##### Table of Contents






UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


FORM 10-Q



|    |  |                                                                                         
|--- |  | ----------------------------------------------------------------------------------------
|[X] |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

For the period ended September 30, 1999

OR



|     |  |                                                                                          
|---- |  | -----------------------------------------------------------------------------------------
|[  ] |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ___________.

Commission file number 0-25508

RTW, INC.

(Exact name of registrant as specified in its
charter)


|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|                                                              
|                                                              
|                                                              
|                                                              
|Minnesota                                                      |  | 41-1440870                          
|                                                               |  |                                     
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)

8500 Normandale Lake Boulevard, Suite 1400

Bloomington, MN 55437




(612)-893-0403



Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject
 to such filing requirements for the past 90 days.

X


At October 31, 1999, 12,312,255 shares of Common Stock were
outstanding.



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TABLE OF CONTENTS



|                                                                                                                                                                                         |  |  |  |  |  |  |  | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 
|TABLE OF CONTENTS                                                                                                                                                                       
|RTW, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1999 AND DECEMBER 31, 1998                                                                                           
|RTW, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998 (Unaudited; in thousands, except share and per share data)
|RTW, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (Unaudited, in thousands)                                                  
|RTW, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998 (Unaudited)                                          
|SIGNATURES                                                                                                                                                                              
|EXHIBIT INDEX                                                                                                                                                                           



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TABLE OF CONTENTS


|                               |  |                                                                                        |  |      |    | 
|------------------------------ |  | -------------------------------------------------------------------------------------- |  | ---- | -- | 
|                               |  |                                                                                        |  | Page
|                               |  |                                                                                        |  |     
|                              
|                              
|                              
|                              
|PART I  FINANCIAL INFORMATION |  |                                                                                        |  |     
|                              
|Item 1.                        |  | Consolidated Financial Statements and Notes (Unaudited)                                |  |      | 3  | 
|                              
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition
	and Results of Operations |  |      | 8  | 
|                              
|Item 3.                        |  | Quantitative and Qualitative Disclosures about Market Risk                             |  |      | 20 | 
|                              
|                              
|                              
|                              
|                              
|PART II  OTHER INFORMATION    |  |                                                                                        |  |     
|                              
|Item 1.                        |  | Legal Proceedings                                                                      |  |      | 21 | 
|                              
|Item 2.                        |  | Changes in Securities                                                                  |  |      | 21 | 
|                              
|Item 3.                        |  | Defaults Upon Senior Securities                                                        |  |      | 21 | 
|                              
|Item 4.                        |  | Submission of Matters to a Vote of Security Holders                                    |  |      | 21 | 
|                              
|Item 5.                        |  | Other Information                                                                      |  |      | 21 | 
|                              
|Item 6.                        |  | Exhibits and Reports on Form 8-K                                                       |  |      | 21 | 
|                              
|Signatures                     |  |                                                                                        |  |      | 22 | 
|                              
|Exhibits                       |  |                                                                                        |  |      | 23 | 

2



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##### Table of Contents



PART I  FINANCIAL INFORMATION

Item 1:  Consolidated Financial Statements and Notes
 (Unaudited)

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                           |  |      |   | 
|------------------------------------------ |  | ---- | - | 
|                                           |  | Page
|                                           |  |     
|CONSOLIDATED FINANCIAL STATEMENTS          |  |      |   | 
|                                          
|                                          
|                                          
|                                          
|                                          
|Consolidated Balance Sheets                |  |      | 4 | 
|                                          
|                                          
|                                          
|                                          
|                                          
|Consolidated Statements of Operations      |  |      | 5 | 
|                                          
|                                          
|                                          
|                                          
|                                          
|Consolidated Statements of Cash Flows      |  |      | 6 | 
|                                          
|                                          
|                                          
|                                          
|                                          
|Notes to Consolidated Financial Statements |  |      | 7 | 

3



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##### Table of Contents








RTW, INC. AND SUBSIDIARY


CONSOLIDATED BALANCE SHEETS


SEPTEMBER 30, 1999 AND DECEMBER 31, 1998


(In thousands, except share data)


|                                                                    |                                                                       |                                                                     |                                            |              |        |         |         |        |        |         | 
|------------------------------------------------------------------- | --------------------------------------------------------------------- | ------------------------------------------------------------------- | ------------------------------------------ | ------------ | ------ | ------- | ------- | ------ | ------ | ------- | 
|                                                                    |                                                                       | September 30,                                                       |                                            | December 31,
|                                                                    |                                                                       | 1999                                                                |                                            | 1998        
|                                                                    |                                                                       |                                                                     |                                            |             
|                                                                    |                                                                       | (Unaudited)                                                         |                                            |             
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Assets                                                              |                                                                       |                                                                     |                                            |              |        |         |         |       
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Investments at fair value, amortized cost of $112,385 and
	$123,924 |                                                                       | $                                                                   | 109,890                                    |              |        | $       | 126,631 |       
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Cash and cash equivalents                                           |                                                                       |                                                                     | 2,080                                      |              |        |         | 700     |       
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Accrued investment income                                           |                                                                       |                                                                     | 1,567                                      |              |        |         | 1,761   |       
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Premiums receivable, less allowance of $569 and $417                |                                                                       |                                                                     | 9,332                                      |              |        |         | 6,554   |       
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Reinsurance recoverables:                                           |                                                                       |                                                                     |                                            |              |        |         |         |       
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | On unpaid claim and claim settlement expenses                         |                                                                     |                                            | 34,250       |        |         |         | 19,414 |       
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | On paid claim and claim settlement expenses                           |                                                                     |                                            | 1,876        |        |         |         | 867    |       
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Deferred policy acquisition costs                                   |                                                                       |                                                                     | 1,767                                      |              |        |         | 1,501   |       
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Furniture and equipment, net                                        |                                                                       |                                                                     | 4,134                                      |              |        |         | 4,565   |       
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Other assets                                                        |                                                                       |                                                                     | 8,597                                      |              |        |         | 8,952   |       
|                                                                    |                                                                       |                                                                     |                                            |              |        |         |         |       
|                                                                    |                                                                       |                                                                     | Total assets                               |              | $      | 173,493 |         |        | $      | 170,945 | 
|                                                                    |                                                                       |                                                                     |                                            |              |        |         |         |       
|                                                                   
|Liabilities and Shareholders Equity                                |                                                                       |                                                                     |                                            |              |        |         |         |       
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Unpaid claim and claim settlement expenses                          |                                                                       | $                                                                   | 98,797                                     |              |        | $       | 97,269  |       
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Unearned premiums                                                   |                                                                       |                                                                     | 15,196                                     |              |        |         | 13,027  |       
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Accrued expenses and other liabilities                              |                                                                       |                                                                     | 2,085                                      |              |        |         | 5,570   |       
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Notes payable                                                       |                                                                       |                                                                     | 2,490                                      |              |        |         | 2,461   |       
|                                                                    |                                                                       |                                                                     |                                            |              |        |         |         |       
|                                                                    |                                                                       |                                                                     | Total liabilities                          |              |        | 118,568 |         |        |        | 118,327 | 
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Shareholders equity:                                               |                                                                       |                                                                     |                                            |              |        |         |         |       
|                                                                    | Common Stock, no par value; authorized 25,000,000 shares; issued
	and |                                                                     |                                            |              |        |         |         |        |       
|                                                                    |                                                                       | outstanding 12,312,000 shares at September 30, 1999 and
	11,935,000 |                                            |              |        |         |         |        |        |        
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    |                                                                       | shares at December 31, 1998                                         |                                            |              | 30,808 |         |         |        | 29,451 |        
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Retained earnings                                                     |                                                                     |                                            | 25,739       |        |         |         | 21,408 |       
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Accumulated other comprehensive income (loss)                         |                                                                     |                                            | (1,622       | )      |         |         | 1,759  |       
|                                                                    |                                                                       |                                                                     |                                            |              |        |         |         |       
|                                                                    |                                                                       |                                                                     | Total shareholders equity                 |              |        | 54,925  |         |        |        | 52,618  | 
|                                                                    |                                                                       |                                                                     |                                            |              |        |         |         |       
|                                                                    |                                                                       |                                                                     | Total liabilities and shareholders equity |              | $      | 173,493 |         |        | $      | 170,945 | 
|                                                                    |                                                                       |                                                                     |                                            |              |        |         |         |       

See notes to consolidated financial statements.

4



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##### Table of Contents








RTW, INC. AND SUBSIDIARY


CONSOLIDATED STATEMENTS OF OPERATIONS


THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998


(Unaudited; in thousands, except share and per share data)


