10-Q 1 cic3rdqtr00.txt CICL 10-Q =============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------------------- FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE --- SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 2000 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE --- SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from to -------- -------- Commission File Number: 0-15286 CHANDLER INSURANCE COMPANY, LTD. (Exact name of registrant as specified in its charter) CAYMAN ISLANDS NONE (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 5TH FLOOR ANDERSON SQUARE N/A P.O. BOX 1854 (Zip Code) GRAND CAYMAN, CAYMAN ISLANDS B.W.I. (Address of principal executive offices) Registrant's telephone number, including area code: 345-949-8177 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- The number of common shares, $1.67 par value, of the registrant outstanding on October 31, 2000 was 4,428,033, which includes 1,142,625 common shares which were rescinded through litigation and are held by a court. =============================================================================== PAGE i CHANDLER INSURANCE COMPANY, LTD. INDEX ----- PART I - FINANCIAL INFORMATION ------------------------------ ITEM 1 ------ Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999..1 Consolidated Statements of Operations for the three months ended September 30, 2000 and 1999.........................................2 Consolidated Statements of Operations for the nine months ended September 30, 2000 and 1999.........................................3 Consolidated Statements of Comprehensive Income for the three months ended September 30, 2000 and 1999..................................4 Consolidated Statements of Comprehensive Income for the nine months ended September 30, 2000 and 1999..................................5 Consolidated Statements of Cash Flows for the nine months ended September 30, 2000 and 1999.........................................6 Notes to Interim Consolidated Financial Statements..........................7 ITEM 2 ------ Management's Discussion and Analysis of Financial Condition and Results of Operations....................................................11 PART II - OTHER INFORMATION --------------------------- Item 1 Legal Proceedings..................................................16 Item 2 Changes in Securities..............................................16 Item 3 Defaults Upon Senior Securities....................................16 Item 4 Submission of Matters to a Vote of Security Holders................16 Item 5 Other Information..................................................16 Item 6 Exhibits and Reports on Form 8-K...................................16 Signatures.................................................................17 PAGE 1 CHANDLER INSURANCE COMPANY, LTD. CONSOLIDATED BALANCE SHEETS (Amounts in thousands except share amounts)

~~June~~September 30, December 31, 2000 1999 ------------- ------------ ~~ASSETS~~ (Unaudited) ASSETS Investments Fixed maturities available for sale, at fair value .............. $ ~~107~~113,~~631~~709 $ 108,709 Fixed maturities held to maturity, at amortized cost (fair value $1,~~074~~097 and $1,039 in 2000 and 1999, respectively) ....... 1,~~020~~038 984 Equity securities available for sale, at fair value ............. ~~306~~442 306 ------------- ------------ Total investments ............................................. ~~108~~115,~~957~~189 109,999 Cash and cash equivalents ......................................... 1216,~~056~~363 8,456 Premiums receivable, less allowance for non-collection of $~~409~~463 and $263 at 2000 and 1999, respectively ................. 3544,~~452~~016 47,721 Reinsurance recoverable on paid losses, less allowance for non-collection of $275 at 2000 and 1999 ......................... 72,~~170~~362 3,281 Reinsurance recoverable on unpaid losses, less allowance for non-collection of $355 and $302 at 2000 and 1999, respectively... 4038,~~273~~025 37,539 Prepaid reinsurance premiums ...................................... 2227,~~233~~702 19,960 Deferred policy acquisition costs ................................. 67,~~808~~366 6,488 Property and equipment, net ....................................... 12,~~646~~612 10,765 Licenses, net ..................................................... 3,~~969~~932 4,044 Excess of cost over net assets acquired, net ...................... 3,~~632~~296 3,955 Other assets ...................................................... 19,~~147~~175 16,912 ------------- ------------ Total assets ...................................................... $ ~~272~~290,~~343~~038 $ 269,120 ============= ============ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Unpaid losses and loss adjustment expenses ...................... $ ~~102~~99,~~077~~748 $ 98,460 Unearned premiums ............................................... 6883,~~994~~366 67,769 Policyholder deposits ........................................... 5,~~307~~329 5,135 Accrued taxes and other payables ................................ 65,~~695~~766 6,796 Premiums payable ................................................ 611,~~941~~582 7,312 Litigation liabilities .......................................... 9,~~163~~263 8,905 Debentures ...................................................... 24,000 24,000 ------------- ------------ Total liabilities ............................................. ~~223~~239,~~177~~054 218,377 ------------- ------------ Shareholders' equity Common stock, $1.67 par value, 10,000,000 shares authorized; 4,428,033 shares issued and outstanding ........... 7,395 7,395 Paid-in surplus ................................................. 21,380 21,380 Capital redemption reserve ...................................... 947 947 Retained earnings ............................................... 2829,~~719~~522 30,479 Less: Stock rescinded through litigation (1,142,625 shares) .... (6,883) (6,883) Accumulated other comprehensive loss: Unrealized loss on investments available for sale, net of deferred income taxes ................................ (21,~~392~~377) (2,575) ------------- ------------ Total shareholders' equity .................................... 4950,~~166~~984 50,743 ------------- ------------ Total liabilities and shareholders' equity ........................ $ ~~272~~290,~~343~~038 $ 269,120 ============= ============

See accompanying Notes to Interim Consolidated Financial Statements. PAGE 2 CHANDLER INSURANCE COMPANY, LTD. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Amounts in thousands except per share data)

