10-Q 1 edg9302010q.txt CHANDLER (U.S.A.), INC. 9/30/2010 10-Q ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------------------- FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE --- SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE --- SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from to --------- --------- COMMISSION FILE NUMBER: 1-15135 CHANDLER (U.S.A.), INC. (Exact name of registrant as specified in its charter) OKLAHOMA 73-1325906 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1010 MANVEL AVENUE, CHANDLER, OKLAHOMA 74834 (Address of principal executive offices and zip code) Registrant's telephone number, including area code: (405) 258-0804 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES NO --- --- Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer Accelerated filer -- -- Non-accelerated filer X (Do not check if a smaller reporting company) -- Smaller reporting company -- Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES NO X --- --- The number of common shares, $1.00 par value, of the registrant outstanding on October 31, 2010 was 2,484, which are owned by Chandler Insurance Company, Ltd. ------------------------------------------------------------------------------- Page i CHANDLER (U.S.A.), INC. INDEX ----- PART I - FINANCIAL INFORMATION ------------------------------ ITEM 1. FINANCIAL STATEMENTS: -------------------------------- Consolidated Balance Sheets as of September 30, 2010 (unaudited) and December 31, 2009 .................................................1 Consolidated Statements of Operations for the three months ended September 30, 2010 and 2009 (unaudited) .........................2 Consolidated Statements of Operations for the nine months ended September 30, 2010 and 2009 (unaudited) .........................3 Consolidated Statements of Comprehensive Income for the three months ended September 30, 2010 and 2009 (unaudited) ..................4 Consolidated Statements of Comprehensive Income for the nine months ended September 30, 2010 and 2009 (unaudited) ..................5 Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009 (unaudited) .........................6 Notes to Interim Consolidated Financial Statements (unaudited) ..............7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND -------------------------------------------------------------------------- RESULTS OF OPERATIONS ............................................16 --------------------- ITEM 4. CONTROLS AND PROCEDURES .............................................22 -------------------------------- PART II - OTHER INFORMATION --------------------------- Item 1. Legal Proceedings ..............................................23 Item 1A. Risk Factors ...................................................23 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ....23 Item 3. Defaults Upon Senior Securities ................................23 Item 4. Reserved .......................................................23 Item 5. Other Information ..............................................23 Item 6. Exhibits .......................................................23 Signatures .................................................................24 PAGE 1 CHANDLER (U.S.A.), INC. CONSOLIDATED BALANCE SHEETS (Amounts in thousands except share amounts)

~~June~~September 30, December 31, 2010 2009 ------------ ------------ (Unaudited) ASSETS Investments Fixed maturities available for sale, at fair value Restricted (amortized cost $3129,~~480~~142 and $34,923 in 2010 and 2009, respectively) ........ $ 3229,~~452~~369 $ 35,392 Unrestricted (amortized cost $6765,~~155~~842 and $66,735 in 2010 and 2009, respectively) ....... 6867,~~310~~238 67,829 Equity securities at fair value (cost $0 in 2010 and 2009) ............................. 4245 42 Mortgage loan on real estate, at cost .................................................. 2,~~334~~287 - Short-term investments at fair value (amortized cost $0 and $380 in 2010 and 2009, respectively) ....................................................... - 380 ------------ ------------ Total investments ..................................................................... ~~103~~98,~~138~~939 103,643 Cash and cash equivalents ($1,~~862~~968 and $2,194 restricted in 2010 and 2009, respectively).. 1410,~~753~~418 7,430 Accrued investment income ............................................................... ~~981~~683 1,228 Premiums receivable, less allowance for non-collection of $~~426~~421 and $291 at 2010 and 2009, respectively ............................................................ 2123,~~426~~325 25,305 Reinsurance recoverable on paid losses .................................................. ~~629~~348 316 Reinsurance recoverable on paid losses from related parties ............................. 2,935 - Reinsurance recoverable on unpaid losses, less allowance for non-collection of $~~266~~253 and $298 at 2010 and 2009, respectively ......................... 3840,~~963~~286 36,588 Reinsurance recoverable on unpaid losses from related parties ........................... 21,~~383~~321 21,360 Prepaid reinsurance premiums ............................................................ 3,~~496~~856 3,424 Prepaid reinsurance premiums to related parties ......................................... 12,~~315~~945 12,276 Deferred policy acquisition costs ....................................................... 2,~~340~~422 1,546 Property and equipment, net ............................................................. 6,~~927~~906 7,174 Amounts due from related parties ........................................................ 11,~~748~~317 12,697 State insurance licenses, net ........................................................... 3,745 3,745 Amortizable intangible assets, net ...................................................... 929 - Other assets ............................................................................ 1013,~~725~~432 10,613 ------------ ------------ Total assets ............................................................................ $ ~~252~~253,~~569~~807 $ 247,345 ============ ============ LIABILITIES AND SHAREHOLDER'S EQUITY Liabilities Unpaid losses and loss adjustment expenses ............................................. $ ~~109~~110,~~579~~641 $ 107,341 Unearned premiums ...................................................................... 4447,~~786~~183 44,519 Policyholder deposits .................................................................. 87,~~400~~747 9,094 Accrued taxes and other payables ....................................................... 98,~~676~~728 6,831 Premiums payable ....................................................................... 43,~~161~~199 4,266 Premiums payable to related parties .................................................... ~~150~~- 522 Senior debentures ...................................................................... 6,979 6,979 Junior subordinated debentures issued to affiliated trusts ............................. 20,620 20,620 ------------ ------------ Total liabilities ..................................................................... ~~204~~205,~~351~~097 200,172 ------------ ------------ 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 .................................................................... (1312,~~799~~977) (14,472) Accumulated other comprehensive income: Unrealized gain on investments available for sale, net of deferred income taxes ........ 1,~~431~~101 1,059 ------------ ------------ Total shareholder's equity ............................................................ 48,~~218~~710 47,173 ------------ ------------ Total liabilities and shareholder's equity .............................................. $ ~~252~~253,~~569~~807 $ 247,345 ============ ============

See accompanying Notes to Interim Consolidated Financial Statements. PAGE 2 CHANDLER (U.S.A.), INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Amounts in thousands)

Three months ended ~~June~~September 30, -------------------------------- 2010 2009 ------------- ------------- Premiums and other revenues Direct premiums written and assumed ........................... $ 2127,~~855~~418 $ 2120,~~034~~396 Reinsurance premiums ceded .................................... (23,~~207~~278) (2,~~836~~682) Reinsurance premiums ceded to related parties ................. (57,~~853~~264) (5,~~398~~293) ------------- ------------- Net premiums written and assumed ............................ 1316,~~795~~876 12,~~800~~421 Decrease (increase) in unearned premiums ......................~~...........~~ 91 (1,~~409~~407) 836 ------------- ------------- Net premiums earned ......................................... 1315,~~886~~469 1413,~~209~~257 Investment income, net .......................................... ~~731~~696 ~~780~~838 Interest income, net from related parties ....................... ~~104~~100 ~~109~~111 Realized investment gains, net .................................. ~~167~~1,408 ~~805~~194 Other income .................................................... ~~436~~725 ~~332~~825 ------------- ------------- Total premiums and other revenues ............................. 1518,~~324~~398 1615,~~235~~225 ------------- ------------- Operating costs and expenses Losses and loss adjustment expenses, net of amounts ceded to related parties of $34,~~579~~064 and $43,~~700~~078 in 2010 and 2009, respectively ................................. 89,~~238~~932 98,~~500~~039 Policy acquisition costs, net of ceding commissions received from related parties of $12,~~719~~195 and $2,~~052~~012 in 2010 and 2009, respectively ................................. 3,~~263~~653 2,~~878~~941 General and administrative expenses ........................... 3,~~181~~012 2,~~719~~699 Interest expense .............................................. ~~578~~581 ~~595~~585 ------------- ------------- Total operating costs and expenses .......................... 1517,~~260~~178 1514,~~692~~264 ------------- ------------- Income before income taxes ...................................... 641,220 ~~543~~961 ~~Federal~~Income ~~income~~ tax provision ............................................ (3398) (~~218~~365) ------------- ------------- Net income .................................................... $ 61822 $ ~~325~~596 ============= =============

See accompanying Notes to Interim Consolidated Financial Statements. PAGE 3 CHANDLER (U.S.A.), INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Amounts in thousands)

