents, deposits of securities
for the benefit of policyholders and the filing of periodic reports with
respect to financial condition and other matters. In addition, regulatory
examiners perform periodic examinations of insurance companies. Such regulation
is generally intended for the protection of policyholders rather than
shareholders or creditors.
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.
In addition to the regulatory oversight of NAICO, Chandler Insurance is
also subject to regulation under the laws of the Cayman Islands and Chandler
USA and all of its affiliates are also subject to regulation under the Oklahoma
Insurance Code. The Oklahoma Insurance Code contains certain reporting
requirements including those requiring Chandler Insurance, as the ultimate
parent company, to file information relating to its capital structure,
ownership and financial condition and general business operations of its
insurance subsidiaries. The Oklahoma Insurance Code contains special reporting
and prior approval requirements with respect to transactions among affiliates.
The Oklahoma Insurance Code also imposes certain requirements upon any person
controlling or seeking to control an insurance company domiciled in Oklahoma.
Control is generally presumed to exist if any person, directly or indirectly,
owns, controls, holds with the power to vote or holds proxies representing 10%
or more of the voting securities of the insurance company or of any other
person or entity controlling the insurance company. The 10% presumption is not
conclusive and control may be found to exist at less than 10%. Persons owning
any securities of Chandler USA or Chandler Insurance must comply with the
Oklahoma Insurance Code. See "BUSINESS - Regulation."
Insurance companies are also affected by a variety of state and federal
legislative and regulatory measures and judicial decisions that define and
extend the risks and benefits for which insurance is sought and provided.
These include the redefinition of risk exposure in areas such as product
liability, environmental damage and workers compensation. In addition,
individual state insurance departments may prevent premium rates for some
classes of insureds from reflecting the level of risk assumed by the insurer
for those classes. Such developments may adversely affect the profitability of
various lines of insurance. In some cases, these adverse effects on
profitability can be minimized through coverage repricing, if permitted by
applicable regulations, or limitations or cessation of the affected business.
COMPETITION
NAICO operates in a highly competitive industry and faces competition
from domestic and foreign insurers, many of which are larger, have greater
financial, marketing and management resources, have more favorable ratings by
ratings agencies and offer more diversified insurance coverages than NAICO.
A company's capacity to write insurance policies is dependent on a variety
of factors including its net worth or "surplus," the lines of business written,
the types of risk insured and its profitability. Since the late 1980's, the
industry has generally had excess underwriting capacity. This condition
resulted in depressed premium rates and expanded policy terms, which generally
occur when excess underwriting capacity exists. NAICO continues to experience
competition, however, NAICO was able to increase its pricing for most coverages
during 2001 and 2002, which has generally been the trend industry wide.
NAICO's underwriting philosophy is to forego underwriting risks from which it
is unable to obtain what it believes to be adequate premium rates.
DISCONTINUED OPERATIONS
On December 20, 2002, Chandler USA completed the sale of its wholly owned
subsidiary L&W to Brown & Brown, Inc. for $3,247,000 in cash and a $361,000
note receivable that is due on or before December 31, 2003. Chandler USA
recorded an after-tax gain of $671,000 on the sale based on the minimum
purchase price for the transaction, after deducting Chandler USA's goodwill
related to L&W of $2,350,000, equity in L&W of $224,000 and approximately
$400,000 of expenses in connection with the sale. The gain on the sale may be
increased over the next three years depending on certain adjustments to the
purchase price as defined in the terms of the transaction, with a maximum
purchase price of $6.0 million. The transaction was effective December 1, 2002.
PAGE 19
L&W is expected to continue to be a significant producer of business for
NAICO. Retail business produced by L&W and placed with NAICO constituted
approximately 8% of NAICO's direct premiums written and assumed in 2002.
Chandler USA will maintain certain wholesale operations related to NAICO's
school districts and trucking programs through CIMI, an underwriting manager
that was established in December 2002. L&W previously functioned as Chandler
USA's agency segment and is presented as discontinued operations.
Chandler USA agreed to indemnify Brown & Brown, Inc. for any breach of a
representation, warranty or covenant made in connection with the sale for a
period of three years, and has deposited cash in the amount of $500,000 into
a trust account for the benefit of Brown & Brown, Inc. as security. Prior to
completing the sale, L&W transferred its real estate to NAICO, and transferred
substantially all of its remaining assets and liabilities, primarily premiums
receivable and premiums payable, to Chandler USA through a shareholder dividend.
ANALYSIS OF INSURANCE PROGRAM RESULTS OF OPERATIONS
The following tables summarize the net premiums earned and the financial
year (losses incurred and recognized by Chandler USA regardless of the year in
which the claim occurred) and accident year (losses incurred by Chandler USA
for a particular year regardless of the period in which Chandler USA recognizes
the costs) loss ratios (computed by dividing losses and loss adjustment
expenses by net premiums earned) in each of the years presented. The first
table is summarized by major insurance program and includes all lines of
insurance written in each program. The second table is summarized by line of
insurance written and includes all net premiums earned and net losses and loss
adjustment expenses incurred from all insurance programs for that particular
line. See "Premiums Earned" and "Losses and Loss Adjustment Expenses."
YEAR ENDED DECEMBER 31,
--------------------------------
2000 2001 2002
---------- ---------- ----------
(Dollars in thousands)
INSURANCE PROGRAMS
- ---------------------------------------------------
STANDARD PROPERTY AND CASUALTY
Net premiums earned ............................. $ 62,823 $ 53,130 $ 49,570
Financial year loss ratio ....................... 76.6% 71.0% 81.1%
Accident year loss ratio ........................ 77.4% 54.7% 58.9%
POLITICAL SUBDIVISIONS
Net premiums earned ............................. $ 12,826 $ 12,534 $ 13,829
Financial year loss ratio ....................... 80.6% 91.1% 55.9%
Accident year loss ratio ........................ 98.2% 67.3% 35.5%
SURETY BONDS
Net premiums earned ............................. $ 6,467 $ 4,125 $ 3,310
Financial year loss ratio ....................... 35.1% 56.7% 59.4%
Accident year loss ratio ........................ 14.3% 72.9% 19.2%
OTHER (1)
Net premiums earned ............................. $ 3,403 $ 196 $ 248
Financial year loss ratio ....................... 124.9% 555.4% 332.7%
Accident year loss ratio ........................ 118.4% 107.3% 79.9%
TOTAL
Net premiums earned ............................. $ 85,519 $ 69,985 $ 66,957
Financial year loss ratio ....................... 76.0% 75.1% 75.7%
Accident year loss ratio ........................ 77.4% 58.2% 52.2%
- --------------------------------------
(1) This category is comprised primarily of the run-off of discontinued programs and
NAICO's participation in various mandatory workers compensation pools and assigned
risks.
YEAR ENDED DECEMBER 31,
--------------------------------
2000 2001 2002
---------- ---------- ----------
(Dollars in thousands)
LINES OF INSURANCE
- ---------------------------------------------------
AUTOMOBILE LIABILITY
Net premiums earned ............................. $ 17,517 $ 13,386 $ 16,526
Financial year loss ratio ....................... 78.1% 70.0% 81.2%
Accident year loss ratio ........................ 75.9% 60.4% 70.6%
OTHER LIABILITY
Net premiums earned ............................. $ 20,992 $ 17,470 $ 16,458
Financial year loss ratio ....................... 55.6% 57.4% 80.2%
Accident year loss ratio ........................ 51.7% 36.3% 62.3%
WORKERS COMPENSATION
Net premiums earned ............................. $ 21,161 $ 16,449 $ 14,808
Financial year loss ratio ....................... 70.4% 105.4% 99.4%
Accident year loss ratio ........................ 85.1% 67.7% 50.7%
AUTOMOBILE PHYSICAL DAMAGE
Net premiums earned ............................. $ 11,434 $ 12,174 $ 9,552
Financial year loss ratio ....................... 85.5% 52.0% 35.3%
Accident year loss ratio ........................ 91.8% 48.6% 33.1%
PROPERTY
Net premiums earned ............................. $ 3,377 $ 4,806 $ 5,543
Financial year loss ratio ....................... 179.5% 92.8% 49.9%
Accident year loss ratio ........................ 179.0% 97.4% 25.4%
SURETY
Net premiums earned ............................. $ 6,760 $ 4,125 $ 3,310
Financial year loss ratio ....................... 33.4% 56.7% 59.4%
Accident year loss ratio ........................ 14.3% 72.9% 19.2%
INLAND MARINE
Net premiums earned ............................. $ 1,088 $ 1,256 $ 760
Financial year loss ratio ....................... 141.9% 143.0% 99.7%
Accident year loss ratio ........................ 197.4% 122.8% 40.6%
ACCIDENT AND HEALTH
Net premiums earned ............................. $ 3,190 $ 319 $ -
Financial year loss ratio ....................... 160.9% 281.2% -%
Accident year loss ratio ........................ 121.4% -% -%
TOTAL
Net premiums earned ............................. $ 85,519 $ 69,985 $ 66,957
Financial year loss ratio ....................... 76.0% 75.1% 75.7%
Accident year loss ratio ........................ 77.4% 58.2% 52.2%
PAGE 21
PREMIUMS EARNED
The following tables set 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 as well as each line of insurance for
each year presented:
GROSS PREMIUMS EARNED NET PREMIUMS EARNED
-------------------------- --------------------------
INSURANCE PROGRAMS 2000 2001 2002 2000 2001 2002
- ----------------------------------------- -------- -------- -------- -------- -------- --------
(In thousands)
Standard property and casualty .......... $139,051 $128,554 $106,051 $ 62,823 $ 53,130 $ 49,570
Political subdivisions .................. 34,353 34,178 35,159 12,826 12,534 13,829
Surety bonds ............................ 13,691 8,796 5,104 6,467 4,125 3,310
Other ................................... 3,672 71 249 3,403 196 248
-------- -------- -------- -------- -------- --------
TOTAL ................................... $190,767 $171,599 $146,563 $ 85,519 $ 69,985 $ 66,957
======== ======== ======== ======== ======== ========
GROSS PREMIUMS EARNED NET PREMIUMS EARNED
-------------------------- --------------------------
LINES OF INSURANCE 2000 2001 2002 2000 2001 2002
- ----------------------------------------- -------- -------- -------- -------- -------- --------
(In thousands)
Other liability ......................... $ 37,543 $ 36,166 $ 36,078 $ 20,992 $ 17,470 $ 16,458
Workers compensation .................... 61,888 57,585 41,958 21,161 16,449 14,808
Automobile liability .................... 31,427 27,237 27,143 17,517 13,386 16,526
Automobile physical damage .............. 13,224 13,516 10,745 11,434 12,174 9,552
Property ................................ 22,682 22,377 22,722 3,377 4,806 5,543
Surety .................................. 13,983 8,796 5,104 6,760 4,125 3,310
Inland marine ........................... 6,626 5,580 2,813 1,088 1,256 760
Accident and health ..................... 3,394 342 - 3,190 319 -
-------- -------- -------- -------- -------- --------
TOTAL ................................... $190,767 $171,599 $146,563 $ 85,519 $ 69,985 $ 66,957
======== ======== ======== ======== ======== ========
Gross premiums earned decreased 10% and 15% in 2001 and 2002,
respectively, as NAICO focused on improving underwriting profitability in its
core programs by re-underwriting and re-pricing the business and discontinuing
certain classes of business. Increases in premium rates partially offset the
decrease in premium production. Net premiums earned decreased 18% and 4% in
2001 and 2002, respectively. Effective October 1, 2000, NAICO purchased quota
share reinsurance which reduced NAICO's net retention for its casualty and
workers compensation lines of business and also reduced net premiums earned.
This quota share reinsurance expired effective January 1, 2002 and NAICO
elected not to renew it. The quota share reinsurance reduced net premiums
earned by $3.2 million, $11.3 million and $4.6 million in 2000, 2001 and 2002,
respectively.
Gross premiums earned in the standard property and casualty program
decreased 8% and 18% in 2001 and 2002, respectively. The decreases in 2001 and
2002 were due primarily to discontinuing certain accounts and classes of
business where rates were not believed to be adequate. Increases in premium
rates partially offset the decrease in premium production. Gross premiums
earned in Texas decreased $4.2 million and $13.7 million in 2001 and 2002,
respectively, and gross premiums earned in Oklahoma decreased $6.9 million and
$7.2 million in 2001 and 2002, respectively. Net premiums earned decreased 15%
and 7% in 2001 and 2002, respectively. The quota share reinsurance reduced net
premiums earned by $2.7 million, $9.5 million and $3.8 million in this program
in 2000, 2001 and 2002, respectively.
Gross premiums earned in the political subdivisions program decreased 1%
in 2001 and increased 3% in 2002. Gross premiums earned in the school
districts portion of the program increased $1.2 million and $4.5 million in
2001 and 2002, respectively, due primarily to increased premium rates in
Oklahoma. This was largely offset by a decrease in gross premiums earned for
the municipalities portion of the program. Net premiums earned decreased 2%
in 2001 and increased 10% in 2002. The quota share reinsurance reduced net
premiums earned by $504,000, $1.8 million and $835,000 in this program in 2000,
2001 and 2002, respectively.
PAGE 22
Gross premiums earned in the surety bond program decreased 36% and 42% in
2001 and 2002, respectively. The decreases are primarily due to stricter
underwriting policies and a reduction in the number of appointed agents that
produce this business as NAICO focuses on improving underwriting profitability
in this program. Net premiums earned in the surety bond program decreased 36%
and 20% in 2001 and 2002, respectively.
Other programs in the preceding table include premiums from the runoff of
various programs which are no longer offered by NAICO, NAICO's participation
in various mandatory pools covering workers compensation for insureds that were
unable to purchase this coverage from an insurance company on a voluntary
basis, and direct assignments to write workers compensation for such insureds
in certain states in lieu of participating in related pools.
NET INTEREST INCOME AND NET REALIZED INVESTMENT GAINS
At December 31, 2002, Chandler USA's investment portfolio consisted
primarily of fixed income U.S. Government and high-quality corporate bonds,
with approximately 14% invested in cash and money market instruments. Income
generated from this portfolio is largely dependent upon prevailing levels of
interest rates. Chandler USA's portfolio contains no non-investment grade
bonds or real estate investments. Chandler USA also receives interest income
from Chandler Barbados on intercompany loans.
Net interest income from continuing operations, excluding interest income
from Chandler Barbados, decreased 15% and 30% in 2001 and 2002, respectively.
The decreases in 2001 and 2002 were due primarily to lower interest rates and
a reduction in invested assets. Cash and invested assets decreased from
$104.8 million at December 31, 2000 to $73.4 million and $68.3 million at
December 31, 2001 and 2002, respectively. This decrease resulted primarily
from the reduction in premiums written during 2001 and 2002, the payment of
claims for prior years and an increase in intercompany loans to Chandler
Barbados. The increase in intercompany loans during 2001 was primarily to
provide financing for a going private transaction for Chandler Insurance.
Interest income from Chandler Barbados was $371,000 and $380,000 during 2001
and 2002, respectively. Chandler USA did not have any interest income from
Chandler Barbados during 2000. See Liquidity and Capital Resources.
Net realized investment gains were $144,000, $2,654,000 and $794,000 in
2000, 2001 and 2002, respectively. The net realized investment gains in 2001
and 2002 resulted primarily from sales of fixed maturity investments available
for sale to provide cash for operating activities due to the decrease in
written premiums.
The average net yield on the portfolio, including net realized investment
gains, was 4.5%, 7.7% and 4.8% in 2000, 2001 and 2002, respectively. The
average net yield on the portfolio, excluding net realized investment gains,
was 4.3%, 4.4% and 3.7% for 2000, 2001 and 2002, respectively. Chandler USA
excludes interest income from related parties when calculating its average net
yield on the portfolio. Chandler USA's average net yield has been reduced by
investment expenses to subsidize a premium finance program for certain insureds
of NAICO. While such expenses reduce Chandler USA's average net yield, the
premium finance program enhances cash flow by providing cash which is available
for investment earlier than conventional deferred payment plans. Based on
information provided by the premium finance company, the outstanding balance of
premiums financed at December 31, 2002 was approximately $11 million. The
average yield on the portfolio before deducting investment expenses was 6.1%,
5.9% and 4.4% in 2000, 2001 and 2002, respectively, excluding capital gains.
LOSSES AND LOSS ADJUSTMENT EXPENSES
Chandler USA estimates losses and loss adjustment expenses based on
historical experience and payment and reporting patterns for the type of risk
involved. These estimates are based on data available at the time of the
estimate and are periodically reviewed by independent professional actuaries.
See "BUSINESS - Reserves."
The percentage of losses and loss adjustment expenses to net premiums
earned ("loss ratio") was 76.0%, 75.1% and 75.7% in 2000, 2001 and 2002,
respectively. Weather-related losses (net of applicable reinsurance) from
wind and hail were $2.9 million, $2.0 million and $1.5 million in 2000, 2001
and 2002, respectively, and increased the respective loss ratios by 3.4, 2.9
and 2.2 percentage points. During 2001, the decline in weather-related
losses and increases in premium rates resulted in improved loss ratios for the
standard property and casualty and political subdivisions programs for the
2001 accident year. However, these improvements were offset by adverse loss
development experienced during 2001 related to prior accident years totaling
$12.7 million. This adverse loss development was due primarily to increased
loss severity in the standard property and casualty and political subdivisions
programs. A substantial part of this loss development was for workers
compensation losses in the 1999 accident year. NAICO's net retention for
workers compensation losses increased substantially in 1999 due to the
rescission of certain reinsurance treaties covering this line of business.
Also contributing to the adverse loss development were provisions for
potentially uncollectible reinsurance and deductibles of approximately $1.2
million during 2001, an increase in losses in the surety bond program and
approximately $878,000 in losses for the runoff of the discontinued group
accident and health program.
