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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
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COMMISSION FILE NUMBER: 1-15135
CHANDLER (U.S.A.), INC.
(Exact name of registrant as specified in its charter)
OKLAHOMA 73-1325906
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1010 MANVEL AVENUE, CHANDLER, OKLAHOMA 74834
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (405) 258-0804
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
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Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the
Exchange Act.
Large accelerated filer Accelerated filer Non-accelerated filer X
--- --- ---
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). YES NO X
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The number of common shares, $1.00 par value, of the registrant
outstanding on April 30, 2007 was 2,484, which are owned by Chandler
Insurance Company, Ltd.
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Page i
CHANDLER (U.S.A.), INC.
INDEX
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PART I - FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS:
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Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006 ...1
Consolidated Statements of Operations for the three months
ended March 31, 2007 and 2006 ..........................................2
Consolidated Statements of Comprehensive Income for the three
months ended March 31, 2007 and 2006 ...................................3
Consolidated Statements of Cash Flows for the three months
ended March 31, 2007 and 2006 ..........................................4
Notes to Interim Consolidated Financial Statements .......................5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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RESULTS OF OPERATIONS .............................................9
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ITEM 4. CONTROLS AND PROCEDURES ..........................................14
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ITEM 4T. CONTROLS AND PROCEDURES ............................................14
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PART II - OTHER INFORMATION
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Item 1. Legal Proceedings ...............................................15
Item 1A. Risk Factors ....................................................15
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds .....15
Item 3. Defaults Upon Senior Securities .................................15
Item 4. Submission of Matters to a Vote of Security Holders .............15
Item 5. Other Information ...............................................15
Item 6. Exhibits ........................................................15
Signatures .................................................................16
PAGE 1
CHANDLER (U.S.A.), INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except share amounts)
March 31, December 31,
2007 2006
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(Unaudited)
ASSETS
Investments
Fixed maturities available for sale, at fair value
Restricted (amortized cost $27,891 and $19,830 in 2007 and 2006, respectively) .... $ 27,196 $ 19,151
Unrestricted (amortized cost $42,925 and $48,557 in 2007 and 2006, respectively)... 41,972 47,228
Equity securities available for sale, at fair value (cost $0 and $1,587 in 2007
and 2006, respectively) ........................................................... 131 1,921
------------- --------------
Total investments ................................................................. 69,299 68,300
Cash and cash equivalents ($565 and $450 restricted in 2007 and 2006, respectively).. 18,778 21,403
Accrued investment income ........................................................... 5,351 5,022
Premiums receivable, less allowance for non-collection
of $139 and $170 at 2007 and 2006, respectively .................................... 34,047 31,008
Reinsurance recoverable on paid losses .............................................. 1,335 1,087
Reinsurance recoverable on unpaid losses, less allowance for non-collection
of $116 and $130 at 2007 and 2006, respectively .................................... 25,026 25,588
Reinsurance recoverable on unpaid losses from related parties ....................... 16,281 15,584
Prepaid reinsurance premiums ........................................................ 3,906 7,603
Prepaid reinsurance premiums to related parties ..................................... 14,706 13,506
Deferred policy acquisition costs ................................................... 1,623 845
Property and equipment, net ......................................................... 8,439 8,457
Amounts due from related parties .................................................... 10,734 9,584
State insurance licenses, net ....................................................... 3,745 3,745
Other assets ........................................................................ 10,353 11,040
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Total assets ........................................................................ $ 223,623 $ 222,772
============= ==============
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities
Unpaid losses and loss adjustment expenses ......................................... $ 83,768 $ 83,253
Unearned premiums .................................................................. 53,174 53,217
Policyholder deposits .............................................................. 7,120 7,663
Accrued taxes and other payables ................................................... 5,722 5,119
Premiums payable ................................................................... 2,247 1,955
Premiums payable to related parties ................................................ 12 1,002
Senior debentures .................................................................. 6,979 6,979
Junior subordinated debentures issued to affiliated trusts ......................... 20,620 20,620
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Total liabilities ................................................................. 179,642 179,808
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Shareholder's equity
Common stock, $1.00 par value, 50,000 shares authorized;
2,484 shares issued and outstanding ............................................... 2 2
Paid-in surplus .................................................................... 60,584 60,584
Accumulated deficit ................................................................ (15,603) (16,517)
Accumulated other comprehensive income (loss):
Unrealized loss on investments available for sale, net of deferred income taxes ... (1,002) (1,105)
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Total shareholder's equity ....................................................... 43,981 42,964
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Total liabilities and shareholder's equity .......................................... $ 223,623 $ 222,772
============= ==============
See accompanying Notes to Interim Consolidated Financial Statements.
PAGE 2
CHANDLER (U.S.A.), INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands)
Three months ended March 31,
--------------------------------
2007 2006
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Premiums and other revenues
Direct premiums written and assumed ........................... $ 27,333 $ 29,535
Reinsurance premiums ceded .................................... 498 (6,371)
Reinsurance premiums ceded to related parties ................. (8,357) (6,251)
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Net premiums written and assumed ............................ 19,474 16,913
Increase in unearned premiums ................................. (2,454) (48)
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Net premiums earned ......................................... 17,020 16,865
Investment income, net .......................................... 1,160 717
Interest income, net from related parties ....................... 212 178
Realized investment gains, net .................................. 35 56
Other income .................................................... 827 47
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Total premiums and other revenues ........................... 19,254 17,863
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Operating costs and expenses
Losses and loss adjustment expenses, net of amounts
ceded to related parties of $4,242 and $3,599 in
2007 and 2006, respectively ................................. 10,667 10,115
Policy acquisition costs, net of ceding commissions
received from related parties of $3,179 and $2,365 in
2007 and 2006, respectively ................................. 3,250 3,171
General and administrative expenses ........................... 3,215 2,991
Interest expense .............................................. 677 655
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Total operating costs and expenses .......................... 17,809 16,932
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Income before income taxes ...................................... 1,445 931
Federal income tax provision .................................... (531) (347)
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Net income .................................................... $ 914 $ 584
============= ============
See accompanying Notes to Interim Consolidated Financial Statements.
