CHANDLER USA INC
GENERAL        Chandler USA is an insurance holding company that provides administrative services to its wholly owned subsidiaries NAICO and Chandler Insurance Managers, Inc. ("CIMI").  Chandler USA is an Oklahoma corporation which is wholly owned by Chandler Insurance Company, Ltd. ("Chandler Insurance"), a privately owned Cayman Islands company.  Chandler USA is headquartered in Chandler, Oklahoma, in facilities also occupied by NAICO and CIMI.        NAICO is one of the leading commercial business insurance writers in Oklahoma, providing property and casualty coverage for businesses in various industries.  NAICO also provides homeowners insurance in Texas.  NAICO has a network of independent agents, totaling approximately 119 at December 31, 2005, that market NAICO's insurance products.  Independent agents originate substantially all of NAICO's business.  NAICO is licensed to write property and casualty coverage in 45 states and the District of Columbia and is authorized by the United States Department of the Treasury to write surety bonds for contractors on federal projects.  NAICO is currently rated as B+ (Very Good) by A.M. Best Company, an insurance rating agency.  This rating is an independent opinion of a company's financial strength, operating performance and ability to meet its obligations to policyholders.        CIMI is an underwriting manager for certain wholesale operations related to NAICO's school districts and trucking insurance.  INSURANCE PROGRAMS        NAICO writes various property and casualty insurance products through three primary marketing programs.  The programs are standard property and casualty, political subdivisions and homeowners.  STANDARD PROPERTY AND CASUALTY PROGRAM        NAICO offers workers compensation, automobile liability and physical damage, other liability (including general liability, products liability and umbrella liability) and property coverages under its standard property and casualty program.  In marketing these products, NAICO targets companies in the construction, manufacturing, wholesale, service, oil and gas, trucking, and retail industries.  NAICO writes this business principally in Oklahoma and Texas.  POLITICAL SUBDIVISIONS PROGRAM        Under the political subdivisions program, NAICO writes insurance policies primarily for school districts in Oklahoma.  As of December 31, 2005 NAICO insured 183 school districts in Oklahoma.  The coverages offered include workers compensation, automobile liability, automobile physical damage, general liability, property and school board legal liability.  NAICO has also written property and casualty insurance for municipalities, primarily in Oklahoma. During 2003, NAICO significantly reduced its premium writings in this portion of the program and did not write any premiums during 2004 or 2005.                                                                   PAGE 2  HOMEOWNERS PROGRAM        In the second quarter of 2005, NAICO began writing homeowners and dwelling fire and allied lines policies in the state of Texas through a managing general agent.  NAICO is currently reviewing this program and may modify or discontinue this program during 2006.  SURETY BOND PROGRAM        NAICO has written surety bonds, commonly referred to as contract performance bonds, to secure the performance of contractors and suppliers on construction projects.  NAICO has also written bail bonds, which guarantee that the principal will discharge obligations set by the court, as well as other types of miscellaneous bonds.  NAICO discontinued the bail bond portion of the program as of the end of 2003.  NAICO is no longer actively marketing its surety bond program.        The following table shows gross premiums earned and net premiums earned by insurance program for the years 2003, 2004 and 2005.  The term "gross premiums earned" means gross premiums written (before reductions for premiums ceded to reinsurers) less the increases or plus the decreases in the gross unearned premium reserve for the unexpired portion of the policy term beyond the current accounting period.  The term "net premiums earned" means gross premiums earned less reductions for earned premiums ceded to reinsurers.  See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."                                            GROSS PREMIUMS EARNED          NET PREMIUMS EARNED                                      --------------------------   -------------------------- INSURANCE PROGRAMS                     2003     2004     2005       2003     2004     2005 - -----------------------------------  -------- -------- --------   -------- -------- --------                                                        (In thousands)        Standard property and casualty ....  $ 93,193 $ 92,894 $ 92,224   $ 45,521 $ 54,278 $ 54,979 Political subdivisions ............    28,926   21,679   18,630      8,093    7,269    6,690 Homeowners ........................         -        -    4,229          -        -    3,321 Surety bonds ......................     3,908    2,788      930      2,724    1,993      669 Other (1)..........................       252      507      406        245      502      401                                      -------- -------- --------   -------- -------- -------- TOTAL .............................  $126,279 $117,868 $116,419   $ 56,583 $ 64,042 $ 66,060                                      ======== ======== ========   ======== ======== ======== - ----------------------------    (1)  This category is comprised primarily of the run-off of discontinued programs and      NAICO's participation in various mandatory workers compensation pools.    LINES OF INSURANCE        The lines of insurance written by NAICO through its programs are automobile liability, other liability (including general liability, products liability and umbrella liability), workers compensation, automobile physical damage, property (including homeowners multiple peril), surety and inland marine.  The following table shows net premiums earned as a percentage of total net premiums earned by each line of insurance written by NAICO during the period indicated.                                                        YEAR ENDED DECEMBER 31,                                     ----------------------------------------------------                                       2001       2002       2003       2004       2005                                     --------   --------   --------   --------   --------       Automobile liability ..............      19%        25%        27%        28%        29% Other liability ...................      25%        25%        23%        28%        27% Workers compensation ..............      24%        22%        29%        27%        25% Automobile physical damage ........      17%        14%        10%         9%         9% Property ..........................       7%         8%         5%         4%         8% Surety ............................       6%         5%         5%         3%         1% Inland marine .....................       2%         1%         1%         1%         1%                                     --------   --------   --------   --------   --------      Total ........................     100%       100%       100%       100%       100%                                     ========   ========   ========   ========   ========                                                                           PAGE 3  UNDERWRITING AND CLAIMS        Independent insurance agents submit applications for commercial insurance policies for prospective customers to NAICO or to NAICO's managing general agent for the homeowners program.  NAICO and the managing general agent review prospective risks in accordance with specific underwriting guidelines established by NAICO.  If the risk is approved and coverage is accepted by the insured, a NAICO insurance policy is issued.        NAICO's claims department reviews and administers all claims except claims associated with the homeowners program which are handled by the managing general agent for this program.  When a claim is received, it is reviewed and assigned to an in-house claim adjuster based on the type and geographic location of the claim, its severity and its class of business.  NAICO's claims department is responsible for reviewing each claim, obtaining necessary documentation and establishing loss and loss adjustment expense reserves. NAICO's in-house claims staff handles and supervises the claims, coordinates with outside legal counsel and independent claims adjusters if necessary, and processes the claims to conclusion.  REINSURANCE        In the ordinary course of business, NAICO cedes insurance risks and a portion of the insurance premiums to its reinsurers under various reinsurance contracts that cover individual risks (facultative reinsurance) or entire classes of business (treaty reinsurance).  Reinsurance provides greater diversification of insurance risk associated with business written and also reduces NAICO's exposure from high policy limits or from catastrophic events and hazards of an unusual nature.  Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policies.  In formulating its reinsurance programs, NAICO considers numerous factors, including the financial stability of the reinsurer, the reinsurer's ability to provide sufficient collateral (if required), reinsurance coverage offered and price.        Treaty reinsurance may be ceded under treaties on both a pro rata or proportional basis (where the reinsurer shares proportionately in premiums and losses) and an excess of loss basis (where only losses above a specific amount are reinsured).  The availability, costs and limits of reinsurance purchased varies from year to year based upon prevailing market conditions, reinsurers' underwriting results and NAICO's desired risk retention levels.  A majority of NAICO's reinsurance programs renew on January 1 or July 1 of each year.  NAICO renewed all January 1, 2006 reinsurance programs.  At the present time, NAICO expects to renew the reinsurance programs that renew on July 1, 2006.        NAICO has structured separate reinsurance programs for property (including inland marine), workers compensation, casualty (including automobile liability, general and products liability, umbrella liability and related professional liability),  automobile physical damage, homeowners and construction surety bonds.  NAICO also purchases facultative reinsurance when it writes a risk with limits of liability exceeding the maximum limits of its treaties or when it otherwise considers such action appropriate.  Chandler Insurance reinsures NAICO for a portion of the risk on NAICO's reinsurance programs except for the homeowners program.        Under the 2003 workers compensation reinsurance program, NAICO's net retention was 70% of the first $250,000 of loss per occurrence, and effective July 1, 2003, NAICO's net retention increased to 70% of the first $500,000 of loss per occurrence.  Effective April 1, 2004, NAICO added 56% of the $500,000 excess of $500,000 of loss per occurrence layer to its net retention, and effective July 1, 2004, NAICO's net retention increased to 70% of the first $1,000,000 of loss per occurrence.        Under the 2003 casualty reinsurance program, NAICO's net retention was 70% of the first $250,000 of loss per occurrence, and effective July 1, 2003, NAICO's net retention increased to 70% of the first $500,000 of loss per occurrence.  Effective April 1, 2004, NAICO added 56% of the $500,000 excess of $500,000 of loss per occurrence layer to its net retention, and effective July 1, 2004, NAICO's net retention increased to 70% of the first $1,000,000 of loss per occurrence.  Effective July 1, 2005, NAICO increased its net retention to 70% of the first $2,000,000 of loss per occurrence.  Effective July 1, 2004, NAICO increased its net retention for umbrella liability losses from 3.5% of the first $2,000,000 of loss per occurrence to 17.5% of the first $4,000,000 of loss per occurrence.        NAICO elected not to renew its construction surety bond excess of loss reinsurance program effective April 1, 2003 due to the decreased premium volume in this program and to the market for this reinsurance.  Effective April 1, 2003, NAICO retains 70% of the losses in this program.                                                                          PAGE 4        Under the 2003 property reinsurance program, NAICO retained 23.1% of the first $1,500,000 of risk for each loss per risk or location.  Effective January 1, 2004, NAICO retains 23.1% of the first $3,000,000 of risk for each loss per risk or location.  Under the 2003 automobile physical damage reinsurance program NAICO retained 70% of the first $500,000 of each loss per occurrence, plus 3.5% of amounts exceeding $500,000 of each loss per occurrence up to $1 million of each loss per occurrence.  Effective January 1, 2004, NAICO retains 70% of each loss per occurrence on automobile physical damage risks.  NAICO purchases catastrophe protection for its automobile physical damage and certain property coverages to limit its retention for single loss occurrences involving multiple policies and/or policyholders resulting from perils such as floods, winds and severe storms.  This catastrophe protection limits NAICO's net retained loss for both automobile physical damage and property losses to $700,000 for 2003 and $1,400,000 effective January 1, 2004 for each loss occurrence.  NAICO retains 75% of the risk under the homeowners program, with per occurrence excess of loss treaties maintained covering 100% of $5,500,000 excess of $2,000,000.        In December 2005, the Terrorism Risk Insurance Act of 2002 (the "Act") was extended through December 31, 2007.  The Act establishes a program for commercial property and casualty losses resulting from foreign acts of terrorism.  The Act requires commercial insurers to offer terrorism coverage on its commercial property and casualty lines of business.  Effective January 1, 2006, commercial automobile liability and physical damage, professional liability, surety, burglary and theft and farm-owners multi-peril insurance coverages are excluded from the Act.  Each insurance company will be responsible for a deductible based on a percentage of direct earned premiums from the previous calendar year, which is 17.5% for losses occurring in 2006 and 20% in 2007.  The Federal Government will pay 90% of covered terrorism losses that exceed company deductibles.        NAICO purchased quota share reinsurance for its deductible under the Act limiting NAICO's retention to 15% for 2005 and 2006 of such deductible, subject to a reinsurance limit of $10,625,000 for 2005 and 2006 for each loss occurrence.  The reinsurance coverage is also limited to $10,625,000 for 2005 and 2006 for all loss occurrences for any year.  NAICO also purchased excess of loss reinsurance covering acts of terrorism that provides coverage of $15 million excess of $12.5 million for 2005 and 2006 of loss per occurrence based on NAICO's net retention.        The following table sets forth certain information related to NAICO's five largest reinsurers determined on the basis of net reinsurance recoverables as of December 31, 2005.                                                                               CEDED REINSURANCE                                                                 NET           PREMIUMS FOR     A.M. BEST                                                             REINSURANCE      THE YEAR ENDED     COMPANY NAME OF REINSURER                                         RECOVERABLE (1)  DECEMBER 31, 2005     RATING - --------------------------------------------------------  ---------------  -----------------  ------------                                                                 (Dollars in thousands)     Employers Reinsurance Corporation ......................  $       29,497   $          8,186        A Chandler Insurance .....................................          26,532             27,158       -(2) Swiss Reinsurance America Corporation ..................          16,691                 46        A+ Odyssey America Reinsurance Corporation ................           4,504              5,594        A Berkley Insurance Company ..............................           3,542                994        A                                                           ---------------  -----------------    Top five reinsurers .................................  $       80,766   $         41,978                                                           ===============  =================    All reinsurers ......................................  $       93,877   $         50,218                                                           ===============  ================= Percentage of total represented by top five reinsurers..             86%                84%  - --------------------------------------------------------    (1)  Includes losses and loss adjustment expenses paid and outstanding, unpaid losses and loss adjustment      expenses and prepaid reinsurance premiums recoverable from reinsurers as of December 31, 2005.  (2)  Chandler Insurance owns 100% of the common stock of Chandler USA, which in turn owns 100% of the common      stock of NAICO.  Although Chandler Insurance is not subject to the minimum capital, audit, reporting and      other requirements imposed by regulation upon United States reinsurance companies, as a foreign reinsurer,      it is required to secure its reinsurance obligations by depositing acceptable securities in trust for      NAICO's benefit.  At December 31, 2005, Chandler Insurance had cash and investments, including accrued      interest, with a fair value of $28.9 million deposited in a trust account for the benefit of NAICO.                                                                           PAGE 5        Reinsurance contracts do not relieve an insurer from its obligation to policyholders.  Failure of reinsurers to honor their obligations could result in losses to Chandler USA; consequently, adjustments to ceded losses and loss adjustment expenses are made for amounts deemed uncollectible.  NAICO incurred charges of $604,000, $282,000 and $108,000 during 2003, 2004 and 2005, respectively, in adjustments to ceded losses and loss adjustment expenses for amounts deemed uncollectible.  LOSS AND UNDERWRITING EXPENSE RATIOS        The combined loss and underwriting expense ratio ("Combined Ratio") is the traditional measure of underwriting experience for property and casualty insurance companies.  It is the sum of the ratios of (i) incurred losses and loss adjustment expenses to net premiums earned ("loss ratio") and (ii) underwriting expenses to net premiums written and assumed ("underwriting expense ratio").        The following table shows the underwriting experience of Chandler USA for the periods indicated by line of insurance written.  Adjustments to reserves made in subsequent periods are reflected in the year of adjustment.  In the following table, incurred losses include paid losses and loss adjustment expenses, net changes in case reserves for losses and loss adjustment expenses and net changes in reserves for incurred but not reported losses and loss adjustment expenses.  See also "Reserves" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."                                                              YEAR ENDED DECEMBER 31,                                                --------------------------------------------                                                  2001     2002     2003     2004     2005                                                -------- -------- -------- -------- --------                                                           (Dollars in thousands)       Automobile liability:   Net premiums earned ........................ $ 13,386 $ 16,526 $ 15,624 $ 17,742 $ 19,126   Loss ratio .................................      70%      81%      49%      61%      82% Other liability:   Net premiums earned ........................ $ 17,470  $16,458 $ 12,870 $ 18,044 $ 18,052   Loss ratio .................................      57%      80%      94%     121%      48% Workers compensation:   Net premiums earned ........................ $ 16,449  $14,808 $ 16,378 $ 17,371 $ 16,475   Loss ratio .................................      105%     99%      72%      85%      53% Automobile physical damage:   Net premiums earned ........................ $ 12,174  $ 9,552 $  5,508 $  5,933 $  5,807   Loss ratio .................................       52%     35%      36%      43%      56% Property:   Net premiums earned ........................ $  4,806  $ 5,543 $  3,072 $  2,611 $  5,594   Loss ratio .................................       93%     50%      74%      47%      41% Surety:   Net premiums earned ........................ $  4,125  $ 3,310 $  2,723 $  1,993 $    669   Loss ratio .................................       57%     59%      34%     134%   (255)% Inland marine:   Net premiums earned ........................ $  1,256  $   760 $    408 $    348 $    337   Loss ratio .................................      143%    100%      54%      29%     162% Accident and health:   Net premiums earned ........................ $    319  $     - $      - $      - $      -   Loss ratio .................................      281%      -%       -%       -%       -% Total:   Net premiums earned ........................ $ 69,985  $66,957  $56,583 $ 64,042 $ 66,060   Loss ratio .................................      75%      76%      66%      84%      57%   Underwriting expense ratio (1) .............      33%      34%      47%      34%      35%                                                -------- -------- -------- -------- --------   Combined ratio (1) .........................     108%     110%     113%     118%      92%                                                ======== ======== ======== ======== ========  - ----------------------------------------------    (1)  Interest expense and certain litigation expenses are not considered underwriting expenses;      therefore, such costs have been excluded from these ratios.  The underwriting expense ratio      for 2003 was impacted by a 23% decrease in net premiums written and assumed during 2003.      Certain types of expenses are fixed in nature, which resulted in an increased ratio for      this period.  See also "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND      RESULTS OF OPERATIONS."                                                                           PAGE 6  RESERVES        Insurance companies provide in their financial statements reserves for unpaid losses and loss adjustment expenses which are estimates of the expense of investigation and settlement of all reported and incurred but not reported losses under their previously issued insurance policies and/or reinsurance contracts.  In estimating reserves, insurance companies use various standardized methods based on historical experience and payment and reporting patterns for the type of risk involved.  The application of these methods involves subjective determinations by the personnel of the insurance company. Inherent in the estimates of the ultimate liability for unpaid claims are expected trends in claim severity, claim frequency and other factors that may vary as claims are settled.  The amount of and uncertainty in the estimates is affected by such factors as the amount of historical claims experience relative to the development period for the type of risk, knowledge of the actual facts and circumstances and the amount of insurance risk retained.  The ultimate cost of insurance claims can be adversely affected by increased costs, such as medical expenses, repair expenses, costs of providing legal defense for policyholders, increased jury awards and court decisions and legislation that expand insurance coverage after the insurance policy was priced and sold.  In recent years, certain of these factors have contributed to incurred amounts that were higher than original estimates.   Accordingly, the loss and loss adjustment expense reserves may not accurately predict an insurance company's ultimate liability for unpaid claims.        NAICO periodically reviews the reserve estimates relating to insurance business written or assumed by NAICO, and the methods used to arrive at such reserve estimates.  NAICO also retains independent professional actuaries who review such reserve estimates and methods.  Any changes in the estimates are reflected in current operating results.  Such changes in estimates may be material.  NAICO's statutory-based reserves (reserves calculated in accordance with an insurer's domiciliary state insurance regulatory authorities) do not differ from its reserves reported on the basis of accounting principles generally accepted in the United States of America ("GAAP").  NAICO does not discount its reserves for unpaid losses or loss adjustment expenses.        Salvage and subrogation recoverables are accrued using the "case basis" method for large recoverables and statistical estimates based on historical experience for smaller recoverables.  Recoverable amounts deducted from Chandler USA's net liability for losses and loss adjustment expenses were approximately $3.7 million and $9.6 million at December 31, 2004 and 2005, respectively.  The increase in estimated recoveries in 2005 is due primarily to NAICO recording net estimated recoveries totaling $4.1 million related to two surety bond principals.  During 2005, NAICO recorded additional net estimated recoveries of $1.1 million as part of a settlement with a principal's bankruptcy estate.  The gross and net estimated recovery from the principal's bankruptcy estate deducted from unpaid losses and loss adjustment expenses at December 31, 2005 is $2.3 million and $1.9 million, respectively.  NAICO is currently pursuing the collection of this settlement.  Also during 2005, NAICO recorded additional net estimated recoveries of $3.0 million in regards to on-going litigation with the obligee of two surety bonds written by NAICO.  The gross and net estimated recovery deducted from unpaid losses and loss adjustment expenses related to this litigation at December 31, 2005 is $5.9 million and $3.4 million, respectively.  Trial is scheduled for 2006.  NAICO may or may not recover the above estimated recoveries and could incur significant costs in collecting these recoverables.        NAICO participates in various pools covering workers compensation risks for insureds who were unable to purchase this coverage from an insurance company on a voluntary basis.  The consolidated financial statements reflect the reserves for unpaid losses and loss adjustment expenses and net premiums earned from its participation in the pools.        There may be significant reporting lags between the occurrence of the insured loss and the time it is actually reported to the insurer.  The inherent uncertainties in estimating insurance reserves are generally greater for casualty coverages, such as  workers compensation, general and automobile liability, than for property coverages primarily due to the longer period of time that typically elapses before a definitive determination of ultimate loss can be made, which is also affected by changing theories of legal liability and changing political climates.        There are significant additional uncertainties in estimating the amount of reserves required for environmental, asbestos-related and other latent exposure claims, including a lack of historical data, long reporting delays and complex unresolved legal issues regarding policy coverage and the extent and timing of any such contractual liability.  Courts have reached different and frequently inconsistent conclusions as to when the loss occurred, what claims are covered, under what circumstances the insurer has an obligation to defend, how policy limits are determined and how policy exclusions are applied and interpreted.                                                                          PAGE 7        The loss settlement period on insurance claims for property damage is relatively short.  The more severe losses for bodily injury and workers compensation claims have a much longer loss settlement period and may be paid out over several years.  It is often necessary to adjust estimates of liability on a loss either upward or downward from the time a claim arises to the time of payment.  Workers compensation indemnity benefit reserves are determined based on statutory benefits described by state law and are estimated based on the same factors generally discussed above which may include, where state law permits, inflation adjustments for rising benefits over time.  Generally, the more costly automobile liability claims involve one or more severe bodily injuries or deaths.  The ultimate cost of these types of claims is dependent on various factors including the relative liability of the parties involved, the number and severity of injuries and the legal jurisdiction where the incident occurred.        The following table sets forth a reconciliation of the beginning and ending reserves for losses and loss adjustment expenses which are net of reinsurance deductions for the years indicated.                                                                  YEAR ENDED DECEMBER 31,                                                  -------------------------------------------------                                                     2001      2002      2003      2004      2005                                                  --------- --------- --------- --------- ---------                                                                 (In thousands)        Net balance at beginning of year ............... $ 46,707  $ 32,812  $ 33,191  $ 29,343  $ 44,695                                                  --------- --------- --------- --------- --------- Net losses and loss adjustment expenses incurred    related to:      Current year ..............................   39,881    34,928    26,108    27,436    30,985      Prior years ...............................   12,669    15,784    11,092    26,345     6,339                                                  --------- --------- --------- --------- ---------        Total ...................................   52,550    50,712    37,200    53,781    37,324                                                  --------- --------- --------- --------- --------- Net paid losses and loss adjustment expenses    related to:      Current year ..............................  (22,646)  (13,283)  (10,626)  (10,222)  (11,171)      Prior years ...............................  (43,799)  (37,050)  (30,422)  (28,207)  (30,299)                                                  --------- --------- --------- --------- ---------        Total ...................................  (66,445)  (50,333)  (41,048)  (38,429)  (41,470)                                                  --------- --------- --------- --------- --------- Net balance at end of year ..................... $ 32,812  $ 33,191  $ 29,343  $ 44,695  $ 40,549                                                  ========= ========= ========= ========= =========         NAICO has experienced a significant amount of incurred losses related to prior accident years during the 2001- 2005 calendar years.  The loss development occurred primarily in the 1997-2001 accident years.  The adverse loss development is generally the result of ongoing analysis of loss development trends for both liability and workers compensation lines of business, and includes provisions for potentially uncollectible reinsurance and deductibles.  NAICO adjusts reserves as experience develops and new information becomes known.  Such adjustments are reflected in the results of operations in the periods in which the estimates are changed.  The adverse development of losses from prior accident years results in higher calendar year loss ratios and reduced calendar year operating results.        During 2001, NAICO experienced adverse loss development totaling $12.7 million due primarily to increased loss severity in the standard property and casualty and political subdivisions programs.  A substantial part of this loss development was for workers compensation losses in the 1999 accident year. NAICO's net retention for workers compensation losses increased substantially in 1999 due to the rescission of certain reinsurance treaties covering this line of business.  Also contributing to the adverse loss development were provisions for potentially uncollectible reinsurance and deductibles of approximately $1.2 million during 2001, an increase in losses in the surety bond program and approximately $878,000 in losses for the runoff of a discontinued group accident and health program.        During 2002, NAICO experienced adverse loss development totaling $15.8 million primarily in the standard property and casualty program including both liability lines and workers compensation.  This adverse development was primarily due to an increase in loss severity within the 1997-2000 accident years.  The adverse development included approximately $2.0 million for provisions for potentially uncollectible reinsurance and deductibles.        During 2003, NAICO experienced adverse loss development totaling $11.1 million primarily in the standard property and casualty program.  This adverse development was due primarily to an increase in losses in the workers compensation and other liability lines of business in the 1998-2001 accident years.  A reduction in losses for the 2002 accident year partially offset this adverse development.  The adverse loss development included approximately $1.3 million for provisions for potentially uncollectible reinsurance and deductibles.                                                                          PAGE 8        During 2004, NAICO experienced adverse loss development totaling $26.3 million primarily in the standard property and casualty and political subdivisions programs.  This adverse development was due primarily to an increase in losses in the workers compensation and other liability lines of business in the 1997-2002 accident years.  The adverse development in the 2002 accident year partially offset the reduction in losses for this accident year that was recorded during 2003.  The adverse loss development included approximately $409,000 for provisions for potentially uncollectible reinsurance and deductibles.  Reserves for unpaid losses and loss adjustment expenses, net of related reinsurance recoverables, were $44.7 million at December 31, 2004 compared to $29.3 million at December 31, 2003, an increase of $15.4 million or 52%.        During 2005, NAICO experienced adverse loss development totaling $6.3 million primarily in the standard property and casualty and political subdivisions programs.  A portion of the adverse development was offset by favorable development of $1.8 million in the surety bond program, primarily in accident years 1994 and 2001 that resulted from the estimated recoveries discussed previously.  The adverse development was due primarily to an increase in losses in the workers compensation, other liability and automobile liability lines of business in the 2000, 2002 and 2003 accident years.  The adverse loss development included approximately $108,000 for provisions for potentially uncollectible reinsurance.        The following table represents the development of net balance sheet reserves for 1996 through 2005.  The top line of the table shows the net reserves at the balance sheet date for each of the indicated years.  This represents the estimated amounts of claims and claim expenses, net of reinsurance deductions, arising in the current and all prior years that are unpaid at the balance sheet date, including the net reserve for incurred but not reported claims.  The upper portion of the table shows the cumulative net amounts paid as of successive years with respect to that reserve liability. The estimate for unpaid losses and loss adjustment expenses changes as more information becomes known about the frequency and severity of claims for individual years.  The next portion of the table shows the revised estimated amount of the previously recorded net reserve based on experience as of the end of each succeeding year.  The heading "net cumulative (deficiency) redundancy" represents the cumulative aggregate change in the estimates over all prior years.  The last portion of the table provides a reconciliation of the net amounts to the gross amounts before any deductions for reinsurance.  The gross cumulative deficiency or redundancy results from the same factors as those described above for the net amounts, and is also impacted by development of large claims that exceed NAICO's net retention including umbrella and surety per principal losses where NAICO has little or no net retention.                                                                          PAGE 9        In evaluating the information in the following table, it should be noted that each amount includes the effects of all changes in amounts for prior periods.  For example, the amount of the deficiency recorded in 1999 for claims that occurred in 1996 will be included in the cumulative deficiency amount for years 1996, 1997, 1998 and 1999.  This table does not present accident or policy year development data.  Conditions and trends that have affected development of the liability in the past may not necessarily occur in the future.  Accordingly, it may not be appropriate to extrapolate future deficiencies or redundancies based on this table.                                                                        DEVELOPMENT OF RESERVES                                                                        AS OF DECEMBER 31,                               -----------------------------------------------------------------------------------------------------                                  1996      1997      1998      1999      2000       2001       2002       2003      2004      2005                               --------- --------- --------- --------- ---------- ---------- ---------- ---------- --------- --------                                                                         (In thousands)            Net reserve for unpaid losses  and loss adjustment  expenses ................... $ 53,845  $ 54,035  $ 39,921  $ 51,378  $  46,707  $  32,812  $  33,191  $  29,343  $ 44,695  $ 40,549 Net paid (cumulative) as of  One year later .............   28,572    30,330    23,896    36,009     43,799     37,050     30,422     28,207    30,299  Two years later ............   40,857    42,934    34,966    58,979     66,141     60,560     51,375     50,158  Three years later ..........   45,668    49,735    45,390    72,052     81,635     77,413     68,643  Four years later ...........   47,995    56,306    51,364    80,860     91,403     89,349  Five years later ...........   50,700    58,843    55,445    86,257     97,700  Six years later ............   51,878    60,821    58,062    88,859  Seven years later ..........   52,964    62,720    59,135  Eight years later ..........   54,407    63,527  Nine years later ...........   54,535  Net liability re-estimated as of  One year later .............   55,713    55,772    43,441    56,357     59,376     48,596     44,283     55,688    51,034  Two years later ............   55,599    56,362    45,373    67,469     74,325     67,903     70,058     61,369  Three years later ..........   54,528    58,176    50,146    77,842     86,377     89,608     73,962  Four years later ...........   54,834    61,096    55,303    83,860    100,408     91,520  Five years later ...........   55,615    62,750    58,060    91,704    102,370  Six years later ............   56,347    63,629    62,995    92,084  Seven years later ..........   56,879    67,608    62,712  Eight years later ..........   59,243    67,254  Nine years later ...........   58,329  Net cumulative (deficiency)  redundancy ................. $ (4,484) $(13,219) $(22,791) $(40,706) $ (55,663) $ (58,708) $ (40,771) $ (32,026) $ (6,339) $      -  Supplemental gross data:  Gross liability ............ $ 78,114  $ 73,721  $ 80,701  $ 98,460  $ 100,173  $  84,756  $  92,606  $  87,768  $108,233  $109,541  Reinsurance recoverable ....   24,269    19,686    40,780    47,082     53,466     51,944     59,415     58,425    63,538    68,992                               --------- --------- --------- --------- ---------- ---------- ---------- ---------- --------- --------  Net liability - end of year. $ 53,845  $ 54,035  $ 39,921  $ 51,378  $  46,707  $  32,812  $  33,191  $  29,343  $ 44,695  $ 40,549                               ========= ========= ========= ========= ========== ========== ========== ========== ========= ========  Gross re-estimated   liability - latest ........ $ 98,418  $103,188  $132,434  $185,860  $ 254,850  $ 279,053  $ 223,732  $ 163,239  $138,811  Re-estimated recoverable -    latest ...................   40,089    35,934    69,722    93,776    152,480    187,533    149,770    101,870    87,777                               --------- --------- --------- --------- ---------- ---------- ---------- ---------- ---------  Net re-estimated    liability - latest ....... $ 58,329  $ 67,254  $ 62,712  $ 92,084  $ 102,370  $  91,520  $  73,962  $  61,369  $ 51,034                               ========= ========= ========= ========= ========== ========== ========== ========== =========  Gross cumulative (deficiency)  redundancy ................. $(20,304) $(29,467) $(51,733) $(87,400) $(154,677) $(194,297) $(131,126) $ (75,471) $(30,578)                               ========= ========= ========= ========= ========== ========== ========== ========== =========                                                                           PAGE 10 INVESTMENTS        Funds available for investment include Chandler USA's present capital as well as premiums received and retained under insurance policies and reinsurance agreements issued by NAICO.  Until these funds are required to be used for the settlement of claims and the payment of operating expenses, they are invested with the objective of generating income, preserving principal and maintaining liquidity.        Investments are purchased to support the investment strategies of Chandler USA and its subsidiaries, which are developed based on many factors including rate of return, maturity, credit risk, tax considerations, regulatory requirements and their mix of business.  At the time of purchase, investments in debt securities that Chandler USA has the positive intent and ability to hold to maturity are classified as held to maturity and reported at amortized cost; all other debt securities are reported at fair value.  Investments in debt and equity securities classified as trading are actively and frequently bought and sold with the objective of generating income on short-term differences in price.  Realized and unrealized gains and losses on securities classified as trading account assets are recognized in current operations. Chandler USA has not classified any investments as trading account assets. Debt securities not classified as held to maturity or trading and equity securities are classified as available for sale, with the related unrealized gains and losses excluded from earnings and reported net of deferred income tax as a separate component of other comprehensive income until realized. Realized gains and losses on sales of securities are based on the specific identification method.  