##### Table of Contents

---



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---



FORM 10-Q



---



(Mark One)

|x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended September 30, 2005.



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 000-51455



---



REPUBLIC COMPANIES GROUP, INC.

(Exact name of registrant as specified in its charter)



---



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 30-0175923                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|222 Delaware Avenue, Suite 900 Wilmington, Delaware            |  | 19801                               
|(Address of principal executive offices)                       |  | (Zip Code)                          



(302) 658-3613

(Registrants telephone number, including area code)



N/A

(Former name, former address, and former fiscal year, if changed since last report)



---



Indicate by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ̈No x



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ̈No x



Shares outstanding of the Registrants common stock:



|                              |  |                                
|----------------------------- |  | -------------------------------
|Class                         |  | Outstanding at November 7, 2005
|Common stock, $0.01 par value |  | 14,020,222                     



---



---

##### Table of Contents



REPUBLIC COMPANIES GROUP,
INC.

Index



|                                                      |  |                                                                                                                                            |  |     
|----------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------ |  | ----
|                                                      |  |                                                                                                                                            |  | Page
|Part I                                                |  | Financial Information                                                                                                                      |  |     
|Item 1.                                               |  | Financial Statements                                                                                                                       |  |     
|                                                      |  |                                                                                                                                           
|                                                      |  | Condensed Consolidated Balance Sheets as of September 30, 2005 (Unaudited) and December 31, 2004                                           |  | 2   
|                                                      |  | Condensed Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2005 and 2004                |  | 4   
|                                                      |  | Condensed Consolidated Statement of Shareholders Equity and Comprehensive Income (Unaudited) for the Nine Months Ended September 30, 2005 |  | 5   
|                                                      |  | Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2005 and 2004                          |  | 6   
|                                                      |  | Notes to Condensed Consolidated Financial Statements (Unaudited)                                                                           |  | 8   
|Item 2.                                               |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                      |  | 17  
|Item 3.                                               |  | Quantitative and Qualitative Disclosures about Market Risk                                                                                 |  | 35  
|Item 4.                                               |  | Controls and Procedures                                                                                                                    |  | 35  
|Part II                                               |  | Other Information                                                                                                                          |  | 36  
|Item 1.                                               |  | Legal Proceedings                                                                                                                          |  | 36  
|Item 2.                                               |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                |  | 36  
|Item 3.                                               |  | Defaults Upon Senior Securities                                                                                                            |  | 36  
|Item 4.                                               |  | Submission of Matters to a Vote of Security Holders                                                                                        |  | 36  
|Item 5.                                               |  | Other Information                                                                                                                          |  | 36  
|Item 6.                                               |  | Exhibits                                                                                                                                   |  | 37  
|                                                      |  | Signatures                                                                                                                                 |  | 39  
|Certification of CEO Pursuant to Section 302          |  |                                                                                                                                           
|Certification of CFO Pursuant to Section 302          |  |                                                                                                                                           
|Certifications of CEO and CFO Pursuant to Section 906 |  |                                                                                                                                           



---

##### Table of Contents



Part I - Financial Information



|Item 1. | Financial Statements
|------- | --------------------



REPUBLIC COMPANIES GROUP, INC.

AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Dollars in thousands, except share amounts)



|                                                                                                 |  |                    |         |                   |   |        
|------------------------------------------------------------------------------------------------ |  | ------------------ | ------- | ----------------- | - | -------
|                                                                                                 |  | September 30, 2005 |         | December 31, 2004
|                                                                                                 |  | (Unaudited)        |         |                  
|Assets                                                                                           |  |                    |         |                   |   |        
|Investments:                                                                                     |  |                    |         |                   |   |        
|Fixed maturities available for sale, at fair value (cost $307,283 in 2005 and $277,858 in 2004)  |  | $                  | 303,431 |                   | $ | 277,999
|Equity securities available for sale, at fair value (cost $1,116 in 2005 and $6 in 2004)         |  |                    | 1,147   |                   |   | 6      
|Investment in unconsolidated foreign insurance company (cost $27,855 in 2005 and in 2004)        |  |                    | 34,152  |                   |   | 30,982 
|Other invested assets                                                                            |  |                    | 991     |                   |   | 993    
|Short-term investments, at cost (which approximates market)                                      |  |                    | 19,025  |                   |   | 36,516 
|                                                                                                 |  |                    |         |                   |   |        
|Total investments                                                                                |  | $                  | 358,746 |                   | $ | 346,496
|Cash and cash equivalents                                                                        |  |                    | 6,137   |                   |   | 2,900  
|Accrued interest and dividends receivable                                                        |  |                    | 2,305   |                   |   | 2,606  
|Premiums receivable from agents and insureds (net of allowance of $533 in 2005 and $497 in 2004) |  |                    | 63,660  |                   |   | 61,241 
|Balances due from reinsurance companies (net of allowance of $762 in 2005 and 2004)              |  |                    | 244,577 |                   |   | 165,080
|Prepaid reinsurance premiums                                                                     |  |                    | 96,615  |                   |   | 98,695 
|Deferred policy acquisition costs                                                                |  |                    | 28,229  |                   |   | 23,450 
|Net deferred tax asset                                                                           |  |                    | 17,221  |                   |   | 18,507 
|Federal income tax recoverable                                                                   |  |                    | 1,012   |                   |   | 2,351  
|Other assets (less accumulated depreciation of $948 in 2005 and $311 in 2004)                    |  |                    | 17,002  |                   |   | 10,291 
|                                                                                                 |  |                    |         |                   |   |        
|Total assets                                                                                     |  | $                  | 835,504 |                   | $ | 731,617
|                                                                                                 |  |                    |         |                   |   |        



(Continued)



2



---

##### Table of Contents



REPUBLIC COMPANIES GROUP,
INC.

AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Dollars in thousands, except share amounts)



|                                                                                                                                                                                           |  |                   |         |   |                  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                                           |  | September 30,2005 |         |   | December 31,2004 |  
|                                                                                                                                                                                           |  | (Unaudited)       |         |   |                  |  
|Liabilities and Shareholders Equity                                                                                                                                                       |  |                   |         |   |                  |   |         |  
|Liabilities:                                                                                                                                                                               |  |                   |         |   |                  |   |         |  
|Losses and loss adjustment expenses                                                                                                                                                        |  | $                 | 348,290 |   |                  | $ | 267,597 |  
|Unearned premiums                                                                                                                                                                          |  |                   | 228,247 |   |                  |   | 213,404 |  
|Senior debt including accrued interest                                                                                                                                                     |  |                   | 20,211  |   |                  |   |        |  
|Subordinated notes payable including accrued interest                                                                                                                                      |  |                   | 31,192  |   |                  |   | 31,192  |  
|Accrued expenses and other liabilities                                                                                                                                                     |  |                   | 38,252  |   |                  |   | 42,155  |  
|Cash overdraft                                                                                                                                                                             |  |                   | 8,549   |   |                  |   | 7,857   |  
|                                                                                                                                                                                           |  |                   |         |   |                  |   |         |  
|Total liabilities                                                                                                                                                                          |  | $                 | 674,741 |   |                  | $ | 562,205 |  
|                                                                                                                                                                                           |  |                   |         |   |                  |   |         |  
|Shareholders equity:                                                                                                                                                                      |  |                   |         |   |                  |   |         |  
|Redeemable preferred shares:                                                                                                                                                               |  |                   |         |   |                  |   |         |  
|2004 - Series A, $0.01 par value, $1,000 per share liquidation value. Authorized 605,000 shares; issued and outstanding 107,825 and 107,531
shares, including accrued dividends of $18,755 |  | $                 |        |   |                  | $ | 126,286 |  
|Common shares:                                                                                                                                                                             |  |                   |         |   |                  |   |         |  
|2005 - Common stock, $0.01 par value, Authorized 200,000,000 shares; issued and outstanding 14,022,422 and 14,020,222 shares                                                               |  |                   | 140     |   |                  |   |        |  
|2004 - Class A (voting), $0.0018 par value, Authorized 9,625,000 shares; issued and outstanding 3,580,286 and 3,567,977 shares                                                             |  |                   |        |   |                  |   | 7       |  
|2004 - Class B (nonvoting), $0.0018 par value, Authorized 2,200,000 shares; issued and outstanding 1,796,883 and 1,794,133
shares                                                          |  |                   |        |   |                  |   | 3       |  
|Additional paid-in capital                                                                                                                                                                 |  |                   | 117,876 |   |                  |   | 4,287   |  
|Accumulated other comprehensive loss, net of taxes                                                                                                                                         |  |                   | (2,796  | ) |                  |   | (877    | )
|Retained earnings                                                                                                                                                                          |  |                   | 47,502  |   |                  |   | 42,942  |  
|Unearned compensation from restricted stock awards                                                                                                                                         |  |                   | (1,959  | ) |                  |   | (3,236  | )
|Treasury stock, at cost (0 shares in 2005 and 12,309 in 2004)                                                                                                                              |  |                   |        |   |                  |   |        |  
|                                                                                                                                                                                           |  |                   |         |   |                  |   |         |  
|Total shareholders equity                                                                                                                                                                 |  | $                 | 160,763 |   |                  | $ | 169,412 |  
|Commitments and contingencies (notes 4, 5 and 12)                                                                                                                                          |  |                   |         |   |                  |   |         |  
|                                                                                                                                                                                           |  |                   |         |   |                  |   |         |  
|Total liabilities and shareholders equity                                                                                                                                                 |  | $                 | 835,504 |   |                  | $ | 731,617 |  
|                                                                                                                                                                                           |  |                   |         |   |                  |   |         |  



See accompanying notes
to condensed consolidated financial statements.



3



---

##### Table of Contents



REPUBLIC COMPANIES GROUP, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Dollars in thousands, except share
amounts)

(Unaudited)



|                                                                                                                         |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                                                         |  | Three months endedSeptember 30, |        |   | Nine months endedSeptember 30, |  
|                                                                                                                         |  | 2005                            |        |   | 2004                           |   |        | 2005 |  |   | 2004    |  
|Revenues:                                                                                                                |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net insurance premiums earned                                                                                            |  | $                               | 64,417 |   |                                | $ | 60,804 |      |  | $ | 186,699 |   |  | $ | 174,223 |  
|Net investment income                                                                                                    |  |                                 | 3,019  |   |                                |   | 2,138  |      |  |   | 8,068   |   |  |   | 6,107   |  
|Net realized investment gains                                                                                            |  |                                 | 45     |   |                                |   | 682    |      |  |   | 121     |   |  |   | 931     |  
|Other income                                                                                                             |  |                                 | 1,011  |   |                                |   | 796    |      |  |   | 3,286   |   |  |   | 3,494   |  
|                                                                                                                         |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|                                                                                                                         |  | $                               | 68,492 |   |                                | $ | 64,420 |      |  | $ | 198,174 |   |  | $ | 184,755 |  
|                                                                                                                         |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Expenses:                                                                                                                |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net losses and loss adjustment expenses incurred                                                                         |  | $                               | 37,485 |   |                                | $ | 35,723 |      |  | $ | 104,515 |   |  | $ | 109,297 |  
|Underwriting, acquisition, and operating expenses                                                                        |  |                                 | 24,399 |   |                                |   | 17,854 |      |  |   | 72,015  |   |  |   | 51,566  |  
|Interest expense                                                                                                         |  |                                 | 867    |   |                                |   | 546    |      |  |   | 2,377   |   |  |   | 1,608   |  
|                                                                                                                         |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|                                                                                                                         |  | $                               | 62,751 |   |                                | $ | 54,123 |      |  | $ | 178,907 |   |  | $ | 162,471 |  
|                                                                                                                         |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Income from continuing operations before income taxes and equity in earnings of unconsolidated foreign insurance company |  | $                               | 5,741  |   |                                | $ | 10,297 |      |  | $ | 19,267  |   |  | $ | 22,284  |  
|Income tax expense                                                                                                       |  |                                 | (2,846 | ) |                                |   | (4,795 | )    |  |   | (7,595  | ) |  |   | (8,991  | )
|Equity in earnings of unconsolidated foreign insurance company, net of income taxes                                      |  |                                 | 1,394  |   |                                |   | 403    |      |  |   | 2,935   |   |  |   | 2,129   |  
|                                                                                                                         |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net income                                                                                                               |  | $                               | 4,289  |   |                                | $ | 5,905  |      |  | $ | 14,607  |   |  | $ | 15,422  |  
|                                                                                                                         |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net income available to common shareholders (note 6)                                                                     |  | $                               | 2,821  |   |                                | $ | 2,259  |      |  | $ | 6,243   |   |  | $ | 4,886   |  
|                                                                                                                         |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net income per common share (note 6):                                                                                    |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Basic                                                                                                                    |  | $                               | 0.27   |   |                                | $ | 0.46   |      |  | $ | 0.90    |   |  | $ | 1.00    |  
|                                                                                                                         |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Diluted                                                                                                                  |  | $                               | 0.26   |   |                                | $ | 0.46   |      |  | $ | 0.90    |   |  | $ | 1.00    |  
|                                                                                                                         |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  



See accompanying notes
to condensed consolidated financial statements.



4



---

##### Table of Contents



REPUBLIC COMPANIES GROUP, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Shareholders Equity and Comprehensive Income

Nine Months Ended September 30, 2005

(Dollars in thousands)

(Unaudited)



|                                            |  |                             |          |   |                         |   |     |        |  |                          |     |  |                                            |         |   |                  |   |        |                                               |  |   |               |   |                     |   |        |   |  |   |   |  |   |         |  
|------------------------------------------- |  | --------------------------- | -------- | - | ----------------------- | - | --- | ------ |  | ------------------------ | --- |  | ------------------------------------------ | ------- | - | ---------------- | - | ------ | --------------------------------------------- |  | - | ------------- | - | ------------------- | - | ------ | - |  | - | - |  | - | ------- | -
|                                            |  | Series ARedeemablePreferred |          |   | Class AandClass BCommon |   |     | Common |  | Additionalpaid-incapital |     |  | Accumulatedothercomprehensiveincome (loss) |         |   | Retainedearnings |   |        | Unearnedcompensationfromrestrictedstock award |  |   | TreasuryStock |   | Shareholdersequity |  
|Balance at December 31, 2004                |  | $                           | 126,286  |   |                         | $ | 10  |        |  | $                        |    |  | $                                          | 4,287   |   |                  | $ | (877   | )                                             |  | $ | 42,942        |   |                     | $ | (3,236 | ) |  | $ |  |  | $ | 169,412 |  
|Comprehensive income (loss) (net of taxes): |  |                             |          |   |                         |   |     |        |  |                          |     |  |                                            |         |   |                  |   |        |                                               |  |   |               |   |                     |   |        |   |  |   |   |  |   |         |  
|Net income                                  |  |                             |         |   |                         |   |    |        |  |                          |    |  |                                            |        |   |                  |   |       |                                               |  |   | 14,607        |   |                     |   |       |   |  |   |  |  |   | 14,607  |  
|Unrealized investment loss                  |  |                             |         |   |                         |   |    |        |  |                          |    |  |                                            |        |   |                  |   | (2,550 | )                                             |  |   |              |   |                     |   |       |   |  |   |  |  |   | (2,550  | )
|Foreign currency translation                |  |                             |         |   |                         |   |    |        |  |                          |    |  |                                            |        |   |                  |   | 631    |                                               |  |   |              |   |                     |   |       |   |  |   |  |  |   | 631     |  
|                                            |  |                             |          |   |                         |   |     |        |  |                          |     |  |                                            |         |   |                  |   |        |                                               |  |   |               |   |                     |   |        |   |  |   |   |  |   |         |  
|Comprehensive income (net of taxes):        |  |                             |          |   |                         |   |     |        |  |                          |     |  |                                            |         |   |                  |   |        |                                               |  |   |               |   |                     |   |        |   |  |   |   |  | $ | 12,688  |  
|                                            |  |                             |          |   |                         |   |     |        |  |                          |     |  |                                            |         |   |                  |   |        |                                               |  |   |               |   |                     |   |        |   |  |   |   |  |   |         |  
|Redemption/forfeiture of shares             |  |                             | (98      | ) |                         |   |    |        |  |                          |    |  |                                            | (517    | ) |                  |   |       |                                               |  |   |              |   |                     |   | 517    |   |  |   |  |  |   | (98     | )
|Stock based compensation                    |  |                             |         |   |                         |   |    |        |  |                          |    |  |                                            | 51      |   |                  |   |       |                                               |  |   |              |   |                     |   | 760    |   |  |   |  |  |   | 811     |  
|Sale of new common stock                    |  |                             |         |   |                         |   |    |        |  |                          | 60  |  |                                            | 83,940  |   |                  |   |       |                                               |  |   |              |   |                     |   |       |   |  |   |  |  |   | 84,000  |  
|Conversion and redemption of shares         |  |                             | (107,433 | ) |                         |   | (10 | )      |  |                          | 80  |  |                                            | 30,115  |   |                  |   |       |                                               |  |   |              |   |                     |   |       |   |  |   |  |  |   | (77,248 | )
|Preferred dividends accrued                 |  |                             | 8,364    |   |                         |   |    |        |  |                          |    |  |                                            |        |   |                  |   |       |                                               |  |   | (8,364        | ) |                     |   |       |   |  |   |  |  |   |        |  
|Dividends paid or declared                  |  |                             | (27,119  | ) |                         |   |    |        |  |                          |    |  |                                            |        |   |                  |   |       |                                               |  |   | (1,683        | ) |                     |   |       |   |  |   |  |  |   | (28,802 | )
|                                            |  |                             |          |   |                         |   |     |        |  |                          |     |  |                                            |         |   |                  |   |        |                                               |  |   |               |   |                     |   |        |   |  |   |   |  |   |         |  
|Balance at September 30, 2005               |  | $                           |         |   |                         | $ |    |        |  | $                        | 140 |  | $                                          | 117,876 |   |                  | $ | (2,796 | )                                             |  | $ | 47,502        |   |                     | $ | (1,959 | ) |  | $ |  |  | $ | 160,763 |  
|                                            |  |                             |          |   |                         |   |     |        |  |                          |     |  |                                            |         |   |                  |   |        |                                               |  |   |               |   |                     |   |        |   |  |   |   |  |   |         |  



See accompanying notes
to condensed consolidated financial statements.



5



---

##### Table of Contents



REPUBLIC COMPANIES GROUP, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Dollars in thousands)

(Unaudited)



|                                                                                  |  |                                |         |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                                                  |  | Nine months endedSeptember 30, |        
|                                                                                  |  | 2005                           |         |   | 2004 |  
|Cash flows from operating activities:                                             |  |                                |         |   |      |   |         |  
|Net income                                                                        |  | $                              | 14,607  |   |      | $ | 15,422  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                |         |   |      |   |         |  
|Equity in earnings of unconsolidated foreign insurance company, net               |  |                                | (2,935  | ) |      |   | (2,129  | )
|Amortization and depreciation                                                     |  |                                | 796     |   |      |   | 168     |  
|Net loss on sale of real estate                                                   |  |                                |        |   |      |   | 668     |  
|Net accretion of bond discount                                                    |  |                                | 1,323   |   |      |   | 1,262   |  
|Net gain on sale of fixed maturities                                              |  |                                | (121    | ) |      |   | (1,599  | )
|Deferred federal income tax expense                                               |  |                                | 2,358   |   |      |   | 2,907   |  
|Stock based compensation                                                          |  |                                | 811     |   |      |   | 903     |  
|Change in:                                                                        |  |                                |         |   |      |   |         |  
|Premiums receivable from agents and insureds                                      |  |                                | (2,419  | ) |      |   | 10,802  |  
|Accrued interest and dividends receivable                                         |  |                                | 301     |   |      |   | 100     |  
|Prepaid reinsurance premiums                                                      |  |                                | 2,080   |   |      |   | (3,702  | )
|Deferred policy acquisition costs                                                 |  |                                | (4,779  | ) |      |   | (14,966 | )
|Balances due from reinsurance companies, net                                      |  |                                | (79,497 | ) |      |   | (13,605 | )
|Federal income tax payable                                                        |  |                                |        |   |      |   | (2,174  | )
|Federal income tax recoverable                                                    |  |                                | 1,339   |   |      |   | (1,742  | )
|Liability for losses and loss adjustment expenses                                 |  |                                | 80,693  |   |      |   | 9,618   |  
|Unearned premiums                                                                 |  |                                | 14,843  |   |      |   | 12,954  |  
|Accrued expenses and other liabilities                                            |  |                                | (3,903  | ) |      |   | (7,132  | )
|Interest payable                                                                  |  |                                | 211     |   |      |   | 149     |  
|Other, net                                                                        |  |                                | (2,381  | ) |      |   | 13,678  |  
|                                                                                  |  |                                |         |   |      |   |         |  
|Net cash provided by operating activities                                         |  | $                              | 23,327  |   |      | $ | 21,582  |  
|                                                                                  |  |                                |         |   |      |   |         |  



(Continued)



6



---

##### Table of Contents



REPUBLIC COMPANIES GROUP,
INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows, Continued

(Dollars in thousands)

(Unaudited)



|                                                                 |  |                                |          |   |      |   |          |  
|---------------------------------------------------------------- |  | ------------------------------ | -------- | - | ---- | - | -------- | -
|                                                                 |  | Nine months endedSeptember 30, |         
|                                                                 |  | 2005                           |          |   | 2004 |  
|Cash flows from investing activities:                            |  |                                |          |   |      |   |          |  
|Sale of fixed assets                                             |  | $                              | 60       |   |      | $ | 179      |  
|Sale of real estate                                              |  |                                |         |   |      |   | 19,570   |  
|Purchase of fixed assets                                         |  |                                | (6,869   | ) |      |   | (909     | )
|Sale and maturities of fixed maturities, available for sale      |  |                                | 158,406  |   |      |   | 268,080  |  
|Purchase of fixed maturities, available for sale                 |  |                                | (189,031 | ) |      |   | (316,090 | )
|Purchase of equity securities                                    |  |                                | (1,110   | ) |      |   |         |  
|Dividends received from unconsolidated foreign insurance company |  |                                | 736      |   |      |   | 426      |  
|Net change in other short-term investments                       |  |                                | 17,491   |   |      |   | 12,954   |  
|                                                                 |  |                                |          |   |      |   |          |  
|Net cash used in investing activities                            |  | $                              | (20,317  | ) |      | $ | (15,790  | )
|                                                                 |  |                                |          |   |      |   |          |  
|Cash flows from financing activities:                            |  |                                |          |   |      |   |          |  
|Redemption of preferred stock                                    |  | $                              | (98      | ) |      | $ | (308     | )
|Issuance of preferred stock                                      |  |                                |         |   |      |   | 1,325    |  
|Proceeds from initial public offering                            |  |                                | 84,000   |   |      |   |         |  
|Expenses associated with initial public offering                 |  |                                | (7,980   | ) |      |   |         |  
|Redemption of preferred stock following initial public offering  |  |                                | (69,268  | ) |      |   |         |  
|Sale of common stock                                             |  |                                |         |   |      |   | 1        |  
|Dividends paid                                                   |  |                                | (27,119  | ) |      |   |         |  
|Increase in senior debt                                          |  |                                | 20,000   |   |      |   |         |  
|Net change in cash overdraft                                     |  |                                | 692      |   |      |   | (3,314   | )
|                                                                 |  |                                |          |   |      |   |          |  
|Net cash provided (used) in financing activities                 |  | $                              | 227      |   |      | $ | (2,296   | )
|                                                                 |  |                                |          |   |      |   |          |  
|Net increase in cash and cash equivalents                        |  |                                | 3,237    |   |      |   | 3,496    |  
|Cash and cash equivalents, beginning of period                   |  |                                | 2,900    |   |      |   | 4        |  
|                                                                 |  |                                |          |   |      |   |          |  
|Cash and cash equivalents, end of period                         |  | $                              | 6,137    |   |      | $ | 3,500    |  
|                                                                 |  |                                |          |   |      |   |          |  
|Supplemental disclosures of cash flow information:               |  |                                |          |   |      |   |          |  
|Interest paid                                                    |  | $                              | 2,166    |   |      | $ | 1,458    |  
|                                                                 |  |                                |          |   |      |   |          |  
|Income taxes paid                                                |  | $                              | 3,898    |   |      | $ | 10,000   |  
|                                                                 |  |                                |          |   |      |   |          |  



See accompanying notes
to condensed consolidated financial statements.



