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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2001

OR

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

|                                                                    
|--------------------------------------------------------------------
|For the
transition period from  ________________ to ________________

Commission file number: 0-25508

RTW, INC.
(Exact name of registrant as specified in its charter)

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

8500 Normandale Lake Boulevard, Suite 1400
Bloomington, MN 55437
(Address of principal executive offices and zip code)

Registrants telephone number, including area code:    (952) 893-0403

|                                                    |  |                                                                         
|--------------------------------------------------- |  | ------------------------------------------------------------------------
|Securities registered pursuant to 12(b) of the Act: |  | None                                                                    
|
|Securities registered pursuant to 12(g) of the Act: |  | Common Stock, no par value
Series A Junior Participating Preferred Stock
|

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

|    |   |  |    |  |  | 
|--- | - |  | -- |  |  | 
|Yes | X |  | No |  | 
|    |   |  |    | 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K: ( X )

As of March 20, 2002, 10,301,818 shares of Common Stock, no par value, were
outstanding. As of March 22, 2002, assuming as fair value the last sale price
of $0.63 per share on The Nasdaq Stock Market, the aggregate fair value of
shares held by non-affiliates was approximately $5,200,000.

Documents incorporated by reference:

The Companys Proxy Statement for its Annual Meeting of Shareholders to be held
in May 2002, a definitive copy of which will be filed with the Securities and
Exchange Commission within 120 days of December 31, 2001, is incorporated by
reference in Part III of this Report on Form 10-K.





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TABLE OF CONTENTS



|                                                 |                                                                                               |                                      |  |  |  |  |  | 
|------------------------------------------------ | --------------------------------------------------------------------------------------------- | ------------------------------------ |  |  |  |  |  | 
|PART I                                          
|                                                 | ITEM 1. BUSINESS                                                                             
|                                                 |                                                                                               | EXECUTIVE OFFICERS OF THE REGISTRANT
|                                                 | ITEM 2. PROPERTIES                                                                           
|                                                 | ITEM 3. LEGAL PROCEEDINGS                                                                    
|                                                 | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|PART II                                         
|                                                 | ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                
|                                                 | ITEM 6. SELECTED FINANCIAL DATA                                                              
|                                                 | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                                 | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                          
|                                                 | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                          
|                                                 | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
|PART III                                        
|                                                 | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                  
|                                                 | ITEM 11. EXECUTIVE COMPENSATION                                                              
|                                                 | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|                                                 | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                      
|PART IV                                         
|                                                 | ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K                    
|                                                 |                                                                                               | SIGNATURES                          
|Employment Agreement                            
|Employment Agreement                            
|Employment Agreement                            
|Description of the 2002 Profit Sharing Program  
|Description of Reinsurance Agreement            
|Election Form                                   
|Workers' Comp. Quota Share Reinsurance Contract 
|Workers' Comp. Quota Share Reinsurance Placement
|Third Amendment to the Credit Agreement         
|Fourth Amendment to the Credit Agreement        
|Statement re: Computation of Net Loss Per Share 
|Consent of Deloitte & Touche LLP                



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TABLE OF CONTENTS

|         |  |                                                                                       |  |      |    | 
|-------- |  | ------------------------------------------------------------------------------------- |  | ---- | -- | 
|PART I   |  |                                                                                       |  | Page |   
|         |  |                                                                                       |  |      |   
|        
|Item 1.  |  | Business                                                                              |  |      | 3  | 
|         |  | Executive Officers of the Registrant                                                  |  |      | 9  | 
|Item 2.  |  | Properties                                                                            |  |      | 10 | 
|Item 3.  |  | Legal Proceedings                                                                     |  |      | 10 | 
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                   |  |      | 10 | 
|PART II  |  |                                                                                       |  |      |    | 
|Item 5.  |  | Market for Registrants Common Equity and Related Stockholder Matters                 |  |      | 11 | 
|Item 6.  |  | Selected Financial Data                                                               |  |      | 11 | 
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results
of Operations |  |      | 12 | 
|Item 7A  |  | Quantitative and Qualitative Disclosures About Market Risk                            |  |      | 26 | 
|Item 8.  |  | Financial Statements and Supplementary Data                                           |  |      | 26 | 
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure  |  |      | 44 | 
|PART III |  |                                                                                       |  |      |    | 
|Item 10. |  | Directors and Executive Officers of the Registrant                                    |  |      | 44 | 
|Item 11. |  | Executive Compensation                                                                |  |      | 44 | 
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management                        |  |      | 44 | 
|Item 13. |  | Certain Relationships and Related Transactions                                        |  |      | 44 | 
|PART IV  |  |                                                                                       |  |      |    | 
|Item 14. |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                      |  |      | 44 | 
|         |  | Signatures                                                                            |  |      | 46 | 

2



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PART I




ITEM 1. BUSINESS

Overview

RTW, Inc. (the Company) provides comprehensive management products and
services to employers for their workers compensation programs in Minnesota,
Wisconsin, South Dakota, Colorado, Missouri, Illinois, Kansas, Michigan,
Indiana, Massachusetts, Connecticut, New Hampshire, Rhode Island and Maine.
The Company announced that it would close its regional offices in Missouri and
Massachusetts in the fourth quarter of 2001. Beginning February 2002, the
Company began to non-renew all policies in its Missouri and Massachusetts
regions and will run off expiring policies in these regions through January
2003. The Company has also obtained licenses but is not operating in
Pennsylvania, Tennessee, Maryland, Arkansas, Iowa, Florida, New Jersey,
Georgia, North Carolina, Texas and Oklahoma. The Company believes its
proprietary management approach substantially reduces wage replacement costs
and medical expenses resulting from workplace injuries. The Company focuses on
controlling costs by returning injured employees to work as soon as possible
and by actively managing all participants in the workers compensation system,
including employers, employees and medical care providers, as well as legal and
judicial participants in the workers compensation system. Elements of the
Companys management approach include:



| |  |  | thorough on-site evaluation of potential customers;                                
| | - |  | -----------------------------------------------------------------------------------
|
| |  |  | active training of customers in the Companys procedures;                          
|
| |  |  | prompt identification of potentially high-cost injuries; and                       
|
| |  |  | rapid intervention in, and intensive management of, potentially high-cost injuries.

The Company has developed two proprietary management systems: (i) the RTW
SOLUTION®, designed to lower employers workers compensation costs and return
injured employees to work as soon as possible, and (ii) the ID15® system,
designed to identify those injured employees who are likely to get stuck in the
workers compensation system. In order to benefit directly from the use of its
proprietary methods, the Company combines its management services with workers
compensation insurance products underwritten by its wholly owned subsidiary,
American Compensation Insurance Company (ACIC). The Company also uses
management techniques including designated health care providers, medical fee
schedule review, utilization review and peer review to control medical costs.

Industry

Workers compensation benefits are mandated and regulated individually by
each state, and every state requires employers to provide wage replacement and
medical benefits to work accident victims regardless of fault. Virtually all
employers in the United States are required to either: (a) purchase workers
compensation insurance from a private insurance carrier; (b) obtain coverage
from a state managed fund; or (c) if permitted by their state, to be
self-insured. Workers compensation laws generally mandate two types of
benefits for injured employees: (i) indemnity payments that consist of
temporary wage replacement or permanent disability payments and (ii) medical
benefits that include expenses related to injury diagnosis and treatment as
well as rehabilitation, if necessary. On an industry-wide basis, indemnity
payments represent approximately 54% of benefits paid, while medical benefits
account for the remaining 46%.

Estimated insurance premiums totaled approximately $24.8 billion
nationwide in 1999. This $24.8 billion includes: (i) the traditional or
private residual market, estimated at $22.1 billion, including commercial
insurers and state-operated assigned risk pools established for high risk
employers and (ii) state funds, estimated at $2.7 billion, operated in states
in order to increase competition and stabilize the market.

Indemnity payments, established by legislative action, have risen, in part
because of higher wage levels and increased state mandated benefits. Medical
expenses have also increased due to the general rise in the cost of health care
and the statutory requirement that employers provide coverage for all
compensable medical costs, without any copayment by the employee. The Company
believes the most significant factor affecting the cost of workers
compensation, however, results from incentives in the system for injured
employees to remain away from work and to continue collecting indemnity
payments and receiving medical treatment beyond the point that is necessary.

The Company believes that traditional workers compensation insurance
companies are not as effective in controlling loss costs as RTW. While
traditional efforts, including focusing on workplace safety and implementing
certain medical cost containment measures, have reduced costs in certain areas,
the Company believes these efforts


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have not had a significant effect on the overall system because they have
not focused effectively on controlling indemnity payments. In the late 1990s
as well as into 2000, traditional insurance companies moved toward a more
comprehensive management approach including return-to-work initiatives. The
Company believes that the traditional insurers have been somewhat successful in
these initiatives but have not achieved the cost reductions and claim closure
outcomes realized by the Company.

The Companys Management Approach

The Company seeks to control workers compensation costs through a
proprietary management approach that is specifically designed for the workers
compensation system. The Companys management strategy seeks to reduce
workers compensation costs significantly through early intervention in each
employee injury and intensive management of all participants in the system,
including employers, injured employees, medical care providers, and legal and
judicial participants in the workers compensation system. Through early
intervention, the Company promptly identifies cases that have the potential to
result in significant expenses and acts to control these expenses before they
are incurred. The Company focuses on controlling indemnity payments for lost
wages, the largest component of workers compensation costs, by quickly
returning injured employees to work. As part of this strategy, the Company
attempts to return an injured employee to his or her original position, if the
employee is able, or to place the employee in a transitional, light-duty
position until the employee is able to resume his or her former position. By
promptly returning an employee to work, the Company has found that not only
indemnity payments, but also medical expenses per injury, are substantially
reduced. In addition, the Company uses other management techniques including
contracts with provider networks, designated health care providers, medical fee
schedule review, utilization review and peer review to control medical costs.

The Company uses five-person operating teams to implement its proprietary
management approach. Each operating team handles all of the claims for a
specific group of employers and is accountable within the Company for the loss
experience of these employers. Each team generally consists of three nurses, a
statutory claims administrator, and an assistant claims administrator /
clerical support person. A teams nurses are responsible for evaluating the
medical condition of an injured employee and monitoring the employees medical
treatment. The claims administrators are responsible for determining the
eligibility of claims, paying benefits in a timely manner and following
statutory requirements for administration of claims. The operating teams meet
regularly to discuss strategies for managing difficult claims and to review
strategies and procedures that have been particularly successful in resolving
disputes.

The following sections summarize the Companys approach to managing the
various participants in the system.

Employers. Generally, each employer is assigned to an operating team
responsible for managing the relationship. Prior to accepting an employer,
members of an operating team conduct a risk assessment and explain the
Companys methods and procedures to the employer. The risk assessment forms a
part of the Companys underwriting process and includes evaluating the
employers willingness to follow the Companys procedures. As part of the
insurance policy, the employer agrees to comply with the Companys early
intervention methods and to provide transitional, light-duty work for injured
employees until such time as they are able to resume their normal positions.
To ensure that the Companys early intervention techniques succeed, the Company
requests prompt notification from the employer of all injuries, typically 24 to
48 hours after the employer learns of the injury.

Each operating team is responsible for implementing the workers
compensation program for the employer, training the employers personnel in the
Companys methods and procedures and managing all reported injuries for the
employer. The operating team meets with the employer, provides access to loss
reports showing current claims status, conducts an annual account review and
maintains active communication on open injuries. The Companys loss control
team or the operating team may make workplace safety recommendations or retain
a workplace safety-engineering firm to assist its employers to remedy work
conditions that the loss control team or the operating team determines
constitute an inappropriate risk. In addition, the operating team may
recommend to the Companys management the cancellation or non-renewal of the
policy for an employer that fails to comply with the Companys procedures.

Employees. The Company focuses on identifying injuries that have the
greatest potential to result in significant expenses and acts quickly to
control expenses resulting from these injuries. The Companys experience has
been that approximately 15% of all injuries result in 85% of all workers
compensation expenses and that early identification of, and intervention in,
these cases can lead to significant cost savings. Within 48 hours of being
notified of an injury, an operating team evaluates several factors, including
the type of injury, the employees injury history and whether the employee is
absent from work, to determine whether the injury is likely to involve
significant expense. In potentially high-cost cases, a member of the operating
team intervenes quickly by meeting with the injured


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employee to assess the injury, assisting the injured employee in obtaining
medical care and rehabilitation and developing a plan to get the employee back
to work as soon as is appropriate. If the employee cannot immediately return
to his or her original position, the employer is required, according to the
terms of the insurance agreement, to provide a transitional light-duty job that
is consistent with the limits defined by the employees medical care provider.
If the employee refuses this transitional position, the Company may terminate
indemnity payments, but is required to continue to provide appropriate medical
benefits.

Medical Care Providers. The operating teams actively assess each injury,
monitor and manage the medical treatment and review the medical expenses of
each employees injury. Each injury report is reviewed by one of the Companys
nurses. The nurse typically contacts the physician treating employees in cases
that involve days off from work or injuries that could involve significant
expense. In these cases, the physician is asked to provide his or her
diagnosis, plan of treatment and assessment of the employees physical
capabilities for transitional work. The Company has contracts with medical
physicians to provide consulting services and assess proposed treatment plans
for injured employees to the operating teams. These physicians also discuss
injured employee treatment plans with the employees medical care providers.
The goal is to ensure both an accurate diagnosis and treatment of the injury
and an understanding of the nature and extent of the limits the diagnosis
places on the employees ability to return to work in either the original job
or a transitional, light-duty position. The operating team also monitors the
health care provided to the injured employee to ensure that the employee
receives proper treatment for the injury and that the employee does not receive
services or procedures that are excessive, unnecessary or unrelated to the
particular injury. In addition, when the operating team believes the diagnosis
of an injury or the proposed rehabilitation treatment is not appropriate, the
operating team will arrange for a second opinion with an independent medical
examiner.

The medical cost management team reviews all bills submitted by medical
care providers to determine if the amounts charged for the treatments are
appropriate according to statutory fee schedules.

In Minnesota, Illinois and many other states, the Company cannot require
that an injured employee go to a specific physician or seek treatment from a
specific provider. Nevertheless, the Company attempts to assist the injured
employee in selecting appropriate medical care providers. In Colorado,
Missouri and Michigan (for the first ten days after the injury) the Company can
require that injured employees go to a physician within a designated network of
medical care providers.

Management of Legal and Judicial Participants. The Company, through early
intervention, seeks to limit the number of disputes with injured employees. As
part of its early intervention process, the Company identifies injuries that
are not eligible for medical or indemnity payments, and denies the claim. The
Company may also deny a claim for indemnity payments when it determines that no
further payments are appropriate (for example, when an employee has been
offered transitional, light-duty work and has refused it). In these and other
sets of circumstances, the employee may engage a lawyer to represent his or her
interests. Generally, if the parties are unable to resolve the matter, the
workers compensation law mandates arbitration, subject to judicial review.
For cases that involve adversary proceedings, the Company engages one of
several lawyers who are familiar with the Companys philosophy and actively
seeks to resolve the dispute with the employees attorney. The Companys
policy is to contest all cases where the Company believes benefits are not
appropriate under applicable law.

Customers

The Company targets employers and associations that operate in industries
with relatively high workers compensation costs, including manufacturing,
retail, wholesale, health care and hospitality industries and employers with a
history of workers compensation claim costs higher than average in their
industry.

The Companys average annual premium per policy increased to $56,800 in
2001 from $40,500 in 2000 and $27,000 in 1999 due to focused aggressive
re-underwriting in 2001, 2000 and 1999. The Companys ten largest customers
accounted for $6.6 million or 7.8% of the Companys premiums in force in 2001
compared to $7.9 million or 7.9% of the Companys premiums in force in 2000 and
$6.5 million or 7.5% of the Companys premiums in force in 1999. No customer
accounted for more than 5% of in force premiums in 2001, 2000 or 1999. The
Company renewed 56.5% of the policies scheduled to expire in 2001 whereas 66.2%
and 65.8% were renewed in 2000 and 1999, respectively.

Currently, all of the Companys employers are in Minnesota, Wisconsin,
South Dakota, Colorado, Missouri, Illinois, Kansas, Michigan, Indiana,
Massachusetts, Connecticut, New Hampshire, Rhode Island and Maine. In December
2001, the Company announced that it would close its regional offices in
Missouri (covering Missouri, Illinois and Kansas) and Massachusetts (covering
Massachusetts, Connecticut, New Hampshire, Rhode Island and Maine). Beginning
February 2002, the Company began to non-renew all policies in its Missouri and
Massachusetts


5Table of Contents

regions and will run off expiring policies in these regions through January
2003. In addition to these states, the Company is also currently licensed in
Pennsylvania, Tennessee, Maryland, Arkansas, Iowa, Florida, New Jersey,
Georgia, North Carolina, Texas and Oklahoma. The Company currently has no
intention to expand operations beyond the present states in which it is
currently operating and expects to run off its employer base in its Missouri
and Massachusetts regions.

Products

Substantially all of the Companys workers compensation products and
services are guaranteed-cost insurance policies. Under a guaranteed-cost
policy, the customer purchases an insurance policy underwritten by ACIC and
pays a premium based on the employers aggregate payroll. The Company assumes
responsibility for all the indemnity and medical costs associated with the
employers workers compensation injuries and works closely with the employer
in managing the employers entire workers compensation program.

The Company determines the premium to be charged an employer based on
several factors, including: (i) the expected dollar loss per $100 of payroll
for the employers industry, (ii) the employers experience modifier, a
measurement of the difference between the employers past claims experience and
its industry average, and (iii) an upward or downward adjustment to the premium
by the Company based on its assessment of the risks associated with providing
the coverage for the specific employer and on competitive market prices. An
employers expected dollar loss and experience modifier are each determined by
an independent rating agency established or adopted by its state, based on a
three-year average of the claims experience of the employer and its industry.

In addition to standard guaranteed-cost policies, the Company offers, on a
limited basis, a deductible guaranteed-cost policy under which the employer is
responsible for all medical and indemnity expenses up to a specific dollar
amount, while the Company is responsible for medical and indemnity expenses
over this level. The Company provides the same comprehensive management
services for the deductible guaranteed-cost policies and the standard
guaranteed-cost policies.

Sales and Marketing

The Company sells its workers compensation products and services through
independent insurance agencies, including several large national agencies.
Agencies are paid a commission, which averaged 7.6% of the Companys gross
premiums earned in 2001 compared to 7.9% of the Companys gross premiums earned
in 2000 and 8.0% of gross premiums earned in 1999. The Companys ten highest
producing agencies accounted for $24.8 million or 29.7% of premiums in force in
2001 compared to $27.2 million or 27.3% of premiums in force in 2000 and $19.9
million or 22.8% of premiums in force in 1999. No agency accounted for more
than 6.4% of premiums in force in 2001 compared to 6.5% of premiums in force in
2000 and 4.0% of premiums in force in 1999. The Company continually markets
its products and services to its agencies to keep them aware of developments in
the Companys business. Each states underwriting team is responsible for
establishing and maintaining agency relationships.

Reinsurance

The Company shares the risks and benefits of the insurance it underwrites
through reinsurance. The Company purchases reinsurance to (i) protect it from
potential losses in excess of the level management is willing to accept and
(ii) to achieve premium to surplus leverage ratios that are at acceptable
levels. From 1995 to 2001, the Companys primary reinsurance was excess of
loss coverage that limited its per-incident exposure. In June 2001, however,
the Company also entered into a quota share reinsurance treaty that was
effective January 1, 2001 to reduce premiums earned and bring the premium to
surplus leverage ratios in line with management targets and rating agency
expectations.

Under excess of loss policies, the Company pays the reinsurer a
percentage of the Companys gross premiums earned, and the reinsurer agrees to
assume all risks relating to injuries over a specific dollar amount on a per
occurrence basis. Excess of loss coverage in Minnesota is provided by a state
established organization, the Minnesota Workers Compensation Reinsurance
Association (WCRA). In non-Minnesota states, excess of loss coverage is
purchased through private reinsurers.

In 2001, 2000 and 1999, the Company selected per occurrence levels in
Minnesota under the WCRA of $330,000, $310,000 and $290,000, respectively. In
2002, the selected per occurrence level excess of loss coverage under the WCRA
is $350,000.

In 2001, 2000 and 1999, the Company purchased non-Minnesota excess of loss
coverage primarily through General Reinsurance Corporation, rated A++
(Superior) by A.M. Best. The excess of loss policy in effect during 2001, 2000
and 1999 provided reinsurance from $300,000 per person per any one loss and up
to statutory limits per


6Table of Contents

occurrence ultimate net loss. Coverage for 2002 through General
Reinsurance Corporation again provides excess of loss coverage from $300,000,
but coverage is capped at $20.0 million per occurrence ultimate net loss.

The excess of loss policy in effect during 1998 and 1997 provided
reinsurance up to $9.5 million in excess of $500,000 per person per any one
loss and up to $40 million in excess of $10 million per occurrence ultimate net
loss. This excess of loss policy was effective January 1, 1997, and replaced
excess of loss policies that were terminated on December 31, 1996. In 1996,
the non-Minnesota excess of loss policies provided reinsurance up to $9.5
million in excess of $500,000 per person per any one loss and up to $49.5
million in excess of $500,000 per occurrence ultimate net loss. Transatlantic
Reinsurance Company, rated A++ (Superior) by A.M. Best, is the only reinsurance
company that received more than 15% of the premiums paid for reinsurance
coverage under the 1996 excess of loss coverage.

For claims occurring on or after July 1, 1998, the Company purchased
excess of loss coverage through GE Reinsurance Corporation, rated A++
(Superior) by A.M. Best that provides reinsurance up to $275,000 in excess of
$25,000 in all states except Minnesota where the coverage is $255,000 in excess
of $25,000 for 1998, $265,000 in excess of $25,000 for 1999 and $275,000 in
excess of $25,000 for 2000 and 2001. This coverage was purchased to reduce risk
and volatility in the Companys operating performance. This contract was
terminated effective December 31, 2000; however the policy was effective in
2001 for policies in force at December 31, 2000 through expiration, not to
exceed fifteen months after the effective termination date. Policies written
or renewing in 2002 and 2001 will not be covered under this lower level excess
of loss reinsurance policy.

In June 2001, the Company entered a new 50% quota share reinsurance policy
effective January 1, 2001 in order to reduce its net premium to surplus
leverage ratio and maintain a secure financial strength rating for ACIC. This
coverage was purchased through The St. Paul Fire and Marine, rated A+ by A.M.
Best. Due to the percentage of amounts ceded under the quota share policy and
its January 1, 2001 effective date, premiums earned, claim and claim settlement
expenses and policy acquisition costs were substantially reduced in 2001. The
Company further increased the amounts ceded to 80% effective December 1, 2001
under this quota share reinsurance policy. This policy continues into 2002 at
an 80%, quota share; however, the Company expects to lower the quota share
percentage after the first quarter of 2002.

A.M. Best determines its ratings based on a comparative analysis of the
financial condition and operating performance of insurance companies. A.M.
Best ratings are based upon factors of concern to insureds and are not directed
toward the protection of investors. See Competition.

Competition

The workers compensation industry is highly competitive. The Company
competes with large insurance companies, managed health care organizations,
state sponsored insurance pools and risk management consultants. Unlike the
Company, which offers only workers compensation products and services, these
competitors may offer additional products and services to employers, including
other forms of insurance. As a consequence, these competitors may have certain
advantages in pricing their workers compensation products. In addition,
certain of these competitors are offering a management approach similar to that
offered by the Company. Many of the Companys competitors have greater
financial and operating resources than the Company.

Competitive factors in the industry include premium rates, level of
service and ability to reduce claims expense. The Company believes that its
workers compensation insurance products are competitively priced and its
premium rates are typically lower than those for customers assigned to the
state sponsored risk pools. The Company also believes that its level of
service and its ability to reduce claims are strong competitive factors that
have enabled it to retain existing customers and attract new customers.

Large insurance companies exit and enter the workers compensation market
in different states depending on their appraisal of current market conditions.
Many insurance companies stopped underwriting workers compensation insurance
during the early 1990s due to rising costs that were not matched by reductions
in statutory benefits or higher premium rates. In the mid to late 1990s, the
Company experienced increased market pressure as new carriers, including large
insurance companies and single line workers compensation insurance companies,
entered the market. In 2001 and 2000, many insurers withdrew from the markets
in which we operate as premium rates were insufficient to cover the cost of
benefits paid.

Large insurance companies compete primarily with the Company for customers
that have lower past claims experience or lower experience modifiers. As a
result, the Company experiences increased competition for the renewal of
workers compensation policies with customers that have reduced their
experience modifiers, and it expects to continue to experience increased
competition from large insurance companies.

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Another competitive factor results from the fact that some employers will
not purchase workers compensation products from carriers with an A.M. Best
rating less than A. In addition, certain insurance carriers that write
umbrella policies will not provide coverage to an employer if a portion of the
employers underlying insurance policy, such as the workers compensation
portion is written by a carrier with a less than A rating. The Company
believes that its B- letter rating from A.M. Best will make it difficult, in
certain instances, for the Company to provide its products to certain
employers. Historically, in these instances, the Company competed by writing
these employers using an A rated insurers paper. This process, known as
fronting, added additional cost for ACIC but allowed the Company access to
markets it may have otherwise not been able to access. The Company does not
currently have a fronting arrangement in effect and believes that its ability
to find a fronting company may also be difficult in 2002.

The Companys insurance subsidiary was assigned an initial rating of B++
(Very Good) on a scale of A++ (Superior) to F (In Liquidation) on December 16,
1996. This rating was reaffirmed in April 1999 and June 2000. In June 2001,
however, based on 2000 financial results, A.M. Best downgraded the Companys
rating to B+ and, based on further disappointing results in 2001, further
downgraded that rating to B- in February 2002. An A.M. Best rating is assigned
after an extensive quantitative and qualitative evaluation of the Companys
financial condition and operating performance. A.M. Best ratings are based
upon factors of concern to insureds and are not directed toward the protection
of investors. Furthermore, A.M. Best ratings are not ratings of the Company or
any of its securities. A.M. Best ratings include Secure Ratings, consisting of
A++ and A+ (Superior); A and A- (Excellent); B++ and B+ (Very Good); Vulnerable
or Unsecure Ratings, consisting of B and B- (Adequate); C++ and C+ (Fair); C
and C- (Marginal); D (Very Vulnerable); E (Under State Supervision) and F (In
Liquidation).

Data Management

During the period 1997 to 2001, the Company contracted with various
unrelated third-parties for certain computer information systems and other
software licenses. In 1996, the Company developed and implemented its own
proprietary claims management and medical fee adjudicating systems to manage
claims, audit medical fees, pay claims, provide reports to policyholders and
analyze claims data. These systems replaced third-party contracts for claims
management and medical fee adjudicating systems. In 1995, the Company
developed and implemented its own proprietary policy management system to
process insurance applications and issue policies and endorsements. This
system replaced a third-party contract for a policy management system. In
1999, the Company developed and implemented its own proprietary billing, cash
receipts, collections and agency commission systems. These systems replaced
third-party software systems purchased by the Company. The Company continues
to utilize third party software to maintain financial information, prepare
accounting reports and financial statements and pay vendors. The Company also
contracts with a third-party provider of payroll services for payroll, benefit
and human resource software services. The Company utilizes other licensed
software from national vendors to maintain its financial records, file
statutory statements with insurance regulators and perform other general
business.

Employees

The Company had 204 full-time employees at December 31, 2001. Of the
Companys employees, approximately 101 work in the Companys administrative and
financial functions and 103 serve on, provide service to or manage
approximately 18 different operating teams. None of the Companys employees
are subject to collective bargaining agreements. The Company believes its
employee relations are good.

Regulation

The Companys insurance subsidiary is subject to substantial regulation by
the governmental agencies in the states in which it operates, and will be
subject to such regulation in any state in which it provides workers
compensation products and services in the future. State regulatory agencies
have broad administrative power with respect to all aspects of the business of
the Company, including premium rates, benefit levels, policy forms, dividend
payments, capital adequacy and the amount and type of its investments. These
regulations are primarily intended to protect covered employees and
policyholders rather than the insurance company. Both the legislation covering
insurance companies and the regulations adopted by state agencies are subject
to change.

Workers compensation coverage is a creation of state law, subject to
change by the state legislature, and is influenced by the political processes
in each state. Several states have mandated that employers receive coverage
only from state operated funds. New laws affecting the workers compensation
system in Minnesota, Colorado, Missouri, Michigan and Massachusetts and any
other state where the Company currently operates or may operate in the future,
including laws that require all employers to participate in state sponsored
funds or that mandate premium reductions, could have a material adverse effect
on the Company.

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##### Table of Contents






Executive Officers of the Registrant

The following are the executive officers of the Company at March 28, 2002:

|                          |  |     |    |  |          |                                                 
|------------------------- |  | --- | -- |  | -------- | ------------------------------------------------
|Name                      |  | Age |    |  | Position
|                          |  |     |    |  |         
|David C. Prosser          |  |     | 77 |  |          | Chairman of the Board                           
|J. Alexander Fjelstad III |  |     | 50 |  |          | President and Chief Executive Officer           
|Alfred L. LaTendresse     |  |     | 53 |  |          | Executive Vice President                        
|Jeffrey B. Murphy         |  |     | 40 |  |          | Chief Financial Officer, Treasurer and Secretary
|Patricia M. Sheveland     |  |     | 43 |  |          | Vice President  Case and Claims Management     
|Keith D. Krueger          |  |     | 43 |  |          | Vice President  Underwriting and Sales         
|Debora S. Allen           |  |     | 44 |  |          | Vice President  RTW Service Business           

David C. Prosser is the founder of the Company and current Chairman of the
Board since December 2001. Mr. Prosser was previously Chairman of the Board
through March 2000, served as President and Chief Executive Officer through
January 1998, and has been a Director of the Company since its formation in
1983. From 1965 through 1985, Mr. Prosser was the owner and President of
Vocational Personnel Services, Inc., which merged into the Company in 1986.