For the three months ended ~~June~~September 30, ------------------------ 2000 1999 ---------- ---------- Premiums and other revenues Direct premiums written and assumed ....................$ 4665,~~808~~265 $ 3950,~~708~~219 Reinsurance premiums ceded ............................. (1523,~~457~~027) (1719,~~474~~382) ---------- ---------- Net premiums written and assumed ..................... 3142,~~351~~238 2230,~~234~~837 Increase in unearned premiums .......................... (18,~~212~~903) (18,~~578~~472) ---------- ---------- Net premiums earned .................................. 3033,~~139~~335 2022,~~656~~365 Interest income, net ..................................... 1,~~402~~599 1,~~315~~373 Realized investment gains, net ........................... 178 5 Commissions, fees and other income ....................... ~~365~~479 ~~416~~499 ---------- ---------- Total premiums and other revenues .................... 3135,~~906~~591 2224,~~387~~242 ---------- ---------- Operating costs and expenses Losses and loss adjustment expenses .................... 2122,~~236~~039 1416,~~687~~382 Policy acquisition costs ............................... 78,~~941~~117 64,~~252~~863 General and administrative expenses .................... 3,~~155~~833 23,~~938~~086 Interest expense ....................................... ~~565~~571 ~~213~~514 Litigation expenses, net ............................... ~~205~~153 ~~191~~233 ---------- ---------- Total operating costs and expenses ................... 3334,~~102~~713 2425,~~281~~078 ---------- ---------- ~~Loss~~Income (loss) before income taxes ........................~~.........~~ ~~(1,196)~~878 (~~1,894~~836) Federal income tax benefit (provision) of consolidated U.S. subsidiaries ...................................... ~~699~~(75) ~~739~~513 ---------- ---------- Net income (loss) ........................................~~.........~~$ ~~(497)~~803 $ (~~1,155~~323) ========== ========== Basic and diluted earnings (loss) per common share .......~~...........~~$ (0.~~11)~~18 $ (0.1805) Basic weighted average common shares outstanding ......... 4,428 6,417 Diluted weighted average common shares outstanding ....... 4,~~446~~444 6,~~435~~433

See accompanying Notes to Interim Consolidated Financial Statements. PAGE 3 CHANDLER INSURANCE COMPANY, LTD. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Amounts in thousands except per share data)

For the ~~six~~nine months ended ~~June~~September 30, ------------------------ 2000 1999 ---------- ---------- Premiums and other revenues Direct premiums written and assumed ....................$ 91157,~~937~~202 $ 74125,~~819~~038 Reinsurance premiums ceded ............................. (3356,~~771~~798) (3150,~~527~~909) ---------- ---------- Net premiums written and assumed ..................... 58100,~~166~~404 4374,~~292~~129 ~~Decrease~~Increase ~~(increase)~~ in unearned premiums .......................... 1(7,~~048~~855) (110,~~598~~070) ---------- ---------- Net premiums earned .................................. 5992,~~214~~549 4164,~~694~~059 Interest income, net ..................................... 24,~~880~~479 24,~~698~~071 Realized investment gains, net ........................... -178 5055 Commissions, fees and other income ....................... ~~763~~1,242 ~~863~~1,362 ---------- ---------- Total premiums and other revenues .................... 6298,~~857~~448 4569,~~305~~547 ---------- ---------- Operating costs and expenses Losses and loss adjustment expenses .................... 4264,~~036~~075 2844,~~138~~520 Policy acquisition costs ............................... 1523,~~639~~756 1116,~~299~~162 General and administrative expenses .................... 610,~~667~~500 59,~~924~~010 Interest expense ....................................... 1,~~131~~702 ~~441~~955 Litigation expenses, net ............................... ~~432~~585 ~~450~~683 ---------- ---------- Total operating costs and expenses ................... 65100,~~905~~618 4671,~~252~~330 ---------- ---------- Loss before income taxes ................................. (32,~~048~~170) (~~947~~1,783) Federal income tax benefit of consolidated U.S. subsidiaries ...................................... 1,~~288~~213 ~~317~~830 ---------- ---------- Net loss .................................................$ (~~1,760~~957) $ (~~630~~953) ========== ========== Basic and diluted loss per common share ..................$ (0.4022) $ (0.1015) Basic weighted average common shares outstanding ......... 4,428 6,417 Diluted weighted average common shares outstanding ....... 4,~~446~~445 6,~~435~~434

See accompanying Notes to Interim Consolidated Financial Statements. PAGE 4 CHANDLER INSURANCE COMPANY, LTD. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Amounts in thousands)

For the three months ended ~~June~~September 30, ------------------------ 2000 1999 ---------- ---------- Net income (loss) .............................................~~.........~~$ ~~(497)~~803 $ (~~1,155~~323) ---------- ---------- Other comprehensive income (loss), before income tax: Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period ... ~~285 (~~1,~~734~~554 (297) Less: Reclassification adjustment for gains included in net income ........................................... (178) (5) ---------- ---------- Other comprehensive income (loss), before income tax .......... ~~285 (~~1,~~734~~376 (302) Income tax benefit (provision) related to items of other comprehensive income (loss) ................................. (78361) ~~468~~71 ---------- ---------- Other comprehensive income (loss), net of tax ................. ~~207 (~~1,~~266~~015 (231) ---------- ---------- Comprehensive income (loss) ...................................~~.........~~$ ~~(290)~~1,818 $ (~~2,421~~554) ========== ==========

See accompanying Notes to Interim Consolidated Financial Statements. PAGE 5 CHANDLER INSURANCE COMPANY, LTD. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Amounts in thousands)

For the ~~six~~nine months ended ~~June~~September 30, ------------------------ 2000 1999 ---------- ---------- Net loss ......................................................$ (~~1,760~~957) $ (~~630~~953) ---------- ---------- Other comprehensive income (loss), before income tax: Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period ... ~~257~~1,811 (3,~~134~~431) Less: Reclassification adjustment for gains included in net income......... .................................. -(178) (5055) ---------- ---------- Other comprehensive income (loss), before income tax .......... ~~257~~1,633 (3,~~184~~486) Income tax benefit (provision) related to items of other comprehensive income (loss) ................................. (74435) ~~884~~955 ---------- ---------- Other comprehensive income (loss), net of income tax .......... ~~183~~1,198 (2,~~300~~531) ---------- ---------- Comprehensive income (loss) ...................................~~.........~~$ ~~(1,577)~~241 $ (23,~~930~~484) ========== ==========

