Second quarter net income rises 91.6% to $1.0 million as Company continues to
benefit from significantly reduced litigation costs and focus on core business
lines; Purchase of additional reinsurance shifts premium and ratio levels
relative to prior periods
GRAND CAYMAN, Cayman Islands, July 29 /PRNewswire/ -- Chandler Insurance
Company, Ltd., (Nasdaq: CHANF), the parent of subsidiary companies based in
Oklahoma, today announced results for the second quarter and six month periods
ended June 30, 1998. Net income was $1,031,000 or $0.16 per share for the
second quarter of 1998 versus $538,000 or $0.08 per share in the second
quarter of 1997. During the second quarter of 1998, the Company recaptured
$3.8 million in previously expensed litigation costs which was more than
offset by approximately $660,000 in storm-related losses and $3.7 million of
additional loss development from prior accident years which were also
recognized in the current quarter. The Company continues to benefit from a
strong competitive position in its chosen markets and its focus on its core
business lines.
Summary of Second Quarter Financial Highlights
(unaudited; amounts in thousands except per share amounts)
Three Months Ended June 30, Six Months Ended June 30,
1998 1997 Change 1998 1997 Change
Gross Premiums
Earned $31,157 $30,008 +4% $61,205 $57,157 +7%
Net Premiums
Earned(A) $17,475 $25,723 -32% $33,614 $49,396 -32%
Litigation Expenses,
Net $(3,512) $562 -725% $(3,356) $10,922 -131%
Net Income (Loss) $1,031 $538 +92% $2,005 $(9,789) +120%
Net Income (Loss)
Per Share $0.16 $0.08 +100% $0.31 $(1.43) +122%
Diluted Weighted
Average Common
Shares Outstanding6,437 6,708 -4% 6,450 6,824 -5%
(A) See "Purchase of Additional Reinsurance" and "Premiums Earned"
sections
"Chandler's increase in gross earned premiums for both the second quarter
and six month periods is notable in this highly competitive marketplace.
Again this quarter, our standard property-casualty and political subdivisions
programs were the largest premium growth contributors, while our outstanding
service capabilities allowed us to maintain our competitive edge in our
flagship markets in Oklahoma and surrounding states."
-- Brent LaGere, Chairman & Chief Executive Officer
As cited in the prior quarter as well, the purchase of additional
reinsurance had an impact on the Company's combined loss and underwriting
expense ratio. In addition, the loss ratio was affected by $3.7 million in
additional loss development from prior accident years recognized in the second
quarter of 1998 (see Losses and Loss Adjustment Expenses). Also, storm-
related losses from wind and hail totaled approximately $660,000 in the
current quarter versus $190,000 a year ago. Primarily as a result of these
factors, the Company's combined loss and underwriting expense ratio increased
to 123.8% for the second quarter of 1998 versus 101.6% for second quarter of
1997. The loss ratio for these same periods increased from 60.4% to 80.7%,
while the Company's underwriting expense ratio increased from 41.2% to 43.1%,
primarily as a result of the effects of the additional reinsurance on net
premiums written. The operating ratio, which considers net investment income
(excluding net realized gains or losses) in addition to the combined ratio,
increased to 113.8% from 94.6% in the year ago quarter.
Net income for the first six months of 1998 was $2,005,000 or $0.31 per
share, versus a net loss of $9,789,000 or $1.43 per share in the first six
months of 1997. As previously noted for the quarter, the change in net income
for the six months period is primarily attributable to a reduction in
significant and unusual litigation costs and related expenses from the year
ago period, plus the recapture of previously expensed litigation costs. Net
loss excluding net litigation expenses was $2.5 million or $0.39 per share in
the second quarter of 1998, versus net income excluding net litigation
expenses of $1.0 million or $0.15 per share in the year ago quarter.
Brent LaGere, Chairman and Chief Executive Officer, commented: "Chandler's
increase in gross earned premiums for both the second quarter and six month
periods is notable in this highly competitive marketplace. Again this
quarter, our standard property-casualty and political subdivisions programs
were the largest premium growth contributors, while our outstanding service
capabilities allowed us to maintain our competitive edge in our flagship
markets 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, oil and gas, wholesalers,
the service and retail industries along with political subdivisions.
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
reduces the risk of loss for NAICO's workers compensation and casualty
insurance lines of business, but result in significantly lower net premiums
earned, loss and loss adjustment expenses and policy acquisition costs.
