-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, B/pLe9RuTqzy2Z2bB3NDplBlWcZfqkAi55Q3nHFStd+Ba8UmsLbFqw/Wyoc94JQs onYymd1nnWr9nWFJ9JZrtQ== 0001083750-09-000017.txt : 20091109 0001083750-09-000017.hdr.sgml : 20091109 20091109154248 ACCESSION NUMBER: 0001083750-09-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20090930 FILED AS OF DATE: 20091109 DATE AS OF CHANGE: 20091109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHANDLER USA INC CENTRAL INDEX KEY: 0001083750 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 731325906 STATE OF INCORPORATION: OK FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15135 FILM NUMBER: 091168251 BUSINESS ADDRESS: STREET 1: 1010 MANVEL AVE CITY: CHANDLER STATE: OK ZIP: 74834 BUSINESS PHONE: 4052580804 MAIL ADDRESS: STREET 1: 1010 MANVEL AVE CITY: CHANDLER STATE: OK ZIP: 74834 10-Q 1 edgarusa9302009.txt CHANDLER (U.S.A.), INC. 9/30/09 10-Q - ------------------------------------------------------------------------------- UNITED STATES 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, 2009 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: 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 --- --- Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES NO --- --- Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer Accelerated filer -- -- Non-accelerated filer X (Do not check if a smaller reporting company) -- Smaller reporting company -- Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES NO X --- --- The number of common shares, $1.00 par value, of the registrant outstanding on October 31, 2009 was 2,484, which are owned by Chandler Insurance Company, Ltd. - ------------------------------------------------------------------------------- Page i CHANDLER (U.S.A.), INC. INDEX ----- PART I - FINANCIAL INFORMATION - ------------------------------ ITEM 1. FINANCIAL STATEMENTS: - -------------------------------- Consolidated Balance Sheets as of September 30, 2009 (unaudited) and December 31, 2008 .................................................1 Consolidated Statements of Operations for the three months ended September 30, 2009 and 2008 (unaudited) .........................2 Consolidated Statements of Operations for the nine months ended September 30, 2009 and 2008 (unaudited) .........................3 Consolidated Statements of Comprehensive Income for the three months ended September 30, 2009 and 2008 (unaudited) ..................4 Consolidated Statements of Comprehensive Income for the nine months ended September 30, 2009 and 2008 (unaudited) ..................5 Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008 (unaudited) .........................6 Notes to Interim Consolidated Financial Statements (unaudited) ..............7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - -------------------------------------------------------------------------- RESULTS OF OPERATIONS ............................................15 --------------------- ITEM 4T. CONTROLS AND PROCEDURES ............................................21 - -------------------------------- PART II - OTHER INFORMATION - --------------------------- Item 1. Legal Proceedings ..............................................22 Item 1A. Risk Factors ...................................................22 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ....22 Item 3. Defaults Upon Senior Securities ................................22 Item 4. Submission of Matters to a Vote of Security Holders ............22 Item 5. Other Information ..............................................22 Item 6. Exhibits .......................................................22 Signatures .................................................................23 PAGE 1 CHANDLER (U.S.A.), INC. CONSOLIDATED BALANCE SHEETS (Amounts in thousands except share amounts)
September 30, December 31, 2009 2008 ------------ ------------ (Unaudited) ASSETS Investments Fixed maturities available for sale, at fair value Restricted (amortized cost $34,258 and $34,243 in 2009 and 2008, respectively) ...... $ 35,216 $ 35,397 Unrestricted (amortized cost $65,519 and $40,771 in 2009 and 2008, respectively) .... 67,223 41,699 Equity securities at fair value (cost $0 in 2009 and 2008) ........................... 186 76 Short-term investments at fair value (amortized cost $570 and $5,853 in 2009 and 2008, respectively) .................................................... 570 5,865 ------------ ------------ Total investments ................................................................... 103,195 83,037 Cash and cash equivalents ($837 and $118 restricted in 2009 and 2008, respectively) ... 6,792 20,636 Accrued investment income ............................................................. 961 1,018 Premiums receivable, less allowance for non-collection of $139 and $138 at 2009 and 2008, respectively .......................................................... 21,458 26,405 Reinsurance recoverable on paid losses ................................................ 959 423 Reinsurance recoverable on unpaid losses, less allowance for non-collection of $304 and $231 at 2009 and 2008, respectively ....................... 35,174 32,492 Reinsurance recoverable on unpaid losses from related parties ......................... 20,912 19,899 Prepaid reinsurance premiums .......................................................... 3,384 2,882 Prepaid reinsurance premiums to related parties ....................................... 11,570 12,203 Deferred policy acquisition costs ..................................................... 1,332 1,304 Property and equipment, net ........................................................... 7,286 7,849 Amounts due from related parties ...................................................... 12,301 11,869 State insurance licenses, net ......................................................... 3,745 3,745 Other assets .......................................................................... 10,335 10,885 ------------ ------------ Total assets .......................................................................... $ 239,404 $ 234,647 ============ ============ LIABILITIES AND SHAREHOLDER'S EQUITY Liabilities Unpaid losses and loss adjustment expenses ........................................... $ 105,178 $ 101,459 Unearned premiums .................................................................... 42,122 43,725 Policyholder deposits ................................................................ 8,964 7,820 Accrued taxes and other payables ..................................................... 5,120 6,017 Premiums payable ..................................................................... 2,595 2,440 Premiums payable to related parties .................................................. 22 222 Senior debentures .................................................................... 6,979 6,979 Junior subordinated debentures issued to affiliated trusts ........................... 20,620 20,620 ------------ ------------ Total liabilities ................................................................... 191,600 189,282 ------------ ------------ 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 .................................................................. (14,662) (16,654) Accumulated other comprehensive income: Unrealized gain on investments available for sale, net of deferred income taxes ...... 1,880 1,433 ------------ ------------ Total shareholder's equity .......................................................... 47,804 45,365 ------------ ------------ Total liabilities and shareholder's equity ............................................ $ 239,404 $ 234,647 ============ ============