|                                     |                                     |                                 |                                   |                     |            |       |   |        |            |      |   |         |            |       |   |        |            |        |  
|------------------------------------ | ----------------------------------- | ------------------------------- | --------------------------------- | ------------------- | ---------- | ----- | - | ------ | ---------- | ---- | - | ------- | ---------- | ----- | - | ------ | ---------- | ------ | -
|                                     |                                     |                                 |                                   |                    
|                                     |                                     | For the Three Months            |                                   | For the Nine Months
|                                     |                                     | Ended September 30,             |                                   | Ended September 30,
|                                     |                                     |                                 |                                   |                    
|                                     |                                     | 1999                            |                                   | 1998                |            | 1999  |   | 1998  
|                                     |                                     |                                 |                                   |                     |            |       |   |       
|Revenues:                            |                                     |                                 |                                   |                     |            |       |   |        |            |      |   |         |            |       |   |       
|                                    
|                                    
|                                    
|                                    
|                                     | Gross premiums earned               |                                 | $                                 | 22,254              |            |       | $ | 22,885 |            |      | $ | 65,366  |            |       | $ | 66,459 |           
|                                    
|                                    
|                                    
|                                    
|                                     | Premiums ceded                      |                                 |                                   | (4,682              | )          |       |   | (1,029 | )          |      |   | (13,451 | )          |       |   | (874   | )         
|                                     |                                     |                                 |                                   |                     |            |       |   |        |            |      |   |         |            |       |   |       
|                                     |                                     | Premiums earned                 |                                   |                     | 17,572     |       |   |        | 21,856     |      |   |         | 51,915     |       |   |        | 65,585     |       
|                                    
|                                    
|                                    
|                                    
|                                     | Investment income                   |                                 |                                   | 1,588               |            |       |   | 1,854  |            |      |   | 4,914   |            |       |   | 5,909  |           
|                                    
|                                    
|                                    
|                                    
|                                     | Net realized investment gains       |                                 |                                   | (18                 | )          |       |   | 330    |            |      |   | 84      |            |       |   | 1,049  |           
|                                     |                                     |                                 |                                   |                     |            |       |   |        |            |      |   |         |            |       |   |       
|                                     |                                     | Total revenues                  |                                   |                     | 19,142     |       |   |        | 24,040     |      |   |         | 56,913     |       |   |        | 72,543     |       
|                                    
|                                    
|                                    
|                                    
|Expenses:                            |                                     |                                 |                                   |                     |            |       |   |        |            |      |   |         |            |       |   |       
|                                    
|                                    
|                                    
|                                    
|                                     | Claim and claim settlement expenses |                                 |                                   | 11,082              |            |       |   | 17,571 |            |      |   | 32,334  |            |       |   | 54,782 |           
|                                    
|                                    
|                                    
|                                    
|                                     | Policy acquisition costs            |                                 |                                   | 3,016               |            |       |   | 3,657  |            |      |   | 10,025  |            |       |   | 10,247 |           
|                                    
|                                    
|                                    
|                                    
|                                     | General and administrative expenses |                                 |                                   | 2,879               |            |       |   | 3,150  |            |      |   | 8,797   |            |       |   | 8,681  |           
|                                     |                                     |                                 |                                   |                     |            |       |   |        |            |      |   |         |            |       |   |       
|                                     |                                     | Total expenses                  |                                   |                     | 16,977     |       |   |        | 24,378     |      |   |         | 51,156     |       |   |        | 73,710     |       
|                                     |                                     |                                 |                                   |                     |            |       |   |        |            |      |   |         |            |       |   |       
|                                     |                                     |                                 | Income (loss) from operations     |                     |            | 2,165 |   |        |            | (338 | ) |         |            | 5,757 |   |        |            | (1,167 | )
|                                    
|                                    
|                                    
|                                    
|                                     | Interest expense                    |                                 |                                   | 69                  |            |       |   | 139    |            |      |   | 207     |            |       |   | 417    |           
|                                     |                                     |                                 |                                   |                     |            |       |   |        |            |      |   |         |            |       |   |       
|                                     |                                     |                                 | Income (loss) before income taxes |                     |            | 2,096 |   |        |            | (477 | ) |         |            | 5,550 |   |        |            | (1,584 | )
|                                    
|                                    
|                                    
|                                    
|                                     | Income tax expense (benefit)        |                                 |                                   | 485                 |            |       |   | (339   | )          |      |   | 1,219   |            |       |   | (820   | )         
|                                     |                                     |                                 |                                   |                     |            |       |   |        |            |      |   |         |            |       |   |       
|                                     |                                     | Net income (loss)               |                                   | $                   | 1,611      |       |   | $      | (138       | )    |   | $       | 4,331      |       |   | $      | (764       | )     
|                                     |                                     |                                 |                                   |                     |            |       |   |        |            |      |   |         |            |       |   |       
|Net income (loss) per share:         |                                     |                                 |                                   |                     |            |       |   |        |            |      |   |         |            |       |   |       
|                                    
|                                    
|                                    
|                                    
|                                     |                                     | Basic income (loss) per share   |                                   | $                   | 0.13       |       |   | $      | (0.01      | )    |   | $       | 0.35       |       |   | $      | (0.06      | )     
|                                     |                                     |                                 |                                   |                     |            |       |   |        |            |      |   |         |            |       |   |       
|                                     |                                     | Diluted income (loss) per share |                                   | $                   | 0.13       |       |   | $      | (0.01      | )    |   | $       | 0.35       |       |   | $      | (0.06      | )     
|                                     |                                     |                                 |                                   |                     |            |       |   |        |            |      |   |         |            |       |   |       
|Weighted average shares outstanding: |                                     |                                 |                                   |                     |            |       |   |        |            |      |   |         |            |       |   |       
|                                    
|                                    
|                                    
|                                    
|                                     |                                     | Basic shares outstanding        |                                   |                     | 12,312,000 |       |   |        | 11,955,000 |      |   |         | 12,284,000 |       |   |        | 11,921,000 |       
|                                     |                                     |                                 |                                   |                     |            |       |   |        |            |      |   |         |            |       |   |       
|                                     |                                     | Diluted shares outstanding      |                                   |                     | 12,383,000 |       |   |        | 11,955,000 |      |   |         | 12,361,000 |       |   |        | 11,921,000 |       
|                                     |                                     |                                 |                                   |                     |            |       |   |        |            |      |   |         |            |       |   |       

See notes to consolidated financial statements.

5



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RTW, INC. AND SUBSIDIARY


CONSOLIDATED STATEMENTS OF CASH FLOWS


NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998


(Unaudited, in thousands)


|                                                  |                                             |                                                                                                     |                                    |                                               |                                                     |        |         |         |      |        |        |         |  
|------------------------------------------------- | ------------------------------------------- | --------------------------------------------------------------------------------------------------- | ---------------------------------- | --------------------------------------------- | --------------------------------------------------- | ------ | ------- | ------- | ---- | ------ | ------ | ------- | -
|                                                  |                                             |                                                                                                    
|                                                  |                                             | For the Nine Months                                                                                
|                                                  |                                             | Ended September 30,                                                                                
|                                                  |                                             |                                                                                                    
|                                                  |                                             | 1999                                                                                                |                                    | 1998                                         
|                                                  |                                             |                                                                                                     |                                    |                                              
|Cash flows from operating activities:             |                                             |                                                                                                     |                                    |                                               |                                                     |        |         |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                             | Net income (loss)                                                                                   |                                    | $                                             | 4,331                                               |        |         | $       | (764 | )     
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                             | Adjustments to reconcile net income (loss) to net cash
	provided by (used in) operating activities: |                                    |                                               |                                                     |        |         |         |      |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                             |                                                                                                     | Net realized investment gains      |                                               |                                                     | (84    | )       |         |      | (1,049 | )     
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                             |                                                                                                     | Depreciation and amortization      |                                               |                                                     | 978    |         |         |      | 944    |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                             |                                                                                                     | Deferred income taxes              |                                               |                                                     | (1,884 | )       |         |      | (454   | )     
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                             |                                                                                                     | Changes in assets and liabilities: |                                               |                                                     |        |         |         |      |        |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                             |                                                                                                     |                                    | Amounts due from reinsurers                   |                                                     |        | (15,845 | )       |      |        | 501    |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                             |                                                                                                     |                                    | Unpaid claim and claim settlement expenses    |                                                     |        | 1,528   |         |      |        | 15,286 |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                             |                                                                                                     |                                    | Unearned premiums, net of premiums receivable |                                                     |        | (609    | )       |      |        | 1,802  |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                             |                                                                                                     |                                    | Other, net                                    |                                                     |        | 564     |         |      |        | (2,314 | )      
|                                                  |                                             |                                                                                                     |                                    |                                               |                                                     |        |         |        
|                                                  |                                             |                                                                                                     |                                    |                                               | Net cash provided by (used in) operating activities |        |         | (11,021 | )    |        |        | 13,952  |  
|                                                 
|                                                 
|                                                 
|                                                 
|Cash flows from investing activities:             |                                             |                                                                                                     |                                    |                                               |                                                     |        |         |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Proceeds from maturities of securities      |                                                                                                     |                                    | 1,915                                         |                                                     |        |         | 2,000   |     
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Proceeds from sales of securities           |                                                                                                     |                                    | 18,745                                        |                                                     |        |         | 61,883  |     
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Purchases of securities                     |                                                                                                     |                                    | (9,098                                        | )                                                   |        |         | (73,563 | )   
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Purchases of furniture and equipment        |                                                                                                     |                                    | (518                                          | )                                                   |        |         | (647    | )   
|                                                  |                                             |                                                                                                     |                                    |                                               |                                                     |        |         |        
|                                                  |                                             |                                                                                                     |                                    |                                               | Net cash provided by (used in) investing activities |        |         | 11,044  |      |        |        | (10,327 | )
|                                                 
|                                                 
|                                                 
|                                                 
|Cash flows from financing activities:             |                                             |                                                                                                     |                                    |                                               |                                                     |        |         |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Proceeds from stock options exercised       |                                                                                                     |                                    | 1,252                                         |                                                     |        |         | 333     |     
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Issuance of common stock under ESPP         |                                                                                                     |                                    | 105                                           |                                                     |        |         | 199     |     
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Proceeds from sales of common stock         |                                                                                                     |                                    |                                              |                                                     |        |         | 30      |     
|                                                  |                                             |                                                                                                     |                                    |                                               |                                                     |        |         |        
|                                                  |                                             |                                                                                                     |                                    |                                               | Net cash provided by financing activities           |        |         | 1,357   |      |        |        | 562     |  
|                                                  |                                             |                                                                                                     |                                    |                                               |                                                     |        |         |        
|Net increase in cash and cash equivalents         |                                             |                                                                                                     | 1,380                              |                                               |                                                     |        | 4,187   |        
|                                                 
|                                                 
|                                                 
|                                                 
|Cash and cash equivalents at beginning of year    |                                             |                                                                                                     | 700                                |                                               |                                                     |        | 5,798   |        
|                                                  |                                             |                                                                                                     |                                    |                                               |                                                     |        |         |        
|Cash and cash equivalents at end of period        |                                             | $                                                                                                   | 2,080                              |                                               |                                                     | $      | 9,985   |        
|                                                  |                                             |                                                                                                     |                                    |                                               |                                                     |        |         |        
|Supplemental disclosure of cash flow information: |                                             |                                                                                                     |                                    |                                               |                                                     |        |         |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Cash paid (received) during the period for: |                                                                                                     |                                    |                                               |                                                     |        |         |         |     
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                             | Interest                                                                                            |                                    | $                                             | 169                                                 |        |         | $       | 352  |       
|                                                  |                                             |                                                                                                     |                                    |                                               |                                                     |        |         |        
|                                                  |                                             | Income taxes                                                                                        |                                    | $                                             | (1,808                                              | )      |         | $       | 480  |       
|                                                  |                                             |                                                                                                     |                                    |                                               |                                                     |        |         |        

See notes to consolidated financial statements.

