August 5, 2005
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Attention: Ibolya Ignat, Staff Accountant
Division of Corporation Finance
RE: Chandler (U.S.A.), Inc.
Form 10-K for Fiscal Year Ended December 31, 2004
Filed March 22, 2005
Form 10-Q for Fiscal Quarter Ended March 31, 2005
Filed May 11, 2005
File No. 001-15135
Dear Ms. Ignat:
We are responding to your letter dated July 8, 2005 concerning the
filings referred to above by Chandler (U.S.A.), Inc. ("Chandler USA"). We
have numbered our responses to correspond with the numbers assigned to the
comments contained in your letter. Page numbers refer to the redlined
drafts of the filings.
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
- -----------------------------------------------------
Comment 1: We have revised the "Critical Accounting Policies" and the "Losses
and Loss Adjustment Expense" sections of Management's Discussion
and Analysis of Finanical Condition and Results of Operations to
include additional information and explanations of the reasons for
the changes in estimates of our loss reserves. The additional
information includes, but is not limited to, the following items:
- We have added a table on page 12 of the amended Form 10-K that
identifies the accident years that experienced loss development,
the amount of that development, the amount of the related loss
reserve as of the beginning of each calendar year and the
re-estimated loss reserve as of the beginning of each calendar
year. There were no significant offsetting changes other than
a release of approximately $8.2 million in reserves for the 2002
accident year during 2003. This is discussed on page 13 of the
amended Form 10-K.
- One change in key assumptions was made during 2004, and this
change is described on page 3.
- The changes in estimate were the result of frequency and
severity patterns not previously experienced. Since such
development patterns were not present in the loss history
available at the time the estimate was prepared, they could
therefore not be anticipated. This is discussed on page 11.
Other than the development of the loss data, there were no new
events or additional information acquired that led to the
changes in estimate.
PAGE 2
- We have included in our disclosures for "Critical Accounting
Policies" and "Losses on Loss Adjustment Expenses" that changes
in the estimates are recorded in the current period. Also, as
noted above, the additional disclosure on page 11 explains why
recognition of the change in estimates occurred in the periods
that it did.
- A general discussion of trends is included on page 3. There
were no trends that were a significant factor in determining
the changes in loss reserve estimates.
Comment 2: We have provided additional information within Management's
Discussion and Analysis of the amended Form 10-K discussing the
following items:
- Reserves as of December 31, 2004 are disclosed by line of
business on page 2.
- The case reserves and IBNR reserves are disclosed by line of
business on page 2.
- Our actuaries do not prepare a range of estimates.
- Key assumptions used by management in determining point
estimates for our loss reserves are discussed on pages 2 and 3.
- Both management and our independent actuaries determine a point
estimate for our loss reserves. A table comparing the high and
low point estimates for each method with the recorded reserve is
shown on page 3. The various methods considered and selected
are discussed on pages 2 and 3.
- The determination of point estimates selected is discussed on
page 3. The company records to its point estimate, which may or
may not be the same as the independent actuaries' point estimate.
If there is a difference, we review the differences with the
actuary to ensure the differences are not material.
- The impact of a 1% change in estimate in our loss reserves is
disclosed on page 3.
Comment 3: The calculations for the "financial year" and the "accident year"
ratios are explained at the top of page 7. We have revised the
title for the "financial year" ratios to "GAAP year" and have made
several changes to clarify these ratios. See the amended wording
in the Form 10-K.
We believe that the accident year loss ratios should be considered
non-GAAP financial measures. The comparable GAAP loss ratios are
already included in these tables. A reconciliation of the GAAP
losses to the accident year losses has been added on page 8 of the
amended Form 10-K.
PAGE 3
The "combined ratio" is the sum of the "loss ratio" and the
"expense ratio". The loss ratio represents the relationship
between losses and loss adjustment expenses incurred to net
premiums earned. Since losses are recorded only for the expired
portion of an insurance policy, the numerator and denominator are
consistent. The expense ratio represents the relationship between
underwriting expenses and net premiums written. For purposes of
this calculation, underwriting expenses do not include the change
in the balance sheet amounts for deferred acquisition costs.
