##### Table of Contents



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 1934For the fiscal year ended
    December 31, 2006ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)  OF
    THE SECURITIES EXCHANGE ACT OF 1934For 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:
 Common Stock, no par
    value
 Series A Junior
    Participating Preferred Stock
  Securities
    registered pursuant to 12(g) of the Act: None
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K: o
  Rule 12b-2)
 o o þ
  Rule 12b-2)  Yes o þ
    Documents
    incorporated by reference:
  Form 10-K.




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##### 



TABLE
    OF CONTENTS
  
  PagePART IItem 1.

Business


2Executive Officers
    of the Registrant


9Item 1A.

Risk
    Factors


11Item 2.

Properties


12Item 3.

Legal
    Proceedings


12Item 4.

Submission of
    Matters to a Vote of Security Holders


13PART IIItem 5.

Market for
    Registrants Common Equity, Related Stockholder Matters and
    Issuer purchases of Equity Securities


14Item 6.

Selected Financial
    Data


17Item 7.

Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


18Item 7A.

Quantitative and
    Qualitative Disclosures About Market Risk


44Item 8.

Financial
    Statements and Supplementary Data


45Item 9.

Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure


73Item 9A(T).

Controls and
    Procedures


73Item 9B.

Other
    Information


73PART IIIItem 10.

Directors,
    Executive Officers and Corporate Governance


73Item 11.

Executive
    Compensation


73Item 12.

Security Ownership
    of Certain Beneficial Owners and Management and Related
    Stockholder Matters


73Item 13.

Certain
    Relationships and Related Transactions and Director
    Independence


73Item 14.

Principal
    Accountant Fees and Services


74PART IVItem 15.

Exhibits and
    Financial Statement Schedules


74Signatures


76Description of the 2007 Performance Incentive ProgramsMinnesota Workers' Compensation Reinsurance Association reinsurance agreementElection form for the 2006 Minnesota Workers' Compensation Reinsurance Association reinsuranceDescription of the Reinsurance Agreement for 2007Minnesota Lease Addendum dated December 5, 2006Statement Re: Computation of Income Per ShareConsent of Independent Registered Public Accounting FirmCertification of President and CEOCertification of CFOCertification Pursuant to 18 U.S.C. Section 1350   1




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##### Table of Contents



PART I  ITEM 1.
    BUSINESS  Overview
  ® fee-for-service
  ® ® state-of-the-art
    
    focus our efforts on the 15% of the injured employees that drive
    80% of the system costs;
    control costs by actively managing all participants in the
    system, including employers, injured employees, medical care
    providers, attorneys and the legal system; and
    return injured employees to work as soon as safely possible.  Industry
       2




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return-to-work
  Our
    Management Approach
  ® ®
      Customers. on-site
   3




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Employees. return-to-work
  Medical Care Providers.
      Legal and Judicial Participants.
  Customers
   4




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Products
  Insurance Products.
      Service Offerings. fee-for-service
 5




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Sales and
    Marketing
      Reinsurance
        Covers Losses Per Occurrence:In Excess of:


Limited to:Minnesota:2006 WCRA

$
390,000


Statutory limitVarious reinsurers

$
200,000


$390,0002005 WCRA

$
380,000


Statutory limitVarious reinsurers

$
200,000


$380,0002004 WCRA

$
360,000


Statutory limitVarious reinsurers

$
200,000


$360,000Other States:2006 Various reinsurers

$
200,000


$20 million, excluding acts of
    terrorism2005 Various reinsurers

$
200,000


$20 million, excluding acts
    of terrorism2004 Various reinsurers

$
200,000


$20 million, excluding acts
    of terrorism    6




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##### Table of Contents



Reinsurer

A.M. Best RatingAspen Insurance UK Ltd


AContinental Casualty Company


AEverest Reinsurance Company


A
+General Reinsurance Corporation


A
++Max Re Ltd


A
−Munich Re America Corporation


APlatinum Underwriters Reinsurance,
    Inc.


ASwiss Reinsurance America


A
+SCOR Reinsurance Company


B
++Transatlantic Reinsurance Company


A
+     Terrorism
    Reinsurance
      Competition
  fee-for-service
 7




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##### Table of Contents



Data
    Management
    FirstInstall

System Description

Business Use1995

Policy management system

Process insurance applications;
    issue and endorse policies1996

Case and claims management and
    medical fee adjudicating systems

Manage claims, audit medical fees,
    pay claims, provide  reports to policyholders and analyze claims
    data1999

Client account management system

Billing, cash receipts,
    collections and agency commission systems    8




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Employees
    Regulation
      Trade
    Names, Trademarks and Service Marks
    Company
    Information
  http://www.rtwi.com
 Executive
    Officers of the Registrant    Name

Age

PositionJohn O. Goodwyne


68


Chairman of the BoardJeffrey B. Murphy


45


President, Chief Executive Officer
    and DirectorAlfred L. LaTendresse


58


Executive Vice President, Chief
    Financial Officer and SecretaryThomas J. Byers


51


Executive Vice President, Sales
    and MarketingKeith D. Krueger


48


Vice President, Chief Operating
    Officer and Assistant SecretaryDavid M. Dietz


40


Vice President, Business
    DevelopmentPatricia M. Sheveland


48


Vice President, Product
    Development, Quality and Compliance  9




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10




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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.  The degree of estimation error inherent
    in the process of estimating workers compensation claim
    and claim settlement expense may result in a high degree of
    volatility in periodic earnings reports. 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 and BCIC since 2005
    and therefore have relatively limited experience (fifteen
    years), and accordingly, are subject to volatility. New medical
    procedures could evolve and new legal theories develop that
    could cause older claims to re-open and increase expense. Claim
    frequency and severity can be volatile. Workers
    compensation is also subject to both medical and wage inflation.
    The cost of medical care has increased in excess of 10% per
    annum in recent years and indemnity cost has increased 3% to 4%
    with wage increases. These changes have resulted in reduced
    profitability in the workers compensation insurance line.
    Inflationary increases which are not offset by improved
    efficiency and effectiveness in managing claims could adversely
    affect profitability. See further discussion under Claim
    and Claim Settlement Expenses and Unpaid Claim and
    Claim Settlement Expenses in ITEM 7 of this Report on
    Form 10-K;
    Workers compensation pricing is
    cyclical.  In 2006 and 2005, premium rates on our
    renewing policies declined an average 6.9% and 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 1990s. 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 in ITEM 7 of this Report on
    Form 10-K;
    Reinsurance for workers compensation
    .  Reinsurance costs in 2006, as a percentage of
    gross premiums earned, were approximately the same as 2005 and
    increased versus 2004 and prior years. We expect that
    reinsurance costs will increase in the future. Higher
    reinsurance costs, if not recovered through increased rates from
    our customers, will adversely affect our profit margin.
    Additionally, reinsurance for workers compensation may not
    be available. See further discussion under Premiums
    Ceded in ITEM 7 of this Report on
    Form 10-K;
    Acts of terrorism:  While we believe that our
    reinsurance programs, together with the coverage provided under
    the Terrorism Risk Insurance Extension Act of 2005, are
    sufficient to limit our net losses relating to potential future
    terrorist attacks, we can offer no assurance that our reserve
    for unpaid claim and claim settlement expenses when they
    materialize will be adequate to cover losses when they
    materialize. It is not possible to eliminate completely our
    exposure to unforecasted or unpredictable events, and to the
    extent that losses from such risks occur, our financial
    condition and results of operations could be materially
    adversely affected. See further discussion under Terrorism
    Reinsurance in ITEM 1 of this Report on
    Form 10-K;
    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 11




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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; and  
    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:  
    our ability to retain renewing policies and write new business
    with a B++ (Good, Secure) rating from A.M. Best;
    adverse rating changes form A.M. Best;
    the ability of our reinsurers to honor their obligations to us;
    our ability to provide our proprietary products and services to
    customers successfully;
    our ability to obtain and retain reinsurance at a reasonable
    cost;
    investment risk, including those of our portfolio of fixed
    income securities and interest rate changes; and
    general economic and business conditions.    ITEM 2.
    PROPERTIES    Area leased(in SquareLocation and Description

Feet)


TerminationBloomington, Minnesota;
    Headquarters and Minnesota office space


31,930



September 2012Denver, Colorado; Colorado office
    space


7,825



May 2010Detroit, Michigan; Michigan office
    space


7,118



January 2013Grand Rapids, Michigan; Michigan
    office space


4,571



February 2011   ITEM 3.
    LEGAL
    PROCEEDINGS  RTW v. Carolina Casualty:
       12




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Other litigation:
  ITEM 4.
    SUBMISSION
    OF MATTERS TO A VOTE OF SECURITY HOLDERS   13




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PART II  ITEM 5.
    MARKET
    FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
    AND ISSUER PURCHASES OF EQUITY SECURITIES  QUARTERLY
    STOCK PRICE COMPARISON AND DIVIDENDS
    First


Second


Third


FourthFiscal Year:

Quarter


Quarter


Quarter


Quarter2006High

$
11.38


$
12.00


$
11.00


$
10.17Low


9.30



10.15



9.70



8.762005High

$
12.37


$
10.86


$
11.40


$
12.08Low


8.27



8.44



9.35



9.05     RECENT
    SALES OF UNREGISTERED EQUITY SECURITIES
    ISSUER
    REPURCHASES OF EQUITY SECURITIES
  time-to-time
    Rule 10b-18, time-to-time
   14




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Total Number of


Maximum ApproximateTotal





Shares Purchased


Dollar Value ofNumber of


Average


as Part of Publicly


Shares That May YetShares


Price Paid


Announced Plans or


be Purchased UnderPeriod

Purchased


Per Share


Programs


the Plans or ProgramsOctober 1 to October 31,
    2006


21,317


$
9.90



21,317


$
1,447,000November 1 to
    November 30, 2006


35,859


$
9.31



35,859


$
1,113,000December 1 to
    December 31, 2006


26,471


$
9.30



26,471


$
867,000Totals


83,647


$
9.46



83,647   SECURITIES
    AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION
    PLANS
    Number of SharesNumber of Shares


Weighted-Average


Remaining Availableto be Issued


Exercise Price of


for Issuance UnderUpon Exercise of


Outstanding Options


Equity Compensation PlansOptions(a)


(b)


(Excluding Column (a))Plans approved by shareholders


604,707


$
7.54



349,126  15




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COMPARATIVE
    STOCK PERFORMANCE
  Form 10-K
  Five Year
    Cumulative Total Shareholder Returns
  
  12/31/01


12/31/02


12/31/03


12/31/04


12/30/05


12/29/06RTW, Inc.


