**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM10-Q**

 

**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For theQuarter Ended June 30, 2004**

 

**CommissionFile No. 001-31984**

 

**BRISTOL WEST HOLDINGS, INC.**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                                                    | ** ** | **13-3994449**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction  of incorporation or organization) |       | (I.R.S. Employer  Identification No.) |
|                                                            |       |                                  |
| **5701  Stirling Road, Davie, Florida**                         | ** ** | **33314**                             |
| (Address of principal executive offices)                        |       | (Zip Code)                            |
|                                                            |       |                                  |
| Registrant’s telephone number, including area code:        |
| **(954)  316-5200**                                             |

 

Indicate by check mark whether the Registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter 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  ý  No  o

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

Yes  o  No  ý

 

At June 30, 2004, the Registrant had issued andoutstanding an aggregate of 31,697,198 shares of its Common Stock.

 

 

----

 

**INDEXTO QUARTERLY REPORT**

 

**ON FORM 10-Q**

 
|                                                                           |                                                                                                                               | **Page** |
|--------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------|----------|
| Part I                                                                         | Financial Information                                                                                                              |     |
| Item 1.                                                                        | Financial Statements:                                                                                                              |     |
|                                                                           | Consolidated  Balance Sheets as of June 30, 2004 (unaudited) and December 31,  2003                                      | 3        |
|                                                                           | Consolidated  Statements of Income for the three months and six months ended June 30,  2004 and 2003 (unaudited)              | 4        |
|                                                                           | Consolidated  Statements of Changes in Stockholders’ Equity for the six months ended  June 30, 2004 and 2003 (unaudited) | 5        |
|                                                                           | Consolidated  Statements of Cash Flow for the six months ended June 30, 2004 and 2003  (unaudited)                            | 6        |
|                                                                           | Notes  to Consolidated Financial Statements                                                                                        | 7        |
| Item 2.                                                                        | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                        | 10       |
| Item 3.                                                                        | Quantitative and Qualitative Disclosure  About Market Risk                                                                         | 21       |
| Item 4.                                                                        | Controls and Procedures                                                                                                            | 22       |
|                                                                           |                                                                                                                               |     |
| Part II                                                                        | Other Information                                                                                                                  | 22       |
| Item 1.                                                                        | Legal Proceedings                                                                                                                  | 22       |
| Item 2.                                                                        | Changes in Securities, Use of Proceeds and  Issuer Purchases of Equity Securities                                                  | 22       |
| Item 3.                                                                        | Defaults Upon Senior Securities                                                                                                    | 23       |
| Item 4.                                                                        | Submission of Matters to a Vote of Security  Holders                                                                               | 23       |
| Item 5.                                                                        | Other Information                                                                                                                  | 23       |
| Item 6.                                                                        | Exhibits and Reports on Form 8-K                                                                                                   | 24       |
| Signatures                                                                     | 27                                                                                                                                 |
| Certifications Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002 |                                                                                                                               |
| Certification Pursuant to Section 906  of the Sarbanes-Oxley Act of 2002  |                                                                                                                               |

 

2

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**BRISTOL WEST HOLDINGS, INC.**

**CONSOLIDATEDBALANCE SHEETS**

 
| ** **                                                                                                                                                                | ** ** | **(Unaudited)  June 30, 2004**   | ** ** | **December 31,  2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                | ** ** | **(in thousands, except share data)** | ** ** |
| **Assets:**                                                                                                                                                               |       |                                  |       |                        |       |
| Investments:                                                                                                                                                              |       |                                  |       |                        |       |
| Fixed maturities available-for-sale  (amortized cost $249,343—2004, and $136,065—2003)                                                                          |       | $                                     | 246,304    |                        | $          | 139,502 |   |
| Equity securities (cost $2,181—2004,  $1,782—2003)                                                                                                              |       | 2,182                                 |       | 1,783                       |       |
| Total investments                                                                                                                                                         |       | 248,486                               |       | 141,285                     |       |
| Cash and cash equivalents                                                                                                                                                 |       | 31,319                                |       | 9,256                       |       |
| Accrued investment income                                                                                                                                                 |       | 2,598                                 |       | 1,627                       |       |
| Premiums receivable                                                                                                                                                       |       | 176,724                               |       | 142,229                     |       |
| Reinsurance recoverables on paid and unpaid  losses & loss adjustment expenses                                                                                        |       | 150,380                               |       | 149,486                     |       |
| Prepaid reinsurance                                                                                                                                                       |       | 103,331                               |       | 95,037                      |       |
| Ceding commission receivable                                                                                                                                              |       | 111,092                               |       | 90,513                      |       |
| Deferred policy acquisition costs                                                                                                                                         |       | 31,200                                |       | 22,423                      |       |
| Property, equipment and leasehold  improvements - net                                                                                                                     |       | 15,475                                |       | 13,082                      |       |
| Goodwill                                                                                                                                                                  |       | 101,677                               |       | 101,677                     |       |
| Other assets                                                                                                                                                              |       | 10,708                                |       | 11,261                      |       |
| Total assets                                                                                                                                                              |       | $                                     | 982,990    |                        | $          | 777,876 |   |
| **Liabilities and  Stockholders’ Equity:**                                                                                                                           |       |                                  |       |                        |       |
| Liabilities:                                                                                                                                                              |       |                                  |       |                        |       |
| Policy liabilities:                                                                                                                                                       |       |                                  |       |                        |       |
| Reserve for losses and loss adjustment  expenses                                                                                                                          |       | $                                     | 206,704    |                        | $          | 202,296 |   |
| Drafts outstanding                                                                                                                                                        |       | 2,041                                 |       | 2,154                       |       |
| Unearned premiums                                                                                                                                                         |       | 200,326                               |       | 157,178                     |       |
| Total policy liabilities                                                                                                                                                  |       | 409,071                               |       | 361,628                     |       |
| Reinsurance payables                                                                                                                                                      |       | 163,733                               |       | 159,598                     |       |
| Accounts payable and other liabilities                                                                                                                                    |       | 42,420                                |       | 40,782                      |       |
| Deferred income taxes                                                                                                                                                     |       | 3,517                                 |       | 5,633                       |       |
| Long-term debt                                                                                                                                                            |       | 74,463                                |       | 71,500                      |       |
| Total liabilities                                                                                                                                                         |       | 693,204                               |       | 639,141                     |       |
| Commitments and contingent liabilities  (Note 7)                                                                                                                          |       |                                  |       |                        |       |
| Stockholders’ equity:                                                                                                                                                |       |                                  |       |                        |       |
| Preferred stock, $0.01 par value  (15,000,000 shares authorized; 0 shares outstanding as of June 30, 2004  and December 31, 2003, respectively)                 |       | —                                |       | —                      |       |
| Common stock, $0.01 par value (200,000,000  shares authorized 32,380,234 and 24,506,485 shares issued as of June 30,  2004 and December 31, 2003, respectively) |       | 324                                   |       | 245                         |       |
| Additional paid-in capital                                                                                                                                                |       | 229,474                               |       | 97,810                      |       |
| Retained earnings                                                                                                                                                         |       | 70,156                                |       | 41,504                      |       |
| Deferred compensation on restricted stock                                                                                                                                 |       | (4,970                                | )          | —                      |       |
| Treasury stock at cost (683,036 and 662,330  shares held as of June 30, 2004 and December 31, 2003,  respectively)                                              |       | (2,965                                | )          | (2,563                      | )          |
| Stock subscription receivable                                                                                                                                             |       | (198                                  | )          | (393                        | )          |
| Accumulated other comprehensive (loss)  income                                                                                                                            |       | (2,035                                | )          | 2,132                       |       |
| Total stockholders’ equity                                                                                                                                           |       | 289,786                               |       | 138,735                     |       |
| Total liabilities and stockholders’ equity                                                                                                                           |       | $                                     | 982,990    |                        | $          | 777,876 |   |

 

The accompanying notes are an integral partof the consolidated financial statements.

 

3

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**BRISTOL WEST HOLDINGS, INC.**

**CONSOLIDATEDSTATEMENTS OF INCOME**

**(Unaudited)**

 
| ** **                                    | ** ** | **Three Months ended  June 30,**     | ** ** | **Six Months ended  June 30,** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------|------------|
| ** **                                    | ** ** | **2004**                                  | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                    | ** ** | **(in thousands, except per share data)** | ** ** |
| **Revenue:**                                  |       |                                      |       |                                |       |   |   |   |   |
| Net earned premium                            |       | $                                         | 81,101     |                                | $          | 72,403 |   | $ | 150,710 |   | $ | 144,790 |   |
| Net investment income                         |       | 2,258                                     |       | 1,687                               |       | 4,063 |   | 3,357 |   |
| Realized gain on investments - net            |       | 69                                        |       | 50                                  |       | 69 |   | 50 |   |
| Policy service fee revenues                   |       | 18,504                                    |       | 19,472                              |       | 36,354 |   | 35,446 |   |
| Other income                                  |       | 457                                       |       | 336                                 |       | 1,070 |   | 735 |   |
|                                          |       |                                      |       |                                |       |   |   |   |   |
| Total revenue                                 |       | 102,389                                   |       | 93,948                              |       | 192,266 |   | 184,378 |   |
|                                          |       |                                      |       |                                |       |   |   |   |   |
| **Costs and Expenses:**                       |       |                                      |       |                                |       |   |   |   |   |
| Losses and loss adjustment expenses  incurred |       | 54,652                                    |       | 52,989                              |       | 102,218 |   | 104,648 |   |
| Commissions and other underwriting expenses   |       | 13,890                                    |       | 15,707                              |       | 23,387 |   | 27,989 |   |
| Other operating and general expenses          |       | 8,350                                     |       | 6,245                               |       | 15,414 |   | 12,246 |   |
| Interest expense                              |       | 723                                       |       | 791                                 |       | 1,374 |   | 1,681 |   |
| Extinguishment of debt                        |       | —                                    |       | —                              |       | 1,613 |   | — |   |
| Stock based compensation expense              |       | 92                                        |       | 272                                 |       | 671 |   | 352 |   |
|                                          |       |                                      |       |                                |       |   |   |   |   |
| Total costs and expenses                      |       | 77,707                                    |       | 76,004                              |       | 144,677 |   | 146,916 |   |
|                                          |       |                                      |       |                                |       |   |   |   |   |
| Income before income taxes                    |       | 24,682                                    |       | 17,944                              |       | 47,589 |   | 37,462 |   |
|                                          |       |                                      |       |                                |       |   |   |   |   |
| Income tax expense                            |       | 9,009                                     |       | 7,476                               |       | 17,370 |   | 14,235 |   |
|                                          |       |                                      |       |                                |       |   |   |   |   |
| **Net Income**                                |       | $                                         | 15,673     |                                | $          | 10,468 |   | $ | 30,219 |   | $ | 23,227 |   |
|                                          |       |                                      |       |                                |       |   |   |   |   |
| Net income per common share - Basic           |       | $                                         | 0.50       |                                | $          | 0.44 |   | $ | 1.01 |   | $ | 0.98 |   |
| Net income per common share - Diluted         |       | $                                         | 0.48       |                                | $          | 0.42 |   | $ | 0.95 |   | $ | 0.95 |   |

 

The accompanying notes are an integral partof the consolidated financial statements.

