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UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D. C. 20549


Form 10-K


|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the fiscal year ended December 31, 2005                                                 
|  
|OR
|  
|o  |  | 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


o þ


o þ


þ o


S-K 10-K 10-K: o


12b-2)


o o þ


12b-2) o þ




Documents incorporated by reference:


10-K.










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TABLE OF CONTENTS


|                                                                                                         |  |                                                                                                    |    |      |    | 
|-------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                                                                                                         |  |                                                                                                    |    | Page |   
|                                                                                                         |  |                                                                                                    |    |      |   
|PART I                                                                                                   |  |                                                                                                    |    |     
|Item 1.                                                                                                  |  | Business                                                                                           |    |      | 2  | 
|                                                                                                         |  | Executive Officers of the Registrant                                                               |    |      | 9  | 
|Item 1A.                                                                                                 |  | Risk Factors                                                                                       |    |      | 10 | 
|Item 2.                                                                                                  |  | Properties                                                                                         |    |      | 11 | 
|Item 3.                                                                                                  |  | Legal Proceedings                                                                                  |    |      | 11 | 
|Item 4.                                                                                                  |  | Submission of Matters to a Vote of Security
    Holders                                            |    |      | 12 | 
|                                                                                                        
|PART II                                                                                                  |  |                                                                                                    |    |     
|Item 5.                                                                                                  |  | Market for Registrants Common Equity
    and Related Stockholder Matters                          |    |      | 13 | 
|Item 6.                                                                                                  |  | Selected Financial Data                                                                            |    |      | 13 | 
|Item 7.                                                                                                  |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations          |    |      | 14 | 
|Item 7A.                                                                                                 |  | Quantitative and Qualitative Disclosures
    About Market Risk                                     |    |      | 34 | 
|Item 8.                                                                                                  |  | Financial Statements and Supplementary
    Data                                                    |    |      | 35 | 
|Item 9.                                                                                                  |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure           |    |      | 61 | 
|Item 9A.                                                                                                 |  | Controls and Procedures                                                                            |    |      | 61 | 
|Item 9B.                                                                                                 |  | Other Information                                                                                  |    |      | 61 | 
|                                                                                                        
|PART III                                                                                                 |  |                                                                                                    |    |     
|Item 10.                                                                                                 |  | Directors and Executive Officers of the
    Registrant                                             |    |      | 62 | 
|Item 11.                                                                                                 |  | Executive Compensation                                                                             |    |      | 62 | 
|Item 12.                                                                                                 |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters |    |      | 62 | 
|Item 13.                                                                                                 |  | Certain Relationships and Related
    Transactions                                                 |    |      | 62 | 
|Item 14.                                                                                                 |  | Principal Accountant Fees and Services                                                             |    |      | 62 | 
|                                                                                                        
|PART IV                                                                                                  |  |                                                                                                    |    |     
|Item 15.                                                                                                 |  | Exhibits and Financial Statement
    Schedules                                                     |    |      | 63 | 
|Signatures                                                                                               |  |                                                                                                    | 65 |     
|Employment Agreement - Jeffrey B. Murphy                                                                
|Description of the 2006 Performance Incentive Program                                                   
|Description of the Reinsurance Agreement                                                                
|Minnesota Workers' Compensation Reinsurance Association                                                 
|Election Form for the 2006 Minnesota Workers' Compensation Reinsurance Association Reinsurance Agreement
|Description of the Reinsurance Agreement for 2006                                                       
|Statement Re: Computation of Income Per Share                                                           
|Consent of Independent Registered Public Accounting Firm                                                
|Certification of President and Chief Executive Officer                                                  
|Certification of Chief Financial Officer                                                                
|Certification Pursuant to Section 906                                                                   
|Share Repurchase Program Resumption                                                                     



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PART I







|        |         
|------- | --------
|ITEM 1. | BUSINESS

Overview


sm


® ® state-of




Industry








2



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return-to


Our Management Approach


® ®






Customers. on-site




3



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Employees. return-to


Medical Care Providers.






Legal and Judicial Participants.


Customers






4



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Products


Insurance Products.






Service Offerings.


Sales and Marketing




5



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Reinsurance








|              |                         |                               |   |         |             |  |                                         
|------------- | ----------------------- | ----------------------------- | - | ------- | ----------- |  | ----------------------------------------
|              |                         | Covers Losses per Occurrence:
|              |                         |                              
|              |                         | In Excess of:                 |   |         | Limited to:
|              |                         |                               |   |         |            
|Minnesota:    |                         |                               |   |         |             | 
|              | 2005 WCRA               |                               | $ | 380,000 |             |  | Statutory limit                         
|              | Various reinsurers      |                               | $ | 200,000 |             |  | $380,000                                
|              | 2004 WCRA               |                               | $ | 360,000 |             |  | Statutory limit                         
|              | Various reinsurers      |                               | $ | 200,000 |             |  | $360,000                                
|              | 2003 WCRA               |                               | $ | 360,000 |             |  | Statutory limit                         
|              | Various reinsurers      |                               | $ | 200,000 |             |  | $360,000                                
|Other States: |                         |                               |   |         |             | 
|              | 2005 Various reinsurers |                               | $ | 200,000 |             |  | $20 million, excluding acts of terrorism
|              | 2004 Various reinsurers |                               | $ | 200,000 |             |  | $20 million, excluding acts of terrorism
|              | 2003 Various reinsurers |                               | $ | 200,000 |             |  | $20 million, excluding acts of terrorism





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|                                        |  |           |   |   
|--------------------------------------- |  | --------- | - | --
|                                        |  | A.M. Best |  
|Reinsurer                               |  | Rating    |  
|                                        |  |           |  
|Aspen Insurance UK Ltd                  |  |           | A |   
|American Re-Insurance Company           |  |           | A |   
|Continental Casualty Company            |  |           | A |   
|Everest Reinsurance Company             |  |           | A | + 
|GE Reinsurance Corporation              |  |           | A |   
|General Reinsurance Corporation         |  |           | A | ++
|Max Re Ltd                              |  |           | A | - 
|Platinum Underwriters Reinsurance, Inc. |  |           | A |   
|SCOR Reinsurance Company                |  |           | B | ++
|Transatlantic Reinsurance Company       |  |           | A | + 



Competition










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Data Management




|        |  |                                                                 |  |                                                                                                            
|------- |  | --------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------
|First   |  |                                                                 |  |                                                                                                            
|Install |  | System Description                                              |  | Business Use                                                                                               
|        |  |                                                                 |  |                                                                                                            
|1995    |  | Policy management system                                        |  | Process insurance applications; issue and endorse policies                                                 
|1996    |  | Case and claims management and medical fee adjudicating systems |  | Manage claims, audit medical fees, pay claims, provide reports
    to policyholders and analyze claims data
|1999    |  | Client account management system                                |  | Billing, cash receipts, collections and agency commission systems                                          



Employees




Regulation






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Trade Names, Trademarks and Service Marks




Company Information


http://www.rtwi.com





Executive Officers of the Registrant




|                      |  |     |    |  |          |                                                                
|--------------------- |  | --- | -- |  | -------- | ---------------------------------------------------------------
|Name                  |  | Age |    |  | Position
|                      |  |     |    |  |         
|John O. Goodwyne      |  |     | 67 |  |          | Chairman of the Board                                          
|Jeffrey B. Murphy     |  |     | 44 |  |          | President, Chief Executive Officer and Director                
|Alfred L. LaTendresse |  |     | 57 |  |          | Executive Vice President, Chief Financial Officer and Secretary
|Thomas J. Byers       |  |     | 50 |  |          | Executive Vice President  Sales and Marketing                 
|Keith D. Krueger      |  |     | 47 |  |          | Vice President  Insured Products and Assistant
    Secretary  
|David M. Dietz        |  |     | 39 |  |          | Vice President  Business Development                          
|Patricia M. Sheveland |  |     | 47 |  |          | Vice President  Case and Claims Management                    







9



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|         |             
|-------- | ------------
|ITEM 1A. | RISK FACTORS





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Workers compensation is a state regulated industry and
    therefore subject to change. Workers compensation is
    governed and regulated by state governmental agencies. We are
    subject to state regulation in any state in which we provide
    workers compensation products and services, now and 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.
    Legislation covering insurance companies and the regulations
    adopted by state agencies are subject to change and any change
    may adversely affect our operations;
|
| |  | Workers compensation claims and related expenses can be
    volatile. Workers compensation is a long-tailed
    property and casualty insurance line. Claims for a given year
    are open on average for twelve to thirteen years and it is not
    unusual for workers compensation insurers to have some
    claims open for thirty or more years. We have operated ACIC
    since 1992, BCIC since 2005 and therefore have relatively
    limited experience (fourteen years), and accordingly, are
    subject to volatility. See further discussion under Claim
    and Claim Settlement Expenses;                                                                                                                                                      
|
| |  | Workers compensation is subject to inflationary
    pressures. Workers compensation is subject to both
    medical and wage inflation. The cost of medical care has
    increased in excess of 10% per annum in                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | recent years. This has resulted in reduced profitability in the
    workers compensation insurance line. New medical
    procedures could evolve and new legal theories develop that
    could cause older claims to re-open and increase expense. See
    further discussion under Claim and Claim Settlement
    Expenses;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Workers compensation pricing is cyclical. In 2005,
    premium rates on our renewing policies declined an
    average 2.4%. Rates increased 0.9%, 1.4%, 9.0% and 18.5% in
    2004, 2003, 2002 and 2001, respectively. These increases came
    after many years of rate decreases that unfavorably affected the
    industry in the late 1990s. If we are unable to maintain
    rates or decrease our costs, our profit margin will be adversely
    affected. See further discussion under Premiums in Force
    and Gross Premiums Earned;                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Reinsurance costs for workers compensation have
    increased. Reinsurance costs in 2005 increased over the
    prior year, continuing a pattern of cost increases beginning in
    2001. These higher costs, if not recovered through increased
    rates from our customers, will adversely affect our profit
    margin. See further discussion under Premiums
    Ceded; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Profitable service revenue growth could be difficult. The
    national market for disability and absence management services
    is highly competitive and includes national, regional and local
    providers. We do not have a national presence, limiting our
    ability to service national accounts. Any infrastructure changes
    to support growth in our non-insurance revenues could be
    expensive and diminish our earnings in the short-term.                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | Other risk factors. The following additional important
    factors, among others, could affect our results and could cause
    our actual financial performance to differ materially from that
    expressed in any forward-looking statement contained herein:
    (i) our ability to retain renewing policies and write new
    business with a B+ (Very Good, Secure) rating from A.M. Best;
    (ii) the ability of our reinsurers to honor their
    obligations to us; (iii) our ability to provide our
    proprietary products and services to customers successfully;
    (iv) our ability to manage both our existing claims and new
    claims in an effective manner; (v) our experience with
    claims frequency and severity; (vi) general economic and
    business conditions; (xii) our ability to obtain and retain
    reinsurance at a reasonable cost; and (vii) interest rate
    changes.






|        |           
|------- | ----------
|ITEM 2. | PROPERTIES



|                                                                    |  |             |        |  |             |  |                 | 
|------------------------------------------------------------------- |  | ----------- | ------ |  | ----------- |  | --------------- | 
|                                                                    |  | Area Leased |        |  |            
|                                                                    |  | (in Square  |        |  |            
|Location and Description                                            |  | Feet)       |        |  | Termination | 
|                                                                    |  |             |        |  |             | 
|Bloomington, Minnesota; Headquarters and
    Minnesota office space |  |             | 26,301 |  |             |  | September  2007 | 
|Denver, Colorado; Colorado office space                             |  |             | 7,825  |  |             |  | May 2010        | 
|Detroit, Michigan; Michigan office space                            |  |             | 7,118  |  |             |  | March 2007      | 
|Grand Rapids, Michigan; Michigan office space                       |  |             | 4,571  |  |             |  | April 2006      | 






|        |                  
|------- | -----------------
|ITEM 3. | LEGAL PROCEEDINGS

RTW v. Carolina Casualty:




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Other litigation:







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



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PART II







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

QUARTERLY STOCK PRICE COMPARISON AND DIVIDENDS




|             |      |         |   |       |         |  |   |         |  |  |         |       |  |  |   |       | 
|------------ | ---- | ------- | - | ----- | ------- |  | - | ------- |  |  | ------- | ----- |  |  | - | ----- | 
|             |      | First   |   |       | Second  |  |   | Third   |  |  | Fourth  |      
|Fiscal Year: |      | Quarter |   |       | Quarter |  |   | Quarter |  |  | Quarter |      
|             |      |         |   |       |         |  |   |         |  |  |         |      
|2005         |      |         |   |       |         |  |   |         |  |  |         |       |  |  |   |      
|             | High |         | $ | 12.37 |         |  | $ | 10.86   |  |  | $       | 11.40 |  |  | $ | 12.08 | 
|             | Low  |         |   | 8.27  |         |  |   | 8.44    |  |  |         | 9.35  |  |  |   | 9.05  | 
|2004         |      |         |   |       |         |  |   |         |  |  |         |       |  |  |   |      
|             | High |         | $ | 7.12  |         |  | $ | 7.01    |  |  | $       | 7.29  |  |  | $ | 9.48  | 
|             | Low  |         |   | 5.83  |         |  |   | 5.76    |  |  |         | 5.71  |  |  |   | 6.40  | 



RECENT SALES OF UNREGISTERED EQUITY SECURITIES




ISSUER REPURCHASES OF EQUITY SECURITIES









|        |                        
|------- | -----------------------
|ITEM 6. | SELECTED FINANCIAL DATA

10-K. 10-K.


|                                  |                               |                                       |         |        |      |   |         |        |  |   |         |        |  |      |         |        |  |   |         |        | 
|--------------------------------- | ----------------------------- | ------------------------------------- | ------- | ------ | ---- | - | ------- | ------ |  | - | ------- | ------ |  | ---- | ------- | ------ |  | - | ------- | ------ | 
|                                  |                               | 2005                                  |         |        | 2004 |   |         | 2003   |  |   | 2002    |        |  | 2001 |        
|                                  |                               |                                       |         |        |      |   |         |        |  |   |         |        |  |      |        
|                                  |                               | (In thousands, except per share data) |        
|Total revenues                    |                               | $                                     | 59,011  |        |      | $ | 58,687  |        |  | $ | 51,383  |        |  | $    | 67,023  |        |  | $ | 95,570  |       
|Income (loss) from operations     |                               |                                       | 10,079  |        |      |   | 8,072   |        |  |   | 6,635   |        |  |      | 10,325  |        |  |   | (15,761 | )     
|Income (loss) before income taxes |                               |                                       | 10,079  |        |      |   | 8,072   |        |  |   | 6,587   |        |  |      | 10,162  |        |  |   | (16,272 | )     
|Net income (loss)                 |                               |                                       | 5,998   |        |      |   | 9,941   |        |  |   | 6,999   |        |  |      | 14,319  |        |  |   | (25,215 | )     
|Basic income (loss) per share     |                               |                                       | 1.11    |        |      |   | 1.90    |        |  |   | 1.37    |        |  |      | 2.78    |        |  |   | (4.89   | )     
|Diluted income (loss) per share   |                               |                                       | 1.06    |        |      |   | 1.81    |        |  |   | 1.32    |        |  |      | 2.78    |        |  |   | (4.89   | )     
|Total assets                      |                               |                                       | 228,471 |        |      |   | 220,507 |        |  |   | 202,168 |        |  |      | 223,834 |        |  |   | 218,307 |       
|Notes payable                     |                               |                                       |        |        |      |   |        |        |  |   |        |        |  |      | 1,250   |        |  |   | 4,500   |       
|Total shareholders equity        |                               |                                       | 50,578  |        |      |   | 45,531  |        |  |   | 35,587  |        |  |      | 29,810  |        |  |   | 14,222  |       
|Other information (unaudited):    |                               |                                       |         |        |      |   |         |        |  |   |         |        |  |      |         |        |  |   |         |       
|                                  | Premiums in force at year end |                                       |         | 52,900 |      |   |         | 62,700 |  |   |         | 58,100 |  |      |         | 54,200 |  |   |         | 83,700 | 
|                                  | Annualized service revenue    |                                       |         | 6,600  |      |   |         | 5,000  |  |   |         |       |  |      |         |       |  |   |         |       | 



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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 sm


® ® state-of






Significant Accounting Policies




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Off-Balance Sheet Arrangements


Financial Summary




|                                    |  |                         |        |  |      |   |        |      |  |   |        | 
|----------------------------------- |  | ----------------------- | ------ |  | ---- | - | ------ | ---- |  | - | ------ | 
|                                    |  | Year Ended December 31, |       
|                                    |  |                         |       
|                                    |  | 2005                    |        |  | 2004 |   |        | 2003 | 
|                                    |  |                         |        |  |      |   |        |      | 
|Gross premiums earned               |  | $                       | 59,872 |  |      | $ | 63,370 |      |  | $ | 54,431 | 
|Premiums earned                     |  |                         | 49,420 |  |      |   | 53,682 |      |  |   | 46,290 | 
|Service revenue                     |  |                         | 4,398  |  |      |   | 633    |      |  |   | 109    | 
|Total revenues                      |  |                         | 59,011 |  |      |   | 58,687 |      |  |   | 51,383 | 
|Claim and claim settlement expenses |  |                         | 30,807 |  |      |   | 35,536 |      |  |   | 27,256 | 
|Income before income taxes          |  |                         | 10,079 |  |      |   | 8,072  |      |  |   | 6,587  | 
|Net income                          |  |                         | 5,998  |  |      |   | 9,941  |      |  |   | 6,999  | 
|Diluted income per share            |  | $                       | 1.06   |  |      | $ | 1.81   |      |  | $ | 1.32   | 





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Gross premiums earned decreased 5.5% to $59.9 million in
    2005 from $63.4 million in 2004 primarily due to a decrease
    in average premiums in force to $57.9 million for 2005 from
    $61.5 million in 2004. See further discussion under
    Premiums In Force and Gross Premiums Earned;                                                                                                                                                                                                                              
|
| |  | Premiums earned decreased 7.9% to $49.4 million in 2005
    from $53.7 million in 2004. Premiums earned in 2005 reflect
    the decrease in gross premiums earned from 2004, and an increase
    in final audit premiums earned in 2005 compared to 2004, offset
    by an increase in premiums ceded as our cost of excess of loss
    reinsurance increased in 2005;                                                                                                                                                           
|
| |  | Service revenue from our Absentia division grew to
    $4.4 million in 2005 from $633,000 in 2004;                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Total revenues included $4.6 million of net investment
    income and $580,000 of net realized investment gains in 2005
    compared to $3.7 million of net investment income and
    $705,000 of net realized investment gains in 2004;                                                                                                                                                                                                                                                                                         
|
| |  | Claim and claim settlement expenses decreased to 62.3% of
    premiums earned for 2005 from 66.2% for 2004. We benefited from
    improving our claim management capabilities and closing old
    claims, realizing favorable development of $5.5 million in
    2005 compared to $7.0 million in 2004. Claim and claim
    settlement expenses also decreased in 2005 due to the decrease
    in gross premiums earned in 2005 compared to 2004. See further
    discussion under Claim and Claim Settlement
    Expenses; and
|
| |  | Income tax expense in 2005 includes adjustments for changes in
    estimates from prior periods that have affected the
    year-to-year comparison
    of income tax expense. Income tax benefit for 2004 includes a
    $3.6 million benefit resulting from the reversal of the
    remaining valuation allowance on our income tax asset at
    December 31, 2004. See further discussion under
    Income Taxes.                                                                                                            



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RESULTS OF OPERATIONS


Total revenues:


|                                    |                            |                               |                |        |      |        |        |        |     |        |        |        |     |        | 
|----------------------------------- | -------------------------- | ----------------------------- | -------------- | ------ | ---- | ------ | ------ | ------ | --- | ------ | ------ | ------ | --- | ------ | 
|                                    |                            | Year Ended December 31,       |               
|                                    |                            |                               |               
|                                    |                            | 2005                          |                |        | 2004 |        |        | 2003   |    
|                                    |                            |                               |                |        |      |        |        |        |    
|Gross premiums earned               |                            | $                             | 59,872         |        |      | $      | 63,370 |        |     | $      | 54,431 |       
|Premiums ceded                      |                            |                               | (10,452        | )      |      |        | (9,688 | )      |     |        | (8,141 | )     
|                                    |                            |                               |                |        |      |        |        |        |    
|                                    | Premiums earned            |                               |                | 49,420 |      |        |        | 53,682 |     |        |        | 46,290 |    
|Net investment income               |                            |                               | 4,613          |        |      |        | 3,667  |        |     |        | 4,299  |       
|Realized investment gains (losses): |                            |                               |                |        |      |        |        |        |     |        |        |       
|                                    | Realized investment gains  |                               |                | 584    |      |        |        | 708    |     |        |        | 685    |    
|                                    | Realized investment losses |                               |                | (4     | )    |        |        | (3     | )   |        |        |       |    
|                                    |                            |                               |                |        |      |        |        |        |    
|                                    |                            | Net realized investment gains |                |        | 580  |        |        |        | 705 |        |        |        | 685 |       
|Service revenue                     |                            |                               | 4,398          |        |      |        | 633    |        |     |        | 109    |       
|                                    |                            |                               |                |        |      |        |        |        |    
|                                    |                            |                               | Total revenues |        | $    | 59,011 |        |        | $   | 58,687 |        |        | $   | 51,383 | 
|                                    |                            |                               |                |        |      |        |        |        |    

|                                         |                         |      |        |        |      |   |        |        |  |   |        |        | 
|---------------------------------------- | ----------------------- | ---- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                         |                         | 2005 |        |        | 2004 |   |        | 2003   | 
|Premiums in force by region at year-end: |                         |      |        |        |      |   |        |        | 
|Minnesota                                |                         | $    | 32,300 |        |      | $ | 37,800 |        |  | $ | 32,000 |       
|Colorado                                 |                         |      | 8,300  |        |      |   | 10,600 |        |  |   | 13,000 |       
|Michigan                                 |                         |      | 12,300 |        |      |   | 14,300 |        |  |   | 13,100 |       
|                                         |                         |      |        |        |      |   |        |        | 
|                                         | Total premiums in force |      | $      | 52,900 |      |   | $      | 62,700 |  |   | $      | 58,100 | 
|                                         |                         |      |        |        |      |   |        |        | 