$
100.00



$
75.00



$
287.50



$
416.07



$
414.29



$
402.68Nasdaq Stock Market (U.S.)


$
100.00



$
69.14



$
103.37



$
112.50



$
114.89



$
126.22Nasdaq Insurance Stocks


$
100.00



$
100.79



$
124.54



$
151.21



$
169.47



$
191.62  16




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##### Table of Contents



ITEM 6.
    SELECTED
    FINANCIAL DATA  Form 10-K. Form 10-K.
  2006


2005


2004


2003


2002(In thousands, except per share data)Total revenues

$
53,872


$
59,011


$
58,687


$
51,383


$
67,023Income from operations


5,222



10,079



8,072



6,635



10,325Income before income taxes


5,222



10,079



8,072



6,587



10,162Net income


3,288



5,998



9,941



6,999



14,319Basic income per share


0.62



1.11



1.90



1.37



2.78Diluted income per share


0.60



1.06



1.81



1.32



2.78Total assets


218,439



228,471



220,507



202,168



223,834Notes payable


















1,250Total shareholders equity


51,355



50,578



45,531



35,587



29,810  17




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##### Table of Contents



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 fee-for-service ®
  ® ® state-of-the-art
      Significant Accounting Policies
  Off-Balance Sheet Arrangements
  Financial Summary
 18




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##### Table of Contents



Year Ended December 31,2006


2005


2004Gross premiums earned

$
51,367


$
59,872


$
63,370Premiums earned


42,606



49,420



53,682Service revenue


5,941



4,398



633Total revenues


53,872



59,011



58,687Claim and claim settlement expenses


30,134



30,807



35,536Income before income taxes


5,222



10,079



8,072Net income


3,288



5,998



9,941Diluted income per share

$
0.60


$
1.06


$
1.81     
    Gross premiums earned decreased 14.2% to $51.4 million in
    2006 from $59.9 million in 2005 primarily due to a decrease
    in average premiums in force to $50.9 million for 2006 from
    $57.9 million in 2005. See further discussion under
    Premiums In Force and Gross Premiums Earned;
    Premiums earned decreased 13.8% to $42.6 million in 2006
    from $49.4 million in 2005. Premiums earned in 2006 reflect
    the decrease in gross premiums earned from 2005, offset by a
    slight decrease in premiums ceded as our cost of excess of loss
    reinsurance decreased slightly in 2006;
    Service revenue from our Absentia division grew to
    $5.9 million in 2006 from $4.4 million in 2005;
    Total revenues included $5.3 million of net investment
    income and no net realized investment gains in 2006 compared to
    $4.6 million of net investment income and $580,000 of net
    realized investment gains in 2005;
    Claim and claim settlement expenses increased to 70.7% of
    premiums earned for 2006 from 62.3% for 2005. We realized
    favorable development of $1.8 million in 2006 compared to
    $5.5 million in 2005. Claim and claim settlement expenses
    decreased in 2006 due to the decrease in gross premiums earned
    in 2006 compared to 2005 but increased as a percent due to the
    reduced favorable development recorded in 2006. See further
    discussion under Claim and Claim Settlement
    Expenses; and
    Income tax expense decreased to 37.0% of income before income
    taxes for 2006 from 40.5% for 2005. 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. See further discussion under
    Income Taxes.       19




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##### Table of Contents



RESULTS
    OF OPERATIONS
  Total revenues:
  Year Ended December 31,2006


2005


2004Gross premiums earned

$
51,367


$
59,872


$
63,370Premiums ceded


(8,761
)


(10,452
)


(9,688
)Premiums earned


42,606



49,420



53,682Net investment income


5,325



4,613



3,667Realized investment gains (losses):Realized investment gains






584



708Realized investment losses






(4
)


(3
)Net realized investment gains






580



705Service revenue


5,941



4,398



633Total revenues

$
53,872


$
59,011


$
58,687   2006


2005


2004Premiums in force by region at
    year-end:Minnesota

$
28,500


$
32,300


$
37,800Colorado


7,100



8,300



10,600Michigan


11,900



12,300



14,300Total premiums in force

$
47,500


$
52,900


$
62,700   Premiums In Force and Gross Premiums
    Earned:
     20




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##### Table of Contents



Premiums Ceded:
    Covers Losses Per Occurrence:In Excess of:


Limited to:Minnesota:2006 WCRA

$
390,000


Statutory limitVarious reinsurers

$
200,000


$390,0002005 WCRA

$
380,000


Statutory limitVarious reinsurers

$
200,000


$380,0002004 WCRA

$
360,000


Statutory limitVarious reinsurers

$
200,000


$360,000Other States:2006 Various reinsurers

$
200,000


$20 million, excluding acts
    of terrorism2005 Various reinsurers

$
200,000


$20 million, excluding acts
    of terrorism2004 Various reinsurers

$
200,000


$20 million, excluding acts
    of terrorism      21




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2007 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 2007 and
    terminate some that are not performing as expected. We expect
    growth in premiums in force in 2007 as we expand our
    underwriting niche, write multi-state policies and begin
    leveraging unused licenses;
    Our 2007 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 2007. The cost of excess of loss reinsurance
    has decreased slightly or remained the same for all regions in
    2007; 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 2007 when compared to the results attained for 2006.  Net Investment Income and Net Realized Investment Gains
    (Losses):
  available-for-sale.
  available-for-sale
     22




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##### Table of Contents



2007 Outlook:
  
    We expect intermediate to long-term interest rates to vary only
    slightly in 2007. The timing of any such rate changes is unknown
    at this time;
    We expect that short-term interest rates on cash and cash
    equivalents will decrease slightly in 2007 as the Federal
    Reserve Board decreases 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 2007 are expected to be affected by decreases in
    cash flows resulting from claim payments on claims from 2006 and
    prior years, offset by cash flows from our premiums and service
    revenue;
    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 2007; and
    New and re-negotiated reinsurance treaties may affect our future
    cash flow and future net investment income.  Service Revenue:
  2007 Outlook:
  
    In March 2004, we were awarded a three-year contract to service
    25% of the ARP. On January 4, 2007, this contract was
    extended for one year. 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,
    2006 is approximately $63.1 million, which decreased from
    $85.1 million at December 31, 2005. We expect the
    total annual premium in the ARP to continue to decrease during
    2007, which will exert downward pressure on our service
    revenue; and
    We continue to market our services 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:
   23




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##### Table of Contents



Average Gross


Average NetOpen Claims


Reserve


Reserve2006


918


$
28,600


$
21,9002005


200


$
99,000


$
71,9002004


103


$
163,500


$
84,600     2006 Compared to 2005:
  
    The decrease in gross premiums earned as discussed above under
    Premiums In Force and Gross Premiums Earned;
    The 2006 results include a $1.8 million decrease in prior
    accident years reserves for unpaid claim and claim
    settlement expenses compared to the 2005 results, which include
    a $5.5 million decrease in prior accident years
    reserves. Our estimate for unpaid claim and claim settlement
    expenses decreased in 2006 due to the following: (i) our
    ability to manage and close claims has improved over our
    historical experience; and (ii) our estimate of the
    liability for unpaid claim and claim settlement expenses is
    volatile due to our relatively limited fifteen-year historical
    claim data and our small claim population;
    Claim costs continued to reflect increasing medical and
    indemnity costs in accident year 2006 as compared to accident
    year 2005 resulting from inflationary pressures; and
    Claim costs, measured as a percentage of gross premiums earned,
    were adversely affected by the price declines experienced in
    2006 versus 2005.  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- 24




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##### Table of Contents



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;  
    Claim costs continued to reflect increasing medical and
    indemnity costs in accident year 2005 as compared to accident
    year 2004 resulting from inflationary pressures; and
    Claim costs, measured as a percentage of gross premiums earned,
    were adversely affected by the price declines experienced in
    2005 versus 2004.  2007 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 31,2006


2005


2004Commission expense

$
3,355


$
3,986


$
4,489Premium tax expense


942



1,153



1,147Other policy acquisition costs


2,944



2,815



2,769Direct policy acquisition costs


7,241



7,954



8,405Ceding commission on excess of
    loss reinsurance


(2,081
)


(2,498
)


(2,360
)Total policy acquisition costs

$
5,160


$
5,456


$
6,045     
    Gross premiums earned decreased in 2006 compared to 2005
    resulting in a corresponding decrease in policy acquisition
    costs;
    Commission expense decreased to 6.5% of gross premiums earned in
    2006 from 6.7% in 2005 and 7.1% in 2004. The decreased
    commission rates are the result of the decrease in our new
    business, which we pay 25