Declines in the fair value of securities below their carrying value that are other than temporary are recognized in earnings.        As of December 31, 2005, all of the investments of NAICO were in fixed-maturity investments (rated Aa3 or A+ or better by Moody's Investors Service, Inc. or Standard & Poor's, respectively), mutual funds that invest in equity securities,  interest-bearing money market accounts, collateralized repurchase agreements and common stock received in connection with an unaffiliated entity's conversion to a for-profit corporation.  NAICO's investment portfolio is managed by the Investment Committee of its Board of Directors.  For additional information, see Notes to Consolidated Financial Statements.  DEBENTURES        On July 16, 1999, Chandler USA completed a public offering of $24 million principal amount of senior debentures (the "Debentures") with a maturity date of July 16, 2014.  The Debentures were priced at $1,000 each with an interest rate of 8.75% and are redeemable by Chandler USA on or after July 16, 2009 without penalty or premium.  The indenture governing the Debentures was amended during 2003 to clarify that purchases of Debentures by Chandler USA through private treaty or on the open market for an agreed price of less than the sum of the principal amount and accrued interest are not considered to be a redemption of the Debentures, and that any such Debentures purchased by Chandler USA will be cancelled.  Chandler USA purchased and cancelled $16.7 million and $275,000 principal amount of the Debentures during 2003 and 2004, respectively,  and at December 31, 2005, there was $6,979,000 principal amount of the Debentures outstanding.  Chandler USA's subsidiaries and affiliates are not obligated by the Debentures.  Accordingly, the Debentures are effectively subordinated to all existing and future liabilities and obligations of Chandler USA's existing and future subsidiaries.  For additional information, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."  TRUST PREFERRED SECURITIES        In May 2003, Chandler USA established Chandler Capital Trust I ("Trust I") by purchasing all of its common securities for $403,000.  Trust I is a Delaware statutory business trust and is a wholly owned non-consolidated subsidiary of Chandler USA.  On May 22, 2003, Trust I issued $13.0 million of capital securities (the "Trust I Preferred Securities") to InCapS Funding I, Ltd., an unaffiliated company established under the laws of the Cayman Islands, in a private transaction.  Trust I used the proceeds from the issuance to purchase $13,403,000 of 9.75% junior subordinated debentures (the "Junior Debentures I") of Chandler USA.  Distributions on the Junior Debentures I are payable quarterly at a fixed annual rate of 9.75%.  Chandler USA may defer these payments for up to 20 consecutive quarters, but not beyond the maturity of the Junior Debentures I, with such deferred payments accruing interest compounded quarterly.  The Junior Debentures I are subject to a mandatory redemption on May 23, 2033, but they may be redeemed after five years at a premium of half the fixed rate coupon declining ratably to par in the 10th year.        The Junior Debentures I are the sole assets of Trust I and Trust I will distribute any cash payments it receives thereon to the holders of its preferred and common securities.  Distributions on the Trust I Preferred Securities are payable quarterly at a fixed annual rate of 9.75%.  Trust I may defer these payments for up to 20 consecutive quarters, but not beyond the maturity of the Trust I Preferred Securities, with such deferred payments accruing interest compounded quarterly.  The Trust I Preferred Securities are subject to a mandatory redemption on May 23, 2033, but they may be redeemed after five years at a premium of half the fixed rate coupon declining ratably to par in the 10th year.  All payments by Trust I regarding the Trust I Preferred Securities are guaranteed by Chandler USA.                                                                          PAGE 11        In December 2003, Chandler USA established Chandler Capital Trust II ("Trust II") by purchasing all of its common securities for $217,000.  Trust II is a Delaware statutory business trust and is a wholly owned non-consolidated subsidiary of Chandler USA.  On December 16, 2003, Trust II issued $7.0 million of capital securities (the "Trust II Preferred Securities") to InCapS Funding II, Ltd., an unaffiliated company established under the laws of the Cayman Islands, in a private transaction.  Trust II used the proceeds from the issuance to purchase $7,217,000 of floating rate junior subordinated debentures (the "Junior Debentures II") of Chandler USA.  Distributions on the Junior Debentures II are payable quarterly at a floating rate of 4.10% over LIBOR (LIBOR is recalculated quarterly and the interest rate may not exceed 12.5% prior to January 8, 2009).  The interest rate was 8.25% at December 31, 2005. Chandler USA may defer these payments for up to 20 consecutive quarters, but not beyond the maturity of the Junior Debentures II, with such deferred payments accruing interest compounded quarterly.  The Junior Debentures II are subject to a mandatory redemption on January 8, 2034, but they may be redeemed after five years without penalty or premium.        The Junior Debentures II are the sole assets of Trust II and Trust II will distribute any cash payments it receives thereon to the holders of its preferred and common securities.  Distributions on the Trust II Preferred Securities are payable quarterly at a floating rate of 4.10% over LIBOR (LIBOR is recalculated quarterly and the interest rate may not exceed 12.5% prior to January 8, 2009).  The interest rate was 8.25% at December 31, 2005.  Trust II may defer these payments for up to 20 consecutive quarters, but not beyond the maturity of the Trust II Preferred Securities, with such deferred payments accruing interest compounded quarterly.  The Trust II Preferred Securities are subject to a mandatory redemption on January 8, 2034, but they may be redeemed after five years without penalty or premium.  All payments by Trust II regarding the Trust II Preferred Securities are guaranteed by Chandler USA.        The sale of the Trust I Preferred Securities and the Trust II Preferred Securities during 2003 resulted in net proceeds of $19.3 million to Chandler USA, net of placement costs.  At December 31, 2005, issuance costs in the amount of $670,000 have been capitalized and are being amortized over the stated maturity periods of thirty years.  Chandler USA used $13.3 million of the proceeds to purchase $16.7 million principal amount of its outstanding Debentures during 2003.  The Debentures purchased by Chandler USA were cancelled.  The purchase and cancellation of the Debentures resulted in a pre-tax gain of $3.1 million during 2003, net of an adjustment to unamortized issuance costs, which is included in other income in the consolidated statement of operations.  Chandler USA also contributed $5.0 million of the proceeds to NAICO to be used for general corporate purposes.        In December 2003, the Financial Accounting Standards Board issued Revised Interpretation No. 46 ("FIN 46R"), CONSOLIDATION OF VARIABLE INTEREST ENTITIES. FIN 46R provides guidance on the identification of, and financial reporting for, entities over which control is achieved through means other than voting rights.  FIN 46R is used to determine whether consolidation is required or, alternatively, whether the variable-interest model under FIN 46R should be used to account for existing and new entities.  Chandler USA adopted FIN 46R effective January 1, 2004.  The result of adoption was the deconsolidation of the two capital trusts that were created during 2003 in connection with the issuance of trust preferred securities.  Chandler USA now reports the $20.6 million of junior subordinated debentures that were issued to the capital trusts on its consolidated balance sheet.  The adoption of FIN 46R had no effect on net earnings.  EMPLOYEES AND ADMINISTRATION        At December 31, 2005, Chandler USA and its subsidiaries had approximately 247 full-time employees.  Chandler USA and its subsidiaries generally have enjoyed good relations with their employees.  COMPETITION        NAICO operates in a highly competitive industry and faces competition from domestic and foreign insurers, many of which are larger, have greater financial, marketing and management resources, have more favorable ratings by ratings agencies and offer more diversified insurance coverages than NAICO.        An insurance company's capacity to write insurance policies is dependent on a variety of factors including its net worth or "surplus," the lines of business written, the types of risk insured and its profitability.  During the late 1990's and into 2000, property and casualty insurance companies generally under priced their products, which resulted in poor underwriting results that were partially offset by investment returns.  Interest rates decreased in 2000 and underwriting results continued to deteriorate for business written in the late 1990's and into 2000.  These factors coupled with additional potential losses due to terrorism and lower investment returns caused the industry to increase pricing beginning in the latter half of 2001.  Rate increases continued through 2003 and to a lesser extent in 2004, and the industry's underwriting results have improved.  The pricing environment during 2005 experienced downward pressure, particularly for larger accounts.  NAICO has been able to increase its pricing for most coverages from 2001 through 2005. However, NAICO continues to experience competition in all of its programs. NAICO's underwriting philosophy is to forego underwriting risks from which it is unable to obtain what it believes to be adequate premium rates.                                                                          PAGE 12  REGULATION  REGULATION IN GENERAL        NAICO is subject to regulation by government agencies in the jurisdictions in which it does business. The nature and extent of such regulation vary from jurisdiction to jurisdiction, but typically involve prior approval of the acquisition of control of an insurance company or of any company controlling an insurance company, regulation of certain transactions entered into by an insurance company with any of its affiliates, approval of premium rates, forms and policies used for many lines of insurance, standards of solvency and minimum amounts of capital and surplus which must be maintained, establishment of reserves required to be maintained for unearned premiums, unpaid losses and loss adjustment expenses or for other purposes, limitations on types and amounts of investments, restrictions on the size of risks which may be insured by a single company, licensing of insurers and agents, deposits of securities for the benefit of policyholders and the filing of periodic reports with respect to financial condition and other matters. In addition, regulatory examiners perform periodic financial and market conduct examinations of insurance companies. Such regulation is generally intended for the protection of policyholders rather than shareholders or creditors.        NAICO is required to deposit securities with regulatory agencies in several states in which it is licensed as a condition of conducting operations in those states.        In addition to the regulatory oversight of NAICO, Chandler Insurance is also subject to regulation under the laws of the Cayman Islands and Chandler USA and all of its affiliates are subject to regulation under the insurance laws of Oklahoma (the "Oklahoma Insurance Code"). The Oklahoma Insurance Code contains certain reporting requirements including those requiring Chandler Insurance, as the ultimate parent company, to file information relating to its capital structure, ownership, and financial condition and the general business operations of its insurance subsidiaries. The Oklahoma Insurance Code contains special reporting and prior approval requirements with respect to transactions among affiliates.        NAICO is also affected by a variety of state and federal legislative and regulatory measures and judicial decisions that define and extend the risks and benefits for which insurance is sought and provided.  These include redefinitions of risk exposure in areas such as product liability, environmental damage and workers compensation.  In addition, individual state insurance departments may prevent premium rates for some classes of insureds from reflecting the level of risk assumed by the insurer for those classes. Such developments may adversely affect the profitability of various lines of insurance.  In some cases, these adverse effects on profitability can be minimized through re-pricing, if permitted by applicable regulations, of coverages or limitations or cessation of the affected business.  INSURANCE REGULATION CONCERNING CHANGE OR ACQUISITION OF CONTROL        NAICO is a domestic property and casualty insurance company organized under the Oklahoma Insurance Code.  The Oklahoma Insurance Code provides that the acquisition or change of "control" of a domestic insurer or of any person that controls a domestic insurer cannot be consummated without the prior approval of the Oklahoma Department of Insurance.  A person seeking to acquire control, directly or indirectly, of a domestic insurance company or of any person controlling a domestic insurance company must generally file with the relevant insurance regulatory authority an application for change of control containing certain information required by statute and published regulations and provide a copy of such to the domestic insurer. In Oklahoma, control is generally presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote or holds proxies representing 10% or more of the voting securities of the insurance company or of any other person or entity controlling the insurance company.  The 10% presumption is not conclusive and control may be found to exist at less than 10%.        In addition, many state insurance regulatory laws contain provisions that require pre-notification to state agencies of a change in control of a non-domestic insurance company admitted in that state. While such pre-notification statutes do not authorize the state agency to disapprove the change of control, such statutes do authorize issuance of a cease and desist order with respect to the non-domestic insurer if certain conditions exist such as undue market concentration.        Any future transactions that would constitute a change in control of Chandler Insurance or Chandler USA would also generally require prior approval by the Oklahoma Department of Insurance and would require pre-acquisition notification in those states which have adopted pre-acquisition notification provisions and in which the insurers are admitted.  Because such requirements are primarily for the benefit of policyholders, they may deter, delay or prevent certain transactions that could be advantageous to the shareholders or creditors of Chandler USA.  RESTRICTIONS ON SHAREHOLDER DIVIDENDS        A significant portion of Chandler USA's consolidated assets represents assets of NAICO that may not be immediately transferable to Chandler USA in the form of shareholder dividends, loans, advances or other payments.                                                                          PAGE 13        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, 2005, NAICO had statutory earned surplus of $9.6 million.  Applying the Oklahoma statutory limits described above, the maximum shareholder dividend NAICO may pay in 2006 without the approval of the Oklahoma Department of Insurance is $5.7 million.  NAICO paid shareholder dividends to Chandler USA totaling $3.4 million in 2004.        In addition to the statutory limits described above, the amount of shareholder dividends and other payments to affiliates permitted can be further limited by contractual or regulatory restrictions or other agreements with regulatory authorities restricting dividends and other payments, including regulatory restrictions that are imposed as a matter of administrative policy. If insurance regulators determine that payment of a shareholder dividend or other payments to an affiliate (such as payments under a tax sharing agreement, payments for employee or other services, or payments pursuant to a surplus note) would be hazardous to such insurance company's policyholders or creditors, the regulators may block such payments that would otherwise be permitted without prior approval.  RISK-BASED CAPITAL        The National Association of Insurance Commissioners has adopted a methodology for assessing the adequacy of statutory surplus of domestic property and casualty insurers.  This methodology is described in the Risk Based Capital Model Act (the "RBC Model Act").  The RBC Model Act includes a risk-based capital requirement that requires insurance companies to calculate and report information under a risk-based formula which attempts to measure statutory capital and surplus needs based on the risks in the insurance company's mix of products and investment portfolio.  The formula is designed to allow state insurance regulators to identify potential under-capitalized companies.  Under the formula, an insurer determines its "risk-based capital" ("RBC") by taking into account certain risks related to the insurer's assets (including risks related to its investment portfolio and ceded reinsurance) and the insurer's liabilities (including underwriting risks related to the nature and experience of its insurance business).  The RBC rules provide for different levels of regulatory attention depending on the ratio of a company's total adjusted capital to its "authorized control level" of RBC.  Insurers below the specific ratios are classified within certain levels, each of which requires specific corrective action.  The levels and ratios are as follows:                                            Ratio of Total Adjusted Capital to                                            Authorized Control Level RBC                                              (Less than or equal to)                                         ----------------------------------                   Regulatory Event (1)         --------------------          Company Action Level (2) ......                 2.0         Regulatory Action Level (3) ...                 1.5         Authorized Control Level (4) ..                 1.0         Mandatory Control Level (5) ...                 0.7  - ----------------------------------   (1)  When an insurer's ratio exceeds 2.0, it is not subject to regulatory attention under      the RBC Model Act.  (2)  "Company Action Level" requires an insurer to prepare and submit an RBC Plan to the      insurance commissioner of its state of domicile.  After review, the insurance      commissioner will notify the insurer if the Plan is satisfactory.  (3)  "Regulatory Action Level" requires the insurer to submit an RBC Plan, or if applicable,      a Revised RBC Plan to the insurance commissioner of its state of domicile.  After      examination or analysis, the insurance commissioner will issue an order specifying      corrective actions to be taken.  (4)  "Authorized Control Level" authorizes the insurance commissioner to take such regulatory      actions considered necessary to protect the best interest of the policyholders and      creditors of an insurer which may include the actions necessary to cause the insurer to be      placed under regulatory control (i.e., rehabilitation or liquidation).  (5)  "Mandatory Control Level" authorizes the insurance commissioner to take actions necessary      to place the insurer under regulatory control (i.e., rehabilitation or liquidation).                                                                           PAGE 14  The ratios of total adjusted capital to authorized control level RBC for NAICO were 4.8:1 and 5.2:1 at December 31, 2004 and 2005, respectively.  Therefore, NAICO's total adjusted capital exceeds the level that would trigger regulatory attention pursuant to the risk-based capital requirement.  NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS-IRIS RATIOS        The National Association of Insurance Commissioners Insurance Regulatory Information System ("IRIS") was developed by a committee of state insurance regulators and is primarily intended to assist state insurance departments in executing their statutory mandates to oversee the financial condition of insurance companies operating in their respective states. IRIS identifies 13 industry ratios and specifies "usual values" for each ratio. Departure from the "usual values," which fluctuate annually, on four or more ratios generally leads to inquiries from individual state insurance commissioners.  NAICO had three 2005 ratios that were outside of the "usual values," two of which resulted primarily from adverse loss development as explained below.        NAICO's "investment yield" as calculated using the IRIS formula was 2.9% during 2005 compared to a usual value of greater than 3.0% and less than 6.5%. NAICO maintains a high-quality investment portfolio, with no non-investment grade bonds, derivative instruments or real estate investments (other than real estate occupied by the company).  NAICO's investment yield is largely dependent upon prevailing levels of interest rates.  The significant decline in interest rates in recent years had a significant impact on NAICO's investment yield. Moreover, in periods of relatively low interest rates, NAICO generally shortens maturities and accepts lower yields to reduce market risk for future rate increases.        NAICO's "two-year reserve development to policyholders' surplus" for 2005 was 60% compared to a usual value of less than 20%.  The primary reason was adverse loss development experienced during 2004 related to the 1997 - 2002 accident years.  This adverse loss development related primarily to the workers compensation and other liability lines of business in NAICO's standard property and casualty and political subdivisions programs.        NAICO's "estimated current reserve deficiency to policyholders' surplus" was 43% at December 31, 2005 compared to a usual value of less than 25%.  The adverse loss development experienced in 2004 related to prior accident years was primarily responsible for this ratio being outside of the normal range. NAICO experienced significant growth from 1996 through 2000, with gross premiums written increasing from $108 million in 1996 to $197 million in 2000. Since 2000, NAICO has implemented substantial price increases on most lines of business.  NAICO also exited some classes of business and non-renewed accounts with unfavorable frequency and/or severity characteristics.  These actions resulted in a reduction in gross premiums written from $197 million in 2000 to $120 million in 2005.  Management believes that while the insured exposure base has been significantly reduced, the premium for that exposure has increased significantly.  The calculation of this ratio assumes that factors that led to past under reserving will cause current under reserving without regard to changes in premium volume, premium rates, product mix, the amount of risk retained by NAICO and current reserving practices.  EFFECT OF FEDERAL LEGISLATION        Although the Federal Government does not directly regulate the business of insurance, federal initiatives often affect the insurance business in a variety of ways.  Current and proposed federal measures which may significantly affect the insurance business include Federal Government participation in asbestos and other product liability claims, claims related to acts of terrorism, pension and other employee benefit plan regulation (ERISA), examination of the taxation of insurers and reinsurers, minimum levels of liability insurance and automobile safety regulations.  Federal regulation of the health care industry may directly and indirectly impact the business of insurance.
Our business is subject to numerous risks and uncertainties, the outcome of which may adversely impact future results of operations and financial condition.  The following risks, as well as other information included in this 2005 Annual Report on Form 10-K, should be considered carefully.                                                                          PAGE 15  IF OUR ACTUAL LOSSES EXCEED OUR LOSS RESERVES, OUR FINANCIAL RESULTS WOULD BE ADVERSELY AFFECTED.        We maintain reserves for unpaid losses and loss adjustment expenses which are estimates of the expense of investigation and settlement of all reported and incurred but not reported losses under our previously issued insurance policies and/or reinsurance contracts.  These reserves do not represent an exact measurement of liability, but are estimates based upon historical data and anticipated future events.  The process of estimating loss reserves is complex and imprecise.  We periodically review the reserve estimates and the methods used to arrive at such reserve estimates, and we also retain independent professional actuaries who review such reserve estimates and methods.  Any changes that result from these reviews are reflected in current operating results.        If our estimates are incorrect and our reserves are inadequate, we are required to increase our reserves.  An increase in reserves results in an increase in losses and a reduction in our net income for the period in which the deficiency is identified.  Accordingly, an increase in reserves could have a material adverse effect on our results of operations, liquidity and financial condition.  CATASTROPHIC EVENTS AND ACTS OF TERRORISM CAN HAVE A SIGNIFICANT IMPACT ON OUR RESULTS OF OPERATIONS, LIQUIDITY AND FINANCIAL CONDITION.        We are subject to claims arising out of catastrophes that may have a significant effect on our results of operations, liquidity and financial condition.  Catastrophes can be caused by various events, including tornadoes, windstorms, hail, fires, severe winter weather, earthquakes, power outages and explosions, and may include man-made events such as terrorist attacks.  The frequency and severity of these catastrophes are inherently unpredictable.  The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event.        We seek to reduce the impact of a catastrophe on our business through the purchase of catastrophe and terrorism reinsurance.  Reinsurance does not relieve us of our direct liability to our policyholders.  As long as the reinsurers meet their obligations, our net liability is limited to the amount of risk that we retain.  Reinsurance, however, may prove inadequate if a major catastrophic loss exceeds the reinsurance limit or the reinsurers' financial capacity.  OUR RESULTS MAY FLUCTUATE BASED ON MANY FACTORS, INCLUDING CYCLICAL CHANGES IN THE INSURANCE INDUSTRY.        The results of companies in the property and casualty insurance industry historically have been subject to significant fluctuations and uncertainties. The industry's profitability can be affected significantly by rising levels of claim costs that are not known by companies at the time they price their products.  The property and casualty insurance industry historically is cyclical. The demand for property and casualty insurance can vary significantly, generally rising as the overall level of economic activity increases and falling as such activity decreases. The property and casualty insurance industry also has been very competitive.  During the late 1990's and into 2000, property and casualty insurance companies generally under priced their products, which resulted in poor underwriting results that were partially offset by investment returns.  Interest rates decreased in 2000 and underwriting results continued to deteriorate for business written in the late 1990's and into 2000.  These factors coupled with additional potential losses due to terrorism and lower investment returns caused the industry to increase pricing beginning in the latter half of 2001.  Rate increases continued through 2003 and to a lesser extent in 2004, and the industry's underwriting results have improved.  The pricing environment during 2005 experienced downward pressure, particularly for larger accounts.  The hurricane activity during the third quarter of 2005 may result in higher rates for certain property business. Reinsurance costs may increase substantially.  Competition for profitable business in the past has resulted in pressure on pricing and less restrictive terms and conditions, contributing to the cyclical pricing and underwriting results.        Our underwriting philosophy is to forego underwriting risks from which we are unable to obtain what we believe to be adequate premium rates.  However, the fluctuations in demand and competition and the impact on us of other factors described above could have a material adverse effect on our business, results of operations and/or financial condition.  OUR ABILITY TO REDUCE OUR EXPOSURE TO RISKS DEPENDS ON THE AVAILABILITY AND COST OF REINSURANCE.        We transfer a portion of our risks insured under our policies and reinsurance contracts to other companies through reinsurance arrangements. These reinsurance arrangements reduce the potential impact of unusually severe or frequent losses.  The amount and cost of reinsurance are subject, in large part, to prevailing market conditions that are beyond our control.  Our ability to provide insurance at competitive premium rates and coverage limits on a continuing basis depends to a great extent upon our ability to obtain adequate reinsurance in amounts and at rates that will not adversely affect our competitive position.  If we are unable to maintain such arrangements, then we would be forced to either bear the associated increase in net exposures or reduce the amount of risk that we underwrite.  Either of these circumstances could have a material adverse effect on our results of operations, liquidity and/or financial condition.                                                                          PAGE 16  IF WE ARE UNABLE TO COLLECT FROM OUR REINSURERS ON A TIMELY BASIS, OUR FINANCIAL RESULTS WOULD BE ADVERSELY AFFECTED.        We face a credit risk when we obtain reinsurance because we are still liable for the transferred risks if the reinsurer cannot meet the transferred obligations.  Losses may not be recovered from our reinsurers until claims are paid and, in the case of certain long-term workers compensation and liability claims, the creditworthiness of our reinsurers may change before we can recover amounts to which we are entitled.  The failure of any of our reinsurers to pay reinsurance claims on a timely basis could have a material adverse effect on our results of operations, liquidity and financial condition.  THE FAIR VALUE OF OUR INVESTMENT PORTFOLIO AND OUR INVESTMENT INCOME COULD SUFFER AS A RESULT OF FLUCTUATIONS IN INTEREST RATES AND MARKET CONDITIONS.        Our market risk generally represents the risk of gain or loss that may result from the potential change in the fair value of our investment portfolio as a result of fluctuations in prices and interest rates.  A portion of our interest expense fluctuates with changes in interest rates as well.        Increases and decreases in prevailing interest rates generally translate into decreases and increases in fair values of those instruments. Additionally, fair values of interest rate sensitive instruments may be affected by the credit worthiness of the issuer, prepayment options, relative values of alternative investments, liquidity of the instrument and other general market conditions.  Any significant decline in our investment income as a result of falling interest rates, decreased dividend payment rates or general market conditions would have an adverse effect on our results.  Any significant decline in the market value of our investments would reduce our shareholder's equity and our policyholders' surplus, which could impact our ability to write additional business.  WE MAY BE ADVERSELY IMPACTED BY A CHANGE IN OUR FINANCIAL STRENGTH RATING.        Insurance companies are subject to financial strength ratings produced by external rating agencies.  Higher ratings generally indicate greater financial stability and a stronger ability to pay claims.  Ratings are assigned by rating agencies to insurers based upon factors they believe are important to policyholders.  Ratings are not recommendations to buy our securities.        NAICO's ability to write business is most influenced by our rating from A.M. Best Company.  A.M Best ratings are designed to assess an insurer's financial strength and ability to meet continuing obligations to policyholders.  Currently, our rating from A.M. Best is "B+" (Very Good), with a negative outlook.  A negative outlook is placed on a company's rating if it is experiencing unfavorable financial or market trends, and if continued, the company has a good possibility of having its rating downgraded.  NAICO's rating and outlook were downgraded to the current rating from "B++" effective June 21, 2005.  The downgrade was primarily due to the significant net loss and decline in statutory surplus in 2004 which were driven by adverse loss reserve development on prior accident years.  We believe that as a result of our improved surplus and operating performance in 2005, our rating will remain at least at its current level.  However, there can be no assurance that A.M. Best will not change its rating in the future.  A rating downgrade from A.M. Best could adversely affect the business we write and our results of operations.  WE DEPEND ON OUR INDEPENDENT INSURANCE AGENTS.        We market and sell our insurance products through independent, non-exclusive insurance agencies.  These agencies are not obligated to sell our insurance products, and generally they also sell our competitors' insurance products.  As a result, our business depends in part on the marketing and sales efforts of these agencies.  If we diversify and expand our business geographically, then we may need to expand our network of agencies to successfully market our products.  If these agencies fail to market our products successfully, our business may be adversely impacted.  Also, independent agents may decide to sell their businesses to banks, other insurance agencies or other businesses.  Changes in ownership of agencies, or expansion of agencies through acquisition, could adversely affect an agency's ability to control growth and profitability, thereby adversely affecting our business.  MUCH OF OUR BUSINESS IS CONCENTRATED IN THE SOUTHWEST AND MIDWEST AREAS OF THE UNITED STATES, WHICH TIES OUR PERFORMANCE TO THE ENVIRONMENTAL, BUSINESS, ECONOMIC AND REGULATORY CONDITIONS OF THESE REGIONS.        During 2005, approximately 83% of our written premiums were in the states of Oklahoma and Texas.  Unusually severe storms or other natural or man-made disasters that destroy property in these states could adversely affect our operations.  Our revenues and profitability are also subject to prevailing economic and regulatory conditions in these states.  An economic downturn in these states could have a significant adverse impact on our business.  The loss of a significant amount of premiums written in either of these states, whether due to regulatory changes, competitive changes, economic downturns in these states or other reasons, would reduce our revenues and could have a material adverse effect on our results of operations, liquidity and/or financial condition.                                                                          PAGE 17  WE OPERATE IN A HIGHLY COMPETITIVE INDUSTRY.        We compete with local, regional and national insurance companies in our selected lines of business.  Many of these companies are larger, have greater financial, marketing and management resources, have more favorable ratings by ratings agencies and offer more diversified insurance coverages than we do.  In addition, we face competition within each insurance agency that sells our insurance because we sell through independent agencies that represent more than one insurance company.        The property and casualty insurance industry is highly competitive on the basis of product, price and service.  If our competitors offer products with more coverage, or price their products more aggressively, our ability to grow or renew our business may be adversely impacted.  The inability to compete effectively could materially reduce our customer base and revenues, and could adversely affect our results of operations, liquidity and financial condition.  WE ARE AN INSURANCE HOLDING COMPANY WITH NO DIRECT OPERATIONS, WHICH COULD ADVERSELY AFFECT OUR ABILITY TO MEET OUR DEBT OBLIGATIONS.        As a holding company with no business operations of its own, we receive cash principally through borrowings, subsidiary dividends and other payments from our subsidiaries and parent company to pay interest on and repay the principal of our debt.  Statutes and regulations governing NAICO and other insurance companies domiciled in Oklahoma regulate the payment of shareholder dividends and other payments from NAICO to Chandler USA.  To the extent that these restrictions limit NAICO's ability to pay dividends or other payments to us, our ability to satisfy our obligations may also be limited.        Historically, NAICO has played a significant role in the servicing of debt and other obligations of Chandler USA through the payment of shareholder dividends.  Management's expectation is that Chandler Insurance or other subsidiaries will be able to meet these obligations in the future.  It is possible that dividends from NAICO may be necessary to service Chandler USA's debt obligations.  To the extent that the restrictions discussed previously limit NAICO's ability to pay shareholder dividends or other payments to Chandler USA, Chandler USA's ability to satisfy the debt obligations may also be limited.  WE ARE HEAVILY REGULATED IN THE STATES IN WHICH WE OPERATE.        NAICO is subject to regulation by government agencies in the jurisdictions in which it does business. The nature and extent of such regulation vary from jurisdiction to jurisdiction, but typically involve prior approval of the acquisition of control of an insurance company or of any company controlling an insurance company, regulation of certain transactions entered into by an insurance company with any of its affiliates, approval of premium rates, forms and policies used for many lines of insurance, standards of solvency and minimum amounts of capital and surplus which must be maintained, establishment of reserves required to be maintained for unearned premiums, unpaid losses and loss adjustment expenses or for other purposes, limitations on types and amounts of investments, restrictions on the size of risks which may be insured by a single company, licensing of insurers and agents, deposits of securities for the benefit of policyholders and the filing of periodic reports with respect to financial condition and other matters. In addition, regulatory examiners perform periodic financial and market conduct examinations of insurance companies. Such regulation is generally intended for the protection of policyholders rather than shareholders or creditors.        NAICO is also affected by a variety of state and federal legislative and regulatory measures and judicial decisions that define and extend the risks and benefits for which insurance is sought and provided.  These include redefinitions of risk exposure in areas such as product liability, environmental damage and workers compensation.  In addition, individual state insurance departments may prevent premium rates for some classes of insureds from reflecting the level of risk assumed by the insurer for those classes. Such developments may adversely affect the profitability of various lines of insurance.  In some cases, these adverse effects on profitability can be minimized through re-pricing, if permitted by applicable regulations, of coverages or limitations or cessation of the affected business.        This extensive regulation of our business may affect the cost or demand for our products and may limit our ability to obtain rate increases or to take other actions that we might desire to increase our profitability.  In addition, we may be unable to maintain all required approvals or comply fully with the wide variety of applicable laws and regulations, or the relevant authority's interpretation of such laws and regulations.  LITIGATION AND LEGAL PROCEEDINGS AGAINST US COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS, RESULTS OF OPERATIONS AND/OR FINANCIAL CONDITION.        Like other insurance companies, we are involved in lawsuits and legal proceedings in the normal course of our business, some of which involve claims for substantial amounts and the outcomes of which are unpredictable.  This litigation is based on a variety of issues including insurance and claim settlement practices.                                                                          PAGE 18  ASSESSMENTS FOR GUARANTY FUNDS AND OTHER MANDATORY POOLING ARRANGEMENTS MAY REDUCE OUR PROFITABILITY.        Virtually all states require insurers licensed to do business in their state to bear a portion of the loss suffered by some insureds as the result of impaired or insolvent insurance companies.  These obligations are funded by assessments that are expected to continue in the future as a result of insolvencies.  In addition, as a condition to the ability to conduct business in some states, insurance companies are required to participate in mandatory workers compensation shared market mechanisms or pooling arrangements, which provide workers compensation insurance coverage from private insurers.  The effect of these assessments and mandatory shared market mechanism or changes in them could reduce our profitability in any given period or limit our ability to grow our business.  WE DEPEND ON KEY PERSONNEL.        We believe that our future success will depend to a significant extent on our ability to attract and retain key employees, in particular our senior officers, and key management, information systems, underwriting, claims and corporate personnel.  MANAGING TECHNOLOGY INITIATIVES AND MEETING NEW DATA SECURITY REQUIREMENTS PRESENT SIGNIFICANT CHALLENGES.        While technological developments can streamline many business processes and ultimately reduce the cost of operations, technology initiatives can present short term cost and implementation risks.  Data security is subject to increasing regulation.  We face rising costs and competing time constraints in meeting compliance requirements of new and proposed regulations.  The expanding volume and sophistication of computer viruses, hackers and other external hazards may increase the vulnerability of our data systems to security breaches.  These increased risks and expanding regulatory requirements expose us to potential data loss and damages and significant increases in compliance costs.