PAGE 23
During 2002, NAICO experienced adverse loss development related to prior
accident years totaling $15.8 million primarily in the standard property and
casualty program including both liability lines and workers compensation.
This adverse development is generally the result of ongoing analysis of recent
loss development trends that reflect an increase in loss severity within the
1997-2000 accident years. The adverse loss development included approximately
$2.0 million for provisions for potentially uncollectible reinsurance and
deductibles.
At this time, NAICO has not received any claims related to the September
11, 2001 terrorist attacks on the World Trade Center and does not believe that
it has any significant exposure to these and related losses. While several of
NAICO's reinsurers did experience significant losses related to these attacks,
it currently does not appear that these losses will impair the reinsurers'
ability to pay claims.
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 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 Chandler USA's policy acquisition costs
from continuing operations for each of the three years ended December 31, 2000,
2001 and 2002:
YEAR ENDED DECEMBER 31,
--------------------------------
2000 2001 2002
---------- ---------- ----------
(In thousands)
Commissions expense ........................ $ 30,851 $ 23,241 $ 20,151
Other premium related assessments .......... 989 463 1,397
Premium taxes .............................. 4,487 4,276 2,764
Excise taxes ............................... 351 234 240
Dividends to policyholders ................. 190 143 105
Other expense .............................. 176 295 567
---------- ---------- ----------
Total direct expenses ...................... 37,044 28,652 25,224
Indirect underwriting expenses ............. 9,139 9,099 8,135
Commissions received from reinsurers ....... (32,447) (27,325) (22,309)
Adjustment for deferred acquisition costs .. 3,146 443 (811)
---------- ---------- ----------
Net policy acquisition costs ............... $ 16,882 $ 10,869 $ 10,239
========== ========== ==========
Total gross direct and indirect expenses as a percentage of direct written
and assumed premiums were 23.4%, 23.7% and 23.8% in 2000, 2001 and 2002,
respectively. For these periods, commission expense as a percentage of gross
written and assumed premiums was 15.6%, 14.6% and 14.4%. Indirect underwriting
expenses were 4.6%, 5.7% and 5.8% of total direct written and assumed premiums
in 2000, 2001 and 2002, 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 Chandler USA's overall premium volume. Premium taxes decreased
$1.5 million in 2002 due to the decrease in written premiums, a decrease in
expenses associated with guaranty fund assessments and the elimination of a 2%
tax on workers compensation premiums written in Oklahoma. However, an increase
in premium related assessments in Oklahoma offset part of this savings.
Expenses associated with guaranty fund assessments, net of applicable premium
tax credits, were approximately $252,000, $489,000 and $31,000 in 2000, 2001
and 2002, respectively. NAICO may receive additional guaranty fund assessments
in the future related to Reliance or other insolvent insurance companies. At
this time, NAICO is unable to estimate the amount of such assessments.
Commissions received from reinsurers included $3.4 million, $4.6 million
and $744,000 in 2000, 2001 and 2002, respectively, for the quota share
reinsurance purchased in the fourth quarter of 2000. Net policy acquisition
costs decreased $1.5 million, $4.9 million and $2.3 million in 2000, 2001 and
2002, respectively, due to the purchase of the quota share reinsurance, net of
the adjustment for deferred acquisition costs.
PAGE 24
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses from continuing operations were 5.5%,
6.7% and 8.5% of gross premiums earned in 2000, 2001 and 2002, respectively.
General and administrative expenses included $297,000 for settlement of certain
litigation, and $736,000 for a reserve for receivables related to certain
derivative claims. Amortization of Chandler USA's state insurance licenses and
goodwill was discontinued effective January 1, 2002 due to the implementation
of Statement of Financial Accounting Standard No. 142. Amortization expense
from continuing operations was $529,000 and $150,000 in 2000 and 2001,
respectively, for these items. General and administrative expenses have
historically not varied in direct proportion to Chandler USA'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 Chandler USA's
revenues.
INTEREST EXPENSE
Interest expense decreased less than 1% in 2001 and 2002. Substantially
all of Chandler USA's interest expense is related to the $24 million of
outstanding debentures. See "Liquidity and Capital Resources."
NET LOSS
As a result of the factors described above, Chandler USA reported a loss
from continuing operations of $3.1 million, $481,000 and $3.0 million in 2000,
2001 and 2002, respectively, and a net loss of $4.0 million, $1.1 million and
$2.1 million in 2000, 2001 and 2002, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Chandler USA is a holding company receiving cash principally through
borrowings, subsidiary dividends and other payments, subject to various
regulatory restrictions described in "Regulation" and the Notes to Consolidated
Financial Statements. The capacity of insurance companies to write insurance
is based on maintaining liquidity and capital resources sufficient to pay
claims and expenses as they become due. The primary sources of liquidity for
Chandler USA's subsidiaries are funds generated from insurance premiums,
investment income, capital contributions from Chandler USA and proceeds from
sales and maturities of portfolio investments. The principal expenditures are
payment of losses and loss adjustment expenses, insurance operating expenses
and commissions.
NAICO maintains a liquid operating position and follows investment
guidelines that are intended to provide for an acceptable return on investment
while preserving capital, maintaining sufficient liquidity to meet obligations
and keeping a sufficient margin of capital and surplus to ensure unimpaired
ability to write insurance.
NAICO purchases fixed-maturity investments to support its investment
strategies which are developed based on many factors including rate of return,
maturity, credit risk, tax considerations, regulatory requirements and its mix
of business. At the time of purchase, investments in debt securities that
NAICO has the positive intent and ability to hold to maturity are classified
as held to maturity and reported at amortized cost; all other debt securities
are reported at fair value. Investments classified as trading are actively
and frequently bought and sold with the objective of generating income on
short-term differences in price. Realized and unrealized gains and losses on
securities classified as trading account assets are recognized in current
operations. NAICO has not classified any investments as trading account
assets. Securities not classified as held to maturity or trading are
classified as available for sale, with the related unrealized gains and losses
excluded from earnings and reported net of deferred income tax as a separate
component of other comprehensive income until realized.
During 2000, Chandler USA provided $10.7 million in cash from operations.
During 2001, Chandler USA used $27.8 million in cash from operations due
primarily to decreases in unpaid losses and loss adjustment expenses, unearned
premiums and premiums payable that resulted from the decrease in written
premiums in 2001, and from the payment of claims for prior years. During 2002,
Chandler USA used $7.5 million in cash from operations due primarily to a
decrease in premiums payable that resulted from the reduction in reinsurance
premiums ceded.
PAGE 25
Cash flows from investing activities were primarily the result of normal
purchases and sales of investment securities. Net realized investment gains
before income taxes were $144,000, $2,654,000 and $794,000 during 2000, 2001
and 2002, respectively, from the sale of investments. NAICO received proceeds
of $14.2 million, $73.1 million and $31.5 million during 2000, 2001 and 2002,
respectively, from the sale of available for sale fixed-income securities
prior to their maturity. The proceeds and related net realized investment
gains in 2001 and 2002 provided cash for operating activities due to the
decrease in written premiums. The average maturity of NAICO's investments was
3.3 years and 3.1 years at December 31, 2001 and 2002, respectively. Cash
flows from investing activities also included $3.8 million from a sale and
leaseback transaction for certain equipment owned by Chandler USA during 2001.
The sale and leaseback transaction resulted in a reduction of property and
equipment of $1.8 million and a deferred gain of $2.0 million which is included
in accrued taxes and other payables. Chandler USA has exercised its option to
repurchase the equipment at the end of the lease for approximately $3.0 million
and will amortize the deferred gain into income over the last year of the
lease. See Note 11 to Consolidated Financial Statements. Cash flows from
investing activities also included proceeds from the sale of L&W in 2002 of
$3.1 million net of cash disposed of as part of the sale. See Note 4 to
Consolidated Financial Statements for more information.
NAICO is required to deposit securities with regulatory agencies in
several states in which it is licensed as a condition of conducting operations
in the state. Chandler USA has deposited cash into a trust account as security
related to certain indemnification provisions related to its sale of L&W. At
December 31, 2002, the total amount of cash and investments restricted as a
result of these arrangements was $8.0 million.
On March 5, 2001, shareholders of Chandler USA's indirect parent, Chandler
Insurance, approved a going private transaction. Chandler Insurance financed
the going private transaction through (i) a $2.4 million sale of Chandler
Insurance Class A Common Shares to Messrs. LaGere and Paden, (ii) a $10.7
million intercompany loan from Chandler Barbados, and (iii) proceeds of
approximately $735,000 from the exercise of outstanding Chandler Insurance
options. Chandler USA loaned approximately $10.7 million to Chandler Barbados.
Chandler USA's intercompany loan to Chandler Barbados was financed by a $3.8
million sale and leaseback transaction for certain equipment owned by Chandler
USA and a $7.0 million dividend declared and paid by NAICO.
During 2001, Chandler USA and Chandler Barbados entered into an
Intercompany Credit Agreement (the "Credit Agreement") covering intercompany
loans between the parties. The Credit Agreement requires interest to be paid
at the prime interest rate published in The Wall Street Journal each month,
and balances owed by either party are payable at any time upon demand. At
December 31, 2001 and 2002, Chandler Barbados owed approximately $7.9 million
and $10.6 million, respectively, to Chandler USA, and Chandler USA earned
$371,000 and $380,000 in interest income from Chandler Barbados during 2001
and 2002, respectively.
Reliance reinsured NAICO for certain workers compensation risks during
1998. At December 31, 2002, NAICO had reinsurance recoverables from Reliance
for paid and unpaid losses of approximately $2.8 million. During October 2001,
the Commonwealth of Pennsylvania placed Reliance in liquidation. At this time,
NAICO is unable to determine the amount of its reinsurance recoverables from
Reliance that will ultimately be collected and has fully reserved the carrying
value of such amounts as of December 31, 2002.
Reinsurance contracts do not relieve an insurer from its obligation to
policyholders. Failure of reinsurers to honor their obligations could result
in losses to Chandler USA; consequently, adjustments to ceded losses and loss
adjustment expenses are made for amounts deemed uncollectible. NAICO did not
incur any charges for uncollectible reinsurance recoverables from reinsurers
in 2000. During 2001 and 2002, NAICO incurred charges of $454,000 and $1.7
million, respectively, in adjustments to ceded losses and loss adjustment
expenses for amounts deemed uncollectible.
PAGE 26
LITIGATION
Chandler Insurance and certain of its subsidiaries and affiliates,
including Chandler USA, were previously involved in various matters of
litigation with CenTra, Inc. ("CenTra"). In the CenTra litigation, certain
officers and directors of Chandler USA and Chandler Insurance were named as
defendants. In accordance with its Articles of Association, Chandler Insurance
and its subsidiaries have 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. These expenses together with certain other expenses may be
recovered from Chandler Insurance's director and officer liability insurance
policy (the "D&O Insurer"). As a result of various events in 1995, 1996 and
1997, Chandler Barbados and Chandler USA recorded estimated recoveries of costs
from its D&O Insurer totaling $3,456,000 and $1,044,000, respectively, for
reimbursable amounts previously paid that relate to allowable defense and
litigation costs for such parties. Chandler Barbados and Chandler USA received
payment for a 1995 claim during 1996 in the amount of $636,000 and $159,000,
respectively. The balance of $2,820,000 and $885,000 is included in other
assets in Chandler Barbados' and Chandler USA's respective balance sheets.
Chandler Insurance and its subsidiaries contend they are entitled to a total
of $5 million under the applicable insurance policy to the extent they have
advanced reimbursable expenses. The D&O Insurer contends that certain policy
provisions exclude coverage for these claims. On August 22, 2001, Chandler
Insurance and its subsidiaries, including Chandler USA, filed an action in the
State District Court in Oklahoma City, Oklahoma ("Oklahoma State Court")
alleging that the director and officer liability insurance policies should be
rescinded and seeking repayment of more than $5 million in premiums they
previously paid. Chandler Insurance and its subsidiaries are currently
involved in litigation with the insurer for payment of the policy balance or
rescission and repayment of premiums previously paid. The litigation is
pending in the Oklahoma State Court. The case is still in the early pleading
stages and Chandler USA cannot predict the date of resolution or the outcome
of this case. Chandler Insurance and its subsidiaries may or may not recover
the remaining policy limits or the previously paid premiums and could incur
significant costs in resolving this matter.
Transamerica reinsured NAICO for certain workers compensation risks during
1989, 1990 and 1991. Beginning in 1996, Transamerica refused to pay NAICO for
balances that it owed under the reinsurance treaties. Transamerica owed NAICO
approximately $1.5 million for reinsurance recoverables on paid losses and
loss adjustment expenses as of December 31, 2002. NAICO is currently engaged
in arbitration in order to enforce the terms of the reinsurance treaties.
Chandler USA and its subsidiaries are not parties to any other material
litigation other than as is routinely encountered in their respective business
activities. While the outcome of these matters cannot be predicted with
certainty, Chandler USA does not expect these matters to have a material
adverse effect on its financial condition, results of operations or cash flows.
NEW ACCOUNTING STANDARDS
See Note 1 to Consolidated Financial Statements for a discussion of
recently issued accounting pronouncements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Chandler USA's consolidated balance sheets include a certain amount of
assets and liabilities whose fair values are subject to market risk. Due to
Chandler USA's significant investment in fixed-maturity investments, interest
rate risk represents the largest market risk factor affecting Chandler USA's
consolidated financial position. Increases and decreases in prevailing
interest rates generally translate into decreases and increases in fair values
of those instruments. Additionally, fair values of interest rate sensitive
instruments may be affected by the credit worthiness of the issuer, prepayment
options, relative values of alternative investments, liquidity of the
instrument and other general market conditions.
As of December 31, 2002, substantially all of the investments of NAICO
were in fixed-maturity investments (rated Aa3 or AA or better by Moody's
Investors Service, Inc. or Standard & Poor's, respectively), interest-bearing
money market accounts and a collateralized repurchase agreement. NAICO does
not hold any investments classified as trading account assets or derivative
financial instruments.
PAGE 27
The table below summarizes the estimated effects of hypothetical increases
and decreases in interest rates on NAICO's fixed-maturity investment portfolio.
It is assumed that the changes occur immediately and uniformly, with no effect
given to any steps that management might take to counteract that change. The
hypothetical changes in market interest rates reflect what could be deemed best
and worst case scenarios. The fair values shown in the following table are
based on contractual maturities. Significant variations in market interest
rates could produce changes in the timing of repayments due to prepayment
options available. The fair value of such instruments could be affected and,
therefore, actual results might differ from those reflected in the following
table:
Estimated
fair value after
Hypothetical hypothetical
Fair value at change in change in
December 31, interest rate interest rate
---------------------- (bp=basis points) ----------------------
2001 2002 2001 2002
---------- ---------- ----------------- ---------- ----------
(Dollars in thousands) (Dollars in thousands)
Fixed-maturity investments .... $ 68,894 $ 58,327 100 bp increase.. $ 66,949 $ 56,630
200 bp increase.. 65,085 55,022
100 bp decrease.. 70,928 60,126
200 bp decrease.. 73,053 62,034
The table above illustrates, for example, that an instantaneous 200 basis
point increase in market interest rates at December 31, 2002 would reduce the
estimated fair value of NAICO's fixed-maturity investments by approximately
$3.3 million at that date.
Chandler USA is obligated for senior debentures that have a maturity date
of July 16, 2014. The debentures have a fixed interest rate of 8.75%. At
December 31, 2002, the fair value of Chandler USA's debentures was estimated to
be $23 million based on quoted market prices for similar securities. Chandler
USA's debentures have not historically traded regularly, and settlement at the
reported fair value may not be possible. The debentures are redeemable by
Chandler USA on or after July 16, 2009 without penalty or premium.
During March 2001, Chandler USA entered into a $3.8 million sale and
leaseback transaction for certain owned equipment. Chandler USA agreed to
lease the equipment for three years with monthly rental installments equal to
the sum of (i) $22,167 plus (ii) interest on the unpaid lease balance at a
floating interest rate of 1% over Chase Manhattan Bank Prime, which was 4.25%
at December 31, 2002. The sale and leaseback transaction resulted in a
reduction of property and equipment of $1.9 million and a deferred gain of
$2.0 million which is included in accrued taxes and other payables. Chandler
USA has exercised its option to repurchase the equipment at the end of the
lease for approximately $3.0 million and will amortize the deferred gain into
income over the final year of the lease.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 15 (a) 1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On June 11, 2001, the Audit Committee of the Board of Directors determined
not to re-engage its independent auditors, Deloitte & Touche LLP, and appointed
Tullius Taylor Sartain & Sartain LLP as Chandler USA's independent auditors for
the fiscal year ending December 31, 2001. See the Current Report on Form 8-K
filed by Chandler USA on June 14, 2001.
PAGE 28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
A brief description of each director and executive officer of Chandler USA
is provided below. Directors hold office until the next annual meeting of
shareholders or until their respective successors are duly elected and
qualified. Executive officers are elected by the Board of Directors at its
annual meeting and hold office until its next annual meeting or until their
respective successors are duly elected and qualified. The current directors
and executive officers of Chandler USA are as follows:
NAME AGE POSITION
- --------------------- ----- ------------------------------------------------------------------
W. Brent LaGere 57 Chairman of the Board, Chief Executive Officer, Compensation
Committee Member and Director.
Mark T. Paden 46 President, Chief Operating Officer, Compensation Committee Member
and Director.
Brenda B. Watson 62 Executive Vice President of NAICO.
Richard L. Evans 56 Senior Vice President and Director.
R. Patrick Gilmore 51 Senior Vice President, Secretary, General Counsel and Director.
Mark C. Hart 47 Vice President - Finance, Chief Financial Officer and Treasurer.
Larry B. McMillon 58 Vice President - Administration.
Robert L. Rice 68 Audit Committee Chairman and Director.
W. Scott Martin 52 Audit Committee Member and Director.
K.R. Price 65 Audit Committee Member and Director.