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##### Table of Contents



higher commissions on, in 2006 relative to 2005 and 2004. In all
    of our markets, we believe the commission rates we pay are
    marketplace competitive;  
    Premium tax expense paid to states was 1.8% of gross premiums
    earned in 2006, 1.9% of gross premiums earned in 2005 and 1.8%
    of gross premiums earned in 2004; 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 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 2006, we
    recorded a $325,000 increase in other policy acquisition costs
    reflecting a re-allocation of prior year mandatory reinsurance
    pool expenses, compared to a $169,000 increase recorded in 2005
    and a $468,000 increase recorded in 2004; 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 5.1% in 2006, 4.4% in 2005 and
    3.6% in 2004.  2007 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 2007; 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:
    
    Service revenue increased to $5.9 million in 2006 from
    $4.4 million in 2005 and $633,000 in 2004. We added staff
    and other general and administrative expenses to deliver the
    services associated with this revenue and we have continued to
    build the infrastructure necessary to support our service
    revenue growth;
    No bonus expense was incurred in 2006 compared to
    $1.5 million in 2005 and $1.3 million in 2004;
    Bad debt expense was $144,000 in 2006 compared to $450,000 in
    2005 and a benefit of $108,000 in 2004. 2005 was adversely
    affected by customer bankruptcies in our Michigan
    region; and
    Share-based compensation expense for 2006 was $388,000, due to
    adopting SFAS 123R, Share-Based Payment, a new
    accounting pronouncement requiring the expensing of stock-based
    compensation. There was no comparable charge recorded for 2005
    or 2004.  2007 Outlook:
  
    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
    2007, 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. 26




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##### Table of Contents



Income Taxes:
      2007 Outlook:
  INVESTMENTS
     27




---



##### Table of Contents



available-for-sale,
  REINSURANCE
    RECOVERABLES
          Reinsurance recoverable on:A.M. Best


Unpaid claim and claim


Paid claim and claimReinsurer

Rating


settlement expenses(5)


settlement expensesAspen Insurance UK Ltd


A


$
1,404


$
Continental Casualty Company


A



294



Everest Reinsurance Company


A+



885



15General Reinsurance Corporation(1)


A++



26,471



239Max Re Ltd(1)(2)


A-



3,857



Minnesota WCRA(1)(3)


Not rated



23,062



333Munich Re America Corporation


A



2,653



Platinum Underwriters Reinsurance,
    Inc.


A



885



15SCOR Reinsurance Company


B++



294



Swiss Reinsurance America(1)(4)


A+



16,775



165Transatlantic Reinsurance Company


A+



588



Total





$
77,168


$
767     (1)
    
    Current reinsurer for 2007(2)
    
    Max Re, Ltd, a Bermuda-based reinsurer, collateralized unpaid
    amounts ceded to it with a $3.9 million irrevocable letter
    of credit that we can draw upon if necessary. 28




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##### Table of Contents



(3)
    
    The Minnesota WCRA is a mandatory reinsurer for business
    underwritten in Minnesota. It is not rated by A.M. Best.
    The WCRA has the ability to assess members for cash shortfalls.(4)
    
    Swiss Re (parent of Swiss Reinsurance America, A.M. Best
    rating A+) acquired GE Reinsurance in June 2006.(5)
    
    Reinsurance recoverable on unpaid claim and claim settlement
    expenses can be very long-term in nature, extending for decades.      2006


2005


2004Consolidated Statement of Income:Ceded premiums

$
(8,761
)

$
(10,452
)

$
(9,688
)Ceded losses


(1,187
)


9,898



13,373Ceding commissions


2,081



2,498



2,360Reinsurance effect on income
    before income taxes


(7,867
)


1,944



6,045Income taxes expense (benefit) at
    statutory rate


(2,675
)


661



2,055Net income effect of reinsurance
    transactions

$
(5,192
)

$
1,283


$
3,990Consolidated Statement of Cash
    Flows:Net income effect of reinsurance
    transactions

$
(5,192
)

$
1,283


$
3,990Change in reinsurance recoverables


6,134



(4,946
)


(6,803
)Operating cash flow effect of
    reinsurance transactions

$
942


$
(3,663
)

$
(2,813
)   UNPAID
    CLAIM AND CLAIM SETTLEMENT EXPENSES
       29




---



##### Table of Contents



ground-up
 30




---



##### Table of Contents




    Incurred Loss Development Method.  The incurred
    loss development method is based on the assumption that the
    relative change in a given years reported loss estimates
    from one evaluation point to the next is similar to the relative
    change in prior years reported loss estimates at similar
    evaluation points. This method evaluates actual historical loss
    data. Successive years can be arranged to form a triangle of
    data.
    Report-to-report
    (RTR) development factors are calculated to measure the change
    in cumulative reported costs from one evaluation point to the
    next. These historical RTR factors and comparable industry
    benchmark factors form the basis for selecting the RTR factors
    used in projecting the current valuation of losses to an
    ultimate basis. In addition, a tail factor is selected to
    account for loss development beyond the observed experience. The
    tail factor is based on trends shown in the data and
    consideration of external benchmarks. The incurred loss
    development methods implicit assumption is that the
    relative adequacy of case reserves has been consistent over
    time, and that there have been no material changes in the rate
    at which claims have been reported;
    Paid Loss Development Method.  The paid loss
    development method is similar to the incurred loss development
    method, but excludes case reserves in the analysis. While this
    method has the disadvantage of not recognizing information
    provided by current case reserves, it has the advantage of
    avoiding potential distortions in the data due to changes in
    case reserving methodology. This methods implicit
    assumption is that the rate of payment of claims has been
    relatively consistent over time;
    Average Claim Cost Method.  The average claim
    cost (or frequency/severity) method calculates ultimate losses
    by separately projecting ultimate claim frequency (claims per
    exposure) and ultimate claim severity (cost per claim) for each
    accident period. Typically, the incurred and paid loss
    development methods are used to project ultimate frequency and
    severity based on historical data and ultimate losses are
    calculated as the product of the two. The average claim cost
    method is intended to avoid distortions that may exist with the
    other methods for the most recent years as the result of changes
    in case reserve levels, settlement rates or other factors for
    prior years. In addition, this method may provide insight into
    the drivers of the loss experience;
    Average Hindsight Outstanding Method.  The
    average hindsight outstanding method estimates of ultimate
    losses for more mature accident years are used to estimate what
    the average cost per outstanding and IBNR claim would have been
    at various maturities, if the ultimate cost had been known. The
    average hindsight outstanding method is an iterative process.
    Loss Ratio Method.  The loss ratio method
    assumes a loss ratio is appropriate for a particular accident
    year, and multiplies this selected loss ratio by the earned
    premiums for that accident year in order to obtain an estimate
    of ultimate losses. The loss ratio selected for any accident
    year is based upon older accident years, which are adjusted to
    conditions for the current accident year.   31




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##### Table of Contents



32




---



##### Table of Contents



Year Ended December 31,2006


2005


2004Gross Reserves for Claim and
    Claim Settlement Expenses:Gross reserves for claim and claim
    settlement expenses, beginning of year

$
160,141


$
156,123


$
150,044Provision increases (decreases)
    for claim and claim settlement expenses:Current year


38,437



43,936



53,563Prior years


(9,490
)


(3,231
)


(4,654
)Total provision


28,947



40,705



48,909Payments for claim and claim
    settlement expenses:Current year


12,188



11,748



12,666Prior years


24,573



24,939



30,164Total payments


36,761



36,687



42,830Gross reserves for claim and claim
    settlement expenses, end of year

$
152,327


$
160,141


$
156,123  33




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##### Table of Contents



Year Ended December 31,2006


2005


2004Net Reserves for Claim and
    Claim Settlement Expenses:Net reserves for claim and claim
    settlement expenses, beginning of year

$
76,823


$
78,401


$
78,578Plus: Deferred retroactive
    reinsurance gain, beginning of year


49



49



49Provision increases (decreases)
    for claim and claim settlement expenses:Current year


31,933



36,264



42,583Prior years


(1,799
)


(5,457
)


(7,047
)Total provision


30,134



30,807



35,536Payments for claim and claim
    settlement expenses:Current year


11,847



11,748



12,666Prior years


19,951



20,637



23,047Total payments


31,798



32,385



35,713Less: Deferred retroactive
    reinsurance gain, end of year


(49
)


(49
)


(49
)Net reserves for claim and claim
    settlement expenses, end of year

$
75,159


$
76,823


$
78,401     December 31, (000s)2006


2005


2004


2003


2002


2001


2000


1999


1998


1997


1996Loss Reserve
    Development:Gross reserves for unpaid claim and
    claim settlement expenses

$
152,327


$
160,141


$
156,123


$
150,044


$
181,262


$
181,310


$
128,841


$
99,831


$
97,269


$
61,069


$
49,256Paid (cumulative) as of:One year later





$
24,537


$
24,937


$
30,164


$
41,072


$
46,043


$
49,241


$
45,933


$
37,062


$
28,315


$
20,529Two years later










40,175



43,436



61,363



17,086



74,681



67,442



56,031



42,889



29,841Three years later














53,793



71,132



86,710



90,484



78,244



65,664



50,558



35,370Four years later


















79,517



93,348



98,689



85,754



70,631



54,835



38,880Five years later






















100,138



103,391



89,956



73,979



57,261



41,029Six years later


























108,649



93,045



76,311



59,012



41,980Seven years later






























96,319



78,476



60,352



42,728Eight years later


































80,541



61,637



43,511Nine years later






































63,079



44,208Ten years later










































45,086Reserves re-estimated as of:End of year

$
152,327


$
160,141


$
156,123


$
150,044


$
181,262


$
181,310


$
128,841


$
99,831


$
97,269


$
61,069


$
49,256One year later






150,651



152,892



145,389



159,415



183,923



160,065



118,205



85,384



72,443



44,862Two years later










146,434



147,117



160,147



166,738



168,222



130,120



95,696



64,499



48,233Three years later














143,210



163,724



168,892



157,251



137,002



101,893



73,031



44,587Four years later


















161,044



174,451



161,905



129,819



107,522



75,554



50,552Five years later






















173,012



168,190



132,813



103,064



79,398



52,063Six years later


























167,604



138,782



105,705



76,610



54,327Seven years later






























139,732



110,136



77,921



53,047Eight years later


































111,644



80,855



54,250Nine years later






































82,589



55,491Ten years later










































56,558Initial reserves in excess of (less
    than) re-estimated reservesAmount





$
9,490


$
9,689


$
6,834


$
20,218


$
8,298


$
(38,763
)