J. Alexander Fjelstad III rejoined the Company in December 2001 as
President and Chief Executive Officer and Director after serving as President
and Chief Executive Officer of Headwater Systems, a manufacturer of radio
frequency identification devices, from March 1999 through December 2001. Mr
Fjelstad initially joined the Company in 1989 as a Vice President, served as
Chief Operating Officer beginning in 1993 and became Chief Operating Officer -
Marketing and Underwriting in October 1996 through his departure in 1998. Mr.
Fjelstad was a Director of the Company from 1989 to February 1999. He is a
member of the Chartered Property and Casualty Underwriters and the American
Institute for Property and Liability Underwriters.

Alfred L. LaTendresse rejoined the Company in December 2001 as Executive
Vice President and Director after serving as Chief Operations Officer and Chief
Financial Officer for Headwater Systems from June 1999 to December 2001. Mr.
LaTendresse initially joined the Company as Chief Financial Officer in 1990 and
became Secretary and Treasurer in October 1990. Mr. LaTendresse departed from
the Company in December 1998. Mr. LaTendresse served as a Director of the
Company from July 1993 until January 1995. Mr. LaTendresse is a member in the
American Institute of Certified Public Accountants and the Minnesota Society of
Certified Public Accountants.

Jeffrey B. Murphy joined the Company in October 1994 as Controller and was
promoted to Chief Financial Officer in February 2000. Mr. Murphy was the
Corporate Controller and held other management positions for Midcontinent
Media, Inc. from 1989 to 1994. Prior to that time, Mr. Murphy served in
various financial audit positions with Grant Thornton LLP from 1983 to 1989.

Patricia M. Sheveland was appointed to Vice President  Case and Claims
Management in January 2002. Ms. Sheveland joined RTW in April 1990 and has
held various management positions of increasing importance including General
Manager of Operations in our Colorado regional office and Director of
Operations for our Colorado, Michigan and Massachusetts regions. Prior to
joining RTW, Ms. Sheveland worked as an Occupational Nurse for Kmart
Corporation.

Keith D. Krueger joined the Company in September 1998 as the Director of
Underwriting and Pricing for the Companys Minnesota regional office. He was
promoted to director of Underwriting Services for the Companys Home Office in
October 1999 until being promoted to Vice President  Underwriting and Sales in
March 2002. Prior to joining the Company, Mr. Krueger was a Commercial Lines
Underwriting Manager for Citizens Security Mutual Insurance June 1997 to August
1998. From March 1995 to May 1997, Mr. Krueger was Vice President 
Underwriting and Marketing for American West Insurance.

Debora S. Allen was appointed to Vice President  RTW Service Business in
January 2002. Ms. Allen joined RTW in August 1997 and has held various
management positions including Chief Information Officer, Chief Operations
Officer, Director of Home Office Operations and Director of Service Business
Planning. Before joining RTW, Ms. Allen held several leadership positions with
MCC Behavioral Care and financial audit positions with Ernst & Young.

9



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##### Table of Contents






ITEM 2. PROPERTIES

The following is a summary of properties leased by the Company at December 31, 2001:

|                                                                |  |                  |        |  |             |                |  | 
|--------------------------------------------------------------- |  | ---------------- | ------ |  | ----------- | -------------- |  | 
|                                                                |  | Area leased      |        |  |             |                | 
|Location and description                                        |  | (in square feet) |        |  | Termination |               
|                                                                |  |                  |        |  |             |               
|Bloomington, Minnesota; Headquarters and
Minnesota office space |  |                  | 35,487 |  |             | September 2002
|Denver, Colorado; Colorado office space                         |  |                  | 7,825  |  |             | May 2005      
|St. Louis, Missouri; Missouri office space                      |  |                  | 6,542  |  |             | September 2005
|Detroit, Michigan; Michigan office space                        |  |                  | 11,008 |  |             | June 2002     
|Grand Rapids, Michigan; Michigan satellite office               |  |                  | 4,631  |  |             | April 2006    
|Boston, Massachusetts; Massachusetts office space               |  |                  | 12,381 |  |             | May 2002      




ITEM 3. LEGAL PROCEEDINGS

In the ordinary course of administering its workers compensation
management program, the Company is routinely involved in the adjudication of
claims resulting from workplace injuries. The Company is not involved in any
legal or administrative claims that it believes are likely to have a material
adverse effect on the Companys operations or financial condition.




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

On December 11, 2001, the Company held its 2001 Annual Meeting of Shareholders
and voted to elect three directors to fill director terms that expired in 2001.
David R. Hubers and Steven M. Rothschild were elected to serve as directors of
the Company until the Annual Meeting of Shareholders held in the year 2004 and
David C. Prosser was elected to serve as a director of the Company until the
Annual Meeting of Shareholders in 2003. Shareholders present in person or
proxy at the annual meeting voted for the election of each director as follows:

|                     |  |                |  |  |                   | 
|-------------------- |  | -------------- |  |  | ----------------- | 
|David R. Hubers      |  | For:
Withheld: |  |  | 6,563,989
823,015 | 
|Steven M. Rothschild |  | For:
Withheld: |  |  | 6,563,089
823,915 | 
|David C. Prosser     |  | For:
Withheld: |  |  | 7,253,150
133,254 | 

On December 12, 2001, Mr. Hubers and Mr. Rothschild resigned as directors
of the Company.

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##### Table of Contents






PART II




ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

QUARTERLY STOCK PRICE COMPARISON AND DIVIDENDS

The Companys shares are publicly traded on The Nasdaq Stock Market under
the symbol RTWI. The table below sets forth the range of high and low sales
prices for the Companys stock for each quarter during the past two years. The
Company had approximately 2,000 shareholders of its common stock at the close
of trading on March 1, 2002.

|             |  |      |  |   |      |         |  |   |         |  |  |         |      |  |         |   |      |  |  | 
|------------ |  | ---- |  | - | ---- | ------- |  | - | ------- |  |  | ------- | ---- |  | ------- | - | ---- |  |  | 
|             |  |      |  |   |      | First   |  |   | Second  |  |  | Third   |      |  | Fourth  |  
|Fiscal Year: |  |      |  |   |      | Quarter |  |   | Quarter |  |  | Quarter |      |  | Quarter |  
|             |  |      |  |   |      |         |  |   |         |  |  |         |      |  |         |  
|2001         |  | High |  | $ | 5.94 |         |  | $ | 2.64    |  |  | $       | 1.92 |  |         | $ | 5.62 | 
|             |  | Low  |  |   | 2.13 |         |  |   | 1.00    |  |  |         | 0.68 |  |         |   | 0.25 | 
|2000         |  | High |  |   | 6.22 |         |  |   | 5.75    |  |  |         | 5.03 |  |         |   | 4.25 | 
|             |  | Low  |  |   | 4.75 |         |  |   | 3.25    |  |  |         | 2.88 |  |         |   | 3.22 | 

The Company has never paid cash dividends on its common stock. The Company
currently intends to retain any and all income for use in its business and
does not anticipate paying cash dividends in the foreseeable future. Any
future determination as to payment of dividends will depend on the financial
condition and results of operations of the Company and such other factors
deemed relevant by the Board of Directors. Under the terms of its credit
agreement, the Company is prohibited from making dividend payments without
prior consent of the lender.




ITEM 6. SELECTED FINANCIAL DATA

The consolidated statements of operations data set forth below for each
of the three years in the period ended December 31, 2001, and the
consolidated balance sheet data at December 31, 2001 and 2000 are derived
from, and are qualified by reference to, the audited consolidated financial
statements included elsewhere in this Form 10-K. The consolidated statements
of operations data set forth below for the two years in the period ended
December 31, 1998, and the consolidated balance sheet data at December 31,
1999, 1998 and 1997, are derived from audited consolidated financial
statements not included herein. The information set forth below should be
read in conjunction with Managements Discussion and Analysis of Financial
Condition and Results of Operations and the Companys consolidated financial
statements and related notes included elsewhere in this Form 10-K.

|                                |  |                                       |         |  |      |   |         |      |  |   |         |  |  |      |         |   |  |   |         |  
|------------------------------- |  | ------------------------------------- | ------- |  | ---- | - | ------- | ---- |  | - | ------- |  |  | ---- | ------- | - |  | - | ------- | -
|                                |  | 1997                                  |         |  | 1998 |   |         | 1999 |  |   | 2000    |  |  | 2001 |        
|                                |  |                                       |         |  |      |   |         |      |  |   |         |  |  |      |        
|                                |  | (In thousands, except per share data)
|Total revenues                  |  | $                                     | 88,263  |  |      | $ | 90,152  |      |  | $ | 77,812  |  |  | $    | 83,299  |   |  | $ | 50,062  |  
|Income (loss) from operations   |  |                                       | 9,446   |  |      |   | (10,485 | )    |  |   | 8,357   |  |  |      | (14,780 | ) |  |   | (14,241 | )
|Net income (loss)               |  |                                       | 5,799   |  |      |   | (7,081  | )    |  |   | 6,167   |  |  |      | (9,708  | ) |  |   | (23,695 | )
|Basic income (loss) per share   |  |                                       | 0.49    |  |      |   | (0.59   | )    |  |   | 0.50    |  |  |      | (0.89   | ) |  |   | (2.30   | )
|Diluted income (loss) per share |  |                                       | 0.48    |  |      |   | (0.59   | )    |  |   | 0.50    |  |  |      | (0.89   | ) |  |   | (2.30   | )
|Premiums in force at year end   |  |                                       | 78,400  |  |      |   | 82,100  |      |  |   | 87,200  |  |  |      | 99,400  |   |  |   | 83,700  |  
|Total assets                    |  |                                       | 142,997 |  |      |   | 172,934 |      |  |   | 176,511 |  |  |      | 194,535 |   |  |   | 227,034 |  
|Notes payable                   |  |                                       | 4,875   |  |      |   | 2,461   |      |  |   |        |  |  |      | 7,000   |   |  |   | 4,500   |  
|Total shareholders equity      |  |                                       | 58,357  |  |      |   | 52,618  |      |  |   | 55,565  |  |  |      | 38,736  |   |  |   | 15,742  |  

11



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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RTW, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

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

We have developed two proprietary management systems: (i) the RTW
SOLUTION®, designed to lower employers workers compensation costs and return
injured employees to work as soon as possible, and (ii) the ID15® system,
designed to identify those injured employees who are likely to become
inappropriately dependent on the workers compensation system. We combine our
management system with insurance products underwritten by our insurance
subsidiary to offer services to customers. We currently provide workers
compensation management services solely to employers insured through our
insurance subsidiary.

During 2001, we operated in Minnesota, Wisconsin, South Dakota, Colorado,
Missouri, Illinois, Kansas, Michigan, Indiana, Massachusetts, Connecticut, New
Hampshire, Rhode Island and Maine. In the fourth quarter of 2001, we closed
our regional offices in Missouri (which served Missouri, Illinois and Kansas)
and Massachusetts (which served Massachusetts, Connecticut, New Hampshire,
Rhode Island and Maine). Collectively, these offices had premiums in force
totaling $22.2 million at December 31, 2001. We expect to run off this
business in 2002.

On February 28, 2002, our A.M. Best financial rating was downgraded from a
Secure rating (B+) to an Unsecure rating (B-) as a result of the decrease in
statutory surplus in 2001 from $29.3 million at December 31, 2000 to $19.5
million at December 31, 2001 and our adverse development in 2001 and 2000 that
resulted in statutory operating losses in those years. Certain insurance
carriers that write umbrella policies will not provide coverage to an employer
if a portion of the employers underlying insurance policy, such as the
workers compensation portion, is written by a carrier with an unsecure rating.
Additionally, certain of our independent agents may be unwilling to sell our
insurance as a result of the downgrade. As a result, we believe that our B-
rating from A.M. Best will make it difficult to provide our products to certain
employers. While we believe that the A.M. Best downgrade will result in
decreasing premiums in force, the ultimate effect of this downgrade is unknown
at this time.

Additional information about RTW is available on our website,
www.rtwi.com.

Significant Accounting Policies Our significant accounting policies are
summarized in Note 1  Summary of Significant Accounting Policies to our
financial statements. Our significant accounting policies include those
policies related to our accounting for: (i) premiums earned; (ii) unpaid
claim and claim settlement expenses, including reserves for incurred but not
reported claims; (iii) policy acquisition costs; and (iv) investments. These
accounting policies are further discussed in detail within each section of
this Managements Discussion and Analysis of Financial Condition and Results
of Operations.

Financial Summary This financial summary presents our discussion and
analysis of the consolidated financial condition and results of operations of
RTW, Inc. This review should be read in conjunction with the Consolidated
Financial Statements at December 31, 2001.

The following table provides an overview of our key operating results (000s, except per share amounts):

|                                    |  |                         |         |   |      |   |        |      |  |   |        | 
|----------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------ | ---- |  | - | ------ | 
|                                    |  | Year Ended December 31, |        
|                                    |  |                         |        
|                                    |  | 2001                    |         |   | 2000 |   |        | 1999 | 
|                                    |  |                         |         |   |      |   |        |      | 
|Gross premiums earned               |  | $                       | 97,420  |   |      | $ | 95,878 |      |  | $ | 89,226 | 
|Premiums earned                     |  |                         | 40,914  |   |      |   | 78,154 |      |  |   | 71,218 | 
|Claim and claim settlement expenses |  |                         | 53,469  |   |      |   | 72,429 |      |  |   | 43,323 | 
|Net (loss) income                   |  |                         | (23,695 | ) |      |   | (9,708 | )    |  |   | 6,167  | 
|Diluted net (loss) income per share |  |                         | (2.30   | ) |      |   | (0.89  | )    |  |   | 0.50   | 

12



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##### Table of Contents



RTW reported an increase in gross premiums earned to $97.4 million in 2001
from $95.9 million in 2000. Total revenues decreased significantly in 2001 to
$50.1 million from $83.3 million in 2000 due to a significant increase in
premiums ceded to reinsurers.

We reported a net loss of $23.7 million in 2001 compared to a net loss of
$9.7 million in 2000 and net income of $6.2 million in 1999. We reported basic
and diluted net loss per share of $2.30 in 2001 compared to basic and diluted
net loss per share of $0.89 in 2000 and basic and diluted net income per share
of $0.50 in 1999. The primary factors affecting our 2001 operating results
included the following:



| |  |  | Our gross premiums earned increased slightly in 2001 from 2000, due
primarily to a 4.7% increase in average premiums in force to $95.2
million for 2001 from $90.9 million in 2000;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Premiums earned decreased 47.6% in 2001 from 2000. Premiums earned
in 2001 were significantly reduced by premiums ceded under our quota
share reinsurance agreement that was effective January 1, 2001 and were
also reduced by premiums ceded under an excess of loss reinsurance
agreement, effective for claims occurring on or after July 1, 1998, that
was in runoff in 2001. Premiums earned in 2000 were significantly
reduced by premiums ceded under the excess of loss reinsurance
agreement. Premiums ceded in 2001 include $45.1 million in quota share
premiums ceded as well as $7.3 million in premiums ceded under the
excess of loss reinsurance agreement, compared to $13.4 million and
$13.3 million of excess of loss premiums ceded in 2000 and 1999,
respectively.
|
| |  |  | Claim and claim settlement expenses increased significantly to 130.7%
of premiums earned for 2001 from 92.7% for 2000. See further discussion
under Claim and Claim Settlement Expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  |  | At December 31, 2001, we established a $14.1 million valuation
allowance against deferred tax assets resulting in a corresponding
increase in income tax expense. No valuation allowance was provided
against the deferred tax assets recorded in 2000 or 1999.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

We expect 2002 premiums in force to decrease significantly from levels in
2001 as a result of the downgrade in our A.M. Best rating and the closure of
our regional offices in Missouri and Massachusetts. We also anticipate that we
will operate in an environment of continuing premium rate increases in our
markets in 2002. We will focus on achieving profitability in all our remaining
regional markets by (i) aggressively managing and closing claims, (ii)
improving our underwriting, including reviewing policy profitability at renewal
and removing unprofitable accounts, and (iii) aggressively managing policy
acquisition costs and general and administrative expenses.

In the following pages, we take a look at the 2001, 2000 and 1999
operating results for items in our Consolidated Statement of Operations and
also explain key balance sheet accounts in greater detail.

RESULTS OF OPERATIONS

Total revenues:Our total revenues include premiums earned, investment income,
net realized investment gains (losses) and other income. The following table
summarizes the components of our revenues and premiums in force (000s):

|                                        |                            |                                        |                |        |                         |        |         |        |      |        |         |        |    |        | 
|--------------------------------------- | -------------------------- | -------------------------------------- | -------------- | ------ | ----------------------- | ------ | ------- | ------ | ---- | ------ | ------- | ------ | -- | ------ | 
|                                        |                            |                                        |                |        | Year Ended December 31, |       
|                                        |                            |                                        |                |        |                         |       
|                                        |                            |                                        |                |        | 2001                    |        |         | 2000   |      |        | 1999    |       
|                                        |                            |                                        |                |        |                         |        |         |        |      |        |         |       
|Gross premiums earned                   |                            | $                                      | 97,420         |        |                         | $      | 95,878  |        |      | $      | 89,226  |       
|Premiums ceded                          |                            |                                        | (56,506        | )      |                         |        | (17,724 | )      |      |        | (18,008 | )     
|                                        |                            |                                        |                |        |                         |        |         |        |     
|                                        | Premiums earned            |                                        |                | 40,914 |                         |        |         | 78,154 |      |        |         | 71,218 |   
|Investment income                       |                            |                                        | 5,897          |        |                         |        | 5,752   |        |      |        | 6,510   |       
|Net realized investment gains (losses): |                            |                                        |                |        |                         |        |         |        |      |        |         |       
|                                        | Realized investment gains  |                                        |                | 1,225  |                         |        |         | 26     |      |        |         | 108    |   
|                                        | Realized investment losses |                                        |                | (62    | )                       |        |         | (633   | )    |        |         | (24    | ) 
|                                        |                            |                                        |                |        |                         |        |         |        |     
|                                        |                            | Net realized investment gains (losses) |                |        | 1,163                   |        |         |        | (607 | )      |         |        | 84 |       
|Other income                            |                            |                                        | 2,088          |        |                         |        |        |        |      |        |        |       
|                                        |                            |                                        |                |        |                         |        |         |        |     
|                                        |                            |                                        | Total revenues |        | $                       | 50,062 |         |        | $    | 83,299 |         |        | $  | 77,812 | 
|                                        |                            |                                        |                |        |                         |        |         |        |     

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|                                                 |                         |      |                         |        |      |   |        |        |  |   |        |        | 
|------------------------------------------------ | ----------------------- | ---- | ----------------------- | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                                 |                         |      | Year Ended December 31, |       
|                                                 |                         |      |                         |       
|Premiums in force by regional office at year-end |                         | 2001 |                         |        | 2000 |   |        | 1999   | 
|                                                 |                         |      |                         |        |      |   |        |        | 
|Minnesota                                        |                         | $    | 26,700                  |        |      | $ | 33,800 |        |  | $ | 31,500 |       
|Colorado                                         |                         |      | 13,100                  |        |      |   | 16,000 |        |  |   | 14,000 |       
|Missouri                                         |                         |      | 10,300                  |        |      |   | 13,400 |        |  |   | 15,000 |       
|Michigan                                         |                         |      | 21,700                  |        |      |   | 18,600 |        |  |   | 11,500 |       
|Massachusetts                                    |                         |      | 11,900                  |        |      |   | 17,600 |        |  |   | 15,200 |       
|                                                 |                         |      |                         |        |      |   |        |        | 
|                                                 | Total premiums in force |      | $                       | 83,700 |      |   | $      | 99,400 |  |   | $      | 87,200 | 
|                                                 |                         |      |                         |        |      |   |        |        | 

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

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

Our premiums in force decreased 15.8% to $83.7 million at December 31,
2001 from $99.4 million at December 31, 2000 due to an $18.8 million decrease
in premiums in force in our Minnesota, Colorado, Missouri and Massachusetts
markets offset by a $3.1 million increase in premiums in force in our Michigan
market. Average premiums in force increased 4.7% to $95.2 million in 2001 from
$90.9 million in 2000. We aggressively targeted policies that did not meet our
underwriting profit margin standards for non-renewal or re-underwriting at
increased rates at policy expiration in 2001, 2000 and 1999.

Our gross premiums earned increased 1.6% to $97.4 million in 2001 from
$95.9 million in 2000. This increase resulted from the increase in average
premiums in force offset by a decrease in final audit premiums earned to $1.8
million in 2001 from $5.5 million in 2000.

Gross premiums earned increased 7.5% to $95.9 million in 2000 from $89.2
million in 1999. This increase resulted from the increase in premiums in
force and an increase in final audit premiums earned to $5.5 million in 2000
from $4.7 million in 1999.

Premium rates on renewal policies stabilized in the latter half of 1999
and we realized only slight pricing decreases. In 2001 and 2000, we were able
to increase premium rates on renewing policies an average of 18.5% and 11.7%,
respectively. We have been, and expect to continue to, increase rates in our
markets due to the following:



| |  |  | Many workers compensation insurers withdrew from the markets in
which we write premiums due to the historical declines in premium rates
in those markets;                                                                                                                                                                                                                                                                                                                                  
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Reinsurance rates for workers compensation insurers have increased
throughout the industry due to settlements related to Unicover
reinsurance treaties, resulting in increased costs for workers
compensation insurers. Reinsurance rates continue to increase and the
availability of statutory coverage is limited as a result of the
terrorist acts against the United States on September 11, 2001.
Insurers, including RTW, have raised premium rates in reaction to these
costs; and
|
| |  |  | A number of workers compensation insurers financial ratings,
including our own, have decreased due to reserve adjustments recorded in
2001, 2000 and 1999, reducing their ability to compete.                                                                                                                                                                                                                                                                                              

Premiums Ceded:Reinsurance agreements allow us to share certain risks with
other insurance companies. We purchase reinsurance to (i) protect us from
potential losses in excess of the level we are willing to accept and (ii) to
achieve premium to surplus leverage ratios that are at acceptable levels. From
1995 to 2000, our primary reinsurance was excess of loss coverage that limited
our per-incident exposure. In June 2001, we also entered into a quota share
reinsurance treaty that was effective January 1, 2001 to reduce our premiums
earned and bring our premium to surplus leverage ratios in line with management
targets and rating agency expectations. We expect the companies to which we
have ceded reinsurance to honor their obligations. In the event that these
companies are

14



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##### Table of Contents



unable to honor their obligations to us, we will be required to pay these
obligations ourselves. We are not aware of any developments with respect to
our reinsurers that would result in uncollectible reinsurance balances.

Under our excess of loss reinsurance policies, we pay reinsurers to limit
our per-incident exposure and record this cost to premiums ceded as a reduction
of gross premiums earned. In Minnesota, we are required to purchase excess of
loss coverage for our Minnesota policies from the Minnesota Workers
Compensation Reinsurance Association (WCRA). We ceded Minnesota claims in
excess of $330,000, $310,000 and $290,000 per occurrence during 2001, 2000 and
1999, respectively, to the WCRA. In our non-Minnesota states, our per-incident
exposure was $300,000 in 2001, 2000 and 1999. We purchased this non-Minnesota
coverage from a single reinsurer. In 2002, the non-Minnesota coverage is
capped at $20.0 million, no longer includes statutory limit coverage and
further excludes claims resulting from acts of terrorism.

For claims occurring after June 30, 1998 through policy termination on
December 31, 2000, and on a runoff basis into 2001, we further limited our per
incident exposure by purchasing excess of loss coverage for losses from $25,000
to the lesser of $300,000 or the WCRA selected retention level in Minnesota and
from $25,000 to $300,000 in other states from a single reinsurer. This
agreement was finalized after its effective date and activity occurring from
July 1, 1998 through September 30, 1998 was recorded on a retrospective basis
resulting in the deferral of a gain totaling $2.0 million at December 31, 1998.
We amortized $400,000 of the deferred gain as a reduction of claim and claim
settlement expenses in each of 2001 and 2000 and $740,000 in 1999 resulting in
an un-amortized deferred gain of $449,000 at December 31, 2001. The deferred
gain is being amortized into income using the effective interest rate inherent
in the amounts paid to the reinsurer and the estimated timing and amounts of
recoveries from the reinsurer. Activity occurring on or after October 1, 1998
is recorded prospectively. This contract was terminated effective December 31,
2000, however the policy remained in effect in 2001 for policies in force at
December 31, 2000 through expiration, not to exceed fifteen months after the
effective termination date. Policies written or renewing after December 31,
2000 are not covered under this lower-level excess of loss reinsurance policy.

In June 2001, we entered a 50% quota share reinsurance policy that had an
effective date of January 1, 2001 in order to reduce our net premium to surplus
leverage ratio and maintain a secure financial strength rating for our
insurance subsidiary. Due to the percentage of amounts ceded under the quota
share policy and its January 1, 2001 effective date, premiums earned, claim and
claim settlement expenses and policy acquisition costs were substantially
reduced in 2001. We further increased the amounts ceded to 80% effective
December 1, 2001 under this quota share reinsurance policy.

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

|                     |                                      |                                                      |                |         |                         |         |   |      |         |         |      |   |         |         |  
|-------------------- | ------------------------------------ | ---------------------------------------------------- | -------------- | ------- | ----------------------- | ------- | - | ---- | ------- | ------- | ---- | - | ------- | ------- | -
|                     |                                      |                                                      |                |         | Year Ended December 31, |        
|                     |                                      |                                                      |                |         |                         |        
|                     |                                      |                                                      |                |         | 2001                    |         |   | 2000 |         |         | 1999 |  
|                     |                                      |                                                      |                |         |                         |         |   |      |         |         |      |  
|Premiums ceded, net: |                                      |                                                      |                |         |                         |         |   |      |         |         |      |  
|                     | Quota share reinsurance premiums     |                                                      | $              | (45,143 | )                       |         | $ |     |         |         | $    |  |        
|                     | Excess of loss reinsurance premiums: |                                                      |                |         |                         |         |   |      |         |         |      |   |        
|                     |                                      | $25,000 to $300,000 excess of loss policy            |                |         | (7,297                  | )       |   |      | (13,442 | )       |      |   | (13,290 | )      
|                     |                                      | WCRA and other non-Minnesota excess of loss policies |                |         | (4,066                  | )       |   |      | (4,282  | )       |      |   | (4,718  | )      
|                     |                                      |                                                      |                |         |                         |         |   |      |         |        
|                     |                                      |                                                      | Premiums ceded |         | $                       | (56,506 | ) |      | $       | (17,724 | )    |   | $       | (18,008 | )
|                     |                                      |                                                      |                |         |                         |         |   |      |         |        

Premiums ceded to reinsurers increased to $56.5 million in 2001 from $17.7
million in 2000. Excluding premiums ceded totaling $45.1 million under the new
quota share policy in 2001, premiums ceded decreased significantly to $11.4
million in 2001 compared to $17.7 million in 2000. The decrease in premiums
ceded, excluding quota share policy premiums, resulted primarily from the
run-off of premiums ceded under our $25,000 to $300,000 policy.

Premiums ceded to reinsurers decreased to $17.7 million in 2000 from $18.0
million in 1999. This decreased cost resulted from an excess of loss premium
rate decrease in Minnesota in 2000 compared to 1999. This cost decrease was
partially offset by increased excess of loss costs resulting from increased
premiums earned in non-Minnesota states.

2002 Outlook: The 2002 outlook for gross premiums earned and premiums ceded
include the following factors:



| |  |  | We expect that (i) the downgrade in our rating to B- from A.M. Best;
(ii) closure of our regional offices in Massachusetts and Missouri, and
(iii) policies targeted for non-renewal or re-underwriting during 2002
will result in a significant decrease premiums in force in 2002.
Premium rate increases on new and renewing policies will partially
offset these decreases. We expect that renewal premium rates will
continue to
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

15



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##### Table of Contents





| |   |  | increase in 2002; however, the ultimate increase is unknown at this time.
Overall, we expect premiums in force and gross premiums earned to decrease
significantly in 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | We expect to continue to cede a significant portion of our premiums
under our quota share policy in 2002. Premiums ceded under the quota
share policy will initially be 80% of gross premiums earned less excess
of loss premiums ceded. We expect to reduce the quota share policy back
to 50% sometime during the second quarter of 2002.                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  |  | We expect that premiums ceded under excess of loss policies will
decrease as a percent of gross premiums earned when compared to the
results attained for 2001 as we will cede no premiums under our
terminated $25,000 to $300,000 reinsurance agreement in 2002. This
decrease will be partially offset by an increase in premiums ceded in
our in our non-Minnesota markets as our excess of loss reinsurance rate
in these markets increased significantly in 2002 as a result of the
September 11, 2001 terrorist acts against the United States. Excess of
loss reinsurance rates as a percent of premium will decrease in 2002 in
Minnesota as a result of the premium rate increases we expect to realize
in 2002 and realized in 2001.

Investment Income and Net Realized Investment Gains (Losses):Our investment
income includes earnings on our investment portfolio. Our net realized
investment gains (losses), displayed separately on our Consolidated Statements
of Operations, include gains and losses from sales of securities. In 2000 and
through January 2001, we invested entirely in U.S. domiciled investment-grade
taxable and tax-exempt fixed maturity investments. In February 2001, we
repositioned our portfolio and sold our tax-exempt securities, purchasing
taxable securities to take advantage of our net operating loss carry-forward
generated in 2000 and to maximize the after-tax yield of our investment
portfolio. We currently invest entirely in U.S. domiciled investment-grade
taxable fixed maturity investments and classify our investments as
available-for-sale. We intend to hold our available-for-sale investments to
maturity, but may sell them before maturity in response to tax planning
considerations, changes in interest rates, changes in prepayment risk and
changes in funding sources or terms, or to address liquidity needs. Our primary
investment objective is to maintain a diversified, high-quality,
fixed-investment portfolio structured to maximize our after-tax investment
income without taking inappropriate credit risk. For further discussion of
investments, see the Investments section of this Managements Discussion and
Analysis.