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 September 30, -------------------------------- 2009 2008 ------------- ------------- Premiums and other revenues Direct premiums written and assumed ........................... $ 20,396 $ 24,160 Reinsurance premiums ceded .................................... (2,682) (2,441) Reinsurance premiums ceded to related parties ................. (5,293) (6,533) ------------- ------------- Net premiums written and assumed ............................ 12,421 15,186 Decrease in unearned premiums ................................. 836 505 ------------- ------------- Net premiums earned ......................................... 13,257 15,691 Investment income, net .......................................... 838 828 Interest income, net from related parties ....................... 111 159 Realized investment gains, net .................................. 194 91 Other income .................................................... 825 731 ------------- ------------- Total premiums and other revenues ............................. 15,225 17,500 ------------- ------------- Operating costs and expenses Losses and loss adjustment expenses, net of amounts ceded to related parties of $3,078 and $3,665 in 2009 and 2008, respectively ................................. 8,039 11,352 Policy acquisition costs, net of ceding commissions received from related parties of $2,012 and $2,484 in 2009 and 2008, respectively ................................. 2,941 3,097 General and administrative expenses ........................... 2,699 3,161 Interest expense .............................................. 585 628 ------------- ------------- Total operating costs and expenses .......................... 14,264 18,238 ------------- ------------- Income (loss) before income taxes ............................... 961 (738) Federal income tax benefit (provision) .......................... (365) 175 ------------- ------------- Net income (loss) ............................................. $ 596 $ (563) ============= =============
See accompanying Notes to Interim Consolidated Financial Statements. PAGE 3 CHANDLER (U.S.A.), INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Amounts in thousands)
Nine months ended September 30, -------------------------------- 2009 2008 ------------- ------------- Premiums and other revenues Direct premiums written and assumed ........................... $ 66,284 $ 74,554 Reinsurance premiums ceded .................................... (8,060) (7,260) Reinsurance premiums ceded to related parties ................. (17,361) (20,136) ------------- ------------- Net premiums written and assumed ............................ 40,863 47,158 Decrease in unearned premiums ................................. 1,472 1,286 ------------- ------------- Net premiums earned ......................................... 42,335 48,444 Investment income, net .......................................... 2,379 2,565 Interest income, net from related parties ....................... 326 505 Realized investment gains, net .................................. 1,383 95 Other income .................................................... 1,600 1,559 ------------- ------------- Total premiums and other revenues ............................. 48,023 53,168 ------------- ------------- Operating costs and expenses Losses and loss adjustment expenses, net of amounts ceded to related parties of $11,303 and $11,296 in 2009 and 2008, respectively ................................. 25,801 30,668 Policy acquisition costs, net of ceding commissions received from related parties of $6,600 and $7,656 in 2009 and 2008, respectively ................................. 8,735 9,464 General and administrative expenses ........................... 8,523 9,440 Interest expense .............................................. 1,778 1,907 ------------- ------------- Total operating costs and expenses .......................... 44,837 51,479 ------------- ------------- Income before income taxes ...................................... 3,186 1,689 Federal income tax provision .................................... (1,194) (786) ------------- ------------- Net income .................................................... $ 1,992 $ 903 ============= =============
See accompanying Notes to Interim Consolidated Financial Statements. PAGE 4 CHANDLER (U.S.A.), INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Amounts in thousands)
Three months ended September 30, -------------------------------- 2009 2008 ------------- ------------ Net income (loss) ............................................. $ 596 $ (563) ------------- ------------ Other comprehensive income (loss), before income tax: Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period ... 2,497 (401) Less: Reclassification adjustment for gains included in net income (loss) ....................................... (194) (91) ------------- ------------ Other comprehensive income (loss), before income tax .......... 2,303 (492) Income tax (provision) benefit related to items of other comprehensive income (loss) ................................. (783) 167 ------------- ------------ Other comprehensive income (loss), net of income tax .......... 1,520 (325) ------------- ------------ Comprehensive income (loss) ................................... $ 2,116 $ (888) ============= ============
See accompanying Notes to Interim Consolidated Financial Statements. PAGE 5 CHANDLER (U.S.A.), INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Amounts in thousands)
Nine months ended September 30, -------------------------------- 2009 2008 ------------- ------------ Net income .................................................... $ 1,992 $ 903 ------------- ------------ Other comprehensive income (loss), before income tax: Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period ... 2,061 (712) Less: Reclassification adjustment for gains included in net income .............................................. (1,383) (95) ------------- ------------ Other comprehensive income (loss), before income tax .......... 678 (807) Income tax benefit (provision) related to items of other comprehensive income (loss) ................................. (231) 274 ------------- ------------ Other comprehensive income (loss), net of income tax .......... 447 (533) ------------- ------------ Comprehensive income .......................................... $ 2,439 $ 370 ============= ============
See accompanying Notes to Interim Consolidated Financial Statements. PAGE 6 CHANDLER (U.S.A.), INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Amounts in thousands)
Nine months ended September 30, -------------------------------- 2009 2008 ------------ ------------ OPERATING ACTIVITIES Net income .................................................................. $ 1,992 $ 903 Add (deduct): Adjustments to reconcile net income to cash provided by operating activities: Realized investment gains, net .......................................... (1,383) (95) Net losses on sale of property and equipment ............................ 29 - Amortization and depreciation ........................................... 1,371 1,151 Provision for non-collection of premiums ................................ 65 15 Provision for non-collection of reinsurance recoverables ................ 160 155 Provision for impairment of investment .................................. 30 - Net change in non-cash balances relating to operating activities: Accrued investment income ............................................. 57 (46) Premiums receivable ................................................... 4,882 495 Reinsurance recoverable on paid losses ................................ (623) (1,575) Reinsurance recoverable on paid losses from related parties ........... - (687) Reinsurance recoverable on unpaid losses .............................. (2,755) 790 Reinsurance recoverable on unpaid losses from related parties ......... (1,013) (882) Prepaid reinsurance premiums .......................................... (502) 61 Prepaid reinsurance premiums to related parties ....................... 