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UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


Form 10-K


|   |   |  |  |                                                                                             
|-- | - |  |  | --------------------------------------------------------------------------------------------
|   | þ |  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|  
|   |   |  |  | For the fiscal year ended December 31, 2004                                                 
|  
|OR
|  
|   | o |  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
|  
|   |   |  |  | For the transition period
    from           to                                             

Commission file number: 0-25508


RTW, INC.


(Exact name of registrant as specified in its charter)


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

8500 Normandale Lake Boulevard, Suite 1400


Bloomington, MN 55437


(Address of principal executive offices and zip code)


Registrants telephone number, including area code:


(952) 893-0403


Securities registered pursuant to 12(b) of the Act:


None


Securities registered pursuant to 12(g) of the Act: Common
Stock, no par value


Series A Junior Participating Preferred Stock


þ o


o þ


o




Documents incorporated by reference:












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TABLE OF CONTENTS


|                                                                               |  |                                                                                                    |  |      |    | 
|------------------------------------------------------------------------------ |  | -------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                               |  |                                                                                                    |  | Page |   
|                                                                               |  |                                                                                                    |  |      |   
|PART I                                                                        
|Item 1.                                                                        |  | Business                                                                                           |  |      | 2  | 
|                                                                               |  | Executive Officers of the Registrant                                                               |  |      | 9  | 
|Item 2.                                                                        |  | Properties                                                                                         |  |      | 10 | 
|Item 3.                                                                        |  | Legal Proceedings                                                                                  |  |      | 10 | 
|Item 4.                                                                        |  | Submission of Matters to a Vote of Security
    Holders                                            |  |      | 10 | 
|PART II                                                                       
|Item 5.                                                                        |  | Market for Registrants Common Equity
    and Related Stockholder Matters                          |  |      | 10 | 
|Item 6.                                                                        |  | Selected Financial Data                                                                            |  |      | 11 | 
|Item 7.                                                                        |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations          |  |      | 12 | 
|Item 7A.                                                                       |  | Quantitative and Qualitative Disclosures
    About Market Risk                                     |  |      | 33 | 
|Item 8.                                                                        |  | Financial Statements and Supplementary
    Data                                                    |  |      | 34 | 
|Item 9.                                                                        |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure           |  |      | 58 | 
|Item 9A.                                                                       |  | Controls and Procedures                                                                            |  |      | 58 | 
|Item 9B.                                                                       |  | Other Information                                                                                  |  |      | 58 | 
|PART III                                                                      
|Item 10.                                                                       |  | Directors and Executive Officers of the
    Registrant                                             |  |      | 58 | 
|Item 11.                                                                       |  | Executive Compensation                                                                             |  |      | 58 | 
|Item 12.                                                                       |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters |  |      | 58 | 
|Item 13.                                                                       |  | Certain Relationships and Related
    Transactions                                                 |  |      | 58 | 
|Item 14.                                                                       |  | Principal Accountant Fees and Services                                                             |  |      | 58 | 
|PART IV                                                                       
|Item 15.                                                                       |  | Exhibits and Financial Statement
    Schedules                                                     |  |      | 59 | 
|                                                                               |  | Signatures                                                                                         |  |      | 61 | 
|Description of 2005 Profit Sharing Plan                                       
|Description of Reinsurance Agreement for 2005-General Reinsurance Corp.       
|Election Form for 2005 Minnesota Workers' Compensation Reinsurance Association
|Description of Reinsurance Agreement for 2005                                 
|Statement Re: Computation of Income Per Share                                 
|Consent of Ernst & Young, LLP                                                 
|Certification of President and CEO                                            
|Certification of CFO                                                          
|Certification Pursuant to 18 U.S.C. Section 1350                              



1



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PART I







|        |         
|------- | --------
|Item 1. | Business

Overview








Industry










2



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Our Management Approach








Customers.




Employees.


3



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Medical Care Providers.






Legal and Judicial Participants.


Customers






4



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Products


Insurance Products.






Service offerings.


Sales and Marketing




5



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Reinsurance








|              |      |                    |                    |                               |         |         |             |          |                                          
|------------- | ---- | ------------------ | ------------------ | ----------------------------- | ------- | ------- | ----------- | -------- | -----------------------------------------
|              |      |                    |                    | Covers Losses Per Occurrence:
|              |      |                    |                    |                              
|              |      |                    |                    | In Excess of:                 |         |         | Limited to:
|              |      |                    |                    |                               |         |         |            
|Minnesota:    |      |                    |                    |                               |         |         |             |         
|              | 2004 |                    | WCRA               |                               | $       | 360,000 |             |          | Statutory limit                          
|              |      | Various reinsurers |                    | $                             | 200,000 |         |             | $360,000
|              | 2003 |                    | WCRA               |                               | $       | 360,000 |             |          | Statutory limit                          
|              |      | Various reinsurers |                    | $                             | 200,000 |         |             | $360,000
|              | 2002 |                    | WCRA               |                               | $       | 350,000 |             |          | Statutory limit                          
|             
|Other States: |      |                    |                    |                               |         |         |             |         
|              | 2004 |                    | Various reinsurers |                               | $       | 200,000 |             |          | $20.0 million excluding acts of terrorism
|              | 2003 |                    | Various reinsurers |                               | $       | 200,000 |             |          | $20.0 million excluding acts of terrorism
|              | 2002 |                    | Various reinsurers |                               | $       | 300,000 |             |          | $20.0 million                            





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|                                        |  |                 
|--------------------------------------- |  | ----------------
|Reinsurer                               |  | A.M. Best Rating
|                                        |  |                 
|GE Reinsurance Corporation              |  | A               
|General Reinsurance Corporation         |  | A++             
|Everest Reinsurance Company             |  | A+              
|Platinum Underwriters Reinsurance, Inc. |  | A               
|Continental Casualty Company            |  | A               
|SCOR Reinsurance Company                |  | B++             
|Transatlantic Reinsurance Company       |  | A+              



Competition












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Data Management




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



Employees




Regulation






8



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Trade Names, Trademarks and Service Marks




Company Information


http://www.rtwi.com





Executive Officers of the Registrant




|                      |  |     |    |  |          |                                                                               
|--------------------- |  | --- | -- |  | -------- | ------------------------------------------------------------------------------
|Name                  |  | Age |    |  | Position
|                      |  |     |    |  |         
|John O. Goodwyne      |  |     | 66 |  |          | Chairman of the Board                                                         
|Jeffrey B. Murphy     |  |     | 43 |  |          | President, Chief Executive Officer and Director                               
|Alfred L. LaTendresse |  |     | 56 |  |          | Executive Vice President, Chief Financial Officer, Treasurer and
    Secretary
|Keith D. Krueger      |  |     | 46 |  |          | Vice President  Insured Products and Assistant
    Secretary                 
|David M. Dietz        |  |     | 38 |  |          | Vice President  Absentia                                                     
|Patricia M. Sheveland |  |     | 46 |  |          | Vice President  Case and Claims Management                                   









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|        |           
|------- | ----------
|Item 2. | Properties



|                                                                |  |                 |        |  |             |  |                 | 
|--------------------------------------------------------------- |  | --------------- | ------ |  | ----------- |  | --------------- | 
|                                                                |  | Area leased (in |        |  |            
|Location and description                                        |  | square feet)    |        |  | Termination | 
|                                                                |  |                 |        |  |             | 
|Bloomington, Minnesota; Headquarters and Minnesota office space |  |                 | 26,301 |  |             |  | September  2007 | 
|Denver, Colorado; Colorado office space                         |  |                 | 7,825  |  |             |  | April 2005      | 
|Detroit, Michigan; Michigan office space                        |  |                 | 7,118  |  |             |  | May 2007        | 
|Grand Rapids, Michigan; Michigan office space                   |  |                 | 4,571  |  |             |  | April 2006      | 








|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings








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






PART II







|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity and Related
    Stockholder Matters

Quarterly Stock Price Comparison and Dividends




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|             |  |         |  |   |         |  |  |         |      |  |         |   |      |  |  |   |      | 
|------------ |  | ------- |  | - | ------- |  |  | ------- | ---- |  | ------- | - | ---- |  |  | - | ---- | 
|             |  | First   |  |   | Second  |  |  | Third   |      |  | Fourth  |  
|Fiscal Year: |  | Quarter |  |   | Quarter |  |  | Quarter |      |  | Quarter |  
|             |  |         |  |   |         |  |  |         |      |  |         |  
|2004         |  | High    |  | $ | 7.12    |  |  | $       | 7.01 |  |         | $ | 7.29 |  |  | $ | 9.48 | 
|             |  | Low     |  |   | 5.83    |  |  |         | 5.76 |  |         |   | 5.71 |  |  |   | 6.40 | 
|2003         |  | High    |  | $ | 3.01    |  |  | $       | 4.37 |  |         | $ | 4.00 |  |  | $ | 7.60 | 
|             |  | Low     |  |   | 1.79    |  |  |         | 2.38 |  |         |   | 3.45 |  |  |   | 3.78 | 



Recent Sales of Unregistered Equity Securities




Issuer Repurchases of Equity Securities









|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data



|                                  |  |                                       |         |  |      |   |         |      |  |   |         |  |  |      |         |   |  |   |         |  
|--------------------------------- |  | ------------------------------------- | ------- |  | ---- | - | ------- | ---- |  | - | ------- |  |  | ---- | ------- | - |  | - | ------- | -
|                                  |  | 2004                                  |         |  | 2003 |   |         | 2002 |  |   | 2001    |  |  | 2000 |        
|                                  |  |                                       |         |  |      |   |         |      |  |   |         |  |  |      |        
|                                  |  | (In thousands, except per share data) |        
|Total revenues                    |  | $                                     | 58,857  |  |      | $ | 51,558  |      |  | $ | 67,146  |  |  | $    | 95,723  |   |  | $ | 83,299  |  
|Income (loss) from operations     |  |                                       | 8,072   |  |      |   | 6,635   |      |  |   | 10,325  |  |  |      | (15,761 | ) |  |   | (14,780 | )
|Income (loss) before income taxes |  |                                       | 8,072   |  |      |   | 6,587   |      |  |   | 10,162  |  |  |      | (16,272 | ) |  |   | (15,447 | )
|Net income (loss)                 |  |                                       | 9,941   |  |      |   | 6,999   |      |  |   | 14,319  |  |  |      | (25,215 | ) |  |   | (9,708  | )
|Basic income (loss) per share     |  |                                       | 1.90    |  |      |   | 1.37    |      |  |   | 2.78    |  |  |      | (4.89   | ) |  |   | (1.79   | )
|Diluted income (loss) per share   |  |                                       | 1.81    |  |      |   | 1.32    |      |  |   | 2.78    |  |  |      | (4.89   | ) |  |   | (1.79   | )
|Total assets                      |  |                                       | 220,507 |  |      |   | 202,168 |      |  |   | 223,834 |  |  |      | 218,307 |   |  |   | 194,535 |  
|Notes payable                     |  |                                       |        |  |      |   |        |      |  |   | 1,250   |  |  |      | 4,500   |   |  |   | 7,000   |  
|Total shareholders equity        |  |                                       | 45,531  |  |      |   | 35,587  |      |  |   | 29,810  |  |  |      | 14,222  |   |  |   | 38,736  |  
|Other information (unaudited)     |  |                                       |         |  |      |   |         |      |  |   |         |  |  |      |         |   |  |   |         |  
|Premiums in force at year end     |  |                                       | 62,700  |  |      |   | 58,100  |      |  |   | 54,200  |  |  |      | 83,700  |   |  |   | 99,400  |  

11



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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations

RTW, INC.


MANAGEMENTS DISCUSSION AND ANALYSIS OF


FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Overview


The Company








Challenges, risks, uncertainties and trends




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Workers compensation is a state regulated industry.
    Workers compensation is governed and regulated by state
    governmental agencies. We are subject to state regulation in any
    state in which we provide workers compensation products
    and services, now and in the future. State regulatory agencies
    have broad administrative power with respect to all aspects of
    our business, including premium rates, benefit levels, policy
    forms, dividend payments, capital adequacy and the amount and
    type of investments. Legislation covering insurance companies
    and the regulations adopted by state agencies are subject to
    change and any change may adversely affect our operations;
|
| |  | Workers compensation claims and related expenses can be
    volatile. Workers compensation is a long-tailed
    property and casualty insurance line. Claims for a given year
    are open on average for twelve to thirteen years and it is not
    unusual for workers compensation insurers to have some
    claims open for thirty or more years. We have operated ACIC
    since 1992 and therefore have relatively limited experience
    (thirteen years), and accordingly, are subject to volatility.
    See further discussion under Claim and Claim Settlement
    Expenses;                                                                                                                                   
|
| |  | Workers compensation is subject to inflationary
    pressures. Workers compensation is subject to both
    medical and wage inflation. The cost of medical care has
    increased in excess of 10% per annum in recent years. This
    has resulted in reduced profitability in the workers
    compensation insurance line.                                                                                                                                                                                                                                                                                                                                                                                                