~~Six~~Nine months ended ~~June~~September 30, -------------------------------- 2010 2009 ------------- ------------- Premiums and other revenues Direct premiums written and assumed ........................... $ 4371,~~967~~385 $ 4566,~~888~~284 Reinsurance premiums ceded .................................... (48,~~974~~252) (58,~~378~~060) Reinsurance premiums ceded to related parties ................. (1118,~~682~~946) (1217,~~068~~361) ------------- ------------- Net premiums written and assumed ............................ 2744,~~311~~187 2840,~~442~~863 Decrease (increase) in unearned premiums ...................... (~~157~~1,564) ~~636~~1,472 ------------- ------------- Net premiums earned ......................................... 2742,~~154~~623 2942,~~078~~335 Investment income, net .......................................... 12,~~464~~160 12,~~541~~379 Interest income, net from related parties ....................... ~~214~~314 ~~215~~326 Realized investment gains, net .................................. 12,~~095~~503 1,~~189~~383 Other income .................................................... ~~928~~1,653 ~~775~~1,600 ------------- ------------- Total premiums and other revenues ............................. 3049,~~855~~253 3248,~~798~~023 ------------- ------------- Operating costs and expenses Losses and loss adjustment expenses, net of amounts ceded to related parties of $610,~~556~~620 and $811,~~225~~303 in 2010 and 2009, respectively ................................. 1626,~~481~~413 1725,~~762~~801 Policy acquisition costs, net of ceding commissions received from related parties of $35,~~436~~631 and $46,~~588~~600 in 2010 and 2009, respectively ................................. 69,~~069~~722 58,~~794~~735 General and administrative expenses ........................... 69,~~176~~188 58,~~824~~523 Interest expense .............................................. 1,~~155~~736 1,~~193~~778 ------------- ------------- Total operating costs and expenses .......................... 2947,~~881~~059 3044,~~573~~837 ------------- ------------- Income before income taxes ...................................... ~~974~~ 2,~~225~~194 ~~Federal~~3,186 ~~income~~Income tax provision ............................................ (~~301~~699) (~~829~~1,194) ------------- ------------- Net income .................................................... $ ~~673~~1,495 $ 1,~~396~~992 ============= =============

See accompanying Notes to Interim Consolidated Financial Statements. PAGE 4 CHANDLER (U.S.A.), INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Amounts in thousands)

Three months ended ~~June~~September 30, -------------------------------- 2010 2009 ------------- ------------ Net income .................................................... $ 61822 $ ~~325~~596 ------------- ------------ Other comprehensive income (loss), before income tax: Unrealized gains ~~(losses)~~ on securities: Unrealized holding gains ~~(losses)~~ arising during period ............ 1907 2,~~186~~497 ~~(158)~~ Less: Reclassification adjustment for gains included in net income ................................................ (~~167~~1,408) (~~805~~194) ------------- ------------ Other comprehensive income (loss), before income tax .......... ~~1,019~~ (~~963~~501) 2,303 Income tax benefit (provision) related to items of other comprehensive income (loss) ................................. 171 (~~347~~783) ~~327~~ ------------- ------------ Other comprehensive income (loss), net of income tax .......... ~~672~~ (~~636~~330) 1,520 ------------- ------------ Comprehensive income ~~(loss)~~ .......................................... $ ~~733~~492 $ ~~(311)~~2,116 ============= ============

See accompanying Notes to Interim Consolidated Financial Statements. PAGE 5 CHANDLER (U.S.A.), INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Amounts in thousands)

~~Six~~Nine months ended ~~June~~September 30, -------------------------------- 2010 2009 ------------- ------------ Net income .................................................... $ ~~673~~1,495 $ 1,~~396~~992 ------------- ------------ Other comprehensive income ~~(loss)~~, before income tax: Unrealized gains ~~(losses)~~ on securities: Unrealized holding gains ~~(losses)~~ arising during period ............ 12,~~659~~566 ~~(436)~~2,061 Less: Reclassification adjustment for gains included in net income .............................................. (12,~~095~~503) (1,~~189~~383) ------------- ------------ Other comprehensive income ~~(loss)~~, before income tax ................. ~~564~~63 ~~(1,625)~~678 Income tax ~~benefit (~~provision) related to items of other comprehensive income ~~(loss)~~ ........................................ (~~192~~21) ~~552~~(231) ------------- ------------ Other comprehensive income ~~(loss)~~, net of income tax ................. ~~372~~42 ~~(1,073)~~447 ------------- ------------ Comprehensive income .......................................... $ 1,~~045~~537 $ ~~323~~2,439 ============= ============

See accompanying Notes to Interim Consolidated Financial Statements. PAGE 6 CHANDLER (U.S.A.), INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Amounts in thousands)

~~Six~~Nine months ended ~~June~~September 30, -------------------------------- 2010 2009 ------------ ------------ OPERATING ACTIVITIES Net income .................................................................. $ ~~673~~1,495 $ 1,~~396~~992 Add (deduct): Adjustments to reconcile net income to cash provided by (applied to) operating activities: Realized investment gains, net .......................................... (12,~~095~~503) (1,~~189~~383) Net (gains) ~~losses~~ on sale of property and equipment ............................. ~~(7)~~6 2529 Amortization and depreciation ........................................... ~~775~~1,119 ~~867~~1,371 Provision for non-collection of premiums ................................ ~~135~~151 3065 Provision for non-collection of reinsurance recoverables ................ 1121 ~~155~~160 Provision for non-collection of debenture ............................... 2030 2030 Net change in non-cash balances relating to operating activities: Accrued investment income ............................................. ~~247~~545 ~~(255)~~57 Premiums receivable ................................................... 31,~~744~~845 4,~~155~~882 Reinsurance recoverable on paid losses ................................ (~~349~~98) (23623) Reinsurance recoverable on paid losses from related parties ........... (2,935) - Reinsurance recoverable on unpaid losses .............................. (23,~~350~~653) (32,~~534~~755) Reinsurance recoverable on unpaid losses from related parties ......... ~~(23)~~39 (21,~~244~~013) Prepaid reinsurance premiums .......................................... (72432) (~~314~~502) Prepaid reinsurance premiums to related parties ....................... (39669) ~~274~~633 Deferred policy acquisition costs ..................................... (~~794~~876) (2128) Other assets .......................................................... (~~353~~550) ~~178~~246 Unpaid losses and loss adjustment expenses ............................ 23,~~238~~300 83,~~712~~719 Unearned premiums ..................................................... ~~267~~2,664 (~~595~~1,603) Policyholder deposits ................................................. (~~694~~1,347) 21,~~457~~144 Accrued taxes and other payables ...................................... ~~864~~(559) ~~1,384~~(897) Premiums payable ...................................................... (~~105~~1,067) ~~(359)~~155 Premiums payable to related parties ................................... (~~372~~522) (~~205~~200) ------------ ------------ Cash provided by (applied to) operating activities ......................~~.............~~ 2(3,~~721~~996) 105,~~914~~479 ------------ ------------ INVESTING ACTIVITIES Short-term investments: Purchases ............................................................... - (380) Maturities .............................................................. 380 45,~~900~~660 Unrestricted fixed maturities available for sale: Purchases ............................................................... (4489,~~978~~703) (5358,~~773~~249) Sales ................................................................... 3668,~~210~~088 2025,~~629~~984 Maturities .............................................................. 1430,~~500~~395 48,~~715~~215 Mortgage loan on real estate: Purchases ............................................................... (2,350) - Principal payments received ............................................. 1663 - Cost of property and equipment purchased .................................. (~~133~~321) (~~131~~140) Proceeds from sale of property and equipment .............................. 89 19 Cost of subsidiary purchased, net of cash received ........................ (958) - ------------ ------------ Cash provided by (applied to) investing activities ...................... 35,~~653~~603 (2418,~~021~~891) ------------ ------------ FINANCING ACTIVITIES Payments and loans from related parties ................................... 24,~~405~~081 ~~889~~1,912 Payments and loans to related parties ..................................... (12,~~456~~700) (12,~~620~~344) ------------ ------------ Cash provided by (applied to) financing activities ........................ ~~949~~1,381 (~~731~~432) ------------ ------------ Increase (decrease) in cash and cash equivalents during the period .......... 72,~~323~~988 (13,~~838~~844) Cash and cash equivalents at beginning of period ............................ 7,430 20,636 ------------ ------------ Cash and cash equivalents at end of period .................................. $ 1410,~~753~~418 $ 6,~~798~~792 ============ ============

