A.M. Best Downgrades Rating for NAICO

June 21, 2005

A.M. Best Co. has downgraded the financial strength rating to B+ (Very Good) from B++ (Very Good) of National American Insurance Company (Okla.) (NAICO) (Chandler, Okla.) and revised its outlook to negative from stable.

Concurrently, A.M. Best has assigned an issuer credit rating (ICR) of “bb-” to NAICO’s parent, Chandler (U.S.A.) Inc. (Chandler) and a debt rating of “bb-” to Chandler’s 8.75% senior unsecured debentures due 2014. The ICR and senior debt ratings have been assigned a negative outlook.

These rating actions reflect the weakening in NAICO’s risk-adjusted capitalization due to a net loss and decline in surplus in 2004 driven by adverse loss reserve development on prior accident years. More specifically, the company reported approximately $25 million in prior accident year adverse reserve development in 2004. Most of this development stems from accident years 1997 through 2001, a period of growth and expansion into Texas. The aforementioned reserve development follows approximately $40 million in cumulative prior accident year adverse reserve development reported from 2000 through 2003.

Somewhat offsetting these negative factors are management’s corrective actions in recent years, including significant rate increases, reducing exposures, improving risk selection and tightening policy terms and conditions.

As a result of these actions, more recent accident years appear to be developing more favorably. However, given the uncertainty surrounding the development of accident years 1997 through 2001, as well as the time it will take to determine the true profitability of more recent accident years, the negative outlook is appropriate.

Although financial leverage of 39% at year-end 2004 at Chandler remains within A.M. Best’s expectations given its rating, its fixed coverage ratio has been volatile and falls below that expected for its rating. Historically, NAICO has played a role in servicing of debt at Chandler, but management indicates that the obligations can be met by other companies throughout the enterprise. It is possible that dividends from NAICO could be necessary to service the holding company’s debt obligations, which could have an adverse impact on surplus and overall capitalization.

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