See accompanying Notes to Interim Consolidated Financial Statements. PAGE 6 CHANDLER INSURANCE COMPANY, LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Amounts in thousands)

For the ~~six~~nine months ended ~~June~~September 30, ------------------------ 2000 1999 ---------- ---------- OPERATING ACTIVITIES: Net loss ............................................................ $ (~~1,760~~957) $ (~~630~~953) Add (deduct): Adjustments to reconcile net loss to cash provided by ~~(applied to)~~ operating activities: Realized investment gains, net ................................... -(178) (5055) Net losses on sale of equipment .................................. 35 61 Amortization and depreciation .................................... 1,~~189~~949 1,~~130~~746 Provision for non-collection of premiums ......................... 75249 96166 Net change in non-cash balances relating to operating activities: Premiums receivable ............................................ 123,~~194~~456 (48,~~957~~476) Reinsurance recoverable on paid losses ......................... ~~(3,882)~~903 ~~591~~352 Reinsurance recoverable on unpaid losses ....................... (~~2,741~~470) (1820,~~096~~589) Prepaid reinsurance premiums ................................... (27,~~273~~742) (~~890~~4,731) Deferred policy acquisition costs .............................. (~~320~~878) (~~131~~752) Other assets ................................................... (2,~~366~~783) (1,~~216~~233) Unpaid losses and loss adjustment expenses ..................... 31,~~617~~288 1415,~~511~~685 Unearned premiums .............................................. 115,~~225~~597 214,~~488~~801 Policyholder deposits .......................................... ~~172~~194 ~~285~~756 Accrued taxes and other payables ............................... (~~101~~1,030) ~~373~~243 Premiums payable ............................................... ~~(371)~~4,270 864,497 Litigation liabilities ......................................... ~~258~~358 ~~390~~592 ---------- ---------- Cash provided by ~~(applied to)~~ operating activities ........................... 414,~~919~~231 (62,~~014)~~050 ---------- ---------- INVESTING ACTIVITIES: Fixed maturities available for sale: Purchases ....................................................... (1435,~~153~~156) (816,~~137~~654) Sales ........................................................... -9,184 34,~~048~~159 Maturities ...................................................... 22,348 15,~~253~~820 7Fixed maturities held to maturity: Maturities....................................................... - 1,~~498~~000 Cost of property and equipment purchased .......................... (2,~~437~~721) (~~873~~1,841) Proceeds from sale of property and equipment ...................... 1821 7396 ---------- ---------- Cash provided by (applied to) investing activities .............. (16,~~319~~324) 12,~~609~~580 ---------- ---------- FINANCING ACTIVITIES: Proceeds from debentures........................................... - 24,000 Payments on notes payable ......................................... - (~~958~~9,410) Debt issue costs................................................... - (1,692) ---------- ---------- Cash ~~applied~~provided toby financing activities ............................ - ~~(958)~~12,898 ---------- ---------- Increase ~~(decrease)~~ in cash and cash equivalents during the period ............. 37,~~600~~907 (517,~~363)~~528 Cash and cash equivalents at beginning of period .................... 8,456 10,383 ---------- ---------- Cash and cash equivalents at end of period .......................... $ 1216,~~056~~363 $ 527,~~020~~911 ========== ==========

