The selected financial data has been derived from the consolidated financial statements of Chandler USA and its subsidiaries, which appear in Item 14(a). The consolidated balance sheets of Chandler USA and its subsidiaries as of December 31, 2000, and the related consolidated statements of operations, comprehensive income, shareholder's equity and cash flows for each of the two years in the period ended December 31, 2000 were audited by Deloitte & Touche LLP, independent auditors, whose independent auditors' report expressed an unqualified opinion and included an explanatory paragraph relating to litigation. The consolidated balance sheet of Chandler USA and its subsidiaries as of December 31, 2001 and the related consolidated statements of operations, comprehensive income, shareholder's equity and cash flows for the year ended December 31, 2001 have been audited by Tullius Taylor Sartain & Sartain LLP, independent auditors, whose independent auditors' report expresses an unqualified opinion and includes an explanatory paragraph relating to litigation. The selected financial data should be read in conjunction with "LEGAL PROCEEDINGS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and the consolidated financial statements of Chandler USA and the notes thereto appearing in Item 14(a). See Notes to Consolidated Financial Statements for various litigation and contingency matters.
The impact of a recession on Chandler USA would depend on its duration and severity. A prolonged downturn in the economy could result in decreased demand for NAICO's insurance products and an increase in uncollectible premiums and/or reinsurance recoverables. In addition, an economic downturn could result in an increase in the number of insurance claims if insureds decrease expenditures that promote safety. Much of NAICO's insurance business is concentrated in the Southwest and Midwest areas of the United States. Approximately $143 million, or 90%, of NAICO's direct written premiums in 2001 were in the states of Oklahoma and Texas. An economic downturn in these states could have a significant adverse impact on Chandler USA. A recession might also cause defaults on fixed-income securities owned by NAICO. During 2001, the market value of NAICO's available for sale investments increased by $2.6 million due primarily to lower interest rates experienced during this time. Management believes it has mitigated the impact of a recession by employing conservative underwriting practices and strict credit policies and maintaining a high-quality investment portfolio.
Gross premiums earned increased 21% and 25% in 1999 and 2000, respectively. The increases in 1999 and 2000 were primarily attributable to increases in premium production in Texas and Oklahoma, and to increases in premium rates during 2000. Gross premiums earned decreased 10% in 2001 despite increases in premium rates as NAICO focused on improving underwriting profitability in its core programs and discontinued certain classes of business. Net premiums earned increased 66% in 1999, decreased 2% in 2000 and decreased 18% in 2001. The rescission of two reinsurance treaties increased net premiums earned in 1999 by $19.6 million. During 2000, NAICO purchased additional reinsurance for its workers compensation and casualty lines of business which reduced NAICO's net retention for these lines of business and also reduced net premiums earned. Effective October 1, 2000, NAICO purchased quota share reinsurance which reduced NAICO's net retention for its casualty and workers compensation lines of business. The purchase of the quota share reinsurance reduced net premiums earned by $3.2 million and $11.3 million in 2000 and 2001, respectively.
Gross premiums earned in the standard property and casualty program increased 30% and 40% in 1999 and 2000, respectively. The increases in 1999 and 2000 were primarily attributable to increases in premium production in Texas and Oklahoma, and to increases in premium rates during 2000. Gross premiums earned decreased 8% in 2001 due primarily to discontinuing certain accounts and classes of business where rates were not believed to be adequate. Increases in premium rates partially offset the decrease in premium production. Net premiums earned increased 94% in 1999, increased 11% in 2000 and decreased 15% in 2001. The rescission of the reinsurance treaties increased net premiums earned in 1999 by $17.3 million in this program. The purchase of the quota share reinsurance reduced net premiums earned by $2.7 million and $9.5 million in this program in 2000 and 2001, respectively.
Gross premiums earned in the group accident and health program increased 50% in 1999, decreased 63% in 2000 and decreased 90% in 2001. Net premiums earned increased 78% in 1999, decreased 61% in 2000 and decreased 90% in 2001. NAICO discontinued this program during 2000 due to poor underwriting results.
Other programs in the preceding table include premiums from the runoff of various programs which are no longer offered by NAICO and from NAICO's participation in various mandatory pools covering workers compensation for insureds that were unable to purchase this coverage from an insurance company on a voluntary basis, and direct assignments to write workers compensation for such insureds in certain states in lieu of participating in related pools.
At December 31, 2001, Chandler USA's investment portfolio consisted primarily of fixed income U.S. Government and high-quality corporate bonds, with approximately 6% invested in cash and money market instruments. Income generated from this portfolio is largely dependent upon prevailing levels of interest rates. Chandler USA's portfolio contains no non-investment grade bonds or real estate investments. Chandler USA also receives interest income from Chandler Barbados on intercompany loans.