See accompanying Notes to Interim Consolidated Financial Statements. PAGE 7 CHANDLER (U.S.A.), INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009 (Unaudited) NOTE 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of Chandler (U.S.A.), Inc. ("Chandler USA") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. They do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. However, except as disclosed herein, there have been no material changes in the information included in Chandler USA's Annual Report on Form 10-K for the year ended December 31, 2009. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the interim periods ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year. The consolidated financial statements include the accounts of Chandler USA and all wholly owned subsidiaries that meet consolidation requirements including National American Insurance Company ("NAICO"), Chandler Insurance Managers, Inc. ("CIMI") and Chandler Insurance Services Agency, Inc. ("CISA"). NOTE 2. SEGMENT INFORMATION Chandler USA has two reportable operating segments: property and casualty insurance and agency. The segments are managed separately due to the differences in the nature of the insurance products and services sold. The following table presents a summary of Chandler USA's operating segments for the periods indicated:

PROPERTY AND CASUALTY INTERSEGMENT REPORTED INSURANCE AGENCY ELIMINATIONS BALANCES ------------ ------------ ------------ ------------ (In thousands) THREE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, 2010 Revenues from external customers (1) ........... $ 1315,~~996~~570 $ ~~326~~624 $ - $ 1416,~~322~~194 Intersegment revenues .......................... 2333 ~~382~~518 (~~405~~551) - Segment profit ~~(loss)~~ before income taxes (2) ......... ~~302~~1,148 ~~(238)~~72 - 641,220 THREE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, 2009 Revenues from external customers (1) ........... $ 1413,~~319~~338 $ ~~222~~744 $ - $ 14,~~541~~082 Intersegment revenues .......................... 4240 ~~602~~534 (~~644~~574) - Segment profit ~~(loss)~~ before income taxes (2) ......... ~~598~~531 ~~(55)~~430 - ~~543~~961 ~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, 2010 Revenues from external customers (1) ........... $ 2742,~~340~~910 $ ~~742~~1,366 $ - $ 2844,~~082~~276 Intersegment revenues .......................... 5487 ~~779~~1,297 (~~833~~1,384) - Segment profit (loss) before income taxes (2) .. 12,~~312~~461 (~~338~~267) - ~~974~~2,194 Segment assets ................................. ~~250~~252,~~894~~322 9,~~349~~385 (7,~~674~~900) ~~252~~253,~~569~~807 ~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, 2009 Revenues from external customers (1) ........... $ 2942,~~333~~671 $ ~~520~~1,264 $ - $ 2943,~~853~~935 Intersegment revenues .......................... 71111 1,~~405~~940 (12,~~476~~051) - Segment profit before income taxes (2) ......... 2,~~042~~572 ~~183~~614 - 23,~~225~~186 Segment assets ................................. ~~244~~236,~~795~~972 89,~~881~~940 (7,~~312~~508) ~~246~~239,~~364~~404 --------------------------------------------------- (1) Consists of net premiums earned and other income. (2) Includes net realized investment gains.

PAGE 8 Net premiums earned and losses and loss adjustment expenses within the property and casualty insurance segment can be identified to Chandler USA designated insurance programs and to each line of insurance. Chandler USA's chief operating decision makers review net premiums earned and losses and loss adjustment expenses in assessing the performance of the insurance programs and lines of business. In addition, Chandler USA's chief operating decision makers consider many other factors such as the lines of business offered within an insurance program and the states in which the insurance programs are offered. Certain discrete financial information is not readily available by insurance programs or lines of insurance, including assets, interest income, and investment gains or losses, allocated to each insurance program or line of insurance. Chandler USA does not consider its insurance programs or lines of insurance to be reportable segments, however, the following supplemental information pertaining to each insurance program's net premiums earned and losses and loss adjustment expenses is presented by insurance program and line of insurance for the property and casualty insurance segment.

THREE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, ~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, -------------------------------- -------------------------------- 2010 2009 2010 2009 ------------ ------------ ------------ ------------ (In thousands) LINES OF INSURANCE: ----------------------------------------- NET PREMIUMS EARNED Workers compensation .................. $ 56,~~254~~527 $ 5,~~152~~531 $ 1016,~~287~~814 $ 1015,~~283~~813 Automobile liability .................. 4,~~197~~119 43,~~403~~135 812,~~289~~408 912,~~153~~288 Other liability ....................... 23,~~868~~160 3,~~258~~314 58,~~658~~818 69,~~621~~936 Automobile physical damage ............ 1,~~207~~305 1,~~333~~138 23,~~230~~535 24,~~936~~073 Inland marine ......................... ~~188~~182 3275 ~~350~~532 35110 Property .............................. ~~156~~160 1449 ~~288~~449 1666 Other ................................. 16 1715 5267 3449 ------------ ------------ ------------ ------------ TOTAL ................................. $ 1315,~~886~~469 $ 1413,~~209~~257 $ 2742,~~154~~623 $ 2942,~~078~~335 ============ ============ ============ ============ LOSSES AND LOSS ADJUSTMENT EXPENSES Workers compensation .................. $ 25,~~509~~043 $ 63,~~307~~132 $ 611,~~267~~310 $ 811,~~715~~847 Automobile liability .................. 3,~~955~~505 13,~~099~~008 610,~~840~~345 47,~~873~~881 Other liability ....................... ~~782~~438 1,~~472~~227 1,~~388~~826 24,~~878~~104 Automobile physical damage ............ ~~758~~781 ~~714~~525 12,~~528~~309 1,~~390~~915 Inland marine ......................... 8753 1- ~~175~~228 (63) Property .............................. 7480 ~~(4)~~- ~~130~~210 (3334) Other ................................. 7332 ~~(89)~~147 ~~153~~185 2151 ------------ ------------ ------------ ------------ TOTAL ................................. $ 89,~~238~~932 $ 98,~~500~~039 $ 1626,~~481~~413 $ 1725,~~762~~801 ============ ============ ============ ============

