Purchase of additional reinsurance necessitates same-quarter comparison
based on gross premiums earned, which increased 11%; net income shows
significant gain
GRAND CAYMAN, Cayman Islands, May 4 /PRNewswire/ -- Chandler Insurance
Company, Ltd., (Nasdaq: CHANF), the parent of subsidiary companies based in
Oklahoma, today announced strong results for the first quarter ended March 31,
1998 which reflected the ongoing positive effects of the Company's focus on
its core insurance programs plus the continued benefits stemming from
previously implemented cost controls and process improvements as well as the
purchase of additional reinsurance.
These factors, in addition to the generally healthy economy and the
Company's increasingly strong competitive position in its chosen markets,
contributed to the posting of net income of $974,000 or $0.15 per share for
the first quarter of 1998 versus a net loss of $10,327,000 or $1.49 per share
in the first quarter of 1997. The net loss in the year ago quarter was
primarily attributable to the effect of unusual and significant litigation
costs and related expenses during that period.
Summary of Financial Highlights
(unaudited; amounts in thousands except per share amounts)
Quarter Ended March 31,
1998 1997 Change
Gross Premiums Earned $30,048 $27,149 +11%
Net Premiums Earned (a) $16,139 $23,673 -32%
Litigation Expenses, Net $156 $10,360 -98%
Net Income (Loss) $974 $(10,327) +109%
Net Income (Loss) Per Share $0.15 $(1.49) +110%
Weighted Average Common Shares
Outstanding 6,447 6,942 -7%
(a) See "Purchase of Additional Reinsurance" and "Premiums Earned"
sections.
"Increased operational strength and efficiency resulting from cost
controls, increased automation and process improvements we implemented last
year contributed to an improved first quarter. We were able to increase
gross earned premiums by 11% over the prior year with our standard property-
casualty and political subdivisions programs as the largest contributors. We
believe that our comprehensive business reassessment implemented in 1997,
together with our commitment to outstanding service and our increasingly
strong market presence, provide for a competitive edge in Oklahoma and
surrounding states." -- Brent LaGere, Chairman & Chief Executive Officer
Net income excluding net litigation expenses was $1,086,000 or $0.17 per
share in the first quarter of 1998, versus a net loss of $68,000 for the first
quarter of 1997.
The additional reinsurance also had an impact on the Company's combined
loss and underwriting expense ratio, which increased to 104.4% for the first
quarter of 1998 versus 103.0% for first quarter of 1997. The loss ratio for
these same periods decreased from 65.8% to 59.6%, while the Company's
underwriting expense ratio increased from 37.2% to 44.8%, primarily as a
result of the effects of the additional reinsurance on net premiums written.
However, the operating ratio, which considers net investment income (excluding
net realized gains or losses) in addition to the combined ratio, improved to
94.0% from 95.4% in the year ago quarter.
Brent LaGere, Chairman and Chief Executive Officer, commented: "Increased
operational strength and efficiency resulting from cost controls, increased
automation and process improvements we implemented last year contributed to an
improved first quarter. We were able to increase gross earned premiums by
11% over the prior year with our standard property-casualty and political
subdivisions programs as the largest contributors. We believe that our
comprehensive business reassessment implemented in 1997, together with our
commitment to outstanding service and our increasingly strong market presence,
provide for a competitive edge in Oklahoma and surrounding states."
Through its U.S.-based subsidiary, National American Insurance Company
(NAICO), Chandler underwrites various lines of property and casualty insurance
including surety performance bonds and workers compensation in Oklahoma and
surrounding states, principally Texas. The Company's main areas of
concentration include contractors, manufacturers, healthcare facilities,
wholesalers, the service and retail industries along with political
subdivisions.
Added LaGere: "We continue to benefit from the ongoing absence of
significant litigation expenses which obscured our operational strength in the
past. We also remain hopeful for the timely resolution of the remaining
litigation matters and what would subsequently be a more predictable expense
structure. Accordingly, we look forward to the opportunity to deliver
significant value to our shareholders through the end of 1998."