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | New medical procedures could evolve and new legal theories
    develop that could cause older claims to re-open and increase
    expense. See further discussion under Claim and Claim
    Settlement Expenses;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Workers compensation pricing is cyclical. In 2004,
    we were able to increase premium rates on renewing policies only
    by an average of 0.9%, decreasing significantly from recent
    years. Rates increased 1.4%, 9.0%, 18.5% and 11.7% in 2003,
    2002, 2001 and 2000, respectively. These increases came after
    many years of rate decreases that unfavorably affected the
    industry in the late 1990s. If we are unable to maintain
    rate increases or decrease our costs, our profit margin will be
    adversely affected. See further discussion under Premiums
    in Force and Gross Premiums Earned;                                                                                                                                   
|
| |  | Reinsurance costs for workers compensation have
    increased. Reinsurance costs increased over the prior year
    continuing a pattern of cost increases beginning in 2001. These
    higher costs, if not recovered through increased rates from our
    customers, will adversely affect our profit margin. See further
    discussion under Premiums Ceded;                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | Low interest rates reduce our investment income. Interest
    rates for investment-grade instruments are lower than historic
    averages. Our investment income is directly affected by the
    interest rate at which we invest our free cash flow. The
    historical low interest rate environment during the pase several
    years contributed to a significant mortgage refinancing boom,
    resulting in prepayment of our mortgage-backed investments and
    increased our cash on hand in ACIC. We continue to invest these
    funds in short-term instruments. An ongoing low interest rate
    environment will adversely affect our investment income. See
    further discussion under Investment Income and Net
    Realized Investment Gains; and
|
| |  | Profitable service revenue growth could be difficult. The
    national market for disability management services is highly
    competitive and includes national, regional and local providers
    of services. We do not have a national presence, limiting our
    ability to service national accounts. Any infrastructure changes
    to support growth in our non-insurance revenues could be
    expensive and diminish our earnings in the short-term.                                                                                                                                                                                                                                                                                                         

Significant Accounting Policies




Off-Balance Sheet Arrangements


Financial Summary


13



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|                                    |  |                         |        |  |      |   |        |      |  |   |        | 
|----------------------------------- |  | ----------------------- | ------ |  | ---- | - | ------ | ---- |  | - | ------ | 
|                                    |  | Year Ended December 31, |       
|                                    |  |                         |       
|                                    |  | 2004                    |        |  | 2003 |   |        | 2002 | 
|                                    |  |                         |        |  |      |   |        |      | 
|Gross premiums earned               |  | $                       | 63,370 |  |      | $ | 54,431 |      |  | $ | 62,506 | 
|Premiums earned                     |  |                         | 53,682 |  |      |   | 46,290 |      |  |   | 60,264 | 
|Service revenue                     |  |                         | 633    |  |      |   | 109    |      |  |   | 22     | 
|Total revenues                      |  |                         | 58,857 |  |      |   | 51,558 |      |  |   | 67,146 | 
|Claim and claim settlement expenses |  |                         | 35,536 |  |      |   | 27,256 |      |  |   | 40,533 | 
|Net income                          |  |                         | 9,941  |  |      |   | 6,999  |      |  |   | 14,319 | 
|Diluted income per share            |  | $                       | 1.81   |  |      | $ | 1.32   |      |  | $ | 2.78   | 





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Gross premiums earned increased 16.4% to $63.4 million in
    2004 from $54.4 million in 2003 due primarily to an
    increase in average premiums in force to $61.5 million for
    2004 from $53.6 million in 2003. See further discussion
    under Premiums In Force and Gross Premiums Earned;                                                                                                                                                                                                        
|
| |  | Premiums earned increased 16.0% to $53.7 million in 2004
    from $46.3 million in 2003. Premiums earned in 2004 reflect
    the increase in gross premiums earned from 2003, and an increase
    in final audit premiums earned in 2004 compared to 2003, offset
    by an increase in premiums ceded as our cost of excess of loss
    reinsurance increased in 2004;                                                                                                                                      
|
| |  | In addition to the factors affecting premiums earned, total
    revenues increased as we recorded $705,000 of net realized
    investment gains in 2004 compared to $685,000 recorded in 2003;                                                                                                                                                                                                                                                                                                               
|
| |  | Claim and claim settlement expenses increased to 66.2% of
    premiums earned for 2004 from 58.8% for 2003. Favorable
    development for prior accident years reduced claim and claim
    settlement expenses by $7.0 million in 2004 compared to
    $6.7 million in 2003. Claim and claim settlement expenses
    also increased in 2004 due to the increase in gross premiums
    earned in 2004 compared to 2003. See further discussion under
    Claim and Claim Settlement Expenses; and           
|
| |  | At December 31, 2004, we eliminated the valuation allowance
    recorded against our deferred tax asset. This allowance was
    originally established at December 31, 2001 at
    $14.5 million, and was decreased by $7.9 million in
    2002, $3.0 million in 2003 and $4.0 million in 2004.
    The $4.0 million and $3.0 million decreases in the
    valuation allowance favorably affected our income tax expense in
    2004 and 2003, respectively. See further discussion under
    Income Taxes.





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Results of Operations


Total revenues:


|                               |                            |                               |                |        |      |        |        |        |     |        |        |        |       |        | 
|------------------------------ | -------------------------- | ----------------------------- | -------------- | ------ | ---- | ------ | ------ | ------ | --- | ------ | ------ | ------ | ----- | ------ | 
|                               |                            | Year Ended December 31,       |               
|                               |                            |                               |               
|                               |                            | 2004                          |                |        | 2003 |        |        | 2002   |    
|                               |                            |                               |                |        |      |        |        |        |    
|Gross premiums earned          |                            | $                             | 63,370         |        |      | $      | 54,431 |        |     | $      | 62,506 |       
|Premiums ceded                 |                            |                               | (9,688         | )      |      |        | (8,141 | )      |     |        | (2,242 | )     
|                               |                            |                               |                |        |      |        |        |        |    
|                               | Premiums earned            |                               |                | 53,682 |      |        |        | 46,290 |     |        |        | 60,264 |      
|Investment income              |                            |                               | 3,837          |        |      |        | 4,474  |        |     |        | 5,139  |       
|Net realized investment gains: |                            |                               |                |        |      |        |        |        |     |        |        |       
|                               | Realized investment gains  |                               |                | 708    |      |        |        | 685    |     |        |        | 1,930  |      
|                               | Realized investment losses |                               |                | (3     | )    |        |        |       |     |        |        | (209   | )    
|                               |                            |                               |                |        |      |        |        |        |    
|                               |                            | Net realized investment gains |                |        | 705  |        |        |        | 685 |        |        |        | 1,721 |       
|Service revenue                |                            |                               | 633            |        |      |        | 109    |        |     |        | 22     |       
|                               |                            |                               |                |        |      |        |        |        |    
|                               |                            |                               | Total revenues |        | $    | 58,857 |        |        | $   | 51,558 |        |        | $     | 67,146 | 
|                               |                            |                               |                |        |      |        |        |        |    

|                                        |                                                    |                         |   |        |        |  |   |        |        |  |   |        |        | 
|--------------------------------------- | -------------------------------------------------- | ----------------------- | - | ------ | ------ |  | - | ------ | ------ |  | - | ------ | ------ | 
|                                        |                                                    | 2004                    |   |        | 2003   |  |   | 2002   |       
|                                        |                                                    |                         |   |        |        |  |   |        |       
|Premiums in force by region at year-end |                                                    |                         |   |        |        |  |   |        |        |  |   |       
|                                        | Minnesota                                          |                         | $ | 37,800 |        |  | $ | 32,000 |        |  | $ | 23,000 |       
|                                        | Colorado                                           |                         |   | 10,600 |        |  |   | 13,000 |        |  |   | 11,800 |       
|                                        | Michigan                                           |                         |   | 14,300 |        |  |   | 13,100 |        |  |   | 18,000 |       
|                                        | Closed regional offices  Missouri and New England |                         |   |       |        |  |   |       |        |  |   | 1,400  |       
|                                        |                                                    |                         |   |        |        |  |   |        |       
|                                        |                                                    | Total premiums in force |   | $      | 62,700 |  |   | $      | 58,100 |  |   | $      | 54,200 | 
|                                        |                                                    |                         |   |        |        |  |   |        |       

Premiums In Force and Gross Premiums Earned:






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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Many workers compensation insurers have withdrawn from the
    markets in which we write premiums as profitability diminished
    in the workers compensation insurance line;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Reinsurance rates for workers compensation insurers have
    increased due to: (i) reductions in reinsurers
    surplus as a result of the September 11, 2001 terrorist
    acts against the United States; (ii) unprofitability
    resulting from highly competitive reinsurance pricing in the
    late 1990s; (iii) settlements related to certain
    reinsurance treaties written in the late 1990s;
    (iv) five major reinsurers leaving the market in 2003; and
    (v) low investment yields. These rate increases have
    resulted in increased costs for workers compensation
    insurers. Insurers, including RTW, have raised premium rates to
    offset these increases in reinsurance premiums; and
|
| |  | A number of workers compensation insurers financial
    ratings decreased due to reserve adjustments recorded in 2004,
    2003 and 2002 resulting in a reduced capacity and
    creditworthiness of those insurers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

Premiums Ceded:




|              |      |                    |                    |                               |         |         |             |          |                                          
|------------- | ---- | ------------------ | ------------------ | ----------------------------- | ------- | ------- | ----------- | -------- | -----------------------------------------
|              |      |                    |                    | Covers losses per occurrence:
|              |      |                    |                    |                              
|              |      |                    |                    | In excess of:                 |         |         | Limited to:
|              |      |                    |                    |                               |         |         |            
|Minnesota:    |      |                    |                    |                               |         |         |             |         
|              | 2004 |                    | WCRA               |                               | $       | 360,000 |             |          | Statutory limit                          
|              |      | Various reinsurers |                    | $                             | 200,000 |         |             | $360,000
|              | 2003 |                    | WCRA               |                               | $       | 360,000 |             |          | Statutory limit                          
|              |      | Various reinsurers |                    | $                             | 200,000 |         |             | $360,000
|              | 2002 |                    | WCRA               |                               | $       | 350,000 |             |          | Statutory limit                          
|Other states: |      |                    |                    |                               |         |         |             |         
|              | 2004 |                    | Various reinsurers |                               | $       | 200,000 |             |          | $20.0 million excluding acts of terrorism
|              | 2003 |                    | Various reinsurers |                               | $       | 200,000 |             |          | $20.0 million excluding acts of terrorism
|              | 2002 |                    | Various reinsurers |                               | $       | 300,000 |             |          | $20.0 million                            



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2005 Outlook:




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We expect premium rates to decrease 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 2005 and terminate some that are not
    performing well. We expect premiums in force to decrease
    slightly in 2005 with any growth occurring primarily in our
    Minnesota and Michigan regions;
|
| |  | Our 2005 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                                                                                                                                                                                                                                             
|
| |  | Premiums ceded under excess of loss policies will increase as a
    percent of gross premiums earned in 2005 when compared to the
    results attained for 2004. We maintained a $200,000 retention in
    all our regions in 2005. The cost of excess of loss reinsurance
    has increased at all retention levels and for all regions in
    2005.                                                                           

Investment Income and Net Realized Investment Gains:








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2005 Outlook:




| |   |                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our investment in tax-exempt municipal bonds will reduce
    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;                             
|
| |  | We expect interest rates to increase in 2005. The timing of any
    such rate increases is unknown at this time. We intend to invest
    our excess cash into higher yielding investments in 2005 as
    rates increase;                             
|
| |  | We expect that short-term interest rates on cash and cash
    equivalents will increase in 2005 as the Federal Reserve Board
    increases its rates;                                                                                                
|
| |  | Cash flows for 2005 are expected to be adversely affected by
    decreases in cash flows resulting from claim payments on claims
    from 2004 and prior years offset by cash flows from our premiums
    as we increase our premiums earned in 2005;
|
| |  | 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; and             
|
| |  | New and renegotiated reinsurance treaties may affect our future
    cash flow and future investment income.                                                                                                                                          

Service Revenue:


Service Revenue Outlook:




| |   |                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In March 2004, we were awarded a three-year contract to service
    25% of the ARP. We are paid a fee based on a percent of the
    premium we service and began servicing new ARP business on
    July 1, 2004 and renewal ARP business on September 1,
    2004. We believe the annual premium for the ARP to be

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | in excess of $100 million. We currently expect this
    contract to produce service revenue in excess of
    $4.0 million during 2005, some of which will be deferred to
    future periods; and                                                                                                                                                                                                                                                                                                                                                    
|
| |  | We currently have 23 additional non-insurance customers in
    Minnesota, Michigan, California and Indiana that will generate
    approximately $1.0 million of annualized service revenue
    over the term of their contracts. We continue to market our
    alternative products aggressively inside and outside the regions
    in which we currently operate. We expect service revenue will
    increase as new customers become aware of and purchase these
    services. The ultimate effect on service revenue is unknown at
    this time.