$
(39,901
)

$
(14,375
)

$
(21,520
)

$
(7,302
)Percent






5.9
%


6.2
%


4.6
%


11.2
%


4.6
%


(30.1
)%


(40.0
)%


(14.8
)%


(35.2
)%


(14.8
)%  34




---



##### Table of Contents



December 31,2006


2005


2004


2003


2002


2001


2000


1999


1998


1997


1996Loss Reserve
    Development:Gross reserves for unpaid claim and
    claim settlement expenses

$
152,237


$
160,141


$
156,123


$
150,044


$
181,262


$
181,310


$
128,841


$
99,831


$
97,269


$
61,069


$
49,256Reinsurance recoverables


77,168



83,318



77,722



71,466



91,822



90,115



61,845



41,179



21,403



5,374



6,183Net reserves for unpaid claim and
    claim settlement expenses

$
75,159


$
76,823


$
78,401


$
78,578


$
89,440


$
91,195


$
66,996


$
58,652


$
75,866


$
55,695


$
43,073Paid (cumulative) as of:One year later





$
19,951


$
20,637


$
23,047


$
27,357


$
30,285


$
32,028


$
35,932


$
34,380


$
27,737


$
19,439Two years later










31,253



32,068



40,956



43,825



43,823



48,069



49,958



42,046



28,173Three years later














38,067



46,673



50,871



49,531



54,360



56,376



49,671



33,438Four years later


















50,913



54,078



53,130



58,113



60,453



53,814



36,904Five years later






















56,807



55,342



60,690



63,278



56,140



38,919Six years later


























57,369



62,465



65,347



57,903



39,770Seven years later






























64,175



66,674



59,219



40,530Eight years later


































68,347



60,442



41,289Nine years later






































61,475



41,924Ten years later










































42,393Reserves re-estimated as of:End of year

$
75,159


$
76,823


$
78,401


$
78,578


$
89,440


$
91,195


$
66,996


$
58,652


$
75,866


$
55,695


$
43,073One year later






75,024



72,944



71,531



82,742



82,839



74,727



74,181



67,753



66,674



39,988Two years later










71,947



69,831



78,482



76,545



71,202



76,502



77,205



61,075



43,484Three years later














70,049



78,037



77,055



71,911



75,321



78,391



68,065



41,451Four years later


















78,474



78,054



71,177



77,443



78,772



69,474



45,959Five years later






















78,735



73,660



75,588



80,522



69,595



47,147Six years later


























74,652



79,204



78,878



69,926



47,126Seven years later






























80,482



82,676



69,095



46,969Eight years later


































83,879



71,540



47,039Nine years later






































74,098



48,288Ten years later










































48,977Initial reserves in excess of (less
    than) re-estimated reservesAmount





$
1,799


$
6,454


$
8,529


$
10,966


$
12,460


$
(7,656
)

$
(21,830
)

$
(8,013
)

$
(18,403
)

$
(5,904
)Percent






2.3
%


8.2
%


10.9
%


12.3
%


13.7
%


(11.4
)%


(37.2
)%


(10.6
)%


(33.0
)%


(13.7
)%  35




---



##### Table of Contents



36




---



##### Table of Contents



CumulativeRe-estimatesfor eachEffect of Reserve Re-estimates on Calendar Year
    Operations:


Accident2006


2005


2004


2003


2002


2001


2000


1999


1998


Pre-1998


YearAccident Year:1992

$
10


$
(21
)

$
25


$
(30
)

$
2


$
(6
)

$
(19
)

$
38


$
(15
)

$
(147
)

$
(163
)1993


(64
)


12



(98
)


14



261



(706
)


(160
)


7



(96
)


699



(131
)1994


(369
)


3



(174
)


(77
)


178



(633
)


(459
)


(68
)


(574
)


4,356



2,1831995


(38
)


(217
)


(138
)


139



(261
)


31



(1,227
)


430



(642
)


6,552



4,6291996


(228
)


(1,026
)


315



111



(159
)


126



(2,643
)


1,626



(2,169
)


803



(3,244
)1997


(1,869
)


(1,196
)


901



(488
)


(142
)


(221
)


(2,482
)


3,566



(7,483
)






(9,414
)1998


1,355



(1,353
)


813



(1,419
)


(320
)


283



(2,462
)


2,514











(589
)1999


(75
)


182



211



(372
)


1,622



(1,195
)


(6,077
)














(5,704
)2000


286



1,133



(1,121
)


1,413



2,344



(5,410
)


















(1,355
)2001


311



1,484



1,756



4,003



4,831























12,3852002


244



1,444



1,770



3,404



























6,8622003


219



1,255



2,787































4,2612004


1,215



3,757



































4,9722005


802







































802Total

$
1,799


$
5,457


$
7,047


$
6,698


$
8,356


$
(7,731
)

$
(15,529
)

$
8,113


$
(10,979
)

$
12,263


$
15,494   Volatility in net carried loss reserves:
       37




---



##### Table of Contents



38




---



##### Table of Contents



Reserve development recognized:
  
    Effect of variability of results on estimation
    process.  The frequency and severity of claims
    will vary by year. Actual emergence will vary by year. Adverse
    frequency, severity and emergence affect actuarial judgments
    more rapidly than a corresponding favorable event;
    Procedural changes.  We regularly review and
    adjust internal processes and procedures with the intent of
    becoming more effective and efficient in our claims
    adjudication. The effect of these changes will not be
    discernable in our data patterns for a minimum of two years, if
    not longer. Favorable and unfavorable claim results will be
    recognized in the short-run prior to the actuaries being
    comfortable in adjusting the long-term development patterns;
    Office closure.  During 2002, we stopped
    writing business in our Missouri and New England regions and
    closed our offices there. We are still responsible for managing
    and paying for all accidents related to policies that we
    underwrote while we operated there. We also experienced
    significant losses and adverse development in these markets
    during 2000 and 2001. Our claims management processes
    traditionally have relied upon being in close proximity to the
    claimant. The lack of proximity to the claimant and recent
    significant adverse development created significant uncertainty
    in how these claims would emerge. Actual claim emergence has
    been more favorable than anticipated; and
    Re-underwriting our book of
    business.  Beginning in 2000 and continuing today,
    we deliberately eliminated certain classes of business and
    industries from our book of business. Additionally, we
    re-emphasized to our customers that they must return workers to
    light-duty positions when approved by treating physicians and
    that failure to do so results in cancellation or non-renewal of
    their account. An employers failure to return workers to
    light-duty positions results in higher claim and claim
    settlement expenses for us. These shifts changed the nature and
    frequency of claims that occurred. The resulting data shift
    continues to emerge in our historical results.       39




---



##### Table of Contents



LIQUIDITY
    AND CAPITAL RESOURCES
    available-for-sale
       40




---



##### Table of Contents



12-month
  time-to-time
      CONTRACTUAL
    OBLIGATIONS
    Unpaid Claimand ClaimLease


SettlementObligations


expenses(1)


Total2007

$
1,169


$
31,932


$
33,1012008


1,329



20,183



21,5122009


1,372



13,690



15,0622010


1,320



9,776



11,0962011


1,224



7,400



8,624Thereafter


984



69,688



70,672Total

$
7,398


$
152,669


$
160,067  41




---



##### Table of Contents



(1)
    
    Unpaid claim and claim settlement expenses represent our
    estimate of the amount and timing of the ultimate settlement and
    administration of claims based on our assessment of facts and
    circumstances known as of December 31, 2006. The amounts
    are stated on a gross basis and do not reflect any
    potential recoveries under existing reinsurance agreements and
    do not reflect the effect of discounting of reserve amounts.    Recoveries As a Percentage ofUnpaid Claim and ClaimSettlement Expenses Payments2007


24
%2008


37
%2009


48
%2010


53
%2011


53
%Thereafter


66
%   INTEREST
    RATE RISK
        NAIC
    RISK-BASED CAPITAL STANDARDS
    REGULATION
   42




---



##### Table of Contents



EFFECT OF
    RECENT ACCOUNTING PRONOUNCEMENTS
        115-1, Other-Than-Temporary 115-1). 115-1 other-than-temporary. 115-1 other-than-temporary other-than-temporary 115-1.
  05-1, (SOP 05-1). SOP 05-1 SOP 05-1 SOP 05-1 SOP 05-1
  FORWARD-LOOKING
    STATEMENTS
  Form 10-K
 43




