10-Q 1 edgrmarch200910q.txt CHANDLER (U.S.A.), INC. 3/31/09 10-Q ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------------------- FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE --- SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2009 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE --- SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from to --------- --------- COMMISSION FILE NUMBER: 1-15135 CHANDLER (U.S.A.), INC. (Exact name of registrant as specified in its charter) OKLAHOMA 73-1325906 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1010 MANVEL AVENUE, CHANDLER, OKLAHOMA 74834 (Address of principal executive offices and zip code) Registrant's telephone number, including area code: (405) 258-0804 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES NO --- --- Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer Accelerated filer -- -- Non-accelerated filer X (Do not check if a smaller reporting company) -- Smaller reporting company -- Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES NO X --- --- The number of common shares, $1.00 par value, of the registrant outstanding on April 30, 2009 was 2,484, which are owned by Chandler Insurance Company, Ltd. ------------------------------------------------------------------------------- Page i CHANDLER (U.S.A.), INC. INDEX ----- PART I - FINANCIAL INFORMATION ------------------------------ ITEM 1. FINANCIAL STATEMENTS: -------------------------------- Consolidated Balance Sheets as of March 31, 2009 (unaudited) and December 31, 2008 ..................................................1 Consolidated Statements of Operations for the three months ended March 31, 2009 and 2008 (unaudited) ..............................2 Consolidated Statements of Comprehensive Income for the three months ended March 31, 2009 and 2008 (unaudited) .......................3 Consolidated Statements of Cash Flows for the three months ended March 31, 2009 and 2008 (unaudited) ..............................4 Notes to Interim Consolidated Financial Statements (unaudited) ...........5 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND -------------------------------------------------------------------------- RESULTS OF OPERATIONS ............................................10 --------------------- ITEM 4T. CONTROLS AND PROCEDURES ............................................15 -------------------------------- PART II - OTHER INFORMATION --------------------------- Item 1. Legal Proceedings ................................................15 Item 1A. Risk Factors .....................................................15 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ......15 Item 3. Defaults Upon Senior Securities ..................................15 Item 4. Submission of Matters to a Vote of Security Holders ..............15 Item 5. Other Information ................................................15 Item 6. Exhibits .........................................................15 Signatures ..................................................................16 PAGE 1 CHANDLER (U.S.A.), INC. CONSOLIDATED BALANCE SHEETS (Amounts in thousands except share amounts)

~~June~~March 3031, December 31, 2009 2008 ~~2007~~ ------------- -------------- (Unaudited) ~~Assets~~ASSETS Investments Fixed maturities available for sale, at fair value Restricted (amortized cost $3439,~~201~~264 and $3234,~~416~~243 in ~~2008~~2009 and ~~2007~~2008, respectively) ...... $ 3440,~~397~~195 $ 3235,~~670~~397 Unrestricted (amortized cost $44,~~530~~044 and $3040,~~484~~771 in ~~2008~~2009 and ~~2007~~2008, respectively) .... 44,~~241~~541 3041,~~387~~699 Equity securities available for sale, at fair value (cost $0 in ~~2008~~2009 and ~~2007~~2008) .......~~....................~~ 76 ~~141~~76 Short-term investments at fair value (amortized cost $4,996 and $5,853 in 2009 and 2008, respectively) .....................................................~~..........~~ ~~760~~5,002 15,~~045~~865 ------------- -------------- Total investments .................................................................... 7989,~~474~~814 6483,~~243~~037 Cash and cash equivalents ($~~1,956~~421 and $~~146~~118 restricted in ~~2008~~2009 and ~~2007~~2008, respectively) .. 2216,~~393~~498 3220,~~956~~636 Accrued investment income ............................................................. 931 1,~~042~~018 ~~874~~ Premiums receivable, less allowance for non-collection of $~~144~~157 and $~~134~~138 at ~~2008~~2009 and ~~2007~~2008, respectively .....................................~~....................~~ 2624,~~846~~295 2826,~~128~~405 Reinsurance recoverable on paid losses ................................................ ~~1,061~~319 ~~1,100~~423 Reinsurance recoverable on unpaid losses, less allowance for non-collection of $~~264~~310 and $~~239~~231 at ~~2008~~2009 and ~~2007~~2008, respectively ..................................... 3834,~~638~~391 3632,~~036~~492 Reinsurance recoverable on unpaid losses from related parties ......................... 20,~~352~~124 1819,~~688~~899 Prepaid reinsurance premiums .......................................................... 3,~~072~~088 32,~~105~~882 Prepaid reinsurance premiums to related parties ....................................... 12,~~594~~539 12,~~928~~203 Deferred policy acquisition costs ..................................................... 1,~~198~~393 1,~~118~~304 Property and equipment, net ........................................................... 87,~~107~~680 87,~~255~~849 Amounts due from related parties ...................................................... 12,~~030~~031 11,~~506~~869 State insurance licenses, net ......................................................... 3,745 3,745 Other assets .......................................................................... 1110,~~273~~690 1110,~~685~~885 ------------- -------------- Total assets .......................................................................... $ ~~241~~237,~~825~~538 $ 234,~~367~~647 ============= ============== LIABILITIES AND SHAREHOLDER'S EQUITY Liabilities Unpaid losses and loss adjustment expenses ........................................... $ ~~108~~104,~~150~~037 $ ~~100~~101,~~590~~459 Unearned premiums .................................................................... 45,~~241~~041 4643,~~389~~725 Policyholder deposits ................................................................ 86,~~263~~952 7,~~947~~820 Accrued taxes and other payables ..................................................... 65,~~153~~657 56,~~777~~017 Premiums payable ..................................................................... 1,~~501~~990 2,~~263~~440 Premiums payable to related parties .................................................. 56263 ~~198~~222 ~~Senior~~Debentures ~~debentures~~ .......................................................................... 6,979 6,979 Junior subordinated debentures issued to affiliated trusts ........................... 20,620 20,620 ------------- -------------- Total liabilities ................................................................... ~~196~~191,~~963~~539 ~~190~~189,~~763~~282 ------------- -------------- Shareholder's equity Common stock, $1.00 par value, 50,000 shares authorized; 2,484 shares issued and outstanding ................................................. 2 2 Paid-in surplus ...................................................................... 60,584 60,584 Accumulated deficit .................................................................. (15,~~713~~583) (1716,~~179~~654) Accumulated other comprehensive income ~~(loss)~~: Unrealized gain ~~(loss)~~ on investments available for sale, net of deferred income taxes ....~~....................................................~~ ~~(11)~~996 ~~197~~1,433 ------------- -------------- Total shareholder's equity .......................................................... 4445,~~862~~999 4345,~~604~~365 ------------- -------------- Total liabilities and shareholder's equity ............................................ $ ~~241~~237,~~825~~538 $ 234,~~367~~647 ============= ==============