Premiums Earned
The following tables set forth premiums earned on a gross basis (before
reductions for premiums ceded to unaffiliated reinsurers) and a net basis for
the three and six month periods ended June 30, 1998 and 1997:
Three months ended June 30,Gross premiums earned Net premiums earned
1998 1997 1998 1997
(In thousands)
Standard property-
casualty $ 18,424 $ 15,804 $ 10,413 $ 13,910
Political subdivisions 5,902 5,301 3,051 3,658
Surety bonds 2,919 3,228 2,340 2,929
Nonstandard private-
passenger automobile 1,956 3,783 137 3,783
Other 1,956 1,892 1,534 1,443
TOTAL $ 31,157 $ 30,008 $ 17,475 $ 25,723
Six months ended June 30, Gross premiums earned Net premiums earned
1998 1997 1998 1997
(In thousands)
Standard property
-casualty $ 35,601 $ 29,213 $ 19,738 $ 25,726
Political subdivisions 11,712 10,366 6,131 7,193
Surety bonds 5,593 6,231 4,484 5,842
Nonstandard private
-passenger automobile 4,542 7,707 423 7,707
Other 3,757 3,640 2,838 2,928
TOTAL $ 61,205 $ 57,157 $ 33,614 $ 49,396
Gross premiums earned, before reductions for premiums ceded to
unaffiliated reinsurers, increased $1.1 million or 4% in the quarter ended
June 30, 1998 compared to the prior year, and increased $4.0 million or 7% for
the six months ended June 30, 1998 compared to the 1997 period. Net premiums
earned decreased $8.2 million or 32% in the 1998 quarter compared to the prior
year, and decreased $15.8 million or 32% for the six months ended June 30,
1998 compared to the 1997 period. The reduction in net premiums earned was
due to the purchase of additional reinsurance for NAICO's workers compensation
and casualty insurance programs described previously, 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
$2.6 million or 17% in the current quarter versus the prior year, and
increased $6.4 million or 22% for the six months ended June 30, 1998 compared
to the 1997 period. This increase is primarily attributable to marketing
activity in Oklahoma and contiguous states, principally Texas. Net premiums
earned decreased $3.5 million or 25% in the current quarter versus the prior
year, and decreased $6.0 million or 23% in the six months ended June 30, 1998
compared to the 1997 period due to the purchase of additional reinsurance
described previously.
Gross premiums earned in the political subdivisions program increased
$601,000 or 11% in the current quarter versus the prior year, and increased
$1.3 million or 13% for the six months ended June 30, 1998 compared to the
1997 period due primarily to expansion of the school districts program in
Texas and increased production in Oklahoma. Net premiums earned decreased
$607,000 or 17% in the current quarter versus the prior year, and decreased
$1.1 million or 15% for the six months ended June 30, 1998 compared to the
1997 period due to the purchase of additional reinsurance described
previously.
Net premiums earned in the surety bond program decreased $589,000 or 20%
in the current quarter versus the prior year, and decreased $1.4 million or
23% for the six months ended June 30, 1998 compared to the 1997 period. Net
premiums earned from surety bonds produced by Midwest Indemnity Corp.
(Midwest) during the runoff portion of that program decreased by $356,000 or
151% in the current quarter versus the prior year, and decreased $950,000 or
164% for the six months ended June 30, 1998 compared to the 1997 period.
NAICO and Midwest 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 $293,000 or
14% in the current quarter versus the prior year, and decreased $521,000 or
13% for the six months ended June 30, 1998 compared to the 1997 period.
Increased competition and the purchase of additional reinsurance contributed
to the decline in the 1998 periods.
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 31,
1997, NAICO entered into a 100% quota share reinsurance agreement to fully
reinsure the risk.
During 1996, NAICO began writing excess 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 preceding table) were
$1.2 million in the second quarter of 1998 versus $451,000 in the 1997
quarter, and $2.2 million in the first six months of 1998 versus $758,000 in
the 1997 period.
Commissions, Fees and Other Income
L&W's brokerage commissions and fees before intercompany eliminations were
$1.7 million and $3.6 million in the three and six months ended June 30, 1998,
respectively, compared to $2.0 million and $4.0 million in the year ago
periods. The decrease in L&W's brokerage commissions and fees in the 1998
periods is primarily a result of increased competition and general declines in
premium rates. 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.
Fees generated by Network Administrators, Inc. (Network) were $146,000 and
$359,000 in the second quarter and first six months of 1997. Network no
longer functions as a third-party administrator and did not generate any
income in the 1998 periods.
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 excluding capital gains was $1.7 million and
$3.4 million in the three and six month periods ended June 30, 1998,
respectively, compared to $1.8 million and $3.6 million in the year ago
periods. 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 $281,000 and $543,000 in the three and
six month periods ended June 30, 1998. NAICO had no tax exempt income in the
corresponding 1997 periods.
Net realized capital gains were $268,000 and $277,000 in the second
quarter and first six months of 1998, respectively, compared to $18,000 and
$32,000 in the year ago periods. Net investment income including capital
gains was $2.0 million and $3.7 million in the three and six month periods
ended June 30, 1998, respectively, compared to $1.8 million and $3.6 million
in the year ago periods.