 

4

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**BRISTOL WEST HOLDINGS, INC.**

**CONSOLIDATED STATEMENTS OF CHANGES IN ST****OCKHOLDERS’ EQUITY**

**(Unaudited)**

 
| ** **                                                                              | ** ** | **Six Months Ended June 30,**    | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                              | ** ** | **2004**                              | ** ** | **2003** | ** ** |
| ** **                                                                              | ** ** | **(in thousands, except share data)** | ** ** |
|                                                                                    |       |                                  |       |   |   |   |   |   |   |
| **Common Stock**                                                                        |       |                                  |       |   |   |   |   |   |   |
| Balance, beginning of period                                                            |       | $                                     | 245        |   |   |   | $ | 245 |   |   |   |
| Issuance of common stock in initial public  offering (6,250,000 shares — 2004)     |       | 63                                    |       |   |   | — |   |   |   |
| Exercise of options and warrants, including  tax benefit (1,297,764 shares — 2004) |       | 13                                    |       |   |   | — |   |   |   |
| Shares issued for services (29,950  shares—2004)                                   |       | —                                |       |   |   | — |   |   |   |
| Issuance of restricted common stock  (296,035 shares — 2004)                       |       | 3                                     |       |   |   | — |   |   |   |
| Balance, end of period                                                                  |       | $                                     | 324        |   |   |   | $ | 245 |   |   |   |
|                                                                                    |       |                                  |       |   |   |   |   |   |   |
| **Additional Paid-In  Capital**                                                         |       |                                  |       |   |   |   |   |   |   |
| Balance, beginning of period                                                            |       | $                                     | 97,810     |   |   |   | $ | 95,151 |   |   |   |
| Issuance of common stock in initial public  offering (6,250,000 shares — 2004)     |       | 113,368                               |       |   |   | — |   |   |   |
| Exercise of options and warrants, including  tax benefit (1,297,764 shares — 2004) |       | 12,326                                |       |   |   | — |   |   |   |
| Shares issued for services (29,950  shares—2004)                                   |       | 526                                   |       |   |   | — |   |   |   |
| Options issued for services                                                             |       | -                                     |       |   |   | 352 |   |   |   |
| Issuance of restricted common stock  (296,035 shares — 2004)                       |       | 5,444                                 |       |   |   | — |   |   |   |
| Balance, end of period                                                                  |       | $                                     | 229,474    |   |   |   | $ | 95,503 |   |   |   |
|                                                                                    |       |                                  |       |   |   |   |   |   |   |
| **Retained Earnings**                                                                   |       |                                  |       |   |   |   |   |   |   |
| Balance, beginning of period                                                            |       | $                                     | 41,504     |   |   |   | $ | 7,990 |   |   |   |
| Net Income                                                                              |       | 30,219                                |       | $ | 30,219 |   | 23,227 |   | $ | 23,227 |   |
| Cash dividend to common shareholders ($0.05  per share — 2004)                     |       | (1,567                                | )          |   |   | — |   |   |   |
| Balance, end of period                                                                  |       | $                                     | 70,156     |   |   |   | $ | 31,217 |   |   |   |
|                                                                                    |       |                                  |       |   |   |   |   |   |   |
| **Deferred  Compensation on Restricted Stock**                                          |       |                                  |       |   |   |   |   |   |   |
| Balance, beginning of period                                                            |       | $                                     | —     |   |   |   | $ | — |   |   |   |
| Issuance of restricted common stock (296,035  shares — 2004)                       |       | (5,447                                | )          |   |   | — |   |   |   |
| Amortization of deferred compensation on  restricted stock                              |       | 144                                   |       |   |   | — |   |   |   |
| Restricted stock forfeited (18,098 shares)                                              |       | 333                                   |       |   |   | — |   |   |   |
| Balance, end of period                                                                  |       | $                                     | (4,970     | ) |   |   | $ | — |   |   |   |
|                                                                                    |       |                                  |       |   |   |   |   |   |   |
| **Treasury Stock**                                                                      |       |                                  |       |   |   |   |   |   |   |
| Balance, beginning of period                                                            |       | $                                     | (2,563     | ) |   |   | $ | (2,509 | ) |   |   |
| Acquisition of treasury stock (2,608 shares  — 2004, 3,911 shares — 2003)     |       | (69                                   | )          |   |   | (34 | ) |   |   |
| Restricted stock forfeited (18,098 shares)                                              |       | (333                                  | )          |   |   | — |   |   |   |
| Balance, end of period                                                                  |       | $                                     | (2,965     | ) |   |   | $ | (2,543 | ) |   |   |
|                                                                                    |       |                                  |       |   |   |   |   |   |   |
| **Stock Subscription  Receivable**                                                      |       |                                  |       |   |   |   |   |   |   |
| Balance, beginning of period                                                            |       | $                                     | (393       | ) |   |   | $ | (535 | ) |   |   |
| Payment of stock subscriptions receivable                                               |       | 195                                   |       |   |   | 98 |   |   |   |
| Balance, end of period                                                                  |       | $                                     | (198       | ) |   |   | $ | (437 | ) |   |   |
|                                                                                    |       |                                  |       |   |   |   |   |   |   |
| **Accumulated Other  Comprehensive (Loss) Income**                                      |       |                                  |       |   |   |   |   |   |   |
| Balance, beginning of period                                                            |       | $                                     | 2,132      |   |   |   | $ | 2,474 |   |   |   |
| Unrealized holdings (losses) gains arising  during the period                           |       | (4,034                                | )          |   |   | 1,681 |   |   |   |
| Less:   reclassification adjustment                                                |       | (133                                  | )          |   |   | — |   |   |   |
| Net unrealized (losses) gains on securities                                             |       | (4,167                                | )          | (4,167 | ) | 1,681 |   | 1,681 |   |
| Interest rate cap adjustment                                                            |       | —                                |       |   |   | (117 | ) | (117 | ) |
| Balance, end of period                                                                  |       | $                                     | (2,035     | ) |   |   | $ | 4,038 |   |   |   |
|                                                                                    |       |                                  |       |   |   |   |   |   |   |
| **Comprehensive  Income**                                                               |       |                                  |       | $ | 26,052 |   |   |   | $ | 24,791 |   |

 

The accompanying notes are an integral partof the consolidated financial statements.

 

5

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**BRISTOL WEST HOLDINGS, INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOW**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                         | ** ** | **2004**                           | ** ** | **2003** | ** ** |
| ** **                                                                         | ** ** | **(in thousands)**                 | ** ** |
| **CASH FLOWS FROM  OPERATING ACTIVITIES:**                                         |       |                               |       |   |   |
| Net income                                                                         |       | $                                  | 30,219     |   | $ | 23,227 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                               |       |   |   |
| Accretion of fixed maturity investments                                            |       | 998                                |       | 626 |   |
| Depreciation and amortization                                                      |       | 2,302                              |       | 1,953 |   |
| Realized investment gain                                                           |       | (69                                | )          | (50 | ) |
| Deferred federal income taxes                                                      |       | 175                                |       | 4,474 |   |
| Stock based compensation                                                           |       | 671                                |       | 352 |   |
| Extinguishment of debt                                                             |       | 1,613                              |       | — |   |
| Changes in assets and liabilities:                                                 |       |                               |       |   |   |
| Premiums receivable                                                                |       | (34,495                            | )          | 1,275 |   |
| Reinsurance receivables                                                            |       | (21,473                            | )          | (35,794 | ) |
| Prepaid reinsurance premiums                                                       |       | (8,294                             | )          | (22,212 | ) |
| Deferred policy acquisition costs                                                  |       | (8,777                             | )          | 807 |   |
| Losses and loss adjustment expenses                                                |       | 4,408                              |       | 33,572 |   |
| Unearned premiums                                                                  |       | 43,148                             |       | 21,708 |   |
| Drafts outstanding                                                                 |       | (113                               | )          | (248 | ) |
| Reinsurance payables                                                               |       | 4,135                              |       | 22,793 |   |
| Other assets and liabilities                                                       |       | 1,612                              |       | (18,570 | ) |
| Net cash provided by operating activities                                          |       | 16,060                             |       | 33,913 |   |
|                                                                               |       |                               |       |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                          |       |                               |       |   |   |
| Purchase of fixed maturity investments -  available-for-sale                       |       | (135,863                           | )          | (41,913 | ) |
| Sales and maturities of fixed maturity  investments - available-for-sale           |       | 21,887                             |       | 22,372 |   |
| Purchase of equity securities                                                      |       | (400                               | )          | — |   |
| Acquisition of property and equipment                                              |       | (4,536                             | )          | (3,442 | ) |
| Net cash used in investing activities                                              |       | (118,912                           | )          | (22,983 | ) |
|                                                                               |       |                               |       |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                          |       |                               |       |   |   |
| Proceeds from initial public offering of  stock                                    |       | 113,431                            |       | — |   |
| Proceeds from exercise of stock options,  including tax benefit                    |       | 12,339                             |       | — |   |
| Acquisition of treasury stock                                                      |       | (69                                | )          | (34 | ) |
| Principal payments on notes payable                                                |       | (72,038                            | )          | — |   |
| Proceeds from acquisition of long-term bank  debt                                  |       | 75,000                             |       | — |   |
| Payment of fees and expenses related to  acquisition of long-term debt             |       | (2,325                             | )          | — |   |
| Payment of dividends to stockholders                                               |       | (1,567                             | )          | — |   |
| Other                                                                              |       | 144                                |       | 197 |   |
| Net cash provided by financing activities                                          |       | 124,915                            |       | 163 |   |
| **NET INCREASE IN CASH AND CASH EQUIVALENTS**                                      |       | 22,063                             |       | 11,093 |   |
| Cash and cash equivalents, January 1                                          |       | 9,256                              |       | 12,424 |   |
| Cash and cash equivalents, June 30                                            |       | $                                  | 31,319     |   | $ | 23,517 |   |

 

The accompanying notes are an integral partof the consolidated financial statements.

 

6

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**BRISTOLWEST HOLDINGS, INC.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMEN**TS (Unaudited)

** (in thousands, except per share data)**

** **

**1.****              Nature of Operations**

 

Bristol West Holdings, Inc. (the “Company”) is a holding companyengaged in the distribution and underwriting of private passenger automobileinsurance through its subsidiaries. The Company conducts its business as asingle segment, given that the product, the regulatory framework, the type ofcustomer and the method of distribution vary little from state to state. As ofJune 30, 2004, the Company was licensed in 35 states and the District ofColumbia. The Company consists of a holding company, four property andliability insurance companies (Bristol West Casualty Insurance Company, BristolWest Insurance Company, Security National Insurance Company and Coast NationalInsurance Company), agencies and claims servicing companies.

 

**2.****              Basis ofPresentation**

 

The unaudited consolidated financialstatements included herein have been prepared pursuant to the rules andregulations of the Securities and Exchange Commission. Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America (GAAP) have been condensed or omitted pursuant to such rules andregulations. In the opinion of management, all adjustments considered necessary for a fairpresentation have been included. Operating results for the three months and sixmonths ended June 30, 2004, are not necessarily indicative of the resultsthat may be expected for the year ending December 31, 2004. Theseunaudited consolidated financial statements and the notes thereto should beread in conjunction with the Company’s audited financial statements andaccompanying notes included in the Company’s Annual Report on Form 10-K for theyear ended December 31, 2003.