Not applicable.
Chandler USA and its subsidiaries own and occupy four office buildings with approximately 127,000 square feet of usable space in Chandler, Oklahoma. Chandler USA believes such space is sufficient for its operations for the foreseeable future.
See Note 10 to Consolidated Financial Statements for a discussion of litigation matters.
No matters were submitted to a vote of security holders during the quarter ended December 31, 2005.                                         PART II
All of the common stock of Chandler USA, its sole class of common equity on the date hereof, is owned by Chandler Insurance.  Chandler USA has never paid cash dividends on its common shares.
YEAR ENDED DECEMBER 31,                                                      -------------------------------------------------                                                        2001      2002      2003      2004      2005                                                      --------- --------- --------- --------- ---------                                                                     (Dollars in thousands)       OPERATING DATA (1) Revenues  Direct premiums written and assumed ............... $158,964  $140,162  $118,444  $121,651  $120,344                                                      ========= ========= ========= ========= =========  Net premiums earned ............................... $ 69,985  $ 66,957  $ 56,583  $ 64,042  $ 66,060  Investment income, net ............................    3,632     2,540     2,148     3,186     2,798  Interest income, net from related parties .........      371       380       412       491       670  Realized investment gains, net ....................    2,654       794     2,351       652       383  Other income (2) ..................................      101       261     5,077       640       251                                                      --------- --------- --------- --------- --------- Total revenues .....................................   76,743    70,932    66,571    69,011    70,162                                                      --------- --------- --------- --------- --------- Operating expenses  Losses and loss adjustment expenses ...............   52,550    50,712    37,200    53,781    37,324  Policy acquisition costs ..........................   10,869    10,239    11,278    11,039    10,671  General and administrative expenses ...............   11,549    12,473    13,486    12,380    12,749  Interest expense ..................................    2,240     2,234     2,441     2,397     2,535                                                      --------- --------- --------- --------- --------- Total operating expenses ...........................   77,208    75,658    64,405    79,597    63,279                                                      --------- --------- --------- --------- --------- Income (loss) from continuing operations before   income taxes .....................................     (465)   (4,726)    2,166   (10,586)    6,883 Federal income tax benefit (provision) .............      (16)    1,680      (192)    3,582    (2,450)                                                      --------- --------- --------- --------- --------- Income (loss) from continuing operations ...........     (481)   (3,046)    1,974    (7,004)    4,433  Income (loss) from discontinued operations .........     (622)      284         -         -         - Gain on sale of subsidiary .........................        -       671         -         -         -                                                      --------- --------- --------- --------- --------- Net income (loss) .................................. $ (1,103) $ (2,091) $  1,974  $ (7,004) $  4,433                                                      ========= ========= ========= ========= =========  Combined loss and underwriting expense ratio (3) ...      108%      110%      113%      118%       92%  BALANCE SHEET DATA Cash and investments ............................... $ 73,378  $ 68,276  $ 69,198  $ 86,913  $ 86,316 Amounts due from related parties ...................    7,880    10,582     9,642    10,891     9,360 Total assets .......................................  234,809   229,855   218,213   237,297   245,059 Unpaid losses and loss adjustment expenses .........   84,756    92,606    87,768   108,233   109,541 Debentures .........................................   24,000    24,000     7,254     6,979     6,979 Junior subordinated debentures issued to affiliated   trusts ...........................................        -         -    20,620    20,620    20,620 Total liabilities ..................................  191,067   186,855   174,374   201,105   205,373 Shareholder's equity ...............................   43,742    43,000    43,839    36,192    39,686  - ----------------------------------------------------   (1)  In December 2002, Chandler USA completed the sale of a wholly owned      subsidiary for $3.6 million.  Chandler USA recorded an after-tax gain of      $671,000 on the sale in 2002 based on the minimum purchase price for the      transaction.  Amounts for 2001 and 2002 have been restated to reflect the      results of the subsidiary as a discontinued operation.  (2)  Other income included a $3.1 million gain on the purchase and cancellation      of $16.7 million principal amount of Debentures in 2003, and $1.7 million      and $368,000 for the amortization of the deferred gain on a sale and      leaseback transaction in 2003 and 2004, respectively.  For additional      information, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL      CONDITION AND RESULTS OF OPERATIONS."  (3)  Interest expense and certain litigation expenses are not considered      underwriting expenses and have been excluded from this ratio.                                                                           PAGE 20
GENERAL        References to Chandler USA which follow within this Item 7 refer to Chandler USA and its subsidiaries on a consolidated basis unless otherwise indicated.        Chandler USA is engaged in various property and casualty insurance operations through its wholly owned subsidiaries, NAICO and CIMI.  NAICO writes various property and casualty insurance products through three separate marketing programs:  standard property and casualty, political subdivisions and homeowners.  The lines of insurance written by NAICO are commercial coverages consisting of workers compensation, automobile liability, other liability (including general liability, products liability and umbrella liability), automobile physical damage, property, surety and inland marine.  Beginning in 2005, NAICO also writes homeowner and dwelling fire and allied lines policies in the state of Texas through a managing general agent.  NAICO markets these products through a network of independent insurance agents.  A portion of the insurance written by NAICO is reinsured by Chandler USA's parent Chandler Insurance.  CIMI maintains certain wholesale operations related to NAICO's school districts and trucking insurance.  SUMMARY OF RESULTS        For the year ended December 31, 2005, Chandler USA had a net income of $4.4 million compared to a net loss of $7.0 million for 2004 and net income of $2.0 million for 2003.  Net income for 2003 included $3.1 million in gains on the purchase and cancellation of $16.7 million principal amount of Debentures, and $1.7 million for the amortization of the deferred gain on a sale and leaseback transaction.  These transactions are discussed in more detail under "Other Income" and "Liquidity and Capital Resources."  The net loss in 2004 is primarily due to the adverse loss development experienced by Chandler USA.  See "Losses and Loss Adjustment Expenses."        Many factors determine the profitability of an insurance company including regulation and rate competition; the frequency and severity of claims; the cost, availability and collectibility of reinsurance; interest rates; inflation; general business conditions; and jury awards, court decisions and legislation expanding the extent of coverage and the amount of compensation due for injuries and losses.  CRITICAL ACCOUNTING POLICIES        The preparation of financial statements in conformity with U.S. GAAP requires the application of accounting policies that often involve a significant degree of judgment.  Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods.  If management determines, as a result of its consideration of facts and circumstances, that changes in estimates and assumptions are appropriate, results of operations and financial position as reported in the consolidated financial statements may change significantly. Management has identified the following accounting policies as critical in understanding Chandler USA's reported financial results.  RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES        Insurance companies provide in their financial statements reserves for unpaid losses and loss adjustment expenses which are estimates of the expense of investigation and settlement of all reported and incurred but not reported losses under their previously issued insurance policies and reinsurance contracts.  In estimating reserves, insurance companies use various standardized methods based on historical experience and payment and reporting patterns for the type of risk involved.  The application of these methods necessarily involves subjective determinations by the personnel of the insurance company.  Inherent in the estimates of the ultimate liability for unpaid claims are expected trends in claim severity, claim frequency and other factors that may vary as claims are settled.  The amount of and uncertainty in the estimates is affected by such factors as the amount of historical claims experience relative to the development period for the type of risk, knowledge of the actual facts and circumstances, and the amount of insurance risk retained.  The ultimate cost of insurance claims can be adversely affected by increased costs, such as medical expenses, repair expenses, costs of providing legal defense for policyholders, increased jury awards and court decisions and legislation that expand insurance coverage after the insurance policy was priced and sold.  In recent years, certain of these factors have contributed to incurred amounts that were significantly higher than original estimates. Accordingly, the loss and loss adjustment expense reserves may not accurately predict an insurance company's ultimate liability for unpaid claims.                                                                          PAGE 21        Estimating the ultimate loss and loss adjustment expense liability is a complex and judgmental process inasmuch as the amounts are based on management's informed estimates, assumptions and judgments using data currently available.  The assumptions used in establishing reserves are regularly reviewed and updated by management as new data becomes available. Changes to estimates of previously established reserves are included in earnings in the period in which the estimate is changed.  Such changes in estimates may be material.  If the ultimate losses prove to differ substantially from the amounts previously recorded, the related adjustments could have a material adverse effect on Chandler USA's financial condition, results of operations and liquidity.        NAICO's loss reserves consist of case reserves and reserves for incurred but not reported ("IBNR") claims.  Case reserves are established by claims personnel based on a review of the facts known at the time the claim is reported, and are subsequently revised as more information about a claim becomes known.  IBNR is computed using various actuarial methods and techniques and includes reserves for losses that have occurred but for which claims have not yet been reported, including provision for expected future development on case reserves.  As of December 31, 2005, NAICO's case reserves and IBNR for each line of business are shown in the following table.                                               Gross reserves at December 31, 2005  Net Reserves at December 31, 2005                                           -----------------------------------  ---------------------------------                                              Case                    Total        Case                  Total                                            reserves      IBNR      reserves     reserves     IBNR     reserves                                           ----------- ----------- -----------  ---------- ---------- -----------                                                      (In thousands)                     (In thousands)         Other liability ........................ $   15,354  $   37,916  $   53,270   $   4,570  $  10,637  $   15,207  Automobile liability ...................     11,433      16,338      27,771       7,872      9,315      17,187  Workers compensation ...................     18,514      19,169      37,683       7,623      8,138      15,761  Automobile physical damage .............        651           -         651         460          -         460  Property ...............................      2,134         176       2,310         642        128         770  Surety .................................    (12,281)        336     (11,945)     (8,503)        48      (8,455)  Accident and health ....................       (443)          -        (443)       (443)         -        (443)  Inland marine ..........................        244           -         244          62          -          62                                           ----------- ----------- -----------  ---------- ---------- -----------   Total reserves ........................ $   35,606  $   73,935  $  109,541   $  12,283  $  28,266  $   40,549                                           =========== =========== ===========  ========== ========== ===========          NAICO periodically reviews the reserve estimates relating to insurance business written or assumed by NAICO and the methods used to arrive at such reserve estimates.  NAICO also retains independent professional actuaries who review such reserve estimates and methods.  Methods used include the paid loss development method, incurred loss development method, Bornhuetter-Ferguson method and loss ratio method.  Most methods assume that past patterns in the historical data will be repeated in the future, as long as there are no significant changes in pertinent variables.  The methods chosen are those that are believed to produce the most reliable indication at that particular evaluation date.  While each of the methods produce point estimates for each period analyzed, management's best estimate is usually comprised of a combination of methods due to differences in conditions during each period. The selected estimate may be one method, or a weighted average of several methods, or a judgmental selection if management determines it is appropriate. The ultimate point estimate selected by management represents the amount that management believes is the most likely amount that will ultimately be paid to settle the net reserves recorded at a particular point in time.        Reserves for losses and loss adjustment expenses are developed using multiple estimation methods that result in various point estimates for each insurance program.  The estimate recorded by management is a function of detailed analysis of the historical trends and development factors resulting from the different methods.  As a result of the variety of factors that must be considered by management there is a significant risk that actual incurred losses will develop differently from these estimates.        The process of selecting the point estimate from the set of possible outcomes produced by the various actuarial methods discussed above is based upon the judgment of management.  In making its selection, management considers recent trends in claims frequency and severity and other factors including, but not limited to, large loss activity, large case reserve additions, historical loss information, per claim information, NAICO's loss retention, legislative enactments, judicial decisions, and trends in general economic conditions, including the effects of inflation.  This process assumes that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for predicting future events.  Significant changes in claims development patterns from historical claims development patterns may cause a significant variation between current reserve estimates and the actual future paid amounts.  Assumptions used in establishing loss reserves are regularly reviewed and updated by management as new data becomes available.  The changes in these estimates, resulting from the review process and the differences between estimates and ultimate payments, are reflected in the consolidated statements of operations for the period in which such estimates are changed. Such changes in estimates may be material.  See Notes to Consolidated Financial Statements.                                                                          PAGE 22        The following table shows the recorded reserves and the high and low point estimates based on the results of the various actuarial methods described above as of December 31, 2005.         Insurance program                             Low         High      Recorded - ---------------------------------------------- ----------  ----------  ----------                                                          (In thousands)       Gross Reserves:   ---------------     Standard property and casualty ........... $  86,545   $ 130,134   $ 105,956     Political subdivisions ...................     6,086       6,086       6,086     Homeowners ...............................       683         683         683     Surety bonds .............................   (11,960)    (11,960)    (11,960)     Involuntary workers compensation  pools ..     6,228       6,228       6,228     Other ....................................     2,548       2,548       2,548                                                ----------  ----------  ----------                                                $  90,130   $ 133,719   $ 109,541                                                ==========  ==========  ==========   Net Reserves:   -------------     Standard property and casualty ........... $  30,367   $  53,307   $  36,816     Political subdivisions ...................     2,513       3,399       2,837     Homeowners ...............................       512         512         512     Surety bonds .............................    (8,453)     (5,954)     (8,470)     Involuntary workers compensation  pools ..     6,228       6,228       6,228     Other ....................................     2,626       2,626       2,626                                                ----------  ----------  ----------                                                $  33,793   $  60,118   $  40,549                                                ==========  ==========  ==========          For the workers compensation portion of the standard property and casualty program, NAICO's actuaries selected the results of the incurred loss development method for the 2002 and prior accident years.  The 2003 and 2004 accident years were based on the loss ratios that resulted from using the incurred loss development method before the application of certain quota share reinsurance.  The 2005 accident year selection was based on a judgmentally selected loss ratio.  For the casualty portion of this program, the actuaries used an average of the incurred loss development method and the corresponding selections from the prior quarter for all accident years prior to 2003.  The 2003, 2004 and 2005 accident year selections were based on judgmentally selected loss ratios.  The estimation methods chosen are those that are believed to produce the most reliable indication at that particular evaluation date for the losses being evaluated.  The point estimates for the political subdivisions, homeowners and surety bond programs are less volatile as portions of these programs are in a run-off mode and can be estimated with more certainty.  Surety bond reserves are actually a net receivable due to anticipated subrogation recoveries.  Certain involuntary pools provided their own estimates and NAICO records these estimates plus an accrual to account for the lag time in reporting to NAICO.  Changes in actuarial methods were made in the 2005 loss reserve analysis for the standard property and casualty program. In the 2004 loss reserve analysis, additional weight was given to paid loss indications for certain accident year selections for this program.  The 2005 loss reserve analysis used only the incurred loss development method, adjusted as described above, with judgmentally selected loss ratios for the more recent accident years.        The loss settlement period on insurance claims for property damage is relatively short.  The more severe losses for bodily injury, workers compensation and other liability claims have a much longer loss settlement period and may be paid out over several years.  It is often necessary to adjust estimates of liability on a loss either upward or downward between the time a claim arises and the time of payment.  Workers compensation indemnity benefit reserves are determined based on statutory benefits prescribed by state law and are estimated based on the same factors generally discussed above which may include, where state law permits, inflation adjustments for rising benefits over time. Generally, the more costly automobile liability claims involve one or more severe bodily injuries or deaths.  Other liability claims include coverages protecting the insured against legal liability resulting from negligence, carelessness, or a failure to act causing property damage or personal injury to others.  The estimation of loss reserves for other liability claims is affected by the timing of claims reporting, the applicable statute of limitations, the litigious climate and magnitude of jury awards, the unpredictability of judicial decisions regarding coverage issues and outside counsel costs.  The ultimate cost of these types of claims is dependent on various factors including the relative liability of the parties involved, the number and severity of injuries and the legal jurisdiction where the incident occurred.        NAICO does not ordinarily insure against environmental matters as that term is commonly used.  However, in some cases, regulatory filings made on behalf of an insured can make NAICO directly liable to the regulatory authority for property damage, which could include environmental pollution.  In those cases, NAICO ordinarily has recourse against the insured or the surety bond principal for amounts paid.  NAICO has insured certain trucking companies and pest control operators who are required to provide proof of insurance which in some cases assures payment for cleanup and restoration of damage resulting from sudden and accidental release or discharge of contaminants or other substances which may be classified as pollutants.  NAICO also provides surety bonds for construction contractors who use or have control of such substances and for contractors who remove and dispose of asbestos as a part of their contractual obligations.                                                                          PAGE 23        NAICO also insures independent oil and gas producers who may purchase coverage for the escape of oil, saltwater, or other substances which may be harmful to persons or property, but may not generally be classified as pollutants.  NAICO maintains claims records which segregate this type of risk for the purpose of evaluating environmental risk exposure.  Based upon the nature of such lines of business with NAICO's insureds, and current data regarding the limited severity and infrequency of such matters, it appears that potential environmental risks are not a significant portion of claim reserves and therefore would not likely have a material adverse impact, if any, on the financial condition of Chandler USA.        NAICO's statutory-based reserves (reserves calculated in accordance with accounting practices prescribed or permitted by an insurer's domiciliary state insurance regulatory authorities for purposes of financial reporting to regulators) do not differ from its reserves reported on the basis of GAAP. NAICO does not discount its reserves for unpaid losses and loss adjustment expenses.        Management believes that its unpaid losses and related reinsurance recoverables are fairly stated as of December 31, 2005.  However, estimating the ultimate claims liability is necessarily a complex and judgmental process inasmuch as the amounts are based on management's informed estimates, assumptions and judgments using data currently available.  REINSURANCE RECOVERABLES        Reinsurance recoverables on unpaid losses and loss adjustment expenses are similarly subject to changes in estimates and assumptions.  Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policies.  In addition to factors noted above, estimates of reinsurance recoverables may prove uncollectible if the reinsurer is unable or unwilling to meet its responsibilities under the reinsurance contracts.  Reinsurance contracts do not relieve an insurer from its obligation to policyholders.  DEFERRED INCOME TAXES        Chandler USA uses an asset and liability approach for accounting for income taxes.  Deferred income taxes are recognized for the tax consequences of temporary differences and carryforwards by applying enacted tax rates applicable to future years to differences between the financial statement amounts and the tax bases of existing assets and liabilities.  A valuation allowance is established if it is more likely than not that some portion of the deferred tax asset will not be realized.  The determination of whether a valuation allowance is appropriate requires the exercise of management judgment.        At December 31, 2005, Chandler USA had a net operating loss carryforward available for U.S. Federal income taxes of $5.7 million which begins to expire in 2023.  Chandler USA has concluded that the deferred tax asset including the federal net operating loss carryforwards is more likely than not to be realized. Chandler USA anticipates that its future U.S. consolidated income will be sufficient to utilize the federal net operating losses within the required time. Chandler USA will continue to evaluate income generated in future periods in determining the reasonableness of its position.  If Chandler USA determines that future income is insufficient to cause the realization of the federal net operating losses within the required time, a valuation allowance will be established.        In addition, Chandler USA, at December 31, 2005, had net operating loss carryforwards available for Oklahoma state income taxes totaling approximately $54.2 million which expire in the years 2006 through 2025.  At December 31, 2005, Chandler USA also had a capital loss carryforward for U.S. Federal income taxes of $3.1 million which expires in 2007.  A valuation allowance has been provided for the tax effect of the state net operating loss and the net capital loss carryforwards since realization of such amounts is not considered more likely than not.  OTHER        See Note 1 to Consolidated Financial Statements for information related to other accounting and reporting policies.  ECONOMIC CONDITIONS        The impact of a recession on Chandler USA would depend on its duration and severity. A prolonged downturn in the economy could result in decreased demand for NAICO's insurance products and an increase in uncollectible premiums and/or reinsurance recoverables.  In addition, an economic downturn could result in an increase in the number of insurance claims if insureds decrease expenditures that promote safety.  Much of NAICO's insurance business is concentrated in the Southwest and Midwest areas of the United States. Approximately $100.1 million, or 83%, of NAICO's direct written and assumed premiums in 2005 were in the states of Oklahoma and Texas.  An economic downturn in these states could have a significant adverse impact on Chandler USA.  A recession might also cause defaults on fixed-income securities or a decrease in the value of the equity mutual funds owned by NAICO.  Management believes it has mitigated the impact of a recession by employing conservative underwriting practices and strict credit policies and maintaining a high-quality investment portfolio.                                                                          PAGE 24        Periods of inflation have varying effects on Chandler USA and its subsidiaries as well as other companies in the insurance industry.  Inflation contributes to higher claims and related costs and operating costs as well as higher interest rates which generally provide for potentially higher interest rates on investable cash flow and decreases in the market value of existing fixed-income securities.  Premium rates and commissions, however, are not significantly affected by inflation since competitive forces generally control such rates.  COMPETITION        NAICO operates in a highly competitive industry and faces competition from domestic and foreign insurers, many of which are larger, have greater financial, marketing and management resources, have more favorable ratings by ratings agencies and offer more diversified insurance coverages than NAICO.        An insurance company's capacity to write insurance policies is dependent on a variety of factors including its net worth or "surplus," the lines of business written, the types of risk insured and its profitability.  During the late 1990's and into 2000, property and casualty insurance companies generally under priced their products, which resulted in poor underwriting results that were partially offset by investment returns.  Interest rates decreased in 2000 and underwriting results continued to deteriorate for business written in the late 1990's and into 2000.  These factors coupled with additional potential losses due to terrorism and lower investment returns caused the industry to increase pricing beginning in the latter half of 2001.  Rate increases continued through 2003 and to a lesser extent in 2004, and the industry's underwriting results have improved.  The pricing environment during 2005 experienced downward pressure, particularly for larger accounts.  NAICO has been able to increase its pricing for most coverages from 2001 through 2005. However, NAICO continues to experience competition in all of its programs. NAICO's underwriting philosophy is to forego underwriting risks from which it is unable to obtain what it believes to be adequate premium rates.  REGULATION        NAICO is subject to regulation by government agencies in the jurisdictions in which it does business. The nature and extent of such regulations vary from jurisdiction to jurisdiction, but typically involve prior approval of the acquisition of control of an insurance company or of any company controlling an insurance company, regulation of certain transactions entered into by an insurance company with any of its affiliates, approval of premium rates, forms and policies used for many lines of insurance, standards of solvency and minimum amounts of capital and surplus which must be maintained, establishment of reserves required to be maintained for unearned premiums, unpaid losses and loss adjustment expenses or for other purposes, limitations on types and amounts of investments, restrictions on the size of risks which may be insured by a single company, licensing of insurers and agents, deposits of securities for the benefit of policyholders and the filing of periodic reports with respect to financial condition and other matters. In addition, regulatory examiners perform periodic examinations of insurance companies. Such regulation is generally intended for the protection of policyholders rather than shareholders or creditors.        As an Oklahoma corporation, NAICO and any person controlling NAICO, directly or indirectly, are subject to the insurance laws of Oklahoma including laws concerning the change or acquisition of control and payment of shareholder and policyholder dividends by NAICO.        In addition to the regulatory oversight of NAICO, Chandler Insurance is also subject to regulation under the laws of the Cayman Islands and Chandler USA and all of its affiliates are also subject to regulation under the Oklahoma Insurance Code. The Oklahoma Insurance Code contains certain reporting requirements including those requiring Chandler Insurance, as the ultimate parent company, to file information relating to its capital structure, ownership and financial condition and general business operations of its insurance subsidiaries. The Oklahoma Insurance Code contains special reporting and prior approval requirements with respect to transactions among affiliates. The Oklahoma Insurance Code also imposes certain requirements upon any person controlling or seeking to control an insurance company domiciled in Oklahoma. Control is generally presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote or holds proxies representing 10% or more of the voting securities of the insurance company or of any other person or entity controlling the insurance company.  The 10% presumption is not conclusive and control may be found to exist at less than 10%.  Persons owning any securities of Chandler USA or Chandler Insurance must comply with the Oklahoma Insurance Code.  See "BUSINESS - Regulation."        Insurance companies are also affected by a variety of state and federal legislative and regulatory measures and judicial decisions that define and extend the risks and benefits for which insurance is sought and provided. These include the redefinition of risk exposure in areas such as product liability, environmental damage and workers compensation. In addition, individual state insurance departments may prevent premium rates for some classes of insureds from reflecting the level of risk assumed by the insurer for those classes. Such developments may adversely affect the profitability of various lines of insurance. In some cases, these adverse effects on profitability can be minimized through coverage re-pricing, if permitted by applicable regulations, or limitations or cessation of the affected business.                                                                          PAGE 25  ANALYSIS OF INSURANCE PROGRAM RESULTS OF OPERATIONS        The following tables summarize the net premiums earned and loss ratios (computed by dividing losses and loss adjustment expenses by net premiums earned) in each of the years presented.  The "loss ratio" is based on losses recorded during the calendar year presented regardless of the accident year in which the claim occurred.  The first table is summarized by major insurance program and includes all lines of insurance written in each program.  The second table is summarized by line of insurance written and includes all net premiums earned and net losses and loss adjustment expenses incurred from all insurance programs for that particular line.  See "Premiums Earned" and "Losses and Loss Adjustment Expenses."                                                       YEAR ENDED DECEMBER 31,                                              --------------------------------                                                 2003       2004       2005                                              ---------- ---------- ----------                                                   (Dollars in thousands)     INSURANCE PROGRAMS - -------------------------------------------- STANDARD PROPERTY AND CASUALTY  Net premiums earned ....................... $  45,521  $  54,278  $  54,979  Loss ratio ................................      65.1%      79.0%      61.0% POLITICAL SUBDIVISIONS  Net premiums earned ....................... $   8,093  $   7,269  $   6,690  Loss ratio ................................      70.7%      98.0%      61.2% HOMEOWNERS  Net premiums earned ....................... $       -  $       -  $   3,321  Loss ratio ................................         -%         -%      39.3% SURETY BONDS  Net premiums earned ....................... $   2,724  $   1,993  $     669  Loss ratio ................................      33.5%     134.4%   (254.7)% OTHER (1)  Net premiums earned ....................... $     245  $     502  $    401  Loss ratio ................................     374.0%     215.3%     29.7% TOTAL  Net premiums earned ....................... $  56,583  $  64,042  $ 66,060  Loss ratio ................................      65.7%      84.0%     56.5%  - ----------------------------   (1)  This category is comprised primarily of the run-off of discontinued programs      and NAICO's participation in various mandatory workers compensation pools.                                                                           PAGE 26                                                      YEAR ENDED DECEMBER 31,                                              --------------------------------                                                 2003       2004       2005                                              ---------- ---------- ----------                                                   (Dollars in thousands)     LINES OF INSURANCE - --------------------------------------------  AUTOMOBILE LIABILITY  Net premiums earned ....................... $  15,624  $  17,742  $  19,126  Loss ratio ................................      49.4%      61.2%      81.8% OTHER LIABILITY  Net premiums earned ....................... $  12,870  $  18,044   $ 18,052  Loss ratio ................................      94.0%     120.9%      47.6% WORKERS COMPENSATION  Net premiums earned ....................... $  16,378  $  17,371   $ 16,475  Loss ratio ................................      71.8%      85.5%      52.7% AUTOMOBILE PHYSICAL DAMAGE  Net premiums earned ....................... $   5,508  $   5,933   $  5,807  Loss ratio ................................      36.0%      42.9%      56.3% PROPERTY  Net premiums earned ....................... $   3,072  $   2,611   $  5,594  Loss ratio ................................      73.7%      46.8%      41.5% SURETY  Net premiums earned ....................... $   2,723  $   1,993   $    669  Loss ratio ................................      33.5%     134.4%   (254.7)% INLAND MARINE  Net premiums earned ....................... $     408  $     348   $    337  Loss ratio ................................      54.1%      29.5%     162.0% TOTAL  Net premiums earned ....................... $  56,583  $  64,042  $  66,060  Loss ratio ................................      65.7%      84.0%      56.5%                                                                           PAGE 27  PREMIUMS EARNED        The following tables set forth premiums earned on a gross basis (before reductions for premiums ceded to reinsurers) and on a net basis (after such reductions) for each insurance program as well as each line of insurance for each year presented:                                            GROSS PREMIUMS EARNED          NET PREMIUMS EARNED                                      --------------------------   --------------------------        INSURANCE PROGRAMS              2003     2004     2005       2003     2004     2005 - -----------------------------------  -------- -------- --------   -------- -------- --------                                                        (In thousands)        Standard property and casualty ....  $ 93,193 $ 92,894 $ 92,224   $ 45,521 $ 54,278 $ 54,979 Political subdivisions ............    28,926   21,679   18,630      8,093    7,269    6,690 Homeowners ........................         -        -    4,229          -        -    3,321 Surety bonds ......................     3,908    2,788      930      2,724    1,993      669 Other .............................       252      507      406        245      502      401                                      -------- -------- --------   -------- -------- -------- TOTAL .............................  $126,279 $117,868 $116,419   $ 56,583 $ 64,042 $ 66,060                                      ======== ======== ========   ======== ======== ========                                            GROSS PREMIUMS EARNED          NET PREMIUMS EARNED                                      --------------------------   --------------------------         LINES OF INSURANCE             2003     2004     2005       2003     2004     2005 - -----------------------------------  -------- -------- --------   -------- -------- --------                                                        (In thousands)        Other liability ...................  $ 34,715 $ 35,438 $ 33,944   $ 12,870 $ 18,044 $ 18,052 Automobile liability ..............    27,538   26,660   28,031     15,624   17,742   19,126 Workers compensation ..............    29,821   26,995   25,769     16,378   17,371   16,475 Automobile physical damage ........     9,146    9,154    8,914      5,508    5,933    5,807 Property ..........................    19,359   15,130   17,102      3,072    2,611    5,594 Surety ............................     3,908    2,788      930      2,723    1,993      669 Inland marine .....................     1,792    1,703    1,729        408      348      337                                      -------- -------- --------   -------- -------- -------- TOTAL .............................  $126,279 $117,868 $116,419   $ 56,583 $ 64,042 $ 66,060                                      ======== ======== ========   ======== ======== ========         Gross premiums earned decreased 7% and 1% in 2004 and 2005, respectively. These decreases were primarily the result of NAICO's continued efforts to improve underwriting profitability and increased competition within the Oklahoma school districts portion of the political subdivisions program.  In 2005, the gross earned premium from the new homeowners program offset the decreases in gross earned premiums in the political subdivision and surety bond programs.  Gross premiums earned in Texas decreased 3% and 4% in 2004 and 2005, respectively, and gross premiums earned in Oklahoma decreased 8% and 4% in 2004 and 2005.  Net premiums earned increased 13% and 3% in 2004 and 2005, respectively.  The increase in 2004 was due primarily to changes in NAICO's reinsurance programs for certain excess of loss and quota share reinsurance. Effective January 1, 2004, NAICO discontinued a quota share reinsurance arrangement that covered casualty, workers compensation and physical damage risks produced by certain agents.  Effective, April 1, 2004, NAICO increased its net retention to include 56% of the layer covering $500,000 excess of $500,000 of loss per occurrence for its casualty and workers compensation risks, and effective July 1, 2004, NAICO increased its net retention to include 70% of this layer.  During 2005, the only significant change in NAICO's reinsurance retention was that effective July 1, 2005, NAICO increased its net retention for the casualty reinsurance program to include 70% of each loss occurrence up to $2 million.  These changes increased NAICO's net retention for these lines of business and also increased net premiums earned.  The new homeowners program also contributed to the increase in net premiums earned in 2005.        Gross premiums earned in the standard property and casualty program decreased less than 1% in 2004 and 2005.  Gross premiums earned in Texas decreased $685,000 and $4.9 million in 2004 and 2005, respectively, and gross premiums earned in Oklahoma increased $1.7 million and $906,000 in 2004 and 2005.  NAICO offset the decrease in Texas by expanding its standard property and casualty program in several midwestern states, including New Mexico and Colorado.  NAICO has also increased premiums from trucking accounts in 2004 and 2005.  Gross premiums earned from trucking accounts increased $4.9 million and $6.4 million in 2004 and 2005, respectively, while net premiums earned increased $2.8 million and $3.3 million in these periods.  Net premiums earned increased 19% and 1% in 2004 and 2005, respectively.  The increases are primarily due to reinsurance changes described above.        Gross premiums earned in the political subdivisions program decreased 25% and 14% in 2004 and 2005, respectively.  The decrease in gross premiums earned is due primarily to increased competition related to Oklahoma school districts. Net premiums earned decreased 10% and 8% in 2004 and 2005, respectively.  The decrease in 2004 and 2005 was due to a decrease in gross premiums earned and was partially offset by the reinsurance changes described above.                                                                          PAGE 28        In the second quarter of 2005, NAICO began writing homeowner and dwelling policies in the state of Texas through a managing general agent.  Gross and net earned premiums for 2005 were $4.2 million and $3.3 million, respectively. NAICO is currently reviewing this program and may modify or discontinue this program during 2006.        Gross premiums earned in the surety bond program decreased 29% and 67% in 2004 and 2005, respectively.  Net premiums earned decreased 27% and 66% in 2004 and 2005, respectively.  NAICO is no longer actively marketing surety business, and expects premium volume to continue to decline.        Other programs in the preceding table include premiums from the runoff of various programs which are no longer offered by NAICO and NAICO's participation in various mandatory pools covering workers compensation for insureds that were unable to purchase this coverage from an insurance company on a voluntary basis.  NET INVESTMENT INCOME AND NET REALIZED INVESTMENT GAINS        At December 31, 2005, Chandler USA's investment portfolio consisted primarily of fixed income U.S. Treasury and government agency bonds, high-quality corporate bonds and mutual funds that invest in equity securities, with approximately 6% invested in cash and money market instruments.  Income generated from this portfolio is largely dependent upon prevailing levels of interest rates.  Chandler USA's portfolio contains no non-investment grade bonds or real estate investments.  Chandler USA also receives interest income from related parties on intercompany loans.        Net investment income, excluding interest income from related parties, increased 48% in 2004 and decreased 12% in 2005.  The increase in 2004 was due primarily to NAICO receiving $577,000 in interest from an arbitration award in addition to an increase in fixed maturity investments during the year.  The interest received from the arbitration award in 2004 attributed to the decrease in 2005.  Excluding the arbitration interest, Chandler USA's net investment income increased 7% in 2005.   Interest income from related parties was $412,000, $491,000 and $670,000 during 2003, 2004 and 2005, respectively.  The increase in 2004 was due primarily to an increase in the amount loaned to Chandler Insurance.  The 2005 increase was due primarily to higher interest rates.  See Liquidity and Capital Resources.        Net realized investment gains were $2,351,000, $652,000 and $383,000 in 2003, 2004 and 2005, respectively.  Realized investment gains in 2003 included a gain of $1.7 million from the sale of 19,371 shares of common stock of Insurance Services Office, Inc. ("ISO").  NAICO received these shares in 1997 as a result of ISO converting to a for-profit corporation.        The average net yield on the fixed maturity portfolio, including net realized investment gains, was 6.7%, 4.0% and 3.4% in 2003, 2004 and 2005, respectively.  The average net yield on the fixed maturity portfolio, excluding net realized investment gains, was 3.2% for 2003 and 2004 and 3.4% for 2005. Chandler USA excludes interest income from related parties when calculating its average net yield on the portfolio.  Chandler USA's average net yield has been reduced by investment expenses to subsidize a premium finance program for certain insureds of NAICO.  While such expenses reduce Chandler USA's average net yield, the premium finance program enhances cash flow by providing cash which is available for investment earlier than conventional deferred payment plans.  Based on information provided by the premium finance company, the outstanding balance of premiums financed at December 31, 2005 was approximately $10.5 million.  The average yield on the fixed maturity portfolio before deducting investment expenses was 3.6% in 2003 and 2004 and 3.8% in 2005, excluding net realized capital gains.  OTHER INCOME        During 2003, Chandler USA's other income included a $3.1 million gain on the purchase and cancellation of $16.7 million of its Debentures.  In addition, the amortization of a deferred gain related to a sale and leaseback transaction increased other income by $1.7 million in 2003.  During 2004, the remaining $368,000 of deferred gain was amortized into income.  The deferred gain was amortized into income over the final year of the lease following the exercise of the option for Chandler USA to repurchase the equipment at the end of the lease.                                                                          PAGE 29  LOSSES AND LOSS ADJUSTMENT EXPENSES        Chandler USA estimates losses and loss adjustment expenses based on historical experience and payment and reporting patterns for the type of risk involved.  These estimates are based on data available at the time of the estimate and are periodically reviewed by independent professional actuaries. See "BUSINESS - Reserves."        The percentage of losses and loss adjustment expenses to net premiums earned ("loss ratio") was 65.7%, 84.0% and 56.5% in 2003, 2004 and 2005, respectively.  Weather-related losses (net of applicable reinsurance) from wind and hail were $1.9 million, $761,000 and $475,000 in 2003, 2004 and 2005, respectively, and increased the respective loss ratios by 3.4, 1.2 and 0.7 percentage points.  NAICO did not experience any losses related to Hurricane Katrina, but did experience approximately $315,000 in net incurred losses from Hurricane Rita.        NAICO has experienced a significant amount of incurred losses related to prior accident years during the 2001- 2005  calendar years.  The loss development occurred primarily in the 1997-2001 accident years.  The adverse loss development is generally the result of ongoing analysis of loss development trends for both liability and workers compensation lines of business, and includes provisions for potentially uncollectible reinsurance and deductibles.  The development was primarily a function of more adverse frequency and severity patterns than previously anticipated.  Since such development patterns were not present in the loss history available at the time the earlier estimates were prepared, they could therefore not be anticipated. NAICO adjusts reserves as experience develops and new information becomes known. Such adjustments are reflected in the results of operations in the periods in which the estimates are changed.  The adverse development of losses from prior accident years results in higher calendar year loss ratios and reduced calendar year operating results.        The following table sets forth the loss development by line of business during each of the calendar years shown.                                                              Calendar years                                                  --------------------------------                                                     2003       2004       2005                                                  ---------- ---------- ----------                                                           (In thousands)                         Other liability ...................... $   5,546  $  15,537  $   1,330           Automobile liability .................       (56)     1,082      4,562           Workers compensation .................     4,183      7,580      1,387           Automobile physical damage ...........       180        194        255           Property .............................       547        275        325           Surety ...............................       357      1,936     (1,844)           Accident and health ..................       240       (286)       (26)           Inland marine ........................        95         27        350                                                  ---------- ---------- ----------                                                  $  11,092  $  26,345  $   6,339                                                  ========== ========== ==========         In 2003 and 2004, the majority of the adverse loss development was in the other liability and workers compensation lines of business.  Other liability claims may not be reported for several years after the occurrence of a loss and may not be settled for several years once reported.  Workers compensation claims may be paid out over several years.  In 2005, the majority of the adverse loss development was in the automobile liability line of business, as reserves were strengthened in the 1999-2004 accident years for this line of business.  A portion of this adverse development was offset by favorable development in the surety line of business that resulted from an increase in estimated recoveries primarily in the 1994 and 2001 accident years.  The 1997-2001 accident years have clearly been the problematic years where the loss development was so significant.  During those years, NAICO's premium volume grew from $123 million in 1997 to $197 million in 2000, before dropping to $159 million in 2001.  Much of that growth was attributable to the planned expansion of NAICO's Texas business.  This growth occurred at a time when premium rates were very soft.  The expansion into Texas began in the last half of 1996. NAICO had written business in Texas for many years with reasonably good experience.  Based on this experience, management believed the economic and tort climates were similar to Oklahoma.  This did not turn out as expected, especially in regards to business in south and east Texas.  Because this expansion was primarily a casualty driven book of business, it took several years to realize that claims in many areas of Texas were more severe and emerged differently than Oklahoma claims.  As the historical loss data picked up the development of these claims, the projections of ultimate losses became more accurate.                                                                          PAGE 30        The following table sets forth the net reserves at the beginning of each accident year, the loss development incurred during each calendar year, and the re-estimated net reserves as of the beginning of each calendar year.                                                                                Accident years                                  --------------------------------------------------------------------------------------------------                                   Prior to                                     1997      1997      1998      1999      2000      2001      2002      2003     2004     Total                                  --------- --------- --------- --------- --------- --------- --------- --------- -------- ---------                                                                           (In thousands)             Reserves at beginning of 2003 .. $ 3,966   $   (720) $    370  $  1,947  $  2,531  $  3,413  $ 21,684  $      -  $     -  $ 33,191 Development during 2003 ........     533        346     1,878     3,261     6,034     7,255    (8,215)        -        -    11,092                                  --------- --------- --------- --------- --------- --------- --------- --------- -------- --------- Re-estimated reserves at  beginning of 2003 ............. $ 4,499   $   (374) $  2,248  $  5,208  $  8,565  $ 10,668  $ 13,469  $      -  $     -  $ 44,283                                  ========= ========= ========= ========= ========= ========= ========= ========= ======== =========  Reserves at beginning of 2004 .. $ 3,383   $ (1,266) $    146  $    481  $  1,879  $  2,651  $  6,554  $ 15,515  $     -  $ 29,343 Development during 2004 ........   2,365      1,615       956     2,909     6,186     7,674     4,071       569        -    26,345                                  --------- --------- --------- --------- --------- --------- --------- --------- -------- --------- Re-estimated reserves at  beginning of 2004 ............. $ 5,748   $    349  $  1,102  $  3,390  $  8,065  $ 10,325  $ 10,625  $ 16,084  $     -  $ 55,688                                  ========= ========= ========= ========= ========= ========= ========= ========= ======== =========  Reserves at beginning of 2005 .. $ 4,301   $   (107) $    385  $    610  $  3,695  $  3,242  $  6,524  $  8,833  $17,212  $ 44,695 Development during 2005 ........    (913)       559        71       664     1,582       (50)    1,992     1,777      657     6,339                                  --------- --------- --------- --------- --------- --------- --------- --------- -------- --------- Re-estimated reserves at  beginning of 2005 ............. $ 3,388   $    452  $    456  $  1,274  $  5,277  $  3,192  $  8,516  $ 10,610  $ 17,869 $ 51,034                                  ========= ========= ========= ========= ========= ========= ========= ========= ======== =========          During 2003, NAICO experienced adverse loss development totaling $11.1 million primarily in the standard property and casualty program.  This adverse development was due primarily to an increase in losses in the workers compensation and other liability lines of business in the 1998-2001 accident years.  Adverse loss development for workers compensation was $4.2 million and adverse loss development for other liability was $5.5 million.  A reduction in losses for the 2002 accident year partially offset this adverse development. This reduction was based on more favorable development patterns in the standard property and casualty program including the workers compensation, other liability and automobile liability lines of business.  However, the patterns experienced during 2003 worsened during 2004 and approximately half of this reserve reduction had to be added back to the 2002 accident year.  The adverse loss development included approximately $1.3 million for provisions for potentially uncollectible reinsurance and deductibles relating primarily to the workers compensation line of business.        During 2004, NAICO experienced adverse loss development totaling $26.3 million primarily in the standard property and casualty and political subdivisions programs.  This adverse development was due primarily to continued increases in losses in the workers compensation and other liability lines of business in the 1997-2002 accident years.  Adverse loss development for other liability was $15.5 million.  Adverse loss development for workers compensation, surety bonds and automobile liability were $7.6 million, $1.9 million and $1.1 million, respectively.  As discussed previously, the adverse development in the 2002 accident year partially offset the reduction in losses for this accident year that was recorded during 2003.  Involuntary workers compensation pools experienced $803,000 in adverse loss development, with $703,000 of this in 1996 and prior accident years.  NAICO records losses based on information obtained from the pools plus an accrual for the lag time in reporting.  The adverse loss development included approximately $409,000 for provisions for potentially uncollectible reinsurance and deductibles.  Reserves for unpaid losses and loss adjustment expenses, net of related reinsurance recoverables, were $44.7 million at December 31, 2004 compared to $29.3 million at December 31, 2003, an increase of $15.4 million or 52%.        During 2005, NAICO experienced adverse loss development totaling $6.3 million primarily in the standard property and casualty and political subdivisions programs.  A portion of the adverse development was offset by favorable development of $1.8 million in the surety bond program, primarily in accident years 1994 and 2001 that resulted from the estimated recoveries discussed previously.  The adverse development was due primarily to an increase in losses in the workers compensation, other liability and automobile liability lines of business in the 2000, 2002 and 2003 accident years.  The adverse loss development included approximately $108,000 for provisions for potentially uncollectible reinsurance.        In the last five years, management has undertaken several initiatives to improve the quality and profitability of business.  These initiatives included significant rate increases, changes in coverage forms that limit or eliminate coverage, reduction or elimination of classes of business that have not been profitable, reduction or elimination of business in geographic areas that have not been profitable and increased emphasis on risk selection.  Management has also improved case reserving which improves the overall reserving accuracy and also leads to better underwriting decisions.        Reinsurance contracts do not relieve an insurer from its obligation to policyholders.  Failure of reinsurers to honor their obligations could result in losses to Chandler USA; consequently, adjustments to ceded losses and loss adjustment expenses are made for amounts deemed uncollectible.  During 2003, 2004 and 2005, NAICO incurred charges of $604,000,  $282,000 and $108,000, respectively, in adjustments to ceded losses and loss adjustment expenses for amounts deemed uncollectible.                                                                          PAGE 31        NAICO did not receive any claims related to the September 11, 2001 terrorist attacks on the World Trade Center and does not believe that it has any significant exposure to these and related losses.  While several of NAICO's reinsurers did experience significant losses related to these attacks, it currently does not appear that these losses will impair the reinsurers' ability to pay claims.  POLICY ACQUISITION COSTS        Policy acquisition costs consist of costs associated with the acquisition of new and renewal business and generally include direct costs such as premium taxes, commissions to agents and ceding companies and premium-related assessments and indirect costs such as salaries and expenses of personnel who perform and support underwriting activities. NAICO also receives ceding commissions from reinsurers who assume premiums from NAICO under certain reinsurance contracts and the ceding commissions are accounted for as a reduction of policy acquisition costs.  Direct policy acquisition costs and ceding commissions are deferred and amortized over the terms of the policies. When the sum of the anticipated losses, loss adjustment expenses and unamortized policy acquisition costs exceeds the related unearned premiums, including anticipated investment income, a provision for the indicated deficiency is recorded.        The following table sets forth Chandler USA's policy acquisition costs for each of the three years ended December 31, 2003, 2004 and 2005:                                                      YEAR ENDED DECEMBER 31,                                              --------------------------------                                                 2003       2004       2005                                              ---------- ---------- ----------                                                       (In thousands)     Commissions expense ........................ $  17,644  $  16,078  $  17,186 Other premium related assessments ..........     1,159      1,137        960 Premium taxes ..............................     2,446      2,562      2,205 Excise taxes ...............................       260        301        272 Dividends to policyholders .................       (52)         -          - Other expense ..............................       598        458        723                                              ---------- ---------- ---------- Total direct expenses ......................    22,055     20,536     21,346  Indirect underwriting expenses .............     7,675      7,463      6,384 Commissions received from reinsurers .......   (18,643)   (17,068)   (15,891) Adjustment for deferred acquisition costs ..       191        108     (1,168)                                              ---------- ---------- ---------- Net policy acquisition costs ............... $  11,278  $  11,039  $  10,671                                              ========== ========== ==========         Total gross direct and indirect expenses as a percentage of direct written and assumed premiums were 25.1%, 23.0% and 23.0% in 2003, 2004 and 2005, respectively.  For these periods, commission expense as a percentage of gross written and assumed premiums was 14.9%, 13.2% and 14.3%.  The decrease in 2004 in commission expense was primarily due to a decrease in contingent commissions to agents that resulted from higher loss ratios than had been projected for these agents.  The increase in 2005 in commission expense was due primarily to the new homeowners program that began during 2005.  This new program has a higher average commission rate than most of the other programs due to the use of a managing general agent who performs certain underwriting, claims and administrative functions.        Indirect underwriting expenses were 6.5%, 6.1% and 5.3% of total direct written and assumed premiums in 2003, 2004 and 2005, respectively.  The decrease in 2005 was due primarily to a reduction in employee related expenses. Indirect expenses include general overhead and administrative costs associated with the acquisition of new and renewal business, some of which is relatively fixed in nature, thus, the percentage of such expenses to direct written and assumed premiums will vary depending on Chandler USA's overall premium volume. Commissions received from reinsurers as a percentage of ceded reinsurance premiums were 28.0%, 33.3% and 31.6% in 2003, 2004 and 2005, respectively.  GENERAL AND ADMINISTRATIVE EXPENSES        General and administrative expenses were 10.7%, 10.5% and 11.0% of gross premiums earned in 2003, 2004 and 2005, respectively.  General and administrative expenses decreased $1.1 million in 2004 due primarily to a reduction in employee related expenses and to a recovery of certain litigation expenses of $359,000.  General and administrative expenses have historically not varied in direct proportion to Chandler USA's revenues.  A portion of such expenses is allocated to policy acquisition costs (indirect underwriting expenses) and loss and loss adjustment expenses based on various factors, including employee counts, salaries, occupancy and specific identification. Because certain types of expenses are fixed in nature, the percentage of such expenses to revenues will vary depending on Chandler USA's revenues.                                                                          PAGE 32  INTEREST EXPENSE        Interest expense decreased 2% in 2004 and increased 6% in 2005. Substantially all of Chandler USA's interest expense is related to its outstanding senior debentures and junior subordinated debentures.  The increase in 2005 was due primarily to the increase in interest rates during 2005, as a portion of Chandler USA's junior subordinated debentures were issued with a floating interest rate.  FEDERAL INCOME TAXES        Chandler USA's federal income tax benefit (provision) as a percentage of income (loss) before income taxes was 8.9%, 33.8% and 35.6% for 2003, 2004 and 2005, respectively.  The low percentage in 2003 was primarily due to offsetting taxable realized gains of $2.4 million against Chandler USA's capital loss carryforward which is fully reserved due to its realization not being considered more likely than not.        At December 31, 2005, Chandler USA had a net deferred tax asset of $5.6 million including $1.9 million related to federal net operating loss carryforwards which begin to expire in 2023.  Chandler USA believes it is more likely than not that the deferred income tax asset including the federal net operating loss carryforwards will be realized through future earnings.  As a result, a valuation allowance has not been recorded.  Chandler USA used the same assumptions as in internal financial projections to estimate future taxable income.  If Chandler USA's results are not as profitable as anticipated, a valuation allowance may have to be established for the federal net operating loss carryforwards and the other remaining deferred tax assets.  LIQUIDITY AND CAPITAL RESOURCES        Chandler USA is a holding company receiving cash principally through borrowings, subsidiary dividends and other payments, subject to various regulatory restrictions described in "Regulation" and the Notes to Consolidated Financial Statements.  The capacity of insurance companies to write insurance is based on maintaining liquidity and capital resources sufficient to pay claims and expenses as they become due.  The primary sources of liquidity for Chandler USA's subsidiaries are funds generated from insurance premiums, investment income, capital contributions from Chandler USA and proceeds from sales and maturities of portfolio investments.  The principal expenditures are payment of losses and loss adjustment expenses, insurance operating expenses and commissions.        A significant portion of Chandler USA's consolidated assets represents assets of NAICO that may not be immediately transferable to Chandler USA in the form of shareholder dividends, loans, advances or other payments.        Statutes and regulations governing NAICO and other insurance companies domiciled in Oklahoma regulate the payment of shareholder dividends and other payments by NAICO to Chandler USA.  Under applicable Oklahoma statutes and regulations, NAICO is permitted to pay shareholder dividends only out of statutory earned surplus.  To the extent NAICO has statutory earned surplus, NAICO may pay shareholder dividends only to the extent that such dividends are not defined as extraordinary dividends or distributions.  If the dividends are, under applicable statutes and regulations, extraordinary dividends or distributions, regulatory approval must be obtained.  Under the applicable Oklahoma statute, and subject to the availability of statutory earned surplus, the maximum shareholder dividend that may be declared (or cash or property distribution that may be made) by NAICO in any one calendar year without regulatory approval is the greater of (i) NAICO's statutory net income, excluding realized capital gains, for the preceding calendar year; or (ii) 10% of NAICO's statutory policyholders' surplus as of the preceding calendar year end, not to exceed NAICO's statutory earned surplus.        As of December 31, 2005, NAICO had statutory earned surplus of $9.6 million.  Applying the Oklahoma statutory limits described above, the maximum shareholder dividend NAICO may pay in 2006 without the approval of the Oklahoma Department of Insurance is $5.7 million.  NAICO paid shareholder dividends to Chandler USA totaling $3.4 million in June of 2004.                                                                          PAGE 33        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.  Management's expectation is that Chandler Insurance or other subsidiaries will be able to meet these obligations in the future.  It is possible that dividends from NAICO may be necessary to service Chandler USA's debt obligations.  To the extent that the restrictions discussed previously limit NAICO's ability to pay shareholder dividends or other payments to Chandler USA, Chandler USA's ability to satisfy the debt obligations may also be limited.        NAICO maintains a liquid operating position and follows investment guidelines that are intended to provide for an acceptable return on investment while preserving capital, maintaining sufficient liquidity to meet obligations and keeping a sufficient margin of capital and surplus to ensure unimpaired ability to write insurance.  As of December 31, 2005, all of NAICO's fixed-maturity investments were rated Aa3 or A+ or better by Moody's Investors Service, Inc. or Standard & Poor's, respectively.        NAICO purchases investments to support its investment strategies which are developed based on many factors including rate of return, maturity, credit risk, tax considerations, regulatory requirements and its mix of business.  As of December 31, 2005 all of the investments of NAICO were in fixed-maturity investments, mutual funds that invest in equity securities, interest-bearing money market accounts, collateralized repurchase agreements and common stock received in connection with an unaffiliated entity's conversion to a for-profit corporation.  At the time of purchase, investments in debt securities that NAICO has the positive intent and ability to hold to maturity are classified as held to maturity and reported at amortized cost; all other debt securities are reported at fair value.  Investments classified as trading are actively and frequently bought and sold with the objective of generating income on short-term differences in price.  Realized and unrealized gains and losses on securities classified as trading account assets are recognized in current operations.  NAICO has not classified any investments as trading account assets.  Debt securities not classified as held to maturity or trading and equity securities are classified as available for sale, with the related unrealized gains and losses excluded from earnings and reported net of deferred income tax as a separate component of other comprehensive income until realized.        Chandler USA used $6.0 million in cash from operations during 2003, provided $20.2 million in cash from operations in 2004 and used $131,000 in cash from operations in 2005.  Cash flow from operations was negatively impacted during 2003 due to the decline in written premiums during this year since claim payments for any given year will include payments for claims on insurance policies written in prior years.  The cash used by operations was largely funded from sales and maturities of investments and certain financing activities described below.  The cash provided by operations in 2004 was due primarily to the decrease in reinsurance purchased in 2004 which resulted in an increase in net premiums written of $18.6 million.  Cash flow from operations is positively impacted during times when net premiums written increase since a substantial portion of the claim payments for any given year will be made in future years.  The cash provided by operations was used primarily to fund purchases of investments and loans to related parties.  During 2005, net premiums written decreased slightly which attributed to Chandler USA using only $131,000 in cash from operations.  In 2005, the increase in premium receivables and reinsurance recoverables on unpaid losses were offset by Chandler USA's net income and an increase in unearned premium.        Cash flows from investing activities during 2003 and 2004 were primarily the result of normal purchases and sales of investment securities.  During 2004, NAICO purchased $8.1 million of mutual funds that invest in equity securities.  Net realized investment gains before income taxes were $2,351,000, $652,000 and $383,000 during 2003, 2004 and 2005, respectively, from the sale of investments.  NAICO received proceeds of $24.5 million, $23.8 million and $2.5 million during 2003, 2004 and 2005, respectively, from the sale of available for sale securities prior to their maturity.  The proceeds and related net realized investment gains in 2003 provided cash for operating activities due to the decrease in written premiums.  During 2003, 2004 and 2005, the market value of NAICO's available for sale fixed-income investments decreased by $500,000, $581,000 and $1.6 million, respectively, due primarily to changes in interest rates experienced during this time.  The average maturity of NAICO's fixed maturity investments was 4.9 years and 4.0 years at December 31, 2004 and 2005, respectively.        Cash flows from financing activities during 2003 included $19.3 million in proceeds from the issuance of junior subordinated debentures net of related issuance costs and purchase of common securities of related trusts, less $12.8 million for payments to purchase $16.7 million principal amount of Chandler USA's Debentures.  See Note 5 to Consolidated Financial Statements.                                                                          PAGE 34        NAICO is required to deposit securities with regulatory agencies in several states in which it is licensed as a condition of conducting operations in the state.  At December 31, 2005, the total amount of cash and investments restricted as a result of these arrangements was $7.8 million.  In addition, NAICO deposited $3.7 million into a trust account during 2005 as collateral for a reinsurance agreement in which NAICO is the assuming reinsurer.        Chandler USA and Chandler Insurance are parties to an Intercompany Credit Agreement (the "Credit Agreement") covering intercompany loans between the parties.  The Credit Agreement requires interest to be paid at the prime interest rate published in The Wall Street Journal each month, and balances owed by either party are payable at any time upon demand.  At December 31, 2004 and 2005, Chandler USA had a receivable of $10.9 million and $9.4 million, respectively, under the Credit Agreement, and Chandler USA earned $412,000, $439,000 and $614,000 in interest income under the Credit Agreement during 2003, 2004 and 2005, respectively.        During March 2001, Chandler USA entered into a $3.8 million sale and leaseback transaction for certain owned equipment for a three year term. During March 2004, the lease was extended for an additional three years with monthly rental installments equal to the sum of (i) $17,512 plus (ii) interest, which was 8.25% at December 31, 2005, on the unpaid lease balance which is a floating interest rate of 1% over JP Morgan Chase Bank prime.  Chandler USA has the option to repurchase the equipment at the end of the lease for approximately $2.4 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 $1.9 million.  See Note 11 to Consolidated Financial Statements.  CONTRACTUAL OBLIGATIONS        The following table provides the future payments due by period under contractual obligations as of December 31, 2005, aggregated by type of obligation:                                          LESS THAN      1-3        3-5     MORE THAN                                       ONE YEAR     YEARS      YEARS     5 YEARS     TOTAL                                      ----------  ---------  ---------  ---------  ----------                                                          (In thousands)       Unpaid losses and loss adjustment  expenses (1) ...................... $  49,522   $ 46,319   $ 10,310   $  3,390   $ 109,541 Future minimum rental payments  under operating leases ............       623        152          -          -         775 Guaranteed residual value of  operating lease (2) ...............         -      1,921          -          -       1,921 Capital leases .....................        61         88         46          -         195 Debentures .........................         -          -          -      6,979       6,979 Junior subordinated debentures  issued to affiliated trusts .......         -          -          -     20,620      20,620                                      ----------  ---------  ---------  ---------  ----------  Total ............................. $  50,206   $ 48,480   $ 10,356   $ 30,989   $ 140,031                                      ==========  =========  =========  =========  ========== - ---------------------------------   (1)  The amounts presented are estimates of the dollar amounts and time period in which NAICO      expects to pay out its gross unpaid losses and loss adjustment expenses.  These amounts      are based on historical payment patterns and do not represent actual contractual      obligations.  The actual payment amount and the related timing of those amounts could      differ significantly from these estimates.  (2)  This amount represents the specified maximum deficiency that Chandler USA could be required      to make up under the sale and leaseback transaction discussed above.                                                                           PAGE 35  LITIGATION        Certain officers and directors of Chandler USA and Chandler Insurance were named as defendants in certain litigation involving CenTra, Inc. ("CenTra").  This litigation was concluded in 2002.  As a result of various events in 1995, 1996 and 1997 related to the CenTra litigation, Chandler Insurance (Barbados), Ltd. ("Chandler Barbados") and Chandler USA recorded estimated recoveries of costs from its Director and Officer Liability Insurance policy totaling $3,456,000 and $1,044,000, respectively, for reimbursable amounts previously paid that relate to allowable defense and litigation costs. Chandler Barbados and Chandler USA received payment for a 1995 claim during 1996 in the amount of $636,000 and $159,000, respectively.  Chandler Insurance assumed Chandler Barbados' remaining receivable in December 2003 under the reorganization of these companies.  During June 2004, Chandler Insurance and Chandler USA received payment in the amount of $558,000 and $167,000, respectively, in exchange for releasing certain insurers with respect to policies covering periods from June 28, 1997 up to June 28, 2002.  During the third quarter of 2004, Chandler Insurance and its subsidiaries settled the remaining litigation with the insurer for policy periods from June 28, 1992 to June 28, 1997.  Based on the terms of the settlement, Chandler Insurance and Chandler USA recorded additional estimated recoveries of $1,204,000 and $359,000, respectively, during the third quarter of 2004.  Chandler Insurance and Chandler USA received payment of $3,527,000 and $1,053,000, respectively, during December 2004 and received payment of the remaining settlement funds of $497,000 and $192,000 during the first quarter of 2005.        Transamerica Occidental Life Insurance Company ("Transamerica") reinsured NAICO for certain workers compensation risks during 1989, 1990 and 1991. Beginning in 1996, Transamerica refused to pay NAICO for balances that it owed under the reinsurance treaties.  On March 15, 2004, an arbitration panel ordered Transamerica to pay the losses and loss adjustment expenses owed to NAICO in the amount of $1,607,704 plus interest at 6%, or approximately $577,000, plus $25,000 in costs.  NAICO received payment for these amounts during 2004.        Chandler USA and its subsidiaries are not parties to any other 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.  NEW ACCOUNTING STANDARDS        See Note 1 to Consolidated Financial Statements for a discussion of recently issued accounting pronouncements.