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

Three months ended ~~June~~March 3031, -------------------------------- 2009 2008 ~~2007~~ ------------- ------------- Premiums and other revenues Direct premiums written and assumed ........................... $ 2024,~~191~~854 $ 2430,~~120~~203 Reinsurance premiums ceded .................................... (2,~~095~~542) (2,~~811~~724) Reinsurance premiums ceded to related parties ................. (56,~~398~~670) (68,~~562~~205) ------------- ------------- Net premiums written and assumed ............................ 1215,~~698~~642 1419,~~747~~274 ~~Decrease~~Increase in unearned premiums ................................. ~~2,545~~(773) (1,~~123~~764) ------------- ------------- Net premiums earned ......................................... 1514,~~243~~869 1517,~~870~~510 ~~Investment~~Interest income, net ............................................ ~~847~~761 ~~860~~890 Interest income, net from related parties ....................... ~~158~~106 ~~248~~188 Realized investment gains, net .................................. 4384 26- Other income .................................................... ~~416~~443 ~~168~~412 ------------- ------------- Total premiums and other revenues ............................ 16,~~668~~563 1719,~~172~~000 ------------- ------------- Operating costs and expenses Losses and loss adjustment expenses, net of amounts ceded to related parties of $3,~~576~~525 and $34,~~784~~055 in ~~2008~~2009 and ~~2007~~2008, respectively ................................. 8,~~380~~262 910,~~366~~936 Policy acquisition costs, net of ceding commissions received from related parties of $2,~~052~~536 and $23,~~495~~120 in ~~2008~~2009 and ~~2007~~2008, respectively ................................. 32,~~124~~916 3,~~032~~243 General and administrative expenses ........................... 3,~~119~~105 3,~~034~~160 Interest expense .............................................. ~~627~~598 ~~678~~652 ------------- ------------- Total operating costs and expenses .......................... 1514,~~250~~881 1617,~~110~~991 ------------- ------------- Income before income taxes ...................................... 1,~~418~~682 1,~~062~~009 Federal income tax provision .................................... (~~568~~611) (~~394~~393) ------------- ------------- Net income .................................................... $ ~~850~~1,071 $ ~~668~~616 ============= =============

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

~~Six~~Three months ended ~~June~~March 3031, -------------------------------- 2009 2008 ~~2007~~ ------------- ------------ ~~Premiums~~Net ~~and~~income ~~other revenues Direct premiums written and assumed~~ ....................... ~~$ 50,394 $ 51,453 Reinsurance premiums ceded~~ ............................~~....~~ ~~(4,819)~~$ (21,~~313)~~071 ~~Reinsurance~~$ ~~premiums~~616 ~~ceded to related parties ............. (13,603) (14,919)~~ ------------- ------------ ~~Net~~Other ~~premiums~~comprehensive ~~written~~income ~~and~~(loss), ~~assumed~~before ~~........................~~income ~~31,972~~tax: ~~34,221~~Unrealized ~~Decrease~~gains (~~increase~~losses) inon ~~unearned~~securities: ~~premiums~~Unrealized ~~..................~~holding ~~781~~gains (~~1,331~~losses) ~~-------------~~arising ~~------------~~during ~~Net~~period ~~premiums earned~~ ..~~...................................~~ ~~32,753~~(278) ~~32,890 Investment income, net ......................................~~ 1,~~737~~268 ~~2,020~~Less: ~~Interest~~Reclassification ~~income,~~adjustment ~~net~~for ~~from~~gains ~~related~~included ~~parties~~in ~~................... 346 460 Realized investment gains,~~ net ~~.............................. 4 61 Other~~ income ..........................................~~......~~ ~~828~~(384) ~~995~~ -~~------------~~ ------------ ~~Total premiums and other revenues ......................... 35,668 36,426~~ -~~------------~~ ------------ ~~Operating~~Other ~~costs~~comprehensive ~~and~~income ~~expenses Losses and~~ (loss ~~adjustment expenses~~), ~~net~~before ofincome ~~amounts~~tax ~~ceded to related parties of $7,631 and $8,026 in 2008 and 2007, respectively~~ .........~~....................~~ ~~19,316~~(662) 201,~~033~~268 ~~Policy~~Income ~~acquisition~~tax ~~costs,~~benefit ~~net~~(provision) ~~of ceding commissions received from~~ related ~~parties~~to items of ~~$5,172~~other ~~and~~comprehensive ~~$5,674~~income in(loss) ~~2008 and 2007, respectively~~ ............................. ~~6,367 6,282 General and administrative expenses~~ ...~~....................~~ ~~6,279~~225 ~~6,249~~(431) ~~Interest expense .......................................... 1,279 1,355~~ ------------- ------------ ~~Total~~Other ~~operating~~comprehensive ~~costs and expenses ...................... 33,241 33,919 ------------- ------------ Income before~~ income ~~taxes .................................. 2~~(loss),~~427~~ ~~2,507~~net ~~Federal~~of income tax ~~provision~~ .........~~.......................~~ (~~961~~437) ~~(925)~~837 ------------- ------------ ~~Net~~Comprehensive income .........................................~~.......~~ $ ~~1,466~~634 $ 1,~~582~~453 ============= ============

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

Three months ended ~~June~~March 3031, -------------------------------- 2009 2008 ~~2007~~ ------------- ------------ OPERATING ACTIVITIES Net income .................................................................. $ ~~850~~1,071 $ ~~668~~616 Add (deduct): Adjustments to reconcile net income to cash provided by operating activities: Realized investment gains, net .......................................... (384) - Net (gains) losses on sale of property and equipment .................... 6 (2) Amortization and depreciation expense ................................... 393 364 Provision for non-collection of premiums ................................ 15 15 Provision for non-collection of reinsurance recoverables ................ 112 127 Provision for impairment of investment .................................. 10 - Net change in non-cash balances relating to operating activities: Accrued investment income ............................................. 87 43 Premiums receivable ................................................... 2,095 (2,704) Reinsurance recoverable on paid losses ................................ 71 (10) Reinsurance recoverable on unpaid losses .............................. (1,978) (1,559) Reinsurance recoverable on unpaid losses from related parties ......... (225) (969) Prepaid reinsurance premiums .......................................... (206) (321) Prepaid reinsurance premiums to related parties ....................... (336) (756) Deferred policy acquisition costs ..................................... (89) (162) Other assets .......................................................... 396 749 Unpaid losses and loss adjustment expenses ............................ 2,578 5,141 Unearned premiums ..................................................... 1,316 2,841 Policyholder deposits ................................................. (868) (820) Accrued taxes and other payables ...................................... (360) 265 Premiums payable ...................................................... (450) (185) Premiums payable to related parties ................................... 41 603 ------------ ------------ ~~Other~~Cash ~~comprehensive~~provided ~~loss,~~by ~~before~~operating ~~income~~activities ~~tax:~~................................... ~~Unrealized~~3,295 ~~losses~~3,276 on------------ ~~securities:~~------------ ~~Unrealized~~INVESTING ~~holding~~ACTIVITIES ~~losses~~Short-term ~~arising~~investments: ~~during~~Purchases ~~period~~ ............................................................... (~~1,579~~95) (~~484~~285) ~~Less:~~Maturities ~~Reclassification~~.............................................................. ~~adjustment~~950 380 Unrestricted fixed maturities available for ~~gains~~sale: ~~included~~Purchases in............................................................... ~~net~~(16,402) ~~income~~(8,507) Sales ................................................................... 6,616 - Maturities .............................................................. 1,715 1,250 Cost of property and equipment purchased .................................. (471) (26129) Proceeds from sale of property and equipment .............................. 16 33 ------------- ------------ ~~Other~~Cash ~~comprehensive~~applied ~~loss,~~to ~~before~~investing ~~income~~activities ~~tax~~ .................................... (17,~~583~~271) (~~510~~7,258) ~~Income~~------------ ~~tax~~------------ ~~benefit~~FINANCING ~~related~~ACTIVITIES toPayments ~~items~~and ofloans ~~other~~from ~~comprehensive~~related ~~loss~~parties ................................... 403 493 Payments and loans to related parties ..................................... ~~538~~(565) (174) ------------ ------------ Cash provided by (applied to) investing activities ...................... (162) 319 ------------ ~~Other~~------------ ~~comprehensive~~Decrease ~~loss,~~in ~~net~~cash ofand ~~income~~cash ~~tax~~equivalents during the period ..................... (14,~~045~~138) (~~336~~3,663) Cash and cash equivalents at beginning of period ............................ 20,636 32,956 ------------- ------------ ~~Comprehensive~~Cash ~~income~~and ~~(loss)~~cash equivalents at end of period .................................. $ ~~(195)~~16,498 $ ~~332~~29,293 ============= ============