PAGE 9 NOTE 3. COMMITMENTS AND CONTINGENCIES During March 2001, Chandler USA entered into a $3.8 million sale and leaseback transaction for certain owned equipment for three years. During March 2004 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 September 30, 2010. The interest rate is subject to a minimum rate of 5.5%. 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 Chandler Capital Trust I and Chandler Capital Trust II (the "Capital Trusts") with respect to the trust preferred securities they have outstanding. The Capital Trusts distribute the interest received from Chandler USA on the junior subordinated debentures to the holders of the trust preferred securities to fulfill their obligations with respect to such securities. The Capital Trusts are wholly owned non- consolidated subsidiaries of Chandler USA. Chandler USA guarantees payment of distributions and the redemption price of the trust preferred securities until the securities are redeemed in full. The total redemption price of the trust preferred securities is $20.0 million. NOTE 4. LITIGATION In October 1999, NAICO provided surety bonds for Gulsby Engineering, Inc. ("Gulsby") in connection with contracts between Gulf Liquids New River Project, LLC ("Gulf Liquids") and Gulsby for the construction of two gas processing plants in Louisiana. During 2001, Gulsby became unable to pay various vendors resulting in payments to vendors by NAICO totaling $20,182,499. In August 2001, NAICO filed suit in federal court in Louisiana alleging that Gulf Liquids had breached its obligations under the bonds by materially altering certain contracts and that, as a result, NAICO was exonerated on the bonds and should recover the amounts paid to vendors. In the fall of 2001, Gulsby and Bay Limited, another contractor with whom Gulsby had entered into a joint venture for the construction of other gas processing plants for Gulf Liquids, filed lawsuits relating to those plants in Houston, Texas. Gulf Liquids filed original actions and counterclaims. NAICO intervened in the Texas lawsuits and, in addition, sued Williams Energy Marketing and Trading (which later became Williams Power Company, Inc.) ("Williams") alleging fraud, breach of contract, tortious interference with contractual relations, conspiracy and alter ego. These claims were asserted against both Gulf Liquids and Williams. Gulf Liquids asserted counterclaims alleging breach of contract against NAICO and requesting contractual and statutory damages ranging from $40 million to $80 million. The cases were consolidated for trial in the 215th Judicial District Court in Harris County, Texas. The trial in the Harris County cases began in late April 2006, and concluded August 1, 2006. The jury found in favor of NAICO and Gulsby, Bay Limited and the joint venture between Gulsby and Bay Limited ("Gulsby-Bay Plant Partners") on all counts and fixed damages against Gulf Liquids and Williams totaling $402,568,089. The damages determined by the jury included a total of $325 million in punitive damages. Among other findings, the jury found: 1. Williams tortiously interfered with NAICO's contractual relationship with Gulsby and Gulf Liquids; and 2. Williams fraudulently induced NAICO to issue the surety bonds; and 3. Williams defrauded NAICO after the bonds were issued; and 4. Williams' actions were malicious; and 5. Gulf Liquids fraudulently induced NAICO to issue the surety bonds; and 6. Gulf Liquids breached its obligations to NAICO under the bonds; and 7. Williams is responsible for the claims against Gulf Liquids because Gulf Liquids is the alter ego of Williams; and 8. There were material alterations (cardinal changes) to the contracts NAICO bonded. The amounts the jury found owing to NAICO included $20,182,499 in actual damages, against both Gulf Liquids and Williams, $20 million in punitive damages against Gulf Liquids, and $50 million in punitive damages against Williams. The verdicts in favor of Gulsby included $20,941,436 in actual damages against both Gulf Liquids and Williams, $25 million in punitive damages against Gulf Liquids and $60 million in punitive damages against Williams. NAICO is subrogated to any recovery by Gulsby to the extent of NAICO's losses on the bonds including loss adjustment expenses with interest from the date the losses and loss expenses were paid. PAGE 10 A significant amount of NAICO's losses on the surety bonds were ceded to various reinsurers and NAICO will be required to reimburse these reinsurers in accordance with the agreements between NAICO and the reinsurers. On January 28, 2008, the court entered a final judgment denying Gulf Liquid's claims against NAICO and Gulsby, denying all of NAICO's claims against Gulf Liquids and Williams, and entering judgment for Gulsby against Gulf Liquids for $15,651,927 plus interest at 7.25% compounded annually from January 28, 2008 until paid. The court also ordered Gulf Liquids to pay Gulsby's taxable court costs, estimated at $100,000. Gulf Liquids has appealed the judgment entered in favor of Gulsby and the denial of its claims against NAICO and Gulsby. NAICO has appealed the trial court's denial of its claims against Gulf Liquids and Williams and seeks entry of judgment upon the jury verdicts for the amounts the jury found should be awarded to NAICO. Gulsby has also appealed the trial court's final judgment, contending that judgment should be entered in its favor against Gulf Liquids and Williams in accordance with the jury verdicts. The recoverable amounts deducted from Chandler USA's net liability for losses and loss adjustment expenses related to this litigation were approximately $10.1 million at September 30, 2010 and December 31, 2009. NOTE 5. NEW ACCOUNTING STANDARDS Chandler USA has reviewed the recently issued accounting pronouncements and concluded that the following new accounting standards and accounting standard updates are applicable to Chandler USA. In June 2009, the Financial Accounting Standards Board ("FASB") issued 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. Chandler USA adopted this new guidance as of January 1, 2010. 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 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. Chandler USA adopted this new guidance as of January 1, 2010. The adoption of this new guidance did not have any impact on its consolidated financial statements. While the trusts that hold Chandler USA's junior subordinated debentures are variable interest entities, and Chandler USA has 100% ownership and has guaranteed the performance of the trusts, Chandler USA is not the primary beneficiary because its interest is not variable. Therefore, Chandler USA does not consolidate the trusts under this new guidance. In January 2010, the FASB issued new guidance on improving disclosures about fair value measurements. The new guidance does not change how fair values are measured. Chandler USA adopted this new guidance as of January 1, 2010. The adoption of this new guidance did not have any impact on its consolidated financial statements. The disclosures required by this new guidance are included in Note 8. In July 2010, the FASB issued new guidance on disclosures about the credit quality of financing receivables and the allowance for credit losses. The new guidance is effective for interim and annual reporting periods ending after December 15, 2010. The new guidance requires additional disclosures about financing receivables and the allowances for credit losses. The new guidance does not change how financing receivables or allowances for credit losses are measured. Accordingly, except for the additional disclosures, Chandler USA does not anticipate that the initial application of the new guidance will have any impact on Chandler USA's consolidated financial statements. In October 2010, the FASB issued new guidance on the accounting for costs associated with acquiring or renewing insurance contracts. The new guidance modifies the definition of the types of costs incurred by insurance entities that can be capitalized in the acquisition of new and renewal contracts. The new guidance specifies that the costs must be based on successful efforts. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. Early adoption is permitted, but only at the beginning of an entity's annual reporting period. Chandler USA is currently evaluating the impact that this new guidance will have, if any, on its consolidated financial statements. PAGE 11 NOTE 6. BUSINESS COMBINATION On July 1, 2010, CIMI acquired the customer accounts and certain assets and assumed certain liabilities of a retail insurance agency. The purchase price of the acquisition was $896,000, including $654,000 that was applied to premiums receivable due from the agency in lieu of a cash payment and a $242,000 earn-out liability. The earn-out obligation is based on the value of the expected future payments to be made on behalf of the seller of the acquired business in accordance with the provisions outlined in the purchase agreement. Due to the short-term nature of the earn-out provision of approximately 24 months, the carrying value is estimated to be the fair value. The estimated fair value of the assets and liabilities acquired as of the acquisition date were $945,000 for purchased customer accounts, $62,000 for premiums receivable and $111,000 for liabilities assumed. The purchase price allocation was preliminarily established at the time of the acquisition and will be subsequently reviewed within the first year of operations to determine the necessity for allocation adjustments. The purchased customer accounts are being amortized on a straight-line basis over a 15 year estimated useful life. Amortization expense for amortizable intangible assets was $16,000 for the three and nine months ended September 30, 2010. No goodwill was recorded as a result of the acquisition. The results of operations for the acquisition have been combined with those of Chandler USA since the acquisition date. The total revenues and income after income taxes from the acquisition included in the consolidated statement of operations were $231,000 and $63,000, respectively, for the three and nine months ended September 30, 2010. If the acquisition had occurred as of the beginning of the period, Chandler USA's results would not have been materially different than the results reported previously. The retail insurance business acquired is operated through Chandler USA's new subsidiary CISA. NOTE 7. INVESTMENTS AND INVESTMENT INCOME Net investment income and realized investment gains are summarized in the following table. These amounts are net of investment expenses.

THREE MONTHS ENDED ~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, ~~JUNE~~SEPTEMBER 30, ------------------ ------------------ 2010 2009 2010 2009 -------- -------- -------- -------- (In thousands) Interest on fixed-maturity investments .................... $ ~~768~~717 $ ~~821~~883 $ 12,~~550~~267 $ 12,~~594~~457 Interest on short-term investments and cash equivalents ... 19 10 2335 16106 76 Interest on mortgage loan on real estate .................. 1325 - 1338 - Investment expenses ....................................... (6065) (6455) (~~115~~180) (~~129~~184) -------- -------- -------- -------- Investment income, net .................................. ~~731~~696 ~~780~~838 12,~~464~~160 12,~~541~~379 Realized gains, net - fixed maturity investments .......... ~~167 805~~ 1,~~095~~408 ~~1,189~~194 ~~Realized gains~~2,503 ~~net - equity securities ................... - - - - -------- -------- -------- -------- Realized investment gains, net .......................... 167 805~~ 1,~~095~~383 ~~1,189~~ -------- -------- -------- -------- $ ~~898~~2,104 $ 1,~~585~~032 $ 24,~~559~~663 $ 23,~~730~~762 ======== ======== ======== ========

Investment expenses included $21,000 and $60,000 in the third quarter and first nine months of 2010, and $19,000 and $73,000 in the third quarter and first nine months of 2009, respectively, in expense to subsidize a premium finance program for certain insureds of NAICO with an unaffiliated premium finance company. PAGE 12 The amortized cost of fixed maturities or cost of equity securities, gross unrealized gains or losses, fair value and carrying value of investments are as follows:

GROSS GROSS UNREALIZED UNREALIZED FAIR CARRYING ~~JUNE~~SEPTEMBER 30, 2010 COST GAINS LOSSES VALUE VALUE --------------------------------------------------- ---------- ---------- ---------- ---------- ---------- FIXED MATURITIES AVAILABLE FOR SALE: (In thousands) U.S. Treasury securities and obligations of U.S. government corporations and agencies ................................... $ 4956,~~638~~032 $ ~~940~~481 $ -(17) $ 5056,~~578~~496 $ 5056,~~578~~496 Corporate obligations ............................. 168,~~120~~614 ~~355~~81 (41) 168,~~471~~694 168,~~471~~694 ~~Public utilities .................................. 1,024 45 - 1,069 1,069~~ Obligations of states and political subdivisions .. 3130,~~853~~338 ~~799~~1,120 (841) 3231,~~644~~417 3231,~~644~~417 ---------- ---------- ---------- ---------- ---------- $ 9894,~~635~~984 $ 21,~~139~~682 $ (1259) $ ~~100~~96,~~762~~607 $ ~~100~~96,~~762~~607 ========== ========== ========== ========== ========== EQUITY SECURITIES: Corporate stock ................................... $ - $ 4245 $ - $ 4245 $ 4245 ========== ========== ========== ========== ==========