Chandler USA's consolidated balance sheets include a certain amount of assets and liabilities whose fair values are subject to market risk.  Due to Chandler USA's significant investment in fixed-maturity investments, interest rate risk represents the largest market risk factor affecting Chandler USA's consolidated financial position.  Increases and decreases in prevailing interest rates generally translate into decreases and increases in fair values of those instruments.  Additionally, fair values of interest rate sensitive instruments may be affected by the credit worthiness of the issuer, prepayment options, relative values of alternative investments, liquidity of the instrument and other general market conditions.        As of December 31, 2005, substantially all of the investments of NAICO were in fixed-maturity investments (rated Aa3 or A+ or better by Moody's Investors Service, Inc. or Standard & Poor's, respectively), mutual funds that invest in equity securities, interest-bearing money market accounts and collateralized repurchase agreements.  NAICO does not hold any investments classified as trading account assets or derivative financial instruments.                                                                          PAGE 36        The table below summarizes the estimated effects of hypothetical increases and decreases in interest rates on NAICO's fixed-maturity investment portfolio.  It is assumed that the changes occur immediately and uniformly, with no effect given to any steps that management might take to counteract that change.  The hypothetical changes in market interest rates reflect what could be deemed best and worst case scenarios.  The fair values shown in the following table are based on contractual maturities.  Significant variations in market interest rates could produce changes in the timing of repayments due to prepayment options available.  The fair value of such instruments could be affected and, therefore, actual results might differ from those reflected in the following table:                                                                                  Estimated                                                                            fair value after                                                        Hypothetical          hypothetical                                   Fair value at         change in              change in                                    December 31,        interest rate         interest rate                               ----------------------  (bp=basis points) ----------------------                                  2004        2005                          2004        2005                               ----------  ----------  ----------------- ----------  ----------                               (Dollars in thousands)                    (Dollars in thousands)        Fixed-maturity investments... $  71,670   $  71,735   100 bp increase.. $  68,482   $  69,120                                                       200 bp increase..    65,501      66,657                                                       100 bp decrease..    75,083      74,516                                                       200 bp decrease..    78,744      77,477          The table above illustrates, for example, that an instantaneous 200 basis point increase in market interest rates at December 31, 2005 would reduce the estimated fair value of NAICO's fixed-maturity investments by approximately $5.1 million at that date.        NAICO's portfolio of equity mutual funds has exposure to equity price risk.  Equity price risk is defined as the potential loss in fair value resulting from an adverse change in prices.  These mutual funds primarily invest in equity securities of large U.S. entities across a variety of industries.  These funds are managed by the individual fund managers, and NAICO's Investment Committee monitors the performance of these mutual funds. The equity mutual funds are carried on the balance sheet at fair value.  The changes in estimated fair value of the equity portfolio are presented as a component of shareholder's equity in accumulated other comprehensive income, net of taxes.        The table below summarizes NAICO's equity price risk and shows the effect of a hypothetical 20% increase and a 20% decrease in market prices as of December 31, 2004 and 2005.  The selected hypothetical changes do not indicate what could be the potential best or worst case scenarios.                                                                                    Estimated                                                                             fair value after                                    Fair value at                              hypothetical                                     December 31,         Hypothetical       change in prices                                ----------------------    price change    ----------------------                                   2004        2005                          2004        2005                                ----------  ----------  ----------------- ----------  ----------                                (Dollars in thousands)                    (Dollars in thousands)        Equity securities ............  $  8,373   $   9,071    20% increase ...  $ 10,048    $ 10,885                                                         20% decrease ...     6,698       7,257          Chandler USA is obligated for $7.0 million principal amount of Debentures that have a maturity date of July 16, 2014.  The Debentures have a fixed interest rate of 8.75%.  At December 31, 2005, the fair value of Chandler USA's Debentures was estimated to be $6.1 million based on the latest reported trade. Chandler USA's Debentures have not historically traded regularly, and settlement at the reported fair value may not be possible.  The Debentures are redeemable by Chandler USA on or after July 16, 2009 without penalty or premium, but may be purchased and cancelled by Chandler USA at a price of less than the sum of the principal amount and accrued interest at any time. Chandler USA is obligated for $13.4 million principal amount of junior subordinated debentures that mature in 2033 with a fixed interest rate of 9.75%, and $7.2 million principal amount of junior subordinated debentures that mature in 2034 with a floating rate of 4.10% over LIBOR.  The interest rate was 8.25% at December 31, 2005.  At December 31, 2005, the fair value of Chandler USA's junior subordinated debentures was estimated to be $21.1 million.                                                                          PAGE 37        During March 2001, Chandler USA entered into a $3.8 million sale and leaseback transaction for certain owned equipment for three years.  The sale and leaseback transaction resulted in a deferred gain of $2.0 million which was amortized into income over the final year of the lease, resulting in other income of $1.7 million in 2003 and $368,000 in 2004.  During March 2004, the lease was extended for an additional three years with monthly rental installments equal to the sum of (i) $17,512 plus (ii) interest, which was 8.25% at December 31, 2005, on the unpaid lease balance which is a floating interest rate of 1% over JP Morgan Chase Bank prime.  Chandler USA has the option to repurchase the equipment at the end of the lease for approximately $2.4 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 $1.9 million.
See Item 15(a)1.
None.
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        As of the end of the period covered by this report, there have been no changes in internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter to which this report relates that have materially affected or are reasonably likely to materially affect, Chandler USA's internal control over financial reporting.
None.                                                                          PAGE 38                                      PART III
DIRECTORS AND EXECUTIVE OFFICERS        A brief description of each director and executive officer of Chandler USA is provided below.  Directors hold office until the next annual meeting of shareholders or until their respective successors are duly elected and qualified.  Executive officers are elected by the Board of Directors at its annual meeting and hold office until its next annual meeting or until their respective successors are duly elected and qualified.  The current directors and executive officers of Chandler USA are as follows:     NAME                    AGE  POSITION - ----------------------  ---  ---------------------------------------------------------------     W. Brent LaGere         60   Chairman of the Board, Chief Executive Officer, Compensation                                Committee Member and Director.  Mark T. Paden           49   President, Chief Operating Officer, Compensation Committee Member                                and Director.  Brenda B. Watson        65   Executive Vice President of NAICO and CIMI.  Richard L. Evans        59   Senior Vice President and Director.  R. Patrick Gilmore      54   Senior Vice President, Secretary, General Counsel and Director.  Mark C. Hart            50   Vice President - Finance, Chief Financial Officer and Treasurer.  M. Steven Blain         48   Vice President - Administration.  Robert L. Rice          71   Audit Committee Chairman and Director.  W. Scott Martin         55   Audit Committee Member and Director.  William T. Keele        69   Audit Committee Member and Director.          W. BRENT LAGERE has been a director, Chairman of the Board and Chief Executive Officer of Chandler USA since 1988 and of CIMI since December 2002. Since 1988, Mr. LaGere has served in officer and director capacities for various subsidiaries of Chandler USA pursuant to an employment contract with Chandler USA.  Mr. LaGere serves as Chairman of the Board and Chief Executive Officer of Chandler Insurance and was a director of Chandler Barbados until December 2003.        MARK T. PADEN has served as President of Chandler USA and NAICO since May 2001 and as Chief Operating Officer of Chandler USA and NAICO since May 1998. Mr. Paden has served as President and Chief Operating Officer of CIMI since December 2002.  From May 1998 to May 2001, Mr. Paden also served as Executive Vice President of Chandler USA and NAICO.  Mr. Paden has served as Chief Financial Officer of NAICO from January 1988 through May 2001 and also served as Vice President-Finance of NAICO from January 1988 through May 1998.  Mr. Paden has been a director of Chandler USA since July 1988, NAICO since November 1992 and CIMI since December 2002.  Mr. Paden also serves as a director and President of Chandler Insurance.        BRENDA B. WATSON has been Executive Vice President of NAICO since August 1987 and of CIMI since December 2002.  Since October 1988, she has served in officer and director capacities for various subsidiaries of Chandler USA.  Ms. Watson has been a director of CIMI since December 2002.  Ms. Watson also serves as Executive Vice President of Chandler Insurance.        RICHARD L. EVANS has been a director of Chandler USA since May 1990.  He has been Senior Vice President of Chandler USA and NAICO since March 1999, and served as Vice President of NAICO since 1987, and of Chandler USA since 1989. Mr. Evans also serves as Senior Vice President of Chandler Insurance.        R. PATRICK GILMORE has served as General Counsel for Chandler USA and its subsidiaries since 1988 and currently serves as corporate Secretary and Senior Vice President.  Mr. Gilmore has been a director of Chandler USA since May 1990 and NAICO since September 2000.                                                                          PAGE 39        MARK C. HART has served as Vice President-Finance and Treasurer of Chandler USA and NAICO since May 1998, and has served as Chief Financial Officer of Chandler USA and NAICO since May 2001.  Mr. Hart has also served as Vice President of Chandler USA since March 1994.  Mr. Hart has served as Treasurer of CIMI since December 2002.  Mr. Hart also serves as Vice President-Accounting, Chief Financial Officer and Treasurer of Chandler Insurance.        M. STEVEN BLAIN has served as Vice President-Administration of Chandler USA and NAICO since August 2003.  From November 1999 to August 2003, Mr. Blain was employed by NAICO in various capacities.  Prior to his employment by NAICO in November 1999, Mr. Blain was Vice President - Operations and Chief Financial Officer for J.B. Pratt Foods, Inc.        ROBERT L. RICE has been a director of Chandler USA since June 1993 and a director of NAICO since March 2000.  He has for more than 20 years engaged in private practice as a Certified Public Accountant.        W. SCOTT MARTIN has been a director of Chandler USA and NAICO since March 2000.  Mr. Martin has been President of the Tulsa Loan Production Office with First Bank & Trust Company in Wagoner, Oklahoma since 1994.  Mr. Martin also serves as a director of First Bank & Trust in Wagoner, Oklahoma, First Bank of Chandler in Chandler, Oklahoma, First National Bank in Burkburnett, Texas and First Bank in Ketchum, Oklahoma.        WILLIAM T. KEELE has been a director of Chandler USA and NAICO since May 2001.  Mr. Keele has been President of Hallman & Keele, Inc., a construction and steel fabrication firm, since 1974.  AUDIT COMMITTEE FINANCIAL EXPERT        Chandler USA's Board of Directors has determined that Robert L. Rice, Chairman of the Audit Committee, is an "audit committee financial expert", as defined by Securities and Exchange Commission rules.  Mr. Rice is an independent director, as that term is used in Item 7(d)(3)(IV) of Schedule 14A under the Securities Exchange Act of 1934.  CODE OF ETHICS        Chandler USA has adopted a Code of Ethics for Principal Executive and Senior Financial Officers, a copy of which was filed as Exhibit 14.1 to Chandler USA's Form 10-K for the fiscal year ended December 31, 2003.  COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934        Based solely upon a review of Forms 3, 4 and 5, any amendments thereto furnished to Chandler USA pursuant to the rules of the Securities and Exchange Commission, or written representations from certain reporting persons presented to Chandler USA, all such reports required to be filed by reporting persons have been filed in a timely fashion during the fiscal year ended December 31, 2005.                                                                          PAGE 40
The following table sets forth the compensation paid or to be paid by Chandler USA or any of its subsidiaries as well as certain other compensation paid or accrued, during the years indicated, to the Chairman and Chief Executive Officer and the four other highest paid executive officers of Chandler USA and its subsidiaries (the "Named Executives") for such period in all capacities in which they served.                                                       SUMMARY COMPENSATION TABLE                                                      ANNUAL COMPENSATION (1)                                         -------------------------------------------------------                                                                        OTHER ANNUAL  ALL OTHER                                                    SALARY     BONUS    COMPENSATION COMPENSATION NAME AND PRINCIPAL POSITION               YEAR       ($)      ($)(2)      ($)(3)       ($)(4) - --------------------------------------- -------- ---------- ---------- ------------ ------------       W. Brent LaGere                            2005  $ 515,706  $ 442,552  $   514,861  $   124,521  Chairman of the Board and CEO             2004    501,726    719,943      390,399       90,362  of Chandler USA, NAICO and CIMI           2003    489,602    574,456      795,994       94,131  Mark T. Paden                              2005    323,208    364,347       64,327       16,500  President and COO of Chandler USA,        2004    313,793    490,718       70,273       25,930  NAICO and CIMI                            2003    304,654    395,427       73,934        7,133  Brenda B. Watson                           2005    252,888          -          N/A        5,600  Executive Vice President                  2004    256,457          -          N/A       11,450  of NAICO and CIMI                         2003    254,072          -          N/A       18,860  Richard L. Evans                           2005    268,346          -          N/A       10,600  Senior Vice President - Claims of         2004    260,530          -          N/A        8,700  Chandler USA and NAICO                    2003    254,875          -          N/A        9,866  R. Patrick Gilmore                         2005    237,537     10,000          N/A        6,357  Senior Vice President, Secretary and      2004    234,515          -          N/A       13,600  General Counsel of Chandler USA,          2003    224,154          -          N/A        7,240  NAICO and CIMI  - ----------------------------------------   (1)  Amounts shown include cash and non-cash compensation earned and received by the Named      Executives as well as amounts earned but deferred at their election.  (2)  All Named Executives are eligible to receive bonuses based upon various factors.  (3)  The amounts shown under this column represent various perquisites and other personal      benefits including any associated tax reimbursements to the Named Executives.  Amounts      that did not exceed the lesser of $50,000 or 10% of the total annual salary and bonus for      any Named Executive have been excluded.  Substantially all of the amounts shown in this      column represent payment of various personal expenses, none of which individually exceeded      25% of total perquisites for the Named Executive.  Tax gross-ups for the personal expenses      included in the amounts shown above were $366,902, $206,583 and $248,411 for Mr. LaGere in      2003, 2004 and 2005, respectively, and $32,996, $39,865 and $33,598 for Mr. Paden in 2003,      2004 and 2005, respectively.  (4)  The amounts shown under this column include contributions by Chandler USA's subsidiaries to      a 401(k) plan ($5,600 for Mr. LaGere, $4,600 for Mr. Paden, $5,600 for Ms. Watson, $5,600      for Mr. Evans, and $4,600 for Mr. Gilmore), and the premiums paid or to be paid by Chandler      USA's subsidiaries under life insurance arrangements with the Named Executives.  A portion      of the premiums ($44,453, $45,103 and $39,453 in 2003, 2004 and 2005, respectively) were      paid under a split dollar life insurance plan.  Under this plan, Chandler USA's      subsidiaries pay the premiums for life insurance issued to the Named Executive.  Repayment      of the premiums is secured by the death benefit or the cash surrender value of the policy,      if any, if the Named Executive cancels and surrenders the policy.                                                                           PAGE 41  OPTIONS EXERCISED AND HOLDINGS        No options were granted to or exercised by the Named Executives during 2005 and there were no unexercised options held by the Named Executives as of December 31, 2005.  DIRECTOR COMPENSATION        Directors who are employees of Chandler USA do not receive additional compensation for serving as directors.  Each non-employee director of Chandler USA is paid $1,000 per day for any meeting or committee meeting attended. However, if a non-employee director is attending meetings for two or more affiliates of Chandler USA on the same day, his compensation is $750 per day for any meeting or committee meeting of Chandler USA attended.  If a non-employee director attends the meeting by telephonic conference, his compensation is $500 per day for any meeting or committee meetings so attended.  EMPLOYMENT AGREEMENTS        Chandler USA has an employment agreement with W. Brent LaGere, Chairman of the Board and Chief Executive Officer of Chandler USA and its subsidiaries. Under this agreement, Mr. LaGere's base compensation is established at not less than $250,000 per year.  In the event that Mr. LaGere is terminated without cause, as defined in the agreement, he is entitled to receive his base compensation for the remainder of the term of the agreement, but in no event for more than 60 months.  The agreement will terminate upon Mr. LaGere attaining age 70, unless earlier terminated by Chandler USA for cause.  In addition to his base compensation, Mr. LaGere is eligible to receive certain benefits and bonuses from Chandler USA and its subsidiaries.                                                                          PAGE 42
All of the common stock of Chandler USA, its sole class of common equity, is owned by Chandler Insurance.        The following table sets forth the number and percentage of outstanding shares of each class of the capital stock of Chandler Insurance that, as of February 28, 2006, are beneficially owned by (i) each director of Chandler USA and Chandler Insurance, (ii) Chandler USA's Chairman and Chief Executive Officer and each of Chandler USA's four other most highly compensated executive officers for services rendered for the fiscal year ended December 31, 2005 and (iii) all current directors and executive officers as a group:                                                                                 BENEFICIAL OWNERSHIP                                                             -------------------------------------------------------                                                              TYPE OF CAPITAL SHARES      NUMBER OF NAME OF DIRECTOR OR EXECUTIVE OFFICER                        OF CHANDLER INSURANCE   CAPITAL SHARES (1) PERCENT (2) - ----------------------------------------------------------  ------------------------ ------------------ -----------     W. Brent LaGere (3) ......................................  Class A Common Shares              500,661       80.0%                                                             Series A Preferred Shares           75,152       19.6%  Mark T. Paden ............................................  Class A Common Shares              125,165       20.0%                                                             Series A Preferred Shares           17,610        4.6%  Brenda B. Watson (4) .....................................  Series A Preferred Shares           18,024        4.7%                                                             Series B Preferred Shares           26,451        7.3%  Richard L. Evans .........................................  Series A Preferred Shares           27,272        7.1%                                                             Series B Preferred Shares           32,250        8.9%  R. Patrick Gilmore .......................................  Series B Preferred Shares           11,000        3.0%  Robert L. Rice ...........................................               -                           -          -%  W. Scott Martin ..........................................  Series C Preferred Shares           19,000        3.0%  William T. Keele (5) .....................................  Series C Preferred Shares          122,417       19.1%  All directors and officers as a group (9 persons) (6) ....  Class A Common Shares              625,826      100.0%                                                             Series A Preferred Shares          141,586       37.0%                                                             Series B Preferred Shares           69,701       19.1%                                                             Series C Preferred Shares          141,417       22.0%  - ----------------------------------------------------------   (1)  The rules of the SEC provide that, for the purposes hereof, a person is      considered the "beneficial owner" of shares with respect to which the      person, directly or indirectly, has or shares the voting or investment      power, irrespective of his economic interest in the shares.  Unless      otherwise noted, each person identified possesses sole voting and      investment power over the shares listed, subject to community property      laws.  The Preferred Shares of Chandler Insurance have no voting rights.      The Series A Preferred Shares of Chandler Insurance are convertible to      Class A Common Shares of Chandler Insurance.   (2)  Based on 625,826 Class A Common Shares of Chandler Insurance, 382,632      Series A Preferred Shares of Chandler Insurance, 364,308 Series B      Preferred Shares of Chandler Insurance and 642,069 Series C Preferred      Shares of Chandler Insurance outstanding on February 28, 2006.  (3)  Includes (i) 348,390 Class A Common Shares of Chandler Insurance owned by      the W. Brent LaGere Irrevocable Trust (the "LaGere Trust") and (ii) 22,500      Class A Common Shares of Chandler Insurance owned by W&L Holding Corp.      ("W&L Holding"), a corporation 100% of which is owned by the LaGere Trust.      Mr. LaGere holds an irrevocable proxy for the Class A Common Shares owned      by the LaGere Trust and W&L Holding.  Mr. LaGere disclaims beneficial      ownership of the shares held by the LaGere Trust and W&L Holding.  The      business address of Mr. LaGere is 1010 Manvel Avenue, Chandler, Oklahoma      74834.  (4)  Includes 8,027 Series A Preferred Shares of Chandler Insurance held by Ms.      Watson's husband.  Ms. Watson disclaims beneficial ownership of the shares      owned by her husband.  (5)  Includes 63,787 Series C Preferred Shares of Chandler Insurance held by      the Keele Family Ltd. Partnership, 4,062 shares held by Mr. Keele's wife      and 23,911 shares held by Mr. Keele's children.  Mr. Keele disclaims      beneficial ownership of the shares owned by his wife and children.  (6)  Includes 3,528 Series A Preferred Shares of Chandler Insurance owned by      one executive officer of Chandler USA not listed in the table above.                                                                           PAGE 43  SHAREHOLDERS HOLDING OVER FIVE PERCENT        Listed below are persons, other than those listed previously, who are known by Chandler USA to own beneficially more than 5% of Chandler Insurance's Class A Common Shares as of February 28, 2006.  Except as otherwise indicated, each of the persons named below has sole voting and investment power with respect to the common shares beneficially owned.                                                                              BENEFICIAL OWNERSHIP                                                                 --------------------------------------- NAME OF SHAREHOLDER                                              NUMBER OF SHARES (1)     PERCENT (2) - --------------------------------------------------------------- ----------------------  ---------------    Malinda K. LaGere Laird, Matthew C. LaGere and Lance A. LaGere,  Successor Co-Trustees of the W. Brent LaGere Irrevocable Trust  1010 Manvel Avenue, Chandler, Oklahoma 74834 .................           370,890 (3)           59.3 %  - ---------------------------------------------------------------   (1)  The rules of the SEC provide that, for the purposes hereof, a person is considered the "beneficial      owner" of shares with respect to which the person, directly or indirectly, has or shares the voting      or investment power, irrespective of his economic interest in the shares.  Unless otherwise noted,      each person identified possesses sole voting and investment power over the shares listed, subject to      community property laws.  (2)  Based on 625,826 Class A Common Shares of Chandler Insurance outstanding on February 28, 2006.  (3)  Includes 370,890 Class A Common Shares of Chandler Insurance held by the LaGere Trust, of which 22,500      Class A Common Shares are directly owned by W&L Holding, which is 100% owned by the LaGere Trust.  Mr. LaGere      holds an irrevocable proxy for the Class A Common Shares owned by the LaGere Trust and W&L Holding.    OTHER MATTERS REGARDING BENEFICIAL OWNERSHIP        For purposes of this report, unless otherwise indicated, Chandler USA has assumed that the following persons are affiliates:  an entity's executive officers and directors or its managing partners, persons holding more than 10% of an entity, and those persons who are controlling, controlled by, or under common control with such officers, directors, managing partners, or shareholders.        Statements of percentages of ownership are made based upon pertinent reporting requirements and guidelines specifically applicable to this report on Form 10-K.  Determination of voting power under Chandler USA's Articles of Incorporation or applicable insurance holding company laws may be at variance with the above stated percentages.