Premiums In Force and Gross Premiums Earned:




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Premiums Ceded:


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##### Table of Contents





|              |                         |                               |  |          |             |  |                                         
|------------- | ----------------------- | ----------------------------- |  | -------- | ----------- |  | ----------------------------------------
|              |                         | Covers Losses per Occurrence:
|              |                         |                              
|              |                         | In Excess of:                 |  |          | Limited to:
|              |                         |                               |  |          |            
|Minnesota:    |                         |                               |  |          |             | 
|              | 2005 WCRA               |                               |  | $380,000 |             |  | Statutory limit                         
|              | Various reinsurers      |                               |  | $200,000 |             |  | $380,000                                
|              | 2004 WCRA               |                               |  | $360,000 |             |  | Statutory limit                         
|              | Various reinsurers      |                               |  | $200,000 |             |  | $360,000                                
|              | 2003 WCRA               |                               |  | $360,000 |             |  | Statutory limit                         
|              | Various reinsurers      |                               |  | $200,000 |             |  | $360,000                                
|Other States: |                         |                               |  |          |             | 
|              | 2005 Various reinsurers |                               |  | $200,000 |             |  | $20 million, excluding acts of terrorism
|              | 2004 Various reinsurers |                               |  | $200,000 |             |  | $20 million, excluding acts of terrorism
|              | 2003 Various reinsurers |                               |  | $200,000 |             |  | $20 million, excluding acts of terrorism





2006 Outlook:




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We expect increased price competition in the markets in which we
    operate, which will exert downward pressure on premium pricing
    on new and renewal policies as national and regional carriers
    focus on writing and retaining workers compensation
    insurance. We expect to add new agency relationships in 2006 and
    terminate some that are not performing well. We expect growth in
    premiums in force in 2006 as we expand our underwriting niche,
    write multi-state policies and begin leveraging unused licenses;  
|
| |  | Our 2006 gross premiums earned will move in the same direction
    as our premiums in force, lagging slightly as premiums are
    earned over the term of the insurance policy; and                                                                                                                                                                                                                                                                                                                                                               
|
| |  | We continue to limit our exposure to large losses by purchasing
    excess of loss reinsurance for losses in excess of $200,000 in
    all our regions in 2006. The cost of excess of loss reinsurance
    has decreased slightly or remained the same for all regions in
    2006; however, because of a shift in premiums earned to higher
    reinsurance cost states, we expect premiums ceded under excess
    of loss policies to increase as a percent of gross premiums
    earned in 2006 when compared to the results attained for 2005.

Net Investment Income and Net Realized Investment Gains
(Losses):


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2006 Outlook:




| |   |                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We expect interest rates to increase in 2006. The timing of any
    such rate increases is unknown at this time. We intend to invest
    our excess cash into higher yielding investments in 2006 as
    rates increase;    
|
| |  | We expect that short-term interest rates on cash and cash
    equivalents will increase in 2006 as the Federal Reserve Board
    increases its rates;                                                                       
|
| |  | Our investment in tax-exempt municipal bonds will reduce net
    investment income and favorably affect net income as investment
    yields will be lower on a pre-tax basis but will be higher on a
    tax-adjusted basis;
|
| |  | Cash flows for 2006 are expected to be affected by decreases in
    cash flows resulting from claim payments on claims from 2005 and
    prior years offset by cash flows from our premiums and service
    revenue;        

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| |   |                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Recognition of realized investment gains and losses will depend
    on sales of our investments, if any, to meet our short-term cash
    requirements or as we reposition our portfolio to further manage
    our portfolio returns. We do not anticipate selling any
    securities in 2006; and
|
| |  | New and renegotiated reinsurance treaties may affect our future
    cash flow and future net investment income.                                                                                                                                                                                  

Service Revenue:


2006 Outlook:




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In March 2004, we were awarded a three-year contract to service
    25% of the ARP. We are paid a fee based on a percent of the
    premium we service and began servicing new ARP business on
    July 1, 2004 and renewal ARP business on September 1,
    2004. During 2005, we continued to ramp up our servicing of this
    contract, achieving a full 25% share in September
    2005. The total annual premium in the ARP at December 31,
    2005 is approximately $85.1 million, which decreased from
    $100.7 million at December 31, 2004. We expect the
    total annual premium in the ARP to continue to decrease slightly
    during 2006, which will exert downward pressure on our related
    revenue, offset by being at a full 25% servicing
    rate for the entire year; and
|
| |  | We continue to market our alternative products aggressively
    inside and outside the regions in which we currently operate. We
    expect service revenue will increase as new customers become
    aware of and purchase these services. The ultimate effect on
    service revenue is unknown at this time.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

Total Expenses:


Claim and Claim Settlement Expenses:






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|     |  |             |       |               |         |   |             |         |  |   |        | 
|---- |  | ----------- | ----- | ------------- | ------- | - | ----------- | ------- |  | - | ------ | 
|     |  |             |       | Average Gross |         |   | Average Net |        
|     |  | Open Claims |       |               | Reserve |   |             | Reserve | 
|     |  |             |       |               |         |   |             |         | 
|2005 |  |             | 1,032 |               |         | $ | 28,800      |         |  | $ | 23,800 | 
|2004 |  |             | 223   |               |         | $ | 104,200     |         |  | $ | 62,400 | 
|2003 |  |             | 95    |               |         | $ | 116,700     |         |  | $ | 67,400 | 



2005 Compared to 2004:




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The decrease in gross premiums earned as discussed above under
    Premiums In Force and Gross Premiums Earned;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | The 2005 results include a $5.5 million decrease in prior
    accident years reserves for unpaid claim and claim
    settlement expenses compared to the 2004 results, which include
    a $7.0 million decrease in prior accident years
    reserves. Our estimate for unpaid claim and claim settlement
    expenses decreased in 2005 due to the following: (i) our
    ability to manage and close claims has improved over our
    historical experience; (ii) the re-underwriting of our book
    of business has resulted in claims with profiles different than
    experienced historically; and (iii) our estimate of the
    liability for unpaid claim and claim settlement expenses is
    volatile due to our relatively limited fourteen-year historical
    claim data and our small claim population; and
|
| |  | Claim costs continued to reflect increasing medical and
    indemnity costs in accident year 2005 as compared to accident
    year 2004 resulting from inflationary pressures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

2004 Compared to 2003:




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The increase in gross premiums earned as discussed above under
    Premiums In Force and Gross Premiums Earned;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | The 2004 results include a $7.0 million decrease in prior
    accident years reserves for unpaid claim and claim
    settlement expenses compared to the 2003 results, which include
    a $6.7 million decrease in prior accident years
    reserves. Our estimate for unpaid claim and claim settlement
    expenses decreased in 2004 due to the following: (i) our
    ability to manage and close claims has improved over our
    historical experience; (ii) the re-underwriting of our book
    of business has resulted in claims with profiles different than
    experienced historically; and (iii) our estimate of the
    liability for unpaid claim and claim settlement expenses is
    volatile due to our relatively limited historical claim data and
    our small claim population; and
|
| |  | Claim costs continued to reflect increasing medical and
    indemnity costs in accident year 2004 as compared to accident
    year 2003 resulting from inflationary pressures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

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2006 Outlook:




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Claim costs will continue to be affected by: (i) increases
    in medical and indemnity costs resulting from inflationary
    changes; (ii) severity experienced in current and future
    periods in our policyholder 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;
|
| |  | Increases (decreases) in premium rates will have a direct
    affect on gross premiums earned without a corresponding effect
    on claim and claim settlement expenses, ultimately affecting
    claim and claim settlement expense as a percent of premiums
    earned. Legislative changes in estimated loss costs, increased
    competition and changes in customer loss experience may offset
    or eliminate the effect of any rate improvement; and                                                                                                
|
| |  | Continued application of our claims management technology and
    methods to all open claims.                                                                                                                                                                                                                                                                                                                                                                                                                                                               



Policy Acquisition Costs:




|                                                |                                 |                         |        |       |      |   |        |       |  |   |        |       | 
|----------------------------------------------- | ------------------------------- | ----------------------- | ------ | ----- | ---- | - | ------ | ----- |  | - | ------ | ----- | 
|                                                |                                 | Year Ended December 31, |       
|                                                |                                 |                         |       
|                                                |                                 | 2005                    |        |       | 2004 |   |        | 2003  | 
|                                                |                                 |                         |        |       |      |   |        |       | 
|Commission expense                              |                                 | $                       | 3,986  |       |      | $ | 4,489  |       |  | $ | 4,000  |      
|Premium tax expense                             |                                 |                         | 1,153  |       |      |   | 1,147  |       |  |   | 997    |      
|Other policy acquisition costs                  |                                 |                         | 2,815  |       |      |   | 2,769  |       |  |   | 3,381  |      
|                                                |                                 |                         |        |       |      |   |        |       | 
|                                                | Direct policy acquisition costs |                         |        | 7,954 |      |   |        | 8,405 |  |   |        | 8,378 | 
|Ceding commission on excess of loss reinsurance |                                 |                         | (2,498 | )     |      |   | (2,360 | )     |  |   | (1,500 | )    
|                                                |                                 |                         |        |       |      |   |        |       | 
|                                                | Total policy acquisition costs  |                         | $      | 5,456 |      |   | $      | 6,045 |  |   | $      | 6,878 | 
|                                                |                                 |                         |        |       |      |   |        |       | 





| |   |                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Gross premiums earned decreased in 2005 compared to 2004
    resulting in a corresponding decrease in policy acquisition
    costs;                                                                                                                                                                                                                                                           
|
| |  | Commission expense decreased to 6.7% of gross premiums earned in
    2005 from 7.1% in 2004 and 7.3% in 2003. The decreased
    commission rates are the result of the decrease in our new
    business in 2005 relative to 2004 and 2003 and the focus on
    reducing the commissions we pay. In all of our markets, we
    believe the commission rates we pay are marketplace competitive;
|
| |  | Premium tax expense paid to states was 1.9% of gross premiums
    earned in 2005, 1.8% of gross premiums earned in 2004 and 1.8%
    of gross premiums earned in 2003; and                                                                                                                                                                                                                    
|
| |  | Other policy acquisition costs consist of personnel and overhead
    costs, various state and regulatory assessments related to
    second injury funds and mandatory state pools, payroll audit
    vendor costs and                                                                                                                                                                         

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| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the net effect of assigned risk plan activity in the states in
    which we operate. Other policy acquisition costs were affected
    by the following: (i) in 2005, we recorded a $169,000
    increase in other policy acquisition costs reflecting a
    re-allocation of prior year mandatory reinsurance pool expenses,
    compared to a $468,000 increase recorded in 2004 and a
    $1.5 million increase recorded in 2003; and (ii) a
    general change related to the increase or decrease in gross
    premiums earned. Excluding the mandatory pool re-allocation
    discussed above, other policy acquisition costs as a percentage
    of gross premiums earned were 4.4% in 2005, 3.6% in 2004 and
    3.6% in 2003.

2006 Outlook:




| |   |                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our commission expense will continue to be affected by how much
    new business we write relative to renewal business as we pay
    higher commissions on new policies;
|
| |  | Premium tax accrual rates will remain relatively constant at
    approximately 2.0% in 2006; and                                                                        
|
| |  | Other underwriting expenses will continue to be affected by pool
    reimbursements offset by pool disbursements, the effect of which
    is not known at this time.    

General and Administrative Expenses:






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | General and administrative expenses increased in 2005 from 2004
    levels. Significant changes include: (i) we added staff and
    other general and administrative expenses to deliver the
    services associated with the service revenue increase to
    $4.4 million in 2005 from $633,000 in 2004; (ii) bonus
    expense was $1.5 million in 2005 compared to
    $1.3 million in 2004; and (iii) bad debt expense was
    $450,000 in 2005 compared to a benefit of $108,000 in 2004,
    principally due to customer bankruptcies in our Michigan region;
    and;
|
| |  | General and administrative expenses decreased in 2004 from 2003
    levels. Significant changes include: (i) the reversal of a
    previously recorded contingent reinsurance commission resulting
    in $375,000 in expense in 2003; (ii) bonus expense was
    $1.3 million in 2004 compared to $941,000 in 2003;
    (iii) bad debt expense was $400,000 lower in 2004; and
    (iv) we operated with fewer average headcount in 2004
    compared to 2003.                                                                                                             

2006 Outlook:




| |   |                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our contract to manage the ARP business and continued growth in
    our service revenue will require staff additions and increase
    our general and administrative expense;               
|
| |  | We will make appropriate investments in infrastructure to
    position us for future growth of our service revenue and to
    continue to support and enhance our core insurance operations;
|
| |  | Although we have no current plans to open additional offices in
    2006, if growth opportunities warrant opening a new office, we
    will evaluate the opportunity as presented; and      
|
| |  | All expenses will continue to be aggressively managed and
    reduced where appropriate.                                                                                                    

Income Taxes:


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year-to


2006 Outlook:


INVESTMENTS






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UNPAID CLAIM AND CLAIM SETTLEMENT EXPENSES AND REINSURANCE
RECOVERABLES












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|                                                        |                                                                               |                         |                 |         |        |        |   |         |        |        |   |         |         |        | 
|------------------------------------------------------- | ----------------------------------------------------------------------------- | ----------------------- | --------------- | ------- | ------ | ------ | - | ------- | ------ | ------ | - | ------- | ------- | ------ | 
|                                                        |                                                                               | Year Ended December 31, |                
|                                                        |                                                                               |                         |                
|                                                        |                                                                               | 2005                    |                 |         | 2004   |        |   | 2003    |       
|                                                        |                                                                               |                         |                 |         |        |        |   |         |       
|Gross Reserves for Claim and Claim Settlement Expenses: |                                                                               |                         |                 |         |        |        |   |         |        |        |   |        
|                                                        | Gross reserves for claim and claim settlement expenses,
    beginning of year |                         | $               | 156,123 |        |        | $ | 150,044 |        |        | $ | 181,262 |        
|                                                        | Provision increases (decreases) for claim and claim
    settlement expenses:  |                         |                 |         |        |        |   |         |        |        |   |         |        
|                                                        |                                                                               | Current year            |                 |         | 43,936 |        |   |         | 53,563 |        |   |         | 42,777  |       
|                                                        |                                                                               | Prior years             |                 |         | (3,231 | )      |   |         | (4,654 | )      |   |         | (21,846 | )     
|                                                        |                                                                               |                         |                 |         |        |        |   |         |       
|                                                        |                                                                               |                         | Total provision |         |        | 40,705 |   |         |        | 48,909 |   |         |         | 20,931 | 
|                                                        | Payments for claim and claim settlement expenses:                             |                         |                 |         |        |        |   |         |        |        |   |         |        
|                                                        |                                                                               | Current year            |                 |         | 11,748 |        |   |         | 12,666 |        |   |         | 11,077  |       
|                                                        |                                                                               | Prior years             |                 |         | 24,939 |        |   |         | 30,164 |        |   |         | 41,072  |       
|                                                        |                                                                               |                         |                 |         |        |        |   |         |       
|                                                        |                                                                               |                         | Total payments  |         |        | 36,687 |   |         |        | 42,830 |   |         |         | 52,149 | 
|                                                        |                                                                               |                         |                 |         |        |        |   |         |       
|                                                        | Gross reserves for claim and claim settlement expenses, end of
    year       |                         | $               | 160,141 |        |        | $ | 156,123 |        |        | $ | 150,044 |        
|                                                        |                                                                               |                         |                 |         |        |        |   |         |       



|                                                      |                                                                              |                                                                   |                 |        |        |        |   |        |        |        |   |        |        |        | 
|----------------------------------------------------- | ---------------------------------------------------------------------------- | ----------------------------------------------------------------- | --------------- | ------ | ------ | ------ | - | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                                      |                                                                              | Year Ended December 31,                                           |                
|                                                      |                                                                              |                                                                   |                
|                                                      |                                                                              | 2005                                                              |                 |        | 2004   |        |   | 2003   |       
|                                                      |                                                                              |                                                                   |                 |        |        |        |   |        |       
|Net Reserves for Claim and Claim Settlement Expenses: |                                                                              |                                                                   |                 |        |        |        |   |        |        |        |   |       
|                                                      | Net reserves for claim and claim settlement expenses, beginning
    of year  |                                                                   | $               | 78,401 |        |        | $ | 78,578 |        |        | $ | 89,440 |       
|                                                      | Plus: Deferred retrospective reinsurance gain, beginning of year             |                                                                   |                 | 49     |        |        |   | 49     |        |        |   | 49     |       
|                                                      | Provision increases (decreases) for claim and claim
    settlement expenses: |                                                                   |                 |        |        |        |   |        |        |        |   |        |       
|                                                      |                                                                              | Current year                                                      |                 |        | 36,264 |        |   |        | 42,583 |        |   |        | 33,954 |       
|                                                      |                                                                              | Prior years                                                       |                 |        | (5,457 | )      |   |        | (7,047 | )      |   |        | (6,698 | )     
|                                                      |                                                                              |                                                                   |                 |        |        |        |   |        |       
|                                                      |                                                                              |                                                                   | Total provision |        |        | 30,807 |   |        |        | 35,536 |   |        |        | 27,256 | 
|                                                      | Payments for claim and claim settlement expenses:                            |                                                                   |                 |        |        |        |   |        |        |        |   |        |       
|                                                      |                                                                              | Current year                                                      |                 |        | 11,748 |        |   |        | 12,666 |        |   |        | 10,761 |       
|                                                      |                                                                              | Prior years                                                       |                 |        | 20,637 |        |   |        | 23,047 |        |   |        | 27,357 |       
|                                                      |                                                                              |                                                                   |                 |        |        |        |   |        |       
|                                                      |                                                                              |                                                                   | Total payments  |        |        | 32,385 |   |        |        | 35,713 |   |        |        | 38,118 | 
|                                                      | Less: Deferred retrospective reinsurance gain, end of year                   |                                                                   |                 | (49    | )      |        |   | (49    | )      |        |   | (49    | )     
|                                                      |                                                                              |                                                                   |                 |        |        |        |   |        |       
|                                                      |                                                                              | Net reserves for claim and claim settlement expenses, end of year |                 | $      | 76,823 |        |   | $      | 78,401 |        |   | $      | 78,578 |       
|                                                      |                                                                              |                                                                   |                 |        |        |        |   |        |       