6



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RTW, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998


(Unaudited)


Note A  Basis of Presentation

The accompanying consolidated financial statements have been
prepared in conformity with generally accepted accounting
principles applied on a basis consistent with the financial
statements included in the RTW, Inc. 1998 Report on
Form 10-K filed with the Securities and Exchange Commission,
 except that the consolidated financial statements were prepared
in conformity with the instructions to Form 10-Q for interim
 financial information and, accordingly, do not include all of
the information and notes required by generally accepted
accounting principles for complete financial statements. The
consolidated financial information included herein, other than
the consolidated balance sheet at December 31, 1998, has
been prepared by us without audit by independent certified public
 accountants. We derived the consolidated balance sheet at
December 31, 1998 from the audited consolidated financial
statements for the year ended December 31, 1998, but this
report does not include all the disclosures contained therein.

The information furnished includes all adjustments and accruals,
consisting only of normal, recurring accrual adjustments, which
are, in our opinion, necessary for a fair statement of results
for the interim period. The results of operations for any interim
 period are not necessarily indicative of results for the full
year. The unaudited interim consolidated financial statements
should be read in conjunction with the consolidated financial
statements and notes thereto contained in the 1998 Annual Report.

Note B  Subsequent Event

On November 2, 1999 we, in conjunction with our Chairman,
David C. Prosser, announced that a group consisting of
Mr. Prosser, members of his family, and an RTW director and
former RTW executive (the Prosser group), have
retained an investment banker to explore a sale of the
groups shares to a new strategic investor in RTW. The group
 holds approximately 52% of all outstanding shares. Any sale of
the groups shares would require approval by our Board of
Directors (the Board). The Board has appointed a special
committee of independent directors to evaluate any proposed
transaction, and the committee has retained an independent
investment firm as its financial advisor to assist in this
process.

The Prosser group has advised us that the proposed sale is being
pursued for personal financial and estate planning purposes, and
does not reflect a lack of confidence in management or our
future. Our Board respects these objectives and will cooperate
with the Prosser group in their efforts to identify a buyer for
their shares.

7



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##### Table of Contents





|        |                                                                                       
|------- | --------------------------------------------------------------------------------------
|Item 2: | Managements Discussion and Analysis of Financial
	Condition and Results of Operations

Overview

The Company  RTW, Inc. (RTW) and
its wholly owned insurance subsidiary, American Compensation
Insurance Company (ACIC), provide disability management services
to employers. Collectively, we, our and
us will refer to these entities in this
Managements Discussion and Analysis of Financial
Condition and Results of Operations.

We developed a proprietary management system, the RTW
SOLUTION®, designed to lower employers workers
compensation costs and return injured employees to work as soon
as possible. We combine our management system with insurance
products underwritten by our insurance subsidiary to offer
services to customers. We provide workers compensation
management services solely to employers insured through our
insurance subsidiary or through fronted insurance arrangements.
We currently operate in Minnesota, Wisconsin, South Dakota,
Colorado, Missouri, Illinois, Kansas, Michigan, Indiana,
Massachusetts, Connecticut, Rhode Island and New Hampshire.

Financial Summary

This financial summary presents our discussion and analysis of
the consolidated results of operations and financial condition of
 RTW, Inc. This review should be read in conjunction with our
consolidated financial statements and notes thereto at
September 30, 1999 and December 31, 1998 and the three
and nine month periods ended September 30, 1999 and 1998.

The following table provides an overview of our key operating
results (000s):

|                                    |  |                    |        |                   |  |      |        |      |  |   |        |  |  |   |        |  
|----------------------------------- |  | ------------------ | ------ | ----------------- |  | ---- | ------ | ---- |  | - | ------ |  |  | - | ------ | -
|                                    |  |                    |        |                  
|                                    |  | Three Months Ended |        | Nine Months Ended
|                                    |  | September 30,      |        | September 30,    
|                                    |  |                    |        |                  
|                                    |  | 1999               |        | 1998              |  | 1999 |        | 1998
|                                    |  |                    |        |                   |  |      |        |     
|Gross premiums earned               |  | $                  | 22,254 |                   |  | $    | 22,885 |      |  | $ | 65,366 |  |  | $ | 66,459 |  
|                                   
|                                   
|                                   
|                                   
|Total revenues                      |  |                    | 19,142 |                   |  |      | 24,040 |      |  |   | 56,913 |  |  |   | 72,543 |  
|                                   
|                                   
|                                   
|                                   
|Claim and claim settlement expenses |  |                    | 11,082 |                   |  |      | 17,571 |      |  |   | 32,334 |  |  |   | 54,782 |  
|                                   
|                                   
|                                   
|                                   
|Net income (loss)                   |  |                    | 1,611  |                   |  |      | (138   | )    |  |   | 4,331  |  |  |   | (764   | )

RTW reported gross premiums earned of $22.3 million in the
third quarter of 1999 compared to $22.9 million in the third
 quarter of 1998 and reported gross premiums earned of
$65.4 million for the nine months ended September 30,
1999 compared to $66.5 million for the same period in 1998.

Total revenues for the third quarter of 1999 were
$19.1 million compared to $24.0 million for the third
quarter of 1998 and total revenues for the nine months ended
September 30, 1999 were $56.9 million compared to
$72.5 million for the same period in 1998. Total revenues
for the three and nine month periods ended September 30,
1999 were reduced by premiums ceded under reinsurance agreements
entered into during the fourth quarter of 1998 totaling
$3.3 million and $9.6 million, respectively. No
comparative premiums were ceded during the first, second and
third quarters of 1998. Additionally, total revenues for the nine
 month period ended September 30, 1998 include a
$2.3 million refund received in the first quarter of 1998
from the Minnesota Workers Compensation Reinsurance
Association (WCRA). No comparable refund was received in the
first three quarters of 1999. After excluding the effects of
reinsurance and refunds, adjusted total revenues for the three
and nine month periods ended September 30, 1999 were
$22.4 million and $66.5 million, respectively, compared
 to $24.0 million and $70.3 million, respectively, for
the same periods in 1998.

We reported net income of $1.6 million in the third quarter
of 1999 compared to net loss $138,000 in the third quarter of
1998 and reported net income of $4.3 million for the nine
months ended September 30, 1999 compared to a net loss of
$764,000 for the same period in 1998 due primarily to the
following factors:



| |   |                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In the third quarter of 1999, we recorded an estimate of ceded
	paid and unpaid claim and claim settlement expenses under our
	$25,000 to $300,000 excess of loss reinsurance agreements
	totaling $5.5 million resulting in a corresponding reduction
	 in claim and claim settlement expenses. Combined with $5.4

8



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##### Table of Contents





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | million recorded in the first quarter of 1999 and
	$5.3 million recorded in the second quarter of 1999, claim
	and claim settlement expenses have been reduced by
	$16.2 million for the nine months ended September 30,
	1999. No such ceding estimates were recorded in the first three
	quarters of 1998.                                                                                                                                                                                                                                                                                                                      
|
| |  | The 1998 nine month results include a $3.0 million increase
	in reserves for unpaid claim and claim settlement expenses
	recorded in the first quarter of 1998 to reflect adverse
	development of prior period claims. Additionally, the 1998
	nine-month results included a $400,000 Minnesota Special
	Compensation Fund (SCF) recorded in the second quarter of 1998.
	The SCF assesses us to cover the costs of second injuries that
	are substantially greater, because of a pre-existing physical
	impairment, than what would have resulted from the second injury
	alone.                                                 
|
| |  | We have aggressively targeted policies for non-renewal or
	re-underwriting at more favorable rates during 1999 at policy
	expiration if the profitability of the policy did not meet our
	underwriting profit margin standards. For the nine months ended
	September 30, 1999, our aggressive re-underwriting resulted
	in $8.0 million of premiums renewed at higher prices as well as
	$7.6 million in premiums that were not renewed. We will
	continue to review business at policy expiration through the
	remainder of 1999 and non-renew or re- underwrite at more
	favorable rates any business not meeting our standards;
|
| |  | Pricing pressure continues to affect premiums in force and
	decrease profit margins, especially in Minnesota. The pricing
	pressure is the result of (i) increased competition in our
	markets and (ii)  continued price declines due to
	legislative benefit changes in recent years; and                                                                                                                                                                                                                                                                                                                                        
|
| |  | Inflation continues to affect medical and wage costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

While we expect to continue to operate in a difficult pricing
environment for the remainder of 1999, we are working to improve
profitability in all of our offices by continuing to aggressively
 manage expenses, refining our sales and distribution channels
and improving our underwriting, including reviewing policy
profitability at renewal and removing unprofitable accounts.

In the following pages, we take a look at the operating results
for the three and nine month periods ended September 30,
1999 and 1998 for items in our Consolidated Statement of
Operations and also explain key balance sheet accounts in greater
 detail.

Results of Operations

Total revenues:  Our total revenues include gross
premiums earned, premiums ceded, investment income and realized
investment gains.