7



---

##### Table of Contents



REPUBLIC COMPANIES GROUP, INC.

AND SUBSIDIARIES



Notes to Condensed Consolidated Financial Statements



(Unaudited)



|(1) | Basis of Presentation and Nature of Operations
|--- | ----------------------------------------------



Republic Companies Group, Inc. (the Company) is an insurance holding company whose subsidiaries and affiliates market and underwrite personal and commercial property and
casualty risks located primarily in the southwestern United States. The consolidated financial statements of the Company and its wholly owned subsidiaries and certain affiliates, who are controlled through various management agreements, have been
prepared on the basis of accounting principles generally accepted in the United States of America (GAAP). All significant intercompany balances and transactions have been eliminated in consolidation. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for interim financial reporting.



The Company completed an initial public offering (IPO) of its common stock effective
August 8, 2005. The Company issued 6,000,000 new shares of its common stock at an IPO price to the public of $14 per share. These financial statements and the notes thereto should be read in conjunction with the Companys audited financial
statements and accompanying notes for the year ended December 31, 2004 included in the Companys IPO prospectus filed with the SEC on August 4, 2005 (Registration No. 333-124758).



The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. These estimates and assumptions are particularly important in determining revenue recognition, liabilities for losses and loss adjustment expenses, deferred policy acquisition costs, reinsurance receivables and impairment of assets. Actual
results could differ materially from those estimates.



The interim financial
information is unaudited, but reflects all normal adjustments that are, in the opinion of management, necessary for a fair presentation in conformity with GAAP as of September 30, 2005 and for the three and nine month periods ended
September 30, 2005 and 2004. The results of operations for the three and nine month periods ended September 30, 2005 are not necessarily indicative of the results which might be expected for the full year.



Reclassifications



Certain amounts in prior periods have been reclassified to conform to the presentation adopted in the current year. Such reclassification
did not impact earnings or total shareholders equity.



Recently
Issued Accounting Standards



In November 2003, the Financial
Accounting Standards Board (FASB) issued Emerging Issues Task Force (EITF) 03-1,The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. The guidance applies to all investment
securities accounted for under Statement of Financial Accounting Standards (SFAS) No. 115,Accounting for Certain Investments in Debt and Equity Securities. EITF 03-1 provides guidance in identifying whether an unrealized
loss on an investment security should be treated as an other-than-temporary impairment of the securitys recorded value. Among other things, the guidance provides that other-than-temporary impairment loss recognition would depend on market
conditions, managements intent and a companys ability to hold a potentially impaired security for a period sufficient for recovery of the loss. In September 2004, the FASB delayed the effective date of many provisions of EITF 03-1 until
certain implementation issues could be resolved. In June 2005, the FASB issued a final FASB Staff Position (FSP) EITF- 03-01a (retitled FSP FAS 115-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments)
which will replace the guidance set forth in paragraphs 10-18 of EITF 03-01 and clarifies when an investor should recognize an impairment loss. The provisions of FSP FAS 115-1 are effective for other-than-temporary analysis conducted in periods
beginning after September 15, 2005. The Company does not anticipate that this statement will have a significant impact on its financial position or results of operations.



In December 2004, the FASB issued SFAS No. 123 (Revised),Share Based Payment. SFAS No. 123R, which replaces SFAS
No. 123, Accounting for Stock-Based Compensation, supersedes Accounting Procedures Board Opinion No. 25,Accounting for Stock Issued to Employees, and amends SFAS No. 95,Statement of Cash Flows. Generally, the
approach in SFAS No. 123R is similar to the approach described in SFAS No. 123. SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements
based on their fair values (i.e., pro forma disclosure is no longer an alternative to financial statement recognition). SFAS No. 123R is effective for public companies at the beginning of the first annual period beginning after
September 15, 2005. The Company adopted the provisions of SFAS No. 148,Accounting for Stock-Based Compensation  Transition and Disclosure, in 2004 and uses the fair value method for expensing stock-based compensation for
periods beginning on and after January 1, 2004. However, the Company continues to analyze the expected impact of SFAS No. 123R.



8



---

##### Table of Contents

REPUBLIC COMPANIES GROUP, INC.

AND SUBSIDIARIES



Notes to Condensed Consolidated Financial Statements



(Unaudited)



|(2) | Capitalization and Shareholders Equity
|--- | ---------------------------------------



In May 2005, the Companys Board of Directors approved the form of an amendment of its Amended and Restated Certificate of Incorporation to change the capitalization
of the Company upon an IPO. The final form of the amendment was approved by the Board of Directors and shareholders of the Company in July 2005. The amendment provides that upon the consummation of an IPO each issued and outstanding share of the
Companys Class A Common Stock and Class B Common Stock shall be converted into one share of newly authorized Common Stock (Converted Common Stock) without any action on the part of the holder. The amendment also provides that upon the
consummation of an IPO, after the payment of all accrued but unpaid dividends on each outstanding share of Series A Preferred Stock, each issued and outstanding share of Series A Preferred Stock that is not redeemed for cash following an IPO shall
be converted into a number of shares of Converted Common Stock equal to (a) the liquidation value of the unredeemed Series A Preferred Stock divided by (b) the public offering price per share of the Converted Common Stock. The amendment
provided for a 5.5:1 stock split of common stock and addressed other matters in anticipation of completing an IPO, such as increasing the number of authorized shares of Common and Preferred Stock. All previously reported common share and per share
amounts have been adjusted to give effect to the stock split.



Effective
August 8, 2005, the Company completed the IPO of its common stock with the sale of 6,000,000 shares of Common Stock at a price to the public of $14 per share. The majority of the proceeds from the IPO were used to pay all accrued and unpaid
dividends totaling $7.1 million on the Series A Preferred Stock and to redeem 69,268 shares of the Series A Preferred Stock at their liquidation value. All shares of Class A and Class B Common Stock were converted into shares of Converted
Common Stock and the remaining shares of Series A Preferred Stock were converted into 2,726,024 shares of Converted Common Stock. On September 3, 2005, the over-allotment option granted to the underwriters in the IPO expired. Underwriting
discounts and other offering expenses totaling $8.0 million were deducted from additional paid-in capital.



On September 16, 2005, the Company declared a dividend of 12 cents per common share, payable on October 14, 2005 to shareholders of record on September 30.



In February 2005, the Company paid $20 million of accrued preferred dividends with the
proceeds from a senior bank credit facility as described in note 7 below.



|(3) | Unconsolidated Investment
|--- | -------------------------



The investment in unconsolidated foreign insurance company represents the Companys 30% interest in Seguros Atlas, S.A., a Mexican insurance company (Atlas).
Summarized financial information for Atlas as of and for the periods ended September 30, 2005 and 2004 is presented below:



|                                                    |  |                        |  |        
|--------------------------------------------------- |  | ---------------------- |  | -------
|                                                    |  | 2005                  
|                                                    |  | Pesos                  |  | Dollars
|                                                    |  | (Amounts in thousands)
|Assets                                              |  | 4,371,122              |  | 406,351
|Liabilities                                         |  | 2,955,900              |  | 274,789
|Equity                                              |  | 1,415,222              |  | 131,562
|Net income (period January 1 to September 30, 2005) |  | 105,167                |  | 9,783  



|                                                    |  |                        |  |        
|--------------------------------------------------- |  | ---------------------- |  | -------
|                                                    |  | 2004                  
|                                                    |  | Pesos                  |  | Dollars
|                                                    |  | (Amounts in thousands)
|Assets                                              |  | 4,000,079              |  | 349,963
|Liabilities                                         |  | 2,768,533              |  | 242,216
|Equity                                              |  | 1,231,546              |  | 107,747
|Net income (period January 1 to September 30, 2004) |  | 80,054                 |  | 7,097  



The exchange rates used to convert the
balance sheet information as of September 30, 2005 and 2004 were 10.757 pesos and 11.430 pesos, respectively, to one dollar. For 2005, net income was converted using an average exchange rate of 10.75 pesos to one dollar. For 2004, net income
was converted using an average exchange rate of 11.28 pesos to one dollar. The Company recorded $2,935,000 and $2,129,000 as equity in the earnings of Atlas for the nine months ended September 30, 2005 and 2004, respectively. This represents an
estimate of the Companys share of Atlas earnings adjusted for estimated differences between Mexican statutory accounting requirements and U.S. GAAP. There is no income tax effect from the equity in the earnings of Atlas included in the
accompanying condensed consolidated financial statements, other than the current tax on cash dividends received from Atlas.



9



---

##### Table of Contents

REPUBLIC COMPANIES GROUP, INC.

AND SUBSIDIARIES



Notes to Condensed Consolidated Financial Statements



(Unaudited)



|(4) | Reinsurance
|--- | -----------



The Companys insurance subsidiaries assume reinsurance from and cede reinsurance to other insurance companies, primarily under treaty reinsurance agreements. Reinsurance does not discharge or diminish the
primary liability to insureds of the companies as direct insurers. However, it does permit the companies to recover losses from the reinsurer. To the extent that reinsuring companies are unable to meet obligations arising under reinsuring
agreements, the Company would remain liable. The effect of reinsurance on premiums written and earned is as follows (dollars in thousands):



|        |  |                                      |          |   |                                      |   |          |         |  |   |          |   |  |   |          |  
|------- |  | ------------------------------------ | -------- | - | ------------------------------------ | - | -------- | ------- |  | - | -------- | - |  | - | -------- | -
|        |  | Three months endedSeptember 30, 2005 |          |   | Three months endedSeptember 30, 2004 |  
|        |  | Written                              |          |   | Earned                               |   |          | Written |  |   | Earned   |  
|Direct  |  | $                                    | 137,594  |   |                                      | $ | 124,031  |         |  | $ | 127,465  |   |  | $ | 118,775  |  
|Assumed |  |                                      | 10       |   |                                      |   | 709      |         |  |   | 20       |   |  |   | 20       |  
|Ceded   |  |                                      | (64,182  | ) |                                      |   | (60,323  | )       |  |   | (62,099  | ) |  |   | (57,991  | )
|        |  |                                      |          |   |                                      |   |          |         |  |   |          |   |  |   |          |  
|Net     |  | $                                    | 73,422   |   |                                      | $ | 64,417   |         |  | $ | 65,386   |   |  | $ | 60,804   |  
|        |  |                                      |          |   |                                      |   |          |         |  |   |          |   |  |   |          |  
|        |  |                                     
|        |  | Nine months endedSeptember 30, 2005  |          |   | Nine months endedSeptember 30, 2004  |  
|        |  | Written                              |          |   | Earned                               |   |          | Written |  |   | Earned   |  
|Direct  |  | $                                    | 375,244  |   |                                      | $ | 357,152  |         |  | $ | 359,400  |   |  | $ | 346,447  |  
|Assumed |  |                                      | 23       |   |                                      |   | 3,273    |         |  |   | 248      |   |  |   | 248      |  
|Ceded   |  |                                      | (171,647 | ) |                                      |   | (173,726 | )       |  |   | (176,173 | ) |  |   | (172,472 | )
|        |  |                                      |          |   |                                      |   |          |         |  |   |          |   |  |   |          |  
|Net     |  | $                                    | 203,620  |   |                                      | $ | 186,699  |         |  | $ | 183,475  |   |  | $ | 174,223  |  
|        |  |                                      |          |   |                                      |   |          |         |  |   |          |   |  |   |          |  



|(5) | Losses and Loss Adjustment Expenses and Balances Due from Reinsurance Companies
|--- | -------------------------------------------------------------------------------



In the third quarter of 2005, Hurricanes Katrina and Rita struck the coasts of Louisiana and Texas and significantly affected properties
insured by the Company. Gross losses and loss adjustment expenses before reinsurance include approximately $66.0 million for these events. This represents the Companys best estimate and is based on claims received to date plus assumptions
involving industry loss estimates, estimates from industry and proprietary models, coverage and contract language, and estimates for anticipated assessments from various state facilities, among other factors. The estimates may be influenced by
claims yet to be reported and increased costs due to the effects of increased demand for services and supplies in the affected areas. Cost escalation could occur at a higher level than estimated.



Our loss and loss adjustment expenses estimates from hurricane losses are calculated in
accordance with the coverage provided in the respective policies. The Companys homeowners policies specifically exclude coverage for losses caused by flood, but generally provide coverage for damage caused by wind and wind driven rain. The
estimates for homeowners losses, therefore, do not include estimates for losses caused by flood. Also see note 12 regarding contingent liabilities.



The Company has several catastrophe reinsurance treaties that combined to significantly reduce the net loss retained. The liabilities for loss and loss adjustment
expenses include estimates for the hurricane-related catastrophe losses. Further, the balances due from reinsurance companies include estimates for the portion of the catastrophe losses expected to be recovered from reinsurers according to the
treaty provisions. Management believes that the liabilities for losses and loss adjustment expenses, net of reinsurance recoverables, at September 30, 2005 have been appropriately established in the aggregate and are adequate to cover the
ultimate net cost of reported and unreported claims arising from losses which had occurred by that date. The Companys combined retention on the two major hurricanes after consideration of reinsurance recoveries is approximately $5.0 million.



Also see note 14 regarding subsequent events.



10



---

##### Table of Contents

REPUBLIC COMPANIES GROUP, INC.

AND SUBSIDIARIES



Notes to Condensed Consolidated Financial Statements



(Unaudited)



|(6) | Earnings Per Share
|--- | ------------------



Basic net income per share is computed by dividing net income available to common shareholders by the weighted average number of shares outstanding for each period, including all vested restricted shares issued under
the 2004 Stock Plan. Diluted net income per share includes the potential dilution that could occur if outstanding contracts to issue common stock were exercised and converted to common stock using the treasury stock method prescribed by SFAS
No. 128,Earnings Per Share.



Following are the basic and diluted
per share calculations for the three and nine month periods ended September 30, 2005 and 2004 (dollars in thousands except per share data):



|                                            |  |                                 |            |   |                                |   |           |      |  |   |           |   |  |   |           |  
|------------------------------------------- |  | ------------------------------- | ---------- | - | ------------------------------ | - | --------- | ---- |  | - | --------- | - |  | - | --------- | -
|                                            |  | Three months endedSeptember 30, |            |   | Nine months endedSeptember 30, |  
|                                            |  | 2005                            |            |   | 2004                           |   |           | 2005 |  |   | 2004      |  
|Net income                                  |  | $                               | 4,289      |   |                                | $ | 5,905     |      |  | $ | 14,607    |   |  | $ | 15,422    |  
|Less: Preferred stock dividends accrued     |  |                                 | (1,468     | ) |                                |   | (3,646    | )    |  |   | (8,364    | ) |  |   | (10,545   | )
|Accretion of preferred stock discount       |  |                                 |           |   |                                |   |          |      |  |   |          |   |  |   | 9         |  
|                                            |  |                                 |            |   |                                |   |           |      |  |   |           |   |  |   |           |  
|Net income available to common shareholders |  | $                               | 2,821      |   |                                | $ | 2,259     |      |  | $ | 6,243     |   |  | $ | 4,886     |  
|                                            |  |                                 |            |   |                                |   |           |      |  |   |           |   |  |   |           |  
|Weighted average common shares outstanding: |  |                                 |            |   |                                |   |           |      |  |   |           |   |  |   |           |  
|Basic                                       |  |                                 | 10,638,725 |   |                                |   | 4,925,847 |      |  |   | 6,898,979 |   |  |   | 4,902,538 |  
|                                            |  |                                 |            |   |                                |   |           |      |  |   |           |   |  |   |           |  
|Diluted                                     |  |                                 | 10,696,198 |   |                                |   | 4,941,974 |      |  |   | 6,922,046 |   |  |   | 4,906,151 |  
|                                            |  |                                 |            |   |                                |   |           |      |  |   |           |   |  |   |           |  
|Net income per share:                       |  |                                 |            |   |                                |   |           |      |  |   |           |   |  |   |           |  
|Basic                                       |  | $                               | 0.27       |   |                                | $ | 0.46      |      |  | $ | 0.90      |   |  | $ | 1.00      |  
|                                            |  |                                 |            |   |                                |   |           |      |  |   |           |   |  |   |           |  
|Diluted                                     |  | $                               | 0.26       |   |                                | $ | 0.46      |      |  | $ | 0.90      |   |  | $ | 1.00      |  
|                                            |  |                                 |            |   |                                |   |           |      |  |   |           |   |  |   |           |  



|(7) | Senior Bank Debt
|--- | ----------------



In February 2005, the Company entered a credit agreement to secure $20 million of senior bank debt, the proceeds of which were used to pay accrued dividends on the Companys Series A Preferred Stock. The senior
bank debt is due and payable on February 23, 2010, with interest only payable quarterly based on the Companys election of a Eurodollar rate plus 2% or the prime rate as quoted by the Wall Street Journal.



|(8) | Income Taxes
|--- | ------------



The Company is subject to Federal income taxes at the 35% rate. During the third quarter, the Company adjusted the prior year deferred tax inventory by approximately $.58 million. The effective tax rate for the third
quarter of 2005 after the adjustments was 49.6%.



The effective tax rate for
the third quarter of 2004 was 46.6%. The rate was higher than the expected rate primarily due to a $4.7 million adjustment of the valuation allowance of capital loss carryforwards.



11



---

##### Table of Contents

REPUBLIC COMPANIES GROUP, INC.

AND SUBSIDIARIES



Notes to Condensed Consolidated Financial Statements



(Unaudited)



|(9) | Comprehensive Income (Loss)
|--- | ---------------------------



The changes in the components of accumulated other comprehensive income (loss), net of income taxes, for the nine months ended September 30, 2005 and 2004 were as
follows (dollars in thousands):



|                                                                                             |  |                                     |        |   |            |       |   |            |   |        |  
|-------------------------------------------------------------------------------------------- |  | ----------------------------------- | ------ | - | ---------- | ----- | - | ---------- | - | ------ | -
|                                                                                             |  | Nine months endedSeptember 30, 2005 |       
|                                                                                             |  | Pretaxamount                        |        |   | Tax effect |       |   | Net amount |  
|Unrealized holding loss for fixed maturities and equity securities arising during the period |  | $                                   | (4,083 | ) |            | 1,454 |   |            |   | (2,629 | )
|Reclassification adjustment for gains included in net income                                 |  |                                     | 121    |   |            | (42   | ) |            |   | 79     |  
|Foreign currency translation adjustment                                                      |  |                                     | 971    |   |            | (340  | ) |            |   | 631    |  
|                                                                                             |  |                                     |        |   |            |       |   |            |   |        |  
|Other comprehensive loss                                                                     |  | $                                   | (2,991 | ) |            | 1,072 |   |            |   | (1,919 | )
|                                                                                             |  |                                     |        |   |            |       |   |            |   |        |  
|Net income                                                                                   |  |                                     |        |   |            |       |   |            |   | 14,607 |  
|                                                                                             |  |                                     |        |   |            |       |   |            |   |        |  
|Total comprehensive income                                                                   |  |                                     |        |   |            |       |   |            | $ | 12,688 |  
|                                                                                             |  |                                     |        |   |            |       |   |            |   |        |  



|                                                                                             |  |                                     |        |   |            |      |   |            |   |        |  
|-------------------------------------------------------------------------------------------- |  | ----------------------------------- | ------ | - | ---------- | ---- | - | ---------- | - | ------ | -
|                                                                                             |  | Nine months endedSeptember 30, 2004 |       
|                                                                                             |  | Pretaxamount                        |        |   | Tax effect |      |   | Net amount |  
|Unrealized holding loss for fixed maturities and equity securities arising during the period |  | $                                   | (1,540 | ) |            | 539  |   |            |   | (1,001 | )
|Reclassification adjustment for gains included in net income                                 |  |                                     | 931    |   |            | (326 | ) |            |   | 605    |  
|Foreign currency translation adjustment                                                      |  |                                     | (762   | ) |            | 267  |   |            |   | (495   | )
|                                                                                             |  |                                     |        |   |            |      |   |            |   |        |  
|Other comprehensive loss                                                                     |  | $                                   | (1,371 | ) |            | 480  |   |            |   | (891   | )
|                                                                                             |  |                                     |        |   |            |      |   |            |   |        |  
|Net income                                                                                   |  |                                     |        |   |            |      |   |            |   | 15,422 |  
|                                                                                             |  |                                     |        |   |            |      |   |            |   |        |  
|Total comprehensive income                                                                   |  |                                     |        |   |            |      |   |            | $ | 14,531 |  
|                                                                                             |  |                                     |        |   |            |      |   |            |   |        |  



|(10) | Stock Compensation Plans
|---- | ------------------------



In April 2004, the Companys shareholders approved a Stock Plan (the 2004 Plan). The 2004 Plan authorizes the issuance of up to 693,000 shares of common stock
pursuant to restricted stock awards and the exercise of stock options.