 

On February 12, 2004, the Companydeclared a 130.38-for-one split of its outstanding common stock (see Note 4).All references to number of shares, per share amounts and stock option datahave been restated to reflect the stock split. The authorized number of sharesof common stock has been increased to 200,000,000. In addition, 15,000,000shares of preferred stock, par value $0.01 per share, are authorized.

 

**3.****              Debt**

 

On February 18, 2004, the Company completed a refinancing of itssecured credit facility. This bank agreement (“Bank Agreement”) consists of:(1) a $50,000 Secured Revolving Credit Facility, which includes up to $15,000of letters of credit and matures in 2009, (2) a $35,000 Term A Loan, whichmatures in 2010 and (3) a $40,000 Term B Loan, which matures in 2011. TheCompany’s interest rate on borrowings under the Bank Agreement is LondonInterbank Offered Rate (LIBOR) plus a margin (1% to 2.25%), which is determinedbased on the Company’s consolidated total debt to consolidated totalcapitalization ratio. The Company also pays certain commitment fees. The BankAgreement is secured by a pledge of stock of certain of the Company’ssubsidiaries. The refinancing extended the maturity of the Company’s debtcoming due in 2005 through 2007. In connection with the refinancing, theCompany recorded a charge of $1,613 related primarily to the write-off ofdeferred financing fees.  The amountoutstanding at June 30, 2004 was $74,463. The Company had no borrowings on the revolving credit line atJune 30, 2004.

 

**4.****              Initial PublicOffering**

 

On February 12, 2004, an initial publicoffering of 17,250,000 shares of the Company’s common stock (after effect of a130.38-for-one stock split (see Note 2)) was completed. The Company sold6,250,000 shares resulting in net proceeds to the Company (after deductingissuance costs) of approximately $113,431. The Company contributed $110,000 of the proceeds to its insurancesubsidiaries, which increased their statutory surplus.  The additional capital will permit theCompany to reduce its reinsurance purchases and to retain more gross premiumswritten over time. The Company used the remaining $3,431 for general corporatepurposes at the holding company level. Additionally, selling shareholders sold11,000,000 shares of

 

7

----

 

common stock in connection with the initial public offering, whichincluded the exercise of the underwriters’ over-allotment of 2,250,000shares.  Although the Company did notreceive any proceeds for the sale of stock by the selling shareholders, theCompany did receive net proceeds of approximately $6,936, including the relatedtax benefit, from the selling shareholders’ exercise of stock options andwarrants of 750,751.

 

**5.****              Net Income per Share**

 

The following table sets forth the computation of basic and dilutedearnings per share:

 
| ** **                                   | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                   | ** ** | **2004**                             | ** ** | **2003**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                         |       |                                 |       |                               |       |   |   |   |   |
| Net Income applicable to common stockholders |       | $                                    | 15,673     |                               | $          | 10,468 |   | $ | 30,219 |   | $ | 23,227 |   |
|                                         |       |                                 |       |                               |       |   |   |   |   |
| Weighted average common shares - basic       |       | 31,226,618                           |       | 23,813,516                         |       | 29,852,208 |   | 23,813,842 |   |
| Effect of dilutive securities:               |       |                                 |       |                               |       |   |   |   |   |
| Options                                      |       | 1,400,567                            |       | 1,004,633                          |       | 1,535,684 |   | 502,316 |   |
| Restricted stock                             |       | 11,290                               |       | —                             |       | 5,645 |   | — |   |
| Warrants                                     |       | 222,075                              |       | 242,507                            |       | 264,042 |   | 121,254 |   |
| Weighted average common shares - dilutive    |       | 32,860,550                           |       | 25,060,656                         |       | 31,657,579 |   | 24,437,412 |   |
|                                         |       |                                 |       |                               |       |   |   |   |   |
| Basic Earnings Per Share                     |       | $                                    | 0.50       |                               | $          | 0.44 |   | $ | 1.01 |   | $ | 0.98 |   |
|                                         |       |                                 |       |                               |       |   |   |   |   |
| Diluted Earnings Per Share                   |       | $                                    | 0.48       |                               | $          | 0.42 |   | $ | 0.95 |   | $ | 0.95 |   |

 

**6.****              Stock Options**

 

In December 2002, the FinancialAccounting Standards Board issued SFAS No. 148, *Accountingfor Stock-Based Compensation-Transition and Disclosure.* Thisstatement provides alternative methods of transition for a voluntary change tothe fair value based method of accounting for stock-based employeecompensation. It also amends the disclosure requirements of SFAS No. 123, *Accounting for Stock-Based Compensation*,to require prominent disclosures in both annual and interim financialstatements about the method of accounting for stock-based employee compensationand the effect of the method on reported results. The Company has elected tocontinue to apply APB No. 25,*Accounting forStock Issued to Employees,* and related interpretations in accountingfor stock options.

 

The following table illustrates the effect onnet income and net income per share if the Company had applied SFAS No. 123 tostock-based compensation.

 
| ** **                                                                                                                              | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                                              | ** ** | **2004**                             | ** ** | **2003**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                                                                    |       |                                 |       |                               |       |   |   |   |   |
| Net income, as reported                                                                                                                 |       | $                                    | 15,673     |                               | $          | 10,468 |   | $ | 30,219 |   | $ | 23,227 |   |
|                                                                                                                                    |       |                                 |       |                               |       |   |   |   |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value method for all awards, net  of related tax effects |       | (68                                  | )          | (53                                | )          | (127 | ) | (105 | ) |
|                                                                                                                                    |       |                                 |       |                               |       |   |   |   |   |
| Pro forma net income                                                                                                                    |       | $                                    | 15,605     |                               | $          | 10,415 |   | $ | 30,092 |   | $ | 23,122 |   |
|                                                                                                                                    |       |                                 |       |                               |       |   |   |   |   |
| **Net income per  share**                                                                                                               |       |                                 |       |                               |       |   |   |   |   |
| Basic—As reported                                                                                                                  |       | $                                    | 0.50       |                               | $          | 0.44 |   | $ | 1.01 |   | $ | 0.98 |   |
| Basic—Pro forma                                                                                                                    |       | $                                    | 0.50       |                               | $          | 0.44 |   | $ | 1.01 |   | $ | 0.97 |   |
| Diluted—As reported                                                                                                                |       | $                                    | 0.48       |                               | $          | 0.42 |   | $ | 0.95 |   | $ | 0.95 |   |
| Diluted—Pro forma                                                                                                                  |       | $                                    | 0.47       |                               | $          | 0.42 |   | $ | 0.95 |   | $ | 0.95 |   |

 

8

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**7.****              Commitments andContingencies**

 

In the course of pursuing its normal businessactivities, the Company is involved in various legal proceedings and claims.  Management does not expect thatamounts, if any, which may be required to be paid by reason of such proceedingsor claims will have a material effect on the Company’s financial position orresults of operations.

 

9

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**Item 2. Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

The following discussion and analysis of theresults of operations for the three months and six months ended June 30,2004, and three months and six months ended June 30, 2003, respectively,provides commentary relating to, and should be read in conjunction with, theconsolidated financial statements included elsewhere in this document.

 

### **General**

 

Weprovide non-standard private passenger automobile insurance and relatedservices in 18 states. Non-standard automobile insurance affords coverage todrivers who find it difficult to purchase standard automobile insurance as aresult of a number of factors, including their driving record, vehicle, age orclaims history, or because they have limited financial resources. Many of thesedrivers purchase state-mandated minimum limits of coverage to comply withfinancial responsibility laws. Premium rates for non-standard automobileinsurance policies are generally higher than standard or preferred automobileinsurance policies for comparable coverage.

 

The non-standard automobile insurancebusiness is highly competitive and we compete with both large nationalinsurance providers and smaller regional companies. Some of our competitorshave more capital, higher ratings and greater resources than we have, and mayoffer a broader range of products and lower prices and down payments than weoffer.

 

The operating results of property andcasualty insurance companies are subject to fluctuations fromquarter-to-quarter and year-to-year due to a number of factors, including butnot limited to general economic conditions, the regulatory climate in stateswhere an insurer operates, state regulation of premium rates, changes inpricing and underwriting practices of the insurer and its competitors, thefrequency and severity of losses, natural disasters, and other factors. Resultsof property and casualty insurance companies have been historically cyclical,with periods of high premium rates and strong profitability followed by periodsof price competition, falling premium rates and reduced profitability.

 

We continue to direct our operations in viewof the market conditions and anticipated changes to those conditions weencounter in each state in which we operate. One facet of our strategy is to bea long-term, stable market for our producers and insureds. We possess licenses,systems and professional staff to service the markets in each state in which weoperate.

 

We provide capabilities to help our agentsand producers improve customer retention, such as OneStepÔ, our new online point-of-saleapplication system, electronic funds transfer bill plans, check by phone andBWProducers.com that web enables a producer’s customer management.  We continue to target profitable areas withinthe states in which we operate, and we continuously add new producers toincrease new business production.

 

**Operating Results –Key States**

 

In the states in which we operate, we believethat market conditions are becoming generally more competitive.  We are seeing fewer rate filings wherecompanies are raising rates, and in several states companies are seeking ratedecreases.  In addition, in Californiasome companies have begun to relax underwriting standards.  We believe these actions are intended toeffectively reduce the premiums companies charge, and therefore increase thenumber of policies they write.

 

Most companies, Bristol West included, areoperating profitably at current rate levels, so there does not appear to be aneed for large rate increases for market participants to earn a profit.  This contrasts with market conditions during2001, 2002 and even into 2003 when most market participants were seeking rateincreases.

 

We monitor the rate and underwriting activityof the other market participants in each state in which we do business.  During the quarter, we observed 72 raterevisions by companies that we monitor in the states in which we dobusiness.  Fourteen of these filedchanges were rate increases, 28 were rate reductions, 14 were revenue neutral,and 16 were introductions of new products.

 

The following table shows our direct writtenpremium by state.  In the aggregate, ourdirect written premium grew by 12% in the second quarter of 2004 compared tothe second quarter of 2003 and by 19% for the first six months of 2004 comparedto 2003.