The average net yield on the portfolio, including net realized investment gains, was 4.3%, 4.5% and 7.7% in 1999, 2000 and 2001, respectively. The average net yield on the portfolio, excluding net realized investment gains, was 4.2%, 4.4% and 4.5% for 1999, 2000 and 2001, respectively. Chandler USA excludes interest income from related parties when calculating its average net yield on the portfolio. Chandler USA's average net yield has been reduced by investment expenses to subsidize a premium finance program for certain insureds of NAICO. While such expenses reduce Chandler USA's average net yield, the premium finance program enhances cash flow by providing cash which is available for investment earlier than conventional deferred payment plans. Based on information provided by the premium finance company, the outstanding balance of premiums financed at December 31, 2001 was approximately $13 million. The average yield on the portfolio before deducting investment expenses was 5.6%, 6.1% and 6.0% in 1999, 2000 and 2001, respectively, excluding capital gains.
Commissions, fees and other income decreased 15% and 5% in 1999 and 2000, respectively, and increased 27% in 2001. The increase in 2001 was due to increased commission income in L&W due to increased premium production and increased commissions from higher premium rates. The majority of Chandler USA's income from commissions, fees and other income is from L&W. A large portion of the brokerage commissions and fees for L&W is incurred by NAICO and thus eliminated in the consolidation of Chandler USA's subsidiaries.
At this time, NAICO has not received any claims related to the September 11, 2001 terrorist attacks on the World Trade Center and does not believe that it has any significant exposure to these and related losses. While several of NAICO's reinsurers did experience significant losses related to these attacks, it currently does not appear that these losses will impair the reinsurers' ability to pay claims.
Policy acquisition costs consist of costs associated with the acquisition of new and renewal business and generally include direct costs such as premium taxes, commissions to agents and ceding companies and premium-related assessments and indirect costs such as salaries and expenses of personnel who perform and support underwriting activities. NAICO also receives ceding commissions from reinsurers who assume premiums from NAICO under certain reinsurance contracts and the ceding commissions are accounted for as a reduction of policy acquisition costs. Direct policy acquisition costs and ceding commissions are deferred and amortized over the terms of the policies. When the sum of the anticipated losses, loss adjustment expenses and unamortized policy acquisition costs exceeds the related unearned premiums, including anticipated investment income, a provision for the indicated deficiency is recorded.
Commissions received from reinsurers was reduced by $9.7 million during 1999 due to the rescission of the reinsurance treaties discussed previously. Net policy acquisition costs increased $7.0 million in 1999 due to the rescission of the reinsurance treaties, net of the adjustment for deferred acquisition costs. Ceding commissions included $3.4 million and $4.6 million in 2000 and 2001, respectively, for the purchase of the quota share reinsurance in the fourth quarter of 2000. Net policy acquisition costs decreased $1.5 million and $4.9 million in 2000 and 2001, respectively, due to the purchase of the quota share reinsurance, net of the adjustment for deferred acquisition costs.
General and administrative expenses were 7.0%, 6.5% and 7.9% of gross premiums earned and commissions, fees and other income (excluding the fee related to the rescission of the reinsurance treaties) in 1999, 2000 and 2001, respectively. General and administrative expenses have historically not varied in direct proportion to Chandler USA's revenues. A portion of such expenses is allocated to policy acquisition costs (indirect underwriting expenses) and loss and loss adjustment expenses based on various factors, including employee counts, salaries, occupancy and specific identification. Because certain types of expenses are fixed in nature, the percentage of such expenses to revenues will vary depending on Chandler USA's revenues.
On July 16, 1999, Chandler USA completed a public offering of $24 million principal amount of senior debentures with a maturity date of July 16, 2014. The debentures were priced at $1,000 each with an interest rate of 8.75% and are redeemable by Chandler USA on or after July 16, 2009 without penalty or premium. The proceeds to Chandler USA before expenses but after the underwriter's discount were $23.16 million. The proceeds of the offering were used to repay existing bank debt, to repay amounts owed by Chandler USA to its parent Chandler Barbados, and for general corporate purposes.
On March 5, 2001, shareholders of Chandler USA's indirect parent, Chandler Insurance, approved a going private transaction. Chandler Insurance financed the going private transaction through (i) a $2.4 million sale of Chandler Insurance Class A Common Shares to Messrs. LaGere and Paden, (ii) a $10.7 million intercompany loan from Chandler Barbados, and (iii) proceeds of approximately $735,000 from the exercise of outstanding Chandler Insurance options. Chandler USA loaned approximately $10.7 million to Chandler Barbados. Chandler USA's intercompany loan to Chandler Barbados was financed by a $3.8 million sale and leaseback transaction for certain equipment owned by Chandler USA and a $7.0 million dividend declared and paid by NAICO.