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 fixed maturity investments that exceeded 10% of shareholder's equity at September 30, 2010 or December 31, 2009. The fair value of Chandler USA's investments with continuous gross unrealized losses at September 30, 2010 is presented below:

LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL ----------------------- ----------------------- ------------------------ UNREALIZED UNREALIZED UNREALIZED FAIR VALUE LOSSES FAIR VALUE LOSSES FAIR VALUE LOSSES ----------- ---------- ----------- ---------- ----------- ---------- (In thousands) U.S. Treasury securities and obligations of U.S. government corporations and agencies .......... $ -4,978 $ -(17) $ - $ - $ -4,978 $ -(17) Corporate securities ................. -999 ~~- 710 - 710~~ (41) ~~Public utilities .....................~~ - - -999 -(1) ~~- -~~ Obligations of states and political subdivisions ....................... 1,~~030~~825 (841) - - 1,~~030~~825 (841) ----------- ---------- ----------- ---------- ----------- ---------- $ 17,~~030~~802 $ (859) $ ~~710~~- $ ~~(4)~~- $ 17,~~740~~802 $ (1259) =========== ========== =========== ========== =========== ==========

PAGE 13 The unrealized losses of Chandler USA's fixed maturity investments were primarily caused by changes in market interest rates since the date of purchase, current conditions in the capital markets and the impact of those conditions on market prices. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Chandler USA regularly reviews its investment portfolio for factors that may indicate that a decline in fair value of an investment is other than temporary. Based on an evaluation of the issues, including, but not limited to, Chandler USA's intentions to sell or ability to hold the investments; the length of time and amount of the unrealized loss; and the credit ratings of the issuers of the investments, Chandler USA does not consider these investments to be other-than-temporarily impaired at September 30, 2010. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The maturities of investments in fixed maturities at September 30, 2010 are shown below:

AVAILABLE FOR SALE ------------------------ AMORTIZED COST FAIR VALUE ------------ ---------- (In thousands) Due in one year or less .......................... $ 67,~~157~~911 $ 67,~~179~~970 Due after one year through five years ............ 3111,~~537~~042 3211,~~592~~322 Due after five years through ten years ........... 4336,~~833~~687 4437,~~648~~655 Due after ten years .............................. 1739,~~108~~344 1739,~~343~~660 ------------ ---------- $ 9894,~~635~~984 $ ~~100~~96,~~762~~607 ============ ==========

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

THREE MONTHS ENDED ~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, ~~JUNE~~SEPTEMBER 30, ------------------ ------------------ 2010 2009 2010 2009 -------- -------- -------- -------- (In thousands) FIXED MATURITIES: Gross realized gains ........... $ ~~325~~1,408 $ ~~805~~194 $ 12,~~253~~661 $ 1,~~189~~383 Gross realized losses .......... ~~(158)~~- - (158) - -------- -------- -------- -------- Total net realized gains ..... $ ~~167~~1,408 $ ~~805~~194 $ 12,~~095~~503 $ 1,~~189~~383 ======== ======== ======== ========

The mortgage loan on real estate is recorded at carrying value, which is comprised of the original cost net of repayments. The mortgage loan has an interest rate of prime plus 1%, which was 4.25% at September 30, 2010. The mortgage loan contract requires monthly payments of both principal and interest. The mortgage loan contract is due upon demand, and has an amortization period of 10 years. NAICO is required to deposit cash and securities with regulatory agencies in which it is licensed as a condition of conducting operations in the state. In addition, NAICO has deposited cash and securities into a trust account as collateral for a reinsurance agreement in which NAICO is the assuming reinsurer. NAICO has also established a letter of credit in the amount of $500,000 and pledged cash and investments in this amount to secure reserves assumed under a reinsurance agreement. Certain insurance companies require CIMI to hold unremitted net insurance premiums in a fiduciary capacity until disbursed by CIMI. At September 30, 2010, the total amount of cash and securities restricted as a result of these arrangements was $31.3 million which was a decrease of $6.2 million from December 31, 2009. PAGE 14 NOTE 8. FAIR VALUE MEASUREMENTS Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The quality and reliability of the information used to determine fair values is prioritized into three broad categories, with the highest priority given to Level 1 inputs and the lowest priority to Level 3 inputs. These levels are defined as follows: Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 - Observable inputs other than quoted prices included within Level 1 for the asset or liability, either directly or indirectly. If an asset or liability has a specified term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 3 - Unobservable inputs for the asset or liability. The following table presents information about Chandler USA's assets measured at fair value on a recurring basis as of September 30, 2010 and December 31, 2009, and indicates the fair value hierarchy of the valuation techniques utilized to determine such values. Substantially all of the prices of fixed maturities, equity securities and short-term investments that are valued as Level 1 or Level 2 in the fair value hierarchy are received from independent pricing services utilized by our investment custodians. No liabilities were measured at fair value at September 30, 2010 or December 31, 2009.

FAIR VALUE MEASUREMENTS AT ~~JUNE~~SEPTEMBER 30, 2010 --------------------------------------------------~~-----------~~ 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 ............. $ - $ 5056,~~578~~496 $ - $ 5056,~~578~~496 Corporate obligations ............................. - 168,~~471~~694 - 168,~~471~~694 ~~Public utilities .................................. - 1,069 - 1,069~~ Obligations of states and political subdivisions .. - 3231,~~644~~417 - 3231,~~644~~417 ---------------- ---------------- ---------------- ---------------- Total fixed maturities available for sale ....... - ~~100~~96,~~762~~607 - ~~100~~96,~~762~~607 Equity securities - corporate stock ................. - - 4245 4245 ~~Short~~-~~term investments ..............................~~ - - - - ----------- ----- ----------- ---- ------------ ---- ------------ Total ............................................. $ - $ ~~100~~96,~~762~~607 $ 4245 $ ~~100~~96,~~804~~652 ================ ================ ================ ================

PAGE 15

FAIR VALUE MEASUREMENTS AT DECEMBER 3130, 2009 --------------------------------------------------~~------------~~ QUOTED PRICES SIGNIFICANT IN ACTIVE OTHER SIGNIFICANT MARKETS FOR OBSERVABLE UNOBSERVABLE IDENTICAL ASSETS INPUTS INPUTS TOTAL DESCRIPTION (LEVEL 1) (LEVEL 2) (LEVEL 3) FAIR VALUE --------------------------------------------------------- ---------------- ---------------- ---------------- ---------------- (In thousands) Fixed maturities available for sale: U.S. Treasury securities and obligations of U.S. government corporations and agencies ............. $ - $ 41,074 $ - $ 41,074 Corporate obligations ............................. - 32,591 - 32,591 Public utilities .................................. - 2,095 - 2,095 Obligations of states and political subdivisions .. - 27,461 - 27,461 ---------------- ---------------- ---------------- ---------------- Total fixed maturities available for sale ........ - 103,221 - 103,221 Equity securities - corporate stock ................. - - 42 42 Short-term investments .............................. - 380 - 380 ---------------- ---------------- ---------------- ---------------- Total ............................................. $ - $ 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 $774,000 and $377,000 at September 30, 2010 and December 31, 2009, respectively, or 0.8% and 0.4% of total Level 2 assets in each period. There were no transfers into or out of Level 1 or Level 2 during the third quarter or nine months ended September 30, 2010. At September 30, 2010, Chandler USA's equity securities which were measured at fair value using Level 3 inputs consisted of common stock received in connection with an unaffiliated entity's conversion to a for- profit corporation. The fair value of this stock was based upon an analytically determined valuation from an independent rating organization. The following table presents additional information about assets measured at fair value using Level 3 inputs for the three and nine-month periods ended September 30, 2010:

THREE MONTHS ~~SIX~~NINE MONTHS FAIR VALUE MEASUREMENTS USING SIGNIFICANT ENDED ENDED UNOBSERVABLE INPUTS (LEVEL 3) ~~JUNE~~SEPTEMBER 30, 2010 ~~JUNE~~SEPTEMBER 30, 2010 ------------------------------------------------- ------------------ ------------------ (In thousands) Equity Securities - corporate stocks: Beginning balance ............................. $ 42 $ 42 Total realized and unrealized gains (losses): Included in earnings ...................... - - Included in other comprehensive income .... -3 -3 Purchases, issuances, ~~sales~~ and settlements: Purchases ................................... - - Issuances ................................... - - Sales ....................................... - - Settlements ................................. - - Transfers into Level 3 ...................... - - Transfers out of Level 3 .................... - - ------------------ ------------------ Ending balance ................................ $ 4245 $ 4245 ================== ==================