PAGE 3
CHANDLER (U.S.A.), INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Amounts in thousands)
Three months ended March 31,
--------------------------------
2007 2006
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Net income ................................................. $ 914 $ 584
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Other comprehensive income (loss), before income tax:
Unrealized losses on securities:
Unrealized holding gains (losses) arising during period .. 192 (488)
Less: Reclassification adjustment for gains included
in net income ........................................... (35) (56)
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Other comprehensive income (loss), before income tax ....... 157 (544)
Income tax benefit related to items of other
comprehensive income (loss) .............................. (54) 185
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Other comprehensive income (loss), net of income tax ....... 103 (359)
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Comprehensive income ....................................... $ 1,017 $ 225
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See accompanying Notes to Interim Consolidated Financial Statements.
PAGE 4
CHANDLER (U.S.A.), INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
Three months ended March 31,
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2007 2006
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OPERATING ACTIVITIES
Net income .................................................................. $ 914 $ 584
Add (deduct):
Adjustments to reconcile net income to cash provided by
(applied to) operating activities:
Realized investment gains, net .......................................... (35) (56)
Net gains on sale of property and equipment ............................. (2) -
Amortization and depreciation ........................................... 355 343
Provision for non-collection of premiums ................................ 1 1
Provision for non-collection of reinsurance recoverables ................ 7 17
Net change in non-cash balances relating to operating activities:
Accrued investment income ............................................. (329) 141
Premiums receivable ................................................... (3,040) (1,226)
Reinsurance recoverable on paid losses ................................ (269) 43
Reinsurance recoverable on unpaid losses .............................. 576 5,571
Reinsurance recoverable on unpaid losses from related parties ......... (697) (80)
Prepaid reinsurance premiums .......................................... 3,697 (414)
Prepaid reinsurance premiums to related parties ....................... (1,200) 170
Deferred policy acquisition costs ..................................... (778) (588)
Other assets .......................................................... 619 279
Unpaid losses and loss adjustment expenses ............................ 515 (6,665)
Unearned premiums ..................................................... (43) 292
Policyholder deposits ................................................. (543) (342)
Accrued taxes and other payables ...................................... 685 (68)
Premiums payable ...................................................... 292 1,912
Premiums payable to related parties ................................... (990) 92
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Cash provided by (applied to) operating activities ...................... (265) 6
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INVESTING ACTIVITIES
Unrestricted fixed maturities available for sale:
Purchases ............................................................... (4,649) (995)
Maturities .............................................................. 2,083 2,510
Equity securities available for sale:
Purchases ............................................................... (4,517) (2,022)
Sales ................................................................... 6,139 3,343
Cost of property and equipment purchased .................................. (195) (142)
Proceeds from sale of property and equipment .............................. 11 24
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Cash provided by (applied to) investing activities ...................... (1,128) 2,718
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FINANCING ACTIVITIES
Payments and loans from related parties ................................... 263 719
Payments and loans to related parties ..................................... (1,413) (404)
Payments on bank loan ..................................................... (82) -
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Cash provided by (applied to) financing activities ...................... (1,232) 315
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Increase (decrease) in cash and cash equivalents during the period .......... (2,625) 3,039
Cash and cash equivalents at beginning of period ............................ 21,403 5,510
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Cash and cash equivalents at end of period .................................. $ 18,778 $ 8,549
============ ============
See accompanying Notes to Interim Consolidated Financial Statements.
PAGE 5
CHANDLER (U.S.A.), INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of
Chandler (U.S.A.), Inc. ("Chandler USA") 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 Chandler USA's
Annual Report on Form 10-K for the year ended December 31, 2006. 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-month period ended
March 31, 2007 are not necessarily indicative of the results that may be
expected for the year. Certain reclassifications of prior years have
been made to conform to the 2007 presentation.
The consolidated financial statements include the accounts of
Chandler USA and all wholly owned subsidiaries that meet consolidation
requirements including National American Insurance Company ("NAICO") and
Chandler Insurance Managers, Inc. ("CIMI").
NOTE 2. SEGMENT INFORMATION
Chandler USA has two reportable operating segments: property and
casualty insurance and agency. The segments are managed separately due
to the differences in the nature of the insurance products and services
sold. Following the sale of a subsidiary in 2002 that was engaged in
agency operations, agency operations were not significant on a
consolidated basis and therefore not reported as a separate segment.
Effective January 1, 2007, NAICO transferred its existing property and
inland marine business in its standard lines and political subdivisions
programs to Praetorian Insurance Company ("Praetorian") through an
arrangement between Praetorian and CIMI. Under this arrangement, CIMI
receives commission income for the business it produces for Praetorian.
Since this new arrangement is expected to result in a significant
increase in agency revenues, the agency segment is now reported
separately.
The following table presents a summary of Chandler USA's operating
segments for the three month periods ended March 31, 2007 and 2006:
Property
and
casualty Intersegment Reported
insurance Agency eliminations balances
------------ ------------ ------------ ------------
(In thousands)
THREE MONTHS ENDED MARCH 31, 2007
Revenues from external customers (1) .. $ 17,093 $ 754 $ - $ 17,847
Intersegment revenues ................. 12 982 (994) -
Segment profit (loss) before
income taxes (2) .................... 488 957 - 1,445
Segment assets ........................ 222,052 6,117 (4,546) 223,623
THREE MONTHS ENDED MARCH 31, 2006
Revenues from external customers (1) .. $ 16,907 $ 5 $ - $ 16,912
Intersegment revenues ................. - 662 (662) -
Segment profit (loss) before
income taxes (2) .................... 270 661 - 931
Segment assets ........................ 240,437 3,754 (3,686) 240,505
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<FN>
(1) Consists of net premiums earned and other income.