Underwriting expenses, including commissions and ceding
commissions, are a function of premiums written, therefore the use
of net premiums written as a denominator is consistent with
underwriting expenses as the numerator. Combining a loss ratio
based on premiums earned and an expense ratio based on premiums
written produces a meaningful measure of underwriting profitability
and is commonly used in the insurance industry.
Comment 4: We have revised the contractual obligations table to include the
payment of loss reserves.
The contractual obligations table in the original Form 10-K filing
has been revised to include the obligation for the guaranteed
residual value of $1.9 million under the lease for the sale and
leaseback transaction described in Note 12 of the financial
statements. The amounts included in the table under "future
minimum rental payments under operating leases" for this
transaction were $383,000 (less than one year) and $429,000
(1-3 years).
Comment 5: Paragraph 33 of SFAS 13 was superceded by SFAS 28 "Accounting for
Sales with Leasebacks." SFAS 28 requires that any profit or loss on
the sale shall be deferred and amortized in proportion to the
amortization of the leased asset, if a capital lease, or in
proportion to the rental payments over the period of time the asset
is expected to be used, if an operating lease.
The terms of this leaseback did not meet the criteria of a capital
lease and was treated as an operating lease. Under the original
lease, Chandler USA had the option to repurchase the equipment at
the end of the lease for approximately $3.0 million, or elect to
have the lessor sell the equipment. If the proceeds from the sale
were less than approximately $2.4 million, the Company would be
required to pay the difference between the proceeds and the $2.4
million. The deferred gain on the sale was $2.0 million. As long
as Chandler USA had a potential obligation to repay the shortfall
between the sale price of the equipment and $2.4 million, the $2.0
million gain on the sale was deferred. Upon the decision to
repurchase the equipment, Chandler USA began amortizing the
deferred gain over the last 12 months of the lease.
FORM 10-Q - MARCH 31, 2005
- --------------------------
Comment 6: We have provided additional discussion for "net premiums earned"
and certain other financial statement classifications within the
Results of Operations section of the Form 10-Q. See the amended
Form 10-Q for specific changes.
PAGE 4
Comment 7: The current disclosure states that the use of $3.6 million in cash
from operations was due primarily to the payment of losses from
prior accident years. It also discusses the reduction of unpaid
losses of $11.7 million that is partially offset by the reduction
of reinsurance recoverables on unpaid losses of $8.3 million. This
resulted in a net cash outflow of $3.4 million, which compared to
total cash used from operations of $3.6 million.
The affect of the payment of losses from prior accident years is
shown in the following table. As you can see, we did experience
substantial payments of $10.6 million in prior accident years
related to this reserve.
2005
2004 and prior accident
accident years year Total
-------------- -------------- --------------
Unpaid losses @ 12/31/04 $ 108,233 $ - $ 108,233
Reinsurance recoverables @12/31/04 (63,538) - (63,538)
-------------- -------------- --------------
Net reserves @ 12/31/04 44,695 - 44,695
Net losses incurred@ 3/31/05 931 6,969 7,900
Net losses paid @ 3/31/05 (10,559) (760) (11,319)
-------------- -------------- --------------
Net reserves @ 3/31/05 35,067 6,209 41,276
Reinsurance recoverables @ 3/31/05 50,360 4,906 55,266
-------------- -------------- --------------
Unpaid losses @ 3/31/05 $ 85,427 $ 11,115 $ 96,542
============== ============== ==============
We have provided additional disclosure about the holding company aspect
of our operations including NAICO's role in servicing the holding
company's debt in the amended Form 10-Q.
In connection with responding to your comments, we acknowledge that:
- Chandler USA is responsible for the adequacy and accuracy of the
disclosure in the filings;
- staff comments or changes to disclosure in response to staff comments do
not foreclose the Commission from taking any action with respect to the
filings; and
- Chandler USA may not assert staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities
laws of the United States.
Drafts of our amended filings are being sent to your attention via e-mail.
If you have any questions or require any additional information, please
contact me at (405)258-4292.
Sincerely,
/s/ Mark C. Hart
- --------------------------
Mark C. Hart
Vice President and
Chief Financial Officer
MCH:js