 

10

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**DIRECT WRITTEN PREMIUM PRODUCTION BY STATE**

**($in millions)**

 
| ** **     | ** ** | **Three months ended** | ** ** | ** ** | ** ** | **Six months ended** | ** ** | ** ** | ** ** |
|----------------|------------|------------------------|------------|------------|------------|----------------------|------------|------------|------------|
| ** **     | ** ** | **June 30,**      | ** ** | **%**      | ** ** | **June 30,**    | ** ** | **%**      | ** ** |
| **State**      | ** ** | **2004**               | ** ** | **2003**   | ** ** | **Change**           | ** ** | **2004**   | ** ** | **2003** | ** ** | **Change** | ** ** |
|           |       |                   |       |       |       |                 |       |       |       |   |   |   |   |
| California     |       | $                      | 100.7      |       | $          | 99.8                 |       | 0.9        | %          | $ | 233.4 |   | $ | 207.9 |   | 12.3 | % |
| Florida        |       | 23.4                   |       | 18.1       |       | 29.3                 | %          | 46.0       |       | 36.6 |   | 25.7 | % |
| Michigan       |       | 16.8                   |       | 10.6       |       | 58.5                 | %          | 33.8       |       | 21.0 |   | 61.0 | % |
| Pennsylvania   |       | 4.1                    |       | 3.4        |       | 20.6                 | %          | 8.2        |       | 6.2 |   | 32.3 | % |
| South Carolina |       | 4.1                    |       | 2.7        |       | 51.9                 | %          | 7.9        |       | 6.2 |   | 27.4 | % |
| Virginia       |       | 3.0                    |       | 1.9        |       | 57.9                 | %          | 6.4        |       | 3.3 |   | 93.9 | % |
| Maine          |       | 3.2                    |       | 2.6        |       | 23.1                 | %          | 6.7        |       | 4.8 |   | 39.6 | % |
| Texas          |       | 3.4                    |       | 2.5        |       | 36.0                 | %          | 6.5        |       | 5.2 |   | 25.0 | % |
| Georgia        |       | 3.2                    |       | 4.9        |       | -34.7                | %          | 6.6        |       | 10.9 |   | -39.4 | % |
| New Hampshire  |       | 3.3                    |       | 1.7        |       | 94.1                 | %          | 6.0        |       | 3.3 |   | 81.8 | % |
| All Other      |       | 10.0                   |       | 7.6        |       | 31.6                 | %          | 19.4       |       | 14.8 |   | 31.1 | % |
|           |       |                   |       |       |       |                 |       |       |       |   |   |   |   |
| **TOTAL**      |       | $                      | 175.2      |       | $          | 155.8                |       | 12.5       | %          | $ | 380.9 |   | $ | 320.2 |   | 19.0 | % |

 

**One important aspect of our growth strategy is to increasethe number of producers with whom we do business.  We attempt to target producers in geographicareas where we are under-represented and where we believe we can writeprofitable business.  During the firstsix months of 2004 we have increased our total number of producers by 1,800 to6,100.**

** **

**California continues to be our largest state, andCalifornia, Florida and Michigan accounted for 80% of our volume for the secondquarter.**       Growth rates, as enumerated above, vary significantly bystate and are dependent upon a variety of factors, including competitive conditionswithin those states and our strategies with respect to product pricing, andnumber and location of producers.

** **

**Most of our growth, in the aggregate, emanates fromincreasing the number of policies in force. At the end of the second quarter, our policy in force count hadincreased to 495,000 from 445,000 at the end of 2003, an increase of 11%.  The related annualized premiums in forceincreased by 13% compared to December 31, 2003.**

** **

**We grew 1% for the quarter in California and 12% for thesix months ended June 30, 2004 relative to the comparable 2003 periods.While rates remain stable, some companies are loosening underwriting standardsby not enforcing mileage bands, and not verifying basic underwritinginformation, like driving experience. This behavior results in lower premium quotations for some drivers,making it more difficult for companies not engaging in such practices to retainexisting customers and attract new ones. We have not changed our underwriting behavior, which makes our productless competitive versus those companies that have relaxed their standards.**

** **

**Our new business application volume in California is downby 7% from 2003, but customer retention has improved, resulting in a 3%increase in policies in force. The year to date decline in new businessapplications is due to the first half of 2004 being a less active market fornew business than the first half of 2003. During the first half of 2003, many companies were implementing rateincreases, which precipitated increased shopping by consumers.**

** **

**11**

----

** **

**We have increased the number of producers in California to869 at June 30, 2004 from 521 at June 30, 2003, or by 66.8%.  Our strategy of increasing the number ofproducers, without over-saturating the market, is contributing to our overallpremium growth as smaller producers and newer producers have grown more rapidlythan our largest producers.  We closelymonitor the behavior of our new producers to ensure adherence to our underwritingstandards.**

** **

**In Florida, our second largest state, we have grown by 29%over the second quarter of last year.  InApril, we introduced a new product design, with a rating structure thatproduces unique rates for a larger number of market segments than did itspredecessor.  This rating plan producesrate quotes that more closely match the observed loss costs associated witheach segment or cell as defined by rating variables employed to produce thequote. This product has been well received in the market, and we are pleasedwith the increase in new business volume. Our producer count has increased by57% in Florida since the beginning of 2004. The market remains stable in Florida.**

** **

**We have experienced very strong growth in Michigan, as ourpremium volume has increased 59% there, compared to the second quarter of2003.  The market is stable from a rateand competitive perspective, and our strategy in Michigan, as in California andelsewhere, is to grow by increasing the number of producers in profitable geographicareas where we are under-represented.**

** **

**Operations**

** **

We continue to stress productivity gains, and staff count has increasedby 3% since December 31, 2003, while policy count has grown by 11% and directwritten premiums have grown by 12%. We continue to monitor our staffing levelsin relation to volume in our claims and policyholder services operations.  In addition, we use a number of metrics totrack performance and, generally, performance is meeting or exceeding ourinternal benchmarks.

 

**We have modified rates 18 times this year.  Only one such modification was adecrease.  This was in Wisconsin, a statewe entered in mid-2003, where we were too conservative in setting ratesinitially.  We plan to continue to seekrate increases in states where necessary to stay ahead of loss cost trends. Inaddition, we believe we can continue to improve our product structure by filingclass plan changes in states where, through segmentation, we can write morebusiness that outperforms our overall book.**

** **

**We have been aggressively expanding our distribution plant.We had approximately 6,100 producers as of the end of June 2004, up from5,500 at the end of the first quarter and 4,300 at year-end 2003. During thesecond quarter, we expanded our distribution force by adding 90 new agents inour newer states, Wisconsin, Missouri and Colorado. **We continue to add producers in our larger states, California, Floridaand Michigan, as we have used our data warehouse, SOON, to identify territorieswhere our product is profitable and competitive and we areunder-represented.  In California, wehave added 126 new producers, in Florida 295 new producers and in Michigan 82new producers.  Our new producers have generated approximately $36 millionor slightly less than ten percent of our year to date gross writtenpremium.  We closely monitor theirbehavior, like the behavior of all producers, for compliance with ourunderwriting standards.

** **

**In the second quarter, we continued to roll out OneStep inCalifornia.  It is now deployed in 626brokerage locations in California, representing approximately 37.5% of our newbusiness applications in the state.**         Theroll-out to the remainder of the states should take 24 to 36 months to achievefull functionality.

** **

**Our experience to date with OneStep validates the value ofpoint of sale underwriting and verification. Capitalizing upon the knowledge we have developed in the OneStepimplementation, we have modified our existing production system, Raptor**Ò, to provide pointof sale underwriting and verification capabilities as well. OneStep-RaptorÔ now has virtuallythe same producer functionality as OneStep. OneStep-Raptor was introduced in Florida and Michigan in the secondquarter, and was introduced in Colorado and Ohio in July.  Like OneStep, OneStep-Raptor has enabled usto significantly reduce up-rates and improve retention.  An up-rate occurs when, after a customer’sapplication is processed, the initially quoted rate is increased due to thediscovery of new facts not disclosed on the application, such as an accident ortraffic violation.

** **

**In the aggregate, we utilized point of sale underwriting on23% of new business applications in the second quarter and 36% for the month ofJune.  OneStep-Raptor does not have thepotential internal workflow and operational efficiency capabilities of OneStep,but does provide the business benefits of dramatically reduced up-rates aspolicies are completely underwritten at the point of sale.  Policy issuance has gone on average from 5days to a half a day in the states where point of sale underwriting technology,OneStep or OneStep-Raptor, has been deployed.**

** **

**12**

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** **

**Reinsurance**

** **

**We recently entered into a Discretionary Quota ShareReinsurance Agreement, effective January 1, 2005.  This agreementpermits us to cede between 5% and 30% of premiums written for policies thatincept during 2005 and 2006. We can elect a different percentage for each year,and we must notify the reinsurer of our election no later than 30 business daysprior to January 1 of each year. The reinsurer can cancel the second year of the agreement if our lossand loss adjustment expense ratio through the third quarter of 2005 is greaterthan 82%.  The agreement has been 100%subscribed by National Union Fire Insurance Company of Pittsburgh, PA, asubsidiary of AIG.**

** **

**Results of Operations**

 

**The table below displays certain measures we use inmonitoring and evaluating our operations.**

** **

**13**

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** **
| ** **                                    | ** ** | **Three months ended June 30,**      | ** ** | **Six months ended June 30,** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------|------------|------------------------------------|------------|
| ** **                                    | ** ** | **2004**                                  | ** ** | **2003**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                    | ** ** | ** **                                | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | **(in thousands, except per share data)** | ** ** |
|                                          |       |                                      |       |                               |       |   |   |   |   |
| **Statement of  Operations Data:**            |       |                                      |       |                               |       |   |   |   |   |
| **Revenue:**                                  |       |                                      |       |                               |       |   |   |   |   |
| Net earned premium                            |       | $                                         | 81,101     |                               | $          | 72,403 |   | $ | 150,710 |   | $ | 144,790 |   |
| Net investment income                         |       | 2,258                                     |       | 1,687                              |       | 4,063 |   | 3,357 |   |
| Realized gain on investments                  |       | 69                                        |       | 50                                 |       | 69 |   | 50 |   |
| Policy service fee revenues                   |       | 18,504                                    |       | 19,472                             |       | 36,354 |   | 35,446 |   |
| Other income                                  |       | 457                                       |       | 336                                |       | 1,070 |   | 735 |   |
| Total revenue                                 |       | 102,389                                   |       | 93,948                             |       | 192,266 |   | 184,378 |   |
|                                          |       |                                      |       |                               |       |   |   |   |   |
| **Costs and Expenses:**                       |       |                                      |       |                               |       |   |   |   |   |
| Losses and loss adjustment expenses  incurred |       | 54,652                                    |       | 52,989                             |       | 102,218 |   | 104,648 |   |
| Commissions and other underwriting expenses   |       | 13,890                                    |       | 15,707                             |       | 23,387 |   | 27,989 |   |
| Other operating and general expenses          |       | 8,350                                     |       | 6,245                              |       | 15,414 |   | 12,246 |   |
| Interest expense                              |       | 723                                       |       | 791                                |       | 1,374 |   | 1,681 |   |
| Extinguishment of debt                        |       | —                                    |       | —                             |       | 1,613 |   | — |   |
| Stock based compensation expense              |       | 92                                        |       | 272                                |       | 671 |   | 352 |   |
| Total costs and expenses                      |       | 77,707                                    |       | 76,004                             |       | 144,677 |   | 146,916 |   |
|                                          |       |                                      |       |                               |       |   |   |   |   |
| Income before income taxes                    |       | 24,682                                    |       | 17,944                             |       | 47,589 |   | 37,462 |   |
| Income tax expense                            |       | 9,009                                     |       | 7,476                              |       | 17,370 |   | 14,235 |   |
| **Net Income**                                |       | $                                         | 15,673     |                               | $          | 10,468 |   | $ | 30,219 |   | $ | 23,227 |   |
| ** **                                    |       |                                      |       |                               |       |   |   |   |   |
| **Per Share Data:**                           |       |                                      |       |                               |       |   |   |   |   |
| Net income per common share - Basic           |       | $                                         | 0.50       |                               | $          | 0.44 |   | $ | 1.01 |   | $ | 0.98 |   |
| Net income per common share - Diluted         |       | $                                         | 0.48       |                               | $          | 0.42 |   | $ | 0.95 |   | $ | 0.95 |   |
|                                          |       |                                      |       |                               |       |   |   |   |   |
| **Operating Data:**                           |       |                                      |       |                               |       |   |   |   |   |
| Gross written premium                         |       | $                                         | 175,238    |                               | $          | 155,829 |   | $ | 380,855 |   | $ | 320,212 |   |
| Net written premium                           |       | 85,793                                    |       | 65,195                             |       | 185,564 |   | 133,552 |   |
| Gross earned premium                          |       | 174,463                                   |       | 158,290                            |       | 337,709 |   | 300,195 |   |
|                                          |       |                                      |       |                               |       |   |   |   |   |
| **Ratios:**                                   |       |                                      |       |                               |       |   |   |   |   |
| Loss ratio (a)                                |       | 54.6                                      | %          | 57.5                               | %          | 54.3 | % | 57.8 | % |
| Expense ratio (b)                             |       | 22.2                                      | %          | 23.8                               | %          | 20.6 | % | 22.2 | % |
| Combined ratio (c)                            |       | 76.8                                      | %          | 81.3                               | %          | 74.9 | % | 80.0 | % |

 

----

(a)          Loss ratio is the ratio, expressed as apercentage, of (i) losses and loss adjustment expenses incurred, divided by(ii) the sum of (A) net earned premium, (B) policy service fee revenues, and(C) other income.

