10-K 1 final2009edg10kcusa.txt CHANDLER (U.S.A.), INC. 2009 10-K ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------------------- FORM 10-K ----------------------------------- ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009 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 incorporation or organization) Identification No.) 1010 MANVEL AVENUE, CHANDLER, OKLAHOMA 74834 (Address of principal executive offices and zip code) Registrant's telephone number, including area code: (405) 258-0804 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered -------------------------------- -------------------------------------------- 8.75% SENIOR DEBENTURES DUE 2014 NYSE AMEX LLC Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES NO X -- -- Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES NO X -- -- 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X -- 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 Act). YES NO X -- -- Aggregate market value of the voting stock held by non-affiliates of the registrant on June 30, 2009, the last business day of the registrant's most recently completed second fiscal quarter: None. The number of common shares, $1.00 par value, of the registrant outstanding on February 28, 2010 was 2,484, which are owned by Chandler Insurance Company, Ltd. DOCUMENTS INCORPORATED BY REFERENCE Registrant does not incorporate by reference in this report any annual report, proxy statement, or Rule 424 prospectus. ------------------------------------------------------------------------------- PAGE 1 PART I FORWARD-LOOKING STATEMENTS Some of the statements made in this Form 10-K 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. ITEM 1. BUSINESS. GENERAL Chandler USA is an insurance holding company that provides administrative services to its wholly owned subsidiaries NAICO and Chandler Insurance Managers, Inc. ("CIMI"). Chandler USA is an Oklahoma corporation which is wholly owned by Chandler Insurance Company, Ltd. ("Chandler Insurance"), a privately owned Cayman Islands company. Chandler USA is headquartered in Chandler, Oklahoma, in facilities also occupied by NAICO and CIMI. NAICO is one of the leading commercial business insurance writers in Oklahoma, providing property and casualty insurance products for businesses in various industries. NAICO has a network of independent agents, totaling approximately 230 at December 31, 2009, that market NAICO's insurance products. Independent agents originate substantially all of NAICO's business. NAICO is licensed to write property and casualty coverage in 45 states and the District of Columbia and is authorized by the United States Department of the Treasury to write surety bonds for contractors on federal projects. NAICO is currently rated as B+ (Good) by A.M. Best Company, an insurance rating agency. This rating is an independent opinion of a company's financial strength, operating performance and ability to meet its obligations to policyholders. CIMI is an underwriting manager and wholesaler that offers multiple insurance products for businesses in various industries and political subdivisions. INSURANCE PROGRAMS NAICO writes various property and casualty insurance products through two primary marketing programs. The programs are standard lines and political subdivisions. STANDARD LINES PROGRAM NAICO offers workers compensation, automobile liability and physical damage, other liability (including general liability, products liability and umbrella liability) and property and inland marine coverages under its standard lines program. In marketing these products, NAICO targets companies in the construction, manufacturing, wholesale, service, oil and gas, trucking, and retail industries. NAICO writes this business principally in Oklahoma and Texas. Effective January 1, 2007, the property and inland marine lines of insurance that were previously written by NAICO in the standard lines program were written by Praetorian Insurance Company ("Praetorian") through an arrangement between Praetorian and CIMI. Under this arrangement, CIMI received commission income for the business it produced for Praetorian. CIMI and Praetorian terminated this arrangement effective June 29, 2009, and NAICO resumed writing these lines of insurance in this program. PAGE 2 POLITICAL SUBDIVISIONS PROGRAM Under the political subdivisions program, NAICO has written insurance policies primarily for school districts in Oklahoma. The coverages offered included workers compensation, automobile liability, automobile physical damage, general liability and school board legal liability. NAICO has also written property and inland marine coverages in this program. Effective January 1, 2007, the property and inland marine lines of insurance that were previously written by NAICO were written by Praetorian through an arrangement between Praetorian and CIMI. CIMI and Praetorian terminated this arrangement effective June 29, 2009. Effective July 1, 2009, the property, inland marine, automobile liability, automobile physical damage and other liability lines of insurance in the political subdivisions program that were previously written by NAICO are being written by Greenwich Insurance Company ("Greenwich") through an arrangement with CIMI. Under this arrangement, CIMI receives 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 Greenwich. 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. HOMEOWNERS PROGRAM In 2005, NAICO began writing homeowners and dwelling fire and allied lines policies in the state of Texas through a managing general agent. NAICO discontinued this program during 2006 due primarily to increased catastrophic exposures. SURETY BOND PROGRAM NAICO has written surety bonds, commonly referred to as contract performance bonds, to secure the performance of contractors and suppliers on construction projects. NAICO has also written bail bonds, which guarantee that the principal will discharge obligations set by the court, as well as other types of miscellaneous bonds. NAICO discontinued the bail bond portion of the program as of the end of 2003. NAICO is no longer actively marketing its surety bond program. The following table shows gross premiums earned and net premiums earned by insurance program for the years 2007, 2008 and 2009. The term "gross premiums earned" means gross premiums written (before reductions for premiums ceded to reinsurers) less the increases or plus the decreases in the gross unearned premium reserve for the unexpired portion of the policy term beyond the current accounting period. The term "net premiums earned" means gross premiums earned less reductions for earned premiums ceded to reinsurers. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."

GROSS PREMIUMS EARNED NET PREMIUMS EARNED -------------------------- -------------------------- INSURANCE PROGRAMS 2007 2008 2009 2007 2008 2009 ---------------------------------------- -------- -------- -------- -------- -------- -------- (In thousands) Standard lines ......................... $ ~~91,153 $~~100,844 $ 96,587 $ 5487,~~357~~100 $ 62,342 $ 61,047 $ 54,129 Political subdivisions ................. ~~14,337~~ 5,084 4,191 52,~~253~~955 3,436 2,747 1,925 Homeowners ............................. ~~8,542~~ 501 - ~~5,353~~- 9 - - Surety bonds ........................... ~~278~~ 266 119 ~~193~~101 186 83 70 Other (1) .............................. ~~550~~ 214 150 ~~548~~236 212 150 236 -------- -------- -------- -------- -------- -------- TOTAL .................................. $~~114,860 $~~106,909 $101,047 $ 6590,~~704~~392 $ 66,185 $ 64,027 $ 56,360 ======== ======== ======== ======== ======== ======== ------------------------------------------- (1) This category is comprised primarily of the run-off of discontinued programs and NAICO's participation in various mandatory workers compensation pools.

PAGE 3 LINES OF INSURANCE The lines of insurance written by NAICO through its programs are automobile liability, other liability (including general liability, products liability and umbrella liability), workers compensation, automobile physical damage, property, surety and inland marine. The following table shows net premiums earned as a percentage of total net premiums earned by each line of insurance written by NAICO during the period indicated.

YEAR ENDED DECEMBER 31, -------------------------------------------- ~~2004~~ 2005 2006 2007 2008 2009 -------- -------- -------- -------- -------- ~~Automobile~~Workers ~~liability~~compensation ........ 2825% 2923% 3227% 4032% 3438% ~~Workers~~Automobile ~~compensation~~liability ........ 2729% 2532% 2340% 2734% 3230% Other liability ............. ~~28%~~ 27% 25% 23% 25% 23% Automobile physical damage .. 9% 98% 89% 9% 9% Property .................... 4% 8% 11% 1% -% -% Inland marine ............... 1% 1% 1-% -% -% Surety ...................... 31% 1-% -% -% -% -------- -------- -------- -------- -------- Total 100% 100% 100% 100% 100% ======== ======== ======== ======== ========

NAICO discontinued its homeowners program during 2006, and also transferred its property and inland marine business for the standard lines and political subdivisions programs to Praetorian from January 2007 to the second quarter of 2009 through an arrangement between Praetorian and CIMI. In July 2009, Greenwich began writing the property and inland marine business, as well as certain other lines of insurance, for the political subdivisions program through an arrangement between Greenwich and CIMI. Because of these changes, NAICO's net premiums earned for property and inland marine business in 2007, 2008 and 2009 were minimal. See "Insurance Programs" for more information. AGENCY AND BROKERAGE CIMI serves as a general agent for certain wholesale insurance operations related to NAICO's school districts and trucking insurance and for a number of unaffiliated insurance companies. Under its general agency agreement with NAICO, CIMI was appointed to accept, in accordance with NAICO's underwriting guidelines, certain surety bonds and property and casualty insurance. CIMI is authorized to secure qualified insurance agents for NAICO and assists NAICO in coordinating the agents' activities. From January 2007 to the second quarter of 2009, CIMI administered certain property and inland marine business for Praetorian under a general agency agreement between the parties. CIMI and Praetorian terminated this arrangement effective June 29, 2009. Effective July 1, 2009, the property, inland marine, automobile liability, automobile physical damage and other liability lines of insurance in NAICO's political subdivisions program are being written by Greenwich through an arrangement with CIMI. CIMI receives commission income for its services under the agreement, and is responsible for the payment of commissions to the producing agents. CIMI is also responsible for providing underwriting and loss control services for this business. See "Insurance Programs" for more information. UNDERWRITING AND CLAIMS Independent insurance agents submit applications for commercial insurance policies for prospective customers to NAICO or CIMI. Prospective risks are reviewed in accordance with specific underwriting guidelines. If the risk is approved and coverage is accepted by the insured, an insurance policy is issued. NAICO's claims department reviews and administers all claims except claims associated with the homeowners program which were handled by the managing general agent for this program. When a claim is received, it is reviewed and assigned to an in-house claim adjuster based on the type and geographic location of the claim, its severity and its class of business. NAICO's claims department is responsible for reviewing each claim, obtaining necessary documentation and establishing loss and loss adjustment expense reserves. NAICO's in-house claims staff handles and supervises the claims, coordinates with outside legal counsel and independent claims adjusters if necessary, and processes the claims to conclusion. NAICO also handles claims for the business placed by CIMI with Praetorian and Greenwich under claims handling agreements with these insurers. PAGE 4 REINSURANCE In the ordinary course of business, NAICO cedes insurance risks and a portion of the insurance premiums to its reinsurers under various reinsurance contracts that cover individual risks (facultative reinsurance) or entire classes of business (treaty reinsurance). Reinsurance provides greater diversification of insurance risk associated with business written and also reduces NAICO's exposure from high policy limits or from catastrophic events and hazards of an unusual nature. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policies. In formulating its reinsurance programs, NAICO considers numerous factors, including the financial stability of the reinsurer, the reinsurer's ability to provide sufficient collateral (if required), reinsurance coverage offered and price. Treaty reinsurance may be ceded under treaties on both a pro rata basis (where the reinsurer shares proportionately in premiums and losses) and an excess of loss basis (where only losses above a specific amount are reinsured). The availability, costs and limits of reinsurance purchased varies from year to year based upon prevailing market conditions, reinsurers' underwriting results and NAICO's desired risk retention levels. The majority of NAICO's reinsurance programs renew on July 1 of each year. At the present time, NAICO expects to renew the reinsurance programs that expire on July 1, 2010. NAICO has structured separate reinsurance programs for property (including inland marine), workers compensation, casualty (including automobile liability, general and products liability, umbrella liability and related professional liability), automobile physical damage and construction surety bonds. NAICO also purchases facultative reinsurance when it writes a risk with limits of liability exceeding the maximum limits of its treaties or when it otherwise considers such action appropriate. Chandler Insurance reinsures NAICO for a portion of the risk on NAICO's reinsurance programs. Effective July 1, 2004, NAICO's net retention under the workers compensation reinsurance program was 70% of the first $1,000,000 of loss per occurrence. NAICO's excess of loss reinsurance covers workers compensation losses up to $30,000,000 effective July 1, 2002. Effective July 1, 2005, NAICO's net retention under the casualty reinsurance program was 70% of the first $2,000,000 of loss per occurrence, although most policies are issued with policy limits of $1,000,000 of loss per occurrence for casualty coverages. Effective July 1, 2006, NAICO's net retention for umbrella liability losses was 10.5% of the first $4,000,000 of loss per occurrence. Effective April 1, 2004, NAICO retains 70% of the losses in the construction surety bond portion of the surety bond program. Effective April 1, 2009, NAICO retains 70% of the first $250,000 of risk for each loss per risk or per location under its property reinsurance program. NAICO had previously discontinued its property reinsurance program effective January 1, 2007 due to the transfer of its property business for the standard lines and political subdivisions programs to Praetorian. Effective January 1, 2005, NAICO retains 70% of each loss per occurrence under the automobile physical damage reinsurance program. NAICO has purchased catastrophe protection for automobile physical damage and property (including inland marine) coverages to limit its retention for single loss occurrences involving multiple policies and/or policyholders resulting from perils such as floods, winds and severe storms. This catastrophe protection limits NAICO's net retained loss for automobile physical damage to $1,400,000 for each loss occurrence. In December 2007, the Terrorism Risk Insurance Program Reauthorization Act of 2007 (the "Act") extended the Terrorism Risk Insurance Act of 2002 (the "Act") through December 31, 2014. The Act, as modified, establishes a program for commercial property and casualty losses resulting from foreign and domestic acts of terrorism. The Act requires commercial insurers to offer terrorism coverage on certain commercial property and casualty lines of business. Effective January 1, 2006, commercial automobile liability and physical damage, professional liability, surety, burglary and theft and farm-owners multi-peril insurance coverages are excluded from the Act. Each insurance company will be responsible for a deductible of 20% of an insurer's direct earned premium. The Federal Government will pay 85% of covered terrorism losses that exceed company deductibles. PAGE 5 For 2007, NAICO purchased excess of loss reinsurance covering acts of terrorism that provided coverage of $24,900,000 excess of $100,000 for NAICO's deductible under the Act, as well as for acts of terrorism other than those covered under the Act. Effective July 1, 2007, terrorism coverage was included in the casualty reinsurance program and effective January 1, 2008, terrorism coverage was included in the workers compensation reinsurance program. The following table sets forth certain information related to NAICO's five largest reinsurers determined on the basis of net reinsurance recoverables as of December 31, 2009.

CEDED REINSURANCE NET PREMIUMS FOR A.M. BEST REINSURANCE THE YEAR ENDED COMPANY NAME OF REINSURER RECOVERABLE (1) DECEMBER 31, ~~2008~~2009 RATING ---------------------------------------------------------- --------------- ------------------ ----------- (Dollars in thousands) Chandler Insurance ....................................... $ 3233,~~102~~636 $ 2623,~~596~~994 (2) Swiss Reinsurance America Corporation (3)................. 1516,~~999~~448 ~~338~~289 A Westport Insurance Corporation (3)........................ 138,~~314~~837 - A Transatlantic Reinsurance Company ........................ 24,~~640~~395 12,~~987~~390 A Markel Insurance Company ................................. 23,~~553~~875 1,~~772~~841 A --------------- ------------------ Top five reinsurers ................................. $ 6667,~~608~~191 $ 3028,~~693~~514 =============== ================== All reinsurers ...................................... $ 6773,~~899~~964 $ 3634,~~072~~647 =============== ================== Percentage of total represented by top five reinsurers ... 9891% 8582% ------------------------------------------------------------- (1) Includes losses and loss adjustment expenses paid and outstanding, unpaid losses and loss adjustment expenses and prepaid reinsurance premiums recoverable from reinsurers as of December 31, ~~2008~~2009. (2) Chandler Insurance owns 100% of the common stock of Chandler USA, which in turn owns 100% of the common stock of NAICO. Chandler Insurance does not have an A.M. Best Company rating. Although Chandler Insurance is not subject to the minimum capital, audit, reporting and other requirements imposed by regulation upon United States reinsurance companies, as a foreign reinsurer, it is required to secure its reinsurance obligations by depositing acceptable securities in trust for NAICO's benefit. At December 31, ~~2008~~2009, Chandler Insurance had cash and investments, including accrued interest, with a fair value of $3233.1 million deposited in a trust account for the benefit of NAICO, and also had premiums receivable of $522,000 due from NAICO. (3) Westport Insurance Corporation and Swiss Reinsurance America Corporation are subsidiaries of Swiss Reinsurance Company.

Reinsurance contracts do not relieve an insurer from its obligation to policyholders. Failure of reinsurers to honor their obligations could result in losses to Chandler USA; consequently, adjustments to ceded losses and loss adjustment expenses are made for amounts deemed uncollectible. NAICO incurred charges of $356,000, $166,000 and $180,000 during 2007, 2008 and 2009, respectively, in adjustments to ceded losses and loss adjustment expenses for amounts deemed uncollectible. PAGE 6 LOSS AND UNDERWRITING EXPENSE RATIOS The combined loss and underwriting expense ratio ("Combined Ratio") is the traditional measure of underwriting experience for property and casualty insurance companies. It is the sum of the ratios of (i) incurred losses and loss adjustment expenses to net premiums earned ("loss ratio") and (ii) underwriting expenses (net of agency fee income) to net premiums earned ("underwriting expense ratio"). The following table shows the underwriting experience of Chandler USA for the periods indicated by line of insurance written. Adjustments to reserves made in subsequent periods are reflected in the year of adjustment. In the following table, incurred losses include paid losses and loss adjustment expenses, net changes in case reserves for losses and loss adjustment expenses and net changes in reserves for incurred but not reported losses and loss adjustment expenses. See also "Reserves" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."

YEAR ENDED DECEMBER 31, ------------------------------------------------ ~~2004~~ 2005 2006 2007 2008 2009 -------- -------- -------- -------- -------- (Dollars in thousands) ~~Automobile~~Workers ~~liability~~compensation: Net premiums earned ......................... $ 1716,~~742~~475 $ 1915,~~126~~361 $ 2117,~~122~~861 $ 2620,~~469~~681 $ 21,~~537~~267 Loss ratio .................................. 6153% 8263% 9962% 7476% 7079% ~~Workers~~Automobile ~~compensation~~liability: Net premiums earned ......................... $ 1719,~~371~~126 $ 1621,~~475~~122 $ 1526,~~361~~469 $ 1721,~~861~~537 $ 2016,~~681~~816 Loss ratio .................................. 8582% 5399% 6374% 6270% 7667% Other liability: Net premiums earned ......................... $ 18,~~044 $ 18,~~052 $ 16,628 $ 15,137 $ 16,301 $ 12,826 Loss ratio .................................. ~~121%~~ 48% 57% 32% 38% 27% Automobile physical damage: Net premiums earned ......................... $ 5,~~933 $ 5,~~807 $ 5,008 $ 6,096 $ 5,492 $ 4,995 Loss ratio .................................. ~~43%~~ 56% 63% 55% 75% ~~Property~~50% Inland marine: Net premiums earned ......................... $ ~~2,611~~337 $ ~~5,594~~309 $ ~~7,082~~157 $ ~~279~~(68) $ 1222 Loss ratio .................................. 47162% 4130% 4119% 64(5)% (~~750~~28)% ~~Surety~~Property: Net premiums earned ......................... $ 15,~~993~~594 $ ~~669~~7,082 $ ~~194~~279 $ ~~186~~1 $ 83164 Loss ratio .................................. ~~134~~41% ~~(255)~~41% 64% (~~459~~750)% ~~1,119%~~ (5217)% ~~Inland marine~~Surety: Net premiums earned ......................... $ ~~348~~669 $ ~~337~~194 $ ~~309~~186 $ ~~157~~83 $ ~~(68)~~70 Loss ratio .................................. 29(255)% ~~162~~(459)% 301,119% ~~19%~~ (552)% 707% Total: Net premiums earned ......................... $ ~~64,042 $~~ 66,060 $ 65,704 $ 66,185 $ 64,027 $ 56,360 Loss ratio .................................. ~~84%~~ 57% 69% 63% 64% 61% Underwriting expense ratio (1) .............. ~~37%~~ 35% 37% 36% 37% 39% -------- -------- -------- -------- -------- Combined ratio (1) .......................... ~~121%~~ 92% 106% 99% 101% 100% ======== ======== ======== ======== ======== ------------------------------------------------- (1) During 2008, Chandler USA revised its method of calculating its underwriting expense ratio to underwriting expenses (net of agency fee income) divided by net premiums earned. Prior period ratios have been restated to conform to the current period's presentation.

PAGE 7 RESERVES Insurance companies provide in their financial statements reserves for unpaid losses and loss adjustment expenses which are estimates of the expense of investigation and settlement of all reported and incurred but not reported losses under their previously issued insurance policies and/or reinsurance contracts. In estimating reserves, insurance companies use various standardized methods based on historical experience and payment and reporting patterns for the type of risk involved. The application of these methods involves subjective determinations by the personnel of the insurance company. Inherent in the estimates of the ultimate liability for unpaid claims are expected trends in claim severity, claim frequency and other factors that may vary as claims are settled. The amount of and uncertainty in the estimates is affected by such factors as the amount of historical claims experience relative to the development period for the type of risk, knowledge of the actual facts and circumstances and the amount of insurance risk retained. The ultimate cost of insurance claims can be adversely affected by increased costs, such as medical expenses, repair expenses, costs of providing legal defense for policyholders, increased jury awards and court decisions and legislation that expand insurance coverage after the insurance policy was priced and sold. In recent years, certain of these factors have contributed to incurred amounts that were significantly higher than original estimates. Accordingly, the loss and loss adjustment expense reserves may not accurately predict an insurance company's ultimate liability for unpaid claims. NAICO periodically reviews the reserve estimates relating to insurance business written or assumed by NAICO, and the methods used to arrive at such reserve estimates. NAICO also retains independent professional actuaries who review such reserve estimates and methods. Any changes in the estimates are reflected in current operating results. Such changes in estimates may be material. NAICO's statutory-based reserves (reserves calculated in accordance with an insurer's domiciliary state insurance regulatory authorities) do not differ from its reserves reported on the basis of accounting principles generally accepted in the United States of America ("GAAP"). NAICO does not discount its reserves for unpaid losses or loss adjustment expenses. Salvage and subrogation recoverables are accrued using the "case basis" method for large recoverables and statistical estimates based on historical experience for smaller recoverables. Recoverable amounts deducted from Chandler USA's net liability for losses and loss adjustment expenses were approximately $10.9 million and $10.8 million at December 31, 2008 and 2009. Included in these recoverable amounts were net recoverables of $10.1 million in 2008 and 2009, related to a favorable jury verdict in civil litigation regarding certain surety bond claims during 2006. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" for more information related to this litigation. NAICO may or may not recover the above estimated recoveries and could incur significant costs in collecting these recoverables. NAICO participates in various pools covering workers compensation risks for insureds who were unable to purchase this coverage from an insurance company on a voluntary basis. The consolidated financial statements reflect the reserves for unpaid losses and loss adjustment expenses and net premiums earned from its participation in the pools. There may be significant reporting lags between the occurrence of the insured loss and the time it is actually reported to the insurer. The inherent uncertainties in estimating insurance reserves are generally greater for casualty coverages, such as workers compensation, general and automobile liability, than for property coverages primarily due to the longer period of time that typically elapses before a definitive determination of ultimate loss can be made, which is also affected by changing theories of legal liability and changing political climates. There are significant additional uncertainties in estimating the amount of reserves required for environmental, asbestos-related and other latent exposure claims, including a lack of historical data, long reporting delays and complex unresolved legal issues regarding policy coverage and the extent and timing of any such contractual liability. Courts have reached different and frequently inconsistent conclusions as to when the loss occurred, what claims are covered, under what circumstances the insurer has an obligation to defend, how policy limits are determined and how policy exclusions are applied and interpreted. The loss settlement period on insurance claims for property damage is relatively short. The more severe losses for bodily injury and workers compensation claims have a much longer loss settlement period and may be paid out over several years. It is often necessary to adjust estimates of liability on a loss either upward or downward from the time a claim arises to the time of payment. Workers compensation indemnity benefit reserves are determined based on statutory benefits described by state law and are estimated based on the same factors generally discussed above which may include, where state law permits, inflation adjustments for rising benefits over time. Generally, the more costly automobile liability claims involve one or more severe bodily injuries or deaths. The ultimate cost of these types of claims is dependent on various factors including the relative liability of the parties involved, the number and severity of injuries and the legal jurisdiction where the incident occurred. PAGE 8 The following table sets forth a reconciliation of the beginning and ending reserves for losses and loss adjustment expenses which are net of reinsurance deductions for the years indicated.

YEAR ENDED DECEMBER 31, ------------------------------------------------------ ~~2004~~ 2005 2006 2007 2008 2009 ---------- ---------- ---------- ---------- ---------- (In thousands) Net balance at beginning of year ................. $ ~~29,343 $~~ 44,695 $ 40,549 $ 42,081 $ 45,866 $ 49,068 ---------- ---------- ---------- ---------- ---------- Net losses and loss adjustment expenses incurred related to: Current year ................................. ~~27,436~~ 30,985 41,644 40,194 38,869 33,480 Prior years .................................. ~~26,345~~ 6,339 3,829 1,199 2,071 734 ---------- ---------- ---------- ---------- ---------- Total ...................................... ~~53,781~~ 37,324 45,473 41,393 40,940 34,214 ---------- ---------- ---------- ---------- ---------- Net paid losses and loss adjustment expenses related to: Current year ................................. (~~10,222) (~~11,171) (12,403) (12,494) (11,856) (10,531) Prior years .................................. (~~28,207) (~~30,299) (31,538) (25,114) (25,882) (23,358) ---------- ---------- ---------- ---------- ---------- Total ...................................... (~~38,429) (~~41,470) (43,941) (37,608) (37,738) (33,889) ---------- ---------- ---------- ---------- ---------- Net balance at end of year ....................... $ ~~44,695 $~~ 40,549 $ 42,081 $ 45,866 $ 49,068 $ 49,393 ========== ========== ========== ========== ==========

NAICO has experienced incurred losses related to prior accident years during each of the calendar years in the table above. The adverse loss development was generally the result of ongoing analysis of loss development trends for both liability and workers compensation lines of business, and included provisions for potentially uncollectible reinsurance and deductibles. NAICO adjusts reserves as experience develops and new information becomes known. Such adjustments are reflected in the results of operations in the periods in which the estimates are changed. The adverse development of losses from prior accident years results in higher calendar year loss ratios and reduced calendar year operating results. During 2005, NAICO experienced adverse loss development totaling $6.3 million primarily in the standard lines and political subdivisions programs. A portion of the adverse development was offset by favorable development of $1.8 million in the surety bond program, primarily in accident years 1994 and 2001 that resulted from the estimated recoveries discussed previously. The adverse development was due primarily to an increase in losses in the workers compensation, other liability and automobile liability lines of business in the 2000, 2002 and 2003 accident years. The adverse loss development included approximately $108,000 for provisions for potentially uncollectible reinsurance. During 2006, NAICO experienced adverse loss development totaling $3.8 million primarily in the standard lines program. A portion of the adverse development was offset by favorable development of $1.0 million in the surety bond program, primarily in the 2001 accident year, that resulted from the estimated recoveries discussed previously. The adverse development was due primarily to an increase in losses in the automobile liability line of business in the 2005 accident year and in the workers compensation line of business in the 1997 and 1999 accident years. The adverse loss development included approximately $97,000 for provisions for potentially uncollectible reinsurance. During 2007, NAICO experienced adverse loss development totaling $1.2 million primarily in the surety bond program. During 2007, a portion of the estimated recoveries that were recorded in the surety bond program during 2006 were reduced based on a final judgment entered by the court regarding certain surety bond claims. The reduction of the estimated recoveries accounted for $1.8 million of the loss development during 2007. The adverse loss development included approximately $356,000 for provisions for potentially uncollectible reinsurance. During 2008, NAICO experienced adverse loss development totaling $2.1 million primarily in the workers compensation line of business in the standard lines program. A portion of the adverse loss development was offset by favorable development in the automobile liability line of business in this program. The adverse loss development included approximately $166,000 for provisions for potentially uncollectible reinsurance. PAGE 9 During 2009, NAICO experienced adverse loss development totaling approximately $734,000 primarily in the workers compensation line of business in the standard lines program. A portion of the adverse loss development was offset by favorable development in the automobile liability and other liability lines of business in this program. The adverse loss development included approximately $180,000 for provisions for potentially uncollectible reinsurance. The following table represents the development of net balance sheet reserves for 2000 through 2009. The top line of the table shows the net reserves at the balance sheet date for each of the indicated years. This represents the estimated amounts of claims and claim expenses, net of reinsurance deductions, arising in the current and all prior years that are unpaid at the balance sheet date, including the net reserve for incurred but not reported claims. The upper portion of the table shows the cumulative net amounts paid as of successive years with respect to that reserve liability. The estimate for unpaid losses and loss adjustment expenses changes as more information becomes known about the frequency and severity of claims for individual years. The next portion of the table shows the revised estimated amount of the previously recorded net reserve based on experience as of the end of each succeeding year. The heading "net cumulative (deficiency) redundancy" represents the cumulative aggregate change in the estimates over all prior years. The last portion of the table provides a reconciliation of the net amounts to the gross amounts before any deductions for reinsurance. The gross cumulative deficiency or redundancy results from the same factors as those described above for the net amounts, and is also impacted by development of large claims that exceed NAICO's net retention including umbrella and surety per principal losses where NAICO has little or no net retention. In evaluating the information in the following table, it should be noted that each amount includes the effects of all changes in amounts for prior periods. For example, the amount of the deficiency recorded in 2003 for claims that occurred in 2000 will be included in the cumulative deficiency amount for years 2000, 2001, 2002 and 2003. This table does not present accident or policy year development data. Conditions and trends that have affected development of the liability in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future deficiencies or redundancies based on this table. PAGE 10

DEVELOPMENT OF RESERVES AS OF DECEMBER 31, ------------------------------------------------------------------------------------------------------- ~~1999~~ 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 ---------- ---------- ---------- ---------- --------- --------- --------- --------- --------- --------- (In thousands) Net reserve for unpaid losses and loss adjustment expenses .. $ ~~51,378 $~~ 46,707 $ 32,812 $ 33,191 $ 29,343 $ 44,695 $ 40,549 $ 42,081 $ 45,866 $ 49,068 $ 49,393 Net paid (cumulative) as of One year later ........... ~~36,009~~ 43,799 37,050 30,422 28,207 30,299 31,537 25,111 25,882 23,359 Two years later .......... ~~58,979~~ 66,141 60,560 51,375 50,158 50,183 46,348 39,931 40,569 Three years later ........ ~~72,052~~ 81,635 77,413 68,643 63,900 58,263 54,405 45,919 Four years later ......... ~~80,860~~ 91,403 89,349 79,591 69,099 63,164 57,341 Five years later ......... ~~86,257~~ 97,700 98,060 83,845 72,937 64,596 Six years later .......... ~~88,859~~ 99,506 101,213 86,328 73,741 Seven years later ........ ~~89,346~~ 101,257 103,109 87,005 Eight years later ........ ~~90,708~~ 102,461 103,672 Nine years later ......... 91102,~~764~~355 Net liability re-estimated as of One year later ............ ~~56,357~~ 59,376 48,596 44,283 55,688 51,034 44,378 43,280 47,937 49,802 Two years later ........... ~~67,469~~ 74,325 67,903 70,058 61,369 50,989 50,909 45,071 51,047 Three years later ......... ~~77,842~~ 86,377 89,608 73,962 61,216 57,175 53,585 49,338 Four years later .......... ~~83,860~~ 100,408 91,520 74,805 66,153 59,725 57,108 Five years later .......... ~~91,704~~ 102,370 91,700 79,781 68,663 62,907 Six years later ........... ~~92,084~~ 104,227 96,161 81,643 71,293 Seven years later ......... ~~93,873~~ 106,396 98,123 84,232 Eight years later ......... ~~95,812~~ 107,610 100,672 Nine years later .......... 96109,~~941~~477 Net cumulative (deficiency) redundancy ................ $ (4562,~~563~~770) $ (6067,~~903~~860) $ (6551,~~311~~041) $ (4841,~~452~~950) $(3918,~~320~~212) $(1516,~~030~~559) $ (137,~~036~~257) $ (25,~~990~~181) $ (~~2,071~~734) $ - Supplemental gross data: Gross liability ........... $ ~~98,460 $~~ 100,173 $ 84,756 $ 92,606 $ 87,768 $108,233 $109,541 $ 83,253 $100,590 $101,459 $107,341 Reinsurance recoverable ... ~~47,082~~ 53,466 51,944 59,415 58,425 63,538 68,992 41,172 54,724 52,391 57,948 ---------- ---------- ---------- ---------- --------- --------- --------- --------- --------- --------- Net liability-end of year.. $ ~~51,378 $~~ 46,707 $ 32,812 $ 33,191 $ 29,343 $ 44,695 $ 40,549 $ 42,081 $ 45,866 $ 49,068 $ 49,393 ========== ========== ========== ========== ========= ========= ========= ========= ========= ========= Gross re-estimated liability - latest ....... $~~193~~ 276,~~962~~455 $ ~~270~~304,~~871~~793 $ ~~296~~253,~~765~~927 $ ~~245~~188,~~572~~155 $~~181~~160,~~034~~708 $~~154~~139,~~041~~781 $~~132~~120,~~434~~465 $~~110~~117,~~983~~954 $~~109~~105,~~680~~745 Re-estimated recoverable - latest ................... 97166,~~021~~978 ~~163~~204,~~261~~121 ~~198~~169,~~642~~695 ~~163~~116,~~929~~862 ~~112~~97,~~371~~801 9482,~~316~~673 7871,~~849~~127 6566,~~912~~907 6155,~~743~~943 ---------- ---------- ---------- ---------- --------- --------- --------- --------- --------- Net re-estimated liability - latest ....... $ 96109,~~941~~477 $ ~~107~~100,~~610~~672 $ 9884,~~123~~232 $ 8171,~~643~~293 $ 6862,~~663~~907 $ 5957,~~725~~108 $ 5349,~~585~~338 $ 4551,~~071~~047 $ 4749,~~937~~802 ========== ========== ========== ========== ========= ========= ========= ========= ========= Gross cumulative (deficiency) redundancy ................ $(95176,~~502~~282) $(~~170~~220,~~698~~037) $(~~212~~161,~~009~~321) $(~~152~~100,~~966~~387) $(9352,~~266~~475) $(4530,~~808~~240) $(2237,~~893~~212) $(2717,~~730~~364) $ (94,~~090~~286) ========== ========== ========== ========== ========= ========= ========= ========= =========