See accompanying Notes to Interim Consolidated Financial Statements. PAGE 5 CHANDLER (U.S.A.), INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (Unaudited) NOTE 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of Chandler (U.S.A.), Inc. ("Chandler USA") have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") 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 GAAP for complete financial statements. However, except as disclosed herein, there have been no material changes in the information included in Chandler USA's Annual Report on Form 10-K for the year ended December 31, 2008. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the three month period ended March 31, 2009 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") and Chandler Insurance Managers, Inc. ("CIMI"). NOTE 2. SEGMENT INFORMATION Chandler USA has two reportable operating segments: property and casualty insurance and agency. The segments are managed separately due to the differences in the nature of the insurance products and services sold. The following table presents a summary of Chandler USA's operating segments for the three month periods ended March 31, 2009 and 2008:

~~Six~~Property ~~months~~and ~~ended~~casualty ~~June~~Intersegment ~~30,~~Reported insurance Agency eliminations balances ------------ ------------~~-------~~ ~~2008 2007~~ ------------ ------------ ~~Net~~(In ~~income~~thousands) THREE MONTHS ENDED MARCH 31, 2009 Revenues from external customers (1) ... $ 15,014 $ 298 $ - $ 15,312 Intersegment revenues .................. 29 803 (832) - Segment profit before income taxes (2).. 1,444 238 - 1,682 Segment assets ........................... $236,678 18,~~466~~690 $(7,830) 1237,~~582~~538 ~~------------~~THREE ~~------------~~MONTHS ~~Other~~ENDED ~~comprehensive~~MARCH ~~loss~~31, ~~before~~2008 ~~income~~Revenues ~~tax:~~from ~~Unrealized~~external ~~losses~~customers on(1) ~~securities: Unrealized holding losses arising during period~~ ...~~......~~ ~~(311)~~$ ~~(292)~~17,596 ~~Less:~~$ ~~Reclassification~~326 ~~adjustment~~$ ~~for~~- ~~gains~~$ ~~included~~17,922 inIntersegment ~~net~~revenues ~~income~~ ..................~~..........................~~ ~~(4)~~11 996 (611,007) -~~-----------~~ ~~------------~~Segment ~~Other~~profit ~~comprehensive loss,~~ before income ~~tax~~taxes (2)..~~...............~~ ~~(315)~~506 ~~(353)~~503 ~~Income~~- ~~tax~~1,009 ~~benefit~~Segment ~~related~~assets ~~to items of other comprehensive loss~~ .........................~~...............~~ ~~107~~242,201 ~~120~~8,375 (6,911) 243,665 ------------ ------------ ~~Other comprehensive loss, net of income tax ................. (208) (233)~~ ------------ ------~~------~~ ~~Comprehensive~~(1) ~~income~~Consists of net premiums earned and other income.~~.......................................~~ $(2) ~~1,258~~Includes $net ~~1,349~~realized ~~============~~investment ~~============~~gains.

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 each 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 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. PAGE 6

~~Six~~THREE ~~months~~MONTHS ~~ended~~ENDED ~~June~~MARCH 3031, -------------------------------- 2009 2008 ~~2007~~ ------------ ------------ ~~OPERATING~~(In ~~ACTIVITIES~~thousands) ~~Net~~INSURANCE ~~income .................................................................. $ 1, 466 $ 1,582 Add (deduct)~~PROGRAM: ~~Adjustments~~----------------------------------------- toNET ~~reconcile~~PREMIUMS ~~net~~EARNED ~~income~~Standard tolines ~~cash provided by operating activities: Realized investment gains, net~~ ........................~~..................~~ ~~(4)~~$ ~~(61)~~14,172 ~~Net~~$ ~~(gains)~~16,736 ~~losses~~Political onsubdivisions ~~sale of property and equipment~~ ................~~....~~ ~~(4)~~644 5700 ~~Amortization~~Other ~~and depreciation~~ .................................~~..........~~ ~~749~~53 ~~706~~74 ~~Provision for non~~-~~collection of premiums ................................ 25 40 Provision for non~~-~~collection~~---------- ~~of reinsurance recoverables ................ 139 24 Net change in non~~-~~cash~~----------- ~~balances~~TOTAL ~~relating to operating activities: Accrued investment income~~ .................................~~............~~ ~~(168)~~$ ~~(432)~~14,869 ~~Premiums~~$ ~~receivable ................................................... 1~~17,~~257~~510 ~~501~~============ ~~Reinsurance~~============ ~~recoverable~~LOSSES onAND ~~paid~~LOSS ~~losses~~ADJUSTMENT ~~................................~~EXPENSES ~~(74)~~Standard ~~(441)~~lines ~~Reinsurance recoverable on unpaid losses~~ ........................~~......~~ ~~(2,628)~~$ ~~199 Reinsurance recoverable on unpaid losses from related parties ......... (1~~7,~~664)~~702 ~~(1,171)~~$ ~~Prepaid reinsurance premiums .......................................... 33 4~~10,~~017~~429 ~~Prepaid~~Political ~~reinsurance~~subdivisions ~~premiums to related parties~~ ................~~.......~~ ~~334~~409 ~~(742)~~436 ~~Deferred policy acquisition costs ..................................... (80) (789)~~ Other ~~assets~~ .................................~~.........................~~ ~~490~~151 ~~611~~71 ~~Unpaid~~------------ ~~losses~~------------ ~~and~~TOTAL ~~loss adjustment expenses~~ ............................ ~~7,560 2,082 Unearned premiums~~ .....~~................................................~~ ~~(1,148)~~$ (18,~~944)~~262 ~~Policyholder~~$ ~~deposits~~10,936 ~~.................................................~~============ ~~316~~============ ~~(346)~~THREE ~~Accrued~~MONTHS ~~taxes~~ENDED ~~and~~MARCH ~~other payables ...................................... 376 1~~31,~~558~~ ~~Premiums~~-------------------------------- ~~payable~~2009 ~~......................................................~~2008 ~~(762) (447) Premiums payable to related parties ................................... (142) (527)~~ ------------ ------------ ~~Cash~~(In ~~provided~~thousands) byLINES ~~operating~~OF ~~activities~~INSURANCE: ~~................................... 6,071 4,425~~ ------------ ------------ ~~INVESTING ACTIVITIES Short~~-~~term~~---------------- ~~investments:~~NET ~~Purchases~~PREMIUMS ~~...............................................................~~EARNED ~~(665)~~Automobile -liability ~~Maturities~~ ..................~~............................................~~ ~~950~~$ -4,750 ~~Unrestricted~~$ ~~fixed~~6,764 ~~maturities~~Workers ~~available~~compensation ~~for sale: Purchases~~ ..................~~.............................................~~ ~~(22~~5,~~412)~~130 (95,~~617)~~371 ~~Sales~~Other ~~...................................................................~~liability ~~270 - Maturities~~ .......................~~.......................................~~ 63,~~029~~364 34,~~197~~055 ~~Equity~~Automobile ~~securities~~physical ~~available~~damage ~~for sale: Purchases~~ ............~~...................................................~~ ~~- (5~~1,~~278)~~603 ~~Sales ................................................................... - 6~~1,~~925~~248 ~~Cost~~Other ~~of property and equipment purchased~~ .................................. ~~(325)~~22 ~~(297)~~72 ~~Proceeds from sale of property and equipment .............................. 42 14~~ ------------ ------------ ~~Cash~~TOTAL ~~applied to investing activities~~ .................................~~...~~ ~~(16,111)~~$ (514,~~056)~~869 ~~------------~~$ ~~------------~~17,510 ~~FINANCING~~============ ~~ACTIVITIES~~============ ~~Payments~~LOSSES ~~and~~AND ~~loans~~LOSS ~~from~~ADJUSTMENT ~~related~~EXPENSES ~~parties~~Automobile liability ..................~~.................~~ 1$ 3,~~025~~774 ~~263~~$ ~~Payments~~5,149 ~~and~~Workers ~~loans~~compensation ~~to related parties~~ ..................~~...................~~ (12,~~548)~~408 (23,~~623)~~503 ~~Payments~~Other onliability ~~bank loan~~ .......................~~..............................~~ -1,406 ~~(166)~~1,547 ~~------------~~Automobile ~~------------~~physical ~~Cash~~damage ~~applied to financing activities~~ ............~~........................~~ ~~(523)~~676 ~~(2,526)~~715 ~~------------~~Other ~~------------ Decrease in cash and cash equivalents during the period~~ ..................... ~~(10,563) (3,157) Cash and cash equivalents at beginning of period~~ ............~~................~~ ~~32,956~~(2) ~~21,403~~22 ------------ ------------ ~~Cash~~TOTAL ~~and cash equivalents at end of period~~ .................................. $ 228,~~393~~262 $ 1810,~~246~~936 ============ ============