Purchase of Additional Reinsurance
During the first quarter of 1998, NAICO purchased additional reinsurance
under its workers compensation and casualty reinsurance programs that
substantially reduced the combined net retentions in these lines of business.
The purchase of the additional reinsurance coverages in 1998 substantially
reduced per occurrence loss exposure for NAICO's workers compensation and
casualty insurance lines of business, but resulted in significantly lower net
premiums earned, loss and loss adjustment expenses and policy acquisition
costs. The Company believes, therefore, that a gross earned premium
comparison of comparable quarters during 1997 and 1998 together with a net
earned premium comparison for the same periods may be more meaningful than a
net premiums earned analysis taken alone.
Premiums Earned
The following table sets forth premiums earned on a gross basis (before
reductions for premiums ceded to unaffiliated reinsurers) and a net basis for
the three month periods ended March 31, 1998 and 1997:
Gross premiums earned Net premiums earned
1998 1997 1998 1997
(amounts in thousands)
Standard property-
casualty $17,177 $13,409 $9,325 $11,816
Political
subdivisions 5,810 5,065 3,080 3,535
Surety bonds 2,674 3,003 2,144 2,913
Nonstandard private
passenger auto 2,586 3,924 286 3,924
Other 1,801 1,748 1,304 1,485
TOTAL $30,048 $27,149 $16,139 $23,673
Gross premiums earned, before reductions for premiums ceded to
unaffiliated reinsurers, increased by $2.9 million or 11% in the quarter ended
March 31, 1998 compared to the prior year. Net premiums earned decreased by
$7.5 million or 32% in the 1998 quarter compared to the prior year. The
reduction in net premiums earned was due to the purchase of additional
reinsurance for NAICO's workers compensation and casualty insurance programs
described above; and to a reinsurance arrangement for a large portion of
NAICO's nonstandard private passenger automobile program which was effective
July 1, 1997.
Gross premiums earned in the standard property-casualty program increased
$3.8 million or 28% in the current quarter versus the prior year. This
increase is primarily attributable to increased marketing activity in Oklahoma
and contiguous states, principally Texas. Net premiums earned decreased
$2.5 million or 21% in the current quarter versus the prior year due to the
additional reinsurance described above.
Gross premiums earned in the political subdivisions program increased
$745,000 or 15% in the current quarter versus the prior year due primarily to
expansion of the school districts program in Texas and increased production in
Oklahoma. Net premiums earned decreased $455,000 or 13% due to the additional
reinsurance described above.
Net premiums earned in the surety bond program decreased $769,000 or 26%
in the current quarter versus the prior year. Net premiums earned from surety
bonds produced by Midwest Indemnity Corp. (Midwest) during the runoff portion
of that program decreased by $594,000 or 173% in the current quarter versus
the prior year. NAICO and Midwest previously agreed to terminate the
underwriting and production contract effective December 31, 1995. Net
premiums earned from surety bonds produced by LaGere & Walkingstick Insurance
Agency, Inc. (L&W) decreased to $1.7 million in the current quarter from
$2.0 million in the 1997 quarter. Increased competition and higher insurance
costs contributed to the decline in the 1998 quarter.
During 1997, NAICO discontinued the Oklahoma and Arizona portions of the
nonstandard private-passenger automobile program. During the second quarter
of 1997, management reviewed the underwriting performance of the California
portion of the program and concluded that it would be in the Company's best
interest to substantially reduce its underwriting risk. Effective July 1,
1997, NAICO entered into a 100% quota share reinsurance agreement to fully
reinsure the risk.
During 1996, NAICO began writing excess specific and aggregate accident
and health coverage for small to medium sized employers generally in Oklahoma
and Texas. Net premiums earned in this program (included in Other in the
table above) were $1.0 million in the 1998 quarter versus $308,000 in the
first quarter of 1997.