PAGE 11 INVESTMENTS Funds available for investment include Chandler USA's present capital as well as premiums received and retained under insurance policies and reinsurance agreements issued by NAICO. Until these funds are required to be used for the settlement of claims and the payment of operating expenses, they are invested with the objective of generating income, preserving principal and maintaining liquidity. Investments are purchased to support the investment strategies of Chandler USA and its subsidiaries, which are developed based on many factors including rate of return, maturity, credit risk, tax considerations, regulatory requirements and their mix of business. At the time of purchase, investments in debt securities that Chandler USA has the positive intent and ability to hold to maturity are classified as held to maturity and reported at amortized cost; all other debt securities are reported at fair value. Investments in debt and equity securities classified as trading are actively and frequently bought and sold with the objective of generating income on short-term differences in price. Realized and unrealized gains and losses on securities classified as trading account assets are recognized in current operations. Chandler USA has not classified any investments as trading account assets. Debt securities not classified as held to maturity or trading and equity securities are classified as available for sale, with the related unrealized gains and losses excluded from earnings and reported net of deferred income tax as a separate component of other comprehensive income until realized. Realized gains and losses on sales of securities are based on the specific identification method. Declines in the fair value of securities below their carrying value that are other than temporary are recognized in earnings. As of December 31, 2009, all of the investments of NAICO were in fixed- maturity investments, certificates of deposit insured by the Federal Deposit Insurance Corporation ("FDIC"), interest-bearing money market accounts, collateralized repurchase agreements and common stock received in connection with an unaffiliated entity's conversion to a for-profit corporation. At December 31, 2009, approximately 96% of total fixed maturity investments were rated AA or better by Moody's Investor Service, Inc. or Standard & Poor's. Approximately 3% of total fixed maturities were rated A by Moody's Investor Service, Inc. or Standard & Poor's, and approximately 1% was rated BAA by Moody's Investor Service, Inc. and BBB by Standard & Poor's. NAICO's investment portfolio is managed by the Investment Committee of its Board of Directors. For additional information, see Notes to Consolidated Financial Statements. DEBENTURES On July 16, 1999, Chandler USA completed a public offering of $24 million principal amount of senior debentures (the "Debentures") with a maturity date of July 16, 2014. The Debentures were priced at $1,000 each with an interest rate of 8.75% and are redeemable by Chandler USA on or after July 16, 2009 without penalty or premium. The indenture governing the Debentures was amended during 2003 to clarify that purchases of Debentures by Chandler USA through private treaty or on the open market for an agreed price of less than the sum of the principal amount and accrued interest are not considered to be a redemption of the Debentures, and that any such Debentures purchased by Chandler USA will be cancelled. At December 31, 2009, there was $6,979,000 principal amount of the Debentures outstanding. Chandler USA's subsidiaries and affiliates are not obligated by the Debentures. Accordingly, the Debentures are effectively subordinated to all existing and future liabilities and obligations of Chandler USA's existing and future subsidiaries. For additional information, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." TRUST PREFERRED SECURITIES In May 2003, Chandler USA established Chandler Capital Trust I ("Trust I") by purchasing all of its common securities for $403,000. Trust I is a Delaware statutory business trust and is a wholly owned non-consolidated subsidiary of Chandler USA. On May 22, 2003, Trust I issued $13.0 million of capital securities (the "Trust I Preferred Securities") to InCapS Funding I, Ltd., an unaffiliated company established under the laws of the Cayman Islands, in a private transaction. Trust I used the proceeds from the issuance to purchase $13,403,000 of 9.75% junior subordinated debentures (the "Junior Debentures I") of Chandler USA. Distributions on the Junior Debentures I are payable quarterly at a fixed annual rate of 9.75%. Chandler USA may defer these payments for up to 20 consecutive quarters, but not beyond the maturity of the Junior Debentures I, with such deferred payments accruing interest compounded quarterly. The Junior Debentures I are subject to a mandatory redemption on May 23, 2033, but they may be redeemed after five years at a premium of half the fixed rate coupon declining ratably to par in the 10th year. PAGE 12 The Junior Debentures I are the sole assets of Trust I and Trust I will distribute any cash payments it receives thereon to the holders of its preferred and common securities. Distributions on the Trust I Preferred Securities are payable quarterly at a fixed annual rate of 9.75%. Trust I may defer these payments for up to 20 consecutive quarters, but not beyond the maturity of the Trust I Preferred Securities, with such deferred payments accruing interest compounded quarterly. The Trust I Preferred Securities are subject to a mandatory redemption on May 23, 2033, but they may be redeemed after five years at a premium of half the fixed rate coupon declining ratably to par in the 10th year. All payments by Trust I regarding the Trust I Preferred Securities are guaranteed by Chandler USA. In December 2003, Chandler USA established Chandler Capital Trust II ("Trust II") by purchasing all of its common securities for $217,000. Trust II is a Delaware statutory business trust and is a wholly owned non- consolidated subsidiary of Chandler USA. On December 16, 2003, Trust II issued $7.0 million of capital securities (the "Trust II Preferred Securities") to InCapS Funding II, Ltd., an unaffiliated company established under the laws of the Cayman Islands, in a private transaction. Trust II used the proceeds from the issuance to purchase $7,217,000 of floating rate junior subordinated debentures (the "Junior Debentures II") of Chandler USA. Distributions on the Junior Debentures II are payable quarterly at a floating rate of 4.10% over LIBOR (LIBOR is recalculated quarterly). The interest rate was 4.38% at December 31, 2009. Chandler USA may defer these payments for up to 20 consecutive quarters, but not beyond the maturity of the Junior Debentures II, with such deferred payments accruing interest compounded quarterly. The Junior Debentures II are subject to a mandatory redemption on January 8, 2034, but they may be redeemed after five years without penalty or premium. The Junior Debentures II are the sole assets of Trust II and Trust II will distribute any cash payments it receives thereon to the holders of its preferred and common securities. Distributions on the Trust II Preferred Securities are payable quarterly at a floating rate of 4.10% over LIBOR (LIBOR is recalculated quarterly). The interest rate was 4.38% at December 31, 2009. Trust II may defer these payments for up to 20 consecutive quarters, but not beyond the maturity of the Trust II Preferred Securities, with such deferred payments accruing interest compounded quarterly. The Trust II Preferred Securities are subject to a mandatory redemption on January 8, 2034, but they may be redeemed after five years without penalty or premium. All payments by Trust II regarding the Trust II Preferred Securities are guaranteed by Chandler USA. Trust I and Trust II are variable interest entities in which Chandler USA is not the primary beneficiary under GAAP because its interest is not variable. Therefore, Chandler USA is prohibited from consolidating these trusts even though it has 100% ownership, complete voting control and has guaranteed the performance of the trusts. Accordingly, Chandler USA carries the Junior Debentures I and Junior Debentures II as a liability on its consolidated balance sheets. EMPLOYEES AND ADMINISTRATION At December 31, 2009, Chandler USA and its subsidiaries had 187 full-time employees. Chandler USA and its subsidiaries generally have enjoyed good relations with their employees. COMPETITION NAICO operates in a highly competitive industry and faces competition from domestic and foreign insurers, many of which are larger, have greater financial, marketing and management resources, have more favorable ratings by ratings agencies and offer more diversified insurance coverages than NAICO. An insurance company's capacity to write insurance policies is dependent on a variety of factors including its net worth or "surplus," the lines of business written, the types of risk insured and its profitability. During the late 1990's and into 2000, property and casualty insurance companies generally under priced their products, which resulted in poor underwriting results that were partially offset by investment returns. Interest rates decreased in 2000 and underwriting results continued to deteriorate for business written in the late 1990's and into 2000. These factors coupled with additional potential losses due to terrorism and lower investment returns caused the industry to increase pricing beginning in the latter half of 2001. Rate increases continued through 2003 and to a lesser extent in 2004, and the industry's underwriting results improved. The pricing environment during 2005 through 2009 experienced downward pressure, particularly for larger accounts. NAICO was able to increase its pricing for most coverages from 2001 through 2005. However, the recent industry trend has been for insurers to maintain or reduce rate levels, and NAICO has reduced its pricing in certain situations and for certain coverages from 2006 through 2009. NAICO continues to experience competition in all of its programs. NAICO's underwriting philosophy is to forego underwriting risks from which it is unable to obtain what it believes to be adequate premium rates. PAGE 13 REGULATION REGULATION IN GENERAL NAICO is subject to regulation by government agencies in the jurisdictions in which it does business. The nature and extent of such regulation vary from jurisdiction to jurisdiction, but typically involve prior approval of the acquisition of control of an insurance company or of any company controlling an insurance company, regulation of certain transactions entered into by an insurance company with any of its affiliates, approval of premium rates, forms and policies used for many lines of insurance, standards of solvency and minimum amounts of capital and surplus which must be maintained, establishment of reserves required to be maintained for unearned premiums, unpaid losses and loss adjustment expenses or for other purposes, limitations on types and amounts of investments, restrictions on the size of risks which may be insured by a single company, licensing of insurers and agents, deposits of securities for the benefit of policyholders and the filing of periodic reports with respect to financial condition and other matters. In addition, regulatory examiners perform periodic financial and market conduct examinations of insurance companies. Such regulation is generally intended for the protection of policyholders rather than shareholders or creditors. NAICO is required to deposit securities with regulatory agencies in several states in which it is licensed as a condition of conducting operations in those states. In addition to the regulatory oversight of NAICO, Chandler Insurance is also subject to regulation under the laws of the Cayman Islands and Chandler USA and all of its affiliates are subject to regulation under the insurance laws of Oklahoma (the "Oklahoma Insurance Code"). The Oklahoma Insurance Code contains certain reporting requirements including those requiring Chandler Insurance, as the ultimate parent company, to file information relating to its capital structure, ownership, and financial condition and the general business operations of its insurance subsidiaries. The Oklahoma Insurance Code contains special reporting and prior approval requirements with respect to transactions among affiliates. NAICO is also affected by a variety of state and federal legislative and regulatory measures and judicial decisions that define and extend the risks and benefits for which insurance is sought and provided. These include redefinitions of risk exposure in areas such as product liability, environmental damage and workers compensation. In addition, individual state insurance departments may prevent premium rates for some classes of insureds from reflecting the level of risk assumed by the insurer for those classes. Such developments may adversely affect the profitability of various lines of insurance. In some cases, these adverse effects on profitability can be minimized through re-pricing, if permitted by applicable regulations, of coverages or limitations or cessation of the affected business. INSURANCE REGULATION CONCERNING CHANGE OR ACQUISITION OF CONTROL NAICO is a domestic property and casualty insurance company organized under the Oklahoma Insurance Code. The Oklahoma Insurance Code provides that the acquisition or change of "control" of a domestic insurer or of any person that controls a domestic insurer cannot be consummated without the prior approval of the Oklahoma Department of Insurance. A person seeking to acquire control, directly or indirectly, of a domestic insurance company or of any person controlling a domestic insurance company must generally file with the relevant insurance regulatory authority an application for change of control containing certain information required by statute and published regulations and provide a copy of such to the domestic insurer. In Oklahoma, control is generally presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote or holds proxies representing 10% or more of the voting securities of the insurance company or of any other person or entity controlling the insurance company. The 10% presumption is not conclusive and control may be found to exist at less than 10%. In addition, many state insurance regulatory laws contain provisions that require pre-notification to state agencies of a change in control of a non-domestic insurance company admitted in that state. While such pre- notification statutes do not authorize the state agency to disapprove the change of control, such statutes do authorize issuance of a cease and desist order with respect to the non-domestic insurer if certain conditions exist such as undue market concentration. Any future transactions that would constitute a change in control of Chandler Insurance or Chandler USA would also generally require prior approval by the Oklahoma Department of Insurance and would require pre- acquisition notification in those states which have adopted pre-acquisition notification provisions and in which the insurers are admitted. Because such requirements are primarily for the benefit of policyholders, they may deter, delay or prevent certain transactions that could be advantageous to the shareholders or creditors of Chandler USA. RESTRICTIONS ON SHAREHOLDER DIVIDENDS 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. PAGE 14 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, 2009, NAICO had statutory earned surplus of $15.5 million. Applying the Oklahoma statutory limits described above, the maximum shareholder dividend NAICO may pay in 2010 without the approval of the Oklahoma Department of Insurance is $5.4 million. NAICO paid shareholder dividends to Chandler USA totaling $2.1 million and $1.4 million in 2008 and 2009, respectively. In addition to the statutory limits described above, the amount of shareholder dividends and other payments to affiliates permitted 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. RISK-BASED CAPITAL The National Association of Insurance Commissioners has adopted a methodology for assessing the adequacy of statutory surplus of domestic property and casualty insurers. This methodology is described in the Risk Based Capital Model Act (the "RBC Model Act"). The RBC Model Act includes a risk-based capital requirement that requires insurance companies to calculate and report information under a risk-based formula which attempts to measure statutory capital and surplus needs based on the risks in the insurance company's mix of products and investment portfolio. The formula is designed to allow state insurance regulators to identify potential under-capitalized companies. Under the formula, an insurer determines its "risk-based capital" ("RBC") by taking into account certain risks related to the insurer's assets (including risks related to its investment portfolio and ceded reinsurance) and the insurer's liabilities (including underwriting risks related to the nature and experience of its insurance business). The RBC rules provide for different levels of regulatory attention depending on the ratio of a company's total adjusted capital to its "authorized control level" of RBC. Insurers below the specific ratios are classified within certain levels, each of which requires specific corrective action. The levels and ratios are as follows:

PAGE 15 The ratios of total adjusted capital to authorized control level RBC for NAICO were 6.5:1 and 7.3:1 at December 31, 2008 and 2009, respectively. Therefore, NAICO's total adjusted capital exceeds the level that would trigger regulatory attention pursuant to the risk-based capital requirement. NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS-IRIS RATIOS The National Association of Insurance Commissioners Insurance Regulatory Information System ("IRIS") was developed by a committee of state insurance regulators and is primarily intended to assist state insurance departments in executing their statutory mandates to oversee the financial condition of insurance companies operating in their respective states. IRIS identifies 13 industry ratios and specifies "usual values" for each ratio. Departure from the "usual values," which fluctuate annually, on four or more ratios generally leads to inquiries from individual state insurance commissioners. NAICO had one 2009 ratio that was outside of the "usual values". NAICO's "investment yield" as calculated using the IRIS formula was 2.9% during 2009 compared to a usual value of greater than 3.0% and less than 6.5%. NAICO maintains a high-quality investment portfolio, with no non- investment grade bonds, derivative instruments or real estate investments (other than real estate occupied by the company). NAICO's investment yield is largely dependent upon prevailing levels of interest rates. The significant decline in interest rates in recent years had a significant impact on NAICO's investment yield. NAICO has also increased its holdings of tax-exempt bonds, which generally have lower yields due to their tax advantaged status. EFFECT OF FEDERAL LEGISLATION Although the Federal Government does not directly regulate the business of insurance, federal initiatives often affect the insurance business in a variety of ways. Current and proposed federal measures which may significantly affect the insurance business include Federal Government participation in asbestos and other product liability claims, claims related to acts of terrorism, pension and other employee benefit plan regulation (ERISA), examination of the taxation of insurers and reinsurers, minimum levels of liability insurance and automobile safety regulations. Federal regulation of the health care industry may directly and indirectly impact the business of insurance. ITEM 1A. RISK FACTORS. Our business is subject to numerous risks and uncertainties, the outcome of which may adversely impact future results of operations and financial condition. The following risks, as well as other information included in this 2009 Annual Report on Form 10-K, should be considered carefully. IF OUR ACTUAL LOSSES EXCEED OUR LOSS RESERVES, OUR FINANCIAL RESULTS WOULD BE ADVERSELY AFFECTED. We maintain reserves for unpaid losses and loss adjustment expenses which are estimates of the expense of investigation and settlement of all reported and incurred but not reported losses under our previously issued insurance policies and/or reinsurance contracts. These reserves do not represent an exact measurement of liability, but are estimates based upon historical data and anticipated future events. The process of estimating loss reserves is complex and imprecise. We periodically review the reserve estimates and the methods used to arrive at such reserve estimates, and we also retain independent professional actuaries who review such reserve estimates and methods. Any changes that result from these reviews are reflected in current operating results. If our estimates are incorrect and our reserves are inadequate, we are required to increase our reserves. An increase in reserves results in an increase in losses and a reduction in our net income for the period in which the deficiency is identified. Accordingly, an increase in reserves could have a material adverse effect on our results of operations, liquidity and financial condition. CATASTROPHIC EVENTS AND ACTS OF TERRORISM CAN HAVE A SIGNIFICANT IMPACT ON OUR RESULTS OF OPERATIONS, LIQUIDITY AND FINANCIAL CONDITION. We are subject to claims arising out of catastrophes that may have a significant effect on our results of operations, liquidity and financial condition. Catastrophes can be caused by various events, including tornadoes, windstorms, hail, fires, severe winter weather, earthquakes, power outages and explosions, and may include man-made events such as terrorist attacks. The frequency and severity of these catastrophes are inherently unpredictable. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. PAGE 16 We seek to reduce the impact of a catastrophe on our business through the purchase of catastrophe and terrorism reinsurance. Reinsurance does not relieve us of our direct liability to our policyholders. As long as the reinsurers meet their obligations, our net liability is limited to the amount of risk that we retain. Reinsurance, however, may prove inadequate if a major catastrophic loss exceeds the reinsurance limit or the reinsurers' financial capacity. OUR RESULTS MAY FLUCTUATE BASED ON MANY FACTORS, INCLUDING CYCLICAL CHANGES IN THE INSURANCE INDUSTRY. The results of companies in the property and casualty insurance industry historically have been subject to significant fluctuations and uncertainties. The industry's profitability can be affected significantly by rising levels of claim costs that are not known by companies at the time they price their products. The property and casualty insurance industry historically is cyclical. The demand for property and casualty insurance can vary significantly, generally rising as the overall level of economic activity increases and falling as such activity decreases. The property and casualty insurance industry also has been very competitive. During the late 1990's and into 2000, property and casualty insurance companies generally under priced their products, which resulted in poor underwriting results that were partially offset by investment returns. Interest rates decreased in 2000 and underwriting results continued to deteriorate for business written in the late 1990's and into 2000. These factors coupled with additional potential losses due to terrorism and lower investment returns caused the industry to increase pricing beginning in the latter half of 2001. Rate increases continued through 2003 and to a lesser extent in 2004, and the industry's underwriting results improved. The pricing environment during 2005 through 2009 experienced downward pressure, particularly for larger accounts. The recent industry trend has been for insurers to maintain or reduce rate levels, and NAICO has reduced its pricing in certain situations and for certain coverages from 2006 through 2009. Competition for profitable business in the past has resulted in pressure on pricing and less restrictive terms and conditions, contributing to the cyclical pricing and underwriting results. Our underwriting philosophy is to forego underwriting risks from which we are unable to obtain what we believe to be adequate premium rates. However, the fluctuations in demand and competition and the impact on us of other factors described above could have a material adverse effect on our business, results of operations and/or financial condition. OUR ABILITY TO REDUCE OUR EXPOSURE TO RISKS DEPENDS ON THE AVAILABILITY AND COST OF REINSURANCE. We transfer a portion of our risks insured under our policies and reinsurance contracts to other companies through reinsurance arrangements. These reinsurance arrangements reduce the potential impact of unusually severe or frequent losses. The amount and cost of reinsurance are subject, in large part, to prevailing market conditions that are beyond our control. Our ability to provide insurance at competitive premium rates and coverage limits on a continuing basis depends to a great extent upon our ability to obtain adequate reinsurance in amounts and at rates that will not adversely affect our competitive position. If we are unable to maintain such arrangements, then we would be forced to either bear the associated increase in net exposures or reduce the amount of risk that we underwrite. Either of these circumstances could have a material adverse effect on our results of operations, liquidity and/or financial condition. IF WE ARE UNABLE TO COLLECT FROM OUR REINSURERS ON A TIMELY BASIS, OUR FINANCIAL RESULTS WOULD BE ADVERSELY AFFECTED. We face a credit risk when we obtain reinsurance because we are still liable for the transferred risks if the reinsurer cannot meet the transferred obligations. Losses may not be recovered from our reinsurers until claims are paid and, in the case of certain long-term workers compensation and liability claims, the credit worthiness of our reinsurers may change before we can recover amounts to which we are entitled. The failure of any of our reinsurers to pay reinsurance claims on a timely basis could have a material adverse effect on our results of operations, liquidity and financial condition. THE FAIR VALUE OF OUR INVESTMENT PORTFOLIO AND OUR INVESTMENT INCOME COULD SUFFER AS A RESULT OF FLUCTUATIONS IN INTEREST RATES AND MARKET CONDITIONS. Our market risk generally represents the risk of gain or loss that may result from the potential change in the fair value of our investment portfolio as a result of fluctuations in prices and interest rates. A portion of our interest expense fluctuates with changes in interest rates as well. The severe downturn in the public debt and equity markets could result in a significant reduction in the fair value of our investment portfolio and our investment income. Depending on market conditions going forward, we could incur significant realized and unrealized losses in future periods, which could have an adverse impact on our results of operations, financial condition and financial strength ratings. We believe that we have mitigated the impact of these conditions by maintaining a high-quality investment portfolio. At December 31, 2009, approximately 96% of our fixed maturity investments were rated AA or better by Moody's Investor Service, Inc. or Standard & Poor's. Approximately 3% of total fixed maturities were rated A by Moody's Investor Service, Inc. or Standard & Poor's, and approximately 1% was rated BAA by Moody's Investor Service, Inc. and BBB by Standard & Poor's. PAGE 17 Increases and decreases in prevailing interest rates generally translate into decreases and increases in fair values of those instruments. Additionally, fair values of interest rate sensitive instruments may be affected by the credit worthiness of the issuer, prepayment options, relative values of alternative investments, liquidity of the instrument and other general market conditions. Any significant decline in our investment income as a result of falling interest rates, decreased dividend payment rates or general market conditions would have an adverse effect on our results. Any significant decline in the market value of our investments, which could result from an increase in interest rates or other market conditions, would reduce our shareholder's equity and our policyholders' surplus, which could impact our ability to write additional business. WE MAY BE ADVERSELY IMPACTED BY A CHANGE IN OUR FINANCIAL STRENGTH RATING. Insurance companies are subject to financial strength ratings produced by external rating agencies. Higher ratings generally indicate greater financial stability and a stronger ability to pay claims. Ratings are assigned by rating agencies to insurers based upon factors they believe are important to policyholders. Ratings are not recommendations to buy our securities. NAICO's ability to write business is most influenced by our rating from A.M. Best Company. A.M. Best ratings are designed to assess an insurer's financial strength and ability to meet continuing obligations to policyholders. Currently, our rating from A.M. Best is "B+" (Good), with a stable outlook. NAICO's rating was downgraded to the current rating from "B++" effective June 21, 2005. The downgrade was primarily due to the significant net loss and decline in statutory surplus in 2004 which were driven by adverse loss reserve development on prior accident years. We believe that as a result of our improved surplus and operating performance in 2006 through 2009, our rating will remain at least at its current level. However, there can be no assurance that A.M. Best will not change its rating in the future. A rating downgrade from A.M. Best could adversely affect the business we write and our results of operations. WE DEPEND ON OUR INDEPENDENT INSURANCE AGENTS. We market and sell our insurance products through independent, non-exclusive insurance agencies. These agencies are not obligated to sell our insurance products, and generally they also sell our competitors' insurance products. As a result, our business depends in part on the marketing and sales efforts of these agencies. If we diversify and expand our business geographically, then we may need to expand our network of agencies to successfully market our products. If these agencies fail to market our products successfully, our business may be adversely impacted. Also, independent agents may decide to sell their businesses to banks, other insurance agencies or other businesses. Changes in ownership of agencies, or expansion of agencies through acquisition, could adversely affect an agency's ability to control growth and profitability, thereby adversely affecting our business. MUCH OF OUR BUSINESS IS CONCENTRATED IN THE SOUTHWEST AND MIDWEST AREAS OF THE UNITED STATES, WHICH TIES OUR PERFORMANCE TO THE ENVIRONMENTAL, BUSINESS, ECONOMIC AND REGULATORY CONDITIONS OF THESE REGIONS. During 2009, approximately 78% of our written premiums were in the states of Oklahoma and Texas. Unusually severe storms or other natural or man-made disasters that destroy property in these states could adversely affect our operations. Our revenues and profitability are also subject to prevailing economic and regulatory conditions in these states. An economic downturn in these states could have a significant adverse impact on our business. The loss of a significant amount of premiums written in either of these states, whether due to regulatory changes, competitive changes, economic downturns in these states or other reasons, would reduce our revenues and could have a material adverse effect on our results of operations, liquidity and/or financial condition. WE OPERATE IN A HIGHLY COMPETITIVE INDUSTRY. We compete with local, regional and national insurance companies in our selected lines of business. Many of these companies are larger, have greater financial, marketing and management resources, have more favorable ratings by ratings agencies and offer more diversified insurance coverages than we do. In addition, we face competition within each insurance agency that sells our insurance because we sell through independent agencies that represent more than one insurance company. The property and casualty insurance industry is highly competitive on the basis of product, price and service. If our competitors offer products with more coverage, or price their products lower, our ability to grow or renew our business may be adversely impacted. The inability to compete effectively could materially reduce our customer base and revenues, and could adversely affect our results of operations, liquidity and financial condition. PAGE 18 WE ARE AN INSURANCE HOLDING COMPANY WITH NO DIRECT OPERATIONS, WHICH COULD ADVERSELY AFFECT OUR ABILITY TO MEET OUR DEBT OBLIGATIONS. As a holding company with no business operations of its own, we receive cash principally through borrowings, subsidiary dividends and other payments from our subsidiaries and parent company to pay interest on and repay the principal of our debt. Statutes and regulations governing NAICO and other insurance companies domiciled in Oklahoma regulate the payment of shareholder dividends and other payments from NAICO to Chandler USA. To the extent that these restrictions limit NAICO's ability to pay dividends or other payments to us, our ability to satisfy our obligations may also be limited. Historically, NAICO has played a significant role in the servicing of debt and other obligations of Chandler USA through the payment of shareholder dividends. 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. WE ARE HEAVILY REGULATED IN THE STATES IN WHICH WE OPERATE. NAICO is subject to regulation by government agencies in the jurisdictions in which it does business. The nature and extent of such regulation vary from jurisdiction to jurisdiction, but typically involve prior approval of the acquisition of control of an insurance company or of any company controlling an insurance company, regulation of certain transactions entered into by an insurance company with any of its affiliates, approval of premium rates, forms and policies used for many lines of insurance, standards of solvency and minimum amounts of capital and surplus which must be maintained, establishment of reserves required to be maintained for unearned premiums, unpaid losses and loss adjustment expenses or for other purposes, limitations on types and amounts of investments, restrictions on the size of risks which may be insured by a single company, licensing of insurers and agents, deposits of securities for the benefit of policyholders and the filing of periodic reports with respect to financial condition and other matters. In addition, regulatory examiners perform periodic financial and market conduct examinations of insurance companies. Such regulation is generally intended for the protection of policyholders rather than shareholders or creditors. NAICO is also affected by a variety of state and federal legislative and regulatory measures and judicial decisions that define and extend the risks and benefits for which insurance is sought and provided. These include redefinitions of risk exposure in areas such as product liability, environmental damage and workers compensation. In addition, individual state insurance departments may prevent premium rates for some classes of insureds from reflecting the level of risk assumed by the insurer for those classes. Such developments may adversely affect the profitability of various lines of insurance. In some cases, these adverse effects on profitability can be minimized through re-pricing, if permitted by applicable regulations, of coverages or limitations or cessation of the affected business. This extensive regulation of our business may affect the cost or demand for our products and may limit our ability to obtain rate increases or to take other actions that we might desire to increase our profitability. In addition, we may be unable to maintain all required approvals or comply fully with the wide variety of applicable laws and regulations, or the relevant authority's interpretation of such laws and regulations. LITIGATION AND LEGAL PROCEEDINGS AGAINST US COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS, RESULTS OF OPERATIONS AND/OR FINANCIAL CONDITION. Like other insurance companies, we are involved in lawsuits and legal proceedings in the normal course of our business, some of which involve claims for substantial amounts and the outcomes of which are unpredictable. This litigation is based on a variety of issues including insurance and claim settlement practices. ASSESSMENTS FOR GUARANTY FUNDS AND OTHER MANDATORY POOLING ARRANGEMENTS MAY REDUCE OUR PROFITABILITY. Virtually all states require insurers licensed to do business in their state to bear a portion of the loss suffered by some insureds as the result of impaired or insolvent insurance companies. These obligations are funded by assessments that are expected to continue in the future as a result of insolvencies. In addition, as a condition to the ability to conduct business in some states, insurance companies are required to participate in mandatory workers compensation shared market mechanisms or pooling arrangements, which provide workers compensation insurance coverage from private insurers. The effect of these assessments and mandatory shared market mechanism or changes in them could reduce our profitability in any given period or limit our ability to grow our business. PAGE 19 WE DEPEND ON KEY PERSONNEL. We believe that our future success will depend to a significant extent on our ability to attract and retain key employees, in particular our senior officers, and key management, information systems, underwriting, claims and corporate personnel. MANAGING TECHNOLOGY INITIATIVES AND MEETING NEW DATA SECURITY REQUIREMENTS PRESENT SIGNIFICANT CHALLENGES. While technological developments can streamline many business processes and ultimately reduce the cost of operations, technology initiatives can present short term cost and implementation risks. Data security is subject to increasing regulation. We face rising costs and competing time constraints in meeting compliance requirements of new and proposed regulations. The expanding volume and sophistication of computer viruses, hackers and other external hazards may increase the vulnerability of our data systems to security breaches. These increased risks and expanding regulatory requirements expose us to potential data loss and damages and significant increases in compliance costs. ITEM 1B. UNRESOLVED STAFF COMMENTS. Not applicable. ITEM 2. PROPERTIES. Chandler USA and its subsidiaries own and occupy four office buildings with approximately 127,000 square feet of usable space in Chandler, Oklahoma. Chandler USA believes such space is sufficient for its operations for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS. See Note 11 to Consolidated Financial Statements for a discussion of litigation matters. ITEM 4. RESERVED. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. All of the common stock of Chandler USA, its sole class of common equity on the date hereof, is owned by Chandler Insurance. Chandler USA has never paid cash dividends on its common shares. ITEM 6. SELECTED FINANCIAL DATA. The selected financial data has been derived from the consolidated financial statements of Chandler USA and its subsidiaries, which appear in Item 15(a). The consolidated balance sheets of Chandler USA and its subsidiaries and the related consolidated statements of operations, comprehensive income, shareholder's equity and cash flows for each of the five years in the period ended December 31, 2009 have been audited by HoganTaylor LLP, independent auditors, whose independent auditors' report expresses an unqualified opinion. Tullius Taylor Sartain & Sartain LLP merged with Hogan & Slovacek, P.C. to form HoganTaylor LLP effective January 7, 2009. The selected financial data should be read in conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and the consolidated financial statements of Chandler USA and the notes thereto appearing in Item 15(a). PAGE 20 ITEM 6. SELECTED FINANCIAL DATA (CONTINUED).

YEAR ENDED DECEMBER 31, ------------------------------------------------- ~~2004~~ 2005 2006 2007 2008 2009 --------- --------- --------- --------- --------- (Dollars in thousands) OPERATING DATA Revenues Direct premiums written and assumed .................... $~~121,651 $~~120,344 $113,043 $100,081 $ 98,384 $ 91,185 ========= ========= ========= ========= ========= Net premiums earned .................................... $ ~~64,042 $~~ 66,060 $ 65,704 $ 66,185 $ 64,027 $ 56,360 Investment income, net (1) .............................. ~~3,186~~ 2,798 9,801 (572) 3,347 3,168 Interest income, net from related parties .............. ~~491~~ 670 792 941 647 438 Realized investment gains, net ......................... ~~652~~ 383 745 214 95 1,527 Other income ........................................... ~~640~~ 251 317 1,916 2,069 2,037 --------- --------- --------- --------- --------- Total revenues ........................................... ~~69,011~~ 70,162 77,359 68,684 70,185 63,530 --------- --------- --------- --------- --------- Operating expenses Losses and loss adjustment expenses .................... ~~53,781~~ 37,324 45,473 41,393 40,940 34,214 Policy acquisition costs ............................... ~~11,039~~ 10,671 11,666 12,547 12,348 12,044 General and administrative expenses .................... 12,~~380 12,~~749 12,469 12,790 13,124 11,437 Interest expense ....................................... 2,~~397 2,~~535 2,690 2,703 2,569 2,357 --------- --------- --------- --------- --------- Total operating expenses ................................. ~~79,597~~ 63,279 72,298 69,433 68,981 60,052 --------- --------- --------- --------- --------- Income (loss) before income taxes ........................ ~~(10,586)~~ 6,883 5,061 (749) 1,204 3,478 Federal income tax benefit (provision) ................... ~~3,582~~ (2,450) (1,665) 87 (679) (1,296) --------- --------- --------- --------- --------- Net income (loss) ........................................ $ ~~(7,004) $~~ 4,433 $ 3,396 $ (662) $ 525 $ 2,182 ========= ========= ========= ========= ========= Combined loss and underwriting expense ratio (2) ......... ~~121%~~ 92% 106% 99% 101% 100% BALANCE SHEET DATA Cash and investments ..................................... $ 86,~~913 $ 86,~~316 $ 89,703 $ 97,199 $103,673 $111,073 Amounts due from related parties ......................... ~~10,891~~ 9,360 9,584 11,506 11,869 12,697 Total assets ............................................. ~~237,297~~ 245,059 222,772 234,367 234,647 247,345 Unpaid losses and loss adjustment expenses ............... ~~108,233~~ 109,541 83,253 100,590 101,459 107,341 Debentures ............................................... 6,979 6,979 6,979 6,979 6,979 Junior subordinated debentures issued to affiliated trusts ................................................. 20,620 20,620 20,620 20,620 20,620 Total liabilities ........................................ ~~201,105~~ 205,373 179,808 190,763 189,282 200,172 Shareholder's equity ..................................... ~~36,192~~ 39,686 42,964 43,604 45,365 47,173 ------------------------------------------------------------ (1) Net investment income included $~~577,000 in interest from an arbitration award in 2004, and $~~6.6 million for the accrual of prejudgment interest on a favorable jury verdict in 2006. In January 2008, the court entered a final judgment on this matter which resulted in the accrual of prejudgment interest being reduced by $4.1 million during 2007. For additional information, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." (2) During 2008, Chandler USA revised its method of calculating its underwriting expense ratio to underwriting expenses (net of agency fee income) divided by net premiums earned. Prior period ratios have been restated to conform to the current period's presentation.