During March 2001, Chandler USA entered into a $3.8 million sale and leaseback transaction for certain owned equipment for a three year term. During March 2004, the lease was extended for an additional three years.  See Note 11 to Consolidated Financial Statements for additional information.  The bank that participated in the sale and leaseback transaction  established a letter of credit in the amount of $500,000 on behalf of Chandler USA for the benefit of Brown & Brown, Inc. as security in connection with the sale of a subsidiary.  Chandler USA paid a fee of $5,000 during 2004 to the bank for issuing the letter of credit.  This letter of credit expired on December 31, 2005.  W. Scott Martin, a director of NAICO and Chandler USA, is an officer and director of the bank that participated in these transactions, and is also a significant shareholder of the bank's holding company.  Mr. Martin is also a director of the bank that Chandler USA and its subsidiaries use as their principal disbursement bank, and is a significant shareholder of the bank's holding company.  The balance maintained by Chandler USA and each subsidiary is fully insured by the Federal Deposit Insurance Corporation, and Chandler USA and its subsidiaries pay customary service charges to the bank for the services provided.        Chandler USA leases a rural property from Davenport Farms, Inc. ("Davenport Farms"), a corporation owned by Messrs. LaGere, Evans and Paden. Chandler USA has placed three mobile homes on the property, drilled a water well connected to the mobile homes and made other smaller improvements to the property.  Its personnel maintain these improvements.  These mobile homes and the property provide hunting, fishing, lodging, dining and other outdoor recreational activities for the entertainment of customers and business associates of Chandler USA and/or its subsidiaries.  Chandler USA pays no rent to Davenport Farms but reimburses it for one-half of the utilities and for hunting supplies.  Chandler USA has also agreed to indemnify Davenport Farms for claims arising out of its use of the property.  Chandler USA retains the right to remove all structures located upon the property when the lease terminates.  In 2003, 2004 and 2005, Chandler USA incurred approximately $336,000, $353,000 and $313,000, respectively, in expenses associated with its use of this property, including $12,000, $14,000 and $10,000 for reimbursement of certain expenses, such as utility and similar expenses, for the years 2003, 2004 and 2005, respectively.                                                                          PAGE 44
AUDIT FEES        The aggregate audit fees billed or to be billed by Tullius Taylor Sartain & Sartain LLP for the audit of Chandler USA's annual financial statements and review of financial statements included in Chandler USA's Form 10-Q and services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements were approximately $149,600, $155,000 and $167,100 for the years ended December 31, 2003, 2004 and 2005, respectively.  AUDIT-RELATED FEES        The aggregate fees billed for professional services rendered by Tullius Taylor Sartain & Sartain LLP for audit related services rendered in connection with the audits of employee benefit plans and consultation on accounting standards or transactions were $18,675, $18,150 and $28,450 for the years ended December 31, 2003, 2004 and 2005, respectively.  TAX FEES        The aggregate fees billed or to be billed for professional services rendered by Tullius Taylor Sartain & Sartain LLP for tax compliance, tax advice and tax planning were $26,375, $17,700 and $23,650 for the years ended December 31, 2003, 2004 and 2005, respectively.  ALL OTHER FEES        The aggregate fees billed by Tullius Taylor Sartain & Sartain LLP for professional services other than those reported in the categories above were $1,446 and $500 for the years ended December 31, 2003 and 2005, respectively. There were no other fees billed by Tullius Taylor Sartain & Sartain LLP for the year ended December 31, 2004.  POLICY ON PRE-APPROVAL OR RETENTION OF INDEPENDENT AUDITORS        All audit and permitted non-audit services for which Chandler USA engages Tullius Taylor Sartain & Sartain LLP require pre-approval by Chandler USA's Audit Committee.  The percentage of Audit-Related Fees, Tax Fees and All Other Fees out of all fees paid to Tullius Taylor Sartain & Sartain LLP was 23.7%, 18.8% and 23.9% for the years ended December 31, 2003, 2004 and 2005, respectively.                                       PART IV
(a)  1.  FINANCIAL STATEMENTS.  The consolidated balance sheets of                Chandler USA and its subsidiaries as of December 31, 2004 and                2005, and the related consolidated statements of operations,                comprehensive income, shareholder's equity and cash flows for                each of the three years in the period ended December 31, 2005,                together with the related notes thereto and the report of                Tullius Taylor Sartain & Sartain LLP, independent auditors on                such financial statements, are filed as a part of this Form                10-K.  See accompanying Index on page F-1.             2.  FINANCIAL STATEMENT SCHEDULES.  The financial statement                schedules listed in the accompanying index to consolidated                financial statements and schedules are filed as part of this                Form 10-K.  All other schedules have been omitted since the                required information is not applicable or is not present in                amounts sufficient to require submission of the schedule or                because the information is included in the consolidated                financial statements or the notes thereon.                                                                          PAGE 45             3.  EXHIBITS.                   3.1  Certificate of Incorporation.  (1)                   3.2  Bylaws, as amended.  (1)                   4.1  Form of Indenture entered into by and between Chandler                       (U.S.A.), Inc. as issuer and U.S. Trust of Texas, N.A. as                       trustee.  (1)                   4.2  First Amendment to Indenture effective May 13, 2003                       constituting the First Amendment to the Indenture dated                       as of July 16, 1999, between Chandler (U.S.A.), Inc., and                       The Bank of New York Trust Company of Florida, N.A. as                       successor trustee to U.S. Trust Company of Texas, N.A.,                       as Trustee regarding the 8.75% senior debentures due 2014                       issued by Chandler (U.S.A.), Inc.  (3)                   4.3  Second Amendment to Indenture effective December 1, 2003                       constituting the Second Amendment to the Indenture dated                       as of July 16, 1999, between Chandler (U.S.A.), Inc., and                       The Bank of New York Trust Company of Florida, N.A. as                       successor trustee to U.S. Trust Company of Texas, N.A.,                       as Trustee regarding the 8.75% senior debentures due 2014                       issued by Chandler (U.S.A.), Inc.  (5)                  10.1  Employment Agreement, effective as of October 28, 1988,                       by and between Chandler (U.S.A.), Inc. and Brent LaGere.                       (1)                  10.2  Employment Agreement, effective as of October 28, 1988, by                       and between Chandler (U.S.A.), Inc., and Brenda B. Watson                       (formerly Brenda B. Pair).  (1)                  10.3  Amendment to Employment Agreement, effective as of                       January 1, 1999, by and between Chandler (U.S.A.), Inc.                       and Brenda B. Watson.  (1)                  10.4  Intercompany Credit Agreement effective as of January 1,                       2001, by and between Chandler (U.S.A.), Inc. and Chandler                       Insurance (Barbados), Ltd.  (2)                  10.5  Stock Purchase Agreement effective as of December 1,                       2002, by and among Brown & Brown, Inc., Chandler                       (U.S.A.), Inc., Chandler Insurance Company, Ltd.,                       National American Insurance Company, W. Brent LaGere and                       Mark T. Paden.  (3)                  10.6  Amended and Restated Declaration of Trust of Chandler                       Capital Trust I dated as of May 22, 2003 among Chandler                       (U.S.A.), Inc., as sponsor, Wilmington Trust Company, as                       Delaware trustee, Wilmington Trust Company, as                       institutional trustee, and W. Brent LaGere, Mark T. Paden                       and Mark C. Hart, as administrators.  (4)                  10.7  Indenture, dated as of May 22, 2003 among Chandler                       (U.S.A.), Inc., as issuer, and Wilmington Trust Company,                       as trustee.  (4)                  10.8  Guarantee Agreement, dated as of May 22, 2003 between                       Chandler (U.S.A.), Inc., as guarantor, and Wilmington                       Trust Company, as guarantee trustee.  (4)                  10.9  Capital Securities Subscription Agreement dated as of May                       13, 2003 among Chandler (U.S.A.), Inc. and Chandler                       Capital Trust I, together as offerors, and InCapS Funding                       I, Ltd., as purchaser.  (4)                 10.10  Placement Agreement dated May 13, 2003 among Chandler                       (U.S.A.), Inc. and Chandler Capital Trust I, together as                       offerors, and Sandler O'Neill & Partners, L.P., as                       placement agent.  (4)                 10.11  Amended and Restated Declaration of Trust of Chandler                       Capital Trust II dated as of December 16, 2003 among                       Chandler (U.S.A.), Inc., as sponsor, Wilmington Trust                       Company, as Delaware trustee, Wilmington Trust Company,                       as institutional trustee, and W. Brent LaGere, Mark T.                       Paden and Mark C. Hart, as administrators.  (6)                 10.12  Indenture, dated as of December 16, 2003 among Chandler                       (U.S.A.), Inc., as issuer, and Wilmington Trust Company,                       as trustee.  (6)                                                                          PAGE 46                 10.13  Guarantee Agreement, dated as of December 16, 2003                       between Chandler (U.S.A.), Inc., as guarantor, and                       Wilmington Trust Company, as guarantee trustee.  (6)                 10.14  Capital Securities Subscription Agreement dated as of                       December 4, 2003 among Chandler (U.S.A.), Inc. and                       Chandler Capital Trust II, together as offerors, and                       InCapS Funding I, Ltd., as purchaser.  (6)                 10.15  Placement Agreement dated December 4, 2003 among Chandler                       (U.S.A.), Inc. and Chandler Capital Trust II, together as                       offerors, and Sandler O'Neill & Partners, L.P., as                       placement agent.  (6)                  14.1  Code of Ethics.  (6)                  21.1  Subsidiaries of the registrant.                  31.1  Rule 13a-14(a)/15d-14(a) Certifications.                  32.1  Section 1350 Certifications.     -----------------------------                   (1)  Previously filed as an exhibit to Registration No.                       333-76393 on Form S-1 and incorporated herein by                       reference.                   (2)  Previously filed as an exhibit to Chandler USA's Annual                       Report on Form 10-K for the year ended December 31, 2001                       and incorporated herein by reference.                   (3)  Previously filed as an exhibit to Chandler USA's Annual                       Report on Form 10-K for the year ended December 31, 2002                       and incorporated herein by reference.                   (4)  Previously filed as an exhibit to Chandler USA's                       Quarterly Report on Form 10-Q for the quarter ended June                       30, 2003 and incorporated herein by reference.                   (5)  Previously filed as an exhibit to Chandler USA's current                       report on Form 8-K dated December 1, 2003 and                       incorporated herein by reference.                   (6)  Previously filed as an exhibit to Chandler USA's Annual                       Report on Form 10-K for the year ended December 31, 2003                       and incorporated herein by reference.        Copies of the foregoing exhibits filed with this Form 10-K or       incorporated by reference are available from Chandler USA upon written       request and payment of a reasonable copying fee.                                                                          PAGE 47                                     SIGNATURES       PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.                               CHANDLER (U.S.A.), INC.   Date:  February 28, 2006    By:/s/ W. Brent LaGere                                -------------------------------------------------                                W. Brent LaGere                                Chairman of the Board and Chief Executive Officer       PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.   Date:  February 28, 2006    By:/s/ W. Brent LaGere                                -------------------------------------------------                                W. Brent LaGere, Chairman of the Board,                                 Chief Executive Officer and Director                                 (Principal Executive Officer)   Date:  February 28, 2006    By:/s/ Mark T. Paden                                -------------------------------------------------                                Mark T. Paden, President, Chief Operating Officer                                 and Director   Date:  February 28, 2006    By:/s/ Mark C. Hart                                -------------------------------------------------                                Mark C. Hart, Vice President - Finance,                                 Chief Financial Officer and Treasurer                                 (Principal Financial Officer)   Date:  February 28, 2006    By:/s/ Richard L. Evans                                -------------------------------------------------                                Richard L. Evans, Senior Vice President                                 and Director   Date:  February 28, 2006    By:/s/ R. Patrick Gilmore                                -------------------------------------------------                                R. Patrick Gilmore, Senior Vice President,                                 Secretary, General Counsel and Director   Date:  February 28, 2006    By:/s/ Robert L. Rice                                -------------------------------------------------                                Robert L. Rice, Director   Date:  February 28, 2006    By:/s/ W. Scott Martin                                -------------------------------------------------                                W. Scott Martin, Director   Date:  February 28, 2006    By:/s/ William T. Keele                                -------------------------------------------------                                William T. Keele, Director                                                                          PAGE F-1                               CHANDLER (U.S.A.), INC.               INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES                                                                                        PAGES                                                                               ----------------- FINANCIAL STATEMENTS   Consolidated Balance Sheets as of December 31, 2004 and 2005 ................        F-2  Consolidated Statements of Operations for the years ended    December 31, 2003, 2004 and 2005 .........................................        F-3  Consolidated Statements of Comprehensive Income for the years ended  December 31, 2003, 2004 and 2005 ...........................................        F-4  Consolidated Statements of Cash Flows for the years ended  December 31, 2003, 2004 and 2005 ...........................................        F-5  Consolidated Statements of Shareholder's Equity for the years ended  December 31, 2003, 2004 and 2005 ...........................................        F-6  Notes to Consolidated Financial Statements .................................. F-7 through F-24  Report of Independent Registered Public Accounting  Firm on Consolidated Financial Statements  and Financial Statement Schedules ..........................................        F-25  SCHEDULES   I    Summary of Investments - Other Than Investments in Related Parties ....        F-26    II   Condensed Financial Information of Registrant ......................... F-27 through F-29   III  Supplementary Insurance Information ...................................        F-30   IV   Reinsurance ...........................................................        F-31   V    Valuation and Qualifying Accounts .....................................        F-32   VI   Supplemental Information (for property-casualty insurance        underwriters) ........................................................        F-33                                                                           PAGE F-2                               CHANDLER (U.S.A.), INC.                            CONSOLIDATED BALANCE SHEETS                    (Amounts in thousands except share amounts)                                                                                                    DECEMBER 31,                                                                                             ------------------------                                                                                                2004          2005                                                                                             ----------    ----------    ASSETS Investments  Fixed maturities available for sale, at fair value   Restricted (amortized cost $8,421 and $11,789 in 2004 and 2005, respectively) ........... $   8,279     $  11,330   Unrestricted (amortized cost $63,636 and $61,954 in 2004 and 2005, respectively) ........    63,391        60,405  Equity securities at fair value (cost $8,058 and $8,558 in 2004 and 2005, respectively) ..     8,373         9,071                                                                                             ----------    ----------   Total investments .......................................................................    80,043        80,806 Cash and cash equivalents ($141 and $209 restricted in 2004 and 2005, respectively) .......     6,870         5,510 Premiums receivable, less allowance for non-collection  of $119 and $223 at 2004 and 2005, respectively ..........................................    22,809        28,346 Reinsurance recoverable on paid losses, less allowance for non-collection  of $3,035 at 2004 ........................................................................     2,172         2,875 Reinsurance recoverable on paid losses from related parties ...............................        83             - Reinsurance recoverable on unpaid losses, less allowance for non-collection  of $237 and $174 at 2004 and 2005 ........................................................    50,381        54,708 Reinsurance recoverable on unpaid losses from related parties .............................    13,157        14,284 Prepaid reinsurance premiums ..............................................................     9,837         9,763 Prepaid reinsurance premiums to related parties ...........................................    12,315        12,247 Deferred policy acquisition costs .........................................................        57         1,225 Property and equipment, net ...............................................................     9,110         8,640 Amounts due from related parties ..........................................................    10,891         9,360 State insurance licenses, net .............................................................     3,745         3,745 Other assets ..............................................................................    15,827        13,550                                                                                             ----------    ---------- Total assets .............................................................................. $ 237,297     $ 245,059                                                                                             ==========    ========== LIABILITIES AND SHAREHOLDER'S EQUITY Liabilities  Unpaid losses and loss adjustment expenses ............................................... $ 108,233     $ 109,541  Unearned premiums ........................................................................    51,109        55,034  Policyholder deposits ....................................................................     4,912         5,684  Accrued taxes and other payables .........................................................     5,578         5,221  Premiums payable .........................................................................     3,674         2,181  Premiums payable to related parties ......................................................         -           113  Debentures ...............................................................................     6,979         6,979  Junior subordinated debentures issued to affiliated trusts ...............................    20,620        20,620                                                                                             ----------    ----------      Total liabilities ....................................................................   201,105       205,373                                                                                             ----------    ---------- Commitments and contingencies (Notes 10 and 11)  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 ......................................................................   (24,346)      (19,913)  Accumulated other comprehensive income (loss):   Unrealized loss on investments available for sale, net of deferred income taxes .........       (48)         (987)                                                                                             ----------    ----------   Total shareholder's equity ..............................................................    36,192        39,686                                                                                             ----------    ---------- Total liabilities and shareholder's equity ................................................ $ 237,297     $ 245,059                                                                                             ==========    ==========    SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.                                                                          PAGE F-3                              CHANDLER (U.S.A.), INC.                       CONSOLIDATED STATEMENTS OF OPERATIONS                              (Amounts in thousands)                                                                                    YEAR ENDED DECEMBER 31,                                                                        --------------------------------------                                                                            2003         2004         2005                                                                        ------------ ------------ ------------     Premiums and other revenues   Direct premiums written and assumed ...............................  $   118,444  $   121,651  $   120,344   Reinsurance premiums ceded ........................................      (40,612)     (21,132)     (23,060)   Reinsurance premiums ceded to related parties .....................      (25,992)     (30,055)     (27,158)                                                                        ------------ ------------ ------------     Net premiums written and assumed ................................       51,840       70,464       70,126   Decrease (increase) in unearned premiums ..........................        4,743       (6,422)      (4,066)                                                                        ------------ ------------ ------------     Net premiums earned .............................................       56,583       64,042       66,060 Investment income, net ..............................................        2,148        3,186        2,798 Interest income, net from related parties ...........................          412          491          670 Realized investment gains, net ......................................        2,351          652          383 Other income ........................................................        5,077          640          251                                                                        ------------ ------------ ------------     Total premiums and other revenues ...............................       66,571       69,011       70,162                                                                        ------------ ------------ ------------ Operating costs and expenses   Losses and loss adjustment expenses, net of amounts ceded     to related parties of $14,244, $15,587 and $13,200     in 2003, 2004 and 2005, respectively ............................       37,200       53,781       37,324   Policy acquisition costs, net of ceding commissions received     from related parties of $8,770, $11,550 and $10,498     in 2003, 2004 and 2005, respectively ............................       11,278       11,039       10,671   General and administrative expenses ...............................       13,486       12,380       12,749   Interest expense ..................................................        2,441        2,397        2,535                                                                        ------------ ------------ ------------     Total operating costs and expenses ..............................       64,405       79,597       63,279                                                                        ------------ ------------ ------------ Income (loss) before income taxes ...................................        2,166      (10,586)       6,883 Federal income tax benefit (provision) ..............................         (192)       3,582       (2,450)                                                                        ------------ ------------ ------------ Income (loss) .......................................................  $     1,974  $    (7,004) $     4,433                                                                        ============ ============ ============    SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.                                                                          PAGE F-4                               CHANDLER (U.S.A.), INC.                  CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME                              (Amounts in thousands)                                                                                        YEAR ENDED DECEMBER 31,                                                                             --------------------------------------                                                                                 2003         2004         2005                                                                             ------------ ------------ ------------     Net income (loss) ........................................................  $     1,974  $    (7,004) $     4,433                                                                             ------------ ------------ ------------ Other comprehensive income (loss), before income tax:   Unrealized gains (losses) on securities:     Unrealized holding gains (losses) arising during period ..............          631         (322)      (1,040)      Less: Reclassification adjustment for gains included in net       income (loss).......................................................       (2,351)        (652)        (383)                                                                             ------------ ------------ ------------ Other comprehensive income (loss), before income tax .....................       (1,720)        (974)      (1,423)  Income tax benefit (provision) related to items of other   comprehensive income (loss) ............................................          585          331          484                                                                             ------------ ------------ ------------ Other comprehensive income (loss), net of income tax .....................       (1,135)        (643)        (939)                                                                             ------------ ------------ ------------ Comprehensive income (loss) ..............................................  $       839  $    (7,647) $     3,494                                                                             ============ ============ ============    SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.                                                                        PAGE F-5                              CHANDLER (U.S.A.), INC.                       CONSOLIDATED STATEMENTS OF CASH FLOWS                              (Amounts in thousands)                                                                                           YEAR ENDED DECEMBER 31,                                                                                --------------------------------------                                                                                    2003         2004         2005                                                                                ------------ ------------ ------------     OPERATING ACTIVITIES   Net income (loss) .......................................................... $     1,974  $    (7,004) $     4,433   Add (deduct):     Adjustments to reconcile net income (loss) to cash       provided by (applied to) operating activities:       Realized investment gains, net .........................................      (2,351)        (652)        (383)       Gain on retirement of debentures .......................................      (3,106)         (36)           -       Net (gains) losses on sale of property and equipment ...................      (1,661)        (370)          (2)       Amortization and depreciation ..........................................       1,470        1,525        1,486       Provision for non-collection of premiums ...............................         272           42          176       Provision for non-collection of reinsurance recoverables ...............         604          282          108       Net change in non-cash balances relating to operating activities:         Premiums receivable ..................................................       3,433       (2,547)      (5,713)         Reinsurance recoverable on paid losses ...............................       1,449        6,439         (875)         Reinsurance recoverable on paid losses from related parties ..........        (191)         188           83         Reinsurance recoverable on unpaid losses .............................       1,798       (1,551)      (4,263)         Reinsurance recoverable on unpaid losses from related parties ........        (699)      (3,420)      (1,127)         Prepaid reinsurance premiums .........................................       3,933        5,432           74         Prepaid reinsurance premiums to related parties ......................        (841)      (2,794)          68         Deferred policy acquisition costs ....................................         190          108       (1,168)         Other assets .........................................................       2,427       (2,790)       2,704         Unpaid losses and loss adjustment expenses ...........................      (4,838)      20,465        1,308         Unearned premiums ....................................................      (7,835)       3,784        3,925         Policyholder deposits ................................................         563          105          772         Accrued taxes and other payables .....................................        (752)         329         (357)         Premiums payable  ....................................................      (1,822)       2,691       (1,493)         Premiums payable to related parties ..................................           -            -          113                                                                                ------------ ------------ ------------       Cash provided by (applied to) operating activities .....................      (5,983)      20,226         (131)                                                                                ------------ ------------ ------------ INVESTING ACTIVITIES   Unrestricted fixed maturities available for sale:     Purchases ................................................................     (33,378)     (38,927)      (6,158)     Sales ....................................................................      22,806       23,772        2,091     Maturities ...............................................................       5,892        4,311        1,770   Equity securities available for sale:     Purchases ................................................................           -       (8,058)        (500)     Sales ....................................................................       1,720           36          380   Cost of property and equipment purchased ...................................        (818)        (208)        (413)   Proceeds from sale of property and equipment ...............................         104           85           70                                                                                ------------ ------------ ------------       Cash applied to investing activities ...................................      (3,674)     (18,989)      (2,760)                                                                                ------------ ------------ ------------ FINANCING ACTIVITIES   Proceeds from issuance of junior subordinated debentures, net ..............      20,000            -            -   Payment on retirement of debentures ........................................     (12,782)        (226)           -   Debt issue costs ...........................................................        (711)         (18)           -   Payments and loans from related parties ....................................       2,426        4,602        2,513   Payments and loans to related parties ......................................      (1,486)      (5,851)        (982)                                                                                ------------ ------------ ------------       Cash provided by (applied to) financing activities .....................       7,447       (1,493)       1,531                                                                                ------------ ------------ ------------   Decrease in cash and cash equivalents during the period ....................      (2,210)        (256)      (1,360)   Cash and cash equivalents at beginning of period ...........................       9,336        7,126        6,870                                                                                ------------ ------------ ------------   Cash and cash equivalents at end of period ................................. $     7,126  $     6,870  $     5,510                                                                                ============ ============ ============    SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.                                                                          PAGE F-6                               CHANDLER (U.S.A.), INC.                  CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY                              (Amounts in thousands)                                                                                      Accumulated                                                                                     other          Total                                             Common       Paid-in    Accumulated  comprehensive  shareholder's                                              stock       surplus      deficit    income (loss)     equity                                           -----------  -----------  -----------  -------------  -------------       Balance, January 1, 2003 ................ $        2   $   60,584   $  (19,316)  $      1,730   $     43,000  Net income ..............................          -            -        1,974              -          1,974  Change in unrealized gain on   investments available for   sale, net of income tax ...............          -            -            -         (1,135)        (1,135)                                           -----------  -----------  -----------  -------------  ------------- Balance, December 31, 2003 ..............          2       60,584      (17,342)           595         43,839                                           -----------  -----------  -----------  -------------  ------------- Net loss ................................          -            -       (7,004)             -         (7,004)  Change in unrealized gain on   investments available for   sale, net of income tax ...............          -            -            -           (643)          (643)                                           -----------  -----------  -----------  -------------  ------------- Balance, December 31, 2004 ..............          2       60,584      (24,346)           (48)        36,192                                           -----------  -----------  -----------  -------------  ------------- Net income ..............................          -            -        4,433              -          4,433  Change in unrealized loss on   investments available for   sale, net of income tax ...............          -            -            -           (939)          (939)                                           -----------  -----------  -----------  -------------  ------------- Balance, December 31, 2005 .............. $        2   $   60,584   $  (19,913)  $       (987)  $     39,686                                           ===========  ===========  ===========  =============  =============    SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.                                                                          PAGE F-7                               CHANDLER (U.S.A.), INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                   YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005  NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES      (a)  BASIS OF PRESENTATION              Chandler (U.S.A.), Inc. ("Chandler USA") is a holding company          organized and domiciled in Oklahoma.  Chandler USA's wholly owned          subsidiaries are engaged in various property and casualty insurance          operations.  The insurance products offered by Chandler USA through          its subsidiary, National American Insurance Company ("NAICO"), include          property and casualty insurance coverage primarily for businesses in          various industries, political subdivisions, homeowners insurance in          Texas and surety bonds for small contractors in the United States of          America ("U.S.").   The business is conducted through individual          independent insurance agencies and underwriting managers, primarily in          the Southwest and Midwest areas of the U.S.  Chandler Insurance          Managers, Inc. ("CIMI") is a wholly owned subsidiary of Chandler USA          and serves as an underwriting manager for certain wholesale operations          related to NAICO's school districts and trucking insurance.              The consolidated financial statements have been prepared in          accordance with accounting principles generally accepted in the United          States of America ("GAAP").  The preparation of the financial          statements requires management to make estimates and assumptions that          affect the reported amounts of assets and liabilities and disclosure          of contingent assets and liabilities at the date of the financial          statements and the reported amounts of revenues and expenses during          the reporting period.  Actual results could differ significantly from          those estimates.      (b)  PRINCIPLES OF CONSOLIDATION              The consolidated financial statements include the accounts of          Chandler USA and all wholly owned subsidiaries that meet consolidation          requirements including NAICO and CIMI.  All significant intercompany          accounts and transactions have been eliminated in consolidation.      (c)  IMPAIRMENT OF LONG-LIVED ASSETS              Chandler USA periodically evaluates the carrying value of          long-lived assets to be held and used when changes in events and          circumstances warrant such a review.  The carrying value of a          long-lived asset is considered impaired when the separately          identifiable anticipated undiscounted cash flow from such asset is          less than its carrying value.  In that event, a loss is recognized          based on the amount by which the carrying value exceeds the fair value          of the long-lived asset.  Fair value is determined primarily using the          anticipated cash flows discounted at a rate commensurate with the risk          involved.  Losses on long-lived assets to be disposed of are determined          in a similar manner, except that fair values are reduced for disposal          costs.      (d)  REVENUE RECOGNITION              Premiums are generally recognized as earned on a pro rata basis          over the policy period, which is in proportion to the insurance          protection provided. The portion of premiums that will be earned in          the future are deferred and reported as unearned premiums.  Amounts          recorded for ceded reinsurance premiums are reported as prepaid          reinsurance premiums and amortized over the remaining contract period          in proportion to the amount of the insurance protection provided.          Commission revenues are generally recognized when coverage is          effective and premiums are billed.      (e)  PREMIUMS RECEIVABLE              Premiums receivable are presented net of valuation allowances for          estimated uncollectible amounts.  Chandler USA determines the          allowance for non-collection by regularly evaluating individual agent          accounts and balances due from insureds, considering their financial          condition and other appropriate factors.  Such accounts are considered          past due based on contractual terms for the agent or insured.          Premiums receivable are written off when deemed uncollectible.          Recoveries of accounts previously written off are recorded when          received.                                                          2004        2005                                                    ----------  ----------                                                        (In thousands)                                          Real estate and improvements .. $  11,714   $  11,756                    Other property and equipment ..     9,010       8,468                                                    ----------  ----------                                                       20,724      20,224                    Accumulated depreciation ......   (11,614)    (11,584)                                                    ----------  ----------                                                    $   9,110   $   8,640                                                    ==========  ==========               Depreciation expense was approximately $918,000, $894,000 and          $815,000 for 2003, 2004 and 2005, respectively.      (i)  INTANGIBLE ASSETS              Intangible assets are stated at cost less accumulated amortization.          Prior to 2002, the cost of state insurance licenses acquired was          amortized over 40 years using the straight-line method.  Effective          January 1, 2002, the state insurance licenses are no longer amortized          since they were determined to have indefinite lives but are reviewed          at least annually for impairment.  Chandler USA completed the required          impairment tests during 2004 and 2005 and concluded that there has not          been an impairment loss since the fair values exceeded their carrying          values.  The fair values were determined based on the present value of          projected future net cash flows.  Intangible assets included the          following at December 31:                                                          2004        2005                                                    ----------  ----------                                                        (In thousands)                                          State insurance licenses ...... $   5,991   $   5,991                    Accumulated amortization ......    (2,246)     (2,246)                                                    ----------  ----------                                                    $   3,745   $   3,745                                                    ==========  ==========                                                                           PAGE F-9      (j)  POLICYHOLDER DEPOSITS              NAICO requires certain policyholders to pay a deposit at inception          of coverage to secure payment of future premiums and deductibles on          claims incurred. It is expressly agreed between NAICO and the          policyholder that the funds will be used by NAICO only in the event          the policyholder fails to pay any premiums, deductibles or other          charges when due.  NAICO has established a liability for these          deposits in an amount equal to that due the policyholders based on          insurance premiums reported as of the balance sheet date.      (k)  INVESTMENTS              At the time of purchase, investments in debt securities that          Chandler USA has the positive intent and ability to hold to maturity          are classified as held to maturity and reported at amortized cost; all          other debt securities are reported at fair value.  Investments in debt          and equity securities classified as trading are actively and          frequently bought and sold with the objective of generating income on          short-term differences in price.  Realized and unrealized gains and          losses on securities classified as trading account assets are          recognized in current operations.  Chandler USA has not classified any          investments as trading account assets.  Debt securities not classified          as held to maturity or trading and equity securities are classified as          available for sale, with the related unrealized gains and losses          excluded from earnings and reported net of deferred income tax as other          comprehensive income until realized. Realized gains and losses on sales          of securities are based on the specific identification method.          Declines in the fair value of securities below their carrying value          that are other than temporary are recognized in earnings.              Chandler USA regularly reviews its investment portfolio for factors          that may indicate that a decline in fair value of an investment is          other than temporary.  Some factors considered in evaluating whether          or not a decline in fair value is other than temporary include Chandler          USA's ability and intent to retain the investment for a period of time          sufficient to allow for a recovery in value; the duration and extent to          which the fair value has been less than cost; and the financial          condition and prospects of the issuer.      (l)  INCOME TAXES              Chandler USA uses an asset and liability approach for accounting          for income taxes. Deferred income taxes are recognized for the tax          consequences of temporary differences and carryforwards by applying          enacted tax rates applicable to future years to differences between          the financial statement amounts and the tax bases of existing assets          and liabilities.  A valuation allowance is established if it is more          likely than not that some portion of the deferred tax asset will not          be realized.      (m)  CASH AND CASH EQUIVALENTS              For purposes of the consolidated statements of cash flows, Chandler          USA considers all highly liquid investments with original maturities          of 14 days or less to be cash equivalents.  For cash and cash          equivalents, the carrying amount is a reasonable estimate of fair          value.      (n)  SUPPLEMENTAL CASH FLOW INFORMATION              Cash payments for interest and income taxes, and noncash investing          activities were as follows:                                                                    YEAR ENDED DECEMBER 31,                                                             --------------------------------                                                                2003       2004       2005                                                             ---------- ---------- ----------                                                                      (In thousands)                         Cash payments (refunds) during the year for:             Interest ...................................... $   2,809  $   2,261  $   2,447             Income taxes ..................................      (300)         -        160            Transfers from (to) restricted securities, net .. $    (563) $    (801) $  (3,429)        (o)  REINSURANCE              Management believes all of NAICO's reinsurance contracts with          reinsurers meet the criteria for risk transfer and the revenue and          cost recognition provisions in order to be accounted for as          reinsurance.  As more fully explained in Note 11, reinsurance          contracts do not relieve NAICO from its obligation to policyholders.          In addition, failure of reinsurers to honor their obligations could          result in losses to Chandler USA.                                                                          PAGE F-10     (p)  NEW ACCOUNTING STANDARDS              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 December 2004, the FASB issued Statement of Financial Accounting          Standards ("SFAS") No. 153, EXCHANGES OF NONMONETARY ASSETS - AN          AMENDMENT OF APB OPINION NO. 29.  