Total Expenses:


Claim and Claim Settlement Expenses:








2004 Compared to 2003:




| |   |                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------
| |  | The increase in gross premiums earned as discussed above under
    Premiums In Force and Gross Premiums Earned;

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

2003 Compared to 2002:




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The decrease in gross premiums earned as discussed above under
    Premiums In Force and Gross Premiums Earned;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | The 2003 results include a $6.7 million decrease in prior
    years reserves for unpaid claim and claim settlement
    expenses compared to the 2002 results which include an
    $8.4 million decrease in prior years reserves. Our
    estimate for unpaid claim and claim settlement expenses
    decreased in 2003 due to the following: (i) our ability to
    manage and close claims has improved over our historical
    experience; (ii) the re-underwriting of our book of
    business has resulted in claims with profiles different than
    experienced historically; (iii) the frequency of claims
    reported in 2003 for 2002 and prior years was less than
    anticipated when we determined our liability in 2002; and
    (iv) our estimate of the liability for unpaid claim and
    claim settlement expenses is volatile due to our relatively
    limited twelve-year historical claim data and our small claim
    population;
|
| |  | Claim and claims settlement expenses decreased in total due to
    the overall decrease in average premiums in force and decreased
    as a percent of gross premiums earned as premium rate increases
    realized in 2002 and 2003 flow through 2003 premiums
    earned; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Claim costs continued to reflect increasing medical and
    indemnity costs in accident year 2003 as compared to accident
    year 2002 resulting from inflationary pressures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

2005 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 affect 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                               



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Policy Acquisition Costs:




|                                                |                                 |                         |        |       |      |   |        |       |  |   |       |       | 
|----------------------------------------------- | ------------------------------- | ----------------------- | ------ | ----- | ---- | - | ------ | ----- |  | - | ----- | ----- | 
|                                                |                                 | Year Ended December 31, |       
|                                                |                                 |                         |       
|                                                |                                 | 2004                    |        |       | 2003 |   |        | 2002  | 
|                                                |                                 |                         |        |       |      |   |        |       | 
|Commission expense                              |                                 | $                       | 4,489  |       |      | $ | 4,000  |       |  | $ | 4,321 |      
|Premium tax expense                             |                                 |                         | 1,147  |       |      |   | 997    |       |  |   | 1,048 |      
|Other policy acquisition costs                  |                                 |                         | 2,769  |       |      |   | 3,381  |       |  |   | 935   |      
|                                                |                                 |                         |        |       |      |   |        |       | 
|                                                | Direct policy acquisition costs |                         |        | 8,405 |      |   |        | 8,378 |  |   |       | 6,304 | 
|Ceding commission on excess of loss reinsurance |                                 |                         | (2,360 | )     |      |   | (1,500 | )     |  |   |      |      
|                                                |                                 |                         |        |       |      |   |        |       | 
|                                                | Total policy acquisition costs  |                         | $      | 6,045 |      |   | $      | 6,878 |  |   | $     | 6,304 | 
|                                                |                                 |                         |        |       |      |   |        |       | 





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Gross premiums earned increased in 2004 compared to 2003 and
    2002 resulting in corresponding increases in policy acquisition
    costs;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Commission expense decreased to 7.1% of gross premiums earned in
    2004 from 7.3% in 2003 and increased from 6.9% in 2002. This
    decrease in commission rates is the result of new business
    growth that we experienced in the second half of 2003 on which
    we paid higher commission rates and the focus in 2004 on
    reducing the commissions we pay. In 2002, our renewal business,
    on which we pay lower commission rates, significantly outpaced
    our new business. 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 2004, 1.8% of gross premiums earned in 2003 and 1.7%
    in 2002; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Other policy acquisition costs consist of 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 2004, we recorded a $478,000 increase in
    other policy acquisition costs reflecting a re-allocation of
    2003 mandatory reinsurance pool expenses compared to a
    $1.5 million increase recorded in 2003; we were not
    assessed any re-allocation in 2002; (ii) in 2002, Michigan
    changed the basis of its second injury fund assessment from a
    claims based assessment to a premium based assessment, resulting
    in an $851,000 benefit in 2002 compared to no benefit received
    in 2004 or 2003; (iii) in 2002, we received a $541,000
    favorable adjustment from a state data collection agency
    resulting from our significant decrease in premiums; and
    (iv) a general change related to the increase or decrease
    in gross premiums earned. Excluding the mandatory pool
    re-allocation, second injury fund assessment changes and refunds
    from data collection organizations discussed above, other policy
    acquisitions costs were 3.6% in 2004, 3.6% in 2003 and 3.7% in
    2002.

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2005 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. We had significant new
    business growth in the latter half of 2003 and the first half of
    2004, which will continue to affect commission expense in 2005.
    We expect new business growth in 2005 to decrease from 2004;
|
| |  | Premium tax accrual rates will return to their normal level of
    2.0% in 2005;                                                                                                                                                                                                                                                                                                                         
|
| |  | Other underwriting expenses will continue to be affected by pool
    reimbursements offset by pool disbursements, the effect of which
    is not known at this time.                                                                                                                                                                                                                                     

General and Administrative Expenses:






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | General and administrative expenses decreased in 2004 from 2003
    levels. Significant changes include: (i) the reversal of a
    previously recorded contingent reinsurance commission resulting
    in $375,000 in expense in 2003; (ii) bonus expense of
    $1.3 million in 2004 compared to $941,000 in 2003;
    (iii) bad debt expense was $400,000 lower in 2004; and
    (iv) we operated with fewer average headcount in 2004
    compared to 2003;                
|
| |  | General and administrative expenses increased in 2003 from 2002
    levels. Significant changes include: (i) the reversal of a
    previously recorded contingent reinsurance commission resulting
    in $375,000 in expense in 2003; (ii) $217,000 in expenses
    related to severance and relocation in 2003;
    (iii) increased professional fees; and (iv) costs
    associated with investing in the necessary staff and
    infrastructure to position us for growth;

2005 Outlook:




| |   |                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | General and administrative expenses, as a percentage of gross
    premiums earned, are expected to decrease since we will earn
    more premium and service revenue in 2005 and will have more
    premium and revenue to cover our relatively fixed costs;
|
| |  | 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
    2005, if service opportunities warrant opening a new office, we
    will evaluate the opportunities that present themselves; and                                                       
|
| |  | All expenses will continue to be aggressively managed and
    reduced where appropriate.                                                                                                                                                                   

Interest Expense:


Income Taxes:


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2005 Outlook:


Investments






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Unpaid Claim and Claim Settlement Expenses and Reinsurance
Recoverables










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|                                                        |                                                                               |                         |                 |         |        |        |   |         |         |        |   |         |        |        | 
|------------------------------------------------------- | ----------------------------------------------------------------------------- | ----------------------- | --------------- | ------- | ------ | ------ | - | ------- | ------- | ------ | - | ------- | ------ | ------ | 
|                                                        |                                                                               | Year Ended December 31, |                
|                                                        |                                                                               |                         |                
|                                                        |                                                                               | 2004                    |                 |         | 2003   |        |   | 2002    |        
|                                                        |                                                                               |                         |                 |         |        |        |   |         |        
|Gross Reserves for Claim and Claim Settlement Expenses: |                                                                               |                         |                 |         |        |        |   |         |         |        |   |        
|                                                        | Gross reserves for claim and claim settlement expenses,
    beginning of year |                         | $               | 150,044 |        |        | $ | 181,262 |         |        | $ | 181,310 |       
|                                                        | Provision increases (decreases) for claim and claim settlement
    expenses:  |                         |                 |         |        |        |   |         |         |        |   |         |       
|                                                        |                                                                               | Current year            |                 |         | 53,563 |        |   |         | 42,777  |        |   |         | 56,117 |       
|                                                        |                                                                               | Prior years             |                 |         | (4,654 | )      |   |         | (21,846 | )      |   |         | 3,593  |       
|                                                        |                                                                               |                         |                 |         |        |        |   |         |        
|                                                        |                                                                               |                         | Total provision |         |        | 48,909 |   |         |         | 20,931 |   |         |        | 59,710 | 
|                                                        | Payments for claim and claim settlement expenses:                             |                         |                 |         |        |        |   |         |         |        |   |         |       
|                                                        |                                                                               | Current year            |                 |         | 12,666 |        |   |         | 11,075  |        |   |         | 13,715 |       
|                                                        |                                                                               | Prior years             |                 |         | 30,164 |        |   |         | 41,074  |        |   |         | 46,043 |       
|                                                        |                                                                               |                         |                 |         |        |        |   |         |        
|                                                        |                                                                               |                         | Total payments  |         |        | 42,830 |   |         |         | 52,149 |   |         |        | 59,758 | 
|                                                        |                                                                               |                         |                 |         |        |        |   |         |        
|                                                        | Gross reserves for claim and claim settlement expenses, end of
    year       |                         | $               | 156,123 |        |        | $ | 150,044 |         |        | $ | 181,262 |       
|                                                        |                                                                               |                         |                 |         |        |        |   |         |        



|                                                      |                                                                              |                                                                   |                 |        |        |        |   |        |        |        |   |        |        |        | 
|----------------------------------------------------- | ---------------------------------------------------------------------------- | ----------------------------------------------------------------- | --------------- | ------ | ------ | ------ | - | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                                      |                                                                              | Year Ended December 31,                                           |                
|                                                      |                                                                              |                                                                   |                
|                                                      |                                                                              | 2004                                                              |                 |        | 2003   |        |   | 2002   |       
|                                                      |                                                                              |                                                                   |                 |        |        |        |   |        |       
|Net Reserves for Claim and Claim Settlement Expenses: |                                                                              |                                                                   |                 |        |        |        |   |        |        |        |   |       
|                                                      | Net reserves for claim and claim settlement expenses, beginning
    of year  |                                                                   | $               | 78,578 |        |        | $ | 89,440 |        |        | $ | 91,195 |       
|                                                      | Plus: Deferred retrospective reinsurance gain, beginning of year             |                                                                   |                 | 49     |        |        |   | 49     |        |        |   | 449    |       
|                                                      | Provision increases (decreases) for claim and claim
    settlement expenses: |                                                                   |                 |        |        |        |   |        |        |        |   |        |       
|                                                      |                                                                              | Current year                                                      |                 |        | 42,583 |        |   |        | 33,954 |        |   |        | 49,621 |       
|                                                      |                                                                              | Prior years                                                       |                 |        | (7,047 | )      |   |        | (6,698 | )      |   |        | (8,356 | )     
|                                                      |                                                                              | Write-off of reinsurance recoverable                              |                 |        |       |        |   |        |       |        |   |        | (332   | )     
|                                                      |                                                                              | Amortization of deferred retrospective reinsurance gain           |                 |        |       |        |   |        |       |        |   |        | (400   | )     
|                                                      |                                                                              |                                                                   |                 |        |        |        |   |        |       
|                                                      |                                                                              |                                                                   | Total provision |        |        | 35,536 |   |        |        | 27,256 |   |        |        | 40,533 | 
|                                                      | Payments for claim and claim settlement expenses:                            |                                                                   |                 |        |        |        |   |        |        |        |   |        |       
|                                                      |                                                                              | Current year                                                      |                 |        | 12,666 |        |   |        | 10,761 |        |   |        | 13,715 |       
|                                                      |                                                                              | Prior years                                                       |                 |        | 23,047 |        |   |        | 27,357 |        |   |        | 28,973 |       
|                                                      |                                                                              |                                                                   |                 |        |        |        |   |        |       
|                                                      |                                                                              |                                                                   | Total payments  |        |        | 35,713 |   |        |        | 38,118 |   |        |        | 42,688 | 
|                                                      | Less: Deferred retrospective reinsurance gain, end of year                   |                                                                   |                 | (49    | )      |        |   | (49    | )      |        |   | (49    | )     
|                                                      |                                                                              |                                                                   |                 |        |        |        |   |        |       
|                                                      |                                                                              | Net reserves for claim and claim settlement expenses, end of year |                 | $      | 78,401 |        |   | $      | 78,578 |        |   | $      | 89,440 |       
|                                                      |                                                                              |                                                                   |                 |        |        |        |   |        |       