(2) Includes net realized investment gains.
PAGE 6
Net premiums earned and losses and loss adjustment expenses within the
property and casualty insurance segment can be identified to Chandler USA
designated insurance programs. Chandler USA's chief operating decision
makers review net premiums earned and losses and loss adjustment expenses
in assessing the performance of an insurance program. In addition,
Chandler USA's chief operating decision makers consider many other factors
such as the lines of business offered within an insurance program and the
states in which the insurance programs are offered. Certain discrete
financial information is not readily available by insurance program,
including assets, interest income, and investment gains or losses,
allocated to each insurance program. Chandler USA does not consider its
insurance programs to be reportable segments, however, 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 insurance segment.
THREE MONTHS ENDED MARCH 31,
--------------------------------
2007 2006
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(In thousands)
INSURANCE PROGRAM
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NET PREMIUMS EARNED
Standard lines .......................... $ 15,505 $ 13,159
Political subdivisions .................. 991 1,475
Homeowners .............................. 294 2,069
Surety bonds ............................ 67 66
Other (1) ............................... 163 96
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$ 17,020 $ 16,865
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LOSSES AND LOSS ADJUSTMENT EXPENSES
Standard lines .......................... $ 9,227 $ 8,030
Political subdivisions .................. 862 610
Homeowners .............................. 102 706
Surety bonds ............................ 22 883
Other (1) ............................... 454 (114)
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$ 10,667 $ 10,115
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<FN>
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(1) This category is comprised primarily of the run-off of discontinued programs
and NAICO's participation in various mandatory workers compensation pools.
NOTE 3. COMMITMENTS AND CONTINGENCIES
During March 2001, Chandler USA entered into a $3.8 million sale and
leaseback transaction for certain owned equipment for three years. During
March 2004, the lease was extended for three years and during March 2007,
the lease was extended for an additional three years with monthly rental
installments equal to the sum of (i) $13,834 plus (ii) interest on the
unpaid lease balance at 1% over JP Morgan Chase Bank prime which was 9.25%
at March 31, 2007. Chandler USA has the option to repurchase the
equipment at the end of the lease for approximately $1.9 million (the
"Balloon Payment"), or may elect to have the lessor sell the equipment.
If the election to sell the equipment is made, Chandler USA would retain
any proceeds exceeding the Balloon Payment. If the proceeds were less
than the Balloon Payment, Chandler USA would be required to pay the
difference between the proceeds and the Balloon Payment, not to exceed
approximately $1.5 million.
Chandler USA has guaranteed the obligations of Chandler Capital Trust
I and Chandler Capital Trust II (the "Capital Trusts"). The Capital Trusts
are wholly owned non-consolidated subsidiaries of Chandler USA that have a
total of $20.0 million of trust preferred securities outstanding. Chandler
USA guarantees payment of distributions and the redemption price of the trust
preferred securities until the securities are redeemed in full.
PAGE 7
NOTE 4. LITIGATION
In October 1999, NAICO provided surety bonds for Gulsby Engineering, Inc.
("Gulsby") in connection with contracts between Gulf Liquids New River Project,
LLC ("Gulf Liquids") and Gulsby for the construction of two gas processing
plants in Louisiana. During 2001, Gulsby became unable to pay various vendors
resulting in payments to vendors by NAICO totaling $20,182,499. In August
2001, NAICO filed suit in federal court in Louisiana alleging that Gulf
Liquids had breached its obligations under the bonds by materially altering
certain contracts and that, as a result, NAICO was exonerated on the bonds and
should recover the amounts paid to vendors. In the fall of 2001, Gulsby and
Bay Limited, another contractor with whom Gulsby had entered into a joint
venture for the construction of other gas processing plants for Gulf Liquids,
filed lawsuits relating to those plants in Houston, Texas. Gulf Liquids filed
original actions and counterclaims. NAICO intervened in the Texas lawsuits
and, in addition, sued Williams Energy Marketing and Trading (which later
became Williams Power Company, Inc.) ("Williams") alleging fraud, breach of
contract, tortious interference with contractual relations, conspiracy and
alter ego. These claims were asserted against both Gulf Liquids and Williams.
Gulf Liquids asserted counterclaims alleging breach of contract against NAICO
and requesting contractual and statutory damages ranging from $40 million to
$80 million. The cases were consolidated for trial in the 215th Judicial
District Court in Harris County, Texas.
The trial in the Harris County cases began in late April 2006, and
concluded August 1, 2006. The jury found in favor of NAICO, Gulsby, Bay
Limited and the joint venture between Gulsby and Bay Limited ("Gulsby-Bay
Plant Partners") on all counts and fixed damages against Gulf Liquids and
Williams totaling $402,568,089.53. The damages determined by the jury
included a total of $325 million in punitive damages. Among other findings,
the jury found:
1. Williams tortiously interfered with NAICO's contractual relationship with
Gulsby and Gulf Liquids; and
2. Williams fraudulently induced NAICO to issue the surety bonds; and
3. Williams defrauded NAICO after the bonds were issued; and
4. Williams' actions were malicious; and
5. Gulf Liquids fraudulently induced NAICO to issue the surety bonds; and
6. Gulf Liquids breached its obligations to NAICO under the bonds; and
7. Williams is responsible for the claims against Gulf Liquids because
Gulf Liquids is the alter ego of Williams; and
8. There were material alterations (cardinal changes) to the contracts
NAICO bonded.