William T. Keele 66 Director.
W. BRENT LAGERE has been a director, Chairman of the Board and Chief
Executive Officer of Chandler USA since 1988. Since 1988, Mr. LaGere has
served in officer and director capacities for various subsidiaries of Chandler
USA pursuant to an employment contract with Chandler USA. Mr. LaGere serves
as Chairman of the Board and Chief Executive Officer of Chandler Insurance and
is a director of Chandler Barbados. Mr. LaGere served as an officer and a
director of L&W prior to December 1, 2002.
MARK T. PADEN has served as President of Chandler USA and NAICO since May
2001 and as Chief Operating Officer of Chandler USA and NAICO since May 1998.
From May 1998 to May 2001, Mr. Paden also served as Executive Vice President
of Chandler USA and NAICO. Mr. Paden has served as Chief Financial Officer of
NAICO from January 1988 through May 2001 and also served as Vice President-
Finance of NAICO from January 1988 through May 1998. Mr. Paden has been a
director of Chandler USA since July 1988 and NAICO since November 1992. Mr.
Paden also serves as a director and President of Chandler Insurance. Mr.
Paden served as an officer and a director of L&W prior to December 1, 2002.
BRENDA B. WATSON has been Executive Vice President of NAICO since August
1987. Since October 1988, she has served in officer and director capacities
for various subsidiaries of Chandler USA pursuant to an employment contract
with Chandler USA. Ms. Watson also serves as Executive Vice President of
Chandler Insurance. Ms. Watson served as an officer of L&W prior to December
1, 2002.
RICHARD L. EVANS has been a director of Chandler USA since May 1990. He
has been Senior Vice President of Chandler USA and NAICO since March 1999, and
served as Vice President of NAICO since 1987, and of Chandler USA since 1989.
Mr. Evans also serves as Senior Vice President of Chandler Insurance. Mr.
Evans served as an officer of L&W prior to December 1, 2002.
PAGE 29
R. PATRICK GILMORE has served as General Counsel for Chandler USA and its
subsidiaries since 1988 and currently serves as corporate Secretary and Senior
Vice President. Mr. Gilmore has been a director of Chandler USA since May
1990 and NAICO since September 2000. Mr. Gilmore served as an officer and a
director of L&W prior to December 1, 2002.
MARK C. HART has served as Vice President-Finance and Treasurer of
Chandler USA and NAICO since May 1998, and has served as Chief Financial
Officer of Chandler USA and NAICO since May 2001. Mr. Hart has also served as
Vice President of Chandler USA since March 1994. Mr. Hart also serves as Vice
President-Accounting, Chief Financial Officer and Treasurer of Chandler
Insurance. Mr. Hart served as an officer of L&W prior to December 1, 2002.
LARRY B. MCMILLON has served as Vice President-Administration of Chandler
USA and NAICO since 1989. He was an Executive Vice President and Controller
for W. H. Braum, Inc. before joining Chandler USA.
ROBERT L. RICE has been a director of Chandler USA since June 1993 and a
director of NAICO since March 2000. He has for more than 20 years engaged in
private practice as a Certified Public Accountant.
W. SCOTT MARTIN has been a director of Chandler USA and NAICO since March
2000. Mr. Martin has been President of the Tulsa Loan Production Office with
First Bank & Trust Company in Wagoner, Oklahoma since 1994. Mr. Martin also
serves as a director of First Bank & Trust in Wagoner, Oklahoma, First Bank of
Chandler in Chandler, Oklahoma, First National Bank in Burkburnett, Texas and
The Bank of Union in Union City, Oklahoma.
K. R. PRICE has been a director of Chandler USA and NAICO since May 2001.
Mr. Price has been a stockbroker for Raymond James Financial Services, Inc.
since April 1997, and was Executive Vice President and a director for Southwest
Securities, Inc. from 1974 until April 1997.
WILLIAM T. KEELE has been a director of Chandler USA and NAICO since May
2001. Mr. Keele has been President of Hallman & Keele, Inc., a construction
and steel fabrication firm, since 1974.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Based solely upon a review of Forms 3, 4 and 5, any amendments thereto
furnished to Chandler USA pursuant to the rules of the Securities and Exchange
Commission, or written representations from certain reporting persons
presented to Chandler USA, all such reports required to be filed by reporting
persons have been filed in a timely fashion during the fiscal year ended
December 31, 2002.
PAGE 30
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or to be paid by
Chandler USA or any of its subsidiaries as well as certain other compensation
paid or accrued, during the years indicated, to the Chairman and Chief
Executive Officer and the four other highest paid executive officers of
Chandler USA and its subsidiaries (the "Named Executives") for such period in
all capacities in which they served.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION (1)
-------------------------------------------------------
OTHER ANNUAL ALL OTHER
SALARY BONUS COMPENSATION COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($)(2) ($)(3) ($)(4)
- --------------------------------------- -------- ---------- ---------- ------------ ------------
W. Brent LaGere 2002 $ 507,410 $ 484,120 $ 299,485 $ 49,332
Chairman of the Board and CEO 2001 464,376 305,000 109,743 46,381
of Chandler USA and NAICO 2000 414,922 150,000 N/A 39,525
Mark T. Paden 2002 295,481 403,348 77,861 5,749
President and COO of Chandler USA 2001 293,295 225,000 N/A 5,502
and NAICO 2000 238,865 150,000 N/A 5,225
Brenda B. Watson 2002 244,448 - N/A 11,526
Executive Vice President 2001 238,904 - N/A 10,372
of NAICO 2000 230,987 84,936 N/A 9,725
Richard L. Evans 2002 245,899 4,500 N/A 7,928
Senior Vice President - Claims of 2001 238,713 - N/A 7,261
Chandler USA and NAICO 2000 232,219 - N/A 6,525
R. Patrick Gilmore 2002 216,790 - N/A 5,405
Senior Vice President, Secretary and 2001 210,460 - N/A 3,837
General Counsel of Chandler USA 2000 204,119 - N/A 3,808
and NAICO
- ---------------------------------------
(1) Amounts shown include cash and non-cash compensation earned and received by the Named
Executives as well as amounts earned but deferred at their election.
(2) All Named Executives are eligible to receive bonuses based upon various factors.
(3) The amounts shown under this column represent various perquisites and other personal
benefits including any associated tax reimbursements to the Named Executives. Amounts
that did not exceed the lesser of $50,000 or 10% of the total annual salary and bonus
for any Named Executive have been excluded. Substantially all of the amounts shown in
this column represent payment of various personal expenses, none of which individually
exceeded 25% of total perquisites for the Named Executive. Tax gross-ups for the personal
expenses in 2002 were $118,459 for Mr. LaGere and $33,231 for Mr. Paden.
(4) The amounts shown under this column include contributions by Chandler USA's subsidiaries
to a 401(k) plan ($4,100 each for Mr. LaGere and Ms. Watson, $3,850 each for Mr. Paden and
Mr. Evans, and $2,980 for Mr. Gilmore), and the premiums paid or to be paid by Chandler
USA's subsidiaries under life insurance arrangements with the Named Executives. A portion
of the premiums ($28,700, $31,300 and $33,600 in 2000, 2001 and 2002, respectively) were
paid under split dollar life insurance plans. Under these plans, Chandler USA's
subsidiaries pay the premiums for life insurance issued to the Named Executive. Repayment
of the premiums is secured by the death benefit or the cash surrender value of the policy,
if any, if the Named Executive cancels and surrenders the policy.
PAGE 31
OPTIONS EXERCISED AND HOLDINGS
No options were granted to or exercised by the Named Executives during
2002 and there were no unexercised options held by the Named Executives as of
December 31, 2002.
DIRECTOR COMPENSATION
Directors who are employees of Chandler USA do not receive additional
compensation for serving as directors. Each non-employee director of Chandler
USA is paid $1,000 per day for any meeting or committee meeting attended.
However, if a non-employee director is attending meetings for two or more
affiliates of Chandler USA on the same day, his compensation is $750 per day
for any meeting or committee meeting of Chandler USA attended. If a
non-employee director attends the meeting by telephonic conference, his
compensation is $500 per day for any meeting or committee meetings so attended.
EMPLOYMENT AGREEMENTS
Chandler USA has an employment agreement with W. Brent LaGere, Chairman
of the Board and Chief Executive Officer of Chandler USA and its subsidiaries.
Under this agreement, Mr. LaGere's base compensation is established at not less
than $250,000 per year. In the event that Mr. LaGere is terminated without
cause, as defined in the agreement, he is entitled to receive his base
compensation for the remainder of the term of the agreement, but in no event
for more than 60 months. The agreement will terminate upon Mr. LaGere
attaining age 70, unless earlier terminated by Chandler USA for cause. In
addition to his base compensation, Mr. LaGere is eligible to receive certain
benefits and bonuses from Chandler USA and its subsidiaries.
Chandler USA has an employment agreement with Brenda B. Watson, an
executive officer of NAICO. Under this agreement, Ms. Watson's base
compensation is established at not less than $125,000 per year. The agreement
terminates on December 31, 2003, unless earlier terminated by Chandler USA for
cause, as defined in the agreement. In the event that Ms. Watson is terminated
without cause, she is entitled to receive her base compensation through the
termination date. In addition to her base compensation, Ms. Watson is eligible
to receive certain benefits and to participate in an incentive bonus plan
offered by Chandler USA and its subsidiaries.
PAGE 32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of the common stock of Chandler USA, its sole class of common equity,
is owned by Chandler Barbados, which is a wholly owned subsidiary of Chandler
Insurance.
The following table sets forth the number and percentage of outstanding
shares of each class of the capital stock of Chandler Insurance that, as of
February 28, 2003, are beneficially owned by (i) each director of Chandler USA
and Chandler Insurance, (ii) Chandler USA's Chairman and Chief Executive
Officer and each of Chandler USA's four other most highly compensated executive
officers for services rendered for the fiscal year ended December 31, 2002 and
(iii) all current directors and executive officers as a group:
BENEFICIAL OWNERSHIP
-------------------------------------------------------
TYPE OF CAPITAL SHARES NUMBER OF
NAME OF DIRECTOR OR EXECUTIVE OFFICER OF CHANDLER INSURANCE CAPITAL SHARES (1) PERCENT (2)
- ---------------------------------------------------------- ------------------------ ------------------ -----------
W. Brent LaGere (3) ...................................... Class A Common Shares 500,661 80.0%
Series A Preferred Shares 75,152 18.8%
Mark T. Paden ............................................ Class A Common Shares 125,165 20.0%
Series A Preferred Shares 17,610 4.4%
Brenda B. Watson (4) ..................................... Series A Preferred Shares 18,024 4.5%
Series B Preferred Shares 35,542 8.0%
Richard L. Evans ......................................... Series A Preferred Shares 27,272 6.8%
Series B Preferred Shares 32,250 7.3%
R. Patrick Gilmore ....................................... Series B Preferred Shares 11,000 2.5%
Robert L. Rice ........................................... - - -%
W. Scott Martin .......................................... Series C Preferred Shares 31,500 4.4%
K.R. Price (5) ........................................... Series C Preferred Shares 146,200 20.5%
William T. Keele (6) ..................................... Series C Preferred Shares 142,417 19.9%
Steven R. Butler (7) ..................................... Series C Preferred Shares 3,200 *%
All directors and officers as a group (12 persons) (8) ... Class A Common Shares 625,826 100.0%
Series A Preferred Shares 162,776 40.8%
Series B Preferred Shares 78,792 17.8%
Series C Preferred Shares 323,317 45.2%
- ----------------------------------------------------------
* Less than 1%
(1) The rules of the SEC provide that, for the purposes hereof, a person is considered the "beneficial owner" of shares
with respect to which the person, directly or indirectly, has or shares the voting or investment power, irrespective of
his economic interest in the shares. Unless otherwise noted, each person identified possesses sole voting and investment
power over the shares listed, subject to community property laws. The Preferred Shares of Chandler Insurance have no
voting rights. The Series A Preferred Shares of Chandler Insurance are convertible to Class A Common Shares of Chandler
Insurance.
(2) Based on 625,826 Class A Common Shares of Chandler Insurance, 399,110 Series A Preferred Shares of Chandler Insurance,
441,580 Series B Preferred Shares of Chandler Insurance and 714,569 Series C Preferred Shares of Chandler Insurance
outstanding on February 28, 2003.
(3) Includes (i) 348,390 Class A Common Shares of Chandler Insurance owned by the W. Brent LaGere Irrevocable Trust (the
"Trust") and (ii) 22,500 Class A Common Shares of Chandler Insurance owned by W&L Holding Corp. ("W&L Holding"), a
corporation 100% of which is owned by the Trust. Mr. LaGere holds an irrevocable proxy for the Class A Common Shares
owned by the Trust and W&L Holding. Mr. LaGere disclaims beneficial ownership of the shares held by the Trust and W&L
Holding. The business address of Mr. LaGere is 1010 Manvel Avenue, Chandler, Oklahoma 74834.
(4) Includes 8,027 Series A Preferred Shares of Chandler Insurance held by Ms. Watson's husband. Ms. Watson disclaims
beneficial ownership of the shares owned by her husband.
(5) Includes 11,500 Series C Preferred Shares of Chandler Insurance held by Mr. Price's wife. Mr. Price disclaims beneficial
ownership of these shares.
(6) Includes 63,787 Series C Preferred Shares of Chandler Insurance held by the Keele Family Ltd. Partnership, 4,062 shares
held by Mr. Keele's wife and 23,911 shares held by Mr. Keele's children. Mr. Keele disclaims beneficial ownership of the
shares owned by his wife and children.
(7) Mr. Butler is a director, Vice President - Administration and Secretary of Chandler Insurance, and also serves as a
director and President of Chandler Barbados.
(8) Includes 24,718 Series A Preferred Shares of Chandler Insurance owned by two executive officers of Chandler USA not
listed in the table above.
PAGE 33
SHAREHOLDERS HOLDING OVER FIVE PERCENT
Listed below are persons, other than those listed previously, who are
known by Chandler USA to own beneficially more than 5% of Chandler Insurance's
Class A Common Shares as of February 28, 2003. Except as otherwise indicated,
each of the persons named below has sole voting and investment power with
respect to the common shares beneficially owned.
BENEFICIAL OWNERSHIP
---------------------------------------
NAME OF SHAREHOLDER NUMBER OF SHARES (1) PERCENT (2)
- -------------------------------------------------------- ---------------------- ---------------
Malinda Laird, Matthew LaGere and Lance LaGere, Trustees
of the W. Brent LaGere Irrevocable Trust
1010 Manvel Avenue, Chandler, Oklahoma 74834 ......... 370,890 (3) 59.3%
- --------------------------------------------------------
(1) The rules of the SEC provide that, for the purposes hereof, a person is considered the
"beneficial owner" of shares with respect to which the person, directly or indirectly, has
or shares the voting or investment power, irrespective of his economic interest in the
shares. Unless otherwise noted, each person identified possesses sole voting and
investment power over the shares listed, subject to community property laws.
(2) Based on 625,826 Class A Common Shares of Chandler Insurance outstanding on February 28,
2003.
(3) Includes 370,890 Class A Common Shares of Chandler Insurance held by the Trust, of which
22,500 Class A Common Shares are directly owned by W&L Holding, which is 100% owned by the
Trust. Mr. LaGere holds an irrevocable proxy for the Class A Common Shares owned by the
Trust and W&L Holding.
OTHER MATTERS REGARDING BENEFICIAL OWNERSHIP
For purposes of this report, unless otherwise indicated, Chandler USA has
assumed that the following persons are affiliates: an entity's executive
officers and directors or its managing partners, persons holding more than 10%
of an entity, and those persons who are controlling, controlled by, or under
common control with such officers, directors, managing partners, or
shareholders.
Statements of percentages of ownership are made based upon pertinent
reporting requirements and guidelines specifically applicable to this report
on Form 10-K. Determination of voting power under Chandler USA's Articles of
Incorporation or applicable insurance holding company laws may be at variance
with the above stated percentages.
PAGE 34
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Chandler USA leases a rural property from Davenport Farms, Inc.
("Davenport Farms"), a corporation owned by Messrs. LaGere, Evans and Paden.
Chandler USA has placed three mobile homes on the property, drilled a water
well connected to the mobile homes and made other smaller improvements to the
property. Its personnel maintains these improvements. These mobile homes and
the property provide hunting, fishing, lodging, dining and other outdoor
recreational activities for the entertainment of customers and business
associates of Chandler USA and/or its subsidiaries. Chandler USA pays no rent
to Davenport Farms but reimburses it for one-half of the utilities and for
hunting supplies. Chandler USA has also agreed to indemnify Davenport Farms
for claims arising out of its use of the property. Chandler USA retains the
right to remove all structures located upon the property when the lease
terminates. In 2000, 2001 and 2002, Chandler USA incurred approximately
$265,000, $263,000 and $255,000, respectively, in expenses associated with its
use of this property, including $9,000, $25,000 and $18,000 paid to Davenport
Farms for reimbursement of certain expenses, such as utility and similar
expenses, for the years 2000, 2001 and 2002, respectively.
Prior to May 1, 1997, Benjamin T. Walkingstick was an employee of Chandler
USA pursuant to an employment agreement dated October 28, 1988 (the "Employment
Agreement") and served as an executive officer and director of Chandler USA and
certain of it subsidiaries. Effective May 1, 1997, Mr. Walkingstick resigned
these positions and ceased to be an employee of Chandler USA. He continued to
be a consultant to Chandler USA and its subsidiaries pursuant to the Employment
Agreement and continued to receive compensation under the Employment Agreement
through October 2000. In March 2001, Chandler USA entered into a consulting
agreement (the "Consulting Agreement") with Mr. Walkingstick. The Consulting
Agreement has a term of five years with monthly payments of $12,500. Mr.