PAGE 21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL References to Chandler USA which follow within this Item 7 refer to Chandler USA and its subsidiaries on a consolidated basis unless otherwise indicated. Chandler USA is engaged in various property and casualty insurance operations through its wholly owned subsidiaries, NAICO and CIMI. NAICO writes various property and casualty insurance products through two separate marketing programs: standard lines and political subdivisions. The lines of insurance written by NAICO are commercial coverages consisting of workers compensation, automobile liability, other liability (including general liability, products liability and umbrella liability), automobile physical damage, property, surety and inland marine. During 2005, NAICO began writing homeowner and dwelling fire and allied lines policies in the state of Texas through a managing general agent. NAICO discontinued its homeowners program during 2006. NAICO also transferred its property and inland marine business for the standard lines and political subdivisions programs to Praetorian effective January 1, 2007 through an arrangement between Praetorian and CIMI. CIMI and Praetorian terminated this arrangement effective June 29, 2009. Effective July 1, 2009, the property, inland marine, automobile liability, automobile physical damage and other liability lines of insurance in NAICO's political subdivisions program are being written by Greenwich through an arrangement with CIMI. See "Insurance Programs" for more information. NAICO markets these products through a network of independent insurance agents. A portion of the insurance written by NAICO is reinsured by Chandler USA's parent Chandler Insurance. CIMI is an underwriting manager and wholesaler that offers multiple insurance products for businesses in various industries and political subdivisions. SUMMARY OF RESULTS For the year ended December 31, 2009, Chandler USA had net income of $2.2 million compared to $525,000 for 2008 and a net loss of $662,000 for 2007. The net loss in 2007 was primarily due to the reversal of a portion of the prejudgment interest income that was accrued during 2006 on a favorable jury verdict. This is discussed in more detail under "Litigation" and in Note 11 to Consolidated Financial Statements. Many factors determine the profitability of an insurance company including regulation and rate competition; the frequency and severity of claims; the cost, availability and collectibility of reinsurance; interest rates; inflation; general business conditions; and jury awards, court decisions and legislation expanding the extent of coverage and the amount of compensation due for injuries and losses. CRITICAL ACCOUNTING POLICIES The preparation of financial statements in conformity with U.S. GAAP requires the application of accounting policies that often involve a significant degree of judgment. Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods. If management determines, as a result of its consideration of facts and circumstances, that changes in estimates and assumptions are appropriate, results of operations and financial position as reported in the consolidated financial statements may change significantly. Management has identified the following accounting policies as critical in understanding Chandler USA's reported financial results. RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES Insurance companies provide in their financial statements reserves for unpaid losses and loss adjustment expenses which are estimates of the expense of investigation and settlement of all reported and incurred but not reported losses under their previously issued insurance policies and reinsurance contracts. In estimating reserves, insurance companies use various standardized methods based on historical experience and payment and reporting patterns for the type of risk involved. The application of these methods necessarily involves subjective determinations by the personnel of the insurance company. Inherent in the estimates of the ultimate liability for unpaid claims are expected trends in claim severity, claim frequency and other factors that may vary as claims are settled. The amount of and uncertainty in the estimates is affected by such factors as the amount of historical claims experience relative to the development period for the type of risk, knowledge of the actual facts and circumstances, and the amount of insurance risk retained. The ultimate cost of insurance claims can be adversely affected by increased costs, such as medical expenses, repair expenses, costs of providing legal defense for policyholders, increased jury awards and court decisions and legislation that expand insurance coverage after the insurance policy was priced and sold. In recent years, certain of these factors have contributed to incurred amounts that were significantly higher than original estimates. Accordingly, the loss and loss adjustment expense reserves may not accurately predict an insurance company's ultimate liability for unpaid claims. PAGE 22 Estimating the ultimate loss and loss adjustment expense liability is a complex and judgmental process inasmuch as the amounts are based on management's informed estimates, assumptions and judgments using data currently available. The assumptions used in establishing reserves are regularly reviewed and updated by management as new data becomes available. Changes to estimates of previously established reserves are included in earnings in the period in which the estimate is changed. Such changes in estimates may be material. If the ultimate losses prove to differ substantially from the amounts previously recorded, the related adjustments could have a material adverse effect on Chandler USA's financial condition, results of operations and liquidity. NAICO's loss reserves consist of case reserves and reserves for incurred but not reported ("IBNR") claims. Case reserves are established by claims personnel based on a review of the facts known at the time the claim is reported, and are subsequently revised as more information about a claim becomes known. IBNR is computed using various actuarial methods and techniques and includes reserves for losses that have occurred but for which claims have not yet been reported, including provision for expected future development on case reserves. As of December 31, 2009, NAICO's case reserves and IBNR for each line of business are shown in the following table.

Gross reserves at December 31, ~~2008~~2009 Net reserves at December 31, ~~2008~~2009 ----------------------------------- --------------------------------- Case Total Case Total reserves IBNR reserves reserves IBNR reserves ----------- ----------- ----------- ---------- ---------- ----------- (In thousands) (In thousands) ~~Automobile~~Workers ~~liability~~compensation ......... $ 2535,~~117~~033 $ 1526,~~674~~738 $ 4061,~~791~~771 $ 1714,~~884~~915 $ 912,~~977~~118 $ 27,~~861~~033 ~~Workers~~Automobile ~~compensation~~liability ......... 2822,~~725~~363 2012,~~875~~503 4934,~~600~~866 1115,~~032~~902 97,~~562~~211 2023,~~594~~113 Other liability .............. 4,~~215~~424 2726,~~138~~683 31,~~353~~107 32,~~076~~621 87,~~396~~706 1110,~~472~~327 Automobile physical damage ... ~~597~~226 - ~~597~~226 ~~421~~159 - ~~421~~159 Property ..................... 127 3- 157 3- 3- 6- Surety ....................... (2120,~~028~~922) ~~130~~285 (20,~~898~~637) (11,~~286~~239) - (11,~~286~~239) Accident and health .......... 1 - 1 - - - Inland marine ................ - - - - - - ----------- ----------- ----------- ---------- ---------- ----------- Total reserves .............. $ 3741,~~639~~132 $ 6366,~~820~~209 $ ~~101~~107,~~459~~341 $ 2122,~~130~~358 $ 27,~~938~~035 $ 49,~~068~~393 =========== =========== =========== ========== ========== ===========

NAICO periodically reviews the reserve estimates relating to insurance business written or assumed by NAICO and the methods used to arrive at such reserve estimates. NAICO also retains independent professional actuaries who review such reserve estimates and methods. Methods used include the paid loss development method, incurred loss development method, Bornhuetter- Ferguson method and loss ratio method. Most methods assume that past patterns in the historical data will be repeated in the future, as long as there are no significant changes in pertinent variables. The methods chosen are those that are believed to produce the most reliable indication at that particular evaluation date. While each of the methods produce point estimates for each period analyzed, management's best estimate is usually comprised of a combination of methods due to differences in conditions during each period. The selected estimate may be one method, or a weighted average of several methods, or a judgmental selection if management determines it is appropriate. The ultimate point estimate selected by management represents the amount that management believes is the most likely amount that will ultimately be paid to settle the net reserves recorded at a particular point in time. Reserves for losses and loss adjustment expenses are developed using multiple estimation methods that result in various point estimates for each line of business. The estimate recorded by management is a function of detailed analysis of the historical trends and development factors resulting from the different methods. As a result of the variety of factors that must be considered by management there is a significant risk that actual incurred losses will develop differently from these estimates. The process of selecting the point estimate from the set of possible outcomes produced by the various actuarial methods discussed above is based upon the judgment of management. In making its selection, management considers recent trends in claims frequency and severity and other factors including, but not limited to, large loss activity, large case reserve additions, historical loss information, per claim information, NAICO's loss retention, legislative enactments, judicial decisions, and trends in general economic conditions, including the effects of inflation. This process assumes that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for predicting future events. Significant changes in claims development patterns from historical claims development patterns may cause a significant variation between current reserve estimates and the actual future paid amounts. Assumptions used in establishing loss reserves are regularly reviewed and updated by management as new data becomes available. The changes in these estimates, resulting from the review process and the differences between estimates and ultimate payments, are reflected in the consolidated statements of operations for the period in which such estimates are changed. Such changes in estimates may be material. See Notes to Consolidated Financial Statements. PAGE 23 The following table shows the recorded reserves and the high and low point estimates based on the results of the various actuarial methods described above as of December 31, 2009.

~~Line~~Lines of Insurance Low High Recorded ------------------------------------------- --------- ---------- ---------- (In thousands) Gross Reserves -------------- ~~Automobile~~Workers ~~liability~~compensation .................... $ 3141,~~004~~540 $ 5363,~~057~~574 $ 3955,~~808~~424 ~~Workers~~Automobile ~~compensation~~liability .................... 3525,~~787~~510 6236,~~269~~776 4334,~~107~~066 Other liability ......................... 2517,~~796~~747 5468,~~712~~529 30,~~571~~267 Automobile physical damage .............. ~~587~~223 ~~942~~956 ~~587~~223 Surety bonds ............................ (20,~~899~~643) (20,~~899~~643) (20,~~899~~643) Involuntary workers compensation pools .. 5,~~370~~085 5,~~370~~085 5,~~370~~085 Other ................................... 2,~~915~~919 2,~~915~~919 2,~~915~~919 --------- ---------- ---------- Total ................................. $ 8072,~~560~~381 $ ~~158~~157,~~366~~196 $ ~~101~~107,~~459~~341 ========= ========== ========== Net Reserves -------------- ~~Automobile~~Workers ~~liability~~compensation .................... $ 2013,~~442~~016 $ 3521,~~620~~907 $ 2620,~~879~~388 ~~Workers~~Automobile ~~compensation~~liability .................... 1118,~~832~~214 2026,~~687~~138 1322,~~870~~314 Other liability ......................... 86,~~333~~339 1615,~~617~~403 109,~~690~~487 Automobile physical damage .............. ~~411~~156 658 ~~411~~156 Surety bonds ............................ (11,~~289~~245) (11,~~289~~245) (11,~~289~~245) Involuntary workers compensation pools .. 5,~~370~~085 5,~~370~~085 5,~~370~~085 Other ................................... 3,~~137~~208 3,~~137~~208 3,~~137~~208 --------- ---------- ---------- Total ................................. $ 3834,~~236~~773 $ 7061,~~800~~154 $ 49,~~068~~393 ========= ========== ==========

For the workers compensation gross and net reserves, NAICO's actuaries selected an average of the results of all methods examined for accident years 2000 through 2008. For the 2009 accident year, the actuaries selected the case incurred projection for both gross and net reserves. For the automobile liability gross and net reserves, the actuaries relied on the average of the results of all methods examined for accident years prior to 2009. The 2009 accident year selection was based on a judgmentally selected loss ratio. General liability gross and net reserves were based on the average of all methods examined for all accident years except 2008. The case incurred Bornhuetter-Ferguson projection was selected for the 2008 accident year for both gross and net reserves. The loss settlement period for automobile physical damage claims is relatively short, and the actuaries used case incurred losses for their selection for all accident years. Surety bond reserves are actually a net receivable due to anticipated subrogation recoveries. Certain involuntary workers compensation pools provided their own estimates and NAICO records these estimates plus an accrual to account for the lag time in reporting to NAICO. The estimation methods chosen are those that are believed to produce the most reliable indication at that particular evaluation date for the losses being evaluated. The actuarial methods used in the 2009 loss reserve analysis were similar to those used in the 2008 analysis. During 2008, NAICO modified the way that the loss data was grouped for analysis purposes so that the data could be analyzed by line of business rather than by insurance program. Management believes that by doing so, the analysis is enhanced since each line of business may produce different loss development trend patterns. The loss settlement period on insurance claims for property damage is relatively short. The more severe losses for bodily injury, workers compensation and other liability claims have a much longer loss settlement period and may be paid out over several years. It is often necessary to adjust estimates of liability on a loss either upward or downward between the time a claim arises and the time of payment. Workers compensation indemnity benefit reserves are determined based on statutory benefits prescribed by state law and are estimated based on the same factors generally discussed above which may include, where state law permits, inflation adjustments for rising benefits over time. Generally, the more costly automobile liability claims involve one or more severe bodily injuries or deaths. Other liability claims include coverages protecting the insured against legal liability resulting from negligence, carelessness, or a failure to act causing property damage or personal injury to others. The estimation of loss reserves for other liability claims is affected by the timing of claims reporting, the applicable statute of limitations, the litigious climate and magnitude of jury awards, the unpredictability of judicial decisions regarding coverage issues and outside counsel costs. The ultimate cost of these types of claims is dependent on various factors including the relative liability of the parties involved, the number and severity of injuries and the legal jurisdiction where the incident occurred. PAGE 24 NAICO does not ordinarily insure against environmental matters as that term is commonly used. However, in some cases, regulatory filings made on behalf of an insured can make NAICO directly liable to the regulatory authority for property damage, which could include environmental pollution. In those cases, NAICO ordinarily has recourse against the insured or the surety bond principal for amounts paid. NAICO has insured certain trucking companies and pest control operators who are required to provide proof of insurance which in some cases assures payment for cleanup and restoration of damage resulting from sudden and accidental release or discharge of contaminants or other substances which may be classified as pollutants. NAICO also provides surety bonds for construction contractors who use or have control of such substances and for contractors who remove and dispose of asbestos as a part of their contractual obligations. NAICO also insures independent oil and gas producers who may purchase coverage for the escape of oil, saltwater, or other substances which may be harmful to persons or property, but may not generally be classified as pollutants. NAICO maintains claims records which segregate this type of risk for the purpose of evaluating environmental risk exposure. Based upon the nature of such lines of business with NAICO's insureds, and current data regarding the limited severity and infrequency of such matters, it appears that potential environmental risks are not a significant portion of claim reserves and therefore would not likely have a material adverse impact, if any, on the financial condition of Chandler USA. NAICO's statutory-based reserves (reserves calculated in accordance with accounting practices prescribed or permitted by an insurer's domiciliary state insurance regulatory authorities for purposes of financial reporting to regulators) do not differ from its reserves reported on the basis of GAAP. NAICO does not discount its reserves for unpaid losses and loss adjustment expenses. Management believes that its unpaid losses and related reinsurance recoverables are fairly stated as of December 31, 2009. However, estimating the ultimate claims liability is necessarily a complex and judgmental process inasmuch as the amounts are based on management's informed estimates, assumptions and judgments using data currently available. REINSURANCE RECOVERABLES Reinsurance recoverables on unpaid losses and loss adjustment expenses are similarly subject to changes in estimates and assumptions. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policies. In addition to factors noted above, estimates of reinsurance recoverables may prove uncollectible if the reinsurer is unable or unwilling to meet its responsibilities under the reinsurance contracts. Reinsurance contracts do not relieve an insurer from its obligation to policyholders. DEFERRED INCOME TAXES Chandler USA uses an asset and liability approach for accounting for income taxes. Deferred income taxes are recognized for the tax consequences of temporary differences and carryforwards by applying enacted tax rates applicable to future years to differences between the financial statement amounts and the tax bases of existing assets and liabilities. A valuation allowance is established if it is more likely than not that some portion of the deferred tax asset will not be realized. The determination of whether a valuation allowance is appropriate requires the exercise of management judgment. At December 31, 2007, Chandler USA had a net operating loss carryforward available for U.S. Federal income taxes of $1.3 million, which was fully utilized during 2008. In addition, at December 31, 2009, Chandler USA had net operating loss carryforwards available for Oklahoma state income taxes totaling approximately $33.9 million which expire in the years 2010 through 2029. A valuation allowance has been provided for the tax effect of the state net operating loss since realization of such amount is not considered more likely than not. OTHER See Note 1 to Consolidated Financial Statements for information related to other accounting and reporting policies. ECONOMIC CONDITIONS The impact of a recession on Chandler USA would depend on its duration and severity. A prolonged downturn in the economy could result in decreased demand for NAICO's insurance products and an increase in uncollectible premiums and/or reinsurance recoverables. In addition, an economic downturn could result in an increase in the number of insurance claims if insureds decrease expenditures that promote safety. Much of NAICO's insurance business is concentrated in the Southwest and Midwest areas of the United States. Approximately $71.1 million, or 78%, of NAICO's direct written and assumed premiums in 2009 were in the states of Oklahoma and Texas. An economic downturn in these states could have a significant adverse impact on Chandler USA. A recession might also cause defaults on fixed-income securities or a decrease in the value of equity securities owned by NAICO. Management believes it has mitigated the impact of a recession by employing conservative underwriting practices and strict credit policies and maintaining a high-quality investment portfolio. PAGE 25 Periods of inflation have varying effects on Chandler USA and its subsidiaries as well as other companies in the insurance industry. Inflation contributes to higher claims and related costs and operating costs as well as higher interest rates which generally provide for potentially higher interest rates on investable cash flow and decreases in the market value of existing fixed-income securities. Premium rates and commissions, however, are not significantly affected by inflation since competitive forces generally control such rates. COMPETITION NAICO operates in a highly competitive industry and faces competition from domestic and foreign insurers, many of which are larger, have greater financial, marketing and management resources, have more favorable ratings by ratings agencies and offer more diversified insurance coverages than NAICO. An insurance company's capacity to write insurance policies is dependent on a variety of factors including its net worth or "surplus," the lines of business written, the types of risk insured and its profitability. During the late 1990's and into 2000, property and casualty insurance companies generally under priced their products, which resulted in poor underwriting results that were partially offset by investment returns. Interest rates decreased in 2000 and underwriting results continued to deteriorate for business written in the late 1990's and into 2000. These factors coupled with additional potential losses due to terrorism and lower investment returns caused the industry to increase pricing beginning in the latter half of 2001. Rate increases continued through 2003 and to a lesser extent in 2004, and the industry's underwriting results improved. The pricing environment during 2005 through 2009 experienced downward pressure, particularly for larger accounts. NAICO was able to increase its pricing for most coverages from 2001 through 2005. However, the recent industry trend has been for insurers to maintain or reduce rate levels, and NAICO has reduced its pricing in certain situations and for certain coverages from 2006 through 2009. NAICO continues to experience competition in all of its programs. NAICO's underwriting philosophy is to forego underwriting risks from which it is unable to obtain what it believes to be adequate premium rates. REGULATION NAICO is subject to regulation by government agencies in the jurisdictions in which it does business. The nature and extent of such regulations vary from jurisdiction to jurisdiction, but typically involve prior approval of the acquisition of control of an insurance company or of any company controlling an insurance company, regulation of certain transactions entered into by an insurance company with any of its affiliates, approval of premium rates, forms and policies used for many lines of insurance, standards of solvency and minimum amounts of capital and surplus which must be maintained, establishment of reserves required to be maintained for unearned premiums, unpaid losses and loss adjustment expenses or for other purposes, limitations on types and amounts of investments, restrictions on the size of risks which may be insured by a single company, licensing of insurers and agents, deposits of securities for the benefit of policyholders and the filing of periodic reports with respect to financial condition and other matters. In addition, regulatory examiners perform periodic examinations of insurance companies. Such regulation is generally intended for the protection of policyholders rather than shareholders or creditors. As an Oklahoma corporation, NAICO and any person controlling NAICO, directly or indirectly, are subject to the insurance laws of Oklahoma including laws concerning the change or acquisition of control and payment of shareholder and policyholder dividends by NAICO. In addition to the regulatory oversight of NAICO, Chandler Insurance is also subject to regulation under the laws of the Cayman Islands and Chandler USA and all of its affiliates are also subject to regulation under the Oklahoma Insurance Code. The Oklahoma Insurance Code contains certain reporting requirements including those requiring Chandler Insurance, as the ultimate parent company, to file information relating to its capital structure, ownership and financial condition and general business operations of its insurance subsidiaries. The Oklahoma Insurance Code contains special reporting and prior approval requirements with respect to transactions among affiliates. The Oklahoma Insurance Code also imposes certain requirements upon any person controlling or seeking to control an insurance company domiciled in Oklahoma. Control is generally presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote or holds proxies representing 10% or more of the voting securities of the insurance company or of any other person or entity controlling the insurance company. The 10% presumption is not conclusive and control may be found to exist at less than 10%. Persons owning any securities of Chandler USA or Chandler Insurance must comply with the Oklahoma Insurance Code. See "BUSINESS - Regulation." PAGE 26 Insurance companies are also affected by a variety of state and federal legislative and regulatory measures and judicial decisions that define and extend the risks and benefits for which insurance is sought and provided. These include the redefinition of risk exposure in areas such as product liability, environmental damage and workers compensation. In addition, individual state insurance departments may prevent premium rates for some classes of insureds from reflecting the level of risk assumed by the insurer for those classes. Such developments may adversely affect the profitability of various lines of insurance. In some cases, these adverse effects on profitability can be minimized through coverage re-pricing, if permitted by applicable regulations, or limitations or cessation of the affected business. ANALYSIS OF INSURANCE PROGRAM RESULTS OF OPERATIONS The following tables summarize the net premiums earned and loss ratios (computed by dividing losses and loss adjustment expenses by net premiums earned) in each of the years presented. The "loss ratio" is based on losses recorded during the calendar year presented regardless of the accident year in which the claim occurred. The first table is summarized by major insurance program and includes all lines of insurance written in each program. The second table is summarized by line of insurance written and includes all net premiums earned and net losses and loss adjustment expenses incurred from all insurance programs for that particular line. See "Premiums Earned" and "Losses and Loss Adjustment Expenses."

YEAR ENDED DECEMBER 31, -------------------------------- ~~2006~~ 2007 2008 2009 ---------- ---------- ---------- (Dollars in thousands) INSURANCE PROGRAMS ---------------------------------------- STANDARD LINES Net premiums earned .................. $ ~~54,357 $~~ 62,342 $ 61,047 $ 54,129 Loss ratio ........................... ~~74.0%~~ 59.5% 63.7% 58.4% POLITICAL SUBDIVISIONS Net premiums earned .................. $ ~~5,253 $~~ 3,436 $ 2,747 $ 1,925 Loss ratio ........................... ~~51.3%~~ 46.1% 67.7% 81.2% HOMEOWNERS Net premiums earned .................. $ ~~5,353~~9 $ 9- $ - Loss ratio ........................... ~~47.0%~~ (560.0)% -% -% SURETY BONDS Net premiums earned .................. $ ~~193~~186 $ ~~186~~83 $ 8370 Loss ratio ........................... ~~(78.8)%~~ 1,119.1% (51.9)% 704.3% OTHER (1) Net premiums earned .................. $ ~~548~~212 $ ~~212~~150 $ ~~150~~236 Loss ratio ........................... ~~37.5%~~ 307.2% 127.8% 222.9% TOTAL Net premiums earned .................. $ ~~65,704 $~~ 66,185 $ 64,027 $ 56,360 Loss ratio ........................... ~~69.2%~~ 62.5% 63.9% 60.7% ------------------------- (1) This category is comprised primarily of the run-off of discontinued programs and NAICO's participation in various mandatory workers compensation pools.

PAGE 27

YEAR ENDED DECEMBER 31, -------------------------------- ~~2006~~ 2007 2008 2009 ---------- ---------- ---------- (Dollars in thousands) ~~LINES~~LINE OF INSURANCE ---------------------------------------- ~~AUTOMOBILE~~WORKERS ~~LIABILITY~~COMPENSATION Net premiums earned .................. $ 2117,~~122~~861 $ 2620,~~469~~681 $ 21,~~537~~267 Loss ratio ........................... 9962.52% 7375.78% 6978.65% ~~WORKERS~~AUTOMOBILE ~~COMPENSATION~~LIABILITY Net premiums earned .................. $ 1526,~~361~~469 $ 1721,~~861~~537 $ 2016,~~681~~816 Loss ratio ........................... 6373.37% 6269.26% 7567.85% OTHER LIABILITY Net premiums earned .................. $ ~~16,628 $~~ 15,137 $ 16,301 $ 12,826 Loss ratio ........................... ~~56.9%~~ 32.4% 37.7% 27.0% AUTOMOBILE PHYSICAL DAMAGE Net premiums earned .................. $ ~~5,008 $~~ 6,096 $ 5,492 $ 4,995 Loss ratio ........................... ~~62.6%~~ 55.0% 75.4% ~~PROPERTY~~50.4% INLAND MARINE Net premiums earned .................. $ ~~7,082~~157 $ ~~279~~(68) $ 1222 Loss ratio ........................... 4118.39% 63(5.92)% (~~750~~28.4)% ~~SURETY~~PROPERTY Net premiums earned .................. $ ~~194~~279 $ ~~186~~1 $ 83164 Loss ratio ........................... 63.9% (~~459~~750.4)% ~~1,119.1%~~ (5117.91)% ~~INLAND~~SURETY ~~MARINE~~ Net premiums earned .................. $ ~~309~~186 $ ~~157~~83 $ ~~(68)~~70 Loss ratio ........................... 301,119.01% 18(51.9)% (5707.2)1% TOTAL Net premiums earned .................. $ ~~65,704 $~~ 66,185 $ 64,027 $ 56,360 Loss ratio ........................... ~~69.2%~~ 62.5% 63.9% 60.7%

PAGE> PAGE 28 PREMIUMS EARNED The following tables set 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 each year presented:

GROSS PREMIUMS EARNED NET PREMIUMS EARNED ------------------------------- ------------------------------- INSURANCE PROGRAMS ~~2006~~ 2007 2008 ~~2006~~2009 2007 2008 2009 -------------------------------- --------- --------- --------- --------- --------- --------- (In thousands) Standard lines ................. $ ~~91,153 $~~100,844 $ 96,587 $ 5487,~~357~~100 $ 62,342 $ 61,047 $ 54,129 Political subdivisions ......... ~~14,337~~ 5,084 4,191 52,~~253~~955 3,436 2,747 1,925 Homeowners ..................... ~~8,542~~ 501 - ~~5,353~~- 9 - - Surety bonds ................... ~~278~~ 266 119 ~~193~~101 186 83 70 Other .......................... ~~550~~ 214 150 ~~548~~236 212 150 236 --------- --------- --------- --------- --------- --------- TOTAL .......................... $~~114,860 $~~106,909 $101,047 $ 6590,~~704~~392 $ 66,185 $ 64,027 $ 56,360 ========= ========= ========= ========= ========= ========= GROSS PREMIUMS EARNED NET PREMIUMS EARNED ------------------------------- ------------------------------- LINES OF INSURANCE ~~2006~~ 2007 2008 ~~2006~~2009 2007 2008 2009 -------------------------------- --------- --------- --------- --------- --------- --------- (In thousands) ~~Automobile~~Workers ~~liability~~compensation ........... $ 3128,~~615~~337 $ 3931,~~298~~967 $ 3132,~~261~~687 $ 2117,~~122~~861 $ 2620,~~469~~681 $ 21,~~537~~267 ~~Workers~~Automobile ~~compensation~~liability ........... 2339,~~562~~298 2831,~~337~~261 3124,~~967~~441 1526,~~361~~469 1721,~~861~~537 2016,~~681~~816 Other liability ................ ~~31,744~~ 28,995 29,732 1625,~~628~~070 15,137 16,301 12,826 Automobile physical damage ..... ~~7,720~~ 9,021 8,065 57,~~008~~424 6,096 5,492 ~~Property~~4,995 Inland marine ..................~~.....~~ ~~18,335~~247 ~~745~~(99) 2337 ~~7,082~~157 ~~279~~(68) 1222 ~~Surety~~Property ......................... ~~278~~745 ~~266~~2 ~~119~~333 ~~194~~279 ~~186~~1 83164 ~~Inland~~Surety ~~marine~~ ......................... ~~1,606~~266 ~~247~~119 ~~(99)~~100 ~~309~~186 ~~157~~83 ~~(68)~~70 --------- --------- --------- --------- --------- --------- TOTAL .......................... $~~114,860 $~~106,909 $101,047 $ 6590,~~704~~392 $ 66,185 $ 64,027 $ 56,360 ========= ========= ========= ========= ========= =========

Gross premiums earned decreased 5% and 11% in 2008 and 2009, respectively. The decrease in 2008 gross premiums earned was due primarily to a decrease in automobile liability premiums in the standard lines program. During 2009, the standard lines and political subdivisions programs experienced significant decreases in gross premiums earned, primarily in the automobile liability and other liability lines of business. Gross premiums earned in the workers compensation line of business increased slightly during 2009. Gross premiums earned in Texas decreased 21% and 14% in 2008 and 2009, respectively, and gross premiums earned in Oklahoma increased 6% in 2008 and decreased 2% in 2009. Net premiums earned decreased 3% in 2008 and 12% in 2009. During 2008, net premiums earned increased for the workers compensation and other liability lines of insurance, but decreased for automobile liability due to the decrease in gross premiums earned. During 2009, net premiums earned increased slightly in the workers compensation line of business, but decreased in the automobile liability and other liability lines of business due to the decrease in gross premiums earned. PAGE 29 Gross premiums earned in the standard lines program decreased 4% in 2008 and 10% in 2009. Gross premiums earned for workers compensation business in this program increased $3.7 million or 13% in 2008, and $651,000 or 2% in 2009. Gross premiums earned from trucking accounts decreased $8.2 million in 2008 and $6.2 million in 2009. Net premiums earned in the standard lines program decreased 2% in 2008 and 11% in 2009. Net premiums earned from trucking accounts decreased $4.6 million in 2008 and $4.2 million in 2009. From January 2007 to the second quarter of 2009, the property and inland marine lines of insurance that were previously written by NAICO in the standard lines program were written by Praetorian Insurance Company ("Praetorian") through an arrangement between Praetorian and CIMI. Under this arrangement, CIMI received commission income for the business it produced for Praetorian. NAICO handles all claims for this business under a separate claims handling agreement with Praetorian. CIMI and Praetorian terminated this arrangement effective June 29, 2009, and NAICO resumed writing these lines of insurance in this program. Gross premiums earned in the political subdivisions program decreased 18% and 29% in 2008 and 2009, respectively. Net premiums earned decreased 20% and 30% in 2008 and 2009, respectively. From January 2007 to the second quarter of 2009, the property and inland marine lines of insurance in the political subdivisions program that were previously written by NAICO were written by Praetorian through an arrangement between Praetorian and CIMI. CIMI and Praetorian terminated this arrangement effective June 29, 2009. Effective July 1, 2009, the property, inland marine, automobile liability, automobile physical damage and other liability lines of insurance in the political subdivisions program that were previously written by NAICO are being written by Greenwich Insurance Company ("Greenwich") 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 Greenwich. NAICO will continue to write workers compensation coverages for the political subdivisions 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 the political subdivisions program to decrease significantly. In 2005, NAICO began writing homeowner and dwelling policies in the state of Texas through a managing general agent. NAICO discontinued this program during 2006 due primarily to increased catastrophic exposures. Gross premiums earned in the surety bond program decreased 55% and 15% in 2008 and 2009, respectively. Net premiums earned decreased 55% and 16% in 2008 and 2009, respectively. NAICO is no longer actively marketing its surety bond program. Other programs in the preceding table include premiums from the runoff of various programs which are no longer offered by NAICO and NAICO's participation in various mandatory pools covering workers compensation for insureds that were unable to purchase this coverage from an insurance company on a voluntary basis. NET INVESTMENT INCOME AND NET REALIZED INVESTMENT GAINS At December 31, 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 7% 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. During 2007, NAICO reversed $4.1 million of prejudgment interest income based on a final judgment entered by the court. The prejudgment interest income had been accrued during 2006 on a favorable jury verdict in civil litigation regarding certain surety bond claims in 2006. See Litigation and Note 11 of Notes to Consolidated Financial Statements. Net investment income, excluding interest income from related parties and the prejudgment interest, decreased 6% in 2008 and 5% in 2009. Interest income from related parties was $941,000, $647,000 and $438,000 during 2007, 2008 and 2009, respectively. The decreases in 2008 and 2009 were due to lower interest rates. See Liquidity and Capital Resources. Net realized investment gains were $214,000, $95,000 and $1,527,000 in 2007, 2008 and 2009, respectively. PAGE 30 The average net yield on the fixed maturity portfolio, including net realized investment gains, was 4.0%, 3.4% and 4.3% in 2007, 2008 and 2009, respectively. The average net yield on the fixed maturity portfolio, excluding net realized investment gains, was 3.8% for 2007, 3.3% for 2008 and 2.9% for 2009. Chandler USA excludes interest income from related parties when calculating its average net yield on the portfolio. Chandler USA's average net yield has been reduced by investment expenses to subsidize a premium finance program for certain insureds of NAICO. While such expenses reduce Chandler USA's average net yield, the premium finance program enhances cash flow by providing cash which is available for investment earlier than conventional deferred payment plans. Based on information provided by the premium finance company, the outstanding balance of premiums financed at December 31, 2009 was approximately $12.1 million. The average yield on the fixed maturity portfolio before deducting investment expenses was 4.2% in 2007, 3.6% in 2008 and 3.1% in 2009, excluding net realized capital gains. OTHER INCOME Other income was $1.9 million, $2.1 million and $2.0 million during 2007, 2008 and 2009, respectively. Other income included net commission income related to business produced by CIMI for insurance companies other than NAICO totaling $1.3 million in 2007, and $1.6 million in 2008 and 2009, respectively. 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. See "BUSINESS - Reserves." The percentage of losses and loss adjustment expenses to net premiums earned ("loss ratio") was 62.5%, 63.9% and 60.7% in 2007, 2008 and 2009, respectively. Weather-related losses (net of applicable reinsurance) from wind and hail were $109,000, $344,000 and $92,000 in 2007, 2008 and 2009, respectively, and increased the respective loss ratios by 0.2, 0.5 and 0.2 percentage points. Weather-related losses have decreased due in part to the transfer of the property and inland marine lines of business in the standard lines and political subdivisions programs to Praetorian from January 2007 through June 2009. Effective July 1, 2009, the property and inland marine lines of business in the political subdivisions program are being written by Greenwich. NAICO experienced $1.2 million, $2.1 million and $734,000 of incurred losses related to prior accident years during 2007, 2008 and 2009, respectively. The adverse loss development is generally the result of ongoing analysis of loss development trends for both liability and workers compensation lines of business, and includes provisions for potentially uncollectible reinsurance and deductibles. The development was primarily a function of more adverse frequency and severity patterns than previously anticipated. Since such development patterns were not present in the loss history available at the time the earlier estimates were prepared, they could therefore not be anticipated. NAICO adjusts reserves as experience develops and new information becomes known. Such adjustments are reflected in the results of operations in the periods in which the estimates are changed. The adverse development of losses from prior accident years results in higher calendar year loss ratios and reduced calendar year operating results. The following table sets forth the loss development by line of business during each of the calendar years shown.

Calendar years -------------------------------- ~~2006~~ 2007 2008 2009 ---------- ---------- ---------- (In thousands) ~~Automobile~~Workers ~~liability~~compensation ..................... $ 31,~~028~~314 $ ~~(691)~~3,536 $ (13,~~660)~~958 ~~Workers~~Automobile ~~compensation~~liability ..................... ~~994~~(691) (1,~~314~~660) 3(1,~~536~~966) Other liability .......................... ~~590~~ (1,796) 216 (1,572) Automobile physical damage ............... ~~261~~ 65 1 120 Property ................................. (~~47) (~~173) 23 (14) Surety ................................... ~~(986)~~ 2,074 (49) 489 Accident and health ...................... 4 394 - (218) Inland marine ............................ ~~(15)~~ 12 4 (63) ---------- ---------- ---------- $ ~~3,829 $~~ 1,199 $ 2,071 $ 734 ========== ========== ==========

PAGE 31 During 2007, certain surety bond estimated recoveries were reduced based on a final judgment entered by the court regarding certain surety bond claims. The reduction of the estimated recoveries accounted for $1.8 million of the loss development for surety business during 2007. During 2008, workers compensation losses developed adversely by $3.5 million, but the automobile liability line of business offset approximately $1.7 million of this. During 2009, workers compensation losses developed adversely by $4.0 million, but the automobile liability line of business offset approximately $2.0 million of this, and the other liability line offset approximately $1.6 million of this. The 1997-2001 accident years have clearly been the problematic years where the loss development was so significant. During those years, NAICO's premium volume grew from $123 million in 1997 to $197 million in 2000, before dropping to $159 million in 2001. Much of that growth was attributable to the planned expansion of NAICO's Texas business. This growth occurred at a time when premium rates were very soft. The expansion into Texas began in the last half of 1996. NAICO had written business in Texas for many years with reasonably good experience. Based on this experience, management believed the economic and tort climates were similar to Oklahoma. This did not turn out as expected, especially in regards to business in south and east Texas. Because this expansion was primarily a casualty driven book of business, it took several years to realize that claims in many areas of Texas were more severe and emerged differently than Oklahoma claims. As the historical loss data picked up the development of these claims, the projections of ultimate losses became more accurate. The following table sets forth the net reserves at the beginning of each accident year, the loss development incurred during each calendar year, and the re-estimated net reserves as of the beginning of each calendar year.