633 548 Deferred policy acquisition costs ..................................... (28) (24) Other assets .......................................................... 246 159 Unpaid losses and loss adjustment expenses ............................ 3,719 3,213 Unearned premiums ..................................................... (1,603) (1,895) Policyholder deposits ................................................. 1,144 715 Accrued taxes and other payables ...................................... (897) (760) Premiums payable ...................................................... 155 (192) Premiums payable to related parties ................................... (200) (198) ------------ ------------ Cash provided by operating activities ................................... 5,479 1,851 ------------ ------------ INVESTING ACTIVITIES Short-term investments: Purchases ............................................................... (380) (3,594) Maturities .............................................................. 5,660 1,330 Unrestricted fixed maturities available for sale: Purchases ............................................................... (58,249) (34,192) Sales ................................................................... 25,984 6,417 Maturities .............................................................. 8,215 16,182 Equity securities available for sale: Purchases ............................................................... - (266) Sales ................................................................... - 270 Cost of property and equipment purchased .................................. (140) (570) Proceeds from sale of property and equipment .............................. 19 129 ------------ ------------ Cash applied to investing activities .................................... (18,891) (14,294) ------------ ------------ FINANCING ACTIVITIES Payments and loans from related parties ................................... 1,912 2,146 Payments and loans to related parties ..................................... (2,344) (2,866) Payments on bank loan ..................................................... - - ------------ ------------ Cash applied to financing activities .................................... (432) (720) ------------ ------------ Decrease in cash and cash equivalents during the period ..................... (13,844) (13,163) Cash and cash equivalents at beginning of period ............................ 20,636 32,956 ------------ ------------ Cash and cash equivalents at end of period .................................. $ 6,792 $ 19,793 ============ ============
See accompanying Notes to Interim Consolidated Financial Statements. PAGE 7 CHANDLER (U.S.A.), INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008 (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, 2008. 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 interim periods ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year. Chandler USA has evaluated subsequent events for potential recognition or disclosure through November 9, 2009, the issuance date of Chandler USA's consolidated financial statements. 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. The following table presents a summary of Chandler USA's operating segments for the periods indicated:
PROPERTY AND CASUALTY INTERSEGMENT REPORTED INSURANCE AGENCY ELIMINATIONS BALANCES ------------ ------------ ------------ ------------ (In thousands) THREE MONTHS ENDED SEPTEMBER 30, 2009 Revenues from external customers (1) ........... $ 13,338 $ 744 $ - $ 14,082 Intersegment revenues .......................... 40 534 (574) - Segment profit before income taxes (2) ......... 531 430 - 961 THREE MONTHS ENDED SEPTEMBER 30, 2008 Revenues from external customers (1) ........... $ 15,848 $ 574 $ - $ 16,422 Intersegment revenues .......................... 21 805 (826) - Segment profit (loss) before income taxes (2) .. (1,282) 544 - (738) NINE MONTHS ENDED SEPTEMBER 30, 2009 Revenues from external customers (1) ........... $ 42,671 $ 1,264 $ - $ 43,935 Intersegment revenues .......................... 111 1,940 (2,051) - Segment profit before income taxes (2) ......... 2,572 614 - 3,186 Segment assets ................................. 236,972 9,940 (7,508) 239,404 NINE MONTHS ENDED SEPTEMBER 30, 2008 Revenues from external customers (1) ........... $ 48,839 $ 1,164 $ - $ 50,003 Intersegment revenues .......................... 44 2,525 (2,569) - Segment profit before income taxes (2) ......... 477 1,212 - 1,689 Segment assets ................................. 233,081 9,871 (7,332) 235,620 - --------------------------------------------------- (1) Consists of net premiums earned and other income. (2) Includes net realized investment gains.
PAGE 8 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 and to each line of insurance. Chandler USA's chief operating decision makers review net premiums earned and losses and loss adjustment expenses in assessing the performance of the insurance programs and lines of business. 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 programs or lines of insurance, including assets, interest income, and investment gains or losses, allocated to each insurance program or line of insurance. Chandler USA does not consider its insurance programs or lines of insurance 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 by insurance program and line of insurance for the property and casualty insurance segment.
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- -------------------------------- 2009 2008 2009 2008 ------------ ------------ ------------ ------------ (In thousands) INSURANCE PROGRAM: - ----------------------------------------- NET PREMIUMS EARNED Standard lines ........................ $ 12,828 $ 14,943 $ 40,433 $ 46,169 Political subdivisions ................ 373 694 1,654 2,092 Other ................................. 56 54 248 183 ------------ ------------ ------------ ------------ TOTAL ................................. $ 13,257 $ 15,691 $ 42,335 $ 48,444 ============ ============ ============ ============ LOSSES AND LOSS ADJUSTMENT EXPENSES Standard lines ........................ $ 7,678 $ 10,703 $ 23,647 $ 28,881 Political subdivisions ................ 200 626 1,370 1,481 Other ................................. 161 23 784 306 ------------ ------------ ------------ ------------ TOTAL ................................. $ 8,039 $ 11,352 $ 25,801 $ 30,668 ============ ============ ============ ============
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- -------------------------------- 2009 2008 2009 2008 ------------ ------------ ------------ ------------ (In thousands) LINES OF INSURANCE: - ----------------------------------------- NET PREMIUMS EARNED Automobile liability................... $ 3,135 $ 5,064 $ 12,288 $ 16,880 Workers compensation .................. 5,531 4,945 15,813 15,006 Other liability ....................... 3,314 4,110 9,936 12,507 Automobile physical damage ............ 1,138 1,549 4,073 4,039 Other ................................. 139 23 225 12 ------------ ------------ ------------ ------------ TOTAL ................................. $ 13,257 $ 15,691 $ 42,335 $ 48,444 ============ ============ ============ ============ LOSSES AND LOSS ADJUSTMENT EXPENSES Automobile liability .................. $ 3,008 $ 4,413 $ 7,881 $ 12,369 Workers compensation .................. 3,132 4,050 11,847 10,604 Other liability ....................... 1,227 1,863 4,104 4,489 Automobile physical damage ............ 525 1,111 1,915 3,086 Other ................................. 147 (85) 54 120 ------------ ------------ ------------ ------------ TOTAL ................................. $ 8,039 $ 11,352 $ 25,801 $ 30,668 ============ ============ ============ ============