Walkingstick received $125,000 and $150,000 in compensation under the
Consulting Agreement during 2001 and 2002, respectively.
NAICO purchases and sells investment securities through various brokerage
firms including Raymond James & Associates, Inc., a subsidiary of Raymond James
Financial, Inc. K.R. Price is employed by Raymond James Financial Services,
Inc. which is also a subsidiary of Raymond James Financial, Inc. Since May
2001, Mr. Price has been a director of NAICO and Chandler USA. Mr. Price
receives no compensation from NAICO's investment transactions since joining the
boards in May 2001.
During the fourth quarter of 2002, Chandler USA's board of directors
approved the cancellation and release of certain judgments against three
directors of Chandler USA and one executive officer of NAICO that resulted from
the CenTra litigation. The amounts canceled included $233,122 for Mr. LaGere,
$136,467 for Ms. Watson, $99,338 for Mr. Evans and $72,142 for Mr. Paden. The
board's action followed a ruling during August 2002 by the U.S. District Court
for the Western District of Oklahoma denying CenTra's claim for post-judgment
interest from Chandler Insurance of approximately $2.5 million.
Chandler USA believes that all transactions, including loans, with
directors, officers, or shareholders of Chandler USA and its subsidiaries are
and will continue to be on terms no less favorable to Chandler USA and its
subsidiaries than could be obtained from unaffiliated parties.
ITEM 14. CONTROLS AND PROCEDURES
Chandler USA's Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of Chandler USA's disclosure controls and
procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of a
date within 90 days prior to the filing date of this annual report. Based on
such evaluation, such officers have concluded that Chandler USA's disclosure
controls and procedures are effective in alerting them on a timely basis to
material information relating to Chandler USA (including its consolidated
subsidiaries) required to be included in Chandler USA's periodic filings under
the Exchange Act. There have not been any significant changes in Chandler
USA's internal controls or in other factors that could significantly affect
such controls subsequent to the date of this evaluation.
PAGE 35
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS. The consolidated balance sheets of Chandler
USA and its subsidiaries as of December 31, 2001 and 2002, and the
related consolidated statements of operations, comprehensive
income, shareholder's equity and cash flows for each of the three
years in the period ended December 31, 2002, together with the
related notes thereto and the report of Tullius Taylor Sartain &
Sartain LLP, independent auditors on such financial statements as
of December 31, 2001 and 2002 and for the two years ended December
31, 2002, and the report of Deloitte & Touche LLP, independent
auditors on such financial statements for the year ended December
31, 2000, are filed as a part of this Form 10-K. See accompanying
Index on page F-1.
2. FINANCIAL STATEMENT SCHEDULES. The financial statement schedules
listed in the accompanying index to consolidated financial
statements and schedules are filed as part of this Form 10-K. All
other schedules have been omitted since the required information is
not applicable or is not present in amounts sufficient to require
submission of the schedule or because the information is included
in the consolidated financial statements or the notes thereon.
3. EXHIBITS.
3.1 Certificate of Incorporation. (1)
3.2 Bylaws, as amended. (1)
4.1 Form of Indenture entered into by and between Chandler USA
as issuer and U.S. Trust of Texas, N.A. as trustee. (1)
10.1 Employment Agreement, effective as of October 28, 1988, by
and between Chandler USA and Brent LaGere. (1)
10.2 Employment Agreement, effective as of October 28, 1988, by
and between Chandler USA, and Brenda B. Watson
(formerly Brenda B. Pair). (1)
10.3 Amendment to Employment Agreement, effective as of January 1,
1999, by and between Chandler USA and Brenda B. Watson. (1)
10.4 Intercompany Credit Agreement effective as of January 1,
2001, by and between Chandler USA and Chandler Barbados. (2)
10.5 Stock Purchase Agreement effective as of December 1, 2002, by
and among Brown & Brown, Inc., Chandler USA, Chandler
Insurance, NAICO, W. Brent LaGere and Mark T. Paden.
21.1 Subsidiaries of the registrant.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.
- -------------------------------
(1) Previously filed as an exhibit to Registration No. 333-76393
on Form S-1 and incorporated herein by reference.
(2) Previously filed as an exhibit to Chandler USA's Annual
Report on Form 10-K for the year ended December 31, 2001 and
incorporated herein by reference.
Copies of the foregoing exhibits filed with this Form 10-K or
incorporated by reference are available from Chandler USA upon written
request and payment of a reasonable copying fee.
(b) Reports on Form 8-K.
Chandler USA filed one current report on Form 8-K dated December 20,
2002 responding to Item 5 of Form 8-K.
PAGE 36
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) 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.
CHANDLER (U.S.A.), INC.
Date: March 4, 2003 By: /s/ W. Brent LaGere
-------------------------------------------------
W. Brent LaGere
Chairman of the Board
and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
Date: March 4, 2003 /s/ W. Brent LaGere
-------------------------------------------------
W. Brent LaGere, Chairman of the Board,
Chief Executive Officer and Director
(Principal Executive Officer)
Date: March 4, 2003 /s/ Mark T. Paden
-------------------------------------------------
Mark T. Paden, President, Chief Operating Officer
and Director
Date: March 4, 2003 /s/ Mark C. Hart
-------------------------------------------------
Mark C. Hart, Vice President - Finance,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Date: March 4, 2003 /s/Richard L. Evans
-------------------------------------------------
Richard L. Evans, Senior Vice President
and Director
Date: March 4, 2003 /s/ R. Patrick Gilmore
-------------------------------------------------
R. Patrick Gilmore, Senior Vice President,
Secretary, General Counsel and Director
Date: March 4, 2003 /s/ Robert L. Rice
-------------------------------------------------
Robert L. Rice, Director
PAGE 37
Date: March 4, 2003 /s/ W. Scott Martin
-------------------------------------------------
W. Scott Martin, Director
Date: March 4, 2003 /s/ K.R. Price
-------------------------------------------------
K.R. Price, Director
Date: March 4, 2003 /s/ William T. Keele
-------------------------------------------------
William T. Keele, Director
PAGE 38
CERTIFICATIONS
- --------------
I, W. Brent LaGere, certify that:
1. I have reviewed this annual report on Form 10-K of Chandler (U.S.A.), Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 4, 2003
/s/ W. Brent LaGere
---------------------------------------
W. Brent LaGere
Chairman of the Board and
Chief Executive Officer
PAGE 39
I, Mark C. Hart, certify that:
1. I have reviewed this annual report on Form 10-K of Chandler (U.S.A.), Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 4, 2003
/s/ Mark C. Hart
---------------------------------------
Mark C. Hart
Vice President - Finance,
Chief Financial Officer
and Treasurer
PAGE F-1
CHANDLER (U.S.A.), INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
PAGES
-----------------
FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 2001 and 2002 .......................... F-2
Consolidated Statements of Operations for the years ended
December 31, 2000, 2001 and 2002 .................................................... F-3
Consolidated Statements of Comprehensive Income for the years ended
December 31, 2000, 2001 and 2002 .................................................... F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 2001 and 2002 .................................................... F-5
Consolidated Statements of Shareholder's Equity for the years ended
December 31, 2000, 2001 and 2002 .................................................... F-6
Notes to Consolidated Financial Statements ............................................ F-7 through F-23
Independent Auditors' Report on Consolidated Financial Statements
and Financial Statement Schedules - Deloitte & Touche LLP ........................... F-24
Independent Auditors' Report on Consolidated Financial Statements
and Financial Statement Schedules - Tullius Taylor Sartain & Sartain LLP ............ F-25
SCHEDULES
I Summary of Investments - Other Than Investments in Related Parties ............ F-26
II Condensed Financial Information of Registrant ................................. F-27 through F-29
III Supplementary Insurance Information ........................................... F-30
IV Reinsurance ................................................................... F-31
V Valuation and Qualifying Accounts ............................................. F-32
VI Supplemental Information (for property-casualty insurance underwriters) ....... F-33
PAGE F-2
CHANDLER (U.S.A.), INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except share amounts)
DECEMBER 31,
----------------------
2001 2002
---------- ----------
ASSETS
Investments
Fixed maturities available for sale, at fair value
Restricted (amortized cost $5,419 and $6,737 in 2001 and 2002, respectively) ........ $ 5,501 $ 6,943
Unrestricted (amortized cost $62,124 and $48,362 in 2001 and 2002, respectively) .... 62,154 50,096
Fixed maturities held to maturity, at amortized cost
Restricted (fair value $385 and $394 in 2001 and 2002, respectively) ................ 353 374
Unrestricted (fair value $854 and $895 in 2001 and 2002, respectively) .............. 782 846
Equity securities available for sale, at fair value ................................... 464 681
---------- ----------
Total investments ................................................................... 69,254 58,940
Cash and cash equivalents ($210 and $711 restricted in 2001 and 2002, respectively) ..... 4,124 9,336
Premiums receivable, less allowance for non-collection
of $298 and $246 at 2001 and 2002, respectively ....................................... 24,185 24,009
Reinsurance recoverable on paid losses, less allowance for
non-collection of $1,096 and $2,275 at 2001 and 2002, respectively .................... 11,756 11,198
Reinsurance recoverable on paid losses from related parties ............................. 292 80
Reinsurance recoverable on unpaid losses, less allowance for
non-collection of $492 at 2002 ........................................................ 42,545 50,377
Reinsurance recoverable on unpaid losses from related parties ........................... 9,399 9,038
Prepaid reinsurance premiums ............................................................ 26,890 19,202
Prepaid reinsurance premiums to related parties ......................................... 8,103 8,680
Deferred policy acquisition costs ....................................................... - 355
Property and equipment, net ............................................................. 10,822 10,093
Amounts due from related parties ........................................................ 7,880 10,582
State insurance licenses, net ........................................................... 3,745 3,745
Goodwill ................................................................................ 2,350 -
Other assets ............................................................................ 13,464 14,220
---------- ----------
Total assets ............................................................................ $ 234,809 $ 229,855
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities
Unpaid losses and loss adjustment expenses ............................................ $ 84,756 $ 92,606
Unearned premiums ..................................................................... 61,562 55,160
Policyholder deposits ................................................................. 4,600 4,244
Accrued taxes and other payables ...................................................... 7,480 8,040
Premiums payable ...................................................................... 8,669 2,805
Debentures ............................................................................ 24,000 24,000
---------- ----------
Total liabilities ................................................................... 191,067 186,855
---------- ----------
Commitments and contingencies (Notes 10 and 11)
Shareholder's equity
Common stock, $1.00 par value, 50,000 shares authorized;
2,484 shares issued and outstanding ................................................. 2 2
Paid-in surplus ....................................................................... 60,584 60,584
Accumulated deficit ................................................................... (17,225) (19,316)
Accumulated other comprehensive income:
Unrealized gain on investments available for sale, net
of deferred income taxes ............................................................ 381 1,730
---------- ----------
Total shareholder's equity .......................................................... 43,742 43,000
---------- ----------
Total liabilities and shareholder's equity .............................................. $ 234,809 $ 229,855
========== ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
PAGE F-3
CHANDLER (U.S.A.), INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands)
YEAR ENDED DECEMBER 31,
--------------------------------
2000 2001 2002
---------- ---------- ----------
Premiums and other revenues
Direct premiums written and assumed ........................ $ 197,196 $ 158,964 $ 140,162
Reinsurance premiums ceded ................................. (83,674) (70,086) (48,380)
Reinsurance premiums ceded to related parties .............. (35,077) (23,455) (24,115)
---------- ---------- ----------
Net premiums written and assumed ......................... 78,445 65,423 67,667
Decrease (increase) in unearned premiums ................... 7,074 4,562 (710)
---------- ---------- ----------
Net premiums earned ...................................... 85,519 69,985 66,957
Interest income, net ......................................... 4,281 3,632 2,540
Interest income, net from related parties .................... - 371 380
Realized investment gains, net ............................... 144 2,654 794
Other income ................................................. 301 101 261
---------- ---------- ----------
Total premiums and other revenues ........................ 90,245 76,743 70,932
---------- ---------- ----------
Operating costs and expenses
Losses and loss adjustment expenses, net of amounts ceded
to related parties of $19,212, $15,712 and $16,936
in 2000, 2001 and 2002, respectively ..................... 64,999 52,550 50,712
Policy acquisition costs, net of ceding commissions received
from related parties of $12,390, $8,029 and $8,199
in 2000, 2001 and 2002, respectively ..................... 16,882 10,869 10,239
General and administrative expenses ........................ 10,557 11,549 12,473
Interest expense ........................................... 2,255 2,240 2,234
---------- ---------- ----------
Total operating costs and expenses ....................... 94,693 77,208 75,658
---------- ---------- ----------
Loss from continuing operations before income taxes .......... (4,448) (465) (4,726)
Federal income tax benefit (provision) ....................... 1,347 (16) 1,680
---------- ---------- ----------
Loss from continuing operations .............................. (3,101) (481) (3,046)
Income (loss) from discontinued operations ................... (894) (622) 284
Gain on sale of subsidiary ................................... - - 671
---------- ---------- ----------
Net loss ................................................... $ (3,995) $ (1,103) $ (2,091)
========== ========== ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
PAGE F-4
CHANDLER (U.S.A.), INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
YEAR ENDED DECEMBER 31,
--------------------------------
2000 2001 2002
---------- ---------- ----------
Net loss ............................................................... $ (3,995) $ (1,103) $ (2,091)
---------- ---------- ----------
Other comprehensive income (loss), before income tax:
Unrealized gains on securities:
Unrealized holding gains arising during period ..................... 3,337 2,644 2,838
Less: Reclassification adjustment for gains included in net loss ... (144) (2,654) (794)
---------- ---------- ----------
Other comprehensive income (loss), before income tax ................... 3,193 (10) 2,044
Income tax benefit (provision) related to items of other
comprehensive income (loss) .......................................... (1,086) 4 (695)
---------- ---------- ----------
Other comprehensive income (loss), net of income tax ................... 2,107 (6) 1,349
---------- ---------- ----------
Comprehensive loss ..................................................... $ (1,888) $ (1,109) $ (742)
========== ========== ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
PAGE F-5
CHANDLER (U.S.A.), INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
YEAR ENDED DECEMBER 31,
--------------------------------
2000 2001 2002
---------- ---------- ----------
OPERATING ACTIVITIES
Net loss ............................................................. $ (3,995) $ (1,103) $ (2,091)
Add (deduct):
Adjustments to reconcile net loss to cash provided by
(applied to) operating activities:
Realized investment gains, net ................................... (144) (2,654) (794)
Gain on sale of subsidiary ....................................... - - (671)
Net losses on sale of property and equipment ..................... 10 23 32
Amortization and depreciation .................................... 2,592 2,169 1,602
Provision for non-collection of premiums ......................... 179 305 444
Provision for non-collection of reinsurance recoverables ......... - 454 1,726
Net change in non-cash balances relating to operating activities:
Premiums receivable ............................................ 14,019 9,029 (268)
Reinsurance recoverable on paid losses ......................... (50) (9,396) (712)
Reinsurance recoverable on paid losses from related parties .... (614) 322 212
Reinsurance recoverable on unpaid losses ....................... (1,799) (2,689) (8,288)
Reinsurance recoverable on unpaid losses from related parties .. (4,537) 4,680 361
Prepaid reinsurance premiums ................................... (12,739) 5,809 7,688
Prepaid reinsurance premiums to related parties ................ (764) 2,265 (577)
Deferred policy acquisition costs .............................. 3,134 - (355)
Other assets ................................................... (3,006) 1,906 (1,349)
Unpaid losses and loss adjustment expenses ..................... 1,713 (15,417) 7,850
Unearned premiums .............................................. 6,429 (12,636) (6,402)
Policyholder deposits .......................................... (73) (462) (356)
Accrued taxes and other payables ............................... 146 (1,248) 307
Premiums payable ............................................... 10,494 (9,138) (5,864)
Premiums payable to related parties ............................ (343) - -
---------- ---------- ----------
Cash provided by (applied to) operating activities ............... 10,652 (27,781) (7,505)
---------- ---------- ----------
INVESTING ACTIVITIES
Unrestricted fixed maturities available for sale:
Purchases .......................................................... (39,653) (61,448) (23,163)
Sales .............................................................. 14,167 73,107 31,460
Maturities ......................................................... 24,391 14,297 4,339
Cost of property and equipment purchased ............................. (2,949) (1,356) (373)
Proceeds from sale of property and equipment ......................... 46 3,924 98
Net proceeds from sale of subsidiary ................................. - - 3,058
---------- ---------- ----------
Cash provided by (applied to) investing activities ............... (3,998) 28,524 15,419
---------- ---------- ----------
FINANCING ACTIVITIES
Payments and loans from related parties .............................. 1,200 4,032 3,249
Payments and loans to related parties ................................ (1,016) (12,629) (5,951)
---------- ---------- ----------
Cash provided by (applied to) financing activities ............... 184 (8,597) (2,702)
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents during the period ... 6,838 (7,854) 5,212
Cash and cash equivalents at beginning of period ..................... 5,140 11,978 4,124
---------- ---------- ----------
Cash and cash equivalents at end of period ........................... $ 11,978 $ 4,124 $ 9,336
========== ========== ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
PAGE F-6
CHANDLER (U.S.A.), INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(Amounts in thousands)
Accumulated
other Total
Common Paid-in Accumulated comprehensive shareholder's
stock surplus deficit income (loss) equity
----------- ----------- ----------- ------------- -------------
Balance, January 1, 2000 ................ $ 2 $ 60,584 $ (12,127) $ (1,720) $ 46,739
Net loss ................................ - - (3,995) - (3,995)
Change in unrealized loss on
investments available for
sale, net of income tax ............... - - - 2,107 2,107
----------- ----------- ----------- ------------- -------------
Balance, December 31, 2000 .............. 2 60,584 (16,122) 387 44,851
----------- ----------- ----------- ------------- -------------
Net loss ................................ - - (1,103) - (1,103)
Change in unrealized gain on
investments available for
sale, net of income tax ............... - - - (6) (6)
----------- ----------- ----------- ------------- -------------
Balance, December 31, 2001 .............. 2 60,584 (17,225) 381 43,742
----------- ----------- ----------- ------------- -------------
Net loss ................................ - - (2,091) - (2,091)
Change in unrealized gain on
investments available for
sale, net of income tax ............... - - - 1,349 1,349
----------- ----------- ----------- ------------- -------------
Balance, December 31, 2002 .............. $ 2 $ 60,584 $ (19,316) $ 1,730 $ 43,000
=========== =========== =========== ============= =============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
PAGE F-7
CHANDLER (U.S.A.), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
(a) BASIS OF PRESENTATION
Chandler (U.S.A.), Inc. ("Chandler USA") is a holding company
organized and domiciled in Oklahoma. Chandler USA's wholly owned
subsidiaries are engaged in various property and casualty insurance
operations. The insurance products offered by Chandler USA through
its subsidiary, National American Insurance Company ("NAICO"),
include property and casualty insurance coverage primarily for
businesses in various industries, political subdivisions and surety
bonds for small contractors in the United States of America ("U.S.").