On
March 18, 2005, options to purchase 58,124 shares of the Companys common stock were granted to certain officers at an exercise price of $10.00 per share. In July 2005, the Company granted additional options to certain officers totaling
1,347 shares of common stock at an exercise price of $10.00 per share. These options vest ratably over three to five years from the date of grant.



In July 2005, the Board of Directors authorized the grant of options to certain employees totaling 30,250 common shares with an exercise price equal to the closing price
of the Companys common stock on the closing date of the IPO, which was $14.13. In addition, in July 2005, the Board of Directors of the Company approved the grant of options to certain members of management totaling 12,375 common shares
contingent on the closing of the Companys IPO. The exercise price of these options was to equal the price of the Companys common stock on the closing date of the IPO, which was $14.13.



The Company recorded stock compensation expense of $301,000 and $811,000 for the three and
nine month periods ended September 30, 2005. The Company recorded stock compensation expense of $146,000 and $903,000 for the three and nine month periods ended September 30, 2004.



In May 2005, the Companys shareholders amended the Incentive Bonus Plan of its
subsidiary, Republic Underwriters Insurance Company, to provide that 25% of bonus awards may be paid in restricted common stock after the IPO. In July 2005, the Companys shareholders adopted the final form of an Employee Stock Purchase Plan.
The plan will become effective in 2006. The shareholders also approved the final form of an Equity Based Compensation Plan and Deferred Compensation Plan for Directors.



12



---

##### Table of Contents

REPUBLIC COMPANIES GROUP, INC.

AND SUBSIDIARIES



Notes to Condensed Consolidated Financial Statements



(Unaudited)



|(11) | Pension Plans
|---- | -------------



The Company sponsors a qualified defined benefit plan for employees of the Company and certain affiliates that was frozen with benefits accrued through December 31, 2003. Pension costs for this pension plan are
as follows (dollars in thousands):



|                                                   |  |                                 |      |   |                                |      |   |      |        |   |      |        |  
|-------------------------------------------------- |  | ------------------------------- | ---- | - | ------------------------------ | ---- | - | ---- | ------ | - | ---- | ------ | -
|                                                   |  | Three months endedSeptember 30, |      |   | Nine months endedSeptember 30, |     
|                                                   |  | 2005                            |      |   | 2004                           |      |   | 2005 |        |   | 2004 |       
|Service cost                                       |  | $                               |     |   |                                |     |   |      |       |   |      |       |  
|Interest cost                                      |  |                                 | 663  |   |                                | 647  |   |      | 1,989  |   |      | 1,941  |  
|Amortization of unrecognized transition obligation |  |                                 |     |   |                                |     |   |      |       |   |      |       |  
|Recognized net actuarial loss                      |  |                                 |     |   |                                |     |   |      |       |   |      |       |  
|Expected return on plan assets                     |  |                                 | (840 | ) |                                | (783 | ) |      | (2,520 | ) |      | (2,349 | )
|Curtailment                                        |  |                                 |     |   |                                |     |   |      |       |   |      |       |  
|Prior service cost                                 |  |                                 |     |   |                                |     |   |      |       |   |      |       |  
|                                                   |  |                                 |      |   |                                |      |   |      |        |   |      |        |  
|Net periodic pension benefit                       |  | $                               | (177 | ) |                                | (136 | ) |      | (531   | ) |      | (408   | )
|                                                   |  |                                 |      |   |                                |      |   |      |        |   |      |        |  



The Company sponsors a noncontributory
nonqualified defined benefit pension restoration plan for a select group of management employees of the Company and its subsidiaries that was frozen with benefits accrued through December 31, 2003. This plan restores the benefit lost by these
employees due to cap limits of the qualified plan. Pension costs for this pension plan are as follows (dollars in thousands):



|                                                   |  |                                 |    |                                |    |      |     |      |   
|-------------------------------------------------- |  | ------------------------------- | -- | ------------------------------ | -- | ---- | --- | ---- | --
|                                                   |  | Three months endedSeptember 30, |    | Nine months endedSeptember 30,
|                                                   |  | 2005                            |    | 2004                           |    | 2005 |     | 2004
|Service cost                                       |  | $                               |   |                                |   |      |    |      |  
|Interest cost                                      |  |                                 | 31 |                                | 31 |      | 93  |      | 93
|Amortization of unrecognized transition obligation |  |                                 |   |                                |   |      |    |      |  
|Recognized net actuarial loss                      |  |                                 | 3  |                                | 1  |      | 9   |      | 3 
|Expected return on plan assets                     |  |                                 |   |                                |   |      |    |      |  
|Curtailment                                        |  |                                 |   |                                |   |      |    |      |  
|Prior service cost                                 |  |                                 |   |                                |   |      |    |      |  
|                                                   |  |                                 |    |                                |    |      |     |      |   
|Net periodic pension cost                          |  | $                               | 34 |                                | 32 |      | 102 |      | 96
|                                                   |  |                                 |    |                                |    |      |     |      |   



|(12) | Contingent Liabilities and Commitments
|---- | --------------------------------------



The Company is subject to claims and lawsuits that arise in the ordinary course of business. On the basis of information presently available in connection with claims and
lawsuits presently pending, it is the opinion of the Companys management that the disposition or ultimate determination of such claims and lawsuits will not have a material adverse effect on the financial position or results of operations of
the Company.



As discussed in note 5 regarding losses and loss adjustment
expenses, the Company has been impacted by two major hurricanes in the third quarter of 2005. Hurricanes Katrina and Rita are among the most costly hurricanes on record and many of the losses, especially from Katrina, were caused by rising water
from the unusually high storm surge as well as flooding from broken levees along lakes and rivers in Louisiana. Our loss and loss adjustment expenses estimates from hurricane losses are determined in accordance with the coverage provided in the
respective policies. The Companys homeowners policies specifically exclude coverage for losses caused by flood, but generally provide coverage for damage caused by wind and wind driven rain. The estimates for homeowners losses, therefore, do
not include estimates for losses caused by flood.



There may be issues that
arise in the wake of the storms that could create uncertainties in the future and may negatively impact our operations in future quarters. These could include changes in the regulatory or legal environment impacting traditional policy contract
terms, including the flood exclusion. The Company is unable to determine the impact, if any, of such issues on future operations, particularly if the flood exclusion is altered or deemed not applicable by regulators and upheld by the courts.



Also see note 14 regarding subsequent events.



13



---

##### Table of Contents

REPUBLIC COMPANIES GROUP, INC.

AND SUBSIDIARIES



Notes to Condensed Consolidated Financial Statements



(Unaudited)



|(13) | Segment Information
|---- | -------------------



The Company classifies its business into the following segments: Independent Agents  Personal Lines, Independent Agents  Commercial Lines, Program Management, and Insurance Services and Corporate. Segments
are designated based on the respective similarities in distribution systems, internal processing and management reporting systems and organizational management structure.



In the Independent Agents  Personal Lines segment, the Company underwrites personal lines of insurance distributed through a network
of independent agencies. The Company tailors its products to meet the needs of policyholders located in underserved geographic and demographic markets within the Southwest region. These products currently include homeowners, dwelling fire, standard
auto, nonstandard auto and personal umbrella coverages. Additionally, personal lines products distributed through the Companys two affiliated managing general agents (MGAs) are included in this segment.



In the Independent Agents  Commercial Lines segment, the Company underwrites commercial
lines of insurance distributed through a network of independent agencies. The Companys products target specific classes of business in industries that the Company believes are underserved by the insurance industry. These products currently
include commercial package policies, casualty, property, auto, workers compensation, farm and ranch and commercial umbrella coverages.



In the Program Management segment, the Company distributes personal and commercial insurance policies through contractual programs established with unaffiliated MGAs.
These MGAs provide the underwriting, claims handling and management for the Companys products in targeted niche markets. The Company writes the policies produced through these MGAs, retains all or a portion of the business and generally cedes
any remaining premium to highly-rated reinsurers. The Company generally receives a fronting fee in addition to sharing in the underwriting results of each program. The Company requires various contractual, operational, financial and other oversight
controls on the business of each MGA to protect its surplus and reputation. These relationships are based on years of experience with the MGA principals and an understanding of the products, markets and distribution of the programs. Through these
unaffiliated MGA programs, the Company currently underwrites nonstandard auto, commercial auto, light commercial casualty, property, prize indemnification, collateral indemnity and employers nonsubscriber policies.



In the Insurance Services and Corporate segment, the Company provides fronting services
through its Texas county mutual insurance company and other insurance subsidiaries and controlled affiliates primarily to national carriers seeking to utilize the Companys charters and licenses to access insurance markets in Texas and other
states. These companies establish programs whereby the Company underwrites risks that are entirely ceded back to the carriers in exchange for a fronting fee. The Companys principal fronting programs are for nonstandard auto policies. The
Insurance Services and Corporate segment also reflects the revenue and expenses that are not allocated to any other particular segment, including general corporate overhead and interest expenses and the equity in the earnings of the Companys
unconsolidated foreign insurance company.



Income (loss) before income taxes by
segment consists of revenues, including allocated investment income, less expenses, related to the respective segments operations. Net investment results include realized gains and losses allocated on the same basis as investment income. Taxes
are allocated to each segment at the Companys effective tax rate. Identifiable assets by segment are those assets used in or allocated to the operation of each segment (dollars in thousands).



|                                                               |  |                                     |         |                                    |   |         |                    |  |                                |         |              |   |         |  |   |        
|-------------------------------------------------------------- |  | ----------------------------------- | ------- | ---------------------------------- | - | ------- | ------------------ |  | ------------------------------ | ------- | ------------ | - | ------- |  | - | -------
|                                                               |  | Independent Agents - Personal Lines |         | IndependentAgents -CommercialLines |   |         | Program Management |  | InsuranceServices andCorporate |         | Consolidated
|Three months ended September 30, 2005                          |  |                                     |         |                                    |   |         |                    |  |                                |         |              |   |         |  |   |        
|Gross written premiums                                         |  | $                                   | 38,140  |                                    | $ | 21,469  |                    |  | $                              | 40,025  |              | $ | 37,970  |  | $ | 137,604
|                                                               |  |                                     |         |                                    |   |         |                    |  |                                |         |              |   |         |  |   |        
|Net insurance premiums earned                                  |  |                                     | 30,813  |                                    |   | 16,315  |                    |  |                                | 15,619  |              |   | 1,670   |  |   | 64,417 
|Net investment income and net realized investment gains/losses |  |                                     | 1,150   |                                    |   | 999     |                    |  |                                | 823     |              |   | 92      |  |   | 3,064  
|Other income                                                   |  |                                     |        |                                    |   |        |                    |  |                                | 519     |              |   | 492     |  |   | 1,011  
|                                                               |  |                                     |         |                                    |   |         |                    |  |                                |         |              |   |         |  |   |        
|Total revenues                                                 |  | $                                   | 31,963  |                                    | $ | 17,314  |                    |  | $                              | 16,961  |              | $ | 2,254   |  | $ | 68,492 
|                                                               |  |                                     |         |                                    |   |         |                    |  |                                |         |              |   |         |  |   |        
|Income (loss) before income taxes                              |  | $                                   | 2,773   |                                    | $ | (1,208  | )                  |  | $                              | 3,219   |              | $ | 957     |  | $ | 5,741  
|Income tax expense (benefit)                                   |  |                                     | 1,536   |                                    |   | (438    | )                  |  |                                | 1,389   |              |   | 359     |  |   | 2,846  
|Equity in earnings of unconsolidated foreign insurance company |  |                                     |        |                                    |   |        |                    |  |                                |        |              |   | 1,394   |  |   | 1,394  
|                                                               |  |                                     |         |                                    |   |         |                    |  |                                |         |              |   |         |  |   |        
|Net income                                                     |  | $                                   | 1,237   |                                    | $ | (770    | )                  |  | $                              | 1,830   |              | $ | 1,992   |  | $ | 4,289  
|                                                               |  |                                     |         |                                    |   |         |                    |  |                                |         |              |   |         |  |   |        
|Identifiable assets                                            |  | $                                   | 285,793 |                                    | $ | 167,412 |                    |  | $                              | 206,495 |              | $ | 175,804 |  | $ | 835,504
|                                                               |  |                                     |         |                                    |   |         |                    |  |                                |         |              |   |         |  |   |        



14



---

##### Table of Contents

REPUBLIC COMPANIES GROUP, INC.

AND SUBSIDIARIES



Notes to Condensed Consolidated Financial Statements



(Unaudited)



|                                                               |  |                                   |         |                                     |   |         |                    |  |                                |         |              |   |         |  |   |        
|-------------------------------------------------------------- |  | --------------------------------- | ------- | ----------------------------------- | - | ------- | ------------------ |  | ------------------------------ | ------- | ------------ | - | ------- |  | - | -------
|                                                               |  | IndependentAgents -Personal Lines |         | IndependentAgents -Commercial Lines |   |         | Program Management |  | InsuranceServices andCorporate |         | Consolidated
|Three months ended September 30, 2004                          |  |                                   |         |                                     |   |         |                    |  |                                |         |              |   |         |  |   |        
|Gross written premiums                                         |  | $                                 | 34,640  |                                     | $ | 17,240  |                    |  | $                              | 42,372  |              | $ | 33,233  |  | $ | 127,485
|                                                               |  |                                   |         |                                     |   |         |                    |  |                                |         |              |   |         |  |   |        
|Net insurance premiums earned                                  |  |                                   | 31,220  |                                     |   | 13,696  |                    |  |                                | 14,719  |              |   | 1,169   |  |   | 60,804 
|Net investment income and net realized investment gains/losses |  |                                   | 1,417   |                                     |   | 834     |                    |  |                                | 513     |              |   | 56      |  |   | 2,820  
|Other income                                                   |  |                                   |        |                                     |   |        |                    |  |                                | 550     |              |   | 246     |  |   | 796    
|                                                               |  |                                   |         |                                     |   |         |                    |  |                                |         |              |   |         |  |   |        
|Total revenues                                                 |  | $                                 | 32,637  |                                     | $ | 14,530  |                    |  | $                              | 15,782  |              | $ | 1,471   |  | $ | 64,420 
|                                                               |  |                                   |         |                                     |   |         |                    |  |                                |         |              |   |         |  |   |        
|Income (loss) before income taxes                              |  | $                                 | 7,618   |                                     | $ | (3,330  | )                  |  | $                              | 4,531   |              | $ | 1,478   |  | $ | 10,297 
|Income tax expense (benefit)                                   |  |                                   | 3,431   |                                     |   | (1,283  | )                  |  |                                | 2,052   |              |   | 595     |  |   | 4,795  
|Equity in earnings of unconsolidated foreign insurance company |  |                                   |        |                                     |   |        |                    |  |                                |        |              |   | 403     |  |   | 403    
|                                                               |  |                                   |         |                                     |   |         |                    |  |                                |         |              |   |         |  |   |        
|Net income (loss)                                              |  | $                                 | 4,187   |                                     | $ | (2,047  | )                  |  | $                              | 2,479   |              | $ | 1,286   |  | $ | 5,905  
|                                                               |  |                                   |         |                                     |   |         |                    |  |                                |         |              |   |         |  |   |        
|Identifiable assets                                            |  | $                                 | 211,490 |                                     | $ | 141,650 |                    |  | $                              | 178,340 |              | $ | 188,813 |  | $ | 720,293
|                                                               |  |                                   |         |                                     |   |         |                    |  |                                |         |              |   |         |  |   |        
|                                                               |  |                                   |         |                                     |  
|                                                               |  | IndependentAgents -Personal Lines |         | IndependentAgents -Commercial Lines |   |         | ProgramManagement  |  | InsuranceServices andCorporate |         | Consolidated
|Nine months ended September 30, 2005                           |  |                                   |         |                                     |   |         |                    |  |                                |         |              |   |         |  |   |        
|Gross written premiums                                         |  | $                                 | 105,487 |                                     | $ | 62,363  |                    |  | $                              | 101,798 |              | $ | 105,619 |  | $ | 375,267
|                                                               |  |                                   |         |                                     |   |         |                    |  |                                |         |              |   |         |  |   |        
|Net insurance premiums earned                                  |  |                                   | 94,935  |                                     |   | 49,699  |                    |  |                                | 37,137  |              |   | 4,928   |  |   | 186,699
|Net investment income and net realized investment gains/losses |  |                                   | 3,323   |                                     |   | 2,612   |                    |  |                                | 1,936   |              |   | 318     |  |   | 8,189  
|Other income                                                   |  |                                   |        |                                     |   |        |                    |  |                                | 1,741   |              |   | 1,545   |  |   | 3,286  
|                                                               |  |                                   |         |                                     |   |         |                    |  |                                |         |              |   |         |  |   |        
|Total revenues                                                 |  | $                                 | 98,258  |                                     | $ | 52,311  |                    |  | $                              | 40,814  |              | $ | 6,791   |  | $ | 198,174
|                                                               |  |                                   |         |                                     |   |         |                    |  |                                |         |              |   |         |  |   |        
|Income (loss) before income taxes                              |  | $                                 | 13,069  |                                     | $ | (326    | )                  |  | $                              | 5,832   |              | $ | 692     |  | $ | 19,267 
|Income tax expense (benefit)                                   |  |                                   | 5,151   |                                     |   | (128    | )                  |  |                                | 2,299   |              |   | 273     |  |   | 7,595  
|Equity in earnings of unconsolidated foreign insurance company |  |                                   |        |                                     |   |        |                    |  |                                |        |              |   | 2,935   |  |   | 2,935  
|                                                               |  |                                   |         |                                     |   |         |                    |  |                                |         |              |   |         |  |   |        
|Net income                                                     |  | $                                 | 7,918   |                                     | $ | (198    | )                  |  | $                              | 3,533   |              | $ | 3,354   |  | $ | 14,607 
|                                                               |  |                                   |         |                                     |   |         |                    |  |                                |         |              |   |         |  |   |        
|Identifiable assets                                            |  | $                                 | 285,793 |                                     | $ | 167,412 |                    |  | $                              | 206,495 |              | $ | 175,804 |  | $ | 835,504
|                                                               |  |                                   |         |                                     |   |         |                    |  |                                |         |              |   |         |  |   |        
|Nine months ended September 30, 2004                           |  |                                   |         |                                     |   |         |                    |  |                                |         |              |   |         |  |   |        
|Gross written premiums                                         |  | $                                 | 100,786 |                                     | $ | 48,966  |                    |  | $                              | 121,971 |              | $ | 87,925  |  | $ | 359,648
|                                                               |  |                                   |         |                                     |   |         |                    |  |                                |         |              |   |         |  |   |        
|Net insurance premiums earned                                  |  |                                   | 92,052  |                                     |   | 37,981  |                    |  |                                | 40,947  |              |   | 3,243   |  |   | 174,223
|Net investment income and net realized investment gains/losses |  |                                   | 3,556   |                                     |   | 1,896   |                    |  |                                | 1,419   |              |   | 167     |  |   | 7,038  
|Other income                                                   |  |                                   |        |                                     |   |        |                    |  |                                | 2,207   |              |   | 1,287   |  |   | 3,494  
|                                                               |  |                                   |         |                                     |   |         |                    |  |                                |         |              |   |         |  |   |        
|Total revenues                                                 |  | $                                 | 95,608  |                                     | $ | 39,877  |                    |  | $                              | 44,573  |              | $ | 4,697   |  | $ | 184,755
|                                                               |  |                                   |         |                                     |   |         |                    |  |                                |         |              |   |         |  |   |        
|Income before income taxes                                     |  | $                                 | 14,561  |                                     | $ | (3,136  | )                  |  | $                              | 9,153   |              | $ | 1,706   |  | $ | 22,284 
|Income tax expense (benefit)                                   |  |                                   | 5,861   |                                     |   | (1,215  | )                  |  |                                | 3,670   |              |   | 675     |  |   | 8,991  
|Equity in earnings of unconsolidated foreign insurance company |  |                                   |        |                                     |   |        |                    |  |                                |        |              |   | 2,129   |  |   | 2,129  
|                                                               |  |                                   |         |                                     |   |         |                    |  |                                |         |              |   |         |  |   |        
|Net income                                                     |  | $                                 | 8,700   |                                     | $ | (1,921  | )                  |  | $                              | 5,483   |              | $ | 3,160   |  | $ | 15,422 
|                                                               |  |                                   |         |                                     |   |         |                    |  |                                |         |              |   |         |  |   |        
|Identifiable assets                                            |  | $                                 | 211,490 |                                     | $ | 141,650 |                    |  | $                              | 178,340 |              | $ | 188,813 |  | $ | 720,293
|                                                               |  |                                   |         |                                     |   |         |                    |  |                                |         |              |   |         |  |   |        



15



---

##### Table of Contents

REPUBLIC COMPANIES GROUP, INC.

AND SUBSIDIARIES



Notes to Condensed Consolidated Financial Statements



(Unaudited)



|(14) | Subsequent Events
|---- | -----------------



On October 12, 2005, the Company filed a Form S-8 with the SEC to register 1,558,124 shares of the Companys common stock pursuant to the Companys Stock Plan, Employee Stock Purchase Plan and
Equity-Based Compensation Plan.



The Company is required to participate in
involuntary risk plans in various states that provide insurance coverage to individuals or entities that otherwise are unable to purchase such coverage from private insurers. Because of the Companys participation, the Company may be exposed to
losses that surpass the capitalization of these facilities and/or to assessments from these facilities.