---



##### Table of Contents




    our ability to retain renewing policies and write new business
    with a B++ (Good, Secure) rating from A.M. Best;
    adverse changes in the rating assigned to us by A.M. Best;
    our ability to extend our workers compensation services to
    self-insured employers and other alternative markets and to
    operate profitably in providing these services;
    changes in the pricing environment including those due to the
    cyclical nature of the property and casualty insurance industry
    and the effect of competition;
    the adequacy of our unpaid claim and claim settlement expense
    reserves, including:  
    the long-tail and potentially volatile nature of workers
    compensation insurance;
    our ability to accurately predict claim development;
    our experience with claims frequency and severity;
    our ability to manage both our existing claims and new claims in
    an effective manner;
    medical inflation and medical innovation;
    the ability of our reinsurers to honor their obligations to us;  
    exposure as to coverage for terrorist acts and our retention
    under The Terrorism Risk Insurance Extension Act of 2005 (TRIEA)
    and the potential expiration of TRIEA and the unpredictable
    nature of such events;
    our ability to obtain and retain reinsurance at a reasonable
    cost;
    our ability to provide our proprietary products and services to
    customers successfully and profitably;
    competition and the regulatory environment in which we operate;
    changes in workers compensation regulation by states,
    including changes in mandated benefits or insurance company
    regulation;
    investment risk, including those of our portfolio of fixed
    income securities and interest rate changes;
    general economic and business conditions;
    risk factors noted in Item 1A of this Annual Report on
    Form 10-K; and
    other factors as noted in our other filings with the Securities
    and Exchange Commission.   ITEM 7A.QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  Form 10-K
 44




---



##### Table of Contents



ITEM 8.  FINANCIAL
    STATEMENTS AND SUPPLEMENTARY DATA  INDEX TO
    FINANCIAL STATEMENTS
  FINANCIAL STATEMENTS

PageReport of
    Independent Registered Public Accounting Firm


46Consolidated
    Balance Sheets  December 31, 2006 and
    2005


47Consolidated
    Statements of Income  Years Ended December 31,
    2006, 2005 and 2004


48Consolidated
    Statements of Shareholders Equity  Years Ended
    December 31, 2006, 2005 and 2004


49Consolidated
    Statements of Cash Flows  Years Ended
    December 31, 2006, 2005 and 2004


50Notes to
    Consolidated Financial Statements  Years Ended
    December 31, 2006, 2005 and 2004


51  45




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm                  46




---



##### Table of Contents



RTW,
    INC.



Consolidated
    Balance Sheets

December 31,
    2006 and 2005  2006


2005(In thousands, except share data)ASSETSInvestments at fair value,
    amortized cost of $112,746 and $109,021

$
111,089


$
107,250Cash and cash equivalents


13,898



21,914Accrued investment income


939



857Premiums receivable, less
    allowance of $73 and $192


2,367



3,382Service revenue receivable, less
    allowance of $130 in 2006


1,058



978Reinsurance recoverables:On unpaid claim and claim
    settlement expenses


77,168



83,318On paid claim and claim settlement
    expenses


767



751Deferred policy acquisition costs


800



889Furniture and equipment, net


1,570



1,444Other assets


8,783



7,688Total assets

$
218,439


$
228,471LIABILITIES AND
    SHAREHOLDERS EQUITYUnpaid claim and claim settlement
    expenses

$
152,327


$
160,141Unearned premiums


7,432



8,341Accrued expenses and other
    liabilities


7,325



9,411Total liabilities


167,084



177,893Commitments 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
    5,185,000 and 5,441,000 shares


18,284



21,365Retained earnings


34,148



30,364Accumulated other comprehensive
    loss


(1,077
)


(1,151
)Total shareholders equity


51,355



50,578Total liabilities and
    shareholders equity

$
218,439


$
228,471    47




---



##### Table of Contents



RTW,
    INC.



Consolidated
    Statements of Income

Years
    Ended December 31, 2006, 2005 and 2004  2006


2005


2004(In thousands, except shareand per share data)Revenues:Gross premiums earned

$
51,367


$
59,872


$
63,370Premiums ceded


(8,761
)


(10,452
)


(9,688
)Premiums earned


42,606



49,420



53,682Net investment income


5,325



4,613



3,667Realized investment gains (losses):Realized investment gains






584



708Realized investment losses






(4
)


(3
)Net realized investment gains






580



705Service revenue


5,941



4,398



633Total revenues


53,872



59,011



58,687Expenses:Claim and claim settlement expenses


30,134



30,807



35,536Policy acquisition costs


5,160



5,456



6,045General and administrative expenses


13,356



12,669



9,034Total expenses


48,650



48,932



50,615Income before income taxes


5,222



10,079



8,072Income tax expense (benefit)


1,934



4,081



(1,869
)Net income

$
3,288


$
5,998


$
9,941Income per share:Basic income per share

$
0.62


$
1.11


$
1.90Diluted income per share

$
0.60


$
1.06


$
1.81Weighted average shares
    outstanding:Basic shares outstanding


5,323,000



5,399,000



5,233,000Diluted shares outstanding


5,501,000



5,663,000



5,487,000    48




---



##### Table of Contents



RTW,
    INC.



Consolidated
    Statements of Shareholders Equity

Years
    Ended December 31, 2006, 2005 and 2004  AccumulatedOtherComprehensive





Comprehensive


TotalCommon


Income


Retained


Income


ShareholdersStock


(Loss)


Earnings


(Loss)


Equity(In thousands)Balance at January 1, 2004

$
20,644






$
13,970


$
973


$
35,587Comprehensive income (loss):Net income





$
9,941



9,941







9,941Other comprehensive loss, net of
    tax:Change in unrealized investment
    gains






(595
)






(595
)


(595
)Comprehensive income





$
9,346Stock option activity


362







171







533Issuance of shares under ESPP


65















65Balance at December 31, 2004


21,071







24,082



378



45,531Comprehensive income (loss):Net income





$
5,998



5,998







5,998Other comprehensive loss, net of
    tax:Change in unrealized investment
    losses






(1,529
)






(1,529
)


(1,529
)Comprehensive income





$
4,469Stock option activity


195







284







479Issuance of shares under ESPP


99















99Balance at December 31, 2005


21,365







30,364



(1,151
)


50,578Comprehensive income:Net income





$
3,288



3,288







3,288Other comprehensive income, net of
    tax:Change in unrealized investment
    losses






74







74



74Comprehensive income





$
3,362Stock option activity


106







113







219Retirement of common stock


(3,338
)














(3,338
)Equity-based compensation expense










383







383Issuance of shares under ESPP


151















151Balance at December 31, 2006

$
18,284






$
34,148


$
(1,077
)

$
51,355    49




---



##### Table of Contents



RTW,
    INC.



Consolidated
    Statements of Cash Flows

Years
    Ended December 31, 2006, 2005 and 2006  2006


2005


2004(In thousands)Cash flows from operating
    activities:Net income

$
3,288


$
5,998


$
9,941Adjustments to reconcile net
    income to net cash provided by operating activities:Net realized investment gains






(580
)


(705
)Depreciation and amortization


423



686



952Equity-based compensation expense


383







Deferred income taxes


(432
)


599



(2,576
)Changes in assets and liabilities:Reinsurance recoverables


6,134



(4,946
)


(6,803
)Unpaid claim and claim settlement
    expenses


(7,814
)


4,018



6,079Unearned premiums, net of premiums
    receivable


106



(1,746
)


1,007Accrued expenses and other
    liabilities


(2,086
)


1,055



1,119Other, net


(804
)


(166
)


(942
)Net cash (used in) provided by
    operating activities


(802
)


4,918



8,072Cash flows from investing
    activities:Maturities of investments


23,769



12,450



11,324Purchases of
    available-for-sale
    investments


(30,901
)


(45,915
)


(41,446
)Proceeds from sales of
    available-for-sale
    investments






6,246



14,180Proceeds from principal paydowns
    of
    available-for-sale
    investments


3,469



4,944



7,445Purchases of furniture and
    equipment


(616
)


(696
)


(444
)Disposals of furniture and
    equipment


5



10



Net cash (used in) investing
    activities


(4,274
)


(22,961
)


(8,941
)Cash flows from financing
    activities:Stock options exercised, including
    tax benefits


219



479



533Issuance of common stock under
    Employee Stock Purchase Plan


151



99



65Excess tax benefits from
    equity-based compensation


28







Repurchase of common stock


(3,338
)






Net cash (used in) provided by
    financing activities


(2,940
)


578



598Net (decrease) in cash and cash
    equivalents


(8,016
)


(17,465
)


(271
)Cash and cash equivalents at
    beginning of year


21,914



39,379



39,650Cash and cash equivalents at end
    of year

$
13,898


$
21,914


$
39,379Supplemental disclosure of cash
    flow information:Cash paid during the year for:Income taxes

$
2,305


$
2,839


$
1,033    50




---



##### Table of Contents



RTW,
    INC.