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|                          |                                                                     |                      |   |         |         |  |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |      |         |         |      |   |        |         |    |   |        |         |    |   |        |         |    |   |        |        |    |   |        |        |  
|------------------------- | ------------------------------------------------------------------- | -------------------- | - | ------- | ------- |  | - | ------- | ------- | - | ---- | ------- | ------- | ---- | - | ------- | ------- | - | - | ------- | ------- | - | ---- | ------- | ------- | ---- | - | ------ | ------- | -- | - | ------ | ------- | -- | - | ------ | ------- | -- | - | ------ | ------ | -- | - | ------ | ------ | -
|                          |                                                                     | December 31, (000s) |  
|                          |                                                                     |                      |  
|                          |                                                                     | 2005                 |   |         | 2004    |  |   | 2003    |         |   | 2002 |         |         | 2001 |   |         | 2000    |   |   | 1999    |         |   | 1998 |         |         | 1997 |   |        | 1996    |    |   | 1995   |        
|                          |                                                                     |                      |   |         |         |  |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |      |         |         |      |   |        |         |    |   |        |        
|Loss Reserve Development: |                                                                     |                      |   |         |         |  |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |      |         |         |      |   |        |         |    |   |        |         |    |   |        |         |    |   |        |        |    |   |       
|                          | Gross reserves for unpaid claim and claim settlement expenses       |                      | $ | 160,141 |         |  | $ | 156,123 |         |   | $    | 150,044 |         |      | $ | 181,262 |         |   | $ | 181,310 |         |   | $    | 128,841 |         |      | $ | 99,831 |         |    | $ | 97,269 |         |    | $ | 61,069 |         |    | $ | 49,256 |        |    | $ | 37,138 |       
|                          | Paid (cumulative) as of:                                            |                      |   |         |         |  |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |      |         |         |      |   |        |         |    |   |        |         |    |   |        |         |    |   |        |        |    |   |        |       
|                          |                                                                     | One year later       |   |         |         |  |   | $       | 24,937  |   |      | $       | 30,164  |      |   | $       | 41,072  |   |   | $       | 46,043  |   |      | $       | 49,241  |      |   | $      | 45,933  |    |   | $      | 37,062  |    |   | $      | 28,315  |    |   | $      | 20,529 |    |   | $      | 10,032 |  
|                          |                                                                     | Two years later      |   |         |         |  |   |         |         |   |      |         | 43,436  |      |   |         | 61,363  |   |   |         | 17,086  |   |      |         | 74,681  |      |   |        | 67,442  |    |   |        | 56,031  |    |   |        | 42,889  |    |   |        | 29,841 |    |   |        | 15,306 |  
|                          |                                                                     | Three years later    |   |         |         |  |   |         |         |   |      |         |         |      |   |         | 71,132  |   |   |         | 86,710  |   |      |         | 90,484  |      |   |        | 78,244  |    |   |        | 65,664  |    |   |        | 50,558  |    |   |        | 35,370 |    |   |        | 18,415 |  
|                          |                                                                     | Four years later     |   |         |         |  |   |         |         |   |      |         |         |      |   |         |         |   |   |         | 93,348  |   |      |         | 98,689  |      |   |        | 85,754  |    |   |        | 70,631  |    |   |        | 54,835  |    |   |        | 38,880 |    |   |        | 19,964 |  
|                          |                                                                     | Five years later     |   |         |         |  |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |      |         | 103,391 |      |   |        | 89,956  |    |   |        | 73,979  |    |   |        | 57,261  |    |   |        | 41,029 |    |   |        | 21,289 |  
|                          |                                                                     | Six years later      |   |         |         |  |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |      |         |         |      |   |        | 93,045  |    |   |        | 76,311  |    |   |        | 59,012  |    |   |        | 41,980 |    |   |        | 22,117 |  
|                          |                                                                     | Seven years later    |   |         |         |  |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |      |         |         |      |   |        |         |    |   |        | 78,476  |    |   |        | 60,352  |    |   |        | 42,728 |    |   |        | 22,702 |  
|                          |                                                                     | Eight years later    |   |         |         |  |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |      |         |         |      |   |        |         |    |   |        |         |    |   |        | 61,637  |    |   |        | 43,511 |    |   |        | 23,020 |  
|                          |                                                                     | Nine years later     |   |         |         |  |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |      |         |         |      |   |        |         |    |   |        |         |    |   |        |         |    |   |        | 44,208 |    |   |        | 23,448 |  
|                          |                                                                     | Ten years later      |   |         |         |  |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |      |         |         |      |   |        |         |    |   |        |         |    |   |        |         |    |   |        |        |    |   |        | 23,809 |  
|                          | Reserves re-estimated as of:                                        |                      |   |         |         |  |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |      |         |         |      |   |        |         |    |   |        |         |    |   |        |         |    |   |        |        |    |   |        |       
|                          |                                                                     | End of year          |   | $       | 160,141 |  |   | $       | 156,123 |   |      | $       | 150,044 |      |   | $       | 181,262 |   |   | $       | 181,310 |   |      | $       | 128,841 |      |   | $      | 99,831  |    |   | $      | 97,269  |    |   | $      | 61,069  |    |   | $      | 49,256 |    |   | $      | 37,138 |  
|                          |                                                                     | One year later       |   |         |         |  |   |         | 152,892 |   |      |         | 145,389 |      |   |         | 159,415 |   |   |         | 183,923 |   |      |         | 160,065 |      |   |        | 118,205 |    |   |        | 85,384  |    |   |        | 72,443  |    |   |        | 44,862 |    |   |        | 26,086 |  
|                          |                                                                     | Two years later      |   |         |         |  |   |         |         |   |      |         | 147,117 |      |   |         | 160,147 |   |   |         | 166,738 |   |      |         | 168,222 |      |   |        | 130,120 |    |   |        | 95,696  |    |   |        | 64,499  |    |   |        | 48,233 |    |   |        | 22,295 |  
|                          |                                                                     | Three years later    |   |         |         |  |   |         |         |   |      |         |         |      |   |         | 163,724 |   |   |         | 168,892 |   |      |         | 157,251 |      |   |        | 137,002 |    |   |        | 101,893 |    |   |        | 73,031  |    |   |        | 44,587 |    |   |        | 24,111 |  
|                          |                                                                     | Four years later     |   |         |         |  |   |         |         |   |      |         |         |      |   |         |         |   |   |         | 174,451 |   |      |         | 161,905 |      |   |        | 129,819 |    |   |        | 107,522 |    |   |        | 75,554  |    |   |        | 50,552 |    |   |        | 23,054 |  
|                          |                                                                     | Five years later     |   |         |         |  |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |      |         | 168,190 |      |   |        | 132,813 |    |   |        | 103,064 |    |   |        | 79,398  |    |   |        | 52,063 |    |   |        | 26,485 |  
|                          |                                                                     | Six years later      |   |         |         |  |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |      |         |         |      |   |        | 138,782 |    |   |        | 105,705 |    |   |        | 76,610  |    |   |        | 54,327 |    |   |        | 27,237 |  
|                          |                                                                     | Seven years later    |   |         |         |  |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |      |         |         |      |   |        |         |    |   |        | 110,136 |    |   |        | 77,921  |    |   |        | 53,047 |    |   |        | 28,411 |  
|                          |                                                                     | Eight years later    |   |         |         |  |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |      |         |         |      |   |        |         |    |   |        |         |    |   |        | 80,855  |    |   |        | 54,250 |    |   |        | 28,533 |  
|                          |                                                                     | Nine years later     |   |         |         |  |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |      |         |         |      |   |        |         |    |   |        |         |    |   |        |         |    |   |        | 55,491 |    |   |        | 29,107 |  
|                          |                                                                     | Ten years later      |   |         |         |  |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |      |         |         |      |   |        |         |    |   |        |         |    |   |        |         |    |   |        |        |    |   |        | 29,627 |  
|                          | Initial reserves in excess of (less than)
    re-estimated reserves |                      |   |         |         |  |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |      |         |         |      |   |        |         |    |   |        |         |    |   |        |         |    |   |        |        |    |   |        |       
|                          |                                                                     | Amount               |   |         |         |  |   | $       | 3,231   |   |      | $       | 2,927   |      |   | $       | 17,538  |   |   | $       | 6,859   |   |      | $       | (39,349 | )    |   | $      | (38,951 | )  |   | $      | (12,867 | )  |   | $      | (19,786 | )  |   | $      | (6,235 | )  |   | $      | 7,511  |  
|                          |                                                                     | Percent              |   |         |         |  |   |         | 2.1     | % |      |         | 2.0     | %    |   |         | 9.7     | % |   |         | 3.8     | % |      |         | (30.5   | )%   |   |        | (39.0   | )% |   |        | (13.2   | )% |   |        | (32.4   | )% |   |        | (12.7  | )% |   |        | 20.2   | %







28



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##### Table of Contents







|                          |                                                                 |                   |   |         |        |  |   |         |        |   |      |         |        |      |   |         |        |   |   |         |        |   |      |         |        |      |   |        |         |    |   |        |        |    |   |        |         |    |   |        |        |    |   |        |        |  
|------------------------- | --------------------------------------------------------------- | ----------------- | - | ------- | ------ |  | - | ------- | ------ | - | ---- | ------- | ------ | ---- | - | ------- | ------ | - | - | ------- | ------ | - | ---- | ------- | ------ | ---- | - | ------ | ------- | -- | - | ------ | ------ | -- | - | ------ | ------- | -- | - | ------ | ------ | -- | - | ------ | ------ | -
|                          |                                                                 | December 31,      |  
|                          |                                                                 |                   |  
|                          |                                                                 | 2005              |   |         | 2004   |  |   | 2003    |        |   | 2002 |         |        | 2001 |   |         | 2000   |   |   | 1999    |        |   | 1998 |         |        | 1997 |   |        | 1996    |    |   | 1995   |       
|                          |                                                                 |                   |   |         |        |  |   |         |        |   |      |         |        |      |   |         |        |   |   |         |        |   |      |         |        |      |   |        |         |    |   |        |       
|Loss Reserve Development: |                                                                 |                   |   |         |        |  |   |         |        |   |      |         |        |      |   |         |        |   |   |         |        |   |      |         |        |      |   |        |         |    |   |        |        |    |   |        |         |    |   |        |        |    |   |       
|                          | Gross reserves for unpaid claim and claim settlement expenses   |                   | $ | 160,141 |        |  | $ | 156,123 |        |   | $    | 150,044 |        |      | $ | 181,262 |        |   | $ | 181,310 |        |   | $    | 128,841 |        |      | $ | 99,831 |         |    | $ | 97,269 |        |    | $ | 61,069 |         |    | $ | 49,256 |        |    | $ | 37,138 |       
|                          | Reinsurance recoverables                                        |                   |   | 83,318  |        |  |   | 77,722  |        |   |      | 71,466  |        |      |   | 91,822  |        |   |   | 90,115  |        |   |      | 61,845  |        |      |   | 41,179 |         |    |   | 21,403 |        |    |   | 5,374  |         |    |   | 6,183  |        |    |   | 8,312  |       
|                          |                                                                 |                   |   |         |        |  |   |         |        |   |      |         |        |      |   |         |        |   |   |         |        |   |      |         |        |      |   |        |         |    |   |        |       
|                          | Net reserves for unpaid claim and claim settlement expenses     |                   | $ | 76,823  |        |  | $ | 78,401  |        |   | $    | 78,578  |        |      | $ | 89,440  |        |   | $ | 91,195  |        |   | $    | 66,996  |        |      | $ | 58,652 |         |    | $ | 75,866 |        |    | $ | 55,695 |         |    | $ | 43,073 |        |    | $ | 28,826 |       
|                          |                                                                 |                   |   |         |        |  |   |         |        |   |      |         |        |      |   |         |        |   |   |         |        |   |      |         |        |      |   |        |         |    |   |        |       
|                          | Paid (cumulative) as of:                                        |                   |   |         |        |  |   |         |        |   |      |         |        |      |   |         |        |   |   |         |        |   |      |         |        |      |   |        |         |    |   |        |        |    |   |        |         |    |   |        |        |    |   |        |       
|                          |                                                                 | One year later    |   |         |        |  |   | $       | 20,637 |   |      | $       | 23,047 |      |   | $       | 27,357 |   |   | $       | 30,285 |   |      | $       | 32,028 |      |   | $      | 35,932  |    |   | $      | 34,380 |    |   | $      | 27,737  |    |   | $      | 19,439 |    |   | $      | 8,595  |  
|                          |                                                                 | Two years later   |   |         |        |  |   |         |        |   |      |         | 32,068 |      |   |         | 40,956 |   |   |         | 43,825 |   |      |         | 43,823 |      |   |        | 48,069  |    |   |        | 49,958 |    |   |        | 42,046  |    |   |        | 28,173 |    |   |        | 12,894 |  
|                          |                                                                 | Three years later |   |         |        |  |   |         |        |   |      |         |        |      |   |         | 46,673 |   |   |         | 50,871 |   |      |         | 49,531 |      |   |        | 54,360  |    |   |        | 56,376 |    |   |        | 49,671  |    |   |        | 33,438 |    |   |        | 15,521 |  
|                          |                                                                 | Four years later  |   |         |        |  |   |         |        |   |      |         |        |      |   |         |        |   |   |         | 54,078 |   |      |         | 53,130 |      |   |        | 58,113  |    |   |        | 60,453 |    |   |        | 53,814  |    |   |        | 36,904 |    |   |        | 16,869 |  
|                          |                                                                 | Five years later  |   |         |        |  |   |         |        |   |      |         |        |      |   |         |        |   |   |         |        |   |      |         | 55,342 |      |   |        | 60,690  |    |   |        | 63,278 |    |   |        | 56,140  |    |   |        | 38,919 |    |   |        | 18,020 |  
|                          |                                                                 | Six years later   |   |         |        |  |   |         |        |   |      |         |        |      |   |         |        |   |   |         |        |   |      |         |        |      |   |        | 62,465  |    |   |        | 65,347 |    |   |        | 57,903  |    |   |        | 39,770 |    |   |        | 18,714 |  
|                          |                                                                 | Seven years later |   |         |        |  |   |         |        |   |      |         |        |      |   |         |        |   |   |         |        |   |      |         |        |      |   |        |         |    |   |        | 66,674 |    |   |        | 59,219  |    |   |        | 40,530 |    |   |        | 19,200 |  
|                          |                                                                 | Eight years later |   |         |        |  |   |         |        |   |      |         |        |      |   |         |        |   |   |         |        |   |      |         |        |      |   |        |         |    |   |        |        |    |   |        | 60,442  |    |   |        | 41,289 |    |   |        | 19,530 |  
|                          |                                                                 | Nine years later  |   |         |        |  |   |         |        |   |      |         |        |      |   |         |        |   |   |         |        |   |      |         |        |      |   |        |         |    |   |        |        |    |   |        |         |    |   |        | 41,924 |    |   |        | 19,934 |  
|                          |                                                                 | Ten years later   |   |         |        |  |   |         |        |   |      |         |        |      |   |         |        |   |   |         |        |   |      |         |        |      |   |        |         |    |   |        |        |    |   |        |         |    |   |        |        |    |   |        | 20,232 |  
|                          | Reserves re-estimated as of:                                    |                   |   |         |        |  |   |         |        |   |      |         |        |      |   |         |        |   |   |         |        |   |      |         |        |      |   |        |         |    |   |        |        |    |   |        |         |    |   |        |        |    |   |        |       
|                          |                                                                 | End of year       |   | $       | 76,823 |  |   | $       | 78,401 |   |      | $       | 78,578 |      |   | $       | 89,440 |   |   | $       | 91,195 |   |      | $       | 66,996 |      |   | $      | 58,652  |    |   | $      | 75,866 |    |   | $      | 55,695  |    |   | $      | 43,073 |    |   | $      | 28,826 |  
|                          |                                                                 | One year later    |   |         |        |  |   |         | 72,944 |   |      |         | 71,531 |      |   |         | 82,742 |   |   |         | 82,839 |   |      |         | 74,727 |      |   |        | 74,181  |    |   |        | 67,753 |    |   |        | 66,674  |    |   |        | 39,988 |    |   |        | 20,751 |  
|                          |                                                                 | Two years later   |   |         |        |  |   |         |        |   |      |         | 69,831 |      |   |         | 78,482 |   |   |         | 76,545 |   |      |         | 71,202 |      |   |        | 76,502  |    |   |        | 77,205 |    |   |        | 61,075  |    |   |        | 43,484 |    |   |        | 18,469 |  
|                          |                                                                 | Three years later |   |         |        |  |   |         |        |   |      |         |        |      |   |         | 78,037 |   |   |         | 77,055 |   |      |         | 71,911 |      |   |        | 75,321  |    |   |        | 78,391 |    |   |        | 68,065  |    |   |        | 41,451 |    |   |        | 19,796 |  
|                          |                                                                 | Four years later  |   |         |        |  |   |         |        |   |      |         |        |      |   |         |        |   |   |         | 78,054 |   |      |         | 71,177 |      |   |        | 77,443  |    |   |        | 78,772 |    |   |        | 69,474  |    |   |        | 45,959 |    |   |        | 19,389 |  
|                          |                                                                 | Five years later  |   |         |        |  |   |         |        |   |      |         |        |      |   |         |        |   |   |         |        |   |      |         | 73,660 |      |   |        | 75,588  |    |   |        | 80,522 |    |   |        | 69,595  |    |   |        | 47,147 |    |   |        | 21,254 |  
|                          |                                                                 | Six years later   |   |         |        |  |   |         |        |   |      |         |        |      |   |         |        |   |   |         |        |   |      |         |        |      |   |        | 79,204  |    |   |        | 78,878 |    |   |        | 69,926  |    |   |        | 47,126 |    |   |        | 22,568 |  
|                          |                                                                 | Seven years later |   |         |        |  |   |         |        |   |      |         |        |      |   |         |        |   |   |         |        |   |      |         |        |      |   |        |         |    |   |        | 82,676 |    |   |        | 69,095  |    |   |        | 46,969 |    |   |        | 22,388 |  
|                          |                                                                 | Eight years later |   |         |        |  |   |         |        |   |      |         |        |      |   |         |        |   |   |         |        |   |      |         |        |      |   |        |         |    |   |        |        |    |   |        | 71,540  |    |   |        | 47,039 |    |   |        | 22,342 |  
|                          |                                                                 | Nine years later  |   |         |        |  |   |         |        |   |      |         |        |      |   |         |        |   |   |         |        |   |      |         |        |      |   |        |         |    |   |        |        |    |   |        |         |    |   |        | 48,288 |    |   |        | 22,727 |  
|                          |                                                                 | Ten years later   |   |         |        |  |   |         |        |   |      |         |        |      |   |         |        |   |   |         |        |   |      |         |        |      |   |        |         |    |   |        |        |    |   |        |         |    |   |        |        |    |   |        | 22,950 |  
|                          | Initial reserves in excess of (less than) re-estimated reserves |                   |   |         |        |  |   |         |        |   |      |         |        |      |   |         |        |   |   |         |        |   |      |         |        |      |   |        |         |    |   |        |        |    |   |        |         |    |   |        |        |    |   |        |       
|                          |                                                                 | Amount            |   |         |        |  |   | $       | 5,457  |   |      | $       | 8,747  |      |   | $       | 11,403 |   |   | $       | 13,141 |   |      | $       | (6,664 | )    |   | $      | (20,552 | )  |   | $      | (6,810 | )  |   | $      | (15,845 | )  |   | $      | (5,215 | )  |   | $      | 5,876  |  
|                          |                                                                 | Percent           |   |         |        |  |   |         | 7.0    | % |      |         | 11.1   | %    |   |         | 12.7   | % |   |         | 14.4   | % |      |         | (9.9   | )%   |   |        | (35.0   | )% |   |        | (9.0   | )% |   |        | (28.4   | )% |   |        | (12.1  | )% |   |        | 20.4   | %