Accident years -------------------------------------------------------------------------------------------- Prior to ~~2000~~2001 ~~2000~~ 2001 2002 2003 2004 2005 2006 2007 2008 Total -------- -------- -- -------- --------- -------- -------- -------- -------- -------- --------- (In thousands) Reserves at beginning of ~~2006~~2007 ... $ 34,~~000~~596 $ 1(11,~~579~~030) $ (21,~~444)~~610 $ 32,~~188~~132 $ 53,~~896~~492 $ 912,~~525~~051 $1929,~~805~~230 $ - $ - $ 4042,~~549~~081 Development during ~~2006~~2007 ......... 12,~~789~~169 682,292 515 (39) 1,~~678)~~249 ~~663~~345 (~~996~~5,332) ~~108 3,875~~ - - 31,~~829~~199 -------- -------- -- -------- --------- -------- -------- -------- -------- -------- --------- Re-estimated reserves at beginning of ~~2006~~2007 ............. $ 46,~~789~~765 $ 1(8,~~647~~738) $ (42,~~122)~~125 $ 32,~~851~~093 $ 4,~~900~~741 $ 912,~~633~~396 $23,~~680~~898 $ - $ - $ 4443,~~378~~280 ======== ======== == ======== ========= ======== ======== ======== ======== ======== ========= Reserves at beginning of ~~2007~~2008 .... $ 45,~~267~~013 $ ~~329 $~~(1110,~~030~~139) $ 1,~~610~~028 $ 21,~~132~~154 $ 31,~~492~~855 $12 5,~~051~~660 $2913,~~230~~618 $27,677 $ - $ 4245,~~081~~866 Development during ~~2007~~2008 ......... 1,~~939~~214 ~~230~~749 ~~2,292 515~~ (39100) ~~1,249~~647 ~~345~~40 125 (~~5,332~~884) 280 - 12,~~199~~071 -------- -------- -- -------- --------- -------- -------- -------- -------- -------- --------- Re-estimated reserves at beginning of ~~2007~~2008 ............. $ 6,~~206~~227 $ ~~559 $~~ (89,~~738~~390) $ 2928 $ 1,~~125~~801 $ 21,~~093~~895 $ 45,~~741~~785 $12,~~396~~734 $2327,~~898~~957 $ - $ 4347,~~280~~937 ======== ======== == ======== ========= ======== ======== ======== ======== ======== ========= Reserves at beginning of ~~2008~~2009 ... $ 45,~~843~~024 $ ~~170 $~~(10,~~139~~084) $ ~~1,028~~339 $ ~~1,154~~443 $ 1836 $ 2,~~855~~629 $ 5,~~660~~980 $1316,~~618~~932 $2726,~~677~~969 $ 4549,~~866~~068 Development during ~~2008~~2009 ......... 1,~~129~~865 85683 ~~749~~40 ~~(100)~~41 ~~647~~552 40341 ~~125~~744 (~~884~~1,156) ~~280~~ (2,~~071~~376) 734 -------- -------- -- -------- --------- -------- -------- -------- -------- -------- --------- Re-estimated reserves at beginning of ~~2008~~2009 ............. $ 56,~~972~~889 $ ~~255 $~~ (9,~~390~~401) $ ~~928~~379 $ 484 $ 1,~~801~~388 $ 12,~~895~~970 $ 56,~~785~~724 $1215,~~734~~776 $2724,~~957~~593 $ 4749,~~937~~802 ======== ======== == ======== ========= ======== ======== ======== ======== ======== =========

During 2007, NAICO experienced adverse loss development totaling $1.2 million primarily in the surety bond program. During 2007, a portion of the estimated recoveries that were recorded in the surety bond program during 2006 were reduced based on a final judgment entered by the court regarding certain surety bond claims. The reduction of the estimated recoveries accounted for $1.8 million of the loss development during 2007. The adverse loss development included approximately $356,000 for provisions for potentially uncollectible reinsurance. During 2008, NAICO experienced adverse loss development totaling $2.1 million primarily in the workers compensation line of business in the standard lines program. A portion of the adverse loss development was offset by favorable development in the automobile liability line of business in this program. The adverse loss development included approximately $166,000 for provisions for potentially uncollectible reinsurance. During 2009, NAICO experienced adverse loss development totaling $734,000 primarily in the workers compensation line of business in the standard lines program. A portion of the adverse loss development was offset by favorable development in the automobile liability and other liability lines of business in this program. The adverse loss development included approximately $180,000 for provisions for potentially uncollectible reinsurance. PAGE 32 Since 2001, management has undertaken several initiatives to improve the quality and profitability of business. These initiatives included significant rate increases, changes in coverage forms that limit or eliminate coverage, reduction or elimination of classes of business that have not been profitable, reduction or elimination of business in geographic areas that have not been profitable and increased emphasis on risk selection. Management has also improved case reserving which improves the overall reserving accuracy and also leads to better underwriting decisions. Reinsurance contracts do not relieve an insurer from its obligation to policyholders. Failure of reinsurers to honor their obligations could result in losses to Chandler USA; consequently, adjustments to ceded losses and loss adjustment expenses are made for amounts deemed uncollectible. During 2007, 2008 and 2009, NAICO incurred charges of $356,000, $166,000 and $180,000, respectively, in adjustments to ceded losses and loss adjustment expenses for amounts deemed uncollectible. 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 reinsurers who assume premiums from NAICO under certain reinsurance contracts and the ceding commissions are accounted for as a reduction of policy acquisition costs. Direct policy acquisition costs and ceding commissions are deferred and amortized over the terms of the policies. When the sum of the anticipated losses, loss adjustment expenses and unamortized policy acquisition costs exceeds the related unearned premiums, including anticipated investment income, a provision for the indicated deficiency is recorded. The following table sets forth Chandler USA's policy acquisition costs for each of the three years ended December 31, 2007, 2008 and 2009:

YEAR ENDED DECEMBER 31, -------------------------------- ~~2006~~ 2007 2008 2009 ---------- ---------- ---------- (In thousands) Commissions expense .............................. $ ~~15,933 $~~ 13,987 $ 14,029 $ 13,514 Other premium related assessments ................ 1,~~061~~020 1,~~020~~098 1,~~098~~227 Premium taxes .................................... 2,~~020 2,~~014 1,965 1,781 Excise taxes ..................................... ~~272~~ 280 266 240 Other expense .................................... ~~730~~ 789 540 684 ---------- ---------- ---------- Total direct expenses ............................ ~~20,016~~ 18,090 17,898 17,446 Indirect underwriting expenses ................... ~~6,296~~ 5,906 6,322 5,815 Commissions received from reinsurers ............. (1511,~~026~~176) (11,~~176~~686) (1110,~~686~~975) Adjustment for deferred acquisition costs ........ ~~380~~ (273) (186) (242) ---------- ---------- ---------- Net policy acquisition costs ..................... $ 1112,~~666~~547 $ 12,~~547~~348 $ 12,~~348~~044 ========== ========== ==========

Total gross direct and indirect expenses as a percentage of direct written and assumed premiums were 24.0% in 2007, 24.6% in 2008 and 25.5% in 2009. For these periods, commissions expense as a percentage of gross written and assumed premiums was 14.0%, 14.3% and 14.8%. Indirect underwriting expenses as a percentage of direct written and assumed premiums were 5.9% in 2007 and 6.4% in 2008 and 2009, respectively. The increase in indirect underwriting expenses during 2008 was primarily due to increased marketing costs. 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 percentage of ceded reinsurance premiums were 31.4%, 32.4% and 31.7% in 2007, 2008 and 2009, respectively. PAGE 33 GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses were 11.8%, 12.7% and 12.4% of gross premiums earned and other income in 2007, 2008 and 2009, respectively. The increase in the 2008 percentage was due to a decrease in gross premiums earned of $5.9 million along with an increase of 2.6% in general and administrative expenses. During 2009, general and administrative expenses decreased 12.9%. General and administrative expenses have historically not varied in direct proportion to Chandler USA's revenues. A portion of such expenses is allocated to policy acquisition costs (indirect underwriting expenses) and loss and loss adjustment expenses based on various factors, including employee counts, salaries, occupancy and specific identification. Because certain types of expenses are fixed in nature, the percentage of such expenses to revenues will vary depending on Chandler USA's revenues. INTEREST EXPENSE Interest expense decreased 5.0% in 2008 and 8.3% in 2009. Substantially all of Chandler USA's interest expense is related to its outstanding senior debentures and junior subordinated debentures. The decreases in 2008 and 2009 were due primarily to the decrease in interest rates during these periods, as a portion of Chandler USA's junior subordinated debentures were issued with a floating interest rate. FEDERAL INCOME TAXES Chandler USA's federal income tax benefit (provision) as a percentage of income (loss) before income taxes was 11.6%, 56.4% and 37.3% for 2007, 2008 and 2009, respectively. The 2007 percentage was lower than the percentage expected using U.S. Federal enacted income tax rates due primarily to the impact of nondeductible expenses on the net loss before income taxes. The 2008 and 2009 percentages were higher than the percentage expected due primarily to the impact of nondeductible expenses on net income before income taxes. At December 31, 2009, Chandler USA had a net deferred tax asset of $3.1 million. Chandler USA believes it is more likely than not that the deferred income tax asset will be realized through future earnings. As a result, a valuation allowance has not been recorded. Chandler USA used the same assumptions as in internal financial projections to estimate future taxable income. If Chandler USA's results are not as profitable as anticipated, a valuation allowance may have to be established for the remaining deferred tax assets. LIQUIDITY AND CAPITAL RESOURCES Chandler USA is a holding company receiving cash principally through borrowings, subsidiary dividends and other payments, subject to various regulatory restrictions described in "Regulation" and the Notes to Consolidated Financial Statements. The capacity of insurance companies to write insurance is based on maintaining liquidity and capital resources sufficient to pay claims and expenses as they become due. The primary sources of liquidity for Chandler USA's subsidiaries are funds generated from insurance premiums, investment income, capital contributions from Chandler USA and proceeds from sales and maturities of portfolio investments. The principal expenditures are payment of losses and loss adjustment expenses, insurance operating expenses and commissions. A significant portion of Chandler USA's consolidated assets represents assets of NAICO that may not be immediately transferable to Chandler USA in the form of shareholder dividends, loans, advances or other payments. Statutes and regulations governing NAICO and other insurance companies domiciled in Oklahoma regulate the payment of shareholder dividends and other payments by NAICO to Chandler USA. Under applicable Oklahoma statutes and regulations, NAICO is permitted to pay shareholder dividends only out of statutory earned surplus. To the extent NAICO has statutory earned surplus, NAICO may pay shareholder dividends only to the extent that such dividends are not defined as extraordinary dividends or distributions. If the dividends are, under applicable statutes and regulations, extraordinary dividends or distributions, regulatory approval must be obtained. Under the applicable Oklahoma statute, and subject to the availability of statutory earned surplus, the maximum shareholder dividend that may be declared (or cash or property distribution that may be made) by NAICO in any one calendar year without regulatory approval is the greater of (i) NAICO's statutory net income, excluding realized capital gains, for the preceding calendar year; or (ii) 10% of NAICO's statutory policyholders' surplus as of the preceding calendar year end, not to exceed NAICO's statutory earned surplus. PAGE 34 As of December 31, 2009, NAICO had statutory earned surplus of $15.5 million. Applying the Oklahoma statutory limits described above, the maximum shareholder dividend NAICO may pay in 2010 without the approval of the Oklahoma Department of Insurance is $5.4 million. NAICO paid shareholder dividends to Chandler USA totaling $2.1 million and $1.4 million during 2008 and 2009, respectively. 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 below. 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. NAICO maintains a liquid operating position and follows investment guidelines that are intended to provide for an acceptable return on investment while preserving capital, maintaining sufficient liquidity to meet obligations and keeping a sufficient margin of capital and surplus to ensure unimpaired ability to write insurance. At December 31, 2009, approximately 96% of total fixed maturity investments were rated AA or better by Moody's Investor Service, Inc. or Standard & Poor's. Approximately 3% of total fixed maturities were rated A by Moody's Investor Service, Inc. or Standard & Poor's, and approximately 1% was rated BAA by Moody's Investor Service, Inc. and BBB by Standard & Poor's. NAICO purchases investments to support its investment strategies which are developed based on many factors including rate of return, maturity, credit risk, tax considerations, regulatory requirements and its mix of business. As of December 31, 2009, all of the investments of NAICO were in fixed- maturity investments, certificates of deposit insured by the FDIC, interest- bearing money market accounts, collateralized repurchase agreements and common stock received in connection with an unaffiliated entity's conversion to a for-profit corporation. At the time of purchase, investments in debt securities that NAICO has the positive intent and ability to hold to maturity are classified as held to maturity and reported at amortized cost; all other debt securities are reported at fair value. Investments classified as trading are actively and frequently bought and sold with the objective of generating income on short-term differences in price. Realized and unrealized gains and losses on securities classified as trading account assets are recognized in current operations. NAICO has not classified any investments as trading account assets. Debt securities not classified as held to maturity or trading and equity securities are classified as available for sale, with the related unrealized gains and losses excluded from earnings and reported net of deferred income tax as a separate component of other comprehensive income until realized. Chandler USA provided $8.7 million, $6.0 million and $8.4 million in cash from operations in 2007, 2008 and 2009, respectively. The cash provided by operations in 2007 included an increase in unpaid losses and loss adjustment expenses of $17.3 million, but this was offset in part by an increase in reinsurance recoverable on unpaid losses of $10.6 million. These increases were primarily the result of reducing the estimated recoveries on certain surety bond claims based on a final judgment entered by the court. See "Litigation." The cash provided by operations in 2008 included a decrease in reinsurance recoverable on unpaid losses of $2.3 million, a decrease in premiums receivable of $1.7 million, a decrease in prepaid reinsurance premiums of $948,000 and an increase in unpaid losses and loss adjustment expenses of $869,000. These were partially offset by a decrease in unearned premiums of $2.7 million. The cash provided by operations in 2009 included an increase in unpaid losses and loss adjustment expenses of $5.9 million, an increase in premiums payable of $1.8 million, an increase in policyholder deposits of $1.3 million, an increase in accrued taxes and other payables of $814,000, and a decrease in premiums receivable of $745,000. These were partially offset by an increase in reinsurance recoverables on unpaid losses of $5.6 million. Cash flows from investing activities were primarily the result of normal purchases and sales of investment securities. Net realized investment gains before income taxes were $214,000, $95,000 and $1,527,000 during 2007, 2008 and 2009, respectively, from the sale of investments. NAICO received proceeds of $17.6 million, $6.7 million and $30.1 million during 2007, 2008 and 2009, respectively, from the sale of available for sale securities prior to their maturity. The market value of NAICO's available for sale fixed- income investments increased $2.2 million and $1.9 million in 2007 and 2008 and decreased $532,000 in 2009, respectively, due primarily to changes in interest rates and other economic conditions experienced during this time. The average maturity of NAICO's fixed maturity investments was 3.7 years and 5.0 years at December 31, 2008 and 2009, respectively. PAGE 35 Cash flows from financing activities were primarily the result of payments and loans between Chandler USA and Chandler Insurance. Chandler USA and Chandler Insurance are parties to 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. At December 31, 2008 and 2009, Chandler USA had a receivable of $11.9 million and $12.7 million, respectively, under the Credit Agreement, and Chandler USA earned $881,000, $590,000 and $388,000 in interest income under the Credit Agreement during 2007, 2008 and 2009, respectively. NAICO is required to deposit securities with regulatory agencies in several states in which it is licensed as a condition of conducting operations in the state. At December 31, 2009, the total amount of cash and investments restricted as a result of these arrangements was $8.1 million. In addition, NAICO has deposited $28.1 million of cash and investments into a trust account as collateral for a reinsurance agreement in which NAICO is the assuming reinsurer. During 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. During March 2001, Chandler USA entered into a $3.8 million sale and leaseback transaction for certain owned equipment for a three year term. During March 2004 and March 2007, the lease was extended for additional three year terms, and during March 2010, the lease was extended for an additional three years with monthly rental installments equal to the sum of (i) $10,929 plus (ii) interest on the unpaid lease balance at 1% over JP Morgan Chase Bank prime which was 4.25% at December 31, 2009. The interest rate is subject to a minimum rate of 5.5% beginning in March 2010. Chandler USA has the option to repurchase the equipment at the end of the lease for approximately $1.5 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 $1.2 million. See Note 12 to Consolidated Financial Statements. CONTRACTUAL OBLIGATIONS The following table provides the future payments due by period under contractual obligations as of December 31, 2009, aggregated by type of obligation:

LESS THAN 1-3 3-5 MORE THAN ONE YEAR YEARS YEARS 5 YEARS TOTAL ---------- --------- --------- --------- --------- (In thousands) Unpaid losses and loss adjustment expenses (1) ....................... $ 3846,~~141~~033 $ 45,~~009~~917 $ 1412,~~179~~671 $ 42,~~130~~720 $ ~~101~~107,~~459~~341 Future minimum rental payments under operating leases ............. ~~424~~368 ~~137~~494 -35 - ~~561~~897 Guaranteed residual value of operating lease (2) ................ - - 1,~~518~~199 - - 1,~~518~~199 Capital leases ....................... 7050 8260 27- - ~~179~~110 Debentures ........................... - - - 6,979 - 6,979 Junior subordinated debentures issued to affiliated trusts ........ - - - 20,620 20,620 ---------- --------- --------- --------- --------- Total .............................. $ 3846,~~635~~451 $ 46,~~746~~471 $ 1420,~~206~~884 $ 3123,~~729~~340 $ ~~131~~137,~~316~~146 ========== ========= ========= ========= ========= ---------------------------------------- (1) The amounts presented are estimates of the dollar amounts and time period in which NAICO expects to pay out its gross unpaid losses and loss adjustment expenses. These amounts are based on historical payment patterns and do not represent actual contractual obligations. The actual payment amount and the related timing of those amounts could differ significantly from these estimates. (2) This amount represents the specified maximum deficiency that Chandler USA could be required to make up under the sale and leaseback transaction described previously.

PAGE 36 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 11 of Notes to Consolidated Financial Statements for a discussion of this jury verdict. 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 December 31, 2008 and December 31, 2009. NEW ACCOUNTING STANDARDS See Note 1 to Consolidated Financial Statements for a discussion of recently issued accounting pronouncements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Chandler USA's consolidated balance sheets include a certain amount of assets and liabilities whose fair values are subject to market risk. Due to Chandler USA's significant investment in fixed-maturity investments, interest rate risk represents the largest market risk factor affecting Chandler USA's consolidated financial position. Increases and decreases in prevailing interest rates generally translate into decreases and increases in fair values of those instruments. Additionally, fair values of interest rate sensitive instruments may be affected by the credit worthiness of the issuer, prepayment options, relative values of alternative investments, liquidity of the instrument and other general market conditions. As of December 31, 2009, substantially all of the investments of NAICO were in fixed-maturity investments, certificates of deposit insured by the FDIC, interest-bearing money market accounts, collateralized repurchase agreements and common stock received in connection with an unaffiliated entity's conversion to a for-profit corporation. At December 31, 2009, approximately 96% of total fixed maturity investments were rated AA or better by Moody's Investor Service, Inc. or Standard & Poor's. Approximately 3% of total fixed maturities were rated A by Moody's Investor Service, Inc. or by Standard & Poor's, and approximately 1% was rated BAA by Moody's Investor Service, Inc. and BBB by Standard & Poor's. NAICO does not hold any investments classified as trading account assets or derivative financial instruments. PAGE 37 The table below summarizes the estimated effects of hypothetical increases and decreases in interest rates on NAICO's fixed-maturity investment portfolio. It is assumed that the changes occur immediately and uniformly, with no effect given to any steps that management might take to counteract that change. The hypothetical changes in market interest rates reflect what could be deemed best and worst case scenarios. The fair values shown in the following table are based on contractual maturities. Significant variations in market interest rates could produce changes in the timing of repayments due to prepayment options available. The fair value of such instruments could be affected and, therefore, actual results might differ from those reflected in the following table:

Estimated fair value after hypothetical Fair value at Hypothetical change in December 31, change in interest rate ---------------------- interest rate ---------------------- ~~2007~~ 2008 2009 (bp=basis points) ~~2007~~ 2008 2009 ---------- ---------- ----------------- ---------- ---------- (Dollars in thousands) (Dollars in thousands) Fixed-maturity investments ... $ 6377,~~057~~096 $ 77103,~~096~~221 100 bp increase $ 6174,~~526~~603 $ 7499,~~603~~174 200 bp increase ~~60,068~~ 72,247 95,538 100 bp decrease ~~64,644~~ 78,678 107,144 200 bp decrease ~~66,312~~ 81,410 111,514

The table above illustrates, for example, that an instantaneous 200 basis point increase in market interest rates at December 31, 2009 would reduce the estimated fair value of NAICO's fixed-maturity investments by approximately $7.7 million at that date. NAICO's portfolio of equities has exposure to equity price risk. Equity price risk is defined as the potential loss in fair value resulting from an adverse change in prices. At December 31, 2008 and 2009, Chandler USA's equity securities consisted of common stock received in connection with an unaffiliated entity's conversion to a for-profit corporation. The equities are carried on the balance sheet at fair value. The changes in estimated fair value of the equity portfolio are presented as a component of shareholder's equity in accumulated other comprehensive income, net of taxes. The table below summarizes NAICO's equity price risk and shows the effect of a hypothetical 20% decrease and a 20% increase in market prices as of December 31, 2008 and 2009. The selected hypothetical changes do not indicate what could be the potential best or worst case scenarios.

Estimated fair value after Fair value at hypothetical December 31, change in prices ---------------------- Hypothetical ---------------------- ~~2007~~ 2008 2009 price change ~~2007~~ 2008 2009 ---------- ---------- ----------------- ---------- ---------- (Dollars in thousands) (Dollars in thousands) Equity securities ........ $ ~~141~~76 $ 7642 20% increase .... $ ~~169~~91 $ 9150 20% decrease .... ~~113~~ 61 34

Chandler USA is obligated for $7.0 million principal amount of Debentures that have a maturity date of July 16, 2014. The Debentures have a fixed interest rate of 8.75%. At December 31, 2009, the fair value of Chandler USA's Debentures was estimated to be $7.1 million based on an analytically determined valuation from an independent rating organization. Chandler USA's Debentures have not historically traded regularly, and settlement at the reported fair value may not be possible. The Debentures are redeemable by Chandler USA on or after July 16, 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 was 4.38% at December 31, 2009. At December 31, 2009, the fair value of Chandler USA's junior subordinated debentures was estimated to be $22.0 million. PAGE 38 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 and March 2007, the lease was extended for additional three year terms, and during March 2010, the lease was extended for an additional three years with monthly rental installments equal to the sum of (i) $10,929 plus (ii) interest on the unpaid lease balance at 1% over JP Morgan Chase Bank prime, which was 4.25% at December 31, 2009. The interest rate is subject to a minimum rate of 5.5% beginning in March 2010. Chandler USA has the option to repurchase the equipment at the end of the lease for approximately $1.5 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 $1.2 million. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See Item 15(a)1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ITEM 9A(T). 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. MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Securities Exchange Act of 1934 (the "Exchange Act"). Under the supervision and with the participation of Chandler USA's management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our internal control over financial reporting based on the framework in INTERNAL CONTROL-INTEGRATED FRAMEWORK issued by the Committee of Sponsoring Organizations of the Treadway Commission. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Based on our evaluation under that framework and applicable SEC rules, our management concluded that our internal control over financial reporting was effective as of December 31, 2009. This annual report does not include an attestation report of Chandler USA's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by Chandler USA's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit Chandler USA to provide only management's report in this annual report. CHANGES IN INTERNAL CONTROLS 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, Chandler USA's internal control over financial reporting. ITEM 9B. OTHER INFORMATION. None. PAGE 39 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. DIRECTORS AND EXECUTIVE OFFICERS A brief description of each director and executive officer of Chandler USA is provided below. Directors hold office until the next annual meeting of shareholders or until their respective successors are duly elected and qualified. Executive officers are elected by the Board of Directors at its annual meeting and hold office until its next annual meeting or until their respective successors are duly elected and qualified. The current directors and executive officers of Chandler USA are as follows:

NAME AGE POSITION -------------------- --- --------- W. Brent LaGere 6364 Chairman of the Board, Chief Executive Officer, Compensation Committee Member and Director. Mark T. Paden 5253 President, Compensation Committee Member and Director. Lance A. LaGere 2829 Executive Vice President and Chief Operating Officer. Richard L. Evans 6263 Senior Vice President and Director. R. Patrick Gilmore 5758 Senior Vice President, Secretary, General Counsel and Director. Mark C. Hart 5354 Senior Vice President-Finance, Chief Financial Officer and Treasurer. M. Steven Blain 5152 Vice President. Robert L. Rice 7475 Audit Committee Chairman and Director. W. Scott Martin 5859 Audit Committee Member and Director. William T. Keele 7273 Audit Committee Member and Director.

W. BRENT LAGERE has been a director, Chairman of the Board and Chief Executive Officer of NAICO since 1987, Chandler USA since 1988 and CIMI since December 2002. Mr. LaGere has also served as President of NAICO from August 1987 to October 1989, and from May 1997 to May 2001. Mr. LaGere also served as President of Chandler USA from June 1988 to October 1989 and from May 1997 to May 2001. Since 1988, Mr. LaGere has served in officer and director capacities for various subsidiaries of Chandler USA pursuant to an employment contract with Chandler USA. Mr. LaGere serves as Chairman of the Board and Chief Executive Officer of Chandler Insurance. MARK T. PADEN has served as President of Chandler USA and NAICO since May 2001 and as Chief Operating Officer of Chandler USA and NAICO from May 1998 to February 2006. Mr. Paden has served as President of CIMI since December 2002 and Chief Operating Officer of CIMI from December 2002 to February 2006. From May 1998 to May 2001, Mr. Paden also served as Executive Vice President of Chandler USA and NAICO. Mr. Paden has served as Chief Financial Officer of NAICO from January 1988 through May 2001 and also served as Vice President-Finance of NAICO from January 1988 through May 1998. Mr. Paden has been a director of Chandler USA since July 1988, NAICO since November 1992 and CIMI since December 2002. Mr. Paden also serves as a director and President of Chandler Insurance. LANCE A. LAGERE has served as Executive Vice President of NAICO since January 2006, and of Chandler USA and CIMI since February 2006. Mr. LaGere has also served as Chief Operating Officer of these companies since February 2006. From December 2002 to December 2005, Mr. LaGere was a retail insurance agent for Brown & Brown of Central Oklahoma, Inc. From June 2002 to December 2002, Mr. LaGere was a retail insurance agent for LaGere & Walkingstick Insurance Agency, Inc., which was a wholly owned subsidiary of Chandler USA until its sale to Brown & Brown, Inc. in December 2002. Mr. LaGere is the son of W. Brent LaGere, Chairman of the Board and Chief Executive Officer of Chandler USA. RICHARD L. EVANS has been a director of Chandler USA since May 1990. He has been Senior Vice President of Chandler USA and NAICO since March 1999, and served as Vice President of NAICO since 1987, and of Chandler USA since 1989. Mr. Evans also serves as Senior Vice President of Chandler Insurance. PAGE 40 R. PATRICK GILMORE has served as General Counsel for Chandler USA and its subsidiaries since 1988 and currently serves as corporate Secretary and Senior Vice President. Mr. Gilmore has been a director of Chandler USA since May 1990 and NAICO since September 2000. MARK C. HART has served as Senior Vice President-Finance and Treasurer of Chandler USA and NAICO since May 1998, and has served as Chief Financial Officer of Chandler USA and NAICO since May 2001. Mr. Hart has also served as Vice President of Chandler USA since March 1994. Mr. Hart has served as Treasurer of CIMI since December 2002. Mr. Hart also serves as Vice President-Accounting, Chief Financial Officer and Treasurer of Chandler Insurance. M. STEVEN BLAIN has served as Vice President of Chandler USA and NAICO since August 2003. From November 1999 to August 2003, Mr. Blain was employed by NAICO in various capacities. Prior to his employment by NAICO in November 1999, Mr. Blain was Vice President-Operations and Chief Financial Officer for J.B. Pratt Foods, Inc. ROBERT L. RICE has been a director of Chandler USA since June 1993 and a director of NAICO since March 2000. He has for more than 20 years engaged in private practice as a Certified Public Accountant. W. SCOTT MARTIN has been a director of Chandler USA and NAICO since March 2000. Mr. Martin has been President of the Tulsa Loan Production Office with First Bank & Trust Company in Wagoner, Oklahoma since 1994. Mr. Martin also serves as a director of First Bank & Trust in Wagoner, Oklahoma, First Bank of Chandler in Chandler, Oklahoma and First Bank in Burkburnett, Texas. Mr. Martin is also the Manager for Basin Management, LLC. WILLIAM T. KEELE has been a director of Chandler USA and NAICO since May 2001. Mr. Keele has been President of Hallman & Keele, Inc., a construction and steel fabrication firm, since 1974. DIRECTOR QUALIFICATIONS The preceding paragraphs provide information about each director of Chandler USA, including the director's particular business experience, qualifications, directorships for the past five years, and attributes or skills that led our Board of Directors and sole shareholder to conclude that they should serve as a director of Chandler USA. The Board of Directors consists of a total of seven individuals, including four directors who are also employees, and three non-employee directors. The current members who are also employees are our Chief Executive Officer who also serves as our Chairman of the Board, our President, our Senior Vice President and General Counsel, and our Senior Vice President of Claims. Our three non-employee directors include a certified public accountant who serves as Chairman of our Audit Committee, a member who is primarily involved in the banking industry and a member who is President of a construction and steel fabrication firm. Each director has more than twenty years of business experience. Since Chandler USA's sole shareholder is Chandler Insurance, we do not have a director nominating committee. Directors are nominated and elected by our sole shareholder. BOARD LEADERSHIP STRUCTURE AND RISK OVERSIGHT Chandler USA's Chairman of the Board is also our Chief Executive Officer. We believe that this structure is the most appropriate structure for Chandler USA based on the business experience of our Chairman, Mr. W. Brent LaGere, his knowledge of our industry, and our ownership structure which is described in Item 12 "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS." We have not designated a lead independent director. Management is primarily responsible for assessing and managing our exposure to risk. Our Audit Committee, which is comprised of our three non-employee directors, meets regularly with our independent auditors and our independent actuary to review our financial condition and to discuss operations. The Audit Committee regularly reports to our full Board of Directors, which also considers our exposure to various risks. AUDIT COMMITTEE FINANCIAL EXPERT Chandler USA's Audit Committee is composed of Messrs. Rice, Martin and Keele, with Mr. Rice serving as Chairman. Chandler USA's Board of Directors has determined that Mr. Rice is an "audit committee financial expert", as defined by Securities and Exchange Commission rules. Mr. Rice is an independent director, as that term is used in Item 7(d)(3)(IV) of Schedule 14A under the Securities Exchange Act of 1934. PAGE 41 CODE OF ETHICS Chandler USA has adopted a Code of Ethics for Principal Executive and Senior Financial Officers, a copy of which was filed as Exhibit 14.1 to Chandler USA's Form 10-K for the fiscal year ended December 31, 2003. COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934 Based solely upon a review of Forms 3, 4 and 5, any amendments thereto furnished to Chandler USA pursuant to the rules of the Securities and Exchange Commission, or written representations from certain reporting persons presented to Chandler USA, all such reports required to be filed by reporting persons have been filed in a timely fashion during the fiscal year ended December 31, 2009. ITEM 11. EXECUTIVE COMPENSATION. GENERAL We believe that our compensation policies and practices for all employees, including non-executive officers, do not create risks that are reasonably likely to have a material adverse effect on Chandler USA. We have not engaged or paid compensation consultants. COMPENSATION DISCUSSION AND ANALYSIS This section provides information regarding the compensation of our Chief Executive Officer, Chief Financial Officer and, in addition, our three most highly compensated executive officers. Collectively, we refer to these executives as the named executive officers. Our executive compensation program is developed and monitored by our Compensation Committee which consists of our Chief Executive Officer and our President. COMPENSATION PROGRAM OBJECTIVES Our overall goal in compensating executive officers is to attract, retain and motivate key executives who are critical to our future success. We want to reinforce our goal to grow our business profitably and to reward each executive's contributions toward this goal. Our decisions with respect to executive officer salaries and incentives are influenced by the executive's level of responsibility and function within Chandler USA as well as the overall performance and profitability of Chandler USA. EXECUTIVE COMPENSATION ELEMENTS Our Compensation Committee reviews the performance results of each named executive officer and establishes individual compensation levels. Our executive compensation program consists of base salaries, cash bonuses and perquisites. BASE SALARIES The purpose of the base salary is to reflect each executive's job responsibilities and to reward each executive's job performance. During 2009, the following base salaries were approved for our named executive officers:

PERCENTAGE NAMED EXECUTIVE OFFICER ~~2008~~2009 BASE SALARY INCREASE ------------------------------------ ---------------- ---------- W. Brent LaGere .................... $ 589,360 ~~4.9~~-% Mark T. Paden ...................... ~~354~~364,~~037~~659 3.0% Richard L. Evans ................... ~~293~~302,~~942~~760 3.0% R. Patrick Gilmore ................. 263,695 ~~3.0~~-% Mark C. Hart ....................... 182,586 ~~3.0~~-%

Base annual salaries are evaluated at least annually on the officer's anniversary date for each of the named executive officers. This evaluation includes recommendations from the Chief Operating Officer for certain of the executive officers. At that time, the Compensation Committee determines the base salary adjustment for each executive officer. The factors that influence the determination include the executive's experience, performance, changes in responsibilities and budgetary considerations. PAGE 42 Chandler USA has an employment agreement with W. Brent LaGere, Chairman of the Board and Chief Executive Officer of Chandler USA and its subsidiaries. Under this agreement, Mr. LaGere's base compensation is established at not less than $250,000 per year. In the event that Mr. LaGere is terminated without cause, as defined in the agreement, he is entitled to receive his base compensation for the remainder of the term of the agreement, but in no event for more than 60 months. The agreement will terminate upon Mr. LaGere attaining age 70, unless earlier terminated by Chandler USA for cause. CASH BONUSES While the company does not have a formal incentive bonus program, all of the named executive officers are eligible to receive cash bonuses. The amount of cash bonuses to be paid are determined at the discretion of the Compensation Committee. During 2009, the Compensation Committee awarded cash bonuses to the named executive officers as shown in the Summary Compensation Table that follows. These cash bonuses were paid during the years in which they are reported. PERQUISITES Each of the named executive officers participate in employee benefit plans generally available to our employees, including medical, life insurance, disability plans and our defined contribution 401(k) retirement plan. Other perquisites such as company provided automobiles, additional disability and life insurance are also provided to certain named executive officers. In addition, various personal expenses are paid for on behalf of our Chief Executive Officer and President, and these expenses and related income tax gross-ups are reported as "All Other Compensation" in the Summary Compensation Table that follows. The amount and nature of the personal expenses to be paid are determined at the discretion of the Compensation Committee. ROLE OF EXECUTIVE OFFICERS IN DETERMINING COMPENSATION Our Compensation Committee consists of our Chief Executive Officer and President. These two individuals also own 100% of the outstanding common stock of our ultimate parent company. As such, they determine the levels of their own compensation including cash bonuses and perquisites. They also determine the levels of compensation, with input from the Chief Operating Officer, for each of the other named executive officers. PAGE 43 The following table sets forth the compensation paid or to be paid by Chandler USA or any of its subsidiaries as well as all other compensation paid or accrued to the Chief Executive Officer, Chief Financial Officer, and the three other most highly compensated executive officers of Chandler USA and its subsidiaries during the years indicated.