SFAS No. 153 amends APB Opinion No.          29 to eliminate the exception for nonmonetary exchanges of similar          productive assets and replaces it with a general exception for          exchanges of nonmonetary assets that do not have commercial substance.          SFAS No. 153 is to be applied prospectively for nonmonetary exchanges          occurring in fiscal periods beginning after June 15, 2005.  The          adoption of SFAS No. 153 is not expected to have a material impact on          Chandler USA's financial position or results of operations.              In May 2005, the FASB issued SFAS No. 154, ACCOUNTING CHANGES AND          ERROR CORRECTIONS which replaces APB Opinion No. 20, ACCOUNTING CHANGES          and FASB Statement 3, REPORTING ACCOUNTING CHANGES IN INTERIM FINANCIAL          STATEMENTS.  This statement changes the requirements for the accounting          for and reporting of a change in accounting principle.  This statement          applies to all voluntary changes in accounting principles.  It also          applies to changes required by an accounting pronouncement in the          unusual instance that the pronouncement does not include specific          transition provisions.  This statement requires voluntary changes in          accounting principles be recognized retrospectively to prior periods'          financial statements, rather than recognition in the net income of the          current period.  Retrospective application requires restatements of          prior period financial statements as if that accounting principle had          always been used.  This statement carries forward without change the          guidance contained in Opinion 20 for reporting the correction of an          error in previously issued financial statements and a change in          accounting estimate.  The provisions of SFAS No. 154 are effective for          accounting changes and corrections of errors made in fiscal years          beginning after December 15, 2005.              In September 2005, the Accounting Standards Executive Committee          issued Statement of Position ("SOP") No. 05-1, ACCOUNTING BY INSURANCE          ENTERPRISES FOR DEFERRED ACQUISITION COSTS IN CONNECTION WITH          MODIFICATIONS OR EXCHANGES OF INSURANCE CONTRACTS, which provides          guidance on the accounting by insurance companies for deferred          acquisition costs for internal replacements of insurance contracts          other than those accounted for under SFAS No. 97, ACCOUNTING AND          REPORTING BY INSURANCE ENTERPRISES FOR CERTAIN LONG-DURATION CONTRACTS          AND FOR REALIZED GAINS AND LOSSES FROM THE SALE OF INVESTMENTS.  An          internal replacement occurs when an insurance contract's benefits,          features, rights or coverages are modified by exchanging an existing          contract for a new contract that is substantially changed from the          original contract, or by amendment, endorsement, or rider to a          contract, or by the election of a feature or coverage within a          contract.  SOP 05-1 requires that internal replacements be accounted          for as an extinguishment of the replaced contract, and any unamortized          deferred acquisition costs related to the replaced contract should not          be deferred.  This SOP is effective for internal replacements          occurring in fiscal years beginning after December 15, 2006, with          earlier adoption encouraged.  The adoption of SOP No. 05-1 is not          expected to have a material impact on Chandler USA's financial          position or results of operations.              In November 2005, FASB released FASB Staff Position 115-1 "THE          MEANING OF OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS APPLICATION TO          CERTAIN INVESTMENTS."  The proposed guidance addresses the          "determination as to when an investment is considered impaired,          whether that impairment is other-than-temporary, and the measurement          of an impairment loss."  The effective date for the guidance is for          reporting periods beginning after December 15, 2005.  The guidance is          not expected to have a material effect on Chandler USA's consolidated          financial statements.                                                                          PAGE F-11  NOTE 2. INVESTMENTS AND INVESTMENT INCOME        Net investment income and realized investment gains are summarized in the following table.  These amounts are net of investment expenses.                                                                  YEAR ENDED DECEMBER 31,                                                          --------------------------------                                                             2003       2004       2005                                                          ---------- ---------- ----------                                                                   (In thousands)     Interest on fixed-maturity investments ................. $   2,271  $   2,746  $   2,791 Interest on cash equivalents ...........................       139        695        159 Dividend income on equity securities ...................         -         22        135 Investment expenses ....................................      (262)      (277)      (287)                                                          ---------- ---------- ----------  Investment income, net ................................     2,148      3,186      2,798                                                          ---------- ---------- ---------- Realized gains, net - fixed-maturity investments .......       631        616          3 Realized gains, net - equity securities ................     1,720         36        380                                                          ---------- ---------- ----------  Realized investments gains, net .......................     2,351        652        383                                                          ---------- ---------- ----------                                                          $   4,499  $   3,838  $   3,181                                                          ========== ========== ==========          Investment expenses include $81,000, $104,000 and $137,000 for the years ended December 31, 2003, 2004 and 2005, respectively, in expense to subsidize a premium finance program for certain insureds of NAICO with an unaffiliated premium finance company.        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 DECEMBER 31, 2004                           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 ......................... $  31,884  $     165  $    (225) $  31,824  $  31,824 Corporate obligations ..................    29,756        188       (429)    29,515     29,515 Public utilities .......................     7,603         78        (95)     7,586      7,586 Mortgage-backed securities .............     2,814          -        (69)     2,745      2,745                                          ---------- ---------- ---------- ---------- ----------                                          $  72,057  $     431  $    (818) $  71,670  $  71,670                                          ========== ========== ========== ========== ========== EQUITY SECURITIES: Corporate stock ........................ $   8,058  $     315  $       -  $   8,373  $   8,373                                          ========== ========== ========== ========== ==========                                                            GROSS      GROSS                                                     UNREALIZED UNREALIZED   FAIR     CARRYING DECEMBER 31, 2005                           COST      GAINS      LOSSES     VALUE      VALUE - ---------------------------------------- ---------- ---------- ---------- ---------- ---------- FIXED MATURITIES AVAILABLE FOR SALE:                         (In thousands)       U.S. Treasury securities and obligations   of U.S. government corporations   and agencies ......................... $  37,933  $       -  $    (904) $  37,029  $  37,029 Corporate obligations ..................    27,314          2       (861)    26,455     26,455 Public utilities .......................     6,479         13       (159)     6,333      6,333 Mortgage-backed securities .............     2,017          -        (99)     1,918      1,918                                          ---------- ---------- ---------- ---------- ----------                                          $  73,743  $      15  $  (2,023) $  71,735  $  71,735                                          ========== ========== ========== ========== ========== EQUITY SECURITIES: Corporate stock ........................ $   8,558  $     513  $       -  $   9,071  $   9,071                                          ========== ========== ========== ========== ==========         At December 31, 2004, Chandler USA held fixed maturity investments from General Electric Capital Corporation of $3.9 million which exceeded 10% of Chandler USA's shareholder's equity.  At December 31, 2005, Chandler USA did not hold any fixed maturity investments that exceeded 10% of shareholder's equity.                                                                          PAGE F-12        The fair value of Chandler USA's investments with sustained gross unrealized losses at December 31, 2005 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 ....... $   22,714   $     349   $   14,315   $     555   $   37,029   $     904 Corporate securities ..............      4,035          49       20,396         813       24,431         862 Public utilities ..................          -           -        4,602         159        4,602         159 Mortgage-backed securities ........          -           -        1,918          99        1,918          99                                     -----------  ----------  -----------  ----------  -----------  ----------                                     $   26,749   $     398   $   41,231   $   1,626   $   67,980   $   2,024                                     ===========  ==========  ===========  ==========  ===========  ==========          The unrealized losses of Chandler USA's fixed maturity investments were caused by interest rate increases.  The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment.  Chandler USA regularly reviews its investment portfolio for factors that may indicate that a decline in fair value of an investment is other than temporary.  Based on an evaluation of the issues, including, but not limited to, Chandler USA's intentions to sell or ability to hold the investments; the length of time and amount of the unrealized loss; and the credit ratings of the issuers of the investments, Chandler USA does not consider these investments to be other-than-temporarily impaired at December 31, 2005.        Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.  The maturities of investments in fixed maturities at December 31, 2005 are shown below:                                                      AVAILABLE FOR SALE                                                ------------------------                                                 AMORTIZED                                                    COST      FAIR VALUE                                                ------------  ----------                                                     (In thousands)    Due in one year or less ...................... $     5,419   $   5,372 Due after one year through five years ........      40,109      38,972 Due after five years through ten years .......      23,398      22,717 Due after ten years ..........................       2,800       2,756                                                ------------  ----------                                                     71,726      69,817  Mortgage-backed securities ...................       2,017       1,918                                                ------------  ----------                                                $    73,743   $  71,735                                                ============  ==========         Realized gains and losses from sales of investments are shown below:                                           GROSS REALIZED GAINS  GROSS REALIZED LOSSES                                        --------------------  ---------------------                                                      (In thousands)                                              FIXED MATURITIES:                      2003 ............ $               631   $                  -                      2004 ............                 693                     77                      2005 ............                  20                     17                       EQUITY SECURITIES:                      2003 ............ $             1,720   $                  -                      2004 ............                  36                      -                      2005 ............                 380                      -          NAICO is required by several states to deposit securities with state regulators as a condition of doing business in those states.  As of December 31, 2004 and 2005, the carrying value of these deposits totaled approximately $8.4 million and $7.8 million, respectively.  In addition, NAICO deposited $3.7 million into a trust account during 2005 as collateral for a reinsurance agreement in which NAICO is the assuming reinsurer.                                                                          PAGE F-13  NOTE 3. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES        NAICO provides a reserve for estimated losses (reported and unreported) and loss adjustment expenses based on historical experience and payment reporting patterns for the type of risk involved. These estimates are based on data available at the time of the estimate and such estimates are periodically reviewed by independent professional actuaries.  Inherent in the estimates of the ultimate liability for unpaid claims are expected trends in claim severity, claim frequency and other factors that may vary as claims are settled.  The amount and uncertainty in the estimates are affected by such factors as the amount of historical claims experience relative to the development period for the type of risk, knowledge of the actual facts and circumstances, and the amount of insurance risk retained.  The ultimate cost of insurance claims can be adversely affected by increased costs such as medical expenses, repair expenses, costs of providing legal defense for policyholders, increased jury awards and court decisions and legislation that define and expand insurance coverage subsequent to the time that the insurance policy was priced and sold.        Salvage and subrogation recoverables are accrued using the "case basis" method for large recoverables and statistical estimates based on historical experience for smaller recoverables.  Recoverable amounts deducted from NAICO's net liability for unpaid losses and loss adjustment expenses were approximately $3.7 million and $9.6 million at December 31, 2004 and 2005, respectively.  The increase in estimated recoveries in 2005 is due primarily to NAICO recording net estimated recoveries totaling $4.1 million related to two surety bond principals.  During 2005, NAICO recorded additional net estimated recoveries of $1.1 million as part of a settlement with a principal's bankruptcy estate.  The gross and net estimated recovery from the principal's bankruptcy estate deducted from unpaid losses and loss adjustment expenses at December 31, 2005 is $2.3 million and $1.9 million, respectively.  NAICO is currently pursuing the collection of this settlement.  Also during 2005, NAICO recorded additional net estimated recoveries of $3.0 million in regards to on-going litigation with the obligee of two surety bonds written by NAICO for a principal.  The gross and net estimated recovery deducted from unpaid losses and loss adjustment expenses related to this litigation at December 31, 2005 is $5.9 million and $3.4 million, respectively.  Trial is scheduled for 2006.  NAICO may or may not recover the above estimated recoveries and could incur significant costs in collecting these recoverables.        Although such estimates are management's best estimates of the expected values, the ultimate liability for unpaid claims may vary from these values. NAICO does not discount the liability for unpaid losses and loss adjustment expenses.        The following table sets forth a reconciliation of the beginning and ending unpaid losses and loss adjustment expenses which are net of reinsurance deductions.                                                                      YEAR ENDED DECEMBER 31,                                                              --------------------------------                                                                 2003       2004       2005                                                              ---------- ---------- ----------                                                                       (In thousands)     Net balance at beginning of year ........................... $  33,191  $  29,343  $  44,695                                                              ---------- ---------- ---------- Net losses and loss adjustment expenses incurred related to:    Current year ............................................    26,108     27,436     30,985    Prior years .............................................    11,092     26,345      6,339                                                              ---------- ---------- ----------       Total ................................................    37,200     53,781     37,324                                                              ---------- ---------- ---------- Net paid losses and loss adjustment expenses related to:    Current year ............................................   (10,626)   (10,222)   (11,171)    Prior years .............................................   (30,422)   (28,207)   (30,299)                                                              ---------- ---------- ----------       Total ................................................   (41,048)   (38,429)   (41,470)                                                              ---------- ---------- ---------- Net balance at end of year ................................. $  29,343  $  44,695  $  40,549                                                              ========== ========== ==========          NAICO has experienced a significant amount of incurred losses related to prior accident years during the 2003, 2004 and 2005 calendar years.  The loss development occurred primarily in the 1997-2001 accident years.  The adverse loss development is generally the result of ongoing analysis of loss development trends for both liability and workers compensation lines of business, and includes provisions for potentially uncollectible reinsurance and deductibles. NAICO adjusts reserves as experience develops and new information becomes known. Such adjustments are reflected in the results of operations in the periods in which the estimates are changed.  The adverse development of losses from prior accident years results in higher calendar year loss ratios and reduced calendar year operating results.        During 2003, NAICO experienced adverse loss development totaling $11.1 million primarily in the standard property and casualty program.  This adverse development was due primarily to an increase in losses in the workers compensation and other liability lines of business in the 1998-2001 accident years.  A reduction in losses for the 2002 accident year partially offset this adverse development.  The adverse loss development included approximately $1.3 million for provisions for potentially uncollectible reinsurance and deductibles.                                                                          PAGE F-14        During 2004, NAICO experienced adverse loss development totaling $26.3 million primarily in the standard property and casualty and political subdivisions programs.  This adverse development was due primarily to an increase in losses in the workers compensation and other liability lines of business in the 1997-2002 accident years.  The adverse development in the 2002 accident year partially offset the reduction in losses for this accident year that was recorded during 2003.  The adverse loss development included approximately $409,000 for provisions for potentially uncollectible reinsurance and deductibles.  Reserves for unpaid losses and loss adjustment expenses, net of related reinsurance recoverables, were $44.7 million at December 31, 2004 compared to $29.3 million at December 31, 2003, an increase of $15.4 million or 52%.        During 2005, NAICO experienced adverse loss development totaling $6.3 million primarily in the standard property and casualty and political subdivisions programs.  A portion of the adverse development was offset by favorable development of $1.8 million in the surety bond program, primarily in accident years 1994 and 2001 that resulted from the estimated recoveries discussed previously.  The adverse development was due primarily to an increase in losses in the workers compensation, other liability and automobile liability lines of business in the 2000, 2002 and 2003 accident years.  The adverse loss development included approximately $108,000 for provisions for potentially uncollectible reinsurance.        NAICO does not ordinarily insure against environmental matters as that term is commonly used.  However, in some cases, regulatory filings made by NAICO on behalf of an insured can make NAICO directly liable to the regulatory authority for property damage which could include environmental pollution.  In those cases, NAICO ordinarily has recourse against the insured or the surety bond principal for amounts paid.  NAICO has insured certain trucking companies and pest control operators that are required to provide proof of insurance which in some cases assures payment for clean-up and remediation of damage resulting from sudden and accidental release or discharge of contaminants or other substances which may be classified as pollutants.  NAICO also provides surety bonds for construction contractors that use or have control of such substances and for contractors that remove and dispose of asbestos as a part of their contractual obligations.  NAICO also insures independent oil and gas producers that may purchase coverage for the escape of oil, saltwater, or other substances which may be harmful to persons or property, but may not generally be classified as pollutants.  NAICO maintains claims records which segregate this type of risk for the purpose of evaluating environmental risk exposure. Based upon the nature of such lines of business with insureds of NAICO, and current data regarding the limited severity and infrequency of such matters, it appears that potential environmental risks are not a significant portion of claims reserves and therefore would not likely have a material impact, if any, on the consolidated financial condition, results of operations or cash flows of Chandler USA.        At this time, NAICO has not received any claims related to the September 11, 2001 terrorist attacks on the World Trade Center and does not believe that it has any significant exposure to these and related losses.  While several of NAICO's reinsurers did experience significant losses related to these attacks, it currently does not appear that these losses will impair the reinsurers' ability to pay claims.  NOTE 4. DEBENTURES        On July 16, 1999, Chandler USA completed a public offering of $24 million principal amount of senior debentures (the "Debentures") with a maturity date of July 16, 2014.  The Debentures were priced at $1,000 each with an interest rate of 8.75% and are redeemable by Chandler USA on or after July 16, 2009 without penalty or premium.  The indenture governing the Debentures was amended during 2003 to clarify that purchases of Debentures by Chandler USA through private treaty or on the open market for an agreed price of less than the sum of the principal amount and accrued interest are not considered to be a redemption of the Debentures, and that any such Debentures purchased by Chandler USA will be cancelled.  Chandler USA purchased and cancelled $16.7 million and $275,000 principal amount of the Debentures during 2003 and 2004, respectively, and at December 31, 2004, there were $6,979,000 principal amount of the Debentures outstanding.  As of December 31, 2005, Chandler USA has capitalized $280,000 related to debt issuance costs for the Debentures.  These costs are being amortized as interest expense over the term of the Debentures. When Debentures are purchased and cancelled by Chandler USA, debt issuance costs are reduced accordingly and reflected in the gain on retirement of debt which is included in other income in the consolidated statements of operations. Chandler USA's subsidiaries and affiliates are not obligated by the Debentures. Accordingly, the Debentures are effectively subordinated to all existing and future liabilities and obligations of Chandler USA's existing and future subsidiaries.  The indenture governing the Debentures contains certain restrictive covenants, including covenants that limit subsidiary debt, issuance or sale of subsidiary stock, incurring of liens, sale-leaseback transactions for a period of more than three years, mergers, consolidations and sales of assets.  At December 31, 2005, Chandler USA was in compliance with all covenants.                                                                          PAGE F-15  NOTE 5. TRUST PREFERRED SECURITIES        In May 2003, Chandler USA established Chandler Capital Trust I ("Trust I") by purchasing all of its common securities for $403,000.  Trust I is a Delaware statutory business trust and is a wholly owned non-consolidated subsidiary of Chandler USA.  On May 22, 2003, Trust I issued $13.0 million of capital securities (the "Trust I Preferred Securities") to InCapS Funding I, Ltd., an unaffiliated company established under the laws of the Cayman Islands, in a private transaction.  Trust I used the proceeds from the issuance to purchase $13,403,000 of 9.75% junior subordinated debentures (the "Junior Debentures I") of Chandler USA.  Distributions on the Junior Debentures I are payable quarterly at a fixed annual rate of 9.75%.  Chandler USA may defer these payments for up to 20 consecutive quarters, but not beyond the maturity of the Junior Debentures I, with such deferred payments accruing interest compounded quarterly.  The Junior Debentures I are subject to a mandatory redemption on May 23, 2033, but they may be redeemed after five years at a premium of half the fixed rate coupon declining ratably to par in the 10th year.        The Junior Debentures I are the sole assets of Trust I and Trust I will distribute any cash payments it receives thereon to the holders of its preferred and common securities.  Distributions on the Trust I Preferred Securities are payable quarterly at a fixed annual rate of 9.75%.  Trust I may defer these payments for up to 20 consecutive quarters, but not beyond the maturity of the Trust I Preferred Securities, with such deferred payments accruing interest compounded quarterly.  The Trust I Preferred Securities are subject to a mandatory redemption on May 23, 2033, but they may be redeemed after five years at a premium of half the fixed rate coupon declining ratably to par in the 10th year.  All payments by Trust I regarding the Trust I Preferred Securities are guaranteed by Chandler USA.        In December 2003, Chandler USA established Chandler Capital Trust II ("Trust II") by purchasing all of its common securities for $217,000.  Trust II is a Delaware statutory business trust and is a wholly owned non-consolidated subsidiary of Chandler USA.  On December 16, 2003, Trust II issued $7.0 million of capital securities (the "Trust II Preferred Securities") to InCapS Funding II, Ltd., an unaffiliated company established under the laws of the Cayman Islands, in a private transaction.  Trust II used the proceeds from the issuance to purchase $7,217,000 of floating rate junior subordinated debentures (the "Junior Debentures II") of Chandler USA.  Distributions on the Junior Debentures II are payable quarterly at a floating rate of 4.10% over LIBOR (LIBOR is recalculated quarterly and the interest rate may not exceed 12.5% prior to January 8, 2009).  The interest rate was 8.25% at December 31, 2005. Chandler USA may defer these payments for up to 20 consecutive quarters, but not beyond the maturity of the Junior Debentures II, with such deferred payments accruing interest compounded quarterly.  The Junior Debentures II are subject to a mandatory redemption on January 8, 2034, but they may be redeemed after five years without penalty or premium.        The Junior Debentures II are the sole assets of Trust II and Trust II will distribute any cash payments it receives thereon to the holders of its preferred and common securities.  Distributions on the Trust II Preferred Securities are payable quarterly at a floating rate of 4.10% over LIBOR (LIBOR is recalculated quarterly and the interest rate may not exceed 12.5% prior to January 8, 2009). The interest rate was 8.25% at December 31, 2005.  Trust II may defer these payments for up to 20 consecutive quarters, but not beyond the maturity of the Trust II Preferred Securities, with such deferred payments accruing interest compounded quarterly.  The Trust II Preferred Securities are subject to a mandatory redemption on January 8, 2034, but they may be redeemed after five years without penalty or premium.  All payments by Trust II regarding the Trust II Preferred Securities are guaranteed by Chandler USA.        The sale of the Trust I Preferred Securities and the Trust II Preferred Securities during 2003 resulted in net proceeds of $19.3 million to Chandler USA, net of placement costs.  As of December 31, 2005, issuance costs in the amount of $670,000 have been capitalized and are being amortized over the stated maturity periods of thirty years.  Chandler USA used $13.3 million of the proceeds to purchase $16.7 million principal amount of its outstanding Debentures during 2003.  The Debentures purchased by Chandler USA were cancelled.  The purchase and cancellation of the Debentures resulted in a pre-tax gain of $3.1 million during 2003, net of an adjustment to unamortized issuance costs, which is included in other income in the consolidated statement of operations.  Chandler USA also contributed $5.0 million of the proceeds to NAICO to be used for general corporate purposes.        In December 2003, the Financial Accounting Standards Board issued Revised Interpretation No. 46 ("FIN 46R"), CONSOLIDATION OF VARIABLE INTEREST ENTITIES. FIN 46R provides guidance on the identification of, and financial reporting for, entities over which control is achieved through means other than voting rights.  FIN 46R is used to determine whether consolidation is required or, alternatively, whether the variable-interest model under FIN 46R should be used to account for existing and new entities.  Chandler USA adopted FIN 46R effective January 1, 2004.  The result of adoption was the deconsolidation of the two capital trusts that were created during 2003 in connection with the issuance of trust preferred securities.  Chandler USA reports the $20.6 million of junior subordinated debentures that were issued to the capital trusts on its consolidated balance sheet.  The adoption of FIN 46R had no effect on net earnings.                                                                          PAGE F-16  NOTE 6. SHAREHOLDER'S EQUITY  CAPITAL STOCK        In addition to the regulatory oversight of NAICO by the Oklahoma Department of Insurance, Chandler Insurance Company Ltd. ("Chandler Insurance"), Chandler USA's parent company, and Chandler USA are also subject to regulation under the insurance laws of Oklahoma (the "Oklahoma Insurance Code").  In addition to various reporting requirements imposed on Chandler Insurance and Chandler USA, the Oklahoma Insurance Code requires any person who seeks to acquire or exercise control over NAICO (which is presumed to exist if any person owns 10% or more of Chandler Insurance's or Chandler USA's outstanding voting stock) to file and obtain approval of certain applications with the Oklahoma Department of Insurance regarding their proposed ownership of such shares.  STATUTORY FINANCIAL INFORMATION AND MINIMUM CAPITAL REQUIREMENTS        NAICO is required to file financial statements with state regulatory authorities prepared on a statutory basis which differs from GAAP.  Statutory net income (loss) and statutory capital and surplus of NAICO are as follows:                                                       2003      2004      2005                                                  --------  --------  --------                                                         (In thousands)                             Statutory net income (loss) ........ $ 1,447   $(7,482)  $ 5,915             Statutory capital and surplus ...... $50,154   $41,458   $47,285          During 2005, the Oklahoma Insurance Code was amended to allow domestic insurers to admit office equipment, furniture and other such property constituting less than 3% of its otherwise admitted assets.  This prescribed accounting practice increased NAICO's statutory capital and surplus by $510,000 at December 31, 2005.  There is no difference between NAICO's statutory net income under the National Association of Insurance Commissioners' ("NAIC") ACCOUNTING PRACTICES AND PROCEDURES manual and practices prescribed by the Oklahoma Insurance Code.        The Oklahoma Insurance Commissioner has the right to permit other specific practices that deviate from prescribed practices.  NAICO does not have any such permitted practices.        The NAIC has adopted risk-based capital ("RBC") standards for domestic property and casualty insurance companies.  The RBC standards are designed to assist insurance regulators in analytically determining a level of capital and surplus that would be sufficient to withstand reasonably foreseeable adverse events associated with underwriting risk, investment risk, credit risk and loss reserve risk.  NAICO is subject to the RBC standards.  Based on available information, management believes NAICO complied with the RBC standards at December 31, 2004 and 2005.        At periodic intervals, various insurance regulatory authorities routinely examine the required statutory financial statements of NAICO as part of their legally prescribed oversight of the insurance industry.  Based on these examinations, the regulators can direct such financial statements to be adjusted in accordance with their findings.  DIVIDEND RESTRICTIONS        The amount of cash shareholder dividends that NAICO can pay to Chandler USA within any one year without the approval of the Oklahoma Department of Insurance is generally limited to the greater of (i) statutory net income excluding realized capital gains for the preceding year, or (ii) 10% of statutory surplus as regards policyholders as of the preceding December 31 with such amount not to exceed NAICO's statutory earned surplus.  Based on this criteria the maximum shareholder dividend NAICO may pay in 2006 without the approval of the Oklahoma Department of Insurance is approximately $5.7 million. NAICO paid cash shareholder dividends to Chandler USA totaling $3.4 million in 2004.        The future payment of shareholder dividends also depends upon the earnings, financial position and cash requirements of Chandler USA, as well as regulatory limitations and such other factors as the board of directors may deem relevant.        NAICO is subject to regulations which restrict its ability to pay dividends to policyholders.  The maximum amount of available policyholder dividends is limited to statutory earned surplus (approximately $9.6 million as of December 31, 2005).  NAICO paid approximately $146,000 and $62,000 in policyholder dividends during 2003 and 2004, respectively.  NAICO did not pay any policyholder dividends during 2005.                                                                          PAGE F-17  NOTE 7. INCOME TAXES        Chandler USA and its wholly owned subsidiaries file a consolidated U.S. Federal income tax return. The income taxes reflected in the accompanying consolidated statements of operations differ from those expected using U.S. Federal enacted income tax rates as noted by the following:                                                             2003       2004       2005                                                       ---------- ---------- ----------                                                                (In thousands)     Computed income tax provision (benefit) at 34% ...... $     736  $  (3,599) $   2,340 Increase (decrease) in income taxes resulting from:   Utilization of capital loss .......................      (800)      (248)      (104)   Nondeductible expenses ............................       256        265        214                                                       ---------- ---------- ---------- Federal income tax provision (benefit) .............. $     192  $  (3,582) $   2,450                                                       ========== ========== ==========      U.S. Federal income tax provision (benefit) consists of:                                                       CURRENT          DEFERRED         TOTAL                                               ---------------  ----------------  --------------                                                                 (In thousands)     2003 ........................................ $       (904)    $       1,096     $         192 2004 ........................................            -            (3,582)           (3,582) 2005 ........................................          160             2,290             2,450         Deferred income tax provision (benefit) relating to temporary differences includes the following components:                                                         2003           2004          2005                                                 -------------  ------------  ------------                                                               (In thousands)     Loss reserve discounts ......................... $       276   $      (796)  $       454 Unearned premiums ..............................         249          (372)         (256) Deferred policy acquisition costs ..............         (65)          (37)          397 Investment in limited partnerships .............           -             -          (126) Alternative minimum tax ........................           -             -          (160) Reserve for uncollectible premiums receivable ..          38             5           (36) Depreciation and lease expense .................         627             5          (106) Discount on fixed maturity investments .........        (218)           11            26 Net operating loss carryforwards ...............         214        (2,345)        2,076 Other ..........................................         (25)          (53)           21                                                 -------------  ------------  ------------                                                 $      1,096   $    (3,582)  $     2,290                                                 =============  ============  ============                                                                           PAGE F-18        The tax effect of temporary differences between the consolidated financial statement carrying amounts and tax bases of assets and liabilities that give rise to significant portions of the net deferred tax assets, which are included in other assets, at December 31, relate to the following:                                                                          2004          2005                                                                  ------------  ------------                                                                        (In thousands)    Deferred tax assets:   Loss reserve discounts ....................................... $     2,569   $     2,116   Unearned premiums ............................................       1,989         2,246   Compensated absences .........................................         242           227   Net operating loss carryforwards - federal ...................       4,019         1,942   Net operating loss carryforwards - state .....................       3,194         3,254   Net capital loss carryforward ................................         357         1,071   Investment in limited partnership ............................           -           126   Alternative minimum tax ......................................           -           160   Unrealized loss on investments available for sale ............          25           508   Other ........................................................         159           186   Valuation allowance ..........................................      (3,551)       (4,325)                                                                  ------------  ------------ Total deferred tax assets ......................................       9,003         7,511                                                                  ------------  ------------ Deferred tax liabilities:   Depreciation and lease expense ...............................       1,475         1,370   Deferred policy acquisition costs ............................          20           416   Other ........................................................         106           129                                                                  ------------  ------------ Total deferred tax liabilities .................................       1,601         1,915                                                                  ------------  ------------ Net deferred tax assets ........................................ $     7,402   $     5,596                                                                  ============  ============          At December 31, 2005, Chandler USA had a net operating loss carryforward available for U.S. Federal income taxes of $5.7 million which begins to expire in 2023.  Chandler USA has concluded that the deferred tax asset including the federal net operating loss carryforwards are more likely than not to be realized.  Chandler USA anticipates that its future U.S. consolidated income will be sufficient to utilize the federal net operating losses within the required time.  Chandler USA will continue to evaluate income generated in future periods in determining the reasonableness of its position.  If Chandler USA determines that future income is insufficient to cause the realization of the federal net operating losses within the required time, a valuation allowance will be established.        In addition, Chandler USA, at December 31, 2005, had net operating loss carryforwards available for Oklahoma state income taxes totaling approximately $54.2 million which expire in the years 2006 through 2025.  At December 31, 2005, Chandler USA also had a capital loss carryforward for U.S. Federal income taxes of $3.1 million which expires in 2007.  Chandler USA's capital loss carryforward increased in 2005 due to Chandler USA finalizing the sales price of a subsidiary sold in 2002.  A valuation allowance has been provided for the tax effect of the state net operating loss and the net capital loss carryforwards since realization of such amounts is not considered more likely than not.  NOTE 8. EMPLOYEE BENEFITS        Chandler USA and its subsidiaries participate in a defined contribution retirement plan established under Section 401(k) of the Internal Revenue Code. All full time employees who have completed one year of service and attained age 21 may elect to participate in the 401(k) plan.  Participants may contribute up to 25% of compensation, subject to certain limitations.  Chandler USA matches 50% of the first $2,000, 40% of the next $3,000, 30% of the next $3,000 and 25% of the remaining employee contributions up to a maximum employer contribution of $5,600 per employee per year.  In addition, Chandler USA may make additional annual contributions to the 401(k) plan at its discretion.  Chandler USA's expense for 401(k) plan contributions was $286,000, $321,000 and $315,000 for 2003, 2004 and 2005, respectively.  NOTE 9. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS        The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS.  The estimated fair value amounts have been determined by Chandler USA, using available market information and appropriate valuation methodologies.  However, considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value.  Accordingly, the estimates of fair values presented herein are not necessarily indicative of the amounts that Chandler USA could realize in a current market exchange.  The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.                                                                          PAGE F-19        A number of Chandler USA's significant assets (including deferred policy acquisition costs, property and equipment, reinsurance recoverables, prepaid reinsurance premiums and state insurance licenses) and liabilities (including unpaid losses and loss adjustment expenses and unearned premiums) are not considered financial instruments.  Based on the short term nature or other relevant characteristics, Chandler USA has concluded that the carrying value of other assets and liabilities considered financial instruments, such as cash equivalents, premiums receivable, policyholder deposits, accrued taxes and other payables, and premiums payable, approximates their fair value as of December 31, 2004 and 2005.  The estimated fair values of Chandler USA's fixed-maturity and equity security investments are disclosed at Note 2.  At December 31, 2005, the fair value of Chandler USA's Debentures was estimated to be $6.1 million based on the latest reported trade.  Chandler USA's Debentures have not historically traded regularly, and settlement at the reported fair value may not be possible. The Debentures are redeemable by Chandler USA on or after July 16, 2009 without penalty or premium, but may be purchased and cancelled by Chandler USA at a price of less than the sum of the principal amount and accrued interest at any time.  Chandler USA is obligated for $13.4 million principal amount of junior subordinated debentures that mature in 2033 with a fixed interest rate of 9.75%, and $7.2 million principal amount of junior subordinated debentures that mature in 2034 with a floating rate of 4.10% over LIBOR.  The interest rate at December 31, 2005 was 8.25%.  At December 31, 2005, the fair value of Chandler USA's junior subordinated debentures was estimated to be $21.1 million.  NOTE 10. LITIGATION        Certain officers and directors of Chandler USA and Chandler Insurance were named as defendants in certain litigation involving CenTra, Inc.  This litigation was concluded in 2002.  As a result of various events in 1995, 1996 and 1997 related to the CenTra litigation, Chandler Insurance (Barbados), Ltd. ("Chandler Barbados") and Chandler USA recorded estimated recoveries of costs from its Director and Officer Liability Insurance policy totaling $3,456,000 and $1,044,000, respectively, for reimbursable amounts previously paid that relate to allowable defense and litigation costs.  Chandler Barbados and Chandler USA received payment for a 1995 claim during 1996 in the amount of $636,000 and $159,000, respectively.  Chandler Insurance assumed Chandler Barbados' remaining receivable in December 2003 under the reorganization of these companies.  During June 2004, Chandler Insurance and Chandler USA received payment in the amount of $558,000 and $167,000, respectively, in exchange for releasing certain insurers with respect to policies covering periods from June 28, 1997 up to June 28, 2002.  During the third quarter of 2004, Chandler Insurance and its subsidiaries settled the remaining litigation with the insurer for policy periods from June 28, 1992 to June 28, 1997.  Based on the terms of the settlement, Chandler Insurance and Chandler USA recorded additional estimated recoveries of $1,204,000 and $359,000, respectively, during the third quarter of 2004.  Chandler Insurance and Chandler USA received payment of $3,527,000 and $1,053,000, respectively, during December 2004 and received payment of the remaining settlement funds of $497,000 and $192,000 during the first quarter of 2005.        Transamerica Occidental Life Insurance Company ("Transamerica") reinsured NAICO for certain workers compensation risks during 1989, 1990 and 1991. Beginning in 1996, Transamerica refused to pay NAICO for balances that it owed under the reinsurance treaties.  On March 15, 2004, an arbitration panel ordered Transamerica to pay the losses and loss adjustment expenses owed to NAICO in the amount of $1,607,704 plus interest at 6%, or approximately $577,000, plus $25,000 in costs.  NAICO received payment for these amounts during 2004.        Chandler USA and its subsidiaries are not parties to any other 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.  NOTE 11. COMMITMENTS AND CONTINGENCIES  REINSURANCE        In the ordinary course of business, NAICO cedes insurance to other insurers and reinsurers under various reinsurance treaties that cover individual risks (facultative reinsurance) or entire classes of business (treaty reinsurance).  Reinsurance provides greater diversification of business written and also reduces NAICO's exposure arising from high limits of liability or from hazards of an unusual nature. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policies.  In formulating its reinsurance programs, NAICO considers numerous factors, including the financial stability of the reinsurer, ability to provide sufficient collateral (if required), reinsurance coverage offered and price.        NAICO has structured separate reinsurance programs for property (including inland marine), workers compensation, casualty (including automobile liability, general and products liability, umbrella liability and related professional liability),  automobile physical damage, homeowners and construction surety bonds.  Chandler Insurance reinsures NAICO for a portion of the risk on NAICO's reinsurance programs except for the homeowners program.                                                                          PAGE F-20        In addition, NAICO purchases catastrophe protection to limit its retention for single loss occurrences involving multiple policies and/or policyholders, such as floods, winds and severe storms.  NAICO also purchases facultative reinsurance when it writes a risk with limits of liability exceeding the maximum limits of its treaties or when it otherwise considers such action appropriate.        Treaty reinsurance may be ceded under treaties on both a pro rata or proportional basis (where the reinsurer shares proportionately in premiums and losses) and an excess of loss basis (where only losses above a specific amount are reinsured).  The availability, costs and limits of reinsurance purchased can vary from year to year based upon prevailing market conditions, reinsurers' underwriting results and NAICO's desired risk retention levels.  