See accompanying Notes to Consolidated Financial Statements. PAGE 7 CHANDLER INSURANCE COMPANY, LTD. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. They do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. However, except as disclosed herein, there have been no material changes in the information included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the three and nine month periods ended September 30, 2000 are not necessarily indicative of the results that may be expected for the year. Certain reclassifications of prior year amounts have been made to conform to the 2000 presentation. The consolidated financial statements include the accounts of Chandler Insurance Company, Ltd. ("Chandler" or the "Company") and all subsidiaries. The following represents the significant subsidiaries: - Chandler Insurance (Barbados), Ltd. ("Chandler Barbados"), a wholly owned subsidiary of the Company. - Chandler (U.S.A.), Inc. ("Chandler USA"), a wholly owned subsidiary of Chandler Barbados. - National American Insurance Company ("NAICO") and LaGere & Walkingstick Insurance Agency, Inc. ("L&W"), wholly owned subsidiaries of Chandler USA. All significant intercompany accounts and transactions have been eliminated in consolidation. NOTE 2. LITIGATION CENTRA LITIGATION The Company and certain of its subsidiaries and affiliates have been involved in various matters of litigation with CenTra, Inc. ("CenTra") and certain of its affiliates, officers and directors (the "CenTra Group") since 1992. The CenTra Group has been a significant shareholder in the Company owning 49.2% of the Company's stock in July 1992. Three present or former executive officers of CenTra, Norman E. Harned, Ronald W. Lech and M. J. Moroun were directors of the Company until November 1999. On April 22, 1997, the U.S. District Court in Oklahoma City, Oklahoma (the "Oklahoma Federal Court") entered judgments in that litigation. Various appeals were taken from those judgments, but the judgments were affirmed on appeal. On March 25, 1997, the U.S. District Court for the District of Nebraska ("Nebraska Court") ordered CenTra and certain of its affiliates to divest all Chandler shares owned by them. The CenTra defendants owned or controlled 3,133,450 Chandler shares. The Nebraska Court approved a divestiture plan submitted by NAICO (the "NAICO Plan") which called for the Company to acquire and cancel the shares of Chandler stock owned by the CenTra Group. During December 1999, the Company acquired 1,989,200 shares of its stock in exchange for payment of $15,204,758. These shares were canceled upon acquisition by the Company. On November 1, 2000, the Nebraska Court ordered that all remaining shares owned by CenTra be transferred to the Company by November 15, 2000 and that the Company simultaneously pay $6,882,500 in exchange for the shares. The Company previously recorded the return of the 1,142,625 shares as a decrease to shareholders' equity during 1997. PAGE 8 In 1997, NAICO learned that several CenTra affiliates had filed two lawsuits against NAICO, NAICO Indemnity (Cayman), Ltd. ("NAICO Indemnity"), a wholly owned subsidiary of the Company, and certain NAICO officers asserting some of the same claims made and tried in the Oklahoma lawsuit described previously. Those claims were purportedly prosecuted by CenTra on its own behalf and on behalf of its subsidiaries and were based upon alleged wrongful cancellation of their insurance policies by NAICO and NAICO Indemnity. The Oklahoma Federal Court entered a judgment against CenTra on these claims. NAICO and NAICO Indemnity contend that the Oklahoma Federal Court's adjudication is conclusive as to all claims. The lawsuits have been consolidated and have been assigned to the same judge who presided over the action in the Oklahoma Federal Court. Dispositive motions filed by NAICO, NAICO Indemnity and the other defendants are currently under consideration by the Oklahoma Federal Court. In the CenTra litigation, certain officers and directors of the Company were named as defendants. In accordance with its Articles of Association, the Company has advanced the litigation expenses of these persons in exchange for undertakings to repay such expenses if those persons are later determined to have breached the standard of conduct provided in the Articles of Association. The Company has paid expenses on behalf of these officers and directors totaling approximately $2.3 million as of September 30, 2000. Some of these expenses relate to claims decided adversely to the officers and directors and a portion of these expenses relate to claims which are pending, have been dismissed or which were decided in favor of the officers and directors. These expenses together with certain other expenses may be recovered from the Company's director and officer liability insurance policy ("D&O Insurer"). As a result of various events in 1995, 1996 and 1997, the Company recorded estimated recoveries of costs from its D&O Insurer totaling $4,500,000 for reimbursable amounts previously paid that relate to allowable defense and litigation costs for such parties. The Company received payment for a 1995 claim during 1996 in the amount of $795,000. The balance is included in other assets in the Company's consolidated balance sheets. The Company is entitled to a total of $5 million under the applicable insurance policy to the extent it has advanced reimbursable expenses. The Company is negotiating with the insurer for payment of the policy balance. The Company could recover the remaining policy limits or could compromise its claim, and could incur significant costs in either case. The ultimate outcome of the litigation described above could have a material adverse effect on the Company and could negatively impact future earnings. The Company's management believes that adequate financial resources are available to pay the judgments as they currently exist or as they may be modified on appeal. As a holding company, the Company may receive cash through equity sales, borrowings and dividends from its subsidiaries. Chandler Barbados and NAICO are subject to various regulations which restrict their ability to pay shareholder dividends. A reduction in the amount of invested assets, or an increase in borrowings resulting from potential payments of these judgments would reduce investment earnings or increase operating expenses in future periods. At the present time the Company is actively participating in court proceedings and rights of appeal concerning these legal proceedings; therefore, the Company is unable to predict the outcome of such litigation with certainty or the effect of such ongoing litigation on future operations. The Company is also unable to predict the effect of the divestiture order on the rights, limitations or other regulation of ownership of the stock of any existing or prospective holders of the Company's common stock, or the effect on the market price of the Company's stock. PAGE 9 GOING PRIVATE LITIGATION On June 1, 2000, Brent LaGere, Chairman and CEO of the Company, announced a plan led by senior company management and key stockholders of the Company which would result in the Company becoming privately held. At a regularly scheduled meeting of the Company's board of directors held on June 5, 2000, Robert L. Rice, James M. Jacoby and Paul A. Maestri were appointed as a special committee of the board for the purpose of considering the concept and fairness of the announced plan. On June 30, 2000, the Company announced that three civil lawsuits were filed against the Company, its indirect subsidiary Chandler USA, and all of the Company's directors on June 5 and 6, 2000. The suits allege that the plans announced on June 1, 2000 to take the Company private are detrimental to the public shareholders. The suits also request that they be certified as class actions and that the court enter a temporary restraining order to prevent completion of the announced plan. The suits also allege that all defendants have breached and are breaching fiduciary duties owed to the plaintiffs and other shareholders. All three suits have been consolidated into a single action pending before a State District Judge in Oklahoma City. The plaintiffs, who are represented by one law firm have been granted leave to amend their claims and are expected to do so by November 13, 2000. The Company will file a timely response and will vigorously defend the suit. On June 12, 2000, CenTra made similar allegations in an already pending lawsuit in the Nebraska Court involving a court-ordered divestiture of the Company's shares owned by CenTra. CenTra requested that the court enjoin and restrain Mr. LaGere and others from completing the announced plans. On July 20, 2000, the Nebraska Court denied CenTra's request. On June 27, 2000, CenTra filed a similar request in an already pending case in the Oklahoma Federal Court. The Company has responded, but the Oklahoma Federal Court has not ruled. OTHER LITIGATION The Company and its subsidiaries are not parties to any other material litigation other than as is routinely encountered in their respective business activities. NOTE 3. EARNINGS (LOSS) PER COMMON SHARE Basic earnings (loss) per common share is computed based upon net income (loss) divided by the weighted average number of common shares outstanding during each period. Diluted earnings (loss) per common share is computed based upon net income (loss) divided by the weighted average number of common shares outstanding during each period adjusted for the effect of dilutive potential common shares calculated using the treasury stock method. Weighted average shares include 1,142,625 and 1,660,125 common shares at September 30, 2000 and 1999, respectively, which were rescinded through litigation during 1997 but were still outstanding, and exclude 524,475 common shares held by a subsidiary of the Company at September 30, 1999. The numerator for basic and diluted earnings per share is equal to the net income (loss) for the respective period. The following table sets forth the computation of the denominator for basic and diluted earnings (loss) per share:

THREE MONTHS ENDED ~~JUNE~~NINE ~~30, SIX~~ MONTHS ENDED ~~JUNE~~SEPTEMBER 30, SEPTEMBER 30, --------------------------- -------------------------- 2000 1999 2000 1999 ------------ ------------ ------------ ------------ (In thousands) Denominator for basic earnings per share- Weighted average shares ................ 4,428 6,417 4,428 6,417 Effect of dilutive securities - Stock options .......................... 1816 1816 1817 1817 ------------ ------------ ------------ ------------ Denominator for diluted earnings per share- Adjusted weighted average shares and assumed conversions .............. 4,~~446~~444 6,~~435~~433 4,~~446~~445 6,~~435~~434 ============ ============ ============ ============

NOTE 4. ACCOUNTING STANDARD ISSUED BUT NOT YET ADOPTED In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that the Company recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. The Company will adopt SFAS No. 133 when required. Management of the Company does not expect that adoption of SFAS No. 133 will have a material impact on the Company's consolidated financial condition or results of operations. PAGE 10 NOTE 5. SEGMENT INFORMATION The following table presents a summary of the Company's operating segments for the three and nine month periods ended September 30, 2000 and 1999:

Property and All Intersegment Reported Agency casualty Other eliminations balances --------- ---------- --------- ------------ ---------- (In thousands) THREE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, 2000 Revenues from external customers (1)...$ ~~298~~399 $ 3033,~~140~~346 $ 6669 $ - $ 3033,~~504~~814 Intersegment revenues.................. 12,~~616~~917 7344 4139 (13,~~730~~000) - Segment profit (loss) before income taxes (2)..................... (775) ~~(757)~~1,364 (~~362~~481) - ~~(1,196)~~878 THREE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, 1999 Revenues from external customers (1)...$ ~~356~~441 $ 2022,~~652~~367 $ 6456 $ - $ 2122,~~072~~864 Intersegment revenues.................. 12,~~672~~720 7135 4341 (12,~~786~~796) - Segment profit (loss) before income taxes (2)..................... 7106 (~~1,547~~557) (~~337~~385) ~~(17)~~- (~~1,894~~836) ~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, 2000 Revenues from external customers (1)...$ ~~612~~1,011 $ 5992,~~233~~579 $ ~~132~~201 $ - $ 5993,~~977~~791 Intersegment revenues.................. 36,~~408~~325 ~~110~~155 82121 (36,~~600~~601) - Segment profit (loss) before income taxes (2)..................... (~~333~~338) (~~1,970~~605) (~~745~~1,227) - (32,~~048~~170) Segment assets......................... 56,~~439~~636 ~~276~~294,~~737~~377 ~~462~~465 (1011,~~295~~440) ~~272~~290,~~343~~038 ~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, 1999 Revenues from external customers (1)...$ ~~707~~1,147 $ 4164,~~700~~068 $ ~~150~~206 $ - $ 4265,~~557~~421 Intersegment revenues.................. 36,~~325~~046 ~~121~~157 82123 (36,~~528~~326) - Segment profit (loss) before income taxes (2)..................... ~~(105)~~1 (89646) (~~736~~1,122) (1716) (~~947~~1,783) Segment assets......................... 56,~~045~~127 ~~256~~290,~~273~~550 4,~~359~~094 (1517,~~407~~066) ~~250~~283,~~270~~705 --------------------------------------- (1) Consists of net premiums earned and commissions, fees and other income. (2) Includes net realized investment gains.

PAGE 11 The following supplemental information pertaining to each insurance program's net premiums earned and losses and loss adjustment expenses is presented for the property and casualty segment.

THREE MONTHS ENDED ~~JUNE~~NINE ~~30, SIX~~ MONTHS ENDED ~~JUNE~~SEPTEMBER 30, SEPTEMBER 30, --------------------------- -------------------------- 2000 1999 2000 1999 ------------ ------------ ------------ ------------ (In thousands) INSURANCE PROGRAM ------------------------------------------ NET PREMIUMS EARNED Standard property and casualty ...........$ 2226,~~271~~005 $ 1213,~~112~~746 $ 4369,~~089~~094 $ 2437,~~227~~973 Political subdivisions ................... 4,~~305~~270 3,~~714~~933 812,~~693~~963 711,~~495~~429 Surety bonds ............................. 2,~~588~~332 2,~~562~~598 57,~~425~~758 58,~~443~~041 Group accident and health ................ ~~820~~770 2,~~317~~056 12,~~775~~544 46,~~616~~673 Other .................................... ~~155~~ (4942) ~~232~~32 190 (8757) ------------ ------------ ------------ ------------ $ 3033,~~139~~335 $ 2022,~~656~~365 $ 5992,~~214~~549 $ 4164,~~694~~059 ============ ============ ============ ============ LOSSES AND LOSS ADJUSTMENT EXPENSES Standard property and casualty ...........$ 1517,~~877~~574 $ 89,~~524~~750 $ 3048,~~994~~568 $ 1727,~~453~~202 Political subdivisions ................... 32,~~390~~892 4,~~489~~241 69,~~760~~652 711,~~325~~566 Surety bonds ............................. ~~769~~437 ~~(38)~~85 1,~~460~~897 ~~272~~357 Group accident and health ................ 1,~~145~~065 ~~1,929~~ 2,~~846~~047 3,~~485~~911 5,532 Other .................................... 5571 ~~(217)~~259 ~~(24)~~47 (~~397~~137) ------------ ------------ ------------ ------------ $ 2122,~~236~~039 $ 1416,~~687~~382 $ 4264,~~036~~075 $ 2844,~~138~~520 ============ ============ ============ ============