SUMMARY COMPENSATION TABLE ALL OTHER NAME AND PRINCIPLE POSITION YEAR SALARY BONUS COMPENSATION(1) TOTAL --------------------------------------------- ---- ---------- ---------- --------------- ------------ W. Brent LaGere, Chairman of the Board ~~2008~~2009 $ ~~566~~589,~~419~~360 $ ~~735~~443,~~482~~811 $ ~~608~~606,~~574~~186 $ 1,~~910~~639,~~475~~357 and CEO 2008 566,419 735,482 608,574 1,910,475 2007 549,255 504,777 1,432,763 2,486,795 ~~2006~~Mark ~~537~~T. Paden,~~544~~ ~~574~~President 2009 363,~~269~~774 ~~819~~159,~~886~~000 1137,~~931,699~~369 ~~Mark T. Paden~~660,143 ~~President~~ 2008 353,178 132,000 105,171 590,349 2007 342,891 183,000 155,994 681,885 ~~2006~~Richard ~~332~~L. Evans,~~904~~ ~~563~~Senior 2009 302,~~432~~025 983,~~204~~445 ~~994~~23,~~540~~999 ~~Richard~~329,469 L.Vice ~~Evans,~~President ~~Senior~~- Claims 2008 293,229 - 25,808 319,037 ~~Vice President - Claims~~ 2007 284,688 8,000 22,972 315,660 ~~2006 276,396 - 21,383 297,779~~ R. Patrick Gilmore, Senior Vice President, 2009 263,695 - 14,993 278,688 Secretary and General Counsel 2008 258,574 25,000 14,169 297,743 ~~Secretary and General Counsel~~ 2007 251,043 8,000 14,867 273,910 ~~2006 243,731 - 13,102 256,833~~ Mark C. Hart, Senior Vice President - Finance, ~~2008~~2009 ~~180~~182,~~592~~586 - 6,~~225~~600 ~~186~~189,~~817~~186 Chief Financial Officer and Treasurer ~~2007~~2008 ~~175~~180,~~332~~592 ~~15,000~~- 6,225 ~~196~~186,~~557~~817 ~~2006~~2007 ~~170~~175,~~225~~332 -15,000 6,~~100~~225 ~~176~~196,~~325~~557 ------------------------------------------------------- (1) The amounts shown in this column include matching contributions under Chandler USA's 401(k) plan, life and disability insurance premiums and various perquisites and tax gross-ups as detailed below.

SUPPLEMENTAL TABLE FOR ALL OTHER COMPENSATION 401(K) LIFE OTHER COMPANY INSURANCE PERSONAL TAX NAMED EXECUTIVE OFFICER YEAR MATCH (1) PREMIUMS (2) EXPENSES (3) GROSS-UPS (4) TOTAL ------------------------- ---- --------- ------------ ------------ ------------- ---------- W. Brent LaGere ......... ~~2008~~2009 $ 6,~~225~~600 $ 82100,~~075~~280 $ ~~267~~251,~~528~~603 $ ~~252~~247,~~746~~703 $ 606,186 2008 6,225 82,075 267,528 252,746 608,574 2007 6,225 100,280 729,179 597,079 1,432,763 ~~2006 6,100 75,953 429,622 308,211 819,886~~ Mark T. Paden ........... 2009 6,600 2,500 78,326 49,943 137,369 2008 6,225 3,900 53,425 41,621 105,171 2007 6,225 15,882 72,953 60,934 155,994 ~~2006 6,100 3,900 54,615 33,589 98,204~~ Richard L. Evans ........ 2009 6,600 5,000 8,786 3,613 23,999 2008 6,225 5,000 12,219 2,364 25,808 2007 6,225 5,000 8,111 3,636 22,972 ~~2006 6,100 5,000 6,557 3,726 21,383~~ R. Patrick Gilmore ...... 2009 6,600 2,100 4,927 1,366 14,993 2008 6,225 1,900 5,146 898 14,169 2007 6,225 2,000 5,188 1,454 14,867 ~~2006 6,100 2,000 3,474 1,528 13,102~~ Mark C. Hart ............ ~~2008~~2009 6,~~225~~600 - - - 6,~~225~~600 ~~2007~~2008 6,225 - - - 6,225 ~~2006~~2007 6,~~100~~225 - - - 6,~~100~~225 ---------------------------------- (1) The amounts shown in this column reflect company matching contributions under our 401(k) plan. (2) The amounts shown in this column reflect the premiums paid or to be paid under life insurance arrangements with the named executive officers. A portion of the premiums for each year ($30,153 for Mr. LaGere, $2,500 for Mr. Paden, $5,000 for Mr. Evans and $12,~~900~~100 for Mr. Gilmore during ~~2008~~2009) were paid under a split dollar life insurance plan. Under this plan, Chandler USA or its subsidiaries pay the premiums for life insurance issued to the named executive officer. Repayment of the premiums is secured by the death benefit or the cash surrender value of the policy, if any, if the named executive officer cancels and surrenders the policy. PAGE 4344 (3) The amounts shown in this column reflect various personal expenses, none of which individually exceeded the greater of $25,000 or ten percent of total perquisites for each named executive officer except as disclosed below. Personal expenses during ~~2008~~2009 included company provided automobiles and payment of disability insurance premiums for Messrs. LaGere, Paden, Evans and Gilmore. In addition, the amounts shown for Mr. LaGere and Mr. Paden include automobile lease and related payments for each of their spouses, gasoline and other automobile related expenses for their spouses and other family members, club memberships and related expenses, payments for personal insurance premiums, ~~and~~ payments ~~for~~related ~~miscellaneous~~to ~~personal~~personally ~~expenses.~~owned ~~Mr.~~watercraft, ~~LaGere's~~payments for miscellaneous personal expenses ~~also included legal~~ and ~~tax preparation services,~~ personal flights on company provided aircraft,. ~~payments~~Mr. ~~related~~LaGere's topersonal ~~personally~~expenses ~~owned~~also ~~watercraft~~included ofestate ~~$43~~planning services,~~144~~ inpayments ~~2008~~for home improvements and payments for personal charges on personal credit cards of $~~148~~145,~~379~~936 during ~~2008~~2009. The incremental cost to the company of the personal use of company provided aircraft is calculated based on the variable operating cost per flight hour. (4) The amounts shown in this column represent the income tax gross-ups for each of the named executive officers that relate to certain personal expenses and life insurance premiums.

COMPENSATION OF DIRECTORS Directors who are employees of Chandler USA do not receive additional compensation for serving as directors. Each non-employee director of Chandler USA is paid $1,000 per day for any meeting or committee meeting attended. However, if a non-employee director is attending meetings for two or more affiliates of Chandler USA on the same day, his compensation is $750 per day for any meeting or committee meeting of Chandler USA attended. Each non- employee director is also paid $1,500 per day for any NAICO board meeting attended. If a non-employee director attends the meeting by telephonic conference, his compensation is $500 per day for any meeting or committee meetings so attended. As Chairman of the Audit Committee, Mr. Rice's compensation for audit committee meetings is 150% of the applicable meeting fee. The following table sets forth the compensation earned by our non-employee directors during the years indicated.

DIRECTOR COMPENSATION FEES EARNED NAME YEAR OR PAID IN CASH TOTAL ----------------------------------- -------- --------------- ---------- Robert L. Rice ................... ~~2008~~2009 $ 13,125 $ 13,125 ~~2007~~2008 1213,~~375~~125 1213,~~375~~125 ~~2006~~2007 12,375 12,375 W. Scott Martin .................. ~~2008~~2009 11,250 11,250 ~~2007~~2008 11,250 11,250 ~~2006~~2007 1011,~~750~~250 1011,~~750~~250 William T. Keele ................. 2009 10,750 10,750 2008 11,250 11,250 2007 11,250 11,250 ~~2006 10,750 10,750~~

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Chandler USA's Compensation Committee consists of W. Brent LaGere and Mark T. Paden. Mr. LaGere is the Chief Executive Officer of Chandler USA and its subsidiaries, and is also a director of Chandler USA's sole shareholder Chandler Insurance. Mr. Paden is President of Chandler USA and its subsidiaries, and is also a director of Chandler Insurance. Chandler Insurance has no employees and does not have a compensation committee. COMPENSATION COMMITTEE REPORT The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis section with management and, based on such review and discussion, recommended to our Board of Directors that it be included in this Annual Report on Form 10-K. March 2, 2010 Compensation Committee: W. Brent LaGere Mark T. Paden PAGE 45 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. All of the common stock of Chandler USA, its sole class of common equity, is owned by Chandler Insurance. The following table sets forth the number and percentage of outstanding shares of each class of the capital stock of Chandler Insurance that, as of February 28, 2010, are beneficially owned by (i) each director of Chandler USA and Chandler Insurance, (ii) each of the named executive officers and (iii) all current directors and executive officers as a group:

BENEFICIAL OWNERSHIP -------------------------------------------------------------- TYPE OF CAPITAL SHARES NUMBER OF NAME OF DIRECTOR OR EXECUTIVE OFFICER OF CHANDLER INSURANCE CAPITAL SHARES (1) PERCENT (2) ------------------------------------------------------------ -------------------------- -------------------- ----------- W. Brent LaGere (3) ........................................ Class A Common Shares 500,661 80.0% Series A Preferred Shares 285,266 80.0% Series B Preferred Shares 75,757 80.0% Series C Preferred Shares 113,134 1718.91% Mark T. Paden (4) .......................................... Class A Common Shares 125,165 20.0% Series A Preferred Shares 71,317 20.0% Series B Preferred Shares 18,939 20.0% Series C Preferred Shares 28,283 4.5% Lance A. LaGere (5) ........................................ Class A Common Shares 370,890 59.3% Series A Preferred Shares 211,311 59.3% Series B Preferred Shares 56,117 59.3% Series C Preferred Shares 83,804 13.34% Richard L. Evans ........................................... Series C Preferred Shares 937 0.12% All directors and officers as a group (4 persons) .......... Class A Common Shares 625,826 100.0% Series A Preferred Shares 356,583 100.0% Series B Preferred Shares 94,696 100.0% Series C Preferred Shares 142,354 22.58% ------------------------------------------------------------- (1) The rules of the SEC provide that, for the purposes hereof, a person is considered the "beneficial owner" of shares with respect to which the person, directly or indirectly, has or shares the voting or investment power, irrespective of his economic interest in the shares. Unless otherwise noted, each person identified possesses sole voting and investment power over the shares listed, subject to community property laws. The Preferred Shares of Chandler Insurance have no voting rights. The Series A Preferred Shares of Chandler Insurance are convertible to Class A Common Shares of Chandler Insurance. (2) Based on 625,826 Class A Common Shares of Chandler Insurance, 356,583 Series A Preferred Shares of Chandler Insurance, 94,696 Series B Preferred Shares of Chandler Insurance and ~~632~~624,~~069~~569 Series C Preferred Shares of Chandler Insurance outstanding on February 28, ~~2009~~2010. (3) Includes (i) 348,390 Class A Common Shares of Chandler Insurance owned by the W. Brent LaGere Irrevocable Trust (the "LaGere Trust") and (ii) 22,500 Class A Common Shares of Chandler Insurance owned by W&L Holding Corp. ("W&L Holding"), a corporation 100% of which is owned by the LaGere Trust. Also includes 211,311 Series A Preferred Shares, 56,117 Series B Preferred Shares and 83,804 Series C Preferred Shares owned by the LaGere Trust. Mr. LaGere has no right to vote and disclaims beneficial ownership of the shares held by the LaGere Trust and W&L Holding. To secure a personal loan, Mr. LaGere has pledged 32,491 Class A Common Shares, 73,955 Series A Preferred Shares, 19,640 Series B Preferred Shares and 29,330 Series C Preferred Shares. The business address of Mr. LaGere is 1010 Manvel Avenue, Chandler, Oklahoma 74834. (4) Includes 125,165 Class A Common Shares of Chandler Insurance owned by the Mark T. Paden Living Trust (the "Paden Trust"). Mr. Paden is a co-trustee of the Paden Trust. As a co-trustee of the Paden Trust, Mr. Paden may vote the Class A Common Shares. Also includes 71,317 Series A Preferred Shares, 18,939 Series B Preferred Shares and 28,283 Series C Preferred Shares owned by the Paden Trust. To secure a personal loan, 8,169 Class A Common Shares, 71,317 Series A Preferred Shares, 18,939 Series B Preferred Shares and 28,283 Series C Preferred Shares owned by the Paden Trust have been pledged. The business address of Mr. Paden is 1010 Manvel Avenue, Chandler, Oklahoma 74834. PAGE 45 (5) Includes (i) 348,390 Class A Common Shares of Chandler Insurance owned by the LaGere Trust and (ii) 22,500 Class A Common Shares of Chandler Insurance owned by W&L Holding. Also includes 211,311 Series A Preferred Shares, 56,117 Series B Preferred Shares and 83,804 Series C Preferred Shares owned by the LaGere Trust. Lance A. LaGere is a co-trustee of the LaGere Trust. As such, he shares with Malinda K. LaGere Laird and Mathew C. LaGere the right to vote the Class A Common Shares. To secure a loan, the LaGere Trust has pledged 211,311 Series A Preferred Shares, 56,117 Series B Preferred Shares and 83,804 Series C Preferred Shares.

PAGE 46 (5) Includes (i) 348,390 Class A Common Shares of Chandler Insurance owned by the LaGere Trust and (ii) 22,500 Class A Common Shares of Chandler Insurance owned by W&L Holding. Also includes 211,311 Series A Preferred Shares, 56,117 Series B Preferred Shares and 83,804 Series C Preferred Shares owned by the LaGere Trust. Lance A. LaGere is a co-trustee of the LaGere Trust. As such, he shares with Malinda K. LaGere Laird and Mathew C. LaGere the right to vote the Class A Common Shares. To secure a loan, the LaGere Trust has pledged 211,311 Series A Preferred Shares, 56,117 Series B Preferred Shares and 83,804 Series C Preferred Shares. SHAREHOLDERS HOLDING OVER FIVE PERCENT Listed below are persons, other than those listed previously, who are known by Chandler USA to own beneficially more than 5% of Chandler Insurance's Class A Common Shares as of February 28, 2010. Except as otherwise indicated, each of the persons named below has sole voting and investment power with respect to the common shares beneficially owned.

BENEFICIAL OWNERSHIP --------------------------------------------------------------- TYPE OF CAPITAL SHARES NUMBER OF NAME OF SHAREHOLDER OF CHANDLER INSURANCE CAPITAL SHARES (1) PERCENT (2) -------------------------------------------------- -------------------------- -------------------- -------------- Malinda K. LaGere Laird, Mathew C. LaGere and Class A Common Shares 370,890 59.3% Lance A. LaGere, Successor Co-Trustees of Series A Preferred Shares 211,311 59.3% the W. Brent LaGere Irrevocable Trust Series B Preferred Shares 56,117 59.3% 1010 Manvel Avenue, Chandler, Oklahoma 74834 (3) Series C Preferred Shares 83,804 13.34% -------------------------------------------------------------------- (1) The rules of the SEC provide that, for the purposes hereof, a person is considered the "beneficial owner" of shares with respect to which the person, directly or indirectly, has or shares the voting or investment power, irrespective of his economic interest in the shares. Unless otherwise noted, each person identified possesses sole voting and investment power over the shares listed, subject to community property laws. The Preferred Shares of Chandler Insurance have no voting rights. The Series A Preferred Shares of Chandler Insurance are convertible to Class A Common Shares of Chandler Insurance. (2) Based on 625,826 Class A Common Shares of Chandler Insurance, 356,583 Series A Preferred Shares of Chandler Insurance, 94,696 Series B Preferred Shares of Chandler Insurance and 624,569 Series C Preferred Shares of Chandler Insurance outstanding on February 28, ~~2009~~2010. (3) Includes 370,890 Class A Common Shares of Chandler Insurance held by the LaGere Trust, of which 22,500 Class A Common Shares are directly owned by W&L Holding, which is 100% owned by the LaGere Trust. To secure a loan, the LaGere Trust has pledged 211,311 Series A Preferred Shares, 56,117 Series B Preferred Shares and 83,804 Series C Preferred Shares.

CHANGES IN CONTROL As described previously, certain capital shares of Chandler Insurance have been pledged to a bank to secure loans, including Class A Common Shares and Series A Preferred Shares. The Series A Preferred Shares of Chandler Insurance are convertible to Class A Common Shares of Chandler Insurance. A change in control could result from a foreclosure of these shares if the Series A Preferred Shares are converted to Class A Common Shares. OTHER MATTERS REGARDING BENEFICIAL OWNERSHIP For purposes of this report, unless otherwise indicated, Chandler USA has assumed that the following persons are affiliates: an entity's executive officers and directors or its managing partners, persons holding more than 10% of an entity, and those persons who are controlling, controlled by, or under common control with such officers, directors, managing partners, or shareholders. Statements of percentages of ownership are made based upon pertinent reporting requirements and guidelines specifically applicable to this report on Form 10-K. Determination of voting power under Chandler USA's Articles of Incorporation or applicable insurance holding company laws may be at variance with the above stated percentages. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. Transactions with related persons are reviewed and approved by the Board of Directors of Chandler USA or, in certain situations, by the Board of Directors of one of its subsidiary companies. PAGE 47 During March 2001, Chandler USA entered into a $3.8 million sale and leaseback transaction for certain owned equipment for a three year term. During March 2004 and March 2007, the lease was extended for additional three year terms, and during March 2010 the lease was extended for an additional three years. See Note 12 to Consolidated Financial Statements for additional information. W. Scott Martin, a director of NAICO and Chandler USA, is an officer and director of the bank that participated in these transactions, and is also a significant shareholder of the bank's holding company. Mr. Martin is also a director of the bank that Chandler USA and its subsidiaries use as their principal disbursement bank, and is a significant shareholder of the bank's holding company. The balances maintained by Chandler USA and each subsidiary are fully insured by the FDIC, and Chandler USA and its subsidiaries pay customary service charges to the bank for the services provided. During 2006, CIMI purchased two limited partnership units in Basin Drilling #2 LP for $2,000 and purchased 8% cumulative subordinated debentures in the amount of $500,000. The timing of payment of interest and principal on the debentures is subject to various restrictions contained in the cumulative subordinated debenture note. Interest has been paid through September 30, 2008. The purpose of the partnership is to own and operate an oil and gas drilling rig. CIMI financed the purchase with a $500,000 variable rate bank loan. CIMI paid off the balance of this bank loan in December 2007. The partnership is managed by Basin Management, LLC ("BMLLC") who is the General Partner. W. Scott Martin, a director of NAICO and Chandler USA, is the Manager for BMLLC, and is also a director of the bank and a significant shareholder of the bank holding company that provided the bank loan described above. During 2008, the drilling rig was stacked due to the current economic environment until it can be re-deployed in the future when economic conditions and the demand for drilling rigs improves. CIMI recorded a reserve for possible loss in the partnership of $252,000 plus accrued interest in the amount of $50,000 as of December 31, 2009. During 2008, W. Brent LaGere, the LaGere Trust and the Paden Trust pledged certain capital shares of Chandler Insurance to a bank to secure certain loans made by the bank to these parties. W. Scott Martin, a director of NAICO and Chandler USA, is a director of the bank and a significant shareholder of the bank holding company that provided these bank loans. Chandler USA leases a rural property from Davenport Farms, Inc. ("Davenport Farms"), a corporation owned by W. Brent LaGere, Richard L. Evans and Mark T. Paden. Chandler USA has placed three mobile homes on the property, drilled a water well connected to the mobile homes and made other smaller improvements to the property. Its personnel maintain these improvements. These mobile homes and the property provide hunting, fishing, lodging, dining and other outdoor recreational activities for the entertainment of customers and business associates of Chandler USA and/or its subsidiaries. Chandler USA pays no rent to Davenport Farms but reimburses it for one-half of the utilities and for certain other expenses. Chandler USA has also agreed to indemnify Davenport Farms for claims arising out of its use of the property. Chandler USA retains the right to remove all structures located upon the property when the lease terminates. In 2007, 2008 and 2009, Chandler USA incurred approximately $302,000, $361,000 and $332,000, respectively, in expenses associated with its use of this property, including $3,000, $4,000 and $4,000 for reimbursement of certain expenses, such as utility and similar expenses, for the years 2007, 2008 and 2009, respectively. DIRECTOR INDEPENDENCE Chandler USA is a privately held corporation with only debt securities listed on the NYSE Amex LLC ("NYSE Amex") exchange (formerly known as the American Stock Exchange). NYSE Amex requires that a majority of the directors be "independent directors" as defined in the NYSE Amex's Company Guide. Chandler USA has relied upon an exception to this requirement which is provided for companies listing only debt securities. The Board of Directors has determined that Messrs. Rice, Martin and Keele are independent directors. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES. AUDIT FEES The aggregate audit fees billed or to be billed by HoganTaylor LLP for the audit of Chandler USA's annual financial statements and review of financial statements included in Chandler USA's Form 10-Q and services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements were approximately $195,800 and $202,800 for the years ended December 31, 2008 and 2009, respectively. AUDIT-RELATED FEES The aggregate fees billed for professional services rendered by HoganTaylor LLP for audit related services rendered in connection with the audits of employee benefit plans and consultation on accounting standards or transactions were $19,500 and $20,000 for the years ended December 31, 2008 and 2009, respectively. PAGE 48 TAX FEES The aggregate fees billed or to be billed for professional services rendered by HoganTaylor LLP for tax compliance, tax advice and tax planning were $46,670 and $36,400 for the years ended December 31, 2008 and 2009, respectively. ALL OTHER FEES There were no fees billed by HoganTaylor LLP for professional services other than those reported in the categories above for the years ended December 31, 2008 and 2009. POLICY ON PRE-APPROVAL OR RETENTION OF INDEPENDENT AUDITORS All audit and permitted non-audit services for which Chandler USA engages HoganTaylor LLP require pre-approval by Chandler USA's Audit Committee. The percentage of Audit-Related Fees, Tax Fees and All Other Fees out of all fees paid to HoganTaylor LLP was 25.3% and 21.7% for the years ended December 31, 2008 and 2009, respectively. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES. (a) 1. FINANCIAL STATEMENTS. The consolidated balance sheets of Chandler USA and its subsidiaries as of December 31, 2008 and 2009, and the related consolidated statements of operations, comprehensive income, shareholder's equity and cash flows for each of the three years in the period ended December 31, 2009, together with the related notes thereto and the report of HoganTaylor LLP, independent auditors on such financial statements, are filed as a part of this Form 10-K. See accompanying Index on page F-1. 2. FINANCIAL STATEMENT SCHEDULES. The financial statement schedules listed in the accompanying index to consolidated financial statements and schedules are filed as part of this Form 10-K. All other schedules have been omitted since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule or because the information is included in the consolidated financial statements or the notes thereon. 3. EXHIBITS. 3.1 Certificate of Incorporation. (1) 3.2 Bylaws, as amended. (1) 4.1 Form of Indenture entered into by and between Chandler (U.S.A.), Inc. as issuer and U.S. Trust of Texas, N.A. as trustee. (1) 4.2 First Amendment to Indenture effective May 13, 2003 constituting the First Amendment to the Indenture dated as of July 16, 1999, between Chandler (U.S.A.), Inc., and The Bank of New York Trust Company of Florida, N.A. as successor trustee to U.S. Trust Company of Texas, N.A., as Trustee regarding the 8.75% senior debentures due 2014 issued by Chandler (U.S.A.), Inc. (3) 4.3 Second Amendment to Indenture effective December 1, 2003 constituting the Second Amendment to the Indenture dated as of July 16, 1999, between Chandler (U.S.A.), Inc., and The Bank of New York Trust Company of Florida, N.A. as successor trustee to U.S. Trust Company of Texas, N.A., as Trustee regarding the 8.75% senior debentures due 2014 issued by Chandler (U.S.A.), Inc. (5) 10.1 Employment Agreement, effective as of October 28, 1988, by and between Chandler (U.S.A.), Inc. and Brent LaGere. (1) 10.2 Employment Agreement, effective as of October 28, 1988, by and between Chandler (U.S.A.), Inc., and Brenda B. Watson (formerly Brenda B. Pair). (1) 10.3 Amendment to Employment Agreement, effective as of January 1, 1999, by and between Chandler (U.S.A.), Inc. and Brenda B. Watson. (1) 10.4 Intercompany Credit Agreement effective as of January 1, 2001, by and between Chandler (U.S.A.), Inc. and Chandler Insurance (Barbados), Ltd. (2) 10.5 Stock Purchase Agreement effective as of December 1, 2002, by and among Brown & Brown, Inc., Chandler (U.S.A.), Inc., Chandler Insurance Company, Ltd., National American Insurance Company, W. Brent LaGere and Mark T. Paden. (3) PAGE 49 10.6 Amended and Restated Declaration of Trust of Chandler Capital Trust I dated as of May 22, 2003 among Chandler (U.S.A.), Inc., as sponsor, Wilmington Trust Company, as Delaware trustee, Wilmington Trust Company, as institutional trustee, and W. Brent LaGere, Mark T. Paden and Mark C. Hart, as administrators. (4) 10.7 Indenture, dated as of May 22, 2003 among Chandler (U.S.A.),Inc., as issuer, and Wilmington Trust Company, as trustee. (4) 10.8 Guarantee Agreement, dated as of May 22, 2003 between Chandler (U.S.A.), Inc., as guarantor, and Wilmington Trust Company, as guarantee trustee. (4) 10.9 Capital Securities Subscription Agreement dated as of May 13, 2003 among Chandler (U.S.A.), Inc. and Chandler Capital Trust I, together as offerors, and InCapS Funding I, Ltd., as purchaser. (4) 10.10 Placement Agreement dated May 13, 2003 among Chandler (U.S.A.), Inc. and Chandler Capital Trust I, together as offerors, and Sandler O'Neill & Partners, L.P., as placement agent. (4) 10.11 Amended and Restated Declaration of Trust of Chandler Capital Trust II dated as of December 16, 2003 among Chandler (U.S.A.), Inc., as sponsor, Wilmington Trust Company, as Delaware trustee, Wilmington Trust Company, as institutional trustee, and W. Brent LaGere, Mark T. Paden and Mark C. Hart, as administrators. (6) 10.12 Indenture, dated as of December 16, 2003 among Chandler (U.S.A.), Inc., as issuer, and Wilmington Trust Company, as trustee. (6) 10.13 Guarantee Agreement, dated as of December 16, 2003 between Chandler (U.S.A.), Inc., as guarantor, and Wilmington Trust Company, as guarantee trustee. (6) 10.14 Capital Securities Subscription Agreement dated as of December 4, 2003 among Chandler (U.S.A.), Inc. and Chandler Capital Trust II, together as offerors, and InCapS Funding II, Ltd., as purchaser. (6) 10.15 Placement Agreement dated December 4, 2003 among Chandler (U.S.A.), Inc. and Chandler Capital Trust II, together as offerors, and Sandler O'Neill & Partners, L.P., as placement agent. (6) 14.1 Code of Ethics. (6) 21.1 Subsidiaries of the registrant. 31.1 Rule 13a-14(a)/15d-14(a) Certifications. 32.1 Section 1350 Certifications. --------------------- (1) Previously filed as an exhibit to Registration No. 333-76393 on Form S-1 and incorporated herein by reference. (2) Previously filed as an exhibit to Chandler USA's Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated herein by reference. (3) Previously filed as an exhibit to Chandler USA's Annual Report on Form 10-K for the year ended December 31, 2002 and incorporated herein by reference. (4) Previously filed as an exhibit to Chandler USA's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 and incorporated herein by reference. (5) Previously filed as an exhibit to Chandler USA's current report on Form 8-K dated December 1, 2003 and incorporated herein by reference. (6) Previously filed as an exhibit to Chandler USA's Annual Report on Form 10-K for the year ended December 31, 2003 and incorporated herein by reference. Copies of the foregoing exhibits filed with this Form 10-K or incorporated by reference are available from Chandler USA upon written request and payment of a reasonable copying fee. PAGE 50 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) 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. CHANDLER (U.S.A.), INC. Date: March 2, 2010 By: /s/ W. Brent LaGere ---------------------------------------------------- W. Brent LaGere Chairman of the Board and Chief Executive Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED. Date: March 2, 2010 /s/ W. Brent LaGere ---------------------------------------------------- W. Brent LaGere, Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer) Date: March 2, 2010 /s/ Mark T. Paden ---------------------------------------------------- Mark T. Paden, President and Director Date: March 2, 2010 /s/ Mark C. Hart ---------------------------------------------------- Mark C. Hart, Senior Vice President - Finance, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) Date: March 2, 2010 /s/ Richard L. Evans ---------------------------------------------------- Richard L. Evans, Senior Vice President and Director Date: March 2, 2010 /s/ R. Patrick Gilmore ---------------------------------------------------- R. Patrick Gilmore, Senior Vice President, Secretary, General Counsel and Director Date: March 2, 2010 /s/ Robert L. Rice ---------------------------------------------------- Robert L. Rice, Director Date: March 2, 2010 /s/ W. Scott Martin ---------------------------------------------------- W. Scott Martin, Director Date: March 2, 2010 /s/ William T. Keele ---------------------------------------------------- William T. Keele, Director PAGE F-1 CHANDLER (U.S.A.), INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

PAGES ----------------- FINANCIAL STATEMENTS Consolidated Balance Sheets as of December 31, ~~2007~~2008 and ~~2008~~2009 ................................. F-2 Consolidated Statements of Operations for the years ended December 31, ~~2006~~2007, ~~2007~~2008 and ~~2008~~2009 ............................................................ F-3 Consolidated Statements of Comprehensive Income for the years ended December 31, ~~2006~~2007, ~~2007~~2008 and ~~2008~~2009 ............................................................ F-4 Consolidated Statements of Cash Flows for the years ended December 31, ~~2006~~2007, ~~2007~~2008 and ~~2008~~2009 ............................................................ F-5 Consolidated Statements of Shareholder's Equity for the years ended December 31, ~~2006~~2007, ~~2007~~2008 and ~~2008~~2009 ............................................................ F-6 Notes to Consolidated Financial Statements ................................................... F-7 through F-2729 Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements and Financial Statement Schedules ........................................................... F-2830 SCHEDULES I Summary of Investments - Other Than Investments in Related Parties ................... F-2931 II Condensed Financial Information of Registrant ........................................ F-3032 through F-3234 III Supplementary Insurance Information .................................................. F-3335 IV Reinsurance .......................................................................... F-3436 V Valuation and Qualifying Accounts .................................................... F-3537 VI Supplemental Information (~~for~~Concerning ~~property~~Property-~~casualty~~Casualty ~~insurance~~Insurance ~~underwriters~~Operations) .........~~.....~~ F-3638

PAGE F-2 CHANDLER (U.S.A.), INC. CONSOLIDATED BALANCE SHEETS (Amounts in thousands except share amounts)

DECEMBER 31, ----------------------- ~~2007~~ 2008 2009 ---------- ---------- ASSETS Investments Fixed maturities available for sale, at fair value Restricted (amortized cost $3234,~~416~~243 and $34,~~243~~923 in ~~2007~~2008 and ~~2008~~2009, respectively) ......... $ 3235,~~670~~397 $ 35,~~397~~392 Unrestricted (amortized cost $3040,~~484~~771 and $4066,~~771~~735 in ~~2007~~2008 and ~~2008~~2009, respectively) ....... ~~30,387~~ 41,699 67,829 Equity securities at fair value (cost $0 in ~~2007~~2008 and ~~2008~~2009) ............................... ~~141~~ 76 42 Short-term investments at fair value (amortized cost $15,~~045~~853 and $~~5,853~~380 in ~~2007~~2008 and ~~2008~~2009, respectively) ................................................................ ~~1,045~~ 5,865 380 ---------- ---------- Total investments ...................................................................... ~~64,243~~ 83,037 103,643 Cash and cash equivalents ($~~146~~118 and $~~118~~2,194 restricted in ~~2007~~2008 and ~~2008~~2009, respectively) ........ ~~32,956~~ 20,636 7,430 Accrued investment income .................................................................. ~~874~~ 1,018 1,228 Premiums receivable, less allowance for non-collection of $~~134~~138 and $~~138~~291 at ~~2007~~2008 and ~~2008~~2009, respectively .............................................................. ~~28,128~~ 26,405 25,305 Reinsurance recoverable on paid losses ..................................................... ~~1,100~~ 423 316 Reinsurance recoverable on unpaid losses, less allowance for non-collection of $~~239~~231 and $~~231~~298 at ~~2007~~2008 and ~~2008~~2009, respectively .......................................... ~~36,036~~ 32,492 36,588 Reinsurance recoverable on unpaid losses from related parties .............................. ~~18,688~~ 19,899 21,360 Prepaid reinsurance premiums ............................................................... ~~3,105~~ 2,882 3,424 Prepaid reinsurance premiums to related parties ............................................ 12,~~928~~203 12,~~203~~276 Deferred policy acquisition costs .......................................................... 1,~~118~~304 1,~~304~~546 Property and equipment, net ................................................................ 87,~~255~~849 7,~~849~~174 Amounts due from related parties ........................................................... 11,~~506~~869 1112,~~869~~697 State insurance licenses, net .............................................................. 3,745 3,745 Other assets ............................................................................... 1110,~~685~~885 10,~~885~~613 ---------- ---------- Total assets ............................................................................... $ 234,~~367~~647 $ ~~234~~247,~~647~~345 ========== ========== LIABILITIES AND SHAREHOLDER'S EQUITY Liabilities Unpaid losses and loss adjustment expenses ............................................... $ ~~100~~101,~~590~~459 $ ~~101~~107,~~459~~341 Unearned premiums ........................................................................ ~~46,389~~ 43,725 44,519 Policyholder deposits .................................................................... 7,~~947~~820 79,~~820~~094 Accrued taxes and other payables ......................................................... 56,~~777~~017 6,~~017~~831 Premiums payable ......................................................................... 2,~~263~~440 24,~~440~~266 Premiums payable to related parties ...................................................... ~~198~~ 222 522 Debentures ............................................................................... 6,979 6,979 Junior subordinated debentures issued to affiliated trusts ............................... 20,620 20,620 ---------- ---------- Total liabilities ...................................................................... ~~190,763~~ 189,282 200,172 ---------- ---------- Commitments and contingencies (Notes 11 and 12) 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 ...................................................................... (1716,~~179~~654) (1614,~~654~~472) Accumulated other comprehensive income: Unrealized gain on investments available for sale, net of deferred income taxes ........ ~~197~~ 1,433 1,059 ---------- ---------- Total shareholder's equity ............................................................. ~~43,604~~ 45,365 47,173 ---------- ---------- Total liabilities and shareholder's equity ................................................. $ 234,~~367~~647 $ ~~234~~247,~~647~~345 ========== ==========

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. PAGE F-3 CHANDLER (U.S.A.), INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands)