The Company is subject to assessments from the Louisiana Citizens Property Insurance Corporation (LA Citizens). LA Citizens has estimated plan losses due to losses incurred from the hurricanes that struck
Louisiana in the third quarter of 2005, and is thereby able to levy regular and emergency assessments to participating companies and policyholders, respectively. Subsequent to September 30, 2005, the Companys insurance subsidiaries were
assessed $1.4 million based on estimated losses and the Companys market share in Louisiana. Additional assessments will follow. Such assessments are not expected to have a net financial statement impact to the Company as all such assessments
are recoverable (subject to treaty limits) under the Companys reinsurance treaties. Further, the Company will be able to recoup a regular assessment through a surcharge to policyholders. Such recoupments will be refunded to reinsurers as the
related premiums are written and collected. Insurers are required to collect emergency assessments, of which there have been none, directly from residential property policyholders and remit them to LA Citizens as they are collected.



The Company is currently monitoring developments with respect to various state facilities
such as guaranty funds, LA Citizens, the Texas FAIR Plan Association and the Texas Windstorm Insurance Association. The ultimate impact of Hurricanes Katrina and Rita on these facilities is currently uncertain, but could result in the facilities
recognizing a financial deficit different than the level currently estimated. They may, in turn, have the ability to assess participating insurers when financial deficits occur. However, the Company is not expected to incur any net expense or loss
from such assessments due to reinsurance recoveries.



On November 14,
2005, an unaffiliated financial services organization announced that it was acquiring the Companys largest unaffiliated managing general agency (MGA). At the same time, the Company announced it had reached an agreement with the acquiror that
will provide for continued participation by certain of the Companys insurance subsidiaries as policy issuing insurers for business produced by the MGA for a three-year period following the pending acquisition of the MGA. The contract is
contingent upon the acquisition of the MGA, the execution of definitive agreements and certain regulatory approvals. For the 2005 year of account, the Companys subsidiaries will continue to retain 40% of the net premium and underwriting risk
of this MGAs production. Pursuant to the terms of the new contract, the Companys subsidiaries will expand their net retention of this book to a minimum of 50% and a maximum of 75% of total volume for 2006. The Company will retain 40% to
50% of this book of business in 2007 and a minimum of 30% in 2008. Additionally, the Companys subsidiaries will continue to receive fees for issuing this book of business during the three year period. Business with this MGA accounts for 23.9%
and 17.7% of the Companys gross and net written premiums, respectively, and 14.2% of net insurance premiums earned for the nine month period ended September 30, 2005.



16



---

##### Table of Contents

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



Forward Looking Statements



A number of the statements in this Form 10-Q are forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995 (PSLRA), that
reflect our current views with respect to future events and financial performance. These forward-looking statements, which may apply to us specifically or the insurance industry in general, are made pursuant to the safe harbor provisions of the
PSLRA and include estimates and assumptions related to economic, competitive, regulatory, judicial, legislative and other developments. Statements that include the words expect, intend, plan, believe,
project, estimate, may, should, anticipate, will and similar statements of a future or forward-looking nature identify forward-looking statements for purposes of the federal
securities laws or otherwise.



All forward-looking statements address matters
that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements. We believe that these factors include but are not limited to
the following:



| |  |  | greater frequency or severity of claims and loss activity than our underwriting, reserving or investment practices anticipate based on historical experience or industry data,
including activity resulting from natural or man-made catastrophic events or severe weather. Hurricanes Katrina and Rita, which occurred on August 29, 2005 and September 24, 2005, respectively, are such examples. Factors that might
influence our exposure to losses from these types of events in addition to the routine adjustment of losses include: exhaustion of reinsurance cover, increases in reinsurance rates, unanticipated litigation expenses, recoverability of ceded losses,
impact on independent agent operations and future premium income in areas affected by catastrophic events, among others;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the occurrence of one or more catastrophic events or a series of severe weather events in the concentrated geographic area where we focus our insurance underwriting;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | economic or regulatory developments in the states of Texas, Louisiana, Oklahoma, New Mexico or other states in which we operate now or in the future, that adversely affect our
financial condition and results of operations, such as efforts to override industry standard flood exclusion clauses in homeowners policies in the wake of Hurricanes Katrina and Rita;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in general economic conditions, including inflation and other factors;
| | - |  | ------------------------------------------------------------------------------



| |  |  | failure to adequately price our insurance policies and provide sufficient reserves, primarily in the wake of Hurricanes Katrina and Rita;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | industry developments that centralize and commoditize insurance products to the detriment of agency distribution models;
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | lack of acceptance of our products and services, including new products and services;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | decreased demand for our insurance products;
| | - |  | --------------------------------------------



| |  |  | difficulty in expanding our book of business;
| | - |  | ---------------------------------------------



| |  |  | changes in the availability, cost or quality of reinsurance and failure of our reinsurers to pay claims timely or at all;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | the creditworthiness of our reinsurers or of the insurers for whom we provide fronting services;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | loss of independent insurance agents to distribute our products;
| | - |  | ----------------------------------------------------------------



| |  |  | failure of one or more of our MGAs to appropriately underwrite our products or administer claims;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | inability to maintain our business relationship with our largest producing MGA (See note 14 of the Notes to Condensed Consolidated Financial Statements);
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | loss of the services of any of our executive officers, underwriters or other key personnel;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | decline of our A.M. Best Company, Inc. (A.M. Best) financial strength rating;
| | - |  | -------------------------------------------------------------------------------



17



---

##### Table of Contents

| |  |  | changes in rating agency policies or practices;
| | - |  | -----------------------------------------------



| |  |  | failure of any loss limitation method we employ;
| | - |  | ------------------------------------------------



| |  |  | changes in legal theories of liability under our insurance policies, such as changes imposing liability for flood damages under our homeowners policies which is specifically
excluded from coverage;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | increased competition on the basis of pricing, capacity, coverage terms or other factors;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | developments in the worlds financial and capital markets that adversely affect the performance of our investments;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | inability to obtain capital on acceptable terms;
| | - |  | ------------------------------------------------



| |  |  | changes in regulations, laws and accounting standards applicable to us or our subsidiaries, agents or customers;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | increases in the amount of assessments we are required to pay;
| | - |  | --------------------------------------------------------------



| |  |  | the effect our holding company structure and regulatory constraints may have on our ongoing cash requirements and ability to pay dividends;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | failure of our information technology systems;
| | - |  | ----------------------------------------------



| |  |  | the effects of future acquisitions on our business; and
| | - |  | -------------------------------------------------------



| |  |  | difficulty in effecting a change of control of our company.
| | - |  | -----------------------------------------------------------



This list of factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this Form 10-Q.
Unless otherwise required by law, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise. In addition to risks discussed herein, you should read
the Risk Factors included in our IPO prospectus filed with the SEC on August 4, 2005 (Registration No. 333-124758).



If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions otherwise prove to be incorrect, our actual results may vary
materially from what we project. Any forward-looking statements you read in this report reflect our views as of the date of this report with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to
our operations, financial condition, results of operations, growth strategy and liquidity. All subsequent written and oral forward-looking statements attributable to us or individuals acting on our behalf are expressly qualified in their entirety by
this paragraph.



Comparability of Financial Statement Information



As discussed in the Companys IPO prospectus filed with the SEC on
August 4, 2005 (Registration No. 333-124758), on August 29, 2003 the Company, then backed by an investor group, acquired all of the issued and outstanding capital stock of our top tier operating companies from a Swiss insurance
company (2003 Acquisition). As a result of the 2003 Acquisition, we were required under SFAS No. 141,Business Combinations, to adopt purchase accounting and record our assets and liabilities at their fair market values at the time of
the 2003 Acquisition. Since the price paid in the 2003 Acquisition was less than our net asset value, we recorded negative goodwill and wrote down the value of some of our assets. The resulting change in the book value of our assets limits the
comparability of several income statement items from and after August 29, 2003. You should read this discussion in conjunction with the Companys audited financial statements and accompanying notes included in our IPO prospectus filed with
the Securities and Exchange Commission.



In connection with the 2003
Acquisition, we adjusted our unearned premium reserve liability to fair value at the August 29, 2003 acquisition date pursuant to SFAS No. 141,Business Combinations. The adjustment reduced the unearned premium reserve liability to
its fair value by $23.4 million which was approximately equal to the historical deferred acquisition cost asset of $24.2 million. The fair value adjustment of the unearned premium reserve liability was amortized over the twelve months following the
2003 Acquisition. The following table reflects the impact of the amortization by segment of the fair value adjustment of the unearned premium reserve liability.



18



---

##### Table of Contents

Impact of Amortization of the Purchase-GAAP Fair Value Adjustment of

the Unearned Premium Reserve Liability



|                                                        |  |                    |        |                   |                   |        |                   |  |                   |         |  |   |         |  
|------------------------------------------------------- |  | ------------------ | ------ | ----------------- | ----------------- | ------ | ----------------- |  | ----------------- | ------- |  | - | ------- | -
|                                                        |  | Three Months Ended |        |                   | Nine Months Ended |       
|                                                        |  | September 30,2005  |        | September 30,2004 |                   |        | September 30,2005 |  | September 30,2004 |        
|                                                        |  | ($ in thousands)   |       
|Independent Agents  Personal Lines                     |  |                    |        |                   |                   |        |                   |  |                   |         |  |   |         |  
|Net insurance premiums earned                           |  |                    |        |                   |                   |        |                   |  |                   |         |  |   |         |  
|Pre amortization balance                                |  | $                  | 30,813 |                   | $                 | 33,531 |                   |  | $                 | 94,935  |  | $ | 101,595 |  
|Amortization of fair value adjustment                   |  |                    |       |                   |                   | (2,311 | )                 |  |                   |        |  |   | (9,543  | )
|                                                        |  |                    |        |                   |                   |        |                   |  |                   |         |  |   |         |  
|Post amortization balance                               |  | $                  | 30,813 |                   | $                 | 31,220 |                   |  | $                 | 94,935  |  | $ | 92,052  |  
|                                                        |  |                    |        |                   |                   |        |                   |  |                   |         |  |   |         |  
|Total underwriting, acquisition, and operating expenses |  |                    |        |                   |                   |        |                   |  |                   |         |  |   |         |  
|Pre amortization balance                                |  | $                  | 11,457 |                   | $                 | 10,162 |                   |  | $                 | 32,062  |  | $ | 31,198  |  
|Amortization of fair value adjustment                   |  |                    |       |                   |                   | (2,311 | )                 |  |                   |        |  |   | (9,543  | )
|                                                        |  |                    |        |                   |                   |        |                   |  |                   |         |  |   |         |  
|Post amortization balance                               |  | $                  | 11,457 |                   | $                 | 7,851  |                   |  | $                 | 32,062  |  | $ | 21,655  |  
|                                                        |  |                    |        |                   |                   |        |                   |  |                   |         |  |   |         |  
|Independent Agents  Commercial Lines                   |  |                    |        |                   |                   |        |                   |  |                   |         |  |   |         |  
|Net insurance premiums earned                           |  |                    |        |                   |                   |        |                   |  |                   |         |  |   |         |  
|Pre amortization balance                                |  | $                  | 16,315 |                   | $                 | 14,831 |                   |  | $                 | 49,699  |  | $ | 42,530  |  
|Amortization of fair value adjustment                   |  |                    |       |                   |                   | (1,135 | )                 |  |                   |        |  |   | (4,549  | )
|                                                        |  |                    |        |                   |                   |        |                   |  |                   |         |  |   |         |  
|Post amortization balance                               |  | $                  | 16,315 |                   | $                 | 13,696 |                   |  | $                 | 49,699  |  | $ | 37,981  |  
|                                                        |  |                    |        |                   |                   |        |                   |  |                   |         |  |   |         |  
|Total underwriting, acquisition, and operating expenses |  |                    |        |                   |                   |        |                   |  |                   |         |  |   |         |  
|Pre amortization balance                                |  | $                  | 6,897  |                   | $                 | 4,898  |                   |  | $                 | 20,311  |  | $ | 15,672  |  
|Amortization of fair value adjustment                   |  |                    |       |                   |                   | (1,135 | )                 |  |                   |        |  |   | (4,549  | )
|                                                        |  |                    |        |                   |                   |        |                   |  |                   |         |  |   |         |  
|Post amortization balance                               |  | $                  | 6,897  |                   | $                 | 3,763  |                   |  | $                 | 20,311  |  | $ | 11,123  |  
|                                                        |  |                    |        |                   |                   |        |                   |  |                   |         |  |   |         |  
|Program Management                                      |  |                    |        |                   |                   |        |                   |  |                   |         |  |   |         |  
|Net insurance premiums earned                           |  |                    |        |                   |                   |        |                   |  |                   |         |  |   |         |  
|Pre amortization balance                                |  | $                  | 15,619 |                   | $                 | 15,196 |                   |  | $                 | 37,137  |  | $ | 42,548  |  
|Amortization of fair value adjustment                   |  |                    |       |                   |                   | (477   | )                 |  |                   |        |  |   | (1,601  | )
|                                                        |  |                    |        |                   |                   |        |                   |  |                   |         |  |   |         |  
|Post amortization balance                               |  | $                  | 15,619 |                   | $                 | 14,719 |                   |  | $                 | 37,137  |  | $ | 40,947  |  
|                                                        |  |                    |        |                   |                   |        |                   |  |                   |         |  |   |         |  
|Total underwriting, acquisition, and operating expenses |  |                    |        |                   |                   |        |                   |  |                   |         |  |   |         |  
|Pre amortization balance                                |  | $                  | 5,615  |                   | $                 | 7,279  |                   |  | $                 | 15,920  |  | $ | 19,015  |  
|Amortization of fair value adjustment                   |  |                    |       |                   |                   | (477   | )                 |  |                   |        |  |   | (1,601  | )
|                                                        |  |                    |        |                   |                   |        |                   |  |                   |         |  |   |         |  
|Post amortization balance                               |  | $                  | 5,615  |                   | $                 | 6,802  |                   |  | $                 | 15,920  |  | $ | 17,414  |  
|                                                        |  |                    |        |                   |                   |        |                   |  |                   |         |  |   |         |  
|Insurance Services and Corporate                        |  |                    |        |                   |                   |        |                   |  |                   |         |  |   |         |  
|Net insurance premiums earned                           |  |                    |        |                   |                   |        |                   |  |                   |         |  |   |         |  
|Pre amortization balance                                |  | $                  | 1,670  |                   | $                 | 1,169  |                   |  | $                 | 4,928   |  | $ | 3,243   |  
|Amortization of fair value adjustment                   |  |                    |       |                   |                   |       |                   |  |                   |        |  |   |        |  
|                                                        |  |                    |        |                   |                   |        |                   |  |                   |         |  |   |         |  
|Post amortization balance                               |  | $                  | 1,670  |                   | $                 | 1,169  |                   |  | $                 | 4,928   |  | $ | 3,243   |  
|                                                        |  |                    |        |                   |                   |        |                   |  |                   |         |  |   |         |  
|Total underwriting, acquisition, and operating expenses |  |                    |        |                   |                   |        |                   |  |                   |         |  |   |         |  
|Pre amortization balance                                |  | $                  | 430    |                   | $                 | (562   | )                 |  | $                 | 3,722   |  | $ | 1,374   |  
|Amortization of fair value adjustment                   |  |                    |       |                   |                   |       |                   |  |                   |        |  |   |        |  
|                                                        |  |                    |        |                   |                   |        |                   |  |                   |         |  |   |         |  
|Post amortization balance                               |  | $                  | 430    |                   | $                 | (562   | )                 |  | $                 | 3,722   |  | $ | 1,374   |  
|                                                        |  |                    |        |                   |                   |        |                   |  |                   |         |  |   |         |  
|Consolidated                                            |  |                    |        |                   |                   |        |                   |  |                   |         |  |   |         |  
|Net insurance premiums earned                           |  |                    |        |                   |                   |        |                   |  |                   |         |  |   |         |  
|Pre amortization balance                                |  | $                  | 64,417 |                   | $                 | 64,727 |                   |  | $                 | 186,699 |  | $ | 189,916 |  
|Amortization of fair value adjustment                   |  |                    |       |                   |                   | (3,923 | )                 |  |                   |        |  |   | (15,693 | )
|                                                        |  |                    |        |                   |                   |        |                   |  |                   |         |  |   |         |  
|Post amortization balance                               |  | $                  | 64,417 |                   | $                 | 60,804 |                   |  | $                 | 186,699 |  | $ | 174,223 |  
|                                                        |  |                    |        |                   |                   |        |                   |  |                   |         |  |   |         |  
|Total underwriting, acquisition, and operating expenses |  |                    |        |                   |                   |        |                   |  |                   |         |  |   |         |  
|Pre amortization balance                                |  | $                  | 24,399 |                   | $                 | 21,777 |                   |  | $                 | 72,015  |  | $ | 67,259  |  
|Amortization of fair value adjustment                   |  |                    |       |                   |                   | (3,923 | )                 |  |                   |        |  |   | (15,693 | )
|                                                        |  |                    |        |                   |                   |        |                   |  |                   |         |  |   |         |  
|Post amortization balance                               |  | $                  | 24,399 |                   | $                 | 17,854 |                   |  | $                 | 72,015  |  | $ | 51,566  |  
|                                                        |  |                    |        |                   |                   |        |                   |  |                   |         |  |   |         |  



19



---

##### Table of Contents

Overview



In addition to the information discussed below, you should read the Companys consolidated and combined financial statements included in our IPO prospectus filed
with the SEC on August 4, 2005 (Registration No. 333-124758). The prospectus includes information regarding the Company not discussed in this Form 10-Q, such as an overview of our organizational structure and businesses, a summary of our
principal revenue and expense items, a summary of our key financial measures and a summary of our critical accounting policies.



We are a provider of personal and commercial property and casualty insurance products to individuals and small to medium-size businesses primarily in Texas, Louisiana,
Oklahoma and New Mexico. We have written insurance in Texas consistently throughout our entire 102-year history while many of our competitors have moved in and out of the state. Our long-standing presence and deep market knowledge have allowed us to
develop a loyal network of over 450 independent agents and a select group of managing general agents (MGAs) who provide us access to what we believe are among the most profitable markets  underserved niches primarily in rural and
small to medium-size metropolitan markets.



We target underserved markets that
have been and continue to be largely ignored by national insurance companies because these markets require underwriting expertise that most carriers have been unwilling to develop given the relatively small volume of premiums produced by local
agents. Within these markets, we capitalize on our superior local knowledge to identify profitable underwriting opportunities. We apply a high level of selectivity in the risks we underwrite and use a risk-adjusted return approach to capital
allocation, which we believe allows us to allocate our capital to the business segments that we believe will generate consistent underwriting profits. We believe that we distinguish ourselves from our competitors by delivering tailored product
solutions, providing a high level of customer service and responding quickly to the needs of our agents and policyholders.



Our business is conducted through four segments organized primarily by distribution channel: Independent Agents  Personal Lines, Independent Agents 
Commercial Lines, Program Management and Insurance Services and Corporate. Our Independent Agents  Personal Lines and our Independent Agents  Commercial Lines segments operate through our network of independent agents and our two
affiliated MGAs. Our Program Management segment includes products distributed through unaffiliated MGAs that bind and underwrite insurance policies on our behalf within designated programs and in conformity with our underwriting guidelines. Our
Insurance Services and Corporate segment primarily comprises our fee-based fronting business and interest expense on our long-term debt.



As noted earlier, two major hurricanes occurred in the third quarter affecting properties we insure in Louisiana and Texas. Severe weather and other catastrophic events
are inherent risks in the property and casualty insurance business which may contribute to material year-to-year fluctuations in our results of operations and financial position. We experience seasonality in our underwriting results related to large
weather events that generally occur in the second and third quarters. Weather related catastrophe losses vary from year to year in severity and frequency depending upon variations in weather patterns. In evaluating our independent agency claims loss
experience, we classify weather events with losses aggregating at least $400,000 as catastrophe losses. We use historical average loss severities and exposure maps, industry and proprietary models and industry loss estimates to estimate the ultimate
cost of catastrophic weather events and we record liabilities for unpaid losses and loss adjustment expenses in the period when an event occurs. Our annual plans are generally based upon the average of the last five years of catastrophe weather
losses. The frequency and severity of catastrophe losses in any year cannot be predicted and may be material to our results of operations and financial position. Accordingly, we have implemented prudent and conservative measures to help mitigate the
potential impact of catastrophe weather events including, among other items, monitoring geographic property risk concentrations, monitoring business mix, contractually sharing risks with policyholders and maintaining catastrophe reinsurance
protections.



We have catastrophe reinsurance treaties that reduced our
combined retention on these two events. One treaty provides coverage for two large severity events up to $55.0 million per event in excess of a $5.0 million retention. Four layers of protection are provided in this treaty (a $5.0 million in excess
of $5.0 million retention layer, a $10.0 million in excess of $10.0 million layer, a $15.0 million in excess of $20.0 million layer and a $25.0 million in excess of $35.0 million layer). Another treaty provides coverage for the reinstatement
premiums required under the first treaty to reinstate coverage for a second severity event. A third treaty provides coverage for frequency of events by providing $5.0 million of coverage above a $10.0 million aggregation of retentions on events that
exceed $0.75 million each. Participations in all of these treaties are spread among multiple reinsurers, each with an AM Best rating of A- or higher. Other than the base retention, we retain no participations in any of the layers of these treaties.
Although we generally experience severe weather-related losses (including from thunderstorms, hailstorms, windstorms, tornadoes, hurricanes and lightning) in our second and third quarters, such events can occur in any calendar quarter. Accordingly,
during our third quarter following Hurricanes Katrina and Rita, we purchased coverage for a third and a fourth large severity event for 2005 at a combined cost of $4.1 million.



While these two hurricanes represent two of the insurance industrys most costly hurricanes on record, the impact on our results is
within the range of losses expected from a major wind-related catastrophe covered by our reinsurance treaties. Our net retention on each event was $5.0 million. Our year-to-date aggregate net retained catastrophe losses exceeded $15.0 million during
the third quarter and provided for a $5.0 million recovery under our aggregate catastrophe treaty. The unrecognized portion of the ceded premiums on the reinsurance layers impacted by these two events was $1.5 million. This cost was accelerated to
the third quarter and recognized as additional ceded premiums. The pro-rata portion of the ceded premiums for the third and fourth large severity event covers purchased during the third quarter was $0.5 million. The after tax impact (using a 35% tax
rate) on the third quarter financial statements of the two hurricanes, net of reinsurance recoveries (including the aggregate catastrophe treaty) and the related cost of reinsurance, is approximately $4.6 million.