A majority of NAICO's reinsurance programs renew on January 1 or July 1 of each year.  NAICO renewed all January 1, 2006 reinsurance programs.  At the present time, NAICO expects to renew the reinsurance programs that renew on July 1, 2006.        NAICO periodically reviews certain prospective single year reinsurance treaties, subject to commutation provisions therein, to determine if it is advantageous to assume the estimated loss exposure on expired insurance policies covered by such treaties in exchange for return premiums.  Commutation of such reinsurance treaties will be determined in future periods based on timely review of all available data.  NAICO reviews the historical results for reinsurance contracts with similar commutation provisions and accrues for such commutations where a commutation election is considered probable.        Reinsurance contracts do not relieve an insurer from its obligation to policyholders.  Failure of reinsurers to honor their obligations could result in losses to Chandler USA; consequently, adjustments to ceded losses and loss adjustment expenses are made for amounts deemed uncollectible.  During 2003, 2004 and 2005, NAICO incurred charges of $604,000, $282,000 and $108,000, respectively, in adjustments to ceded losses and loss adjustment expenses for amounts deemed uncollectible.        The effect of reinsurance on premiums written and earned was as follows:                                   2003                     2004                     2005                      -----------------------  -----------------------  -----------------------                        WRITTEN      EARNED      WRITTEN      EARNED      WRITTEN      EARNED                      -----------  ----------  -----------  ----------  -----------  ----------                                                   (In thousands)        Direct ............. $  118,247   $ 126,067   $  121,146   $ 117,383   $  119,051   $ 115,849 Assumed ............        197         212          505         484        1,293         570 Ceded ..............    (66,604)    (69,696)     (51,187)    (53,825)     (50,218)    (50,359)                      -----------  ----------  -----------  ----------  -----------  ---------- Net premiums ....... $   51,840   $  56,583   $   70,464   $  64,042   $   70,126   $  66,060                      ===========  ==========  ===========  ==========  ===========  ==========          Losses and loss adjustment expenses are reported net of the effect of reinsurance recoveries and recoverables in the consolidated statements of operations.  Ceded losses and loss adjustment expenses were $83.9 million, $52.1 million and $50.3  million for 2003, 2004 and 2005, respectively.  SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK        NAICO conducts its business through individual independent insurance agencies and underwriting managers.  Certain of these underwriting managers have provided collateral to NAICO to secure a portion of the premiums receivable. Substantially all of the principal shareholders of the independent agencies and underwriting managers have provided personal guarantees for payment of premiums to NAICO.  NAICO also requires certain policyholders to pay a deposit at the time of inception of coverage to secure payment of future premiums or other policy related obligations.  Receivables under installment plans do not exceed the corresponding liability for unearned premiums.  Total consolidated premiums receivable at December 31, 2004 and 2005 were $22.8 million and $28.3 million, respectively.  Receivables for deductibles, in most cases, are secured by cash deposits and letters of credit.  At December 31, 2005, NAICO maintained custody of such letters of credit securing these and other transactions totaling approximately $20.4 million, which is a reasonable estimate of their fair value. These letters of credit are not reflected in the accompanying consolidated financial statements.  There were no unaffiliated independent insurance agents that produced 10% or more of NAICO's direct written and assumed premiums during 2003.  During 2004 and 2005, one unaffiliated independent insurance agent produced approximately 13% and 12%, respectively, of NAICO's direct written and assumed premiums.        Approximately $26.7 million, or 28% of NAICO's reinsurance recoverables and prepaid reinsurance premiums at December 31, 2005 are collateralized by premiums payable to the reinsurers, securities pledged in trust or letters of credit for the benefit of NAICO.  Chandler USA believes the above value of such collateral is a reasonable estimate of their fair value.  NAICO's reinsurance contracts include provisions for offsets against premiums owed to the reinsurers.                                                                          PAGE F-21        The following table sets forth certain information related to NAICO's five largest reinsurers determined on the basis of net reinsurance recoverables as of December 31, 2005.                                                                                 CEDED REINSURANCE                                                                  NET           PREMIUMS FOR      A.M. BEST                                                              REINSURANCE      THE YEAR ENDED      COMPANY NAME OF REINSURER                                          RECOVERABLE (1)  DECEMBER 31, 2005     RATING - ---------------------------------------------------------  ---------------  -------------------  ---------                                                                       (Dollars in thousands)     Employers Reinsurance Corporation .......................  $       29,497   $            8,186      A Chandler Insurance ......................................          26,532               27,158      -(2) Swiss Reinsurance America Corporation ...................          16,691                   46      A+ Odyssey America Reinsurance Corporation .................           4,504                5,594      A Berkley Insurance Company ...............................           3,542                  994      A                                                            ---------------  -------------------      Top five reinsurers ................................  $       80,766   $           41,978                                                            ===============  ===================      All reinsurers .....................................  $       93,877   $           50,218                                                            ===============  =================== Percentage of total represented by top five reinsurers ..              86%                  84%  - ---------------------------------------------------------   (1)  Includes losses and loss adjustment expenses paid and outstanding, unpaid losses and loss adjustment      expenses and prepaid reinsurance premiums recoverable from reinsurers as of December 31, 2005.  (2)  Chandler Insurance owns 100% of the common stock of Chandler USA, which in turn owns 100% of the common      stock of NAICO.  Although Chandler Insurance is not subject to the minimum capital, audit, reporting and      other requirements imposed by regulation upon United States reinsurance companies, as a foreign reinsurer,      it is required to secure its reinsurance obligations by depositing acceptable securities in trust for NAICO's      benefit.  At December 31, 2005, Chandler Insurance had cash and investments, including accrued interest, with a      fair value of $28.9 million deposited in a trust account for the benefit of NAICO.    OTHER        See Note 10 regarding contingencies relating to litigation matters.        Chandler USA has an employment agreement with W. Brent LaGere, Chairman of the Board and Chief Executive Officer of Chandler USA and its subsidiaries. Under this agreement, Mr. LaGere's base compensation is established at not less than $250,000 per year.  In the event that Mr. LaGere is terminated without cause, as defined in the agreement, he is entitled to receive his base compensation for the remainder of the term of the agreement, but in no event for more than 60 months.  The agreement will terminate upon Mr. LaGere attaining age 70, unless earlier terminated by Chandler USA for cause.  In addition to his base compensation, Mr. LaGere is eligible to receive certain benefits and bonuses from Chandler USA and its subsidiaries.        In addition, certain executives are eligible to receive bonuses based upon various factors.        NAICO is subject to a variety of assessments related to insurance activities, including those by state guaranty funds and workers compensation second-injury funds.  The amounts and timing of such assessments are beyond the control of NAICO.  NAICO provides for these charges on a current basis by applying historical factors to premiums earned.  Actual results may vary from these values and adjustments therefrom are necessary to maintain an adequate reserve for these assessments.  The reserve for unpaid assessments was approximately $1,037,000 and $1,129,000 at December 31, 2004 and 2005, respectively.  In certain cases, NAICO is permitted to recover a portion of its assessments generally as a reduction to premium taxes paid to certain states. NAICO has recorded receivables in the amount that it expects to recover of approximately $2,812,000 and $3,031,000 at December 31, 2004 and 2005, respectively.  NAICO may receive additional guaranty fund assessments in the future related to insolvent insurance companies.  At this time, NAICO is unable to estimate the amount and timing of such assessments.                                                                          PAGE F-22        At December 31, 2005, Chandler USA's subsidiaries were committed under noncancellable operating and capital leases for certain equipment and office space.  Rental payments under these leases were $919,000, $825,000 and $780,000 in 2003, 2004 and 2005, respectively.  Future minimum lease payments are as follows:                                                         (In thousands)                                             2006 .......................... $         684                      2007 ..........................           182                      2008 ..........................            58                      2009 ..........................            33                      2010 ..........................            13                                                      --------------                                                      $         970                                                      ==============         During March 2001, Chandler USA entered into a $3.8 million sale and leaseback transaction for certain owned equipment for three years.  The sale and leaseback transaction resulted in a deferred gain of $2.0 million which was amortized into income over the final year of the lease, resulting in other income of $1.7 million in 2003 and $368,000 in 2004.  During March 2004, the lease was extended for an additional three years with monthly rental installments equal to the sum of (i) $17,512 plus (ii) interest on the unpaid lease balance at a floating interest rate of 1% over JP Morgan Chase Bank prime, which was 8.25% at December 31, 2005.  Chandler USA has the option to repurchase the equipment at the end of the lease for approximately $2.4 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 $1.9 million.        Chandler USA has guaranteed the obligations of Trust I and Trust II.  It 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 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS        During March 2001, Chandler USA entered into a $3.8 million sale and leaseback transaction for certain owned equipment for a three year term. During March 2004, the lease was extended for an additional three years.  See Note 11 to Consolidated Financial Statements for additional information.  The bank that participated in the sale and leaseback transaction  also established a letter of credit in the amount of $500,000 on behalf of Chandler USA for the benefit of Brown & Brown, Inc. as security in connection with the sale of a subsidiary.  Chandler USA paid a fee of $5,000 during 2004 to the bank for issuing the letter of credit.  The letter of credit expired on December 31, 2005.  A director of NAICO and Chandler USA is an officer and director of the bank that participated in these transactions, and is also a significant shareholder of the bank's holding company.  This director is also a director of the bank that Chandler USA and its subsidiaries use as their principal disbursement bank, and is a significant shareholder of the bank's holding company.  The balance maintained by Chandler USA and each subsidiary is fully insured by the Federal Deposit Insurance Corporation, and Chandler USA and its subsidiaries pay customary service charges to the bank for the services provided.        Chandler USA leases and has made certain improvements to a rural property in which certain directors and officers of Chandler USA own interests.  Under the lease, no cash rental is paid.  Chandler USA drilled a water well on the property and maintains certain structures it regularly uses.  This property provides recreational activities for the entertainment of customers and business associates of Chandler USA's subsidiaries.  Chandler USA incurred approximately $336,000, $353,000 and $313,000 in expenses associated with this property during 2003, 2004 and 2005, respectively, including $12,000, $14,000 and $10,000 for reimbursement of certain expenses, such as utility and similar expenses, for the years 2003, 2004 and 2005, respectively.        Chandler USA and Chandler Insurance are parties to an Intercompany Credit Agreement (the "Credit Agreement") covering intercompany loans between the parties.  The Credit Agreement requires interest to be paid at the prime interest rate published in The Wall Street Journal each month, and balances owed by either party are payable at any time upon demand.  At December 31, 2004 and 2005, Chandler USA had a receivable of $10.9 million and $9.4 million, respectively, under the Credit Agreement, and Chandler USA earned $412,000, $439,000 and $614,000 in interest income under the Credit Agreement during 2003, 2004 and 2005, respectively.                                                                          PAGE F-23  NOTE 13. SEGMENT INFORMATION        Chandler USA has one reportable operating segment for property and casualty insurance.  The insurance products reported in the property and casualty segment are underwritten by NAICO and are marketed through independent insurance agencies.  NAICO underwrites various lines of property and casualty insurance, including surety bonds and workers compensation insurance.  NAICO's main areas of concentration include the construction, manufacturing, oil and gas, trucking, wholesale, service and retail industries along with political subdivisions.  The property and casualty segment operates primarily in Oklahoma and Texas, and other surrounding states.  Oklahoma accounted for approximately 51%, 51% and 47% of gross written premiums in 2003, 2004 and 2005, respectively, while Texas accounted for approximately 36%, 37% and 36% of gross written premiums during the same years.  Management evaluates the property and casualty segment's performance on the basis of growth in gross written premiums and income before income taxes.        Chandler USA accounts for intercompany sales and transactions as if they were to third parties and attempts to set fees consistent with those that would apply in arm's length transactions with a non-affiliate.  There can be no assurance the rates charged reflect those that would have been agreed upon following an arm's length negotiation.        Net premiums earned and losses and loss adjustment expenses within the property and casualty segment can be identified to Chandler USA designated insurance programs.  Chandler USA's chief operating decision makers review net premiums earned and losses and loss adjustment expenses in assessing the performance of an insurance program.  In addition, Chandler USA's chief operating decision makers consider many other factors such as the lines of business offered within an insurance program and the states in which the insurance programs are offered.  Certain discrete financial information is not readily available by insurance program, including assets, interest income, and investment gains or losses.  Chandler USA does not consider its insurance programs to be reportable segments, however, the following supplemental information pertaining to each insurance program's net premiums earned and losses and loss adjustment expenses is presented for the property and casualty segment.                                                               YEAR ENDED DECEMBER 31,                                                      -------------------------------- INSURANCE PROGRAM                                       2003       2004       2005 - ---------------------------------------------------- ---------- ---------- ----------                                                               (In thousands)     NET PREMIUMS EARNED Standard property and casualty ..................... $  45,521  $  54,278  $  54,979 Political subdivisions .............................     8,093      7,269      6,690 Homeowners .........................................         -          -      3,321 Surety bonds .......................................     2,724      1,993        669 Other (1) ..........................................       245        502        401                                                      ---------- ---------- ----------                                                      $  56,583  $  64,042  $  66,060                                                      ========== ========== ==========  LOSSES AND LOSS ADJUSTMENT EXPENSES Standard property and casualty ..................... $  29,650  $  42,901  $  33,512 Political subdivisions .............................     5,722      7,122      4,091 Homeowners .........................................         -          -      1,306 Surety bonds .......................................       911      2,677     (1,704) Other (1) ..........................................       917      1,081        119                                                      ---------- ---------- ----------                                                      $  37,200  $  53,781  $  37,324                                                      ========== ========== ========== - --------------------------------------   (1)  This category is comprised primarily of the run-off of discontinued programs and      NAICO's participation in various mandatory workers compensation pools.                                                                           PAGE F-24  NOTE 14.  SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)        A summary of the unaudited quarterly operating results during 2004 and 2005 follows:                                                   First    Second     Third    Fourth     Total                                               quarter   quarter   quarter   quarter     year                                              --------- --------- --------- --------- ---------       2004 - -------------------------------------------- Net premiums earned ........................ $ 13,872  $ 16,732  $ 17,074  $ 16,364  $ 64,042 Investment income, net .....................    1,238       749       853       837     3,677 Realized investment gains, net .............      463         -         3       186       652 Loss before income taxes ...................     (996)   (4,921)   (1,653)   (3,016)  (10,586) Net loss ...................................     (580)   (3,297)   (1,178)   (1,949)   (7,004)   2005 - -------------------------------------------- Net premiums earned ........................ $ 16,224  $ 16,294  $ 16,726  $ 16,816  $ 66,060 Investment income, net .....................      821       845       880       922     3,468 Realized investment gains, net .............        -         3         -       380       383 Income before income taxes .................    3,370     2,485       460       568     6,883 Net income .................................    2,155     1,595       251       432     4,433                                         *   *   *   *   *   *   *                                                                          PAGE F-25  REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM   To the Board of Directors and Shareholder of Chandler (U.S.A.), Inc.:  We have audited the accompanying consolidated balance sheets of Chandler (U.S.A.), Inc. and subsidiaries ("Chandler USA") as of December 31, 2004 and 2005, and the related consolidated statements of operations, comprehensive income, cash flows and shareholder's equity for each of the three years in the period ended December 31, 2005.  Our audits also included the financial statement schedules listed in the Index at Item 15.  These financial statements and financial statement schedules are the responsibility of Chandler USA's management.  Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.  We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.  In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Chandler USA at December 31, 2004 and 2005, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America.  Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.    /s/ Tullius Taylor Sartain & Sartain LLP  TULLIUS TAYLOR SARTAIN & SARTAIN LLP Tulsa, Oklahoma February 10, 2006                                                                           PAGE F-26                                                                      SCHEDULE I                       CHANDLER (U.S.A.), INC. AND SUBSIDIARIES                           SUMMARY OF INVESTMENTS - OTHER                       THAN INVESTMENTS IN RELATED PARTIES                              AS OF DECEMBER 31, 2005                                   (In thousands)                                                                                   AMOUNT AT WHICH                                                                                SHOWN IN THE TYPE OF INVESTMENT                                      COST      FAIR VALUE   BALANCE SHEET - -------------------------------------------------   ------------ ------------ ---------------     FIXED MATURITIES AVAILABLE FOR SALE: U.S. Treasury securities and obligations of U.S.   government corporations and agencies ..........   $    37,933  $    37,029  $       37,029 Corporate obligations ...........................        27,314       26,455          26,455 Public utilities ................................         6,479        6,333           6,333 Mortgage-backed securities ......................         2,017        1,918           1,918                                                     ------------ ------------ ---------------                                                          73,743       71,735          71,735  EQUITY SECURITIES AVAILABLE FOR SALE: Corporate stock .................................         8,558        9,071           9,071                                                     ------------ ------------ ---------------   Total investments .............................   $    82,301  $    80,806  $       80,806                                                     ============ ============ ===============    SEE REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.                                                                         PAGE F-27                                                                      SCHEDULE II                      CHANDLER (U.S.A.), INC. AND SUBSIDIARIES                   CONDENSED FINANCIAL INFORMATION OF REGISTRANT                              CHANDLER (U.S.A.), INC.                               (PARENT COMPANY ONLY)                                   BALANCE SHEETS                         (In thousands except share amounts)                                                                           DECEMBER 31,                                                                   ---------------------                                                                      2004       2005                                                                   ---------- ----------    ASSETS  Cash ............................................................ $      64  $      26 Premiums receivable .............................................         7          - Amounts due from subsidiaries ...................................     1,276        148 Property and equipment, net .....................................       981        898 Amounts due from related parties ................................    10,891      9,360 Other assets ....................................................     4,479      4,544 Investment in subsidiaries, net .................................    48,381     54,363                                                                   ---------- ---------- Total assets .................................................... $  66,079  $  69,339                                                                   ========== ========== LIABILITIES AND SHAREHOLDER'S EQUITY Liabilities  Accrued taxes and other payables ............................... $   2,288  $   2,054  Debentures .....................................................     6,979      6,979  Junior subordinated debentures issued to affiliated trusts .....    20,620     20,620                                                                   ---------- ---------- Total liabilities ...............................................    29,887     29,653                                                                   ---------- ---------- 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 ............................................   (24,346)   (19,913)  Accumulated other comprehensive income (loss):  Unrealized loss on investments held by subsidiary and available   for sale, net of deferred income taxes ........................       (48)      (987)                                                                   ---------- ---------- Total shareholder's equity ......................................    36,192     39,686                                                                   ---------- ---------- Total liabilities and shareholder's equity ...................... $  66,079  $  69,339                                                                   ========== ==========    SEE REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.                                                                         PAGE F-28                                                                      SCHEDULE II                      CHANDLER (U.S.A.), INC. AND SUBSIDIARIES                   CONDENSED FINANCIAL INFORMATION OF REGISTRANT                              CHANDLER (U.S.A.), INC.                               (PARENT COMPANY ONLY)                              STATEMENTS OF OPERATIONS                                   (In thousands)                                                                              YEAR ENDED DECEMBER 31,                                                                       --------------------------------                                                                          2003       2004       2005                                                                       ---------- ---------- ----------     Revenues    Investment income, net ........................................... $      34  $       2  $       3    Interest income, net from related parties ........................       436        491        670    Other income .....................................................     5,600      1,370        908                                                                       ---------- ---------- ----------      Total revenues .................................................     6,070      1,863      1,581                                                                       ---------- ---------- ---------- Operating costs and expenses    General and administrative expenses ..............................     3,175      2,505      2,749    Interest expense .................................................     2,447      2,385      2,519                                                                       ---------- ---------- ----------      Total operating costs and expenses .............................     5,622      4,890      5,268                                                                       ---------- ---------- ---------- Income (loss) before income tax benefit .............................       448     (3,027)    (3,687) Federal income tax benefit ..........................................       509      1,137      1,198                                                                       ---------- ---------- ---------- Net income (loss) before equity    in net income (loss) of subsidiaries .............................       957     (1,890)    (2,489) Equity in net income (loss) of subsidiaries .........................     1,017     (5,114)     6,922                                                                       ---------- ---------- ---------- Net income (loss) ................................................... $   1,974  $  (7,004) $   4,433                                                                       ========== ========== ==========   SEE REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.                                                                         PAGE F-29                                                                     SCHEDULE II                      CHANDLER (U.S.A.), INC. AND SUBSIDIARIES                   CONDENSED FINANCIAL INFORMATION OF REGISTRANT                              CHANDLER (U.S.A.), INC.                               (PARENT COMPANY ONLY)                              STATEMENTS OF CASH FLOWS                                   (In thousands)                                                                           YEAR ENDED DECEMBER 31,                                                                    --------------------------------                                                                       2003       2004       2005                                                                    ---------- ---------- ----------     Operating activities   Net income (loss) .............................................. $   1,974  $  (7,004) $   4,433   Add (deduct):     Adjustments to reconcile net income (loss) to cash       applied to operating activities:     Net (income) loss of subsidiaries not distributed to parent ..    (1,017)     5,114     (6,922)     Net gains on sale of property and equipment ..................    (1,661)      (371)        (7)     Gain on retirement of debentures .............................    (3,106)       (36)         -     Amortization and depreciation ................................       221        205        210     Net change in non-cash balances relating to       operating activities:       Premiums receivable ........................................       970          2          7       Amounts due from subsidiaries ..............................       325        161      1,128       Other assets ...............................................     1,020       (922)      (121)       Accrued taxes and other payables ...........................      (334)       581       (234)       Premiums payable ...........................................    (2,328)         -          -                                                                    ---------- ---------- ----------     Cash applied to operating activities .........................    (3,936)    (2,270)    (1,506)                                                                    ---------- ---------- ---------- Investing activities   Cost of property and equipment purchased .......................      (471)      (154)      (130)   Proceeds from sale of property and equipment ...................       100         86         67   Investment in subsidiary .......................................    (5,620)         -          -                                                                    ---------- ---------- ----------     Cash applied to investing activities .........................    (5,991)       (68)       (63)                                                                    ---------- ---------- ---------- Financing activities   Shareholder dividend from subsidiaries .........................         -      3,400          -   Proceeds from issuance of debentures ...........................    20,620          -          -   Payment on retirement of debentures ............................   (12,782)      (226)         -   Debt issue costs ...............................................      (711)       (18)         -   Payments and loans from related parties ........................     2,426      4,602      2,513   Payments and loans to related parties ..........................    (1,486)    (5,851)      (982)                                                                    ---------- ---------- ----------     Cash provided by financing activities ........................     8,067      1,907      1,531                                                                    ---------- ---------- ---------- Decrease in cash and cash equivalents ............................    (1,860)      (431)       (38) Cash and cash equivalents at beginning of year ...................     2,355        495         64                                                                    ---------- ---------- ---------- Cash and cash equivalents at end of year ......................... $     495  $      64  $      26                                                                    ========== ========== ==========    SEE REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.                                                                         PAGE F-30                                                                      SCHEDULE III                      CHANDLER (U.S.A.), INC. AND SUBSIDIARIES                        SUPPLEMENTARY INSURANCE INFORMATION                                   (In thousands)                                          FUTURE                                       POLICY                                                       AMORTI-                                      BENEFITS,            OTHER                         CLAIMS,    ZATION OF              NET                            DEFERRED   LOSSES,             POLICY                         LOSSES    DEFERRED             PREMIUMS                             POLICY    CLAIMS            CLAIMS AND             NET        AND       POLICY      OTHER   WRITTEN                          ACQUISITION AND LOSS  UNEARNED  BENEFITS   PREMIUM  INTEREST  SETTLEMENT ACQUISITION OPERATING   AND                             COSTS    EXPENSES  PREMIUMS   PAYABLE   REVENUE   INCOME    EXPENSES     COSTS    EXPENSES  ASSUMED                          ----------- --------- -------- ---------- --------- --------- ---------- ----------- --------- --------            DECEMBER 31, 2003 Property and casualty .. $       165 $  87,768 $ 47,325 $    4,807 $  56,583 $   2,560 $   37,200 $    11,278 $  15,927 $ 51,840                          =========== ========= ======== ========== ========= ========= ========== =========== ========= ======== DECEMBER 31, 2004 Property and casualty .. $        57 $ 108,233 $ 51,109 $    4,912 $  64,042 $   3,677 $   53,781 $    11,039 $  14,777 $ 70,464                          =========== ========= ======== ========== ========= ========= ========== =========== ========= ======== DECEMBER 31, 2005 Property and casualty .. $     1,225 $ 109,541 $ 55,034 $    5,684 $  66,060 $   3,468 $   37,324 $    10,671 $  15,284 $ 70,126                          =========== ========= ======== ========== ========= ========= ========== =========== ========= ========    SEE REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.                                                                         PAGE F-31                                                                      SCHEDULE IV                      CHANDLER (U.S.A.), INC. AND SUBSIDIARIES                                     REINSURANCE                               (Dollars in thousands)                                                                     ASSUMED                    PERCENTAGE                                                    CEDED TO        FROM                      OF AMOUNT                                        GROSS         OTHER         OTHER          NET         ASSUMED                                        AMOUNT      COMPANIES     COMPANIES       AMOUNT        TO NET                                     ------------  ------------  ------------  ------------  ------------       Year ended December 31, 2003  Property and casualty ...........  $   118,247   $   (66,604)  $       197   $    51,840          0.38%                                     ============  ============  ============  ============  ============  Year ended December 31, 2004  Property and casualty ...........  $   121,146   $   (51,187)  $       505   $    70,464          0.72%                                     ============  ============  ============  ============  ============  Year ended December 31, 2005  Property and casualty ...........  $   119,051   $   (50,218)  $     1,293   $    70,126          1.84%                                     ============  ============  ============  ============  ============    SEE REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.                                                                         PAGE F-32                                                                       SCHEDULE V                      CHANDLER (U.S.A.), INC. AND SUBSIDIARIES                          VALUATION AND QUALIFYING ACCOUNTS                                    (In thousands)                                                      BALANCE AT        PROVISION                           BALANCE                                                     BEGINNING           FOR                               AT END                                                     OF PERIOD      NON-COLLECTION      WRITE-OFFS        OF PERIOD                                                 ----------------  ----------------  ----------------  ---------------      Allowance for non-collection of   premiums receivable:     2003 ...................................... $           246   $           272   $          (385)  $          133                                                 ================  ================  ================  ===============     2004 ...................................... $           133   $            42   $           (56)  $          119                                                 ================  ================  ================  ===============     2005 ...................................... $           119   $           176   $           (72)  $          223                                                 ================  ================  ================  ===============  Allowance for non-collection of reinsurance   recoverables on paid and unpaid losses:     2003 ...................................... $         2,767   $           604   $           (57)  $        3,314                                                 ================  ================  ================  ===============     2004 ...................................... $         3,314   $           282   $          (324)  $        3,272                                                 ================  ================  ================  ===============     2005 ...................................... $         3,272   $           108   $        (3,206)  $          174                                                 ================  ================  ================  ===============   SEE REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.                                                                         PAGE F-33                                                                      SCHEDULE VI                       CHANDLER (U.S.A.), INC. AND SUBSIDIARIES                              SUPPLEMENTAL INFORMATION                   (FOR PROPERTY-CASUALTY INSURANCE UNDERWRITERS)                                   (In thousands)                                                       DISCOUNT      PAID LOSSES AND                                                   DEDUCTED      LOSS ADJUSTMENT                                                 FROM RESERVES      EXPENSES                                                ---------------  ---------------    Year ended December 31, 2003   Property-casualty .......................... $            -   $       41,048                                                ===============  =============== Year ended December 31, 2004   Property-casualty .......................... $            -   $       38,429                                                ===============  =============== Year ended December 31, 2005   Property-casualty .......................... $            -   $       41,470                                                ===============  ===============   SEE REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.                                                                         PAGE F-34                                  INDEX TO EXHIBITS                                 -----------------  Exhibit No. - -----------     21.1     Subsidiaries of the registrant.    31.1     Rule 13a-14(a)/15d-14(a) Certifications.    32.1     Section 1350 Certifications.    EX-21.1 2 exhibit211edgar.txt CUSA EXHIBIT 21.1 12/31/05                                                                    EXHIBIT 21.1                      CHANDLER (U.S.A.), INC. AND SUBSIDIARIES                          SUBSIDIARIES OF THE REGISTRANT  1.  National American Insurance Company, an Oklahoma corporation that is a     wholly owned subsidiary of Chandler USA.  2.  Chandler Insurance Managers, Inc., an Oklahoma corporation that is a     wholly owned subsidiary of Chandler USA.  3.  Network Administrators, Inc., a Texas corporation that is a wholly owned     subsidiary of Chandler USA.  4.  Chandler Capital Trust I, a Delaware corporation that is a wholly owned     subsidiary of Chandler USA.  5.  Chandler Capital Trust II, a Delaware corporation that is a wholly owned     subsidiary of Chandler USA.    EX-31.1 3 exh311edgar.txt CUSA EXHIBIT 31.1 12/31/05                                                                    EXHIBIT 31.1                                   CERTIFICATIONS  I, W. Brent LaGere, certify that:  1.  I have reviewed this annual report on Form 10-K of Chandler (U.S.A.), Inc.;  2.  Based on my knowledge, this report does not contain any untrue statement of     a material fact or omit to state a material fact necessary to make the     statements made, in light of the circumstances under which such statements     were made, not misleading with respect to the period covered by this report;  3.  Based on my knowledge, the financial statements, and other financial     information included in this report, fairly present in all material     respects the financial condition, results of operations and cash flows of     the registrant as of, and for, the periods presented in this report;  4.  The registrant's other certifying officer(s) and I are responsible for     establishing and maintaining disclosure controls and procedures (as defined     in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:         a)  Designed such disclosure controls and procedures, or caused such        disclosure controls and procedures to be designed under our supervision,        to ensure that material information relating to the registrant,        including its consolidated subsidiaries, is made known to us by others        within those entities, particularly during the period in which this        report is being prepared;         b)  Evaluated the effectiveness of the registrant's disclosure controls        and procedures and presented in this report our conclusions about the        effectiveness of the disclosure controls and procedures, as of the end        of the period covered by this report based on such evaluation; and         c)  Disclosed in this report any change in the registrant's internal        control over financial reporting that occurred during the registrant's        most recent fiscal quarter (the registrant's fourth fiscal quarter in        the case of an annual report) that has materially affected, or is        reasonably likely to materially affect, the registrant's internal        control over financial reporting; and  5.  The registrant's other certifying officer(s) and I have disclosed, based on     our most recent evaluation of internal control over financial reporting, to     the registrant's auditors and the audit committee of registrant's board of     directors (or persons performing the equivalent functions):         a)  All significant deficiencies and material weaknesses in the design        or operation of internal control over financial reporting which are        reasonably likely to adversely affect the registrant's ability to        record, process, summarize and report financial information; and         b)  Any fraud, whether or not material, that involves management or        other employees who have a significant role in the registrant's internal        control over financial reporting.   Date:  February 28, 2006                                           /s/ W. Brent LaGere                                         ---------------------------------------                                         W. Brent LaGere                                         Chairman of the Board and                                         Chief Executive Officer                                                                      EXHIBIT 31.1                                                                    (CONTINUED)                                   CERTIFICATIONS  I, Mark C. Hart, certify that:  1.  I have reviewed this annual report on Form 10-K of Chandler (U.S.A.), Inc.;  2.  Based on my knowledge, this report does not contain any untrue statement of     a material fact or omit to state a material fact necessary to make the     statements made, in light of the circumstances under which such statements     were made, not misleading with respect to the period covered by this report;  3.  Based on my knowledge, the financial statements, and other financial     information included in this report, fairly present in all material     respects the financial condition, results of operations and cash flows of     the registrant as of, and for, the periods presented in this report;  4.  The registrant's other certifying officer(s) and I are responsible for     establishing and maintaining disclosure controls and procedures (as defined     in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:        a)  Designed such disclosure controls and procedures, or caused such       disclosure controls and procedures to be designed under our supervision,       to ensure that material information relating to the registrant, including       its consolidated subsidiaries, is made known to us by others within those       entities, particularly during the period in which this report is being       prepared;        b)  Evaluated the effectiveness of the registrant's disclosure controls       and procedures and presented in this report our conclusions about the       effectiveness of the disclosure controls and procedures, as of the end of       the period covered by this report based on such evaluation; and        c)  Disclosed in this report any change in the registrant's internal       control over financial reporting that occurred during the registrant's       most recent fiscal quarter (the registrant's fourth fiscal quarter in the       case of an annual report) that has materially affected, or is reasonably       likely to materially affect, the registrant's internal control over       financial reporting; and  5.  The registrant's other certifying officer(s) and I have disclosed, based on     our most recent evaluation of internal control over financial reporting, to     the registrant's auditors and the audit committee of registrant's board of     directors (or persons performing the equivalent functions):        a)  All significant deficiencies and material weaknesses in the design or       operation of internal control over financial reporting which are       reasonably likely to adversely affect the registrant's ability to record,       process, summarize and report financial information; and        b)  Any fraud, whether or not material, that involves management or other       employees who have a significant role in the registrant's internal control       over financial reporting.   Date:  February 28, 2006                                          /s/ Mark C. Hart                                         ---------------------------------------                                         Mark C. Hart                                         Vice President - Finance,                                         Chief Financial Officer                                         and Treasurer    EX-32 4 exhibit32edgar.txt CUSA EXHIBIT 32 12/31/05                                                                    EXHIBIT 32.1                               SECTION 1350 CERTIFICATIONS  In connection with the Annual Report of Chandler (U.S.A.), Inc. (the "Company") on Form 10-K for the period ending December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), W. Brent LaGere, as Chief Executive Officer of the Company, and Mark C. Hart, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002, to the best of his knowledge, that:  (1)  The Report fully complies with the requirements of Section 13(a) or 15(d)      of the Securities Exchange Act of 1934; and  (2)  The information contained in the Report fairly presents, in all material      respects, the financial condition and results of operations of the Company.                                            /s/ W. Brent LaGere                                         ---------------------------------------                                         W. Brent LaGere                                         Chief Executive Officer                                         February 28, 2006                                           /s/ Mark C. Hart                                         ---------------------------------------                                         Mark C. Hart                                         Chief Financial Officer                                         February 28, 2006  A signed original of this written statement required by Section 906 has been provided to Chandler (U.S.A.), Inc. and will be retained by Chandler (U.S.A.), Inc. and furnished to the Securities and Exchange Commission or its staff upon request.    -----END PRIVACY-ENHANCED MESSAGE-----