PAGE 9 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 4.25% at September 30, 2009. 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") with respect to the trust preferred securities they have outstanding. The Capital Trusts distribute the interest received from Chandler USA on the junior subordinated debentures to the holders of the trust preferred securities to fulfill their obligations with respect to such securities. The Capital Trusts are wholly owned non- consolidated subsidiaries of Chandler USA. Chandler USA guarantees payment of distributions and the redemption price of the trust preferred securities until the securities are redeemed in full. The total redemption price of the trust preferred securities is $20.0 million. 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 and 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 included $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. PAGE 10 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 January 28, 2008, the court entered a final judgment denying Gulf Liquid's claims against NAICO and Gulsby, denying all of NAICO's claims against Gulf Liquids and Williams, and entering judgment for Gulsby against Gulf Liquids for $15,651,927 plus interest at 7.25% compounded annually from January 28, 2008 until paid. The court also ordered Gulf Liquids to pay Gulsby's taxable court costs, estimated at $100,000. Gulf Liquids has appealed the judgment entered in favor of Gulsby and the denial of its claims against NAICO and Gulsby. NAICO has appealed the trial court's denial of its claims against Gulf Liquids and Williams and seeks entry of judgment upon the jury verdicts for the amounts the jury found should be awarded to NAICO. Gulsby has also appealed the trial court's final judgment, contending that judgment should be entered in its favor against Gulf Liquids and Williams in accordance with the jury verdicts. The recoverable amounts deducted from Chandler USA's net liability for losses and loss adjustment expenses related to this litigation were approximately $10.1 million at September 30, 2009 and December 31, 2008. NOTE 5. NEW ACCOUNTING STANDARDS Chandler USA has reviewed the recently issued accounting pronouncements and concluded that the following new accounting standards and accounting standard updates are applicable to Chandler USA. In June 2009, the Financial Accounting Standards Board ("FASB") issued guidance on "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles," and established the FASB Accounting Standards Codification ("Codification") as the single source of authoritative accounting principles in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the Securities and Exchange Commission ("SEC") under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The FASB will no longer issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead the FASB will issue Accounting Standards Updates. Accounting Standards Updates will not be authoritative in their own right as they will only serve to update the Codification. Chandler USA has adopted the Codification as of September 30, 2009. The adoption of the Codification did not have any impact on its consolidated financial statements. In March 2008, the FASB issued new guidance on the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance and cash flows. Chandler USA has adopted this new guidance as of January 1, 2009. The adoption of this new guidance did not have any impact on its consolidated financial statements. In April 2009, the FASB issued new guidance related to the disclosures regarding fair value of financial instruments. The new guidance expands the existing disclosures regarding fair value of financial instruments that is required in annual reports to interim periods. The required disclosures are effective for interim reporting periods ending after June 15, 2009. Chandler USA adopted this new guidance as of June 30, 2009. The adoption of this new guidance did not have any impact on its consolidated financial statements. See Note 7 for the required disclosures. In April 2009, the FASB issued new guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. Chandler USA has adopted this new guidance as of June 30, 2009. The adoption of this new guidance did not have any impact on its consolidated financial statements. In April 2009, the FASB issued new guidance for accounting for other- than-temporary impairments for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than- temporary impairments on debt and equity securities in the financial statements. Chandler USA has adopted this new guidance as of June 30, 2009. The adoption of this new guidance did not have any impact on its consolidated financial statements. See Note 6 for the required disclosures. PAGE 11 In May 2009, the FASB issued new guidance for accounting for subsequent events. This new guidance establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This new guidance defines the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. Chandler USA has adopted this new guidance as of June 30, 2009. The adoption of this new guidance did not have any impact on its consolidated financial statements. In June 2009, the FASB issued new guidance on the accounting for transfers of financial assets. The new guidance requires additional disclosures for transfers of financial assets, including securitization transactions, and any continuing exposure to the risks related to transferred financial assets. There is no longer a concept of a qualifying special-purpose entity, and the requirements for derecognizing financial assets have changed. This new guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2009, with early application prohibited. Chandler USA is currently evaluating the impact that this new guidance will have, if any, on its consolidated financial statements. In June 2009, the FASB issued new guidance on the accounting for variable interest entities. The new guidance requires an enterprise to perform an analysis to determine whether the enterprise's variable interest or interests give it a controlling financial interest in a variable interest entity; to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity; to eliminate the quantitative approach previously required for determining the primary beneficiary of a variable interest entity; to add an additional reconsideration event for determining whether an entity is a variable interest entity when any changes in facts and circumstances occur such that holders of the equity investment at risk, as a group, lose the power from voting rights or similar rights of those investments to direct the activities of the entity that most significantly impact the entity's economic performance; and to require enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise's involvement in a variable interest entity. This new guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2009, with early application prohibited. Chandler USA is currently evaluating the impact that this new guidance will have, if any, on its consolidated financial statements. In August 2009, the FASB issued new guidance to provide clarification on measuring liabilities at fair value when a quoted price in an active market is not available. This new guidance became effective for Chandler USA on October 1, 2009. Chandler USA is currently evaluating the impact that this new guidance will have, if any, on its consolidated financial statements. NOTE 6. INVESTMENTS AND INVESTMENT INCOME Net investment income and realized investment gains are summarized in the following table. These amounts are net of investment expenses.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ------------------ 2009 2008 2009 2008 -------- -------- -------- -------- (In thousands) Interest on fixed-maturity investments ................... $ 883 $ 774 $ 2,457 $ 2,196 Interest on short-term investments and cash equivalents .. 10 121 106 578 Investment expenses ...................................... (55) (67) (184) (209) -------- -------- -------- -------- Investment income, net ................................. 838 828 2,379 2,565 Realized gains, net - fixed maturity investments ......... 194 91 1,383 91 Realized gains, net - equity securities .................. - - - 4 -------- -------- -------- -------- Realized investment gains, net ......................... 194 91 1,383 95 -------- -------- -------- -------- $ 1,032 $ 919 $ 3,762 $ 2,660 ======== ======== ======== ========