Investment income increased slightly to $5.9 million in 2001 from $5.8
million in 2000. Investment income increased slightly as a result of
repositioning our portfolio entirely into taxable securities that earn a
higher pre-tax rate of return offset by a reduction in the funds available for
investment to $89.2 million at December 31, 2001 from $96.8 million at
December 31, 2000. Funds available for investment decreased due to decreased
net cash provided by operating activities, resulting primarily from (i) the
difference in timing between the receipt of premiums, the payment of premiums
ceded under our reinsurance agreements, the payment of claim and claim
settlement expenses and the recovery of paid claim and claim settlement
expenses under our reinsurance programs, and (ii) net cash provided by
investment income. Tax-adjusted investment yields were 6.1% in 2001 compared
to 6.6% in 2000. The investment yields realized in future periods will be
affected by yields attained on new investments.

Investment income decreased 11.6% to $5.8 million in 2000 from $6.5
million in 1999. Investment income decreased due to (i) reduced funds
available for investment and (ii) an increase in the percent of tax-exempt
securities held in our portfolio. Funds available for investment decreased to
$96.8 million at December 31, 2000 from $108.1 million at December 31, 1999,
due to decreased net cash provided by operating activities, resulting primarily
from (i) the difference in timing between the receipt of premiums, the payment
of premiums ceded under our reinsurance agreements, the payment of claim and
claim settlement expenses and the recovery of paid claim and claim settlement
expenses under our reinsurance programs, and (ii) net cash provided by
investment income. Tax-exempt securities, which earn lower pre-tax rates than
taxable securities but are comparable on a tax-adjusted basis, increased to
57.5% of our investment portfolio at year-end 2000 compared to 56.3% at
year-end 1999. Tax-adjusted investment yields were 6.6% in 2000 and 1999.

Net realized investment gains were $1.2 million in 2001 and resulted
primarily from our portfolio repositioning in February 2001. Net realized
investment losses were $607,000 in 2000 and included $500,000 for the
write-down of a security whose decrease in value was deemed other than
temporary. Net realized investment gains were $84,000 in 1999.

2002 Outlook: Barring significant changes in interest rates or operational
cash flows, we expect the 2002 pre-tax yield from our investment portfolio to
be affected by the following:



| |  |  | Funds from our operating cash flows and investment cash flows have
historically provided growth in our investment portfolio. These net
cash flows decreased significantly in 2000 and 1999 as we focused on
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

16



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##### Table of Contents





| |   |  | closing old claims, paying earlier to close those claims. Combined with
relatively flat premiums in force since December 1998, our cash flows from
timing on claims payments have decreased. Cash flows will be adversely
affected by: (i) premiums ceded under our quota share policy, and (ii)
decreases in cash flows resulting from claim payments on claims from 2002
and prior years as we reduce our 2002 premiums in force and premiums
earned in 2002 and result in the use of cash in 2002.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | In February 2002, we again repositioned our portfolio to realize
investment gains. We recognized gains totaling $1.1 million as a result
of this repositioning. Further recognition of realized gains and losses
will depend on sales of our investments, if any, to meet our short-term
cash requirements or as we replace securities to manage our portfolio
returns; and                                                                                                                          
|
| |  |  | New and renegotiated reinsurance treaties may reduce our future cash
flow and future investment income.                                                                                                                                                                                                                                                                                                                                                                                              

Other Income:We recorded and received a refund totaling $2.1 million from the
WCRA in 2001. The WCRA periodically reviews its surplus position and refunds
excess surplus to its members. This refund represents our share of the excess
surplus of the WCRA at December 31, 2000.

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

Claim and Claim Settlement Expenses:Claim expenses refer to medical and
indemnity benefits that we paid or expect to pay to claimants for events that
have occurred. The costs of investigating, resolving and processing these
claims are referred to as claim settlement expenses. We record these expenses,
net of amounts recoverable under reinsurance contracts, to claim and claim
settlement expenses in the Consolidated Statements of Operations.

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

Claim and claim settlement expenses decreased to $53.5 million in 2001
from $72.4 million in 2000. As a percent of premiums earned, claim and claim
settlement expenses increased to 130.7% in 2001 from 92.7% in 2000. These
changes are due to the following:



| |  |  | The 2001 results include a $7.7 million increase in prior years
reserves for unpaid claim and claim settlement expenses compared to the
2000 results which include an $15.9 million increase in prior years
reserves for unpaid claim and claim settlement expenses. The 2001
reserve increase includes unfavorable development of accident year 2000
and prior year claims and adjustments for second injury funds and our
mandatory participation in state and national assigned risk pools.                                                                                     
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | We recorded estimates of ceded paid and unpaid claim and claim
settlement expenses under our $25,000 to $300,000 excess of loss
reinsurance agreement totaling $15.2 million in 2001 including $400,000
amortized from a deferred retrospective reinsurance gain resulting in a
corresponding reduction in 2001 claim and claim settlement expenses.
These amounts compare to our 2000 results which include an estimate of
ceded paid and unpaid claim and claim settlement expenses totaling $21.8
million and $400,000 amortized from the deferred retrospective
reinsurance gain.
|
| |  |  | We recorded estimates of ceded paid and unpaid claim and claim
settlement expenses under our quota share reinsurance agreement totaling
$27.7 million in 2001 resulting in a corresponding reduction in 2001
claim and claim settlement expenses. This contract did not exist in
2000.                                                                                                                                                                                                                                                                                               
|
| |  |  | We increased renewal premium rates an average of 18.5% in 2001 and
11.7% in 2000 compared to premium rates for the same periods in 2000 and
1999, respectively, reversing a trend of continued rate declines during
years prior to 2000; and                                                                                                                                                                                                                                                                                                                                         
|
| |  |  | Claim costs continued to increase in 2001, 2000 and 1999 due to
increasing medical and indemnity costs. These increases were offset
somewhat by the effects of provider agreements that we negotiated during
1998.                                                                                                                                                                                                                                                                                                                                                                   

Claim and claim settlement expenses increased to $72.4 million in 2000
from $43.3 million in 1999. As a percent of premiums earned, claim and claim
settlement expenses increased to 92.7% in 2000 from 60.8% in 1999. These
changes are due to the following:



| |  |  | We recorded estimates of ceded paid and unpaid claim and claim
settlement expenses under our $25,000 to
| | - |  | -------------------------------------------------------------------------------------------------------

17



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##### Table of Contents





| |   |  | $300,000 excess of loss reinsurance agreement totaling $21.8 million in
2000 including $400,000 amortized from a deferred retrospective
reinsurance gain resulting in a corresponding reduction in 2000 claim and
claim settlement expenses. These amounts compared to our 1999 results
which include an estimate of ceded paid and unpaid claim and claim
settlement expenses totaling $22.0 million and $740,000 amortized from the
deferred retrospective reinsurance gain;                                                                                                                                                                                                                                                                                   
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The 2000 results include a $15.9 million increase in prior years
reserves for unpaid claim and claim settlement expenses to reflect
unfavorable development of prior period claims compared to the 1999
results which include an $8.1 million decrease in prior years reserves
for unpaid claim and claim settlement expenses reflecting favorable
development of prior period claims. Our year-end actuarial review of
loss reserves in 2000 indicated an increase in the cost incurred or
developing in connection with older claims, particularly in Minnesota
where we have been writing policies since 1992. Given this indication,
we adjusted our actuarial assumptions to reflect this change in loss
experience resulting in the increase in reserves;
|
| |  |  | We increased renewal premium rates an average of 11.7% in 2000,
reversing a trend of continued rate declines in 1999 and prior years;
and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  |  | Claim costs continued to increase in 2000 compared to 1999 due to
increasing medical and indemnity costs. This was offset somewhat by the
effects of provider agreements that we negotiated during 1998.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

2002 Outlook:We expect that claim and claim settlement expenses will be
affected by the following factors:



| |  |  | Claim costs will continue to be affected by (i) increases in medical
and indemnity costs resulting from inflationary changes, (ii) severity
experienced in future periods in our policy holder base, (iii) changes
resulting from increases in operating efficiency and effectiveness
realized through enhancements to our internal processes and procedures,
including changes to our proprietary computer systems, and (iv)
legislative changes that affect benefits payable under workers
compensation laws;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Increased premium rates will result in increasing premiums earned
without a corresponding increase in claim and claim settlement expenses,
ultimately decreasing claim and claim settlement expense as a percent of
premium earned. Changes in premium rates due to legislative changes in
estimated loss costs, increased competition and improving customer loss
experience may offset rate improvements; and                                                                                                 
|
| |  |  | Continued application of our claims management technology and methods
to all open claims.                                                                                                                                                                                                                                                                                                                                                                                                                       

The ultimate result of the above factors on 2002 claim and claim settlement
expenses as a percent of premiums earned, is unknown at this time.

Policy Acquisition Costs:Policy acquisition costs are costs directly related
to writing an insurance policy and consist of commissions, state premium taxes,
underwriting personnel costs and expenses, sales and marketing costs and other
underwriting expenses less ceding commissions from our reinsurers. Ceding
commissions are amounts that reinsurers pay to us for placing reinsurance with
them. Under our 1992 to 1994 quota share reinsurance agreement, the ceding
commission is adjusted to the extent that actual claim and claim settlement
expenses vary from levels specified in the agreements.

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

|                                                                                                                          |                                 |   |                         |        |   |      |       |        |      |   |       |        | 
|------------------------------------------------------------------------------------------------------------------------- | ------------------------------- | - | ----------------------- | ------ | - | ---- | ----- | ------ | ---- | - | ----- | ------ | 
|                                                                                                                          |                                 |   | Year Ended December 31, |       
|                                                                                                                          |                                 |   |                         |       
|                                                                                                                          |                                 |   | 2001                    |        |   | 2000 |       |        | 1999 |  
|                                                                                                                          |                                 |   |                         |        |   |      |       |        |      |  
|Commission expense                                                                                                        |                                 | $ | 7,378                   |        |   | $    | 7,537 |        |      | $ | 7,145 |       
|Premium tax expense                                                                                                       |                                 |   | 1,888                   |        |   |      | 1,933 |        |      |   | 1,798 |       
|Other policy acquisition costs                                                                                            |                                 |   | 4,463                   |        |   |      | 4,207 |        |      |   | 4,847 |       
|Ceding commissions resulting from adjustments to claim and
claim settlement estimates for our 1992 to 1994 accident years |                                 |   | 261                     |        |   |      | 460   |        |      |   | 321   |       
|                                                                                                                          |                                 |   |                         |        |   |      |       |        |     
|                                                                                                                          | Direct policy acquisition costs |   |                         | 13,990 |   |      |       | 14,137 |      |   |       | 14,111 | 
|Ceding commissions on 2001 quota share reinsurance                                                                        |                                 |   | (18,509                 | )      |   |      |      |        |      |   |      |       
|                                                                                                                          |                                 |   |                         |        |   |      |       |        |     
|                                                                                                                          | Policy acquisition costs        |   | $                       | (4,519 | ) |      | $     | 14,137 |      |   | $     | 14,111 | 
|                                                                                                                          |                                 |   |                         |        |   |      |       |        |     

Ceding commissions received under our new quota share reinsurance policy
totaling $18.5 million in 2001 has reduced policy acquisition costs. Under our
2001 quota-share program, the reinsurer returns to us 41% of the premiums we
cede in ceding commissions to reimburse us for salaries and overhead costs
related to managing cases


18Table of Contents

and claims, policy acquisition costs and other underwriting expenses.
Excluding the effect of ceding commissions from the quota share contract,
policy acquisition costs decreased slightly to $14.0 million in 2001 from $14.1
million in 2000 and 1999. As a percent of gross premiums earned, policy
acquisition costs, before ceding commissions from quota share, decreased to
14.4% in 2001 compared to 14.7% in 2000 and 15.8% for 1999. The decrease in
2001 reflects the following:



| |  |  | Commission expense decreased to 7.6% of gross premiums earned in 2001
from 7.9% in 2000 and 8.0% in 1999. The decreased commission
percentages in 2001 and 2000 are the result of (i) a focus on reducing
commissions paid on new business in our non-Minnesota states and (ii)
increased renewal premiums on which we pay lower commission rates in all
our states. Historically, as we entered new markets, we introduced
higher commission rates to attract business from established agents.
These rates continued through early 1999, but were reduced in 2001 and
2000. We believe the commission rates we pay are marketplace
competitive in all our markets;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Premium tax expense decreased slightly to 1.9% of gross premiums
earned in 2001 for 2.0% of gross premiums earned in 2000 and 1999;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  |  | Other policy acquisition costs increased slightly to 4.6% of gross
premiums earned in 2001 from 4.4% in 2000 and decreased when compared
to 5.4% in 1999. Other policy acquisition costs decreased in 2001 and
2000 from levels in 1999 as we focused on improving our underwriting
organizational structure resulting in (i) decreased personnel and
overhead costs and (ii) decreased spending on marketing programs; and                                                                                                                                                                                                                                         
|
| |  |  | We incurred ceding commission expense resulting from adjustments to
claim and claim settlement expense estimates for 1992 to 1994 totaling
$260,000 in 2001, $460,000 in 2000 and $321,000 in 1999.                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

2002 Outlook:Ceding commissions received from our reinsurer under our 2001
quota-share reinsurance policy will significantly reduce policy acquisition
costs again in 2002. Excluding the effects of ceding commissions, we expect
that policy acquisition costs will remain consistent as a percent of gross
premiums earned in 2002 as all components of acquisition costs are expected to
be stable as compared to 2001.

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

Our general and administrative expenses increased to $15.3 million in 2001
from $11.5 million in 2000 and $12.0 million in 1999. As a percent of gross
premiums earned, general and administrative expenses increased to 15.8% in 2001
from 12.0% in 2000 and 13.5% in 1999. General and administrative expenses for
2001 include (i) $2.0 million in restructuring charges related to closing our
regional offices in Missouri and Massachusetts and closing satellite offices in
Brainerd, Minnesota and Overland Park, Kansas; (ii) assessments by state
Insurance Guarantee Associations (IGA) totaling $1.1 million in 2001 compared
to $236,000 in 2000 and $17,000 in 1999; (iii) one-time business repositioning
costs totaling $470,000 in 2001 and corporate oversight costs related to the
efforts of the majority shareholders in seeking a buyer for their shares
totaling $1.3 million in 1999. After adjusting for these items, general and
administrative expenses decreased as a percent of gross premiums earned to
11.7% in 2001 from 11.8% in 2000 and 12.0% in 1999. These decreases reflect:



| |  |  | General and administrative expenses continue to improve as a percent
of premiums earned, after adjusting for restructuring charges, IGA
assessments and one-time charges. We have aggressively managed
personnel and other operating costs and expenses to bring operating
expenses more in line with revenues. All expenses continue to be
managed aggressively and reduced where appropriate.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | A reorganization effected in the fourth quarter of 1999 resulted in a
net reduction of thirty-three positions. This reorganization reduced
costs and centralized and strengthened certain processes late in 1999
and throughout 2000 and 2001.                                                                                                                                                 

2002 Outlook:We expect that general and administrative expenses will be affected by the following:



| |  |  | We will aggressively manage all operating costs and expenses in 2002;                                                                        
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | We have no plans to open additional state offices in 2002 and expect
to reduce overhead costs as a result of our office closures in 2001; and

19



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| |  |  | We expect to realize additional operational efficiency during 2002
through enhancements to our internal processes and procedures, including
changes to our operating structure as well as improvements to our
internal proprietary computer systems.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Interest Expense:We incurred interest charges on our Term Loan in 2001 and
2000 and on our Senior Notes in 1999.

We paid interest at rates ranging from 6.50% to 8.83% on the outstanding
balance of our Term Loan in 2001 compared to 8.68% to 9.34% in 2000. Interest
expense decreased to $511,000 in 2001 from $667,000 in 2000 as a result of the
change in the interest rate and $2.5 million in principal payments on the note
in 2001.

We paid interest at rates ranging from 8.68% to 9.34% on the outstanding
balance of our Term Loan in 2000 compared to 9.50% on the outstanding balance
of our Senior Notes during 1999. Interest expense increased to $667,000 in
2000 from $266,000 in 1999 as we increased our notes payable by financing the
repurchase of shares from a group headed by our majority shareholder and
Chairman, David C. Prosser through an $8.0 million Term Loan and a $2.0 million
Revolving Credit Facility with a bank. The Senior Notes were paid in full in
December 1999. No amounts were outstanding under the Revolving Credit Facility
in 2000 and the Credit Facility was terminated in 2001.

2002 Outlook:We expect to incur interest charges in 2002 on the outstanding
balance of the Term Loan totaling approximately $170,000, decreasing from
$511,000 in 2001 as a result of principal payments of $2.5 million in 2001,
$1.0 million in February 2002 and an additional $1.3 million through the
remainder of 2002 and a decrease in the interest rate to under 5.00%.

Income Taxes:We incur federal income taxes on our combined service
organization (RTW) operations and insurance (ACIC) operations. We incur state
income taxes on the results of our service organizations operations and incur
premium taxes in lieu of state income taxes for substantially all of our
insurance operations. In certain instances, we may incur state income taxes on
our insurance operations. Additionally, certain provisions of the Internal
Revenue Code adversely affect our taxable income by accelerating recognition
and payment of income taxes. Adjustments to book income generating current tax
liabilities include limitations on the deductibility of unpaid claim and claim
settlement expenses, limitations on the deductibility of unearned premium
reserves and limitations on deductions for bad debt reserves.

In assessing the realizability of deferred tax assets, we consider whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. We consider recent operating results, the scheduled
reversal of deferred tax liabilities, projected future taxable income and tax
planning strategies in making this assessment. At December 31, 2001, we
established a $14.1 million valuation allowance against deferred tax assets
resulting in a corresponding increase in income tax expense as a result of this
analysis. We expect the remaining deferred tax assets, net of the valuation
allowance, at December 31, 2001 to be realized as a result of the reversal of
existing taxable temporary differences in the future. No valuation allowance
was provided against the deferred tax assets recorded in 2000 or 1999.

Income tax expense of $8.9 million in 2001 included the $14.1 million
valuation allowance adjustment. After excluding the effects of the valuation
allowance, the income tax benefit was $5.2 million in 2001 compared to a
benefit of $5.7 million in 2000 and an expense of $1.9 million in 1999. As a
percent of (loss) income before income taxes, the income tax (benefit) expense
before valuation allowance was 34.7% of the loss before income taxes in 2001
compared to 37.2% of the loss before income taxes in 2000 and 23.8% of income
before income taxes in 1999. The income tax benefit percentages in 2001 and
2000 have been affected by (i) our loss from operations, (ii) establishing a
deferred tax valuation allowance, (iii) increased taxable net income from the
service organization (RTW) which is subject to both federal and state income
taxes, and (iv) changes in tax-exempt municipal income.

2002 Outlook:Income tax expense will vary based on (i) the income from
operations we recognize for 2002, and (ii) the changes in our analysis of the
valuation allowance necessary during 2002. The ultimate change is unknown at
this time.

INVESTMENTS

Our portfolio of fixed maturity securities at December 31, 2001 included
mortgage-backed securities (50.6%), U.S. government securities (29.5%),
corporate securities (19.2%), and asset-backed securities (0.6%). Our
portfolio is managed by an independent investment manager to maximize our
after-tax investment income without taking inappropriate credit risk. In
February 2001, we repositioned our portfolio by selling our tax-exempt
securities and

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repurchasing taxable fixed maturity investments to increase our after-tax
yield. We recognized gains totaling $1.1 million as a result of this
repositioning. In February 2002, we sold select securities within the
portfolio and realized an additional investment gain totaling $1.1 million to
increase our statutory surplus. We conservatively manage our fixed maturity
portfolio, investing only in investment grade (BBB or better rating from
Standard and Poors) securities of U.S. domiciled issuers. We do not invest in
derivative securities.

Funds from our operating cash flows and investment cash flows have
historically provided growth in our investment portfolio. Operating cash flows
consist of the excess of premiums collected over claim and claim settlement
expenses reduced by payments for reinsurance premiums as well as other
operating expenses paid. Investment cash flows consist of income on existing
investments and proceeds from sales and maturities of investments. Prior to
1999, we generated positive net cash flows from operations due, in part, to
timing differences between the receipt of premiums and the payment of claim and
claim settlement expenses. These net cash flows decreased significantly in
2000 and 1999 as we focused on closing old claims, paying earlier to close
those claims. Combined with relatively flat premiums in force since December
1998, our cash flows from timing on claims payments have decreased.
Additionally, as we lowered our reinsurance retention levels to $25,000 in
mid-1998, we decreased our current period cash flows as a result of
pre-funding quarterly premiums under that agreement. Our investment
portfolio decreased $7.6 million to $89.2 million at December 31, 2001, from
$96.8 million at December 31, 2000, as a result of these factors. We expect
positive quarterly cash flow from our $25,000 to $300,000 excess of loss
reinsurance agreement in 2002 as we are reimbursed for loss payments to
claimants under the policy. This increase in cash flow will be more than
offset by (i) premiums ceded under our quota share policy and (ii) decreases in
cash flows as our 2002 premiums in force and premiums earned decrease and
result in the use of cash in 2002.

We record investments on our balance sheet at fair value, with the
corresponding appreciation or depreciation from amortized cost recorded in
shareholders equity, net of taxes. Because value is based on the relationship
between the portfolios stated yields and prevailing market yields at any given
time, interest rate fluctuations can have a swift and significant impact on the
carrying value of these securities. As a result of classifying our securities
as available-for-sale, and thus carrying them at fair value, we expect to
encounter adjustments in shareholders equity as market interest rates and
other factors change. In 2000, we recorded a $500,000 write-down of a security
held in our portfolio as we deemed its decline in fair value to be other than
temporary in nature. This security was sold in January 2002 and the write-down
was reversed. Prevailing market interest rates decreased in 2001 and 2000
resulting in a $1.4 million unrealized gain on investments in 2001 compared to
a $309,000 unrealized gain in 2000.

UNPAID CLAIM AND CLAIM SETTLEMENT EXPENSES

Our unpaid claim and claim settlement expenses represent reserves established
for the estimated total unpaid cost of claim and claim settlement expenses,
which cover events that occurred in 2001 and prior years. The reserves are
primarily undiscounted; however, we discounted reserves for selected claims
that have fixed and determinable future payments at 5.0% in 2001 and 8.0% in
2000. These reserves reflect our estimates of the total costs of claims that
were reported, but not yet paid, and the cost of claims incurred but not yet
reported (IBNR). For reported claims, we establish reserves on a case basis.
For IBNR claims, we estimate reserves using established actuarial methods.
Both our case and IBNR reserve estimates reflect such variables as past claims
experience, current claim trends and prevailing social, economic and legal
environments. Due to our commencing operations in 1992, we have limited
historical data to estimate our reserves for unpaid claim and claim settlement
expenses and, accordingly, we supplement our experience with external industry
data, as adjusted, to reflect anticipated differences between our results and
the industry. We reduce the unpaid claim and claim settlement expenses for
estimated amounts of subrogation.

We believe our reserves for unpaid claim and claim settlement expenses are
adequate to cover the ultimate costs of claim and claim settlement expenses.
The ultimate cost of claim and claim settlement expenses may differ materially
from the established reserves, particularly when claims may not be settled for
many years. Reserves for unpaid claim and claim settlement expenses and
assumptions used in their development are continually reviewed. We record
adjustments to prior estimates of unpaid claim and claim settlement expenses to
operations in the year in which the adjustments are made. See Notes 1 and 5 of
Notes to Consolidated Financial Statements. The following two tables reconcile
the beginning and ending insurance reserves, displayed individually for each of
the last three years.

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The following table sets forth reserves on a gross (before reinsurance) basis (000s):

|                                                        |                                                                           |  |                 |         |                         |         |   |         |  |         |      |        |  |         |  
|------------------------------------------------------- | ------------------------------------------------------------------------- |  | --------------- | ------- | ----------------------- | ------- | - | ------- |  | ------- | ---- | ------ |  | ------- | -
|                                                        |                                                                           |  |                 |         | Year Ended December 31, |        
|                                                        |                                                                           |  |                 |         |                         |        
|                                                        |                                                                           |  |                 |         | 2001                    |         |   | 2000    |  |         | 1999 |       
|                                                        |                                                                           |  |                 |         |                         |         |   |         |  |         |      |       
|Gross Reserves for Claim and Claim Settlement Expenses: |                                                                           |  |                 |         |                         |         |   |         |  |         |      |       
|                                                        | Gross reserves for claim and claim settlement expenses,
beginning of year |  | $               | 128,841 |                         |         | $ | 99,831  |  |         | $    | 97,269 | 
|                                                        | Provision increases (decreases) for claim and claim
settlement expenses:  |  |                 |         |                         |         |   |         |  |         |      |        | 
|                                                        |                                                                           |  | Current year    |         |                         | 97,510  |   |         |  | 87,203  |      |        |  | 79,333  |  
|                                                        |                                                                           |  | Prior years     |         |                         | 31,224  |   |         |  | 17,930  |      |        |  | (11,868 | )
|                                                        |                                                                           |  |                 |         |                         |         |   |         |  |        
|                                                        |                                                                           |  | Total provision |         |                         | 128,734 |   |         |  | 105,133 |      |        |  | 67,465  |  
|                                                        | Payments for claim and claim settlement expenses:                         |  |                 |         |                         |         |   |         |  |         |      |        | 
|                                                        |                                                                           |  | Current year    |         |                         | 27,024  |   |         |  | 30,190  |      |        |  | 27,841  |  
|                                                        |                                                                           |  | Prior years     |         |                         | 49,241  |   |         |  | 45,933  |      |        |  | 37,062  |  
|                                                        |                                                                           |  |                 |         |                         |         |   |         |  |        
|                                                        |                                                                           |  | Total payments  |         |                         | 76,265  |   |         |  | 76,123  |      |        |  | 64,903  |  
|                                                        |                                                                           |  |                 |         |                         |         |   |         |  |        
|                                                        | Gross reserves for claim and claim settlement expenses,
end of year       |  | $               | 181,310 |                         |         | $ | 128,841 |  |         | $    | 99,831 | 
|                                                        |                                                                           |  |                 |         |                         |         |   |         |  |        

The following table sets forth reserves on a net (after reinsurance) basis (000s):

|                                                                  |                                                                          |              |                                                         |                 |        |                         |        |        |        |        |        |        |        |        |        | 
|----------------------------------------------------------------- | ------------------------------------------------------------------------ | ------------ | ------------------------------------------------------- | --------------- | ------ | ----------------------- | ------ | ------ | ------ | ------ | ------ | ------ | ------ | ------ | ------ | 
|                                                                  |                                                                          |              |                                                         |                 |        | Year Ended December 31, |       
|                                                                  |                                                                          |              |                                                         |                 |        |                         |       
|                                                                  |                                                                          |              |                                                         |                 |        | 2001                    |        |        | 2000   |        |        | 1999   |       
|                                                                  |                                                                          |              |                                                         |                 |        |                         |        |        |        |        |        |        |       
|Net Reserves for Claim and Claim Settlement Expenses:             |                                                                          |              |                                                         |                 |        |                         |        |        |        |        |        |       
|                                                                  | Net reserves for claim and claim settlement expenses,
beginning of year  |              | $                                                       | 66,996          |        |                         | $      | 58,652 |        |        | $      | 75,866 |       
|                                                                  | Plus: Deferred retrospective reinsurance gain, beginning of year         |              |                                                         | 849             |        |                         |        | 1,249  |        |        |        | 1,989  |       
|                                                                  | Provision increases (decreases) for claim and claim
settlement expenses: |              |                                                         |                 |        |                         |        |        |        |        |        |        |       
|                                                                  |                                                                          |              | Current year                                            |                 |        | 46,923                  |        |        |        | 56,900 |        |        |        | 52,176 |       
|                                                                  |                                                                          |              | Prior years                                             |                 |        | 7,731                   |        |        |        | 15,929 |        |        |        | (8,113 | )     
|                                                                  |                                                                          |              | Write-off of reinsurance recoverable                    |                 |        | (785                    | )      |        |        |       |        |        |        |       |       
|                                                                  |                                                                          |              | Amortization of deferred retrospective reinsurance gain |                 |        | (400                    | )      |        |        | (400   | )      |        |        | (740   | )     
|                                                                  |                                                                          |              |                                                         |                 |        |                         |        |        |        |       
|                                                                  |                                                                          |              |                                                         | Total provision |        |                         | 53,469 |        |        |        | 72,429 |        |        |        | 43,323 | 
|                                                                  | Payments for claim and claim settlement expenses:                        |              |                                                         |                 |        |                         |        |        |        |        |        |        |       
|                                                                  |                                                                          | Current year |                                                         |                 | 17,000 |                         |        |        | 28,154 |        |        |        | 26,897 |       
|                                                                  |                                                                          | Prior years  |                                                         |                 | 31,242 |                         |        |        | 36,331 |        |        |        | 34,380 |       
|                                                                  |                                                                          |              |                                                         |                 |        |                         |        |        |        |       
|                                                                  |                                                                          |              |                                                         | Total payments  |        |                         | 48,242 |        |        |        | 64,485 |        |        |        | 61,277 | 
|                                                                  |                                                                          |              |                                                         |                 |        |                         |        |        |        |       
|                                                                  | Less: Deferred retrospective reinsurance gain, end of year               |              |                                                         | (449            | )      |                         |        | (849   | )      |        |        | (1,249 | )     
|                                                                  |                                                                          |              |                                                         |                 |        |                         |        |        |        |       
|Net reserves for claim and claim settlement expenses,
end of year |                                                                          | $            | 72,623                                                  |                 |        | $                       | 66,996 |        |        | $      | 58,652 |       
|                                                                  |                                                                          |              |                                                         |                 |        |                         |        |        |        |       