 

(b)         Expense ratio is the ratio, expressed as apercentage, of (i) the sum of (A) commissions and other underwriting expensesand (B) other operating and general expenses divided by (ii) the sum of (A) netearned premium, (B) policy service fee revenues, and (C) other income.

 

(c)          Combined ratio is the sum of the loss ratioand the expense ratio.  This ratio isused by our management to evaluate our operating profitability.

** **

**14**

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** **

***Overview of Operating Results***

 

**Net income for the three months ended June 30, 2004was $15.7 million compared to $10.5 million for the three months endedJune 30, 2003, an increase of 50%. Net income for the six months ended June 30, 2004 grew by 30% to$30.2 million compared to $23.2 million for the six months ended June 30,2003.  Exclusive of the effect, afterincome taxes, of charges related to the refinancing of the Company’s creditfacilities and the cost of stock awards to employees in connection with the Company’sinitial public offering in February 2004, net income for the most recent sixmonths was $31.8 million.**

** **

**The increase in net income in 2004 as compared to the sameperiods in 2003 is primarily attributable to growth in net earned premium andfee revenue and a reduction in the loss and loss adjustment expense ratio.  The Company’s loss and loss adjustmentexpense ratio improved to 54.6% and 54.3% for the three months and six monthsended June 30, 2004, respectively, from 57.5% and 57.8% for the threemonths and six months ended June 30, 2003. The improvement in the loss and loss adjustment expense ratio is due tothe reduction in the impact of adverse development on prior years’ reserves forlosses and loss adjustment expenses.**                 The Company’s expense ratio improved to 22.2% and 20.6% forthe three months and six months ended June 30, 2004, respectively, from23.8% and 22.2% for the three months and six months ended June 30, 2003 asa result of increased ceding commissions earned resulting from an improved lossand loss adjustment expense ratio on the business ceded and productivity gainsevidenced by lower company expenses per dollar of premium written.

** **

***ThreeMonths and Six Months Ended June 30, 2004 compared to Three Months and SixMonths Ended June 30, 2003***

 

*Gross Written Premium*.    Gross written premiumincreased to $175.2 million and $380.9 million for the three months and sixmonths ended June 30, 2004, or by 12% and 19%, respectively, compared to$155.8 million and $320.2 million for the same periods in 2003.  Average policies in force increased by 11%for the three months and six months ended June 30, 2004, respectively, comparedto the corresponding periods of 2003.

 

In California, our largest market, grosswritten premium increased by 1% and 12% to $100.7 million and $233.4 millionfor the three months and six months ended June 30, 2004, respectively,from $99.8 million and $207.9 million for the three months and six months endedJune 30, 2003, respectively, primarily as a result of the improvedretention rate.  In Florida, our secondlargest market, gross written premium increased 29% and 26% to $23.4 millionand $46.0 million for the three months and six months ended June 30, 2004,respectively, from $18.1 million and $36.6 million for the three months and sixmonths ended June 30, 2003, respectively.                         In Michigan, our third largestmarket, gross written premium increased by 59% and 61%, to $16.8 million and$33.8 million for the three months and six months ended June 30, 2004,respectively, from $10.6 million and $21.0 million for the three months and sixmonths ended June 30, 2003, respectively. In both Florida and Michigan, we introduced additional segmentation intoour rating structures, which rendered our products more broadly competitive, andwe increased the number of producers.

 

*Net Written Premium.*  Net written premium for the three months andsix months ended June 30, 2004 was $85.8 million and $185.6 million,respectively, compared to $65.2 million and $133.6 million for the same periodsin 2003, representing increases of 32% and 39%, respectively.  The increase in net written premium exceededthe increase in gross written premium as a result of changes in the Company’sunderlying reinsurance programs.  Thepercentage of premiums ceded under our quota share reinsurance treaty wasreduced from 60% for policies written in 2003 to 50% for those written in 2004.

 

*NetEarned Premium.*  Net earned premium for the threemonths and six months ended June 30, 2004 were $81.1 million and $150.7million, respectively, compared to $72.4 million and $144.8 million for thesame periods in 2003, representing increases of 12% and 4%, respectively.  The following table shows the gross and cededamounts of written and earned premium for the three months and six months endedJune 30, 2004 and 2003.

 

15

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| ** **            | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-----------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **            | ** ** | **2004**                             | ** ** | **2003**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **            | ** ** | **(in thousands)**                   | ** ** | **(in thousands)**                 | ** ** |
|                  |       |                                 |       |                               |       |   |   |   |   |
| Gross Written Premium |       | $                                    | 175,238    |                               | $          | 155,829 |   | $ | 380,855 |   | $ | 320,212 |   |
| Ceded Written Premium |       | 89,445                               |       | 90,634                             |       | 195,291 |   | 186,660 |   |
| % Ceded               |       | 51.0                                 | %          | 58.2                               | %          | 51.3 | % | 58.3 | % |
|                  |       |                                 |       |                               |       |   |   |   |   |
| Gross Earned Premium  |       | $                                    | 174,463    |                               | $          | 158,290 |   | $ | 337,709 |   | $ | 300,195 |   |
| Ceded Earned Premium  |       | 93,362                               |       | 85,887                             |       | 186,999 |   | 155,405 |   |
| % Ceded               |       | 53.5                                 | %          | 54.3                               | %          | 55.4 | % | 51.8 | % |

 

*Net Investment Income.*  Net investment income for the three monthsand six months ended June 30, 2004 was $2.3 million and $4.1 million,respectively, compared to $1.7 million and $3.4 million for the same periods in2003.  This increase is attributable to alarger average invested asset base as the result of the Company’s initialpublic offering (the “IPO”) completed in February 2004.  Proceeds from the IPO were invested largelyin municipal bonds, which now account for approximately 34% of the portfolio ascompared to 6.0% as of June 30, 2003.

 

*Policy Service Fee Revenues*.  Policy service fee revenues for the threemonths and six months ended June 30, 2004 were $18.5 million and $36.4million, respectively, compared to $19.5 million and $35.4 million for the sameperiods in 2003.  Absent changes in themix of business by state, policy service fee revenues would be expected tochange from period to period commensurate with the change in gross earnedpremium.  However, during the first halfof 2004, the Company’s premium income has been growing faster in states otherthan California than it has in California. Our policy service fees are lower on a per policy basis in these other states.  Hence, policy service fee revenues have grownslower than gross earned premium for the six months ended June 30, 2004, anddeclined by 5% when compared to the quarter ended June 30, 2003.

 

***Costs andExpenses***

 

*Losses and Loss Adjustment Expenses*.  Loss and loss adjustment expenses incurredfor the three months and six months ended June 30, 2004 were $54.7 millionand $102.2 million, respectively, compared to $53.0 million and $104.6 millionfor the same periods in 2003.  The lossand loss adjustment expense ratios were 54.6% and 54.3% for the three monthsand six months ended June 30, 2004, respectively, compared to 57.5% and57.8% for the same periods in 2003.  Theimprovement in the loss and loss adjustment expense ratio is principally due tothe relative absence of adverse loss development in the second quarter andfirst half of 2004 when compared to the similar periods of 2003.  The following table displays the Company’sincurred loss and loss adjustment expenses (“LAE”) as related to the current accidentyear (losses and LAE occurring in the current fiscal year) and prior accidentyears (losses and LAE recognized in the current fiscal year related toaccidents which took place in a prior fiscal year).

 
| ** **                                  | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                  | ** ** | **2004**                             | ** ** | **2003**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                  | ** ** | **(in thousands)**                   | ** ** | **(in thousands)**                 | ** ** |
|                                        |       |                                 |       |                               |       |   |   |   |   |
| Current Accident Year Loss and LAE Incurred |       | $                                    | 54,374     |                               | $          | 49,968 |   | $ | 100,627 |   | $ | 96,615 |   |
| Prior Accident Years Loss and LAE Incurred  |       | 278                                  |       | 3,021                              |       | 1,591 |   | 8,033 |   |
| Total Loss and LAE Incurred                 |       | $                                    | 54,652     |                               | $          | 52,989 |   | $ | 102,218 |   | $ | 104,648 |   |
|                                        |       |                                 |       |                               |       |   |   |   |   |
| Current Accident Year Loss and LAE Ratio    |       | 54.3                                 | %          | 54.2                               | %          | 53.5 | % | 53.4 | % |
| Prior Accident Years Loss and LAE Ratio     |       | 0.3                                  | %          | 3.3                                | %          | 0.8 | % | 4.4 | % |
| Total Loss and LAE Ratio                    |       | 54.6                                 | %          | 57.5                               | %          | 54.3 | % | 57.8 | % |

 

Adverseloss development occurs when loss and loss adjustment expense reservesestablished for accidents that took place in years prior to the current yearprove to be inadequate and management increases those reserves to reflect therevised estimate of the ultimate losses and loss adjustment expenses related tosuch accidents.  Such increases result ina charge to loss and loss adjustment expenses in the current year.

 

16

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*Commissions and Other Underwriting Expenses**.*  Commissions and other underwritingexpenses for the three months and six months ended June 30, 2004 were$13.9 million and $23.4 million, respectively, compared to $15.7 million and$28.0 million for the same periods in 2003, representing a decrease of 11% and16%, respectively.  The decrease isrelated to an increase in ceding commissions earned under our quota sharereinsurance contracts as a result of the improvement in the underlying combinedratio on the business ceded.

 

*Other Operating and General Expenses**.*  Other operating and general expensesfor the three months and six months ended June 30, 2004 were $8.4 millionand $15.4 million, respectively, compared to $6.2 million and $12.2 million forthe same periods in 2003, representing an increase of 35% and 26%,respectively.  The increase was due tothe increase in gross written premium and the related increase in expenses thatare variable such as telephone and bank service charges associated with thelock box facilities used for collecting payments from policyholders.  The growth in operating and general expenseswas greater than the growth in gross written premium.  The Company estimates that it incurredadditional expenses of $1.1 million and $1.6 million for the three months andsix months ended June 30, 2004, respectively, related to being a publiclytraded company.  Such expenses includedincreased directors and officers insurance premiums, increased audit fees, andother costs associated with being a public company.