Commissions, Fees and Other Income
L&W's brokerage commissions and fees before intercompany eliminations were
$1.9 million in the quarter ended March 31, 1998 compared to $2.0 million in
the 1997 quarter. A large portion of the brokerage commissions and fees for
L&W is incurred by NAICO and thus eliminated in the consolidation of the
Company's subsidiaries.
Commissions and fees generated by Network Administrators, Inc. (Network)
were $156,000 in the 1997 quarter. Network no longer functions as a third-
party administrator and did not generate any income in the 1998 period.
Chandler (U.S.A.), Inc. (Chandler USA) disposed of certain equipment in
the first quarter of 1998 that resulted in a gain of $145,000 before provision
for federal income tax.
Net Investment Income
Net investment income in the first quarter of 1998 was $1.7 million versus
$1.8 million in the 1997 quarter. During the fourth quarter of 1997, NAICO
shifted a portion of its fixed maturities portfolio from taxable to tax exempt
bonds resulting in income from tax exempt securities of $262,000 (of which
$223,000 is exempt from federal income tax) in the first quarter of 1998.
NAICO had no tax exempt income in the first quarter of 1997.
Losses and Loss Adjustment Expenses
The percentage of losses and loss adjustment expenses to net premiums
earned was 59.6% for the quarter ended March 31, 1998 versus 65.8% for the
1997 quarter. The purchase of additional reinsurance accounted for
substantially all of the 38% decrease in loss and loss adjustment expenses in
the current quarter versus a year ago.
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.
Recoverability of such deferred costs is dependent on the related unearned
premiums on the policies being more than expected claim losses.
The following table sets forth the Company's policy acquisition
costs for each of the three-month periods ended March 31, 1998 and 1997:
Three months ended March 31,
1998 1997
(in thousands)
Commissions expense $3,580 $3,688
Other premium related assessments 506 294
Premium taxes 827 689
Excise taxes 65 34
Dividends to policyholders 75 50
Other expense 68 75
Total direct expenses 5,121 4,830
Indirect underwriting expenses 2,989 2,913
Commissions received from
reinsurers (3,624) (985)
Adjustment for deferred
acquisition costs (279) (162)
Net policy acquisition costs $4,207 $6,596
Total gross direct and indirect expenses as a percentage of direct written
and assumed premiums were 27.6% in the first quarter of 1998 compared to 27.5%
in the first quarter of 1997. For these periods, the average commission rates
were 12.2% and 13.1%.
Indirect expenses were 10.2% and 10.3% of total direct written and assumed
premiums in the first quarter of 1998 and 1997, respectively. Indirect
expenses include general overhead and administrative costs associated with the
acquisition of new and renewal business, some of which is relatively fixed in
nature, thus, the percentage of such expenses to direct written and assumed
premiums will vary depending on the Company's overall premium volume.
Commissions received from reinsurers increased $2.6 million or 268% in the
first quarter of 1998 to $3.6 million due to the additional reinsurance
discussed previously which increased premiums ceded to reinsurers by 287% in
the 1998 quarter.
General and Administrative Expenses
General and administrative expenses were 11.0% and 12.6% of gross premiums
earned and commissions, fees and other income for the quarters ended March 31,
1998 and 1997, respectively. General and administrative expenses have
historically not varied in direct proportion to the Company's revenues. A
portion of such expenses is allocated to policy acquisition costs and loss and
loss adjustment expenses based on various factors including employee counts,
salaries, occupancy and specific identification. Because certain types of
expenses are fixed in nature, the percentage of such expenses to revenues will
vary depending on the Company's overall premium volume.
Liquidity and Capital Resources
The Company generated $1.7 million of cash in operations in the first
quarter of 1998 compared to $1.9 million in the 1997 quarter. The average
maturity of the Company's investments was 4.9 years at March 31, 1998 compared
to 4.7 years a year ago.
During 1996, Chandler USA borrowed $4.5 million from a bank on a three
year note payable. During the fourth quarter of 1997, the related loan
agreement was amended to provide for additional borrowings up to $8.5 million
and to revise the term to five years with interest payable at a floating rate
equal to 1% over Wall Street Journal Prime, which was 8.5% at March 31, 1998.