Key Measures



Included in the tables of financial information on a consolidated basis and for each segment are various ratios and indicators that are key
measures useful in reviewing the performance of insurance entities. Included are the following:



| |  |  | Net ex-catastrophe loss ratio (expressed as a percentage) is the ratio of net losses and loss adjustment expenses incurred, not including losses from industry designated
catastrophic events or other weather events with losses aggregating at least $400,000, divided by the net insurance premiums earned. This ratio is net of amounts ceded to reinsurers. This ratio is meaningful in evaluating the underwriting
profitability of the insurance policies that are not ceded to reinsurers and that are not related to unpredictable catastrophic events.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Net catastrophe loss ratio (expressed as a percentage) is the ratio of net losses and loss adjustment expenses incurred from industry designated catastrophic events or other weather
events with losses aggregating at least $400,000, divided by the net insurance premiums earned. This ratio is net of amounts ceded to reinsurers. This ratio is meaningful in evaluating the Companys management of our exposure to weather
catastrophes and effective use of reinsurance to mitigate catastrophic losses.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Net expense ratio (expressed as a percentage) is the ratio of underwriting, acquisition and operating expenses to net insurance premiums earned. It measures the cost of producing
our insurance business through independent agents and MGAs and our operational efficiency in underwriting and administering our insurance business.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Net combined ratio is the sum of the net ex-catastrophe loss ratio, the net catastrophe loss ratio and the net expense ratio. A ratio of less than 100% is an indicator of
profitability. A net combined ratio in excess of 100% indicates a net underwriting loss. Investment income, net realized gains and losses and other income are not reflected in the combined ratio.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



20



---

##### Table of Contents

| |  |  | Net underwriting leverage is the ratio of our net written premiums to our statutory surplus. Net underwriting leverage by segment is a product of our return on average equity model
based on net written premiums and allocated equity by segment. This is a measure of capacity and our exposure to pricing errors on our book of business.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Statutory surplus is determined under statutory accounting principles and represents the amount remaining after all liabilities, including loss reserves, are subtracted from all
admitted assets. Statutory surplus is evaluated by regulatory authorities and rating agencies as a measure of financial health and stability. It also governs the ability of the insurance subsidiary to pay dividends.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Results of Operations



The table below summarizes our results of operations on a consolidated basis for the three and nine month periods ended September 30,
2005 and 2004, and illustrates certain operating results and key measures we use in monitoring and evaluating our operations. The information is intended to summarize and supplement information contained in our unaudited condensed consolidated
financial statements included in this Form 10-Q and to assist the reader in gaining a better understanding of our results of operations.



|                                                                                                                         |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------ |  | ------------------ | ------- | - | ----------------- | - | ------- | ----------------- |  | - | ----------------- | - |  | - | ------- | -
|                                                                                                                         |  | Three Months Ended |         |   | Nine Months Ended |  
|Results of Operations  Consolidated                                                                                     |  | September 30,2005  |         |   | September 30,2004 |   |         | September 30,2005 |  |   | September 30,2004 |  
|                                                                                                                         |  | ($ in thousands)   |        
|Net insurance premiums earned                                                                                            |  | $                  | 64,417  |   |                   | $ | 60,804  |                   |  | $ | 186,699           |   |  | $ | 174,223 |  
|Net investment income                                                                                                    |  |                    | 3,019   |   |                   |   | 2,138   |                   |  |   | 8,068             |   |  |   | 6,107   |  
|Net realized gains                                                                                                       |  |                    | 45      |   |                   |   | 682     |                   |  |   | 121               |   |  |   | 931     |  
|Other income                                                                                                             |  |                    | 1,011   |   |                   |   | 796     |                   |  |   | 3,286             |   |  |   | 3,494   |  
|                                                                                                                         |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Total revenues                                                                                                           |  | $                  | 68,492  |   |                   | $ | 64,420  |                   |  | $ | 198,174           |   |  | $ | 184,755 |  
|                                                                                                                         |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Net losses and loss adjustment expenses incurred                                                                         |  | $                  | 37,485  |   |                   | $ | 35,723  |                   |  | $ | 104,515           |   |  | $ | 109,297 |  
|Underwriting, acquisition and operating expenses:                                                                        |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Commissions                                                                                                              |  |                    | 13,416  |   |                   |   | 10,410  |                   |  |   | 38,142            |   |  |   | 26,388  |  
|Other underwriting, acquisition and operating expenses                                                                   |  |                    | 10,983  |   |                   |   | 7,444   |                   |  |   | 33,873            |   |  |   | 25,178  |  
|                                                                                                                         |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Total underwriting, acquisition and operating expenses                                                                   |  |                    | 24,399  |   |                   |   | 17,854  |                   |  |   | 72,015            |   |  |   | 51,566  |  
|Interest expense                                                                                                         |  |                    | 867     |   |                   |   | 546     |                   |  |   | 2,377             |   |  |   | 1,608   |  
|                                                                                                                         |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Total expenses                                                                                                           |  | $                  | 62,751  |   |                   | $ | 54,123  |                   |  | $ | 178,907           |   |  | $ | 162,471 |  
|                                                                                                                         |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Income from continuing operations before income taxes and equity in earnings of unconsolidated foreign insurance company |  | $                  | 5,741   |   |                   | $ | 10,297  |                   |  | $ | 19,267            |   |  | $ | 22,284  |  
|Income tax expense                                                                                                       |  |                    | 2,846   |   |                   |   | 4,795   |                   |  |   | 7,595             |   |  |   | 8,991   |  
|Equity in earnings of unconsolidated foreign insurance company, net of income taxes                                      |  |                    | 1,394   |   |                   |   | 403     |                   |  |   | 2,935             |   |  |   | 2,129   |  
|                                                                                                                         |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Net income                                                                                                               |  | $                  | 4,289   |   |                   | $ | 5,905   |                   |  | $ | 14,607            |   |  | $ | 15,422  |  
|                                                                                                                         |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Key Measures                                                                                                             |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Gross written premiums                                                                                                   |  | $                  | 137,604 |   |                   | $ | 127,485 |                   |  | $ | 375,267           |   |  | $ | 359,648 |  
|Net written premiums                                                                                                     |  |                    | 73,422  |   |                   |   | 65,386  |                   |  |   | 203,620           |   |  |   | 183,475 |  
|Net ex-catastrophe loss ratio (1)                                                                                        |  |                    | 50.8    | % |                   |   | 57.9    | %                 |  |   | 49.5              | % |  |   | 58.6    | %
|Net catastrophe loss ratio (2)                                                                                           |  |                    | 7.4     |   |                   |   | 0.9     |                   |  |   | 6.5               |   |  |   | 4.1     |  
|Net expense ratio (3)                                                                                                    |  |                    | 37.9    |   |                   |   | 29.4    |                   |  |   | 38.6              |   |  |   | 29.6    |  
|                                                                                                                         |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Net combined ratio (4)                                                                                                   |  |                    | 96.1    | % |                   |   | 88.2    | %                 |  |   | 94.6              | % |  |   | 92.3    | %
|                                                                                                                         |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Total assets                                                                                                             |  | $                  | 835,504 |   |                   | $ | 720,293 |                   |  | $ | 835,504           |   |  | $ | 720,293 |  
|Statutory surplus (5)                                                                                                    |  |                    | 162,575 |   |                   |   | 148,977 |                   |  |   | 162,575           |   |  |   | 148,977 |  
|Net underwriting leverage (6)                                                                                            |  |                    | 1.6     | x |                   |   | 1.6     | x                 |  |   | 1.6               | x |  |   | 1.6     | x



|(1) | The net ex-catastrophe loss ratio is the ratio of net losses and loss adjustment expenses, not including losses from industry designated catastrophic events or other weather events
with losses aggregating at least $400,000, divided by the net insurance premiums earned. This ratio is net of amounts ceded to reinsurers.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | The net catastrophe loss ratio is the ratio of net losses and loss adjustment expenses from industry designated catastrophic events or other weather events with losses aggregating
at least $400,000 divided by the net insurance premiums earned. This ratio is net of amounts ceded to reinsurers.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | The net expense ratio is calculated by dividing the total underwriting, acquisition and operating expenses by net insurance premiums earned.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------



|(4) | The net combined ratio is the sum of the net ex-catastrophe loss ratio, the net catastrophe loss ratio and the net expense ratio.
|--- | ---------------------------------------------------------------------------------------------------------------------------------



|(5) | This is the reported statutory surplus as regards policyholders of our lead insurance company, Republic Underwriters Insurance Company.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------



|(6) | The net underwriting leverage ratio is the ratio of annualized net written premiums divided by projected end-of-year statutory surplus.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------



21



---

##### Table of Contents

Comparison of the Consolidated Three Months Ended September 30, 2005 to September 30, 2004



Underwriting income



Consolidated gross written premiums of $137.6 million and consolidated net written premiums of $73.4 million for the third quarter of 2005
were 7.9% and 12.3% higher, respectively, compared to the same period in 2004. Gross written premiums increased 10.1%, 24.5% and 14.3% in the Independent Agents  Personal Lines, Independent Agents  Commercial Lines and Insurance Services
and Corporate segments, respectively. The gross written premium in the Program Management segment declined 5.5%. Net written premiums, which we view as a more appropriate measure of our growth due to the effects of fronting services on our gross
written premiums, increased 1.9% in our Independent Agents  Personal Lines segment, 13.9% in our Independent Agents  Commercial Lines segment and 31.4% in our Program Management segment during the third quarter of 2005 compared to the
same period in 2004. The growth in gross written premium was primarily driven by the new low value dwelling program in the Independent Agents  Personal Lines segment, the new farm and ranch program in the Independent Agents  Commercial
Lines segment and continued growth in nonstandard auto programs in the Insurance Services and Corporate segment. The growth in net written premiums for the Program Management segment is primarily due to our increased retention in our largest
MGAs operations.



Consolidated net insurance premiums earned of $64.4
million increased 5.9% for the third quarter of 2005 over the same period in 2004. Eliminating the effect of the purchase GAAP adjustment (see Comparability of Financial Statement Information above) indicates a decline of 0.5% for the
2005 quarter over 2004. Net insurance premiums earned (after eliminating the effect of the purchase GAAP adjustment) increased 10.0% in the Independent Agents  Commercial Lines segment and 2.8% in the Program Management segments and declined
8.1% in the Independent Agents  Personal Lines segment during the third quarter of 2005. Net insurance premiums earned for the third quarter of 2005 were reduced by $1.5 million due to the acceleration of ceded premiums for utilization of the
lower layers of reinsurance coverage due to the hurricane losses. In addition, we purchased additional reinsurance coverage at a cost of $4.1 million for future 2005 events. The impact on net insurance premiums earned was a further reduction of $0.5
million. The balance of the additional reinsurance cost will be reflected in our fourth quarter results. Thus, net insurance premiums earned in the third quarter of 2005 were $2.0 million lower due to unplanned reinsurance costs.



We have not experienced major losses from hurricanes over the past five years and the average
catastrophe loss ratio for the third quarter in the last five years is 4.8%. The net catastrophe loss ratio for our third quarter of 2005 was 7.4%, which includes the anticipated net impact of Hurricanes Katrina and Rita which had combined gross
losses, including loss adjustment expenses, before reinsurance of approximately $66.0 million. However, due to expected reinsurance recoveries, the net catastrophe losses and loss adjustment expenses for the quarter are estimated to be only $5.0
million. Approximately 90% of the third quarter weather related losses were experienced in the Independent Agents  Personal Lines segment. The catastrophe loss ratio (not including loss adjustment expenses) for the third quarter of 2004 was
only 0.9% for all segments.



The overall loss ratio for the third quarter of
2005 declined 0.6 points compared to the same period in 2004. The ex-catastrophe loss ratio for the three months ended September 30, 2005 declined to 50.8% compared to 57.9% for the same period in 2004 with significant improvement occurring in
the underwriting results for both the Independent Agents  Personal Lines and Commercial Lines segments.



The total loss ratios in 2004, including the catastrophe ratio, were increased due to amortization of the fair value adjustment of the unearned premium reserves (e.g., loss ratios were impacted by reducing the net
insurance premium earned - see Comparability of Financial Statement Information above). Excluding the impact of the fair value adjustment, the total loss ratio in 2004 was 55.2%.



The expense ratio for the third quarter of 2005 was 37.9% compared to 29.4% in 2004. Expenses
in the third quarter of 2004 were reduced by $3.9 million due to the amortization of the fair value adjustment of the unearned premium reserves related to the 2003 Acquisition. Eliminating the impact of the fair value adjustment would result in an
expense ratio of 33.6% for the third quarter of 2004. The higher expenses in 2005 involve higher technology costs related to new product initiatives and other expenses associated with becoming a public company.



The consolidated net combined ratio was 96.1% for the third quarter of 2005, compared to
88.2% for the third quarter of 2004. Although the combined ratio in 2005 includes 7.4% in catastrophe losses compared to 0.9% in 2004, the overall loss ratios were comparable between years, indicating improved ex-catastrophe loss experience in the
current period. Although the expense ratio was 8.5 points higher in 2005 compared to 2004 most of the increase was due to the effects of the purchase GAAP adjustment on total underwriting, acquisition and operating expenses (see Comparability
of Financial Statement Information above), which lowered the 2004 ratio. Eliminating this effect for 2004 would have resulted in a combined ratio of 88.8%. In this comparison, net losses (including the higher catastrophe losses in 2005) would
have accounted for an increase of 3.0 points and higher expenses would have contributed 4.3 points to the increased net combined ratio. The fair value adjustment was fully amortized in the third quarter of 2004, thus the comparative impact will not
apply starting in the fourth quarter.



Investment income



Consolidated net investment income of $3.0 million for the third quarter of 2005 was 41.2%
higher than for the same period in 2004. The increase primarily resulted from the higher investment asset base, increases in short-term market interest rates and a decline in investment expenses related to the absence of expenses associated with
owning and operating our real estate investment which was sold in August 2004. The annualized net investment yield on average invested assets, excluding our investment in Atlas, was 3.7% for the third quarter of 2005 compared to 2.8% for the same
period in 2004.



Net realized gains (losses)



Net realized gains were $45,000 in the third quarter of 2005 compared to gains of $682,000
for the same period in 2004. The Company repositioned its investment portfolio in late 2003 and continued in 2004 following the 2003 Acquisition and recognized capital gains and losses during that process. After the repositioning efforts were
completed late in 2004, the Companys investment strategy has involved limited trading activity, thus resulting in nominal realized gains or losses in 2005.



Other income



Other income primarily represents fronting fees earned by our insurance subsidiaries on policies written on behalf of MGAs in our Program Management segment and fees from
other insurance carriers in our Insurance Services and Corporate segment. Other income of $1.0 million for the third quarter of 2005 was 27.0% higher than other income for the same period in 2004. Other income from the Program Management segment
declined 5.6% during the quarter as a result of the termination of two MGA relationships while other income from the Insurance Services and Corporate segment doubled in part due to increased volume from nonstandard auto programs. Other income in
2004 reflected a reduction of $0.1 million in the Insurance Services and Corporate segment due to the write-off of abandoned software.



22



---

##### Table of Contents

Interest expense



Interest expense of $0.9 million for the third quarter of 2005 was higher than interest expense of $0.5 million for the same period in 2004. The increase is due in part
to the additional $20.0 million of senior bank debt incurred in February 2005 and in part to increases in the applicable floating interest rates. See note 7 to our unaudited condensed consolidated financial statements as of September 30, 2005.



Income from continuing operations before income taxes and income tax
expense



Income from continuing operations of $5.7 million for the third
quarter of 2005 was less than the $10.3 million for the same period in 2004 primarily because of higher catastrophe losses, higher catastrophe reinsurance premiums, and higher operating expenses associated with being a public company.



The Company is subject to Federal income taxes at the 35% effective rate in 2005 and 2004.
However, we true up our tax provision in the third quarter each year after filing the annual tax return for the previous year. The effective tax rate for the third quarter of 2005 was 49.6% as a result of these true up adjustments. The
primary adjustment of the 2004 tax provision related to deferred company fees of approximately $1.8 million. The effective tax rate for the third quarter of 2004 was approximately 46.6% as a result of a $4.7 million adjustment of the valuation
allowance of capital loss carryforwards allocated in the 2003 Acquisition.



Equity in earnings of unconsolidated foreign insurance company



We record our 30% investment in Atlas on the equity basis of accounting. Equity in earnings of our unconsolidated foreign insurance company, net of income taxes, was $1.4 million in the third quarter of 2005 compared to $0.4 million
reported for the same period in 2004. The increase from 2004 to 2005 was due in part to Atlas improved investment results combined with a weaker US dollar.



Net income



Consolidated net income of $4.3 million for the third quarter of 2005 was 27.4% lower than the $5.9 million for the same period in 2004. The decline between periods is
primarily due to the higher catastrophe losses and reinsurance premiums and higher operating expenses associated with being a public company.



Comparison of the Consolidated Nine Months Ended September 30, 2005 to September 30, 2004



Underwriting income



Consolidated gross written premiums of $375.3 million and consolidated net written premiums of $203.6 million for the nine months ended September 30, 2005 were 4.3%
and 11.0% higher, respectively, compared to the same period in 2004. Net written premiums grew 28.1%, 10.9% and 2.1% in our Independent Agents  Commercial Lines, Program Management and Independent Agents  Personal Lines segments,
respectively, in the first nine months of 2005 compared to the same period in 2004. The growth in gross and written premium for our agency business was primarily driven by the new low value dwelling program in the Independent Agents  Personal
Lines segment and the new farm and ranch program in the Independent Agents  Commercial Lines segment. The growth in net written premiums for the Program Management segment reflects the increased retention in the operations of our largest MGA.



Consolidated net insurance premiums earned of $186.7 million increased 7.2%
for the first nine months of 2005 over the same period in 2004. Eliminating the effects of the purchase GAAP adjustment in 2004 (see Comparability of Financial Statement Information above) would have resulted in net insurance premiums
earned declining by 1.7%. Net insurance premiums earned increased 30.9% in the Independent Agents  Commercial Lines segment and 3.1% in the Independent Agents  Personal Lines segment and declined 9.3% in the Program Management segments
during the first nine months of 2005. As noted in the quarterly analysis, net insurance premiums earned in 2005 reflect a total reduction in the third quarter of 2005 of $2.0 million for unplanned reinsurance costs. This includes $1.5 million due to
the acceleration of ceded premiums due to the exhaustion of contract coverage due to the hurricane losses plus $0.5 million for the ceded earned impact for the period for additional reinsurance coverage for future events that could occur during
2005.



The overall net loss ratio for the first nine months of 2005 declined
6.7 points compared to the same period in 2004. The ex-catastrophe loss ratio for the nine months ended September 30, 2005 declined to 49.5% compared to 58.6% for the same period in 2004 with significant improvement occurring in both the
Independent Agents  Personal Lines and Commercial Lines segments. The net catastrophe loss ratio for the first nine months of 2005 was 6.5% compared to 4.1% for 2004. During the first nine months of 2005 we experienced five catastrophe weather
events resulting in claim losses in excess of $1 million, but only two events with claim losses in excess of $1 million in same period of 2004. During the third quarter of 2005 we experienced two major hurricanes with combined gross losses,
including loss adjustment expenses, before reinsurance, of approximately $66.0 million. However, due to expected reinsurance recoveries, the net catastrophe losses for the period are estimated to be only $5.0 million. Most of our weather related
losses were experienced in the Independent Agents  Personal Lines segment. Our average catastrophe loss ratio for the first nine months for the last five years is 7.1%. Despite the occurrence of two of the industrys most costly
hurricanes, our reinsurance program resulted in our net experience remaining in line with our historical experience for catastrophe losses.



The loss ratios in 2004, including the catastrophe ratios, were increased due to amortization of the fair value adjustment of the unearned premium reserves (e.g., loss
ratios were impacted by reducing the net insurance premium earned). Excluding the impact of the fair value adjustment, the net ex-catastrophe loss ratio for the first nine months of 2004 would have been 53.8% and the net catastrophe loss ratio would
have been 3.8% for a total net loss ratio of 57.6%.



The expense ratio for the
first nine months of 2005 was 38.6% compared to 29.6% for the same period in 2004. The comparison is impacted by the reduction of expenses in 2004 by $15.7 million due to the effects of the purchase GAAP adjustment on total underwriting, acquisition
and operating expenses (see Comparability of Financial Statement Information above). Eliminating the impact of this adjustment would result in an expense ratio of 35.4% in 2004. The 2005 increase is primarily related to expenses incurred
in connection with the Companys IPO and subsequent public company operations in addition to new technology costs to support new product initiatives, primarily in the Independent Agent  Commercial Lines segment.



The consolidated net combined ratio for the year-to-date September 30, 2005 was 94.6%
compared to 92.3% for the same period in 2004. Year-to-date September 30, 2005, net underwriting income of $10.2 million (computed as net insurance premiums earned less net losses and loss adjustment expenses incurred and total underwriting,
acquisition and operating expenses) was 23.9% lower than net underwriting income of $13.4 million for the same period in 2004. Although the net loss ratio indicates improvement in loss experience despite higher catastrophe losses in 2005, the
increase in operating expenses resulted in a higher net combined ratio for the nine month period in 2005. Improvements in our ex-catastrophe loss experience in 2005 over 2004 offset the higher catastrophe losses experience in 2005 over 2004. The
comparison is also impacted by the fair value adjustment to the unearned premium reserve. Eliminating the effect of the fair value adjustment for 2004 would have resulted in a combined ratio of 93.0%. The fair value adjustment was fully amortized in
the third quarter of 2004 and will have a diminishing impact on comparative ratios starting in the fourth quarter.



23



---

##### Table of Contents

Investment income



Year-to-date consolidated investment income of $8.1 million through September 30, 2005 was 32.1% higher than the same period in 2004. The increase primarily resulted
from the higher investment asset base, increases in short-term market interest rates and a decline in investment expenses related to the absence of expenses associated with owning and operating our real estate investment, which was sold in August
2004. The annualized net investment yield on average invested assets, excluding our investment in Atlas, was 3.3% for the first nine months of 2005 compared to 2.9% for the same period in 2004.