 

*Interest Expense*.  Interest expense for the three months and sixmonths ended June 30, 2004 were $0.7 million and $1.4 million, compared to$0.8 million and $1.7 million for the same periods in 2003.  The decrease is the result of the decrease inLIBOR.  The aggregate weighted averageinterest rate was 3.0% during the three months and six months endedJune 30, 2004, compared to 3.1% and 3.2% during the comparable periods of2003.  As of June 30, 2004 theCompany had $74.5 million of outstanding debt as compared to $71.5 million atJune 30, 2003.

 

*Ratios*. Our combined ratio was 76.8% and 74.9% for the three months and sixmonths ended June 30, 2004, respectively, compared to 81.3% and 80.0% forthe same periods in 2003, an improvement of 4.5 and 5.1 percentage points,respectively.  The improvement relates tothe aforementioned improvements in both our loss and loss adjustment expenseratio and expense ratio.  For the threemonths and six months ended June 30, 2003, the Company’s combined ratio wasimpacted negatively by 3.3 and 4.4 percentage points of adverse development onloss and loss adjustment expense reserves recorded at the previous year-end.

 

*Income Taxe*s.  Income taxes for the three months and sixmonths ended June 30, 2004 were $9.0 million and $17.4 million,respectively, for effective tax rates of approximately 36.5%.  The effective rates are comprised of 34.0%for federal income taxes and 2.5% for state income taxes.

 

**Financial Condition**

** **

***Liquidity and Capital Resources***

 

We areorganized as a holding company with all of our operations being conducted byour subsidiaries.  Our insurancesubsidiaries underwrite the risks associated with our insurance policies. Ournon-insurance subsidiaries provide our policyholders and our insurance subsidiariesservices related to the insurance policies. We have continuing cash needs forthe payment of principal and interest on borrowings, dividends, taxes andadministrative expenses. These ongoing obligations are funded with dividendsfrom our non-insurance subsidiaries and taxes paid by each subsidiary throughan inter-company tax allocation agreement.

 

InFebruary 2004, we completed an initial public offering of 17,250,000shares of the Company’s common stock. The Company sold 6,250,000 shares providingnet proceeds to the Company, after deducting issuance costs, of approximately$113.4 million. The Company contributed $110.0 million of theproceeds to its principal insurance subsidiary, which increased its statutorysurplus. Over time, the additional capital will permit the Company to reduceits reinsurance purchases and retain more of its written premium. The Companyused the $3.4 million not contributed to its insurance subsidiary forgeneral corporate purposes at the holding company.

 

InFebruary 2004, the Company completed a refinancing of its secured creditfacility. This bank agreement (the “Bank

 

17

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Agreement”) consists of:(1) a $50.0 million Secured Revolving Credit Facility, which includesup to $15.0 million of letters of credit, (2) a $35.0 millionTerm A Loan and (3) a $40.0 million Term B Loan. The Company’sinterest rate on borrowings under the Bank Agreement is LIBOR plus a marginranging from 1.0% to 2.25%, which is determined based on the Company’sconsolidated total debt to consolidated total capitalization ratio. The Companyalso pays certain commitment fees. The Bank Agreement is secured by a pledge ofstock of certain of the Company’s subsidiaries.

 

Thereare no restrictions on the payment of dividends by our non-insurancesubsidiaries other than customary state corporation laws regarding solvency.Dividends from our insurance subsidiaries are subject to restrictions relatingto statutory surplus and earnings.  As ofDecember 31, 2003, our insurance subsidiaries could pay dividends of$1.1 million without seeking regulatory approval.  Our insurance subsidiaries have not paid anydividends since 1999, which has not impacted our ability to meet ourobligations. We do not anticipate that our insurance subsidiaries will paydividends in the foreseeable future because we wish to reduce our reinsurancepurchases in order to retain more of the premium we generate and seek strongerfinancial strength ratings for our insurance subsidiaries, both of whichrequire that the surplus of our insurance subsidiaries be increased. Becauseour non-insurance subsidiaries generate revenues, profits and net cash flowsthat are generally unrestricted as to their availability for the payment ofdividends, we expect to use those funds to service all of our corporatefinancial obligations, such as debt service and stockholder dividends.

 

Ourinsurance subsidiaries’ primary sources of funds are premiums received,investment income and proceeds from the sale and redemption of investmentsecurities. Our non-insurance subsidiaries’ primary sources of funds are policyservice fee revenues and commission income received from our insurancesubsidiaries. These subsidiaries use these funds to pay claims and operatingexpenses, make payments under the tax allocation agreement, purchaseinvestments and pay dividends to us.

 

On May5, 2004, the Board of Directors declared a dividend of $0.05 per common shareresulting in a total payout of approximately $1.6 million from Bristol WestHoldings, Inc.  The dividend was paid onJune 2, 2004 to shareholders of record on May 19, 2004.  On August 3, 2004, the Board ofDirectors declared a dividend of $0.05 per common share, which will result in atotal payout of approximately $1.6 million from Bristol West Holdings,Inc.  The dividend will be paid toshareholders of record on August 17, 2004 and is payable on or beforeAugust 31, 2004.

 

Netcash provided by operating activities was $16.1 million for the six monthsended June 30, 2004, as compared to $33.9 million for the same period in2003.  The decrease from the prior yearrelates primarily to settlements of ceding commissions and funds received inconjunction with the commutation of a quota share reinsurance contract in thefirst half of 2003.  In the first half of2003, we received approximately $27.8 million under reinsurance contractscommuted and in run-off as compared to $10.6 million for comparable settlementsin the first half of 2004.

 

Netcash used in investment activities amounted to $118.9 million and $23.0 millionfor the six months ended June 30, 2004 and 2003, respectively, and wasprimarily used to purchase fixed income securities.  The increase in investment purchases was due tothe investment of proceeds from the Company’s IPO that was completed inFebruary 2004.

 

Netcash provided by financing activities was $124.9 million for the six monthsended June 30, 2004 as compared to $0.2 million for the same period in2003.  As mentioned above, the increasein cash from financing activities is attributable to the Company’s IPO.

 

**Investments**

 

We hadtotal cash, cash equivalents and invested assets of $279.8 million as ofJune 30, 2004. The following table summarizes our cash, cash equivalentsand invested assets.

 

18

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| ** **                            | ** ** | **Cost /  Amortized Cost** | ** ** | **Fair  Value** | ** ** | **% of Total  at Fair Value** | ** ** |
|---------------------------------------|------------|----------------------------|------------|-----------------|------------|-------------------------------|------------|
| ** **                            | ** ** | **(in millions)**          | ** ** | ** **      | ** ** |
| ** **                            | ** ** | ** **                 | ** ** | ** **      | ** ** | ** **                    | ** ** |
| Debt securities, available for sale   |       | $                          | 249.3      |            | $          | 246.3                         |       | 88.0 | % |
| Equity securities, available for sale |       | 2.2                        |       | 2.2             |       | 0.8                           | %          |
| Cash and cash equivalents             |       | 31.3                       |       | 31.3            |       | 11.2                          | %          |
|                                  |       |                       |       |            |       |                          |       |
| Total                                 |       | $                          | 282.8      |            | $          | 279.8                         |       | 100.0 | % |

 

*Investment Strategy.*  We believethat our investment portfolio is highly liquid and consists of readilymarketable, high quality investment-grade debt securities. We currently do notinvest in common equity securities, other than our investment in OneShield,Inc., and we have no exposure to foreign currency risk. Our portfolio ismanaged by Hyperion Capital Management, Inc. for a fee of 12.5 basis pointsof assets under management, and includes all related accounting and statutoryinvestment reporting. Our investment strategy recognizes our need to maintaincapital adequate to support our insurance operations.

 

*Investment Portfolio.*  Ourinvestment portfolio consists primarily of debt securities, all of which areclassified as available for sale, and are carried at fair value with unrealizedgains and losses reported in our financial statements as a separate componentof stockholders’ equity on an after-tax basis. As of June 30, 2004, thefair value of our investment portfolio of $248.5 million included$3.0 million in pre-tax net unrealized losses.  We had realized pre-tax net gains for the sixmonths ended June 30, 2004 of approximately $0.1 million.  The weighted average pre-tax equivalent bookyield of the portfolio was 4.2% at June 30, 2004.

 

Ourinvestment objectives are to maximize liquidity, minimize credit risk andmaximize book income, and thus our portfolio at June 30, 2004 had anaverage Standard & Poor’s rating of “AA+”. The following tablepresents the composition of our investment portfolio by type of investment asof June 30, 2004.

 
| ** **                                | ** ** | **As of June 30,  2004** | ** ** |
|-------------------------------------------|------------|-------------------------------|------------|
| ** **                                | ** ** | **(in millions)**             | ** ** |
|                                      |       |                          |       |   |   |
| Cash and cash equivalents                 |       | $                             | 31.3       |   | 11.2 | % |
| U.S. Government securities                |       | 7.0                           |       | 2.5 | % |
| Mortgage backed bonds                     |       | 28.8                          |       | 10.3 | % |
| Tax exempt bonds                          |       | 94.1                          |       | 33.6 | % |
| Collateralized mortgage obligations       |       | 26.7                          |       | 9.5 | % |
| Corporate and other                       |       | 92.7                          |       | 33.1 | % |
| Preferred stocks                          |       | 0.2                           |       | 0.1 | % |
| Common stocks                             |       | 2.0                           |       | 0.7 | % |
| Net unrealized losses on fixed maturities |       | (3.0                          | )          | -1.0 | % |
|                                      |       |                          |       |   |   |
| Total investments at market value         |       | $                             | 279.8      |   | 100.0 | % |

 

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Wehave significantly increased our portfolio allocation to tax-exempt bonds as ofJune 30, 2004. Given our current tax position resulting from ourprofitable operating performance, the after-tax yield to us on tax-exempt bondscompares favorably with that of taxable bonds.

 

Thefollowing table presents the composition, by type of security, including theamortized cost, gross unrealized gains, gross unrealized losses and fair valueof debt securities available for sale in our investment portfolio as ofJune 30, 2004.

 
| ** **                          | ** ** | **Amortized  Cost** | ** ** | **Unrealized  Gains** | ** ** | **Unrealized  Losses** | ** ** | **Estimated  Market Value** | ** ** |
|-------------------------------------|------------|---------------------|------------|-----------------------|------------|------------------------|------------|-----------------------------|------------|
| ** **                          | ** ** | **(in millions)**   | ** ** |
|                                |       |                |       |                  |       |                   |       |                        |       |
| U.S. Government securities          |       | $                   | 7.0        |                  | $          | 0.1                    |       | $                           | —     |   | $ | 7.1 |   |
| Mortgage backed bonds               |       | 28.8                |       | 0.1                   |       | 0.9                    |       | 28.0                        |       |
| Tax exempt bonds                    |       | 94.1                |       | 0.2                   |       | 2.1                    |       | 92.2                        |       |
| Collateralized mortgage obligations |       | 26.7                |       | 0.2                   |       | 0.2                    |       | 26.7                        |       |
| Corporate and other                 |       | 92.7                |       | 0.9                   |       | 1.3                    |       | 92.3                        |       |
|                                |       |                |       |                  |       |                   |       |                        |       |
| Total fixed maturities              |       | 249.3               |       | 1.5                   |       | 4.5                    |       | 246.3                       |       |
|                                |       |                |       |                  |       |                   |       |                        |       |
| Equity and preferred stock          |       | 2.2                 |       | —                |       | —                 |       | 2.2                         |       |
|                                |       |                |       |                  |       |                   |       |                        |       |
| Total                               |       | $                   | 251.5      |                  | $          | 1.5                    |       | $                           | 4.5        |   | $ | 248.5 |   |