The following tables summarize the components of revenues and
premiums in force (000s):

|                              |                 |                    |        |                   |        |      |        |        |        |   |         |        |        |   |        |        |        | 
|----------------------------- | --------------- | ------------------ | ------ | ----------------- | ------ | ---- | ------ | ------ | ------ | - | ------- | ------ | ------ | - | ------ | ------ | ------ | 
|                              |                 |                    |        |                  
|                              |                 | Three months ended |        | Nine months ended
|                              |                 | September 30,      |        | September 30,    
|                              |                 |                    |        |                  
|                              |                 | 1999               |        | 1998              |        | 1999 |        | 1998  
|                              |                 |                    |        |                   |        |      |        |       
|Gross premiums earned         |                 | $                  | 22,254 |                   |        | $    | 22,885 |        |        | $ | 65,366  |        |        | $ | 66,459 |       
|                             
|                             
|                             
|                             
|Premiums (ceded) recovered    |                 |                    | (4,682 | )                 |        |      | (1,029 | )      |        |   | (13,451 | )      |        |   | (874   | )     
|                              |                 |                    |        |                   |        |      |        |        |        |   |         |        |        |   |        |       
|                              | Premiums earned |                    |        | 17,572            |        |      |        | 21,856 |        |   |         | 51,915 |        |   |        | 65,585 |       
|                             
|                             
|                             
|                             
|Investment income             |                 |                    | 1,588  |                   |        |      | 1,854  |        |        |   | 4,914   |        |        |   | 5,909  |       
|                             
|                             
|                             
|                             
|Net realized investment gains |                 |                    | (18    | )                 |        |      | 330    |        |        |   | 84      |        |        |   | 1,049  |       
|                              |                 |                    |        |                   |        |      |        |        |        |   |         |        |        |   |        |       
|                              |                 | Total revenues     |        | $                 | 19,142 |      |        | $      | 24,040 |   |         | $      | 56,913 |   |        | $      | 72,543 | 
|                              |                 |                    |        |                   |        |      |        |        |        |   |         |        |        |   |        |       

|                                                             |               |   |        |  |  |      |        |      |  |  |   |        |  |  |   |        | 
|------------------------------------------------------------ | ------------- | - | ------ |  |  | ---- | ------ | ---- |  |  | - | ------ |  |  | - | ------ | 
|                                                             |               |   |        |  |  | 1999 |        | 1998
|                                                             |               |   |        |  |  |      |        |     
|                                                            
|                                                            
|                                                            
|                                                            
|Premiums in force, by state office location, at quarter-end:
|                                                             | Minnesota     |   |        |  |  |      |        |      |  |  | $ | 31,500 |  |  | $ | 38,500 | 
|                                                             | Colorado      |   |        |  |  |      |        |      |  |  |   | 12,500 |  |  |   | 13,200 | 
|                                                             | Missouri      |   |        |  |  |      |        |      |  |  |   | 16,600 |  |  |   | 16,700 | 
|                                                             | Michigan      |   |        |  |  |      |        |      |  |  |   | 11,200 |  |  |   | 9,100  | 
|                                                             | Massachusetts |   |        |  |  |      |        |      |  |  |   | 13,900 |  |  |   | 6,900  | 
|                                                             |               |   |        |  |  |      |        |      |  |  |   |        |  |  |   |       
|                                                            
|                                                            
|                                                            
|                                                            
|Total premiums in force at quarter-end:                      |               | $ | 85,700 |  |  | $    | 84,400 |     
|                                                             |               |   |        |  |  |      |        |      |  |  |   |        |  |  |   |       

9



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##### Table of Contents



Gross Premiums Earned:Premiums on workers
compensation insurance policies are our largest source of
revenue. Premiums earned are the gross premiums earned by us on
in force workers compensation policies, net of the effects
of ceded premiums under reinsurance agreements.

The premium we charge a policyholder is a function of its
payroll, industry and prior workers compensation claims
experience. In underwriting a policy, we receive policyholder
payroll estimates for the ensuing year. We record premiums
written on an installment basis matching billing to the
policyholder and earn premiums on a daily basis over the life of
each insurance policy based on the payroll estimate. We record
the excess of premiums billed over premiums earned for each
policy as unearned premiums on our balance sheet. When a policy
expires, we audit employer payrolls for the policy period and
adjust the estimated payroll to its actual value. The result is a
 final audit adjustment recorded to premiums earned
when the adjustment becomes known.

Our premiums in force grew 1.5% to $85.7 million at
September 30, 1999 from $84.4 million at
September 30, 1998 due primarily to $9.1 million in
growth in our Michigan and Massachusetts markets offset by a
$7.8 million decrease in premiums in force in our other
markets including Minnesota which decreased $7.0 million,
Colorado which decreased $700,000 and Missouri which decreased
$100,000. We have aggressively targeted some policies for
non-renewal or re-underwriting at more favorable rates during
1999 at policy expiration if the profitability of the policy did
not meet our underwriting profit margin standards. For the nine
months ended September 30, 1999, our aggressive
re-underwriting resulted in $8.0 million of premiums renewed
 at higher prices as well as $7.6 million in premiums that
were not renewed. We will continue to review business at policy
expiration through the remainder of 1999 and non-renew or
re-underwrite at more favorable rates any business not meeting
our standards.

Our gross premiums earned were $22.3 million in the third
quarter of 1999 compared to $22.9 million in the third
quarter of 1998 and $65.4 million for the nine months ending
 September 30, 1999 compared to $66.5 million for the
same period in 1998. Gross premiums earned was affected by the
1.5% increase in premiums in force offset by a decrease in final
audit premiums recognized to $728,000 for the three months ended
September 30, 1999 compared to $1.9 million for the
three months ended September 30, 1998 and $3.7 million
in final audit premiums recognized in the first three quarters of
 1999 compared to $5.7 million in the first three quarters of
1998. Final audit premiums recognized during the period include
billed final audit premiums plus (or minus) the change in
estimate for premiums on unexpired and expired unaudited
policies.

The premium rate that we charge policyholders per payroll dollar
has declined for several years; however, in the first three
quarters of 1999, we have seen indications that pricing may, in
fact, be firming. The historical decline in rates is due, in
part, to the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Many state legislatures where we provide coverage have reduced
	benefits that injured employees are paid, resulting in lower loss
	 costs of workers compensation insurance and decreased
	corresponding premiums paid by the policyholder;                                                                                                                                                             
|
| |  | As the loss cost structure of workers compensation has
	declined, more insurance companies have entered or re-entered the
	 workers compensation insurance market, resulting in
	increased competition; and                                                                                                                                                                                            
|
| |  | We continue to experience reduced pricing on renewal policies
	due, in part, to our success in lowering our policyholders
	loss experience which then improves their claims history,
	lowering the premium that they have to pay for insurance. The
	improvement that we provide our customers also makes them more
	desirable to our competition, thus increasing price competition
	on these accounts.

Premiums Ceded:Reinsurance agreements allow us to share
certain risks with other insurance companies. The primary purpose
 of ceded reinsurance is to protect us from potential losses in
excess of the level we are willing to accept. Our primary ceded
reinsurance is excess of loss coverage that limits our per
incident exposure. We expect the companies to which we have ceded
 reinsurance to honor their obligations. In the event that these
companies are unable to honor their obligations to us, we will be
 required to pay these obligations ourselves. We are not aware of
 any developments with respect to any of our reinsurers that
would prevent them from honoring any of their obligations to us.

Under our excess of loss reinsurance policies, we pay reinsurers
to limit our per incident exposure and record this cost to
premiums ceded as a reduction to gross premiums earned. In
Minnesota, we are required to purchase excess of loss coverage
for our Minnesota policies from the Minnesota Workers
Compensation Reinsurance Association (WCRA). Our selected
retention levels in Minnesota are $290,000 in 1999 and $280,000
in 1998. In other states, we decreased our per incident exposure
to $300,000 in 1999 from $500,000 in 1998 and prior years. We

10



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##### Table of Contents



purchased this coverage from various reinsurers in 1998 and
limited the coverage to one insurer in 1999. Additionally, for
claims occurring after June 30, 1998, we further limited our
 per incident exposure by purchasing excess of loss coverage for
losses from $25,000 to the WCRA selected retention level in
Minnesota and from $25,000 to $300,000 in other states from a
single reinsurer. This agreement was finalized after its
effective date and activity occurring from July 1, 1998
through September 30, 1998 was recorded on a retrospective
basis resulting in the deferral of a gain totaling
$2.0 million at December 31, 1998. Activity occurring
on or after October 1, 1998 is recorded prospectively. The
deferred gain is being amortized into income in the current year
as well as future years using the effective interest rate
inherent in the amounts paid to the reinsurer and the estimated
timing and amounts of recoveries from the reinsurer. We amortized
 $185,000 of the deferred gain into operations as a reduction of
claim and claim settlement expenses in the third quarter of 1999
and $555,000 for the nine months ended September 30, 1999.

The following table summarizes the components of premiums ceded
(000s):

|                                    |                                               |                    |   |                   |   |      |   |        |   |  |   |         |   |  |   |        |  
|----------------------------------- | --------------------------------------------- | ------------------ | - | ----------------- | - | ---- | - | ------ | - |  | - | ------- | - |  | - | ------ | -
|                                    |                                               |                    |   |                  
|                                    |                                               | Three months ended |   | Nine months ended
|                                    |                                               | September 30,      |   | September 30,    
|                                    |                                               |                    |   |                  
|                                    |                                               | 1999               |   | 1998              |   | 1999 |   | 1998  
|                                    |                                               |                    |   |                   |   |      |   |       
|Premiums (ceded to) recovered from: |                                               |                    |   |                   |   |      |   |        |   |  |   |         |   |  |   |       
|                                   
|                                   
|                                   
|                                   
|                                    | WCRA                                          |                    | $ | (985              | ) |      | $ | (706   | ) |  | $ | (2,701  | ) |  | $ | (2,274 | )
|                                   
|                                   
|                                   
|                                   
|                                    | Non-Minnesota excess of loss policies         |                    |   | (3,697            | ) |      |   | (323   | ) |  |   | (10,750 | ) |  |   | (847   | )
|                                   
|                                   
|                                   
|                                   
|                                    | Refund from the WCRA on prior years activity |                    |   |                  |   |      |   |       |   |  |   |        |   |  |   | 2,247  |  
|                                    |                                               |                    |   |                   |   |      |   |        |   |  |   |         |   |  |   |       
|                                    | Premiums ceded                                |                    | $ | (4,682            | ) |      | $ | (1,029 | ) |  | $ | (13,451 | ) |  | $ | (874   | )
|                                    |                                               |                    |   |                   |   |      |   |        |   |  |   |         |   |  |   |       

Premiums ceded to reinsurers were a cost of $4.7 million in
the third quarter of 1999 compared to a cost of $1.0 million
 in the third quarter of 1998 and premiums ceded to reinsurers
were a cost of $13.5 million for the nine month period ended
 September 30, 1999 compared to a cost of $874,000 for the
same period in 1998. This increased cost resulted from
(i) premiums ceded under our new excess of loss reinsurance
coverage for losses over $25,000; (ii) increased effective
excess of loss premium rates in Minnesota in 1999 from 1998 due
to premium price changes within that state, (iii) increased
excess of loss costs resulting from increased premiums earned in
non-Minnesota states, and (iv) the recognition of a refund
of $2.2 million from the WCRA recorded in the first quarter
of 1998. No comparable refund was received in 1999.