The business is conducted through individual independent insurance
agencies and underwriting managers, primarily in the Southwest and
Midwest areas of the U.S.
Effective December 1, 2002, Chandler USA completed the sale of
its wholly owned subsidiary LaGere and Walkingstick Insurance Agency,
Inc. ("L&W"). L&W previously functioned as Chandler USA's agency
segment. All periods have been restated to reflect the results of
L&W as a discontinued operation. See Note 4 for more information on
the sale of L&W.
Chandler USA is wholly owned by Chandler Insurance (Barbados),
Ltd. ("Chandler Barbados") which, in turn, is wholly owned by
Chandler Insurance Company, Ltd. ("Chandler Insurance"), a Cayman
Islands company.
The consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the
United States of America ("GAAP"). The preparation of the financial
statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ significantly from
those estimates. Certain reclassifications of prior years have been
made to conform to the 2002 presentation.
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
Chandler USA and all wholly owned subsidiaries including NAICO. All
significant intercompany accounts and transactions have been
eliminated in consolidation.
(c) IMPAIRMENT OF LONG-LIVED ASSETS
Chandler USA periodically evaluates the carrying value of
long-lived assets to be held and used when changes in events and
circumstances warrant such a review. The carrying value of a
long-lived asset is considered impaired when the separately
identifiable anticipated undiscounted cash flow from such asset is
less than its carrying value. In that event, a loss is recognized
based on the amount by which the carrying value exceeds the fair
value of the long-lived asset. Fair value is determined primarily
using the anticipated cash flows discounted at a rate commensurate
with the risk involved. Losses on long-lived assets to be disposed
of are determined in a similar manner, except that fair values are
reduced for disposal costs.
(d) REVENUE RECOGNITION
Premiums are generally recognized as earned on a pro rata basis
over the policy period, which is in proportion to the insurance
protection provided. The portion of premiums that will be earned in
the future are deferred and reported as unearned premiums. Amounts
recorded for ceded reinsurance premiums are reported as prepaid
reinsurance premiums and amortized over the remaining contract period
in proportion to the amount of the insurance protection provided.
Commission revenues are generally recognized when coverage is
effective and premiums are billed.
PAGE F-8
(e) PREMIUMS RECEIVABLE
Premiums receivable are presented net of valuation allowances
for estimated uncollectible amounts. Chandler USA determines the
allowance for non-collection by regularly evaluating individual agent
accounts and balances due from insureds, considering their financial
condition and other appropriate factors. Such accounts are
considered past due based on contractual terms for the agent or
insured. Premiums receivable are written off when deemed
uncollectible. Recoveries of accounts previously written off are
recorded when received.
(f) UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
Losses and loss adjustment expenses are charged to income as
incurred. The reserve for unpaid losses and loss adjustment expenses
represents the accumulation of estimates for reported losses and
includes provisions for losses incurred but not reported based on
data available at this time. The methods of determining such
estimates and establishing resulting reserves are periodically
reviewed and updated, and adjustments therefrom are necessary to
maintain an adequate reserve for unpaid losses and loss adjustment
expenses. As more fully explained in Note 3, such estimates are
management's best estimates of the expected values. The actual
results may vary from these values because the evaluation of losses
is inherently subjective and susceptible to significant changing
factors.
(g) DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs that vary with and are primarily
related to the acquisition of new and renewal business (such as
premium taxes, agent commissions, commissions received from
reinsurers and a portion of other underwriting expenses) 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. Due to Chandler USA's purchase
of additional quota share reinsurance during 2000, Chandler USA's
deferred ceding commissions exceeded the deferred policy acquisition
costs related to direct and assumed business by approximately
$456,000 at December 31, 2001 and are recorded in accrued taxes and
other payables. Certain policy acquisition costs, such as
policyholder dividends, are expensed directly. NAICO expensed
$190,000, $143,000 and $105,000 during 2000, 2001 and 2002,
respectively, for dividends to policyholders primarily on
participating workers compensation policies. Gross written premiums
for participating policies were $1.6 million, $1.2 million and
$615,000 in 2000, 2001 and 2002, respectively.
(h) PROPERTY AND EQUIPMENT
Real estate and improvements and other property and equipment
are stated at cost and depreciated using the straight-line method
over their useful lives which range from 3 to 31 years. Property and
equipment consisted of the following at December 31:
2001 2002
---------- ----------
(In thousands)
Real estate and improvements .. $ 10,382 $ 10,411
Other property and equipment .. 10,039 8,870
---------- ----------
20,421 19,281
Accumulated depreciation ...... (9,599) (9,188)
---------- ----------
$ 10,822 $ 10,093
========== ==========
Depreciation expense from continuing operations was
approximately $1,094,000, $1,016,000 and $916,000 for 2000, 2001
and 2002, respectively.
PAGE F-9
(i) INTANGIBLE ASSETS
Intangible assets are stated at cost less accumulated
amortization. Prior to 2002, the cost of state insurance licenses
acquired was amortized over 40 years using the straight-line method.
Goodwill was amortized using the straight-line method over 15-17
years. Effective January 1, 2002, goodwill and the state insurance
licenses are no longer amortized but reviewed at least annually for
impairment. Chandler USA completed the required impairment tests
during 2002 and concluded that there has not been an impairment loss
since the fair values of the licenses and goodwill exceeded their
respective carrying values. The fair values were determined based on
the present value of projected future net cash flows. All of
Chandler USA's goodwill pertains to the agency operating segment and
was written off in 2002 following the sale of L&W. Intangible assets
included the following at December 31:
2001 2002
---------- ----------
(In thousands)
State insurance licenses ...... $ 5,991 $ 5,991
Accumulated amortization ...... (2,246) (2,246)
---------- ----------
$ 3,745 $ 3,745
========== ==========
Goodwill ...................... $ 10,726 $ -
Accumulated amortization ...... (8,376) -
---------- ----------
$ 2,350 $ -
========== ==========
(j) POLICYHOLDER DEPOSITS
NAICO requires certain policyholders to pay a deposit at
inception of coverage to secure payment of future premiums and
deductibles on claims incurred. It is expressly agreed between NAICO
and the policyholder that the funds will be used by NAICO only in the
event the policyholder fails to pay any premiums, deductibles or
other charges when due. NAICO has established a liability for these
deposits in an amount equal to that due the policyholders based on
insurance premiums reported as of the balance sheet date.
(k) INVESTMENTS
At the time of purchase, investments in debt securities that
Chandler USA has the positive intent and ability to hold to maturity
are classified as held to maturity and reported at amortized cost;
all other debt securities are reported at fair value. Investments
classified as trading are actively and frequently bought and sold
with the objective of generating income on short-term differences in
price. Realized and unrealized gains and losses on securities
classified as trading account assets are recognized in current
operations. Chandler USA has not classified any investments as
trading account assets. Securities not classified as held to
maturity or trading are classified as available for sale, with the
related unrealized gains and losses excluded from earnings and
reported net of deferred income tax as other comprehensive income
until realized. Realized gains and losses on sales of securities are
based on the specific identification method. Declines in the fair
value of investment securities below their carrying value that are
other than temporary are recognized in earnings.
(l) INCOME TAXES
Chandler USA uses an asset and liability approach for accounting
for income taxes. Deferred income taxes are recognized for the tax
consequences of temporary differences and carryforwards by applying
enacted tax rates applicable to future years to differences between
the financial statement amounts and the tax bases of existing assets
and liabilities. A valuation allowance is established if it is more
likely than not that some portion of the deferred tax asset will not
be realized.
(m) CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows,
Chandler USA considers all highly liquid investments with original
maturities of 14 days or less to be cash equivalents. For cash and
cash equivalents, the carrying amount is a reasonable estimate of
fair value.
PAGE F-10
(n) SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest and income taxes, and noncash
investing activities were as follows:
YEAR ENDED DECEMBER 31,
--------------------------------
2000 2001 2002
---------- ---------- ----------
(In thousands)
Cash payments (refunds) during the year for:
Interest ...................................... $ 2,255 $ 2,128 $ 2,122
Income taxes .................................. 587 (1,025) (1,241)
Transfers from (to) restricted securities, net .. $ 1,441 $ (146) $ (1,341)
(o) REINSURANCE
Management believes all of NAICO's reinsurance contracts with
reinsurers meet the criteria for risk transfer and the revenue and
cost recognition provisions in order to be accounted for as
reinsurance. As more fully explained in Note 11, reinsurance
contracts do not relieve NAICO from its obligation to policyholders.
In addition, failure of reinsurers to honor their obligations could
result in losses to Chandler USA.
(p) NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") periodically
issues new accounting standards in a continuing effort to improve
standards of financial accounting and reporting. Chandler USA has
reviewed the recently issued pronouncements and concluded that the
following new accounting standards are applicable to Chandler USA.
In June 2001, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS.
SFAS No. 142 supercedes Accounting Principles Board ("APB") Opinion
No. 17, INTANGIBLE ASSETS, and primarily addresses accounting for
goodwill and intangible assets subsequent to acquisition. Under
SFAS No. 142, goodwill and separately identified intangible assets
with indefinite lives will no longer be amortized but reviewed
annually (or more frequently if impairment indicators arise) for
impairment. Separately identified intangible assets not deemed to
have indefinite lives will continue to be amortized over their useful
lives. Chandler USA adopted SFAS No. 142 effective January 1, 2002.
Chandler USA completed the required impairment tests of its state
insurance licenses and goodwill during 2002 and concluded that there
has not been an impairment. The fair values were determined based
on the present value of projected future net cash flows. All of
Chandler USA's goodwill pertains to the agency operating segment and
was written off in the fourth quarter of 2002 following the sale of
L&W.
A reconciliation of the reported loss from continuing operations
to the adjusted loss from continuing operations had SFAS No. 142 been
applied as of January 1, 2000 follows:
YEAR ENDED DECEMBER 31,
--------------------------------
2000 2001 2002
---------- ---------- ----------
(In thousands)
Reported loss from continuing operations ..... $ (3,101) $ (481) $ (3,046)
Add back amortization:
Goodwill ................................... 379 - -
State insurance licenses ................... 150 150 -
---------- ---------- ----------
Adjusted loss from continuing operations ..... $ (2,572) $ (331) $ (3,046)
========== ========== ==========
PAGE F-11
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR
THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. SFAS No. 144
supercedes SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, and APB Opinion
No. 30, REPORTING THE RESULTS OF OPERATIONS - REPORTING THE EFFECTS
OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL
AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS. SFAS No. 144
establishes an accounting model based on SFAS No. 121 for long-lived
assets to be disposed of by sale, previously accounted for under APB
Opinion No. 30. Chandler USA adopted SFAS No. 144 effective January
1, 2002. The adoption of SFAS No. 144 did not have a material impact
on Chandler USA's consolidated financial condition, results of
operations or cash flows.
In June 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES. This standard requires
entities to recognize a liability, at its fair value, associated with
exit or disposal activities when they are incurred rather than at the
date of a commitment to an exit or disposal plan. Chandler USA
adopted SFAS No. 146 effective January 1, 2002. The adoption of
SFAS No. 146 did not have a material impact on Chandler USA's
consolidated financial statements, results of operations or cash
flows.
NOTE 2. INVESTMENTS AND INTEREST INCOME
Net interest income and realized investment gains from continuing
operations are summarized in the following table. These amounts are net of
investment expenses.
YEAR ENDED DECEMBER 31,
--------------------------------
2000 2001 2002
---------- ---------- ----------
(In thousands)
Interest on fixed-maturity investments ................. $ 5,330 $ 4,406 $ 2,755
Interest on cash equivalents ........................... 673 555 252
Interest on amounts due from related parties ........... - 371 380
Investment expenses .................................... (1,722) (1,329) (467)
---------- ---------- ----------
Interest income, net ................................. 4,281 4,003 2,920
Realized gains, net - fixed-maturity investments ....... 144 2,654 794
---------- ---------- ----------
$ 4,425 $ 6,657 $ 3,714
========== ========== ==========
Investment expenses include $1,365,000, $997,000 and $244,000 for the
years ended December 31, 2000, 2001 and 2002, respectively, in expense to
subsidize a premium finance program for certain insureds of NAICO with an
unaffiliated premium finance company.
The amortized cost of fixed maturities or cost of equity securities,
gross unrealized gains or losses, fair value and carrying value of investments
are as follows:
GROSS GROSS
UNREALIZED UNREALIZED FAIR CARRYING
DECEMBER 31, 2001 COST GAINS LOSSES VALUE VALUE
- ---------------------------------------- ---------- ---------- ---------- ---------- ----------
FIXED MATURITIES AVAILABLE FOR SALE: (In thousands)
U.S. Treasury securities and obligations
of U.S. government corporations
and agencies ......................... $ 43,443 $ 262 $ (391) $ 43,314 $ 43,314
Corporate obligations .................. 10,351 255 (80) 10,526 10,526
Public utilities ....................... 8,930 204 (51) 9,083 9,083
Mortgage-backed securities ............. 4,819 - (87) 4,732 4,732
---------- ---------- ---------- ---------- ----------
$ 67,543 $ 721 $ (609) $ 67,655 $ 67,655
========== ========== ========== ========== ==========
FIXED MATURITIES HELD TO MATURITY:
U.S. Treasury securities and obligations
of U.S. government corporations
and agencies ......................... $ 1,135 $ 104 $ - $ 1,239 $ 1,135
========== ========== ========== ========== ==========
EQUITY SECURITIES AVAILABLE FOR SALE:
Corporate stock ........................ $ - $ 464 $ - $ 464 $ 464
========== ========== ========== ========== ==========
PAGE F-12
GROSS GROSS
UNREALIZED UNREALIZED FAIR CARRYING
DECEMBER 31, 2002 COST GAINS LOSSES VALUE VALUE
- ---------------------------------------- ---------- ---------- ---------- ---------- ----------
FIXED MATURITIES AVAILABLE FOR SALE: (In thousands)
U.S. Treasury securities and obligations
of U.S. government corporations
and agencies ......................... $ 37,135 $ 1,348 $ - $ 38,483 $ 38,483
Corporate obligations .................. 11,173 357 (5) 11,525 11,525
Public utilities ....................... 6,791 258 (18) 7,031 7,031
---------- ---------- ---------- ---------- ----------
$ 55,099 $ 1,963 $ (23) $ 57,039 $ 57,039
========== ========== ========== ========== ==========
FIXED MATURITIES HELD TO MATURITY:
U.S. Treasury securities and obligations
of U.S. government corporations
and agencies ......................... $ 1,220 $ 69 $ - $ 1,289 $ 1,220
========== ========== ========== ========== ==========
EQUITY SECURITIES AVAILABLE FOR SALE:
Corporate stock ........................ $ - $ 681 $ - $ 681 $ 681
========== ========== ========== ========== ==========
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties. The maturities of investments in fixed
maturities at December 31, 2002 are shown below:
AVAILABLE FOR SALE HELD TO MATURITY
----------------------- -----------------------
AMORTIZED AMORTIZED
COST FAIR VALUE COST FAIR VALUE
----------- ----------- ----------- -----------
(In thousands)
Due in one year or less ...................... $ 7,181 $ 7,300 $ 1,220 $ 1,289
Due after one year through five years ........ 38,377 39,987 - -
Due after five years through ten years ....... 9,541 9,752 - -
Due after ten years .......................... - - - -
----------- ----------- ----------- -----------
$ 55,099 $ 57,039 $ 1,220 $ 1,289
=========== =========== =========== ===========
Realized gains and losses from sales of fixed maturities are shown below:
GROSS REALIZED GAINS GROSS REALIZED LOSSES
-------------------- ---------------------
(In thousands)
2000 .......... $ 204 $ 60
2001 .......... 2,654 -
2002 .......... 904 110
NAICO is required by several states to deposit securities with state
regulators as a condition of doing business in those states. Chandler USA
has deposited cash into a trust account as security related to certain
indemnification provisions related to its sale of L&W. As of December 31,
2001 and 2002, the carrying value of these deposits totaled approximately
$6.0 million and $8.0 million, respectively.
PAGE F-13
NOTE 3. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
NAICO provides a reserve for estimated losses (reported and unreported)
and loss adjustment expenses based on historical experience and payment
reporting patterns for the type of risk involved. These estimates are based on
data available at the time of the estimate and such estimates are periodically
reviewed by independent professional actuaries. Inherent in the estimates of
the ultimate liability for unpaid claims are expected trends in claim severity,
claim frequency and other factors that may vary as claims are settled. The
amount and uncertainty in the estimates are affected by such factors as the
amount of historical claims experience relative to the development period for
the type of risk, knowledge of the actual facts and circumstances, and the
amount of insurance risk retained. The ultimate cost of insurance claims can
be adversely affected by increased costs such as medical expenses, repair
expenses, costs of providing legal defense for policyholders, increased jury
awards and court decisions and legislation that define and expand insurance
coverage subsequent to the time that the insurance policy was priced and sold.