29



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##### Table of Contents











|               |  |                                                             |        |              |          |   |        |      |  |   |        |   |  |      |       |   |      |   |        |      |  |            |         |   |  |      |       |   |          |   |         |      |  |   |       |   |  |   |       |   |  |   |        |  
|-------------- |  | ----------------------------------------------------------- | ------ | ------------ | -------- | - | ------ | ---- |  | - | ------ | - |  | ---- | ----- | - | ---- | - | ------ | ---- |  | ---------- | ------- | - |  | ---- | ----- | - | -------- | - | ------- | ---- |  | - | ----- | - |  | - | ----- | - |  | - | ------ | -
|               |  |                                                             |        |              |          |   |        |      |  |   |        |   |  |      |       |   |      |   |        |      |  | Cumulative |        
|               |  |                                                             |        | Re-estimates |         
|               |  | Effect of Reserve Re-estimates on Calendar Year Operations: |        |              | for each |  
|               |  |                                                             |        |              | Accident |  
|               |  | 2005                                                        |        |              | 2004     |   |        | 2003 |  |   | 2002   |   |  | 2001 |       |   | 2000 |   |        | 1999 |  |            | 1998    |   |  | 1997 |       |   | Pre-1997 |   |         | Year | 
|               |  |                                                             |        |              |          |   |        |      |  |   |        |   |  |      |       |   |      |   |        |      |  |            |         |   |  |      |       |   |          |   |         |      | 
|Accident Year: |  |                                                             |        |              |          |   |        |      |  |   |        |   |  |      |       |   |      |   |        |      |  |            |         |   |  |      |       |   |          |   |         |      |  |   |       |   |  |   |       |   |  |   |        |  
|1992           |  | $                                                           | (21    | )            |          | $ | 25     |      |  | $ | (30    | ) |  | $    | 2     |   |      | $ | (6     | )    |  | $          | (19     | ) |  | $    | 38    |   |          | $ | (15     | )    |  | $ | (37   | ) |  | $ | (110  | ) |  | $ | (173   | )
|1993           |  |                                                             | 12     |              |          |   | (98    | )    |  |   | 14     |   |  |      | 261   |   |      |   | (706   | )    |  |            | (160    | ) |  |      | 7     |   |          |   | (96     | )    |  |   | (42   | ) |  |   | 741   |   |  |   | (67    | )
|1994           |  |                                                             | 3      |              |          |   | (174   | )    |  |   | (77    | ) |  |      | 178   |   |      |   | (633   | )    |  |            | (459    | ) |  |      | (68   | ) |          |   | (574    | )    |  |   | 413   |   |  |   | 3,943 |   |  |   | 2,552  |  
|1995           |  |                                                             | (217   | )            |          |   | (138   | )    |  |   | 139    |   |  |      | (261  | ) |      |   | 31     |      |  |            | (1,227  | ) |  |      | 430   |   |          |   | (642    | )    |  |   | 1,948 |   |  |   | 4,604 |   |  |   | 4,667  |  
|1996           |  |                                                             | (1,026 | )            |          |   | 315    |      |  |   | 111    |   |  |      | (159  | ) |      |   | 126    |      |  |            | (2,643  | ) |  |      | 1,626 |   |          |   | (2,169  | )    |  |   | 803   |   |  |   |       |   |  |   | (3,016 | )
|1997           |  |                                                             | (1,196 | )            |          |   | 901    |      |  |   | (488   | ) |  |      | (142  | ) |      |   | (221   | )    |  |            | (2,482  | ) |  |      | 3,566 |   |          |   | (7,483  | )    |  |   |       |   |  |   |       |   |  |   | (7,545 | )
|1998           |  |                                                             | (1,353 | )            |          |   | 813    |      |  |   | (1,419 | ) |  |      | (320  | ) |      |   | 283    |      |  |            | (2,462  | ) |  |      | 2,514 |   |          |   |         |      |  |   |       |   |  |   |       |   |  |   | (1,944 | )
|1999           |  |                                                             | 182    |              |          |   | 211    |      |  |   | (372   | ) |  |      | 1,622 |   |      |   | (1,195 | )    |  |            | (6,077  | ) |  |      |       |   |          |   |         |      |  |   |       |   |  |   |       |   |  |   | (5,629 | )
|2000           |  |                                                             | 1,133  |              |          |   | (1,121 | )    |  |   | 1,413  |   |  |      | 2,344 |   |      |   | (5,410 | )    |  |            |         |   |  |      |       |   |          |   |         |      |  |   |       |   |  |   |       |   |  |   | (1,641 | )
|2001           |  |                                                             | 1,484  |              |          |   | 1,756  |      |  |   | 4,003  |   |  |      | 4,831 |   |      |   |        |      |  |            |         |   |  |      |       |   |          |   |         |      |  |   |       |   |  |   |       |   |  |   | 12,074 |  
|2002           |  |                                                             | 1,444  |              |          |   | 1,770  |      |  |   | 3,404  |   |  |      |       |   |      |   |        |      |  |            |         |   |  |      |       |   |          |   |         |      |  |   |       |   |  |   |       |   |  |   | 6,618  |  
|2003           |  |                                                             | 1,255  |              |          |   | 2,787  |      |  |   |        |   |  |      |       |   |      |   |        |      |  |            |         |   |  |      |       |   |          |   |         |      |  |   |       |   |  |   |       |   |  |   | 4,042  |  
|2004           |  |                                                             | 3,757  |              |          |   |        |      |  |   |        |   |  |      |       |   |      |   |        |      |  |            |         |   |  |      |       |   |          |   |         |      |  |   |       |   |  |   |       |   |  |   | 3,757  |  
|               |  |                                                             |        |              |          |   |        |      |  |   |        |   |  |      |       |   |      |   |        |      |  |            |         |   |  |      |       |   |          |   |         |      | 
|Total          |  | $                                                           | 5,457  |              |          | $ | 7,047  |      |  | $ | 6,698  |   |  | $    | 8,356 |   |      | $ | (7,731 | )    |  | $          | (15,529 | ) |  | $    | 8,113 |   |          | $ | (10,979 | )    |  | $ | 3,085 |   |  | $ | 9,178 |   |  | $ | 13,695 |  
|               |  |                                                             |        |              |          |   |        |      |  |   |        |   |  |      |       |   |      |   |        |      |  |            |         |   |  |      |       |   |          |   |         |      | 

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LIQUIDITY AND CAPITAL RESOURCES










31



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CONTRACTUAL OBLIGATIONS




|     |  |   |       | 
|---- |  | - | ----- | 
|2006 |  | $ | 1,022 | 
|2007 |  |   | 670   | 
|2008 |  |   | 125   | 
|2009 |  |   | 140   | 
|2010 |  |   | 59    | 

INTEREST RATE RISK








NAIC RISK-BASED CAPITAL STANDARDS




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REGULATION




EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS


03-1






33



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FORWARD-LOOKING STATEMENTS


10-K







|         |                                                               
|-------- | --------------------------------------------------------------
|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
    RISK

10-K


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|        |                                            
|------- | -------------------------------------------
|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS


|                                                                                                       |  |      |    | 
|------------------------------------------------------------------------------------------------------ |  | ---- | -- | 
|                                                                                                       |  | Page |   
|FINANCIAL STATEMENTS                                                                                   |  |      |   
|Report of Independent Registered Public
    Accounting Firm                                            |  |      | 36 | 
|Consolidated Balance Sheets 
    December 31, 2005 and 2004                                           |  |      | 37 | 
|Consolidated Statements of
    Income  Years Ended December 31, 2005, 2004 and
    2003               |  |      | 38 | 
|Consolidated Statements of
    Shareholders Equity  Years Ended
    December 31, 2005, 2004 and 2003 |  |      | 39 | 
|Consolidated Statements of Cash
    Flows  Years Ended December 31, 2005, 2004 and
    2003           |  |      | 40 | 
|Notes to Consolidated Financial
    Statements  Years Ended December 31, 2005, 2004
    and 2003      |  |      | 41 | 

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Report of Independent Registered Public Accounting Firm
















| |                      
| | ---------------------
| | /s/ ERNST & YOUNG LLP





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RTW, INC.





Consolidated Balance Sheets


December 31, 2005 and 2004


|                                                                  |                                                                                                                        |                                            |         |        |         |   |         |        |         | 
|----------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | ------ | ------- | - | ------- | ------ | ------- | 
|                                                                  |                                                                                                                        | 2005                                       |         |        | 2004    |  
|                                                                  |                                                                                                                        |                                            |         |        |         |  
|                                                                  |                                                                                                                        | (In thousands, except                      |        
|                                                                  |                                                                                                                        | share data)                                |        
|ASSETS                                                           
|Investments at fair value, amortized cost of $109,021 and $86,382 |                                                                                                                        | $                                          | 107,250 |        |         | $ | 86,954  |       
|Cash and cash equivalents                                         |                                                                                                                        |                                            | 21,914  |        |         |   | 39,379  |       
|Accrued investment income                                         |                                                                                                                        |                                            | 857     |        |         |   | 783     |       
|Premiums receivable, less allowance of $192 and $90               |                                                                                                                        |                                            | 3,382   |        |         |   | 3,792   |       
|Reinsurance recoverables:                                         |                                                                                                                        |                                            |         |        |         |   |         |       
|                                                                  | On unpaid claim and claim settlement expenses                                                                          |                                            |         | 83,318 |         |   |         | 77,722 |        
|                                                                  | On paid claim and claim settlement expenses                                                                            |                                            |         | 751    |         |   |         | 1,401  |        
|Deferred policy acquisition costs                                 |                                                                                                                        |                                            | 889     |        |         |   | 1,112   |       
|Furniture and equipment, net                                      |                                                                                                                        |                                            | 1,444   |        |         |   | 1,228   |       
|Other assets                                                      |                                                                                                                        |                                            | 8,666   |        |         |   | 8,136   |       
|                                                                  |                                                                                                                        |                                            |         |        |         |  
|                                                                  |                                                                                                                        | Total assets                               |         | $      | 228,471 |   |         | $      | 220,507 | 
|                                                                  |                                                                                                                        |                                            |         |        |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                             
|Unpaid claim and claim settlement expenses                        |                                                                                                                        | $                                          | 160,141 |        |         | $ | 156,123 |       
|Unearned premiums                                                 |                                                                                                                        |                                            | 8,341   |        |         |   | 10,497  |       
|Accrued expenses and other liabilities                            |                                                                                                                        |                                            | 9,411   |        |         |   | 8,356   |       
|                                                                  |                                                                                                                        |                                            |         |        |         |  
|                                                                  |                                                                                                                        | Total liabilities                          |         |        | 177,893 |   |         |        | 174,976 | 
|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 12,500,000 shares;
    issued and outstanding 5,441,000 and 5,322,000 shares    |                                            |         | 21,365 |         |   |         | 21,071 |        
|                                                                  | Retained earnings                                                                                                      |                                            |         | 30,364 |         |   |         | 24,082 |        
|                                                                  | Accumulated other comprehensive (loss) income                                                                          |                                            |         | (1,151 | )       |   |         | 378    |        
|                                                                  |                                                                                                                        |                                            |         |        |         |  
|                                                                  |                                                                                                                        | Total shareholders equity                 |         |        | 50,578  |   |         |        | 45,531  | 
|                                                                  |                                                                                                                        |                                            |         |        |         |  
|                                                                  |                                                                                                                        | Total liabilities and shareholders equity |         | $      | 228,471 |   |         | $      | 220,507 | 
|                                                                  |                                                                                                                        |                                            |         |        |         |  



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RTW, INC.





Consolidated Statements of Income


Years Ended December 31, 2005, 2004 and 2003


|                                     |                                     |                             |                               |                            |      |        |        |           |     |        |       |           |     |        |       | 
|------------------------------------ | ----------------------------------- | --------------------------- | ----------------------------- | -------------------------- | ---- | ------ | ------ | --------- | --- | ------ | ----- | --------- | --- | ------ | ----- | 
|                                     |                                     | 2005                        |                               |                            | 2004 |        |        | 2003      |    
|                                     |                                     |                             |                               |                            |      |        |        |           |    
|                                     |                                     | (In thousands, except share |                              
|                                     |                                     | and per share data)         |                              
|Revenues:                            |                                     |                             |                               |                            |      |        |        |           |     |        |       |          
|                                     | Gross premiums earned               |                             | $                             | 59,872                     |      |        | $      | 63,370    |     |        | $     | 54,431    |    
|                                     | Premiums ceded                      |                             |                               | (10,452                    | )    |        |        | (9,688    | )   |        |       | (8,141    | )  
|                                     |                                     |                             |                               |                            |      |        |        |           |    
|                                     |                                     |                             | Premiums earned               |                            |      | 49,420 |        |           |     | 53,682 |       |           |     | 46,290 |      
|                                     | Net investment income               |                             |                               | 4,613                      |      |        |        | 3,667     |     |        |       | 4,299     |    
|                                     | Realized investment gains (losses): |                             |                               |                            |      |        |        |           |     |        |       |           |    
|                                     |                                     | Realized investment gains   |                               |                            | 584  |        |        |           | 708 |        |       |           | 685 |       
|                                     |                                     | Realized investment losses  |                               |                            | (4   | )      |        |           | (3  | )      |       |           |    |       
|                                     |                                     |                             |                               |                            |      |        |        |           |    
|                                     |                                     |                             | Net realized investment gains |                            |      | 580    |        |           |     | 705    |       |           |     | 685    |      
|                                     | Service revenue                     |                             |                               | 4,398                      |      |        |        | 633       |     |        |       | 109       |    
|                                     |                                     |                             |                               |                            |      |        |        |           |    
|                                     |                                     |                             | Total revenues                |                            |      | 59,011 |        |           |     | 58,687 |       |           |     | 51,383 |      
|Expenses:                            |                                     |                             |                               |                            |      |        |        |           |     |        |       |          
|                                     | Claim and claim settlement expenses |                             |                               | 30,807                     |      |        |        | 35,536    |     |        |       | 27,256    |    
|                                     | Policy acquisition costs            |                             |                               | 5,456                      |      |        |        | 6,045     |     |        |       | 6,878     |    
|                                     | General and administrative expenses |                             |                               | 12,669                     |      |        |        | 9,034     |     |        |       | 10,614    |    
|                                     |                                     |                             |                               |                            |      |        |        |           |    
|                                     |                                     |                             | Total expenses                |                            |      | 48,932 |        |           |     | 50,615 |       |           |     | 44,748 |      
|                                     |                                     |                             |                               |                            |      |        |        |           |    
|                                     |                                     |                             |                               | Income from operations     |      |        | 10,079 |           |     |        | 8,072 |           |     |        | 6,635 | 
|                                     | Interest expense                    |                             |                               |                           |      |        |        |          |     |        |       | 48        |    
|                                     |                                     |                             |                               |                            |      |        |        |           |    
|                                     |                                     |                             |                               | Income before income taxes |      |        | 10,079 |           |     |        | 8,072 |           |     |        | 6,587 | 
|Income tax expense (benefit)         |                                     |                             | 4,081                         |                            |      |        | (1,869 | )         |     |        | (412  | )        
|                                     |                                     |                             |                               |                            |      |        |        |           |    
|                                     |                                     |                             |                               | Net income                 |      | $      | 5,998  |           |     | $      | 9,941 |           |     | $      | 6,999 | 
|                                     |                                     |                             |                               |                            |      |        |        |           |    
|Income per share:                    |                                     |                             |                               |                            |      |        |        |           |     |        |       |          
|                                     | Basic income per share              |                             | $                             | 1.11                       |      |        | $      | 1.90      |     |        | $     | 1.37      |    
|                                     |                                     |                             |                               |                            |      |        |        |           |    
|                                     | Diluted income per share            |                             | $                             | 1.06                       |      |        | $      | 1.81      |     |        | $     | 1.32      |    
|                                     |                                     |                             |                               |                            |      |        |        |           |    
|Weighted average shares outstanding: |                                     |                             |                               |                            |      |        |        |           |     |        |       |          
|                                     | Basic shares outstanding            |                             |                               | 5,399,000                  |      |        |        | 5,233,000 |     |        |       | 5,114,000 |    
|                                     |                                     |                             |                               |                            |      |        |        |           |    
|                                     | Diluted shares outstanding          |                             |                               | 5,663,000                  |      |        |        | 5,487,000 |     |        |       | 5,296,000 |    
|                                     |                                     |                             |                               |                            |      |        |        |           |    



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RTW, INC.





Consolidated Statements of Shareholders Equity


Years Ended December 31, 2005, 2004 and 2003


|                             |                               |                                                |                                        |                      |        |   |  |             |               |        |        |       |       |               |        |   |   |        |        |     |       |        |   | 
|---------------------------- | ----------------------------- | ---------------------------------------------- | -------------------------------------- | -------------------- | ------ | - |  | ----------- | ------------- | ------ | ------ | ----- | ----- | ------------- | ------ | - | - | ------ | ------ | --- | ----- | ------ | - | 
|                             |                               |                                                |                                        |                      |        |   |  | Accumulated |               |        |       
|                             |                               |                                                |                                        |                      |        |   |  | Other       |               |        |       
|                             |                               |                                                |                                        | Comprehensive        |        |   |  |             | Comprehensive |        |        | Total |      
|                             |                               | Common                                         |                                        |                      | Income |   |  | Retained    |               |        | Income |       |       | Shareholders |       
|                             |                               | Stock                                          |                                        |                      | (Loss) |   |  | Earnings    |               |        | (Loss) |       |       | Equity        |       
|                             |                               |                                                |                                        |                      |        |   |  |             |               |        |        |       |       |               |       
|                             |                               | (In thousands)                                 |                                       
|Balance at January 1, 2003   |                               | $                                              | 20,619                                 |                      |        |   |  |             |               | $      | 6,971  |       |       | $             | 2,220  |   |   | $      | 29,810 |    
|                             | Comprehensive income (loss):  |                                                |                                        |                      |        |   |  |             |               |        |        |       |       |               |        |   |   |        |        |     |      
|                             |                               | Net income                                     |                                        |                      |       |   |  | $           | 6,999         |        |        |       | 6,999 |               |        |   |  |        |        |     | 6,999 |       
|                             |                               | Other comprehensive income (loss), net of tax: |                                        |                      |        |   |  |             |               |        |        |       |       |               |        |   |   |        |        |     |       |       
|                             |                               |                                                | Change in unrealized investment gains  |                      |        |  |  |             |               | (1,247 | )      |       |       |              |        |   |   | (1,247 | )      |     |       | (1,247 | )
|                             |                               |                                                |                                        |                      |        |   |  |             |               |        |        |       |       |               |       
|                             |                               |                                                |                                        | Comprehensive income |        |   |  |             |               | $      | 5,752  |       |       |               |        |   |   |        |        |     |       |        |   | 
|                             |                               |                                                |                                        |                      |        |   |  |             |               |        |        |       |       |               |       
|                             | Retirement of common stock    |                                                |                                        | (37                  | )      |   |  |             |               |        |        |      |       |               |        |  |   |        |        | (37 | )    
|                             | Stock options exercised       |                                                |                                        | 19                   |        |   |  |             |               |        |        |      |       |               |        |  |   |        |        | 19  |      
|                             | Issuance of shares under ESPP |                                                |                                        | 43                   |        |   |  |             |               |        |        |      |       |               |        |  |   |        |        | 43  |      
|                             |                               |                                                |                                        |                      |        |   |  |             |               |        |        |       |       |               |       
|Balance at December 31, 2003 |                               |                                                | 20,644                                 |                      |        |   |  |             |               |        | 13,970 |       |       |               | 973    |   |   |        | 35,587 |    
|                             | Comprehensive income (loss):  |                                                |                                        |                      |        |   |  |             |               |        |        |       |       |               |        |   |   |        |        |     |      
|                             |                               | Net income                                     |                                        |                      |       |   |  | $           | 9,941         |        |        |       | 9,941 |               |        |   |  |        |        |     | 9,941 |       
|                             |                               | Other comprehensive income (loss), net of tax: |                                        |                      |        |   |  |             |               |        |        |       |       |               |        |   |   |        |        |     |       |       
|                             |                               |                                                | Change in unrealized investment gains  |                      |        |  |  |             |               | (595   | )      |       |       |              |        |   |   | (595   | )      |     |       | (595   | )
|                             |                               |                                                |                                        |                      |        |   |  |             |               |        |        |       |       |               |       
|                             |                               |                                                |                                        | Comprehensive income |        |   |  |             |               | $      | 9,346  |       |       |               |        |   |   |        |        |     |       |        |   | 
|                             |                               |                                                |                                        |                      |        |   |  |             |               |        |        |       |       |               |       
|                             | Stock options exercised       |                                                |                                        | 362                  |        |   |  |             |               |        |        | 171   |       |               |        |  |   |        |        | 533 |      
|                             | Issuance of shares under ESPP |                                                |                                        | 65                   |        |   |  |             |               |        |        |      |       |               |        |  |   |        |        | 65  |      
|                             |                               |                                                |                                        |                      |        |   |  |             |               |        |        |       |       |               |       
|Balance at December 31, 2004 |                               |                                                | 21,071                                 |                      |        |   |  |             |               |        | 24,082 |       |       |               | 378    |   |   |        | 45,531 |    
|                             | Comprehensive income:         |                                                |                                        |                      |        |   |  |             |               |        |        |       |       |               |        |   |   |        |        |     |      
|                             |                               | Net income                                     |                                        |                      |       |   |  | $           | 5,998         |        |        |       | 5,998 |               |        |   |  |        |        |     | 5,998 |       
|                             |                               | Other comprehensive income (loss), net of tax: |                                        |                      |        |   |  |             |               |        |        |       |       |               |        |   |   |        |        |     |       |       
|                             |                               |                                                | Change in unrealized investment losses |                      |        |  |  |             |               | (1,529 | )      |       |       |              |        |   |   | (1,529 | )      |     |       | (1,529 | )
|                             |                               |                                                |                                        |                      |        |   |  |             |               |        |        |       |       |               |       
|                             |                               |                                                |                                        | Comprehensive income |        |   |  |             |               | $      | 4,469  |       |       |               |        |   |   |        |        |     |       |        |   | 
|                             |                               |                                                |                                        |                      |        |   |  |             |               |        |        |       |       |               |       
|                             | Stock options exercised       |                                                |                                        | 195                  |        |   |  |             |               |        |        | 284   |       |               |        |  |   |        |        | 479 |      
|                             | Issuance of shares under ESPP |                                                |                                        | 99                   |        |   |  |             |               |        |        |      |       |               |        |  |   |        |        | 99  |      
|                             |                               |                                                |                                        |                      |        |   |  |             |               |        |        |       |       |               |       
|Balance at December 31, 2005 |                               | $                                              | 21,365                                 |                      |        |   |  |             |               | $      | 30,364 |       |       | $             | (1,151 | ) |   | $      | 50,578 |    
|                             |                               |                                                |                                        |                      |        |   |  |             |               |        |        |       |       |               |       



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RTW, INC.