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS Some of the statements made in this Form 10-Q Report, as well as statements made by Chandler Insurance Company, Ltd. (the "Company") in periodic press releases, oral statements made by the Company's officials to analysts and shareholders in the course of presentations about the Company and conference calls following earnings releases, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such factors include, among other things, (i) general economic and business conditions; (ii) interest rate changes; (iii) competition and regulatory environment in which the Company operates; (iv) claims frequency; (v) claims severity; (vi) the number of new and renewal policy applications submitted by the Company's agents; (vii) the ability of the Company to obtain adequate reinsurance in amounts and at rates that will not adversely affect its competitive position; (viii) the ability of National American Insurance Company ("NAICO") to maintain favorable insurance company ratings; and (ix) other factors including the ongoing litigation matters involving a significant concentration of ownership of common stock. PAGE 12 RESULTS OF OPERATIONS PREMIUMS EARNED The following table sets forth premiums earned on a gross basis (before reductions for premiums ceded to reinsurers) and on a net basis (after such reductions) for each insurance program for the three and nine month periods ended September 30, 2000 and 1999:

GROSS PREMIUMS EARNED NET PREMIUMS EARNED --------------------------- -------------------------- THREE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, 2000 1999 2000 1999 ------------------------------------ ------------ ------------ ------------ ------------ (In thousands) Standard property and casualty ..... $ 3337,~~887~~913 $ 24,~~004~~536 $ 2226,~~271~~005 $ 1213,~~112~~746 Political subdivisions ............. 8,~~527~~760 7,~~314~~669 4,~~305~~270 3,~~714~~933 Surety bonds ....................... 3,~~313~~405 3,~~399~~430 2,~~588~~332 2,~~562~~598 Group accident and health .......... ~~868~~835 2,~~600~~233 ~~820~~770 2,~~317~~056 Other .............................. ~~154~~(20) 2837 ~~155~~ (4942) 32 ------------ ------------ ------------ ------------ TOTAL .............................. $ 4650,~~749~~893 $ 37,~~345~~905 $ 3033,~~139~~335 $ 2022,~~656~~365 ============ ============ ============ ============

GROSS PREMIUMS EARNED NET PREMIUMS EARNED --------------------------- -------------------------- ~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, 2000 1999 2000 1999 ------------------------------------ ------------ ------------ ------------ ------------ (In thousands) Standard property and casualty ..... $ 64102,~~594~~507 $ 4570,~~639~~175 $ 4369,~~089~~094 $ 2437,~~227~~973 Political subdivisions ............. 1625,~~679~~439 1422,~~495~~164 812,~~693~~963 711,~~495~~429 Surety bonds ....................... 710,~~322~~727 610,~~953~~384 57,~~425~~758 58,~~443~~041 Group accident and health .......... 12,~~879~~714 57,~~208~~442 12,~~775~~544 46,~~616~~673 Other .............................. ~~238~~218 3672 ~~232~~190 (8757) ------------ ------------ ------------ ------------ TOTAL .............................. $ 90141,~~712~~605 $ 72110,~~331~~237 $ 5992,~~214~~549 $ 4164,~~694~~059 ============ ============ ============ ============