NOTE 3. COMMITMENTS AND CONTINGENCIES During March 2001, Chandler USA entered into a $3.8 million sale and leaseback transaction for certain owned equipment for three years. During March 2004, the lease was extended for three years and during March 2007, the lease was extended for an additional three years with monthly rental installments equal to the sum of (i) $13,834 plus (ii) interest on the unpaid lease balance at 1% over JP Morgan Chase Bank prime which was 4.25% at March 31, 2009. Chandler USA has the option to repurchase the equipment at the end of the lease for approximately $1.9 million (the "Balloon Payment"), or may elect to have the lessor sell the equipment. If the election to sell the equipment is made, Chandler USA would retain any proceeds exceeding the Balloon Payment. If the proceeds were less than the Balloon Payment, Chandler USA would be required to pay the difference between the proceeds and the Balloon Payment, not to exceed approximately $1.5 million. Chandler USA has guaranteed the obligations of Chandler Capital Trust I and Chandler Capital Trust II (the "Capital Trusts") with respect to the trust preferred securities they have outstanding. The Capital Trusts distribute the interest received from Chandler USA on the junior subordinated debentures to the holders of the trust preferred securities to fulfill their obligations with respect to such securities. The Capital Trusts are wholly owned non- consolidated subsidiaries of Chandler USA. Chandler USA guarantees payment of distributions and the redemption price of the trust preferred securities until the securities are redeemed in full. The total redemption price of the trust preferred securities is $20.0 million. PAGE 7 NOTE 4. LITIGATION In October 1999, NAICO provided surety bonds for Gulsby Engineering, Inc. ("Gulsby") in connection with contracts between Gulf Liquids New River Project, LLC ("Gulf Liquids") and Gulsby for the construction of two gas processing plants in Louisiana. During 2001, Gulsby became unable to pay various vendors resulting in payments to vendors by NAICO totaling $20,182,499. In August 2001, NAICO filed suit in federal court in Louisiana alleging that Gulf Liquids had breached its obligations under the bonds by materially altering certain contracts and that, as a result, NAICO was exonerated on the bonds and should recover the amounts paid to vendors. In the fall of 2001, Gulsby and Bay Limited, another contractor with whom Gulsby had entered into a joint venture for the construction of other gas processing plants for Gulf Liquids, filed lawsuits relating to those plants in Houston, Texas. Gulf Liquids filed original actions and counterclaims. NAICO intervened in the Texas lawsuits and, in addition, sued Williams Energy Marketing and Trading (which later became Williams Power Company, Inc.) ("Williams") alleging fraud, breach of contract, tortious interference with contractual relations, conspiracy and alter ego. These claims were asserted against both Gulf Liquids and Williams. Gulf Liquids asserted counterclaims alleging breach of contract against NAICO and requesting contractual and statutory damages ranging from $40 million to $80 million. The cases were consolidated for trial in the 215th Judicial District Court in Harris County, Texas. The trial in the Harris County cases began in late April 2006, and concluded August 1, 2006. The jury found in favor of NAICO, Gulsby, Bay Limited and the joint venture between Gulsby and Bay Limited ("Gulsby-Bay Plant Partners") on all counts and fixed damages against Gulf Liquids and Williams totaling $402,568,089.53. The damages determined by the jury included a total of $325 million in punitive damages. Among other findings, the jury found: 1. Williams tortiously interfered with NAICO's contractual relationship with Gulsby and Gulf Liquids; and 2. Williams fraudulently induced NAICO to issue the surety bonds; and 3. Williams defrauded NAICO after the bonds were issued; and 4. Williams' actions were malicious; and 5. Gulf Liquids fraudulently induced NAICO to issue the surety bonds; and 6. Gulf Liquids breached its obligations to NAICO under the bonds; and 7. Williams is responsible for the claims against Gulf Liquids because Gulf Liquids is the alter ego of Williams; and 8. There were material alterations (cardinal changes) to the contracts NAICO bonded. The amounts the jury found owing to NAICO 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. During the third quarter of 2006, NAICO increased the estimated recovery on the surety bond claims related to the construction of the two gas processing plants which resulted in a decrease in losses and loss adjustment expenses incurred of $4.7 million. Unpaid losses and loss adjustment expenses decreased $22.7 million, reinsurance recoverable on unpaid losses and loss adjustment expenses decreased $16.8 million, and reinsurance recoverable on paid losses and loss adjustment expenses decreased $1.2 million as of December 31, 2006 as a result of increasing the estimated recovery. NAICO also recorded $6.6 million of interest income for its estimate of prejudgment interest through December 31, 2006, including a recovery for a pre-verdict settlement with certain other parties. 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. 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. PAGE 8 In the fourth quarter of 2007, as a result of this final judgment, NAICO decreased the estimated recovery on the surety bond claims related to the construction of the two gas processing plants which resulted in an increase in losses and loss adjustment expenses incurred of $1.8 million. Unpaid losses and loss adjustment expenses increased $12.7 million and reinsurance recoverable on unpaid losses and loss adjustment expenses increased $10.9 million as of December 31, 2007 as a result of decreasing the estimated recovery. NAICO also decreased accrued interest income by $4.5 million for its estimate of prejudgment interest income. NOTE 5. NEW ACCOUNTING STANDARDS The Financial Accounting Standards Board ("FASB") periodically issues new accounting standards in a continuing effort to improve standards of financial accounting and reporting. Chandler USA has reviewed the recently issued pronouncements and concluded that the following new accounting standards are applicable to Chandler USA. In March 2008, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 161, "Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133." SFAS No. 161 changes 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 under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance and cash flows. Chandler USA has adopted SFAS No. 161 as of January 1, 2009. The adoption of SFAS No. 161 did not have a material impact on its consolidated financial statements. In May 2008, the FASB issued SFAS No. 163, "Accounting for Financial Guarantee Insurance Contracts - an interpretation of FASB Statement No. 60." SFAS No. 163 requires that an insurance enterprise recognize a claim liability prior to an event of default when there is evidence that credit deterioration has occurred in an insured financial obligation. It also clarifies how Statement 60 applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities, and requires expanded disclosures about financial guarantee insurance contracts. Chandler USA does not issue financial guarantee insurance contracts. Chandler USA has adopted the SFAS No. 163 as of January 1, 2009. The adoption of SFAS No. 163 did not have any impact on its consolidated financial statements. In April 2009, the FASB issued FASB Staff Position ("FSP") No. FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments". FSP No. FAS 107-1 and APB 28-1 expands existing disclosures regarding fair value of financial instruments required in annual reports to interim periods. The disclosures required by FSP No. FAS 107-1 and APB 28-1 are effective for interim reporting periods ending after June 15, 2009. Chandler USA will adopt FSP No. 107-1 and APB 28-1 on June 30, 2009. Chandler USA does not expect the adoption of FSP No. FAS 107-1 and APB 28-1 to have a material impact on its consolidated financial statements. In April 2009, the FASB issued FSP No. FAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly". FSP No. FAS 157-4 provides additional guidance for estimating fair value in accordance with SFAS No. 157 when the volume and level of activity for the asset or liability have significantly decreased. FSP No. FAS 157-4 is effective prospectively for interim and annual reporting periods ending after June 15, 2009. Chandler USA will adopt FSP No. FAS 157-4 on June 30, 2009. Chandler USA does not expect the adoption of FSP No. FAS 157-4 to have a material impact on its consolidated financial statements. In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, "Recognition and Presentation of Other-Than-Temporary Impairments". FSP No. FAS 115-2 and FAS 124-2 amends other-than-temporary impairment guidance in GAAP 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. FSP No. FAS 115-2 and FAS 124-2 are effective for interim and annual reporting periods ending after June 15, 2009. Chandler USA will adopt FSP No. FAS 115-2 and FAS 124-2 on June 30, 2009. Chandler USA does not expect the adoption of FSP No. FAS 115-2 and FAS 124-2 to have a material impact on its consolidated financial statements. PAGE 9 NOTE 6. FAIR VALUE MEASUREMENTS Effective January 1, 2008, Chandler USA adopted SFAS No. 157 which establishes a framework for measuring fair value and requires specific disclosures regarding assets and liabilities that are measured at fair value. SFAS No. 157 defines fair value 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. SFAS No. 157 ranks the quality and reliability of the information used to determine fair values 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 by SFAS No. 157 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 March 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 March 31, 2009.