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|                          |                                                                 |                   |   |         |         |  |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |    |      |        |         |      |   |        |         |    |   |        |         |    |   |        |        |    |   |        |        |   |   |        |        |  
|------------------------- | --------------------------------------------------------------- | ----------------- | - | ------- | ------- |  | - | ------- | ------- | - | ---- | ------- | ------- | ---- | - | ------- | ------- | - | - | ------- | ------- | -- | ---- | ------ | ------- | ---- | - | ------ | ------- | -- | - | ------ | ------- | -- | - | ------ | ------ | -- | - | ------ | ------ | - | - | ------ | ------ | -
|                          |                                                                 | December 31,      |  
|                          |                                                                 |                   |  
|                          |                                                                 | 2004              |   |         | 2003    |  |   | 2002    |         |   | 2001 |         |         | 2000 |   |         | 1999    |   |   | 1998    |         |    | 1997 |        |         | 1996 |   |        | 1995    |    |   | 1994   |        
|                          |                                                                 |                   |   |         |         |  |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |    |      |        |         |      |   |        |         |    |   |        |        
|                          |                                                                 | (000s)           |  
|Loss Reserve Development: |                                                                 |                   |   |         |         |  |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |    |      |        |         |      |   |        |         |    |   |        |         |    |   |        |        |    |   |        |        |   |   |       
|                          | Gross reserves for unpaid claim and claim settlement expenses   |                   | $ | 156,123 |         |  | $ | 150,044 |         |   | $    | 181,262 |         |      | $ | 181,310 |         |   | $ | 128,841 |         |    | $    | 99,831 |         |      | $ | 97,269 |         |    | $ | 61,069 |         |    | $ | 49,256 |        |    | $ | 37,138 |        |   | $ | 28,165 |       
|                          | Paid (cumulative) as of:                                        |                   |   |         |         |  |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |    |      |        |         |      |   |        |         |    |   |        |         |    |   |        |        |    |   |        |        |   |   |        |       
|                          |                                                                 | One year later    |   |         |         |  |   | $       | 30,164  |   |      | $       | 41,072  |      |   | $       | 46,043  |   |   | $       | 49,241  |    |      | $      | 45,933  |      |   | $      | 37,062  |    |   | $      | 28,315  |    |   | $      | 20,529 |    |   | $      | 10,032 |   |   | $      | 7,625  |  
|                          |                                                                 | Two years later   |   |         |         |  |   |         |         |   |      |         | 61,363  |      |   |         | 17,086  |   |   |         | 74,681  |    |      |        | 67,442  |      |   |        | 56,031  |    |   |        | 42,889  |    |   |        | 29,841 |    |   |        | 15,306 |   |   |        | 10,899 |  
|                          |                                                                 | Three years later |   |         |         |  |   |         |         |   |      |         |         |      |   |         | 86,710  |   |   |         | 90,484  |    |      |        | 78,244  |      |   |        | 65,664  |    |   |        | 50,558  |    |   |        | 35,370 |    |   |        | 18,415 |   |   |        | 13,261 |  
|                          |                                                                 | Four years later  |   |         |         |  |   |         |         |   |      |         |         |      |   |         |         |   |   |         | 98,689  |    |      |        | 85,754  |      |   |        | 70,631  |    |   |        | 54,835  |    |   |        | 38,880 |    |   |        | 19,964 |   |   |        | 14,449 |  
|                          |                                                                 | Five years later  |   |         |         |  |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |    |      |        | 89,956  |      |   |        | 73,979  |    |   |        | 57,261  |    |   |        | 41,029 |    |   |        | 21,289 |   |   |        | 15,126 |  
|                          |                                                                 | Six years later   |   |         |         |  |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |    |      |        |         |      |   |        | 76,311  |    |   |        | 59,012  |    |   |        | 41,980 |    |   |        | 22,117 |   |   |        | 15,650 |  
|                          |                                                                 | Seven years later |   |         |         |  |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |    |      |        |         |      |   |        |         |    |   |        | 60,352  |    |   |        | 42,728 |    |   |        | 22,702 |   |   |        | 15,952 |  
|                          |                                                                 | Eight years later |   |         |         |  |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |    |      |        |         |      |   |        |         |    |   |        |         |    |   |        | 43,511 |    |   |        | 23,020 |   |   |        | 16,226 |  
|                          |                                                                 | Nine years later  |   |         |         |  |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |    |      |        |         |      |   |        |         |    |   |        |         |    |   |        |        |    |   |        | 23,448 |   |   |        | 16,332 |  
|                          |                                                                 | Ten years later   |   |         |         |  |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |    |      |        |         |      |   |        |         |    |   |        |         |    |   |        |        |    |   |        |        |   |   |        | 16,621 |  
|                          | Reserves re-estimated as of:                                    |                   |   |         |         |  |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |    |      |        |         |      |   |        |         |    |   |        |         |    |   |        |        |    |   |        |        |   |   |        |       
|                          |                                                                 | End of year       |   | $       | 156,123 |  |   | $       | 150,044 |   |      | $       | 181,262 |      |   | $       | 181,310 |   |   | $       | 128,841 |    |      | $      | 99,831  |      |   | $      | 97,269  |    |   | $      | 61,069  |    |   | $      | 49,256 |    |   | $      | 37,138 |   |   | $      | 28,165 |  
|                          |                                                                 | One year later    |   |         |         |  |   |         | 145,389 |   |      |         | 159,415 |      |   |         | 183,923 |   |   |         | 160,065 |    |      |        | 118,205 |      |   |        | 85,384  |    |   |        | 72,443  |    |   |        | 44,862 |    |   |        | 26,086 |   |   |        | 23,486 |  
|                          |                                                                 | Two years later   |   |         |         |  |   |         |         |   |      |         | 160,147 |      |   |         | 166,738 |   |   |         | 168,222 |    |      |        | 130,120 |      |   |        | 95,696  |    |   |        | 64,499  |    |   |        | 48,233 |    |   |        | 22,295 |   |   |        | 16,774 |  
|                          |                                                                 | Three years later |   |         |         |  |   |         |         |   |      |         |         |      |   |         | 168,892 |   |   |         | 157,251 |    |      |        | 137,002 |      |   |        | 101,893 |    |   |        | 73,031  |    |   |        | 44,587 |    |   |        | 24,111 |   |   |        | 15,776 |  
|                          |                                                                 | Four years later  |   |         |         |  |   |         |         |   |      |         |         |      |   |         |         |   |   |         | 161,905 |    |      |        | 129,819 |      |   |        | 107,522 |    |   |        | 75,554  |    |   |        | 50,552 |    |   |        | 23,054 |   |   |        | 16,545 |  
|                          |                                                                 | Five years later  |   |         |         |  |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |    |      |        | 132,813 |      |   |        | 103,064 |    |   |        | 79,398  |    |   |        | 52,063 |    |   |        | 26,485 |   |   |        | 16,274 |  
|                          |                                                                 | Six years later   |   |         |         |  |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |    |      |        |         |      |   |        | 105,705 |    |   |        | 76,610  |    |   |        | 54,327 |    |   |        | 27,237 |   |   |        | 18,243 |  
|                          |                                                                 | Seven years later |   |         |         |  |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |    |      |        |         |      |   |        |         |    |   |        | 77,921  |    |   |        | 53,047 |    |   |        | 28,411 |   |   |        | 18,949 |  
|                          |                                                                 | Eight years later |   |         |         |  |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |    |      |        |         |      |   |        |         |    |   |        |         |    |   |        | 54,250 |    |   |        | 28,533 |   |   |        | 19,485 |  
|                          |                                                                 | Nine years later  |   |         |         |  |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |    |      |        |         |      |   |        |         |    |   |        |         |    |   |        |        |    |   |        | 29,107 |   |   |        | 19,969 |  
|                          |                                                                 | Ten years later   |   |         |         |  |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |    |      |        |         |      |   |        |         |    |   |        |         |    |   |        |        |    |   |        |        |   |   |        | 20,140 |  
|                          | Initial reserves in excess of (less than) re-estimated reserves |                   |   |         |         |  |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |    |      |        |         |      |   |        |         |    |   |        |         |    |   |        |        |    |   |        |        |   |   |        |       
|                          |                                                                 | Amount            |   |         |         |  |   | $       | 4,655   |   |      | $       | 21,115  |      |   | $       | 12,418  |   |   | $       | (33,064 | )  |      | $      | (32,982 | )    |   | $      | (8,436  | )  |   | $      | (16,852 | )  |   | $      | (4,994 | )  |   | $      | 8,031  |   |   | $      | 8,025  |  
|                          |                                                                 | Percent           |   |         |         |  |   |         | 3.1     | % |      |         | 11.6    | %    |   |         | 6.8     | % |   |         | (25.7   | )% |      |        | (33.0   | )%   |   |        | (8.7    | )% |   |        | (27.6   | )% |   |        | (10.1  | )% |   |        | 21.6   | % |   |        | 28.5   | %







27



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|                          |                                                                 |                   |   |         |        |  |   |         |        |   |      |         |        |      |   |         |        |   |   |         |        |    |      |        |         |      |   |        |        |    |   |        |         |    |   |        |        |    |   |        |        |   |   |        |        |  
|------------------------- | --------------------------------------------------------------- | ----------------- | - | ------- | ------ |  | - | ------- | ------ | - | ---- | ------- | ------ | ---- | - | ------- | ------ | - | - | ------- | ------ | -- | ---- | ------ | ------- | ---- | - | ------ | ------ | -- | - | ------ | ------- | -- | - | ------ | ------ | -- | - | ------ | ------ | - | - | ------ | ------ | -
|                          |                                                                 | December 31,      |  
|                          |                                                                 |                   |  
|                          |                                                                 | 2004              |   |         | 2003   |  |   | 2002    |        |   | 2001 |         |        | 2000 |   |         | 1999   |   |   | 1998    |        |    | 1997 |        |         | 1996 |   |        | 1995   |    |   | 1994   |        
|                          |                                                                 |                   |   |         |        |  |   |         |        |   |      |         |        |      |   |         |        |   |   |         |        |    |      |        |         |      |   |        |        |    |   |        |        
|Loss Reserve Development: |                                                                 |                   |   |         |        |  |   |         |        |   |      |         |        |      |   |         |        |   |   |         |        |    |      |        |         |      |   |        |        |    |   |        |         |    |   |        |        |    |   |        |        |   |   |       
|                          | Gross reserves for unpaid claim and claim settlement expenses   |                   | $ | 156,123 |        |  | $ | 150,044 |        |   | $    | 181,262 |        |      | $ | 181,310 |        |   | $ | 128,841 |        |    | $    | 99,831 |         |      | $ | 97,269 |        |    | $ | 61,069 |         |    | $ | 49,256 |        |    | $ | 37,138 |        |   | $ | 28,165 |       
|                          | Reinsurance recoverables                                        |                   |   | 77,722  |        |  |   | 71,466  |        |   |      | 91,822  |        |      |   | 90,115  |        |   |   | 61,845  |        |    |      | 41,179 |         |      |   | 21,403 |        |    |   | 5,374  |         |    |   | 6,183  |        |    |   | 8,312  |        |   |   | 13,902 |       
|                          |                                                                 |                   |   |         |        |  |   |         |        |   |      |         |        |      |   |         |        |   |   |         |        |    |      |        |         |      |   |        |        |    |   |        |        
|                          | Net reserves for unpaid claim and claim settlement expenses     |                   | $ | 78,401  |        |  | $ | 78,578  |        |   | $    | 89,440  |        |      | $ | 91,195  |        |   | $ | 66,996  |        |    | $    | 58,652 |         |      | $ | 75,866 |        |    | $ | 55,695 |         |    | $ | 43,073 |        |    | $ | 28,826 |        |   | $ | 14,263 |       
|                          |                                                                 |                   |   |         |        |  |   |         |        |   |      |         |        |      |   |         |        |   |   |         |        |    |      |        |         |      |   |        |        |    |   |        |        
|                          | Paid (cumulative) as of:                                        |                   |   |         |        |  |   |         |        |   |      |         |        |      |   |         |        |   |   |         |        |    |      |        |         |      |   |        |        |    |   |        |         |    |   |        |        |    |   |        |        |   |   |        |       
|                          |                                                                 | One year later    |   |         |        |  |   | $       | 23,047 |   |      | $       | 27,357 |      |   | $       | 30,285 |   |   | $       | 32,028 |    |      | $      | 35,932  |      |   | $      | 34,380 |    |   | $      | 27,737  |    |   | $      | 19,439 |    |   | $      | 8,595  |   |   | $      | 4,639  |  
|                          |                                                                 | Two years later   |   |         |        |  |   |         |        |   |      |         | 40,956 |      |   |         | 43,825 |   |   |         | 43,823 |    |      |        | 48,069  |      |   |        | 49,958 |    |   |        | 42,046  |    |   |        | 28,173 |    |   |        | 12,894 |   |   |        | 6,476  |  
|                          |                                                                 | Three years later |   |         |        |  |   |         |        |   |      |         |        |      |   |         | 50,871 |   |   |         | 49,531 |    |      |        | 54,360  |      |   |        | 56,376 |    |   |        | 49,671  |    |   |        | 33,438 |    |   |        | 15,521 |   |   |        | 7,863  |  
|                          |                                                                 | Four years later  |   |         |        |  |   |         |        |   |      |         |        |      |   |         |        |   |   |         | 53,130 |    |      |        | 58,113  |      |   |        | 60,453 |    |   |        | 53,814  |    |   |        | 36,904 |    |   |        | 16,869 |   |   |        | 8,569  |  
|                          |                                                                 | Five years later  |   |         |        |  |   |         |        |   |      |         |        |      |   |         |        |   |   |         |        |    |      |        | 60,690  |      |   |        | 63,278 |    |   |        | 56,140  |    |   |        | 38,919 |    |   |        | 18,020 |   |   |        | 9,046  |  
|                          |                                                                 | Six years later   |   |         |        |  |   |         |        |   |      |         |        |      |   |         |        |   |   |         |        |    |      |        |         |      |   |        | 65,347 |    |   |        | 57,903  |    |   |        | 39,770 |    |   |        | 18,714 |   |   |        | 9,396  |  
|                          |                                                                 | Seven years later |   |         |        |  |   |         |        |   |      |         |        |      |   |         |        |   |   |         |        |    |      |        |         |      |   |        |        |    |   |        | 59,219  |    |   |        | 40,530 |    |   |        | 19,200 |   |   |        | 9,564  |  
|                          |                                                                 | Eight years later |   |         |        |  |   |         |        |   |      |         |        |      |   |         |        |   |   |         |        |    |      |        |         |      |   |        |        |    |   |        |         |    |   |        | 41,289 |    |   |        | 19,530 |   |   |        | 9,738  |  
|                          |                                                                 | Nine years later  |   |         |        |  |   |         |        |   |      |         |        |      |   |         |        |   |   |         |        |    |      |        |         |      |   |        |        |    |   |        |         |    |   |        |        |    |   |        | 19,934 |   |   |        | 9,857  |  
|                          |                                                                 | Ten years later   |   |         |        |  |   |         |        |   |      |         |        |      |   |         |        |   |   |         |        |    |      |        |         |      |   |        |        |    |   |        |         |    |   |        |        |    |   |        |        |   |   |        | 10,122 |  
|                          | Reserves re-estimated as of:                                    |                   |   |         |        |  |   |         |        |   |      |         |        |      |   |         |        |   |   |         |        |    |      |        |         |      |   |        |        |    |   |        |         |    |   |        |        |    |   |        |        |   |   |        |       
|                          |                                                                 | End of year       |   | $       | 78,401 |  |   | $       | 78,578 |   |      | $       | 89,440 |      |   | $       | 91,195 |   |   | $       | 66,996 |    |      | $      | 58,652  |      |   | $      | 75,866 |    |   | $      | 55,695  |    |   | $      | 43,073 |    |   | $      | 28,826 |   |   | $      | 14,263 |  
|                          |                                                                 | One year later    |   |         |        |  |   |         | 71,531 |   |      |         | 82,742 |      |   |         | 82,839 |   |   |         | 74,727 |    |      |        | 74,181  |      |   |        | 67,753 |    |   |        | 66,674  |    |   |        | 39,988 |    |   |        | 20,751 |   |   |        | 12,789 |  
|                          |                                                                 | Two years later   |   |         |        |  |   |         |        |   |      |         | 78,482 |      |   |         | 76,545 |   |   |         | 71,202 |    |      |        | 76,502  |      |   |        | 77,205 |    |   |        | 61,075  |    |   |        | 43,484 |    |   |        | 18,469 |   |   |        | 9,318  |  
|                          |                                                                 | Three years later |   |         |        |  |   |         |        |   |      |         |        |      |   |         | 77,055 |   |   |         | 71,911 |    |      |        | 75,321  |      |   |        | 78,391 |    |   |        | 68,065  |    |   |        | 41,451 |    |   |        | 19,796 |   |   |        | 8,984  |  
|                          |                                                                 | Four years later  |   |         |        |  |   |         |        |   |      |         |        |      |   |         |        |   |   |         | 71,177 |    |      |        | 77,443  |      |   |        | 78,772 |    |   |        | 69,474  |    |   |        | 45,959 |    |   |        | 19,389 |   |   |        | 9,669  |  
|                          |                                                                 | Five years later  |   |         |        |  |   |         |        |   |      |         |        |      |   |         |        |   |   |         |        |    |      |        | 75,588  |      |   |        | 80,522 |    |   |        | 69,595  |    |   |        | 47,147 |    |   |        | 21,254 |   |   |        | 9,692  |  
|                          |                                                                 | Six years later   |   |         |        |  |   |         |        |   |      |         |        |      |   |         |        |   |   |         |        |    |      |        |         |      |   |        | 78,878 |    |   |        | 69,926  |    |   |        | 47,126 |    |   |        | 22,568 |   |   |        | 10,330 |  
|                          |                                                                 | Seven years later |   |         |        |  |   |         |        |   |      |         |        |      |   |         |        |   |   |         |        |    |      |        |         |      |   |        |        |    |   |        | 69,095  |    |   |        | 46,969 |    |   |        | 22,388 |   |   |        | 11,675 |  
|                          |                                                                 | Eight years later |   |         |        |  |   |         |        |   |      |         |        |      |   |         |        |   |   |         |        |    |      |        |         |      |   |        |        |    |   |        |         |    |   |        | 47,039 |    |   |        | 22,342 |   |   |        | 11,234 |  
|                          |                                                                 | Nine years later  |   |         |        |  |   |         |        |   |      |         |        |      |   |         |        |   |   |         |        |    |      |        |         |      |   |        |        |    |   |        |         |    |   |        |        |    |   |        | 22,727 |   |   |        | 11,327 |  
|                          |                                                                 | Ten years later   |   |         |        |  |   |         |        |   |      |         |        |      |   |         |        |   |   |         |        |    |      |        |         |      |   |        |        |    |   |        |         |    |   |        |        |    |   |        |        |   |   |        | 11,574 |  
|                          | Initial reserves in excess of (less than) re-estimated reserves |                   |   |         |        |  |   |         |        |   |      |         |        |      |   |         |        |   |   |         |        |    |      |        |         |      |   |        |        |    |   |        |         |    |   |        |        |    |   |        |        |   |   |        |       
|                          |                                                                 | Amount            |   |         |        |  |   | $       | 7,047  |   |      | $       | 10,958 |      |   | $       | 14,140 |   |   | $       | (4,181 | )  |      | $      | (16,936 | )    |   | $      | (3,012 | )  |   | $      | (13,400 | )  |   | $      | (3,966 | )  |   | $      | 6,099  |   |   | $      | 2,689  |  
|                          |                                                                 | Percent           |   |         |        |  |   |         | 9.0    | % |      |         | 12.3   | %    |   |         | 15.5   | % |   |         | (6.2   | )% |      |        | (28.9   | )%   |   |        | (4.0   | )% |   |        | (24.1   | )% |   |        | (9.2   | )% |   |        | 21.2   | % |   |        | 18.9   | %