PAGE 16 NOTE 9. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS Estimated fair value amounts have been determined by Chandler USA using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates of fair values presented herein are not necessarily indicative of the amounts that Chandler USA could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. A number of Chandler USA's significant assets (including deferred policy acquisition costs, property and equipment, reinsurance recoverables, prepaid reinsurance premiums and state insurance licenses) and liabilities (including unpaid losses and loss adjustment expenses and unearned premiums) are not considered financial instruments. Based on the short term nature or other relevant characteristics, Chandler USA has concluded that the carrying value of other assets and liabilities considered financial instruments, such as cash equivalents, mortgage loan on real estate, premiums receivable, policyholder deposits, accrued taxes and other payables, and premiums payable, approximates their fair value as of September 30, 2010 and December 31, 2009. The estimated fair values of Chandler USA's fixed-maturity and equity security investments are disclosed at Note 7. The fair value of Chandler USA's senior debentures was estimated to be $7.3 million as of September 30, 2010 and $7.1 million at December 31, 2009, based on an analytically determined valuation from an independent rating organization. Chandler USA's senior debentures have not historically traded regularly, and settlement at the reported fair value may not be possible. The senior debentures are redeemable by Chandler USA without penalty or premium and may be purchased and cancelled by Chandler USA at a price of less than the sum of the principal amount and accrued interest at any time. Chandler USA is obligated for $13.4 million principal amount of junior subordinated debentures that mature in 2033 with a fixed interest rate of 9.75%, and $7.2 million principal amount of junior subordinated debentures that mature in 2034 with a floating rate of 4.10% over LIBOR. The interest rate at September 30, 2010 was 4.40%. The fair value of Chandler USA's junior subordinated debentures was estimated to be $23.9 million and $22.0 million at September 30, 2010 and December 31, 2009, respectively. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS Some of the statements made in this Form 10-Q report, as well as statements made by Chandler (U.S.A.), Inc. ("Chandler USA") in periodic press releases and oral statements made by Chandler USA's officials constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of Chandler USA to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such factors include, among other things, (i) general economic and business conditions; (ii) interest rate changes; (iii) competition and regulatory environment in which Chandler USA and its subsidiaries operate, including the ability to implement price increases; (iv) claims frequency; (v) claims severity; (vi) catastrophic events of unanticipated frequency or severity; (vii) the number of new and renewal policy applications submitted to National American Insurance Company ("NAICO") by its agents; (viii) the ability of NAICO to obtain adequate reinsurance in amounts and at rates that will not adversely affect its competitive position; (ix) the ability of NAICO to collect reinsurance recoverables; (x) the ability of NAICO to maintain favorable insurance company ratings; and (xi) various other factors including ongoing litigation matters. PAGE 17 RESULTS OF OPERATIONS PREMIUMS EARNED The following table sets forth premiums earned on a gross basis (before reductions for premiums ceded to reinsurers) and on a net basis (after such reductions) for each insurance program as well as each line of insurance for the periods indicated:

GROSS PREMIUMS EARNED NET PREMIUMS EARNED --------------------------- --------------------------- THREE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, 2010 2009 2010 2009 ---------------------------------- ------------ ------------ ------------ ------------ (In thousands) INSURANCE PROGRAMS: Standard lines ................... $ 2124,~~927~~637 $ 2120,~~822~~767 $ 1315,~~707~~237 $ 1312,~~434~~828 Political subdivisions ........... ~~259~~373 ~~977~~573 ~~161~~226 ~~637~~373 Other ............................ 2612 ~~145~~64 186 ~~138~~56 ------------ ------------ ------------ ------------ TOTAL ............................ $ 2225,~~212~~022 $ 2221,~~944~~404 $ 1315,~~886~~469 $ 1413,~~209~~257 ============ ============ ============ ============ LINES OF INSURANCE: Workers compensation ............. $ 810,~~078~~106 $ 8,~~058~~464 $ 56,~~254~~527 $ 5,~~152~~531 Automobile liability ............. 6,~~057~~013 64,~~382~~585 4,~~197~~119 43,~~403~~135 Other liability .................. 56,~~694~~368 6,~~411~~414 23,~~868~~160 3,~~258~~314 Automobile physical damage ....... 1,~~782~~931 1,~~986~~694 1,~~207~~305 1,~~333~~138 Inland marine .................... ~~296~~292 46110 ~~188~~182 3275 Property ......................... ~~282~~290 37115 ~~156~~160 1449 Other ............................ 2322 2422 16 1715 ------------ ------------ ------------ ------------ TOTAL ............................ $ 2225,~~212~~022 $ 2221,~~944~~404 $ 1315,~~886~~469 $ 1413,~~209~~257 ============ ============ ============ ============

GROSS PREMIUMS EARNED NET PREMIUMS EARNED --------------------------- --------------------------- ~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, 2010 2009 2010 2009 ---------------------------------- ------------ ------------ ------------ ------------ (In thousands) INSURANCE PROGRAMS: Standard lines ................... $ 4367,~~004~~641 $ 4465,~~314~~081 $ 2641,~~682~~919 $ 2740,~~605~~433 Political subdivisions ........... ~~612~~985 12,~~963~~536 ~~386~~612 1,~~281~~654 Other ............................ 8395 ~~206~~270 8692 ~~192~~248 ------------ ------------ ------------ ------------ TOTAL ............................ $ 4368,~~699~~721 $ 4667,~~483~~887 $ 2742,~~154~~623 $ 2942,~~078~~335 ============ ============ ============ ============ LINES OF INSURANCE: Workers compensation ............. $ 1525,~~889~~995 $ 1524,~~901~~365 $ 1016,~~287~~814 $ 1015,~~283~~813 Automobile liability ............. 1218,~~001~~014 1317,~~281~~866 812,~~289~~408 912,~~153~~288 Other liability .................. 1117,~~379~~747 1219,~~811~~226 58,~~658~~818 69,~~621~~936 Automobile physical damage ....... 35,~~309~~240 46,~~349~~043 23,~~230~~535 24,~~936~~073 Inland marine .................... ~~547~~839 51161 ~~350~~532 35110 Property ......................... ~~525~~815 41155 ~~288~~449 1666 Other ............................ 4971 4971 5267 3449 ------------ ------------ ------------ ------------ TOTAL ............................ $ 4368,~~699~~721 $ 4667,~~483~~887 $ 2742,~~154~~623 $ 2942,~~078~~335 ============ ============ ============ ============