Notes to
    Consolidated Financial Statements

Years
    Ended December 31, 2006, 2005, and 2004  Note 1 SUMMARY
    OF SIGNIFICANT ACCOUNTING POLICIES
  Organization fee-for-service ®
      Accounting Principles
  Consolidation
  Use of Estimates
  Investments available-for-sale.
  Available-for-Sale
    Investments: available-for-sale
  Realized Investment Gains and Losses:
    Cash and Cash Equivalents
 51




---



##### Table of Contents



RTW,
    INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   Fair Value of Financial Instruments
  Deferred Policy Acquisition Costs
    Depreciation
  Income Taxes
  Unpaid Claim and Claim Settlement Expenses
     52




---



##### Table of Contents



RTW,
    INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   Premiums Earned
  Service Revenue
  Effect of Recent Accounting Pronouncements
      115-1, Other-Than-Temporary 115-1). 115-1 other-than-temporary. 115-1 other-than-temporary other-than-temporary 115-1.
  05-1, (SOP 05-1). SOP 05-1
 53




---



##### Table of Contents



RTW,
    INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  SOP 05-1 SOP 05-1 SOP 05-1
  Note 2 INCOME
    PER SHARE
      2006


2005


2004Net income (000s)

$
3,288


$
5,998


$
9,941Basic weighted average shares
    outstanding


5,323,000



5,399,000



5,233,000Effect of dilutive stock options


178,000



264,000



254,000Diluted weighted average shares
    outstanding


5,501,000



5,663,000



5,487,000Basic income per share

$
0.62


$
1.11


$
1.90Diluted income per share

$
0.60


$
1.06


$
1.81   Note 3 INVESTMENTS
  Valuation of Investments available-for-sale
  Gross


GrossAmortized


Unrealized


Unrealized


EstimatedCost


Gains


Losses


Fair Value2006U.S. government securities

$
60,389


$
64


$
(959
)

$
59,494Commercial paper


7,446











7,446Asset-backed securities


2,007







(53
)


1,954Mortgage-backed securities


24,441



93



(407
)


24,127Municipal securities


18,463







(395
)


18,068Total investments

$
112,746


$
157


$
(1,814
)

$
111,089   54




---



##### Table of Contents



RTW,
    INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  Gross


Gross


EstimatedAmortized


Unrealized


Unrealized


FairCost


Gains


Losses


Value2005U.S. government securities

$
56,138


$
63


$
(960
)

$
55,241Commercial paper


10,167











10,167Asset-backed securities


2,009







(60
)


1,949Mortgage-backed securities


22,049



45



(403
)


21,691Municipal securities


18,658







(456
)


18,202Total investments

$
109,021


$
108


$
(1,879
)

$
107,250     Less Than Twelve Months


Greater Than Twelve MonthsGross





Gross





Total GrossFair


Unrealized


Fair


Unrealized


Total Fair


UnrealizedValue


Losses


Value


Losses


Value


Losses2006U.S. government securities

$
8,178


$
(46
)

$
46,824


$
(913
)

$
55,002


$
(959
)Mortgage-backed and asset-backed
    securities


1,695



(4
)


16,740



(456
)


18,435



(460
)Municipal securities










18,068



(395
)


18,068



(395
)Total investments

$
9,873


$
(50
)

$
81,632


$
(1,764
)

$
91,505


$
(1,814
)   Less Than Twelve Months


Greater Than Twelve MonthsGross





Gross





Total GrossFair


Unrealized


Fair


Unrealized


Total Fair


UnrealizedValue


Losses


Value


Losses


Value


Losses2005U.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
)    55




---



##### Table of Contents



RTW,
    INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   Deposits
    Fixed Maturities by Maturity Date
  Amortized


EstimatedMaturing In:

Cost


Fair ValueOne year or less

$
19,426


$
19,304Over one year through five years


49,179



48,249Over five years through ten years


14,584



14,394Over ten years


5,116



5,015Mortgage-backed securities with
    various maturities


24,441



24,127Total investments

$
112,746


$
111,089   Net Investment Income
  2006


2005


2004Fixed maturity investments

$
4,490


$
4,099


$
3,383Cash and cash equivalents


999



672



344Other


21



15



110Investment income


5,510



4,786



3,837Investment expense


(185
)


(173
)


(170
)Net investment income

$
5,325


$
4,613


$
3,667   Note 4
    REINSURANCE
     56




---



##### Table of Contents



RTW,
    INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
     Covers Losses per Occurrence:Minnesota:

In Excess of:


Limited to:2006 WCRA

$
390,000



Statutory limitVarious
    reinsurers

$
200,000



$390,0002005 WCRA

$
380,000



Statutory limitVarious
    reinsurers

$
200,000



$380,0002004 WCRA

$
360,000



Statutory limitVarious
    reinsurers

$
200,000



$360,000 Other States:2006 Various reinsurers

$
200,000



$20 million, excluding acts
    of terrorism2005 Various reinsurers

$
200,000



$20 million, excluding acts
    of terrorism2004 Various reinsurers

$
200,000



$20 million, excluding acts
    of terrorism   un-amortized
    2006


2005Excess of loss reinsurance through
    various reinsurers

$
77,168


$
83,318  57




---



##### Table of Contents



RTW,
    INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
    2006


2005


2004Premiums written:Direct

$
49,893


$
57,716


$
64,687Ceded


(8,761
)


(10,452
)


(9,688
)Net premiums written

$
41,132


$
47,264


$
54,999Claim and claim settlement
    expenses:Direct

$
28,947


$
40,705


$
48,909Ceded


1,187



(9,898
)


(13,373
)Net claim and claim settlement
    expenses

$
30,134


$
30,807


$
35,536     Note 5 
    UNPAID CLAIM AND CLAIM SETTLEMENT EXPENSES
      2006


2005


2004Balance at January 1

$
160,141


$
156,123


$
150,044Less reinsurance recoverables


(83,318
)


(77,722
)


(71,466
)Plus deferred gain on retroactive
    reinsurance


49



49



49Net balance at January 1


76,872



78,450



78,627Incurred related to:Current year


31,933



36,264



42,583Prior years


(1,799
)


(5,457
)


(7,047
)Total incurred


30,134



30,807



35,536Paid related to:Current year


11,847



11,748



12,666Prior years


19,951



20,637



23,047Total paid


31,798



32,385



35,713Net balance at December 31


75,208



76,872



78,450Plus reinsurance recoverables


77,168



83,318



77,722Plus deferred gain on retroactive
    reinsurance


(49
)


(49
)


(49
)Balance at December 31

$
152,327


$
160,141


$
156,123  58




---



##### Table of Contents



RTW,
    INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
                  Note 6
    SEGMENT INFORMATION
     59




---



##### Table of Contents



RTW,
    INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
     Insurance


Service


Consolidated2006:Revenues:Premiums earned

$
42,606


$



$
42,606Investment income


5,325







5,325Net realized investment gains










Service revenue






5,941



5,941Total operating revenues

$
47,931


$
5,941


$
53,872Income before income taxes

$
4,679


$
543


$
5,222Net income

$
2,959


$
329


$
3,288   Insurance


Service


Consolidated2005:Revenues:Premiums earned

$
49,420


$



$
49,420Investment income


4,613







4,613Net realized investment gains


580







580Service revenue






4,398



4,398Total operating revenues

$
54,613


$
4,398


$
59,011Income before income taxes

$
9,208


$
871


$
10,079Net income

$
5,449


$
549


$
5,998   Insurance


Service


Consolidated2004:Revenues:Premiums earned

$
53,682


$



$
53,682Investment income


3,667







3,667Net realized investment gains


705







705Service revenue






633



633Total operating revenues

$
58,054


$
633


$
58,687Income before income taxes

$
7,945


$
127


$
8,072Net income

$
9,861


$
80


$
9,941  60




---



##### Table of Contents



RTW,
    INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
    December 31,


December 31,2006


2005Insurance

$
210,133


$
217,915Service


3,140



1,739Total identifiable assets by
    reportable business segment


213,273



219,654Corporate


5,166



8,817Consolidated total assets

$
218,439


$
228,471   Note 7 
    INCOME TAXES
    2006


2005


2004Current:Federal

$
1,358


$
3,161


$
651State


144



321



56Total current tax expense


1,502



3,482



707Deferred:Federal


432



599



(2,576
)State










Total deferred tax expense
    (benefit)


432



599



(2,576
)Income tax expense (benefit)

$
1,934


$
4,081


$
(1,869
)     2006


2005


2004Federal income tax expense at 35%

$
1,828


$
3,528


$
2,825Increase (reduction) in income tax
    expense (benefit) resulting from:State income taxes, net of federal
    income tax benefit


116



209



36Tax-exempt investment income


(160
)


(162
)


(123
)Non-deductible share-based
    compensation and other expenses


116



13



7Deferred income tax valuation
    allowance










(4,040
)Tax expense (benefit) related to
    prior periods






495



(495
)Other


34



(2
)


(79
)Income tax expense (benefit)

$
1,934


$
4,081


$
(1,869
)      61




---



##### Table of Contents



RTW,
    INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
    2006


2005Unpaid claim and claim settlement
    expenses

$
4,659


$
5,023Accrued second injury funds


47



37Unearned premiums


1,449



1,639Retroactive reinsurance


17



17Net unrealized loss on securities


580



620Other


553



461Deferred tax assets


7,305



7,797Deferred policy acquisition costs


(693
)


(764
)Depreciation


(201
)


(204
)Other


(262
)


(208
)Deferred tax liabilities


(1,156
)


(1,176
)Net deferred tax asset

$
6,149


$
6,621       Note 8 
    STOCK-BASED COMPENSATION
       62




---



##### Table of Contents



RTW,
    INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   Stock Option Pricing
  2006

2005

2004Expected stock price volatility

28% to 46%

26% to 34%

41% to 74%Expected life of options (in years)

1 to 3.5 years

1 to 3 years

1 to 3.8 yearsRisk-free interest rate

4.7% to 5.1%

2.9% to 4.2%

1.2% to 3.3%     2006


2005


2004Aggregate intrinsic value of
    options exercised

$
385,000


$
886,000


$
917,000Income tax benefit realized from
    options exercised


99,000



218,000



251,000Cash received upon exercise


257,000



338,000



429,000      63




---



##### Table of Contents



RTW,
    INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
    2005


2004Net income, as reported:

$
5,998


$
9,941Less: Total stock-based
    compensation expense determined under the fair value based
    method for all awards, net of related tax expense


(185
)