YEAR ENDED DECEMBER 31, -------------------------------------- ~~2006~~ 2007 2008 2009 ------------ ------------ ------------ Premiums and other revenues Direct premiums written and assumed .................................... $ ~~113,043 $~~ 100,081 $ 98,384 $ 91,185 Reinsurance premiums ceded ............................................. (~~21,098) (~~7,690) (9,476) (10,653) Reinsurance premiums ceded to related parties .......................... (27,~~156~~959) (2726,~~959~~596) (2623,~~596~~994) ------------ ------------ ------------ Net premiums written and assumed ...................................... 64,~~789 64,~~432 62,312 56,538 Decrease (increase) in unearned premiums ..............................~~............~~ ~~915~~ 1,753 1,715 (178) ------------ ------------ ------------ Net premiums earned ................................................... ~~65,704~~ 66,185 64,027 56,360 Investment income (loss), net ........................................... ~~9,801~~ (572) 3,347 3,168 Interest income, net from related parties ............................... ~~792~~ 941 647 438 Realized investment gains, net .......................................... ~~745~~ 214 95 1,527 Other income ............................................................ ~~317~~ 1,916 2,069 2,037 ------------ ------------ ------------ Total premiums and other revenues ..................................... ~~77,359~~ 68,684 70,185 63,530 ------------ ------------ ------------ Operating costs and expenses Losses and loss adjustment expenses, net of amounts ceded to related parties of $1416,~~007~~808, $1615,~~808~~532 and $1514,~~532~~791 in ~~2006~~2007, ~~2007~~2008 and ~~2008~~2009, respectively .................................. ~~45,473~~ 41,393 40,940 34,214 Policy acquisition costs, net of ceding commissions received from related parties of $10,~~445~~633, $10,~~633~~112 and $109,~~112~~123 in ~~2006~~2007, ~~2007~~2008 and ~~2008~~2009, respectively .................................. ~~11,666~~ 12,547 12,348 12,044 General and administrative expenses .................................... 12,~~469 12,~~790 13,124 11,437 Interest expense ....................................................... 2,~~690~~703 2,~~703~~569 2,~~569~~357 ------------ ------------ ------------ Total operating costs and expenses .................................... ~~72,298~~ 69,433 68,981 60,052 ------------ ------------ ------------ Income (loss) before income taxes ....................................... ~~5,061~~ (749) 1,204 3,478 Federal income tax benefit (provision) .................................. ~~(1,665)~~ 87 (679) (1,296) ------------ ------------ ------------ Income (loss) ........................................................... $ ~~3,396 $~~ (662) $ 525 $ 2,182 ============ ============ ============

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. PAGE F-4 CHANDLER (U.S.A.), INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Amounts in thousands)

YEAR ENDED DECEMBER 31, -------------------------------------- ~~2006~~ 2007 2008 2009 ------------ ------------ ------------ Net income (loss) ........................................................... $ ~~3,396 $~~ (662) $ 525 $ 2,182 ------------ ------------ ------------ Other comprehensive income (loss), before income tax: Unrealized gains on securities: Unrealized holding gains arising during period ............................ ~~566~~ 2,187 1,968 961 Less: Reclassification adjustment for gains included in net income (loss).. (~~745~~214) (~~214~~95) (951,527) ------------ ------------ ------------ Other comprehensive income (loss), before income tax ........................ ~~(179)~~ 1,973 1,873 (566) Income tax benefit (provision) related to items of other comprehensive income (loss) ................................................ 61 (671) (637) 192 ------------ ------------ ------------ Other comprehensive income (loss), net of income tax ........................ ~~(118)~~ 1,302 1,236 (374) ------------ ------------ ------------ Comprehensive income ........................................................ $ ~~3,278~~640 $ ~~640~~1,761 $ 1,~~761~~808 ============ ============ ============

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. PAGE F-5 CHANDLER (U.S.A.), INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands)

YEAR ENDED DECEMBER 31, -------------------------------------- ~~2006~~ 2007 2008 2009 ------------ ------------ ------------ OPERATING ACTIVITIES Net income (loss) ...................................................... $ ~~3,396 $~~ (662) $ 525 $ 2,182 Add (deduct): Adjustments to reconcile net income (loss) to cash provided by operating activities: Realized investment gains, net ....................................~~...~~ (~~745~~214) (~~214~~95) (951,527) Net (gains) losses on sale of property and equipment ..............~~...~~ 20 (6) 7 34 Amortization and depreciation .....................................~~...~~ 1,~~379~~431 1,~~431~~555 1,~~555~~866 Provision for non-collection of premiums ..........................~~...~~ 80 19 30 355 Provision for non-collection of reinsurance recoverables ..........~~...~~ 97 356 166 179 Provision for non-collection of debenture .........................~~...~~ - - 262 40 Net change in non-cash balances relating to operating activities: Accrued investment income .......................................~~....~~ (4,~~135) 4,~~148 (144) (210) Premiums receivable .............................................~~....~~ (2,~~742) 2,~~861 1,693 745 Reinsurance recoverable on paid losses ..........................~~....~~ ~~1,647~~ (260) 503 (5) Reinsurance recoverable on unpaid losses ........................~~....~~ ~~29,164~~ (10,557) 3,552 (4,163) Reinsurance recoverable on unpaid losses from related parties ...~~....~~ (13,~~300~~104) (31,~~104~~211) (1,~~211~~461) Prepaid reinsurance premiums ....................................~~....~~ ~~2,160~~ 4,498 223 (542) Prepaid reinsurance premiums to related parties .................~~....~~ ~~(1,259)~~ 578 725 (73) Deferred policy acquisition costs ...............................~~....~~ ~~380~~ (273) (186) (242) Other assets ....................................................~~....~~ ~~2,129~~ (1,373) (156) 367 Unpaid losses and loss adjustment expenses ......................~~....~~ ~~(26,288)~~ 17,337 869 5,882 Unearned premiums ...............................................~~....~~ (~~1,817) (~~6,828) (2,664) 794 Policyholder deposits ...........................................~~....~~ ~~1,979~~ 284 (127) 1,274 Accrued taxes and other payables ................................~~....~~ ~~(441)~~ 997 240 814 Premiums payable ................................................~~....~~ ~~(226)~~ 308 177 1,826 Premiums payable to related parties .............................~~....~~ ~~889~~ (804) 24 300 ------------ ------------ ------------ Cash provided by operating activities .............................~~...~~ ~~4,367~~ 8,736 5,968 8,435 ------------ ------------ ------------ INVESTING ACTIVITIES Short-term investments: Purchases ............................................................. - (1,330) (6,424) (380) Maturities ............................................................ - 285 1,615 5,850 Unrestricted fixed maturities available for sale: Purchases ............................................................. (~~995) (~~13,585) (38,722) (64,552) Sales ................................................................. - 10,120 6,417 30,104 Maturities ............................................................ ~~5,809~~ 8,588 19,682 8,405 Equity securities available for sale: Purchases ............................................................. (~~13,620) (~~5,811) (266) - Sales ................................................................. ~~21,336~~ 7,457 270 - Cost of property and equipment purchased ............................... (~~688~~696) (~~696~~642) (~~642~~266) Proceeds from sale of property and equipment ........................... 71 50 145 ~~Investment~~27 ~~in limited partnership ...................................... (502)~~ - - ------------ ------------ ------------ Cash provided by (applied to) investing activities ................~~...~~ ~~11,411~~ 5,078 (17,925) (20,812) ------------ ------------ ------------ FINANCING ACTIVITIES Payments and loans from related parties ................................ ~~1,747~~ 2,164 2,639 2,292 Payments and loans to related parties .................................. (14,~~971~~086) (43,~~086~~002) (3,~~002~~121) ~~Bank loan proceeds ..................................................... 500 - -~~ Payments on bank loan .................................................. (~~161) (~~339) - - ------------ ------------ ------------ Cash ~~provided by (~~applied to) financing activities .............................. ~~115~~ (2,261) (363) (829) ------------ ------------ ------------ Increase (decrease) in cash and cash equivalents during the period ..... ~~15,893~~ 11,553 (12,320) (13,206) Cash and cash equivalents at beginning of period ....................... ~~5,510~~ 21,403 32,956 20,636 ------------ ------------ ------------ Cash and cash equivalents at end of period ............................. $ ~~21,403 $~~ 32,956 $ 20,636 $ 7,430 ============ ============ ============

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. PAGE F-6 CHANDLER (U.S.A.), INC. CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY (Amounts in thousands)

Accumulated other Total Common Paid-in Accumulated comprehensive shareholder's stock surplus deficit income (loss) equity ----------- ----------- ----------- ------------- ------------- Balance, January 1, ~~2006~~2007 ......... $ 2 $ 60,584 $ (1916,~~913~~517) $ (~~987~~1,105) $ 3942,~~686~~964 Net ~~income~~loss ......................... - - ~~3,396~~(662) - ~~3,396~~(662) Change in unrealized loss on investments available for sale, net of income tax ......... - - - ~~(118)~~1,302 ~~(118)~~1,302 ----------- ----------- ----------- ------------- ------------- Balance, December 31, ~~2006~~2007 ....... 2 60,584 (1617,~~517~~179) ~~(1,105)~~197 4243,~~964~~604 ----------- ----------- ----------- ------------- ------------- Net ~~loss~~income ......................... - - ~~(662)~~525 - ~~(662)~~525 Change in unrealized ~~loss~~gain on investments available for sale, net of income tax ......... - - - 1,~~302~~236 1,~~302~~236 ----------- ----------- ----------- ------------- ------------- Balance, December 31, ~~2007~~2008 ....... 2 60,584 (1716,~~179~~654) ~~197~~1,433 4345,~~604~~365 ----------- ----------- ----------- ------------- ------------- Net income ....................... - - ~~525~~2,182 - ~~525~~2,182 Change in unrealized gain on investments available for sale, net of income tax ......... - - - ~~1,236~~(374) ~~1,236~~(374) ----------- ----------- ----------- ------------- ------------- Balance, December 31, ~~2008~~2009 ....... $ 2 $ 60,584 $ (1614,~~654~~472) $ 1,~~433~~059 $ 4547,~~365~~173 =========== =========== =========== ============= =============

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. PAGE F-7 CHANDLER (U.S.A.), INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (a) BASIS OF PRESENTATION Chandler (U.S.A.), Inc. ("Chandler USA") is a holding company organized and domiciled in Oklahoma. Chandler USA's wholly owned subsidiaries are engaged in various property and casualty insurance operations. The insurance products offered by Chandler USA through its subsidiary, National American Insurance Company ("NAICO"), include property and casualty insurance products primarily for businesses in various industries, political subdivisions and surety bonds for small contractors in the United States of America ("U.S."). The business is conducted through individual independent insurance agencies and underwriting managers, primarily in the Southwest and Midwest areas of the U.S. Chandler Insurance Managers, Inc. ("CIMI") is a wholly owned subsidiary of Chandler USA and is an underwriting manager and wholesaler that offers multiple insurance products for businesses in various industries and political subdivisions. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates. (b) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Chandler USA and all wholly owned subsidiaries that meet consolidation requirements including NAICO and CIMI. All significant intercompany accounts and transactions have been eliminated in consolidation. (c) IMPAIRMENT OF LONG-LIVED ASSETS Chandler USA periodically evaluates the carrying value of long-lived assets to be held and used when changes in events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the separately identifiable anticipated undiscounted cash flow from such asset is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair values are reduced for disposal costs. (d) REVENUE RECOGNITION Premiums are generally recognized as earned on a pro rata basis over the policy period, which is in proportion to the insurance protection provided. The portion of premiums that will be earned in the future are deferred and reported as unearned premiums. Amounts recorded for ceded reinsurance premiums are reported as prepaid reinsurance premiums and amortized over the remaining contract period in proportion to the amount of the insurance protection provided. Commission revenues are generally recognized when coverage is effective or premiums are billed, whichever is later. Commission revenues are reported net of commissions paid to producing agents. (e) PREMIUMS RECEIVABLE Premiums receivable are presented net of valuation allowances for estimated uncollectible amounts. Chandler USA determines the allowance for non-collection by regularly evaluating individual agent accounts and balances due from insureds, considering their financial condition and other appropriate factors. Such accounts are considered past due based on contractual terms for the agent or insured. Premiums receivable are written off when deemed uncollectible. Recoveries of accounts previously written off are recorded when received. PAGE F-8 (f) UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES Losses and loss adjustment expenses are charged to income as incurred. The reserve for unpaid losses and loss adjustment expenses represents the accumulation of estimates for reported losses and includes provisions for losses incurred but not reported based on data available at this time. The methods of determining such estimates and establishing resulting reserves are periodically reviewed and updated, and adjustments therefrom are necessary to maintain an adequate reserve for unpaid losses and loss adjustment expenses. As more fully explained in Note 4, such estimates are management's best estimates of the expected values. The actual results may vary from these values because the evaluation of losses is inherently subjective and susceptible to significant changing factors. (g) DEFERRED POLICY ACQUISITION COSTS Policy acquisition costs that vary with and are primarily related to the acquisition of new and renewal business (such as premium taxes, agent commissions, commissions received from reinsurers and a portion of other underwriting expenses) are deferred and amortized over the terms of the policies. When the sum of the anticipated losses, loss adjustment expenses and unamortized policy acquisition costs exceeds the related unearned premiums, including anticipated investment income, a provision for the indicated deficiency is recorded. Certain policy acquisition costs, such as policyholder dividends, are expensed directly. Amortization of deferred policy acquisition costs was approximately $5.9 million in 2007, and $5.5 million in 2008 and 2009, respectfully. (h) PROPERTY AND EQUIPMENT Real estate and improvements and other property and equipment are stated at cost and depreciated using the straight-line method over their useful lives which range from 3 to 31 years. Property and equipment consisted of the following at December 31:

~~2007~~ 2008 2009 ---------- ---------- (In thousands) Real estate and improvements ... $ 1112,~~967~~058 $ 12,~~058~~106 Other property and equipment ... 8,~~577~~803 8,~~803~~743 ---------- ---------- 20,~~544~~861 20,~~861~~849 Accumulated depreciation ....... (1213,~~289~~012) (13,~~012~~675) ---------- ---------- $ 87,~~255~~849 $ 7,~~849~~174 ========== ==========

Depreciation expense was approximately $854,000, $896,000 and $881,000 for 2007, 2008 and 2009, respectively. (i) INTANGIBLE ASSETS Intangible assets are stated at cost less accumulated amortization. Prior to 2002, the cost of state insurance licenses acquired was amortized over 40 years using the straight-line method. Effective January 1, 2002, the state insurance licenses are no longer amortized since they were determined to have indefinite lives but are reviewed at least annually for impairment. Chandler USA completed the required impairment tests during 2008 and 2009 and concluded that there has not been an impairment loss since the fair values exceeded their carrying values. The fair values were determined based on the present value of projected future net cash flows. Intangible assets included the following at December 31:

~~2007~~ 2008 2009 ---------- ---------- (In thousands) State insurance licenses ....... $ 5,991 $ 5,991 Accumulated amortization ....... (2,246) (2,246) ---------- ---------- $ 3,745 $ 3,745 ========== ==========

(j) POLICYHOLDER DEPOSITS NAICO requires certain policyholders to pay a deposit at inception of coverage to secure payment of future premiums and deductibles on claims incurred. It is expressly agreed between NAICO and the policyholder that the funds will be used by NAICO only in the event the policyholder fails to pay any premiums, deductibles or other charges when due. NAICO has established a liability for these deposits in an amount equal to that due the policyholders based on insurance premiums reported as of the balance sheet date. PAGE F-9 (k) INVESTMENTS At the time of purchase, investments in debt securities that Chandler USA has the positive intent and ability to hold to maturity are classified as held to maturity and reported at amortized cost; all other debt securities are reported at fair value. Investments in debt and equity securities classified as trading are actively and frequently bought and sold with the objective of generating income on short-term differences in price. Realized and unrealized gains and losses on securities classified as trading account assets are recognized in current operations. Chandler USA has not classified any investments as trading account assets. Debt securities not classified as held to maturity or trading and equity securities are classified as available for sale, with the related unrealized gains and losses excluded from earnings and reported net of deferred income tax as other comprehensive income until realized. Realized gains and losses on sales of securities are based on the specific identification method. Declines in the fair value of securities below their carrying value that are other than temporary are recognized in earnings. 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. Some factors considered in evaluating whether or not a decline in fair value is other than temporary include Chandler USA's ability and intent to retain the investment for a period of time sufficient to allow for a recovery in value; the duration and extent to which the fair value has been less than cost; and the financial condition and prospects of the issuer. (l) INCOME TAXES Chandler USA uses an asset and liability approach for accounting for income taxes. Deferred income taxes are recognized for the tax consequences of temporary differences and carryforwards by applying enacted tax rates applicable to future years to differences between the financial statement amounts and the tax bases of existing assets and liabilities. A valuation allowance is established if it is more likely than not that some portion of the deferred tax asset will not be realized. (m) CASH AND CASH EQUIVALENTS For purposes of the consolidated statements of cash flows, Chandler USA considers all highly liquid investments with original maturities of 14 days or less to be cash equivalents. For cash and cash equivalents, the carrying amount is a reasonable estimate of fair value. (n) SUPPLEMENTAL CASH FLOW INFORMATION Cash payments for interest and income taxes, and noncash investing activities were as follows:

YEAR ENDED DECEMBER 31, -------------------------------- ~~2006~~ 2007 2008 2009 ---------- ---------- ---------- (In thousands) Cash payments during the year for: Interest ....................................... $ 2,~~608~~649 $ 2,~~649~~517 $ 2,~~517~~377 Income taxes, net of refunds received ..........~~.........................~~ - 25 1,220 640 Transfers from (to) restricted securities, net ...~~.......~~ $ (~~8,127) $ (~~12,726) $ (1,619) $ 750

(o) REINSURANCE Management believes all of NAICO's reinsurance contracts with reinsurers meet the criteria for risk transfer and the revenue and cost recognition provisions in order to be accounted for as reinsurance. As more fully explained in Note 12, reinsurance contracts do not relieve NAICO from its obligation to policyholders. In addition, failure of reinsurers to honor their obligations could result in losses to Chandler USA. PAGE F-10 (p) 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 2 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 3 for the required disclosures. 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. PAGE F-11 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 will adopt this new guidance effective January 1, 2010. This new guidance will have no impact on Chandler USA's consolidated financial statements. While the trusts that hold Chandler USA's junior subordinated debentures are variable interest entities, and Chandler USA has 100% ownership, complete voting control and has guaranteed the performance of the trusts, Chandler USA is not the primary beneficiary because its interest is not variable. Therefore, Chandler USA will not consolidate the trusts under the new guidance. 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. Chandler USA has adopted this new guidance as of October 1, 2009. The adoption of this new guidance did not have any impact on its consolidated financial statements. NOTE 2. 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. PAGE F-12 The following tables present information about Chandler USA's assets measured at fair value on a recurring basis as of December 31, 2008 and 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 December 31, 2008 or 2009.

Fair value measurements at December 31, 2008 ---------------------------------------------------------------- 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: U.S. Treasury securities and obligations of U.S. government corporations and agencies ............. $ - $ 7741,~~096~~500 $ - $ 41,500 Corporate obligations .............................. - 29,485 - 29,485 Public utilities ................................... - 2,976 - 2,976 Obligations of states and political subdivisions ... - 3,135 - 3,135 ---------------- --------------- ---------------- ----------- Total fixed maturities available for sale ........ - 77,096 - 77,096 Equity securities ~~available~~- ~~for~~corporate ~~sale~~stock .................. - - 76 76 Short-term investments ............................... - 5,865 - 5,865 ---------------- --------------- ---------------- ----------- Total .............................................. $ - $ 82,961 $ 76 $ 83,037 ================ =============== ================ ===========

Fair value measurements ~~using~~at ~~significant~~December ~~Year~~31, ~~ended~~2009 ---------------------------------------------------------------- Quoted prices Significant in active other Significant markets for observable unobservable identical assets inputs inputs Total Description (Level 31) ~~December~~(Level ~~31,~~2) ~~2008~~(Level 3) fair value -------------------------------------------------------- ---------------- --------------- ---------------- ----------- (In thousands) ~~Beginning~~Fixed ~~balance~~maturities available for sale: U.S. Treasury securities and obligations of U.S. government corporations and agencies ............. $ - $ 41,074 $ - $ 41,074 Corporate obligations .............................. $- ~~141~~32,591 ~~Total~~- ~~realized~~32,591 ~~and~~Public ~~unrealized~~utilities ~~gains (losses): Included in earnings~~ ................................... - ~~Included~~2,095 in- ~~other~~2,095 ~~comprehensive~~Obligations ~~income~~of states and political subdivisions .... ~~(65)~~- ~~Purchases~~27,461 ~~issuances~~- ~~and~~27,461 ~~settlements~~---------------- --------------- ---------------- ----------- Total fixed maturities available for sale ........ - ~~Transfers~~103,221 in- ~~and/or~~103,221 ~~out~~Equity ofsecurities ~~Level~~- 3corporate stock .................. - - 42 42 Short-term investments ............................... - 380 - 380 ---------------- ~~Ending~~--------------- ~~balance~~---------------- ----------- Total .............................................. $ 76- $ 103,601 $ 42 $ 103,643 ================ =============== ================ ===========

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 $387,000 and $377,000 at December 31, 2008 and 2009, respectively, or 0.5% and 0.4% of total Level 2 assets. There were no transfers of assets into or out of Level 1 or Level 2 during 2009. PAGE F-13 At December 31, 2008 and 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 years ended December 31, 2008 and 2009.

~~YEAR~~Fair ~~ENDED~~value ~~DECEMBER~~measurements using significant Year ended Year ended unobservable inputs (Level 3) December 31, 2008 December 31, 2009 -------------------------------- ~~2006 2007 2008~~ ----------------- ----------------- ----------------- (In thousands) ~~Interest~~Equity onSecurities ~~fixed~~-~~maturity~~ ~~investments~~corporate stocks: Beginning balance ............................. $ ~~2,829~~141 $ ~~2,818~~76 $Total ~~2,929~~realized ~~Interest~~and onunrealized ~~short-term~~gains ~~investments~~(losses): ~~and~~Included ~~cash~~in ~~equivalents~~earnings ...................... ~~574~~- ~~1,069~~- ~~692~~Included ~~Dividend~~in other comprehensive income on.... ~~equity~~(65) ~~securities~~(34) Purchases, issuances, sales and settlements: Purchases ................................. 58- 11- 1Issuances ~~Prejudgment interest related to litigation~~ ................................. ~~6,648~~- ~~(4,148)~~ - ~~Investment~~Sales ~~expenses~~ ...................................... ~~(308) (322) (275)~~ -~~---------~~ -~~---------~~ ~~----------~~Settlements ~~Investment income, net~~ ................................. ~~9,801 (572) 3,347~~ -~~---------~~ -~~---------~~ ~~----------~~Transfers ~~Realized~~into ~~gains,~~Level ~~net~~3 ~~- fixed-maturity investments~~ .................... - ~~154~~- 91Transfers ~~Realized~~out ~~gains,~~of ~~net~~Level -3 ~~equity securities~~ .................. ~~745~~- 60- 4 ---------- ------- --- -------------- ~~Realized~~Ending ~~investment~~balance ~~gains, net~~ ................................ ~~745 214 95 ---------- ---------- ----------~~ $ ~~10,546~~76 $ ~~(358)~~42 ~~$ 3,442~~ ========== ======= === ==============

NOTE 3. INVESTMENTS AND INVESTMENT INCOME Net investment income and realized investment gains are summarized in the following table. These amounts are net of investment expenses.

~~GROSS~~YEAR ~~GROSS~~ENDED ~~UNREALIZED UNREALIZED FAIR CARRYING~~ DECEMBER 31, ~~2007 COST GAINS LOSSES VALUE VALUE~~ --------------------------------~~-------------------~~ ~~----------~~2007 ~~----------~~2008 2009 ---------- ---------- ---------- ~~FIXED MATURITIES AVAILABLE FOR SALE:~~ (In thousands) ~~U.S.~~Interest ~~Treasury~~on ~~securities~~fixed-maturity ~~and~~investments ~~obligations of U~~.S. ~~government corporations and agencies~~ .................~~..................~~ $ 382,~~723~~818 $ ~~516~~2,929 $ ~~(67)~~3,299 $Interest ~~39,172~~on $short-term 39investments and cash equivalents .. 1,~~172~~069 ~~Corporate~~692 ~~obligations~~111 Dividend income on equity securities ..................... 11 1 - Prejudgment interest related to litigation ............... ~~18,703 49~~ (~~246~~4,148) ~~18,506~~- ~~18,506~~- ~~Public~~Investment ~~utilities~~expenses ...................................... ~~4,287~~(322) 2(275) (58242) ~~4,231~~---------- ~~4,231~~---------- ~~Mortgage~~-~~backed~~--------- ~~securities~~Investment income, net ................................. ~~1,187 -~~ (39572) 13,~~148~~347 13,~~148~~168 ---------- ---------- ---------- ~~----------~~Realized ~~----------~~gains, $net ~~62,900~~- $fixed-maturity ~~567~~investments $......... ~~(410)~~154 $91 631,~~057~~527 $Realized 63gains,~~057~~ ~~==========~~net ~~==========~~- ~~==========~~equity ~~==========~~securities ~~========== EQUITY SECURITIES: Corporate stock~~ .................. 60 4 - ---------- ---------- ---------- Realized investment gains, net ......................... $214 -95 $1,527 ~~141~~---------- $---------- ---------- $ ~~141~~(358) $ ~~141~~3,442 ~~==========~~$ ~~==========~~4,695 ========== ========== ==========

During 2006, NAICO recorded $6.6 million of interest income for its estimate of prejudgment interest on a favorable jury verdict in civil litigation regarding certain surety bond claims. During 2007, NAICO reversed $4.1 million of the prejudgment interest income based on a final judgment entered by the court. See Note 11 for more information related to this litigation. Investment expenses include $193,000, $128,000 and $91,000 for the years ended December 31, 2007, 2008 and 2009, respectively, in expense to subsidize a premium finance program for certain insureds of NAICO with an unaffiliated premium finance company. PAGE F-14 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:

~~LESS~~GROSS ~~THAN~~GROSS 12UNREALIZED ~~MONTHS~~UNREALIZED 12FAIR ~~MONTHS~~CARRYING ORDECEMBER ~~LONGER~~31, ~~TOTAL~~2009 ~~-----------------------~~COST GAINS LOSSES VALUE VALUE ----------------------- ------------------------ ~~UNREALIZED UNREALIZED UNREALIZED FAIR VALUE LOSSES FAIR VALUE LOSSES FAIR VALUE LOSSES~~ ----~~-------~~ ---------- ----------- ---------- ----------- ---------- FIXED MATURITIES AVAILABLE FOR SALE: (In thousands) U.S. Treasury securities and obligations of U.S. government corporations and agencies ................................... $ -40,395 $ -731 $ -(52) $ -41,074 $ -41,074 ~~$ -~~ Corporate ~~securities~~obligations ............................. 931,~~027~~989 732 (~~323~~130) 732,~~697~~591 ~~(63) 16~~32,~~724~~591 ~~(386)~~ Public utilities .................................. 12,~~914~~052 ~~(153)~~43 - -2,095 12,~~914~~095 ~~(153)~~ Obligations of states and political subdivisions ...~~....................~~ 227,~~147~~222 331 (7492) -27,461 ~~- 2~~27,~~147~~461 ~~(74)~~ ----------- ---------- ----------- ---------- ----------- ~~----------~~ $ 13101,~~088~~658 $ ~~(550) $ 7~~1,~~697~~837 $ (63274) $ 20103,~~785~~221 $ ~~(613)~~103,221 ========== ========== ========== ========== ========== EQUITY SECURITIES: Corporate stock ................................... $ - $ 42 $ - $ 42 $ 42 ========== ========== ========== ========== ==========

Chandler USA held investments in fixed maturities issued by General Electric Capital Corporation with a fair value of $4.6 million at December 31, 2008 and 2009, or 10.1% and 9.8% of shareholder's equity, respectively. 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 December 31, 2008 or 2009. The fair value of Chandler USA's investments with continuous gross unrealized losses at December 31, 2009 is presented below:

~~AVAILABLE~~LESS ~~FOR~~THAN ~~SALE~~12 MONTHS 12 MONTHS OR LONGER TOTAL ----------------------- ----------------------- ~~AMORTIZED~~------------------------ ~~COST~~UNREALIZED UNREALIZED UNREALIZED FAIR VALUE LOSSES FAIR VALUE LOSSES FAIR VALUE LOSSES ----------- ---------- ----------- ---------- ----------- ---------- (In thousands) ~~Due~~U.S. inTreasury ~~one~~securities ~~year~~and orobligations ~~less~~of U.S. government corporations and agencies ..........~~..............~~ $ 8,~~466~~886 $ ~~8,553~~(52) ~~Due~~$ ~~after~~- ~~one~~$ ~~year~~- ~~through~~$ ~~five~~8,886 ~~years~~$ (52) Corporate securities ................. 552,~~308~~505 ~~56,919~~(130) ~~Due~~- ~~after~~- ~~five~~2,505 ~~years~~(130) ~~through~~Public ~~ten~~utilities ~~years~~ ........... ~~10,023 10,403 Due after ten years~~ .......... - - - - - - Obligations of states and political subdivisions ....................... 19,~~217~~866 (91) 153 (1) 10,~~221~~019 (92) ----------- ---------- ----------- ---------- ----------- ---------- $ 7521,~~014~~257 $ 77(273) $ 153 $ (1) $ 21,~~096~~410 $ (274) =========== ========== =========== ========== =========== ==========

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 December 31, 2009. PAGE F-15 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 December 31, 2009 are shown below:

~~2006~~AVAILABLE ~~2007~~FOR ~~2008~~SALE -------- -------- -------- ~~(In~~AMORTIZED ~~thousands)~~COST ~~FIXED~~FAIR ~~MATURITIES:~~VALUE ~~Gross realized gains ............................. $~~ - ~~$ 191 $ 148 Gross realized losses ............................~~ - ~~(37) (57)~~ -------- -- ------ ----~~----~~ ~~Total~~(In ~~net~~thousands) ~~realized~~Due ~~gains~~in one year or less .......................... $ -7,658 $ ~~154~~7,768 $Due 91after ~~========~~one ~~========~~year ~~========~~through ~~EQUITY~~five ~~SECURITIES:~~years ~~Gross realized gains~~ ............ 51,274 52,505 Due after five years through ten years ...........~~......~~ $37,443 ~~855~~37,636 $Due ~~229~~after $ten 4years ~~Gross realized losses~~ .............................. ~~(110)~~5,283 ~~(169)~~5,312 - -------- --- ----- -----~~---~~ ~~Total net realized gains ........................~~ $ ~~745~~101,658 $ 60103,221 ~~$ 4~~ ======== ==== ==== ========

Realized gains and losses from sales of investments are shown below:

~~YEAR ENDED DECEMBER 31, ---------------------------------- 2006~~ 2007 2008 2009 ---------- ---------- ---------- (In thousands) ~~Net~~FIXED ~~balance~~MATURITIES: atGross ~~beginning~~realized ofgains ~~year~~ ............................. $ ~~40,549~~191 $ ~~42,081~~148 $ 451,~~866~~527 ~~----------~~Gross ~~----------~~realized ~~---------- Net~~ losses ~~and loss adjustment expenses incurred related to: Current year~~ ............................~~................~~ ~~41,644~~(37) ~~40,194~~(57) ~~38,869~~- ~~Prior years ............................................. 3,829 1,199 2,071~~ ---------- ---------- ---------- Total net realized gains ........................~~.........................~~ ~~45,473~~$ ~~41,393~~154 ~~40,940~~$ ~~----------~~91 ~~----------~~$ ~~----------~~1,527 ~~Net~~======== ~~paid~~======== ~~losses~~======== ~~and~~EQUITY ~~loss adjustment expenses related to~~SECURITIES: ~~Current~~Gross ~~year~~realized gains .............................~~...............~~ ~~(12,403)~~$ ~~(12,494)~~229 ~~(11,856)~~$ ~~Prior~~4 ~~years~~$ ~~............................................. (31,538) (25,114) (25,882)~~ -~~---------~~ ~~----------~~Gross ~~----------~~realized ~~Total~~losses ............................~~.....................~~ (~~43,941~~169) ~~(37,608)~~- ~~(37,738)~~- ---------- ---------- ---------- ~~Net~~Total ~~balance~~net atrealized ~~end~~gains ~~of year~~ ........................~~........~~ $ ~~42,081~~60 $ ~~45,866~~4 $ ~~49,068~~- ========== ========== ==========

NAICO is required by several states to deposit securities with state regulators as a condition of doing business in those states. As of December 31, 2008 and 2009, the carrying value of these deposits totaled approximately $8.6 million and $8.1 million, respectively. In addition, at December 31, 2008 and 2009, NAICO had deposited $27.0 million and $28.1 million of cash and investments into a trust account as collateral for a reinsurance agreement in which NAICO is the assuming reinsurer. During 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. NOTE 4. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES NAICO provides a reserve for estimated losses (reported and unreported) and loss adjustment expenses based on historical experience and payment reporting patterns for the type of risk involved. These estimates are based on data available at the time of the estimate and such estimates are periodically reviewed by independent professional actuaries. Inherent in the estimates of the ultimate liability for unpaid claims are expected trends in claim severity, claim frequency and other factors that may vary as claims are settled. The amount and uncertainty in the estimates are affected by such factors as the amount of historical claims experience relative to the development period for the type of risk, knowledge of the actual facts and circumstances, and the amount of insurance risk retained. The ultimate cost of insurance claims can be adversely affected by increased costs such as medical expenses, repair expenses, costs of providing legal defense for policyholders, increased jury awards and court decisions and legislation that define and expand insurance coverage subsequent to the time that the insurance policy was priced and sold. Salvage and subrogation recoverables are accrued using the "case basis" method for large recoverables and statistical estimates based on historical experience for smaller recoverables. Recoverable amounts deducted from Chandler USA's net liability for losses and loss adjustment expenses were approximately $10.9 million and $10.8 million at December 31, 2008 and 2009, respectively. Included in these recoverable amounts were net recoverables of $10.1 million in 2008 and 2009, related to a favorable jury verdict in civil litigation regarding certain surety bond claims during 2006. See Note 11 for more information related to this litigation. NAICO may or may not recover the above estimated recoveries and could incur significant costs in collecting these recoverables. PAGE F-16 Although such estimates are management's best estimates of the expected values, the ultimate liability for unpaid claims may vary from these values. NAICO does not discount the liability for unpaid losses and loss adjustment expenses. The following table sets forth a reconciliation of the beginning and ending unpaid losses and loss adjustment expenses which are net of reinsurance deductions.