 

The qualitydistribution of our fixed maturity portfolio as of June 30, 2004 was asfollows:

 
| ** **                             | ** ** | **NAIC  Rating**  | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** | **% of Total  at Fair Value** | ** ** |
|----------------------------------------|------------|-------------------|------------|---------------------|------------|-----------------|------------|-------------------------------|------------|
| ** **                             | ** ** | **(in millions)** | ** ** |
| **Standard &  Poor’s Rating** |       |              |       |                |       |            |       |                          |       |
| AAA                                    |       | 1                 |       | $                   | 182.0      |            | $          | 178.8                         |       | 72.6 | % |
| AA                                     |       | 1                 |       | 23.3                |       | 23.1            |       | 9.4                           | %          |
| A                                      |       | 1                 |       | 28.4                |       | 28.5            |       | 11.6                          | %          |
| BBB                                    |       | 2                 |       | 8.6                 |       | 8.9             |       | 3.6                           | %          |
| U.S. Treasuries agencies               |       | 1                 |       | 7.0                 |       | 7.0             |       | 2.8                           | %          |
|                                   |       |              |       |                |       |            |       |                          |       |
| Total fixed maturity investments       |       |              |       | $                   | 249.3      |            | $          | 246.3                         |       | 100.0 | % |

 

On aquarterly basis, we examine our investment portfolio for evidence ofimpairment. The assessment of whether impairment has occurred is based on ourevaluation, on an individual security basis, of the underlying reasons for thedecline in fair value, which are discussed with our investment advisor andevaluated to determine the extent to which such changes are attributable tointerest rates, market-related factors other than interest rates, as well asfinancial condition, business prospects and other fundamental factors specificto the issuer. Declines attributable to issuer fundamentals are reviewed infurther detail. When one of our securities has a decline in fair value that isdetermined to be other than temporary, we reduce the carrying value of thesecurity to its current fair value as required by GAAP.

 

Basedupon our analysis, we believe that we will recover all contractual principaland interest payments related to those securities that currently reflectunrealized losses and that we have the ability and intent to hold thesesecurities until they mature or

 

20

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recover in value. Shouldeither of these beliefs change with regard to a particular security, a chargefor impairment would likely be required. In the last three and one-half years,we have not needed to record any impairment charges. We believe that it is notlikely that future impairment charges will have a significant effect on ourliquidity.

 

As ofJune 30, 2004, investments carried at a fair value of $11.3 millionand approximately $0.25 million of cash were on deposit with state insuranceregulatory authorities.

 

**Forward-LookingStatements**

 

Thisreport includes various forward-looking statements regarding the Company thatare subject to risks and uncertainties including, without limitation, the factorsset forth below and under the caption “Risk Factors” in the prospectus filedwith the Commission on February 11, 2004, pursuant to Rule 424(b)(4) underthe Securities Act of 1933, as amended, in connection with the Company’sRegistration Statement on Form S-1 (File No. 333-111259).Forward-looking statements include, but are not limited to, discussionsregarding our operating strategy, growth strategy, acquisition strategy, costsavings initiatives, industry, economic conditions, financial condition,liquidity and capital resources and results of operations. Such statementsinclude, but are not limited to, statements preceded by, followed by or thatotherwise include the words “believes,” “expects,” “anticipates,” “intends,”“estimates” or similar expressions. For those statements, we claim theprotection of the safe harbor for forward-looking statements contained in thePrivate Securities Litigation Reform Act of 1995.

 

Certainimportant factors, which are discussed elsewhere in this document and in ourRegistration Statement on Form S-1 described above, could affect our futurefinancial results and could cause actual results to differ materially fromthose expressed in forward-looking statements contained or incorporated byreference in this document.

 

**Item 3.Quantitative and QualitativeDisclosures About Market Risk.**

 

Webelieve that we are principally exposed to two types of market risk: interestrate risk and credit risk.

 

***Interest Rate Risk***

 

*Investments.*  Our investmentportfolio consists primarily of debt securities, all of which are classified asavailable for sale. Accordingly, the primary market risk exposure to our debtsecurities portfolio is interest rate risk, which we strive to limit bymanaging duration to a defined range of three to four years and laddering orutilizing an even distribution in the maturities of the securities we purchaseto achieve our duration target. Interest rate risk includes the risk frommovements in the underlying market rate and in the credit spread of the respectivesectors of the debt securities held in our portfolio. The fair value of ourfixed maturity portfolio is impacted directly by changes in market interestrates. As interest rates rise, the market value of our fixed-income portfoliofalls, and the converse is also true. We expect to manage interest rate risk byselecting investments with characteristics such as duration, yield andliquidity tailored to the anticipated cash outflow characteristics of ourliabilities. The effective duration of the portfolio as of June 30, 2004was 3.91 years. Should market interest rates increase 1.0%, our fixedincome portfolio would be expected to decline in market value by approximately$9.2 million, or 3.5%. Conversely, a 1.0% decline in interest rates wouldresult in approximately $9.2 million, or 3.5%, appreciation in the marketvalue of our fixed income portfolio. These market value changes are a result ofthe effective duration of the portfolio combined with the marginally lowerinterest rate sensitivity of tax-exempt bonds compared to taxable bonds.

 

*Credit Facility.*  Our exposureto market risk for changes in interest rates also relates to the interestexpense of variable rate debt under a bank credit agreement that we enteredinto on February 18, 2004. The credit agreement is a floating rateborrowing facility and the interest rate we pay increases or decreases with thechanges in interest rates, specifically LIBOR. Based on our borrowings underthe floating rate credit agreement at June 30, 2004, a 10% increase in marketinterest rates would increase our annual net interest expense by approximately$88 thousand.

 

***Credit Risk***

 

*Investments.**  ***Anadditional exposure to our debt securities portfolio is credit risk. We attemptto manage our credit risk through issuer and industry diversification. Weregularly monitor our overall investment results and review compliance with ourinvestment objectives and guidelines. Our investment guidelines includelimitations on the minimum rating of debt

 

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securities in ourinvestment portfolio, as well as restrictions on investments in debt securitiesof a single issuer.

 

*Reinsurance*.    We aresubject to credit risks with respect to our reinsurers. Although our reinsurersare liable to us to the extent we cede risk to them, we are ultimately liableto our policyholders on all risks we have reinsured. As a result, reinsuranceagreements do not limit our ultimate obligations to pay claims to policyholdersand we may not recover claims made to our reinsurers. Our reinsurers are ratedfrom “A-” to “A++” by A.M. Best.

 

**Item 4.Controls and Procedures**

 

Underthe supervision and with the participation of our management, including ourChief Executive Officer and Chief Financial Officer, we evaluated theeffectiveness of the design and operation of our disclosure controls andprocedures (as defined in Exchange Act Rule 13a-15(e)) as of the end ofthe period covered by this quarterly report. Any controls and procedures, nomatter how well designed and operated, can provide only reasonable assurance ofachieving the desired control objectives. Based on that evaluation, our Chief Executive Officer and ChiefFinancial Officer have concluded that our disclosure controls and proceduresprovide reasonable assurance that material information relating to us and ourconsolidated subsidiaries is made known to such officers by others within theseentities, particularly during the period this quarterly report was prepared, inorder to allow timely decisions regarding required disclosure. There have notbeen any changes in our internal control over financial reporting during ourlast fiscal quarter that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

 

**PARTII–OTHER INFORMATION**

 

**Item1.  LegalProceedings**

 

TheCompany is named as a defendant in a number of class action and individuallawsuits, the outcomes of which are uncertain at this time.  These cases include those seekingrestitution, damages and other remedies as a result of the Company’s allegedfailure to timely return unearned premium, the Company’s use of allegedlyimproper rates and discounts, and other cases challenging various aspects ofthe Company’s claims and marketing practices and business operations.  The Company plans to contest the outstandingsuits vigorously. Based upon currently available information, the Companybelieves that its reserves for these lawsuits are reasonable.  However, if any one or more of theseslawsuits results in a judgment against or settlement by the Company in anamount that is significantly in excess of the reserve established for suchlawsuit (if any), the resulting liability could have a material adverse impacton the Company’s financial condition, cash flows and results of operations.

 

For afurther discussion on the Company’s pending litigation, see Item 3 – LegalProceedings in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2003.

 

**Item 2.Changes in Securities, Use ofProceeds and Issuer Purchases of Equity Securities**

 

OnFebruary 12, 2004, the Company commenced the initial public offering ofits common stock, par value $.01 per share, pursuant to its RegistrationStatement on Form S-1 (File No. 333-111259), which was declared effective bythe Securities and Exchange Commission on February 11, 2004. The Companyregistered 17,250,000 shares of common stock at an aggregate maximum offeringprice of $345.0 million pursuant to the registration statement. Pursuant to theoffering, 17,250,000 shares were sold for an aggregate offering price of $345.0million including 6,250,000 shares issued and sold by the Company and11,000,000 shares sold by selling stockholders. The managing underwriters forthe offering were Credit Suisse First Boston and Bear, Stearns & Co. Inc.

 

TheCompany did not receive any proceeds from the sale of stock by the sellingstockholders in the offering. The net proceeds received by the Company in theoffering were $113.4 million as follows: 

 

22

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| Aggregate offering proceeds to the Company |   | $      | 125.0  |   |
|--------------------------------------------|--------|--------|--------|--------|
| Underwriting discounts and commissions     |   | 8.4    |   |
| Finders fee                                |   | — |   |
| Expenses paid to or for underwriters       |   | — |   |
| Other fees and expenses                    |   | 3.2    |   |
|                                       |   |   |   |
| Total expenses                             |   | 11.6   |   |
|                                       |   |   |   |
| Net proceeds to the Company                |   | $      | 113.4  |   |

 

The Company contributed $110.0 million to its primaryinsurance subsidiary, which invested the full amount in fixed maturitysecurities. The remainder of the proceeds, approximately $3.4 million, wasretained by Bristol West Holdings, Inc. for working capital purposes.

 

**Item3.****           Defaults Upon Senior Securities**

 

None

 

**Item4.****           Submission of Matters to a Vote ofSecurity Holders**

 

None

 

**Item5.****           Other Information**

 

On May14, 2004, the Company granted time-based restricted stock awards to 14executive officers pursuant to the Company’s 2004 Stock Incentive Plan.  There are currently outstanding restrictedstock awards in the total amount of 262,719 common shares to 13 of thoseexecutive officers.  These awards were basedon a closing price of $18.40 on the date of the grants, and therefore they hada total dollar value of $4.8 million. All of the awards cliff vest on May 14, 2009, or earlier if there is anacceleration event.  These awards areexpensed monthly on a pro-rata basis over the applicable vesting period.

 

Inaddition, on May 14, 2004, pursuant to the Company’s 2004 Stock Incentive Plan,the Company granted time-based restricted stock awards in the total amount of15,218 Common Shares to seven non-executive directors, none of whom areaffiliated with Kohlberg Kravis Roberts & Co. L.P.  These awards were based on a closing price of$18.40 on the date of the grants, and therefore they had a total dollar valueof $280 thousand.  All of the awardscliff vest on May 14, 2006, or earlier if there is an acceleration event.  These awards are expensed monthly on apro-rata basis over the applicable vesting period.