Investment expenses included $19,000 and $73,000 in the third quarter and first nine months of 2009, and $30,000 and $100,000 in the third quarter and first nine months of 2008, respectively, in expense to subsidize a premium finance program for certain insureds of NAICO with an unaffiliated premium finance company. PAGE 12 The amortized cost of fixed maturities or cost of equity securities, gross unrealized gains or losses, fair value and carrying value of investments are as follows:
GROSS GROSS UNREALIZED UNREALIZED FAIR CARRYING SEPTEMBER 30, 2009 COST GAINS LOSSES VALUE VALUE - --------------------------------------------------- ---------- ---------- ---------- ---------- ---------- FIXED MATURITIES AVAILABLE FOR SALE: (In thousands) U.S. Treasury securities and obligations of U.S. government corporations and agencies ................................... $ 37,007 $ 962 $ (30) $ 37,939 $ 37,939 Corporate obligations ............................. 34,446 912 (62) 35,296 35,296 Public utilities .................................. 2,056 67 - 2,123 2,123 Obligations of states and political subdivisions .. 26,268 817 (4) 27,081 27,081 ---------- ---------- ---------- ---------- ---------- $ 99,777 $ 2,758 $ (96) $ 102,439 $ 102,439 ========== ========== ========== ========== ========== EQUITY SECURITIES: Corporate stock ................................... $ - $ 186 $ - $ 186 $ 186 ========== ========== ========== ========== ==========
GROSS GROSS UNREALIZED UNREALIZED FAIR CARRYING DECEMBER 31, 2008 COST GAINS LOSSES VALUE VALUE - --------------------------------------------------- ---------- ---------- ---------- ---------- ---------- FIXED MATURITIES AVAILABLE FOR SALE: (In thousands) U.S. Treasury securities and obligations of U.S. government corporations and agencies ................................... $ 39,151 $ 2,349 $ - $ 41,500 $ 41,500 Corporate obligations ............................. 29,558 313 (386) 29,485 29,485 Public utilities .................................. 3,108 21 (153) 2,976 2,976 Obligations of states and political subdivisions .. 3,197 12 (74) 3,135 3,135 ---------- ---------- ---------- ---------- ---------- $ 75,014 $ 2,695 $ (613) $ 77,096 $ 77,096 ========== ========== ========== ========== ========== EQUITY SECURITIES: Corporate stock ................................... $ - $ 76 $ - $ 76 $ 76 ========== ========== ========== ========== ==========
Chandler USA held investments in fixed maturities issued by General Electric Capital Corporation with a fair value of $4.7 million or 9.8% of shareholder's equity at September 30, 2009, and $4.6 million or 10.1% of shareholder's equity at December 31, 2008. Other than investments in bonds and notes of the U.S. Government and U.S. Government agencies and authorities, Chandler USA did not hold any other fixed maturity investments that exceeded 10% of shareholder's equity at September 30, 2009 or December 31, 2008. The fair value of Chandler USA's investments with continuous gross unrealized losses at September 30, 2009 is presented below:
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL ----------------------- ----------------------- ------------------------ UNREALIZED UNREALIZED UNREALIZED FAIR VALUE LOSSES FAIR VALUE LOSSES FAIR VALUE LOSSES ----------- ---------- ----------- ---------- ----------- ---------- (In thousands) U.S. Treasury securities and obligations of U.S. government corporations and agencies .......... $ 3,247 $ (29) $ - $ - $ 3,247 $ (29) Corporate securities ................. 714 (7) 1,001 (56) 1,715 (63) Public utilities ..................... - - - - - - Obligations of states and political subdivisions ....................... 1,354 (4) - - 1,354 (4) ----------- ---------- ----------- ---------- ----------- ---------- $ 5,315 $ (40) $ 1,001 $ (56) $ 6,316 $ (96) =========== ========== =========== ========== =========== ==========
PAGE 13 The unrealized losses of Chandler USA's fixed maturity investments were primarily caused by changes in market interest rates since the date of purchase, current conditions in the capital markets and the impact of those conditions on market prices. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Chandler USA regularly reviews its investment portfolio for factors that may indicate that a decline in fair value of an investment is other than temporary. Based on an evaluation of the issues, including, but not limited to, Chandler USA's intentions to sell or ability to hold the investments; the length of time and amount of the unrealized loss; and the credit ratings of the issuers of the investments, Chandler USA does not consider these investments to be other-than-temporarily impaired at September 30, 2009. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The maturities of investments in fixed maturities at September 30, 2009 are shown below:
AVAILABLE FOR SALE ------------------------ AMORTIZED COST FAIR VALUE ------------ ---------- (In thousands) Due in one year or less .......................... $ 3,258 $ 3,281 Due after one year through five years ............ 50,683 52,252 Due after five years through ten years ........... 39,342 40,125 Due after ten years .............................. 6,494 6,781 ------------ ---------- $ 99,777 $ 102,439 ============ ==========
Realized gains and losses from sales of investments are shown below:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ------------------ 2009 2008 2009 2008 -------- -------- -------- -------- (In thousands) FIXED MATURITIES: Gross realized gains ........... $ 194 $ 148 $ 1,383 $ 148 Gross realized losses .......... - (57) - (57) -------- -------- -------- -------- Total net realized gains ..... $ 194 $ 91 $ 1,383 $ 91 ======== ======== ======== ======== EQUITY SECURITIES: Gross realized gains ........... $ - $ - $ - $ 4 Gross realized losses .......... - - - - -------- -------- -------- -------- Total net realized gains ..... $ - $ - $ - $ 4 ======== ======== ======== ========
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. During the third quarter of 2009, NAICO established a letter of credit in the amount of $500,000 and pledged cash and investments in this amount. The letter of credit secures reserves assumed under a quota share reinsurance agreement. At September 30, 2009, the total amount of cash and securities restricted as a result of these arrangements was $36.1 million which was an increase of $538,000 from December 31, 2008. PAGE 14 NOTE 7. FAIR VALUE MEASUREMENTS Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The quality and reliability of the information used to determine fair values is prioritized into three broad categories, with the highest priority given to Level 1 inputs and the lowest priority to Level 3 inputs. These levels are defined as follows: Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 - Observable inputs other than quoted prices included within Level 1 for the asset or liability, either directly or indirectly. If an asset or liability has a specified term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 3 - Unobservable inputs for the asset or liability. The following table presents information about Chandler USA's assets measured at fair value on a recurring basis as of September 30, 2009, and indicates the fair value hierarchy of the valuation techniques utilized to determine such values. Substantially all of the prices of fixed maturities, equity securities and short-term investments that are valued as Level 1 or Level 2 in the fair value hierarchy are received from independent pricing services utilized by our investment custodians. No liabilities were measured at fair value at September 30, 2009.