Consolidated Statements of Cash Flows


Years Ended December 31, 2005, 2004 and 2003


|                                                     |                                                                                       |                                    |                                               |                                                     |       |        |         |         |        |        |        |         |       |         |        |  
|---------------------------------------------------- | ------------------------------------------------------------------------------------- | ---------------------------------- | --------------------------------------------- | --------------------------------------------------- | ----- | ------ | ------- | ------- | ------ | ------ | ------ | ------- | ----- | ------- | ------ | -
|                                                     |                                                                                       | 2005                               |                                               |                                                     | 2004  |        |         | 2003    |       
|                                                     |                                                                                       |                                    |                                               |                                                     |       |        |         |         |       
|                                                     |                                                                                       | (In thousands)                     |                                              
|Cash flows from operating activities:                |                                                                                       |                                    |                                               |                                                     |       |        |         |         |        |        |        |        
|                                                     | Net income                                                                            |                                    | $                                             | 5,998                                               |       |        | $       | 9,941   |        |        | $      | 6,999   |      
|                                                     | Adjustments to reconcile net income to net cash provided by
    operating activities: |                                    |                                               |                                                     |       |        |         |         |        |        |        |         |      
|                                                     |                                                                                       | Net realized investment gains      |                                               |                                                     | (580  | )      |         |         | (705   | )      |        |         | (685  | )      
|                                                     |                                                                                       | Depreciation and amortization      |                                               |                                                     | 686   |        |         |         | 952    |        |        |         | 1,191 |        
|                                                     |                                                                                       | Deferred income taxes              |                                               |                                                     | 599   |        |         |         | (2,576 | )      |        |         | (828  | )      
|                                                     |                                                                                       | Changes in assets and liabilities: |                                               |                                                     |       |        |         |         |        |        |        |         |       |        
|                                                     |                                                                                       |                                    | Reinsurance recoverables                      |                                                     |       | (4,946 | )       |         |        | (6,803 | )      |         |       | 21,611  |       
|                                                     |                                                                                       |                                    | Unpaid claim and claim settlement expenses    |                                                     |       | 4,018  |         |         |        | 6,079  |        |         |       | (31,218 | )     
|                                                     |                                                                                       |                                    | Unearned premiums, net of premiums receivable |                                                     |       | (1,746 | )       |         |        | 1,007  |        |         |       | 2,105   |       
|                                                     |                                                                                       |                                    | Other, net                                    |                                                     |       | 889    |         |         |        | 177    |        |         |       | 5,200   |       
|                                                     |                                                                                       |                                    |                                               |                                                     |       |        |         |         |       
|                                                     |                                                                                       |                                    |                                               | Net cash provided by operating activities           |       |        | 4,918   |         |        |        | 8,072  |         |       |         | 4,375  |  
|Cash flows from investing activities:                |                                                                                       |                                    |                                               |                                                     |       |        |         |         |        |        |        |        
|                                                     | Maturities of investments                                                             |                                    |                                               | 12,450                                              |       |        |         | 11,324  |        |        |        | 5,650   |      
|                                                     | Purchases of available-for-sale investments                                           |                                    |                                               | (45,915                                             | )     |        |         | (41,446 | )      |        |        | (32,903 | )    
|                                                     | Proceeds from sales of available-for-sale investments                                 |                                    |                                               | 11,190                                              |       |        |         | 21,625  |        |        |        | 27,618  |      
|                                                     | Purchases of furniture and equipment                                                  |                                    |                                               | (696                                                | )     |        |         | (444    | )      |        |        | (175    | )    
|                                                     | Disposals of furniture and equipment                                                  |                                    |                                               | 10                                                  |       |        |         |        |        |        |        | 22      |      
|                                                     |                                                                                       |                                    |                                               |                                                     |       |        |         |         |       
|                                                     |                                                                                       |                                    |                                               | Net cash (used in) provided by investing activities |       |        | (22,961 | )       |        |        | (8,941 | )       |       |         | 212    |  
|Cash flows from financing activities:                |                                                                                       |                                    |                                               |                                                     |       |        |         |         |        |        |        |        
|                                                     | Payments on notes payable                                                             |                                    |                                               |                                                    |       |        |         |        |        |        |        | (1,250  | )    
|                                                     | Stock options exercised                                                               |                                    |                                               | 479                                                 |       |        |         | 533     |        |        |        | 19      |      
|                                                     | Issuance of common stock under ESPP                                                   |                                    |                                               | 99                                                  |       |        |         | 65      |        |        |        | 43      |      
|                                                     | Retirement of common stock                                                            |                                    |                                               |                                                    |       |        |         |        |        |        |        | (37     | )    
|                                                     |                                                                                       |                                    |                                               |                                                     |       |        |         |         |       
|                                                     |                                                                                       |                                    |                                               | Net cash provided by (used in) financing activities |       |        | 578     |         |        |        | 598    |         |       |         | (1,225 | )
|                                                     |                                                                                       |                                    |                                               |                                                     |       |        |         |         |       
|Net (decrease) increase in cash and cash equivalents |                                                                                       |                                    | (17,465                                       | )                                                   |       |        | (271    | )       |        |        | 3,362  |        
|Cash and cash equivalents at beginning of year       |                                                                                       |                                    | 39,379                                        |                                                     |       |        | 39,650  |         |        |        | 36,288 |        
|                                                     |                                                                                       |                                    |                                               |                                                     |       |        |         |         |       
|Cash and cash equivalents at end of year             |                                                                                       | $                                  | 21,914                                        |                                                     |       | $      | 39,379  |         |        | $      | 39,650 |        
|                                                     |                                                                                       |                                    |                                               |                                                     |       |        |         |         |       
|Supplemental disclosure of cash flow information:    |                                                                                       |                                    |                                               |                                                     |       |        |         |         |        |        |        |        
|                                                     | Cash paid during the year for:                                                        |                                    |                                               |                                                     |       |        |         |         |        |        |        |         |      
|                                                     |                                                                                       | Interest                           |                                               | $                                                   |      |        |         | $       |       |        |        | $       | 27    |        
|                                                     |                                                                                       |                                    |                                               |                                                     |       |        |         |         |       
|                                                     |                                                                                       | Income tax payments                |                                               | $                                                   | 2,839 |        |         | $       | 1,033  |        |        | $       | 115   |        
|                                                     |                                                                                       |                                    |                                               |                                                     |       |        |         |         |       



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RTW, INC.





Notes to Consolidated Financial Statements


Years Ended December 31, 2005, 2004, and 2003


Note 1 
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Organization sm






Accounting Principles


Consolidation


Use of Estimates


Investments


Available-for-Sale Investments:


Realized Investment Gains and Losses:




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RTW, INC.


Notes to Consolidated Financial
Statements  (Continued)




Cash and Cash Equivalents


Fair Value of Financial Instruments


Deferred Policy Acquisition Costs




Depreciation


Income Taxes


Unpaid Claim and Claim Settlement Expenses




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RTW, INC.


Notes to Consolidated Financial
Statements  (Continued)




Premiums Earned


Stock-Based Compensation


|                           |             |      |   |       |      |  |   |       |  |  |   |       | 
|-------------------------- | ----------- | ---- | - | ----- | ---- |  | - | ----- |  |  | - | ----- | 
|                           |             | 2005 |   |       | 2004 |  |   | 2003  | 
|                           |             |      |   |       |      |  |   |       | 
|Net income:                |             |      |   |       |      |  |   |       |  |  |   |      
|                           | As reported |      | $ | 5,998 |      |  | $ | 9,941 |  |  | $ | 6,999 | 
|                           | Pro forma   |      |   | 5,813 |      |  |   | 9,507 |  |  |   | 6,814 | 
|Basic income per share:    |             |      |   |       |      |  |   |       |  |  |   |      
|                           | As reported |      |   | 1.11  |      |  |   | 1.90  |  |  |   | 1.37  | 
|                           | Pro forma   |      |   | 1.08  |      |  |   | 1.82  |  |  |   | 1.33  | 
|Dilutive income per share: |             |      |   |       |      |  |   |       |  |  |   |      
|                           | As reported |      |   | 1.06  |      |  |   | 1.81  |  |  |   | 1.32  | 
|                           | Pro forma   |      |   | 1.03  |      |  |   | 1.73  |  |  |   | 1.29  | 



Effect of Recent Accounting Pronouncements 03-1-a re-titled 115-1, 115-1


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RTW, INC.


Notes to Consolidated Financial
Statements  (Continued)


115-1.






05-1, 05-1). 05-1 05-1 05-1




|         |                 
|-------- | ----------------
|Note 2  | INCOME PER SHARE



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RTW, INC.


Notes to Consolidated Financial
Statements  (Continued)




|                                            |                                  |      |           |         |      |   |           |         |  |   |           |         | 
|------------------------------------------- | -------------------------------- | ---- | --------- | ------- | ---- | - | --------- | ------- |  | - | --------- | ------- | 
|                                            |                                  | 2005 |           |         | 2004 |   |           | 2003    | 
|                                            |                                  |      |           |         |      |   |           |         | 
|Net income (000s)                          |                                  | $    | 5,998     |         |      | $ | 9,941     |         |  | $ | 6,999     |        
|                                            |                                  |      |           |         |      |   |           |         | 
|Basic weighted average shares outstanding   |                                  |      | 5,399,000 |         |      |   | 5,233,000 |         |  |   | 5,114,000 |        
|                                            | Effect of dilutive stock options |      |           | 264,000 |      |   |           | 254,000 |  |   |           | 182,000 | 
|                                            |                                  |      |           |         |      |   |           |         | 
|Diluted weighted average shares outstanding |                                  |      | 5,663,000 |         |      |   | 5,487,000 |         |  |   | 5,296,000 |        
|                                            |                                  |      |           |         |      |   |           |         | 
|Basic income per share                      |                                  | $    | 1.11      |         |      | $ | 1.90      |         |  | $ | 1.37      |        
|                                            |                                  |      |           |         |      |   |           |         | 
|Diluted income per share                    |                                  | $    | 1.06      |         |      | $ | 1.81      |         |  | $ | 1.32      |        
|                                            |                                  |      |           |         |      |   |           |         | 



|         |            
|-------- | -----------
|Note 3  | INVESTMENTS

Valuation of Investments


|                           |                   |           |        |         |            |   |       |            |  |   |            |        |   |   |        |         | 
|-------------------------- | ----------------- | --------- | ------ | ------- | ---------- | - | ----- | ---------- |  | - | ---------- | ------ | - | - | ------ | ------- | 
|                           |                   |           |        | Gross   |            |   | Gross |            |  |  
|                           |                   | Amortized |        |         | Unrealized |   |       | Unrealized |  |   | Estimated  |       
|                           |                   | Cost      |        |         | Gains      |   |       | Losses     |  |   | Fair Value |       
|                           |                   |           |        |         |            |   |       |            |  |   |            |       
|2005                       |                   |           |        |         |            |   |       |            |  |   |            |        |   |   |        |        
|U.S. government securities |                   | $         | 56,138 |         |            | $ | 63    |            |  | $ | (960       | )      |   | $ | 55,241 |        
|Commercial paper           |                   |           | 10,167 |         |            |   |      |            |  |   |           |        |   |   | 10,167 |        
|Asset-backed securities    |                   |           | 2,009  |         |            |   |      |            |  |   | (60        | )      |   |   | 1,949  |        
|Mortgage-backed securities |                   |           | 22,049 |         |            |   | 45    |            |  |   | (403       | )      |   |   | 21,691 |        
|Municipal securities       |                   |           | 18,658 |         |            |   |      |            |  |   | (456       | )      |   |   | 18,202 |        
|                           |                   |           |        |         |            |   |       |            |  |   |            |       
|                           | Total investments |           | $      | 109,021 |            |   | $     | 108        |  |   | $          | (1,879 | ) |   | $      | 107,250 | 
|                           |                   |           |        |         |            |   |       |            |  |   |            |       

|                           |                   |           |        |        |            |   |       |            |  |           |       |      |   |   |        |        | 
|-------------------------- | ----------------- | --------- | ------ | ------ | ---------- | - | ----- | ---------- |  | --------- | ----- | ---- | - | - | ------ | ------ | 
|                           |                   |           |        | Gross  |            |   | Gross |            |  | Estimated |      
|                           |                   | Amortized |        |        | Unrealized |   |       | Unrealized |  |           | Fair  |     
|                           |                   | Cost      |        |        | Gains      |   |       | Losses     |  |           | Value |     
|                           |                   |           |        |        |            |   |       |            |  |           |       |     
|2004                       |                   |           |        |        |            |   |       |            |  |           |       |      |   |   |        |       
|U.S. government securities |                   | $         | 41,439 |        |            | $ | 654   |            |  | $         | (133  | )    |   | $ | 41,960 |       
|Asset-backed securities    |                   |           | 2,011  |        |            |   | 11    |            |  |           | (19   | )    |   |   | 2,003  |       
|Mortgage-backed securities |                   |           | 24,006 |        |            |   | 234   |            |  |           | (37   | )    |   |   | 24,203 |       
|Municipal securities       |                   |           | 18,926 |        |            |   | 42    |            |  |           | (180  | )    |   |   | 18,788 |       
|                           |                   |           |        |        |            |   |       |            |  |           |       |     
|                           | Total investments |           | $      | 86,382 |            |   | $     | 941        |  |           | $     | (369 | ) |   | $      | 86,954 | 
|                           |                   |           |        |        |            |   |       |            |  |           |       |     

45



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RTW, INC.


Notes to Consolidated Financial
Statements  (Continued)




|                                             |                   |                  |        |        |                     |   |      |        |       |   |            |        |  |             |      |      |            |   |        |        |  |   |      |        |  
|-------------------------------------------- | ----------------- | ---------------- | ------ | ------ | ------------------- | - | ---- | ------ | ----- | - | ---------- | ------ |  | ----------- | ---- | ---- | ---------- | - | ------ | ------ |  | - | ---- | ------ | -
|                                             |                   | Less Than Twelve |        |        | Greater Than Twelve |   |      |        |       |  
|                                             |                   | Months           |        |        | Months              |   |      |        |       |  
|                                             |                   |                  |        |        |                     |   |      |        |       |  
|                                             |                   |                  |        | Gross  |                     |   |      |        | Gross |   |            |        |  | Total Gross |     
|                                             |                   | Fair             |        |        | Unrealized          |   |      | Fair   |       |   | Unrealized |        |  | Total Fair  |      |      | Unrealized |  
|                                             |                   | Value            |        |        | Losses              |   |      | Value  |       |   | Losses     |        |  | Value       |      |      | Losses     |  
|                                             |                   |                  |        |        |                     |   |      |        |       |   |            |        |  |             |      |      |            |  
|2005                                         |                   |                  |        |        |                     |   |      |        |       |   |            |        |  |             |      |      |            |   |        |        |  |   |      |       
|U.S. government securities                   |                   | $                | 42,018 |        |                     | $ | (734 | )      |       | $ | 8,987      |        |  | $           | (226 | )    |            | $ | 51,005 |        |  | $ | (960 | )     
|Mortgage-backed and asset- backed securities |                   |                  | 16,377 |        |                     |   | (342 | )      |       |   | 4,127      |        |  |             | (121 | )    |            |   | 20,504 |        |  |   | (463 | )     
|Municipal securities                         |                   |                  | 5,207  |        |                     |   | (62  | )      |       |   | 12,995     |        |  |             | (394 | )    |            |   | 18,202 |        |  |   | (456 | )     
|                                             |                   |                  |        |        |                     |   |      |        |       |   |            |        |  |             |      |      |            |  
|                                             | Total investments |                  | $      | 63,602 |                     |   | $    | (1,138 | )     |   | $          | 26,109 |  |             | $    | (741 | )          |   | $      | 89,711 |  |   | $    | (1,879 | )
|                                             |                   |                  |        |        |                     |   |      |        |       |   |            |        |  |             |      |      |            |  

|                                             |                   |                  |        |        |                     |   |      |       |       |   |            |       |  |             |     |     |            |   |        |        |  |   |      |      |  
|-------------------------------------------- | ----------------- | ---------------- | ------ | ------ | ------------------- | - | ---- | ----- | ----- | - | ---------- | ----- |  | ----------- | --- | --- | ---------- | - | ------ | ------ |  | - | ---- | ---- | -
|                                             |                   | Less Than Twelve |        |        | Greater Than Twelve |   |      |       |       |  
|                                             |                   | Months           |        |        | Months              |   |      |       |       |  
|                                             |                   |                  |        |        |                     |   |      |       |       |  
|                                             |                   |                  |        | Gross  |                     |   |      |       | Gross |   |            |       |  | Total Gross |    
|                                             |                   | Fair             |        |        | Unrealized          |   |      | Fair  |       |   | Unrealized |       |  | Total Fair  |     |     | Unrealized |  
|                                             |                   | Value            |        |        | Losses              |   |      | Value |       |   | Losses     |       |  | Value       |     |     | Losses     |  
|                                             |                   |                  |        |        |                     |   |      |       |       |   |            |       |  |             |     |     |            |  
|2004                                         |                   |                  |        |        |                     |   |      |       |       |   |            |       |  |             |     |     |            |   |        |        |  |   |      |     
|U.S. government securities                   |                   | $                | 40,912 |        |                     | $ | (118 | )     |       | $ | 1,048      |       |  | $           | (15 | )   |            | $ | 41,960 |        |  | $ | (133 | )   
|Mortgage-backed and asset- backed securities |                   |                  | 26,206 |        |                     |   | (56  | )     |       |   |           |       |  |             |    |     |            |   | 26,206 |        |  |   | (56  | )   
|Municipal securities                         |                   |                  | 18,788 |        |                     |   | (180 | )     |       |   |           |       |  |             |    |     |            |   | 18,788 |        |  |   | (180 | )   
|                                             |                   |                  |        |        |                     |   |      |       |       |   |            |       |  |             |     |     |            |  
|                                             | Total investments |                  | $      | 85,906 |                     |   | $    | (354  | )     |   | $          | 1,048 |  |             | $   | (15 | )          |   | $      | 86,954 |  |   | $    | (369 | )
|                                             |                   |                  |        |        |                     |   |      |       |       |   |            |       |  |             |     |     |            |  



Deposits




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RTW, INC.


Notes to Consolidated Financial
Statements  (Continued)


Fixed Maturities by Maturity Date


|                                                   |                   |           |        |         |            |   |        |         | 
|-------------------------------------------------- | ----------------- | --------- | ------ | ------- | ---------- | - | ------ | ------- | 
|                                                   |                   | Amortized |        |         | Estimated  |  
|Maturing In:                                       |                   | Cost      |        |         | Fair Value |  
|                                                   |                   |           |        |         |            |  
|One year or less                                   |                   | $         | 14,885 |         |            | $ | 14,843 |        
|Over one year through five years                   |                   |           | 49,762 |         |            |   | 48,745 |        
|Over five years through ten years                  |                   |           | 17,187 |         |            |   | 16,893 |        
|Over ten years                                     |                   |           | 5,138  |         |            |   | 5,078  |        
|Mortgage-backed securities with various maturities |                   |           | 22,049 |         |            |   | 21,691 |        
|                                                   |                   |           |        |         |            |  
|                                                   | Total investments |           | $      | 109,021 |            |   | $      | 107,250 | 
|                                                   |                   |           |        |         |            |  

Net Investment Income


|                           |                       |      |       |       |      |   |       |       |  |   |       |       | 
|-------------------------- | --------------------- | ---- | ----- | ----- | ---- | - | ----- | ----- |  | - | ----- | ----- | 
|                           |                       | 2005 |       |       | 2004 |   |       | 2003  | 
|                           |                       |      |       |       |      |   |       |       | 
|Fixed maturity investments |                       | $    | 4,099 |       |      | $ | 3,383 |       |  | $ | 4,346 |      
|Cash and cash equivalents  |                       |      | 672   |       |      |   | 344   |       |  |   | 128   |      
|Other                      |                       |      | 15    |       |      |   | 110   |       |  |   |      |      
|                           |                       |      |       |       |      |   |       |       | 
|                           | Investment income     |      | $     | 4,786 |      |   | $     | 3,837 |  |   | $     | 4,474 | 
|                           |                       |      |       |       |      |   |       |       | 
|Investment expense         |                       |      | (173  | )     |      |   | (170  | )     |  |   | (175  | )    
|                           |                       |      |       |       |      |   |       |       | 
|                           | Net investment income |      | $     | 4,613 |      |   | $     | 3,667 |  |   | $     | 4,299 | 
|                           |                       |      |       |       |      |   |       |       | 

Note 4 
REINSURANCE






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RTW, INC.


Notes to Consolidated Financial
Statements  (Continued)




|              |                         |                               |   |         |             |  |                                         
|------------- | ----------------------- | ----------------------------- | - | ------- | ----------- |  | ----------------------------------------
|              |                         | Covers Losses per Occurrence:
|              |                         |                              
|              |                         | In Excess of:                 |   |         | Limited to:
|              |                         |                               |   |         |            
|Minnesota:    |                         |                               |   |         |             | 
|              | 2005 WCRA               |                               | $ | 380,000 |             |  | Statutory limit                         
|              | Various reinsurers      |                               | $ | 200,000 |             |  | $380,000                                
|              | 2004 WCRA               |                               | $ | 360,000 |             |  | Statutory limit                         
|              | Various reinsurers      |                               | $ | 200,000 |             |  | $360,000                                
|              | 2003 WCRA               |                               | $ | 360,000 |             |  | Statutory limit                         
|              | Various reinsurers      |                               | $ | 200,000 |             |  | $360,000                                
|Other States: |                         |                               |   |         |             | 
|              | 2005 Various reinsurers |                               | $ | 200,000 |             |  | $20 million, excluding acts of terrorism
|              | 2004 Various reinsurers |                               | $ | 200,000 |             |  | $20 million, excluding acts of terrorism
|              | 2003 Various reinsurers |                               | $ | 200,000 |             |  | $20 million, excluding acts of terrorism





|                                                      |  |      |        |  |      |   |        | 
|----------------------------------------------------- |  | ---- | ------ |  | ---- | - | ------ | 
|                                                      |  | 2005 |        |  | 2004 |  
|                                                      |  |      |        |  |      |  
|Excess of loss reinsurance through various reinsurers |  | $    | 83,318 |  |      | $ | 77,722 | 

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RTW, INC.