Premiums Earned Outlook:  The outlook for gross
premiums earned and premiums ceded for the remainder of 1999
includes the following factors:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We expect that the remaining aggressively targeted policies for
	non-renewal or re-underwriting during 1999 will put downward
	pressure on premiums in force in our Minnesota and Missouri
	markets, however, we expect continued growth in premiums in force
	 in our Colorado, Michigan and Massachusetts markets, as well as
	new business in our Minnesota and Missouri markets will lead to
	moderate growth in gross premiums earned for the remainder of the
	 year. In Massachusetts, the premium growth rate will be tempered
	 by an unexpected decision by the Massachusetts Department of
	Insurance to reduce premium rates by 20.3% effective
	September 1, 1999; and
|
| |  | We expect that premiums ceded for the remainder of 1999 will
	remain consistent with the results attained for the three month
	period ended September 30, 1999. Premiums ceded may decrease
	 slightly in future quarters of 1999 as a percent of gross
	premiums earned as the non-Minnesota markets, where we pay
	smaller reinsurance premiums, continue to grow relative to
	Minnesota. Premiums ceded (after adjusting for the WCRA refund)
	will continue to run much higher in 1999 when compared to 1998 as
	 the new lower level excess of loss policy will be in force
	during all of 1999 compared to only being in place during the
	last six months of 1998.          

Investment Income and Net Realized Investment Gains: 
 Our investment income includes earnings on our investment
portfolio. Our net realized investment gains include gains and
losses from sales of available-for-sale securities and are
displayed separately on our Consolidated Statement of Operations.
 We currently invest entirely in U.S. domiciled investment
grade taxable and tax-exempt fixed maturity investments and
classify our investments as available-for-sale. We intend to hold
 our available-for-sale investments to maturity, but may sell
before maturity in response to changes in interest rates, changes
 in prepayment risk and changes in funding sources or terms, or
to address liquidity needs. Our primary investment objective is
to maintain a diversified, high-quality, fixed-

11



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##### Table of Contents



investment portfolio structured to maximize our after-tax
investment income without taking inappropriate credit risk. For
further discussion of investments, see the
Investments section of this Managements
Discussion and Analysis.

Investment income decreased to $1.6 million in the third
quarter of 1999 from $1.9 million in the third quarter of
1998 and decreased to $4.9 million for the nine months ended
 September 30, 1999 from $5.9 million for the nine
months ended September 30, 1998. Investment income decreased
 due to reduced funds available for investment as funds were used
 to pre-fund reinsurance premiums as well as growth of tax-exempt
 municipal securities included in our portfolio which earn lower
pre-tax rates than taxable securities but are comparable on a tax
 adjusted basis. We first began purchasing tax-exempt securities
in the second quarter of 1998. Funds available for investment
decreased to $109.9 million at September 30, 1999 from
$125.2 million at September 30, 1998, due to decreased
net cash provided by operating activities, resulting primarily
from (i) the difference in timing between the receipt of
premiums, the payment of premiums ceded under our reinsurance
agreements, the payment of claim and claim settlement expenses
and the recovery of paid claim and claim settlement expenses
under our reinsurance programs, and (ii) net cash provided
by investment income. Tax-adjusted investment yields increased to
 6.6% for the nine months ended September 30, 1999 from 6.1%
 for the nine months ended September 30, 1998 due to
purchasing tax-exempt municipal securities beginning in the
second quarter of 1998, which have higher yields on a
tax-adjusted basis. The investment yields realized in future
periods will be affected by yields attained on new investments.

Net realized investment losses were $18,000 for the third quarter
 of 1999 compared to a net realized investment gains totaling
$330,000 in the third quarter of 1998 and net realized investment
 gains for the nine months ending September 30, 1999 were
$84,000 compared to $1.0 million for the nine months ending
September 30, 1998. The reduced investment activity in the
third quarter of 1999 is mainly due to portfolio restructuring
completed in the second and third quarters of 1998 that resulted
in the significant net realized investment gains. No such
restructuring has occurred in 1999.

Investment Income and Net Realized Investment Gains Outlook: Barring significant changes in interest rates or operational
 cash flows, we expect that the yield from our investment
portfolio for the remainder of 1999 will be affected by the
following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Funds provided by our operating cash flows and investment cash
	flows have historically provided growth in our investment
	portfolio. Operating cash flows consist of the excess of premiums
	 collected over claim and claim settlement expenses offset by
	payments for reinsurance premiums as well as other operating
	expenses paid. Investment cash flows consist of income on
	existing investments and proceeds from sales and maturities of
	investments. We have historically generated positive net cash
	flows from operations due, in part, to timing differences between
	 the receipt of premiums and the payment of claim and claim
	settlement expenses. These net cash flows have decreased
	significantly in 1999 as we have focused on closing old claims,
	paying earlier to close claims. Combined with relatively flat
	premiums in force since December 1998, our cash flow from
	timing on claims payments has decreased. Additionally, as we
	lowered our reinsurance retention levels to $25,000 in mid-1998,
	we decreased our current period cash flows as a result of
	pre-funding quarterly premiums under that agreement.
	We expect this reduction in quarterly cash flow will continue
	until reimbursements for loss payments to claimants under these
	contracts equal disbursements for premium payments;
|
| |  | Our recognition of realized gains and losses will depend on the
	repositioning of the portfolio, if any, that occurs in 1999 as we
	 continue manage our portfolio returns; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | We will continue to include fixed maturity tax-exempt securities
	in our investment portfolio to increase after-tax yields. The mix
	 of taxable and tax-exempt securities in our portfolio may change
	 over time to accommodate our tax situation. Fixed maturity,
	tax-exempt securities may have the effect of reducing investment
	income recognized and decrease pre-tax investment yields but are
	expected to contribute more to after-tax net income as a result
	of the favorable treatment tax-exempt municipal income receives
	for federal income tax purposes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

Total expenses:Our expenses include claim and claim
settlement expenses, policy acquisition costs, general and
administrative expenses, interest expense and income taxes.

Claim and Claim Settlement Expenses:Claim and claim
settlement expenses refer to amounts that we paid or expect to
pay to claimants for events that have occurred. The costs of
investigating, resolving and processing these

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claims are referred to as claim settlement expenses. We record
these expenses, net of amounts recoverable under reinsurance
contracts, to claim and claim settlement expenses in the
Consolidated Statements of Operations.

Claim and claim settlement expenses are our largest expense and
result in our largest liability. We establish reserves that
reflect our estimates of the total claim and claim settlement
expenses we will ultimately have to pay under our workers
compensation insurance policies. These include claims that have
been reported but not settled and claims that have been incurred
but not yet reported to us. For further discussion of reserve
determination, see the Unpaid Claim and Claim Settlement
Expenses section of this Managements Discussion and
Analysis.

Claim and claim settlement expenses decreased to
$11.1 million in the third quarter of 1999 from
$17.6 million in the third quarter of 1998 and decreased to
$32.3 million for the nine months ended September 30,
1999 from $54.8 million for the nine months ended
September 30, 1998. As a percent of premiums earned, claim
and claim settlement expenses increased to 63.1% for the third
quarter of 1999 from 80.4% for the third quarter of 1998 and
decreased to 62.3% for the nine months ended September 30,
1999 compared to 83.5% for the nine months ended
September 30, 1998. These changes are due to the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In the third quarter of 1999, we recorded an estimate of ceded
	paid and unpaid claim and claim settlement expenses under our
	$25,000 to $300,000 excess of loss reinsurance agreements
	totaling $5.5 million resulting in a corresponding reduction
	 in claim and claim settlement expenses. Combined with
	$5.4 million recorded in the first quarter of 1999 and
	$5.3 million recorded in the second quarter of 1999, claim
	and claim settlement expenses have been reduced by
	$16.2 million for the nine months ended September 30,
	1999. No such ceding estimates were recorded in the first three
	quarters of 1998.     
|
| |  | The 1998 nine month results include a $3.0 million increase
	in reserves for unpaid claim and claim settlement expenses
	recorded in the first quarter of 1998 to reflect adverse
	development of prior period claims. Additionally, the nine-month
	results included a $400,000 Minnesota Special Compensation Fund
	(SCF) recorded in the second quarter of 1998. The SCF
	assesses us to cover the costs of second injuries that are
	substantially greater, because of a pre-existing physical
	impairment, than what would have resulted from the second injury
	alone;                                                          
|
| |  | We have aggressively targeted policies for non-renewal or
	re-underwriting at more favorable rates during 1999 at policy
	expiration as the profitability of that business does not meet
	our underwriting profit margin standards. For the nine months
	ended September 30, 1999, our aggressive re-underwriting
	resulted in $8.0 million of premiums renewed at higher prices as
	well as $7.6 million in premiums that were not renewed. We
	will continue to review business at policy expiration through the
	 remainder of 1999 and non-renew or re-underwrite at more
	favorable rates any business not meeting our standards;
|
| |  | Reduced premiums due to legislative changes in estimated loss
	costs, increased competition and improving customer loss
	experience, have continued to place upward pressure on claim and
	claim settlement expenses as a percentage of premiums earned; and                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Claim costs continued to receive continued upward pressure in
	accident year 1999 as compared to accident year 1998 due to
	increasing medical and indemnity costs resulting from
	inflationary changes. This has been offset somewhat by the
	effects of provider agreements that we negotiated during 1998.                                                                                                                                                                                                                                                                                                                         

Claim and Claim Settlement Expense Outlook:We expect that
 claim and claim settlement expenses will be affected by the
following factors:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Continued favorable effects of ceding paid and unpaid claim and
	claim settlement expenses under our $25,000 to $300,000 excess of
	 loss reinsurance agreements resulting in a reduction of claim
	and claim settlement expenses;.                                                                                                                                                                                                                                                 
|
| |  | Claim costs will continue to be affected by (i) increases in
	 medical and indemnity costs resulting from inflationary changes,
	 (ii) severity experienced in future periods in our policy
	holder base, (iii)  changes resulting from increases in
	operating efficiency and effectiveness realized through
	enhancements to our internal processes and procedures, including
	changes to our proprietary computer systems, and
	(iv) legislative changes in estimated loss costs;
|
| |  | Continued pricing pressure due to legislative changes in
	estimated loss costs, increased competition and improving
	customer loss experience may result in reduced premiums,
	ultimately increasing claim and claim settlement expense as a
	percent of premium earned; and                                                                                                                                                                                                        

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| |   |                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------
| |  | Continued application of our claims management technology and
	methods to all open claims at September 30, 1999, may
	benefit future periods.