~~2006~~YEAR ENDED DECEMBER 31, ---------------------------------- 2007 2008 2009 ---------- ---------- ---------- (In thousands) ~~Statutory~~Net ~~net~~balance ~~income~~at beginning of year .......................... $ 342,~~789~~081 $ 145,~~037~~866 $ 49,068 ---------- ---------- ---------- Net losses and loss adjustment expenses incurred related to: Current year ............................................ 40,194 38,869 33,480 Prior years ............................................. 1,199 2,~~375~~071 ~~Statutory~~734 ~~capital~~---------- ---------- ---------- Total ................................................. 41,393 40,940 34,214 ---------- ---------- ---------- Net paid losses and ~~surplus~~loss adjustment expenses related to: Current year ............................................ (12,494) (11,856) (10,531) Prior years ............................................. (25,114) (25,882) (23,358) ---------- ---------- ---------- Total ................................................. (37,608) (37,738) (33,889) ---------- ---------- ---------- Net balance at end of year ................................ $ 5145,~~663~~866 $ 5049,~~250~~068 $ 5149,~~069~~393 ========== ========== ==========

NAICO experienced incurred losses related to prior accident years totaling $1.2 million, $2.1 million and $734,000 during 2007, 2008 and 2009, respectively. The adverse loss development is generally the result of ongoing analysis of loss development trends for both liability and workers compensation lines of business, and includes provisions for potentially uncollectible reinsurance and deductibles. NAICO adjusts reserves as experience develops and new information becomes known. Such adjustments are reflected in the results of operations in the periods in which the estimates are changed. The adverse development of losses from prior accident years results in higher calendar year loss ratios and reduced calendar year operating results. During 2007, NAICO experienced adverse loss development totaling $1.2 million primarily in the surety bond program. During 2007, a portion of the estimated recoveries that were recorded in the surety bond program during 2006 were reduced based on a final judgment entered by the court regarding certain surety bond claims. The reduction of the estimated recoveries accounted for $1.8 million of the loss development during 2007. The adverse loss development included approximately $356,000 for provisions for potentially uncollectible reinsurance. During 2008, NAICO experienced adverse loss development totaling $2.1 million primarily in the workers compensation line of business in the standard lines program. A portion of the adverse loss development was offset by favorable development in the automobile liability line of business in this program. The adverse loss development included approximately $166,000 for provisions for potentially uncollectible reinsurance. During 2009, NAICO experienced adverse loss development totaling $734,000 primarily in the workers compensation line of business in the standard lines program. A portion of the adverse loss development was offset by favorable development in the automobile liability and other liability lines of business in this program. The adverse loss development included approximately $180,000 for provisions for potentially uncollectible reinsurance. PAGE F-17 NAICO does not ordinarily insure against environmental matters as that term is commonly used. However, in some cases, regulatory filings made by NAICO on behalf of an insured can make NAICO directly liable to the regulatory authority for property damage which could include environmental pollution. In those cases, NAICO ordinarily has recourse against the insured or the surety bond principal for amounts paid. NAICO has insured certain trucking companies and pest control operators that are required to provide proof of insurance which in some cases assures payment for clean-up and remediation of damage resulting from sudden and accidental release or discharge of contaminants or other substances which may be classified as pollutants. NAICO also provides surety bonds for construction contractors that use or have control of such substances and for contractors that remove and dispose of asbestos as a part of their contractual obligations. NAICO also insures independent oil and gas producers that may purchase coverage for the escape of oil, saltwater, or other substances which may be harmful to persons or property, but may not generally be classified as pollutants. NAICO maintains claims records which segregate this type of risk for the purpose of evaluating environmental risk exposure. Based upon the nature of such lines of business with insureds of NAICO, and current data regarding the limited severity and infrequency of such matters, it appears that potential environmental risks are not a significant portion of claims reserves and therefore would not likely have a material impact, if any, on the consolidated financial condition, results of operations or cash flows of Chandler USA. NOTE 5. DEBENTURES On July 16, 1999, Chandler USA completed a public offering of $24 million principal amount of senior debentures (the "Debentures") with a maturity date of July 16, 2014. The Debentures were priced at $1,000 each with an interest rate of 8.75% and are redeemable by Chandler USA on or after July 16, 2009 without penalty or premium. The indenture governing the Debentures was amended during 2003 to clarify that purchases of Debentures by Chandler USA through private treaty or on the open market for an agreed price of less than the sum of the principal amount and accrued interest are not considered to be a redemption of the Debentures, and that any such Debentures purchased by Chandler USA will be cancelled. Chandler USA purchased and cancelled $16.7 million and $275,000 principal amount of the Debentures during 2003 and 2004, respectively, and at December 31, 2009, there were $6,979,000 principal amount of the Debentures outstanding. As of December 31, 2009, Chandler USA has capitalized $149,000 related to debt issuance costs for the Debentures. These costs are being amortized as interest expense over the term of the Debentures. When Debentures are purchased and cancelled by Chandler USA, debt issuance costs are reduced accordingly and reflected in the gain on retirement of debt which is included in other income in the consolidated statements of operations. Chandler USA's subsidiaries and affiliates are not obligated by the Debentures. Accordingly, the Debentures are effectively subordinated to all existing and future liabilities and obligations of Chandler USA's existing and future subsidiaries. The indenture governing the Debentures contains certain restrictive covenants, including covenants that limit subsidiary debt, issuance or sale of subsidiary stock, incurring of liens, sale-leaseback transactions for a period of more than three years, mergers, consolidations and sales of assets. At December 31, 2009, Chandler USA was in compliance with all covenants. NOTE 6. TRUST PREFERRED SECURITIES In May 2003, Chandler USA established Chandler Capital Trust I ("Trust I") by purchasing all of its common securities for $403,000. Trust I is a Delaware statutory business trust and is a wholly owned non-consolidated subsidiary of Chandler USA. On May 22, 2003, Trust I issued $13.0 million of capital securities (the "Trust I Preferred Securities") to InCapS Funding I, Ltd., an unaffiliated company established under the laws of the Cayman Islands, in a private transaction. Trust I used the proceeds from the issuance to purchase $13,403,000 of 9.75% junior subordinated debentures (the "Junior Debentures I") of Chandler USA. Distributions on the Junior Debentures I are payable quarterly at a fixed annual rate of 9.75%. Chandler USA may defer these payments for up to 20 consecutive quarters, but not beyond the maturity of the Junior Debentures I, with such deferred payments accruing interest compounded quarterly. The Junior Debentures I are subject to a mandatory redemption on May 23, 2033, but they may be redeemed after five years at a premium of half the fixed rate coupon declining ratably to par in the 10th year. The Junior Debentures I are the sole assets of Trust I and Trust I will distribute any cash payments it receives thereon to the holders of its preferred and common securities. Distributions on the Trust I Preferred Securities are payable quarterly at a fixed annual rate of 9.75%. Trust I may defer these payments for up to 20 consecutive quarters, but not beyond the maturity of the Trust I Preferred Securities, with such deferred payments accruing interest compounded quarterly. The Trust I Preferred Securities are subject to a mandatory redemption on May 23, 2033, but they may be redeemed after five years at a premium of half the fixed rate coupon declining ratably to par in the 10th year. All payments by Trust I regarding the Trust I Preferred Securities are guaranteed by Chandler USA. PAGE F-18 In December 2003, Chandler USA established Chandler Capital Trust II ("Trust II") by purchasing all of its common securities for $217,000. Trust II is a Delaware statutory business trust and is a wholly owned non-consolidated subsidiary of Chandler USA. On December 16, 2003, Trust II issued $7.0 million of capital securities (the "Trust II Preferred Securities") to InCapS Funding II, Ltd., an unaffiliated company established under the laws of the Cayman Islands, in a private transaction. Trust II used the proceeds from the issuance to purchase $7,217,000 of floating rate junior subordinated debentures (the "Junior Debentures II") of Chandler USA. Distributions on the Junior Debentures II are payable quarterly at a floating rate of 4.10% over LIBOR (LIBOR is recalculated quarterly). The interest rate was 4.38% at December 31, 2009. Chandler USA may defer these payments for up to 20 consecutive quarters, but not beyond the maturity of the Junior Debentures II, with such deferred payments accruing interest compounded quarterly. The Junior Debentures II are subject to a mandatory redemption on January 8, 2034, but they may be redeemed after five years without penalty or premium. The Junior Debentures II are the sole assets of Trust II and Trust II will distribute any cash payments it receives thereon to the holders of its preferred and common securities. Distributions on the Trust II Preferred Securities are payable quarterly at a floating rate of 4.10% over LIBOR (LIBOR is recalculated quarterly). The interest rate was 4.38% at December 31, 2009. Trust II may defer these payments for up to 20 consecutive quarters, but not beyond the maturity of the Trust II Preferred Securities, with such deferred payments accruing interest compounded quarterly. The Trust II Preferred Securities are subject to a mandatory redemption on January 8, 2034, but they may be redeemed after five years without penalty or premium. All payments by Trust II regarding the Trust II Preferred Securities are guaranteed by Chandler USA. The sale of the Trust I Preferred Securities and the Trust II Preferred Securities during 2003 resulted in net proceeds of $19.3 million to Chandler USA, net of placement costs. As of December 31, 2009, issuance costs in the amount of $573,000 have been capitalized and are being amortized over the stated maturity periods of thirty years. Trust I and Trust II are variable interest entities in which Chandler USA is not the primary beneficiary under GAAP because its interest is not variable. Therefore, Chandler USA is prohibited from consolidating these trusts even though it has 100% ownership, complete voting control and has guaranteed the performance of the trusts. Accordingly, Chandler USA carries the Junior Debentures I and Junior Debentures II as a liability on its consolidated balance sheets. NOTE 7. SHAREHOLDER'S EQUITY CAPITAL STOCK In addition to the regulatory oversight of NAICO by the Oklahoma Department of Insurance, Chandler Insurance Company Ltd. ("Chandler Insurance"), Chandler USA's parent company, and Chandler USA are also subject to regulation under the insurance laws of Oklahoma (the "Oklahoma Insurance Code"). In addition to various reporting requirements imposed on Chandler Insurance and Chandler USA, the Oklahoma Insurance Code requires any person who seeks to acquire or exercise control over NAICO (which is presumed to exist if any person owns 10% or more of Chandler Insurance's or Chandler USA's outstanding voting stock) to file and obtain approval of certain applications with the Oklahoma Department of Insurance regarding their proposed ownership of such shares. STATUTORY FINANCIAL INFORMATION AND MINIMUM CAPITAL REQUIREMENTS NAICO is required to file financial statements with state regulatory authorities prepared on a statutory basis which differs from GAAP. Statutory net income and statutory capital and surplus of NAICO are as follows:

~~2006~~ 2007 2008 2009 ---------- ---------- ---------- (In thousands) ~~Computed~~Statutory net income ~~tax provision (benefit) at 34%~~ ..............~~.....~~ $ 1,~~721~~037 $ ~~(255)~~2,375 $ ~~409~~3,602 ~~Increase~~Statutory ~~(decrease) in income taxes resulting from: Utilization of~~ capital ~~loss carryforward ....................... (253) (73) - Interest income on the exempt securities ....................... - - (27) Nondeductible meals~~ and ~~entertainment~~surplus ~~expenses~~ .....~~............~~ ~~163 150 174 Other nondeductible expenses ................................... 34 91 123 ---------- ---------- ---------- Federal income tax provision (benefit) ...........................~~ $ 150,~~665~~250 $ ~~(87)~~51,069 $ ~~679 ========== ========== ==========~~54,111

During 2005, the Oklahoma Insurance Code was amended to allow domestic insurers to admit office equipment, furniture and other such property constituting less than 3% of its otherwise admitted assets. This prescribed accounting practice increased NAICO's statutory capital and surplus by $305,000, $251,000 and $160,000 at December 31, 2007, 2008 and 2009, respectively. There is no difference between NAICO's statutory net income under the National Association of Insurance Commissioners' ("NAIC") ACCOUNTING PRACTICES AND PROCEDURES manual and practices prescribed by the Oklahoma Insurance Code. PAGE F-19 The Oklahoma Insurance Commissioner has the right to permit other specific practices that deviate from prescribed practices. NAICO does not have any such permitted practices. The NAIC has adopted risk-based capital ("RBC") standards for domestic property and casualty insurance companies. The RBC standards are designed to assist insurance regulators in analytically determining a level of capital and surplus that would be sufficient to withstand reasonably foreseeable adverse events associated with underwriting risk, investment risk, credit risk and loss reserve risk. NAICO is subject to the RBC standards. Based on available information, management believes NAICO complied with the RBC standards at December 31, 2008 and 2009. At periodic intervals, various insurance regulatory authorities routinely examine the required statutory financial statements of NAICO as part of their legally prescribed oversight of the insurance industry. Based on these examinations, the regulators can direct such financial statements to be adjusted in accordance with their findings. DIVIDEND RESTRICTIONS The amount of cash shareholder dividends that NAICO can pay to Chandler USA within any one year without the approval of the Oklahoma Department of Insurance is generally limited to the greater of (i) statutory net income excluding realized capital gains for the preceding year, or (ii) 10% of statutory surplus as regards policyholders as of the preceding December 31 with such amount not to exceed NAICO's statutory earned surplus. Based on this criteria, the maximum shareholder dividend NAICO may pay in 2009 without the approval of the Oklahoma Department of Insurance is approximately $5.4 million. NAICO paid cash shareholder dividends to Chandler USA totaling $1.6 million, $2.1 million and $1.4 million in 2007, 2008 and 2009, respectively. The future payment of shareholder dividends also depends upon the earnings, financial position and cash requirements of Chandler USA, as well as regulatory limitations and such other factors as the board of directors may deem relevant. NAICO is subject to regulations which restrict its ability to pay dividends to policyholders. The maximum amount of available policyholder dividends is limited to statutory earned surplus (approximately $15.5 million as of December 31, 2009). NAICO did not pay any policyholder dividends during 2007, 2008 or 2009. NOTE 8. INCOME TAXES Chandler USA and its wholly owned subsidiaries file a consolidated U.S. Federal income tax return. The income taxes reflected in the accompanying consolidated statements of operations differ from those expected using U.S. Federal enacted income tax rates as noted by the following:

~~CURRENT~~2007 ~~DEFERRED~~2008 ~~TOTAL~~2009 ---------- ---------- ---------- (In thousands) ~~2006~~Computed income tax provision (benefit) at 34% ...................~~..........................................~~ $ -(255) $ ~~1,665~~409 $ 1,~~665~~183 ~~2007~~Increase (decrease) in income taxes resulting from: Utilization of capital loss carryforward ....................... (73) - - Interest income on the exempt securities ....................... - (27) (162) Nondeductible meals and entertainment expenses ................. -150 ~~(87)~~174 ~~(87)~~166 ~~2008~~Other nondeductible expenses ................................... 91 123 109 ---------- ---------- ---------- Federal income tax provision (benefit) ........................... ~~1,074~~$ (~~395~~87) $ 679 $ 1,296 ========== ========== ==========

U.S. Federal income tax provision (benefit) consists of:

~~2006~~CURRENT ~~2007~~DEFERRED ~~2008~~TOTAL ---------- ---------- ---------- (In thousands) ~~Loss~~2007 ~~reserve discounts~~ ........................................... ~~$ 66 $ 9 $ (57) Unearned premiums~~ ..................~~..............................~~ 62$ 119 117 Deferred policy acquisition costs ................................ (129) 93 63 Investment in limited partnerships ............................... (152) (40) (7) Reserve for uncollectible premiums receivable .................... 18 12 (2) Reserve for non-~~collection~~ of$ ~~debenture .......................... - -~~ (8987) ~~Depreciation~~$ ~~and lease expense ...................................~~ (7087) ~~(49)~~2008 ~~(52) Discount on fixed maturity investments~~ ........................... ~~23 21 (13) Accrued commissions payable~~ ..................................~~....~~ ~~- - (261) Accrual of prejudgment interest income ...........................~~ 1,~~410~~074 (~~1,410~~395) -679 ~~Net~~2009 ~~operating loss carryforwards~~ ................................. ~~530 1,118 - Other~~ ............................~~................................~~ ~~(93) 40 (94) ---------- ---------- ---------- $~~ 1,~~665~~460 $ (87164) ~~$ (395) ========== ========== ==========~~1,296

PAGE F-20 Deferred income tax provision (benefit) relating to temporary differences includes the following components:

2007 ~~2006~~2008 2009 ---------- -- -------- ---------- (In thousands) ~~Deferred tax assets:~~ Loss reserve discounts ........................................... $ ~~2,040~~9 $ ~~2,098~~(57) $ (87) Unearned premiums ........................................... ~~2,064 1,948 Compensated absences~~ .....~~...................................~~ ~~191~~119 ~~231~~117 ~~Accrued~~(12) ~~commissions~~Deferred ~~payable~~policy acquisition costs ................................. -93 ~~261~~63 ~~Net~~82 ~~operating~~Investment ~~loss~~in ~~carryforwards~~limited -partnerships ~~federal~~ .................. ~~455 - Net operating loss carryforwards - state~~ .............~~.......~~ ~~2,057~~(40) ~~2,100~~(7) ~~Investment~~(122) inReserve ~~limited~~for ~~partnership~~uncollectible premiums receivable ....................~~.......~~ ~~318~~12 ~~324~~(2) (52) Reserve for non-collection of debenture .......................... - (89) ~~Other~~(14) Depreciation and lease expense ...................................~~....................~~ ~~306~~(49) ~~337~~(52) ~~Valuation~~10 ~~allowance~~Discount on fixed maturity investments ...........................~~..............~~ 21 (~~2,057~~13) (~~2,100~~65) ~~------------~~Accrued ~~------------~~commissions ~~Total~~payable ~~deferred tax assets~~ ...................................... ~~5,374 5,288~~ -~~-----------~~ ~~------------~~(261) ~~Deferred~~108 ~~tax~~Accrual ~~liabilities:~~of ~~Depreciation~~prejudgment ~~and~~interest ~~lease~~income ~~expense~~ ...........................~~...~~ (1,~~252~~410) ~~1,200~~- ~~Deferred~~- ~~policy~~Net ~~acquisition~~operating ~~costs~~loss carryforwards ........................... ~~380 443 Unrealized gain on investments available for sale~~ ......~~.....~~ ~~101~~1,118 ~~738~~- - Other ............................................................ ~~194~~40 ~~194~~(94) ~~------------~~(12) ------------ ~~Total deferred tax liabilities ................................ 1,927 2,575~~ ------------ ------------ ~~Net~~$ ~~deferred~~(87) ~~tax assets .......................................~~ $ ~~3,447~~(395) $ ~~2,713~~(164) ========== == ======== ==========

The tax effect of temporary differences between the consolidated financial statement carrying amounts and tax bases of assets and liabilities that give rise to significant portions of the net deferred tax assets, which are included in other assets, at December 31, relate to the following:

~~2006 2007~~ 2008 2009 ------------~~-----------~~ ------------ (In thousands) Deferred tax assets: Loss reserve discounts ...................................... $ 2,098 $ 2,185 Unearned premiums ........................................... 1,948 1,960 Compensated absences ........................................ 231 227 Accrued commissions payable ................................. 261 153 Net operating loss carryforwards - state .................... 2,100 2,032 Investment in limited partnership ........................... 324 447 Reserve for non-~~---------~~collection of debenture ..................... 89 103 Other ....................................................... 337 394 Valuation allowance ......................................... (2,100) (2,032) ------------ ------------ ~~WRITTEN~~Total ~~EARNED~~deferred ~~WRITTEN~~tax ~~EARNED~~assets ~~WRITTEN~~..................................... ~~EARNED~~5,288 ~~-----------~~5,469 ---------- --~~---------~~ ---------- --~~---------~~ ~~----------~~Deferred ~~(In~~tax ~~thousands)~~liabilities: ~~Direct~~Depreciation and lease expense .............................. ~~$ 104~~1,~~037~~200 ~~$ 109~~1,~~637~~209 $Deferred ~~85,836~~policy $acquisition ~~93,487~~costs ~~$ 90,871 $ 91,367 Assumed~~ ........................... ~~9,006~~443 ~~5,223~~526 ~~14,245~~Unrealized ~~13,422~~gain ~~7,513~~on ~~9,680~~investments ~~Ceded~~available for sale ............ ~~(48,254)~~738 ~~(49,156)~~546 ~~(35,649)~~Other ~~(40,724)~~....................................................... ~~(36,072)~~194 ~~(37,020)~~119 ------------ ---------- -- Total deferred tax liabilities ................................ 2,575 2,400 --------- ---~~-------~~ ----------- -~~---------~~ Net ~~premiums~~deferred tax assets ....................................... $ 642,~~789~~713 $ 653,~~704~~069 ~~$ 64,432 $ 66,185 $ 62,312 $ 64,027~~ =========== =~~=========~~ =========== =~~========= =========== ==========~~

At December 31, 2007, Chandler USA had a net operating loss carryforward available for U.S. Federal income taxes of $1.3 million, which was fully utilized during 2008. In addition, Chandler USA, at December 31, 2009, had net operating loss carryforwards available for Oklahoma state income taxes totaling approximately $33.9 million which expire in the years 2010 through 2029. A valuation allowance has been provided for the tax effect of the state net operating loss since realization of such amount is not considered more likely than not. Tax years 2006 through 2009 are open to examination by the U.S. Internal Revenue Service and the Oklahoma Tax Commission. PAGE F-21 NOTE 9. EMPLOYEE BENEFITS Chandler USA and its subsidiaries participate in a defined contribution retirement plan established under Section 401(k) of the Internal Revenue Code. All full time employees who have completed one year of service and attained age 21 may elect to participate in the 401(k) plan. Participants may contribute up to 25% of compensation, subject to certain limitations. Chandler USA matches 50% of the first $2,000, 40% of the next $3,000, 30% of the next $3,000 and 25% of the remaining employee contributions up to a maximum employer contribution of $6,600 per employee per year. In addition, Chandler USA may make additional annual contributions to the 401(k) plan at its discretion. Chandler USA's expense for 401(k) plan contributions was $288,000, $293,000 and $288,000 for 2007, 2008 and 2009, respectively. NOTE 10. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS 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 December 31, 2008 and 2009. The estimated fair values of Chandler USA's fixed-maturity and equity security investments are disclosed at Note 3. At December 31, 2009, the fair value of Chandler USA's Debentures was estimated to be $7.1 million based on an analytically determined valuation from an independent rating organization. Chandler USA's Debentures have not historically traded regularly, and settlement at the reported fair value may not be possible. The Debentures are redeemable by Chandler USA on or after July 16, 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 December 31, 2009 was 4.38%. At December 31, 2009, the fair value of Chandler USA's junior subordinated debentures was estimated to be $22.0 million. The 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. NOTE 11. 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. PAGE F-22 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. 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 December 31, 2008 and December 31, 2009. NOTE 12. COMMITMENTS AND CONTINGENCIES REINSURANCE In the ordinary course of business, NAICO cedes insurance to other insurers and reinsurers under various reinsurance treaties that cover individual risks (facultative reinsurance) or entire classes of business (treaty reinsurance). Reinsurance provides greater diversification of business written and also reduces NAICO's exposure arising from high limits of liability or from hazards of an unusual nature. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policies. In formulating its reinsurance programs, NAICO considers numerous factors, including the financial stability of the reinsurer, ability to provide sufficient collateral (if required), reinsurance coverage offered and price. NAICO has structured separate reinsurance programs for property (including inland marine), workers compensation, casualty (including automobile liability, general and products liability, umbrella liability and related professional liability), automobile physical damage and construction surety bonds. Chandler Insurance reinsures NAICO for a portion of the risk on NAICO's reinsurance programs. In addition, NAICO purchases catastrophe protection to limit its retention for single loss occurrences involving multiple policies and/or policyholders, such as floods, winds and severe storms. NAICO also purchases facultative reinsurance when it writes a risk with limits of liability exceeding the maximum limits of its treaties or when it otherwise considers such action appropriate. PAGE F-23 Treaty reinsurance may be ceded under treaties on both a pro rata basis (where the reinsurer shares proportionately in premiums and losses) and an excess of loss basis (where only losses above a specific amount are reinsured). The availability, costs and limits of reinsurance purchased can vary from year to year based upon prevailing market conditions, reinsurers' underwriting results and NAICO's desired risk retention levels. The majority of NAICO's reinsurance programs renew on July 1 of each year. At the present time, NAICO expects to renew the reinsurance programs that expire on July 1, 2010. NAICO periodically reviews certain prospective single year reinsurance treaties, subject to commutation provisions therein, to determine if it is advantageous to assume the estimated loss exposure on expired insurance policies covered by such treaties in exchange for return premiums. Commutation of such reinsurance treaties will be determined in future periods based on timely review of all available data. NAICO reviews the historical results for reinsurance contracts with similar commutation provisions and accrues for such commutations where a commutation election is considered probable. Reinsurance contracts do not relieve an insurer from its obligation to policyholders. Failure of reinsurers to honor their obligations could result in losses to Chandler USA; consequently, adjustments to ceded losses and loss adjustment expenses are made for amounts deemed uncollectible. During 2007, 2008 and 2009, NAICO incurred charges of $356,000, $166,000 and $180,000, respectively, in adjustments to ceded losses and loss adjustment expenses for amounts deemed uncollectible. The effect of reinsurance on premiums written and earned was as follows:

~~CEDED~~2007 ~~REINSURANCE NET PREMIUMS FOR A.M. BEST REINSURANCE THE YEAR ENDED COMPANY NAME OF REINSURER RECOVERABLE (1) DECEMBER 31,~~ 2008 ~~RATING~~2009 ----------------------- ----------------------- ----------------------- WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED ----------- ---------- ----------- ---------- ----------- ---------- (~~Dollars~~In in thousands) ~~Chandler~~Direct ~~Insurance~~ ...........~~............................~~ $ 3285,~~102~~836 $ 2693,~~596~~487 ~~(2)~~$ ~~Swiss~~90,871 ~~Reinsurance~~$ ~~America~~91,367 ~~Corporation~~$ ~~.................... 15~~82,~~999~~234 ~~338~~$ A82,791 ~~Westport~~Assumed ~~Insurance Corporation (3)~~ ..........~~.............~~ 14,245 13,~~314~~422 -7,513 A9,680 ~~Transatlantic~~8,951 ~~Reinsurance~~7,600 ~~Company~~Ceded ............~~............~~ 2(35,~~640~~649) 1(40,~~987~~724) A(36,072) ~~Markel~~(37,020) ~~Insurance Company ................................. 2~~(34,~~553~~647) 1(34,~~772~~031) A----------- ---------- ----------- ---------- ----------- ~~Top~~---------- ~~five~~Net ~~reinsurers~~premiums .....~~............................~~ $ 64,432 $ 66,~~608~~185 $ 3062,~~693~~312 $ 64,027 $ 56,538 $ 56,360 =========== ==== ====== ============ ~~All reinsurers ...................................... $ 67,899 $ 36,072~~ ========== ===== ====== ============ Percentage of total represented by top five reinsurers ... 98% 85% ------------------------------------------------------------- (1) Includes losses and loss adjustment expenses paid and outstanding, unpaid losses and loss adjustment expenses and prepaid reinsurance premiums recoverable from reinsurers as of December 31, 2008. (2) Chandler Insurance owns 100% of the common stock of Chandler USA, which in turn owns 100% of the common stock of NAICO. Chandler Insurance does not have an A.M. Best Company rating. Although Chandler Insurance is not subject to the minimum capital, audit, reporting and other requirements imposed by regulation upon United States reinsurance companies, as a foreign reinsurer, it is required to secure its reinsurance obligations by depositing acceptable securities in trust for NAICO's benefit. At December 31, 2008, Chandler Insurance had cash and investments, including accrued interest, with a fair value of $32.1 million deposited in a trust account for the benefit of NAICO. (3) Westport Insurance Corporation and Swiss Reinsurance America Corporation are subsidiaries of Swiss Reinsurance Company.

NAICO's assumed premiums generally result from certain business produced by CIMI for other insurance companies that is reinsured by NAICO, and from NAICO's participation in various mandatory workers compensation pools. Losses and loss adjustment expenses are reported net of the effect of reinsurance recoveries and recoverables in the consolidated statements of operations. Ceded losses and loss adjustment expenses were $39.5 million, $28.0 million and $24.7 million for 2007, 2008 and 2009, respectively. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK NAICO conducts its business through individual independent insurance agencies and underwriting managers. NAICO requires certain policyholders to pay a deposit at the time of inception of coverage to secure payment of future premiums or other policy related obligations. Receivables under installment plans do not exceed the corresponding liability for unearned premiums. Total consolidated premiums receivable at December 31, 2008 and 2009 were $26.4 million and $25.3 million, respectively. Receivables for deductibles, in most cases, are secured by cash deposits and letters of credit. At December 31, 2009, NAICO maintained custody of such letters of credit securing these and other transactions totaling approximately $18.4 million, which is a reasonable estimate of their fair value. These letters of credit are not reflected in the accompanying consolidated financial statements. There were no unaffiliated independent insurance agents that produced 10% or more of NAICO's direct written and assumed premiums during 2007, 2008 or 2009. PAGE F-24 Approximately $34.5 million, or 47% of NAICO's reinsurance recoverables and prepaid reinsurance premiums at December 31, 2009 are collateralized by premiums payable to the reinsurers, securities pledged in trust or letters of credit for the benefit of NAICO. Chandler USA believes the above value of such collateral is a reasonable estimate of their fair value. NAICO's reinsurance contracts include provisions for offsets against premiums owed to the reinsurers. The following table sets forth certain information related to NAICO's five largest reinsurers determined on the basis of net reinsurance recoverables as of December 31, 2009.

CEDED REINSURANCE NET PREMIUMS FOR A.M. BEST REINSURANCE THE YEAR ENDED COMPANY NAME OF REINSURER RECOVERABLE (In1) DECEMBER 31, 2009 RATING ---------------------------------------------------------- --------------- ------------------ ----------- (Dollars in thousands) ~~2009~~Chandler Insurance .......................... ~~$ 494 2010~~ ............. $ 33,636 $ 23,994 (2) Swiss Reinsurance America Corporation (3)................. ~~170~~16,448 ~~2011~~289 A Westport Insurance Corporation (3).......................... 498,837 ~~2012~~- A Transatlantic Reinsurance Company .......................... 224,395 ~~2013~~2,390 A Markel Insurance Company ................................. 53,875 1,841 A --------------- ------------------ Top five reinsurers ................................. $ ~~740~~67,191 $ 28,514 =============== ================== All reinsurers ...................................... $ 73,964 $ 34,647 =============== ================== Percentage of total represented by top five reinsurers ... 91% 82% ------------------------------------------------------------- (1) Includes losses and loss adjustment expenses paid and outstanding, unpaid losses and loss adjustment expenses and prepaid reinsurance premiums recoverable from reinsurers as of December 31, 2009. (2) Chandler Insurance owns 100% of the common stock of Chandler USA, which in turn owns 100% of the common stock of NAICO. Chandler Insurance does not have an A.M. Best Company rating. Although Chandler Insurance is not subject to the minimum capital, audit, reporting and other requirements imposed by regulation upon United States reinsurance companies, as a foreign reinsurer, it is required to secure its reinsurance obligations by depositing acceptable securities in trust for NAICO's benefit. At December 31, 2009, Chandler Insurance had cash and investments, including accrued interest, with a fair value of $33.1 million deposited in a trust account for the benefit of NAICO, and also had premiums receivable of $522,000 due from NAICO. (3) Westport Insurance Corporation and Swiss Reinsurance America Corporation are subsidiaries of Swiss Reinsurance Company.

OTHER See Note 11 regarding contingencies relating to litigation matters. Chandler USA has an employment agreement with W. Brent LaGere, Chairman of the Board and Chief Executive Officer of Chandler USA and its subsidiaries. Under this agreement, Mr. LaGere's base compensation is established at not less than $250,000 per year. In the event that Mr. LaGere is terminated without cause, as defined in the agreement, he is entitled to receive his base compensation for the remainder of the term of the agreement, but in no event for more than 60 months. The agreement will terminate upon Mr. LaGere attaining age 70, unless earlier terminated by Chandler USA for cause. In addition to his base compensation, Mr. LaGere is eligible to receive certain benefits and bonuses from Chandler USA and its subsidiaries. In addition, certain executives are eligible to receive bonuses based upon various factors. NAICO is subject to a variety of assessments related to insurance activities, including those by state guaranty funds and workers compensation second-injury funds. The amounts and timing of such assessments are beyond the control of NAICO. NAICO provides for these charges on a current basis by applying historical factors to premiums earned. Actual results may vary from these values and adjustments therefrom are necessary to maintain an adequate reserve for these assessments. The reserve for unpaid assessments which is included in accrued taxes and other payables was approximately $853,000 and $685,000 at December 31, 2008 and 2009, respectively. In certain cases, NAICO is permitted to recover a portion of its assessments generally as a reduction to premium taxes paid to certain states. NAICO has recorded receivables which are included in other assets in the amount that it expects to recover of approximately $2,732,000 and $2,866,000 at December 31, 2008 and 2009, respectively. NAICO may receive additional guaranty fund assessments in the future related to insolvent insurance companies. At this time, NAICO is unable to estimate the amount and timing of such assessments. PAGE F-25 At December 31, 2009, Chandler USA's subsidiaries were committed under noncancellable operating and capital leases for certain equipment and office space. Rental payments under these leases were $648,000, $617,000 and $518,000 in 2007, 2008 and 2009, respectively. Future minimum lease payments are as follows:

~~PROPERTY AND INTERSEGMENT REPORTED CASUALTY AGENCY ELIMINATIONS BALANCES --------------------------------------------------------~~ (In thousands) ~~2006~~2010 ~~Revenues from external customers (1)~~ ...................... ~~$ 65,888 $ 133 $ - $ 66,021 Intersegment revenues~~ ....~~.................................~~ -$ ~~3,150~~418 ~~(3,150)~~2011 ~~- Interest income, net~~ ..........................~~............~~ ~~10,572~~307 212012 ~~- 10,593 Interest expense~~ ..........................~~................~~ ~~2,668~~241 222013 ~~- 2,690 Segment profit (loss) before income taxes (2)~~ ............. ~~1,819 3,242 - 5,061 Segment assets~~ .............~~...............................~~ ~~222,004~~41 ~~5,914~~2014 ~~(5,146) 222,772 Depreciation and amortization~~ ..........................~~...~~ ~~1,379~~ - - ~~1,379 2007 Revenues from external customers (1) ...................... $ 66,753 $ 1,348 $~~ - ~~$ 68,101 Intersegment revenues ..................................... 99 3,737 (3,836)~~ - ~~Interest income, net ...................................... 328 41~~ - ~~369 Interest expense .......................................... 2,686 17~~ - ~~2,703 Segment profit (loss) before income taxes (2) ............. (2,463) 1,714~~ - ~~(749) Segment assets ............................................ 232,482 7,772 (5,887) 234,367 Depreciation and amortization ............................. 1,431~~ - - ~~1,431 2008 Revenues from external customers (1) ...................... $ 64,532 $ 1,564 $~~ - ~~$ 66,096 Intersegment revenues ..................................... 56 3,307 (3,363)~~ - ~~Interest income, net ...................................... 3,967 27~~ - ~~3,994 Interest expense .......................................... 2,569~~ - - ~~2,569 Segment profit (loss) before income taxes (2) ............. (129) 1,333~~ - ~~1,204~~$ ~~Segment assets ............................................ 232,571 9,555 (7,479) 234,647 Depreciation and amortization .............................~~ 1,~~555~~007 ~~- - 1,555 --------------------------------------------------- (1) Consists of net premiums earned and other income. (2) Includes net realized investment gains.~~==============