Notes to Consolidated Financial
Statements  (Continued)




|                                     |        |                                         |   |         |        |  |   |         |        |  |   |        |        | 
|------------------------------------ | ------ | --------------------------------------- | - | ------- | ------ |  | - | ------- | ------ |  | - | ------ | ------ | 
|                                     |        | 2005                                    |   |         | 2004   |  |   | 2003    |       
|                                     |        |                                         |   |         |        |  |   |         |       
|Premiums written:                    |        |                                         |   |         |        |  |   |         |        |  |   |       
|                                     | Direct |                                         | $ | 57,716  |        |  | $ | 64,687  |        |  | $ | 56,481 |       
|                                     | Ceded  |                                         |   | (10,452 | )      |  |   | (9,688  | )      |  |   | (8,141 | )     
|                                     |        |                                         |   |         |        |  |   |         |       
|                                     |        | Net premiums written                    |   | $       | 47,264 |  |   | $       | 54,999 |  |   | $      | 48,340 | 
|                                     |        |                                         |   |         |        |  |   |         |       
|Claim and claim settlement expenses: |        |                                         |   |         |        |  |   |         |        |  |   |       
|                                     | Direct |                                         | $ | 40,705  |        |  | $ | 48,909  |        |  | $ | 20,932 |       
|                                     | Ceded  |                                         |   | (9,898  | )      |  |   | (13,373 | )      |  |   | 6,324  |       
|                                     |        |                                         |   |         |        |  |   |         |       
|                                     |        | Net claim and claim settlement expenses |   | $       | 30,807 |  |   | $       | 35,536 |  |   | $      | 27,256 | 
|                                     |        |                                         |   |         |        |  |   |         |       





Note 5 
UNPAID CLAIM AND CLAIM SETTLEMENT EXPENSES




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RTW, INC.


Notes to Consolidated Financial
Statements  (Continued)




|                           |                                                 |                |         |         |        |   |         |         |        |   |         |         |        | 
|-------------------------- | ----------------------------------------------- | -------------- | ------- | ------- | ------ | - | ------- | ------- | ------ | - | ------- | ------- | ------ | 
|                           |                                                 | 2005           |         |         | 2004   |   |         | 2003    |       
|                           |                                                 |                |         |         |        |   |         |         |       
|Balance at January 1       |                                                 | $              | 156,123 |         |        | $ | 150,044 |         |        | $ | 181,262 |        
|                           | Less reinsurance recoverables                   |                |         | (77,722 | )      |   |         | (71,466 | )      |   |         | (91,822 | )     
|                           | Plus deferred gain on retrospective reinsurance |                |         | 49      |        |   |         | 49      |        |   |         | 49      |       
|                           |                                                 |                |         |         |        |   |         |         |       
|Net balance at January 1   |                                                 |                | 78,450  |         |        |   | 78,627  |         |        |   | 89,489  |        
|Incurred related to:       |                                                 |                |         |         |        |   |         |         |        |   |         |        
|                           | Current year                                    |                |         | 36,264  |        |   |         | 42,583  |        |   |         | 33,954  |       
|                           | Prior years                                     |                |         | (5,457  | )      |   |         | (7,047  | )      |   |         | (6,698  | )     
|                           |                                                 |                |         |         |        |   |         |         |       
|                           |                                                 | Total incurred |         |         | 30,807 |   |         |         | 35,536 |   |         |         | 27,256 | 
|Paid related to:           |                                                 |                |         |         |        |   |         |         |        |   |         |        
|                           | Current year                                    |                |         | 11,748  |        |   |         | 12,666  |        |   |         | 10,761  |       
|                           | Prior years                                     |                |         | 20,637  |        |   |         | 23,047  |        |   |         | 27,357  |       
|                           |                                                 |                |         |         |        |   |         |         |       
|                           |                                                 | Total paid     |         |         | 32,385 |   |         |         | 35,713 |   |         |         | 38,118 | 
|                           |                                                 |                |         |         |        |   |         |         |       
|Net balance at December 31 |                                                 |                | 76,872  |         |        |   | 78,450  |         |        |   | 78,627  |        
|                           | Plus reinsurance recoverables                   |                |         | 83,318  |        |   |         | 77,722  |        |   |         | 71,466  |       
|                           | Plus deferred gain on retrospective reinsurance |                |         | (49     | )      |   |         | (49     | )      |   |         | (49     | )     
|                           |                                                 |                |         |         |        |   |         |         |       
|Balance at December 31     |                                                 | $              | 160,141 |         |        | $ | 156,123 |         |        | $ | 150,044 |        
|                           |                                                 |                |         |         |        |   |         |         |       













50



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RTW, INC.


Notes to Consolidated Financial
Statements  (Continued)


Note 6 
NOTES PAYABLE




Note 7 
INCOME TAXES




|          |         |                                      |   |       |       |  |   |        |        |   |   |      |      |  
|--------- | ------- | ------------------------------------ | - | ----- | ----- |  | - | ------ | ------ | - | - | ---- | ---- | -
|          |         | 2005                                 |   |       | 2004  |  |   | 2003   |       
|          |         |                                      |   |       |       |  |   |        |       
|Current:  |         |                                      |   |       |       |  |   |        |        |   |   |     
|          | Federal |                                      | $ | 3,161 |       |  | $ | 651    |        |   | $ | 288  |     
|          | State   |                                      |   | 321   |       |  |   | 56     |        |   |   | 128  |     
|          |         |                                      |   |       |       |  |   |        |       
|          |         | Total current tax expense            |   |       | 3,482 |  |   |        | 707    |   |   |      | 416  |  
|Deferred: |         |                                      |   |       |       |  |   |        |        |   |   |     
|          | Federal |                                      |   | 599   |       |  |   | (2,576 | )      |   |   | (828 | )   
|          | State   |                                      |   |      |       |  |   |       |        |   |   |     |     
|          |         |                                      |   |       |       |  |   |        |       
|          |         | Total deferred tax expense (benefit) |   |       | 599   |  |   |        | (2,576 | ) |   |      | (828 | )
|          |         |                                      |   |       |       |  |   |        |       
|          |         | Income tax expense (benefit)         |   | $     | 4,081 |  |   | $      | (1,869 | ) |   | $    | (412 | )
|          |         |                                      |   |       |       |  |   |        |       



|                                                                         |                                                       |                              |       |      |       |   |       |        |        |   |       |        |      |  
|------------------------------------------------------------------------ | ----------------------------------------------------- | ---------------------------- | ----- | ---- | ----- | - | ----- | ------ | ------ | - | ----- | ------ | ---- | -
|                                                                         |                                                       | 2005                         |       |      | 2004  |   |       | 2003   |       
|                                                                         |                                                       |                              |       |      |       |   |       |        |       
|Federal income tax expense at 35%                                        |                                                       | $                            | 3,528 |      |       | $ | 2,825 |        |        | $ | 2,305 |       
|Increase (reduction) in income tax expense (benefit)
    resulting from: |                                                       |                              |       |      |       |   |       |        |        |   |       |       
|                                                                         | State income taxes, net of federal income tax benefit |                              |       | 209  |       |   |       | 36     |        |   |       | 79     |     
|                                                                         | Tax-exempt investment income                          |                              |       | (162 | )     |   |       | (123   | )      |   |       |       |     
|                                                                         | Deferred income tax valuation allowance               |                              |       |     |       |   |       | (4,040 | )      |   |       | (3,060 | )   
|                                                                         | Tax expense (benefit) related to prior periods        |                              |       | 495  |       |   |       | (495   | )      |   |       |       |     
|                                                                         | Other                                                 |                              |       | 11   |       |   |       | (72    | )      |   |       | 264    |     
|                                                                         |                                                       |                              |       |      |       |   |       |        |       
|                                                                         |                                                       | Income tax expense (benefit) |       | $    | 4,081 |   |       | $      | (1,869 | ) |       | $      | (412 | )
|                                                                         |                                                       |                              |       |      |       |   |       |        |       



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RTW, INC.


Notes to Consolidated Financial
Statements  (Continued)




|                                           |                          |                        |       |        |       |   |       |        |       | 
|------------------------------------------ | ------------------------ | ---------------------- | ----- | ------ | ----- | - | ----- | ------ | ----- | 
|                                           |                          | 2005                   |       |        | 2004  |  
|                                           |                          |                        |       |        |       |  
|Unpaid claim and claim settlement expenses |                          | $                      | 5,023 |        |       | $ | 5,293 |       
|Accrued second injury funds                |                          |                        | 37    |        |       |   | 74    |       
|Unearned premiums                          |                          |                        | 1,639 |        |       |   | 2,067 |       
|Retrospective reinsurance                  |                          |                        | 17    |        |       |   | 17    |       
|Net unrealized loss on securities          |                          |                        | 620   |        |       |   |      |       
|Other                                      |                          |                        | 461   |        |       |   | 326   |       
|                                           |                          |                        |       |        |       |  
|                                           | Deferred tax assets      |                        |       | 7,797  |       |   |       | 7,777  |      
|Net unrealized gain on securities          |                          |                        |      |        |       |   | (194  | )     
|Deferred policy acquisition costs          |                          |                        | (764  | )      |       |   | (937  | )     
|Depreciation                               |                          |                        | (204  | )      |       |   | (240  | )     
|Other                                      |                          |                        | (208  | )      |       |   |      |       
|                                           |                          |                        |       |        |       |  
|                                           | Deferred tax liabilities |                        |       | (1,176 | )     |   |       | (1,371 | )    
|                                           |                          |                        |       |        |       |  
|                                           |                          | Net deferred tax asset |       | $      | 6,621 |   |       | $      | 6,406 | 
|                                           |                          |                        |       |        |       |  





Note 8 
EMPLOYEE BENEFITS AND PLANS


Stock Based Compensation


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RTW, INC.


Notes to Consolidated Financial
Statements  (Continued)


1995 Employee Stock Purchase Plan


|                                          |  |           |        |  |          |   |      | 
|----------------------------------------- |  | --------- | ------ |  | -------- | - | ---- | 
|                                          |  | Shares    |        |  | Purchase |  
|Phase:                                    |  | Purchased |        |  | Price    |  
|                                          |  |           |        |  |          |  
|Beginning April 2002, expiring April 2003 |  |           | 20,649 |  |          | $ | 2.07 | 
|Beginning April 2003, expiring April 2004 |  |           | 20,151 |  |          |   | 3.23 | 
|Beginning April 2004, expiring April 2005 |  |           | 17,279 |  |          |   | 5.72 | 





1994 Stock Plan


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RTW, INC.


Notes to Consolidated Financial
Statements  (Continued)




|                           |           |           |         |          |               |   |      |        |          |  |          |          |   |   |      |      | 
|-------------------------- | --------- | --------- | ------- | -------- | ------------- | - | ---- | ------ | -------- |  | -------- | -------- | - | - | ---- | ---- | 
|                           |           | Qualified |         |          | Non-Qualified |  
|                           |           |           |         |          |               |  
|                           |           |           |         | Weighted |               |   |      |        | Weighted | 
|                           |           |           |         | Average  |               |   |      |        | Average  | 
|                           |           | Option    |         |          | Exercise      |   |      | Option |          |  | Exercise |         
|                           |           | Shares    |         |          | Price         |   |      | Shares |          |  | Price    |         
|                           |           |           |         |          |               |   |      |        |          |  |          |         
|Balance, January 1, 2003   |           |           | 137,071 |          |               | $ | 9.54 |        |          |  | 326,875  |          |   | $ | 2.60 |     
|                           | Granted   |           |         | 155,500  |               |   |      | 2.19   |          |  |          | 12,500   |   |   |      | 3.13 | 
|                           | Exercised |           |         | (8,000   | )             |   |      | 2.22   |          |  |          |         |   |   |      |     | 
|                           | Canceled  |           |         | (9,052   | )             |   |      | 9.62   |          |  |          | (80,000  | ) |   |      | 2.20 | 
|                           |           |           |         |          |               |   |      |        |          |  |          |         
|Balance, December 31, 2003 |           |           | 275,519 |          |               |   | 5.60 |        |          |  | 259,375  |          |   |   | 2.75 |     
|                           | Granted   |           |         | 209,948  |               |   |      | 6.14   |          |  |          | 79,302   |   |   |      | 6.14 | 
|                           | Exercised |           |         | (43,468  | )             |   |      | 2.22   |          |  |          | (133,500 | ) |   |      | 2.18 | 
|                           | Canceled  |           |         | (38,572  | )             |   |      | 6.21   |          |  |          | (1,875   | ) |   |      | 5.33 | 
|                           |           |           |         |          |               |   |      |        |          |  |          |         
|Balance, December 31, 2004 |           |           | 403,427 |          |               |   | 6.19 |        |          |  | 203,302  |          |   |   | 4.42 |     
|                           | Granted   |           |         |         |               |   |      |       |          |  |          | 62,500   |   |   |      | 9.02 | 
|                           | Exercised |           |         | (59,267  | )             |   |      | 2.60   |          |  |          | (43,000  | ) |   |      | 1.98 | 
|                           | Canceled  |           |         | (9,857   | )             |   |      | 5.52   |          |  |          | (6,667   | ) |   |      | 6.45 | 
|                           |           |           |         |          |               |   |      |        |          |  |          |         
|Balance, December 31, 2005 |           |           | 334,303 |          |               | $ | 6.85 |        |          |  | 216,135  |          |   | $ | 6.18 |     
|                           |           |           |         |          |               |   |      |        |          |  |          |         



2005 Stock Plan




|                           |           |           |        |          |          |   |       |       | 
|-------------------------- | --------- | --------- | ------ | -------- | -------- | - | ----- | ----- | 
|                           |           | Qualified |       
|                           |           |           |       
|                           |           |           |        | Weighted |         
|                           |           |           |        | Average  |         
|                           |           | Option    |        |          | Exercise |  
|                           |           | Shares    |        |          | Price    |  
|                           |           |           |        |          |          |  
|Balance, January 1, 2005   |           |           |       |          |          |   |      |      
|                           | Granted   |           |        | 15,000   |          |   | $     | 11.72 | 
|                           | Exercised |           |        |         |          |   |       |      | 
|                           | Canceled  |           |        |         |          |   |       |      | 
|                           |           |           |        |          |          |  
|Balance, December 31, 2005 |           |           | 15,000 |          |          | $ | 11.72 |      
|                           |           |           |        |          |          |  



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RTW, INC.


Notes to Consolidated Financial
Statements  (Continued)




|                             |                 |                     |  |                  |                     |  |  |           |           |  |         |       |       |          |  |         |         |  |   |       |       | 
|---------------------------- | --------------- | ------------------- |  | ---------------- | ------------------- |  |  | --------- | --------- |  | ------- | ----- | ----- | -------- |  | ------- | ------- |  | - | ----- | ----- | 
|                             |                 | Options Outstanding |  |                  | Options Exercisable | 
|                             |                 |                     |  |                  |                     | 
|                             |                 |                     |  | Weighted Average |                     |  |  |           | Weighted  | 
|                             |                 | Number              |  |                  |                     |  |  | Number    |           |  | Average |      
|                             |                 | of                  |  |                  | Contractual         |  |  | Exercise  |           |  | of      |       |       | Exercise | 
|Exercise Price Range         |                 | Options             |  |                  | Life                |  |  | Price     |           |  | Options |       |       | Price    | 
|                             |                 |                     |  |                  |                     |  |  |           |           |  |         |       |       |          | 
|Incentive stock options:     |                 |                     |  |                  |                     |  |  |           |           |  |         |       |       |          |  |         |         |  |   |      
|                             | $14.00 - $38.67 |                     |  | 35,305           |                     |  |  | 2.3 years |           |  | $       | 16.66 |       |          |  | 35,305  |         |  | $ | 16.66 |      
|                             |                 | 8.75 -  11.72       |  |                  | 50,000              |  |  |           | 5.8 years |  |         |       | 10.89 |          |  |         | 35,000  |  |   |       | 10.54 | 
|                             |                 | 6.00 -   6.18       |  |                  | 172,698             |  |  |           | 8.1 years |  |         |       | 6.13  |          |  |         | 155,419 |  |   |       | 6.15  | 
|                             |                 | 2.19 -   4.50       |  |                  | 91,300              |  |  |           | 6.6 years |  |         |       | 2.76  |          |  |         | 91,300  |  |   |       | 2.76  | 
|                             |                 |                     |  |                  |                     |  |  |           |           |  |         |       |       |          | 
|                             | $ 2.19 - $38.67 |                     |  | 349,303          |                     |  |  | 6.8 years |           |  | $       | 7.00  |       |          |  | 317,024 |         |  | $ | 6.83  |      
|                             |                 |                     |  |                  |                     |  |  |           |           |  |         |       |       |          |  |         |         |  |   |       |      
|                             |                 |                     |  |                  |                     |  |  |           |           |  |         |       |       |          | 
|Non-qualified stock options: |                 |                     |  |                  |                     |  |  |           |           |  |         |       |       |          |  |         |         |  |   |      
|                             | $31.75          |                     |  | 5,000            |                     |  |  | 1.1 years |           |  | $       | 31.75 |       |          |  | 5,000   |         |  | $ | 31.75 |      
|                             |                 | 6.00 -   9.87       |  |                  | 135,135             |  |  |           | 8.7 years |  |         |       | 7.46  |          |  |         | 66,579  |  |   |       | 7.11  | 
|                             |                 | 1.98 -   3.13       |  |                  | 76,000              |  |  |           | 6.3 years |  |         |       | 2.21  |          |  |         | 76,000  |  |   |       | 2.21  | 
|                             |                 |                     |  |                  |                     |  |  |           |           |  |         |       |       |          | 
|                             | $ 1.98 - $31.75 |                     |  | 216,135          |                     |  |  | 7.7 years |           |  | $       | 6.17  |       |          |  | 147,579 |         |  | $ | 5.42  |      
|                             |                 |                     |  |                  |                     |  |  |           |           |  |         |       |       |          |  |         |         |  |   |       |      
|                             |                 |                     |  |                  |                     |  |  |           |           |  |         |       |       |          | 

Employment Contracts


Combined Retirement Plan




| |                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 2005,
    2004 and 2003 was $224,000, $221,000 and $204,000, 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 contributions were made or expense recorded in
    2005, 2004 or 2003.                                                                                                

Other Employee Benefit Plans


Note 9 
SHAREHOLDERS EQUITY




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RTW, INC.


Notes to Consolidated Financial
Statements  (Continued)




Shareholder Rights Plan


Dividend Restrictions






Statutory Surplus and Statutory Net Income


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RTW, INC.


Notes to Consolidated Financial
Statements  (Continued)




|     |  |             |        |  |            |   |       | 
|---- |  | ----------- | ------ |  | ---------- | - | ----- | 
|     |  | Statutory   |        |  |           
|     |  | Capital and |        |  | Statutory  |  
|     |  | Surplus     |        |  | Net Income |  
|     |  |             |        |  |            |  
|2005 |  | $           | 43,597 |  |            | $ | 4,295 | 
|2004 |  |             | 38,503 |  |            |   | 7,540 | 
|2003 |  |             |        |  |            |   | 6,103 | 

Note 10 
COMMITMENTS AND CONTINGENCIES


Operating Leases




|     |  |   |       | 
|---- |  | - | ----- | 
|2006 |  | $ | 1,022 | 
|2007 |  |   | 670   | 
|2008 |  |   | 125   | 
|2009 |  |   | 140   | 
|2010 |  |   | 59    | 



Litigation:










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RTW, INC.


Notes to Consolidated Financial
Statements  (Continued)












|          |                                              
|--------- | ---------------------------------------------
|Note 11  | ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME



|                                                           |                                                    |                                            |                                       |        |        |        |     |      |      |      |       |        |        |        |  
|---------------------------------------------------------- | -------------------------------------------------- | ------------------------------------------ | ------------------------------------- | ------ | ------ | ------ | --- | ---- | ---- | ---- | ----- | ------ | ------ | ------ | -
|                                                           |                                                    | 2005                                       |                                       |        | 2004   |        |     | 2003 |     
|                                                           |                                                    |                                            |                                       |        |        |        |     |      |     
|Accumulated other comprehensive income, beginning of year  |                                                    | $                                          | 378                                   |        |        | $      | 973 |      |      | $    | 2,220 |       
|Changes in comprehensive income arising during the year:   |                                                    |                                            |                                       |        |        |        |     |      |      |      |       |       
|                                                           | Net unrealized investment losses                   |                                            |                                       | (1,763 | )      |        |     | (220 | )    |      |       | (1,234 | )     
|                                                           | Less: Adjustment for net realized investment gains |                                            |                                       | 580    |        |        |     | 705  |      |      |       | 685    |       
|                                                           |                                                    |                                            |                                       |        |        |        |     |      |     
|                                                           |                                                    | Change in net unrealized investment losses |                                       |        | (2,343 | )      |     |      | (925 | )    |       |        | (1,919 | )     
|                                                           |                                                    | Income tax benefit                         |                                       |        | (814   | )      |     |      | (330 | )    |       |        | (672   | )     
|                                                           |                                                    |                                            |                                       |        |        |        |     |      |     
|                                                           |                                                    |                                            | Other comprehensive loss for the year |        |        | (1,529 | )   |      |      | (595 | )     |        |        | (1,247 | )
|                                                           |                                                    |                                            |                                       |        |        |        |     |      |     
|Accumulated other comprehensive (loss) income, end of year |                                                    | $                                          | (1,151                                | )      |        | $      | 378 |      |      | $    | 973   |       
|                                                           |                                                    |                                            |                                       |        |        |        |     |      |     



|          |                                            
|--------- | -------------------------------------------
|Note 12  | QUARTERLY RESULTS OF OPERATIONS (Unaudited)



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RTW, INC.