Gross premiums earned increased $3.6 million or 17% and $834,000 or 1% in the third quarter and first nine months of 2010, respectively, compared to the 2009 periods. Net premiums earned increased $2.2 million or 17% and $288,000 or less than 1% for the third quarter and first nine months of 2010, respectively. Gross premiums earned in the standard lines program increased $3.9 million or 19% and increased $2.6 million or 4% in the third quarter and first nine months of 2010, respectively, compared to the 2009 periods. Gross premiums earned in this program for workers compensation increased $1.7 million and $1.8 million in the third quarter and first nine months of 2010, respectively, and gross premiums earned in this program for automobile liability increased $1.5 million and $919,000 in the third quarter and first nine months of 2010. Gross premiums earned in this program for property and inland marine business increased $357,000 and $1.3 million in the third quarter and first nine months of 2010. These increases were partially offset by decreases in other liability and automobile physical damage premiums. Net premiums earned in this program increased $2.4 million or 19% and increased $1.5 million or 4% in the third quarter and first nine months of 2010, respectively. PAGE 18 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 $200,000 or 35% and $1.6 million or 61% in the third quarter and first nine months of 2010, respectively, compared to the 2009 periods. Net premiums earned in this program decreased $147,000 or 39% and $1.0 million or 63% in the third quarter and first nine months of 2010, 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 June 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 the political subdivisions program and reinsures on a quota share basis 35% of the first $1,000,000 of loss per occurrence of the other liability business in this program. During July 2010, Greenwich provided notice of termination of CIMI's underwriting authority for this business effective November 17, 2010. CIMI will place the property and inland marine coverages in this program with its wholesale property markets, and will write the automobile liability, automobile physical damage and other liability lines through NAICO. NET INVESTMENT INCOME AND NET REALIZED INVESTMENT GAINS At September 30, 2010, Chandler USA's investment portfolio consisted primarily of fixed income U.S. Treasury and government agency bonds, high- quality corporate and tax exempt bonds, certificates of deposit insured by the FDIC and a real estate mortgage loan, with approximately 10% invested in cash and money market instruments. Income generated from this portfolio is largely dependent upon prevailing levels of interest rates. Chandler USA's portfolio contains no non-investment grade bonds or real estate investments. Chandler USA also receives interest income from related parties on intercompany loans. Net investment income, excluding interest income from related parties decreased $142,000 or 17% and decreased $219,000 or 9% in the third quarter and first nine months of 2010, respectively. The decreases in 2010 were due primarily to lower interest rates. Cash and invested assets were $109.4 million at September 30, 2010 compared to $111.1 million at December 31, 2009 and $110.0 million at September 30, 2009. Net interest income from related parties decreased $11,000 and $12,000 in the third quarter and first nine months of 2010, respectively. Net realized investment gains were $1.4 million and $2.5 million during the third quarter and first nine months of 2010, respectively. The realized gains resulted from sales of fixed maturities available for sale in the amount of $68.1 million. Net realized investment gains were $194,000 and $1.4 million during the third quarter and first nine months of 2009. OTHER INCOME Other income was $725,000 and $1.7 million in the third quarter and first nine months of 2010, respectively, compared to $825,000 and $1.6 million in the third quarter and first nine months of 2009. Other income included net commission income related to business produced by CIMI for insurance companies other than NAICO totaling $624,000 and $1.4 million in the third quarter and first nine months of 2010, respectively, compared to $744,000 and $1.3 million in the third quarter and first nine months of 2009. PAGE 19 LOSSES AND LOSS ADJUSTMENT EXPENSES Chandler USA estimates losses and loss adjustment expenses based on historical experience and payment and reporting patterns for the type of risk involved. These estimates are based on data available at the time of the estimate and are periodically reviewed by independent professional actuaries. Although such estimates are management's best estimates of the expected values, the ultimate liability for unpaid claims may vary from these values. The percentage of losses and loss adjustment expenses to net premiums earned ("loss ratio") was 64.2% and 62.0% for the third quarter and first nine months of 2010, compared to 60.6% and 60.9% in the corresponding 2009 periods. During the third quarter of 2010, NAICO experienced an increase in losses incurred related to prior accident years totaling $965,000 which increased the loss ratio by 6.2 percentage points. Loss reserve development for the first nine months of 2010 was $695,000 which increased the loss ratio by 1.6 percentage points. The adverse loss reserve development resulted primarily from the workers compensation and automobile liability lines of business in the standard lines program. The adverse loss reserve development was partially offset by favorable development in the other liability line of business. In the third quarter of 2009, NAICO experienced a decrease in losses incurred related to prior accident years totaling $87,000 which decreased the loss ratio by 0.7 percentage points. Loss reserve development for the first nine months of 2009 was redundant by $102,000. Weather-related losses from wind and hail totaled $46,000 and $240,000 in the third quarter and first nine months of 2010, respectively, and increased the respective loss ratios by 0.3 and 0.6 percentage points. Weather-related losses totaled $13,000 and $92,000 in the third quarter and first nine months of 2009, and increased the respective 2009 loss ratios by 0.1 and 0.2 percentage points. POLICY ACQUISITION COSTS Policy acquisition costs consist of costs associated with the acquisition of new and renewal business and generally include direct costs such as premium taxes, commissions to agents and ceding companies and premium-related assessments and indirect costs such as salaries and expenses of personnel who perform and support underwriting activities. NAICO also receives ceding commissions from the reinsurers who assume premiums from NAICO under certain reinsurance contracts and the ceding commissions are accounted for as a reduction of policy acquisition costs. Direct policy acquisition costs and ceding commissions are deferred and amortized over the terms of the policies. When the sum of anticipated losses, loss adjustment expenses and unamortized policy acquisition costs exceeds the related unearned premiums, including anticipated investment income, a provision for the indicated deficiency is recorded. The following table sets forth Chandler USA's policy acquisition costs for each of the periods indicated:

THREE MONTHS ENDED ~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, ~~JUNE~~SEPTEMBER 30, ------------------ ------------------ 2010 2009 2010 2009 -------- -------- -------- -------- (In thousands) Commissions expense .......................... $ 3,~~205~~887 $ 23,~~935~~049 $ 610,~~452~~339 $ 69,~~618~~667 Other premium related assessments ............ ~~303~~370 ~~272~~324 ~~475~~845 ~~539~~863 Premium taxes ................................ ~~487~~513 ~~479~~394 ~~917~~1,431 ~~934~~1,328 Excise taxes ................................. 5973 5453 ~~117~~189 ~~121~~174 Other expense ................................ ~~145~~83 ~~121~~110 ~~276~~359 ~~247~~357 -------- -------- -------- -------- Total direct expenses ........................ 4,~~199~~926 3,~~861~~930 813,~~237~~163 812,~~459~~389 Indirect underwriting expenses ............... 1,~~470~~563 1,~~460~~491 24,~~943~~506 24,~~890~~381 Commissions received from reinsurers ......... (2,~~074~~754) (2,~~511~~473) (47,~~318~~072) (58,~~534~~007) Adjustment for deferred acquisition costs .... (~~332~~82) 68(7) (~~793~~875) (2128) -------- -------- -------- -------- Net policy acquisition costs ................. $ 3,~~263~~653 $ 2,~~878~~941 $ 69,~~069~~722 $ 58,~~794~~735 ======== ======== ======== ========