The amounts the jury found owing to NAICO include $20,182,499 in
actual damages, against both Gulf Liquids and Williams, $20 million in
punitive damages against Gulf Liquids, and $50 million in punitive damages
against Williams. The verdicts in favor of Gulsby included $20,941,436 in
actual damages against both Gulf Liquids and Williams, $25 million in
punitive damages against Gulf Liquids and $60 million in punitive damages
against Williams.
NAICO is subrogated to any recovery by Gulsby to the extent of NAICO's
losses on the bonds including loss adjustment expenses with interest from
the date the losses and loss expenses were paid.
A significant amount of NAICO's losses on the surety bonds were ceded
to various reinsurers and NAICO will be required to reimburse these
reinsurers in accordance with the agreements between NAICO and the
reinsurers.
On October 30, 2006, NAICO filed its Motion for Entry of Judgment
requesting that the Trial Court enter judgment on the jury verdicts for a
total of $100,577,559 plus court costs and anticipated attorney fees for
appeals. This request for judgment will be reviewed by the Trial Court
and a judgment entered after the Trial Court has considered objections by
Williams and Gulf Liquids. Of the total requested judgment, $70,000,000
is punitive damages and $8,328,824 is prejudgment interest through
November 1, 2006. Prejudgment interest accrues at the rate of $4,561 per
day based upon an 8.25% interest rate. NAICO has requested attorney fees
of $4,566,236 through entry of judgment. The Trial Court denied that
request on January 5, 2007. Gulsby has filed a separate motion for
judgment that includes a request for fees. The request for judgment
takes into account mandatory credits for a pre-verdict settlement with
parties other than Williams and Gulf Liquids. NAICO expects the Trial
Court to enter judgment based upon its request during 2007. When
entering judgment, the Court may enter judgment based upon NAICO's
request or may enter a different judgment. After judgment is entered,
all parties may file post-judgment motions. Following the Court's
rulings on post-judgment motions, all parties may appeal all or any of
those rulings or judgments.
During the third quarter of 2006, NAICO increased the estimated
recovery on the surety bond claims related to the construction of the two
gas processing plants which resulted in a decrease in losses and loss
adjustment expenses incurred of $4.7 million. Unpaid losses and loss
adjustment expenses decreased $22.7 million, reinsurance recoverable on
unpaid losses and loss adjustment expenses decreased $16.8 million, and
reinsurance recoverable on paid losses and loss adjustment expenses
decreased $1.2 million as of March 31, 2007 as a result of increasing
the estimated recovery. NAICO has also recorded $7.0 million of interest
income for its estimate of prejudgment interest through March 31, 2007,
including a recovery for a pre-verdict settlement with certain other
parties. Prejudgment interest will continue to accrue at 8.25%.
PAGE 8
NOTE 5. NEW ACCOUNTING STANDARDS
In February 2006, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 155, "Accounting for Certain Hybrid Financial
Instruments - an amendment of FASB Statements No. 133 and 140." SFAS No.
155 amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," and SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." This Statement also
resolves issues addressed in Statement No. 133 Implementation Issue No. D1,
"Application of Statement 133 to Beneficial Interests in Securitized
Financial Assets." SFAS No. 155 permits fair value remeasurement for any
hybrid financial instrument that contains an embedded derivative that
otherwise would require bifurcation and clarifies which interest-only
strips and principal-only strips are not subject to the requirements of
SFAS No. 133. SFAS No. 140 is amended to eliminate the prohibition on a
qualifying special-purpose entity from holding a derivative financial
instrument that pertains to a beneficial interest other than another
derivative financial instrument. Chandler USA adopted SFAS No. 155
effective January 1, 2007. The adoption of SFAS No. 155 did not have a
material impact on its consolidated financial statements.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing
of Financial Assets - an amendment of FASB Statement No. 140." SFAS No. 156
amends SFAS No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities." SFAS No. 156 requires an
entity to separately recognize financial assets as servicing assets or
servicing liabilities each time it undertakes an obligation to service a
financial asset by entering into certain kinds of servicing contracts. The
entity must also initially measure all separately recognized servicing
assets and servicing liabilities at fair value, if practicable. Servicing
assets and servicing liabilities subsequently measured at fair value must
be separately presented in the statement of financial position and
additional disclosures for all separately recognized servicing assets and
servicing liabilities. Chandler USA adopted SFAS No. 156 effective January
1, 2007. The adoption of SFAS No. 156 did not have a material impact on
its consolidated financial statements.
In July 2006, the FASB issued FASB Interpretation ("FIN") No. 48,
"Accounting for Uncertainty in Income Taxes," which clarifies the
accounting for uncertainty in income taxes recognized in the financial
statements in accordance with SFAS No. 109, "Accounting for Income Taxes."
FIN 48 provides guidance regarding the recognition, measurement,
presentation and disclosure of a tax position taken or expected to be
taken in a tax return as well as the derecognition of a tax position
previously recognized in the financial statements. Chandler USA adopted
FIN 48 effective January 1, 2007. The adoption of FIN 48 did not have a
material impact on its consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements," which defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements. The statement does
not require new fair value measurements, but is applied to the extent
that other accounting pronouncements require or permit fair value
measurements. The statement emphasizes that fair value is a market-based
measurement that should be determined based on the assumptions that
market participants would use in pricing an asset or liability.
Companies will be required to disclose the extent to which fair value is
used to measure assets and liabilities, the inputs used to develop the
measurements, and the effect of certain of the measurements on earnings
(or changes in net assets) for the period. Chandler USA will be required
to adopt SFAS No. 157 as of January 1, 2008. Chandler USA does not
expect this statement to have a material impact on its consolidated
financial statements.