The ultimate result of the above factors, combined with the
change in premium rates, on claim and claim settlement expenses
as a percent of premiums earned for the remainder of 1999 is
unknown at this time.

Policy Acquisition Costs.Policy acquisition costs are
costs directly related to writing an insurance policy and consist
 of commissions, state premium taxes, underwriting personnel
costs and expenses, sales and marketing costs and other
underwriting expenses, offset by ceding commissions received from
 our reinsurers. Ceding commissions are amounts that reinsurers
pay to us for placing reinsurance with them. Ceding commissions
represent adjustments based on actual claim and claim settlement
expenses related to premiums ceded in prior years. Under
reinsurance agreements, our ceding commission is adjusted to the
extent that actual claim and claim settlement expenses vary from
levels specified in the agreement.

The following table summarizes policy acquisition costs
(000s):

|                               |                                 |                    |       |                   |  |      |       |       |  |   |       |        |  |   |       |        | 
|------------------------------ | ------------------------------- | ------------------ | ----- | ----------------- |  | ---- | ----- | ----- |  | - | ----- | ------ |  | - | ----- | ------ | 
|                               |                                 |                    |       |                  
|                               |                                 | Three months ended |       | Nine months ended
|                               |                                 | September 30,      |       | September 30,    
|                               |                                 |                    |       |                  
|                               |                                 | 1999               |       | 1998              |  | 1999 |       | 1998 
|                               |                                 |                    |       |                   |  |      |       |      
|Commission expense             |                                 | $                  | 1,754 |                   |  | $    | 1,881 |       |  | $ | 5,304 |        |  | $ | 5,296 |       
|                              
|                              
|                              
|                              
|Premium tax expense            |                                 |                    | 437   |                   |  |      | 465   |       |  |   | 1,324 |        |  |   | 1,369 |       
|                              
|                              
|                              
|                              
|Other policy acquisition costs |                                 |                    | 825   |                   |  |      | 1,311 |       |  |   | 3,397 |        |  |   | 3,582 |       
|                               |                                 |                    |       |                   |  |      |       |       |  |   |       |        |  |   |       |       
|                               | Direct policy acquisition costs |                    | $     | 3,016             |  |      | $     | 3,657 |  |   | $     | 10,025 |  |   | $     | 10,247 | 
|                               |                                 |                    |       |                   |  |      |       |       |  |   |       |        |  |   |       |       

Policy acquisition costs decreased to $3.0 million in the
third quarter of 1999 from $3.7 million in the third quarter
 of 1998 and decreased to $10.0 million for the nine months ended
 September 30, 1999 compared to $10.2 million for the
nine months ended September 30, 1998. As a percent of gross
premiums earned, policy acquisition costs decreased to 13.6% in
the third quarter of 1999 from 16.0% in the third quarter of 1998
 and decreased to 15.3% for the nine months ended
September 30, 1999 from 15.4% for the nine months ended
September 30, 1998. These changes reflect the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Commission expense was 7.9% of gross premiums earned in the third
	 quarter of 1999 compared to 8.2% in the third quarter of 1998
	and was 8.1% of gross earned premiums for the nine months ended
	September 30, 1999 versus 8.0% for the nine months ended
	September 30, 1998. Historically, as we entered new markets,
	 we introduced higher commission rates to attract business from
	established agents. These rates have continued into current
	policy periods and will have a greater effect on the commission
	expense percent as the non- Minnesota states continue to grow
	relative to Minnesota. In all of our markets, we believe the
	commission rates we pay are marketplace competitive;
|
| |  | Premium tax expense remained consistent at 2.0% of gross premiums
	 earned for the third quarter of 1999 and 1998 and decreased to
	2.0% of gross premiums earned for the nine months ended
	September 30, 1999 compared to 2.1% of gross premiums earned
	 for the nine months ended September 30, 1998; and                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Other policy acquisition costs decreased to 3.7% of gross
	premiums earned in the third quarter of 1999 from 5.7% in the
	third quarter of 1998 and decreased to 5.2% of gross premiums
	earned for the nine months ended September 30, 1999 from
	5.4% for the nine months ended September 30, 1998. The Company
	participates in workers compensation reinsurance pools
	through its affiliation with the National Council on Compensation
	 Insurance (NCCI). Policy acquisition costs decreased $456,000 in
	 the third quarter and for the nine months ended September 30,
	1999 as a result of 1999 and 1998 reapportionments and favorable
	1999 operating results of those pools.                  

Policy Acquisition Cost Outlook:We expect that policy
acquisition costs as a percent of gross premiums earned will
stabilize or remain relatively constant as a percent of gross
premiums earned during the remainder of 1999 due to the
following:



| |   |                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We expect commission expense as a percent of gross premiums
	earned to increase slightly during the remainder of 1999 as the
	non-Minnesota states continue to grow in size relative to
	Minnesota;
|
| |  | We expect premium tax expense as a percent of gross premiums
	earned to remain consistent with the first nine months of 1999;
	and                                                                 

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We expect that other policy acquisition costs will be consistent
	with the first nine months of 1999 as a percent of gross premiums
	 earned (after adjusting for reinsurance pool refunds received in
	 the third quarter of 1999) as we continue to improve our
	underwriting skills, increase premiums in force and generate
	additional revenues to cover the relatively fixed policy
	acquisition costs. We also expect that these costs will be
	offset, on a limited basis, by increases in operating efficiency
	and effectiveness during the remainder of 1999 realized through
	enhancements to our internal processes and procedures, including
	changes to our proprietary computer systems.

General and Administrative Expenses:Our general and
administrative expenses include personnel costs, office rent,
certain state administrative assessments based on premiums and
other costs and expenses not specific to claim and claim
settlement expenses or policy acquisition costs.

General and administrative expenses decreased to
$2.9 million in the third quarter of 1999 from
$3.2 million in the third quarter of 1998 and increased to
$8.8 million for the nine months ended September 30,
1999 compared to $8.7 million for the same period in 1998. As a
percent of gross premiums earned, general and administrative
expenses decreased to 12.9% in the third quarter of 1999 from
13.8% in the third quarter of 1998 and increased to 13.5% for the
 nine months ended September 30, 1999 from 13.1% for the
nine months ended September 30, 1998. General and
administrative expenses continue to be managed aggressively and
reduced where appropriate. Our general and administrative
expenses for the second quarter of 1998 and nine months ended
September 30, 1998 include a $1.1 million benefit
resulting from the reversal of a 1997 accrual for assessments by
the Minnesota Insurance Guarantee Association (MIGA), an
organization formed to fund Minnesota claims for insolvent
insurance companies. MIGA did not assess its members in 1998 for
workers compensation claim liabilities arising from current
 or prior insolvencies resulting in the accrual reversal. We did
not accrue for a 1999 MIGA assessment for the nine months ended
September 30, 1999 while we accrued $206,000 in the third
quarter of 1998 and $694,000 for the nine months ended
September 30, 1998. MIGA did not assess its members in 1998
or 1997 for workers compensation claim liabilities arising
from current or prior insolvencies and we do not anticipate any
assessment in 1999 payable in 2000.

General and Administrative Expenses Outlook:We expect
that general and administrative expenses will be affected by the
following:



| |   |                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We will continue to aggressively manage all general and
	administrative expenses for the remainder of 1999;                                                                                                                     
|
| |  | We have no plans to open additional state offices in 1999 or 2000
	 and expect that growth in premiums in force in Michigan and
	Massachusetts will result in additional revenues to cover the
	fixed costs in those states; and
|
| |  | We expect to realize additional operational efficiency during
	1999 through enhancements to our internal processes and
	procedures, including changes to our internal proprietary
	computer systems.                            

Interest Expense:We incur interest charges on our Senior
Notes. The remaining Senior Notes outstanding mature in
December 1999.

We are paying interest at 9.50% during 1999 and paid interest at
rates ranging from 9.25% to 9.50% during 1998 on the outstanding
balance on our Senior Notes.

Interest expense decreased to $69,000 in the third quarter of
1999 from $139,000 in the third quarter of 1998 and decreased to
$207,000 for the nine months ended September 30, 1999 from
$417,000 for the same period in 1998 due to principal payments on
 the Senior Notes in December 1998.

Interest Expense Outlook:Interest expense for the
remainder of 1999 is expected to decrease to $58,000 following
the repayment of the Senior Notes in December 1999. Total
interest expense on the Senior Notes is expected to decrease to
$266,000 in 1999 from $546,000 in 1998 as a result of principal
payments of $2.5 million made in December 1998.