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The following loss reserve development table sets forth the change, over
time, of reserves established for claim and claim settlement expenses at the
end of the last eight years. The following loss reserve development table is
cumulative and, therefore, ending balances should not be added since the amount
at the end of each calendar year includes activity for both current and prior
years (000s):



|                                                                |                                                               |                   |   |              |        |  |      |         |        |      |   |        |         |    |   |        |        |    |   |        |         |   
|--------------------------------------------------------------- | ------------------------------------------------------------- | ----------------- | - | ------------ | ------ |  | ---- | ------- | ------ | ---- | - | ------ | ------- | -- | - | ------ | ------ | -- | - | ------ | ------- | --
|                                                                |                                                               |                   |   | December 31, |       
|                                                                |                                                               |                   |   |              |       
|                                                                |                                                               |                   |   | 2001         |        |  | 2000 |         |        | 1999 |   |        | 1998    |    |   | 1997   |       
|                                                                |                                                               |                   |   |              |        |  |      |         |        |      |   |        |         |    |   |        |       
|Loss Reserve Development:                                       |                                                               |                   |   |              |        |  |      |         |        |      |   |        |         |    |   |        |        |    |   |       
|                                                                | Gross reserves for unpaid
claim and claim
settlement expenses |                   | $ | 181,310      |        |  | $    | 128,841 |        |      | $ | 99,831 |         |    | $ | 97,269 |        |    | $ | 61,069 |        
|                                                                | Reinsurance recoverables                                      |                   |   | 108,687      |        |  |      | 61,845  |        |      |   | 41,179 |         |    |   | 21,403 |        |    |   | 5,374  |        
|                                                                |                                                               |                   |   |              |        |  |      |         |        |      |   |        |         |    |   |       
|                                                                | Net reserves for unpaid
claim and claim
settlement expenses   |                   | $ | 72,623       |        |  | $    | 66,996  |        |      | $ | 58,652 |         |    | $ | 75,866 |        |    | $ | 55,695 |        
|                                                                |                                                               |                   |   |              |        |  |      |         |        |      |   |        |         |    |   |       
|                                                                | Paid (cumulative) as of:                                      |                   |   |              |        |  |      |         |        |      |   |        |         |    |   |        |        |    |   |        |        
|                                                                |                                                               | One year later    |   |              |        |  |      | $       | 32,028 |      |   | $      | 35,932  |    |   | $      | 34,380 |    |   | $      | 27,737  |   
|                                                                |                                                               | Two years later   |   |              |        |  |      |         |        |      |   |        | 48,069  |    |   |        | 49,958 |    |   |        | 42,046  |   
|                                                                |                                                               | Three years later |   |              |        |  |      |         |        |      |   |        |         |    |   |        | 56,376 |    |   |        | 49,671  |   
|                                                                |                                                               | Four years later  |   |              |        |  |      |         |        |      |   |        |         |    |   |        |        |    |   |        | 53,814  |   
|                                                                |                                                               | Five years later  |   |              |        |  |      |         |        |      |   |        |         |    |   |        |        |    |   |        |         |   
|                                                                |                                                               | Six years later   |   |              |        |  |      |         |        |      |   |        |         |    |   |        |        |    |   |        |         |   
|                                                                |                                                               | Seven years later |   |              |        |  |      |         |        |      |   |        |         |    |   |        |        |    |   |        |         |   
|                                                                |                                                               | Eight years later |   |              |        |  |      |         |        |      |   |        |         |    |   |        |        |    |   |        |         |   
|                                                                |                                                               | Nine years later  |   |              |        |  |      |         |        |      |   |        |         |    |   |        |        |    |   |        |         |   
|Reserves re-estimated as of:                                    |                                                               |                   |   |              |        |  |      |         |        |      |   |        |         |    |   |        |        |    |   |       
|                                                                |                                                               | End of year       |   | $            | 72,623 |  |      | $       | 66,996 |      |   | $      | 58,652  |    |   | $      | 75,866 |    |   | $      | 55,695  |   
|                                                                |                                                               | One year later    |   |              |        |  |      |         | 74,727 |      |   |        | 74,181  |    |   |        | 67,753 |    |   |        | 66,674  |   
|                                                                |                                                               | Two years later   |   |              |        |  |      |         |        |      |   |        | 76,502  |    |   |        | 77,205 |    |   |        | 61,075  |   
|                                                                |                                                               | Three years later |   |              |        |  |      |         |        |      |   |        |         |    |   |        | 78,331 |    |   |        | 68,065  |   
|                                                                |                                                               | Four years later  |   |              |        |  |      |         |        |      |   |        |         |    |   |        |        |    |   |        | 69,474  |   
|                                                                |                                                               | Five years later  |   |              |        |  |      |         |        |      |   |        |         |    |   |        |        |    |   |        |         |   
|                                                                |                                                               | Six years later   |   |              |        |  |      |         |        |      |   |        |         |    |   |        |        |    |   |        |         |   
|                                                                |                                                               | Seven years later |   |              |        |  |      |         |        |      |   |        |         |    |   |        |        |    |   |        |         |   
|                                                                |                                                               | Eight years later |   |              |        |  |      |         |        |      |   |        |         |    |   |        |        |    |   |        |         |   
|                                                                |                                                               | Nine years later  |   |              |        |  |      |         |        |      |   |        |         |    |   |        |        |    |   |        |         |   
|Initial reserves in excess of
(less than) re-estimated reserves |                                                               |                   |   |              |        |  |      |         |        |      |   |        |         |    |   |        |        |    |   |       
|                                                                |                                                               | Amount            |   |              |        |  |      | $       | (7,731 | )    |   | $      | (17,850 | )  |   | $      | (2,465 | )  |   | $      | (13,779 | ) 
|                                                                |                                                               | Percent           |   |              |        |  |      |         | (11.5  | )%   |   |        | (30.4   | )% |   |        | (3.2   | )% |   |        | (24.7   | )%

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                |                                                               |                   |   |              |        |    |      |        |        |      |   |        |        |   |   |        |       |    |   |       |       |   
|--------------------------------------------------------------- | ------------------------------------------------------------- | ----------------- | - | ------------ | ------ | -- | ---- | ------ | ------ | ---- | - | ------ | ------ | - | - | ------ | ----- | -- | - | ----- | ----- | --
|                                                                |                                                               |                   |   | December 31, |       
|                                                                |                                                               |                   |   |              |       
|                                                                |                                                               |                   |   | 1996         |        |    | 1995 |        |        | 1994 |   |        | 1993   |   |   | 1992   |      
|                                                                |                                                               |                   |   |              |        |    |      |        |        |      |   |        |        |   |   |        |      
|Loss Reserve Development:                                       |                                                               |                   |   |              |        |    |      |        |        |      |   |        |        |   |   |        |       |    |   |      
|                                                                | Gross reserves for unpaid
claim and claim
settlement expenses |                   | $ | 49,256       |        |    | $    | 37,138 |        |      | $ | 28,165 |        |   | $ | 13,279 |       |    | $ | 2,688 |      
|                                                                | Reinsurance recoverables                                      |                   |   | 6,183        |        |    |      | 8,312  |        |      |   | 13,902 |        |   |   | 9,593  |       |    |   | 1,886 |      
|                                                                |                                                               |                   |   |              |        |    |      |        |        |      |   |        |        |   |   |       
|                                                                | Net reserves for unpaid
claim and claim
settlement expenses   |                   | $ | 43,073       |        |    | $    | 28,826 |        |      | $ | 14,263 |        |   | $ | 3,686  |       |    | $ | 802   |      
|                                                                |                                                               |                   |   |              |        |    |      |        |        |      |   |        |        |   |   |       
|                                                                | Paid (cumulative) as of:                                      |                   |   |              |        |    |      |        |        |      |   |        |        |   |   |        |       |    |   |       |      
|                                                                |                                                               | One year later    |   | $            | 19,439 |    |      | $      | 8,595  |      |   | $      | 4,639  |   |   | $      | 1,436 |    |   | $     | 583   |   
|                                                                |                                                               | Two years later   |   |              | 28,173 |    |      |        | 12,894 |      |   |        | 6,476  |   |   |        | 2,150 |    |   |       | 678   |   
|                                                                |                                                               | Three years later |   |              | 33,438 |    |      |        | 15,521 |      |   |        | 7,863  |   |   |        | 2,348 |    |   |       | 815   |   
|                                                                |                                                               | Four years later  |   |              | 36,904 |    |      |        | 16,869 |      |   |        | 8,569  |   |   |        | 2,654 |    |   |       | 856   |   
|                                                                |                                                               | Five years later  |   |              | 38,919 |    |      |        | 18,020 |      |   |        | 9,046  |   |   |        | 2,816 |    |   |       | 925   |   
|                                                                |                                                               | Six years later   |   |              |        |    |      |        | 18,714 |      |   |        | 9,396  |   |   |        | 2,847 |    |   |       | 951   |   
|                                                                |                                                               | Seven years later |   |              |        |    |      |        |        |      |   |        | 9,564  |   |   |        | 2,932 |    |   |       | 920   |   
|                                                                |                                                               | Eight years later |   |              |        |    |      |        |        |      |   |        |        |   |   |        | 2,985 |    |   |       | 928   |   
|                                                                |                                                               | Nine years later  |   |              |        |    |      |        |        |      |   |        |        |   |   |        |       |    |   |       | 951   |   
|Reserves re-estimated as of:                                    |                                                               |                   |   |              |        |    |      |        |        |      |   |        |        |   |   |        |       |    |   |      
|                                                                |                                                               | End of year       |   | $            | 43,073 |    |      | $      | 28,826 |      |   | $      | 14,263 |   |   | $      | 3,686 |    |   | $     | 802   |   
|                                                                |                                                               | One year later    |   |              | 39,988 |    |      |        | 20,751 |      |   |        | 12,789 |   |   |        | 3,784 |    |   |       | 1,075 |   
|                                                                |                                                               | Two years later   |   |              | 43,484 |    |      |        | 18,469 |      |   |        | 9,318  |   |   |        | 3,416 |    |   |       | 1,008 |   
|                                                                |                                                               | Three years later |   |              | 41,451 |    |      |        | 19,796 |      |   |        | 8,984  |   |   |        | 2,782 |    |   |       | 950   |   
|                                                                |                                                               | Four years later  |   |              | 45,959 |    |      |        | 19,389 |      |   |        | 9,669  |   |   |        | 2,861 |    |   |       | 912   |   
|                                                                |                                                               | Five years later  |   |              | 47,147 |    |      |        | 21,254 |      |   |        | 9,692  |   |   |        | 2,972 |    |   |       | 949   |   
|                                                                |                                                               | Six years later   |   |              |        |    |      |        | 22,568 |      |   |        | 10,330 |   |   |        | 2,927 |    |   |       | 964   |   
|                                                                |                                                               | Seven years later |   |              |        |    |      |        |        |      |   |        | 11,675 |   |   |        | 3,106 |    |   |       | 926   |   
|                                                                |                                                               | Eight years later |   |              |        |    |      |        |        |      |   |        |        |   |   |        | 3,818 |    |   |       | 945   |   
|                                                                |                                                               | Nine years later  |   |              |        |    |      |        |        |      |   |        |        |   |   |        |       |    |   |       | 951   |   
|Initial reserves in excess of
(less than) re-estimated reserves |                                                               |                   |   |              |        |    |      |        |        |      |   |        |        |   |   |        |       |    |   |      
|                                                                |                                                               | Amount            |   | $            | (4,074 | )  |      | $      | 6,258  |      |   | $      | 2,588  |   |   | $      | (132  | )  |   | $     | (149  | ) 
|                                                                |                                                               | Percent           |   |              | (9.5   | )% |      |        | 21.7   | %    |   |        | 18.1   | % |   |        | (3.6  | )% |   |       | (18.6 | )%

The following table is derived from the loss reserve development table and
summarizes the effect of reserve re-estimates, net of reinsurance, on calendar
year operations for the same eight-year period ended December 31, 2001. The
total of each column details the amount of reserve re-estimates made in the
indicated calendar year and shows the accident years to which the re-estimates
are applicable. The amounts in the total accident year column represent the
cumulative reserve re-estimates for the indicated accident year (000s):



|               |       |  |                                                             |        |   |      |   |         |      |  |   |       |   |  |      |         |   |  |   |       |  
|-------------- | ----- |  | ----------------------------------------------------------- | ------ | - | ---- | - | ------- | ---- |  | - | ----- | - |  | ---- | ------- | - |  | - | ----- | -
|               |       |  | Effect of Reserve re-estimates on Calendar Year Operations: |       
|               |       |  |                                                             |       
|               |       |  | 2001                                                        |        |   | 2000 |   |         | 1999 |  |   | 1998  |   |  | 1997 |        
|               |       |  |                                                             |        |   |      |   |         |      |  |   |       |   |  |      |        
|Accident Year: |       |  |                                                             |        |   |      |   |         |      |  |   |       |   |  |      |         |   |  |   |      
|               | 1992  |  | $                                                           | (6     | ) |      | $ | (19     | )    |  | $ | 38    |   |  | $    | (15     | ) |  | $ | (37   | )
|               | 1993  |  |                                                             | (706   | ) |      |   | (160    | )    |  |   | 7     |   |  |      | (96     | ) |  |   | (42   | )
|               | 1994  |  |                                                             | (633   | ) |      |   | (459    | )    |  |   | (68   | ) |  |      | (574    | ) |  |   | 413   |  
|               | 1995  |  |                                                             | 31     |   |      |   | (1,227  | )    |  |   | 430   |   |  |      | (642    | ) |  |   | 1,948 |  
|               | 1996  |  |                                                             | 126    |   |      |   | (2,643  | )    |  |   | 1,626 |   |  |      | (2,169  | ) |  |   | 803   |  
|               | 1997  |  |                                                             | (221   | ) |      |   | (2,482  | )    |  |   | 3,566 |   |  |      | (7,483  | ) |  |   |       |  
|               | 1998  |  |                                                             | 283    |   |      |   | (2,462  | )    |  |   | 2,514 |   |  |      |         |   |  |   |       |  
|               | 1999  |  |                                                             | (1,195 | ) |      |   | (6,077  | )    |  |   |       |   |  |      |         |   |  |   |       |  
|               | 2000  |  |                                                             | (5,410 | ) |      |   |         |      |  |   |       |   |  |      |         |   |  |   |       |  
|               |       |  |                                                             |        |   |      |   |         |      |  |   |       |   |  |     
|               | Total |  | $                                                           | (7,731 | ) |      | $ | (15,529 | )    |  | $ | 8,113 |   |  | $    | (10,979 | ) |  | $ | 3,085 |  
|               |       |  |                                                             |        |   |      |   |         |      |  |   |       |   |  |     

[Additional columns below]

[Continued from above table, first column(s) repeated]

|               |       |  |                                                             |       |  |          |   |       |      |  |   |      |   |  |      |      |   |  |              |         |  
|-------------- | ----- |  | ----------------------------------------------------------- | ----- |  | -------- | - | ----- | ---- |  | - | ---- | - |  | ---- | ---- | - |  | ------------ | ------- | -
|               |       |  |                                                             |       |  |          |   |       |      |  |   |      |   |  |      |      |   |  | Cumulative   |        
|               |       |  |                                                             |       |  |          |   |       |      |  |   |      |   |  |      |      |   |  | Re-estimates |        
|               |       |  |                                                             |       |  |          |   |       |      |  |   |      |   |  |      |      |   |  | for each     |        
|               |       |  | Effect of Reserve re-estimates on Calendar Year Operations: |       |  | Accident |  
|               |       |  | 1996                                                        |       |  | 1995     |   |       | 1994 |  |   | 1993 |   |  | Year |     
|               |       |  |                                                             |       |  |          |   |       |      |  |   |      |   |  |      |     
|Accident Year: |       |  |                                                             |       |  |          |   |       |      |  |   |      |   |  |      |      |   |  |              |        
|               | 1992  |  | $                                                           | 38    |  |          | $ | 58    |      |  | $ | 67   |   |  | $    | (273 | ) |  | $            | (149    | )
|               | 1993  |  |                                                             | 596   |  |          |   | 310   |      |  |   | (165 | ) |  |      |      |   |  |              | (256    | )
|               | 1994  |  |                                                             | 2,837 |  |          |   | 1,106 |      |  |   |      |   |  |      |      |   |  |              | 2,622   |  
|               | 1995  |  |                                                             | 4,604 |  |          |   |       |      |  |   |      |   |  |      |      |   |  |              | 5,144   |  
|               | 1996  |  |                                                             |       |  |          |   |       |      |  |   |      |   |  |      |      |   |  |              | (2,257  | )
|               | 1997  |  |                                                             |       |  |          |   |       |      |  |   |      |   |  |      |      |   |  |              | (6,620  | )
|               | 1998  |  |                                                             |       |  |          |   |       |      |  |   |      |   |  |      |      |   |  |              | 335     |  
|               | 1999  |  |                                                             |       |  |          |   |       |      |  |   |      |   |  |      |      |   |  |              | (7,272  | )
|               | 2000  |  |                                                             |       |  |          |   |       |      |  |   |      |   |  |      |      |   |  |              | (5,410  | )
|               |       |  |                                                             |       |  |          |   |       |      |  |   |      |   |  |     
|               | Total |  | $                                                           | 8,075 |  |          | $ | 1,474 |      |  | $ | (98  | ) |  | $    | (273 | ) |  | $            | (13,863 | )
|               |       |  |                                                             |       |  |          |   |       |      |  |   |      |   |  |     

LIQUIDITY AND CAPITAL RESOURCES

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

Our primary sources of cash from operations are premiums collected and
investment income. Our investment portfolio is also a source of liquidity,
through the sale of readily marketable fixed maturity investments. Our primary
cash requirements consist of payments for (i) claim and claim settlement
expenses, (ii) reinsurance, (iii) policy acquisition costs, (iv) general and
administrative expenses, (v) capital expenditures, (vi) income taxes, and (vii) debt
service or principal repayment on our Term Loan. Prior to 1999, we generated
positive net cash from operations

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due, in part, to timing
differences between the receipt of premiums and the payment of claim and claim
settlement expenses. As we lowered our reinsurance retention levels to $25,000
beginning in mid-1998 through runoff in 2001, we decreased our current period
cash flows as a result of pre-funding quarterly premiums under that
agreement. We expect positive quarterly cash flow from our $25,000 to $300,000
excess of loss reinsurance agreement in 2002 as we are reimbursed for loss
payments to claimants under the policy. This increase in cash flow will be
more than offset by (i) premiums ceded under our quota share policy and (ii)
decreases in cash flows as our premiums in force and premiums earned decrease
in 2002. Excess cash is either invested in short-term cash and cash
equivalents or longer term available-for-sale securities pending future
payments for such expenses as medical and indemnity benefits and other
operating expenses. Cash and cash equivalents consist of U.S. government
securities acquired under repurchase agreements and corporate securities all
with maturities of 90 days or less, with the remaining balances in cash and a
money market fund that invests primarily in short-term government securities.

Cash used in operating activities in 2001 was $6.5 million. This is
primarily the result of our net loss of $23.7 million; an increase of $55.4
million in amounts due from reinsurers and net realized investment gains
totaling $1.2 million offset by an increase of $52.5 million in unpaid claim
and claim settlement expenses, which are non-cash accruals for future claims; a
decrease in our net deferred income tax asset of $8.8 million; an increase in
accrued liabilities totaling $8.2 million; depreciation and amortization
expense of $1.6 million and a decrease of $744,000 in unearned premiums, net of
premiums receivable. Net cash provided by investing activities was $10.0
million, primarily the result of $92.8 million in proceeds from sales of
securities and $872,000 in disposals of furniture and equipment offset by $83.3
million in purchases of securities and $379,000 in purchases of furniture and
equipment. Net cash used in financing activities was $2.5 million due
primarily to payments on notes payable of $2.5 million.

Our need for additional capital is primarily the result of regulations
that require certain ratios of regulatory or statutory capital to premiums
written in our insurance subsidiary as defined by state regulatory bodies and
insurance rating agencies. We believe that raising additional permanent
capital would stabilize our ratio of premium to capital and provide a solid
base for the future growth of our insurance subsidiary. As an alternative to
raising additional permanent capital, further quota-share reinsurance or other
additional reinsurance on an interim basis would have the effect of reducing
the ratio of premiums to capital and could be used to satisfy state regulatory
requirements.

State insurance regulations limit distributions, including dividends, from
our insurance subsidiary to us. The maximum amount of dividends that can be
paid by ACIC to us in any year is equal to the greater of: (i) 10% of ACICs
statutory surplus as of the end of the previous fiscal year, or (ii) the
statutory net gain from operations (not including realized capital gains) of
ACIC in its most recent fiscal year. Based on this limitation, the maximum
dividend that ACIC could pay to us in 2002, without regulatory approval, is
approximately $1.9 million. (See Note 9 of Notes to Consolidated Financial
Statements.) ACIC has never paid a dividend to us and we intend to retain
capital in the insurance subsidiary.

On September 15, 1998, our Board of Directors approved a share repurchase
program authorizing us to repurchase, from time to time, up to $4,000,000 of
RTW, Inc. common stock. We repurchased 10,000 shares in 2001 for approximately
$9,000, 640,000 shares in 2000 for approximately $2.6 million and 19,500 shares
for approximately $87,000 through 1999. We repurchased these shares on the
open market or through private transactions based upon market conditions and
availability. The repurchased shares will be used for employee stock option
and purchase plans and other corporate purposes.

We believe that cash flow generated by our operations and our cash and
investment balances will be sufficient to fund continuing operations, principal
and interest payments and capital expenditures for the next 12 months.

INTEREST RATE RISK

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

An increase of 100 basis points in prevailing interest rates would reduce
the fair value of our interest rate sensitive instruments by approximately $4.1
million.

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

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##### Table of Contents



NAIC RISK-BASED CAPITAL STANDARDS

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

REGULATION

Our insurance subsidiary is subject to substantial regulation by governmental
agencies in the states in which we operate, and will be subject to such
regulation in any state in which we provide workers compensation products and
services in the future. State regulatory agencies have broad administrative
power with respect to all aspects of our business, including premium rates,
benefit levels, policy forms, dividend payments, capital adequacy and the
amount and type of investments. These regulations are primarily intended to
protect covered employees and policyholders rather than the insurance company.
Both the legislation covering insurance companies and the regulations adopted
by state agencies are subject to change. At December 31, 2001, our insurance
subsidiary was licensed to do business in Minnesota, South Dakota, Wisconsin,
Colorado, Missouri, Illinois, Kansas, Michigan, Indiana, Massachusetts,
Connecticut, Rhode Island, Pennsylvania, Tennessee, Maryland, Arkansas, Iowa,
Florida, Georgia, New Jersey, North Carolina, Texas and Oklahoma.

In March 1998, the National Association of Insurance Commissioners adopted
the Codification of Statutory Accounting Principles (the Codification). The
Codification is intended to standardize regulatory accounting and reporting to
state insurance departments and became effective January 1, 2001. Statutory
accounting principles, however, will continue to be established by individual
state laws and permitted practices. The State of Minnesota required adoption
of the Codification for preparing statutory financial statements for financial
periods occurring on or after January 1, 2001. Adoption of the Codification
increased our statutory capital and surplus by approximately $2.9 million on
January 1, 2001.

EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board issued SFAS No. 141
Business Combinations and SFAS No. 142 Goodwill and Other Intangible
Assets. SFAS No. 141 requires that all business combinations be accounted for
under the purchase method only, and that certain acquired intangible assets in
a business combination be recognized as assets apart from goodwill. SFAS No.
142 requires ratable amortization of goodwill be replaced with periodic tests
of goodwills impairment and that intangible assets other than goodwill be
amortized over their useful lives. Implementation of SFAS No. 141 and 142 is
required for fiscal 2002. We believe that the adoption of SFAS No. 141 and 142
will not have an impact on our financial statements

FORWARD-LOOKING STATEMENTS

Information included in this Annual Report and Report on Form 10-K which can be
identified by the use of forward-looking terminology such as may, will,
expect, anticipate, estimate, or continue or the negative thereof or
other variations thereon or comparable terminology constitutes forward-looking
information. The following important factors, among others, in some cases have
affected and in the future could affect our actual results and could cause our
actual financial performance to differ materially from that expressed in any
forward-looking statement: (i) our ability to retain renewing policies and
write new business with a B- (Unsecure) rating from A.M. Best; (ii) our ability
to continue to increase pricing in the markets in which we remain; (iii) the
ability of our reinsurers to honor their obligations to us; (iv) our ability to
accurately predict claim development; (v) our ability to manage both our
existing claims and new claims in an effective manner; (vi) our experience with
claims frequency and severity; (vii) competition and the regulatory environment
in which we operate; (viii) general economic and business conditions; (ix) our
ability to obtain and retain reinsurance at a reasonable cost; (x) changes in
workers compensation regulation by states, including changes in mandated
benefits or insurance company regulation; (xi) interest rate changes; and (xii)
other factors as noted in our other filings with the SEC. This discussion of
uncertainties is by no means exhaustive but is designed to highlight important
factors that may impact our future performance.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information with respect to Disclosures about Market Risk is contained in
the Section entitled Managements Discussion and Analysis of Financial
Condition and Results of Operations  Interest Rate Risk under Item 7 of this
Report of Form 10-K and is incorporated herein by reference.




ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

|                                                                                               |  |  |      | 
|---------------------------------------------------------------------------------------------- |  |  | ---- | 
|FINANCIAL STATEMENTS                                                                           |  |  | Page | 
|Independent Auditors Report                                                                   |  |  | 26   | 
|Consolidated Balance Sheets  December 31, 2001 and 2000                                       |  |  | 27   | 
|Consolidated Statements of Operations  Years Ended December 31, 2001, 2000 and 1999           |  |  | 28   | 
|Consolidated Statements of Shareholders Equity  Years Ended December 31, 2001, 2000 and 1999 |  |  | 29   | 
|Consolidated Statements of Cash Flows  Years Ended December 31, 2001, 2000 and 1999           |  |  | 30   | 
|Notes to Consolidated Financial Statements  Years Ended December 31, 2001, 2000 and 1999      |  |  | 31   | 

INDEPENDENT AUDITORS REPORT

To the Board of Directors and Shareholders
RTW, Inc.
Minneapolis, Minnesota

We have audited the accompanying consolidated balance sheets of RTW, Inc.
and subsidiary (the Company) as of December 31, 2001 and 2000, and the related
consolidated statements of operations, shareholders equity, and cash flows for
each of the three years in the period ended December 31, 2001. These
consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of the Company at December 31, 2001 and 2000, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2001, in conformity with accounting principles generally accepted in the United
States of America.

As described in Note 5, the establishment of claim and claim settlement
expense reserves is an inherently uncertain process. Additionally, as
described in Note 10, underwriting losses in the years ended December 31, 2001
and 2000 have resulted in a significant reduction in the Companys statutory
policyholders surplus that adversely affected its credit rating.

DELOITTE & TOUCHE LLP

Minneapolis, Minnesota
February 20, 2002
(February 28, 2002 as to Note 10)
(March 22, 2002 as to Note 6)

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RTW, INC.
Consolidated Balance Sheets
December 31, 2001 and 2000
(In Thousands, Except Share Data)

|                                                                 |                                                                                                                    |                                            |                                      |         |         |      |         |        |         |  |  | 
|---------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ------------------------------------ | ------- | ------- | ---- | ------- | ------ | ------- |  |  | 
|                                                                 |                                                                                                                    |                                            |                                      |         |         | 2001 |         |        | 2000    | 
|                                                                 |                                                                                                                    |                                            |                                      |         |         |      |         |        |         | 
|ASSETS                                                           |                                                                                                                    |                                            |                                      |         |         |      |         |       
|Investments at fair value, amortized cost of $87,809 and $96,521 |                                                                                                                    | $                                          | 89,166                               |         |         | $    | 96,830  |       
|Cash and cash equivalents                                        |                                                                                                                    |                                            | 3,425                                |         |         |      | 2,427   |       
|Accrued investment income                                        |                                                                                                                    |                                            | 1,133                                |         |         |      | 1,266   |       
|Premiums receivable, less allowance of $436 and $569             |                                                                                                                    |                                            | 6,665                                |         |         |      | 10,126  |       
|Reinsurance recoverables:                                        |                                                                                                                    |                                            |                                      |         |         |      |         |       
|                                                                 | On unpaid claim and claim settlement expenses                                                                      |                                            |                                      | 108,687 |         |      |         | 61,845 |        
|                                                                 | On paid claim and claim settlement expenses                                                                        |                                            |                                      | 3,039   |         |      |         | 2,295  |        
|                                                                 | Prepaid reinsurance premiums                                                                                       |                                            |                                      | 7,790   |         |      |         |       |        
|Deferred policy acquisition costs                                |                                                                                                                    |                                            | 1,214                                |         |         |      | 1,351   |       
|Furniture and equipment, net                                     |                                                                                                                    |                                            | 1,824                                |         |         |      | 3,590   |       
|Other assets                                                     |                                                                                                                    |                                            | 4,091                                |         |         |      | 14,805  |       
|                                                                 |                                                                                                                    |                                            |                                      |         |         |     
|                                                                 |                                                                                                                    | Total assets                               |                                      | $       | 227,034 |      |         | $      | 194,535 | 
|                                                                 |                                                                                                                    |                                            |                                      |         |         |     
|                                                                 |                                                                                                                    |                                            | LIABILITIES AND SHAREHOLDERS EQUITY |         |         |      |         |        |         |  | 
|Unpaid claim and claim settlement expenses                       |                                                                                                                    | $                                          | 181,310                              |         |         | $    | 128,841 |       
|Unearned premiums                                                |                                                                                                                    |                                            | 9,738                                |         |         |      | 12,455  |       
|Accrued expenses and other liabilities                           |                                                                                                                    |                                            | 15,744                               |         |         |      | 7,503   |       
|Notes payable                                                    |                                                                                                                    |                                            | 4,500                                |         |         |      | 7,000   |       
|                                                                 |                                                                                                                    |                                            |                                      |         |         |     
|                                                                 |                                                                                                                    | Total liabilities                          |                                      |         | 211,292 |      |         |        | 155,799 | 
|Commitments and contingencies                                    |                                                                                                                    |                                            |                                     |         |         |      |        |       
|Shareholders equity:                                            |                                                                                                                    |                                            |                                      |         |         |      |         |       
|                                                                 | Undesignated stock, no par value; authorized 4,750,000 shares;
none issued or outstanding                          |                                            |                                      |        |         |      |         |       |        
|                                                                 | Series A Junior Participating Preferred Stock, no par value;
authorized 250,000 shares; none issued or outstanding |                                            |                                      |        |         |      |         |       |        
|                                                                 | Common stock, no par value; authorized 25,000,000 shares;
issued and outstanding 10,302,000 and 10,293,000 shares  |                                            |                                      | 20,688  |         |      |         | 20,665 |        
|                                                                 | Retained (deficit) earnings                                                                                        |                                            |                                      | (5,828  | )       |      |         | 17,867 |        
|                                                                 | Accumulated other comprehensive income                                                                             |                                            |                                      | 882     |         |      |         | 204    |        
|                                                                 |                                                                                                                    |                                            |                                      |         |         |     
|                                                                 |                                                                                                                    | Total shareholders equity                 |                                      |         | 15,742  |      |         |        | 38,736  | 
|                                                                 |                                                                                                                    |                                            |                                      |         |         |     
|                                                                 |                                                                                                                    | Total liabilities and shareholders equity |                                      | $       | 227,034 |      |         | $      | 194,535 | 
|                                                                 |                                                                                                                    |                                            |                                      |         |         |     

See notes to consolidated financial statements.