In September 2006, the FASB issued SFAS No. 158, "Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans -
an amendment of FASB Statements No. 87, 88, 106, and 132(R)." This
statement requires the company to recognize the funded status of its
defined benefit postretirement plans as an asset or liability in its
financial statements. In addition, the statement eliminates the use of
a measurement date that is different than the date of the company's
year-end financial statements. Chandler USA has adopted SFAS No. 158
effective December 31, 2006. The adoption of SFAS No. 158 did not have
a material impact on its consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value
Option for Financial Assets and Financial Liabilities-Including an
amendment of FASB Statement No. 115." SFAS No. 159 permits companies
to choose to measure many financial instruments and certain other
items at fair value at specified election dates. Upon adoption, an
entity shall report unrealized gains and losses on items for which the
fair value option has been elected in earnings at each subsequent
reporting date. Most of the provisions apply only to entities that
elect the fair value option. However, the amendment to SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities,"
applies to all entities with available for sale and trading securities.
SFAS No. 159 is effective as of the beginning of an entity's first
fiscal year that begins after November 15, 2007. Chandler USA is
currently evaluating the impact that SFAS No. 159 will have, if any,
on its consolidated financial statements.
In March 2007, the FASB ratified Emerging Issues Task Force Issue
("EITF") No. 06-10, ACCOUNTING FOR DEFERRED COMPENSATION AND POST
RETIREMENT BENEFIT ASPECTS OF COLLATERAL ASSIGNMENT SPLIT-DOLLAR LIFE
INSURANCE ARRANGEMENTS. EITF 06-10 provides guidance for determining
a liability for the postretirement benefit obligation and for
recognition and measurement of the associated asset based on the terms
of the collateral assignment agreement. EITF 06-10 is effective for
fiscal years beginning after December 15, 2007. Chandler USA has
evaluated EITF 06-10 and has determined that its adoption is not
expected to have a material impact on its consolidated financial
statements.
PAGE 9
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 (U.S.A.), Inc. ("Chandler USA") in periodic
press releases and oral statements made by Chandler USA's officials
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 Chandler USA 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 Chandler USA and its subsidiaries operate, including
the ability to implement price increases; (iv) claims frequency; (v)
claims severity: (vi) catastrophic events of unanticipated frequency or
severity; (vii) the number of new and renewal policy applications
submitted to National American Insurance Company ("NAICO") by its agents;
(viii) the ability of NAICO to obtain adequate reinsurance in amounts and
at rates that will not adversely affect its competitive position; (ix)
the ability of NAICO to collect reinsurance recoverables; (x) the ability
of NAICO to maintain favorable insurance company ratings; and (xi) various
other factors including ongoing litigation matters.
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 month
periods ended March 31, 2007 and 2006:
GROSS PREMIUMS EARNED NET PREMIUMS EARNED
--------------------------- ---------------------------
THREE MONTHS ENDED MARCH 31, 2007 2006 2007 2006
---------------------------------- ------------ ------------ ------------ ------------
(In thousands)
Standard lines ................... $ 25,128 $ 22,265 $ 15,505 $ 13,159
Political subdivisions ........... 1,512 3,990 991 1,475
Homeowners ....................... 475 2,795 294 2,069
Surety bonds ..................... 95 96 67 66
Other ............................ 166 97 163 96
------------ ------------ ------------ ------------
TOTAL ............................ $ 27,376 $ 29,243 $ 17,020 $ 16,865
============ ============ ============ ============
Gross premiums earned decreased $1.9 million or 6% in the first quarter of
2007 compared to the first quarter of 2006. The decrease was due primarily to
a decrease of $2.3 million in the homeowners program which was discontinued
during 2006, and to a decrease of $2.7 million in property and inland marine
business in the standard lines and political subdivisions programs due to the
transfer of this business to Praetorian Insurance Company ("Praetorian") as
explained further below. Partially offsetting these decreases were an
increase in workers compensation and automobile liability premiums in the
standard lines program.
Effective January 1, 2007, the property and inland marine lines of
insurance that were previously written by NAICO in the standard lines and
political subdivisions programs are being written by Praetorian through an
arrangement between Praetorian and CIMI. NAICO also transferred its existing
property and inland marine business in these programs to Praetorian under
this new arrangement effective January 1, 2007. Under this arrangement, CIMI
receives commission income for the business it produces for Praetorian. CIMI
is responsible for the payment of commissions to the producing agents, and is
also responsible for providing underwriting and loss control services for
this business. NAICO handles all claims for this business under a separate
claims handling agreement with Praetorian. Management believes this new
arrangement will allow Chandler USA's subsidiaries to offer more competitive
property and inland marine programs for its agents. In addition, NAICO will
no longer be required to purchase reinsurance for the significant insured
values associated with this business.
PAGE 10
Net premiums earned increased $155,000 or 1% in the first quarter of
2007 compared to the first quarter of 2006. The decrease was due primarily
to a decrease of $1.8 million in the discontinued homeowners program and a
decrease of $321,000 in property and inland marine business that was
transferred to Praetorian. The decrease in net premiums earned for the
business transferred to Praetorian was much less than the decrease in gross
premiums earned due to the significant amounts of reinsurance that NAICO
had purchased for this business. This reinsurance was also canceled which
resulted in a significant decrease in reinsurance premiums ceded during the
first quarter of 2007.
Gross premiums earned in the standard lines program increased $2.9
million or 13% in the first quarter of 2007 compared to the first quarter
of 2006. The increase was primarily due to an increase of $1.7 million in
workers compensation premiums, primarily in the state of Texas, and to an
increase in automobile liability premiums in the state of Utah. Net
premiums earned increased $2.3 million or 18% in the first quarter of 2007
versus the first quarter of 2006, due primarily to the increase in gross
earned premiums.