Gross premiums earned, before reductions for premiums ceded to reinsurers, increased $13.0 million or 34% in the third quarter of 2000 compared to the third quarter of 1999. Gross premiums earned for the first nine months of 2000 increased $31.4 million or 28% compared to the first nine months of 1999. The increases are primarily attributable to increases in premium rates and premium production in Texas and Oklahoma. Net premiums earned increased $11.0 million or 49% in the third quarter of 2000 compared to the third quarter of 1999, and increased $28.5 million or 44% for the nine months ended September 30, 2000 compared to the 1999 period. The increase in net premiums earned was due to the increases in premium rates and premium production, and to an increase in the amount of risk retained in the 2000 periods for the Company's workers compensation line of business. Gross premiums earned in the standard property and casualty program increased $13.4 million or 55% in the third quarter of 2000 compared to the third quarter of 1999, and increased $32.3 million or 46% for the nine months ended September 30, 2000 compared to the 1999 period. The increases are primarily attributable to increases in premium rates and premium production. Net premiums earned in the standard property and casualty program increased $12.3 million or 89% in the third quarter of 2000 compared to the third quarter of 1999, and increased $31.1 million or 82% for the nine months ended September 30, 2000 compared to the 1999 period. The increase in net premiums earned was due to the increases in premium rates and premium production, and to the increase in the amount of risk retained for the workers compensation portion of the program. Gross premiums earned in the political subdivisions program increased $1.1 million or 14% in the third quarter of 2000 compared to the third quarter of 1999, and increased $3.3 million or 15% for the nine months ended September 30, 2000 compared to the 1999 period. The increases are primarily attributable to rate increases in the school districts portion of the program. Net premiums earned in the political subdivisions program increased $337,000 or 9% in the third quarter of 2000 compared to the third quarter of 1999, and increased $1.5 million or 13% for the nine months ended September 30, 2000 compared to the 1999 period. PAGE 13 Gross premiums earned in the surety bond program decreased $25,000 or 1% in the third quarter of 2000 compared to the third quarter of 1999, and increased $343,000 or 3% for the nine months ended September 30, 2000 compared to the 1999 period. Approximately $227,000 and $995,000 of the gross premiums earned in the third quarter and first nine months of 2000, respectively, relates to a new program that is 100% reinsured by an unaffiliated reinsurer. Excluding this new program, gross premiums earned decreased $252,000 and $652,000 in the third quarter and first nine months of 2000, respectively, compared to the corresponding 1999 periods. Net premiums earned in the surety bond program decreased $266,000 or 10% in the third quarter of 2000 compared to the third quarter of 1999, and decreased $283,000 or 4% for the nine months ended September 30, 2000 compared to the 1999 period. Gross premiums earned in the group accident and health program decreased $1.4 million or 63% in the third quarter of 2000 compared to the third quarter of 1999, and decreased $4.7 million or 64% for the nine months ended September 30, 2000 compared to the 1999 period. Net premiums earned in this program decreased $1.3 million or 63% in the third quarter of 2000 compared to the third quarter of 1999, and decreased $4.1 million or 62% for the nine months ended September 30, 2000 compared to the 1999 periods. NAICO plans to discontinue this program during the first quarter of 2001. NET INTEREST INCOME AND NET REALIZED INVESTMENT GAINS At September 30, 2000, the Company's investment portfolio consisted primarily of fixed income U.S. Government, high-quality corporate and tax exempt bonds, with approximately 12% invested in cash and money market instruments. The Company's portfolio contains no non-investment grade bonds or real estate investments. Net interest income increased $226,000 or 16% in the third quarter of 2000 compared to the third quarter of 1999, and increased $408,000 or 10% for the nine months ended September 30, 2000 compared to the 1999 period, due primarily to an increase in average invested assets and an increase in the average net yield on the portfolio. The average annualized net yield, excluding net realized investment gains, for the three months ended September 30, 2000 and 1999 was 5.0% and 4.5%, respectively. For the nine months ended September 30, 2000 and 1999, the average annualized net yield was 4.7% and 4.5%, respectively. The Company had net realized investment gains of $178,000 and $5,000 in the third quarter of 2000 and 1999, respectively, and had net realized investment gains in the first nine months of 2000 of $178,000 compared to $55,000 in the first nine months of 1999. COMMISSIONS, FEES AND OTHER INCOME The Company's income from commissions, fees and other income decreased $20,000 or 4% in the third quarter of 2000 compared to the third quarter of 1999, and decreased $120,000 or 9% for the nine months ended September 30, 2000 compared to the 1999 period. The majority of the Company's income from commissions, fees and other income are from the Company's subsidiary LaGere & Walkingstick Insurance Agency, Inc. ("L&W"). L&W's brokerage commissions and fees before intercompany eliminations were $3.3 million and $7.3 million in the third quarter and first nine months of 2000, respectively, compared to $3.2 million and $7.2 million in the year ago periods. A large portion of the brokerage commissions and fees for L&W is incurred by NAICO and thus eliminated in the consolidation of the Company's subsidiaries. LOSSES AND LOSS ADJUSTMENT EXPENSES The percentage of losses and loss adjustment expenses to net premiums earned ("loss ratio") was 66.1% and 69.2% for the quarter and nine months ended September 30, 2000, compared to 73.2% and 69.5% in the comparable 1999 periods. Weather-related losses from wind and hail totaled $579,000 and $2.4 million for the third quarter and first nine months of 2000, respectively, and increased the respective loss ratios by 1.7 and 2.6 percentage points. Weather-related losses totaled $803,000 and $4.0 million for the third quarter and first nine months of 1999, respectively, and increased the respective loss ratios by 3.6 and 6.3 percentage points. The nine month period ending September 30, 1999 included $1.8 million in weather-related losses which resulted from the tornadoes, strong winds and hail that caused significant damage in Oklahoma on May 3, 1999. The decrease in weather-related losses in the 2000 periods was largely offset by adverse loss experience in the group accident and health program and higher than normal losses in the Company's surety bond program. PAGE 14 POLICY ACQUISITION COSTS Policy acquisition costs consist of costs associated with the acquisition of new and renewal business and generally include direct costs such as premium taxes, commissions to agents and ceding companies and premium-related assessments and indirect costs such as salaries and expenses of personnel who perform and support underwriting activities. NAICO also receives ceding commissions from the reinsurers who assume premiums from NAICO under certain reinsurance contracts and the ceding commissions are accounted for as a reduction of policy acquisition costs. Direct policy acquisition costs and ceding commissions are deferred and amortized over the terms of the policies. When the sum of the anticipated losses, loss adjustment expenses and unamortized policy acquisition costs exceeds the related unearned premiums, including anticipated investment income, a provision for the indicated deficiency is recorded. The following table sets forth the Company's policy acquisition costs for each of the three and nine month periods ended September 30, 2000 and 1999:

THREE MONTHS ENDED ~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, ~~JUNE~~SEPTEMBER 30, ---------------------- ---------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- (In thousands) Commissions expense ........................ $ 56,~~731~~841 $ 54,~~704~~807 $ 1017,~~990~~832 $ 1014,~~142~~949 Other premium related assessments .......... ~~410~~334 ~~288~~378 ~~813~~1,147 ~~688~~1,065 Premium taxes .............................. 1,~~240~~101 ~~941~~814 23,~~215~~316 12,~~367~~181 Excise taxes ............................... 90121 5370 ~~201~~321 99169 Dividends to policyholders ................. ~~100~~(1) 7090 ~~201~~200 ~~157~~247 Other expense .............................. 30173 5570 72246 85155 ---------- ---------- ---------- ---------- Total direct expenses ...................... 78,~~601~~569 76,~~111~~229 1423,~~492~~062 1218,~~538~~766 Indirect underwriting expenses ............. 35,~~975~~230 34,~~970~~582 813,~~053~~283 712,~~794~~377 Commissions received from reinsurers ....... (25,~~897~~124) (45,~~687~~327) (611,~~586~~710) (814,~~902~~230) Adjustment for deferred acquisition costs .. (~~738~~558) (~~142~~621) (~~320~~879) (~~131~~751) ---------- ---------- ---------- ---------- Net policy acquisition costs ............... $ 78,~~941~~117 $ 64,~~252~~863 $ 1523,~~639~~756 $ 1116,~~299~~162 ========== ========== ========== ==========