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RTW, INC.
Consolidated Statements of Operations
Years Ended December 31, 2001, 2000 and 1999
(In Thousands, Except Share and Per Share Data)

|                                     |                                         |                            |                                        |            |        |         |        |            |        |         |       |            |        |       | 
|------------------------------------ | --------------------------------------- | -------------------------- | -------------------------------------- | ---------- | ------ | ------- | ------ | ---------- | ------ | ------- | ----- | ---------- | ------ | ----- | 
|                                     |                                         |                            |                                        |            | 2001   |         |        | 2000       |        |         | 1999  |           
|                                     |                                         |                            |                                        |            |        |         |        |            |        |         |       |           
|Revenues:                            |                                         |                            |                                        |            |        |         |        |            |        |         |       |           
|                                     | Gross premiums earned                   |                            | $                                      | 97,420     |        |         | $      | 95,878     |        |         | $     | 89,226     |       
|                                     | Premiums ceded                          |                            |                                        | (56,506    | )      |         |        | (17,724    | )      |         |       | (18,008    | )     
|                                     |                                         |                            |                                        |            |        |         |        |            |       
|                                     |                                         | Premiums earned            |                                        |            | 40,914 |         |        |            | 78,154 |         |       |            | 71,218 |      
|                                     | Investment income                       |                            |                                        | 5,897      |        |         |        | 5,752      |        |         |       | 6,510      |       
|                                     | Net realized investment gains (losses): |                            |                                        |            |        |         |        |            |        |         |       |            |       
|                                     |                                         | Realized investment gains  |                                        |            | 1,225  |         |        |            | 26     |         |       |            | 108    |      
|                                     |                                         | Realized investment losses |                                        |            | (62    | )       |        |            | (633   | )       |       |            | (24    | )    
|                                     |                                         |                            |                                        |            |        |         |        |            |       
|                                     |                                         |                            | Net realized investment gains (losses) |            |        | 1,163   |        |            |        | (607    | )     |            |        | 84    | 
|                                     | Other income                            |                            |                                        | 2,088      |        |         |        |           |        |         |       |           |       
|                                     |                                         |                            |                                        |            |        |         |        |            |       
|                                     |                                         | Total revenues             |                                        |            | 50,062 |         |        |            | 83,299 |         |       |            | 77,812 |      
|Expenses:                            |                                         |                            |                                        |            |        |         |        |            |        |         |       |           
|                                     | Claim and claim settlement expenses     |                            |                                        | 53,469     |        |         |        | 72,429     |        |         |       | 43,323     |       
|                                     | Policy acquisition costs                |                            |                                        | (4,519     | )      |         |        | 14,137     |        |         |       | 14,111     |       
|                                     | General and administrative expenses     |                            |                                        | 15,353     |        |         |        | 11,513     |        |         |       | 12,021     |       
|                                     |                                         |                            |                                        |            |        |         |        |            |       
|                                     |                                         | Total expenses             |                                        |            | 64,303 |         |        |            | 98,079 |         |       |            | 69,455 |      
|                                     |                                         |                            |                                        |            |        |         |        |            |       
|                                     |                                         |                            | (Loss) income from operations          |            |        | (14,241 | )      |            |        | (14,780 | )     |            |        | 8,357 | 
|                                     | Interest expense                        |                            |                                        | 511        |        |         |        | 667        |        |         |       | 266        |       
|                                     |                                         |                            |                                        |            |        |         |        |            |       
|                                     | (Loss) income before income taxes       |                            |                                        | (14,752    | )      |         |        | (15,447    | )      |         |       | 8,091      |       
|                                     | Income tax expense (benefit)            |                            |                                        | 8,943      |        |         |        | (5,739     | )      |         |       | 1,924      |       
|                                     |                                         |                            |                                        |            |        |         |        |            |       
|Net (loss) income                    |                                         | $                          | (23,695                                | )          |        | $       | (9,708 | )          |        | $       | 6,167 |           
|                                     |                                         |                            |                                        |            |        |         |        |            |       
|(Loss) income per share:             |                                         |                            |                                        |            |        |         |        |            |        |         |       |           
|                                     | Basic (loss) income per share           |                            | $                                      | (2.30      | )      |         | $      | (0.89      | )      |         | $     | 0.50       |       
|                                     |                                         |                            |                                        |            |        |         |        |            |       
|                                     | Diluted (loss) income per share         |                            | $                                      | (2.30      | )      |         | $      | (0.89      | )      |         | $     | 0.50       |       
|                                     |                                         |                            |                                        |            |        |         |        |            |       
|Weighted average shares outstanding: |                                         |                            |                                        |            |        |         |        |            |        |         |       |           
|                                     | Basic shares outstanding                |                            |                                        | 10,304,000 |        |         |        | 10,855,000 |        |         |       | 12,291,000 |       
|                                     |                                         |                            |                                        |            |        |         |        |            |       
|                                     | Diluted shares outstanding              |                            |                                        | 10,304,000 |        |         |        | 10,855,000 |        |         |       | 12,360,000 |       
|                                     |                                         |                            |                                        |            |        |         |        |            |       

See notes to consolidated financial statements.

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RTW, INC.

Consolidated Statements of Shareholders Equity
Years Ended December 31, 2001, 2000 and 1999
(In Thousands)

|                             |                       |                                         |                                        |                      |         |        |  |   |         |               |         |           |          |   |        |               |   |               |        |  |         |        |   | 
|---------------------------- | --------------------- | --------------------------------------- | -------------------------------------- | -------------------- | ------- | ------ |  | - | ------- | ------------- | ------- | --------- | -------- | - | ------ | ------------- | - | ------------- | ------ |  | ------- | ------ | - | 
|                             |                       |                                         |                                        |                      |         |        |  |   |         |               |         |           |          |   |        |               |   | Accumulated   |        |  |         |        |  
|                             |                       |                                         |                                        |                      |         |        |  |   |         |               |         |           |          |   |        |               |   | Other         |        |  |         |        |  
|                             |                       |                                         |                                        |                      |         |        |  |   |         | Comprehensive |         |           | Retained |   |        | Comprehensive |   |               | Total  | 
|                             |                       |                                         |                                        |                      |         | Common |  |   | Income  |               |         | Earnings  |          |   | Income |               |   | Shareholders' |       
|                             |                       |                                         |                                        |                      |         | Stock  |  |   | (Loss)  |               |         | (Deficit) |          |   | (Loss) |               |   | Equity        |       
|                             |                       |                                         |                                        |                      |         |        |  |   |         |               |         |           |          |   |        |               |   |               |       
|Balance at January 1, 1999   |                       | $                                       | 29,451                                 |                      |         |        |  |   |         | $             | 21,408  |           |          | $ | 1,759  |               |   | $             | 52,618 | 
|                             | Comprehensive income: |                                         |                                        |                      |         |        |  |   |         |               |         |           |          |   |        |               |   |               |        |  |        
|                             |                       | Net income                              |                                        |                      |        |        |  | $ | 6,167   |               |         |           | 6,167    |   |        |               |  |               |        |  | 6,167   |       
|                             |                       | Other comprehensive loss, net of tax:   |                                        |                      |         |        |  |   |         |               |         |           |          |   |        |               |   |               |        |  |         |       
|                             |                       |                                         | Change in unrealized investment losses |                      |         |       |  |   |         | (4,577        | )       |           |          |  |        |               |   | (4,577        | )      |  |         | (4,577 | )
|                             |                       |                                         |                                        |                      |         |        |  |   |         |               |         |           |          |   |        |               |   |               |       
|                             |                       |                                         |                                        | Comprehensive income |         |        |  |   |         | $             | 1,590   |           |          |   |        |               |   |               |        |  |         |        |   | 
|                             |                       |                                         |                                        |                      |         |        |  |   |         |               |         |           |          |   |        |               |   |               |       
|                             |                       | Non-qualified stock options exercised   |                                        |                      | 1,172   |        |  |   |         |               |         |           |         |   |        |               |  |               |        |  | 1,172   |       
|                             |                       | Incentive stock options exercised       |                                        |                      | 80      |        |  |   |         |               |         |           |         |   |        |               |  |               |        |  | 80      |       
|                             |                       | Issuance of shares under ESPP           |                                        |                      | 105     |        |  |   |         |               |         |           |         |   |        |               |  |               |        |  | 105     |       
|                             |                       |                                         |                                        |                      |         |        |  |   |         |               |         |           |          |   |        |              
|Balance at December 31, 1999 |                       |                                         | 30,808                                 |                      |         |        |  |   |         |               | 27,575  |           |          |   | (2,818 | )             |   |               | 55,565 | 
|                             | Comprehensive loss:   |                                         |                                        |                      |         |        |  |   |         |               |         |           |          |   |        |               |   |               |        |  |        
|                             |                       | Net loss                                |                                        |                      |        |        |  | $ | (9,708  | )             |         |           | (9,708   | ) |        |               |  |               |        |  | (9,708  | )     
|                             |                       | Other comprehensive income, net of tax: |                                        |                      |         |        |  |   |         |               |         |           |          |   |        |               |   |               |        |  |         |       
|                             |                       |                                         | Change in unrealized investment gains  |                      |         |       |  |   |         | 3,022         |         |           |          |  |        |               |   | 3,022         |        |  |         | 3,022  |  
|                             |                       |                                         |                                        |                      |         |        |  |   |         |               |         |           |          |   |        |               |   |               |       
|                             |                       |                                         |                                        | Comprehensive loss   |         |        |  |   |         | $             | (6,686  | )         |          |   |        |               |   |               |        |  |         |        |   | 
|                             |                       |                                         |                                        |                      |         |        |  |   |         |               |         |           |          |   |        |               |   |               |       
|                             |                       | Retirement of common stock              |                                        |                      | (10,268 | )      |  |   |         |               |         |           |         |   |        |               |  |               |        |  | (10,268 | )     
|                             |                       | Issuance of shares under ESPP           |                                        |                      | 125     |        |  |   |         |               |         |           |         |   |        |               |  |               |        |  | 125     |       
|                             |                       |                                         |                                        |                      |         |        |  |   |         |               |         |           |          |   |        |              
|Balance at December 31, 2000 |                       |                                         | 20,665                                 |                      |         |        |  |   |         |               | 17,867  |           |          |   | 204    |               |   |               | 38,736 | 
|                             | Comprehensive loss:   |                                         |                                        |                      |         |        |  |   |         |               |         |           |          |   |        |               |   |               |        |  |        
|                             |                       | Net loss                                |                                        |                      |        |        |  | $ | (23,695 | )             |         |           | (23,695  | ) |        |               |  |               |        |  | (23,695 | )     
|                             |                       | Other comprehensive income net of tax:  |                                        |                      |         |        |  |   |         |               |         |           |          |   |        |               |   |               |        |  |         |       
|                             |                       |                                         | Change in unrealized investment gains  |                      |         |       |  |   |         | 678           |         |           |          |  |        |               |   | 678           |        |  |         | 678    |  
|                             |                       |                                         |                                        |                      |         |        |  |   |         |               |         |           |          |   |        |               |   |               |       
|                             |                       |                                         |                                        | Comprehensive loss   |         |        |  |   |         | $             | (23,017 | )         |          |   |        |               |   |               |        |  |         |        |   | 
|                             |                       |                                         |                                        |                      |         |        |  |   |         |               |         |           |          |   |        |               |   |               |       
|                             |                       | Retirement of common stock              |                                        |                      | (10     | )      |  |   |         |               |         |           |         |   |        |               |  |               |        |  | (10     | )     
|                             |                       | Issuance of shares under ESPP           |                                        |                      | 33      |        |  |   |         |               |         |           |         |   |        |               |  |               |        |  | 33      |       
|                             |                       |                                         |                                        |                      |         |        |  |   |         |               |         |           |          |   |        |              
|Balance at December 31, 2001 |                       | $                                       | 20,688                                 |                      |         |        |  |   |         | $             | (5,828  | )         |          | $ | 882    |               |   | $             | 15,742 | 
|                             |                       |                                         |                                        |                      |         |        |  |   |         |               |         |           |          |   |        |              

See notes to consolidated financial statements.

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RTW, INC.
Consolidated Statements of Cash Flows
Years Ended December 31, 2001, 2000 and 1999
(In Thousands)

|                                                     |                                                                                      |                                        |                                               |                                           |        |         |        |         |        |         |        |         |        |         |         |  
|---------------------------------------------------- | ------------------------------------------------------------------------------------ | -------------------------------------- | --------------------------------------------- | ----------------------------------------- | ------ | ------- | ------ | ------- | ------ | ------- | ------ | ------- | ------ | ------- | ------- | -
|                                                     |                                                                                      |                                        |                                               |                                           |        | 2001    |        |         | 2000   |         |        | 1999    |       
|                                                     |                                                                                      |                                        |                                               |                                           |        |         |        |         |        |         |        |         |       
|Cash flows from operating activities:                |                                                                                      |                                        |                                               |                                           |        |         |        |         |        |         |        |        
|                                                     | Net (loss) income                                                                    |                                        | $                                             | (23,695                                   | )      |         | $      | (9,708  | )      |         | $      | 6,167   |       
|                                                     | Adjustments to reconcile net (loss) income to net
cash used in operating activities: |                                        |                                               |                                           |        |         |        |         |        |         |        |         |       
|                                                     |                                                                                      | Net realized investment (gains) losses |                                               |                                           | (1,163 | )       |        |         | 607    |         |        |         | (84    | )      
|                                                     |                                                                                      | Depreciation and amortization          |                                               |                                           | 1,580  |         |        |         | 1,397  |         |        |         | 1,382  |        
|                                                     |                                                                                      | Deferred income taxes                  |                                               |                                           | 8,776  |         |        |         | (1,371 | )       |        |         | 764    |        
|                                                     |                                                                                      | Changes in assets and liabilities:     |                                               |                                           |        |         |        |         |        |         |        |         |        |        
|                                                     |                                                                                      |                                        | Amounts due from reinsurers                   |                                           |        | (55,376 | )      |         |        | (20,638 | )      |         |        | (21,232 | )      
|                                                     |                                                                                      |                                        | Unpaid claim and claim settlement expenses    |                                           |        | 52,469  |        |         |        | 29,010  |        |         |        | 2,562   |        
|                                                     |                                                                                      |                                        | Unearned premiums, net of premiums receivable |                                           |        | 744     |        |         |        | (1,002  | )      |         |        | (3,142  | )      
|                                                     |                                                                                      |                                        | Other, net                                    |                                           |        | 10,149  |        |         |        | (7,167  | )      |         |        | 3,313   |        
|                                                     |                                                                                      |                                        |                                               |                                           |        |         |        |         |       
|                                                     |                                                                                      |                                        |                                               | Net cash used in operating activities     |        |         | (6,516 | )       |        |         | (8,872 | )       |        |         | (10,270 | )
|Cash flows from investing activities:                |                                                                                      |                                        |                                               |                                           |        |         |        |         |        |         |        |        
|                                                     | Maturities of investments                                                            |                                        |                                               |                                          |        |         |        | 510     |        |         |        | 1,915   |       
|                                                     | Purchases of available-for-sale investments                                          |                                        |                                               | (83,341                                   | )      |         |        |        |        |         |        | (11,239 | )     
|                                                     | Proceeds from sales of available-for-sale investments                                |                                        |                                               | 92,839                                    |        |         |        | 14,594  |        |         |        | 20,912  |       
|                                                     | Purchases of furniture and equipment                                                 |                                        |                                               | (379                                      | )      |         |        | (1,015  | )      |         |        | (573    | )     
|                                                     | Disposals of furniture and equipment                                                 |                                        |                                               | 872                                       |        |         |        | 51      |        |         |        |        |       
|                                                     |                                                                                      |                                        |                                               |                                           |        |         |        |         |       
|                                                     |                                                                                      |                                        |                                               | Net cash provided by investing activities |        |         | 9,991  |         |        |         | 14,140 |         |        |         | 11,015  |  
|Cash flows from financing activities:                |                                                                                      |                                        |                                               |                                           |        |         |        |         |        |         |        |        
|                                                     | Proceeds from notes payable                                                          |                                        |                                               |                                          |        |         |        | 8,000   |        |         |        |        |       
|                                                     | Payments on notes payable                                                            |                                        |                                               | (2,500                                    | )      |         |        | (1,000  | )      |         |        | (2,500  | )     
|                                                     | Stock options and warrants exercised                                                 |                                        |                                               |                                          |        |         |        |        |        |         |        | 1,252   |       
|                                                     | Issuance of common stock under ESPP                                                  |                                        |                                               | 33                                        |        |         |        | 125     |        |         |        | 105     |       
|                                                     | Retirement of common stock                                                           |                                        |                                               | (10                                       | )      |         |        | (10,268 | )      |         |        |        |       
|                                                     |                                                                                      |                                        |                                               |                                           |        |         |        |         |       
|                                                     |                                                                                      |                                        |                                               | Net cash used in financing activities     |        |         | (2,477 | )       |        |         | (3,143 | )       |        |         | (1,143  | )
|                                                     |                                                                                      |                                        |                                               |                                           |        |         |        |         |       
|Net increase (decrease) in cash and cash equivalents |                                                                                      |                                        | 998                                           |                                           |        |         | 2,125  |         |        |         | (398   | )      
|Cash and cash equivalents at beginning of year       |                                                                                      |                                        | 2,427                                         |                                           |        |         | 302    |         |        |         | 700    |        
|                                                     |                                                                                      |                                        |                                               |                                           |        |         |        |         |       
|Cash and cash equivalents at end of year             |                                                                                      | $                                      | 3,425                                         |                                           |        | $       | 2,427  |         |        | $       | 302    |        
|                                                     |                                                                                      |                                        |                                               |                                           |        |         |        |         |       
|Supplemental disclosure of cash flow information:    |                                                                                      |                                        |                                               |                                           |        |         |        |         |        |         |        |        
|                                                     | Cash paid (received) during the year for:                                            |                                        |                                               |                                           |        |         |        |         |        |         |        |         |       
|                                                     |                                                                                      | Interest                               |                                               | $                                         | 641    |         |        | $       | 458    |         |        | $       | 238    |        
|                                                     |                                                                                      |                                        |                                               |                                           |        |         |        |         |       
|                                                     |                                                                                      | Income tax (refunds) payments          |                                               | $                                         | (1,559 | )       |        | $       | 802    |         |        | $       | (1,312 | )      
|                                                     |                                                                                      |                                        |                                               |                                           |        |         |        |         |       

See notes to consolidated financial statements.

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RTW, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000, and 1999

Note 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization RTW, Inc. (RTW) provides workers compensation insurance
coverage to employers through its wholly owned insurance subsidiary, American
Compensation Insurance Company (ACIC). Collectively, we, our and us will
refer to these entities in these Notes to Consolidated Financial Statements.

We benefit from our ability to reduce workers compensation costs and
provide employers the ability to control their workers compensation programs.
We are domiciled in Minnesota and were licensed in Minnesota, Colorado,
Missouri, Michigan, Massachusetts, Illinois, Kansas, Connecticut, Wisconsin,
Rhode Island, Florida, Iowa, Indiana, Arkansas, Pennsylvania, Tennessee, South
Dakota, Maryland, Georgia, New Jersey, North Carolina, Texas and Oklahoma at
December 31, 2001. We are also licensed to write workers compensation
insurance coverage for companies covered under the Longshoremans Act. We
wrote policies primarily in Minnesota, Colorado, Missouri, Illinois, Kansas,
Michigan, Massachusetts, Connecticut and Wisconsin during 2001. In the fourth
quarter of 2001, we announced that we would close our regional offices in
Missouri and Massachusetts. Beginning February 2002, we began to non-renew all
policies in our Missouri and Massachusetts regions and will run off expiring
policies in these regions through January 2003. We operate in a single
business segment, workers compensation insurance.

The following explain the accounting policies we use to arrive at some of
the more significant amounts in our financial statements.

Accounting Principles We prepare our financial statements in accordance with
accounting principles generally accepted in the United States of America
(GAAP).

Consolidation Our consolidated financial statements include RTW and ACIC. We
eliminate all inter-company accounts and transactions in consolidation.

Use of Estimates We make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the financial statement date and the recorded amounts of
revenues and expenses during the reporting period. Our most significant
estimates are those relating to our unpaid claim and claim settlement expenses,
income taxes and accrual for premium adjustments. We continually review our
estimates and assumptions and make adjustments as necessary, but actual results
could vary significantly from these estimates.

Investments We invest entirely in fixed maturity investments and classify our
investments as available-for-sale in accordance with Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in
Debt and Equity Securities.

Available-for-Sale Investments:Our available-for-sale investments are carried
at fair value with changes in unrealized gains or losses, net of deferred
taxes, reported as other comprehensive income or loss. The fair values of our
investments are determined based upon quoted market prices as obtained through
commercial pricing services or brokers who provide estimated fair values.

Realized Investment Gains and Losses:Net realized investment gains and losses
are identified separately in our Consolidated Statements of Operations. Cost
of investments sold is determined by the specific identification method.

We continually monitor the difference between investment cost and fair
value for each of our securities. If any security experienced a decline in
value that is determined to be other than temporary, we would reduce the
securitys carrying value for the decline and record a realized loss in the
Consolidated Statements of Operations. In 2000, we recorded $500,000 against a
security whose decline in value was determined to be other than temporary. No
securities were reduced for declines in fair value in 2001 or 1999.

Cash and Cash Equivalents We consider all highly liquid investments with
maturities of three months or less when purchased to be cash equivalents.

Fair Value of Financial Instruments A number of our significant assets and
liabilities (including deferred policy acquisition costs, reinsurance
recoverables, furniture and equipment and unpaid claim and claim settlement
expenses) are not considered financial instruments for disclosure purposes.
Our premiums receivable and other assets and liabilities that are considered
financial instruments are generally of a short-term nature. Our term loan

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bears a floating interest rate. The carrying values of these instruments
approximate their fair values. The carrying values and fair values of
investments are disclosed in Note 3.

Deferred Policy Acquisition Costs The costs directly related to writing an
insurance policy are referred to as policy acquisition costs and consist of
commissions, state premium taxes and other direct underwriting expenses.
Although these costs arise when we issue a policy, we defer certain costs,
principally commissions and state premium taxes. These costs are amortized to
expense as premium revenue is recognized and are reported net of ceding
commissions in the Statement of Operations.

If deferred policy acquisition costs were to exceed the sum of unearned
premiums net of reinsurance and related anticipated investment income less
expected claim and claim settlement expenses, we would immediately expense the
excess costs.

Depreciation We depreciate furniture and equipment on a straight-line basis
over the estimated useful lives of the assets (five to ten years). Accumulated
depreciation was $3.7 million at December 31, 2001 and $5.1 million at December
31, 2000.

Unpaid Claim and Claim Settlement Expenses Claim expenses refer to amounts
that we paid or expect to pay to claimants for insured events that have
occurred. The costs of investigating, resolving and processing these claims
are referred to as claim settlement expenses. We record these expenses, net of
amounts recoverable under reinsurance contracts, as Claim and claim settlement
expenses in the Consolidated Statements of Operations.

Our Unpaid claim and claim settlement expenses represent reserves
established for the estimated total unpaid cost of claim and claim settlement
expenses for insured events that occurred on or prior to each balance sheet
date. The reserves are primarily undiscounted; however, we discounted selected
claims that have fixed or determinable future payments by $482,000 in 2001 and
$1.4 million in 2000 using 5.0% and 8.0% discount factors, respectively. These
reserves reflect our estimates of the total cost of claims that were reported,
but not yet paid, and the cost of claims incurred but not yet reported. Our
estimates consider such variables as past loss experience, current claim trends
and prevailing social, economic and legal environments. We have a limited
amount of historical data to use in estimating our reserves for unpaid claim
and claim settlement expenses because we commenced operations in 1992. As a
result, we supplement our experience with external industry data, as adjusted
to reflect anticipated differences between our results and the industry. We
reduce the unpaid claim and claim settlement expenses for estimated amounts of
subrogation.

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

Premiums Earned Premiums on workers compensation insurance policies are our
largest source of revenue. We record premiums written on an installment basis,
matching billing to the policyholder, and earn premiums on a daily basis over
the life of each insurance policy. We record the excess of premiums billed
over premiums earned for each policy as unearned premiums on our balance sheet.
When a policy expires, we audit employer payrolls for the policy period and
adjust the estimated payroll to its actual value. The result is a final
audit adjustment recorded to premiums earned when the adjustment becomes
known. Final audit premiums recognized during the period include billed final
audit premiums plus (or minus) the change in estimate for premiums on unexpired
and expired unaudited policies.

Note 2  INCOME PER SHARE

We apply SFAS No. 128, Earnings Per Share, which requires dual presentation
of a basic (loss) income per share (IPS), which excludes dilution, and a
diluted IPS, which reflects the potential dilution that could occur if actions
taken with respect to dilutive securities resulted in the issuance of common
stock. Dilutive securities consist of stock options. Basic IPS is computed by
dividing net (loss) income by the weighted average number of common shares
outstanding for the period. Diluted IPS is computed by dividing net (loss)
income by the weighted average number of common shares and dilutive securities
outstanding for the period. Dilutive securities are considered outstanding
from the date of grant, after applying the treasury stock method for
determining the dilutive effect.

The following is a reconciliation of the numerators and denominators of basic and diluted (loss) income per share:

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|                                            |                                  |   |            |   |  |      |            |   |      |   |            |        | 
|------------------------------------------- | -------------------------------- | - | ---------- | - |  | ---- | ---------- | - | ---- | - | ---------- | ------ | 
|                                            |                                  |   | 2001       |   |  | 2000 |            |   | 1999 |  
|                                            |                                  |   |            |   |  |      |            |   |      |  
|Net (loss) income (000s)                   |                                  | $ | (23,695    | ) |  | $    | (9,708     | ) |      | $ | 6,167      |       
|                                            |                                  |   |            |   |  |      |            |   |     
|Basic weighted average shares outstanding   |                                  |   | 10,304,000 |   |  |      | 10,855,000 |   |      |   | 12,291,000 |       
|                                            | Effect of dilutive stock options |   |            |  |  |      |            |  |      |   |            | 69,000 | 
|                                            |                                  |   |            |   |  |      |            |   |     
|Diluted weighted average shares outstanding |                                  |   | 10,304,000 |   |  |      | 10,855,000 |   |      |   | 12,360,000 |       
|                                            |                                  |   |            |   |  |      |            |   |     
|Basic (loss) income per share               |                                  | $ | (2.30      | ) |  | $    | (0.89      | ) |      | $ | 0.50       |       
|                                            |                                  |   |            |   |  |      |            |   |     
|Diluted (loss) income per share             |                                  | $ | (2.30      | ) |  | $    | (0.89      | ) |      | $ | 0.50       |       
|                                            |                                  |   |            |   |  |      |            |   |     

Options to purchase 1.5 million shares of common stock at prices ranging
from $0.99 to $19.33 were outstanding during 2001 and options to purchase 1.2
million shares of common stock at prices ranging from $2.67 to $19.33 were
outstanding in 2000 but excluded from the computation of diluted IPS due to our
2001 and 2000 net losses. Diluted weighted average shares outstanding would
have increased by 8,000 shares and 16,000 shares in 2001 and 2000,
respectively, had these shares not been anti-dilutive in the computation.