Salvage and subrogation recoverables are accrued using the "case basis" method
for large recoverables and statistical estimates based on historical experience
for smaller recoverables. Recoverable amounts deducted from NAICO's net
liability for unpaid losses and loss adjustment expenses were approximately
$5.0 million and $5.6 million at December 31, 2001 and 2002, respectively.
Although such estimates are management's best estimates of the expected values,
the ultimate liability for unpaid claims may vary from these values. NAICO
does not discount the liability for unpaid losses and loss adjustment expenses.
The following table sets forth a reconciliation of the beginning and
ending unpaid losses and loss adjustment expenses which are net of reinsurance
deductions.
YEAR ENDED DECEMBER 31,
--------------------------------
2000 2001 2002
---------- ---------- ----------
(In thousands)
Net balance before provision for uncollectible reinsurance
at beginning of year ................................................. $ 51,123 $ 46,588 $ 32,743
---------- ---------- ----------
Net losses and loss adjustment expenses incurred related to:
Current year ......................................................... 60,020 39,881 34,928
Prior years .......................................................... 4,979 12,669 15,784
---------- ---------- ----------
Total .............................................................. 64,999 52,550 50,712
---------- ---------- ----------
Net paid losses and loss adjustment expenses related to:
Current year ......................................................... (33,525) (22,596) (13,246)
Prior years .......................................................... (36,009) (43,799) (37,050)
---------- ---------- ----------
Total .............................................................. (69,534) (66,395) (50,296)
---------- ---------- ----------
Balance before provision for uncollectible reinsurance at end of year .. 46,588 32,743 33,159
Adjustments to reinsurance recoverables on
unpaid losses for uncollectible reinsurance .......................... 119 69 32
---------- ---------- ----------
Net balance at end of year ............................................. $ 46,707 $ 32,812 $ 33,191
========== ========== ==========
During 2001, NAICO experienced adverse loss development related to prior
accident years totaling $12.7 million due primarily to increased loss severity
in the standard property and casualty and political subdivisions programs. A
substantial part of this loss development was for workers compensation losses
in the 1999 accident year. NAICO's net retention for workers compensation
losses increased substantially in 1999 due to the rescission of certain
reinsurance treaties covering this line of business. Also contributing to the
adverse loss development were provisions for potentially uncollectible
reinsurance and deductibles of approximately $1.2 million during 2001, an
increase in losses in the surety bond program and approximately $878,000 in
losses for the runoff of the discontinued group accident and health program.
During 2002, NAICO experienced adverse loss development related to prior
accident years totaling $15.8 million primarily in the standard property and
casualty program including both liability lines and workers compensation. This
adverse development is generally the result of ongoing analysis of recent loss
development trends that reflect an increase in loss severity within the
1997-2000 accident years. The adverse loss development included approximately
$2.0 million for provisions for potentially uncollectible reinsurance and
deductibles.
PAGE F-14
NAICO does not ordinarily insure against environmental matters as that
term is commonly used. However, in some cases, regulatory filings made by
NAICO on behalf of an insured can make NAICO directly liable to the regulatory
authority for property damage which could include environmental pollution. In
those cases, NAICO ordinarily has recourse against the insured or the surety
bond principal for amounts paid. NAICO has insured certain trucking companies
and pest control operators that are required to provide proof of insurance
which in some cases assures payment for clean-up and remediation of damage
resulting from sudden and accidental release or discharge of contaminants or
other substances which may be classified as pollutants. NAICO also provides
surety bonds for construction contractors that use or have control of such
substances and for contractors that remove and dispose of asbestos as a part
of their contractual obligations. NAICO also insures independent oil and gas
producers that may purchase coverage for the escape of oil, saltwater, or
other substances which may be harmful to persons or property, but may not
generally be classified as pollutants. NAICO maintains claims records which
segregate this type of risk for the purpose of evaluating environmental risk
exposure. Based upon the nature of such lines of business with insureds of
NAICO, and current data regarding the limited severity and infrequency of such
matters, it appears that potential environmental risks are not a significant
portion of claims reserves and therefore would not likely have a material
impact, if any, on the consolidated financial condition, results of operations
or cash flows of Chandler USA.
At this time, NAICO has not received any claims related to the September
11, 2001 terrorist attacks on the World Trade Center and does not believe that
it has any significant exposure to these and related losses. While several of
NAICO's reinsurers did experience significant losses related to these attacks,
it currently does not appear that these losses will impair the reinsurers'
ability to pay claims.
NOTE 4. DISCONTINUED OPERATIONS
On December 20, 2002, Chandler USA completed the sale of its wholly owned
subsidiary L&W to Brown & Brown, Inc. for $3,247,000 in cash and a $361,000
note receivable that is due on or before December 31, 2003. Chandler USA
recorded an after-tax gain of $671,000 on the sale based on the minimum
purchase price for the transaction, after deducting Chandler USA's goodwill
related to L&W of $2,350,000, equity in L&W of $224,000 and approximately
$400,000 of expenses in connection with the sale. The gain on the sale may be
increased over the next three years depending on certain adjustments to the
purchase price as defined in the terms of the transaction, with a maximum
purchase price of $6.0 million. The transaction was effective December 1, 2002.
L&W is expected to continue to be a significant producer of business for
NAICO. Retail business produced by L&W and placed with NAICO constituted
approximately 8% of NAICO's direct premiums written and assumed in 2002.
Chandler USA will maintain certain wholesale operations related to NAICO's
school districts and trucking programs through its wholly owned subsidiary,
Chandler Insurance Managers, Inc. ("CIMI"), an underwriting manager that was
established in December 2002. L&W previously functioned as Chandler USA's
agency segment and is presented as discontinued operations.
Chandler USA agreed to indemnify Brown & Brown, Inc. for any breach of a
representation, warranty or covenant made in connection with the sale for a
period of three years, and has deposited cash in the amount of $500,000 into
a trust account for the benefit of Brown & Brown, Inc. as security. Prior to
completing the sale, L&W transferred its real estate to NAICO, and transferred
substantially all of its remaining assets and liabilities, primarily premiums
receivable and premiums payable, to Chandler USA through a shareholder dividend.
NOTE 5. DEBENTURES
On July 16, 1999, Chandler USA completed a public offering of $24 million
principal amount of senior debentures with a maturity date of July 16, 2014.
The debentures were priced at $1,000 each with an interest rate of 8.75% and
are redeemable by Chandler USA on or after July 16, 2009 without penalty or
premium. As of December 31, 2002, Chandler USA has capitalized $1.3 million
related to debt issuance costs for the debentures. These costs are being
amortized as interest expense over the term of the debentures. Chandler USA's
subsidiaries and affiliates are not obligated by the debentures. Accordingly,
the debentures are effectively subordinated to all existing and future
liabilities and obligations of Chandler USA's existing and future subsidiaries.
The indenture governing the debentures contains certain restrictive covenants,
including covenants that limit subsidiary debt, issuance or sale of subsidiary
stock, incurring of liens, sale-leaseback transactions for a period of more
than three years, mergers, consolidations and sales of assets. At December 31,
2002, Chandler USA was in compliance with all covenants.
PAGE F-15
NOTE 6. SHAREHOLDER'S EQUITY
CAPITAL STOCK
In addition to the regulatory oversight of NAICO by the Oklahoma
Department of Insurance, Chandler Insurance and Chandler USA are also subject
to regulation under the insurance laws of Oklahoma (the "Oklahoma Insurance
Code"). In addition to various reporting requirements imposed on Chandler
Insurance and Chandler USA, the Oklahoma Insurance Code requires any person
who seeks to acquire or exercise control over NAICO (which is presumed to
exist if any person owns 10% or more of Chandler Insurance's or Chandler
USA's outstanding voting stock) to file and obtain approval of certain
applications with the Oklahoma Department of Insurance regarding their
proposed ownership of such shares.
STATUTORY FINANCIAL INFORMATION AND MINIMUM CAPITAL REQUIREMENTS
NAICO is required to file financial statements with state regulatory
authorities prepared on a statutory basis which differs from GAAP. Statutory
net income (loss) and statutory capital and surplus of NAICO are as follows:
2000 2001 2002
---------- ---------- ----------
(In thousands)
Statutory net income (loss) ............... $ 2,915 $ 3,472 $ (405)
Statutory capital and surplus ............. $ 48,550 $ 49,060 $ 44,073
In 1998, the National Association of Insurance Commissioners ("NAIC")
adopted codified statutory accounting principles ("Codification").
Codification changed, to some extent, prescribed statutory accounting
practices and resulted in changes to the accounting practices that NAICO uses
to prepare its statutory financial statements. The State of Oklahoma adopted
Codification to be effective January 1, 2001. The adoption of Codification
increased NAICO's statutory policyholders' surplus by $3.5 million as of
January 1, 2001 which resulted primarily from the recognition of a net
deferred tax asset.
Under Codification, office equipment, furniture and other such property
are not admitted assets. Prior to 2002, the Oklahoma Insurance Code considered
office equipment, furniture and other such property constituting less than 3%
of otherwise admitted assets to be admissible. This prescribed accounting
practice increased NAICO's statutory capital and surplus by $1.1 million at
December 31, 2001. During 2002, the Oklahoma Insurance Code was modified to
exclude office equipment, furniture and other such property from admitted
assets and these have been deducted from NAICO's statutory capital and surplus
as of December 31, 2002. There is no difference between NAICO's statutory net
income under Codification and practices prescribed by the Oklahoma Insurance
Code.
The Oklahoma Insurance Commissioner has the right to permit other specific
practices that deviate from prescribed practices. NAICO does not have any such
permitted practices.
The NAIC has adopted risk-based capital ("RBC") standards for domestic
property and casualty insurance companies. The RBC standards are designed to
assist insurance regulators in analytically determining a level of capital and
surplus that would be sufficient to withstand reasonably foreseeable adverse
events associated with underwriting risk, investment risk, credit risk and
loss reserve risk. NAICO is subject to the RBC standards. Based on available
information, management believes NAICO complied with the RBC standards at
December 31, 2001 and 2002.
At periodic intervals, various insurance regulatory authorities routinely
examine the required statutory financial statements of NAICO as part of their
legally prescribed oversight of the insurance industry. Based on these
examinations, the regulators can direct such financial statements to be
adjusted in accordance with their findings.
DIVIDEND RESTRICTIONS
The amount of cash shareholder dividends that NAICO can pay to Chandler
USA within any one year without the approval of the Oklahoma Department of
Insurance is generally limited to the greater of (i) statutory net income
excluding realized capital gains for the preceding year, or (ii) 10% of
statutory surplus as regards policyholders as of the preceding December 31
with such amount not to exceed NAICO's statutory earned surplus. Based on
this criteria the maximum shareholder dividend NAICO may pay in 2003 without
the approval of the Oklahoma Department of Insurance is approximately $4.4
million. NAICO paid cash shareholder dividends totaling $2.5 million, $7.0
million and $3.5 million to Chandler USA in 2000, 2001 and 2002, respectively.
The Oklahoma Department of Insurance approved the payment of the extraordinary
dividend by NAICO to Chandler USA in 2001.
PAGE F-16
The future payment of shareholder dividends also depends upon the
earnings, financial position and cash requirements of Chandler USA, as well
as regulatory limitations and such other factors as the board of directors may
deem relevant.
NAICO is subject to regulations which restrict its ability to pay
dividends to policyholders. The maximum amount of available policyholder
dividends is limited to statutory earned surplus (approximately $11.4 million
as of December 31, 2002). NAICO paid approximately $294,000, $183,000 and
$120,000 in policyholder dividends during 2000, 2001 and 2002, respectively.
NOTE 7. INCOME TAXES
Chandler USA and its wholly owned subsidiaries file a consolidated U.S.
Federal income tax return. The income taxes reflected in the accompanying
consolidated statements of operations differ from those expected using U.S.
Federal enacted income tax rates as noted by the following:
2000 2001 2002
---------- ---------- ----------
CONTINUING OPERATIONS: (In thousands)
Computed income tax benefit at 34% ................ $ (1,512) $ (158) $ (1,607)
Increase (decrease) in income taxes resulting from:
Amortization of licenses and other intangibles .. 180 51 -
Interest income on tax exempt securities ........ (147) (56) -
Utilization of capital loss ..................... - - (270)
Other, net ...................................... 132 179 197
---------- ---------- ----------
Federal income tax provision (benefit) ............ $ (1,347) $ 16 $ (1,680)
========== ========== ==========
DISCONTINUED OPERATIONS:
Computed income tax provision (benefit) at 34% .... $ (348) $ (211) $ 149
Increase (decrease) in income taxes resulting from:
Amortization of goodwill ........................ 208 208 -
Other, net ...................................... 11 5 6
---------- ---------- ----------
Federal income tax provision (benefit) ............ $ (129) $ 2 $ 155
========== ========== ==========
The sale of L&W resulted in a capital loss for tax purposes as Chandler USA's
tax basis in L&W exceeded the consideration received from the sale.
Accordingly, the gain on the sale of $671,000 that was recorded in the
consolidated statement of operations was not reduced for income taxes.
U.S. Federal income tax provision (benefit) from continuing operations
consists of:
CURRENT DEFERRED TOTAL
---------- ---------- ----------
(In thousands)
2000 .............................................. $ (1,160) $ (187) $ (1,347)
2001 .............................................. (1,006) 1,022 16
2002 .............................................. (2,033) 353 (1,680)
Deferred income tax provision (benefit) from continuing operations
relating to temporary differences includes the following components:
2000 2001 2002
---------- ---------- ----------
(In thousands)
Loss reserve discounts ............................ $ 486 $ 754 $ 152
Unearned premiums ................................. 481 256 (6)
Deferred policy acquisition costs ................. (1,070) (151) 276
Reserve for uncollectible premiums receivable
and reinsurance recoverables .................... (18) 161 (58)
Depreciation and lease expense .................... (46) (52) 126
Other ............................................. (20) 54 (137)
---------- ---------- ----------
$ (187) $ 1,022 $ 353
========== ========== ==========
PAGE F-17
The tax effect of temporary differences between the consolidated financial
statement carrying amounts and tax bases of assets and liabilities that give
rise to significant portions of the net deferred tax assets, which are included
in other assets, at December 31, relate to the following:
2001 2002
---------- ----------
Deferred tax assets:
Loss reserve discounts ..................................... $ 2,202 $ 2,050
Unearned premiums .......................................... 1,861 1,867
Reserve for uncollectible premiums receivable .............. 100 84
Compensated absences ....................................... 193 195
Net operating loss carryforwards - federal ................. - 1,887
Net operating loss carryforwards - state ................... 2,750 2,987
Net capital loss carryforward .............................. - 1,399
Other ...................................................... 516 125
Valuation allowance ........................................ (2,750) (4,386)
---------- ----------
Total deferred tax assets .................................... 4,872 6,208
---------- ----------
Deferred tax liabilities:
Depreciation and lease expense ............................. 716 842
Amortization of discount on fixed maturity investments ..... 212 222
Unrealized gain on investments available for sale .......... 197 891
Deferred policy acquisition costs .......................... (155) 121
Other ...................................................... 372 132
---------- ----------
Total deferred tax liabilities ............................... 1,342 2,208
---------- ----------
Net deferred tax assets ...................................... $ 3,530 $ 4,000
========== ==========
At December 31, 2002, Chandler USA had a net operating loss carryforward
available for U.S. Federal income taxes of $5.5 million which expires in 2022.
In addition, Chandler USA, at December 31, 2002, had net operating loss
carryforwards available for Oklahoma state tax purposes totaling approximately
$49.8 million which expire in the years 2003 through 2022. Also at December
31, 2002, Chandler USA had a capital loss carryforward for U.S. Federal income
taxes of $4.1 million which expires in 2007. A valuation allowance has been
provided for the tax effect of the state net operating loss and net capital
loss carryforwards since realization of such amounts is not considered more
likely than not.
NOTE 8. EMPLOYEE BENEFITS
Chandler USA and its subsidiaries participate in a defined contribution
retirement plan established under Section 401(k) of the Internal Revenue Code.
All full time employees who have completed one year of service and attained
age 21 may elect to participate in the 401(k) plan. Participants may
contribute up to 15% of compensation, subject to certain limitations.
Chandler USA matches 50% of the first $2,000, 40% of the next $3,000, 30% of
the next $3,000 and 25% of the remaining employee contributions up to a
maximum employer contribution of $4,100 per employee per year. In addition,
Chandler USA may make additional annual contributions to the 401(k) plan at
its discretion. Chandler USA's expense for 401(k) plan contributions from
continuing operations was $264,000, $272,000 and $282,000 for 2000, 2001 and
2002, respectively.
NOTE 9. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS 107,
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS. The estimated fair
value amounts have been determined by Chandler USA, using available market
information and appropriate valuation methodologies. However, considerable
judgment is necessarily required in interpreting market data to develop the
estimates of fair value. Accordingly, the estimates of fair values presented
herein are not necessarily indicative of the amounts that Chandler USA could
realize in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the estimated
fair value amounts.
PAGE F-18
A number of Chandler USA's significant assets (including deferred policy
acquisition costs, property and equipment, reinsurance recoverables, prepaid
reinsurance premiums, state insurance licenses and goodwill) and liabilities
(including unpaid losses and loss adjustment expenses and unearned premiums)
are not considered financial instruments. Based on the short term nature or
other relevant characteristics, Chandler USA has concluded that the carrying
value of other assets and liabilities considered financial instruments, such
as cash equivalents, premiums receivable, policyholder deposits, accrued taxes
and other payables, and premiums payable, approximates their fair value as of
December 31, 2001 and 2002. The estimated fair values of Chandler USA's
fixed-maturity and equity security investments are disclosed at Note 2. At
December 31, 2002, the fair value of Chandler USA's debentures was estimated
to be $23 million based on quoted market prices for similar securities.