 

23

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**Item 6. Exhibits and Reports on Form 8-K**

 

(a)   List ofexhibits:

 

Reference is made to the Exhibitsfiled in the Company’s 2003 10-K, filed on March 24, 2004.

 
| **Exhibit   Number** | ** ** | **Description  of Document**                                                                                                                                                                                                                                                                                                                                                                                                       |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 3.1                  |       | Form of Amended  and Restated Certificate of Incorporation of the Registrant (incorporated by  reference to Exhibit 3.1 of Registrant’s Registration Statement (File  No. 333-111259) on Form S-1)                                                                                                                                                                                                             |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 3.2                  |       | Form of Amended  and Restated Bylaws of the Registrant (incorporated by reference to  Exhibit 3.2 of Registrant’s Registration Statement (File No. 333-111259)  on Form S-1)                                                                                                                                                                                                                                   |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.1                  |       | Form of  Certificate of Common Stock (incorporated by reference to Exhibit 4.1 of  Registrant’s Registration Statement (File No. 333-111259) on  Form S-1)                                                                                                                                                                                                                                                     |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.2                  |       | Registration  Rights Agreement, dated as of July 10, 1998, between the Registrant and  Bristol West Associates LLC (incorporated by reference to Exhibit 4.2 of  Registrant’s Registration Statement (File No. 333-111259) on  Form S-1)                                                                                                                                                                  |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.3                  |       | Shareholder  Subscription Agreement, dated as of July 9, 1998, between the Registrant  and Fisher Capital Corp. LLC (incorporated by reference to Exhibit 4.3  of Registrant’s Registration Statement (File No. 333-111259) on  Form S-1)                                                                                                                                                                 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.4                  |       | Sale  Participation Agreement, dated as of July 9, 1998, among KKR Partners  II, L.P., KKR 1996 Fund L.P., Bristol West Associates LLC and Fisher Capital  Corp. LLC (incorporated by reference to Exhibit 4.4 of Registrant’s  Registration Statement (File No. 333-111259) on Form S-1)                                                                                                                 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.5                  |       | Form of  Stockholder Agreement for Senior Management (incorporated by reference to  Exhibit 4.5 of Registrant’s Registration Statement (File  No. 333-111259) on Form S-1)                                                                                                                                                                                                                                     |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.6                  |       | Form of  Stockholder Agreement for Employees (incorporated by reference to  Exhibit 4.6 of Registrant’s Registration Statement (File  No. 333-111259) on Form S-1)                                                                                                                                                                                                                                             |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.7                  |       | Form of Sale  Participation Agreement (incorporated by reference to Exhibit 4.7 of  Registrant’s Registration Statement (File No. 333-111259) on  Form S-1)                                                                                                                                                                                                                                                    |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.8                  |       | Form of  Restricted Stock Agreement for Officers, effective May 14, 2004                                                                                                                                                                                                                                                                                                                                                           |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.9                  |       | Form of  Restricted Stock Agreement for Directors, effective May 14, 2004                                                                                                                                                                                                                                                                                                                                                          |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.1                 |       | Quota Share  Reinsurance Agreement, effective January 1, 2002, among Coast National  Insurance Company, Security National Insurance Company, Bristol West Insurance  Company, Bristol West Casualty Insurance Company and National Union Fire  Insurance Company of Pittsburgh, PA (incorporated by reference to  Exhibit 10.2 of Registrant’s Registration Statement (File  No. 333-111259) on Form S-1) |

 

24

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| 10.2   |   | Addendum I to  Quota Share Reinsurance Agreement, between Coast National Insurance Company,  Security National Insurance Company, Bristol West Insurance Company and  Bristol West Casualty Insurance Company and National Union Fire Insurance  Company of Pittsburgh, PA (incorporated by reference to Exhibit 10.3 of  Registrant’s Registration Statement (File No. 333-111259) on  Form S-1)                 |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.3   |   | Addendum II to  Quota Share Reinsurance Agreement between Coast National Insurance Company,  Security National Insurance Company, Bristol West Insurance Company and  Bristol West Casualty Insurance Company and National Union Fire Insurance  Company of Pittsburgh, PA (incorporated by reference to Exhibit 10.4 of  Registrant’s Registration Statement (File No. 333-111259) on  Form S-1)                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.4   |   | Quota Share  Reinsurance Agreement, effective January 1, 2002, among Coast National  Insurance Company, Security National Insurance Company, Bristol West  Insurance Company, Bristol West Casualty Insurance Company and Alea  London, Ltd. (incorporated by reference to Exhibit 10.5 of  Registrant’s Registration Statement (File No. 333-111259) on  Form S-1)                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.5   |   | Addendum I to  Quota Share Reinsurance Agreement between Coast National Insurance Company,  Security National Insurance Company, Bristol West Insurance Company and  Bristol West Casualty Insurance Company and Alea London, Ltd.  (incorporated by reference to Exhibit 10.6 of Registrant’s Registration  Statement (File No. 333-111259) on Form S-1)                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.6   |   | Quota Share  Reinsurance Agreement, effective January 1, 2002, between Coast National  Insurance Company, Security National Insurance Company, Bristol West  Insurance Company, Bristol West Casualty Insurance Company and Chubb Atlantic  Reinsurance Specialists Ltd. (incorporated by reference to  Exhibit 10.7 of Registrant’s Registration Statement (File  No. 333-111259) on Form S-1)         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.7   |   | Addendum I to  Quota Share Reinsurance Agreement between Coast National Insurance Company,  Security National Insurance Company, Bristol West Insurance Company and  Bristol West Casualty Insurance Company and Chubb Atlantic Reinsurance  Specialists Ltd. (incorporated by reference to Exhibit 10.8 of  Registrant’s Registration Statement (File No. 333-111259) on Form S-1)                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.8   |   | Addendum II to  Quota Share Reinsurance Agreement between Coast National Insurance Company,  Security National Insurance Company, Bristol West Insurance Company and  Bristol West Casualty Insurance Company and Chubb Atlantic Reinsurance  Specialists Ltd. (incorporated by reference to Exhibit 10.9 of  Registrant’s Registration Statement (File No. 333-111259) on  Form S-1)                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.9   |   | Credit Agreement  dated February 18, 2004 among the Registrant, the Lenders, Credit Suisse  First Boston, Administrative Agent, ING Capital LLC, Syndication Agent, Bear  Stearns Corporate Lending Inc. and UBS Securities LLC as  Co-Documentation Agents (incorporated by reference to Exhibit 10.10 of  Registrant’s Annual Report on Form 10-K (File No. 001-31984) filed  on March 24, 2004) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.10  |   | Form of  California Broker’s Agreement (incorporated by reference to  Exhibit 10.12 of Registrant’s Registration Statement (File  No. 333-111259) on Form S-1)                                                                                                                                                                                                                                               |

 

25

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| 10.11  |   | Letter  Agreement, dated as of July 9, 1998, between the Registrant and Fisher  Capital Corp. LLC (incorporated by reference to Exhibit 10.13 of  Registrant’s Registration Statement (File No. 333-111259) on  Form S-1)                                      |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                    |
| 10.12  |   | Amendatory  Agreement to Letter Agreement between the Registrant and Fisher Capital Corp.  LLC, dated as of December 18, 2000 (incorporated by reference to  Exhibit 10.14 of Registrant’s Registration Statement (File  No. 333-111259) on Form S-1)          |
|   |   |                                                                                                                                                                                                                                                                                    |
| 10.13  |   | Amendatory  Agreement to Letter Agreement between the Registrant and Fisher Capital Corp.  LLC, dated as of January 1, 2002 (incorporated by reference to  Exhibit 10.15 of Registrant’s Registration Statement (File  No. 333-111259) on Form S-1)            |
|   |   |                                                                                                                                                                                                                                                                                    |
| 10.14  |   | Stock Option  Plan for the Management and Key Employees of the Registrant and Subsidiaries  (incorporated by reference to Exhibit 10.16 of Registrant’s Registration  Statement (File No. 333-111259) on Form S-1)                                                  |
|   |   |                                                                                                                                                                                                                                                                                    |
| 10.15  |   | Employment  Agreement, dated as of January 1, 2004, between James R. Fisher and  Bristol West Holdings, Inc. (incorporated by reference to  Exhibit 10.17 of Registrant’s Registration Statement (File  No. 333-111259) on Form S-1)                      |
|   |   |                                                                                                                                                                                                                                                                                    |
| 10.16  |   | 2004 Stock Incentive Plan for the Registrant and Subsidiaries  (incorporated by reference to Exhibit 10.18 of Registrant’s Registration  Statement (File No. 333-111259) on Form S-1)                                                                               |
|   |   |                                                                                                                                                                                                                                                                                    |
| 10.17  |   | Quota Share Reinsurance Agreement, effective January 1, 2005,  among Coast National Insurance Company, Security National Insurance Company,  Bristol West Insurance Company, Bristol West Casualty Insurance Company and  National Union Fire Insurance Company of Pittsburgh, PA. |
|   |   |                                                                                                                                                                                                                                                                                    |
| 21.1   |   | List of  Subsidiaries of the Registrant (incorporated by reference to  Exhibit 21.1 of Registrant’s Registration Statement (File  No. 333-111259) on Form S-1)                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                    |
| 31.1   |   | Rule 13a-14(a)/15d-14(a)  Certification of Chief Executive Officer (pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002)                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                    |
| 31.2   |   | Rule 13a-14(a)/15d-14(a)  Certification of Chief Financial Officer (pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002)                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                    |
| 32     |   | Section 1350  Certification of Chief Executive Officer and Chief Financial Officer  (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)                                                                                                                               |

 

**(b)  Reports on Form 8-K filed or furnished during the quarter ended June 30,2004:**

** **

(i)                                     Current Reporton form 8-K filed on May 12, 2004, announcing results for the first quarter of2004. Under the Form 8-K, the Company furnished, pursuant to Item 12, underItem 7 the press release entitled “Bristol West Reports First Quarter, 2004Financial Results” as an exhibit.

(ii)                                  CurrentReport on form 8-K filed on May 27, 2004, announcing the appointment of CraigE. Eisenacher as Senior Vice President – Chief Financial Officer, effectiveJune 1, 2004.  Under the Form 8-K,the Company furnished, pursuant to Item 12, under Item 5, the press releaseentitled “Bristol West Appoints Craig E. Eisenacher As Chief Financial Officer”as an exhibit.

 

26

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized. 

 
|                 |   |   | BRISTOL WEST HOLDINGS, INC.  (Registrant)                                               |   |
|----------------------|--------|--------|-----------------------------------------------------------------------------------------|--------|
|                 |   |   |                                                                                    |
| August 13, 2004 |   | By:    | /s/ JAMES R. FISHER                                                                     |
| Date                 |   |   | (Signature)                                                                             |
|                 |   |   |                                                                                    |
|                 |   | Name:  | James R. Fisher                                                                         |
|                 |   | Title: | Chairman, Chief Executive Officer (Principal  Executive Officer)                        |
|                 |   |   |                                                                                    |
|                 |   |   |                                                                                    |
| August 13, 2004 |   | By:    | /s/ CRAIG E. EISENACHER                                                                 |
| Date                 |   |   | (Signature)                                                                             |
|                 |   |   |                                                                                    |
|                 |   | Name:  | Craig E. Eisenacher                                                                     |
|                 |   | Title: | Chief Financial Officer (Principal Financial  Officer and Principal Accounting Officer) |

 

27

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