28



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|               |       |                                                             |   |            |              |  |   |        |   |  |      |       |   |      |   |        |      |  |   |         |   |  |      |       |   |      |   |         |          |  |   |               |   |  |   |       |  |  |   |       |   |  |   |        |  
|-------------- | ----- | ----------------------------------------------------------- | - | ---------- | ------------ |  | - | ------ | - |  | ---- | ----- | - | ---- | - | ------ | ---- |  | - | ------- | - |  | ---- | ----- | - | ---- | - | ------- | -------- |  | - | ------------- | - |  | - | ----- |  |  | - | ----- | - |  | - | ------ | -
|               |       |                                                             |   | Cumulative |             
|               |       | Effect of Reserve Re-estimates on Calendar Year Operations: |   |            | Re-estimates | 
|               |       |                                                             |   |            | for Each     | 
|               |       | 2004                                                        |   |            | 2003         |  |   | 2002   |   |  | 2001 |       |   | 2000 |   |        | 1999 |  |   | 1998    |   |  | 1997 |       |   | 1996 |   |         | Pre-1996 |  |   | Accident Year |  
|               |       |                                                             |   |            |              |  |   |        |   |  |      |       |   |      |   |        |      |  |   |         |   |  |      |       |   |      |   |         |          |  |   |               |  
|Accident Year: |       |                                                             |   |            |              |  |   |        |   |  |      |       |   |      |   |        |      |  |   |         |   |  |      |       |   |      |   |         |          |  |   |               |   |  |   |       |  |  |   |       |   |  |   |       
|               | 1992  |                                                             | $ | 25         |              |  | $ | (30    | ) |  | $    | 2     |   |      | $ | (6     | )    |  | $ | (19     | ) |  | $    | 38    |   |      | $ | (15     | )        |  | $ | (37           | ) |  | $ | 38    |  |  | $ | (148  | ) |  | $ | (152   | )
|               | 1993  |                                                             |   | (98        | )            |  |   | 14     |   |  |      | 261   |   |      |   | (706   | )    |  |   | (160    | ) |  |      | 7     |   |      |   | (96     | )        |  |   | (42           | ) |  |   | 596   |  |  |   | 145   |   |  |   | (79    | )
|               | 1994  |                                                             |   | (174       | )            |  |   | (77    | ) |  |      | 178   |   |      |   | (633   | )    |  |   | (459    | ) |  |      | (68   | ) |      |   | (574    | )        |  |   | 413           |   |  |   | 2,837 |  |  |   | 1,106 |   |  |   | 2,549  |  
|               | 1995  |                                                             |   | (138       | )            |  |   | 139    |   |  |      | (261  | ) |      |   | 31     |      |  |   | (1,227  | ) |  |      | 430   |   |      |   | (642    | )        |  |   | 1,948         |   |  |   | 4,604 |  |  |   |       |   |  |   | 4,884  |  
|               | 1996  |                                                             |   | 315        |              |  |   | 111    |   |  |      | (159  | ) |      |   | 126    |      |  |   | (2,643  | ) |  |      | 1,626 |   |      |   | (2,169  | )        |  |   | 803           |   |  |   |       |  |  |   |       |   |  |   | (1,990 | )
|               | 1997  |                                                             |   | 901        |              |  |   | (488   | ) |  |      | (142  | ) |      |   | (221   | )    |  |   | (2,482  | ) |  |      | 3,566 |   |      |   | (7,483  | )        |  |   |               |   |  |   |       |  |  |   |       |   |  |   | (6,349 | )
|               | 1998  |                                                             |   | 813        |              |  |   | (1,419 | ) |  |      | (320  | ) |      |   | 283    |      |  |   | (2,462  | ) |  |      | 2,514 |   |      |   |         |          |  |   |               |   |  |   |       |  |  |   |       |   |  |   | (591   | )
|               | 1999  |                                                             |   | 211        |              |  |   | (372   | ) |  |      | 1,622 |   |      |   | (1,195 | )    |  |   | (6,077  | ) |  |      |       |   |      |   |         |          |  |   |               |   |  |   |       |  |  |   |       |   |  |   | (5,811 | )
|               | 2000  |                                                             |   | (1,121     | )            |  |   | 1,413  |   |  |      | 2,344 |   |      |   | (5,410 | )    |  |   |         |   |  |      |       |   |      |   |         |          |  |   |               |   |  |   |       |  |  |   |       |   |  |   | (2,774 | )
|               | 2001  |                                                             |   | 1,756      |              |  |   | 4,003  |   |  |      | 4,831 |   |      |   |        |      |  |   |         |   |  |      |       |   |      |   |         |          |  |   |               |   |  |   |       |  |  |   |       |   |  |   | 10,590 |  
|               | 2002  |                                                             |   | 1,770      |              |  |   | 3,404  |   |  |      |       |   |      |   |        |      |  |   |         |   |  |      |       |   |      |   |         |          |  |   |               |   |  |   |       |  |  |   |       |   |  |   | 5,174  |  
|               | 2003  |                                                             |   | 2,787      |              |  |   |        |   |  |      |       |   |      |   |        |      |  |   |         |   |  |      |       |   |      |   |         |          |  |   |               |   |  |   |       |  |  |   |       |   |  |   | 2,787  |  
|               |       |                                                             |   |            |              |  |   |        |   |  |      |       |   |      |   |        |      |  |   |         |   |  |      |       |   |      |   |         |          |  |   |               |  
|               | Total |                                                             | $ | 7,047      |              |  | $ | 6,698  |   |  | $    | 8,356 |   |      | $ | (7,731 | )    |  | $ | (15,529 | ) |  | $    | 8,113 |   |      | $ | (10,979 | )        |  | $ | 3,085         |   |  | $ | 8,075 |  |  | $ | 1,103 |   |  | $ | 8,238  |  
|               |       |                                                             |   |            |              |  |   |        |   |  |      |       |   |      |   |        |      |  |   |         |   |  |      |       |   |      |   |         |          |  |   |               |  

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Liquidity and Capital Resources








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Contractual Obligations




|     |  |   |       | 
|---- |  | - | ----- | 
|2005 |  | $ | 1,039 | 
|2006 |  |   | 911   | 
|2007 |  |   | 581   | 

Letter of Credit




Interest Rate Risk




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NAIC Risk-Based Capital Standards




Regulation




Effect of Recent Accounting Pronouncements






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Forward-Looking Statements









|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures About Market
    Risk



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|        |                                            
|------- | -------------------------------------------
|Item 8. | Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS


|                                                                                                       |  |      |    | 
|------------------------------------------------------------------------------------------------------ |  | ---- | -- | 
|Financial Statements                                                                                   |  | Page |   
|                                                                                                       |  |      |   
|Report of Independent Registered Public
    Accounting Firm                                            |  |      | 35 | 
|Consolidated Balance Sheets 
    December 31, 2004 and 2003                                           |  |      | 36 | 
|Consolidated Statements of
    Income  Years Ended December 31, 2004, 2003 and
    2002               |  |      | 37 | 
|Consolidated Statements of
    Shareholders Equity  Years Ended
    December 31, 2004, 2003 and 2002 |  |      | 38 | 
|Consolidated Statements of Cash
    Flows  Years Ended December 31, 2004, 2003 and
    2002           |  |      | 39 | 
|Notes to Consolidated Financial
    Statements  Years Ended December 31, 2004, 2003
    and 2002      |  |      | 40 | 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
















| |                           
| | --------------------------
| | /s/ Ernst &
    Young, LLP





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RTW, INC.


CONSOLIDATED BALANCE SHEETS


December 31, 2004 and 2003


|                                                                 |                                                                                                                        |                                            |         |        |         |   |         |        |         | 
|---------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | ------ | ------- | - | ------- | ------ | ------- | 
|                                                                 |                                                                                                                        | 2004                                       |         |        | 2003    |  
|                                                                 |                                                                                                                        |                                            |         |        |         |  
|                                                                 |                                                                                                                        | (In thousands, except                      |        
|                                                                 |                                                                                                                        | share data)                                |        
|ASSETS                                                          
|Investments at fair value, amortized cost of $86,382 and $77,674 |                                                                                                                        | $                                          | 86,954  |        |         | $ | 79,171  |       
|Cash and cash equivalents                                        |                                                                                                                        |                                            | 39,379  |        |         |   | 39,650  |       
|Accrued investment income                                        |                                                                                                                        |                                            | 783     |        |         |   | 769     |       
|Premiums receivable, less allowance of $90 and $225              |                                                                                                                        |                                            | 3,792   |        |         |   | 3,482   |       
|Reinsurance recoverables:                                        |                                                                                                                        |                                            |         |        |         |   |         |       
|                                                                 | On unpaid claim and claim settlement expenses                                                                          |                                            |         | 77,722 |         |   |         | 71,466 |        
|                                                                 | On paid claim and claim settlement expenses                                                                            |                                            |         | 1,401  |         |   |         | 854    |        
|Deferred policy acquisition costs                                |                                                                                                                        |                                            | 1,112   |        |         |   | 926     |       
|Furniture and equipment, net                                     |                                                                                                                        |                                            | 1,228   |        |         |   | 1,242   |       
|Other assets                                                     |                                                                                                                        |                                            | 8,136   |        |         |   | 4,608   |       
|                                                                 |                                                                                                                        |                                            |         |        |         |  
|                                                                 |                                                                                                                        | Total assets                               |         | $      | 220,507 |   |         | $      | 202,168 | 
|                                                                 |                                                                                                                        |                                            |         |        |         |  
|                                                                
|LIABILITIES AND SHAREHOLDERS EQUITY                            
|Unpaid claim and claim settlement expenses                       |                                                                                                                        | $                                          | 156,123 |        |         | $ | 150,044 |       
|Unearned premiums                                                |                                                                                                                        |                                            | 10,497  |        |         |   | 9,180   |       
|Accrued expenses and other liabilities                           |                                                                                                                        |                                            | 8,356   |        |         |   | 7,357   |       
|                                                                 |                                                                                                                        |                                            |         |        |         |  
|                                                                 |                                                                                                                        | Total liabilities                          |         |        | 174,976 |   |         |        | 166,581 | 
|Commitments and contingencies                                    |                                                                                                                        |                                            |        |        |         |   |        |       
|Shareholders equity:                                            |                                                                                                                        |                                            |         |        |         |   |         |       
|                                                                 | Undesignated stock, no par value; authorized
    4,750,000 shares; none issued or outstanding                          |                                            |         |       |         |   |         |       |        
|                                                                 | Series A Junior Participating Preferred Stock, no par
    value; authorized 250,000 shares; none issued or outstanding |                                            |         |       |         |   |         |       |        
|                                                                 | Common stock, no par value; authorized 12,500,000 shares;
    issued and outstanding 5,125,000 and 5,125,000 shares    |                                            |         | 21,071 |         |   |         | 20,644 |        
|                                                                 | Retained earnings                                                                                                      |                                            |         | 24,082 |         |   |         | 13,970 |        
|                                                                 | Accumulated other comprehensive income                                                                                 |                                            |         | 378    |         |   |         | 973    |        
|                                                                 |                                                                                                                        |                                            |         |        |         |  
|                                                                 |                                                                                                                        | Total shareholders equity                 |         |        | 45,531  |   |         |        | 35,587  | 
|                                                                 |                                                                                                                        |                                            |         |        |         |  
|                                                                 |                                                                                                                        | Total liabilities and shareholders equity |         | $      | 220,507 |   |         | $      | 202,168 | 
|                                                                 |                                                                                                                        |                                            |         |        |         |  



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RTW, INC.