~~Property~~Fair ~~and~~value ~~casualty~~measurements ~~Intersegment~~at ~~Reported~~March ~~insurance~~31, ~~Agency~~2009 ~~eliminations balances~~ ------------ ------------ ------------ ---------------------------------- ~~(In~~Quoted ~~thousands)~~prices ~~THREE~~Significant ~~MONTHS~~in ~~ENDED~~active ~~JUNE~~other ~~30,~~Significant ~~2008~~markets ~~Revenues~~for ~~from~~observable ~~external~~unobservable ~~customers~~identical ~~(1)~~assets ~~...........~~inputs $inputs ~~15,395~~Total $Description ~~264 $ - $ 15,659 Intersegment revenues .......................... 12 724~~ (~~736)~~Level ~~- Segment profit (loss~~1) ~~before income taxes~~ (Level 2) ~~.. 1,253 165 - 1,418 THREE MONTHS ENDED JUNE 30, 2007 Revenues from external customers~~ (1Level 3) ~~...........~~fair $value ~~15,925~~------------------------------------------ $---------------- ~~113~~---------------- $ ---------------- ~~$ 16,038 Intersegment revenues .......................... 39 1,142 (1,181)~~ ---------------- ~~Segment profit~~ (~~loss)~~In ~~before income taxes (2~~thousands) ..Fixed ~~643~~maturities ~~419~~available -for ~~1,062~~sale ~~SIX MONTHS ENDED JUNE 30, 2008 Revenues from external customers (1)~~ ...~~........~~ $ ~~32,991~~- $ ~~590~~84,736 $ - $ 3384,~~581~~736 ~~Intersegment~~Equity ~~revenues~~securities ~~..........................~~available 23for ~~1,720~~sale ~~(1,743) - Segment profit (loss) before income taxes (2)~~ .. ~~1,759~~- ~~668~~ - ~~2,427~~76 ~~Segment~~76 ~~assets ................................. 240,707 8,327 (7,209) 241,825 SIX MONTHS ENDED JUNE 30, 2007 Revenues from external customers (1) ........... $ 33,019 $ 866 $~~ Short-term $investments ~~33,885 Intersegment revenues~~ ................~~..........~~ ~~51 2,124 (2,175)~~ - ~~Segment profit (loss) before income taxes (2) .. 1~~5,~~130~~002 ~~1,377~~ - ~~2,507 Segment assets ................................. 223,132 6,709 (~~5,~~510)~~002 ~~224,331~~ ---------------- ---------------- ---------------- ---------------- ~~(1)~~Total ~~Consists~~................................. of$ ~~net~~- ~~premiums~~$ ~~earned~~89,738 ~~and~~$ ~~other~~76 ~~income.~~$ ~~(2)~~89,814 ~~Includes~~================ ~~net~~================ ~~realized~~================ ~~investment gains.~~================

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 $386,000 at March 31, 2009, or 0.4% of total Level 2 assets. At March 31, 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 quarter ended March 31, 2009.

~~THREE~~Fair ~~MONTHS~~value ~~ENDED~~measurements ~~JUNE~~using ~~30,~~significant ~~SIX~~Quarter ~~MONTHS~~ended ~~ENDED~~unobservable ~~JUNE~~inputs 30(Level 3) March 31, ~~---------------------------~~2009 ------------------------- ~~2008 2007 2008 2007~~ ------------ ------------ ---------- ------~~------~~ (In thousands) ~~INSURANCE~~Beginning ~~PROGRAM~~balance ~~--------------------------------------- NET PREMIUMS EARNED Standard lines~~ ............................. $ ~~14,490~~76 $Total ~~15,223~~realized $and ~~31,226~~unrealized $gains ~~30,728~~(losses): ~~Political~~Included ~~subdivisions~~in ~~................~~earnings ~~698 944 1,398 1,934 Homeowners~~ ......................~~......~~ - ~~(304)~~Included -in ~~(10)~~other ~~Surety~~comprehensive ~~bonds~~income .... - Purchases, issuances and settlements ........~~..............~~ 19- 62Transfers 53in ~~129~~and/or ~~Other~~out ~~(1)~~of Level 3 ..........~~...................~~ ~~36 (55) 76 109~~ -~~-----------~~ ------------ ----~~------~~ ~~------------~~Ending $balance ~~15,243 $ 15,870 $ 32,753 $ 32,890 ============ ============ ========== ============ LOSSES AND LOSS ADJUSTMENT EXPENSES Standard lines~~ ........................ ~~$ 7,749 $ 9,187 $ 18,178 $ 18,414 Political subdivisions~~ ........~~........~~ 419 427 855 1,290 Homeowners ............................ 43 (124) 36 (22) Surety bonds .......................... 120 (112) 176 (90) Other (1) ............................. 49 (12) 71 441 ------------ ------------ ---------- ------------ $ ~~8,380~~76 ~~$ 9,366 $ 19,316 $ 20,033~~ ============ ============ ========== ============ ------------------------------------------------------ (1) This category is comprised primarily of the run-off of discontinued programs and NAICO's participation in various mandatory workers compensation pools.