Reinsurance contracts do not relieve an insurer from its obligation to policyholders. Failure of reinsurers to honor their obligations could result in losses to Chandler USA; consequently, adjustments to ceded losses and loss adjustment expenses are made for amounts deemed uncollectible. NAICO did not incur any charges for uncollectible reinsurance recoverables from reinsurers in 1999 or 2000. During 2001, NAICO incurred charges of $454,000 in adjustments to ceded losses and loss adjustment expenses for amounts deemed uncollectible, and has reduced the carrying value of such amounts by approximately $1.1 million as of December 31, 2001.
During the CenTra litigation, a Nebraska Federal Court had previously ordered CenTra to divest all shares of Chandler Insurance stock owned or controlled by it or its affiliates. In December 1999, Chandler Insurance acquired 1,989,200 shares of its own stock in exchange for payment of $15,204,758 to the CenTra Group and affiliates. During November 2000, Chandler Insurance acquired the remaining 1,142,625 of its common shares in exchange for payment of $6,882,500 to the CenTra Group and affiliates pursuant to a ruling of the U.S. District Court for the Western District of Oklahoma (the "Oklahoma Court") in April 1997, which was upheld by the 10th Circuit Court of Appeals in September 2000. The Nebraska Federal Court determined the method of divestiture of these shares and gave effect to the Oklahoma Court judgment ordering the repurchase of the shares which resulted in the above payments.
Following the execution of the judgment of the Nebraska Federal Court, the CenTra Group filed pleadings in the Oklahoma Court claiming entitlement to post-judgment interest on the amounts Chandler Insurance was ordered to pay in exchange for the transfer of the shares. CenTra claims that it is entitled to post-judgment interest amounting to approximately $2.5 million. Chandler Insurance vigorously opposes this claim and the issue is now pending before the Oklahoma Court. The Oklahoma Court has asked for briefs and may hear argument but has not scheduled a date for decision of these issues.
During February 2002, the Oklahoma Court ruled in favor of NAICO, an affiliate and certain officers and directors of NAICO on claims made by CenTra affiliates based upon alleged wrongful cancellation of certain insurance policies by NAICO and NAICO Indemnity (Cayman), Ltd., a wholly owned subsidiary of Chandler Insurance. The CenTra affiliates have not yet indicated whether they will appeal the decision by the Oklahoma Court.
In the CenTra litigation, certain officers and directors of Chandler USA and Chandler Insurance were named as defendants. In accordance with its Articles of Association, Chandler Insurance and its subsidiaries have advanced the litigation expenses of these persons in exchange for undertakings to repay such expenses if those persons are later determined to have breached the standard of conduct provided in the Articles of Association. These expenses together with certain other expenses may be recovered from Chandler Insurance's D&O Insurer. As a result of various events in 1995, 1996 and 1997, Chandler Barbados and Chandler USA recorded estimated recoveries of costs from its D&O Insurer totaling $3,456,000 and $1,044,000, respectively, for reimbursable amounts previously paid that relate to allowable defense and litigation costs for such parties. Chandler Barbados and Chandler USA received payment for a 1995 claim during 1996 in the amount of $636,000 and $159,000, respectively. The balance of $2,820,000 and $885,000 is included in other assets in Chandler Barbados' and Chandler USA's respective balance sheets. Chandler Insurance and its subsidiaries contend they are entitled to a total of $5 million under the applicable insurance policy to the extent they have advanced reimbursable expenses. The D&O Insurer contends that certain policy provisions exclude coverage for these claims. On August 22, 2001, Chandler Insurance and its subsidiaries, including Chandler USA, filed an action in the State District Court in Oklahoma City, Oklahoma ("Oklahoma State Court") alleging that the director and officer liability insurance policies should be rescinded and seeking repayment of more than $5 million in premiums they previously paid. Chandler Insurance and its subsidiaries are currently involved in litigation with the insurer for payment of the policy balance or rescission and repayment of premiums previously paid. The litigation is pending in the Oklahoma State Court and in Federal Court in Michigan. These separate cases are still in the early pleading stages and Chandler USA cannot predict the date of resolution or the outcome of these cases. Chandler Insurance and its subsidiaries may or may not recover the remaining policy limits or the previously paid premiums and could incur significant costs in resolving this matter.
In June 1998, the Financial Accounting Standards Board ("FASB") 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 Chandler USA 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. Chandler USA adopted SFAS No. 133 effective January 1, 2001. The adoption of SFAS No. 133 did not have a material impact on Chandler USA's consolidated financial condition, results of operations or cash flows since Chandler USA has no derivative instruments.
SFAS No. 143 requires that entities record as a liability obligations associated with the retirement of a tangible long-lived asset when such obligations are incurred, and capitalize the cost by increasing the carrying amount of the related long-lived asset. SFAS No. 143 will be effective for fiscal years beginning after June 15, 2002, however, earlier application is encouraged. Chandler USA, which will adopt SFAS No. 143 on January 1, 2002, does not expect a material impact from the adoption of SFAS No. 143 on its consolidated financial statements.