Gross premiums earned in the political subdivisions program decreased
$2.5 million or 62% in the first quarter of 2007 compared to the first
quarter of 2006 due primarily to the transfer of the property and inland
marine business in this program to Praetorian as described previously. Net
premiums earned in the political subdivisions program decreased $484,000 or
33% in the first quarter of 2007 versus the first quarter of 2006. The
decrease in net premiums earned was significantly less than the decrease in
gross premiums earned because of the significant amounts of reinsurance
that NAICO had purchased for the property and inland marine lines of
business in this program.
In 2005, NAICO began writing homeowner and dwelling policies in the
state of Texas through a managing general agent. NAICO discontinued this
program during 2006 due primarily to increased catastrophic exposures.
Gross and net premiums earned in the surety bond program were unchanged
from the first quarter of 2006. NAICO is no longer actively marketing its
surety bond program.
NET INVESTMENT INCOME AND NET REALIZED INVESTMENT GAINS
At March 31, 2007, Chandler USA's investment portfolio consisted primarily
of fixed income U.S. Treasury and government agency bonds, high-quality
corporate bonds and equity securities with approximately 21% 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 related parties on intercompany loans.
Net investment income included $317,000 for the accrual of prejudgment
interest on a favorable jury verdict in civil litigation in 2006 regarding
certain surety bond claims. See "Litigation" and Note 4 of Notes to Interim
Consolidated Financial Statements.
Net investment income, excluding interest income from related parties
and the prejudgment interest accrual, increased $126,000 or 18% in the first
quarter of 2007 versus the first quarter of 2006 due primarily to higher
interest rates and an increase in cash and invested assets. Cash and
invested assets were $88.1 million at March 31, 2007 compared to $85.9
million at March 31, 2006. Net interest income from related parties was
$212,000 in the first quarter of 2007 compared to $178,000 in the first
quarter of 2006. The increase in the 2007 quarter was due to higher interest
rates and to an increase in the amount due from related parties.
Net realized investment gains were $35,000 in the first quarter of 2007
compared to $56,000 in the first quarter of 2006.
OTHER INCOME
Other income was $827,000 in the first quarter of 2007 compared to
$47,000 in the first quarter of 2006. The increase was due to the transfer
of NAICO's property and inland marine business in the standard lines and
political subdivisions programs to Praetorian under a new arrangement
effective January 1, 2007. Under this arrangment, CIMI receives commission
income for the business it produces for Praetorian.
PAGE 11
LOSSES AND LOSS ADJUSTMENT EXPENSES
Chandler USA estimates losses and loss adjustment expenses based on
historical experience and payment and reporting patterns for the type of
risk involved. These estimates are based on data available at the time of
the estimate and are periodically reviewed by independent professional
actuaries. Although such estimates are management's best estimates of the
expected values, the ultimate liability for unpaid claims may vary from
these values.
The percentage of losses and loss adjustment expenses to net premiums
earned ("loss ratio") was 62.7% for the first quarter of 2007 versus 60.0%
in the first quarter of 2006. The increase in the 2007 loss ratio was
primarily due to an increase in losses in the political subdivisions
program compared to the first quarter of 2006 and to the decrease in
homeowners business which had a lower loss ratio than NAICO's larger
programs. During 2007, loss development was redundant by $458,000. During
the first quarter of 2006, NAICO experienced adverse loss development
totaling $1.1 million which increased the 2006 loss ratio by 6.6 percentage
points. The adverse loss development in the 2006 quarter was due primarily
to an increase in surety bond losses for prior accident years.
Weather-related losses from wind and hail were not significant in the first
quarter of 2007 and 2006.
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 Chandler USA's policy acquisition costs
for each of the three month periods ended March 31, 2007 and 2006:
THREE MONTHS ENDED MARCH 31,
----------------------------
2007 2006
------------ ------------
(In thousands)
Commissions expense ......................... $ 3,906 $ 4,625
Other premium related assessments ........... 258 281
Premium taxes ............................... 571 647
Excise taxes ................................ 83 63
Other expense ............................... 239 182
------------ ------------
Total direct expenses ....................... 5,057 5,798
Indirect underwriting expenses .............. 1,463 1,504
Commissions received from reinsurers ........ (2,493) (3,543)
Adjustment for deferred acquisition costs ... (777) (588)
------------ ------------
Net policy acquisition costs ................ $ 3,250 $ 3,171
============ ============
Total gross direct and indirect expenses as a percentage of direct
written and assumed premiums were 23.9% for the first quarter of 2007
versus 24.7% for the first quarter of 2006. Commissions expense as a
percentage of gross written and assumed premiums was 14.3% for the first
quarter of 2007 versus 15.7% for the 2006 quarter. The decrease in
commissions expense was due primarily to the decrease in gross premiums
written in the homeowners program which has a higher average commission
rate than most of the other programs due to the use of a managing general
agent who performs certain underwriting, claims and administrative
functions. The homeowners program was discontinued during 2006.
PAGE 12
Indirect underwriting expenses were 5.4% and 5.1% of total direct
written and assumed premiums in the three month periods ended March 31,
2007 and 2006, respectively. Indirect expenses include general overhead
and administrative costs associated with the acquisition of new and renewal
business, some of which is relatively fixed in nature, thus, the percentage
of such expenses to direct written and assumed premiums will vary depending
on Chandler USA's overall premium volume. Commissions received from
reinsurers decreased $1.1 million in the first quarter of 2007 compared to
the year-ago quarter due primarily to the transfer of NAICO's property and
inland marine business in the standard lines and political subdivisions
programs to Praetorian which resulted in the cancellation of certain quota
share reinsurance arrangements that covered these lines of business.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were 11.7% and 10.2% of gross
premiums earned in the first quarter of 2007 and 2006, respectively.