Notes to Consolidated Financial
Statements  (Continued)




|                         |                                     |                                       |        |        |         |   |        |         |        |   |         |        |        |   |        |        |        | 
|------------------------ | ----------------------------------- | ------------------------------------- | ------ | ------ | ------- | - | ------ | ------- | ------ | - | ------- | ------ | ------ | - | ------ | ------ | ------ | 
|                         |                                     | First                                 |        |        | Second  |   |        | Third   |        |   | Fourth  |       
|                         |                                     | Quarter                               |        |        | Quarter |   |        | Quarter |        |   | Quarter |       
|                         |                                     |                                       |        |        |         |   |        |         |        |   |         |       
|                         |                                     | (In thousands, except per share data) |       
|2005                     |                                     |                                       |        |        |         |   |        |         |        |   |         |        |        |   |        |       
|Premiums in force        |                                     | $                                     | 62,100 |        |         | $ | 58,500 |         |        | $ | 55,900  |        |        | $ | 52,900 |       
|                         |                                     |                                       |        |        |         |   |        |         |        |   |         |       
|Revenues:                |                                     |                                       |        |        |         |   |        |         |        |   |         |        |        |   |        |       
|                         | Gross premiums earned               |                                       | $      | 15,730 |         |   | $      | 15,002  |        |   | $       | 15,261 |        |   | $      | 13,879 |       
|                         | Premiums ceded                      |                                       |        | (2,750 | )       |   |        | (2,612  | )      |   |         | (2,609 | )      |   |        | (2,481 | )     
|                         |                                     |                                       |        |        |         |   |        |         |        |   |         |       
|                         |                                     | Premiums earned                       |        |        | 12,980  |   |        |         | 12,390 |   |         |        | 12,652 |   |        |        | 11,398 | 
|                         | Net investment income               |                                       |        | 1,054  |         |   |        | 1,108   |        |   |         | 1,207  |        |   |        | 1,244  |       
|                         | Net realized investment gains       |                                       |        | 135    |         |   |        | 445     |        |   |         |       |        |   |        |       |       
|                         | Service revenue                     |                                       |        | 595    |         |   |        | 940     |        |   |         | 1,366  |        |   |        | 1,497  |       
|                         |                                     |                                       |        |        |         |   |        |         |        |   |         |       
|                         |                                     | Total revenues                        |        |        | 14,764  |   |        |         | 14,883 |   |         |        | 15,225 |   |        |        | 14,139 | 
|Expenses:                |                                     |                                       |        |        |         |   |        |         |        |   |         |        |        |   |        |       
|                         | Claim and claim settlement expenses |                                       |        | 8,900  |         |   |        | 8,518   |        |   |         | 8,563  |        |   |        | 4,826  |       
|                         | Policy acquisition costs            |                                       |        | 1,425  |         |   |        | 1,542   |        |   |         | 1,288  |        |   |        | 1,201  |       
|                         | General and administrative expenses |                                       |        | 2,875  |         |   |        | 2,817   |        |   |         | 3,093  |        |   |        | 3,884  |       
|                         |                                     |                                       |        |        |         |   |        |         |        |   |         |       
|                         |                                     | Total expenses                        |        |        | 13,200  |   |        |         | 12,877 |   |         |        | 12,944 |   |        |        | 9,911  | 
|                         |                                     |                                       |        |        |         |   |        |         |        |   |         |       
|Income from operations   |                                     | $                                     | 1,564  |        |         | $ | 2,006  |         |        | $ | 2,281   |        |        | $ | 4,228  |       
|                         |                                     |                                       |        |        |         |   |        |         |        |   |         |       
|Net income               |                                     | $                                     | 1,049  |        |         | $ | 1,321  |         |        | $ | 1,521   |        |        | $ | 2,107  |       
|                         |                                     |                                       |        |        |         |   |        |         |        |   |         |       
|Basic income per share   |                                     | $                                     | 0.20   |        |         | $ | 0.24   |         |        | $ | 0.28    |        |        | $ | 0.38   |       
|                         |                                     |                                       |        |        |         |   |        |         |        |   |         |       
|Diluted income per share |                                     | $                                     | 0.19   |        |         | $ | 0.23   |         |        | $ | 0.27    |        |        | $ | 0.37   |       
|                         |                                     |                                       |        |        |         |   |        |         |        |   |         |       





|                                                                                                                |  |   |      |   |  |   |     |   |  |   |      |   |  |   |       |  
|--------------------------------------------------------------------------------------------------------------- |  | - | ---- | - |  | - | --- | - |  | - | ---- | - |  | - | ----- | -
|Net realized investment gains                                                                                   |  | $ | 135  |   |  | $ | 445 |   |  | $ |     |   |  | $ |      |  
|Net changes in estimates for unpaid claim and claim settlement
    expenses on claims reported in prior periods |  |   | 500  |   |  |   | 500 |   |  |   | 500  |   |  |   | 3,550 |  
|Bonus expense                                                                                                   |  |   | (223 | ) |  |   | (82 | ) |  |   | (220 | ) |  |   | (998  | )

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RTW, INC.


Notes to Consolidated Financial
Statements  (Continued)


|                         |                                     |                                       |        |        |         |   |        |         |        |   |         |        |        |   |        |        |        | 
|------------------------ | ----------------------------------- | ------------------------------------- | ------ | ------ | ------- | - | ------ | ------- | ------ | - | ------- | ------ | ------ | - | ------ | ------ | ------ | 
|                         |                                     | First                                 |        |        | Second  |   |        | Third   |        |   | Fourth  |       
|                         |                                     | Quarter                               |        |        | Quarter |   |        | Quarter |        |   | Quarter |       
|                         |                                     |                                       |        |        |         |   |        |         |        |   |         |       
|                         |                                     | (In thousands, except per share data) |       
|2004                     |                                     |                                       |        |        |         |   |        |         |        |   |         |        |        |   |        |       
|Premiums in force        |                                     | $                                     | 59,500 |        |         | $ | 62,400 |         |        | $ | 63,200  |        |        | $ | 62,700 |       
|                         |                                     |                                       |        |        |         |   |        |         |        |   |         |       
|Revenues:                |                                     |                                       |        |        |         |   |        |         |        |   |         |        |        |   |        |       
|                         | Gross premiums earned               |                                       | $      | 14,962 |         |   | $      | 15,376  |        |   | $       | 16,676 |        |   | $      | 16,356 |       
|                         | Premiums ceded                      |                                       |        | (2,320 | )       |   |        | (2,208  | )      |   |         | (2,515 | )      |   |        | (2,645 | )     
|                         |                                     |                                       |        |        |         |   |        |         |        |   |         |       
|                         |                                     | Premiums earned                       |        |        | 12,642  |   |        |         | 13,168 |   |         |        | 14,161 |   |        |        | 13,711 | 
|                         | Net investment income               |                                       |        | 838    |         |   |        | 925     |        |   |         | 929    |        |   |        | 975    |       
|                         | Net realized investment gains       |                                       |        | 649    |         |   |        | 58      |        |   |         | (2     | )      |   |        |       |       
|                         | Service revenue                     |                                       |        | 67     |         |   |        | 73      |        |   |         | 143    |        |   |        | 350    |       
|                         |                                     |                                       |        |        |         |   |        |         |        |   |         |       
|                         |                                     | Total revenues                        |        |        | 14,196  |   |        |         | 14,224 |   |         |        | 15,231 |   |        |        | 15,036 | 
|Expenses:                |                                     |                                       |        |        |         |   |        |         |        |   |         |        |        |   |        |       
|                         | Claim and claim settlement expenses |                                       |        | 9,230  |         |   |        | 9,005   |        |   |         | 10,061 |        |   |        | 7,240  |       
|                         | Policy acquisition costs            |                                       |        | 1,410  |         |   |        | 1,959   |        |   |         | 1,531  |        |   |        | 1,145  |       
|                         | General and administrative expenses |                                       |        | 2,148  |         |   |        | 1,889   |        |   |         | 2,185  |        |   |        | 2,812  |       
|                         |                                     |                                       |        |        |         |   |        |         |        |   |         |       
|                         |                                     | Total expenses                        |        |        | 12,788  |   |        |         | 12,853 |   |         |        | 13,777 |   |        |        | 11,197 | 
|                         |                                     |                                       |        |        |         |   |        |         |        |   |         |       
|Income from operations   |                                     | $                                     | 1,408  |        |         | $ | 1,371  |         |        | $ | 1,454   |        |        | $ | 3,839  |       
|                         |                                     |                                       |        |        |         |   |        |         |        |   |         |       
|Net income               |                                     | $                                     | 930    |        |         | $ | 943    |         |        | $ | 1,093   |        |        | $ | 6,975  |       
|                         |                                     |                                       |        |        |         |   |        |         |        |   |         |       
|Basic income per share   |                                     | $                                     | 0.18   |        |         | $ | 0.18   |         |        | $ | 0.21    |        |        | $ | 1.32   |       
|                         |                                     |                                       |        |        |         |   |        |         |        |   |         |       
|Diluted income per share |                                     | $                                     | 0.17   |        |         | $ | 0.17   |         |        | $ | 0.20    |        |        | $ | 1.25   |       
|                         |                                     |                                       |        |        |         |   |        |         |        |   |         |       



|                                                                                                                |  |   |      |   |  |   |      |   |  |   |      |   |  |   |       |  
|--------------------------------------------------------------------------------------------------------------- |  | - | ---- | - |  | - | ---- | - |  | - | ---- | - |  | - | ----- | -
|Net realized investment gains                                                                                   |  | $ | 649  |   |  | $ | 58   |   |  | $ | (2   | ) |  | $ |      |  
|Net changes in estimates for unpaid claim and claim settlement
    expenses on claims reported in prior periods |  |   | 300  |   |  |   | 850  |   |  |   | 200  |   |  |   | 3,246 |  
|Pool reapportionment charge                                                                                     |  |   |     |   |  |   | (478 | ) |  |   |     |   |  |   |      |  
|Bonus expense                                                                                                   |  |   | (100 | ) |  |   | (150 | ) |  |   | (200 | ) |  |   | (845  | )
|Change in recorded deferred income tax valuation allowance                                                      |  |   |     |   |  |   |     |   |  |   |     |   |  |   | 4,040 |  

60



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##### Table of Contents








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








|         |                        
|-------- | -----------------------
|ITEM 9A. | CONTROLS AND PROCEDURES



| |                                                            
| | -----------------------------------------------------------
| | a)     Evaluation of Disclosure
    Controls and Procedures

13a-15(b)




| |                                        
| | ---------------------------------------
| | b)     Changes in Internal
    Controls

13a-15(f) 15d-15(f)







|         |                  
|-------- | -----------------
|ITEM 9B. | OTHER INFORMATION

Employment Agreement with Jeffrey B. Murphy






|                      |  |        |         |  |          |                                                                
|--------------------- |  | ------ | ------- |  | -------- | ---------------------------------------------------------------
|Name                  |  | Salary |         |  | Position
|                      |  |        |         |  |         
|Alfred L. LaTendresse |  | $      | 220,000 |  |          | Executive Vice President, Chief Financial Officer and Secretary
|Thomas J. Byers       |  | $      | 180,000 |  |          | Executive Vice President  Sales and Marketing                 
|Keith D. Krueger      |  | $      | 187,000 |  |          | Vice President  Insured Products and Assistant
    Secretary  
|David M. Dietz        |  | $      | 177,000 |  |          | Vice President  Business Development                          
|Patricia M. Sheveland |  | $      | 177,000 |  |          | Vice President  Case and Claims Management                    

61



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Non-Employee Director Compensation






RTW, Inc. Resumes Share Repurchase Program







PART III







|         |                                                   
|-------- | --------------------------------------------------
|ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT



10-K.







|         |                       
|-------- | ----------------------
|ITEM 11. | EXECUTIVE COMPENSATION








|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
    MANAGEMENT AND RELATED STOCKHOLDER MATTERS








|         |                                               
|-------- | ----------------------------------------------
|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS








|         |                                       
|-------- | --------------------------------------
|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES



62



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##### Table of Contents






PART IV







|         |                                           
|-------- | ------------------------------------------
|ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES





| |                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------
| | (1) Financial Statements. The following
    Consolidated Financial Statements are set forth on pages 36
    through 60, Item 8 of this Report.

| |                                                                                                   
| | --------------------------------------------------------------------------------------------------
| | Report of Independent Registered Public Accounting Firm                                           
| | Consolidated Balance Sheets  December 31, 2005
    and 2004                                      
| | Consolidated Statements of Income  Years Ended
    December 31, 2005, 2004 and 2003              
| | Consolidated Statements of Shareholders Equity 
    Years Ended December 31, 2005, 2004 and 2003
| | Consolidated Statements of Cash Flows  Years Ended
    December 31, 2005, 2004 and 2003          
| | Notes to Consolidated Financial Statements  Years
    Ended December 31, 2005, 2004 and 2003     



| |                                                                                  
| | ---------------------------------------------------------------------------------
| | (2) Financial Statement Schedules for the Three Years
    Ended December 31, 2005

|                                                                                                                                  |  |      |     | 
|--------------------------------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                                                  |  | Page |    
|                                                                                                                                  |  |      |    
|Report of Independent Registered Public Accounting Firm on
    Schedules for the Years Ended December 31, 2005, 2004 and
    2003 |  |      | 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 Consolidated
    Financial Statements or the notes thereto.



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

| |    |      |  |                                                                                                                                              
| | -- | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------
| | 3  | .1   |  | Amended Articles of Incorporation(10)                                                                                                        
| | 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 between RTW, Inc. and Jeffrey B. Murphy
    dated March 28, 2006                                                        
| | 10 | .2*  |  | Amended RTW, Inc. 1995 Employee Stock Purchase Plan(11)                                                                                      
| | 10 | .3*  |  | Amended RTW, Inc. 1994 Stock Plan(4)                                                                                                         
| | 10 | .4*  |  | RTW, Inc. 2005 Stock Plan(12)                                                                                                                
| | 10 | .5   |  | Contract between RTW and ACIC dated January 1, 1992(5)                                                                                       
| | 10 | .6   |  | Service Agreement between RTW and ACIC dated February 1,
    1992(5)                                                                         
| | 10 | .7*  |  | Description of the 2006 Performance Incentive Program                                                                                        
| | 10 | .8   |  | Reinsurance contract between ACIC and First Excess and
    Reinsurance Corporation (GE Reinsurance Corporation) effective
    July 1, 1998(3)
| | 10 | .9   |  | Endorsement No. 2 to the reinsurance contract between ACIC
    and General Reinsurance Corporation(3)                                        
| | 10 | .9.1 |  | Description of the Reinsurance Agreement for 2002 between ACIC
    and General Reinsurance Corporation effective January 1,
    2002(6)      
| | 10 | .9.2 |  | Description of the Reinsurance Agreement for 2003 between ACIC
    and General Reinsurance Corporation effective January 1,
    2003(7)      

63



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| |    |      |  |                                                                                                                                                                                                                               
| | -- | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10 | .9.3 |  | Description of the Reinsurance Agreement for 2004 between ACIC
    and General Reinsurance Corporation effective January 1,
    2004(8)                                                                                       
| | 10 | .9.4 |  | Description of the Reinsurance Agreement for 2005 between ACIC
    and General Reinsurance Corporation effective January 1,
    2005(9)                                                                                       
| | 10 | .9.5 |  | Description of the Reinsurance Agreement for 2006 between ACIC
    and General Reinsurance Corporation effective January 1,
    2006                                                                                          
| | 10 | .10  |  | Minnesota Workers Compensation Reinsurance Association
    reinsurance agreement                                                                                                                                             
| | 10 | .11  |  | Election form for the 2006 Minnesota Workers Compensation
    Reinsurance Association reinsurance agreement                                                                                                                  
| | 10 | .12  |  | Description of the Reinsurance Agreement for 2003 between ACIC
    and Everest Re/ Platinum Re effective January 1, 2003(7)                                                                                                   
| | 10 | .13  |  | Description of the Reinsurance Agreement for 2004 between ACIC
    and various reinsurers effective January 1, 2004(8)                                                                                                        
| | 10 | .14  |  | Description of the Reinsurance Agreement for 2005 between ACIC
    and various reinsurers effective January 1, 2005(9)                                                                                                        
| | 10 | .15  |  | Description of the Reinsurance Agreement for 2006 between ACIC
    and various reinsurers effective January 1, 2006                                                                                                           
| | 11 |      |  | Statement re: Computation of Income Per Share                                                                                                                                                                                 
| | 21 |      |  | Subsidiaries of the Registrant: The Company has two
    subsidiaries, American Compensation Insurance Company (ACIC), a
    Minnesota corporation, and Bloomington Compensation Insurance
    Company, a Minnesota corporation
| | 23 |      |  | Consent of Independent Registered Public Accounting Firm                                                                                                                                                                      
| | 24 |      |  | Power of Attorney, included in Signature page                                                                                                                                                                                 
| | 31 | .1   |  | Certification of President and Chief Executive Officer                                                                                                                                                                        
| | 31 | .2   |  | Certification of Chief Financial Officer                                                                                                                                                                                      
| | 32 |      |  | Certification Pursuant to 18 U.S.C. § 1350,
    Adopted Pursuant to § 906 of the Sarbanes-Oxley Act of
    2003                                                                                                               
| | 99 | .1   |  | Share Repurchase Program Resumption                                                                                                                                                                                           






| |     |                                                                                                                                   
| | --- | ----------------------------------------------------------------------------------------------------------------------------------
| | (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 Annual
    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. 33-2003C).                   
|
| | (6) | Incorporated by reference to the Companys 2001 Annual
    Report on
    Form 10-K/ A.                                            
|
| | (7) | Incorporated by reference to the Companys 2002 Annual
    Report on
    Form 10-K.                                               
|
| | (8) | Incorporated by reference to the Companys 2003 Annual
    Report on
    Form 10-K.                                               
|
| | (9) | Incorporated by reference to the Companys 2004 Annual
    Report on
    Form 10-K.                                               



|     |                                                                                                                                     
|---- | ------------------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to the Companys
    Form 10-Q for the
    quarter ended March 31, 2004.                                  
|    
|(11) | Incorporated by reference to the Companys Registration
    Statement on
    Form S-8 (Reg.
    No. 333-114030)
    (March 30, 2004)
|    
|(12) | Incorporated by reference to the Companys Registration
    Statement on
    Form S-8 (Reg.
    No. 333-127107)
    (August 2, 2005)

64



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##### Table of Contents






SIGNATURES






| |                                                
| | -----------------------------------------------
| | RTW, INC.                                      
|
| | By /s/ Jeffrey B. Murphy                       
| |                                                
| | Jeffrey B. Murphy                              
| | President, Chief Executive Officer and Director
| | (Principal Executive Officer)                  



Signatures and Power of Attorney


attorney-in 10-K


|               |  |                                                                                                                                                                                      
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Date           |  | Signature and Title                                                                                                                                                                  
|               |  |                                                                                                                                                                                      
|March 30, 2006 |  | By /s/ John O. GoodwyneJohn O. Goodwyne
    Chairman of the Board                                                                                                                    
|              
|March 30, 2006 |  | By /s/ Jeffrey B. MurphyJeffrey B. Murphy
    President, Chief Executive Officer and Director
    (Principal Executive Officer)                                                      
|              
|March 30, 2006 |  | By /s/ Alfred L. LaTendresseAlfred L. LaTendresse
    Executive Vice President, Chief Financial Officer,
    Treasurer and Secretary
    (Principal Financial and Accounting Officer)
|              
|March 30, 2006 |  | By /s/ David C. ProsserDavid C. Prosser
    Chairman Emeritus of the Board                                                                                                           
|              
|March 30, 2006 |  | By /s/ Gregory D. KoschinskaGregory D. Koschinska
    Director                                                                                                                       

65



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##### Table of Contents



|               |  |                                                       
|-------------- |  | ------------------------------------------------------
|Date           |  | Signature and Title                                   
|               |  |                                                       
|              
|March 30, 2006 |  | By /s/ William J. DetersWilliam J. Deters
    Director
|              
|March 30, 2006 |  | By /s/ John W. ProsserJohn W. Prosser
    Director    
|              
|March 30, 2006 |  | By /s/ Vina L. MarquartVina L. Marquart
    Director  

66



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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
SCHEDULES
















S-1



---



##### Table of Contents



SCHEDULE I


RTW, INC.