CONSOLIDATED STATEMENTS OF INCOME


Years Ended December 31, 2004, 2003 and 2002


|                                     |                                     |                             |                               |           |        |       |   |           |        |       |   |           |        |        | 
|------------------------------------ | ----------------------------------- | --------------------------- | ----------------------------- | --------- | ------ | ----- | - | --------- | ------ | ----- | - | --------- | ------ | ------ | 
|                                     |                                     | 2004                        |                               |           | 2003   |       |   | 2002      |       
|                                     |                                     |                             |                               |           |        |       |   |           |       
|                                     |                                     | (In thousands, except share |                              
|                                     |                                     | and per share data)         |                              
|Revenues:                            |                                     |                             |                               |           |        |       |   |           |        |       |   |          
|                                     | Gross premiums earned               |                             | $                             | 63,370    |        |       | $ | 54,431    |        |       | $ | 62,506    |       
|                                     | Premiums ceded                      |                             |                               | (9,688    | )      |       |   | (8,141    | )      |       |   | (2,242    | )     
|                                     |                                     |                             |                               |           |        |       |   |           |       
|                                     |                                     | Premiums earned             |                               |           | 53,682 |       |   |           | 46,290 |       |   |           | 60,264 |       
|                                     | Investment income                   |                             |                               | 3,837     |        |       |   | 4,474     |        |       |   | 5,139     |       
|                                     | Net realized investment gains:      |                             |                               |           |        |       |   |           |        |       |   |           |       
|                                     |                                     | Realized investment gains   |                               |           | 708    |       |   |           | 685    |       |   |           | 1,930  |       
|                                     |                                     | Realized investment losses  |                               |           | (3     | )     |   |           |       |       |   |           | (209   | )     
|                                     |                                     |                             |                               |           |        |       |   |           |       
|                                     |                                     |                             | Net realized investment gains |           |        | 705   |   |           |        | 685   |   |           |        | 1,721  | 
|                                     | Service revenue                     |                             |                               | 633       |        |       |   | 109       |        |       |   | 22        |       
|                                     |                                     |                             |                               |           |        |       |   |           |       
|                                     |                                     | Total revenues              |                               |           | 58,857 |       |   |           | 51,558 |       |   |           | 67,146 |       
|Expenses:                            |                                     |                             |                               |           |        |       |   |           |        |       |   |          
|                                     | Claim and claim settlement expenses |                             |                               | 35,536    |        |       |   | 27,256    |        |       |   | 40,533    |       
|                                     | Policy acquisition costs            |                             |                               | 6,045     |        |       |   | 6,878     |        |       |   | 6,304     |       
|                                     | General and administrative expenses |                             |                               | 9,204     |        |       |   | 10,789    |        |       |   | 9,984     |       
|                                     |                                     |                             |                               |           |        |       |   |           |       
|                                     |                                     | Total expenses              |                               |           | 50,785 |       |   |           | 44,923 |       |   |           | 56,821 |       
|                                     |                                     |                             |                               |           |        |       |   |           |       
|                                     |                                     |                             | Income from operations        |           |        | 8,072 |   |           |        | 6,635 |   |           |        | 10,325 | 
|                                     | Interest expense                    |                             |                               |          |        |       |   | 48        |        |       |   | 163       |       
|                                     |                                     |                             |                               |           |        |       |   |           |       
|                                     |                                     |                             | Income before income taxes    |           |        | 8,072 |   |           |        | 6,587 |   |           |        | 10,162 | 
|                                     | Income tax benefit                  |                             |                               | (1,869    | )      |       |   | (412      | )      |       |   | (4,157    | )     
|                                     |                                     |                             |                               |           |        |       |   |           |       
|                                     |                                     |                             | Net income                    |           | $      | 9,941 |   |           | $      | 6,999 |   |           | $      | 14,319 | 
|                                     |                                     |                             |                               |           |        |       |   |           |       
|Income per share:                    |                                     |                             |                               |           |        |       |   |           |        |       |   |          
|                                     | Basic income per share              |                             | $                             | 1.90      |        |       | $ | 1.37      |        |       | $ | 2.78      |       
|                                     |                                     |                             |                               |           |        |       |   |           |       
|                                     | Diluted income per share            |                             | $                             | 1.81      |        |       | $ | 1.32      |        |       | $ | 2.78      |       
|                                     |                                     |                             |                               |           |        |       |   |           |       
|Weighted average shares outstanding: |                                     |                             |                               |           |        |       |   |           |        |       |   |          
|                                     | Basic shares outstanding            |                             |                               | 5,233,000 |        |       |   | 5,114,000 |        |       |   | 5,146,000 |       
|                                     |                                     |                             |                               |           |        |       |   |           |       
|                                     | Diluted shares outstanding          |                             |                               | 5,487,000 |        |       |   | 5,296,000 |        |       |   | 5,154,000 |       
|                                     |                                     |                             |                               |           |        |       |   |           |       



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RTW, INC.


CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY


Years Ended December 31, 2004, 2003 and 2002


|                             |                               |                                                |                                       |                      |        |   |          |             |        |        |               |     |        |               |       |   |   |        |        |     |        |        |   | 
|---------------------------- | ----------------------------- | ---------------------------------------------- | ------------------------------------- | -------------------- | ------ | - | -------- | ----------- | ------ | ------ | ------------- | --- | ------ | ------------- | ----- | - | - | ------ | ------ | --- | ------ | ------ | - | 
|                             |                               |                                                |                                       |                      |        |   |          | Accumulated |        |        |              
|                             |                               |                                                |                                       | Comprehensive        |        |   | Retained |             |        | Other  |               |     | Total  |              
|                             |                               | Common                                         |                                       |                      | Income |   |          | Earnings    |        |        | Comprehensive |     |        | Shareholders |      
|                             |                               | Stock                                          |                                       |                      | (Loss) |   |          | (Deficit)   |        |        | Income        |     |        | Equity        |      
|                             |                               |                                                |                                       |                      |        |   |          |             |        |        |               |     |        |               |      
|                             |                               | (In thousands)                                 |                                      
|Balance at January 1, 2002   |                               | $                                              | 20,688                                |                      |        |   |          |             |        | $      | (7,348        | )   |        | $             | 882   |   |   | $      | 14,222 |    
|                             | Comprehensive income:         |                                                |                                       |                      |        |   |          |             |        |        |               |     |        |               |       |   |   |        |        |     |       
|                             |                               | Net income                                     |                                       |                      |       |   |          | $           | 14,319 |        |               |     | 14,319 |               |       |   |  |        |        |     | 14,319 |       
|                             |                               | Other comprehensive income, net of tax:        |                                       |                      |        |   |          |             |        |        |               |     |        |               |       |   |   |        |        |     |        |       
|                             |                               |                                                | Change in unrealized investment gains |                      |        |  |          |             |        | 1,338  |               |     |        |              |       |   |   | 1,338  |        |     |        | 1,338  |  
|                             |                               |                                                |                                       |                      |        |   |          |             |        |        |               |     |        |               |      
|                             |                               |                                                |                                       | Comprehensive income |        |   |          |             |        | $      | 15,657        |     |        |               |       |   |   |        |        |     |        |        |   | 
|                             |                               |                                                |                                       |                      |        |   |          |             |        |        |               |     |        |               |      
|                             | Retirement of common stock    |                                                |                                       | (79                  | )      |   |          |             |        |        |               |    |        |               |       |  |   |        |        | (79 | )     
|                             | Issuance of shares under ESPP |                                                |                                       | 10                   |        |   |          |             |        |        |               |    |        |               |       |  |   |        |        | 10  |       
|                             |                               |                                                |                                       |                      |        |   |          |             |        |        |               |     |        |               |      
|Balance at December 31, 2002 |                               |                                                | 20,619                                |                      |        |   |          |             |        |        | 6,971         |     |        |               | 2,220 |   |   |        | 29,810 |    
|                             | Comprehensive income (loss):  |                                                |                                       |                      |        |   |          |             |        |        |               |     |        |               |       |   |   |        |        |     |       
|                             |                               | Net income                                     |                                       |                      |       |   |          | $           | 6,999  |        |               |     | 6,999  |               |       |   |  |        |        |     | 6,999  |       
|                             |                               | Other comprehensive income (loss), net of tax: |                                       |                      |        |   |          |             |        |        |               |     |        |               |       |   |   |        |        |     |        |       
|                             |                               |                                                | Change in unrealized investment gains |                      |        |  |          |             |        | (1,247 | )             |     |        |              |       |   |   | (1,247 | )      |     |        | (1,247 | )
|                             |                               |                                                |                                       |                      |        |   |          |             |        |        |               |     |        |               |      
|                             |                               |                                                |                                       | Comprehensive income |        |   |          |             |        | $      | 5,752         |     |        |               |       |   |   |        |        |     |        |        |   | 
|                             |                               |                                                |                                       |                      |        |   |          |             |        |        |               |     |        |               |      
|                             | Retirement of common stock    |                                                |                                       | (37                  | )      |   |          |             |        |        |               |    |        |               |       |  |   |        |        | (37 | )     
|                             | Stock options exercised       |                                                |                                       | 19                   |        |   |          |             |        |        |               |    |        |               |       |  |   |        |        | 19  |       
|                             | Issuance of shares under ESPP |                                                |                                       | 43                   |        |   |          |             |        |        |               |    |        |               |       |  |   |        |        | 43  |       
|                             |                               |                                                |                                       |                      |        |   |          |             |        |        |               |     |        |               |      
|Balance at December 31, 2003 |                               |                                                | 20,644                                |                      |        |   |          |             |        |        | 13,970        |     |        |               | 973   |   |   |        | 35,587 |    
|                             | Comprehensive income (loss):  |                                                |                                       |                      |        |   |          |             |        |        |               |     |        |               |       |   |   |        |        |     |       
|                             |                               | Net income                                     |                                       |                      |       |   |          | $           | 9,941  |        |               |     | 9,941  |               |       |   |  |        |        |     | 9,941  |       
|                             |                               | Other comprehensive income (loss), net of tax: |                                       |                      |        |   |          |             |        |        |               |     |        |               |       |   |   |        |        |     |        |       
|                             |                               |                                                | Change in unrealized investment gains |                      |        |  |          |             |        | (595   | )             |     |        |              |       |   |   | (595   | )      |     |        | (595   | )
|                             |                               |                                                |                                       |                      |        |   |          |             |        |        |               |     |        |               |      
|                             |                               |                                                |                                       | Comprehensive income |        |   |          |             |        | $      | 9,346         |     |        |               |       |   |   |        |        |     |        |        |   | 
|                             |                               |                                                |                                       |                      |        |   |          |             |        |        |               |     |        |               |      
|                             | Stock options exercised       |                                                |                                       | 362                  |        |   |          |             |        |        |               | 171 |        |               |       |  |   |        |        | 533 |       
|                             | Issuance of shares under ESPP |                                                |                                       | 65                   |        |   |          |             |        |        |               |    |        |               |       |  |   |        |        | 65  |       
|                             |                               |                                                |                                       |                      |        |   |          |             |        |        |               |     |        |               |      
|Balance at December 31, 2004 |                               | $                                              | 21,071                                |                      |        |   |          |             |        | $      | 24,082        |     |        | $             | 378   |   |   | $      | 45,531 |    
|                             |                               |                                                |                                       |                      |        |   |          |             |        |        |               |     |        |               |      



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RTW, INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS


Years Ended December 31, 2004, 2003 and 2002


|                                                     |                                                                                       |                                    |                                               |                                                     |        |        |        |         |       |         |        |         |        |        |        |  
|---------------------------------------------------- | ------------------------------------------------------------------------------------- | ---------------------------------- | --------------------------------------------- | --------------------------------------------------- | ------ | ------ | ------ | ------- | ----- | ------- | ------ | ------- | ------ | ------ | ------ | -
|                                                     |                                                                                       | 2004                               |                                               |                                                     | 2003   |        |        | 2002    |      
|                                                     |                                                                                       |                                    |                                               |                                                     |        |        |        |         |      
|                                                     |                                                                                       | (In thousands)                     |                                              
|Cash flows from operating activities:                |                                                                                       |                                    |                                               |                                                     |        |        |        |         |       |         |        |        
|                                                     | Net income                                                                            |                                    | $                                             | 9,941                                               |        |        | $      | 6,999   |       |         | $      | 14,319  |       
|                                                     | Adjustments to reconcile net income to net cash provided by
    operating activities: |                                    |                                               |                                                     |        |        |        |         |       |         |        |         |       
|                                                     |                                                                                       | Net realized investment gains      |                                               |                                                     | (705   | )      |        |         | (685  | )       |        |         | (1,721 | )     
|                                                     |                                                                                       | Depreciation and amortization      |                                               |                                                     | 952    |        |        |         | 1,191 |         |        |         | 963    |       
|                                                     |                                                                                       | Deferred income taxes              |                                               |                                                     | (2,531 | )      |        |         | (828  | )       |        |         | (721   | )     
|                                                     |                                                                                       | Changes in assets and liabilities: |                                               |                                                     |        |        |        |         |       |         |        |         |        |       
|                                                     |                                                                                       |                                    | Deposit receivable                            |                                                     |        |       |        |         |       |        |        |         |        | 17,635 |       
|                                                     |                                                                                       |                                    | Reinsurance recoverables                      |                                                     |        | (6,803 | )      |         |       | 21,611  |        |         |        | (777   | )     
|                                                     |                                                                                       |                                    | Unpaid claim and claim settlement expenses    |                                                     |        | 6,079  |        |         |       | (31,218 | )      |         |        | (48    | )     
|                                                     |                                                                                       |                                    | Unearned premiums, net of premiums receivable |                                                     |        | 1,007  |        |         |       | 2,105   |        |         |        | 520    |       
|                                                     |                                                                                       |                                    | Other, net                                    |                                                     |        | 132    |        |         |       | 5,200   |        |         |        | (4,790 | )     
|                                                     |                                                                                       |                                    |                                               |                                                     |        |        |        |         |      
|                                                     |                                                                                       |                                    |                                               | Net cash provided by operating activities           |        |        | 8,072  |         |       |         | 4,375  |         |        |        | 25,380 |  
|Cash flows from investing activities:                |                                                                                       |                                    |                                               |                                                     |        |        |        |         |       |         |        |        
|                                                     | Maturities of investments                                                             |                                    |                                               | 11,324                                              |        |        |        | 5,650   |       |         |        |        |       
|                                                     | Purchases of available-for-sale investments                                           |                                    |                                               | (41,446                                             | )      |        |        | (32,903 | )     |         |        | (64,320 | )     
|                                                     | Proceeds from sales of available-for-sale investments                                 |                                    |                                               | 21,625                                              |        |        |        | 27,618  |       |         |        | 75,482  |       
|                                                     | Purchases of furniture and equipment                                                  |                                    |                                               | (444                                                | )      |        |        | (175    | )     |         |        | (630    | )     
|                                                     | Disposals of furniture and equipment                                                  |                                    |                                               |                                                    |        |        |        | 22      |       |         |        | 270     |       
|                                                     |                                                                                       |                                    |                                               |                                                     |        |        |        |         |      
|                                                     |                                                                                       |                                    |                                               | Net cash (used in) provided by investing activities |        |        | (8,941 | )       |       |         | 212    |         |        |        | 10,802 |  
|Cash flows from financing activities:                |                                                                                       |                                    |                                               |                                                     |        |        |        |         |       |         |        |        
|                                                     | Payments on notes payable                                                             |                                    |                                               |                                                    |        |        |        | (1,250  | )     |         |        | (3,250  | )     
|                                                     | Stock options exercised                                                               |                                    |                                               | 533                                                 |        |        |        | 19      |       |         |        |        |       
|                                                     | Issuance of common stock under ESPP                                                   |                                    |                                               | 65                                                  |        |        |        | 43      |       |         |        | 10      |       
|                                                     | Retirement of common stock                                                            |                                    |                                               |                                                    |        |        |        | (37     | )     |         |        | (79     | )     
|                                                     |                                                                                       |                                    |                                               |                                                     |        |        |        |         |      
|                                                     |                                                                                       |                                    |                                               | Net cash provided by (used in) financing activities |        |        | 598    |         |       |         | (1,225 | )       |        |        | (3,319 | )
|                                                     |                                                                                       |                                    |                                               |                                                     |        |        |        |         |      
|Net (decrease) increase in cash and cash equivalents |                                                                                       |                                    | (271                                          | )                                                   |        |        | 3,362  |         |       |         | 32,863 |        
|Cash and cash equivalents at beginning of year       |                                                                                       |                                    | 39,650                                        |                                                     |        |        | 36,288 |         |       |         | 3,425  |        
|                                                     |                                                                                       |                                    |                                               |                                                     |        |        |        |         |      
|Cash and cash equivalents at end of year             |                                                                                       | $                                  | 39,379                                        |                                                     |        | $      | 39,650 |         |       | $       | 36,288 |        
|                                                     |                                                                                       |                                    |                                               |                                                     |        |        |        |         |      
|Supplemental disclosure of cash flow information:    |                                                                                       |                                    |                                               |                                                     |        |        |        |         |       |         |        |        
|                                                     | Cash paid (received) during the year for:                                             |                                    |                                               |                                                     |        |        |        |         |       |         |        |         |       
|                                                     |                                                                                       | Interest                           |                                               | $                                                   |       |        |        | $       | 27    |         |        | $       | 138    |       
|                                                     |                                                                                       |                                    |                                               |                                                     |        |        |        |         |      
|                                                     |                                                                                       | Income tax payments (refunds)      |                                               | $                                                   | 1,033  |        |        | $       | 115   |         |        | $       | (2,976 | )     
|                                                     |                                                                                       |                                    |                                               |                                                     |        |        |        |         |      



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RTW, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Years Ended December 31, 2004, 2003, and 2002




|         |                                           
|-------- | ------------------------------------------
|Note 1  | Summary of Significant Accounting Policies

Organization






Accounting Principles


Consolidation


Use of Estimates


Investments


Available-for-Sale Investments:


Realized Investment Gains and Losses:




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RTW, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Cash and Cash Equivalents


Fair Value of Financial Instruments


Deferred Policy Acquisition Costs




Depreciation


Income Taxes


Unpaid Claim and Claim Settlement Expenses






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RTW, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Premiums Earned


Stock-Based Compensation


|                           |             |      |   |       |      |  |   |       |  |  |   |        | 
|-------------------------- | ----------- | ---- | - | ----- | ---- |  | - | ----- |  |  | - | ------ | 
|                           |             | 2004 |   |       | 2003 |  |   | 2002  | 
|                           |             |      |   |       |      |  |   |       | 
|Net income:                |             |      |   |       |      |  |   |       |  |  |   |       
|                           | As reported |      | $ | 9,941 |      |  | $ | 6,999 |  |  | $ | 14,319 | 
|                           | Pro forma   |      |   | 9,507 |      |  |   | 6,814 |  |  |   | 14,110 | 
|Basic income per share:    |             |      |   |       |      |  |   |       |  |  |   |       
|                           | As reported |      |   | 1.90  |      |  |   | 1.37  |  |  |   | 2.78   | 
|                           | Pro forma   |      |   | 1.82  |      |  |   | 1.33  |  |  |   | 2.74   | 
|Dilutive income per share: |             |      |   |       |      |  |   |       |  |  |   |       
|                           | As reported |      |   | 1.81  |      |  |   | 1.32  |  |  |   | 2.78   | 
|                           | Pro forma   |      |   | 1.73  |      |  |   | 1.29  |  |  |   | 2.74   | 



Effect of Recent Accounting Pronouncements


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RTW, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








Note 2  Income Per Share






|                                            |                                  |      |           |         |      |   |           |         |  |   |           |       | 
|------------------------------------------- | -------------------------------- | ---- | --------- | ------- | ---- | - | --------- | ------- |  | - | --------- | ----- | 
|                                            |                                  | 2004 |           |         | 2003 |   |           | 2002    | 
|                                            |                                  |      |           |         |      |   |           |         | 
|Net income (000s)                          |                                  | $    | 9,941     |         |      | $ | 6,999     |         |  | $ | 14,319    |      
|                                            |                                  |      |           |         |      |   |           |         | 
|Basic weighted average shares outstanding   |                                  |      | 5,233,000 |         |      |   | 5,114,000 |         |  |   | 5,146,000 |      
|                                            | Effect of dilutive stock options |      |           | 254,000 |      |   |           | 182,000 |  |   |           | 8,000 | 
|                                            |                                  |      |           |         |      |   |           |         | 
|Diluted weighted average shares outstanding |                                  |      | 5,487,000 |         |      |   | 5,296,000 |         |  |   | 5,154,000 |      
|                                            |                                  |      |           |         |      |   |           |         | 
|Basic income per share                      |                                  | $    | 1.90      |         |      | $ | 1.37      |         |  | $ | 2.78      |      
|                                            |                                  |      |           |         |      |   |           |         | 
|Diluted income per share                    |                                  | $    | 1.81      |         |      | $ | 1.32      |         |  | $ | 2.78      |      
|                                            |                                  |      |           |         |      |   |           |         | 

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RTW, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Note 3  Investments


Valuation of Investments


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

|                           |                   |           |        |        |            |   |       |            |  |           |       |      |   |   |        |        | 
|-------------------------- | ----------------- | --------- | ------ | ------ | ---------- | - | ----- | ---------- |  | --------- | ----- | ---- | - | - | ------ | ------ | 
|                           |                   |           |        | Gross  |            |   | Gross |            |  | Estimated |      
|                           |                   | Amortized |        |        | Unrealized |   |       | Unrealized |  |           | Fair  |     
|2003                       |                   | Cost      |        |        | Gains      |   |       | Losses     |  |           | Value |     
|                           |                   |           |        |        |            |   |       |            |  |           |       |     
|U.S. government securities |                   | $         | 48,152 |        |            | $ | 1,158 |            |  | $         | (155  | )    |   | $ | 49,155 |       
|Asset-backed securities    |                   |           | 1,008  |        |            |   | 3     |            |  |           |      |      |   |   | 1,011  |       
|Mortgage-backed securities |                   |           | 28,514 |        |            |   | 509   |            |  |           | (18   | )    |   |   | 29,005 |       
|                           |                   |           |        |        |            |   |       |            |  |           |       |     
|                           | Total investments |           | $      | 77,674 |            |   | $     | 1,670      |  |           | $     | (173 | ) |   | $      | 79,171 | 
|                           |                   |           |        |        |            |   |       |            |  |           |       |     



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

|                                            |                   |               |        |        |               |   |      |       |       |            |   |            |             |   |            |   |  |   |        |        |  |   |      |      |  
|------------------------------------------- | ----------------- | ------------- | ------ | ------ | ------------- | - | ---- | ----- | ----- | ---------- | - | ---------- | ----------- | - | ---------- | - |  | - | ------ | ------ |  | - | ---- | ---- | -
|                                            |                   | Less Than     |        |        | Greater Than  |   |      |       |      
|                                            |                   | Twelve Months |        |        | Twelve Months |   |      |       |      
|                                            |                   |               |        |        |               |   |      |       |      
|                                            |                   |               |        | Gross  |               |   |      |       | Gross |            |   |            | Total Gross |  
|                                            |                   | Fair          |        |        | Unrealized    |   |      | Fair  |       | Unrealized |   | Total Fair |             |   | Unrealized |  
|2003                                        |                   | Value         |        |        | Losses        |   |      | Value |       | Losses     |   | Value      |             |   | Losses     |  
|                                            |                   |               |        |        |               |   |      |       |       |            |   |            |             |   |            |  
|U.S. government securities                  |                   | $             | 15,172 |        |               | $ | (155 | )     |       | $          |  |            |             | $ |           |   |  | $ | 15,172 |        |  | $ | (155 | )   
|Mortgage-backed and asset-backed securities |                   |               | 2,450  |        |               |   | (18  | )     |       |            |  |            |             |   |           |   |  |   | 2,420  |        |  |   | (18  | )   
|                                            |                   |               |        |        |               |   |      |       |       |            |   |            |             |   |            |   |  |  
|                                            | Total investments |               | $      | 17,622 |               |   | $    | (173  | )     |            | $ |           |             |   | $          |  |  |   | $      | 17,622 |  |   | $    | (173 | )
|                                            |                   |               |        |        |               |   |      |       |       |            |   |            |             |   |            |   |  |  



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RTW, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Deposits




Fixed Maturities by Maturity Date


|             |                                                    |                   |   |        |            |  |   |        |        | 
|------------ | -------------------------------------------------- | ----------------- | - | ------ | ---------- |  | - | ------ | ------ | 
|             |                                                    | Amortized         |   |        | Estimated  | 
|             |                                                    | Cost              |   |        | Fair Value | 
|             |                                                    |                   |   |        |            | 
|Maturing In: |                                                    |                   |   |        |            |  |   |       
|             | One year or less                                   |                   | $ | 3,453  |            |  | $ | 3,488  |       
|             | Over one year through five years                   |                   |   | 24,957 |            |  |   | 24,836 |       
|             | Over five years through ten years                  |                   |   | 23,146 |            |  |   | 23,320 |       
|             | Over ten years                                     |                   |   | 10,820 |            |  |   | 11,107 |       
|             | Mortgage-backed securities with various maturities |                   |   | 24,006 |            |  |   | 24,203 |       
|             |                                                    |                   |   |        |            | 
|             |                                                    | Total investments |   | $      | 86,382     |  |   | $      | 86,954 | 
|             |                                                    |                   |   |        |            | 

Investment Income


|                               |                   |      |       |       |      |   |       |       |  |   |       |       | 
|------------------------------ | ----------------- | ---- | ----- | ----- | ---- | - | ----- | ----- |  | - | ----- | ----- | 
|                               |                   | 2004 |       |       | 2003 |   |       | 2002  | 
|                               |                   |      |       |       |      |   |       |       | 
|Fixed maturity investments     |                   | $    | 3,383 |       |      | $ | 4,346 |       |  | $ | 4,221 |      
|Interest on deposit receivable |                   |      |      |       |      |   |      |       |  |   | 736   |      
|Cash and cash equivalents      |                   |      | 344   |       |      |   | 128   |       |  |   | 144   |      
|Other                          |                   |      | 110   |       |      |   |      |       |  |   | 38    |      
|                               |                   |      |       |       |      |   |       |       | 
|                               | Investment income |      | $     | 3,837 |      |   | $     | 4,474 |  |   | $     | 5,139 | 
|                               |                   |      |       |       |      |   |       |       | 