Total gross direct and indirect expenses as a percentage of direct written and assumed premiums were 21.1% and 23.1% for the third quarter and first nine months of 2000, respectively, compared to 21.5% and 24.9% in the corresponding year ago periods. Commission expense as a percentage of gross written and assumed premiums was 10.5% and 11.3% in the third quarter and the first nine months of 2000, respectively, compared to 9.6% and 12.0% in the corresponding 1999 periods. Premium taxes increased $287,000 and $1.1 million in the third quarter and nine months ended September 30, 2000, respectively, over the corresponding 1999 periods due to the increase in written premiums and to a refund of $392,000 which was received in the first quarter of 1999 for premium taxes paid in a prior year. Indirect underwriting expenses were 8.0% and 8.4% of total direct written and assumed premiums in the third quarter and first nine months of 2000, respectively, compared to 9.1% and 9.9% in the corresponding 1999 periods. Indirect expenses include general overhead and administrative costs associated with the acquisition of new and renewal business, some of which is relatively fixed in nature, thus, the percentage of such expenses to direct written and assumed premiums will vary depending on the Company's overall premium volume. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses were 7.5% and 7.4% of gross premiums earned and commissions, fees and other income in the third quarter and first nine months of 2000, respectively, compared to 8.0% and 8.1% for the corresponding 1999 periods. General and administrative expenses have historically not varied in direct proportion to the Company's revenues. A portion of such expenses is allocated to policy acquisition costs (indirect underwriting expenses) and loss and loss adjustment expenses based on various factors including employee counts, salaries, occupancy and specific identification. Because certain types of expenses are fixed in nature, the percentage of such expenses to revenues will vary depending on the Company's overall premium volume. INTEREST EXPENSE Interest expense increased $57,000 or 11% in the third quarter of 2000 compared to the third quarter of 1999, and increased $747,000 or 78% for the first nine months of 2000 compared to the 1999 period. The increase was primarily due to interest expense on the $24 million debenture offering which was completed on July 16, 1999 by Chandler USA. PAGE 15 LITIGATION EXPENSES Litigation expenses reflect expenses related to the ongoing legal proceedings involving CenTra, Inc. and certain of its affiliates. Litigation expenses decreased $80,000 or 34% in the third quarter of 2000 compared to the third quarter of 1999, and decreased $98,000 or 14% for the nine months ended September 30, 2000 compared to the 1999 period. Increased or renewed activity could result in greater litigation expenses in the future. See Note 2 to Interim Consolidated Financial Statements. INCOME TAX PROVISION OR BENEFIT The provision for or benefit from federal income taxes of the consolidated U.S. subsidiaries varies with the level of income or loss before income taxes of such subsidiaries. The provision or benefit relative to the consolidated income before income taxes will also vary dependent on the contribution to income before income taxes by the consolidated U.S. subsidiaries. LIQUIDITY AND CAPITAL RESOURCES In the first nine months of 2000, the Company provided $14.2 million in cash from operations due primarily to the collection of certain receivables totaling approximately $12.9 million in January of 2000 that were related to the rescission of two reinsurance treaties during the fourth quarter of 1999. Cash provided from operations also increased due to an increase in unearned premiums and premiums payable, less an increase in prepaid reinsurance premiums and premiums receivable other than the collections described above, which generally resulted from the increase in written premiums. The Company provided $2.1 million in cash from operations during the first nine months of 1999. Book value per share was $15.52 at September 30, 2000 based on 3,285,408 shares (after giving effect to 1,142,625 shares rescinded through litigation) compared to $15.45 at December 31, 1999. A.M. BEST RATING On November 3, 2000, the Company learned that A.M. Best Company had downgraded its rating of NAICO from "A- (Excellent)" to "B+ (Very Good)". Premium growth and slippage in the Company's underwriting results created greater financial leverage which was the primary basis for the downgrade. NAICO is rated "A (Strong)" by Standard and Poor's rating agency. REGULATION - NAICO REDOMESTICATION Effective May 19, 2000, NAICO transferred its domicile from Nebraska to Oklahoma. NAICO's executive and administrative offices have been located in Chandler, Oklahoma since its acquisition by the Company in January 1987. Approximately 48% and 47% of NAICO's written premiums during 1999 and the first nine months of 2000, respectively, were in the state of Oklahoma. As an Oklahoma corporation, NAICO and any person controlling NAICO, directly or indirectly, are subject to the insurance laws of Oklahoma including laws concerning the change or acquisition of control and payment of shareholder and policyholder dividends by NAICO, which are similar to the insurance laws of Nebraska. See Regulation in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. YEAR 2000 READINESS DISCLOSURES Through the first nine months of the year 2000, the Company has not experienced any significant problems or disruptions related to year 2000 problems. The Company is currently not aware of any significant disruptions experienced by its customers, vendors and service providers that would materially affect their ability to do business with the Company. While it is possible that certain year 2000 problems may exist but have not yet materialized, the Company does not currently expect any year 2000 problems to be encountered in the future that would have a material adverse effect on the operating results of the Company. PAGE 16 PART II. OTHER INFORMATION Item 1. Legal Proceedings ----------------- In response to this item, the Company incorporates by reference to Note 2. Litigation to its Interim Consolidated Financial Statements contained elsewhere in this report. Item 2. Changes in Securities --------------------- None Item 3. Defaults Upon Senior Securities ------------------------------- None Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- None Item 5. Other Information ----------------- None Item 6. Exhibits and Reports on Form 8-K -------------------------------- The Company filed one current report on Form 8-K dated September 14, 2000 responding to Item 5 of Form 8-K. PAGE 17 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: ~~August~~November 89, 2000 CHANDLER INSURANCE COMPANY, LTD. By: /s/ W. Brent LaGere --------------------------------------- W. Brent LaGere Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) By: /s/ Mark C. Hart --------------------------------------- Mark C. Hart Vice President - Accounting & Treasurer (Principal Accounting Officer)

Filing Compare · CHANDLER INSURANCE CO LTD