PAGE 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS Some of the statements made in this Form 10-Q report, as well as statements made by Chandler (U.S.A.), Inc. ("Chandler USA") in periodic press releases and oral statements made by Chandler USA's officials constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of Chandler USA to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such factors include, among other things, (i) general economic and business conditions; (ii) interest rate changes; (iii) competition and regulatory environment in which Chandler USA and its subsidiaries operate, including the ability to implement price increases; (iv) claims frequency; (v) claims severity: (vi) catastrophic events of unanticipated frequency or severity; (vii) the number of new and renewal policy applications submitted to National American Insurance Company ("NAICO") by its agents; (viii) the ability of NAICO to obtain adequate reinsurance in amounts and at rates that will not adversely affect its competitive position; (ix) the ability of NAICO to collect reinsurance recoverables; (x) the ability of NAICO to maintain favorable insurance company ratings; and (xi) various other factors including ongoing litigation matters. RESULTS OF OPERATIONS PREMIUMS EARNED The following table sets forth premiums earned on a gross basis (before reductions for premiums ceded to reinsurers) and on a net basis (after such reductions) for each insurance program as well as each line of insurance for the three month periods ended March 31, 2009 and 2008:

~~FAIR~~GROSS ~~VALUE~~PREMIUMS ~~MEASUREMENTS~~EARNED ATNET ~~JUNE~~PREMIUMS ~~30,~~EARNED ~~2008~~ --------------------------- ----------------------------- ~~Quoted~~THREE ~~prices~~MONTHS ~~Significant~~ENDED inMARCH ~~active~~31, ~~other~~2009 ~~Significant~~2008 ~~markets~~2009 ~~for~~2008 ~~observable unobservable identical assets inputs inputs Total Description (Level 1) (Level 2) (Level 3) fair value~~ ---------------------------------- ------------ ------------ ------------ ------------ (In thousands) INSURANCE PROGRAMS: Standard lines ................... $ 22,492 $ 26,208 $ 14,172 $ 16,736 Political subdivisions ........... 987 1,066 644 700 Other ............................ 60 88 53 74 ------------ ------------ ------------ ~~(In~~------------ ~~thousands)~~TOTAL ~~Fixed~~............................ ~~maturities~~$ ~~available~~23,539 ~~for~~$ ~~sale~~27,362 $ 14,869 $ 17,510 ============ ============ ============ ============ LINES OF INSURANCE: Automobile liability ............. $ -6,899 $ 789,~~638~~721 $ -4,750 $ 786,~~638~~764 ~~Equity~~Workers ~~securities~~compensation ~~available~~............. ~~for~~7,843 ~~sale~~8,250 5,130 5,371 Other liability .................. -6,401 -7,458 763,364 764,055 ~~Short-term~~Automobile ~~investments~~physical damage ....... 2,363 1,832 1,603 1,248 Other ............................ -33 ~~760~~101 -22 ~~760~~72 ------------~~----~~ ------------ ------------- ------------ TOTAL ............................~~...~~ $ -23,539 $ 7927,~~398~~362 $ 7614,869 $ 7917,~~474~~510 ============~~====~~ ============ ============= ============

Gross premiums earned in the first quarter of 2009 decreased $3.8 million or 14% compared to the first quarter of 2008. Net premiums earned decreased $2.6 million or 15% in the first quarter of 2009 compared to the first quarter of 2008. Gross premiums earned in the standard lines program decreased $3.7 million or 14% in the first quarter of 2009 compared to the first quarter of 2008. Gross premiums earned from trucking accounts in this program decreased $2.6 million in the first quarter of 2009. Gross premiums earned for automobile liability decreased $2.8 million in the first quarter of 2009, and other liability and workers compensation gross premiums earned decreased $1.1 million and $407,000 in the 2009 quarter, respectively. Gross premiums earned for automobile physical damage increased $531,000 in the first quarter of 2009. Net premiums earned decreased $2.6 million or 15% in the first quarter of 2009 versus the first quarter of 2008, due to the decrease in gross earned premiums. PAGE 11 Gross premiums earned in the political subdivisions program decreased $79,000 or 7% in the first quarter of 2009 compared to the first quarter of 2008. Net premiums earned in the political subdivisions program decreased $56,000 or 8% in the first quarter of 2009 versus the first quarter of 2008. NET INVESTMENT INCOME AND NET REALIZED INVESTMENT GAINS At March 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 16% 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 $129,000 or 14% in the first quarter of 2009 versus the first quarter of 2008 due primarily to lower interest rates. Cash and invested assets were $106.3 million at March 31, 2009 compared to $103.7 million at December 31, 2008 and $101.8 million at March 31, 2008. Net interest income from related parties was $106,000 in the first quarter of 2009 compared to $188,000 in the first quarter of 2008. The decrease in the 2009 quarter was due to lower interest rates. Net realized investment gains were $384,000 in the first quarter of 2009. The realized gains resulted from sales of fixed maturities available for sale in the amount of $6.6 million. There were no net realized investment gains in the first quarter of 2008. OTHER INCOME Other income was $443,000 in the first quarter of 2009 and increased $31,000 or 8% compared to the first quarter of 2008. 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 55.6% for the first quarter of 2009 versus 62.5% in the first quarter of 2008. During the first quarter of 2009, NAICO experienced redundant loss reserve development totaling $330,000 which decreased the 2009 loss ratio by 2.2 percentage points. The redundant loss reserve development in the first quarter of 2009 resulted primarily from certain recoveries on claims in the 1998 and 1999 accident years. During 2008, loss development was $181,000 which increased the 2008 loss ratio by 1.0 percentage point. Weather- related losses from wind and hail were not significant in the first quarter of 2009 or 2008. POLICY ACQUISITION COSTS Policy acquisition costs consist of costs associated with the acquisition of new and renewal business and generally include direct costs such as premium taxes, commissions to agents and ceding companies and premium-related assessments and indirect costs such as salaries and expenses of personnel who perform and support underwriting activities. NAICO also receives ceding commissions from the reinsurers who assume premiums from NAICO under certain reinsurance contracts and the ceding commissions are accounted for as a reduction of policy acquisition costs. Direct policy acquisition costs and ceding commissions are deferred and amortized over the terms of the policies. When the sum of the anticipated losses, loss adjustment expenses and unamortized policy acquisition costs exceeds the related unearned premiums, including anticipated investment income, a provision for the indicated deficiency is recorded. PAGE 12 The following table sets forth Chandler USA's policy acquisition costs for each of the three month periods ended March 31, 2009 and 2008:

~~Three~~THREE ~~months~~MONTHS ~~Six~~ENDED ~~months~~MARCH ~~Fair value measurements using significant ended ended unobservable inputs (Level 3) June 30~~31, ~~2008 June 30, 2008~~ ----------------------------~~---------------------~~ 2009 2008 ------------~~---~~ ------------~~---~~ (In thousands) ~~Beginning~~Commissions ~~balance~~expense .........................~~.....~~ $ ~~141~~3,683 $ ~~141~~4,325 ~~Total~~Other ~~realized~~premium ~~and~~related ~~unrealized~~assessments ~~gains~~........... ~~(losses):~~267 ~~Included~~308 inPremium ~~earnings~~taxes ............................... -455 -577 ~~Included~~Excise intaxes ~~other comprehensive income~~ ......... ~~(65) (65) Purchases, issuances and settlements~~ ....................... -67 -82 ~~Transfers~~Other inexpense ~~and/or out of Level 3~~ ............................... -126 -148 ------------~~---~~ ------------~~---~~ ~~Ending~~Total ~~balance~~direct expenses ....................... 4,598 5,440 Indirect underwriting expenses .............. 1,430 1,575 Commissions received from reinsurers ........ (3,023) (3,610) Adjustment for deferred acquisition costs ... (89) (162) ------------ ------------ Net policy acquisition costs ................ $ 762,916 $ 763,243 ============~~===~~ ============~~===~~