PAGE 20 Total gross direct and indirect expenses as a percentage of direct written and assumed premiums were 23.7% and 24.8% for the third quarter and first nine months of 2010, compared to 26.6% and 25.3% in the corresponding year ago periods. Commissions expense as a percentage of gross written and assumed premiums was 14.2% and 14.5% in the third quarter and first nine months of 2010, compared to 14.9% and 14.6% in the corresponding 2009 periods. Indirect underwriting expenses increased $72,000 and $125,000 in the third quarter and first nine months of 2010, respectively, and were 5.7% and 6.3% of total direct written and assumed premiums in the third quarter and first nine months of 2010, respectively, compared to 7.3% and 6.6% in the corresponding 2009 periods. Indirect expenses include general overhead and administrative costs associated with the acquisition of new and renewal business, some of which is relatively fixed in nature, thus, the percentage of such expenses to direct written and assumed premiums will vary depending on Chandler USA's overall premium volume. Commissions received from reinsurers as a percent of ceded reinsurance premiums were 26.1% and 26.0% in the third quarter and first nine months of 2010, respectively, compared to 31.0% and 31.5% in the corresponding 2009 periods due to a reduction in the ceding commission rate on premiums ceded to related parties. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses increased $313,000 and $665,000 in the third quarter and first nine months of 2010, respectively, and were 11.7% and 13.1% of gross premiums earned and other income in the third quarter and first nine months of 2010, respectively, compared to 12.1% and 12.3% for the corresponding 2009 periods. General and administrative expenses have historically not varied in direct proportion to Chandler USA's revenues. A portion of such expenses is allocated to policy acquisition costs (indirect underwriting expenses) and loss and loss adjustment expenses based on various factors including employee counts, salaries, occupancy and specific identification. Because certain types of expenses are fixed in nature, the percentage of such expenses to revenues will vary depending on Chandler USA's overall premium volume. INTEREST EXPENSE Interest expense decreased $4,000 and $42,000 in the third quarter and first nine months of 2010, respectively, compared to the 2009 periods. Substantially all of Chandler USA's interest expense is related to its outstanding senior debentures and junior subordinated debentures. The decrease in the 2010 periods was due to lower interest rates during 2010, as a portion of Chandler USA's junior subordinated debentures were issued with a floating interest rate. LIQUIDITY AND CAPITAL RESOURCES In the first nine months of 2010, Chandler USA used $4.0 million in cash from operations. Reinsurance recoverable on unpaid losses increased $3.6 million, reinsurance recoverable on paid losses increased $3.0 million, premiums payable decreased $1.6 million and policyholder deposits decreased $1.3 million during the first nine months of 2010. These were partially offset by an increase in unpaid losses of $3.3 million and an increase in unearned premiums of $2.7 million. In the first nine months of 2009, Chandler USA provided $5.5 million in cash from operations. Unpaid losses and loss adjustment expenses increased $3.7 million, premiums receivable decreased $4.9 million and policyholder deposits increased $1.1 million during the first nine months of 2009. These were partially offset by an increase in reinsurance recoverable on unpaid losses of $3.8 million and a decrease in unearned premiums of $1.6 million. NAICO is required to deposit cash and securities with regulatory agencies in which it is licensed as a condition of conducting operations in the state. In addition, NAICO has deposited cash and securities into a trust account as collateral for a reinsurance agreement in which NAICO is the assuming reinsurer. NAICO has also established a letter of credit in the amount of $500,000 and pledged cash and investments in this amount to secure reserves assumed under a reinsurance agreement. Certain insurance companies require CIMI to hold unremitted net insurance premiums in a fiduciary capacity until disbursed by CIMI. At September 30, 2010, the total amount of cash and securities restricted as a result of these arrangements was $31.3 million which was a decrease of $6.2 million from December 31, 2009. At September 30, 2010, Chandler USA's parent company, Chandler Insurance Company, Ltd. ("CICL"), owed approximately $11.3 million to Chandler USA versus $12.7 million at December 31, 2009 under an Intercompany Credit Agreement (the "Credit Agreement") covering intercompany loans between the parties. The Credit Agreement requires interest to be paid at the prime interest rate published in the Wall Street Journal each month, and balances owed by either party are payable at any time upon demand. At September 30, 2010, CICL also owed approximately $2.9 million to NAICO for reinsurance recoverable on paid losses. At December 31, 2009, NAICO owed CICL approximately $522,000 for premiums payable. PAGE 21 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 three years 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 September 30, 2010. The interest rate is subject to a minimum rate of 5.5%. 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 is a holding company receiving cash principally through borrowings, subsidiary dividends and other payments, subject to various regulatory restrictions. The capacity of insurance companies to write insurance is based on maintaining liquidity and capital resources sufficient to pay claims and expenses as they become due. The primary sources of liquidity for Chandler USA's subsidiaries are funds generated from insurance premiums, investment income, capital contributions from Chandler USA and proceeds from sales and maturities of portfolio investments. The principal expenditures are payment of losses and loss adjustment expenses, insurance operating expenses and commissions. A significant portion of Chandler USA's consolidated assets represents assets of NAICO that may not be immediately transferable to Chandler USA in the form of shareholder dividends, loans, advances or other payments. Statutes and regulations governing NAICO and other insurance companies domiciled in Oklahoma regulate the payment of shareholder dividends and other payments by NAICO to Chandler USA. Under applicable Oklahoma statutes and regulations, NAICO is permitted to pay shareholder dividends only out of statutory earned surplus. To the extent NAICO has statutory earned surplus, NAICO may pay shareholder dividends only to the extent that such dividends are not defined as extraordinary dividends or distributions. If the dividends are, under applicable statutes and regulations, extraordinary dividends or distributions, regulatory approval must be obtained. Under the applicable Oklahoma statute, and subject to the availability of statutory earned surplus, the maximum shareholder dividend that may be declared (or cash or property distribution that may be made) by NAICO in any one calendar year without regulatory approval is the greater of (i) NAICO's statutory net income, excluding realized capital gains, for the preceding calendar year; or (ii) 10% of NAICO's statutory policyholders' surplus as of the preceding calendar year end, not to exceed NAICO's statutory earned surplus. As of December 31, 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 cash shareholder dividends of $300,000 to Chandler USA in March 2010, $1.1 million in June 2010 and $550,000 in September 2010. NAICO paid cash shareholder dividends of $500,000 to Chandler USA in March 2009 and $900,000 in June 2009. In addition to the statutory limits described above, the amount of shareholder dividends and other payments to affiliates can be further limited by contractual or regulatory restrictions or other agreements with regulatory authorities restricting dividends and other payments, including regulatory restrictions that are imposed as a matter of administrative policy. If insurance regulators determine that payment of a shareholder dividend or other payments to an affiliate (such as payments under a tax sharing agreement, payments for employee or other services, or payments pursuant to a surplus note) would be hazardous to such insurance company's policyholders or creditors, the regulators may block such payments that would otherwise be permitted without prior approval. Historically, NAICO has played a significant role in the servicing of debt and other obligations of Chandler USA through the payment of shareholder dividends. These obligations include $7.0 million of 8.75% senior debentures due in 2014, $13.4 million of 9.75% junior subordinated debentures due in 2033, $7.2 million of floating rate junior subordinated debentures due in 2034 and the obligations under the sale and leaseback transaction discussed previously. To the extent that the restrictions discussed previously limit NAICO's ability to pay shareholder dividends or other payments to Chandler USA, Chandler USA's ability to satisfy the debt obligations may also be limited. PAGE 22 LITIGATION In October 1999, NAICO provided surety bonds for Gulsby Engineering, Inc. ("Gulsby") in connection with contracts between Gulf Liquids New River Project, LLC ("Gulf Liquids") and Gulsby for the construction of two gas processing plants in Louisiana. During 2001, Gulsby became unable to pay various vendors resulting in payments to vendors by NAICO totaling $20,182,499. In August 2001, NAICO filed suit in federal court in Louisiana alleging that Gulf Liquids had breached its obligations under the bonds by materially altering certain contracts and that as a result, NAICO was exonerated on the bonds and should recover the amounts paid to vendors. In the fall of 2001, Gulsby and Bay Limited, another contractor with whom Gulsby had entered into a joint venture for the construction of other gas processing plants for Gulf Liquids, filed lawsuits relating to those plants in Houston, Texas. Gulf Liquids filed original actions and counterclaims. NAICO intervened in the Texas lawsuits and, in addition, sued Williams Energy Marketing and Trading (which later became Williams Power Company, Inc.) ("Williams") alleging fraud, breach of contract, tortious interference with contractual relations, conspiracy and alter ego. These claims were asserted against both Gulf Liquids and Williams. Gulf Liquids asserted counterclaims alleging breach of contract against NAICO and requesting contractual and statutory damages ranging from $40 million to $80 million. The cases were consolidated for trial in the 215th Judicial District Court in Harris County, Texas. On August 1, 2006, the jury trial concluded in Harris County, Texas, related to the construction of two gas processing plants in Louisiana. The amounts the jury found owing to NAICO included approximately $20.2 million in actual damages and $70.0 million in punitive damages. See Note 4 of Notes to Interim 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 September 30, 2010 and December 31, 2009. ITEM 4. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES As of the end of the period covered by this report and pursuant to Rule 13a-15 of the Securities Exchange Act of 1934 (the "Exchange Act"), Chandler USA's management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness and design of Chandler USA's disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act). Based upon that evaluation, Chandler USA's Chief Executive Officer and Chief Financial Officer concluded, as of the end of the period covered by this report, that Chandler USA's disclosure controls and procedures were effective in recording, processing, summarizing and reporting information required to be disclosed by Chandler USA, within the time periods specified in the Securities and Exchange Commission's rules and forms. CHANGES IN INTERNAL CONTROLS In addition and as of the end of the period covered by this report, there have been no changes in internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter to which this report relates that have materially affected or are reasonably likely to materially affect, the internal control over financial reporting. PAGE 23 PART II. OTHER INFORMATION ----------------- Item 1. LEGAL PROCEEDINGS ----------------- Chandler USA and its subsidiaries are not parties to any material litigation other than as is routinely encountered in their respective business activities. While the outcome of these matters cannot be predicted with certainty, Chandler USA does not expect these matters to have a material adverse effect on its financial condition, results of operations or cash flows. See Note 4 of Notes to Interim Consolidated Financial Statements for a discussion of a favorable jury verdict in civil litigation regarding certain surety bond claims. Item 1A. RISK FACTORS ------------ There have been no material changes from risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009. Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS ----------------------------------------------------------- None. Item 3. DEFAULTS UPON SENIOR SECURITIES ------------------------------- None. Item 4. RESERVED -------- Item 5. OTHER INFORMATION ----------------- None. Item 6. EXHIBITS -------- 31.1 Rule 13a-14(a)/15d-14(a) Certifications. 32.1 Section 1350 Certifications. PAGE 24 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: November 9, 2010 CHANDLER (U.S.A.), INC. By: /s/ W. Brent LaGere -------------------------------------- W. Brent LaGere Chairman of the Board and Chief Executive Officer (Principal Executive Officer) By: /s/ Mark C. Hart -------------------------------------- Mark C. Hart Senior Vice President - Finance, Chief Financial Officer and Treasurer (Principal Accounting Officer

Filing Compare · CHANDLER USA INC