During March 1998, Chandler USA borrowed an additional $6.2 million on the
note and the proceeds were used to repay intercompany advances from Chandler
Barbados. The outstanding balance of the note was $8.5 million at March 31,
1998. The funds received by Chandler Barbados may be used to discharge
litigation judgments. The bank note is collateralized by the shares of NAICO
stock owned by Chandler USA.
In February 1998, Chandler USA entered into a five year loan agreement
with a bank having a principal amount of $2.3 million and an interest rate of
7.75%. Monthly payments are $46,482 including principal and interest. The
loan is collateralized by certain equipment which was purchased with the
proceeds of the loan. The equipment had previously been leased by Chandler
USA.
In April 1998, a subsidiary of the Company acquired 69,858 shares of the
Company's common stock from an agent for approximately $524,000. These shares
had previously been pledged to NAICO to secure certain obligations resulting
from insurance business produced by another agent.
Cash and Investments
Cash and investments at March 31, 1998 were $132.7 million compared to
$125.1 million at December 31, 1997. The Company's portfolio, which contains
no junk bonds or real estate investments, is 88% invested in fixed-income U.S.
Government and high-quality corporate and tax-exempt bonds, and 12% in cash
and money market instruments. Book value per share was $12.41 at March
31, 1998, on 4,786,966 shares (after giving effect to 1,660,125 shares
rescinded through litigation and 494,617 shares that are held by a subsidiary
of the Company) compared to $8.66 on 6,424,208 shares outstanding at March 31,
1997 (after giving effect to 517,500 shares rescinded through litigation).
Litigation and Litigation Expenses
While the Company's litigation expenses related to CenTra, Inc. (CenTra)
have generally decreased since the first quarter of 1997, continued or renewed
actions by CenTra or its affiliates could cause the Company to incur
significant litigation related expenses in future periods. On April 21, 1998,
the Oklahoma Federal Court in which the CenTra litigation is pending ordered
all parties to pay their own costs and attorney fees in the case thus denying
CenTra's request of approximately $4.7 million for those expenses. The Company
is still considering the impact of this ruling and CenTra's appeals of various
judgments and rulings in that court upon its reserve for litigation expenses.
Income Tax Provision
The provision for or benefit from federal income taxes of the consolidated
U.S. subsidiaries varies with the level of income or loss before income taxes
of such subsidiaries. The provision or benefit relative to the consolidated
income before income taxes will also vary dependent on the contribution to
income before income taxes by the consolidated U.S. subsidiaries.
Cautionary Statement
Some of the statements made in this News Release, as well as statements
made by the Company in periodic press releases, oral statements made by the
Company's officials to analysts and shareholders in the course of
presentations about the Company and conference calls following
earnings releases, constitute "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
that may cause the actual results, performance or achievements of the Company
to be materially different from any future results, performance or
achievements expressed or implied by the forward-looking statements. Such
factors include, among other things, (i) general economic and business
conditions; (ii) interest rate changes; (iii) competition and regulatory
environment in which the Company operates; (iv) claims frequency; (v) claims
severity; (vi) the number of new and renewal policy applications submitted by
the Company's agents; and (vii) other factors including the ongoing litigation
matters involving a significant concentration of ownership of common stock.