(434
)Pro forma net income

$
5,813


$
9,507Basic net income per share:As reported

$
1.11


$
1.90Pro forma

$
1.08


$
1.82Diluted net income per share:As reported

$
1.06


$
1.81Pro forma

$
1.03


$
1.73     1995 Employee Stock Purchase Plan 
  Shares


PurchasePhase:

Purchased


PriceBeginning April 2003, expiring
    April 2004


21,151


$
3.23Beginning April 2004, expiring
    April 2005


17,279


$
5.72Beginning April 2005, expiring
    April 2006


17,501



8.61     1994 Stock Plan 
 64




---



##### Table of Contents



RTW,
    INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
     Qualified


Non-QualifiedWeighted





WeightedAverage





AverageOption


Exercise


Option


ExerciseShares


Price


Shares


PriceBalance, January 1, 2004


275,519


$
5.61



259,375


$
2.75Granted


209,948



6.14



79,302



6.14Exercised


(43,468
)


2.22



(133,500
)


2.18Canceled


(38,572
)


6.21



(1,875
)


5.33Balance, December 31, 2004


403,427



6.19



203,302



4.43Granted










62,500



9.02Exercised


(59,267
)


2.60



(43,000
)


1.98Canceled


(9,857
)


5.52



(6,667
)


6.45Balance, December 31, 2005


334,303



6.85



216,135



6.18Exercised


(30,385
)


3.73



(14,704
)


2.35Canceled


(11,013
)


12.65



(2,129
)


6.45Balance, December 31, 2006


292,905


$
6.95



199,302


$
6.46     2005 Stock Plan 
    Qualified


Non-QualifiedWeighted





WeightedAverage





AverageOption


Exercise


Option


ExerciseShares


Price


Shares


PriceBalance, January 1, 2005














Granted


15,000



11.72







Exercised














Canceled














Balance, December 31, 2005


15,000



11.72







Granted


77,500



11.13



20,000



10.87Exercised














Canceled














Balance, December 31, 2006


92,500


$
11.23



20,000


$
10.87  65




---



##### Table of Contents



RTW,
    INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
    Options ExercisableOptions Outstanding





WeightedNumber


Weighted Average


Number


Averageof


Contractual


Exercise


of


ExerciseExercise Price Range




Options


Life


Price


Options


PriceIncentive stock options:$
14.00 - $21.50





32,352



1.4 years


$
15.42



32,352


$
15.428.75 - 12.04





126,500



7.5 years



11.04



68,583



10.816.00 -  6.18





156,153



7.1 years



6.13



139,487



6.152.19 -  4.50





70,400



5.5 years



2.86



70,400



2.86$
2.19 - $21.50





385,405



6.5 years


$
7.92



310,822


$
7.40Non-qualified stock options:$
31.75





5,000



0.1 years


$
31.75



5,000


$
31.756.00 - 10.87





151,802



7.9 years



7.93



115,963



7.391.98 -  3.13





62,500



5.4 years



2.25



62,500



2.25$
1.98 - $31.75





219,302



7.0 years


$
6.85



183,463


$
6.30   in-the-money
  Note 9 
    EMPLOYEE BENEFIT PLANS
  Employment Contracts 
  Combined Retirement Plan
  401(k) Retirement Component
 66




---



##### Table of Contents



RTW,
    INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   Employee Stock Ownership Component
  Other Employee Benefit Plans
  Note 10 
    SHAREHOLDERS EQUITY
  time-to-time
    Rule 10b-18, time-to-time
  Shareholder Rights Plan 
  Dividend Restrictions 
   67




---



##### Table of Contents



RTW,
    INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  12-month
  Statutory Surplus and Statutory Net Income
  StatutoryCapital and


StatutorySurplus


Net Income2006

$
46,566


$
2,7722005


43,597



4,2952004






7,540   Note 11 
    COMMITMENTS AND CONTINGENCIES
  Operating Leases
    2007

$
1,1692008


1,3292009


1,3722010


1,3202011


1.2242012


9682013


16     Litigation:
  RTW v. Carolina Casualty:
 68




---



##### Table of Contents



RTW,
    INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
                  69




---



##### Table of Contents



RTW,
    INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   Note 12 
    ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
  available-for-sale.
  2006


2005


2004Accumulated other comprehensive
    (loss) income, beginning of year

$
(1,151
)

$
378


$
973Changes in comprehensive (loss)
    income arising during the year:Net unrealized investment losses


114



(1,763
)


(220
)Less: Adjustment for net realized
    investment gains






580



705Change in net unrealized
    investment losses


114



(2,343
)


(925
)Income tax expense (benefit)


40



(814
)


(330
)Other comprehensive income (loss)
    for the year


74



(1,529
)


(595
)Accumulated other comprehensive
    (loss) income, end of year

$
(1,077
)

$
(1,151
)

$
378   Note 13 
    QUARTERLY RESULTS OF OPERATIONS (Unaudited)
   70




---



##### Table of Contents



RTW,
    INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
     First


Second


Third


FourthQuarter


Quarter


Quarter


Quarter(In thousands, except per share data)2006Premiums in force

$
52,900


$
51,700


$
48,900


$
47,500Revenues:Gross premiums earned

$
12,988


$
13,193


$
12,949


$
12,237Premiums ceded


(2,152
)


(2,150
)


(2,112
)


(2,347
)Premiums earned


10,836



11,043



10,837



9,890Net investment income


1,305



1,324



1,336



1,360Service revenue


1,568



1,752



1,391



1,230Total revenues


13,709



14,119



13,564



12,480Expenses:Claim and claim settlement expenses


7,159



7,323



8,029



7,623Policy acquisition costs


1,262



1,298



1,291



1,309General and administrative expenses


3,654



3,333



2,825



3,544Total expenses


12,075



11,954



12,145



12,476Income from operations

$
1,634


$
2,165


$
1,419


$
4Net income

$
1,054


$
1,434


$
951


$
(151
)Basic income per share

$
0.19


$
0.27


$
0.18


$
(0.03
)Diluted income per share

$
0.19


$
0.26


$
0.17


$
(0.03
)The following represent pre-tax
    adjustments recorded during 2006 that affected reported net
    income:Net changes in estimates for
    unpaid claim and claim settlement expenses on claims reported in
    prior periods

$
850


$
750


$



$
Bonus expense


(398
)


10



388



   71




---



##### Table of Contents



RTW,
    INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  First


Second


Third


FourthQuarter


Quarter


Quarter


Quarter(In thousands, except per share data)2005Premiums in force

$
62,100


$
58,500


$
55,900


$
52,900Revenues:Gross premiums earned

$
15,730


$
15,002


$
15,261


$
13,879Premiums ceded


(2,750
)


(2,612
)


(2,609
)


(2,481
)Premiums earned


12,980



12,390



12,652



11,398Net investment income


1,054



1,108



1,207



1,244Net realized investment gains


135



445







Service revenue


595



940



1,366



1,497Total revenues


14,764



14,883



15,225



14,139Expenses:Claim and claim settlement expenses


8,900



8,518



8,563



4,826Policy acquisition costs


1,425



1,542



1,288



1,201General and administrative expenses


2,875



2,817



3,093



3,884Total expenses


13,200



12,877



12,944



9,911Income from operations

$
1,564


$
2,006


$
2,281


$
4,228Net income

$
1,049


$
1,321


$
1,521


$
2,107Basic income per share

$
0.20


$
0.24


$
0.28


$
0.39Diluted income per share

$
0.19


$
0.23


$
0.27


$
0.37The following represent pre-tax
    adjustments recorded during 2005 that affected reported net
    income: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



3,550Bonus expense


(223
)


(82
)


(220
)


(998
)    72




---



##### Table of Contents



ITEM 9.
    CHANGES
    IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
    FINANCIAL DISCLOSURE    ITEM 9A
    (T).
    CONTROLS
    AND PROCEDURES    Rule 13a-15(b)
    Rules 13a-15(f) 15d-15(f)
  ITEM 9B.
    OTHER
    INFORMATION   PART III  ITEM 10.
    DIRECTORS,
    EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE    Form 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 AND DIRECTOR
    INDEPENDENCE   73




---



##### Table of Contents



ITEM 14.
    PRINCIPAL
    ACCOUNTANT FEES AND SERVICES   PART IV  ITEM 15.
    EXHIBITS AND
    FINANCIAL STATEMENT SCHEDULES    Financial Statements.
 Report of Independent Registered
    Public Accounting FirmConsolidated Balance
    Sheets  December 31, 2006 and 2005Consolidated Statements of
    Income  Years Ended December 31, 2006, 2005 and
    2004Consolidated Statements of
    Shareholders Equity  Years Ended
    December 31, 2006, 2005 and 2004Consolidated Statements of Cash
    Flows  Years Ended December 31, 2006, 2005 and
    2004Notes to Consolidated Financial
    Statements  Years Ended December 31, 2006, 2005
    and 2004   Financial Statement Schedules for the Three
    Years Ended December 31, 2006
  PageReport of
    Independent Registered Public Accounting Firm on Schedules for
    the Years Ended December 31, 2006, 2005 and 2004


S-1Schedule
    I  Summary of Investments


S-2Schedule II 
    Condensed Financial Information (Parent Company)


S-3Schedule III 
    Supplemental Information Concerning Insurance
    Operations


S-7Schedule
    IV  Reinsurance


S-8Schedule
    V  Valuation and Qualifying Accounts


S-9       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(13)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 2007
    Performance Incentive Programs10
.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) 74




---



##### Table of Contents



10
.9.2

Description of the Reinsurance
    Agreement for 2003 between ACIC and General Reinsurance
    Corporation effective January 1, 2003(7)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(13)10
.10