FAIR VALUE MEASUREMENTS AT SEPTEMBER 30, 2009 ---------------------------------------------------------------------- QUOTED PRICES SIGNIFICANT IN ACTIVE OTHER SIGNIFICANT MARKETS FOR OBSERVABLE UNOBSERVABLE IDENTICAL ASSETS INPUTS INPUTS TOTAL DESCRIPTION (LEVEL 1) (LEVEL 2) (LEVEL 3) FAIR VALUE - ------------------------------------------ ---------------- ---------------- ---------------- ---------------- (In thousands) Fixed maturities available for sale ... $ - $ 102,439 $ - $ 102,439 Equity securities available for sale .. - - 186 186 Short-term investments ................ - 570 - 570 ---------------- ---------------- ---------------- ---------------- Total ............................... $ - $ 103,009 $ 186 $ 103,195 ================ ================ ================ ================
Prices for fixed maturities available for sale and short-term investments were provided by various custodians that hold such assets on behalf of Chandler USA. The custodians utilize independent pricing services to determine prices for these assets. Management reviews the prices provided but does not conduct an independent validation of the prices. Any fixed maturities that are not held by a custodian are priced using non-binding broker quotations. Total assets priced from broker quotations totaled $380,000 at September 30, 2009, or 0.4% of total Level 2 assets. At September 30, 2009, Chandler USA's equity securities which were measured at fair value using Level 3 inputs consisted of common stock received in connection with an unaffiliated entity's conversion to a for-profit corporation. The fair value of this stock was based upon an analytically determined valuation from an independent rating organization. The following table presents additional information about assets measured at fair value using Level 3 inputs for the three and nine month periods ended September 30, 2009.
THREE MONTHS NINE MONTHS FAIR VALUE MEASUREMENTS USING SIGNIFICANT ENDED ENDED UNOBSERVABLE INPUTS (LEVEL 3) SEPTEMBER 30, 2009 SEPTEMBER 30, 2009 ------------------------------------------------- ------------------ ------------------ (In thousands) Beginning balance ............................. $ 76 $ 76 Total realized and unrealized gains (losses): Included in earnings ...................... - - Included in other comprehensive income .... 110 110 Purchases, issuances and settlements ........ - - Transfers in and/or out of Level 3 .......... - - ------------------ ------------------ Ending balance ................................ $ 186 $ 186 ================== ==================
PAGE 15 NOTE 8. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS Estimated fair value amounts have been determined by Chandler USA using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates of fair values presented herein are not necessarily indicative of the amounts that Chandler USA could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. A number of Chandler USA's significant assets (including deferred policy acquisition costs, property and equipment, reinsurance recoverables, prepaid reinsurance premiums and state insurance licenses) and liabilities (including unpaid losses and loss adjustment expenses and unearned premiums) are not considered financial instruments. Based on the short term nature or other relevant characteristics, Chandler USA has concluded that the carrying value of other assets and liabilities considered financial instruments, such as cash equivalents, premiums receivable, policyholder deposits, accrued taxes and other payables, and premiums payable, approximates their fair value as of September 30, 2009 and December 31, 2008. The estimated fair values of Chandler USA's fixed-maturity and equity security investments are disclosed at Note 6. The fair value of Chandler USA's senior debentures was estimated to be $5.6 million as of September 30, 2009 and December 31, 2008, based on the latest reported trade. Chandler USA's senior debentures have not historically traded regularly, and settlement at the reported fair value may not be possible. The senior debentures are redeemable by Chandler USA on or after July 15, 2009 without penalty or premium, but may be purchased and cancelled by Chandler USA at a price of less than the sum of the principal amount and accrued interest at any time. Chandler USA is obligated for $13.4 million principal amount of junior subordinated debentures that mature in 2033 with a fixed interest rate of 9.75%, and $7.2 million principal amount of junior subordinated debentures that mature in 2034 with a floating rate of 4.10% over LIBOR. The interest rate at September 30, 2009 was 4.61%. The fair value of Chandler USA's junior subordinated debentures was estimated to be $22.9 million and $24.6 million at September 30, 2009 and December 31, 2008, respectively. 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. PAGE 16 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 as well as each line of insurance for the periods indicated:
GROSS PREMIUMS EARNED NET PREMIUMS EARNED --------------------------- --------------------------- THREE MONTHS ENDED SEPTEMBER 30, 2009 2008 2009 2008 ---------------------------------- ------------ ------------ ------------ ------------ (In thousands) INSURANCE PROGRAMS: Standard lines ................... $ 20,767 $ 23,787 $ 12,828 $ 14,943 Political subdivisions ........... 573 1,058 373 694 Other ............................ 64 62 56 54 ------------ ------------ ------------ ------------ TOTAL ............................ $ 21,404 $ 24,907 $ 13,257 $ 15,691 ============ ============ ============ ============ LINES OF INSURANCE: Automobile liability ............. $ 4,585 $ 7,385 $ 3,135 $ 5,064 Workers compensation ............. 8,464 7,785 5,531 4,945 Other liability .................. 6,414 7,436 3,314 4,110 Automobile physical damage ....... 1,694 2,269 1,138 1,549 Other ............................ 247 32 139 23 ------------ ------------ ------------ ------------ TOTAL ............................ $ 21,404 $ 24,907 $ 13,257 $ 15,691 ============ ============ ============ ============
GROSS PREMIUMS EARNED NET PREMIUMS EARNED --------------------------- --------------------------- NINE MONTHS ENDED SEPTEMBER 30, 2009 2008 2009 2008 ---------------------------------- ------------ ------------ ------------ ------------ (In thousands) INSURANCE PROGRAMS: Standard lines ................... $ 65,081 $ 73,046 $ 40,433 $ 46,169 Political subdivisions ........... 2,536 3,190 1,654 2,092 Other ............................ 270 213 248 183 ------------ ------------ ------------ ------------ TOTAL ............................ $ 67,887 $ 76,449 $ 42,335 $ 48,444 ============ ============ ============ ============ LINES OF INSURANCE: Automobile liability ............. $ 17,866 $ 24,472 $ 12,288 $ 16,880 Workers compensation ............. 24,365 23,302 15,813 15,006 Other liability .................. 19,226 22,735 9,936 12,507 Automobile physical damage ....... 6,043 5,925 4,073 4,039 Other ............................ 387 15 225 12 ------------ ------------ ------------ ------------ TOTAL ............................ $ 67,887 $ 76,449 $ 42,335 $ 48,444 ============ ============ ============ ============