Income Taxes:We incur federal income taxes on our
combined service organization (RTW) operations and insurance
 (ACIC) operations. We incur state income taxes on the
results of our service organizations operations and incur
premium taxes in lieu of state income taxes for substantially all
 of our insurance operations. In certain instances, we may incur
state income taxes on our insurance operations. Additionally,
certain provisions of the

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Internal Revenue Code adversely affect our taxable income by
accelerating recognition of revenues, deferring recognition of
expenses ultimately accelerating the payment of income taxes.
Adjustments to book income generating current tax liabilities
include limitations on the deductibility of unpaid claim and
claim settlement expenses, limitations on the deductibility of
unearned premium reserves and limitations on deductions for bad
debt reserves. Additionally, we benefit from the non-taxable
portion of our tax-exempt municipal securities.

Income tax expense was $485,000 for the third quarter of 1999
compared to income tax benefit of $339,000 for the third quarter
of 1998 and income tax expense was $1.2 million for the nine
 months ended September 30, 1999 compared to an income tax
benefit of $820,000 for the nine months ended September 30,
1998. As a percent of income (loss) before income taxes, the
income tax expense (benefit) was 23.1% for the third quarter of
1999 versus (71.1%) for the third quarter of 1998 and was 22.0%
for the nine months ended September 30, 1999 compared to
(51.8%) for the cumulative loss for the nine months ended
September 30, 1998. The income tax expense (benefit) percent
 in 1999 has been affected by (i) decreased taxable net
income from the service organization (RTW) which is subject to
both federal and state income taxes, and (ii) the
introduction of tax-exempt municipal income beginning in the
second quarter of 1998.

Income Tax Outlook:  Income tax expense (benefit)
will vary based on (i) the income from operations we
recognize for the remainder of 1999, and will (ii) decrease
as a percent of income before taxes relative to the statutory
effective rate as we purchase additional tax-exempt municipal
fixed investments for our investment portfolio or decrease as a
percent of income before taxes relative to the statutory
effective rate as we sell existing tax exempt municipal fixed
investments. The ultimate change is unknown at this time.

Investments

Our portfolio included taxable and tax-exempt fixed maturity
securities at September 30, 1999 as follows:

|                                      |  |           |         |        |  |                  |         |        |  |   |     |  |  |   |        |  
|------------------------------------- |  | --------- | ------- | ------ |  | ---------------- | ------- | ------ |  | - | --- |  |  | - | ------ | -
|                                      |  |           |         |        |  |                 
|                                      |  |           |         |        |  | Gross Unrealized
|                                      |  | Amortized |         | Market |  |                 
|                                      |  | Cost      |         | Value  |  | Gain             |         | (Loss)
|                                      |  |           |         |        |  |                  |         |       
|U.S. government securities            |  | $         | 15,113  |        |  | $                | 14,899  |        |  | $ | 75  |  |  | $ | (289   | )
|                                     
|                                     
|                                     
|                                     
|Corporate securities                  |  |           | 15,459  |        |  |                  | 15,032  |        |  |   | 29  |  |  |   | (456   | )
|                                     
|                                     
|                                     
|                                     
|Mortgage- and asset-backed securities |  |           | 18,679  |        |  |                  | 18,234  |        |  |   | 13  |  |  |   | (458   | )
|                                     
|                                     
|                                     
|                                     
|Municipal bonds, tax-exempt           |  |           | 63,134  |        |  |                  | 61,725  |        |  |   | 41  |  |  |   | (1,450 | )
|                                      |  |           |         |        |  |                  |         |        |  |   |     |  |  |   |        |  
|Totals                                |  | $         | 112,385 |        |  | $                | 109,890 |        |  | $ | 158 |  |  | $ | (2,653 | )
|                                      |  |           |         |        |  |                  |         |        |  |   |     |  |  |   |        |  

After several years of purchasing solely U.S. government
securities, we engaged an investment manager in 1997 to diversify
 our portfolio to other taxable fixed maturity investments and to
 maximize our after-tax investment income without taking
inappropriate credit risk. During the second quarter of 1998, we
transferred our portfolio to a new investment manager and further
 diversified our portfolio by purchasing investment grade
tax-exempt fixed maturity investments. We manage our fixed
maturity portfolio conservatively, investing only in investment
grade (BBB or better rating from Standard and Poors)
securities of U.S. domiciled issuers. We do not invest in
derivative securities.

Funds provided by our operating cash flows and investment cash
flows have historically provided growth in our investment
portfolio. Operating cash flows consist of the excess of premiums
 collected over claim and claim settlement expenses offset by
payments for reinsurance premiums as well as other operating
expenses paid. Investment cash flows consist of income on
existing investments and proceeds from sales and maturities of
investments. We have historically generated positive net cash
flows operations due, in part, to timing differences between the
receipt of premiums and the payment of claim and claim settlement
 expenses. These net cash flows have decreased significantly in
1999 as we have focused on closing old claims, paying earlier to
close claims. Combined with relatively flat premiums in force
since December 1998, our cash flow from timing on claims payments
 has decreased. Additionally, as we lowered our reinsurance
retention levels to $25,000 in mid-1998, we decreased our current
 period cash flows as a result of pre-funding
quarterly premiums under that agreement. We expect this reduction
 in quarterly cash flow will continue until reimbursements for
loss payments to claimants under these contracts equal
disbursements for premium payments. Our investment portfolio
decreased 12.2% or $15.3 million to $109.9 million at
September 30, 1999, from $125.2 million at
September 30, 1998, as a result of these factors.

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We record investments on our balance sheet at fair value, with
the corresponding appreciation or depreciation from amortized
cost recorded in shareholders equity, net of taxes in
accumulated other comprehensive income. Because value is based on
 the relationship between the portfolios stated yields and
prevailing market yields at any given time, interest rate
fluctuations can have a swift and significant impact on the
carrying value of these securities. As a result of classifying
our securities as available-for-sale, and thus carried at fair
value, we expect to encounter larger adjustments in
shareholders equity as market interest rates and other
factors change.

Unpaid Claim and Claim Settlement Expenses

Our unpaid claim and claim settlement expenses represent
established, undiscounted reserves for the estimated total unpaid
 cost of claim and claim settlement expenses, which cover events
that occurred through September 30, 1999. These reserves
reflect our estimates of the total costs of claims that were
reported, but not yet paid, and the cost of claims incurred but
not yet reported (IBNR). For reported claims, we establish
reserves on a case basis. For IBNR claims, we
estimate reserves using established actuarial methods. Both our
case and IBNR reserve estimates reflect such variables as past
claims experience, current claim trends and prevailing social,
economic and legal environments. Due to commencing operations in
1992, we have limited historical data to estimate our reserves
for unpaid claim and claim settlement expenses and accordingly
supplement our experience with external industry data, as
adjusted, to reflect anticipated differences between our results
and the industry. We reduce the unpaid claim and claim settlement
 expenses for estimated amounts of subrogation.

Based on information currently available, we believe our reserves
 for unpaid claim and claim settlement expenses are adequate to
cover the ultimate costs of claim and claim settlement expenses.
The ultimate cost of claim and claim settlement expenses may
differ from the established reserves, particularly when claims
may not be settled for many years. Reserves for unpaid claim and
claim settlement expenses and assumptions used in their
development are continually reviewed. We record adjustments to
prior estimates of unpaid claim and claim settlement expenses to
operations in the year in which the adjustments are made.

Liquidity and Capital Resources

Liquidity refers to our ability to generate sufficient cash flows
 to meet the short- and long-term cash requirements of our
operations. Capital resources represent those funds deployed or
available to be deployed to support our business operations.

Our primary sources of cash from operations are premiums
collected and investment income. Our investment portfolio is also
 a source of liquidity, through the sale of readily marketable
fixed maturity investments, as well as longer-term investments
that have appreciated in value. Our primary cash requirements
consist of payments for (i) reinsurance, (ii) claim and
 claim settlement expenses, (iii) policy acquisition costs,
(iv) general and administrative expenses, (v) capital
expenditures, (vi) income taxes, and (vii) debt service
 or principal repayment on our outstanding Senior Notes. We have
historically generated positive net cash from operations due, in
part, to timing differences between the receipt of premiums and
the payment of claim and claim settlement expenses. As we lowered
 our reinsurance retention levels to $25,000 in mid-1998, we
decreased our current period cash flows as a result of
pre-funding quarterly premiums under that agreement.
We expect this reduction in quarterly cash flow will continue
until reimbursements for loss payments to claimants under these
contracts equal disbursements for premium payments. Cash
generated is either invested in short-term cash and cash
equivalents or longer term available-for-sale securities pending
future payments for such expenses as indemnity, medical benefits
and other operating expenses. Cash and cash equivalents consist
of U.S. government securities acquired under repurchase
agreements, tax-exempt municipal securities and corporate
securities all with maturities of 90 days or less, with the
remaining balances in cash and a money market fund that invests
primarily in short-term government securities.

Cash used by operating activities for the nine months ended
September 30, 1999 was $11.0 million. This is primarily
 a result of an increase of $15.8 million in amounts due from
reinsurers, a decrease of $3.5 million in accrued
liabilities, a decrease of $609,000 in unearned premiums, net of
premiums receivable, an increase in our deferred income tax asset
 of $1.9 million, offset by our net income of
$4.3 million, an increase in depreciation expense of
$978,000 and an increase of $1.5 million in unpaid claim and
 claim settlement expenses, and which are non-cash accruals for
future claims. Net cash provided by investing activities was
$11.0 million, primarily the result of $18.7 million in
 proceeds from sales of securities and maturities of
$1.9 million of investments offset by $9.1 million in
purchases of securities and $518,000 in purchases of fixed
assets. Net cash provided by financing

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activities was $1.4 million due to proceeds from the
exercise of stock options and purchases of common stock under the
 Employee Stock Purchase Plan.

Our need for additional capital is primarily the result of
regulations which require certain ratios of capital to premiums
written. In the future, we expect that our need for additional
capital will be primarily related to the growth of our insurance
subsidiary and the need to maintain appropriate capital to
premium ratios as defined by state regulatory bodies. As an
alternative to raising additional capital, we believe we could
secure quota-share or other additional reinsurance which would
have the effect of reducing the ratio of premiums to capital and
could be used to satisfy state regulatory requirements.