CHANDLER INSURANCE COMPANY, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands except per share data)
For the three months ended
March 31, %
1998 1997 Change
PREMIUMS AND OTHER REVENUES
Direct premiums written
and assumed $29,400 $28,159 4%
Reinsurance premiums
ceded (a) (14,329) (3,707) 287%
Net premiums written
and assumed 15,071 24,452 -38%
Decrease (increase) in
unearned premiums 1,068 (779) 237%
Net premiums earned (a) 16,139 23,673 -32%
Net investment income -
excluding net
capital gains 1,669 1,801 -7%
Net investment income -
net capital gains 9 14 -36%
Commissions, fees and
other income 733 820 -11%
Total revenues 18,550 26,308 -29%
OPERATING EXPENSES
Losses and loss adjustment
expenses (a) 9,614 15,587 -38%
Policy acquisition
costs (a) 4,207 6,596 -36%
General and administrative
expenses 3,377 3,529 -4%
Interest expense 134 86 56%
Litigation expenses, net 156 10,360 -98%
Total operating expenses 17,488 36,158 -52%
Net income (loss) before
income taxes 1,062 (9,850) 111%
Income tax provision of
U.S. Subsidiaries (88) (477) 82%
Net income (loss) $974 $(10,327) 109%
Basic and diluted earnings
(loss) per common share $0.15 $(1.49) 110%
Weighted average common
shares outstanding 6,447 6,942 -7%
(a) See "Purchase of Additional Reinsurance" in the text of this release.
CHANDLER INSURANCE COMPANY, LTD.
Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands except per share amounts)
March 31, December 31,
1998 1997
Assets
Investments
Fixed maturities available for
sale, at fair value $115,372 $111,718
Fixed maturities held to maturity,
at amortized cost (fair value
of $1,244 and $1,330 in 1998 and
1997, respectively) 1,137 1,222
Equity security available for
sale, at fair value 124 124
Total investments 116,633 113,064
Cash and cash equivalents 16,103 11,999
Premiums receivable, less allowance
for non-collection of $183 and $115
at 1998 and 1997, respectively 29,860 28,079
Reinsurance recoverable on paid
losses, less allowance for
non-collection of $275 at 1998
and 1997 1,670 3,069
Reinsurance recoverable on unpaid
losses, less allowance for
non-collection of $447 and $390 at
1998 and 1997, respectively 14,881 10,876
Prepaid reinsurance premiums 10,083 9,662
Deferred policy acquisition costs 5,591 5,312
Property and equipment, net 7,878 5,907
Other assets 12,661 12,893
Licenses, net 4,306 4,344
Excess of cost over net assets
acquired, net 5,090 5,252
Covenants not to compete, net 233 333
Total assets $224,989 $210,790
CHANDLER INSURANCE COMPANY, LTD.
Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands except per share amounts)
March 31, December 31,
1998 1997
Liabilities and Shareholders' Equity
Liabilities
Unpaid losses and loss
adjustment expenses $74,472 $74,929
Unearned premiums 41,741 42,388
Policyholder deposits 5,114 4,830
Notes payable 10,806 2,796
Accrued taxes and other payables 5,115 6,340
Premiums payable 11,729 4,554
Litigation liabilities 16,618 16,618
Total liabilities 165,595 152,455
Shareholders' equity
Common stock, $1.67 par value,
10,000,000 shares authorized,
6,941,708 shares issued 11,593 11,593
Paid-in surplus 34,942 34,942
Capital redemption reserve 947 947
Retained earnings 25,860 24,886
Unrealized gain on investments
available for sale, net of tax 338 253
Less: Stock held by subsidiary,
at cost (494,617 shares) (2,487) (2,487)
Less: Stock rescinded through
litigation (1,660,125 shares) (11,799) (11,799)
Total shareholders' equity 59,394 58,335
Total liabilities and
shareholders' equity $224,989 $210,790
SOURCE Chandler Insurance Company, Ltd.
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CONTACT:
Steve Butler, V.P.-Administration of Chandler
(Cayman), 345-949-8177; Mark Paden, V.P.-Finance & CFO of
Chandler (USA), 405-258-4228; or Mike Arneth, General
Information, 312-640-6734, mga@chi.frbd.com, or Paul Scheeler,
Investors-Media, 312-640-6742, pas@chi.frbd.com, both of The
Financial Relations Board
NOTE TO EDITORS: For further information on Chandler Insurance
toll-free via fax, simply dial 1-800-PRO-INFO, follow the voice
menu prompts and enter the company code 032 from any touch tone
phone.
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