Losses and Loss Adjustment Expenses
The percentage of losses and loss adjustment expenses to net premiums
earned (loss ratio) was 80.7% and 70.6% for the quarter and six months ended
June 30, 1998 compared to 60.4% and 63.0% in the comparable year ago periods.
The increase in the 1998 loss ratio was primarily a result of additional
loss development from prior accident years recognized in the second quarter of
1998. The prior year loss development in the second quarter of 1998 totaled
$3.7 million and increased the loss ratio for the three and six months ended
June 30, 1998 by 21.0 and 10.9 percentage points. The prior year loss
development by program was as follows:
(in thousands)
Standard property-casualty program $ 1,731
Political subdivisions 662
Accident & health 796
Transportation 427
All other 54
Total $ 3,670
Approximately 35% and 85% of the prior year loss development for the
standard property-casualty and political subdivisions programs, respectively,
was in the workers compensation portion of those programs. All of the prior
year loss development in the transportation program was in the workers
compensation sector of the program. The remainder of the prior year loss
development, with the exception of the accident & health program, was in the
casualty lines of coverage.
In addition, storm-related losses from wind and hail totaled approximately
$660,000 and $190,000 in the second quarter of 1998 and 1997, respectively.
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 and six month periods ended June 30, 1998 and 1997:
Three months ended June 30, Six months ended June 30,
1998 1997 1998 1997
(In thousands)
Commissions expense $3,937 $4,363 $7,517 $8,051
Other premium related
assessments 386 392 892 686
Premium taxes 919 762 1,746 1,451
Excise taxes 41 34 106 68
Dividends to
policyholders 75 48 150 98
Other expense (8) (15) 60 60
Total direct expenses 5,350 5,584 10,471 10,414
Indirect underwriting
expenses 3,154 3,120 6,143 6,033
Commissions received
from reinsurers (3,444) (756) (7,068) (1,741)
Adjustment for deferred
acquisition costs (217) (309) (496) (471)
Net policy acquisition
costs $4,843 $(7,639) $ 9,050 $14,235
Total gross direct and indirect expenses as a percentage of direct written
and assumed premiums were 28.3% and 27.9% in the second quarter and first six
months of 1998 compared to 30.3% and 28.9% in the corresponding year ago
periods. The average commission rates were 13.1% and 12.6% in the second
quarter and first half of 1998 versus 15.2% and 14.1% in the year ago periods.
Indirect expenses were 10.5% and 10.3% of total direct written and assumed
premiums in the second quarter and first six months of 1998, respectively,
compared to 10.8% and 10.6% in the corresponding year ago periods. Indirect
expenses include general overhead and administrative costs associated with the
acquisition of new and renewal business, some of which is relatively fixed in
nature, thus, the percentage of such expenses to direct written and assumed
premiums will vary depending on the Company's overall premium volume.
Commissions received from reinsurers increased $2.7 million or 356% in the
second quarter of 1998 compared to the 1997 quarter, and increased
$5.3 million or 306% in the first six months of 1998 compared to 1997, due to
the purchase of additional reinsurance discussed previously which increased
premiums ceded to reinsurers by 212% and 248% in the second quarter and first
six months of 1998 over the 1997 periods.
General and Administrative Expenses
General and administrative expenses were 10.2% and 10.6% of gross premiums
earned and commissions, fees and other income for the quarter and six month
periods ended June 30, 1998, compared to 10.7% and 11.6% for the corresponding
periods in 1997. During the second quarter of 1998, the Company adopted a
stock option and stock grant plan for certain non-employee directors of the
Company. Compensation expense related to the plan in the amount of $272,000
is included in general and administrative expenses in the second quarter of
1998.
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 losses 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 used $4.6 million of cash for operations in the first six
months of 1998 compared to $2.8 million in the first six months of 1997. The
1998 use of cash was due primarily to the purchase of additional reinsurance
described previously. During 1996, Chandler USA borrowed $4.5 million from a
bank for a three year term. 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 The Wall Street Journal Prime, which was 8.5%
at June 30, 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
$8.1 million at June 30, 1998. The funds received by Chandler Barbados may be
used to discharge litigation judgments. The bank note is collateralized by
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 June 30, 1998 were $125.6 million compared to
$132.7 million at March 31, 1998. The Company's portfolio, which contains no
junk bonds or real estate investments, is 83% invested in fixed-income U.S.
Government and high-quality corporate and tax-exempt bonds, and 17% in cash
and money market instruments. Book value per share was $12.67 at June 30,
1998, on 4,757,108 shares (after giving effect to 1,660,125 shares rescinded
through litigation and 564,475 shares that are held by a subsidiary of the
Company) compared to $9.20 on 6,043,737 shares outstanding at June 30, 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's fees in the case thus
denying CenTra's request of approximately $4.7 million for those expenses.