Net realized gains (losses)



Year-to-date net realized gains were $121,000 through September 30, 2005 compared to
net realized gains of $931,000 for the same period in 2004. As mentioned earlier, the Companys investment strategy has involved limited trading activity, thus resulting in lower realized gains or losses in 2005.



Other income



Year-to-date September 30, 2005 other income of $3.3 million was 6% lower than for the same period in 2004. The reduction is primarily
the result of reduced fronting fees from two MGA relationships in the Program Management segment that we terminated in 2004.



Interest expense



Interest expense of $2.4 million for the first nine months of 2005 was higher than interest expense of $1.6 million for the same period in 2004. The increase is due in part to an additional $20.0 million of senior
bank debt incurred in February 2005 and in part to increases in the applicable floating interest rates.



Income from continuing operations before income taxes and income tax expense



Year-to-date income from continuing operations before income taxes through September 30, 2005 of $19.3 million was 13.5% lower than income from continuing operations
before income taxes of $22.3 million for the same period in 2004. The decline can be attributed to higher catastrophe losses plus higher underwriting, acquisition and operating expenses.



The Company is subject to Federal income taxes at the 35% effective rate in 2005 and 2004. However, we true up our tax provision
in the third quarter each year after filing the annual tax return for the previous year. The effective tax rate for the first nine months of 2005 was 39.4% and reflects these true up adjustments. The effective tax rate for the same period of 2004
was approximately 40.3% as the result of an adjustment of capital loss carryforwards allocated in the 2003 Acquisition being less than expected.



Equity in earnings of unconsolidated foreign insurance company



We record our 30% investment in Atlas on the equity basis of accounting. Equity in earnings of our unconsolidated foreign insurance company, net of income taxes, was $2.9
million in the first nine months of 2005 compared to $2.1 million reported for the same period in 2004. The improved results for Atlas for the year-to-date 2005 reflect improved investment performance by Atlas during this period combined with a
weaker US dollar.



Net income



Year-to-date September 30, 2005 consolidated net income of $14.6 million was 5.3% lower
than for the same period in 2004. The decrease in net income was primarily attributable to higher catastrophe losses plus higher underwriting, acquisition and operating expenses.



24



---

##### Table of Contents

Segment Results of Operations



Independent Agents  Personal Lines



In the third quarter of 2005, the Independent Agents  Personal Lines segment accounted for 27.7% of our gross written premiums, 47.8%
of our net insurance premiums earned and 28.8% of consolidated net income. Approximately 62.0% of gross written premiums for this segment are for personal property lines of business and 38.0% are for personal auto lines of business. Of our personal
auto gross written premiums for 2005, 36.8% was from nonstandard auto products.



Year-to-date September 30, 2005 and 2004, the Independent Agents  Personal Lines segment accounted for 28.1% and 28.0% of our gross written premiums, 50.8% and 52.8% of our net insurance premiums earned, and 54.2% and 56.4% of
our consolidated net income, respectively.



The table below summarizes our
historical results of operations for the Independent Agents  Personal Lines segment and illustrates certain operating results and key measures we use in monitoring and evaluating our operations. The information is intended to summarize and
supplement information contained in our condensed consolidated financial statements included elsewhere in this Form 10-Q and to assist the reader in gaining a better understanding of our results of operations.



|                                                            |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|----------------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | ----------------- |  | - | ----------------- | - |  | - | ------- | -
|                                                            |  | Three Months Ended |         |   | Nine Months Ended |  
|Results of Operations  Independent Agents  Personal Lines |  | September 30,2005  |         |   | September 30,2004 |   |         | September 30,2005 |  |   | September 30,2004 |  
|                                                            |  | ($ in thousands)   |        
|Net insurance premiums earned                               |  | $                  | 30,813  |   |                   | $ | 31,220  |                   |  | $ | 94,935            |   |  | $ | 92,052  |  
|Net investment income                                       |  |                    | 1,133   |   |                   |   | 1,073   |                   |  |   | 3,273             |   |  |   | 3,086   |  
|Net realized gains                                          |  |                    | 17      |   |                   |   | 344     |                   |  |   | 50                |   |  |   | 470     |  
|Other income                                                |  |                    |        |   |                   |   |        |                   |  |   |                  |   |  |   |        |  
|                                                            |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Total revenues                                              |  | $                  | 31,963  |   |                   | $ | 32,637  |                   |  | $ | 98,258            |   |  | $ | 95,608  |  
|                                                            |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Net losses and loss adjustment expenses incurred            |  | $                  | 17,733  |   |                   | $ | 17,168  |                   |  | $ | 53,127            |   |  | $ | 59,392  |  
|Underwriting, acquisition and operating expenses:           |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Commissions                                                 |  |                    | 5,876   |   |                   |   | 3,808   |                   |  |   | 17,114            |   |  |   | 10,234  |  
|Other underwriting, acquisition and operating expenses      |  |                    | 5,581   |   |                   |   | 4,043   |                   |  |   | 14,948            |   |  |   | 11,421  |  
|                                                            |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Total underwriting, acquisition and operating expenses      |  |                    | 11,457  |   |                   |   | 7,851   |                   |  |   | 32,062            |   |  |   | 21,655  |  
|Interest expense                                            |  |                    |        |   |                   |   |        |                   |  |   |                  |   |  |   |        |  
|                                                            |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Total expenses                                              |  | $                  | 29,190  |   |                   | $ | 25,019  |                   |  | $ | 85,189            |   |  | $ | 81,047  |  
|                                                            |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Income from continuing operations before income taxes       |  | $                  | 2,773   |   |                   | $ | 7,618   |                   |  | $ | 13,069            |   |  | $ | 14,561  |  
|Income tax expense                                          |  |                    | 1,536   |   |                   |   | 3,431   |                   |  |   | 5,151             |   |  |   | 5,861   |  
|                                                            |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Income from continuing operations                           |  | $                  | 1,237   |   |                   | $ | 4,187   |                   |  | $ | 7,918             |   |  | $ | 8,700   |  
|                                                            |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Key Measures                                                |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Gross written premiums                                      |  | $                  | 38,140  |   |                   | $ | 34,640  |                   |  | $ | 105,487           |   |  | $ | 100,786 |  
|Net written premiums                                        |  |                    | 34,100  |   |                   |   | 33,477  |                   |  |   | 97,676            |   |  |   | 95,641  |  
|Net ex-catastrophe loss ratio (1)                           |  |                    | 43.8    | % |                   |   | 54.5    | %                 |  |   | 44.4              | % |  |   | 58.9    | %
|Net catastrophe loss ratio (2)                              |  |                    | 13.8    |   |                   |   | 0.5     |                   |  |   | 11.6              |   |  |   | 5.6     |  
|Net expense ratio (3)                                       |  |                    | 37.2    |   |                   |   | 25.1    |                   |  |   | 33.8              |   |  |   | 23.5    |  
|                                                            |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Net combined ratio (4)                                      |  |                    | 94.8    | % |                   |   | 80.1    | %                 |  |   | 89.8              | % |  |   | 88.0    | %
|                                                            |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Allocated assets                                            |  | $                  | 285,793 |   |                   | $ | 211,490 |                   |  | $ | 285,793           |   |  | $ | 211,490 |  
|Net underwriting leverage (5)                               |  |                    | 2.3     | x |                   |   | 2.3     | x                 |  |   | 2.3               | x |  |   | 2.3     | x

---



|(1) | The net ex-catastrophe loss ratio is the ratio of net losses and loss adjustment expenses, not including losses from industry designated catastrophic events or other weather events
with losses aggregating at least $400,000, divided by the net insurance premiums earned. This ratio is net of amounts ceded to reinsurers.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | The net catastrophe loss ratio is the ratio of net losses and loss adjustment expenses from industry designated catastrophic events or other weather events with losses aggregating
at least $400,000 divided by the net insurance premiums earned. This ratio is net of amounts ceded to reinsurers.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | The net expense ratio is calculated by dividing the total underwriting, acquisition and operating expenses by net insurance premiums earned.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------



|(4) | The net combined ratio is the sum of the net ex-catastrophe loss ratio, the net catastrophe loss ratio and the net expense ratio.
|--- | ---------------------------------------------------------------------------------------------------------------------------------



|(5) | Net underwriting leverage by segment is a product of our return on average equity model based on net written premiums and allocated equity by segment.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------



25



---

##### Table of Contents

Comparison of the Three Months Ended September 30, 2005 to September 30, 2004

(Independent Agents  Personal Lines Segment)



Underwriting income



Gross written premiums of $38.1 million for the third quarter of 2005 were 10.1% higher than for the same period in 2004. This increase resulted primarily from personal property lines of business including $2.8
million from our new low-value dwelling product. Reductions in gross written premiums were experienced in personal auto products (standard and nonstandard) as we continue to de-emphasize these products in certain areas due to excess market capacity
and declining rates.



Net insurance premiums earned of $30.8 million were 1.3%
lower in the third quarter of 2005 than for the same period in 2004. Eliminating the impact of the effect of purchase GAAP accounting on 2004 net insurance premiums earned adjustment (see Comparability of Financial Statement Information
above) would result in a decline of 8.1% in net insurance premiums earned for the third quarter. The primary reason for the decline in net insurance premiums earned for the third quarter of 2005 can be attributed to the recognition of additional
ceded premiums on the layers of catastrophe reinsurance treaties impacted by Hurricanes Katrina and Rita and to the purchase of additional catastrophe reinsurance in the third quarter following the occurrence of the hurricanes. Substantially all of
the $2.0 million additional catastrophe reinsurance ceded premium was incurred in the Independent Agents  Personal Lines segment. While there has been significant growth in the gross written premiums of our new low-value dwelling program, the
impact on net insurance premiums earned will not be fully realized until subsequent quarters.



Due to the seasonality of weather related catastrophe losses in our Independent Agents  Personal Lines segment, we generally experience favorable underwriting results in our first and fourth quarters and
experience underwriting losses from catastrophic weather events in our second and third quarters. As noted earlier, there were two major hurricanes in the third quarter that impacted our results. The third quarter 2005 combined ratio of 94.8%
included 13.8% for weather-related catastrophe losses. This was higher than our average weather-related catastrophe net loss ratio of 5.0% for the prior five years for the third quarter for this segment. We recorded $55.3 million in gross
catastrophe losses, not including loss adjustment expenses, in the third quarter of 2005 in this segment compared to $0.4 million in the same period in 2004. However, due to our reinsurance coverage, our net retained catastrophe losses for the third
quarter are estimated to be $4.3 million for this segment. The net combined ratio of 80.1% for the third quarter of 2004 was 14.7 points better than the third quarter of 2005; however, the 2004 net combined ratio included a weather-related
catastrophe net loss ratio of only 0.5% (13.3 points less than in 2005) since there were no major weather catastrophe events in the third quarter of 2004.



The ex-catastrophe loss ratio for the third quarter of 2005 was 43.8% compared to 54.5% in the same period in 2004 with the decline driven by improvement in both the
standard and nonstandard auto lines along with favorable results in the new low-value dwelling program.



The third quarter 2005 net expense ratio was 37.2% compared to 25.1% for the same period in 2004. The net expense ratio for the third quarter of 2004 was reduced 5.2 points by the effects of the purchase GAAP
adjustment on total underwriting, acquisition and operating expenses (see Comparability of Financial Statement Information above). Factoring out the effects of the purchase GAAP adjustment, the third quarter net expense ratio for 2004
was 30.3%. Expenses in 2005 are higher than in 2004 primarily due to the increased costs of becoming a public company.



Income from continuing operations before income taxes



Income from continuing operations before income taxes of $2.8 million for the third quarter of 2005 was lower than the $7.6 million for the same period in 2004 primarily
due to higher ceded reinsurance premiums and weather-related catastrophe losses plus operating expenses.



Comparison of the Nine Months Ended September 30, 2005 to September 30, 2004

(Independent Agents 
Personal Lines Segment)



Underwriting income



Gross written premiums of $105.5 million for the first nine months of 2005 were 4.7% higher
than for the same period in 2004. This increase resulted primarily from an increase of 21.8% in personal property, including $5.3 million from our new low-value dwelling product, which was introduced in March. Gross written premium from personal
auto continued to decline (6.0% in standard auto and 21.0% in nonstandard auto) as we continue to de-emphasize these products in certain areas due to excess market capacity and declining rates.



Net insurance premiums earned of $94.9 million were 3.1% higher in the first nine months of
2005 compared to the same period in 2004 primarily due to the effects of purchase GAAP accounting on 2004 net insurance premiums earned adjustment (see Comparability of Financial Statement Information above). Excluding the impact of the
purchase accounting fair value adjustment in 2004, net insurance premiums earned for the first nine months of 2005 declined 6.6%, primarily due to the decline in nonstandard auto premiums. The earnings impact of growth in the gross written premiums
from our low-value dwelling initiative will not be fully realized until subsequent quarters. Further, net insurance premiums earned in 2005 were reduced by $1.5 million due to the acceleration of ceded premiums for utilization of the lower layers of
reinsurance coverage due to the hurricane losses. Additionally, net insurance premiums earned were reduced by another $0.5 million for the cost of the pro rata premiums associated with the additional reinsurance purchased in the third quarter.



The net combined ratio for the first nine months of 2005 was 89.8% for this
segment, including a 11.6% weather-related catastrophe net loss ratio. The net combined ratio of 88.0% for the first nine months of 2004 was 1.8 points lower than for the same period in 2005. The catastrophe loss ratio for the first nine months of
2004 was 5.6%. The year 2004 reflected lower weather-related catastrophe experience whereas the first nine months of 2005 included five weather-related events with total losses exceeding $1 million each. Two of these events were two of the most
costly hurricanes ever to hit the United States. We recorded $62.8 million in gross catastrophe related losses, not including loss adjustment expenses, in the first nine months of 2005 compared to $5.5 million in 2004. Our reinsurance program
allowed us to cede the largest portion of these losses, plus loss adjustment expenses, to our reinsurers, resulting in net retained catastrophe losses of $11.5 million for this segment for the first nine months of 2005, compared to $5.5 million for
the same period in 2004.



Our ex-catastrophe loss ratio for the nine months
ended September 30, 2005 was 44.4% compared to 58.9% for the same period in 2004. The total loss ratios for the same periods were 56.0% and 64.5%, respectively. The loss ratios in 2004 were increased as the result of the lower net insurance
premiums earned by the amortization of the fair value adjustment of the unearned premium reserves (see Comparability of Financial Statement Information above). Eliminating the impact of this adjustment in 2004 would result in a total net
loss ratio of 58.5% compared to the reported ratio of 64.5%. By either measure, we are experiencing considerably improved ex-catastrophe underwriting results in this segment in both property and auto lines of business.



Based upon actuarial studies, we reduced our net liabilities for losses incurred but not
reported (IBNR) and loss adjustment expenses by $4.2 million in the Independent Agents  Personal Lines segment in the first nine months of 2005, primarily related to losses for mold related claims and our declining nonstandard auto book. This
reduction accounted for a 4.5 point decrease in our September year-to-date net loss ratio for this segment. Eliminating the effects of this reserve reduction, our September 2005 year-to-date net ex-catastrophe loss ratio would have been 48.9%
compared to 58.9% for the same period in 2004, reflecting continued improvement in the ex-catastrophe underwriting margins for this segment. Improvement in the higher-margin property lines accompanied by reductions in the volume of lower-margin
nonstandard auto primarily accounted for the improved underwriting performance.



26



---

##### Table of Contents

The expense ratio for this segment was 33.8% for the first nine months compared to 23.5% for the same period in 2004. The
year-to-date net expense ratio for 2004 was reduced 7.2 points by the effects of the purchase GAAP adjustment on total underwriting, acquisition and operating expenses (see Comparability of Financial Statement Information above). After
factoring out the effects of the purchase GAAP adjustment, the year-to-date net expense ratio for 2004 was 30.7%, which was 3.1 points better than the year-to-date expense ratio for 2005. The higher expense ratio in 2005 resulted from higher
profit-based commissions to our independent agents, new information technology initiatives and additional costs associated with compliance with the Sarbanes-Oxley Act of 2002. We anticipate the net expense ratio will increase slightly in the coming
quarters with the added expenses related to becoming a public company before beginning to decline as the earnings impact of the growing low-value dwelling initiative is realized.



Income from continuing operations before income taxes



Year-to-date income from continuing operations before income taxes through September 30, 2005 of $13.1 million was 10.2% lower than
income from continuing operations before income taxes of $14.6 million for the same period in 2004. The net decrease in income before income taxes resulted primarily from higher catastrophe losses and increased ceded premiums for catastrophe
reinsurance.



Independent Agents  Commercial Lines



In the third quarter of 2005, the Independent Agents 
Commercial Lines segment accounted for 15.6% of our gross written premiums, 25.3% of our net insurance premiums earned and (18.0)% of consolidated net income.



Year-to-date September 30, 2005 and 2004, the Independent Agents  Commercial Lines segment accounted for 16.6% and 13.6% of our gross written premiums,
26.6% and 21.8% of our net insurance premiums earned, and (1.4)% and (12.5)% of our consolidated net income, respectively.



The table below summarizes our historical results of operations for the Independent Agents  Commercial Lines segment and illustrates certain operating results and
key measures we use in monitoring and evaluating our operations. The information is intended to summarize and supplement information contained in our condensed consolidated financial statements included elsewhere in this Form 10-Q and to assist the
reader in gaining a better understanding of our results of operations.



|                                                             |  |                    |         |   |                   |   |         |                    |  |   |                    |   |  |   |         |  
|------------------------------------------------------------ |  | ------------------ | ------- | - | ----------------- | - | ------- | ------------------ |  | - | ------------------ | - |  | - | ------- | -
|                                                             |  | Three Months Ended |         |   | Nine Months Ended |  
|Results of Operations  Independent Agents Commercial Lines |  | September 30, 2005 |         |   | September 30,2004 |   |         | September 30, 2005 |  |   | September 30, 2004 |  
|                                                             |  | ($ in thousands)   |        
|Net insurance premiums earned                                |  | $                  | 16,315  |   |                   | $ | 13,696  |                    |  | $ | 49,699             |   |  | $ | 37,981  |  
|Net investment income                                        |  |                    | 984     |   |                   |   | 646     |                    |  |   | 2,573              |   |  |   | 1,645   |  
|Net realized gains                                           |  |                    | 15      |   |                   |   | 188     |                    |  |   | 39                 |   |  |   | 251     |  
|Other income                                                 |  |                    |        |   |                   |   |        |                    |  |   |                   |   |  |   |        |  
|                                                             |  |                    |         |   |                   |   |         |                    |  |   |                    |   |  |   |         |  
|Total revenues                                               |  | $                  | 17,314  |   |                   | $ | 14,530  |                    |  | $ | 52,311             |   |  | $ | 39,877  |  
|                                                             |  |                    |         |   |                   |   |         |                    |  |   |                    |   |  |   |         |  
|Net losses and loss adjustment expenses incurred             |  | $                  | 11,625  |   |                   | $ | 14,097  |                    |  | $ | 32,326             |   |  | $ | 31,890  |  
|Underwriting, acquisition and operating expenses:            |  |                    |         |   |                   |   |         |                    |  |   |                    |   |  |   |         |  
|Commissions                                                  |  |                    | 3,368   |   |                   |   | 1,320   |                    |  |   | 9,398              |   |  |   | 3,704   |  
|Other underwriting, acquisition and operating expenses       |  |                    | 3,529   |   |                   |   | 2,443   |                    |  |   | 10,913             |   |  |   | 7,419   |  
|                                                             |  |                    |         |   |                   |   |         |                    |  |   |                    |   |  |   |         |  
|Total underwriting, acquisition and operating expenses       |  |                    | 6,897   |   |                   |   | 3,763   |                    |  |   | 20,311             |   |  |   | 11,123  |  
|Interest expense                                             |  |                    |        |   |                   |   |        |                    |  |   |                   |   |  |   |        |  
|                                                             |  |                    |         |   |                   |   |         |                    |  |   |                    |   |  |   |         |  
|Total expenses                                               |  | $                  | 18,522  |   |                   | $ | 17,860  |                    |  | $ | 52,637             |   |  | $ | 43,013  |  
|                                                             |  |                    |         |   |                   |   |         |                    |  |   |                    |   |  |   |         |  
|Loss from continuing operations before income taxes          |  | $                  | (1,208  | ) |                   | $ | (3,330  | )                  |  | $ | (326               | ) |  | $ | (3,136  | )
|Income tax benefit                                           |  |                    | (438    | ) |                   |   | (1,283  | )                  |  |   | (128               | ) |  |   | (1,215  | )
|                                                             |  |                    |         |   |                   |   |         |                    |  |   |                    |   |  |   |         |  
|Loss from continuing operations                              |  | $                  | (770    | ) |                   | $ | (2,047  | )                  |  | $ | (198               | ) |  | $ | (1,921  | )
|                                                             |  |                    |         |   |                   |   |         |                    |  |   |                    |   |  |   |         |  
|Key Measures                                                 |  |                    |         |   |                   |   |         |                    |  |   |                    |   |  |   |         |  
|Gross written premiums                                       |  | $                  | 21,469  |   |                   | $ | 17,240  |                    |  | $ | 62,363             |   |  | $ | 48,966  |  
|Net written premiums                                         |  |                    | 17,849  |   |                   |   | 15,675  |                    |  |   | 53,633             |   |  |   | 41,859  |  
|Net ex-catastrophe loss ratio (1)                            |  |                    | 68.1    | % |                   |   | 99.9    | %                  |  |   | 62.8               | % |  |   | 78.7    | %
|Net catastrophe loss ratio (2)                               |  |                    | 3.2     |   |                   |   | 3.0     |                    |  |   | 2.2                |   |  |   | 5.3     |  
|Net expense ratio (3)                                        |  |                    | 42.3    |   |                   |   | 27.5    |                    |  |   | 40.9               |   |  |   | 29.3    |  
|                                                             |  |                    |         |   |                   |   |         |                    |  |   |                    |   |  |   |         |  
|Net combined ratio (4)                                       |  |                    | 113.6   | % |                   |   | 130.4   | %                  |  |   | 105.9              | % |  |   | 113.3   | %
|                                                             |  |                    |         |   |                   |   |         |                    |  |   |                    |   |  |   |         |  
|Allocated assets                                             |  | $                  | 167,412 |   |                   | $ | 141,650 |                    |  | $ | 167,412            |   |  | $ | 141,650 |  
|Net underwriting leverage (5)                                |  |                    | 2.2     | x |                   |   | 2.3     | x                  |  |   | 2.2                | x |  |   | 2.3     | x



|(1) | The net ex-catastrophe loss ratio is the ratio of net losses and loss adjustment expenses, not including losses from industry designated catastrophic events or other weather events
with losses aggregating at least $400,000, divided by the net insurance premiums earned. This ratio is net of amounts ceded to reinsurers.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | The net catastrophe loss ratio is the ratio of net losses and loss adjustment expenses from industry designated catastrophic events or other weather events with losses aggregating
at least $400,000 divided by the net insurance premiums earned. This ratio is net of amounts ceded to reinsurers.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | The net expense ratio is calculated by dividing the total underwriting, acquisition and operating expenses by net insurance premiums earned.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------



|(4) | The net combined ratio is the sum of the net ex-catastrophe loss ratio, the net catastrophe loss ratio and the net expense ratio.
|--- | ---------------------------------------------------------------------------------------------------------------------------------



|(5) | Net underwriting leverage by segment is a product of our return on average equity model based on net written premiums and allocated equity by segment.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------



27



---

##### Table of Contents

Comparison of the Three Months Ended September 30, 2005 to September 30, 2004

(Independent Agents  Commercial Lines Segment)



Underwriting income



Gross written premiums of $21.5 million for the third quarter of 2005 were 24.5% higher than for the same period in 2004. After the 2003 Acquisition, we initiated various efforts to improve the performance of the
commercial book including phasing out certain unprofitable classes of business (including habitational and multi-tenant coverages), terminating certain unprofitable agency relationships, cultivating relationships with agents with which the
Companys new underwriting and marketing management team members had prior profitable experience, changing our geographic mix of business away from areas more heavily prone to weather catastrophes and providing better communication to agents of
our defined target markets and target risks. In addition, our new farm and ranch program provided $2.2 million of gross written premium in the third quarter of 2005. These efforts were largely completed by the end of 2004 and written premium growth
in 2005 is being realized in our target markets and risks as a result of these initiatives.