State insurance regulations limit distributions, including
dividends, from our insurance subsidiary to us. The maximum
amount of dividends that can be paid by ACIC to us in any year is
 equal to the greater of: (i) 10% of ACICs statutory
surplus as of the end of the previous fiscal year, or
(ii) the statutory net gain from operations (not including
realized capital gains) of ACIC in its most recent fiscal year.
Based on this limitation, the maximum dividend that ACIC could
pay to us in 1999, without regulatory approval, is approximately
$4.2 million. ACIC has never paid a dividend to us.

On September 15, 1998, our Board of Directors approved a
share repurchase program authorizing us to repurchase, from time
to time, up to $4,000,000 of RTW, Inc. common stock. We will
repurchase the shares on the open market or through private
transactions depending upon market conditions and availability.
Through December 31, 1998 we had repurchased 19,500 shares
for approximately $87,000. No shares have been repurchased in
1999. The repurchased shares will be used for employee stock
option and purchase plans and other corporate purposes.

We believe that cash flow generated by our operations and our
cash and investment balances will be sufficient to fund
continuing operations, principal repayments, stock repurchases
and debt service on our outstanding Senior Notes, including
principal repayments of $2.5 million due in
December 1999, and capital expenditures for the next
12 months.

Interest Rate Risk

Our fixed maturity investments and notes payable are subject to
interest rate risk. Increases and decreases in prevailing
interest rates generally translate into decreases and increases
in the fair value of these instruments. Also, fair values of
interest rate sensitive instruments may be affected by the credit
 worthiness of the issuer, prepayment options, relative values of
 alternative instruments, the liquidity of the instrument and
other general market conditions. We regularly evaluate interest
rate risk in order to evaluate the appropriateness of our
investments.

An increase of 100 basis points in prevailing interest rates
would reduce the fair value of our interest rate sensitive
instruments by approximately $5.7 million.

The effect of interest rate risk on potential near-term fair
value was determined based on commonly used models. The models
project the impact of interest rate changes on factors such as
duration, prepayments, put options and call options. Fair value
was determined based on the net present value of cash flows or
duration estimates, using a representative set of likely future
interest rate scenarios.

Impact of the Year 2000 on Computer Applications

The year 2000 is a critical year for computer applications.
Historically, many computer programs were written using two
digits rather than four to define the appropriate year. As a
result, many computer programs that have date sensitive fields
may recognize a date using 00 as the year 1900 rather
 than the year 2000. This could result in system failures or
miscalculations causing disruption of operations, including,
among other things, a temporary inability to process
transactions, send invoices or engage in other critical business
activities.

Year 2000 readiness includes addressing information technology
systems (computer equipment, computer software, network hardware
and software, etc.), non-information technology systems (systems
which include embedded technology such as micro-controllers
including telephone systems) and issues relating to third parties
 with whom we have a material relationship (customers and
vendors).

Information Technology Systems:Our insurance subsidiary
operations began in 1992. After using third party software and
services for several years, we developed our own internal
computer systems to manage our claims and related claim
settlement expenses (1996) and administer our policy
information (1995). These computer systems are year 2000
compliant. Additionally, during the second quarter of 1998 we
implemented third-party provided

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general ledger and accounts payable software, which are year 2000
 compliant. Also, we completed an internally developed billing
and cash receipt system in the second quarter of 1999 which is
year 2000 compliant. These system replacements and software
developments are occurring as a part of our ongoing operations
and are not specifically occurring as a result of the year 2000
issue. We believe our critical computer hardware and software
systems are fully year 2000 compliant and non-critical hardware
and software systems will be compliant through the remainder of
1999. The remaining cost of any hardware and software changes
required to comply with the year 2000, other than those
contemplated as routine upgrades in our operations, are not
expected to have a material adverse effect on our results of
operations.

Non-Information Technology Systems:We have reviewed our
operationally critical non-information technology systems (non-IT
 systems) which may have embedded technology that is reliant on
the year 2000. We have developed a formal plan to address any
non-IT system year 2000 issues. We believe our critical non-IT
systems are fully year 2000 compliant. We are currently unable to
 determine any further ultimate costs relating to non-information
 technology systems.

Third Party Readiness:We have taken steps to ensure that
our significant customers and vendors are year 2000 compliant
through surveys and further information requests. We have
received information from our critical vendors and are
comfortable that our vendors are year 2000 compliant.

We continue to review and update our year 2000 business
contingency plan that will address any year 2000 risks we
identify.

NAIC Risk-based capital Standards

The National Association of Insurance Commissioners
(NAIC) has risk-based capital standards to determine the
capital requirements of a property and casualty insurance carrier
 based upon the risks inherent in its operations. These standards
 require the computation of a risk-based capital amount which is
then compared to a carriers actual total adjusted capital.
The computation involves applying factors to various financial
data to address four primary risks: asset risk, insurance
underwriting risk, credit risk and off-balance sheet risk. These
standards provide for regulatory intervention when the percent of
 total adjusted capital to authorized control level risk-based
capital is below certain levels. Based upon the risk-based
capital standards, our percent of total adjusted capital is
substantially in excess of authorized control level risk-based
capital.

Regulation

Our insurance subsidiary is subject to substantial regulation by
governmental agencies in the states in which we operate, and will
 be subject to such regulation in any state in which we provide
workers compensation products and services in the future.
State regulatory agencies have broad administrative power with
respect to all aspects of our business, including premium rates,
benefit levels, policy forms, dividend payments, capital adequacy
 and the amount and type of investments. These regulations are
primarily intended to protect covered employees and policyholders
 rather than the insurance company. Both the legislation covering
 insurance companies and the regulations adopted by state
agencies are subject to change. At September 30, 1999, our
insurance subsidiary was licensed to do business in Minnesota,
South Dakota, Wisconsin, Colorado, Missouri, Illinois, Kansas,
Michigan, Indiana, Massachusetts, Connecticut, Rhode Island,
Pennsylvania, Tennessee, Maryland, Arkansas, Iowa and Florida.

In March 1998, the National Association of Insurance
Commissioners adopted the Codification of Statutory Accounting
Principles (Codification). The Codification, which is intended to
 standardize regulatory accounting and reporting for the
insurance industry, is proposed to be effective January 1,
2001. However, statutory accounting principles will continue to
be established by individual state laws and permitted practices
and it is uncertain when, or if, the state of Minnesota will
require adoption of Codification for preparing statutory
financial statements. We have not quantified the effect
Codification may have on our statutory financial statements.

Forward Looking Statements

Information included in this Form 10-Q which can be
identified by the use of forward-looking terminology such as
may, will, expect,
anticipate, estimate, or
continue or the negative thereof or other variations
thereon or comparable terminology constitutes forward-looking
information. The following important factors, among others, in
some cases have affected and in the future could affect our
actual results and could cause our actual financial

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performance to differ materially from that expressed in any
forward-looking statement: (i) general economic and business
 conditions; (ii) interest rate changes;
(iii) competition and the regulatory environment in which we
 operate; (iv) claims frequency; (v) claims severity;
(vi) our ability to manage both our existing claims and new
claims in an effective manner; (vii) the number of new and
renewal policy applications submitted by our agents;
(viii) our ability to successfully introduce new products
and services; (ix) our ability and our third party providers
 ability, agents and reinsurers to adequately address year 2000
issues; and (x) other factors as noted in our filings with
the SEC. This discussion of uncertainties is by no means
exhaustive but is designed to highlight important factors that
may impact our future performance.

Item 3:  Quantitative and Qualitative Disclosures about
Market Risk

Information with respect to Disclosures about Market Risk is
contained in the Section entitled Managements
Discussion and Analysis of Financial Condition and Results of
Operations  Interest Rate Risk under Item 2 of
this Report of Form 10-Q and is incorporated herein by
reference.

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PART II  OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

None

Item 2.  CHANGES IN SECURITIES

None

Item 3.  DEFAULTS UPON SENIOR SECURITIES

None

Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS

None

Item 5.  OTHER INFORMATION

None

Item 6.  EXHIBITS AND REPORTS ON FORM 8-K



| |     |                    
| | --- | -------------------
| | (a) | Listing of Exhibits



| |                |                                                                                                                    
| | -------------- | -------------------------------------------------------------------------------------------------------------------
| | Exhibit 11    | STATEMENT REGARDING COMPUTATION OF BASIC AND DILUTED NET INCOME
	PER SHARE                                         
|
| | Exhibit 27    | FINANCIAL STATEMENT SCHEDULE                                                                                       
|
| | Exhibit 99.1  | PRESS RELEASE, dated November 2, 1999, RTW, Inc. and its
	Majority Stockholders are Seeking a New Majority Investor



| |     |                               
| | --- | ------------------------------
| | (b) | Listing of Reports on Form 8-K

None

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SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

RTW, Inc.

|                         |  |    |  |                                                                                                                                                                               
|------------------------ |  | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Dated: November 10, 1999 |  | By |  | /s/ CARL B. LEHMANN
	------------------------------------------------
	Carl B. Lehmann
	President, Chief Executive Officer and Director
	(Principal Executive Officer)        
|                        
|Dated: November 10, 1999 |  | By |  | /s/ TIM C. CHAN
	------------------------------------------------
	Tim C. Chan
	Secretary, Treasurer and Chief Financial Officer
	(Principal Financial and Accounting Officer)

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EXHIBIT INDEX


|        |      |             |  |                                                                                                                     |  |  |    | 
|------- | ---- | ----------- |  | ------------------------------------------------------------------------------------------------------------------- |  |  | -- | 
|Exhibit |      |             |  |                                                                                                                    
|Number  |      | Description |  | Page                                                                                                               
|        |      |             |  |                                                                                                                    
|        | 11   |             |  | Statement Regarding Computation of Basic and Diluted Net Income
	Per Share                                          |  |  | 24 | 
|       
|        | 27   |             |  | Financial Statement Schedule                                                                                        |  |  | 25 | 
|       
|        | 99.1 |             |  | Press Release, dated November 2, 1999, RTW, Inc. and its
	Majority Stockholders are Seeking a New Majority Investor |  |  | 26 | 

23