Note 3  INVESTMENTS

Valuation of Investments- The following tables present amortized cost, gross
unrealized gains and losses and estimated fair values of our available-for-sale
securities (000s):

|                           |                   |      |           |        |       |            |       |        |            |       |       |      |           |   |        |        | 
|-------------------------- | ----------------- | ---- | --------- | ------ | ----- | ---------- | ----- | ------ | ---------- | ----- | ----- | ---- | --------- | - | ------ | ------ | 
|                           |                   |      |           |        |       |            | Gross |        |            | Gross |       |      | Estimated |  
|                           |                   |      | Amortized |        |       | Unrealized |       |        | Unrealized |       |       | Fair |          
|2001                       |                   | Cost |           |        | Gains |            |       | Losses |            |       | Value |     
|                           |                   |      |           |        |       |            |       |        |            |       |       |     
|U.S. government securities |                   | $    | 25,921    |        |       | $          | 524   |        |            | $     | (108  | )    |           | $ | 26,337 |       
|Corporate securities       |                   |      | 16,908    |        |       |            | 317   |        |            |       | (67   | )    |           |   | 17,158 |       
|Asset-backed securities    |                   |      | 506       |        |       |            | 4     |        |            |       |      |      |           |   | 510    |       
|Mortgage-backed securities |                   |      | 44,474    |        |       |            | 812   |        |            |       | (125  | )    |           |   | 45,161 |       
|                           |                   |      |           |        |       |            |       |        |            |       |       |     
|                           | Total investments |      | $         | 87,809 |       |            | $     | 1,657  |            |       | $     | (300 | )         |   | $      | 89,166 | 
|                           |                   |      |           |        |       |            |       |        |            |       |       |     

|                                |                   |      |           |        |       |            |       |        |            |       |       |      |           |   |        |        | 
|------------------------------- | ----------------- | ---- | --------- | ------ | ----- | ---------- | ----- | ------ | ---------- | ----- | ----- | ---- | --------- | - | ------ | ------ | 
|                                |                   |      |           |        |       |            | Gross |        |            | Gross |       |      | Estimated |  
|                                |                   |      | Amortized |        |       | Unrealized |       |        | Unrealized |       |       | Fair |          
|2000                            |                   | Cost |           |        | Gains |            |       | Losses |            |       | Value |     
|                                |                   |      |           |        |       |            |       |        |            |       |       |     
|Tax-exempt municipal securities |                   | $    | 55,450    |        |       | $          | 377   |        |            | $     | (147  | )    |           | $ | 55,680 |       
|U.S. government securities      |                   |      | 14,568    |        |       |            | 326   |        |            |       |      |      |           |   | 14,894 |       
|Corporate securities            |                   |      | 10,514    |        |       |            | 11    |        |            |       | (210  | )    |           |   | 10,315 |       
|Asset-backed securities         |                   |      | 2,000     |        |       |            | 3     |        |            |       |      |      |           |   | 2,003  |       
|Mortgage-backed securities      |                   |      | 13,989    |        |       |            | 86    |        |            |       | (137  | )    |           |   | 13,938 |       
|                                |                   |      |           |        |       |            |       |        |            |       |       |     
|                                | Total investments |      | $         | 96,521 |       |            | $     | 803    |            |       | $     | (494 | )         |   | $      | 96,830 | 
|                                |                   |      |           |        |       |            |       |        |            |       |       |     

Statutory Deposits- Included in investments are U.S. government securities on
deposit with various regulatory authorities, as required by law, with a fair
value of $18.6 million and $12.2 million at December 31, 2001 and 2000,
respectively.

Additionally, included in investments are U.S. government securities
pledged as collateral against a letter of credit provided to an insurer, with a
fair value of $2.6 million at December 31, 2001.

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Fixed Maturities by Maturity Date- The following table presents the amortized
cost and fair value of investments by contractual maturity at December 31,
2001. Actual maturities may differ from those stated as a result of calls and
prepayments (000s):

|                                                   |                   |      |           |        |       |      |           |        | 
|-------------------------------------------------- | ----------------- | ---- | --------- | ------ | ----- | ---- | --------- | ------ | 
|                                                   |                   |      |           |        |       |      | Estimated |       
|                                                   |                   |      | Amortized |        |       | Fair |          
|Maturing In:                                       |                   | Cost |           |        | Value |     
|                                                   |                   |      |           |        |       |     
|One year or less                                   |                   | $    | 2,846     |        |       | $    | 2,891     |       
|Over one year through five years                   |                   |      | 13,268    |        |       |      | 13,667    |       
|Over five years through ten years                  |                   |      | 16,101    |        |       |      | 16,388    |       
|Over ten years                                     |                   |      | 11,120    |        |       |      | 11,059    |       
|Mortgage-backed securities with various maturities |                   |      | 44,474    |        |       |      | 45,161    |       
|                                                   |                   |      |           |        |       |     
|                                                   | Total investments |      | $         | 87,809 |       |      | $         | 89,166 | 
|                                                   |                   |      |           |        |       |     

Investment Income- Investment income includes income from the following sources (000s):

|                           |  |  |  |   |       |      |       |   |       |   |       |      |       |   |       | 
|-------------------------- |  |  |  | - | ----- | ---- | ----- | - | ----- | - | ----- | ---- | ----- | - | ----- | 
|                           |  |  |  |   |       | 2001 |       |   | 2000  |   |       | 1999 |      
|                           |  |  |  |   |       |      |       |   |       |   |       |      |      
|Fixed maturity investments |  |  |  |   |       | $    | 5,599 |   |       | $ | 5,519 |      |       | $ | 6,318 | 
|Short-term investments     |  |  |  |   |       |      | 286   |   |       |   | 185   |      |       |   | 133   | 
|Other                      |  |  |  |   |       |      | 12    |   |       |   | 48    |      |       |   | 59    | 
|                           |  |  |  |   |       |      |       |   |       |   |       |      |      
|Investment income          |  |  |  | $ | 5,897 |      |       | $ | 5,752 |   |       | $    | 6,510 |  
|                           |  |  |  |   |       |      |       |   |       |   |       |      |      

Note 4  REINSURANCE

Our financial statements reflect the effects of ceded reinsurance transactions.
We purchase reinsurance to (i) protect us from potential losses in excess of
the level we are willing to accept and (ii) to achieve premium to surplus
leverage ratios that are at acceptable levels. From 1995 to 2000, our primary
reinsurance was excess of loss coverage that limits our per-incident exposure.
In June 2001, however, we also entered into a quota share reinsurance treaty
that was effective January 1, 2001 to reduce our premiums earned and bring our
premium to surplus leverage ratios in line with management targets and rating
agency expectations.

We report reinsurance related balances on a gross basis on the balance
sheet, resulting in reinsurance recoverable amounts on paid and on unpaid claim
and claim settlement expenses recorded as assets. We estimate amounts
recoverable from reinsurers in a manner consistent with the claim liability
associated with the reinsured policy.

We ceded Minnesota claims in excess of $330,000, $310,000 and $290,000 per
occurrence during 2001, 2000 and 1999, respectively, to the Minnesota Workers
Compensation Reinsurance Association (WCRA). In our non-Minnesota states, our
per-incident exposure was $300,000 in 2001, 2000 and 1999. We purchased this
non-Minnesota coverage from a single reinsurer.

For claims occurring after June 30, 1998, we further limited our per
incident exposure by purchasing excess of loss coverage for losses from $25,000
to the lesser of $300,000 or the WCRA selected retention level in Minnesota and
from $25,000 to $300,000 in other states from a single reinsurer. This
agreement was finalized after its effective date and activity occurring from
July 1, 1998 through September 30, 1998 was recorded on a retrospective basis
resulting in the deferral of a gain totaling $2.0 million at December 31, 1998.
We amortized $400,000 of the deferred gain as a reduction of claim and claim
settlement expenses in each of 2001 and 2000 and $740,000 in 1999 resulting in
an un-amortized deferred gain of $449,000 at December 31, 2001. The deferred
gain is being amortized into income using the effective interest rate inherent
in the amounts paid to the reinsurer and the estimated timing and amounts of
recoveries from the reinsurer. Activity occurring on or after October 1, 1998
is recorded prospectively. This contract was terminated effective December 31,
2000; however, the policy was effective in 2001 for policies in force at
December 31, 2000 through expiration, not to exceed fifteen months after the
effective termination date. Policies written or renewing after December 31,
2000 are not covered under this lower level excess of loss reinsurance policy.

In June 2001, we entered a new 50% quota share reinsurance policy
effective January 1, 2001 in order to reduce our net premium to surplus
leverage ratio and maintain a secure financial strength rating for our
insurance subsidiary. Due to the percentage of amounts ceded under the quota
share policy and its January 1, 2001 effective date, premiums earned, claim and
claim settlement expenses and policy acquisition costs were substantially
reduced in 2001. We further increased the amounts ceded to 80% effective
December 1, 2001 under this quota share reinsurance policy.

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Reinsurance contracts do not relieve us from our obligations to
policyholders. We expect reinsurers to which we have ceded reinsurance to
honor their obligations. Failure of these reinsurers to honor their
obligations could result in losses to us. We do not anticipate any such losses
and accordingly, no provision for amounts deemed uncollectible are included in
our financial statements. We attempt to minimize our exposure to significant
losses from reinsurer insolvency by monitoring the financial condition of our
reinsurers. The reinsurance recoverable on unpaid claim and claim settlement
expenses associated with reinsurers are as follows (000s):

|                                                                    |                                                                       |   |         |  |  |      |        |  | 
|------------------------------------------------------------------- | --------------------------------------------------------------------- | - | ------- |  |  | ---- | ------ |  | 
|                                                                    |                                                                       |   | 2001    |  |  | 2000 |       
|                                                                    |                                                                       |   |         |  |  |      |       
|Excess of loss reinsurance through various reinsurers               |                                                                       | $ | 90,115  |  |  | $    | 61,223 | 
|Quota-share reinsurance for 2001 through a single reinsurer         |                                                                       |   | 18,572  |  |  |      |       | 
|Quota-share reinsurance for 1992 to 1994 through a single reinsurer |                                                                       |   |        |  |  |      | 622    | 
|                                                                    |                                                                       |   |         |  |  |     
|                                                                    | Reinsurance recoverable on unpaid claim and claim settlement expenses | $ | 108,687 |  |  | $    | 61,845 | 
|                                                                    |                                                                       |   |         |  |  |     

The effect of ceded reinsurance on premiums written and claim and claim settlement expenses are as follows (000s):

|                                     |        |                                         |   |         |        |  |      |         |        |      |   |         |        | 
|------------------------------------ | ------ | --------------------------------------- | - | ------- | ------ |  | ---- | ------- | ------ | ---- | - | ------- | ------ | 
|                                     |        |                                         |   | 2001    |        |  | 2000 |         |        | 1999 |  
|                                     |        |                                         |   |         |        |  |      |         |        |      |  
|Premiums written:                    |        |                                         |   |         |        |  |      |         |        |      |   |        
|                                     | Direct |                                         | $ | 94,703  |        |  | $    | 95,566  |        |      | $ | 88,966  |       
|                                     | Ceded  |                                         |   | (56,506 | )      |  |      | (17,724 | )      |      |   | (18,008 | )     
|                                     |        |                                         |   |         |        |  |      |         |       
|                                     |        | Net premiums written                    |   | $       | 38,197 |  |      | $       | 77,842 |      |   | $       | 70,958 | 
|                                     |        |                                         |   |         |        |  |      |         |       
|Claim and claim settlement expenses: |        |                                         |   |         |        |  |      |         |        |      |   |        
|                                     | Direct |                                         | $ | 128,734 |        |  | $    | 105,133 |        |      | $ | 67,465  |       
|                                     | Ceded  |                                         |   | (75,265 | )      |  |      | (32,704 | )      |      |   | (24,142 | )     
|                                     |        |                                         |   |         |        |  |      |         |       
|                                     |        | Net claim and claim settlement expenses |   | $       | 53,469 |  |      | $       | 72,429 |      |   | $       | 43,323 | 
|                                     |        |                                         |   |         |        |  |      |         |       

The reinsurance recoverable on paid claim and claim settlement expenses
consists primarily of receivables from paid claim and claim settlement expenses
that were submitted to but not reimbursed by reinsurers at December 31, 2001
and 2000.

Note 5  UNPAID CLAIM AND CLAIM SETTLEMENT EXPENSES

As described in Note 1, we establish unpaid claim and claim settlement expense
reserves on reported and unreported claims for insured losses. The
establishment of appropriate reserves is an inherently uncertain process.
Furthermore, estimating ultimate reserves is difficult due to our relatively
limited historical claim data and small claim population. Estimates are
further complicated by the extended periods of time that elapse between the
date the loss occurs and the date the loss is reported and ultimately settled.
Reserve estimates are regularly reviewed and updated, using the most current
information available. Any resulting adjustments, which may be material, are
reflected in current operations.

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The following table represents a reconciliation of beginning and ending
unpaid claim and claim settlement expense reserves for each of the last three
years (000s):

|                           |                                                         |                |         |         |        |   |         |         |        |      |        |         |        | 
|-------------------------- | ------------------------------------------------------- | -------------- | ------- | ------- | ------ | - | ------- | ------- | ------ | ---- | ------ | ------- | ------ | 
|                           |                                                         |                |         | 2001    |        |   | 2000    |         |        | 1999 |       
|                           |                                                         |                |         |         |        |   |         |         |        |      |       
|Balance at January 1       |                                                         | $              | 128,841 |         |        | $ | 99,831  |         |        | $    | 97,269 |        
|                           | Less reinsurance recoverables                           |                |         | (61,845 | )      |   |         | (41,179 | )      |      |        | (21,403 | )     
|                           | Plus deferred gain on retrospective reinsurance         |                |         | 849     |        |   |         | 1,249   |        |      |        | 1,989   |       
|                           |                                                         |                |         |         |        |   |         |         |       
|Net balance at January 1   |                                                         |                | 67,845  |         |        |   | 59,901  |         |        |      | 77,855 |        
|Incurred related to:       |                                                         |                |         |         |        |   |         |         |        |      |        |        
|                           | Current year                                            |                |         | 46,923  |        |   |         | 56,900  |        |      |        | 52,176  |       
|                           | Prior years                                             |                |         | 7,731   |        |   |         | 15,929  |        |      |        | (8,113  | )     
|                           | Write-off of reinsurance recoverable                    |                |         | (785    | )      |   |         |        |        |      |        |        |       
|                           | Amortization of deferred retrospective reinsurance gain |                |         | (400    | )      |   |         | (400    | )      |      |        | (740    | )     
|                           |                                                         |                |         |         |        |   |         |         |       
|                           |                                                         | Total incurred |         |         | 53,469 |   |         |         | 72,429 |      |        |         | 43,323 | 
|Paid related to:           |                                                         |                |         |         |        |   |         |         |        |      |        |        
|                           | Current year                                            |                |         | 17,000  |        |   |         | 28,154  |        |      |        | 26,897  |       
|                           | Prior years                                             |                |         | 31,242  |        |   |         | 36,331  |        |      |        | 34,380  |       
|                           |                                                         |                |         |         |        |   |         |         |       
|                           |                                                         | Total paid     |         |         | 48,242 |   |         |         | 64,485 |      |        |         | 61,277 | 
|                           |                                                         |                |         |         |        |   |         |         |       
|Net balance at December 31 |                                                         |                | 73,072  |         |        |   | 67,845  |         |        |      | 59,901 |        
|                           | Plus reinsurance recoverables                           |                |         | 108,687 |        |   |         | 61,845  |        |      |        | 41,179  |       
|                           | Plus deferred gain on retrospective reinsurance         |                |         | (449    | )      |   |         | (849    | )      |      |        | (1,249  | )     
|                           |                                                         |                |         |         |        |   |         |         |       
|Balance at December 31     |                                                         | $              | 181,310 |         |        | $ | 128,841 |         |        | $    | 99,831 |        
|                           |                                                         |                |         |         |        |   |         |         |       

Changes in estimates of unpaid claim and claim settlement expenses for
prior years increased the provision for claim and claim settlement expenses by
$7.7 million in 2001, increased the provision for claim and claim settlement
expenses by $15.9 million in 2000 and decreased the provision for claim and
claim settlement expenses by $8.1 million in 1999.

Note 6  NOTES PAYABLE

In March 2000, we borrowed $8.0 million under a term loan agreement to fund the
repurchase of common stock from certain of our shareholders and simultaneously
entered into a $2.0 million revolving credit facility to be used for general
corporate purposes. The revolving credit facility was terminated early in
2001. We paid $1.0 million in principal on the term loan in 2000 and an
additional $2.5 million in 2001. The term loan accrues interest, payable
quarterly. We may elect to pay an adjusted LIBOR or bank reference rate on the
term loan (adjusted LIBOR was 8.22% and 9.34% at December 31, 2001 and 2000,
respectively).

At December 31, 2001, we failed to meet certain financial covenants
related to the term loan. We paid an additional $1.0 million in principal in
February 2002 and the term loan agreement was amended in March 2002. Under the
amendment, term loan principal payments were adjusted and covenants were
amended in return for waivers of the financial covenants under the term loan
agreement. We believe that we will be in compliance with the amended financial
covenants throughout 2002.

The amended term loan requires principal payments as follows (000s):

|             |  |   |       | 
|------------ |  | - | ----- | 
|December 31, |  |   |       | 
|2002         |  | $ | 2,250 | 
|2003         |  |   | 2,250 | 

The amended term loan is collateralized by the stock of ACIC and is
subject to restrictive financial covenants that require maintaining minimum
financial ratios, including (i) debt coverage, (ii) net worth, (iii)
statutory surplus, (iv) net earnings, (v) risk based capital, (vii) A.M. Best
Rating, and (viii) investment grade ratings. The agreement also restricts
dividends, purchases and redemptions or retirements of common stock.

Note 7  INCOME TAXES

We compute all income tax amounts using the liability method. Under this
method, deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases of assets and
liabilities and their reported amounts using presently enacted tax rates.
Deferred tax assets are recognized for
tax credit and net operating loss carry-forwards, reduced by a valuation
allowance which is established when it is more

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likely than not that some
portion or all of the deferred tax assets will not be realized. The effect on
deferred tax assets and liabilities of a change in tax rates or regulations is
recognized in income in the period that includes the enactment date.

Income tax expense (benefit) consists of the following (000s):

|          |         |                                      |   |       |       |  |      |        |        |      |   |       |       | 
|--------- | ------- | ------------------------------------ | - | ----- | ----- |  | ---- | ------ | ------ | ---- | - | ----- | ----- | 
|          |         |                                      |   | 2001  |       |  | 2000 |        |        | 1999 |  
|          |         |                                      |   |       |       |  |      |        |        |      |  
|Current:  |         |                                      |   |       |       |  |      |        |        |      |   |      
|          | Federal |                                      | $ |      |       |  | $    | (320   | )      |      | $ | 1,056 |      
|          | State   |                                      |   | 242   |       |  |      | 100    |        |      |   | 104   |      
|          |         |                                      |   |       |       |  |      |        |       
|          |         | Total current tax expense (benefit)  |   |       | 242   |  |      |        | (220   | )    |   |       | 1,160 | 
|Deferred: |         |                                      |   |       |       |  |      |        |        |      |   |      
|          | Federal |                                      |   | 8,585 |       |  |      | (5,558 | )      |      |   | 1,031 |      
|          | State   |                                      |   | 116   |       |  |      | 39     |        |      |   | (267  | )    
|          |         |                                      |   |       |       |  |      |        |       
|          |         | Total deferred tax expense (benefit) |   |       | 8,701 |  |      |        | (5,519 | )    |   |       | 764   | 
|          |         |                                      |   |       |       |  |      |        |       
|          |         | Income tax expense (benefit)         |   | $     | 8,943 |  |      | $      | (5,739 | )    |   | $     | 1,924 | 
|          |         |                                      |   |       |       |  |      |        |       

Our income tax expense (benefit) differs from the federal statutory rate as follows (000s):

|                                                                     |                                                       |                              |        |        |       |   |        |      |        |      |       |      |       | 
|-------------------------------------------------------------------- | ----------------------------------------------------- | ---------------------------- | ------ | ------ | ----- | - | ------ | ---- | ------ | ---- | ----- | ---- | ----- | 
|                                                                     |                                                       |                              |        | 2001   |       |   | 2000   |      |        | 1999 |      
|                                                                     |                                                       |                              |        |        |       |   |        |      |        |      |      
|Federal income tax (benefit) expense at 35%                          |                                                       | $                            | (5,163 | )      |       | $ | (5,406 | )    |        | $    | 2,832 |     
|Increase (reduction) in income tax expense (benefit) resulting from: |                                                       |                              |        |        |       |   |        |      |        |      |       |     
|                                                                     | State income taxes, net of federal income tax benefit |                              |        | 228    |       |   |        | 58   |        |      |       | 23   |      
|                                                                     | Tax-exempt investment income                          |                              |        | (48    | )     |   |        | (814 | )      |      |       | (930 | )    
|                                                                     | Deferred income tax valuation allowance               |                              |        | 14,063 |       |   |        |     |        |      |       |     |      
|                                                                     | Other                                                 |                              |        | (137   | )     |   |        | 423  |        |      |       | (1   | )    
|                                                                     |                                                       |                              |        |        |       |   |        |      |       
|                                                                     |                                                       | Income tax expense (benefit) |        | $      | 8,943 |   |        | $    | (5,739 | )    |       | $    | 1,924 | 
|                                                                     |                                                       |                              |        |        |       |   |        |      |       

Differences between the tax basis of assets and liabilities and their
reported amounts in the Consolidated Financial Statements that will result in
taxable or deductible amounts in future years are called temporary differences.
The tax effects of temporary differences that gave rise to net deferred tax
assets, included within other assets, are as follows (000s):

|                                           |                          |                                                    |                     |        |        |         |       |        |        |   | 
|------------------------------------------ | ------------------------ | -------------------------------------------------- | ------------------- | ------ | ------ | ------- | ----- | ------ | ------ | - | 
|                                           |                          |                                                    |                     |        | 2001   |         |       | 2000   |       
|                                           |                          |                                                    |                     |        |        |         |       |        |       
|Unpaid claim and claim settlement expenses |                          | $                                                  | 4,949               |        |        | $       | 4,465 |       
|Net operating loss carry-forward           |                          |                                                    | 6,393               |        |        |         | 4,148 |       
|Accrued second injury funds                |                          |                                                    | 2,670               |        |        |         | 1,466 |       
|Deferred ceding commissions                |                          |                                                    | 1,124               |        |        |         |      |       
|Unearned premiums                          |                          |                                                    | 935                 |        |        |         | 1,309 |       
|Retrospective reinsurance                  |                          |                                                    | 158                 |        |        |         | 297   |       
|AMT credit carry-forward                   |                          |                                                    | 56                  |        |        |         | 56    |       
|Other                                      |                          |                                                    | 976                 |        |        |         | 504   |       
|                                           |                          |                                                    |                     |        |        |        
|                                           | Deferred tax assets      |                                                    |                     | 17,261 |        |         |       | 12,245 |       
|Unrealized gain on securities              |                          |                                                    | (475                | )      |        |         | (105  | )     
|Deferred policy acquisition costs          |                          |                                                    | (427                | )      |        |         | (473  | )     
|Depreciation                               |                          |                                                    | (296                | )      |        |         | (408  | )     
|                                           |                          |                                                    |                     |        |        |        
|                                           | Deferred tax liabilities |                                                    |                     | (1,198 | )      |         |       | (986   | )     
|                                           |                          |                                                    |                     |        |        |        
|                                           |                          | Net deferred tax assets before valuation allowance |                     |        | 16,063 |         |       |        | 11,259 |  
|                                           |                          |                                                    | Valuation allowance |        |        | (14,063 | )     |        |        |  | 
|                                           |                          |                                                    |                     |        |        |        
|                                           |                          | Net deferred tax assets                            |                     | $      | 2,000  |         |       | $      | 11,259 |  
|                                           |                          |                                                    |                     |        |        |        

In assessing the realizability of deferred tax assets, we consider recent
operating results, the scheduled reversal of deferred tax liabilities,
projected future taxable income and tax planning strategies. At December 31,
2001, we established a $14.1 million valuation allowance against deferred tax
assets resulting in a corresponding increase in income tax expense as a result
of this analysis. We expect the remaining deferred tax assets, net of the
valuation allowance, at December 31, 2001 to be realized as a result of the
reversal of existing taxable temporary differences in the future. No valuation
allowance was provided against the deferred tax assets recorded in 2000 or
1999.

We have net operating loss carry-forwards available totaling approximately
$18.8 million that expire in 2020 and 2021.

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Income taxes receivable were approximately $83,000 and $1.7 million at
December 31, 2001 and 2000, respectively, and are included in other assets.

Note 8  EMPLOYEE BENEFITS AND PLANS

Stock Based Compensation We account for our stock-based compensation plans,
the RTW, Inc. 1995 Employee Stock Purchase Plan and Trust (ESPP) and the 1994
Stock Plan, using Accounting Principles Board Opinion No. 25 (APB 25),
Accounting for Stock Issued to Employees, and related Interpretations. Under
APB 25, compensation cost for stock options is measured as the excess, if any,
of the quoted market price of our stock at the date of the grant over the
amount an employee must pay to acquire the stock.

1995 Employee Stock Purchase Plan-The ESPP provides employees the opportunity
to purchase shares of our stock at 85% of the fair value based on the lesser of
the beginning or ending share price for each plan year as set forth in the
plan. In May 1998, the shares reserved for distribution under the plan were
increased from 75,000 to 200,000 shares. The ESPP terminates in ten years and
will be carried out in phases, each consisting of one year or a different
period of time approved by the Board of Directors. Any employee completing two
weeks of service prior to commencing a phase of the plan may participate.
Employees may elect to contribute from $10 to 10% of monthly salary to the plan
through payroll withholdings. The following summarizes shares purchased and
purchase prices for each phase in the most recent three years completed through
2001:

|                                          |  |           |        |  |          |   |      | 
|----------------------------------------- |  | --------- | ------ |  | -------- | - | ---- | 
|                                          |  | Shares    |        |  | Purchase |  
|Phase:                                    |  | Purchased |        |  | Price    |  
|                                          |  |           |        |  |          |  
|Beginning April 1998, expiring April 1999 |  |           | 27,143 |  |          | $ | 3.88 | 
|Beginning April 1999, expiring April 2000 |  |           | 39,154 |  |          | $ | 3.19 | 
|Beginning April 2000, expiring April 2001 |  |           | 18,979 |  |          | $ | 1.70 | 

The seventh one-year phase began in April 2001 and expires in April 2002.

Our liability for employee contributions withheld at December 31, 2001 and
2000 for the purchase of shares in April 2002 and April 2001 under the ESPP was
$39,000 and $72,000, respectively.

1994 Stock Plan-The 1994 Stock Plan provides for awards of qualified and
non-qualified stock options. In July 1998, the Board of Directors increased
the shares reserved for distribution under the plan to 2,000,000. Option
price, option term, vesting provisions and other limits and restrictions are
determined at the time of grant by the Board of Directors or, if established,
by a separate committee. The exercise price for all options granted was the
market price of the common stock at the date of grant.

Options granted, exercised, canceled and outstanding under the 1994 Stock Plan are as follows:

|                           |           |  |           |          |   |               |          |      |        |  |         |          |  |          |      |      | 
|-------------------------- | --------- |  | --------- | -------- | - | ------------- | -------- | ---- | ------ |  | ------- | -------- |  | -------- | ---- | ---- | 
|                           |           |  | Qualified |          |   | Non-Qualified |         
|                           |           |  |           |          |   |               |         
|                           |           |  |           |          |   |               | Weighted |      |        |  |         |          |  | Weighted |     
|                           |           |  |           |          |   |               | Average  |      |        |  |         |          |  | Average  |     
|                           |           |  | Option    |          |   | Exercise      |          |      | Option |  |         | Exercise | 
|                           |           |  | Shares    |          |   | Price         |          |      | Shares |  |         | Price    | 
|                           |           |  |           |          |   |               |          |      |        |  |         |          | 
|Balance, January 1, 1999   |           |  | 1,103,916 |          |   | $             | 6.94     |      |        |  | 470,895 |          |  | $        | 6.91 |     
|                           | Granted   |  |           | 187,672  |   |               |          | 6.28 |        |  |         | 55,556   |  |          |      | 4.50 | 
|                           | Exercised |  |           | (30,000  | ) |               |          | 2.67 |        |  |         |         |  |          |      |     | 
|                           | Canceled  |  |           | (238,052 | ) |               |          | 8.08 |        |  |         |         |  |          |      |     | 
|                           |           |  |           |          |   |               |          |      |        |  |         |         
|Balance, December 31, 1999 |           |  | 1,023,536 |          |   |               | 6.68     |      |        |  | 526,451 |          |  |          | 6.66 |     
|                           | Granted   |  |           | 155,500  |   |               |          | 5.13 |        |  |         |         |  |          |      |     | 
|                           | Canceled  |  |           | (537,583 | ) |               |          | 6.71 |        |  |         |         |  |          |      |     | 
|                           |           |  |           |          |   |               |          |      |        |  |         |         
|Balance, December 31, 2000 |           |  | 641,453   |          |   |               | 6.28     |      |        |  | 526,451 |          |  |          | 6.66 |     
|                           | Granted   |  |           | 127,000  |   |               |          | 2.06 |        |  |         | 400,000  |  |          |      | 0.99 | 
|                           | Canceled  |  |           | (148,679 | ) |               |          | 5.36 |        |  |         |         |  |          |      |     | 
|                           |           |  |           |          |   |               |          |      |        |  |         |         
|Balance, December 31, 2001 |           |  | 619,774   |          |   | $             | 5.64     |      |        |  | 926,451 |          |  | $        | 4.21 |     
|                           |           |  |           |          |   |               |          |      |        |  |         |         

Each of the qualified stock options expires ten years from the date of
grant and substantially all are subject to continued employment with us. Each
of the non-qualified options expires ten years from the date of grant. Certain
of the options are subject to vesting provisions that restrict exercise of the
option.