Net insurance premiums earned during the third quarter of 2005 of $16.3 million were 19.1% higher than for the third quarter of 2004. After factoring out the effects of the purchase GAAP adjustment on 2004 net
insurance premiums earned (see Comparability of Financial Statement Information above), the increase in net insurance premiums earned in the third quarter of 2005 would have been 10.0%. The new farm and ranch program contributed $1.8
million in net insurance premiums earned in the third quarter of 2005. As noted in the Independent Agents  Personal Lines segment, we recorded additional ceded premiums in the third quarter following the two hurricanes. However, the largest
portion of these ceded premiums was recorded in the Independent Agents  Personal Lines segment, thus involving minimal impact on the Independent Agents  Commercial Lines segment.



As noted earlier, we were impacted by two of the most costly hurricanes ever to strike the
United States in the third quarter of 2005. The Independent Agents  Commercial Lines segment is generally not as exposed to weather catastrophes as the Independent Agents  Personal Lines segment due to differences in the mix of risk
coverages and due to the phasing out of certain classes of business which are more prone to weather-related losses. Nevertheless, we experience some seasonality in our underwriting results related to weather events in the second and third quarters.
The average weather catastrophe net loss ratio for the third quarter for the past five years was 8.5% for this segment. As a result of the two hurricanes, we recorded gross losses of $6.4 million in the Independent Agents  Commercial Lines
segment in the third quarter of 2005. However, due to expected reinsurance recoveries, the net catastrophe losses for this segment were $0.5 million. This compares to net catastrophe losses of $0.4 million in 2004. The weather catastrophe loss ratio
for the third quarter of 2005 was only 3.2% compared to 3.0% for the same period in 2004.



The total loss ratio for this segment declined to 71.3% for the third quarter of 2005 from 102.9% in 2004. The ex-catastrophe loss ratio declined to 68.1% in 2005 from 99.9%. The amortization of the fair value
adjustment (see Comparability of Financial Statement Information above) resulted in an increase in the reported loss ratios in 2004. Eliminating the impact of this adjustment would have resulted in a total net loss ratio of 95.1% in the
third quarter of 2004. The net combined ratio of 113.6% for the third quarter of 2005 was approximately 16.8 points better than the net combined ratio of 130.4% for the third quarter of 2004. We believe the improved underwriting results, especially
the decline in the ex-catastrophe combined ratios, are a good indicator of the benefits of the initiatives in underwriting, agency management and target market selection implemented during 2004.



The third quarter of 2005 net expense ratio was 42.3% compared to 27.5% for 2004. However,
the ratio for 2004 was reduced 5.5 points by the effects of the purchase GAAP adjustment on total underwriting, acquisition and operating expenses (see Comparability of Financial Statement Information above). The higher expense ratio in
2005 resulted primarily from expenses associated with implementing and developing changes to certain commercial lines systems and from the additional costs associated with compliance with the Sarbanes-Oxley Act of 2002. We continue the development
of our new commercial lines automated rating and processing systems and anticipate a reduction in the expense ratio in the latter part of 2006 when we plan to have these systems fully on line.



Loss from continuing operations before income taxes



Loss from continuing operations before income taxes of $1.2 million for the third quarter of
2005 was improved over the loss from continuing operations before income taxes of $3.3 million for the same period in 2004. The improvement was primarily from improved ex-catastrophe loss experience driven by the initiatives taken in 2004 and
improved investment results.



28



---

##### Table of Contents

Comparison of the Nine Months Ended September 30, 2005 to September 30, 2004

(Independent Agents  Commercial Lines Segment)



Underwriting income



Gross written premiums of $62.4 million for the first nine months of 2005 were 27.4% higher than for the same period in 2004. The growth in 2005 follows the Companys plan to grow its commercial book of business
in a more targeted fashion, including new agency relationships and new lines of business such as farm and ranch, which generated gross written premium of $7.1 million through September 30, 2005.



Net insurance premiums earned during the first nine months of 2005 of $49.7 million were
30.9% higher than for the same period of 2004. The growth in net insurance premiums earned would have been 16.9% without the effect of the purchase GAAP adjustment on 2004 net insurance premiums earned (see Comparability of Financial Statement
Information above). The new farm and ranch program contributed $5.4 million in net insurance premiums earned in 2005.



Although our company and the insurance industry as a whole has been impacted by two major hurricanes in the third quarter of 2005, the Independent Agents 
Commercial Lines segment is generally not as exposed to weather catastrophes as the Independent Agents  Personal Lines segment due to differences in the mix of risk coverages and due to the phasing out of certain classes of business which are
more prone to weather related losses. Nevertheless, we experience some seasonality in our underwriting results related to weather events in the second and third quarters. The average weather catastrophe net loss ratio for the first nine months for
the past five years was 7.3% for this segment. The weather catastrophe loss ratio for the nine month period ended September 30, 2005 was only 2.2% compared to 5.3% for the same period in 2004. On a net basis, we did not benefit from reinsurance
recoveries in 2004 in the same manner as we did in 2005.



The net combined
ratio for the first nine months of 2005 of 105.9% was approximately 7.4 points better than the net combined ratio of 113.3% for the same period in 2004. For 2005, the ex-catastrophe loss ratio was 62.8% compared to 78.7% in 2004. Thus, the total net
loss ratio in 2005 was 65.0% compared to 84.0% in 2004. The total net loss ratio in 2004 would have been 75.0% without the impact of the purchase GAAP fair value adjustment (see Comparability of Financial Statement Information above). We
believe the improved underwriting results, especially the decline in the ex-catastrophe combined ratios, are a good indicator of the benefits of the initiatives in underwriting, agency management and target market selection implemented during 2004.



Based upon actuarial studies, we increased our net liabilities for IBNR and
loss adjustment expenses for the Independent Agents  Commercial Lines segment by $4.0 million in the first nine months of 2005. The increase added 8.0 points to the year-to-date combined ratio.



The year-to-date net expense ratio for 2004 was reduced 7.5 points by the effects of the
purchase GAAP adjustment on total underwriting, acquisition and operating expenses (see Comparability of Financial Statement Information above). After factoring out the effects of the purchase GAAP adjustment, the year-to-date net
expense ratio for 2004 was 36.8%, which was 4.1 points better than the year-to-date expense ratio for 2005. The higher expense ratio in 2005 results primarily from expenses associated with implementing and developing changes to certain commercial
lines systems and from the additional costs associated with compliance with the Sarbanes-Oxley Act of 2002. We continue the development of our new commercial lines automated rating and processing systems and anticipate a reduction in the expense
ratio in the latter part of 2006 when we plan to have these systems fully on line.



Loss from continuing operations before income taxes



Loss from
continuing operations before income taxes was $0.3 million through September 30, 2005 compared to a loss of $3.1 million for the same period in 2004. The reduction in the loss was primarily from improved ex-catastrophe loss experience margins
in all commercial lines except for commercial liability along with improved investment results.



29



---

##### Table of Contents

Program Management



In the third quarter of 2005, the Program Management segment accounted for 29.1% of our gross written premiums, 24.2% of our net insurance
premiums earned and 42.7% of consolidated net income.



Year-to-date
September 30, 2005 and 2004, the Program Management segment accounted for 27.1% and 33.9% of our gross written premiums, 19.9% and 23.5% of our net insurance premiums earned, and 24.2% and 35.6% of our consolidated net income, respectively.



The table below summarizes our historical results of operations for the
Program Management segment and illustrates certain operating results and key measures we use in monitoring and evaluating our operations. The information is intended to summarize and supplement information contained in our condensed consolidated
financial statements included elsewhere in this Form 10-Q and to assist the reader in gaining a better understanding of our results of operations.



|                                                       |  |                    |         |   |                    |   |         |                    |  |   |                    |   |  |   |         |  
|------------------------------------------------------ |  | ------------------ | ------- | - | ------------------ | - | ------- | ------------------ |  | - | ------------------ | - |  | - | ------- | -
|                                                       |  | Three Months Ended |         |   | Nine Months Ended  |  
|Results of Operations  Program Management             |  | September 30, 2005 |         |   | September 30, 2004 |   |         | September 30, 2005 |  |   | September 30, 2004 |  
|                                                       |  | ($ in thousands)   |        
|Net insurance premiums earned                          |  | $                  | 15,619  |   |                    | $ | 14,719  |                    |  | $ | 37,137             |   |  | $ | 40,947  |  
|Net investment income                                  |  |                    | 811     |   |                    |   | 378     |                    |  |   | 1,907              |   |  |   | 1,231   |  
|Net realized gains                                     |  |                    | 12      |   |                    |   | 135     |                    |  |   | 29                 |   |  |   | 188     |  
|Other income                                           |  |                    | 519     |   |                    |   | 550     |                    |  |   | 1,741              |   |  |   | 2,207   |  
|                                                       |  |                    |         |   |                    |   |         |                    |  |   |                    |   |  |   |         |  
|Total revenues                                         |  | $                  | 16,961  |   |                    | $ | 15,782  |                    |  | $ | 40,814             |   |  | $ | 44,573  |  
|                                                       |  |                    |         |   |                    |   |         |                    |  |   |                    |   |  |   |         |  
|Net losses and loss adjustment expenses incurred       |  | $                  | 8,127   |   |                    | $ | 4,449   |                    |  | $ | 19,062             |   |  | $ | 18,006  |  
|Underwriting, acquisition and operating expenses:      |  |                    |         |   |                    |   |         |                    |  |   |                    |   |  |   |         |  
|Commissions                                            |  |                    | 4,172   |   |                    |   | 5,282   |                    |  |   | 11,630             |   |  |   | 12,450  |  
|Other underwriting, acquisition and operating expenses |  |                    | 1,443   |   |                    |   | 1,520   |                    |  |   | 4,290              |   |  |   | 4,964   |  
|                                                       |  |                    |         |   |                    |   |         |                    |  |   |                    |   |  |   |         |  
|Total underwriting, acquisition and operating expenses |  |                    | 5,615   |   |                    |   | 6,802   |                    |  |   | 15,920             |   |  |   | 17,414  |  
|Interest expense                                       |  |                    |        |   |                    |   |        |                    |  |   |                   |   |  |   |        |  
|                                                       |  |                    |         |   |                    |   |         |                    |  |   |                    |   |  |   |         |  
|Total expenses                                         |  | $                  | 13,742  |   |                    | $ | 11,251  |                    |  | $ | 34,982             |   |  | $ | 35,420  |  
|                                                       |  |                    |         |   |                    |   |         |                    |  |   |                    |   |  |   |         |  
|Income from continuing operations before income taxes  |  | $                  | 3,219   |   |                    | $ | 4,531   |                    |  | $ | 5,832              |   |  | $ | 9,153   |  
|Income tax expense                                     |  |                    | 1,389   |   |                    |   | 2,052   |                    |  |   | 2,299              |   |  |   | 3,670   |  
|                                                       |  |                    |         |   |                    |   |         |                    |  |   |                    |   |  |   |         |  
|Income from continuing operations                      |  | $                  | 1,830   |   |                    | $ | 2,479   |                    |  | $ | 3,533              |   |  | $ | 5,483   |  
|                                                       |  |                    |         |   |                    |   |         |                    |  |   |                    |   |  |   |         |  
|Key Measures                                           |  |                    |         |   |                    |   |         |                    |  |   |                    |   |  |   |         |  
|Gross written premiums                                 |  | $                  | 40,025  |   |                    | $ | 42,372  |                    |  | $ | 101,798            |   |  | $ | 121,971 |  
|Net written premiums                                   |  |                    | 19,802  |   |                    |   | 15,068  |                    |  |   | 47,383             |   |  |   | 42,730  |  
|Net loss ratio (1)                                     |  |                    | 52.0    | % |                    |   | 30.2    | %                  |  |   | 51.3               | % |  |   | 44.0    | %
|Net expense ratio (2)                                  |  |                    | 35.9    |   |                    |   | 46.2    |                    |  |   | 42.9               |   |  |   | 42.5    |  
|                                                       |  |                    |         |   |                    |   |         |                    |  |   |                    |   |  |   |         |  
|Net combined ratio (3)                                 |  |                    | 87.9    | % |                    |   | 76.4    | %                  |  |   | 94.2               | % |  |   | 86.5    | %
|Allocated assets                                       |  | $                  | 206,495 |   |                    | $ | 178,340 |                    |  | $ | 206,495            |   |  | $ | 178,340 |  
|Net underwriting leverage (4)                          |  |                    | 2.2     | x |                    |   | 2.2     | x                  |  |   | 2.2                | x |  |   | 2.2     | x

---

|(1) | The net loss ratio is the ratio of net losses and loss adjustment expenses. This ratio is net of amounts ceded to reinsurers. Catastrophe losses are not reported separately by the
program managers.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | The net expense ratio is calculated by dividing the total underwriting, acquisition and operating expenses by net insurance premiums earned.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------



|(3) | The net combined ratio is the sum of the net loss ratio and the net expense ratio.
|--- | ----------------------------------------------------------------------------------



|(4) | Net underwriting leverage by segment is a product of our return on average equity model based on net written premiums and allocated equity by segment.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------



30



---

##### Table of Contents

Comparison of the Three Months Ended September 30, 2005 to September 30, 2004

(Program Management Segment)



Underwriting income



Gross written premiums of $40.0 million for the third quarter of 2005 were 5.5% lower than for the same period in 2004. The decrease primarily resulted from two programs (a nonstandard auto program and a commercial
auto program) that we terminated in 2004. The terminated programs accounted for none of the gross written premiums in the third quarter of 2005 but accounted for $3.5 million of gross written premiums in the third quarter of 2004. Net written
premiums of $19.8 million for the third quarter of 2005 were 31.4% higher than for the same period in 2004 due to the increased retention in our largest MGAs operations offsetting the impact of the terminated programs. We increased our
participation from 20% to 40% for our largest MGA program for the 2005 year. This program accounted for $13.5 million of our net written premiums in the third quarter of 2005 and $8.1 million of our net written premiums in the same period of 2004.
Our prize indemnification program experiences seasonality with the majority of premiums being written during the summer months. This program accounted for $2.5 million of gross and net written premiums in the third quarter of 2005 compared to $2.6
million in 2004. A new program, from which we anticipate substantial growth in the coming quarters, writing employers nonsubscriber business in Texas (a nonsubscriber is an employer who opts out of the Texas workers compensation system)
started ramping up in the second quarter of 2005 and reported $0.9 million of gross written premiums in the third quarter of 2005 compared to $0.6 million in the second quarter of 2005.



Net insurance premiums earned of $15.6 million for the third quarter of 2005 were 6.1% higher than for the same period in 2004. The
increase, assuming elimination of the effects of the purchase GAAP adjustment on net insurance premiums earned (see Comparability of Financial Statement Information above), would have been 2.8%. The increase in net insurance premiums
earned for the quarter was largely attributable to the increase in retention in our largest MGA program. The net insurance premiums earned on this program were $10.8 million for the third quarter of 2005 compared to $6.2 million for the same period
in 2004. This growth was more than enough to offset the loss of the terminated programs.



The net combined ratio for the third quarter of 2005 of 87.9% was 11.5 points higher than for the same period in 2004. The primary reason for the increase in 2005 is due to the 2004 net loss ratio being favorably
impacted by a $2.9 million reduction of reserves primarily related to favorable prior period development for the terminated programs. These terminated programs continue to run off within the established reserves for losses and loss adjustment
expenses.



Other income



Other income primarily represents fronting fees earned by writing the various MGA programs
through our insurance companies. Other income of $0.5 million for the third quarter of 2005 was 5.6% lower than for the comparable period in 2004 primarily because of the reduced fronting fees from the terminated programs.



Income from continuing operations before income taxes



Income from continuing operations before income taxes of $3.2 million for the third quarter
of 2005 was 29.0% less than for the same period in 2004 primarily due to the $2.9 million reduction in reserves recorded in the third quarter of 2004 related to favorable prior period development for the terminated programs. As the impact on net
insurance premiums earned from the increased retention on our largest MGA program takes effect and as our new program increases in premium volume, the net earnings of this segment should increase.



Comparison of the Nine Months Ended September 30, 2005 to September 30, 2004

(Program Management Segment)



Underwriting income



Gross written premiums of $101.8 million for the first nine months of 2005 were 16.5% lower than for the same period in 2004. The decrease primarily resulted from the two terminated programs in 2004. The terminated
programs accounted for none of the gross written premiums in the first nine months of 2005 but accounted for $20.2 million of gross written premiums in the first nine months of 2004. Net written premiums of $47.4 million for the first nine months of
2005 were 10.9% higher than for the same period in 2004 as the impact of the increased retention in our largest MGAs operations more than offset the reduced premium from the terminated programs. We increased our participation from 20% to 40%
for our largest MGA program for the 2005 year. This program accounted for $36.1 million of our net written premiums in the first nine months of 2005 and $19.3 million of our net written premiums in the same period of 2004. Our prize indemnification
program experiences seasonality with the majority of premiums being written and earned during the summer months. This program accounted for $3.7 million of our gross written and net written premiums in the first nine months of 2005 compared to $3.8
million in the same period in 2004.



Net insurance premiums earned of $37.1
million for the first nine months of 2005 were 12.7% less than for the same period in 2004, after factoring out the effects of the purchase GAAP adjustment on net insurance premiums earned (see Comparability of Financial Statement
Information above). The decline for the year-to-date was due to the terminated programs mentioned above. One of the terminated programs was a fully retained program with $12.1 million of net insurance premiums earned in the first nine months
of 2004. At this time, the increased retention in our largest MGAs operations has yet to outweigh the loss of net insurance premiums earned from the terminated programs.



The net combined ratio for the year-to-date 2005 of 94.2% was 7.7 points higher than for the same period in 2004. The primary reason for the
increase is due to a $1.0 million increase in IBNR reserves in 2005 primarily related to our largest MGA program. The programs terminated in 2004 continue to run off within the established reserves for losses and loss adjustment expenses.



Other income



Other income primarily represents fronting fees earned by writing the various MGA programs
through our insurance companies. Other income of $1.7 million for the first nine months of 2005 was 21.1% lower than for the comparable period in 2004 primarily because of the reduced fronting fees from the terminated programs.



Income from continuing operations before income taxes



Income from continuing operations before income taxes of $5.8 million for the first nine
months of 2005 was 36.3% less than for the same period in 2004 primarily because of the reduction in underwriting results and fee income from the terminated programs. As the impact on net insurance premiums earned from the increased retention on our
largest MGA and as our new program increases in premium volume, the net earnings of this segment are expected to increase.



31



---

##### Table of Contents

Insurance Services and Corporate



In the third quarter of 2005, the Insurance Services and Corporate segment accounted for 27.6% of our gross written premiums, 2.6% of our
net insurance premiums earned and $2.0 million of our $4.3 million of consolidated net income.



Year-to-date September 30, 2005 and 2004, the Insurance Services and Corporate segment accounted for 28.1% and 24.4% of our gross written premiums and 23.0% and 20.5% of our consolidated net income, respectively.