Gross premiums earned decreased $3.5 million or 14% and $8.6 million or 11% in the third quarter and first nine months of 2009, respectively, compared to the 2008 periods. Net premiums earned decreased $2.4 million or 16% and $6.1 million or 13% for the third quarter and first nine months of 2009, respectively. Gross premiums earned in the standard lines program decreased $3.0 million or 13% and $8.0 million or 11% in the third quarter and first nine months of 2009, respectively, compared to the 2008 periods. Gross premiums earned from trucking accounts in this program decreased $1.9 and $5.3 million in the third quarter and first nine months of 2009, respectively. Gross premiums earned in this program for other liability decreased $822,000 and $3.3 million in the third quarter and first nine months of 2009, respectively, and gross premiums earned in this program for automobile liability decreased $2.6 million and $6.3 million in the third quarter and first nine months of 2009. These decreases were partially offset by an increase in workers compensation premiums. Net premiums earned decreased $2.1 million or 14% and $5.7 million or 12% in the third quarter and first nine months of 2009, respectively. PAGE 17 Gross premiums earned in the political subdivisions program decreased $485,000 or 46% and $654,000 or 21% in the third quarter and first nine months of 2009, respectively, compared to the 2008 periods. Net premiums earned in this program decreased $321,000 or 46% and $438,000 or 21% in the third quarter and first nine months of 2009, respectively. Effective July 1, 2009, the automobile liability, automobile physical damage and other liability lines of insurance in the political subdivision program that were previously written by NAICO are being written by an unaffiliated insurance company through an arrangement with CIMI. Under this arrangement, CIMI will receive commission income for the business it produces. 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 the unaffiliated insurance company. NAICO will continue to write workers compensation coverages for this program and has agreed to reinsure on a quota share basis 35% of the first $1,000,000 of loss per occurrence of the other liability business in this program. Because of these changes, NAICO expects its future premiums earned for this program to decrease significantly. NET INVESTMENT INCOME AND NET REALIZED INVESTMENT GAINS At September 30, 2009, Chandler USA's investment portfolio consisted primarily of fixed income U.S. Treasury and government agency bonds, high- quality corporate and tax exempt bonds and certificates of deposit insured by the FDIC, 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 related parties on intercompany loans. Net investment income, excluding interest income from related parties increased $10,000 or 1% and decreased $186,000 or 7% in the third quarter and first nine months of 2009, respectively. The decrease in the first nine months of 2009 was due primarily to lower interest rates. Cash and invested assets were $110.0 million at September 30, 2009 compared to $103.7 million at December 31, 2008 and $96.7 million at September 30, 2008. Net interest income from related parties decreased $48,000 or 30% and $179,000 or 35% in the third quarter and first nine months of 2009, respectively, due to lower interest rates. Net realized investment gains were $194,000 and $1.4 million during the third quarter and first nine months of 2009, respectively. The realized gains resulted from sales of fixed maturities available for sale in the amount of $26.0 million. Net realized investment gains were $91,000 and $95,000 during the third quarter and first nine months of 2008. OTHER INCOME Other income was $825,000 and $1.6 million in the third quarter and first nine months of 2009, respectively, compared to $731,000 and $1.6 million in the third quarter and first nine months of 2008. The increase in the third quarter of 2009 was due primarily to an increase in commission income related to business produced by CIMI for insurance companies other than NAICO. 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 60.6% and 60.9% for the third quarter and first nine months of 2009, compared to 72.3% and 63.3% in the corresponding 2008 periods. During the third quarter of 2009, NAICO experienced a decrease in losses incurred related to prior accident years totaling $87,000 which decreased the loss ratio by 0.7 percentage points. Loss reserve development for the first nine months of 2009 was redundant by $102,000. In the third quarter of 2008, losses and loss adjustment expenses incurred related to prior accident years were $1.7 million and increased the loss ratio by 10.9 percentage points. In the first nine months of 2008, losses and loss adjustment expenses incurred related to prior accident years were $1.2 million which increased the loss ratio by 2.5 percentage points. PAGE 18 Weather-related losses from wind and hail totaled $13,000 and $92,000 in the third quarter and first nine months of 2009 and increased the respective loss ratios by 0.1 and 0.2 percentage points. Weather-related losses totaled $18,000 and $322,000 in the third quarter and first nine months of 2008, and increased the respective 2008 loss ratios by 0.1 and 0.7 percentage points. 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 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 periods indicated:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ------------------ 2009 2008 2009 2008 -------- -------- -------- -------- (In thousands) Commissions expense .......................... $ 3,049 $ 3,306 $ 9,667 $10,584 Other premium related assessments ............ 324 293 863 840 Premium taxes ................................ 394 471 1,328 1,471 Excise taxes ................................. 53 65 174 201 Other expense ................................ 110 111 357 416 -------- -------- -------- -------- Total direct expenses ........................ 3,930 4,246 12,389 13,512 Indirect underwriting expenses ............... 1,491 1,649 4,381 4,832 Commissions received from reinsurers ......... (2,473) (2,855) (8,007) (8,856) Adjustment for deferred acquisition costs .... (7) 57 (28) (24) -------- -------- -------- -------- Net policy acquisition costs ................. $ 2,941 $ 3,097 $ 8,735 $ 9,464 ======== ======== ======== ========