Total gross direct and indirect expenses as a percentage of direct written and assumed premiums were 24.3% for the first quarter of 2009 versus 23.2% for the first quarter of 2008 and 24.6% for the year ended December 31, 2008. Commissions expense as a percentage of gross written and assumed premiums was 14.8% for the first quarter of 2009 versus 14.3% for the first quarter of 2008 and the year ended December 31, 2008. Indirect underwriting expenses decreased $145,000 in the first quarter of 2009 compared to the first quarter of 2008, and were 5.8% and 5.2% of total direct written and assumed premiums in the three month periods ended March 31, 2009 and 2008, respectively. Indirect expenses were 6.4% of total direct written and assumed premiums in the year ended December 31, 2008. Indirect expenses include general overhead and administrative costs associated with the acquisition of new and renewal business, some of which is relatively fixed in nature, thus, the percentage of such expenses to direct written and assumed premiums will vary depending on Chandler USA's overall premium volume. Commissions received from reinsurers decreased $587,000 in the first quarter of 2009 compared to the year-ago quarter due primarily to the decrease in reinsurance premiums ceded in the 2009 quarter. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses were 12.9% of gross premiums earned and other income in the first quarter of 2009 versus 11.4% in the 2008 quarter and 12.7% in the year ended December 31, 2008. General and administrative expenses decreased $55,000 or 2% in the first quarter of 2009 compared to the 2008 quarter. General and administrative expenses have historically not varied in direct proportion to Chandler USA's revenues. A portion of such expenses is allocated to policy acquisition costs (indirect underwriting expenses) and loss adjustment expenses based on various factors including employee counts, salaries, occupancy and specific identification. Because certain types of expenses are fixed in nature, the percentage of such expenses to revenues will vary depending on Chandler USA's overall premium volume. INTEREST EXPENSE Interest expense was $598,000 in the first quarter of 2009 compared to $652,000 in the first quarter of 2008. Substantially all of Chandler USA's interest expense is related to its outstanding senior debentures and junior subordinated debentures. The decrease in the 2009 period was due primarily to lower interest rates during 2009, as a portion of Chandler USA's junior subordinated debentures were issued with a floating interest rate. PAGE 12 LIQUIDITY AND CAPITAL RESOURCES In the first quarter of 2009, Chandler USA provided $3.3 million in cash from operations. Unpaid losses and loss adjustment expenses increased $2.6 million, premiums receivable decreased $2.1 million and unearned premiums increased $1.3 million during the first quarter of 2009. These were partially offset by an increase in reinsurance recoverable on unpaid losses and loss adjustment expenses of $2.2 million. In the first quarter of 2008, Chandler USA provided $3.3 million in cash from operations. Unpaid losses and loss adjustment expenses increased $5.1 million and unearned premiums increased $2.8 million during the first quarter of 2008, but these increases were partially offset by increases in premiums receivable of $2.7 million, reinsurance recoverable on unpaid losses of $2.5 million and prepaid reinsurance premiums of $1.1 million. NAICO is required to deposit cash and securities with regulatory agencies in which it is licensed as a condition of conducting operations in the state. In addition, NAICO has deposited cash and securities into a trust account as collateral for a reinsurance agreement in which NAICO is the assuming reinsurer. At March 31, 2009, the total amount of cash and securities restricted as a result of these arrangements was $40.6 million which was an increase of $5.1 million from December 31, 2008. This increase was due to an increase in the amount of reinsurance that NAICO assumed during 2008 and 2009. At March 31, 2009, Chandler USA's parent company, Chandler Insurance Company, Ltd., owed approximately $12.0 million to Chandler USA versus $11.9 million at December 31, 2008 under an Intercompany Credit Agreement (the "Credit Agreement") covering intercompany loans between the parties. The Credit Agreement requires interest to be paid at the prime interest rate published in The Wall Street Journal each month, and balances owed by either party are payable at any time upon demand. During March 2001, Chandler USA entered into a $3.8 million sale and leaseback transaction for certain owned equipment for three years. During March 2004, the lease was extended for three years and during March 2007, the lease was extended for an additional three years with monthly rental installments equal to the sum of (i) $13,834 plus (ii) interest on the unpaid lease balance at 1% over JP Morgan Chase Bank prime which was 4.25% at March 31, 2009. Chandler USA has the option to repurchase the equipment at the end of the lease for approximately $1.9 million (the "Balloon Payment"), or may elect to have the lessor sell the equipment. If the election to sell the equipment is made, Chandler USA would retain any proceeds exceeding the Balloon Payment. If the proceeds were less than the Balloon Payment, Chandler USA would be required to pay the difference between the proceeds and the Balloon Payment, not to exceed approximately $1.5 million. Chandler USA is a holding company receiving cash principally through borrowings, subsidiary dividends and other payments, subject to various regulatory restrictions. The capacity of insurance companies to write insurance is based on maintaining liquidity and capital resources sufficient to pay claims and expenses as they become due. The primary sources of liquidity for Chandler USA's subsidiaries are funds generated from insurance premiums, investment income, capital contributions from Chandler USA and proceeds from sales and maturities of portfolio investments. The principal expenditures are payment of losses and loss adjustment expenses, insurance operating expenses and commissions. A significant portion of Chandler USA's consolidated assets represents assets of NAICO that may not be immediately transferable to Chandler USA in the form of shareholder dividends, loans, advances or other payments. Statutes and regulations governing NAICO and other insurance companies domiciled in Oklahoma regulate the payment of shareholder dividends and other payments by NAICO to Chandler USA. Under applicable Oklahoma statutes and regulations, NAICO is permitted to pay shareholder dividends only out of statutory earned surplus. To the extent NAICO has statutory earned surplus, NAICO may pay shareholder dividends only to the extent that such dividends are not defined as extraordinary dividends or distributions. If the dividends are, under applicable statutes and regulations, extraordinary dividends or distributions, regulatory approval must be obtained. Under the applicable Oklahoma statute, and subject to the availability of statutory earned surplus, the maximum shareholder dividend that may be declared (or cash or property distribution that may be made) by NAICO in any one calendar year without regulatory approval is the greater of (i) NAICO's statutory net income, excluding realized capital gains, for the preceding calendar year; or (ii) 10% of NAICO's statutory policyholders' surplus as of the preceding calendar year end, not to exceed NAICO's statutory earned surplus. As of December 31, 2008, NAICO had statutory earned surplus of $13.4 million. Applying the Oklahoma statutory limits described above, the maximum shareholder dividend NAICO may pay in 2009 without the approval of the Oklahoma Department of Insurance is $5.1 million. NAICO paid cash shareholder dividends to Chandler USA totaling $500,000 during the first quarter of 2009. During 2008, NAICO paid cash shareholder dividends to Chandler USA totaling $2.1 million. PAGE 14 In addition to the statutory limits described above, the amount of shareholder dividends and other payments to affiliates can be further limited by contractual or regulatory restrictions or other agreements with regulatory authorities restricting dividends and other payments, including regulatory restrictions that are imposed as a matter of administrative policy. If insurance regulators determine that payment of a shareholder dividend or other payments to an affiliate (such as payments under a tax sharing agreement, payments for employee or other services, or payments pursuant to a surplus note) would be hazardous to such insurance company's policyholders or creditors, the regulators may block such payments that would otherwise be permitted without prior approval. Historically, NAICO has played a significant role in the servicing of debt and other obligations of Chandler USA through the payment of shareholder dividends. These obligations include $7.0 million of 8.75% senior debentures due in 2014, $13.4 million of 9.75% junior subordinated debentures due in 2033, $7.2 million of floating rate junior subordinated debentures due in 2034 and the obligations under the sale and leaseback transaction discussed previously. To the extent that the restrictions discussed previously limit NAICO's ability to pay shareholder dividends or other payments to Chandler USA, Chandler USA's ability to satisfy the debt obligations may also be limited. LITIGATION In October 1999, NAICO provided surety bonds for Gulsby Engineering, Inc. ("Gulsby") in connection with contracts between Gulf Liquids New River Project, LLC ("Gulf Liquids") and Gulsby for the construction of two gas processing plants in Louisiana. During 2001, Gulsby became unable to pay various vendors resulting in payments to vendors by NAICO totaling $20,182,499. In August 2001, NAICO filed suit in federal court in Louisiana alleging that Gulf Liquids had breached its obligations under the bonds by materially altering certain contracts and that as a result, NAICO was exonerated on the bonds and should recover the amounts paid to vendors. In the fall of 2001, Gulsby and Bay Limited, another contractor with whom Gulsby had entered into a joint venture for the construction of other gas processing plants for Gulf Liquids, filed lawsuits relating to those plants in Houston, Texas. Gulf Liquids filed original actions and counterclaims. NAICO intervened in the Texas lawsuits and, in addition, sued Williams Energy Marketing and Trading (which later became Williams Power Company, Inc.) ("Williams") alleging fraud, breach of contract, tortious interference with contractual relations, conspiracy and alter ego. These claims were asserted against both Gulf Liquids and Williams. Gulf Liquids asserted counterclaims alleging breach of contract against NAICO and requesting contractual and statutory damages ranging from $40 million to $80 million. The cases were consolidated for trial in the 215th Judicial District Court in Harris County, Texas. On August 1, 2006, the jury trial concluded in Harris County, Texas, related to the construction of two gas processing plants in Louisiana. The amounts the jury found owing to NAICO included approximately $20.2 million in actual damages and $70.0 million in punitive damages. See Note 4 of Notes to Consolidated Financial Statements for a discussion of this jury verdict. During the third quarter of 2006, NAICO increased the estimated recovery on the surety bond claims related to the construction of the two gas processing plants which resulted in a decrease in losses and loss adjustment expenses incurred of $4.7 million. In addition, unpaid losses and loss adjustment expenses decreased $22.7 million, reinsurance recoverable on unpaid losses and loss adjustment expenses decreased $16.8 million, and reinsurance recoverable on paid losses and loss adjustment expenses decreased $1.2 million. NAICO also recorded $6.6 million of interest income for its estimate of prejudgment interest through December 31, 2006 and recorded an additional $317,000 of prejudgment interest during the first quarter of 2007 including a recovery for a pre-verdict settlement with certain other parties. 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. NAICO has appealed to 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. In the fourth quarter of 2007, as a result of this final judgment, NAICO decreased the estimated recovery on the surety bond claims related to the construction of the two gas processing plants which resulted in an increase in losses and loss adjustment expenses incurred of $1.8 million. Unpaid losses and loss adjustment expenses increased $12.7 million and reinsurance recoverable on unpaid losses and loss adjustment expenses increased $10.9 million as of December 31, 2007 as a result of decreasing the estimated recovery. NAICO also decreased accrued interest income by $4.5 million for its estimate of prejudgment interest income. PAGE 15 ITEM 4T. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES As of the end of the period covered by this report and pursuant to Rule 13a-15 of the Securities Exchange Act of 1934 (the "Exchange Act"), Chandler USA's management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness and design of Chandler USA's disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act). Based upon that evaluation, Chandler USA's Chief Executive Officer and Chief Financial Officer concluded, as of the end of the period covered by this report, that Chandler USA's disclosure controls and procedures were effective in recording, processing, summarizing and reporting information required to be disclosed by Chandler USA, within the time periods specified in the Securities and Exchange Commission's rules and forms. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING 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. PART II. OTHER INFORMATION ----------------- Item 1. LEGAL PROCEEDINGS ----------------- Chandler USA and its subsidiaries are not parties to any material litigation other than as is routinely encountered in their respective business activities. While the outcome of these matters cannot be predicted with certainty, Chandler USA does not expect these matters to have a material adverse effect on its financial condition, results of operations or cash flows. See Note 4 of Notes to Interim Consolidated Financial Statements for a discussion of a favorable jury verdict in civil litigation regarding certain surety bond claims. Item 1A. RISK FACTORS ------------ There have been no material changes from risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2008. Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS ----------------------------------------------------------- None. Item 3. DEFAULTS UPON SENIOR SECURITIES ------------------------------- None. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- Effective May 12, 2009, Chandler USA's sole shareholder, Chandler Insurance, re-elected the following individuals to serve on Chandler USA's Board of Directors: W. Brent LaGere W. Scott Martin Mark T. Paden Robert L. Rice R. Patrick Gilmore William Thomas Keele Richard L. Evans Item 5. OTHER INFORMATION ----------------- None. Item 6. EXHIBITS -------- 31.1 Rule 13a-14(a)/15d-14(a) Certifications. 32.1 Section 1350 Certifications. PAGE 16 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: May 12, 2009 CHANDLER (U.S.A.), INC. By: /s/ W. Brent LaGere -------------------------------------- W. Brent LaGere Chairman of the Board and Chief Executive Officer (Principal Executive Officer) By: /s/ Mark C. Hart -------------------------------------- Mark C. Hart Senior Vice President - Finance, Chief Financial Officer and Treasurer (Principal Accounting Officer)