General and administrative expenses increased $224,000 or 7% in the first
quarter of 2007 compared to the 2006 quarter. This increase was due
primarily to an increase in employee related expenses. 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
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 overall premium volume.
INTEREST EXPENSE
Interest expense was $677,000 in the first quarter of 2007 compared
to $655,000 in the year-ago quarter. Substantially all of Chandler USA's
interest expense is related to its outstanding senior debentures and
junior subordinated debentures. The increase in the 2007 period was due
primarily to higher interest rates during 2007, as a portion of Chandler
USA's junior subordinated debentures were issued with a floating interest
rate.
LIQUIDITY AND CAPITAL RESOURCES
In the first quarter of 2007, Chandler USA used $265,000 in cash
from operations. Prepaid reinsurance premiums decreased $2.5 million
during the first quarter of 2007, but this was partially offset by an
increase in premiums receivable of $3.0 million. In the first quarter
of 2006, Chandler USA provided $6,000 in cash from operations. Unpaid
losses and loss adjustment expenses decreased $6.7 million during the
first quarter of 2006, but this was partially offset by a decrease in
reinsurance recoverable on unpaid losses of $5.5 million.
NAICO is required to deposit cash and securities with regulatory
agencies in which it is licensed as a condition of conducting operations
in the state. In addition, NAICO has deposited cash and securities into
a trust account as collateral for a reinsurance agreement in which NAICO
is the assuming reinsurer. At March 31, 2007, the total amount of cash
and securities restricted as a result of these arrangements was $27.8
million which was an increase of $8.2 million from December 31, 2006.
This increase was due to an increase in the amount of reinsurance that
NAICO assumed during the first quarter of 2007.
At March 31, 2007, Chandler USA's parent company, Chandler Insurance
Company, Ltd., owed approximately $10.7 million to Chandler USA versus
$9.6 million at December 31, 2006 under an Intercompany Credit Agreement
(the "Credit Agreement") covering intercompany loans between the
parties. The Credit Agreement requires interest to be paid at the prime
interest rate published in The Wall Street Journal each month, and
balances owed by either party are payable at any time upon demand.
During March 2001, Chandler USA entered into a $3.8 million sale
and leaseback transaction for certain owned equipment for three years.
During March 2004, the lease was extended for three years and during
March 2007, the lease was extended for an additional three years with
monthly rental installments equal to the sum of (i) $13,834 plus (ii)
interest on the unpaid lease balance at 1% over JP Morgan Chase Bank
prime which was 9.25% at March 31, 2007. Chandler USA has the option
to repurchase the equipment at the end of the lease for approximately
$1.9 million (the "Balloon Payment"), or may elect to have the lessor
sell the equipment. If the election to sell the equipment is made,
Chandler USA would retain any proceeds exceeding the Balloon Payment.
If the proceeds were less than the Balloon Payment, Chandler USA would
be required to pay the difference between the proceeds and the Balloon
Payment, not to exceed approximately $1.5 million.
PAGE 13
Chandler USA is a holding company receiving cash principally
through borrowings, subsidiary dividends and other payments, subject to
various regulatory restrictions. The capacity of insurance companies to
write insurance is based on maintaining liquidity and capital resources
sufficient to pay claims and expenses as they become due. The primary
sources of liquidity for Chandler USA's subsidiaries are funds generated
from insurance premiums, investment income, capital contributions from
Chandler USA and proceeds from sales and maturities of portfolio
investments. The principal expenditures are payment of losses and loss
adjustment expenses, insurance operating expenses and commissions.
A significant portion of Chandler USA's consolidated assets
represents assets of NAICO that may not be immediately transferable to
Chandler USA in the form of shareholder dividends, loans, advances or
other payments.
Statutes and regulations governing NAICO and other insurance
companies domiciled in Oklahoma regulate the payment of shareholder
dividends and other payments by NAICO to Chandler USA. Under
applicable Oklahoma statutes and regulations, NAICO is permitted to
pay shareholder dividends only out of statutory earned surplus. To
the extent NAICO has statutory earned surplus, NAICO may pay
shareholder dividends only to the extent that such dividends are not
defined as extraordinary dividends or distributions. If the dividends
are, under applicable statutes and regulations, extraordinary dividends
or distributions, regulatory approval must be obtained. Under the
applicable Oklahoma statute, and subject to the availability of
statutory earned surplus, the maximum shareholder dividend that may be
declared (or cash or property distribution that may be made) by NAICO
in any one calendar year without regulatory approval is the greater of
(i) NAICO's statutory net income, excluding realized capital gains,
for the preceding calendar year; or (ii) 10% of NAICO's statutory
policyholders' surplus as of the preceding calendar year end, not to
exceed NAICO's statutory earned surplus.
As of December 31, 2006, NAICO had statutory earned surplus of
$14.0 million. Applying the Oklahoma statutory limits described above,
the maximum shareholder dividend NAICO may pay in 2007 without the
approval of the Oklahoma Department of Insurance is $5.2 million.
NAICO did not pay any shareholder dividends to Chandler USA in 2006
or in the first quarter of 2007.
In addition to the statutory limits described above, the amount
of shareholder dividends and other payments to affiliates can be
further limited by contractual or regulatory restrictions or other
agreements with regulatory authorities restricting dividends and
other payments, including regulatory restrictions that are imposed
as a matter of administrative policy. If insurance regulators
determine that payment of a shareholder dividend or other payments
to an affiliate (such as payments under a tax sharing agreement,
payments for employee or other services, or payments pursuant to a
surplus note) would be hazardous to such insurance company's
policyholders or creditors, the regulators may block such payments
that would otherwise be permitted without prior approval.