The table below summarizes our historical results of operations for the
Insurance Services and Corporate segment and illustrates certain operating results and key measures we use in monitoring and evaluating our operations. The information is intended to summarize and supplement information contained in our condensed
consolidated financial statements included elsewhere in this Form 10-Q and to assist the reader in gaining a better understanding of our results of operations.



|                                                                                                                         |  |                    |         |                   |                   |         |                    |  |                   |         |  |   |        
|------------------------------------------------------------------------------------------------------------------------ |  | ------------------ | ------- | ----------------- | ----------------- | ------- | ------------------ |  | ----------------- | ------- |  | - | -------
|                                                                                                                         |  | Three Months Ended |         |                   | Nine Months Ended
|Results of Operations  Insurance Services and Corporate                                                                 |  | September 30, 2005 |         | September 30,2004 |                   |         | September 30, 2005 |  | September 30,2004
|                                                                                                                         |  | ($ in thousands)  
|Net insurance premiums earned                                                                                            |  | $                  | 1,670   |                   | $                 | 1,169   |                    |  | $                 | 4,928   |  |   | 3,243  
|Net investment income                                                                                                    |  |                    | 91      |                   |                   | 41      |                    |  |                   | 315     |  |   | 145    
|Net realized gains                                                                                                       |  |                    | 1       |                   |                   | 15      |                    |  |                   | 3       |  |   | 22     
|Other income                                                                                                             |  |                    | 492     |                   |                   | 246     |                    |  |                   | 1,545   |  |   | 1,287  
|                                                                                                                         |  |                    |         |                   |                   |         |                    |  |                   |         |  |   |        
|Total revenues                                                                                                           |  | $                  | 2,254   |                   | $                 | 1,471   |                    |  | $                 | 6,791   |  | $ | 4,697  
|                                                                                                                         |  |                    |         |                   |                   |         |                    |  |                   |         |  |   |        
|Net losses and loss adjustment expenses incurred                                                                         |  | $                  |        |                   | $                 | 9       |                    |  | $                 |        |  | $ | 9      
|Underwriting, acquisition and operating expenses:                                                                        |  |                    |         |                   |                   |         |                    |  |                   |         |  |   |        
|Commissions                                                                                                              |  |                    |        |                   |                   |        |                    |  |                   |        |  |   |       
|Other underwriting, acquisition and operating expenses                                                                   |  |                    | 430     |                   |                   | (562    | )                  |  |                   | 3,722   |  |   | 1,374  
|                                                                                                                         |  |                    |         |                   |                   |         |                    |  |                   |         |  |   |        
|Total underwriting, acquisition and operating expenses                                                                   |  |                    | 430     |                   |                   | (562    | )                  |  |                   | 3,722   |  |   | 1,374  
|Interest expense                                                                                                         |  |                    | 867     |                   |                   | 546     |                    |  |                   | 2,377   |  |   | 1,608  
|                                                                                                                         |  |                    |         |                   |                   |         |                    |  |                   |         |  |   |        
|Total expenses                                                                                                           |  | $                  | 1,297   |                   | $                 | (7      | )                  |  | $                 | 6,099   |  | $ | 2,991  
|                                                                                                                         |  |                    |         |                   |                   |         |                    |  |                   |         |  |   |        
|Income from continuing operations before income taxes and equity in earnings of unconsolidated foreign insurance company |  | $                  | 957     |                   | $                 | 1,478   |                    |  | $                 | 692     |  | $ | 1,706  
|Income tax expense                                                                                                       |  |                    | 359     |                   |                   | 595     |                    |  |                   | 273     |  |   | 675    
|Equity in earnings of unconsolidated foreign insurance company, net of income taxes                                      |  |                    | 1,394   |                   |                   | 403     |                    |  |                   | 2,935   |  |   | 2,129  
|                                                                                                                         |  |                    |         |                   |                   |         |                    |  |                   |         |  |   |        
|Income from continuing operations                                                                                        |  | $                  | 1,992   |                   | $                 | 1,286   |                    |  | $                 | 3,354   |  | $ | 3,160  
|                                                                                                                         |  |                    |         |                   |                   |         |                    |  |                   |         |  |   |        
|Key Measures                                                                                                             |  |                    |         |                   |                   |         |                    |  |                   |         |  |   |        
|Gross written premiums                                                                                                   |  | $                  | 37,970  |                   | $                 | 33,233  |                    |  | $                 | 105,619 |  | $ | 87,925 
|Net written premiums                                                                                                     |  |                    | 1,671   |                   |                   | 1,167   |                    |  |                   | 4,928   |  |   | 3,245  
|Allocated assets                                                                                                         |  | $                  | 175,804 |                   | $                 | 188,813 |                    |  | $                 | 175,804 |  | $ | 188,813



Comparison of the Three Months
Ended September 30, 2005 to September 30, 2004

(Insurance Services and Corporate Segment)



Gross written premiums of $38.0 million for the third quarter of 2005 were 14.3% higher than
for the comparable period in 2004. The increase resulted primarily from our largest fronting program which involves the program of a national carrier writing nonstandard auto products.



Net written premiums and net insurance premiums earned in this segment represent policy fees, which are offset by higher other underwriting,
acquisition and operating expenses. Apart from policy fees, there are no net written premiums or net insurance premiums earned applicable to this segment since there is no retention of underwriting risks on fronting programs. Policy fees generally
have no net effect on our financials since they are fully ceded to the producing companies.



Other income



Other income primarily
represents fees earned for fronting programs on behalf of our reinsurers. This is reported net of our expenses associated with producing the business. The fee varies with the individual programs. Third quarter other income of $0.5 million is 100.0%
higher than the $0.2 million for the comparable period in 2004. The primary reason for the increase in other income is due to the growth in the fee income associated with the programs of national carriers. Additionally, other income in 2004 was
lower due to the write-off of abandoned software in the third quarter of 2004 in the amount of $0.1 million.



32



---

##### Table of Contents

Interest expense



Interest expense of $0.9 million for the third quarter of 2005 was higher than interest expense of $0.5 million for the same period in 2004. The increase is due primarily
to the additional $20.0 million of senior bank debt incurred in February 2005 and in part to increases in applicable floating interest rates. See note 7 to our unaudited condensed consolidated financial statements as of September 30, 2005.



Income from continuing operations before income taxes



Our net income from continuing operations before income taxes for the third quarter of 2005
for this segment was $1.0 million compared to $1.5 million for the same period in 2004. The decline in income from continuing operations occurred from the higher interest expense on the new senior bank debt in 2005 and higher operating expenses
associated with becoming a public company.



Equity in earnings of
unconsolidated foreign insurance company



We record our 30% investment in
Atlas on the equity basis of accounting. Equity in earnings of our unconsolidated foreign insurance company, net of income taxes, was $1.4 million in the third quarter of 2005 compared to $0.4 million for the same period in 2004. The increase from
2004 to 2005 was due in part to Atlas improved investment results combined with a weaker US dollar.



Comparison of the Nine Months Ended September 30, 2005 to September 30, 2004

(Insurance Services and
Corporate Segment)



Year-to-date September 30, 2005 gross written
premiums of $105.6 million are 20.1% higher than for the comparable period in 2004. Net written premiums and net insurance premiums earned, except for policy fees, generally are not applicable to this segment since there is no retention of
underwriting risks on fronting programs. The growth essentially comes from our largest fronting program.



Other income



Year-to-date other income
through September 30, 2005 of $1.5 million is only slightly higher than the $1.3 million for the comparable period in 2004. As noted above, other income in 2004 included the write-off of abandoned software in the amount of $0.1 million.
Otherwise, the increase in other income in 2005 follows the increase in gross written premiums associated with the fronting programs.



Interest expense



Interest expense of $2.4 million for the first nine months of 2005 was higher than interest expense of $1.6 million for the same period in 2004 due in part to the additional $20.0 million of senior bank debt incurred
in February of 2005 and in part to increases in applicable floating interest rates.



Income from continuing operations before income taxes



Our net
income from continuing operations before income taxes of $0.7 million for the first nine months of 2005 for this segment was approximately $1.0 million less than the same period in 2004. The primary difference is the higher interest expense on the
new senior bank debt in 2005 combined with higher operating expenses associated with becoming a public company.



Equity in earnings of unconsolidated foreign insurance company



Equity in earnings of our unconsolidated foreign insurance company, net of income taxes, was $2.9 million for the first nine months of 2005 compared to $2.1 million for
the same period in 2004. The 2005 increase primarily relates to Atlas higher investment income during the period combined with a weaker US dollar.



33



---

##### Table of Contents

Liquidity and Capital Resources



Sources and uses of funds



The Company operates as a holding company with no business operations of its own. Consequently, our ability to pay dividends to stockholders, meet debt payment
obligations and pay taxes and administrative expenses is largely dependent on dividends or other distributions from our subsidiaries and affiliates. Generally, there are no restrictions on the payment of dividends by our non-insurance company
subsidiaries and affiliates other than state corporate laws regarding solvency and those imposed pursuant to the terms of our senior secured credit facility. As a result, our non-insurance company subsidiaries and affiliates generate revenues,
profits and net cash flows that are generally unrestricted as to their availability for the payment of dividends, and we expect to use those revenues to service our corporate financial obligations, such as debt service payments and to pay
stockholder dividends. For the nine months ended September 30, 2005, our non-insurance company subsidiaries and affiliates produced cash flow available for dividends to our holding company of $0.9 million. As of September 30, 2005, we had
$5.1 million of cash and short-term invested assets at our holding company and our non-insurance company subsidiaries and affiliates.



Our insurance company subsidiaries are restricted by statute as to the amount of dividends that they may pay without prior approval of their domiciliary state insurance
departments. Generally, Texas-domiciled insurers may pay dividends without advance regulatory approval only from unassigned surplus and only to the extent that all dividends paid in the twelve months ending on the date in question do not exceed the
greater of (1) 10% of their policyholders surplus as of December 31 of the preceding year or (2) 100% of their net income for the calendar year preceding the year in which the value is being determined and subject to available
earned surplus, as defined by the domiciliary state insurance department. In addition, insurance companies are required by law to maintain a minimum level of surplus on a statutory basis. Statutory surplus is calculated by subtracting total
liabilities from total admitted assets computed under accounting principles prescribed or permitted by the insurers state of domicile. As of January 1, 2005, the maximum dividend that Republic Underwriters Insurance Company, our principal
operating subsidiary, could pay without prior approval was $21.4 million. No dividends have been declared from Republic Underwriters Insurance Company since early 2001 as we have allowed capital to grow organically to provide a platform for
profitable premium growth.



Consolidated net cash provided by operating
activities was $23.3 million, net cash used by investing activities was $20.3 million and net cash provided from financing activities was $0.2 million for the nine months ended September 30, 2005.



Investment Portfolio



Our primary investment objectives are to preserve capital and manage for a total rate of
return in excess of a specified benchmark portfolio. Our investment portfolio provides a high degree of liquidity since it is comprised principally of readily marketable fixed income and short-term securities. We classify our investments in fixed
maturities as available for sale and report these securities at their estimated fair values based on quoted market prices. Changes in unrealized gains and losses on these securities are reported as a separate component of comprehensive net income,
and accumulated unrealized gains and losses are reported as a component of accumulated other comprehensive net income (loss) in shareholders equity, net of deferred taxes. Realized gains and losses are charged or credited to income in the
period in which they are realized.



The aggregate fair market value of our
fixed-income, equity and short-term invested asset portfolio as of September 30, 2005 was $323.6 million. As of that date, fixed maturity securities had a fair value of $303.4 million and amortized cost of $307.3 million.



In February 2005, we entered a credit agreement to secure $20 million of senior bank debt,
the proceeds of which were used to pay accrued dividends on our Series A Preferred Stock. The senior bank debt is due and payable on February 23, 2010, with interest only payable quarterly based on the Companys election of a Eurodollar
rate plus 2% or the prime rate as quoted by the Wall Street Journal. As of September 30, 2005, we are in compliance with all of our financial and other restrictive covenants under this facility.



Initial Public Offering



We completed our IPO of our common stock effective August 8, 2005. In connection with
the IPO, we issued 6,000,000 new shares of our common stock at an IPO price of $14 per share. Our net proceeds from the offering were $76.0 million, after deducting our offering expenses. We used the net proceeds to pay accrued dividends on the
Companys Series A Preferred Stock and redeem 69,268 shares of our Series A Preferred Stock.



Hurricanes Katrina and Rita



On
August 29, 2005, Hurricane Katrina struck portions of Louisiana, Mississippi and Alabama. On September 24, 2005, Hurricane Rita struck portions of the Texas and Louisiana coast. The Company provides insurance for windstorm damage to
personal and commercial risks in Louisiana and Texas. However, the Company does not write flood insurance in Texas or Louisiana or provide any property insurance in Mississippi or Alabama. We recorded gross losses and loss adjustment expenses before
reinsurance from these events of approximately $66.0 million in the third quarter of 2005. This represents the Companys best estimate and is based on broad assumptions about coverage and damage, including claims received to date, industry loss
estimates, estimates from industry and proprietary models, and contract language, among other factors. The Company does not believe that these events will create material liquidity issues. We believe that the majority of these losses will be
reimbursed by our reinsurers in the fourth quarter of 2005 and first quarter of 2006. We anticipate that the cash flow from reinsurance treaties, normal operations and normal investment maturities will be adequate to meet the losses to be paid
without the need to liquidate any investments in our investment portfolio.



In
addition, as described earlier, there may be issues that arise in the wake of Hurricanes Katrina and Rita that could create uncertainties in the future and may negatively impact our operations in future quarters. These could include increases in
reinsurance rates, changes in the regulatory or legal environment impacting traditional policy contract terms, including the flood exclusion. The Company is unable to determine the impact, if any, of such issues on future operations, particularly if
the flood exclusion is altered or deemed not applicable by regulators and upheld by the courts.



34



---

##### Table of Contents

|Item 3. | Quantitative and Qualitative Disclosures about Market Risk
|------- | ----------------------------------------------------------



There have been no material changes in the Companys market risk during the quarter and nine months ended September 30, 2005. Market risk relates to changes in
the value of financial instruments that arise from adverse movements in factors such as interest rates and equity prices. We are mainly exposed to changes in interest rates that affect the fair value of our investments in fixed maturity securities.
Please refer to our IPO prospectus for a discussion of interest rate risk and our sensitivity analysis model that uses fair value to measure its potential gain or loss due to a 100 basis point decline or rise in interest rates.



|Item 4. | Controls and Procedures
|------- | -----------------------



(a) Evaluation of disclosure controls and procedures.



Under the supervision and with the participation of management, including our Chief Executive Officer (CEO) and our Chief Financial Officer (CFO), we have carried out an
evaluation on the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the third quarter of
2005. Based on that evaluation, our CEO and our CFO concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report to provide reasonable assurance that information we are required to disclose
in reports that are filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms specified by the SEC, and have been designed to provide reasonable assurance that
material information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our CEO and CFO, as appropriate, in order to allow timely decisions regarding
required disclosure.



(b) Changes in internal control over financial
reporting.



There were no changes in our internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the period covered in this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.



Since 2004 we have invested significant resources to
comprehensively document and analyze our system of internal control over financial reporting. We have identified areas requiring improvement, and we are in the process of designing enhanced processes and controls to address issues identified through
this review. We plan to continue this initiative as well as prepare for our first management report on internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002 for the annual period ending
December 31, 2006, which may result in changes to our internal control over financial reporting.



(c) Inherent limitations on effectiveness of controls.



The Companys management, including the CEO and CFO, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system,
no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or
that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or
mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the
likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to
risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.



35



---

##### Table of Contents

Part II  Other Information



|Item 1. | Legal Proceedings
|------- | -----------------



The Company and its subsidiaries are defendants in various lawsuits incidental to their businesses. The Company believes that there are meritorious defenses to these
lawsuits and is defending them vigorously. Certain of the lawsuits are pending in jurisdictions that have a history of awarding damages, including punitive damages, which are disproportionate to the actual economic damages alleged to have been
incurred. Additionally, some of these lawsuits seek class action status that, if granted, could expose the Company to potentially significant liability by virtue of the size of the purported classes. The Company believes that resolution of its
pending litigation will not have a material adverse effect on the Companys financial position. However, given the unpredictability of litigation, there can be no assurance that one or more of these lawsuits will not produce a damage award
which could have a material adverse effect on the Companys financial results for any given period.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------



None.



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------



None.



|Item 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------



None.



|Item 5. | Other Information
|------- | -----------------



None.



36



---

##### Table of Contents

|Item 6. | Exhibits.
|------- | ---------



|              |  |                                                                                                                                                                                                                      |  |          
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------
|ExhibitNumber |  | Description                                                                                                                                                                                                          |  | Reference
|3.1           |  | Amended and Restated Certificate of Incorporation of Republic Companies Group, Inc.                                                                                                                                  |  | (d)      
|              |  |                                                                                                                                                                                                                     
|3.2           |  | Amended and Restated Bylaws of Republic Companies Group, Inc.                                                                                                                                                        |  | (d)      
|              |  |                                                                                                                                                                                                                     
|4.1           |  | Form of Common Stock Certificate.                                                                                                                                                                                    |  | (d)      
|              |  |                                                                                                                                                                                                                     
|10.1          |  | Stock Purchase Agreement, dated as of May 9, 2003, by and among Republic Financial Services, Inc. (Texas), Republic Financial Services, Inc. (Nevada), Winterthur U.S. Holdings, Inc., RTXA,
Inc., and RTXA Sub Inc. |  | (a)      
|              |  |                                                                                                                                                                                                                     
|10.2          |  | Securities Purchase Agreement and First Amendment thereto, effective May 9, 2003, among RTXA, Inc. and the investors party thereto.                                                                                  |  | (a)      
|              |  |                                                                                                                                                                                                                     
|10.3          |  | Amended and Restated Registration Rights Agreement.                                                                                                                                                                  |  | (d)      
|              |  |                                                                                                                                                                                                                     
|10.4          |  | Employment Agreement, dated as of November 17, 2003, between Republic Underwriters Insurance Company and Parker W. Rush.                                                                                             |  | (a)      
|              |  |                                                                                                                                                                                                                     
|10.5          |  | Employment Agreement, dated as of May 9, 2003, between RTXA, Inc. and Martin B. Cummings.                                                                                                                            |  | (a)      
|              |  |                                                                                                                                                                                                                     
|10.6          |  | Employment Agreement, dated as of April 9, 2004, between Republic Underwriters Insurance Company and Robert S. Howey.                                                                                                |  | (a)      
|              |  |                                                                                                                                                                                                                     
|10.7          |  | Republic Companies Group, Inc. Stock Plan, effective May 1, 2004.                                                                                                                                                    |  | (a)      
|              |  |                                                                                                                                                                                                                     
|10.8          |  | Republic Financial Services, Inc. Deferred Compensation Plan, effective July 1, 1995, as amended.                                                                                                                    |  | (a)      
|              |  |                                                                                                                                                                                                                     
|10.9          |  | Excess of Loss Reinsurance Agreement and Addenda Nos. 1-3, effective January 1, 1994, between Winterthur Swiss Insurance Company and Republic Insurance Company.                                                     |  | (a)      
|              |  |                                                                                                                                                                                                                     
|10.10         |  | Reinsurance Agreement, dated May 9, 2003, by and between Winterthur Swiss Insurance Company and Republic Underwriters Insurance Company.                                                                             |  | (a)      
|              |  |                                                                                                                                                                                                                     
|10.11         |  | Amended and Restated Investor Rights Agreement, dated as of December 9, 2004, between Republic Companies Group, Inc. and the stockholders designated therein.                                                        |  | (a)      
|              |  |                                                                                                                                                                                                                     
|10.12         |  | Credit Agreement, dated as of February 23, 2005, among Republic Companies, Inc., Republic Companies Group, Inc. and The Frost National Bank.                                                                         |  | (a)      
|              |  |                                                                                                                                                                                                                     
|10.13         |  | Lease Agreement, dated August 31, 2004, between TC Dallas #2, LP and Republic Underwriters Insurance Company.                                                                                                        |  | (a)      
|              |  |                                                                                                                                                                                                                     
|10.14         |  | Managing General Agency Agreement, dated January 1, 1993, among Insured Lloyds, Southern County Mutual Insurance Company, Republic Vanguard Insurance Company and Texas General Agency, Inc.
(as amended).           |  | (b)      
|              |  |                                                                                                                                                                                                                     
|10.15         |  | 2005 Equity-Based Compensation Plan.                                                                                                                                                                                 |  | (d)      
|              |  |                                                                                                                                                                                                                     
|10.16         |  | Employee Stock Purchase Plan.                                                                                                                                                                                        |  | (d)      
|              |  |                                                                                                                                                                                                                     
|10.17         |  | Deferred Compensation Plan for Directors.                                                                                                                                                                            |  | (d)      
|              |  |                                                                                                                                                                                                                     
|10.18         |  | Incentive Bonus Plan.                                                                                                                                                                                                |  | (d)      
|              |  |                                                                                                                                                                                                                     
|10.19         |  | Incentive Stock Option Award Agreement.                                                                                                                                                                              |  | (c)      
|              |  |                                                                                                                                                                                                                     
|10.20         |  | Termsheet for Republic Underwriters Insurance Company/Texas General Agency All Lines Quota Share Reinsurance Agreements.                                                                                             |  |       



37



---

##### Table of Contents

|     |  |                                                                      |  |   
|---- |  | -------------------------------------------------------------------- |  | --
|31.1 |  | Rule 13a-14(a)/15d-14(a) Certification by Parker W. Rush             |  |  
|     |  |                                                                     
|31.2 |  | Rule 13a-14(a)/15d-14(a) Certification by Martin B. Cummings         |  |  
|     |  |                                                                     
|32.1 |  | Section 1350 Certifications by Parker W. Rush and Martin B. Cummings |  | 



| | Filed herewith.
|- | ---------------



| | Furnished herewith
|-- | ------------------



| | Filed herewith. Portions of this document were omitted pursuant to a confidential treatment request filed with the Securities and Exchange Commission. Such portions have been
provided separately to the Commission.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(a) | Previously filed on May 10, 2005 as an Exhibit of like number to the Companys registration statement on Form S-1 (File No. 333-124758) and is incorporated herein by reference.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) | Previously filed on July 29, 2005 as an Exhibit of like number to Amendment No. 3 to the Companys registration statement on Form S-1 (File No. 333-124758) and is incorporated
herein by reference. Portions of this document were omitted pursuant to a confidential treatment request filed with the Securities and Exchange Commission. Such portions have been provided separately to the Commission.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(c) | Previously filed on August 12, 2005 as an Exhibit to the Companys Current Report on Form 8-K and is incorporated herein by reference.
|--- | --------------------------------------------------------------------------------------------------------------------------------------



|(d) | Previously filed on September 19, 2005 as an Exhibit of like number to the Companys Form 10-Q for the quarterly period ended June 30, 2005 (File No.000-51455) and is
incorporated herein by reference.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



38



---

##### Table of Contents



SIGNATURE



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.



|                        |  |  |  |                                |  |                           |  |                                           
|----------------------- |  |  |  | ------------------------------ |  | ------------------------- |  | ------------------------------------------
|                        |  |  |  | Republic Companies Group, Inc.
|                        |  |  | 
|Date: November 14, 2005 |  |  |  | By:                            |  | /s/    MARTIN B.
CUMMINGS
|                        |  |  |  |                                |  |                           |  | Martin B. Cummings                        
|                        |  |  |  |                                |  |                           |  | Vice President and Chief Financial Officer



39