Minnesota Workers
    Compensation Reinsurance Association reinsurance agreement10
.11

Election form for the 2006
    Minnesota Workers Compensation Reinsurance Association
    reinsurance agreement10
.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(13)10
.16

Description of the Reinsurance
    Agreement for 2007 between ACIC and various reinsurers effective
    January 1, 200710
.17

Minnesota Lease Addendum dated
    December 5, 200611


Statement re: Computation of
    Income Per Share21


Subsidiaries of the Registrant:
    The Company has two subsidiaries, American Compensation
    Insurance Company (ACIC), a Minnesota corporation, and
    Bloomington Compensation Insurance Company, a Minnesota
    corporation23


Consent of Independent Registered
    Public Accounting Firm24


Power of Attorney, included in
    Signature page31
.1

Certification of President and
    Chief Executive Officer31
.2

Certification of Chief Financial
    Officer32


Certification Pursuant to
    18 U.S.C. § 1350, Adopted Pursuant to
    § 906 of the Sarbanes-Oxley Act of 2003     (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)(13)
    
    Incorporated by reference to the Companys 2005 Annual
    Report on Form
    10-K. 75




---



##### Table of Contents



SIGNATURES      By:
    /s/  Jeffrey
    B. Murphy   President, Chief Executive Officer and Director
 (Principal Executive Officer)
    Signatures
    and Power of Attorney
  attorney-in-fact Form 10-K
  Signature

Title

Date/s/  John
    O. GoodwyneJohn
    O. Goodwyne

Chairman of the Board

March 30, 2007/s/  Jeffrey
    B. MurphyJeffrey
    B. Murphy

President, Chief Executive Officer
    and Director (Principal Executive Officer)

March 30, 2007/s/  Alfred
    L.
    LaTendresseAlfred
    L. LaTendresse

Executive Vice President, Chief
    Financial Officer, Treasurer and Secretary (Principal Financial
    and Accounting Officer)

March 30, 2007/s/  David
    C. ProsserDavid
    C. Prosser

Chairman Emeritus of the Board

March 30, 2007/s/  Gregory
    D.
    KoschinskaGregory
    D. Koschinska

Director

March 30, 2007/s/  William
    J. DetersWilliam
    J. Deters

Director

March 30, 2007/s/  John
    W. ProsserJohn
    W. Prosser

Director

March 30, 2007/s/  Vina
    L. MarquartVina
    L. Marquart

Director

March 30, 2007/s/  Lyron
    L. BentovimLyron
    L. Bentovim

Director

March 30, 2007  76




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
    SCHEDULES      Form 10-K.
    ERNST
    & YOUNG LLP
    S-1




---



##### Table of Contents



SCHEDULE I  RTW,
    INC.
    SUMMARY OF INVESTMENTS
  December 31,
    2006
 Amount atWhich ShownAmortized


Fair


in the BalanceType of Investment

Cost


Value


Sheet(In thousands)Fixed maturities:Available-for-sale:Municipal securities

$
18,463


$
18,068


$
18,068Commercial paper


7,446



7,446



7,446Mortgage backed securities


24,441



24,127



24,127Asset backed securities


2,007



1,954



1,954United States government,
    government agencies and authorities


60,389



59,494



59,494Total Investments

$
112,746


$
111,089


$
111,089  S-2




---



##### Table of Contents



SCHEDULE II  RTW,
    INC.
  Condensed
    Financial Information of the Registrant
    Balance Sheets
    December 31, 2006 and 2005
   2006


2005(In thousands)ASSETSCash and cash equivalents

$
255


$
142Furniture and equipment, net


1,570



1,444Investment in and advances to
    subsidiary


53,200



53,406Other assets


1,870



1,441$
56,895


$
56,433LIABILITIES AND
    SHAREHOLDERS EQUITYAccrued expenses and other
    liabilities

$
5,540


$
5,855Total liabilities


5,540



5,855Shareholders equity


51,355



50,578$
56,895


$
56,433    S-3




---



##### Table of Contents



SCHEDULE II
  RTW,
    INC.
    Condensed Financial Information of the Registrant
    Statements of Operations
    Years Ended December 31, 2006, 2005 and 2004
  2006


2005


2004(In thousands)Revenues:Intercompany fee income

$
15,261


$
17,469


$
18,289Service fee revenue


5,941



4,398



633Investment income


10



14



104Total revenues


21,212



21,881



19,026Expenses:General and administrative expenses


19,812



18,327



15,933Income before income taxes and
    equity in undistributed net income of subsidiary


1,400



3,554



3,093Income tax expense


795



1,650



879Income before equity in
    undistributed net income of subsidiary


605



1,904



2,214Equity in undistributed net income
    of subsidiary


2,683



4,094



7,727Net income

$
3,288


$
5,998


$
9,941    S-4




---



##### Table of Contents



SCHEDULE II
  RTW,
    INC.
    Condensed Financial Information of the Registrant
    Statements of Cash Flows
    Years Ended December 31, 2006, 2005 and 2004
   2006


2005


2004(In thousands)Cash
    Flows from Operating
    Activities:Reconciliation of net income to
    net cash provided by (used in) operating activities:Net income

$
3,288


$
5,998


$
9,941Adjustments to reconcile net
    income to net cash provided by (used in) operating activities:Depreciation and amortization


485



470



458Equity in net (income) from
    subsidiary


(2,683
)


(4,094
)


(7,727
)Deferred income taxes


(127
)


41



57Changes in assets and liabilities:Accrued expenses and other
    liabilities


(213
)


2,389



1,070Other, net


(326
)


(1,844
)


(1,278
)Net cash provided by operating
    activities


424



2,960



2,521Cash
    Flows from Investing
    Activities:Investment in and advances (to)
    from subsidiary


2,889



(2,860
)


(2,625
)Purchases of furniture and
    equipment


(616
)


(696
)


(444
)Disposals of furniture and
    equipment


5



10



Net cash provided (used in) by
    investing activities


2,278



(3,546
)


(3,069
)Cash
    Flows from Financing Activities:Stock options exercised


598



479



533Issuance of common stock under ESPP


151



99



65Repurchase of common stock


(3,338
)






Net cash (used in) provided by
    financing activities


(2,589
)


578



598Net
    (Decrease) Increase in Cash and Cash Equivalents


113



(8
)


50Cash
    and Cash Equivalents at Beginning of Year


142



150



100Cash and Cash Equivalents at
    End of Year

$
255


$
142


$
150Supplemental
    Disclosure of Cash Flow
    Information:Cash paid (received) during the
    year for:Income tax payments (refunds)

$
105


$
148


$
(357
)    S-5




---



##### Table of Contents



SCHEDULE II
  RTW,
    INC.
    Condensed Financial Information of the Registrant
    Notes to Condensed Financial Statements
    Years Ended December 31, 2006, 2005 and 2004
  NOTE 1 
    ACCOUNTING POLICIES
  Form 10-K.
  NOTE 2 
    RELATED PARTY TRANSACTIONS
       S-6




---



##### Table of Contents



SCHEDULE III  RTW,
    INC.
  SUPPLEMENTAL
    INFORMATION CONCERNING INSURANCE OPERATIONS
 December 31,
    2006
  (Column C)Reserves for











InvestmentUnpaid











Income


Claim and Claim


Amortization


PaidDeferred


Claim and


Discount,








and Net


Settlement Expenses


of Deferred


Claim andPolicy


Claim


If Any,








Realized


Incurred Related to:


Policy


Claim


OtherAcquisition


Settlement


Deducted in


Unearned


Earned


Investment


Current


Prior


Acquisition


Settlement


Operating


PremiumsYear

Costs


Expenses


Column C(1)


Premiums


Premiums


Gains


Year


Years


Costs


Expenses


Expenses


Written(In thousands)2006

$
800


$
152,327


$
343


$
7,432


$
42,606


$
5,510


$
31,933


$
(1,799
)

$
5,160


$
31,798


$
8,143


$
41,1322005

$
889


$
160,141


$
342


$
8,341


$
49,420


$
5,366


$
36,264


$
(5,457
)

$
5,456


$
32,385


$
9,315


$
57,7612004

















$
53,682


$
4,542


$
42,583


$
(7,047
)

$
6,045


$
35,713


$
9,204


$
44,502     (1)
    
    Certain claims with fixed or determinable future payments are
    discounted at 4.0%. S-7




---



##### Table of Contents



SCHEDULE IV  RTW,
    INC.
  REINSURANCE
 Years
    ended December 31, 2006, 2005 and 2004
   Premiums Earned


PercentageCeded to


Assumed





of AmountOther


from Other





AssumedDescription

Direct


Companies


Companies


Net


to Net(In thousands)2006PREMIUMS 
    Workers Compensation

$
51,367


$
8,761


$



$
42,606



0.00
%2005PREMIUMS 
    Workers Compensation

$
59,872


$
10,452


$



$
49,420



0.00
%2004PREMIUMS 
    Workers Compensation

$
63,370


$
9,688


$



$
53,682



0.00
%  S-8




---



##### Table of Contents



SCHEDULE V  RTW,
    INC.
  VALUATION
    AND QUALIFYING ACCOUNTS
 Years
    ended December 31, 2006, 2005 and 2004
  AdditionsBalance at


Charged to


Charged to





Balance atBeginning


Costs and


Other





EndDescription

of Period


Expenses


Accounts


Write-Offs


of Period2006Allowance for
    Doubtful Accounts

$
192


$
144


$



$
133


$
2032005Allowance for
    Doubtful Accounts

$
90


$
450


$



$
348


$
1922004Allowance for
    Doubtful Accounts

$
225


$
(107
)

$



$
28


$
90  S-9