Historically, NAICO has played a significant role in the
servicing of debt and other obligations of Chandler USA through the
payment of shareholder dividends. These obligations include $7.0
million of 8.75% senior debentures due in 2014, $13.4 million of
9.75% junior subordinated debentures due in 2033, $7.2 million of
floating rate junior subordinated debentures due in 2034 and the
obligations under the sale and leaseback transaction discussed
previously. Management's expectation is that Chandler Insurance or
other subsidiaries will be able to meet these obligations in the
future. It is possible that dividends from NAICO may be necessary
to service Chandler USA's debt obligations. To the extent that the
restrictions discussed previously limit NAICO's ability to pay
shareholder dividends or other payments to Chandler USA, Chandler
USA's ability to satisfy the debt obligations may also be limited.
PAGE 14
LITIGATION
On August 1, 2006, a jury trial concluded in Harris County, Texas,
related to the construction of two gas processing plants in Louisiana.
NAICO had provided surety bonds in connection with the construction of
these plants. The amounts the jury found owing to NAICO include
approximately $20.2 million in actual damages and $70.0 million in
punitive damages. See Note 4 of Notes to Interim Consolidated Financial
Statements for a discussion of this jury verdict.
On October 30, 2006, NAICO filed its Motion for Entry of Judgment
requesting that the Trial Court enter judgment for a total of $100.6
million plus court costs and anticipated attorney fees for appeals. This
amount includes $70.0 million in punitive damages, $8.3 million in
prejudgment interest through November 1, 2006, and attorney fees of $4.6
million through entry of judgment. The Trial Court denied the request
for attorney fees on January 5, 2007. NAICO expects the Trial Court to
enter judgment based upon its request during 2007. When entering
judgment, the Court may enter judgment based upon NAICO's request or may
enter a different judgment. After judgment is entered, all parties may
file post-judgment motions. Following the Court's rulings on post-
judgment motions, all parties may appeal all or any of those rulings
or judgments.
During the third quarter of 2006, NAICO increased the estimated
recovery on the surety bond claims related to the construction of the
two gas processing plants which resulted in a decrease in losses and
loss adjustment expenses incurred of $4.7 million. In addition, unpaid
losses and loss adjustment expenses decreased $22.7 million, reinsurance
recoverable on unpaid losses and loss adjustment expenses decreased
$16.8 million, and reinsurance recoverable on paid losses and loss
adjustment expenses decreased $1.2 million. NAICO also recorded $6.6
million of interest income for its estimate of prejudgment interest
through December 31, 2006 and recorded an additional $317,000 of
prejudgment interest during the first quarter of 2007 including a
recovery for a pre-verdict settlement with certain other parties.
Prejudgment interest will continue to accrue at 8.25%.
A.M. BEST RATING
Effective May 2, 2007, A.M. Best Company affirmed the financial
strength rating of B+ (Good) and the issuer credit rating (ICR) of
"bbb-" of NAICO. Concurrently, A.M. Best has affirmed the ICR of
"bb-" of NAICO's parent, Chandler USA, and the debt rating of "bb-"
on Chandler USA's 8.75% senior unsecured debentures due 2014. The
outlook for all ratings has been revised to stable from negative.
NAICO's policyholders surplus has also increased from A.M. Best's
financial size category VI to category VII ($50 million to $100 million).
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this report and pursuant to
Rule 13a-15 of the Securities Exchange Act of 1934 (the "Exchange Act"),
Chandler USA's management, including the Chief Executive Officer and
Chief Financial Officer, conducted an evaluation of the effectiveness
and design of Chandler USA's disclosure controls and procedures (as
that term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange
Act). Based upon that evaluation, Chandler USA's Chief Executive
Officer and Chief Financial Officer concluded, as of the end of the
period covered by this report, that Chandler USA's disclosure controls
and procedures were effective in recording, processing, summarizing
and reporting information required to be disclosed by Chandler USA,
within the time periods specified in the Securities and Exchange
Commission's rules and forms.
CHANGES IN INTERNAL CONTROLS
In addition and as of the end of the period covered by this report,
there have been no changes in internal control over financial reporting
(as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during
the quarter to which this report relates that have materially affected
or are reasonably likely to materially affect the internal control over
financial reporting.
ITEM 4T. CONTROLS AND PROCEDURES
Not applicable.
PAGE 15
PART II. OTHER INFORMATION
-----------------
Item 1. LEGAL PROCEEDINGS
-----------------
Chandler USA and its subsidiaries are not parties to any material
litigation other than as is routinely encountered in their
respective business activities. While the outcome of these
matters cannot be predicted with certainty, Chandler USA does not
expect these matters to have a material adverse effect on its
financial condition, results of operations or cash flows. See
Note 4 of Notes to Interim Consolidated Financial Statements for
a discussion of a favorable jury verdict in civil litigation
regarding certain surety bond claims.
Item 1A. RISK FACTORS
------------
There have been no material changes from risk factors previously
disclosed in our Annual Report on Form 10-K for the year ended
December 31, 2006.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
-----------------------------------------------------------
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
Effective May 8, 2007, Chandler USA's sole shareholder,
Chandler Insurance, re-elected the following individuals to
serve on Chandler USA's Board of Directors:
W. Brent LaGere W. Scott Martin
Mark T. Paden Robert L. Rice
R. Patrick Gilmore William Thomas Keele
Richard L. Evans
Item 5. OTHER INFORMATION
-----------------
None.
Item 6. EXHIBITS
--------
31.1 Rule 13a-14(a)/15d-14(a) Certifications.
32.1 Section 1350 Certifications.
PAGE 16
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: May 8, 2007 CHANDLER (U.S.A.), INC.
By: /s/ W. Brent LaGere
--------------------------------------
W. Brent LaGere
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Mark C. Hart
--------------------------------------
Mark C. Hart
Senior Vice President - Finance, Chief
Financial Officer and Treasurer
(Principal Accounting Officer)