Chandler USA's debentures have not historically traded regularly, and
settlement at the reported fair value may not be possible. The debentures
are redeemable by Chandler USA on or after July 16, 2009 without penalty or
premium.
NOTE 10. LITIGATION
Chandler Insurance and certain of its subsidiaries and affiliates,
including Chandler USA, were previously involved in various matters of
litigation with CenTra, Inc. ("CenTra"). During the CenTra litigation, a
Nebraska Federal Court had previously ordered CenTra to divest all shares of
Chandler Insurance stock owned or controlled by it or its affiliates. In
December 1999, Chandler Insurance acquired 1,989,200 shares of its own stock
in exchange for payment of $15,204,758 to CenTra and its affiliates. During
November 2000, Chandler Insurance acquired the remaining 1,142,625 of its
common shares in exchange for payment of $6,882,500 to CenTra and its
affiliates pursuant to a ruling of the U.S. District Court for the Western
District of Oklahoma ("Oklahoma Court") in April 1997, which was upheld by
the 10th Circuit Court of Appeals in September 2000. Following the execution
of the judgment of the Nebraska Federal Court, CenTra filed pleadings in the
Oklahoma Court claiming entitlement to post-judgment interest on the amounts
Chandler Insurance was ordered to pay in exchange for the transfer of the
shares. CenTra claimed that it was entitled to post-judgment interest
amounting to approximately $2.5 million. The Oklahoma Court denied CenTra's
claim for post-judgment interest in August 2002.
In the CenTra litigation, certain officers and directors of Chandler USA
and Chandler Insurance were named as defendants. In accordance with its
Articles of Association, Chandler Insurance and its subsidiaries have 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. These expenses
together with certain other expenses may be recovered from Chandler Insurance's
director and officer liability insurance policy (the "D&O Insurer"). As a
result of various events in 1995, 1996 and 1997, Chandler Barbados and
Chandler USA recorded estimated recoveries of costs from its D&O Insurer
totaling $3,456,000 and $1,044,000, respectively, for reimbursable amounts
previously paid that relate to allowable defense and litigation costs for such
parties. Chandler Barbados and Chandler USA received payment for a 1995 claim
during 1996 in the amount of $636,000 and $159,000, respectively. The balance
of $2,820,000 and $885,000 is included in other assets in Chandler Barbados'
and Chandler USA's respective balance sheets. Chandler Insurance and its
subsidiaries contend they are entitled to a total of $5 million under the
applicable insurance policy to the extent they have advanced reimbursable
expenses. The D&O Insurer contends that certain policy provisions exclude
coverage for these claims. On August 22, 2001, Chandler Insurance and its
subsidiaries, including Chandler USA, filed an action in the State District
Court in Oklahoma City, Oklahoma ("Oklahoma State Court") alleging that the
director and officer liability insurance policies should be rescinded and
seeking repayment of more than $5 million in premiums they previously paid.
Chandler Insurance and its subsidiaries are currently involved in litigation
with the insurer for payment of the policy balance or rescission and repayment
of premiums previously paid. The litigation is pending in the Oklahoma State
Court. The case is still in the early pleading stages and Chandler USA cannot
predict the date of resolution or the outcome of this case. Chandler Insurance
and its subsidiaries may or may not recover the remaining policy limits or the
previously paid premiums and could incur significant costs in resolving this
matter.
Transamerica Occidental Life Insurance Company ("Transamerica") reinsured
NAICO for certain workers compensation risks during 1989, 1990 and 1991.
Beginning in 1996, Transamerica refused to pay NAICO for balances that it owed
under the reinsurance treaties. Transamerica owed NAICO approximately $1.5
million for reinsurance recoverables on paid losses and loss adjustment
expenses as of December 31, 2002. NAICO is currently engaged in arbitration in
order to enforce the terms of the reinsurance treaties.
Chandler USA and its subsidiaries are not parties to any other material
litigation other than as is routinely encountered in their respective business
activities. While the outcome of these matters cannot be predicted with
certainty, Chandler USA does not expect these matters to have a material
adverse effect on its financial condition, results of operations or cash flows.
PAGE F-19
NOTE 11. COMMITMENTS AND CONTINGENCIES
REINSURANCE
In the ordinary course of business, NAICO cedes insurance to other
insurers and reinsurers under various reinsurance treaties that cover
individual risks (facultative reinsurance) or entire classes of business
(treaty reinsurance). Reinsurance provides greater diversification of
business written and also reduces NAICO's exposure arising from high limits
of liability or from hazards of an unusual nature. Amounts recoverable from
reinsurers are estimated in a manner consistent with the claim liability
associated with the reinsured policies. In formulating its reinsurance
programs, NAICO considers numerous factors, including the financial stability
of the reinsurer, ability to provide sufficient collateral (if required),
reinsurance coverage offered and price.
NAICO has structured separate reinsurance programs for construction surety
bonds, property (including inland marine), workers compensation, casualty
(including automobile liability, general liability, umbrella liability and
related professional liability) and automobile physical damage. Chandler
Barbados reinsures NAICO for a portion of the risk on the construction surety
bonds, workers compensation and casualty reinsurance programs. A portion of
the risk that Chandler Barbados assumes from NAICO is reinsured by Chandler
Insurance.
In addition, NAICO purchases catastrophe protection to limit its retention
for single loss occurrences involving multiple policies and/or policyholders,
such as floods, winds and severe storms. NAICO also purchases facultative
reinsurance when it writes a risk with limits of liability exceeding the
maximum limits of its treaties or when it otherwise considers such action
appropriate.
Treaty reinsurance may be ceded under treaties on both a pro rata or
proportional basis (where the reinsurer shares proportionately in premiums and
losses) and an excess of loss basis (where only losses above a specific amount
are reinsured). The availability, costs and limits of reinsurance purchased
can vary from year to year based upon prevailing market conditions, reinsurers'
underwriting results and NAICO's desired risk retention levels. A majority of
NAICO's reinsurance programs renew on January 1, April 1 or July 1 of each
year. NAICO renewed all January 1, 2003 reinsurance programs. At the present
time, NAICO expects to renew the reinsurance programs that renew on April 1 or
July 1, 2003, as applicable.
NAICO periodically reviews certain prospective single year reinsurance
treaties, subject to commutation provisions therein, to determine if it is
advantageous to assume the estimated loss exposure on expired insurance
policies covered by such treaties in exchange for return premiums. Commutation
of such reinsurance treaties will be determined in future periods based on
timely review of all available data. NAICO reviews the historical results for
reinsurance contracts with similar commutation provisions and accrues for such
commutations where a commutation election is considered probable, which
resulted in a decrease in net premiums earned of $1,094,000 in 2000. NAICO did
not accrue for any commutations during 2001 or 2002.
Reliance Insurance Company ("Reliance") reinsured NAICO for certain
workers compensation risks during 1998. At December 31, 2002, NAICO had
reinsurance recoverables from Reliance for paid and unpaid losses of
approximately $2.8 million. During October 2001, the Commonwealth of
Pennsylvania placed Reliance in liquidation. At this time, NAICO is unable
to determine the amount of its reinsurance recoverables from Reliance that will
ultimately be collected and has fully reserved the carrying value of such
amounts as of December 31, 2002.
Reinsurance contracts do not relieve an insurer from its obligation to
policyholders. Failure of reinsurers to honor their obligations could result
in losses to Chandler USA; consequently, adjustments to ceded losses and loss
adjustment expenses are made for amounts deemed uncollectible. NAICO did not
incur any charges for uncollectible reinsurance recoverables from unaffiliated
reinsurers in 2000. During 2001 and 2002, NAICO incurred charges of $454,000
and $1.7 million, respectively, in adjustments to ceded losses and loss
adjustment expenses for amounts deemed uncollectible.
The effect of reinsurance on premiums written and earned was as follows:
2000 2001 2002
---------------------- ---------------------- ----------------------
WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED
----------- ---------- ----------- ---------- ----------- ----------
(In thousands)
Direct ......... $ 197,041 $ 190,627 $ 158,741 $ 171,378 $ 139,876 $ 146,307
Assumed ........ 155 140 223 223 286 256
Ceded .......... (118,751) (105,248) (93,541) (101,616) (72,495) (79,606)
----------- ---------- ----------- ---------- ----------- ----------
Net premiums ... $ 78,445 $ 85,519 $ 65,423 $ 69,985 $ 67,667 $ 66,957
=========== ========== =========== ========== =========== ==========
PAGE F-20
Losses and loss adjustment expenses are reported net of the effect of
reinsurance recoveries and recoverables in the consolidated statements of
operations. Ceded losses and loss adjustment expenses were $73.1 million,
$99.9 million and $87.7 million for 2000, 2001 and 2002, respectively.
SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
NAICO conducts its business through individual independent insurance
agencies and underwriting managers. Certain of these underwriting managers
have provided collateral to NAICO to secure a portion of the premiums
receivable. Substantially all of the principal shareholders of the independent
agencies and underwriting managers have provided personal guarantees for
payment of premiums to NAICO. NAICO also requires certain policyholders to pay
a deposit at the time of inception of coverage to secure payment of future
premiums or other policy related obligations. Receivables under installment
plans do not exceed the corresponding liability for unearned premiums. Total
consolidated premiums receivable at December 31, 2001 and 2002 were $24.2
million and $24.0 million, respectively. Receivables for deductibles, in most
cases, are secured by cash deposits and letters of credit. At December 31,
2002, NAICO maintained custody of such letters of credit securing these and
other transactions totaling approximately $14.5 million, which is a reasonable
estimate of their fair value. These letters of credit are not reflected in the
accompanying consolidated financial statements. There were no unaffiliated
independent insurance agents that produced 10% or more of NAICO's direct
written and assumed premiums during 2000, 2001 or 2002.
NAICO's bail bond underwriting manager was responsible for gross written
premiums of $2.5 million, $2.3 million and $2.3 million during 2000, 2001 and
2002, respectively.
Approximately $25.9 million, or 26% of NAICO's reinsurance recoverables
and prepaid reinsurance premiums at December 31, 2002 are collateralized by
premiums payable to the reinsurers, securities pledged in trust or letters
of credit for the benefit of NAICO. Chandler USA believes the above value of
such collateral is a reasonable estimate of their fair value. NAICO's
reinsurance contracts include provisions for offsets against premiums owed to
the reinsurers.
The following table sets forth certain information related to NAICO's five
largest reinsurers determined on the basis of net reinsurance recoverables as
of December 31, 2002.
CEDED REINSURANCE
NET PREMIUMS FOR A.M. BEST
REINSURANCE THE YEAR ENDED COMPANY
NAME OF REINSURER RECOVERABLE (1) DECEMBER 31, 2002 RATING
- ---------------------------------------------------------- --------------- ------------------- ---------
(Dollars in thousands)
Swiss Reinsurance America Corporation .................... $ 34,661 $ 10,264 A++
Chandler Barbados ........................................ 17,798 24,115 -(2)
GE Reinsurance Corporation ............................... 11,090 1,958 A+
Employers Reinsurance Corporation ........................ 6,869 10,151 A+
Red River Reinsurance, Ltd. .............................. 5,798 5,674 -(3)
--------------- -------------------
Top five reinsurers .................................... $ 76,216 $ 52,162
=============== ===================
All reinsurers ......................................... $ 98,575 $ 72,495
=============== ===================
Percentage of total represented by top five reinsurers ... 77% 72%
- ----------------------------------------------------------
(1) Includes losses and loss adjustment expenses paid and outstanding, unpaid losses and loss adjustment
expenses and prepaid reinsurance premiums recoverable from reinsurers as of December 31, 2002.
(2) Chandler Barbados owns 100% of the common stock of Chandler USA, which in turn owns 100% of the common
stock of NAICO. Although Chandler Barbados is not subject to the minimum capital, audit, reporting and
other requirements imposed by regulation upon United States reinsurance companies, as a foreign reinsurer,
it is required to secure its reinsurance obligations by depositing acceptable securities in trust for
NAICO's benefit. At December 31, 2002, Chandler Barbados had cash and investments with a fair value of
$18.7 million deposited in a trust account for the benefit of NAICO.
(3) Red River Reinsurance, Ltd. ("Red River") is required to secure its reinsurance obligations by depositing
acceptable securities in trust for NAICO's benefit. At December 31, 2002, Red River's reinsurance
recoverables were collateralized by cash and investments with a fair value of $5.9 million deposited in a
trust account for the benefit of NAICO and by premiums payable to Red River of approximately $766,000.
PAGE F-21
OTHER
See Note 10 regarding contingencies relating to litigation matters.
Chandler USA has an employment agreement with W. Brent LaGere, Chairman
of the Board and Chief Executive Officer of Chandler USA and its subsidiaries.
Under this agreement, Mr. LaGere's base compensation is established at not
less than $250,000 per year. In the event that Mr. LaGere is terminated
without cause, as defined in the agreement, he is entitled to receive his base
compensation for the remainder of the term of the agreement, but in no event
for more than 60 months. The agreement will terminate upon Mr. LaGere
attaining age 70, unless earlier terminated by Chandler USA for cause. In
addition to his base compensation, Mr. LaGere is eligible to receive certain
benefits and bonuses from Chandler USA and its subsidiaries.
Chandler USA has an employment agreement with Brenda B. Watson, an
executive officer of NAICO and L&W. Under this agreement, Ms. Watson's base
compensation is established at not less than $125,000 per year. The agreement
terminates on December 31, 2003, unless earlier terminated by Chandler USA for
cause, as defined in the agreement. In the event that Ms. Watson is terminated
without cause, she is entitled to receive her base compensation through the
termination date. In addition to her base compensation, Ms. Watson is eligible
to receive certain benefits and to participate in an incentive bonus plan
offered by Chandler USA and its subsidiaries.
In addition, certain executives are eligible to receive bonuses based upon
various factors.
NAICO is subject to a variety of assessments related to insurance
activities, including those by state guaranty funds and workers compensation
second-injury funds. The amounts and timing of such assessments are beyond
the control of NAICO. NAICO provides for these charges on a current basis by
applying historical factors to premiums earned. Actual results may vary from
these values and adjustments therefrom are necessary to maintain an adequate
reserve for these assessments. The reserve for unpaid assessments was
approximately $921,000 and $1,049,000 at December 31, 2001 and 2002,
respectively. In certain cases, NAICO is permitted to recover a portion of
its assessments generally as a reduction to premium taxes paid to certain
states. NAICO has recorded receivables in the amount that it expects to
recover of approximately $798,000 and $1,808,000 at December 31, 2001 and
2002, respectively. NAICO may receive additional guaranty fund assessments in
the future related to Reliance or other insolvent insurance companies. At
this time, NAICO is unable to estimate the amount of such assessments.
At December 31, 2002, Chandler USA's subsidiaries were committed under
noncancellable operating leases for certain equipment and office space. Rental
payments under these leases for continuing operations were $541,000, $1,084,000
and $1,086,000 in 2000, 2001 and 2002, respectively. Future minimum lease
payments are as follows:
(In thousands)
2003 .......................... $ 836
2004 .......................... 272
2005 .......................... 67
2006 .......................... 20
--------------
$ 1,195
==============
During March 2001, Chandler USA entered into a $3.8 million sale and
leaseback transaction for certain owned equipment. Chandler USA agreed to
lease the equipment for three years with monthly rental installments equal
to the sum of (i) $22,167 plus (ii) interest on the unpaid lease balance at a
floating interest rate of 1% over Chase Manhattan Bank Prime, which was 4.25%
at December 31, 2002. The sale and leaseback transaction resulted in a
reduction of property and equipment of $1.9 million and a deferred gain of
$2.0 million which is included in accrued taxes and other payables. Chandler
USA has exercised its option to repurchase the equipment at the end of the
lease for approximately $3.0 million and will amortize the deferred gain into
income over the final year of the lease.
NOTE 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Chandler USA leases and has made certain improvements to a rural property
in which certain directors and/or officers of Chandler USA own interests.
Under the lease, no cash rental is paid, but a subsidiary of Chandler USA
drilled a water well on the property and maintains certain structures it
regularly uses. This property provides recreational activities for the
entertainment of customers and business associates of Chandler USA's
subsidiaries. Chandler USA incurred approximately $265,000, $263,000 and
$255,000 in expenses associated with this property during 2000, 2001 and 2002,
respectively, including $9,000, $25,000 and $18,000 paid to Davenport Farms
for reimbursement of certain expenses, such as utility and similar expenses,
for the years 2000, 2001 and 2002, respectively.
PAGE F-22
During 2001, Chandler USA and Chandler Barbados entered into an
Intercompany Credit Agreement (the "Credit Agreement") covering intercompany
loans between the parties. The Credit Agreement requires interest to be paid
at the prime interest rate published in The Wall Street Journal each month,
and balances owed by either party are payable at any time upon demand. At
December 31, 2001 and 2002, Chandler Barbados owed approximately $7.9 million
and $10.6 million, respectively, to Chandler USA, and Chandler USA earned
$371,000 and $380,000 in interest income from Chandler Barbados during 2001
and 2002, respectively.
NOTE 13. SEGMENT INFORMATION
Chandler USA has one reportable operating segment for property and
casualty insurance. In December 2002, Chandler USA sold L&W, which had
previously been reported as Chandler USA's agency segment. The agency segment
and certain items related to L&W have been restated and reported as
discontinued operations for all periods presented.
The insurance products reported in the property and casualty segment are
underwritten by NAICO and are marketed through independent insurance agencies.