SUMMARY OF INVESTMENTS


December 31, 2005


|                   |                     |                                                               |                   |   |        |             |  |         |        |         |  |   |        |         | 
|------------------ | ------------------- | ------------------------------------------------------------- | ----------------- | - | ------ | ----------- |  | ------- | ------ | ------- |  | - | ------ | ------- | 
|                   |                     |                                                               |                   |   |        | Amount at   | 
|                   |                     |                                                               |                   |   |        | Which Shown | 
|                   |                     |                                                               |                   |   |        | in the      | 
|                   |                     | Amortized                                                     |                   |   | Fair   |             |  | Balance |       
|Type of Investment |                     | Cost                                                          |                   |   | Value  |             |  | Sheet   |       
|                   |                     |                                                               |                   |   |        |             |  |         |       
|                   |                     | (In thousands)                                                |                  
|Fixed maturities:  |                     |                                                               |                   |   |        |             |  |         |        |         |  |  
|                   | Available-for-sale: |                                                               |                   |   |        |             |  |         |        |         |  |   |       
|                   |                     | Municipal securities                                          |                   | $ | 18,658 |             |  | $       | 18,202 |         |  | $ | 18,202 |        
|                   |                     | Commercial paper                                              |                   |   | 10,167 |             |  |         | 10,167 |         |  |   | 10,167 |        
|                   |                     | Mortgage backed securities                                    |                   |   | 22,049 |             |  |         | 21,691 |         |  |   | 21,691 |        
|                   |                     | Asset backed securities                                       |                   |   | 2,009  |             |  |         | 1,949  |         |  |   | 1,949  |        
|                   |                     | United States government, government agencies and authorities |                   |   | 56,138 |             |  |         | 55,241 |         |  |   | 55,241 |        
|                   |                     |                                                               |                   |   |        |             |  |         |       
|                   |                     |                                                               | Total Investments |   | $      | 109,021     |  |         | $      | 107,250 |  |   | $      | 107,250 | 
|                   |                     |                                                               |                   |   |        |             |  |         |       

S-2



---



##### Table of Contents



SCHEDULE II


RTW, INC.


Condensed Financial Information of the Registrant


Balance Sheets


December 31, 2005 and 2004


|                                         |                   |                |        |       |      |   |        |       | 
|---------------------------------------- | ----------------- | -------------- | ------ | ----- | ---- | - | ------ | ----- | 
|                                         |                   | 2005           |        |       | 2004 |  
|                                         |                   |                |        |       |      |  
|                                         |                   | (In thousands) |       
|ASSETS                                  
|Cash and cash equivalents                |                   | $              | 142    |       |      | $ | 150    |      
|Furniture and equipment, net             |                   |                | 1,444  |       |      |   | 1,228  |      
|Investment in and advances to subsidiary |                   |                | 53,406 |       |      |   | 46,452 |      
|Other assets                             |                   |                | 1,441  |       |      |   | 1,126  |      
|                                         |                   |                |        |       |      |  
|                                         |                   | $              | 56,433 |       |      | $ | 48,956 |      
|                                         |                   |                |        |       |      |  
|                                        
|LIABILITIES AND SHAREHOLDERS EQUITY    
|Accrued expenses and other liabilities   |                   | $              | 5,855  |       |      | $ | 3,425  |      
|                                         |                   |                |        |       |      |  
|                                         | Total liabilities |                |        | 5,855 |      |   |        | 3,425 | 
|Shareholders equity                     |                   |                | 50,578 |       |      |   | 45,531 |      
|                                         |                   |                |        |       |      |  
|                                         |                   | $              | 56,433 |       |      | $ | 48,956 |      
|                                         |                   |                |        |       |      |  



S-3



---



##### Table of Contents



SCHEDULE II


RTW, INC.


Condensed Financial Information of the Registrant


Statements of Operations


Years Ended December 31, 2005, 2004 and 2003


|                                                 |                                     |                                                                                     |       |        |        |  |       |        |        |  |       |        |        | 
|------------------------------------------------ | ----------------------------------- | ----------------------------------------------------------------------------------- | ----- | ------ | ------ |  | ----- | ------ | ------ |  | ----- | ------ | ------ | 
|                                                 |                                     | 2005                                                                                |       |        | 2004   |  |       | 2003   |       
|                                                 |                                     |                                                                                     |       |        |        |  |       |        |       
|                                                 |                                     | (In thousands)                                                                      |      
|Revenues:                                        |                                     |                                                                                     |       |        |        |  |       |        |        |  |       |       
|                                                 | Intercompany fee income             |                                                                                     | $     | 17,469 |        |  | $     | 18,289 |        |  | $     | 16,617 |       
|                                                 | Service fee revenue                 |                                                                                     |       | 4,398  |        |  |       | 633    |        |  |       | 109    |       
|                                                 | Investment income                   |                                                                                     |       | 14     |        |  |       | 104    |        |  |       | 2      |       
|                                                 |                                     |                                                                                     |       |        |        |  |       |        |       
|                                                 |                                     | Total revenues                                                                      |       |        | 21,881 |  |       |        | 19,026 |  |       |        | 16,728 | 
|Expenses:                                        |                                     |                                                                                     |       |        |        |  |       |        |        |  |       |       
|                                                 | General and administrative expenses |                                                                                     |       | 18,327 |        |  |       | 15,933 |        |  |       | 15,898 |       
|                                                 |                                     |                                                                                     |       |        |        |  |       |        |       
|                                                 |                                     | Income from operations                                                              |       |        | 3,554  |  |       |        | 3,093  |  |       |        | 830    | 
|                                                 | Interest expense                    |                                                                                     |       |       |        |  |       |       |        |  |       | 48     |       
|                                                 |                                     |                                                                                     |       |        |        |  |       |        |       
|                                                 |                                     | Income before income taxes and equity in undistributed net
    income of subsidiary |       |        | 3,554  |  |       |        | 3,093  |  |       |        | 782    | 
|                                                 | Income tax expense                  |                                                                                     |       | 1,650  |        |  |       | 879    |        |  |       | 91     |       
|                                                 |                                     |                                                                                     |       |        |        |  |       |        |       
|                                                 |                                     | Income before equity in undistributed net income of subsidiary                      |       |        | 1,904  |  |       |        | 2,214  |  |       |        | 691    | 
|Equity in undistributed net income of subsidiary |                                     |                                                                                     | 4,094 |        |        |  | 7,727 |        |        |  | 6,308 |       
|                                                 |                                     |                                                                                     |       |        |        |  |       |        |       
|                                                 |                                     | Net income                                                                          |       | $      | 5,998  |  |       | $      | 9,941  |  |       | $      | 6,999  | 
|                                                 |                                     |                                                                                     |       |        |        |  |       |        |       



S-4



---



##### Table of Contents



SCHEDULE II


RTW, INC.


Condensed Financial Information of the Registrant


Statements of Cash Flows


Years Ended December 31, 2005, 2004 and 2003


|                                                         |                                                                                          |                                                                                                 |                                        |                                        |                                                     |        |        |        |       |        |        |        |       |        |        |        |  
|-------------------------------------------------------- | ---------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------- | -------------------------------------- | -------------------------------------- | --------------------------------------------------- | ------ | ------ | ------ | ----- | ------ | ------ | ------ | ----- | ------ | ------ | ------ | -
|                                                         |                                                                                          | 2005                                                                                            |                                        |                                        | 2004                                                |        |        | 2003   |      
|                                                         |                                                                                          |                                                                                                 |                                        |                                        |                                                     |        |        |        |      
|                                                         |                                                                                          | (In thousands)                                                                                  |                                       
|Cash Flows from
    Operating Activities:                |                                                                                          |                                                                                                 |                                        |                                        |                                                     |        |        |        |       |        |        |       
|                                                         | Reconciliation of net income to net cash provided by (used in)
    operating activities: |                                                                                                 |                                        |                                        |                                                     |        |        |        |       |        |        |        |      
|                                                         |                                                                                          | Net income                                                                                      |                                        | $                                      | 5,998                                               |        |        | $      | 9,941 |        |        | $      | 6,999 |       
|                                                         |                                                                                          | Adjustments to reconcile net income to net cash provided by
    (used in) operating activities: |                                        |                                        |                                                     |        |        |        |       |        |        |        |       |       
|                                                         |                                                                                          |                                                                                                 | Depreciation and amortization          |                                        |                                                     | 470    |        |        |       | 458    |        |        |       | 551    |       
|                                                         |                                                                                          |                                                                                                 | Equity in net (income) from subsidiary |                                        |                                                     | (4,094 | )      |        |       | (7,727 | )      |        |       | (6,309 | )     
|                                                         |                                                                                          |                                                                                                 | Deferred income taxes                  |                                        |                                                     | 41     |        |        |       | 57     |        |        |       |       |       
|                                                         |                                                                                          |                                                                                                 | Changes in assets and liabilities:     |                                        |                                                     |        |        |        |       |        |        |        |       |        |       
|                                                         |                                                                                          |                                                                                                 |                                        | Accrued expenses and other liabilities |                                                     |        | 2,389  |        |       |        | 1,070  |        |       |        | (539   | )     
|                                                         |                                                                                          |                                                                                                 |                                        | Other, net                             |                                                     |        | (1,844 | )      |       |        | (1,278 | )      |       |        | (1,270 | )     
|                                                         |                                                                                          |                                                                                                 |                                        |                                        |                                                     |        |        |        |      
|                                                         |                                                                                          |                                                                                                 |                                        |                                        | Net cash provided by (used in) operating activities |        |        | 2,960  |       |        |        | 2,521  |       |        |        | (568   | )
|                                                        
|Cash Flows from
    Investing Activities:                |                                                                                          |                                                                                                 |                                        |                                        |                                                     |        |        |        |       |        |        |       
|                                                         | Investment in and advances to subsidiary                                                 |                                                                                                 |                                        | (2,860                                 | )                                                   |        |        | (2,625 | )     |        |        | 1,725  |      
|                                                         | Purchases of furniture and equipment                                                     |                                                                                                 |                                        | (696                                   | )                                                   |        |        | (444   | )     |        |        | (175   | )    
|                                                         | Disposals of furniture and equipment                                                     |                                                                                                 |                                        | 10                                     |                                                     |        |        |       |       |        |        | 22     |      
|                                                         |                                                                                          |                                                                                                 |                                        |                                        |                                                     |        |        |        |      
|                                                         |                                                                                          |                                                                                                 |                                        |                                        | Net cash (used in) provided by investing activities |        |        | (3,546 | )     |        |        | (3,069 | )     |        |        | 1,572  |  
|                                                        
|Cash Flows from
    Financing Activities:                |                                                                                          |                                                                                                 |                                        |                                        |                                                     |        |        |        |       |        |        |       
|                                                         | Payments on notes payable                                                                |                                                                                                 |                                        |                                       |                                                     |        |        |       |       |        |        | (1,250 | )    
|                                                         | Stock options exercised                                                                  |                                                                                                 |                                        | 479                                    |                                                     |        |        | 533    |       |        |        | 19     |      
|                                                         | Issuance of common stock under ESPP                                                      |                                                                                                 |                                        | 99                                     |                                                     |        |        | 65     |       |        |        | 43     |      
|                                                         | Retirement of common stock                                                               |                                                                                                 |                                        |                                       |                                                     |        |        |       |       |        |        | (37    | )    
|                                                         |                                                                                          |                                                                                                 |                                        |                                        |                                                     |        |        |        |      
|                                                         |                                                                                          |                                                                                                 |                                        |                                        | Net cash provided by (used in) financing activities |        |        | 578    |       |        |        | 598    |       |        |        | (1,225 | )
|                                                         |                                                                                          |                                                                                                 |                                        |                                        |                                                     |        |        |        |      
|Net (Decrease) Increase
    in Cash and Cash Equivalents |                                                                                          |                                                                                                 | (8                                     | )                                      |                                                     |        | 50     |        |       |        | (221   | )     
|Cash and Cash
    Equivalents at Beginning of Year       |                                                                                          |                                                                                                 | 150                                    |                                        |                                                     |        | 100    |        |       |        | 321    |       
|                                                         |                                                                                          |                                                                                                 |                                        |                                        |                                                     |        |        |        |      
|Cash and Cash
    Equivalents at End of Year             |                                                                                          | $                                                                                               | 142                                    |                                        |                                                     | $      | 150    |        |       | $      | 100    |       
|                                                         |                                                                                          |                                                                                                 |                                        |                                        |                                                     |        |        |        |      
|Supplemental Disclosure
    of Cash Flow Information:    |                                                                                          |                                                                                                 |                                        |                                        |                                                     |        |        |        |       |        |        |       
|                                                         | Cash paid (received) during the year for:                                                |                                                                                                 |                                        |                                        |                                                     |        |        |        |       |        |        |        |      
|                                                         |                                                                                          | Interest                                                                                        |                                        | $                                      |                                                    |        |        | $      |      |        |        | $      | 27    |       
|                                                         |                                                                                          |                                                                                                 |                                        |                                        |                                                     |        |        |        |      
|                                                         |                                                                                          | Income tax payments (refunds)                                                                   |                                        | $                                      | 148                                                 |        |        | $      | (357  | )      |        | $      | (9    | )     
|                                                         |                                                                                          |                                                                                                 |                                        |                                        |                                                     |        |        |        |      



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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, 2005, 2004 and 2003


NOTE 1  ACCOUNTING POLICIES


10-K.




NOTE 2  RELATED PARTY TRANSACTIONS








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##### Table of Contents





SCHEDULE III


RTW, INC.


SUPPLEMENTAL INFORMATION CONCERNING INSURANCE OPERATIONS


December 31, 2005


|     |  |                |       |              |            |   |         |             |  |   |          |  |            |          |          |                     |            |                      |              |         |             |      |       |           |  |             |        |  |            |   |        |           |  |   |          |  |  |   |        |  |  |   |        |  |  |   |        | 
|---- |  | -------------- | ----- | ------------ | ---------- | - | ------- | ----------- |  | - | -------- |  | ---------- | -------- | -------- | ------------------- | ---------- | -------------------- | ------------ | ------- | ----------- | ---- | ----- | --------- |  | ----------- | ------ |  | ---------- | - | ------ | --------- |  | - | -------- |  |  | - | ------ |  |  | - | ------ |  |  | - | ------ | 
|     |  |                |       | (Column C)   |            |   |         |             |  |   |          |  |            |          |          |                     |            |                      |              |         |             |      |      
|     |  |                |       | Reserves for |            |   |         |             |  |   |          |  | Investment |          |          | Claim and Claim     |            |                      |              |         |             |      |       |           | 
|     |  |                |       | Unpaid       |            |   |         |             |  |   |          |  | Income     |          |          | Settlement Expenses |            |                      | Amortization |         |             | Paid |       |           |  |             |       
|     |  | Deferred       |       |              | Claim and  |   |         | Discount,   |  |   |          |  |            |          | and Net  |                     |            | Incurred Related to: |              |         | of Deferred |      |       | Claim and |  |             |        |  |           
|     |  | Policy         |       |              | Claim      |   |         | If Any,     |  |   |          |  |            |          | Realized |                     |            |                      |              |         | Policy      |      |       | Claim     |  |             | Other  |  |            |  
|     |  | Acquisition    |       |              | Settlement |   |         | Deducted in |  |   | Unearned |  |            | Earned   |          |                     | Investment |                      |              | Current |             |      | Prior |           |  | Acquisition |        |  | Settlement |   |        | Operating |  |   | Premiums | 
|Year |  | Costs          |       |              | Expenses   |   |         | Column C(1) |  |   | Premiums |  |            | Premiums |          |                     | Gains      |                      |              | Year    |             |      | Years |           |  | Costs       |        |  | Expenses   |   |        | Expenses  |  |   | Written  | 
|     |  |                |       |              |            |   |         |             |  |   |          |  |            |          |          |                     |            |                      |              |         |             |      |       |           |  |             |        |  |            |   |        |           |  |   |          | 
|     |  | (In thousands) |      
|2005 |  | $              | 889   |              |            | $ | 160,141 |             |  | $ | 343      |  |            | $        | 8,341    |                     |            | $                    | 49,420       |         |             | $    | 5,352 |           |  | $           | 36,264 |  |            | $ | (5,457 | )         |  | $ | 5,456    |  |  | $ | 32,385 |  |  | $ | 12,842 |  |  | $ | 47,264 | 
|2004 |  | $              | 1,112 |              |            | $ | 156,123 |             |  | $ | 344      |  |            | $        | 10,497   |                     |            | $                    | 53,682       |         |             | $    | 4,432 |           |  | $           | 42,583 |  |            | $ | (7,047 | )         |  | $ | 6,045    |  |  | $ | 35,713 |  |  | $ | 9,204  |  |  | $ | 54,999 | 
|2003 |  | $              | 926   |              |            | $ | 150,044 |             |  | $ | 505      |  |            | $        | 9,180    |                     |            | $                    | 46,290       |         |             | $    | 5,157 |           |  | $           | 33,954 |  |            | $ | (6,698 | )         |  | $ | 6,878    |  |  | $ | 38,118 |  |  | $ | 10,789 |  |  | $ | 48,340 | 






|    |                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------
|(1) | Certain claims with fixed or determinable future payments are
    discounted at rates ranging from 3.5% to 8.0%.

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##### Table of Contents



SCHEDULE IV


RTW, INC.


REINSURANCE


Years Ended December 31, 2005, 2004 and 2003


|            |                                  |                 |   |          |            |  |            |           |  |     |           |   |        |  |   |        |  |  |  |      |  
|----------- | -------------------------------- | --------------- | - | -------- | ---------- |  | ---------- | --------- |  | --- | --------- | - | ------ |  | - | ------ |  |  |  | ---- | -
|            |                                  | Premiums Earned |   |          |           
|            |                                  |                 |   |          | Percentage | 
|            |                                  |                 |   | Ceded to |            |  | Assumed    |           |  |     | of Amount |  
|            |                                  |                 |   | Other    |            |  | from Other |           |  |     | Assumed   |  
|Description |                                  | Direct          |   |          | Companies  |  |            | Companies |  | Net |           |   | to Net | 
|            |                                  |                 |   |          |            |  |            |           |  |     |           |   |        | 
|            |                                  | (In thousands)  |  
|2005        |                                  |                 |   |          |            |  |            |           |  |     |           |   |        |  |   |        |  |  |  |     
|            | PREMIUMS  Workers Compensation |                 | $ | 59,872   |            |  | $          | 10,452    |  |     | $         |  |        |  | $ | 49,420 |  |  |  | 0.00 | %
|           
|2004        |                                  |                 |   |          |            |  |            |           |  |     |           |   |        |  |   |        |  |  |  |     
|            | PREMIUMS  Workers Compensation |                 | $ | 63,370   |            |  | $          | 9,688     |  |     | $         |  |        |  | $ | 53,682 |  |  |  | 0.00 | %
|           
|2003        |                                  |                 |   |          |            |  |            |           |  |     |           |   |        |  |   |        |  |  |  |     
|            | PREMIUMS  Workers Compensation |                 | $ | 54,431   |            |  | $          | 8,141     |  |     | $         |  |        |  | $ | 46,290 |  |  |  | 0.00 | %

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##### Table of Contents



SCHEDULE V


RTW, INC.


VALUATION AND QUALIFYING ACCOUNTS


Years Ended December 31, 2005, 2004 and 2003


|            |                                 |                |   |           |            |  |   |            |   |            |   |            |           |  |   |     |  |  |   |     | 
|----------- | ------------------------------- | -------------- | - | --------- | ---------- |  | - | ---------- | - | ---------- | - | ---------- | --------- |  | - | --- |  |  | - | --- | 
|            |                                 |                |   | Additions |            |  |   |           
|            |                                 |                |   |           |            |  |   |           
|            |                                 | Balance at     |   |           | Charged to |  |   | Charged to |   |            |   | Balance at |          
|            |                                 | Beginning      |   |           | Costs and  |  |   | Other      |   |            |   | End        |          
|Description |                                 | of Period      |   |           | Expenses   |  |   | Accounts   |   | Write-offs |   |            | of Period | 
|            |                                 |                |   |           |            |  |   |            |   |            |   |            |           | 
|            |                                 | (In thousands) |  
|2005        |                                 |                |   |           |            |  |   |            |   |            |   |            |           |  |   |     |  |  |   |    
|            | Allowance for Doubtful Accounts |                | $ | 90        |            |  | $ | 450        |   |            | $ |           |           |  | $ | 348 |  |  | $ | 192 | 
|           
|2004        |                                 |                |   |           |            |  |   |            |   |            |   |            |           |  |   |     |  |  |   |    
|            | Allowance for Doubtful Accounts |                | $ | 225       |            |  | $ | (107       | ) |            | $ |           |           |  | $ | 28  |  |  | $ | 90  | 
|           
|2003        |                                 |                |   |           |            |  |   |            |   |            |   |            |           |  |   |     |  |  |   |    
|            | Allowance for Doubtful Accounts |                | $ | 220       |            |  | $ | 507        |   |            | $ |           |           |  | $ | 502 |  |  | $ | 225 | 

S-9