Total gross direct and indirect expenses as a percentage of direct written and assumed premiums were 26.6% and 25.3% for the third quarter and first nine months of 2009, compared to 24.4% and 24.6% in the corresponding year ago periods. Commissions expense as a percentage of gross written and assumed premiums was 14.9% and 14.6% in the third quarter and the first nine months of 2009 compared to 13.7% and 14.2% in the corresponding 2008 periods. Indirect underwriting expenses decreased $158,000 and $451,000 in the third quarter and first nine months of 2009, respectively, and were 7.3% and 6.6% of total direct written and assumed premiums in the third quarter and first nine months of 2009, respectively, compared to 6.8% and 6.5% in the corresponding 2008 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 Chandler USA's overall premium volume. Commissions received from reinsurers as a percent of ceded reinsurance premiums were 31.0% and 31.5% in the third quarter and first nine months of 2009, respectively, compared to 31.8% and 32.3% in the corresponding 2008 periods. PAGE 19 GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses decreased $462,000 and $917,000 in the third quarter and first nine months of 2009, respectively, and were 12.1% and 12.3% of gross premiums earned and other income in the third quarter and first nine months of 2009, respectively, compared to 12.3% and 12.1% for the corresponding 2008 periods. 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 overall premium volume. INTEREST EXPENSE Interest expense decreased $43,000 and $129,000 in the third quarter and first nine months of 2009, respectively, compared to the 2008 periods. Substantially all of Chandler USA's interest expense is related to its outstanding senior debentures and junior subordinated debentures. The decrease in the 2009 periods was due to lower interest rates during 2009, as a portion of Chandler USA's junior subordinated debentures were issued with a floating interest rate. LIQUIDITY AND CAPITAL RESOURCES In the first nine months of 2009, Chandler USA provided $5.5 million in cash from operations. Unpaid losses and loss adjustment expenses increased $3.7 million, premiums receivable decreased $4.9 million and policyholder deposits increased $1.1 million during the first nine months of 2009. These were partially offset by an increase in reinsurance recoverable on unpaid losses of $3.8 million and a decrease in unearned premiums of $1.6 million. In the first nine months of 2008, Chandler USA provided $1.9 million in cash from operations. Unpaid losses and loss adjustment expenses increased $3.2 million during the first nine months of 2008, but this was partially offset by an increase in reinsurance recoverable on paid losses of $2.3 million and a decrease in unearned premiums of $1.9 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. During the third quarter of 2009, NAICO established a letter of credit in the amount of $500,000 and pledged cash and investments in this amount. The letter of credit secures reserves assumed under a quota share reinsurance agreement. At September 30, 2009, the total amount of cash and securities restricted as a result of these arrangements was $36.1 million which was an increase of $538,000 from December 31, 2008. At September 30, 2009, Chandler USA's parent company, Chandler Insurance Company, Ltd., owed approximately $12.3 million to Chandler USA versus $11.9 million at December 31, 2008 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 4.25% at September 30, 2009. 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 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. PAGE 20 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, 2008, NAICO had statutory earned surplus of $13.4 million. Applying the Oklahoma statutory limits described above, the maximum shareholder dividend NAICO may pay in 2009 without the approval of the Oklahoma Department of Insurance is $5.1 million. NAICO paid cash shareholder dividends of $500,000 to Chandler USA in March 2009 and $900,000 in June 2009. NAICO paid cash shareholder dividends of $1,000,000 to Chandler USA in June 2008 and $1,050,000 in September 2008. 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. 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. 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. On August 1, 2006, the jury trial concluded in Harris County, Texas, related to the construction of two gas processing plants in Louisiana. The amounts the jury found owing to NAICO included approximately $20.2 million in actual damages and $70.0 million in punitive damages. See Note 4 of Notes to Consolidated Financial Statements for a discussion of this jury verdict. PAGE 21 On January 28, 2008, the court entered a final judgment denying Gulf Liquid's claims against NAICO and Gulsby, denying all of NAICO's claims against Gulf Liquids and Williams, and entering judgment for Gulsby against Gulf Liquids for $15,651,927 plus interest at 7.25% compounded annually from January 28, 2008 until paid. The court also ordered Gulf Liquids to pay Gulsby's taxable court costs, estimated at $100,000. Gulf Liquids has appealed the judgment entered in favor of Gulsby and the denial of its claims against NAICO and Gulsby. NAICO has appealed the trial court's denial of its claims against Gulf Liquids and Williams and seeks entry of judgment upon the jury verdicts for the amounts the jury found should be awarded to NAICO. Gulsby has also appealed the trial court's final judgment, contending that judgment should be entered in its favor against Gulf Liquids and Williams in accordance with the jury verdicts. The recoverable amounts deducted from Chandler USA's net liability for losses and loss adjustment expenses related to this litigation were approximately $10.1 million at September 30, 2009 and December 31, 2008. ITEM 4T. 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. PAGE 22 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, 2008. 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 --------------------------------------------------- None. Item 5. OTHER INFORMATION ----------------- None. Item 6. EXHIBITS -------- 31.1 Rule 13a-14(a)/15d-14(a) Certifications. 32.1 Section 1350 Certifications. PAGE 23 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: November 9, 2009 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 EX-31.1 2 edgexh31sept09q.txt CHANDLER (U.S.A.), INC. 9/30/09 EXHIBIT 31.1 EXHIBIT 31.1 CERTIFICATIONS I, W. Brent LaGere, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Chandler (U.S.A.), Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 9, 2009 /s/ W. Brent LaGere ------------------------------------- W. Brent LaGere Chairman of the Board and Chief Executive Officer EXHIBIT 31.1 (CONTINUED) CERTIFICATIONS I, Mark C. Hart, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Chandler (U.S.A.), Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 9, 2009 /s/ Mark C. Hart ------------------------------------ Mark C. Hart Senior Vice President - Finance, Chief Financial Officer and Treasurer EX-32.1 3 edgexh321sept09q.txt CHANDLER (U.S.A.), INC. 9/30/09 EXHIBIT 32.1 EXHIBIT 32.1 SECTION 1350 CERTIFICATIONS In connection with the Quarterly Report of Chandler (U.S.A.), Inc. (the "Company") on Form 10-Q for the period ending September 30, 2009 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), W. Brent LaGere, as Chief Executive Officer of the Company, and Mark C. Hart, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002, to the best of his knowledge, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ W. Brent LaGere ----------------------------------- W. Brent LaGere Chief Executive Officer November 9, 2009 /s/ Mark C. Hart ----------------------------------- Mark C. Hart Chief Financial Officer November 9, 2009 A signed original of this written statement required by Section 906 has been provided to Chandler (U.S.A.), Inc. and will be retained by Chandler (U.S.A.), Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----