NAICO underwrites various lines of property and casualty insurance, including
surety bonds and workers compensation insurance. NAICO's main areas of
concentration include the construction, manufacturing, oil and gas, wholesale,
service and retail industries along with political subdivisions. The property
and casualty segment operates primarily in Oklahoma and Texas, and other
surrounding states. Oklahoma accounted for approximately 47%, 49% and 53% of
gross written premiums in 2000, 2001 and 2002, respectively, while Texas
accounted for approximately 42%, 41% and 37% of gross written premiums during
the same years. Management evaluates the property and casualty segment's
performance on the basis of growth in gross written premiums and income before
income taxes.
Chandler USA accounts for intercompany sales and transactions as if they
were to third parties and attempts to set fees consistent with those that would
apply in arm's length transactions with a non-affiliate. There can be no
assurance the rates charged reflect those that would have been agreed upon
following an arm's length negotiation.
Net premiums earned and losses and loss adjustment expenses within the
property and casualty segment can be identified to Chandler USA designated
insurance programs. Chandler USA's chief operating decision makers review net
premiums earned and losses and loss adjustment expenses in assessing the
performance of an insurance program. In addition, Chandler USA's chief
operating decision makers consider many other factors such as the lines of
business offered within an insurance program and the states in which the
insurance programs are offered. Certain discrete financial information is not
readily available by insurance program, including assets, interest income, and
investment gains or losses, allocated to each insurance program. Chandler USA
does not consider its insurance programs to be reportable segments, however,
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.
YEAR ENDED DECEMBER 31,
--------------------------------
INSURANCE PROGRAM 2000 2001 2002
- ---------------------------------------------------- ---------- ---------- ----------
(In thousands)
NET PREMIUMS EARNED
Standard property and casualty ..................... $ 62,823 $ 53,130 $ 49,570
Political subdivisions ............................. 12,826 12,534 13,829
Surety bonds ....................................... 6,467 4,125 3,310
Other (1) .......................................... 3,403 196 248
---------- ---------- ----------
$ 85,519 $ 69,985 $ 66,957
========== ========== ==========
LOSSES AND LOSS ADJUSTMENT EXPENSES
Standard property and casualty ..................... $ 48,140 $ 37,707 $ 40,194
Political subdivisions ............................. 10,339 11,420 7,726
Surety bonds ....................................... 2,270 2,339 1,967
Other (1) .......................................... 4,250 1,084 825
---------- ---------- ----------
$ 64,999 $ 52,550 $ 50,712
========== ========== ==========
- --------------------------------------
(1) This category is comprised primarily of the run-off of discontinued programs and
NAICO's participation in various mandatory workers compensation pools and assigned risks.
PAGE F-23
NOTE 14. GOING PRIVATE TRANSACTION - PARENT COMPANY
A special meeting of shareholders of Chandler USA's indirect parent,
Chandler Insurance, was held on March 5, 2001. Three proposals which
constitute a going private transaction were approved at the meeting, and
Chandler Insurance completed the going private transaction in March 2001.
Chandler Insurance financed the going private transaction through (i) a
$2.4 million sale of Chandler Insurance Class A Common Shares to Messrs. LaGere
and Paden, (ii) a $10.7 million intercompany loan from Chandler Barbados, and
(iii) proceeds of approximately $735,000 from the exercise of outstanding
Chandler Insurance options. Chandler USA loaned approximately $10.7 million to
Chandler Barbados. Chandler USA's intercompany loan to Chandler Barbados was
financed by a $3.8 million sale and leaseback transaction for certain equipment
owned by Chandler USA and a $7.0 million dividend declared and paid by NAICO.
NOTE 15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of the unaudited quarterly operating results during 2001 and
2002 follows:
First Second Third Fourth Total
quarter quarter quarter quarter year
--------- --------- --------- --------- ---------
2001
- --------------------------------------------
Net premiums earned ........................ $ 18,876 $ 18,067 $ 17,406 $ 15,636 $ 69,985
Interest income, net ....................... 1,148 881 858 1,116 4,003
Realized investment gains, net ............. 616 266 712 1,060 2,654
Income (loss) before income taxes .......... 370 (353) 397 (879) (465)
Income (loss) from continuing operations ... 200 (257) 217 (641) (481)
Income (loss) from discontinued operations.. (312) (95) (42) (173) (622)
Net income (loss) .......................... (112) (352) 175 (814) (1,103)
2002
- --------------------------------------------
Net premiums earned ........................ $ 16,225 $ 17,126 $ 16,972 $ 16,634 $ 66,957
Interest income, net ....................... 695 798 665 762 2,920
Realized investment gains, net ............. 16 388 - 390 794
Income (loss) before income taxes .......... (136) 1,203 (71) (5,722) (4,726)
Income (loss) from continuing operations ... (157) 761 (82) (3,568) (3,046)
Income (loss) from discontinued operations.. 41 198 56 (11) 284
Gain on sale of subsidiary ................. - - - 671 671
Net income (loss) .......................... (116) 959 (26) (2,908) (2,091)
* * * * * * *
PAGE F-24
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder of
Chandler (U.S.A.), Inc.:
We have audited the consolidated statements of operations, comprehensive
income, shareholder's equity and cash flows of Chandler (U.S.A.), Inc. and
subsidiaries ("Chandler USA") for the year ended December 31, 2000 (none of
which are presented herein). Our audits also included the financial statement
schedules of condensed financial information of registrant and supplementary
insurance information (neither of which are presented herein), reinsurance,
valuation and qualifying accounts and supplemental information for
property-casualty insurance underwriters (which are presented herein) for the
year ended December 31, 2000. The financial statements and financial
statement schedules are the responsibility of Chandler USA's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of operations and the cash flows of Chandler
(USA), Inc. and subsidiaries for the year ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States
of America. Also, in our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as
a whole, present fairly, in all material respects, the information set forth
therein.
As discussed in Note 10 to the consolidated financial statements, Chandler USA
is involved in various legal proceedings, the outcome of which is uncertain.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Tulsa, Oklahoma
February 16, 2001
(March 5, 2001 as to Note 14)
PAGE F-25
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder of
Chandler (U.S.A.), Inc.:
We have audited the accompanying consolidated balance sheets of Chandler
(U.S.A.), Inc. and subsidiaries ("Chandler USA") as of December 31, 2001 and
2002, and the related consolidated statements of operations, comprehensive
income, cash flows and shareholder's equity for the years then ended. Our
audit also included the financial statement schedules as of and for the years
ended December 31, 2001 and 2002, listed in the Index at Item 15. These
financial statements and financial statement schedules are the responsibility
of Chandler USA's management. Our responsibility is to express an opinion on
these financial statements and financial statement schedules based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Chandler USA at
December 31, 2001 and 2002, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein. As discussed in Note 4
to the consolidated financial statements, the Company sold its agency business
segment in 2002. We audited the adjustments necessary to restate the 2000
consolidated financial statements to report the sale of the segment as a
discontinued operation. In our opinion, such adjustments are appropriate and
have been properly applied.
/s/ Tullius Taylor Sartain & Sartain LLP
TULLIUS TAYLOR SARTAIN & SARTAIN LLP
Tulsa, Oklahoma
February 7, 2003
PAGE F-26
SCHEDULE I
CHANDLER (U.S.A.), INC. AND SUBSIDIARIES
SUMMARY OF INVESTMENTS - OTHER
THAN INVESTMENTS IN RELATED PARTIES
AS OF DECEMBER 31, 2002
(In thousands)
AMOUNT AT WHICH
SHOWN IN THE
TYPE OF INVESTMENT COST FAIR VALUE BALANCE SHEET
- ------------------------------------------------- ------------ ------------ ---------------
FIXED MATURITIES AVAILABLE FOR SALE:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies .......... $ 37,135 $ 38,483 $ 38,483
Corporate obligations ........................... 11,173 11,525 11,525
Public utilities ................................ 6,791 7,031 7,031
------------ ------------ ---------------
55,099 57,039 57,039
FIXED MATURITIES HELD TO MATURITY:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies .......... 1,220 1,289 1,220
EQUITY SECURITIES AVAILABLE FOR SALE:
Corporate stock ................................. - 681 681
------------ ------------ ---------------
Total investments ............................. $ 56,319 $ 59,009 $ 58,940
============ ============ ===============
SEE INDEPENDENT AUDITORS' REPORT.
PAGE F-27
SCHEDULE II
CHANDLER (U.S.A.), INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CHANDLER (U.S.A.), INC.
(PARENT COMPANY ONLY)
BALANCE SHEETS
(In thousands except share amounts)
DECEMBER 31,
---------------------
2001 2002
---------- ----------
ASSETS
Cash ............................................................ $ - $ 2,355
Premiums receivable ............................................. - 979
Amounts due from subsidiaries ................................... 2,075 1,762
Property and equipment, net ..................................... 876 825
Amounts due from related parties ................................ 7,880 10,582
Other assets .................................................... 4,288 4,870
Goodwill ........................................................ 2,350 -
Investment in subsidiaries, net ................................. 54,594 52,036
---------- ----------
Total assets .................................................... $ 72,063 $ 73,409
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities
Accrued taxes and other payables .............................. $ 4,321 $ 4,081
Premiums payable .............................................. - 2,328
Debentures .................................................... 24,000 24,000
---------- ----------
Total liabilities ............................................... 28,321 30,409
---------- ----------
Shareholder's equity
Common stock, $1.00 par value, 50,000 shares authorized;
2,484 shares issued and outstanding ......................... 2 2
Paid-in surplus ............................................... 60,584 60,584
Accumulated deficit ........................................... (17,225) (19,316)
Accumulated other comprehensive income:
Unrealized gain on investments held by subsidiary and available
for sale, net of deferred income taxes ...................... 381 1,730
---------- ----------
Total shareholder's equity ...................................... 43,742 43,000
---------- ----------
Total liabilities and shareholder's equity ...................... $ 72,063 $ 73,409
========== ==========
SEE INDEPENDENT AUDITORS' REPORT.
PAGE F-28
SCHEDULE II
CHANDLER (U.S.A.), INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CHANDLER (U.S.A.), INC.
(PARENT COMPANY ONLY)
STATEMENTS OF OPERATIONS
(In thousands)
YEAR ENDED DECEMBER 31,
--------------------------------
2000 2001 2002
---------- ---------- ----------
Revenues
Interest income, net ...................................... $ 19 $ 8 $ 7
Interest income, net from related parties ................. - 371 380
Commissions, fees and other income ........................ 798 618 765
---------- ---------- ----------
Total revenues .......................................... 817 997 1,152
---------- ---------- ----------
Operating costs and expenses
General and administrative expenses ....................... 2,069 2,442 3,529
Interest expense .......................................... 2,214 2,213 2,213
---------- ---------- ----------
Total operating costs and expenses ...................... 4,283 4,655 5,742
---------- ---------- ----------
Loss from continuing operations before income tax benefit ... (3,466) (3,658) (4,590)
Federal income tax benefit .................................. 979 1,143 1,729
---------- ---------- ----------
Net loss from continuing operations before equity
in net income (loss) of subsidiaries ...................... (2,487) (2,515) (2,861)
Equity in net income (loss) of subsidiaries ................. (895) 2,025 133
---------- ---------- ----------
Net loss from continuing operations ......................... (3,382) (490) (2,728)
Loss from discontinued operations ........................... (613) (613) (34)
Gain on sale of subsidiary .................................. - - 671
---------- ---------- ----------
Net loss .................................................... $ (3,995) $ (1,103) $ (2,091)
========== ========== ==========
SEE INDEPENDENT AUDITORS' REPORT.
PAGE F-29
SCHEDULE II
CHANDLER (U.S.A.), INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CHANDLER (U.S.A.), INC.
(PARENT COMPANY ONLY)
STATEMENTS OF CASH FLOWS
(In thousands)
YEAR ENDED DECEMBER 31,
--------------------------------
2000 2001 2002
---------- ---------- ----------
OPERATING ACTIVITIES
Net loss ...................................................... $ (3,995) $ (1,103) $ (2,091)
Add (deduct):
Adjustments to reconcile net loss to cash
applied to operating activities:
Net (income) loss of subsidiaries not distributed to parent.. 895 (2,025) (133)
Net (gains) losses on sale of property and equipment ........ 6 2 (12)
Gain on sale of subsidiary .................................. - - (671)
Amortization and depreciation ............................... 1,306 834 222
Net change in non-cash balances relating to
operating activities:
Premiums receivable ....................................... - - 2,778
Amounts due from subsidiaries ............................. (690) 264 314
Other assets .............................................. (708) 1,121 1,428
Accrued taxes and other payables .......................... 520 (729) (692)
Premiums payable .......................................... - - (3,200)
---------- ---------- ----------
Cash applied to operating activities ........................ (2,666) (1,636) (2,057)
---------- ---------- ----------
INVESTING ACTIVITIES
Cost of property and equipment purchased ...................... (61) (682) (103)
Proceeds from sale of property and equipment .................. 43 3,915 57
Proceeds from sale of subsidiary .............................. - - 3,247
Investment in subsidiary ...................................... - - (2)
---------- ---------- ----------
Cash provided by (applied to) investing activities .......... (18) 3,233 3,199
---------- ---------- ----------
FINANCING ACTIVITIES
Shareholder dividend from subsidiaries ........................ 2,500 7,000 3,915
Payments and loans from related parties ....................... 1,200 4,032 3,249
Payments and loans to related parties ......................... (1,016) (12,629) (5,951)
---------- ---------- ----------
Cash provided by (applied to) financing activities .......... 2,684 (1,597) 1,213
---------- ---------- ----------
Increase in cash and cash equivalents ........................... - - 2,355
Cash and cash equivalents at beginning of year .................. - - -
---------- ---------- ----------
Cash and cash equivalents at end of year ........................ $ - $ - $ 2,355
========== ========== ==========
SEE INDEPENDENT AUDITORS' REPORT.
PAGE F-30
SCHEDULE III
CHANDLER (U.S.A.), INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(In thousands)
FUTURE
POLICY AMORTI-
BENEFITS, OTHER ZATION OF NET
DEFERRED LOSSES, POLICY CLAIMS, DEFERRED PREMIUMS
POLICY CLAIMS CLAIMS AND NET LOSSES AND POLICY OTHER WRITTEN
ACQUISITION AND LOSS UNEARNED BENEFITS PREMIUM INTEREST SETTLEMENT ACQUISITION OPERATING AND
COSTS EXPENSES PREMIUMS PAYABLE REVENUE INCOME EXPENSES COSTS EXPENSES ASSUMED
----------- -------- -------- ---------- --------- --------- ---------- ----------- --------- --------
YEAR ENDED
DECEMBER 31, 2000
Property and casualty .. $ (12) $100,173 $ 74,198 $ 5,062 $ 85,519 $ 4,281 $ 64,999 $ 16,882 $ 12,812 $ 78,445
========== ======== ======== ========== ========= ========= ========== =========== ========= ========
DECEMBER 31, 2001
Property and casualty .. $ (456) $ 84,756 $ 61,562 $ 4,600 $ 69,985 $ 4,003 $ 52,550 $ 10,869 $ 13,789 $ 65,423
========== ======== ======== ========== ========= ========= ========== =========== ========= ========
DECEMBER 31, 2002
Property and casualty .. $ 355 $ 92,606 $ 55,160 $ 4,244 $ 66,957 $ 2,920 $ 50,712 $ 10,239 $ 14,707 $ 67,667
========== ======== ======== ========== ========= ========= ========== =========== ========= ========
SEE INDEPENDENT AUDITORS' REPORT.
PAGE F-31
SCHEDULE IV
CHANDLER (U.S.A.), INC. AND SUBSIDIARIES
REINSURANCE
(Dollars in thousands)
ASSUMED PERCENTAGE
CEDED TO FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
------------ ------------ ------------ ------------ ------------
Year ended December 31, 2000
Property and casualty ........................... $ 197,041 $ (118,751) $ 155 $ 78,445 0.20 %
============ ============ ============ ============ ============
Year ended December 31, 2001
Property and casualty ........................... $ 158,741 $ (93,541) $ 223 $ 65,423 0.34 %
============ ============ ============ ============ ============
Year ended December 31, 2002
Property and casualty ........................... $ 139,876 $ (72,495) $ 286 $ 67,667 0.42 %
============ ============ ============ ============ ============
SEE INDEPENDENT AUDITORS' REPORT.
PAGE F-32
SCHEDULE V
CHANDLER (U.S.A.), INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
BALANCE AT PROVISION BALANCE
BEGINNING FOR AT END
OF PERIOD NON-COLLECTION WRITE-OFFS OF PERIOD
---------------- ---------------- ---------------- ----------------
Allowance for non-collection of
premiums receivable:
2000 ............................................ $ 263 $ 179 $ (134) $ 308
================ ================ ================ ================
2001 ............................................ $ 308 $ 305 $ (315) $ 298
================ ================ ================ ================
2002 ............................................ $ 298 $ 444 $ (496) $ 246
================ ================ ================ ================
Allowance for non-collection of reinsurance
recoverables on paid and unpaid losses:
2000 ............................................ $ 577 $ - $ 95 $ 672
================ ================ ================ ================
2001 ............................................ $ 672 $ 454 $ (30) $ 1,096
================ ================ ================ ================
2002 ............................................ $ 1,096 $ 1,726 $ (55) $ 2,767
================ ================ ================ ================
SEE INDEPENDENT AUDITORS' REPORT.
PAGE F-33
SCHEDULE VI
CHANDLER (U.S.A.), INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION
(FOR PROPERTY-CASUALTY INSURANCE UNDERWRITERS)
(In thousands)
DISCOUNT PAID LOSSES AND
DEDUCTED LOSS ADJUSTMENT
FROM RESERVES EXPENSES
--------------- ---------------
Year ended December 31, 2000
Property-casualty ........................................ $ - $ 69,534
=============== ===============
Year ended December 31, 2001
Property-casualty ........................................ $ - $ 66,395
=============== ===============
Year ended December 31, 2002
Property-casualty ........................................ $ - $ 50,296
=============== ===============
SEE INDEPENDENT AUDITORS' REPORT.