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The following table summarizes the options outstanding and exercisable at December 31, 2001:

|                             |   |                 |  |                     |         |  |                  |           |  |          |                     |      |         |       |  |          |  |  |   |          |  | 
|---------------------------- | - | --------------- |  | ------------------- | ------- |  | ---------------- | --------- |  | -------- | ------------------- | ---- | ------- | ----- |  | -------- |  |  | - | -------- |  | 
|                             |   |                 |  | Options Outstanding |         |  |                  |           |  |          | Options Exercisable |     
|                             |   |                 |  |                     |         |  |                  |           |  |          |                     |     
|                             |   |                 |  |                     |         |  |                  |           |  |          |                     |      |         |       |  |          |  |  |   | Weighted | 
|                             |   |                 |  | Number              |         |  | Weighted Average |           |  | Number   |                     |      | Average |      
|                             |   |                 |  | of                  |         |  | Contractual      |           |  | Exercise |                     |      | of      |       |  | Exercise | 
|Exercise Price Range         |   | Options         |  |                     | Life    |  |                  | Price     |  |          | Options             |      |         | Price | 
|                             |   |                 |  |                     |         |  |                  |           |  |          |                     |      |         |       | 
|Qualified stock options:     |   |                 |  |                     |         |  |                  |           |  |          |                     |      |         |       |  |          |  |  |   |         
|                             | $ | 0.99 - $  2.94  |  |                     | 107,000 |  |                  | 9.6 years |  |          | $                   | 1.70 |         |       |  | 20,000   |  |  | $ | 1.03     | 
|                             |   | 4.00 -     5.44 |  |                     | 254,444 |  |                  | 8.0 years |  |          |                     | 4.96 |         |       |  | 104,890  |  |  |   | 5.04     | 
|                             |   | 7.00 -   19.33  |  |                     | 258,330 |  |                  | 6.0 years |  |          |                     | 7.93 |         |       |  | 270,007  |  |  |   | 7.91     | 
|                             |   |                 |  |                     |         |  |                  |           |  |          |                     |      |         |       | 
|                             | $ | 0.99 - $19.33   |  |                     | 619,774 |  |                  | 7.4 years |  |          | $                   | 5.64 |         |       |  | 394,897  |  |  | $ | 6.80     | 
|                             |   |                 |  |                     |         |  |                  |           |  |          |                     |      |         |       | 
|Non-qualified stock options: |   |                 |  |                     |         |  |                  |           |  |          |                     |      |         |       |  |          |  |  |   |         
|                             | $ | 0.99 - $  2.67  |  |                     | 403,750 |  |                  | 9.9 years |  |          | $                   | 1.01 |         |       |  | 83,750   |  |  | $ | 1.07     | 
|                             |   | 4.50 -   15.88  |  |                     | 522,701 |  |                  | 6.0 years |  |          |                     | 6.69 |         |       |  | 511,590  |  |  |   | 6.73     | 
|                             |   |                 |  |                     |         |  |                  |           |  |          |                     |      |         |       | 
|                             | $ | 0.99 - $15.88   |  |                     | 926,451 |  |                  | 7.7 years |  |          | $                   | 4.21 |         |       |  | 595,340  |  |  | $ | 5.94     | 
|                             |   |                 |  |                     |         |  |                  |           |  |          |                     |      |         |       | 

Non-Qualified Common Stock Options-Certain non-qualified options were issued
prior to the onset of the 1994 Stock Plan. At January 1, 1999, 320,000
non-qualified options were outstanding at an exercise price of $2.00 per share.
These options were exercised in their entirety during 1999.

We are permitted a tax deduction equal to the difference between the
non-qualified option exercise price and the fair value on the option exercise
date. Upon exercise, the proceeds and the amount of the deduction are recorded
to common stock. In 1999, we recorded a reduction of income taxes payable and
increased common stock by $532,000 to reflect the exercise.

Pro Forma Information-Had we calculated compensation expense for our option
grants under the 1994 Stock Plan and stock issuances under the ESPP based on
the fair value method described in SFAS No. 123, Accounting for Stock-Based
Compensation, our net (loss) income and basic and dilutive net (loss) income
per share would approximate the following pro forma amounts (in 000s, except
per share data):

|                                      |             |  |      |         |   |      |   |         |      |  |   |       | 
|------------------------------------- | ----------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ----- | 
|                                      |             |  | 2001 |         |   | 2000 |   |         | 1999 | 
|                                      |             |  |      |         |   |      |   |         |      | 
|Net (loss) income:                    |             |  |      |         |   |      |   |         |      |  |   |      
|                                      | As reported |  | $    | (23,695 | ) |      | $ | (9,708  | )    |  | $ | 6,167 | 
|                                      | Pro forma   |  |      | (24,182 | ) |      |   | (10,507 | )    |  |   | 5,060 | 
|Basic net (loss) income per share:    |             |  |      |         |   |      |   |         |      |  |   |      
|                                      | As reported |  |      | (2.30   | ) |      |   | (0.89   | )    |  |   | 0.50  | 
|                                      | Pro forma   |  |      | (2.35   | ) |      |   | (0.97   | )    |  |   | 0.41  | 
|Dilutive net (loss) income per share: |             |  |      |         |   |      |   |         |      |  |   |      
|                                      | As reported |  |      | (2.30   | ) |      |   | (0.89   | )    |  |   | 0.50  | 
|                                      | Pro forma   |  |      | (2.35   | ) |      |   | (0.97   | )    |  |   | 0.41  | 

The weighted average fair value of options granted under the ESPP and 1994
Stock Plan during 2001, 2000 and 1999 is estimated at $1.10, $2.24 and $2.53,
respectively, on the date of grant using the Black-Scholes option-pricing model
with the following assumptions: no dividend yield; volatility of 182.8% in
2001, 64.6% in 2000 and 64.3% in 1999; risk-free interest rates ranging from
1.66% to 7.70%; and an expected life of 1 to 5 years.

Employment ContractsWe entered into one-year employment agreements with our
Chairman, David C. Prosser, President and Chief Executive Officer, J. Alexander
Fjelstad III, and Executive Vice President, Alfred L. LaTendresse beginning
December 13, 2001. Under these agreements, each receives a base salary,
subject to review annually for increase by our Board of Directors. Mr. Prosser
receives $250,000 which includes $30,000 for his services as Chairman of the
Board and $220,000 in base salary. Mr. Fjelstad receives a base salary of
$275,000 and Mr. LaTendresse a base salary of $200,000. In addition to base
salary, each is eligible for bonuses and expense reimbursements. We also
provide these individuals with health, dental, life and disability insurance
consistent with that provided to other officers and employees. Additionally,
Mr. Fjelstad and Mr. LaTendresse were each granted 200,000 non-qualified
options at $0.99 per share on December 13, 2001. Mr. Prosser was granted
200,000 non-qualified options on February 6, 2002 at $1.21 per share.

Employment agreements with Carl B. Lehmann, our former President and Chief
Executive Officer expired during 2001 and Mr. Lehmann terminated his employment
with us on December 12, 2001. Under supplemental

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agreements with Mr. Lehmann in 2000 and 2001, we paid him stay bonuses of
$200,000 on January 15, 2001 and $100,000 on June 30, 2001.

Combined Retirement Plan- In January 1998, we combined our 401(k) Retirement
Plan and Employee Stock Ownership Plan (ESOP) into a single retirement plan,
the KSOP. The KSOP retains the features of each separate component except for
eligibility and vesting provisions. Under the plan, employees become eligible
to participate in the plan on the first day of the month after beginning
employment and attaining age 21.



| |  | 401(k) Retirement Component We sponsor a defined contribution retirement
component under Section 401(k) of the Internal Revenue Code for eligible
employees. Our contributions are discretionary and are based on
contributions made by employees. Expense recognized for 2001, 2000 and 1999
was $316,000, $152,000 and $151,000, respectively.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Employee Stock Ownership Component We maintain an ESOP for our qualified
employees. Our contributions are discretionary. We may contribute cash or
shares of our common stock. No expense was recorded in 2001, 2000 or 1999.                                                                                                                   

Other Employee Benefit Plans- We maintained bonus plans in 2001, 2000 and 1999
under which all employees, including officers, were eligible for a bonus based,
in part, on our operating results. These bonuses aggregated $204,000, $951,000
and $544,000 in 2001, 2000 and 1999, respectively.

Note 9  SHAREHOLDERS EQUITY

On September 15, 1998, our Board of Directors approved a share repurchase
program authorizing the repurchase of up to $4.0 million of RTW, Inc. common
stock. We may repurchase shares on the open market or through private
transactions depending upon market conditions and availability. Through
December 31, 2001 we repurchased 669,500 shares for $2.7 million. We will use
the repurchased shares for employee stock option and purchase plans and other
corporate purposes.

On March 28, 2000, we repurchased 1,418,570 shares from a group consisting
of David C. Prosser, RTWs founder and a director, certain members of his
family, and J. Alexander Fjelstad, who at the time was a former director and
former executive of RTW (together, the Prosser Selling Group). We paid $5.19
per share, as well as legal and other costs, totaling approximately $7.7
million to repurchase the shares. After completing the transaction, the
combined ownership of Mr. Prosser, members of his family and Mr. Fjelstad was
reduced from approximately 52% to 46%. In December 2001, Mr. Fjelstad returned
to RTW as President and Chief Executive Officer and a director (see Note 8).

In connection with the repurchase, Mr. Prosser retired from the Company,
resigned as Chairman and was paid $225,000 as a termination benefit. He
remained a member of our Board of Directors. Additionally, at closing, each
member of the Prosser Selling Group entered into a two year standstill and
voting agreement under which each agreed, among other things, not to acquire
additional securities of RTW and not to initiate or support certain initiatives
designed to effect fundamental changes in RTW policy or structure. The
two-year voting and standstill agreements expired March 6, 2002. In December
2001, Mr. Prosser returned to RTW as Chairman of the Board (see Note 8).

Shareholder Rights Plan-In April 1997, we adopted a shareholder rights plan
and declared a dividend of one right for each outstanding share of common stock
to shareholders of record at the close of business on June 30, 1997. The
rights become exercisable only after any person or group (the Acquiring Person)
becomes the beneficial owner of 15% or more of the voting power of our common
stock. Certain shares held by our Chairman, David C. Prosser, and his wife are
excluded from the computation for determining whether a person is an Acquiring
Person. Each right entitles its registered holder to purchase from us one
one-hundredth share of a new Series A Junior Participating Preferred Stock, no
par value, at a price of $85 per one one-hundredth share, subject to
adjustment. If any Acquiring Person acquires beneficial ownership of 15% or
more of our voting power, each right will entitle its holder (other than such
Acquiring Person) to purchase, at the then current purchase price of the right,
that number of shares of our common stock having a market value of two times
the purchase price of the right, subject to certain possible adjustments. In
addition, if we are acquired in a merger or other business combination
transaction, each right will entitle its holder to purchase, at the then
current purchase price of the right, that number of common shares of the
acquiring company having a market value of two times the purchase price of the
right. Following the acquisition of a beneficial ownership of 15% or more of
our outstanding common stock by any Acquiring Person and prior to an
acquisition by any Acquiring Person of 50% or more of our outstanding common
stock, our Board of Directors may exchange the outstanding rights (other than
rights owned by such Acquiring Person), in whole or in part, at an exchange
ratio of one share of common stock, or one one-hundredth share of Preferred
Stock (or equivalent

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securities) per right, subject to adjustment. We may
redeem the rights, in whole, at $.001 per right, at any time prior
to an acquisition by any Acquiring Person of 15% or more of our outstanding
common stock and prior to the expiration of the rights. The rights expire on
April 17, 2007, unless extended or earlier redeemed by us.

Dividend Restrictions-Dividends are paid as determined by our Board of
Directors. No cash dividends have ever been paid by us.

Our ability to pay cash dividends to shareholders may depend upon the
amount of dividends received from our insurance subsidiary. ACICs ability to
pay dividends is restricted by law or subject to approval of the insurance
regulatory authorities of Minnesota.

Under Minnesota insurance law regulating the payment of dividends by ACIC,
any such payments must be an amount deemed prudent by ACICs Board of Directors
and, unless otherwise approved by the Commissioner of the Minnesota Department
of Commerce (Commissioner), must be paid solely from the adjusted earned
surplus of ACIC. Adjusted earned surplus means the earned surplus as
determined in accordance with statutory accounting practices (unassigned
funds), less 25% of the amount of such earned surplus that is attributable to
unrealized capital gains. Further, without approval of the Commissioner, ACIC
may not pay a dividend in any calendar year which, when combined with dividends
paid in the preceding twelve months, exceeds the greater of (i) 10% of ACICs
statutory capital and surplus at the prior year end or (ii) 100% of ACICs
statutory net gain from operations (not including realized capital gains) for
the prior calendar year. For 2002, dividends in excess of $2.0 million would
require prior consent of the Commissioner.

Statutory Surplus and Statutory Net Income (Loss) Our insurance subsidiary is
required to file financial statements with state regulatory agencies. The
accounting principles used to prepare the statutory financial statements follow
prescribed accounting practices that differ from GAAP. Statutory
policyholders surplus at December 31, 2001 and 2000, and statutory net (loss)
income for the years ended December 31, 2001, 2000 and 1999 are as follows
(000s):

|     |  |               |        |  |            |   |         |  
|---- |  | ------------- | ------ |  | ---------- | - | ------- | -
|     |  | Statutory     |        |  | Statutory  |  
|     |  | Policyholders |        |  | Net (Loss) |  
|     |  | Surplus       |        |  | Income     |  
|     |  |               |        |  |            |  
|2001 |  | $             | 19,542 |  |            | $ | (14,074 | )
|2000 |  |               | 29,303 |  |            |   | (16,600 | )
|1999 |  |               |        |  |            |   | 5,544   |  

In March 1998, the National Association of Insurance Commissioners
adopted the Codification of Statutory Accounting Principles (the
Codification). The Codification is intended to standardize regulatory
accounting and reporting to state insurance departments and became effective
January 1, 2001. Statutory accounting principles, however, will continue to
be established by individual state laws and permitted practices. The State
of Minnesota required adoption of the Codification for preparing statutory
financial statements for financial periods occurring on or after January 1,
2001. Adoption of the Codification increased our statutory capital and
surplus by approximately $1.9 million at December 31, 2001.

Note 10  COMMITMENTS AND CONTINGENCIES

Operating Leases We conduct our operations in leased office facilities under
operating lease agreements. The agreements provide for monthly base lease
payments plus contingent rentals based on an allocable portion of certain
operating expenses incurred by the lessor.

Future minimum (base) rental payments required under the leases, as of December 31, 2001, are as follows (000s):

|     |  |   |       | 
|---- |  | - | ----- | 
|2002 |  | $ | 1,368 | 
|2003 |  |   | 383   | 
|2004 |  |   | 391   | 
|2005 |  |   | 250   | 
|2006 |  |   | 27    | 
|     |  |   |      
|     |  | $ | 2,419 | 
|     |  |   |      

Rent expense, including contingent rentals, was $2.0 million, $2.1 million
and $2.1 million for 2001, 2000 and 1999, respectively.

In the ordinary course of administering our workers compensation
management program, we are routinely involved in the adjudication of claims
resulting from workplace injuries. We are not involved in any legal or

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administrative claims that we believe are likely to have a material adverse
effect on our financial condition or results of operations.

Through February 2002, we were party to an agreement under which another
insurance company wrote policies on our behalf and ceded 100% of the risk to us
through a reinsurance treaty. In connection with this agreement, in February
2001 we provided this insurer with an irrevocable letter of credit totaling
$2.1 million to indemnify them for incurred losses.

The accompanying financial statements have been prepared assuming the
Company will continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business.
The underwriting losses that we have experienced in the years ended December
31, 2001 and 2000 have resulted in a significant reduction in our statutory
policyholders surplus (see Note 9). The underwriting losses and reduction in
surplus led to a downgrade in our credit rating from B+ (Secure) to B- (Unsecure)
on February 28, 2002 that could adversely affect our current scope
of our operations. Although it is not possible to predict the impact that the
reduction in surplus and the change in our credit rating might have on our
future operations, management believes that we will be able to realize the
recorded value of our assets and meet our obligations as they come due.

Note 11  ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Our comprehensive income (loss) includes only unrealized gains and losses on
investments classified as available-for-sale. Changes in accumulated other
comprehensive income (loss) and other comprehensive income (loss) were as
follows (000s):

|                                                                 |                                                             |                                                    |                                         |       |       |     |        |       |       |       |        |        |        |        |  
|---------------------------------------------------------------- | ----------------------------------------------------------- | -------------------------------------------------- | --------------------------------------- | ----- | ----- | --- | ------ | ----- | ----- | ----- | ------ | ------ | ------ | ------ | -
|                                                                 |                                                             |                                                    |                                         |       | 2001  |     |        | 2000  |       |       | 1999   |       
|                                                                 |                                                             |                                                    |                                         |       |       |     |        |       |       |       |        |       
|Accumulated other comprehensive income (loss), beginning of year |                                                             | $                                                  | 204                                     |       |       | $   | (2,818 | )     |       | $     | 1,759  |       
|Changes in comprehensive income (loss) arising during the year:  |                                                             |                                                    |                                         |       |       |     |        |       |       |       |        |       
|                                                                 | Unrealized investment gains (losses)                        |                                                    |                                         | 2,211 |       |     |        | 3,972 |       |       |        | (6,893 | )     
|                                                                 | Less: Adjustment for net realized investment gains (losses) |                                                    |                                         | 1,163 |       |     |        | (607  | )     |       |        | 84     |       
|                                                                 |                                                             |                                                    |                                         |       |       |     |        |       |      
|                                                                 |                                                             | Change in net unrealized investment gains (losses) |                                         |       | 1,048 |     |        |       | 4,579 |       |        |        | (6,977 | )     
|                                                                 |                                                             | Income tax expense (benefit)                       |                                         |       | 370   |     |        |       | 1,557 |       |        |        | (2,400 | )     
|                                                                 |                                                             |                                                    |                                         |       |       |     |        |       |      
|                                                                 |                                                             |                                                    | Other comprehensive income for the year |       |       | 678 |        |       |       | 3,022 |        |        |        | (4,577 | )
|                                                                 |                                                             |                                                    |                                         |       |       |     |        |       |      
|Accumulated other comprehensive income (loss), end of year       |                                                             | $                                                  | 882                                     |       |       | $   | 204    |       |       | $     | (2,818 | )     
|                                                                 |                                                             |                                                    |                                         |       |       |     |        |       |      

Note 12  RESTRUCTURING CHARGES

During 2001, we recorded pre-tax restructuring charges totaling $2.0 million to
general and administrative expenses in the Statement of Operations. These
charges included costs associated with our decision to close our Missouri and
Massachusetts regional offices, as well as our Brainerd, Minnesota and Overland
Park, Kansas satellite offices. We anticipated that 38 employees in our
regional offices, 17 employees in our satellite offices and 2 employees in our
Home Office would be affected by these closures. The restructuring charge
includes $715,000 of severance pay and benefits, of which $106,000 was paid by
December 31, 2001. Additionally, the restructuring charge includes office and
equipment lease costs totaling $684,000 of which $80,000 was paid by December
31, 2001, and furniture and equipment disposals and other costs totaling
$600,000 of which $53,000 had been disposed of by December 31, 2001. The
remaining accrual balance for severance pay and benefits, office and equipment
lease costs and furniture and equipment disposals and other costs was $1.8
million at December 31, 2001. A substantial portion of the remaining costs
will be paid or assets disposed of in the first half of 2002.

42



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##### Table of Contents



Note 13  QUARTERLY RESULTS OF OPERATIONS (Unaudited)

The following tables present unaudited quarterly results of operations for the
eight quarters ended December 31, 2001:

|                                |                                     |                 |         |         |        |                                       |         |         |       |         |        |         |         |   |         |         |        | 
|------------------------------- | ----------------------------------- | --------------- | ------- | ------- | ------ | ------------------------------------- | ------- | ------- | ----- | ------- | ------ | ------- | ------- | - | ------- | ------- | ------ | 
|                                |                                     |                 |         | First   |        |                                       | Second  |         |       | Third   |        |         | Fourth  |  
|                                |                                     |                 |         | Quarter |        |                                       | Quarter |         |       | Quarter |        |         | Quarter |  
|                                |                                     |                 |         |         |        |                                       |         |         |       |         |        |         |         |  
|2001                            |                                     |                 |         |         |        | (In thousands, except per share data) |         |         |       |         |       
|Premiums in force               |                                     | $               | 104,100 |         |        | $                                     | 99,400  |         |       | $       | 89,400 |         |         | $ | 83,700  |        
|                                |                                     |                 |         |         |        |                                       |         |         |       |         |        |        
|Revenues:                       |                                     |                 |         |         |        |                                       |         |         |       |         |        |         |         |   |         |        
|                                | Gross premiums earned               |                 | $       | 26,123  |        |                                       | $       | 25,803  |       |         | $      | 23,419  |         |   | $       | 22,075  |       
|                                | Premiums ceded                      |                 |         | (4,114  | )      |                                       |         | (25,519 | )     |         |        | (12,945 | )       |   |         | (13,928 | )     
|                                |                                     |                 |         |         |        |                                       |         |         |       |         |        |        
|                                |                                     | Premiums earned |         |         | 22,009 |                                       |         |         | 284   |         |        |         | 10,474  |   |         |         | 8,147  | 
|                                | Investment income                   |                 |         | 1,457   |        |                                       |         | 1,575   |       |         |        | 1,467   |         |   |         | 1,398   |       
|                                | Net realized investment losses      |                 |         | 1,079   |        |                                       |         | 28      |       |         |        | 25      |         |   |         | 31      |       
|                                | Other income                        |                 |         | 2,088   |        |                                       |         |        |       |         |        |        |         |   |         |        |       
|                                |                                     |                 |         |         |        |                                       |         |         |       |         |        |        
|                                |                                     | Total revenues  |         |         | 26,633 |                                       |         |         | 1,887 |         |        |         | 11,966  |   |         |         | 9,576  | 
|Expenses:                       |                                     |                 |         |         |        |                                       |         |         |       |         |        |         |         |   |         |        
|                                | Claim and claim settlement expenses |                 |         | 18,990  |        |                                       |         | 6,682   |       |         |        | 9,855   |         |   |         | 17,942  |       
|                                | Policy acquisition costs            |                 |         | 3,626   |        |                                       |         | (5,570  | )     |         |        | (1,145  | )       |   |         | (1,430  | )     
|                                | General and administrative expenses |                 |         | 2,816   |        |                                       |         | 3,202   |       |         |        | 3,291   |         |   |         | 6,044   |       
|                                |                                     |                 |         |         |        |                                       |         |         |       |         |        |        
|                                |                                     | Total expenses  |         |         | 25,432 |                                       |         |         | 4,314 |         |        |         | 12,001  |   |         |         | 22,556 | 
|                                |                                     |                 |         |         |        |                                       |         |         |       |         |        |        
|Income (loss) from operations   |                                     | $               | 1,201   |         |        | $                                     | (2,427  | )       |       | $       | (35    | )       |         | $ | (12,980 | )      
|                                |                                     |                 |         |         |        |                                       |         |         |       |         |        |        
|Net income (loss)               |                                     | $               | 777     |         |        | $                                     | (1,691  | )       |       | $       | (103   | )       |         | $ | (22,678 | )      
|                                |                                     |                 |         |         |        |                                       |         |         |       |         |        |        
|Basic income (loss) per share   |                                     | $               | 0.08    |         |        | $                                     | (0.16   | )       |       | $       | (0.01  | )       |         | $ | (2.20   | )      
|                                |                                     |                 |         |         |        |                                       |         |         |       |         |        |        
|Diluted income (loss) per share |                                     | $               | 0.08    |         |        | $                                     | (0.16   | )       |       | $       | (0.01  | )       |         | $ | (2.20   | )      
|                                |                                     |                 |         |         |        |                                       |         |         |       |         |        |        

|                                |                                     |                 |        |         |        |                                       |         |        |        |         |        |        |         |   |         |        |        | 
|------------------------------- | ----------------------------------- | --------------- | ------ | ------- | ------ | ------------------------------------- | ------- | ------ | ------ | ------- | ------ | ------ | ------- | - | ------- | ------ | ------ | 
|                                |                                     |                 |        | First   |        |                                       | Second  |        |        | Third   |        |        | Fourth  |  
|                                |                                     |                 |        | Quarter |        |                                       | Quarter |        |        | Quarter |        |        | Quarter |  
|                                |                                     |                 |        |         |        |                                       |         |        |        |         |        |        |         |  
|2000                            |                                     |                 |        |         |        | (In thousands, except per share data) |         |        |        |         |       
|Premiums in force               |                                     | $               | 90,500 |         |        | $                                     | 88,600  |        |        | $       | 88,900 |        |         | $ | 99,400  |       
|                                |                                     |                 |        |         |        |                                       |         |        |        |         |        |       
|Revenues:                       |                                     |                 |        |         |        |                                       |         |        |        |         |        |        |         |   |         |       
|                                | Gross premiums earned               |                 | $      | 23,135  |        |                                       | $       | 25,222 |        |         | $      | 22,563 |         |   | $       | 24,958 |       
|                                | Premiums ceded                      |                 |        | (4,478  | )      |                                       |         | (4,410 | )      |         |        | (4,309 | )       |   |         | (4,527 | )     
|                                |                                     |                 |        |         |        |                                       |         |        |        |         |        |       
|                                |                                     | Premiums earned |        |         | 18,657 |                                       |         |        | 20,812 |         |        |        | 18,254  |   |         |        | 20,431 | 
|                                | Investment income                   |                 |        | 1,527   |        |                                       |         | 1,454  |        |         |        | 1,413  |         |   |         | 1,358  |       
|                                | Net realized investment losses      |                 |        | (26     | )      |                                       |         | (536   | )      |         |        | (45    | )       |   |         |       |       
|                                |                                     |                 |        |         |        |                                       |         |        |        |         |        |       
|                                |                                     | Total revenues  |        |         | 20,158 |                                       |         |        | 21,730 |         |        |        | 19,622  |   |         |        | 21,789 | 
|Expenses:                       |                                     |                 |        |         |        |                                       |         |        |        |         |        |        |         |   |         |       
|                                | Claim and claim settlement expenses |                 |        | 11,414  |        |                                       |         | 12,586 |        |         |        | 11,446 |         |   |         | 36,983 |       
|                                | Policy acquisition costs            |                 |        | 3,629   |        |                                       |         | 3,645  |        |         |        | 2,911  |         |   |         | 3,952  |       
|                                | General and administrative expenses |                 |        | 2,928   |        |                                       |         | 2,927  |        |         |        | 2,490  |         |   |         | 3,168  |       
|                                |                                     |                 |        |         |        |                                       |         |        |        |         |        |       
|                                |                                     | Total expenses  |        |         | 17,971 |                                       |         |        | 19,158 |         |        |        | 16,847  |   |         |        | 44,103 | 
|                                |                                     |                 |        |         |        |                                       |         |        |        |         |        |       
|Income (loss) from operations   |                                     | $               | 2,187  |         |        | $                                     | 2,572   |        |        | $       | 2,775  |        |         | $ | (22,314 | )     
|                                |                                     |                 |        |         |        |                                       |         |        |        |         |        |       
|Net income (loss)               |                                     | $               | 1,597  |         |        | $                                     | 1,791   |        |        | $       | 1,879  |        |         | $ | (14,975 | )     
|                                |                                     |                 |        |         |        |                                       |         |        |        |         |        |       
|Basic income (loss) per share   |                                     | $               | 0.13   |         |        | $                                     | 0.17    |        |        | $       | 0.18   |        |         | $ | (1.45   | )     
|                                |                                     |                 |        |         |        |                                       |         |        |        |         |        |       
|Diluted income (loss) per share |                                     | $               | 0.13   |         |        | $                                     | 0.17    |        |        | $       | 0.18   |        |         | $ | (1.45   | )     
|                                |                                     |                 |        |         |        |                                       |         |        |        |         |        |       

Quarterly revenues are affected by (i) premiums in force at the beginning of
the quarter, (ii) new policies written in the quarter, (iii) final audit
premiums recognized during the quarter, and (iv) our policy renewal rate in the
quarter. Historically, a majority of new policies written and policy renewals
have occurred in the first, second and fourth quarters.

43



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##### Table of Contents






ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.




PART III




ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information with respect to Directors is contained in the Section entitled
Election of Directors in the Companys 2002 Proxy Statement and is
incorporated herein by reference.

Information with respect to Executive Officers is included in PART I of this Report on Form 10-K.




ITEM 11. EXECUTIVE COMPENSATION

Information required under this item is contained in the Section
entitled Executive Compensation and Other Information in the Companys 2002
Proxy Statement and is incorporated herein by reference.




ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information required under this item is contained in the Section entitled
Security Ownership of Principal Shareholders and Management in the Companys
2002 Proxy Statement and is incorporated herein by reference.




ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required under this item is contained in the Section entitled
Certain Transactions in the Companys 2002 Proxy Statement and is
incorporated herein by reference.