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 and March 2007, the lease was extended for additional three year terms, and during March 2010, the lease was extended for an additional three years with monthly rental installments equal to the sum of (i) $10,929 plus (ii) interest on the unpaid lease balance at a floating interest rate of 1% over JP Morgan Chase Bank prime, which was 4.25% at December 31, 2009. The interest rate is subject to a minimum rate of 5.5% beginning in March 2010. Chandler USA has the option to repurchase the equipment at the end of the lease for approximately $1.5 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 $1.2 million. Chandler USA has guaranteed the obligations of Trust I and Trust II with respect to the Trust I Preferred Securities and the Trust II Preferred Securities. Trust I and Trust II distribute the interest received from Chandler USA on the junior subordinated debentures to the holders of their Trust I Preferred Securities and Trust II Preferred Securities to fulfill their obligations with respect to such securities. 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 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS During March 2001, Chandler USA entered into a $3.8 million sale and leaseback transaction for certain owned equipment for a three year term. During March 2004 and March 2007, the lease was extended for additional three year terms, and during March 2010 the lease was extended for an additional three years. See Note 12 to Consolidated Financial Statements for additional information. A director of NAICO and Chandler USA is an officer and director of the bank that participated in these transactions, and is also a significant shareholder of the bank's holding company. This director is also a director of the bank that Chandler USA and its subsidiaries use as their principal disbursement bank, and is a significant shareholder of the bank's holding company. The balance maintained by Chandler USA and each subsidiary is fully insured by the Federal Deposit Insurance Corporation, and Chandler USA and its subsidiaries pay customary service charges to the bank for the services provided. During the second quarter of 2006, CIMI purchased two limited partnership units in Basin Drilling #2 LP for $2,000 and purchased 8% cumulative subordinated debentures in the amount of $500,000. The timing of payment of interest and principal on the debentures is subject to various restrictions contained in the cumulative subordinated debenture note. Interest on the debentures has been paid through September 30, 2008. The purpose of the partnership is to own and operate an oil and gas drilling rig. CIMI financed the purchase with a $500,000 variable rate bank loan. CIMI paid off the balance of this bank loan in December 2007. The partnership is managed by Basin Management, LLC ("BMLLC") who is the General Partner. A director of NAICO and Chandler USA is the Manager for BMLLC, and is also a director of the bank and a significant shareholder of the bank holding company that provided the bank loan described above. During 2008, the drilling rig was stacked due to the current economic environment until it can be re-deployed in the future when economic conditions and the demand for drilling rigs improves. CIMI recorded a reserve for possible loss in the partnership of $252,000 plus accrued interest in the amount of $50,000 as of December 31, 2009. PAGE F-26 During 2008, a director and officer of Chandler USA and two trusts which are affiliated with certain directors and officers of Chandler USA pledged certain capital shares of Chandler Insurance to a bank to secure certain loans made by the bank to these parties. A director of NAICO and Chandler USA is a director of the bank and a significant shareholder of the bank holding company that provided these bank loans. Chandler USA leases and has made certain improvements to a rural property in which certain directors and officers of Chandler USA own interests. Under the lease, no cash rental is paid. Chandler USA drilled a water well on the property and maintains certain structures it regularly uses. This property provides recreational activities for the entertainment of customers and business associates of Chandler USA's subsidiaries. Chandler USA incurred approximately $302,000, $361,000 and $332,000 in expenses associated with this property during 2007, 2008 and 2009, respectively, including $3,000, $4,000 and $4,000 for reimbursement of certain expenses, such as utility and similar expenses, for the years 2007, 2008 and 2009, respectively. Chandler USA and Chandler Insurance are parties to 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. At December 31, 2008 and 2009, Chandler USA had a receivable of $11.9 million and $12.7 million, respectively, under the Credit Agreement, and Chandler USA earned $881,000, $590,000 and $388,000 in interest income under the Credit Agreement during 2007, 2008 and 2009, respectively. NOTE 14. 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 agency segment accounted for 7.0%, 6.7% and 6.4% of 2007, 2008 and 2009 consolidated revenues before intersegment eliminations, respectively. CIMI is an underwriting manager and wholesaler that offers multiple insurance products for businesses in various industries and political subdivisions. A large portion of certain classes of business produced by CIMI is placed with NAICO. Management evaluates the agency segment's performance on the basis of commission income generated and income before income taxes. Chandler USA accounts for intercompany sales and transactions as if they were to third parties and attempts to set fees consistent with those that would apply in arm's length transactions with a non-affiliate. There can be no assurance the rates charged reflect those that would have been agreed upon following an arm's length negotiation. PAGE F-27 The following table presents a summary of Chandler USA's operating segments for the years ended December 31:

~~2006~~PROPERTY ~~2007~~AND ~~2008~~INTERSEGMENT REPORTED CASUALTY AGENCY ELIMINATIONS BALANCES -------- -------- ---------------------------------------- (In thousands) 2007 Revenues from external customers (1) ...................... $ 66,753 $ 1,348 $ - $ 68,101 Intersegment revenues ..................................... 99 3,737 (3,836) - Interest income, net ...................................... 328 41 - 369 Interest expense .......................................... 2,686 17 - 2,703 Segment ~~asset~~profit ~~eliminations~~(loss) ~~Investment~~before inincome ~~subsidiaries~~taxes (2) ............. (2,463) 1,714 - (749) Segment assets ............................................ $232,482 7,772 (5,887) 234,367 Depreciation and amortization ............................. 1,431 - - 1,431 2008 Revenues from external customers (1) ...................... $ 64,532 $ 1,564 $ - $ 66,096 Intersegment revenues ..................................... 56 3,307 (3,363) - Interest income, net ...................................... 3,967 27 - 3,994 Interest expense .......................................... 2,569 - - 2,569 Segment profit (loss) before income taxes (2) ............. (129) 1,333 ~~Elimination~~- of1,204 ~~intersegment~~Segment ~~receivables~~assets ............................................ 5232,~~145~~571 59,~~886~~555 (7,~~478~~479) 234,647 Depreciation and amortization ............................. 1,555 - - 1,555 2009 Revenues from external customers (1) ...................... $ 56,787 $ 1,610 $ - $ 58,397 Intersegment revenues ..................................... 149 2,604 (2,753) - Interest income, net ...................................... 3,610 (4) - 3,606 Interest expense .......................................... 2,357 - - 2,357 Segment profit before income taxes (2) .................... 2,742 736 - 3,478 Segment assets ............................................ 245,400 10,139 (8,194) 247,345 Depreciation and amortization ............................. 1,866 - - 1,866 ------ --------------------------------------------- $(1) ~~5,146~~Consists $of ~~5,887~~net $premiums ~~7,479~~earned ~~========~~and ~~========~~other ~~========~~income. (2) Includes net realized investment gains.

The following table shows the detail of intersegment eliminations for segment assets shown in the previous table:

~~YEAR ENDED DECEMBER 31, ---------------------------------- INSURANCE PROGRAM 2006~~ 2007 2008 ~~----------------------------------------------------------~~2009 ---------- ---------- ---------- (In thousands) ~~NET~~Segment ~~PREMIUMS~~asset ~~EARNED~~eliminations ~~Standard~~Investment ~~lines~~in subsidiaries .............................~~..............~~ $ ~~54,357~~1 $ ~~62,342~~1 $ ~~61,047~~1 ~~Political~~Elimination ~~subdivisions~~of ~~...................................~~intersegment ~~5,253~~receivables ~~3,436 2,747 Homeowners~~ ................~~...............................~~ 5,~~353~~886 ~~9 - Surety bonds ............................................. 193 186 83 Other (1) ................................................ 548 212 150 ---------- ---------- ---------- $ 65~~7,~~704~~478 ~~$ 66~~8,~~185~~193 $ 64,027 ========== ========== ========== LOSSES AND LOSS ADJUSTMENT EXPENSES Standard lines ........................................... $ 40,212 $ 37,122 $ 38,897 Political subdivisions ................................... 2,693 1,584 1,860 Homeowners ............................................... 2,515 (48) 34 Surety bonds ............................................. (152) 2,082 (43) Other (1) ................................................ 205 653 192 ---------- ---------- ---------- $ 455,~~473~~887 $ 417,~~393~~479 $ 408,~~940~~194 ========== ========== ========~~== -------------------------- (1) This category is comprised primarily of the run-off of discontinued programs and NAICO's participation in various mandatory workers compensation pools.~~

PAGE F-28 Net premiums earned and losses and loss adjustment expenses within the property and casualty segment can be identified to Chandler USA designated insurance programs and lines of business. Chandler USA's chief operating decision makers review net premiums earned and losses and loss adjustment expenses in assessing the performance of an insurance program and line 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 and lines of business are offered. Certain discrete financial information is not readily available by insurance program or line of business, including assets, interest income, and investment gains or losses. Chandler USA does not consider its insurance programs and lines of business to be reportable segments, however, the following supplemental information for net premiums earned and losses and loss adjustment expenses pertaining to each insurance program and line of business is presented for the property and casualty segment.

~~First~~YEAR ~~Second~~ENDED ~~Third~~DECEMBER ~~Fourth~~31, ~~Total quarter quarter quarter quarter year~~ --------- --------- ---------------- INSURANCE PROGRAM 2007 2008 2009 --------- -------- ~~2007~~ ----------------------------------------- ---------- ---------- ~~Net~~---------- ~~premiums~~(In ~~earned~~thousands) NET PREMIUMS EARNED Standard lines ........................................... $ 1762,~~020~~342 $ 1561,~~870~~047 $ 1654,~~510~~129 $Political ~~16,785~~subdivisions ~~$66,185 Investment income, net~~ ................................... 13,~~372~~436 12,~~108~~747 1,~~166~~925 ~~(3,277)~~Homeowners ~~369 Realized investment gains, net~~ ............................................... 359 26- 34- ~~119~~Surety ~~214~~bonds ~~Income (loss) before income taxes~~ ............................................. ~~1,445~~186 ~~1,062~~83 ~~921~~70 ~~(4,177)~~Other ~~(749) Net income (loss)~~ .................................................... ~~914~~212 ~~668~~150 ~~514~~236 ~~(2,758) (662) 2008~~ ---------- ---------- ----------~~-----------------------~~ ~~Net~~$ ~~premiums~~66,185 ~~earned~~$ 64,027 $ 56,360 ========== ========== ========== LOSSES AND LOSS ADJUSTMENT EXPENSES Standard lines ........................................... $ 1737,~~510~~122 $ 1538,~~243~~897 $ 1531,~~691~~629 $Political ~~15,583~~subdivisions ~~$64,027 Investment income, net~~ ................................... 1,~~078~~584 1,~~005~~860 ~~987 924 3~~1,~~994~~564 ~~Realized~~Homeowners ~~investment gains, net~~ ............................................... ~~- 4 91 - 95 Income~~ (~~loss~~48) ~~before~~34 ~~income~~2 ~~taxes~~Surety bonds ............................................. 12,~~009~~082 ~~1,418~~ (~~738~~43) ~~(485)~~493 ~~1,204~~Other ~~Net income (loss)~~ .................................................... ~~616~~653 ~~850~~192 ~~(563)~~526 ~~(378)~~---------- ~~525~~---------- ---------- $ 41,393 $ 40,940 $ 34,214 ========== ========== ==========

~~AMOUNT~~YEAR ATENDED ~~WHICH~~DECEMBER ~~SHOWN~~31, IN---------------------------------- ~~THE~~LINES ~~TYPE~~ OF ~~INVESTMENT~~INSURANCE ~~COST~~2007 ~~FAIR~~2008 ~~VALUE~~2009 ~~BALANCE SHEET~~ --------------------------------------------------- ------- ----- ----- ----- ----- ---------- ~~FIXED~~(In ~~MATURITIES~~thousands) ~~AVAILABLE~~NET ~~FOR~~PREMIUMS ~~SALE:~~EARNED ~~U.S.~~Workers ~~Treasury~~compensation ~~securities and obligations of U~~.S. ~~government corporations and agencies~~ ................................... $ 3917,~~151~~861 $ 4120,~~500~~681 $ 4121,~~500~~267 ~~Corporate~~Automobile ~~obligations~~liability ..................................... 2926,~~558~~469 2921,~~485~~537 2916,~~485~~816 ~~Public~~Other ~~utilities~~liability .......................................... 315,~~108~~137 216,~~976~~301 212,~~976~~826 ~~Obligations~~Automobile ofphysical ~~states~~damage ~~and political subdivisions~~ ............................... 36,~~197~~096 35,~~135~~492 34,~~135~~995 Other .................................................... 622 16 456 ------------ ---------- ----------~~-----~~ 75$ 66,~~014~~185 77$ 64,~~096~~027 77$ 56,~~096~~360 ~~EQUITY~~========== ~~SECURITIES~~========== ~~AVAILABLE~~========== ~~FOR~~LOSSES ~~SALE:~~AND ~~Corporate~~LOSS ~~stock~~ADJUSTMENT EXPENSES Workers compensation ..................................... -$ 7611,107 76$ ~~Short-term~~15,558 ~~investments~~$ 16,703 Automobile liability ..................................... 519,~~853~~503 515,~~865~~207 511,~~865~~349 ~~------------~~Other ~~----------~~liability ~~---------------~~.......................................... ~~Total~~4,901 ~~investments~~6,078 3,458 Automobile physical damage ............................... 3,354 4,114 2,517 Other .................................................... 2,528 (17) 187 ---------- ---------- ---------- $ 8041,~~867~~393 $ 8340,~~037~~940 $ 8334,~~037~~214 ============ ========== ==========~~=====~~

PAGE F-29 NOTE 15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) A summary of the unaudited quarterly operating results during 2008 and 2009 follows:

~~DECEMBER~~First ~~31,~~Second Third Fourth Total quarter quarter quarter quarter year --------- --------- --------- ~~2007~~--------- -------- 2008 ---------- ------------------------------------------- ~~ASSETS~~Net ~~Property~~premiums ~~and~~earned ~~equipment, net~~ ................................~~.......~~ $ 117,~~021~~510 $ ~~935~~15,243 ~~Amounts~~$ ~~due~~15,691 ~~from~~$ ~~related parties .................................. 11~~15,~~506~~583 11$64,~~869~~027 ~~Other~~Investment ~~assets~~income, net .............................~~.........................~~ 21,~~561~~078 1,~~678~~005 ~~Investment~~987 in924 ~~subsidiaries~~3,994 ~~net~~Realized ~~...................................~~investment 61gains,~~562~~ ~~64,082~~net ~~---------- ---------- Total assets~~ .....................~~.................................~~ $- ~~76,650~~4 $91 ~~78,564~~- ~~==========~~95 ~~==========~~Income ~~LIABILITIES~~(loss) ~~AND~~before ~~SHAREHOLDER'S~~income ~~EQUITY Liabilities Accrued~~ taxes ~~and other payables~~ ..................~~..............~~ ~~$ 2~~1,~~169~~009 ~~$ 2~~1,~~009~~418 ~~Amounts~~(738) ~~due~~(485) ~~to subsidiaries ..................................... 3~~1,~~278~~204 ~~3,591~~Net ~~Debentures~~income (loss) ..................................~~....................~~ ~~6,979~~616 ~~6,979~~850 ~~Junior~~(563) ~~subordinated~~(378) ~~debentures~~525 ~~issued~~2009 ~~to affiliated trusts ...... 20,620 20,620~~ ---------- ---------- ~~Total liabilities ................................................. 33,046 33,199~~ ---------- ----------------------- ~~Shareholder's~~Net ~~equity~~premiums ~~Common~~earned ~~stock, $1~~.~~00 par value, 50,000 shares authorized; 2,484 shares issued and outstanding~~ ............................... 2$ 214,869 ~~Paid-in~~$ ~~surplus~~14,209 $ 13,257 $ 14,025 $56,360 Investment income, net .............................~~....................~~ ~~60,584~~867 60889 949 901 3,~~584~~606 ~~Accumulated~~Realized ~~deficit~~investment gains, net .....................~~........................~~ ~~(17,179)~~384 ~~(16,654)~~805 ~~Accumulated~~194 ~~other~~144 ~~comprehensive income: Unrealized gain on investments held by subsidiary and available for sale~~1,527 ~~net~~Income ofbefore ~~deferred~~ income taxes ......................... ~~197~~ 1,~~433~~682 ~~----------~~543 ~~----------~~961 ~~Total~~292 ~~shareholder's~~3,478 ~~equity~~Net income ........................................ ~~43,604 45,365 ---------- ---------- Total liabilities and shareholder's equity~~ .~~.......................~~ ~~$ 76~~1,~~650~~071 $325 ~~78,564~~596 ~~==========~~190 ~~==========~~2,182

* * * * * * * PAGE F-30 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholder of Chandler (U.S.A.), Inc.: We have audited the accompanying consolidated balance sheets of Chandler (U.S.A.), Inc. and subsidiaries ("Chandler USA") as of December 31, 2008 and 2009, and the related consolidated statements of operations, comprehensive income, cash flows and shareholder's equity for each of the three years in the period ended December 31, 2009. Our audits also included the financial statement schedules of Chandler USA listed in Item 15(a). These financial statements and financial statement schedules are the responsibility of Chandler USA's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. Tullius Taylor Sartain & Sartain LLP audited the financial statements of Chandler USA for the year ended December 31, 2007, and merged with Hogan & Slovacek, P.C. to form HoganTaylor LLP effective January 7, 2009. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Chandler USA as of December 31, 2008 and 2009, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2009 in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. We were not engaged to examine management's assertion about the effectiveness of Chandler USA's internal control over financial reporting as of December 31, 2009 included in the accompanying Management's Report on Internal Control Over Financial Reporting and, accordingly, we do not express an opinion thereon. /s/ HoganTaylor LLP HoganTaylor LLP Tulsa, Oklahoma March 30, 2010 PAGE F-31 SCHEDULE I CHANDLER (U.S.A.), INC. AND SUBSIDIARIES SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES AS OF DECEMBER 31, 2009 (In thousands)

~~YEAR~~AMOUNT ~~ENDED~~AT ~~DECEMBER~~WHICH ~~31,~~SHOWN IN THE TYPE OF INVESTMENT COST FAIR VALUE BALANCE SHEET ---------------------------------- ~~2006 2007 2008~~ ---------- ------- --- ---------- Revenues Investment income, net .................................. $ 4 $ 8 $ 1 Interest income, net from related parties ............... 792 941 647 Other income ............................................ 1,334 1,020 830 ---------- ---------- -----~~-----~~ ~~Total~~FIXED ~~revenues~~MATURITIES ~~........................................~~AVAILABLE ~~2,130~~FOR ~~1,969~~SALE: ~~1,478~~U.S. ~~----------~~Treasury ~~----------~~securities ~~----------~~and ~~Operating~~obligations ~~costs~~of ~~and~~U.S. ~~expenses~~government ~~General~~corporations and ~~administrative~~agencies ~~expenses~~ ............~~.........~~ 3$ 40,~~116~~395 3$ 41,~~587~~074 2$ 41,~~949~~074 ~~Interest~~Corporate ~~expense~~obligations .............................~~...........~~ 231,~~649~~989 232,~~665~~591 232,~~544~~591 ~~----------~~Public ~~----------~~utilities ~~---------- Total operating costs and expenses~~ .................... ~~5,765 6,252 5,493 ---------- ---------- ---------- Loss before income tax benefit~~ ..............~~..............~~ (32,~~635)~~052 (42,~~283)~~095 (42,~~015)~~095 ~~Federal~~Obligations ~~income~~of ~~tax~~states ~~benefit~~and political subdivisions ..~~..............................~~ 127,~~606~~222 127,~~430~~461 127,~~205~~461 ------------ ---------- --------------- ~~Net~~101,658 ~~loss~~103,221 ~~before~~103,221 ~~equity~~EQUITY inSECURITIES ~~net~~AVAILABLE ~~income~~FOR ofSALE: ~~subsidiaries~~Corporate stock ................................... ~~(2,029)~~- ~~(2,853)~~42 ~~(2,810)~~42 ~~Equity~~Short-term ininvestments ~~net income of subsidiaries~~ ............................ ~~5,425~~380 ~~2,191~~380 ~~3,335~~380 ------------ ---------- --------------- ~~Net~~Total ~~income~~investments ~~(loss)~~ ...............................~~..........~~ $ 3102,~~396~~038 $ ~~(662)~~103,643 $ ~~525~~103,643 ============ ========== ===============

SEE REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM. PAGE F-32 SCHEDULE II CHANDLER (U.S.A.), INC. AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT CHANDLER (U.S.A.), INC. (PARENT COMPANY ONLY) BALANCE SHEETS (In thousands except share amounts)

~~YEAR ENDED~~ DECEMBER 31, ---------------------~~-------------~~ ~~2006 2007~~ 2008 ~~----------~~2009 ---------- ---------- ~~Operating~~ASSETS ~~activities~~Property ~~Net~~and ~~income~~equipment, ~~(loss)~~net ......................................... $ ~~3,396~~935 $ ~~(662)~~868 $Amounts ~~525~~due ~~Add~~from ~~(deduct):~~related ~~Adjustments~~parties ~~to reconcile net income (loss) to cash provided by (applied to) operating activities: Net income of subsidiaries not distributed to parent~~ .................................. (511,~~425)~~869 (212,~~191)~~697 ~~(3,335)~~Other ~~Net~~assets ~~(gain) loss on sale of property and equipment~~ ........ ~~8 (6) 10 Amortization and depreciation~~ .............................................. ~~218~~1,678 ~~243~~957 ~~265~~Investment ~~Net change~~ in ~~non-cash balances relating to operating activities: Amounts due from~~ subsidiaries, net ................................... ~~148~~64,082 67,530 ---------- ---------- ~~Other~~Total assets ...................................................... ~~809~~$ 178,~~059~~564 ~~827~~$ 82,052 ========== ========== LIABILITIES AND SHAREHOLDER'S EQUITY Liabilities Accrued taxes and other payables ................................ ~~(162)~~$ ~~277~~2,009 ~~(160)~~$ 1,517 Amounts due to subsidiaries ..................................... 13,~~306~~591 15,~~973~~763 ~~313~~Debentures ~~----------~~...................................................... ~~----------~~6,979 ~~----------~~6,979 ~~Cash~~Junior ~~provided~~subordinated bydebentures ~~(applied~~issued to) ~~operating~~affiliated ~~activities~~trusts ....... ~~298~~20,620 ~~693 (1~~20,~~555)~~620 ---------- ---------- ~~----------~~Total ~~Investing~~liabilities ~~activities Cost of property and equipment purchased~~ .................. ~~(145) (420) (267) Proceeds from sale of property and equipment~~ .............. ~~45 49 135 ---------- ---------- ---------- Cash applied to investing activities~~ .................~~....~~ ~~(100)~~33,199 ~~(371)~~34,879 ~~(132)~~ ---------- ---------- ~~----------~~Shareholder's ~~Financing~~equity ~~activities~~Common ~~Shareholder~~stock, ~~dividend~~$1.00 ~~from~~par ~~subsidiaries~~value, 50,000 shares authorized; 2,484 shares issued and outstanding ........................... -2 ~~1,600~~ 2~~,050~~ ~~Payments~~Paid-in ~~and~~surplus ~~loans from related parties~~ ................... ~~1,747 2,164 2,639 Payments and loans to related parties~~ ..................... ~~(1,971) (4,086) (3,002) ---------- ---------- ---------- Cash provided by (applied to) financing activities~~ ......... ~~(224)~~60,584 ~~(322) 1~~60,~~687~~584 ~~----------~~Accumulated ~~----------~~deficit ~~---------- Decrease in cash~~ ............................................. (2616,654) -(14,472) -Accumulated ~~Cash~~other atcomprehensive ~~beginning~~income: Unrealized gain on investments held by subsidiary and available for sale, net of ~~year~~deferred income taxes ........................~~..........~~ 261,433 -1,059 - ---------- ---------- ~~----------~~Total ~~Cash~~shareholder's atequity ~~end of year~~ ........................................ $45,365 47,173 ---------- ---------- Total liabilities and shareholder's equity ........................ $ -78,564 $ -82,052 ========== ========== ~~===========~~

SEE REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM. PAGE F-33 SCHEDULE II CHANDLER (U.S.A.), INC. AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT CHANDLER (U.S.A.), INC. (PARENT COMPANY ONLY) STATEMENTS OF OPERATIONS (In thousands)

~~FUTURE~~YEAR ~~POLICY~~ENDED ~~AMORTI-~~DECEMBER ~~BENEFITS~~31, OTHER CLAIMS, ZATION OF NET DEFERRED LOSSES, POLICY LOSSES DEFERRED PREMIUMS POLICY CLAIMS CLAIMS AND NET AND POLICY OTHER WRITTEN ACQUISITION AND LOSS UNEARNED BENEFITS PREMIUM INTEREST SETTLEMENT ACQUISITION OPERATING AND COSTS EXPENSES PREMIUMS PAYABLE REVENUE INCOME EXPENSES COSTS EXPENSES ASSUMED ----------- --------- -------- ------~~----~~ ~~---------~~2007 ~~---------~~2008 2009 ---------- ----------- --------- -~~-------~~ ~~DECEMBER~~Revenues 31Investment income, ~~2006~~net ~~Property and casualty~~ .................................. $ ~~845~~8 $ ~~83,253~~1 $ ~~53,217~~(2) $Interest 7income,~~663~~ $net ~~65,704~~from $related ~~10,572~~parties $............... ~~45,743~~941 $647 ~~11,666~~438 $Other ~~15,097~~income ~~$ 64,789 Agency~~ ............................................ -1,020 -830 -373 - - 21 - - 62 - -----~~------~~ --------- -~~-------~~ ---------- ~~---------~~Total ~~---------~~revenues ........................................ 1,969 1,478 809 ---------- ----------- --------- -~~-------~~ ~~Total~~Operating costs and expenses General and administrative expenses ..................... ~~$ 845 $ 83~~3,~~253~~587 ~~$ 53~~2,~~217~~949 ~~$ 7~~2,~~663~~505 $Interest ~~65,704~~expense ~~$ 10,593 $ 45,473 $ 11,666 $ 15,159 $ 64,789 =========== ========= ======== ========== ========= ========= ========== =========== ========= ======== DECEMBER 31, 2007 Property and casualty~~ ... ~~$ 1,118 $ 100,590 $ 46,389 $ 7,947 $ 66,185 $ 328 $ 41,393 $ 10,823 $ 13,805 $ 64,432 Agency~~ ..................................... -2,665 ~~- - - - 41 - 1~~2,~~724~~544 12,~~688~~336 - ----------- --------- -~~-------~~ ---------- ~~---------~~Total ~~---------~~operating costs and expenses .................... 6,252 5,493 4,841 ---------- ----------- --------- -~~-------~~ ~~Total~~Loss before income tax benefit ................... $ 1,118 $ 100,590 $ 46,389 $ 7,947 $ 66,185 $ 369 $ 41,393 $ 12,547 $ 15,493 $ 64,432 =========== ========= ======== ========== ========= ========= ========== =========== ========= ======== DECEMBER 31, 2008 Property and casualty ......... ~~$ 1~~(4,~~304~~283) ~~$ 101~~(4,~~459~~015) ~~$ 43~~(4,~~725~~032) $Federal ~~7,820~~income $tax ~~64,027~~benefit ~~$ 3,967 $ 40,940 $ 10,573 $ 13,903 $ 62,312 Agency~~ ................................ ~~- - - - - 27 -~~ 1,~~775~~430 1,~~790~~205 -897 ----------- --------- -~~-------~~ ---------- ~~---------~~Net ~~---------~~loss before equity in net income of subsidiaries .................................. (2,853) (2,810) (3,135) Equity in net income of subsidiaries ...................... 2,191 3,335 5,317 ---------- ----------- --------- -~~-------~~ ~~Total~~Net income (loss) ......................................... $ ~~1,304~~(662) $ ~~101,459~~525 $ 432,~~725~~182 ~~$ 7,820 $ 64,027 $ 3,994 $ 40,940 $ 12,348 $ 15,693 $ 62,312~~ =========== ========= =~~=======~~ ========== ~~========= ========= ========== =========== ========= ========~~

SEE REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM. PAGE F-34 SCHEDULE II CHANDLER (U.S.A.), INC. AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT CHANDLER (U.S.A.), INC. (PARENT COMPANY ONLY) STATEMENTS OF CASH FLOWS (In thousands)

~~ASSUMED~~YEAR ~~PERCENTAGE~~ENDED ~~CEDED~~DECEMBER TO31, ~~FROM~~---------------------------------- OF2007 ~~AMOUNT~~2008 ~~GROSS~~2009 ~~OTHER~~---------- ~~OTHER~~---------- ~~NET~~---------- ~~ASSUMED~~Operating ~~AMOUNT~~activities ~~COMPANIES~~Net ~~COMPANIES~~income ~~AMOUNT~~(loss) TO......................................... ~~NET~~$ (662) $ 525 $ 2,182 Add (deduct): Adjustments to reconcile net income (loss) to cash provided by (applied to) operating activities: Net income of subsidiaries not distributed to parent ..... (2,191) (3,335) (5,317) Net (gain) loss on sale of property and equipment ........ (6) 10 33 Amortization and depreciation ............................ 243 265 265 Net change in non-cash balances relating to operating activities: Other assets ............................................ 1,059 827 664 Accrued taxes and other payables ........................ 277 (160) (493) Amounts due to subsidiaries ............................. 1,973 313 2,172 ----------- ---------- -- -------- Cash provided by (applied to) operating activities ....... 693 (1,555) (494) ---- ------ ------ ---- ---------- ~~Year~~Investing ~~ended~~activities ~~December~~Cost ~~31,~~of ~~2006~~property ~~Property~~and equipment purchased .................. (420) (267) (200) Proceeds from sale of property and ~~casualty~~equipment .............. $49 ~~104,037~~135 $122 ---------- ---------- ---------- Cash applied to investing activities ..................... (~~48,254~~371) $(132) ~~9,006~~(78) $---------- ~~64,789~~---------- ~~13.90%~~---------- ~~============~~Financing ~~============~~activities ~~============~~Shareholder ~~============~~dividend ~~============~~from ~~Year~~subsidiaries ~~ended~~.................... ~~December~~1,600 312,050 ~~2007~~1,400 ~~Property~~Payments and ~~casualty~~loans from related parties ................... $2,164 852,~~836~~639 $2,292 Payments and loans to related parties ..................... (354,~~649~~086) $(3,002) 14(3,~~245~~120) $---------- ~~64,432~~---------- ~~22.11%~~---------- ~~============~~Cash ~~============~~provided ~~============~~by ~~============~~(applied ~~============~~to) ~~Year~~financing ~~ended~~activities ~~December~~....... 31(322) 1,687 ~~2008~~572 ~~Property~~---------- ~~and~~---------- ~~casualty~~---------- Decrease in cash ........................................... $- ~~90,871~~- $- ~~(36,072)~~Cash at beginning of year .................................. - - - ---------- ---------- ---------- Cash at end of year ........................................ $ ~~7,513~~- $ ~~62,312~~- ~~12.06%~~$ ~~============~~- ============ ============ ===========~~= ============~~

SEE REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM. PAGE F-35 SCHEDULE III CHANDLER (U.S.A.), INC. AND SUBSIDIARIES SUPPLEMENTARY INSURANCE INFORMATION (In thousands)

~~BALANCE~~FUTURE ATPOLICY ~~PROVISION~~AMORTI- ~~BALANCE~~BENEFITS, ~~BEGINNING~~OTHER ~~FOR~~CLAIMS, ATZATION ~~END~~ OF ~~PERIOD~~NET ~~NON-COLLECTION~~DEFERRED ~~WRITE-OFFS~~LOSSES, OFPOLICY ~~PERIOD~~LOSSES DEFERRED PREMIUMS POLICY CLAIMS CLAIMS AND NET AND POLICY OTHER WRITTEN ACQUISITION AND LOSS UNEARNED BENEFITS PREMIUM INTEREST SETTLEMENT ACQUISITION OPERATING AND COSTS EXPENSES PREMIUMS PAYABLE REVENUE INCOME EXPENSES COSTS EXPENSES ASSUMED ----------- --------- -------- ---------- --------- --------- ---------- ----------- ~~Allowance~~--------- ~~for non~~-~~collection~~------- ofDECEMBER ~~premiums~~31, ~~receivable:~~2007 ~~2006~~Property and casualty ... $ 1,118 $100,590 $46,389 $ 7,947 $ 66,185 $ 328 $ 41,393 $ 5,852 $ 18,776 $64,432 Agency ..................~~......~~ $- ~~223~~- $- 73- $- ~~(126)~~41 $- ~~170~~- ~~================~~3,412 ~~================~~- ~~================~~----------- ~~===============~~--------- ~~2007~~-------- ---------- --------- --------- ---------- ----------- --------- -------- Total ...................~~........~~ $ ~~170~~1,118 $100,590 19$46,389 $ ~~(55)~~7,947 $ ~~134~~66,185 $ 369 $ 41,393 $ 5,852 $ 22,188 $64,432 =========== ===== ==== ======== ==== ====== ========== =========~~======~~ ~~2008 ........................... $ 134 $ 30 $ (26) $ 138~~ ==========~~======~~ ===========~~=====~~ =========~~=======~~ ========~~=======~~ ~~Allowance~~DECEMBER ~~for~~31, ~~non-collection~~2008 ofProperty ~~reinsurance~~and ~~recoverables~~casualty on... ~~paid~~$ ~~and~~1,304 ~~unpaid~~$101,459 ~~losses:~~$43,725 ~~2006~~$ 7,820 $ 64,027 $ 3,967 $ 40,940 $ 5,486 $ 18,990 $62,312 Agency .................. - - - - - 27 - - 3,565 - ----------- --------- -------- ---------- --------- --------- ---------- ----------- --------- -------- Total ................... $ ~~174~~1,304 $101,459 97$43,725 $ ~~(141)~~7,820 $ ~~130~~64,027 $ 3,994 $ 40,940 $ 5,486 $ 22,555 $62,312 =========== ===== ==== ======== ==== ====== ========== =========~~======~~ ~~2007 ........................... $ 130 $ 356 $ (247) $ 239~~ ==========~~======~~ ===========~~=====~~ =========~~=======~~ ========~~=======~~ ~~2008~~DECEMBER 31, 2009 Property and casualty ... $ 1,546 $107,341 $44,519 $ 9,094 $ 56,360 $ 3,610 $ 34,214 $ 5,545 $ 16,820 $56,538 Agency .................. - - - - - (4) - - 3,473 - ----------- --------- -------- ---------- --------- --------- ---------- ----------- --------- -------- Total ................... $ ~~239~~1,546 $107,341 ~~166~~$44,519 $ ~~(174)~~9,094 $ ~~231~~56,360 $ 3,606 $ 34,214 $ 5,545 $ 20,293 $56,538 =========== ========= ======== ========== ========= ========= ========== =========== ========= ========

SEE REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM. PAGE F-36 SCHEDULE IV CHANDLER (U.S.A.), INC. AND SUBSIDIARIES REINSURANCE (Dollars in thousands)

~~DISCOUNT~~ASSUMED ~~PAID~~PERCENTAGE ~~LOSSES~~CEDED ~~AND~~TO ~~DEDUCTED~~FROM ~~LOSS~~OF ~~ADJUSTMENT~~AMOUNT ~~FROM~~GROSS ~~RESERVES~~OTHER ~~EXPENSES~~OTHER NET ASSUMED AMOUNT COMPANIES COMPANIES AMOUNT TO NET ------------ ------------ ------------ ------------ ------------ Year ended December 31, ~~2006~~2007 Property- and casualty ......~~.............~~ $ -85,836 $ 43(35,~~941~~649) $ 14,245 $ 64,432 22.11% ============ ============ ============ ============ ============ Year ended December 31, ~~2007~~2008 Property- and casualty ......~~.............~~ $ -90,871 $ 37(36,~~608~~072) $ 7,513 $ 62,312 12.06% ============ ============ ============ ============ ============ Year ended December 31, ~~2008~~2009 Property- and casualty ......~~.............~~ $ -82,234 $ 37(34,~~738~~647) $ 8,951 $ 56,538 15.83% ============ ============ ============ ============ ============

SEE REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM. PAGE F-37 SCHEDULE V CHANDLER (U.S.A.), INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (In thousands)

SEE REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM. PAGE F-38 SCHEDULE VI CHANDLER (U.S.A.), INC. AND SUBSIDIARIES SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS (In thousands)

SEE REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM. PAGE F-39 INDEX TO EXHIBITS ----------------- Exhibit No. ----------- 21.1 Subsidiaries of the registrant. 31.1 Rule 13a-14(a)/15d-14(a) Certifications. 32.1 Section 1350 Certifications.

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