CenTra did not appeal this decision. Accordingly, the Company reduced the
previous first quarter 1997 net charge for CenTra litigation matters by
$3,771,000 during the second quarter of 1998.
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.
Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands except per share amounts)
June 30, December 31,
1998 1997
Assets
Investments
Fixed maturities available for sale,
at fair value $102,728 $111,718
Fixed maturities held to maturity,
at amortized cost (fair value $1,266 and
$1,330 in 1998 and 1997, respectively) 1,152 1,222
Equity securities available for sale,
at fair value 191 124
Total investments 104,071 113,064
Cash and cash equivalents 21,480 11,999
Premiums receivable, less allowance for
non-collection of $170 and $115 at 1998
and 1997, respectively 26,852 28,079
Reinsurance recoverable on paid losses,
less allowance for non-collection of $275
at 1998 and 1997 1,411 3,069
Reinsurance recoverable on unpaid losses,
less allowance for non-collection of $420
and $390 at 1998 and 1997, respectively 21,192 10,876
Prepaid reinsurance premiums 8,878 9,662
Deferred policy acquisition costs 5,809 5,312
Property and equipment, net 7,880 5,907
Other assets 11,953 12,893
Licenses, net 4,269 4,344
Excess of cost over net assets acquired, net 4,928 5,252
Covenants not to compete, net 133 333
Total assets $218,856 $210,790
CHANDLER INSURANCE
COMPANY, LTD.
Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands except per share amounts)
June 30, December 31,
1998 1997
Liabilities and Shareholders' Equity
Liabilities
Unpaid losses and loss adjustment expenses 79,859 74,929
Unearned premiums 40,645 42,388
Policyholder deposits 4,957 4,830
Notes payable 10,378 2,796
Accrued taxes and other payables 5,766 6,340
Premiums payable 4,134 4,554
Litigation liabilities 12,847 16,618
Total liabilities 158,586 152,455
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 34,964 34,942
Common stock to be issued (40,000 shares) 250 --
Capital redemption reserve 947 947
Retained earnings 26,891 24,886
Less: Stock held by subsidiary, at cost
(564,475 and 494,617 shares in 1998 and
1997, respectively) (3,011) (2,487)
Less: Stock rescinded through litigation
(1,660,125 shares) (11,799) (11,799)
Accumulated other comprehensive income:
Unrealized gain on investments available
for sale, net of tax 435 253
Total shareholders' equity 60,270 58,335
Total liabilities and shareholders' equity $218,856 $210,790
CHANDLER INSURANCE COMPANY, LTD.
Consolidated Statements of Operations
(Unaudited)
(Amounts in thousands except per share data)
For the three months For the six months
ended June 30, ended June 30,
1998 1997 1998 1997
PREMIUMS AND OTHER REVENUES
Direct premiums written
and assumed $30,061 $28,756 $59,461 $56,915
Reinsurance premiums
ceded (12,478) (4,005) (26,807) (7,712)
Net premiums written
and assumed 17,583 24,751 32,654 49,203
Decrease (increase)
in unearned premiums (108) 972 960 193
Net premiums earned 17,475 25,723 33,614 49,396
Net investment income 2,012 1,808 3,690 3,623
Commissions, fees
and other income 366 620 1,099 1,440
Total revenues 19,853 28,151 38,403 54,459
OPERATING EXPENSES
Losses and loss
adjustment expenses 14,103 15,549 23,717 31,136
Policy acquisition costs 4,843 7,639 9,050 14,235
General and
administrative expenses 3,209 3,267 6,586 6,796
Interest expense 267 92 401 178
Litigation expenses,
net (3,512) 562 (3,356) 10,922
Total operating expenses 18,910 27,109 36,398 63,267
Income (loss) before
income taxes 943 1,042 2,005 (8,808)
Federal income tax benefit
(provision) of consolidated
U.S. subsidiaries 88 (504) -- (981)
Net income (loss) $1,031 $538 $2,005 $(9,789)
Basic and diluted earnings
(loss) per common share $0.16 $0.08 $0.31 $(1.43)
Basic weighted average
common shares outstanding 6,423 6,708 6,441 6,824
Diluted weighted average
common shares outstanding 6,437 6,708 6,450 6,824
SOURCE Chandler Insurance Company, Ltd.
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CONTACT:
Steve Butler, V.P.-Administration of Chandler
(Cayman), 345-949-8177, or Mark Paden, Executive V.P. & CFO of
Chandler (USA), 405-258-4228; or General Information, Mike
Arneth, 312-640-6734, e-mail, mga@chi.frbd.com, or
Investors-Media, Paul Scheeler, 312-640-6742, e-mail,
pas@chi.frbd.com, both of The Financial Relations Board
NOTE TO EDITORS: For further information on Chandler Insurance
toll-free via fax, dial 1-800-PRO-INFO, follow the voice menu
prompts and enter the company code 032 on any touch tone phone.
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