GROSS PREMIUMS EARNED NET PREMIUMS EARNED --------------------------- --------------------------- THREE MONTHS ENDED JUNE 30, 2008 2007 2008 2007 ---------------------------------- ------------ ------------ ------------ ------------ (In thousands) Standard lines ................... $ 23,052 $ 24,687 $ 14,490 $ 15,223 Political subdivisions ........... 1,065 1,271 698 944 Homeowners ....................... - 28 - (304) Surety bonds ..................... 27 89 19 62 Other ............................ 36 (54) 36 (55) ------------ ------------ ------------ ------------ TOTAL ............................ $ 24,180 $ 26,021 $ 15,243 $ 15,870 ============ ============ ============ ============

GROSS PREMIUMS EARNED NET PREMIUMS EARNED --------------------------- --------------------------- SIX MONTHS ENDED JUNE 30, 2008 2007 2008 2007 ---------------------------------- ------------ ------------ ------------ ------------ (In thousands) Standard lines ................... $ 49,259 $ 49,815 $ 31,226 $ 30,728 Political subdivisions ........... 2,131 2,784 1,398 1,934 Homeowners ....................... - 503 - (10) Surety bonds ..................... 76 184 53 129 Other ............................ 76 111 76 109 ------------ ------------ ------------ ------------ TOTAL ............................ $ 51,542 $ 53,397 $ 32,753 $ 32,890 ============ ============ ============ ============

THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------- ---------------------- 2008 2007 2008 2007 ---------- ---------- ---------- ---------- (In thousands) Commissions expense ........................ $ 2,953 $ 3,374 $ 7,278 $ 7,279 Other premium related assessments .......... 239 263 546 521 Premium taxes .............................. 423 580 1,000 1,152 Excise taxes ............................... 54 66 136 149 Other expense .............................. 157 214 306 453 ---------- ---------- ---------- ---------- Total direct expenses ...................... 3,826 4,497 9,266 9,554 Indirect underwriting expenses ............. 1,608 1,457 3,183 2,920 Commissions received from reinsurers ....... (2,391) (2,911) (6,001) (5,404) Adjustment for deferred acquisition costs .. 81 (11) (81) (788) ---------- ---------- ---------- ---------- Net policy acquisition costs ............... $ 3,124 $ 3,032 $ 6,367 $ 6,282 ========== ========== ========== ==========

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