PART IV




ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)  Documents filed as Part of this Report



| |                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) Financial Statements. The following consolidated financial statements
of the Company are set forth on pages 26 through 43 of Part II, Item 8 of this Report.



| |  |  | Independent Auditors Report                                                                  
| |  |  | ----------------------------------------------------------------------------------------------
| |  |  | Consolidated Balance Sheets  December 31, 2001 and 2000                                      
| |  |  | Consolidated Statements of Operations  Years Ended December 31, 2001, 2000 and 1999          
| |  |  | Consolidated Statements of Shareholders Equity  Years Ended December 31, 2001, 2000 and 1999
| |  |  | Consolidated Statements of Cash Flows  Years Ended December 31, 2001, 2000 and 1999          
| |  |  | Notes to Consolidated Financial Statements  Years Ended December 31, 2001, 2000 and 1999     



| |                                                                               
| | ------------------------------------------------------------------------------
| | (2)  Financial Statement Schedules for the Three Years Ended December 31,
2001

|                                                                                               |  |     
|---------------------------------------------------------------------------------------------- |  | ----
|                                                                                               |  | Page
|                                                                                               |  |     
|Independent Auditors Report on Schedules for the Years Ended
December 31, 2001, 2000 and 1999 |  | S-1 
|Schedule I  Summary of Investments                                                            |  | S-2 
|Schedule II  Condensed Financial Information (Parent Company)                                 |  | S-3 
|Schedule III  Supplemental Information Concerning Insurance Operations                        |  | S-7 
|Schedule IV  Reinsurance                                                                      |  | S-8 
|Schedule V  Valuation and Qualifying Accounts                                                 |  | S-9 



| |                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | All other schedules are omitted because they are not applicable or the
required information is presented in the Financial Statements or the notes
thereto.

44



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##### Table of Contents



(b)  Reports on Form 8-K



| |      
| | -----
| | None.

(c)  Listing of Exhibits (* indicates compensatory plan)

|        |  |                                                                                                                                                                     
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1     |  | Amended Articles of Incorporation (1)                                                                                                                               
|3.2     |  | Amended Bylaws (1)                                                                                                                                                  
|4.1     |  | Form of Rights Agreement dated April 17, 1997 between RTW, Inc. and
Norwest Bank Minnesota National Association (2)                                                 
|10.1*   |  | Employment agreement and stock option agreement between RTW, Inc. and
David C. Prosser dated December 13, 2001                                                      
|10.2*   |  | Employment agreement and stock option agreement between RTW, Inc. and J.
Alexander Fjelstad III dated December 13, 2001                                             
|10.3*   |  | Employment agreement and stock option agreement between RTW, Inc. and
Alfred L. LaTendresse dated December 13, 2001                                                 
|10.4*   |  | Amended RTW, Inc. 1995 Employee Stock Purchase Plan (4)                                                                                                             
|10.5*   |  | Amended RTW, Inc. 1994 Stock Plan (4)                                                                                                                               
|10.6    |  | Contract between RTW and ACIC dated January 1, 1992 (5)                                                                                                             
|10.7    |  | Service Agreement between RTW and ACIC dated February 1, 1992 (5)                                                                                                   
|10.8*   |  | Description of the 2002 Profit Sharing Program                                                                                                                      
|10.9    |  | Reinsurance contract between ACIC and First Excess and Reinsurance
Corporation (GE Reinsurance Corporation) effective July 1, 1998 (3)                              
|10.10   |  | Endorsement No. 2 to the reinsurance contract between ACIC and General Reinsurance Corporation (3)                                                                  
|10.10.1 |  | Description of the Reinsurance Agreement for 2002 between ACIC and General Reinsurance Corporation effective January 1, 2002                                        
|10.11   |  | Minnesota Workers Compensation Reinsurance Association reinsurance agreement (3)                                                                                   
|10.12   |  | Election form for Minnesota Workers Compensation Reinsurance Association reinsurance agreement for 2002                                                            
|10.13   |  | Workers Compensation Quota Share Reinsurance Contract between ACIC and
St. Paul Re (on behalf of St. Paul Fire and Marine) effective January 1, 2001               
|10.13.1 |  | Workers Compensation Quota Share Reinsurance Placement Confirmation
between ACIC and St. Paul Re (on behalf of St. Paul Fire and Marine)
effective December 1, 2001
|10.14   |  | Credit Agreement by and between RTW, Inc. and U.S. Bank National
Association dated March 31, 2000 (6)                                                               
|10.14.1 |  | First Amendment to the Credit Agreement by and between RTW, Inc. and
U.S. Bank National Association dated May 4, 2000 (6)                                           
|10.14.2 |  | Second Amendment to the Credit Agreement by and between RTW, Inc. and
U.S. Bank National Association dated March 28, 2001 (6)                                       
|10.14.3 |  | Third Amendment to the Credit Agreement by and between RTW, Inc. and
U.S. Bank National Association dated September 29, 2001                                        
|10.14.4 |  | Fourth Amendment to the Credit Agreement by and between RTW, Inc. and
U.S. Bank National Association dated March 27, 2002                                           
|11      |  | Statement, re: Computation of Net Loss Per Share                                                                                                                    
|21      |  | Subsidiaries of the Registrant:                                                                                                                                     
|        |  | The Company has one wholly-owned subsidiary, American Compensation
Insurance Company, a Minnesota corporation                                                       
|23      |  | Consent of Deloitte & Touche LLP                                                                                                                                    
|24      |  | Power of Attorney, included in Signature page                                                                                                                       



---

|(1) |  | Incorporated by reference to the Companys Registration Statement on Form
S-1 (Reg. No. 33-89164).                    
|--- |  | ----------------------------------------------------------------------------------------------------------------------
|(2) |  | Incorporated by reference to the Companys Registration Statement on Form
8-A filed April 25, 1997 (File No. 0-25508).
|(3) |  | Incorporated by reference to the Companys 1998 Report on Form 10-K.                                                  
|(4) |  | Incorporated by reference to the Companys Registration Statement on Form
S-8 (Reg. No. 333-81408).                   
|(5) |  | Incorporated by reference to the Companys Registration Statement on Form
SB-2 (Reg. No. 33-2002C).                   
|(6) |  | Incorporated by reference to the Companys 2000 Report on Form 10-K.                                                  

45



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) or the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

|                       |  |                                  |  |                                      
|---------------------- |  | -------------------------------- |  | -------------------------------------
|                       |  |                                  |  | RTW, INC.                            
|Date:   March 28, 2002 |  | By /s/ J. Alexander Fjelstad III
|                       |  |                                  |  |                                      
|                       |  |                                  |  | J. Alexander Fjelstad III            
|                       |  |                                  |  | President and Chief Executive Officer
|                       |  |                                  |  | (Principal Executive Officer)        

Signatures and Power of Attorney

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant, in
the capacities, and on the dates, indicated. Each person whose signature
appears below constitutes and appoints J. Alexander Fjelstad III and Jeffrey B.
Murphy as his true and lawful attorney-in-fact and agents, each acting alone,
with full power of substitutions and resubstitution, for him and in his name,
place, and stead, in any and all capacities, to sign any or all amendments to
this Annual Report on Form 10-K and to file the same, with the exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission.

|               |  |                                                 
|-------------- |  | ------------------------------------------------
|Date           |  | Signature and Title                             
|               |  |                                                 
|              
|March 28, 2002 |  | By /s/ David C. Prosser                         
|               |  |                                                 
|               |  | David C. Prosser                                
|               |  | Chairman of the Board                           
|              
|March 28, 2002 |  | By /s/ J. Alexander Fjelstad III                
|               |  |                                                 
|               |  | J. Alexander Fjelstad III                       
|               |  | President and Chief Executive Officer           
|               |  | (Principal Executive Officer)                   
|              
|March 28, 2002 |  | By /s/ Jeffrey B. Murphy                        
|               |  |                                                 
|               |  | Jeffrey B. Murphy                               
|               |  | Secretary, Treasurer and Chief Financial Officer
|               |  | (Principal Financial and Accounting Officer)    
|              
|March 28, 2002 |  | By /s/ Gregory D. Koschinska                    
|               |  |                                                 
|               |  | Gregory D. Koschinska                           
|               |  | Director                                        
|              
|March 28, 2002 |  | By /s/ Mark E. Hegman                           
|               |  |                                                 
|               |  | Mark E. Hegman                                  
|               |  | Director                                        
|              
|March 28, 2002 |  | By /s/ John O. Goodwyne                         
|               |  |                                                 
|               |  | John O. Goodwyne                                
|               |  | Director                                        
|              
|March 28, 2002 |  | By /s/ Alfred L. LaTendresse                    
|               |  |                                                 
|               |  | Alfred L. LaTendresse                           
|               |  | Executive Vice President and Director           

46



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##### Table of Contents



INDEPENDENT AUDITORS REPORT

To the Board of Directors and Shareholders
RTW, Inc.
Minneapolis, Minnesota

We have audited the consolidated financial statements of RTW, Inc. and
subsidiary (the Company) as of December 31, 2001 and 2000 and for each of the
three years in the period ended December 31, 2001, and have issued our report
thereon dated February 20, 2002 (February 28, 2002 as to Note 10
and March 22, 2002 as to Note 6). Our audits also
included the consolidated financial statement schedules listed in Item 14(a)(2)
of this Report on Form 10-K. These consolidated financial statement schedules
are the responsibility of the Companys management. Our responsibility is to
express an opinion based on our audits. In our opinion, such consolidated
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.

/s/ DELOITTE & TOUCHE LLP

Minneapolis, Minnesota
February 20, 2002

S-1



---



##### Table of Contents



SCHEDULE I

RTW, INC.
SUMMARY OF INVESTMENTS
December 31, 2001
(In thousands)

|                   |                     |                                                               |                   |       |           |        |      |   |                |        |  |   |             |        | 
|------------------ | ------------------- | ------------------------------------------------------------- | ----------------- | ----- | --------- | ------ | ---- | - | -------------- | ------ |  | - | ----------- | ------ | 
|                   |                     |                                                               |                   |       |           |        |      |   |                |        |  |   | Amount at  
|                   |                     |                                                               |                   |       |           |        |      |   |                |        |  |   | which shown
|                   |                     |                                                               |                   |       | Amortized |        | Fair |   | in the balance
|Type of investment |                     | Cost                                                          |                   | Value |           | sheet 
|                   |                     |                                                               |                   |       |           |       
|Fixed maturities:  |                     |                                                               |                   |       |           |        |      |   |                |        |  |  
|                   | Available-for-sale: |                                                               |                   |       |           |        |      |   |                |        |  |   |            
|                   |                     | Corporate securities                                          |                   | $     | 16,908    |        |      | $ | 17,158         |        |  | $ | 17,158      |       
|                   |                     | Mortgage backed securities                                    |                   |       | 44,474    |        |      |   | 45,161         |        |  |   | 45,161      |       
|                   |                     | Asset backed securities                                       |                   |       | 506       |        |      |   | 510            |        |  |   | 510         |       
|                   |                     | United States government, government agencies and authorities |                   |       | 25,921    |        |      |   | 26,337         |        |  |   | 26,337      |       
|                   |                     |                                                               |                   |       |           |        |      |   |                |        |  |  
|                   |                     |                                                               | Total Investments |       | $         | 87,809 |      |   | $              | 89,166 |  |   | $           | 89,166 | 
|                   |                     |                                                               |                   |       |           |        |      |   |                |        |  |  

S-2



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##### Table of Contents



SCHEDULE II

RTW, INC.
Condensed Financial Information of the Registrant
Balance Sheets
December 31, 2001 and 2000
(IN THOUSANDS)

|                                         |                   |   |        |       |      |   |        |        |  |  | 
|---------------------------------------- | ----------------- | - | ------ | ----- | ---- | - | ------ | ------ |  |  | 
|                                         |                   |   |        |       | 2001 |   | 2000  
|                                         |                   |   |        |       |      |   |       
|ASSETS                                  
|Cash and cash equivalents                |                   | $ | 82     |       |      | $ | 328    |       
|Furniture and equipment, net             |                   |   | 1,924  |       |      |   | 3,590  |       
|Investment in and advances to subsidiary |                   |   | 21,387 |       |      |   | 44,757 |       
|Deferred income tax asset                |                   |   | 351    |       |      |   |       |       
|Other assets                             |                   |   | 753    |       |      |   | 451    |       
|                                         |                   |   |        |       |      |   |        |       
|                                         |                   | $ | 24,497 |       |      | $ | 49,126 |       
|                                         |                   |   |        |       |      |   |        |       
|LIABILITIES AND SHAREHOLDERS EQUITY    
|Accrued expenses and other liabilities   |                   | $ | 4,255  |       |      | $ | 3,112  |       
|Deferred income liability                |                   |   |       |       |      |   | 278    |       
|Notes payable                            |                   |   | 4,500  |       |      |   | 7,000  |       
|                                         |                   |   |        |       |      |   |        |       
|                                         | Total liabilities |   |        | 8,755 |      |   |        | 10,390 | 
|Shareholders equity                     |                   |   | 15,742 |       |      |   | 38,736 |       
|                                         |                   |   |        |       |      |   |        |       
|                                         |                   | $ | 24,497 |       |      | $ | 49,126 |       
|                                         |                   |   |        |       |      |   |        |       

See notes to condensed financial statements.

S-3



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##### Table of Contents



SCHEDULE II

RTW, INC.
Condensed Financial Information of the Registrant
Statements of Operations
Years Ended December 31, 2001, 2000 and 1999
(IN THOUSANDS)

|                                                                              |                                     |                               |         |        |        |      |         |        |        |   |       |        |        | 
|----------------------------------------------------------------------------- | ----------------------------------- | ----------------------------- | ------- | ------ | ------ | ---- | ------- | ------ | ------ | - | ----- | ------ | ------ | 
|                                                                              |                                     |                               |         | 2001   |        | 2000 |         | 1999  
|                                                                              |                                     |                               |         |        |        |      |         |       
|Revenues:                                                                     |                                     |                               |         |        |        |      |         |        |        |   |       |       
|                                                                              | Intercompany fee income             |                               | $       | 28,419 |        |      | $       | 27,929 |        |   | $     | 25,762 |       
|                                                                              | Investment income                   |                               |         | 15     |        |      |         | 24     |        |   |       | 15     |       
|                                                                              |                                     |                               |         |        |        |      |         |        |        |   |       |       
|                                                                              |                                     | Total revenues                |         |        | 28,434 |      |         |        | 27,953 |   |       |        | 25,777 | 
|Expenses:                                                                     |                                     |                               |         |        |        |      |         |        |        |   |       |       
|                                                                              | General and administrative expenses |                               |         | 25,424 |        |      |         | 24,180 |        |   |       | 25,044 |       
|                                                                              |                                     |                               |         |        |        |      |         |        |        |   |       |       
|                                                                              |                                     | Income (loss) from operations |         |        | 3,010  |      |         |        | 3,773  |   |       |        | 733    | 
|Interest expense                                                              |                                     |                               | 511     |        |        |      | 667     |        |        |   | 266   |       
|                                                                              |                                     |                               |         |        |        |      |         |        |        |   |       |       
|Income before income taxes and equity in
undistributed net loss of subsidiary |                                     |                               | 2,499   |        |        |      | 3,106   |        |        |   | 467   |       
|                                                                              | Income tax expense (benefit)        |                               |         | 928    |        |      |         | 1,367  |        |   |       | (246   | )     
|                                                                              |                                     |                               |         |        |        |      |         |        |        |   |       |       
|Income loss before equity in undistributed net (loss)
income of subsidiary    |                                     |                               | 1,571   |        |        |      | 1,739   |        |        |   | 713   |       
|Equity in undistributed net (loss) income of subsidiary                       |                                     |                               | (25,266 | )      |        |      | (11,447 | )      |        |   | 5,454 |       
|                                                                              |                                     |                               |         |        |        |      |         |        |        |   |       |       
|Net (loss) income                                                             |                                     | $                             | (23,695 | )      |        | $    | (9,708  | )      |        | $ | 6,167 |       
|                                                                              |                                     |                               |         |        |        |      |         |        |        |   |       |       

See notes to condensed financial statements.

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SCHEDULE II

RTW, INC.
Condensed Financial Information of the Registrant
Statements of Cash Flows
Years Ended December 31, 2001, 2000 and 1999
(IN THOUSANDS)

|                                                     |                                                                                   |                                                                                          |                                             |                                                     |         |        |        |         |        |        |        |        |       |        |        |  
|---------------------------------------------------- | --------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | ------------------------------------------- | --------------------------------------------------- | ------- | ------ | ------ | ------- | ------ | ------ | ------ | ------ | ----- | ------ | ------ | -
|                                                     |                                                                                   |                                                                                          |                                             |                                                     |         | 2001   |        | 2000    |        | 1999  
|                                                     |                                                                                   |                                                                                          |                                             |                                                     |         |        |        |         |        |       
|CASH FLOWS FROM OPERATING ACTIVITIES:                |                                                                                   |                                                                                          |                                             |                                                     |         |        |        |         |        |        |        |       
|                                                     | Reconciliation of net (loss) income to net cash provided
by operating activities: |                                                                                          |                                             |                                                     |         |        |        |         |        |        |        |        |      
|                                                     |                                                                                   | Net (loss) income                                                                        |                                             | $                                                   | (23,695 | )      |        | $       | (9,708 | )      |        | $      | 6,167 |       
|                                                     |                                                                                   | Adjustments to reconcile net (loss) income to net
cash provided by operating activities: |                                             |                                                     |         |        |        |         |        |        |        |        |       |       
|                                                     |                                                                                   |                                                                                          | Depreciation and amortization               |                                                     |         | 1,203  |        |         |        | 1,295  |        |        |       | 1,296  |       
|                                                     |                                                                                   |                                                                                          | Equity in net loss (income) from subsidiary |                                                     |         | 25,266 |        |         |        | 11,447 |        |        |       | (5,454 | )     
|                                                     |                                                                                   |                                                                                          | Deferred income taxes                       |                                                     |         | (629   | )      |         |        | (52    | )      |        |       | (16    | )     
|                                                     |                                                                                   |                                                                                          | Changes in assets and liabilities:          |                                                     |         |        |        |         |        |        |        |        |       |        |       
|                                                     |                                                                                   |                                                                                          |                                             | Accrued expenses and other liabilities              |         |        | 1,143  |         |        |        | 1,483  |        |       |        | (141   | )
|                                                     |                                                                                   |                                                                                          |                                             | Other, net                                          |         |        | 346    |         |        |        | 2,892  |        |       |        | (4,190 | )
|                                                     |                                                                                   |                                                                                          |                                             |                                                     |         |        |        |         |        |        |        |       
|                                                     |                                                                                   |                                                                                          |                                             | Net cash provided by (used in) operating activities |         |        | 3,634  |         |        |        | 7,357  |        |       |        | (2,338 | )
|CASH FLOWS FROM INVESTING ACTIVITIES:                |                                                                                   |                                                                                          |                                             |                                                     |         |        |        |         |        |        |        |       
|                                                     | Investment in and advances to subsidiary                                          |                                                                                          |                                             | (1,896                                              | )       |        |        | (2,924  | )      |        |        | 3,843  |      
|                                                     | Purchases of furniture and equipment                                              |                                                                                          |                                             | (379                                                | )       |        |        | (1,015  | )      |        |        | (573   | )    
|                                                     | Disposals of furniture and equipment                                              |                                                                                          |                                             | 872                                                 |         |        |        | 51      |        |        |        |       |      
|                                                     |                                                                                   |                                                                                          |                                             |                                                     |         |        |        |         |        |        |        |       
|                                                     |                                                                                   |                                                                                          |                                             | Net cash used in provided by investing activities   |         |        | (1,403 | )       |        |        | (3,888 | )      |       |        | 3,270  |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                |                                                                                   |                                                                                          |                                             |                                                     |         |        |        |         |        |        |        |       
|                                                     | Proceeds from notes payable                                                       |                                                                                          |                                             |                                                    |         |        |        | 8,000   |        |        |        |       |      
|                                                     | Payments on notes payable                                                         |                                                                                          |                                             | (2,500                                              | )       |        |        | (1,000  | )      |        |        | (2,500 | )    
|                                                     | Stock options and warrants exercised                                              |                                                                                          |                                             |                                                    |         |        |        |        |        |        |        | 1,252  |      
|                                                     | Issuance of common stock under ESPP                                               |                                                                                          |                                             | 33                                                  |         |        |        | 125     |        |        |        | 105    |      
|                                                     | Retirement of common stock                                                        |                                                                                          |                                             | (10                                                 | )       |        |        | (10,268 | )      |        |        |       |      
|                                                     |                                                                                   |                                                                                          |                                             |                                                     |         |        |        |         |        |        |        |       
|                                                     |                                                                                   |                                                                                          |                                             | Net cash (used in) financing activities             |         |        | (2,477 | )       |        |        | (3,143 | )      |       |        | (1,143 | )
|                                                     |                                                                                   |                                                                                          |                                             |                                                     |         |        |        |         |        |        |        |       
|NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |                                                                                   |                                                                                          | (246                                        | )                                                   |         |        | 326    |         |        |        | (211   | )     
|CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR       |                                                                                   |                                                                                          | 328                                         |                                                     |         |        | 2      |         |        |        | 213    |       
|                                                     |                                                                                   |                                                                                          |                                             |                                                     |         |        |        |         |        |        |        |       
|CASH AND CASH EQUIVALENTS AT END OF YEAR             |                                                                                   | $                                                                                        | 82                                          |                                                     |         | $      | 328    |         |        | $      | 2      |       
|                                                     |                                                                                   |                                                                                          |                                             |                                                     |         |        |        |         |        |        |        |       
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:    |                                                                                   |                                                                                          |                                             |                                                     |         |        |        |         |        |        |        |       
|                                                     | Cash paid (received) during the year for:                                         |                                                                                          |                                             |                                                     |         |        |        |         |        |        |        |        |      
|                                                     |                                                                                   | Interest                                                                                 |                                             | $                                                   | 641     |        |        | $       | 458    |        |        | $      | 238   |       
|                                                     |                                                                                   |                                                                                          |                                             |                                                     |         |        |        |         |        |        |        |       
|                                                     |                                                                                   | Income tax payments (refunds)                                                            |                                             | $                                                   | 325     |        |        | $       | 73     |        |        | $      | (97   | )     
|                                                     |                                                                                   |                                                                                          |                                             |                                                     |         |        |        |         |        |        |        |       

See notes to condensed financial statements.

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##### Table of Contents



SCHEDULE II

RTW, INC.
Condensed Financial Information of the Registrant
Notes to Condensed Financial Statements
Years Ended December 31, 2001, 2000 and 1999

NOTE 1  ACCOUNTING POLICIES

The accompanying condensed financial information should be read in conjunction
with the consolidated financial statements and notes included in the RTW, Inc.
(RTW) 2001 Annual Report.

NOTE 2  RELATED PARTY TRANSACTIONS

RTW provides American Compensation Insurance Company (ACIC) with management
services, including preparing and submitting filings, maintaining books and
records, collecting premiums, administering and adjudicating claims, and
performing other administrative services. RTW receives 10% of ACICs gross
premiums earned each month for these services, which amounted to $9,850,000,
$9,743,000 and $8,934,000 for the years ended December 31, 2001, 2000 and 1999,
respectively. In addition, RTW receives 15% of ACICs gross premiums earned for
claims administration during the year in which the premiums are earned and a
total of 4% of gross premiums earned in subsequent years which amounted to
$18,570,000, $18,142,000 and $16,771,000 for the years ended December 31, 2001,
2000 and 1999, respectively.

RTW files a consolidated federal tax return with ACIC. Taxes are allocated
between the companies based on a tax allocation agreement under which allocation
is made primarily on a separate return basis for taxes incurred with current
credit for any net operating losses or other items utilized in the consolidated
tax return. This allocation is settled annually after completing and filing the
federal tax return.

Amounts due from (to) ACIC related to the above transactions are included in the
balance sheet account caption Investment in and advances to subsidiary and
totaled approximately $8,389,000 and $4,591,000 at December 31, 2001 and 2000,
respectively.

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##### Table of Contents



SCHEDULE III

RTW, INC.
SUPPLEMENTAL INFORMATION CONCERNING INSURANCE OPERATIONS
(In thousands)

|     |  |             |       |              |  | (Column C)   |         |          |  |          |       |            |  |         |        |              |  |                      |        |             |  |                     |       | Claim and claim |  |   |        |  |  |   |        |   |  |   |        |  
|---- |  | ----------- | ----- | ------------ |  | ------------ | ------- | -------- |  | -------- | ----- | ---------- |  | ------- | ------ | ------------ |  | -------------------- | ------ | ----------- |  | ------------------- | ----- | --------------- |  | - | ------ |  |  | - | ------ | - |  | - | ------ | -
|     |  |             |       |              |  | Reserves for |         |          |  |          |       |            |  |         |        |              |  |                      |        | Investment  |  | settlement expenses |       | Amortization    |  |   |        |  |  |   |        |  
|     |  | Deferred    |       | unpaid claim |  | Discount,    |         |          |  |          |       |            |  |         |        | income and   |  | incurred related to: |        | of deferred |  | Paid claim          |       |                 |  |  
|     |  | policy      |       | and claim    |  | if any,      |         |          |  |          |       |            |  |         |        | net realized |  |                      |        | policy      |  | and claim           |       |                 |  |  
|     |  | acquisition |       | settlement   |  | deducted in  |         | Unearned |  | Earned   |       | investment |  | Current |        | Prior        |  | acquisition          |        | settlement  |  | Premiums           
|Year |  | costs       |       | expenses     |  | column C     |         | premiums |  | premiums |       | gains      |  | year    |        | years        |  | costs                |        | expenses    |  | written            
|     |  |             |       |              |  |              |         |          |  |          |       |            |  |         |        |              |  |                      |        |             |  |                    
|2001 |  | $           | 1,214 |              |  | $            | 181,310 |          |  | $        | 482   |            |  | $       | 9,738  |              |  | $                    | 40,914 |             |  | $                   | 7,045 |                 |  | $ | 46,923 |  |  | $ | 7,731  |   |  | $ | (4,519 | )
|2000 |  | $           | 1,351 |              |  | $            | 128,841 |          |  | $        | 1,441 |            |  | $       | 12,455 |              |  | $                    | 78,154 |             |  | $                   | 5,077 |                 |  | $ | 56,900 |  |  | $ | 15,529 |   |  | $ | 14,137 |  
|1999 |  | $           | 1,487 |              |  | $            | 99,831  |          |  | $        | 2,873 |            |  | $       | 12,766 |              |  | $                    | 71,218 |             |  | $                   | 6,521 |                 |  | $ | 51,436 |  |  | $ | (8,113 | ) |  | $ | 14,111 |  

S-7



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##### Table of Contents



SCHEDULE IV

RTW, INC.
REINSURANCE
Years ended December 31, 2001, 2000 and 1998
(In thousands)

|            |                                  |        |                 |           |            |           |          |        |            |        |   |   |  |  |           |        |  |  |  |      |  
|----------- | -------------------------------- | ------ | --------------- | --------- | ---------- | --------- | -------- | ------ | ---------- | ------ | - | - |  |  | --------- | ------ |  |  |  | ---- | -
|            |                                  |        | Premiums earned |           |            |           |         
|            |                                  |        |                 |           | Percentage
|            |                                  |        |                 |           |            |           | Ceded to |        | Assumed    |        |   |   |  |  | of amount
|            |                                  |        |                 |           |            |           | other    |        | from other |        |   |   |  |  | assumed  
|Description |                                  | Direct |                 | companies |            | companies |          | Net    |            | to net
|            |                                  |        |                 |           |            |           |          |        |            |       
|2001        |                                  |        |                 |           |            |           |          |        |            |        |   |   |  |  |           |        |  |  |  |     
|            | PREMIUMS  Workers Compensation |        | $               | 97,420    |            |           | $        | 56,506 |            |        | $ |  |  |  | $         | 40,914 |  |  |  | 0.00 | %
|2000        |                                  |        |                 |           |            |           |          |        |            |        |   |   |  |  |           |        |  |  |  |     
|            | PREMIUMS  Workers Compensation |        | $               | 95,878    |            |           | $        | 17,724 |            |        | $ |  |  |  | $         | 78,154 |  |  |  | 0.00 | %
|1999        |                                  |        |                 |           |            |           |          |        |            |        |   |   |  |  |           |        |  |  |  |     
|            | PREMIUMS  Workers Compensation |        | $               | 89,226    |            |           | $        | 18,008 |            |        | $ |  |  |  | $         | 71,218 |  |  |  | 0.00 | %

S-8



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##### Table of Contents



SCHEDULE V

RTW, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 2001, 2000 and 1999
(In thousands)

|            |                                 |           |            |          |            |          |            |            |  |           |   |   |            |  |   |     |  |  |   |     | 
|----------- | ------------------------------- | --------- | ---------- | -------- | ---------- | -------- | ---------- | ---------- |  | --------- | - | - | ---------- |  | - | --- |  |  | - | --- | 
|            |                                 |           |            |          |            |          | Additions  |            |  |           |   |   |            |  |  
|            |                                 |           |            |          |            |          |            |            |  |           |   |   |            |  |  
|            |                                 |           | Balance at |          | Charged to |          | Charged to |            |  |           |   |   | Balance at
|            |                                 |           | beginning  |          | costs and  |          | other      |            |  |           |   |   | end       
|Description |                                 | of period |            | expenses |            | accounts |            | Write-offs |  | of period
|            |                                 |           |            |          |            |          |            |            |  |          
|2001        |                                 |           |            |          |            |          |            |            |  |           |   |   |            |  |   |     |  |  |   |    
|            | Allowance for Doubtful Accounts |           | $          | 569      |            |          | $          | 530        |  |           | $ |  |            |  | $ | 663 |  |  | $ | 436 | 
|2000        |                                 |           |            |          |            |          |            |            |  |           |   |   |            |  |   |     |  |  |   |    
|            | Allowance for Doubtful Accounts |           | $          | 519      |            |          | $          | 599        |  |           | $ |  |            |  | $ | 549 |  |  | $ | 569 | 
|1999        |                                 |           |            |          |            |          |            |            |  |           |   |   |            |  |   |     |  |  |   |    
|            | Allowance for Doubtful Accounts |           | $          | 417      |            |          | $          | 163        |  |           | $ |  |            |  | $ | 61  |  |  | $ | 519 | 

S-9