Note 4  Reinsurance






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RTW, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|              |      |                    |                    |                               |         |         |             |          |                                          
|------------- | ---- | ------------------ | ------------------ | ----------------------------- | ------- | ------- | ----------- | -------- | -----------------------------------------
|              |      |                    |                    | Covers losses per occurrence:
|              |      |                    |                    |                              
|              |      |                    |                    | In Excess of:                 |         |         | Limited to:
|              |      |                    |                    |                               |         |         |            
|Minnesota:    |      |                    |                    |                               |         |         |             |         
|              | 2004 |                    | WCRA               |                               | $       | 360,000 |             |          | Statutory limit                          
|              |      | Various reinsurers |                    | $                             | 200,000 |         |             | $360,000
|              | 2003 |                    | WCRA               |                               | $       | 360,000 |             |          | Statutory limit                          
|              |      | Various reinsurers |                    | $                             | 200,000 |         |             | $360,000
|              | 2002 |                    | WCRA               |                               | $       | 350,000 |             |          | Statutory limit                          
|             
|Other states: |      |                    |                    |                               |         |         |             |         
|              | 2004 |                    | Various reinsurers |                               | $       | 200,000 |             |          | $20.0 million excluding acts of terrorism
|              | 2003 |                    | Various reinsurers |                               | $       | 200,000 |             |          | $20.0 million excluding acts of terrorism
|              | 2002 |                    | Various reinsurers |                               | $       | 300,000 |             |          | $20.0 million                            







|                                                      |  |      |        |  |      |   |        | 
|----------------------------------------------------- |  | ---- | ------ |  | ---- | - | ------ | 
|                                                      |  | 2004 |        |  | 2003 |  
|                                                      |  |      |        |  |      |  
|Excess of loss reinsurance through various reinsurers |  | $    | 77,722 |  |      | $ | 71,466 | 

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RTW, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                     |        |                                         |   |         |        |  |   |        |        |  |   |         |        | 
|------------------------------------ | ------ | --------------------------------------- | - | ------- | ------ |  | - | ------ | ------ |  | - | ------- | ------ | 
|                                     |        | 2004                                    |   |         | 2003   |  |   | 2002   |       
|                                     |        |                                         |   |         |        |  |   |        |       
|Premiums written:                    |        |                                         |   |         |        |  |   |        |        |  |   |        
|                                     | Direct |                                         | $ | 64,687  |        |  | $ | 56,481 |        |  | $ | 59,898  |       
|                                     | Ceded  |                                         |   | (9,688  | )      |  |   | (8,141 | )      |  |   | (2,242  | )     
|                                     |        |                                         |   |         |        |  |   |        |       
|                                     |        | Net premiums written                    |   | $       | 54,999 |  |   | $      | 45,340 |  |   | $       | 57,656 | 
|                                     |        |                                         |   |         |        |  |   |        |       
|Claim and claim settlement expenses: |        |                                         |   |         |        |  |   |        |        |  |   |        
|                                     | Direct |                                         | $ | 48,909  |        |  | $ | 20,931 |        |  | $ | 59,710  |       
|                                     | Ceded  |                                         |   | (13,373 | )      |  |   | 6,325  |        |  |   | (19,177 | )     
|                                     |        |                                         |   |         |        |  |   |        |       
|                                     |        | Net claim and claim settlement expenses |   | $       | 35,536 |  |   | $      | 27,256 |  |   | $       | 40,533 | 
|                                     |        |                                         |   |         |        |  |   |        |       





Note 5  Unpaid Claim and Claim Settlement
Expenses




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RTW, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                           |                                                         |                |         |         |        |   |         |         |        |   |         |         |        | 
|-------------------------- | ------------------------------------------------------- | -------------- | ------- | ------- | ------ | - | ------- | ------- | ------ | - | ------- | ------- | ------ | 
|                           |                                                         | 2004           |         |         | 2003   |   |         | 2002    |       
|                           |                                                         |                |         |         |        |   |         |         |       
|Balance at January 1       |                                                         | $              | 150,044 |         |        | $ | 181,262 |         |        | $ | 181,310 |        
|                           | Less reinsurance recoverables                           |                |         | (71,466 | )      |   |         | (91,822 | )      |   |         | (90,115 | )     
|                           | Plus deferred gain on retrospective reinsurance         |                |         | 49      |        |   |         | 49      |        |   |         | 449     |       
|                           |                                                         |                |         |         |        |   |         |         |       
|Net balance at January 1   |                                                         |                | 78,627  |         |        |   | 89,489  |         |        |   | 91,644  |        
|Incurred related to:       |                                                         |                |         |         |        |   |         |         |        |   |         |        
|                           | Current year                                            |                |         | 42,583  |        |   |         | 33,954  |        |   |         | 49,621  |       
|                           | Prior years                                             |                |         | (7,047  | )      |   |         | (6,698  | )      |   |         | (8,356  | )     
|                           | Write-off of reinsurance recoverable                    |                |         |        |        |   |         |        |        |   |         | (332    | )     
|                           | Amortization of deferred retrospective reinsurance gain |                |         |        |        |   |         |        |        |   |         | (400    | )     
|                           |                                                         |                |         |         |        |   |         |         |       
|                           |                                                         | Total incurred |         |         | 35,536 |   |         |         | 27,256 |   |         |         | 40,533 | 
|Paid related to:           |                                                         |                |         |         |        |   |         |         |        |   |         |        
|                           | Current year                                            |                |         | 12,666  |        |   |         | 10,761  |        |   |         | 13,715  |       
|                           | Prior years                                             |                |         | 23,047  |        |   |         | 27,357  |        |   |         | 28,973  |       
|                           |                                                         |                |         |         |        |   |         |         |       
|                           |                                                         | Total paid     |         |         | 35,713 |   |         |         | 38,118 |   |         |         | 42,688 | 
|                           |                                                         |                |         |         |        |   |         |         |       
|Net balance at December 31 |                                                         |                | 78,450  |         |        |   | 78,627  |         |        |   | 89,489  |        
|                           | Plus reinsurance recoverables                           |                |         | 77,722  |        |   |         | 71,466  |        |   |         | 91,822  |       
|                           | Plus deferred gain on retrospective reinsurance         |                |         | (49     | )      |   |         | (49     | )      |   |         | (49     | )     
|                           |                                                         |                |         |         |        |   |         |         |       
|Balance at December 31     |                                                         | $              | 156,123 |         |        | $ | 150,044 |         |        | $ | 181,262 |        
|                           |                                                         |                |         |         |        |   |         |         |       













48



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RTW, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Note 6  Notes Payable




Note 7  Income Taxes




|          |         |                                      |   |        |        |   |   |      |      |   |   |        |        |  
|--------- | ------- | ------------------------------------ | - | ------ | ------ | - | - | ---- | ---- | - | - | ------ | ------ | -
|          |         | 2004                                 |   |        | 2003   |   |   | 2002 |     
|          |         |                                      |   |        |        |   |   |      |     
|Current:  |         |                                      |   |        |        |   |   |      |      |   |   |       
|          | Federal |                                      | $ | 651    |        |   | $ | 288  |      |   | $ | (3,521 | )     
|          | State   |                                      |   | 56     |        |   |   | 128  |      |   |   | 85     |       
|          |         |                                      |   |        |        |   |   |      |     
|          |         | Total current tax (benefit) expense  |   |        | 707    |   |   |      | 416  |   |   |        | (3,436 | )
|Deferred: |         |                                      |   |        |        |   |   |      |      |   |   |       
|          | Federal |                                      |   | (2,576 | )      |   |   | (828 | )    |   |   | (721   | )     
|          | State   |                                      |   |       |        |   |   |     |      |   |   |       |       
|          |         |                                      |   |        |        |   |   |      |     
|          |         | Total deferred tax (benefit) expense |   |        | (2,576 | ) |   |      | (828 | ) |   |        | (721   | )
|          |         |                                      |   |        |        |   |   |      |     
|          |         | Income tax benefit                   |   | $      | (1,869 | ) |   | $    | (412 | ) |   | $      | (4,157 | )
|          |         |                                      |   |        |        |   |   |      |     



|                                                                         |                                                                             |                    |       |        |        |   |       |        |      |   |       |        |        |  
|------------------------------------------------------------------------ | --------------------------------------------------------------------------- | ------------------ | ----- | ------ | ------ | - | ----- | ------ | ---- | - | ----- | ------ | ------ | -
|                                                                         |                                                                             | 2004               |       |        | 2003   |   |       | 2002   |     
|                                                                         |                                                                             |                    |       |        |        |   |       |        |     
|Federal income tax expense (benefit) at 35%                              |                                                                             | $                  | 2,825 |        |        | $ | 2,305 |        |      | $ | 3,557 |       
|Increase (reduction) in income tax expense (benefit)
    resulting from: |                                                                             |                    |       |        |        |   |       |        |      |   |       |       
|                                                                         | State income taxes, net of federal income tax benefit                       |                    |       | 36     |        |   |       | 79     |      |   |       | 242    |       
|                                                                         | Non-deductible investment amortization and tax-exempt investment
    income |                    |       | (116   | )      |   |       | 11     |      |   |       | 18     |       
|                                                                         | Deferred income tax valuation allowance                                     |                    |       | (4,040 | )      |   |       | (3,060 | )    |   |       | (7,927 | )     
|                                                                         | Other                                                                       |                    |       | (574   | )      |   |       | 253    |      |   |       | (47    | )     
|                                                                         |                                                                             |                    |       |        |        |   |       |        |     
|                                                                         |                                                                             | Income tax benefit |       | $      | (1,869 | ) |       | $      | (412 | ) |       | $      | (4,157 | )
|                                                                         |                                                                             |                    |       |        |        |   |       |        |     



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RTW, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                           |                          |                                                    |                     |        |       |   |       |        |       |        |  
|------------------------------------------ | ------------------------ | -------------------------------------------------- | ------------------- | ------ | ----- | - | ----- | ------ | ----- | ------ | -
|                                           |                          | 2004                                               |                     |        | 2003  |  
|                                           |                          |                                                    |                     |        |       |  
|Unpaid claim and claim settlement expenses |                          | $                                                  | 5,293               |        |       | $ | 6,455 |       
|Accrued second injury funds                |                          |                                                    | 74                  |        |       |   | 90    |       
|Unearned premiums                          |                          |                                                    | 2,067               |        |       |   | 1,877 |       
|Office closure costs                       |                          |                                                    |                    |        |       |   | 88    |       
|Retrospective reinsurance                  |                          |                                                    | 17                  |        |       |   | 17    |       
|Other                                      |                          |                                                    | 326                 |        |       |   | 642   |       
|                                           |                          |                                                    |                     |        |       |  
|                                           | Deferred tax assets      |                                                    |                     | 7,777  |       |   |       | 9,169  |      
|Net unrealized gain on securities          |                          |                                                    | (194                | )      |       |   | (524  | )     
|Deferred policy acquisition costs          |                          |                                                    | (937                | )      |       |   | (894  | )     
|Depreciation                               |                          |                                                    | (240                | )      |       |   | (211  | )     
|                                           |                          |                                                    |                     |        |       |  
|                                           | Deferred tax liabilities |                                                    |                     | (1,371 | )     |   |       | (1,629 | )    
|                                           |                          |                                                    |                     |        |       |  
|                                           |                          | Net deferred tax assets before valuation allowance |                     |        | 6,406 |   |       |        | 7,540 |       
|                                           |                          |                                                    | Valuation allowance |        |       |  |       |        |       | (4,040 | )
|                                           |                          |                                                    |                     |        |       |  
|                                           |                          | Net deferred tax asset                             |                     | $      | 6,406 |   |       | $      | 3,500 |       
|                                           |                          |                                                    |                     |        |       |  





Note 8  Employee Benefits and Plans


Stock Based Compensation


1995 Employee Stock Purchase Plan


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RTW, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                          |  |           |        |  |          |   |      | 
|----------------------------------------- |  | --------- | ------ |  | -------- | - | ---- | 
|                                          |  | Shares    |        |  | Purchase |  
|Phase:                                    |  | Purchased |        |  | Price    |  
|                                          |  |           |        |  |          |  
|Beginning April 2001, expiring April 2002 |  |           | 5,047  |  |          | $ | 1.90 | 
|Beginning April 2002, expiring April 2003 |  |           | 20,649 |  |          |   | 2.07 | 
|Beginning April 2003, expiring April 2004 |  |           | 20,151 |  |          |   | 3.23 | 





1994 Stock Plan




|                           |           |           |         |          |               |   |       |        |          |  |          |          |   |   |      |       | 
|-------------------------- | --------- | --------- | ------- | -------- | ------------- | - | ----- | ------ | -------- |  | -------- | -------- | - | - | ---- | ----- | 
|                           |           | Qualified |         |          | Non-Qualified |  
|                           |           |           |         |          |               |  
|                           |           |           |         | Weighted |               |   |       |        | Weighted | 
|                           |           |           |         | Average  |               |   |       |        | Average  | 
|                           |           | Option    |         |          | Exercise      |   |       | Option |          |  | Exercise |         
|                           |           | Shares    |         |          | Price         |   |       | Shares |          |  | Price    |         
|                           |           |           |         |          |               |   |       |        |          |  |          |         
|Balance, January 1, 2002   |           |           | 292,390 |          |               | $ | 11.83 |        |          |  | 480,726  |          |   | $ | 8.19 |      
|                           | Granted   |           |         | 25,500   |               |   |       | 2.48   |          |  |          | 112,500  |   |   |      | 2.40  | 
|                           | Canceled  |           |         | (180,819 | )             |   |       | 12.24  |          |  |          | (266,351 | ) |   |      | 12.60 | 
|                           |           |           |         |          |               |   |       |        |          |  |          |         
|Balance, December 31, 2002 |           |           | 137,071 |          |               |   | 9.54  |        |          |  | 326,875  |          |   |   | 2.60 |      
|                           | Granted   |           |         | 155,500  |               |   |       | 2.19   |          |  |          | 12,500   |   |   |      | 3.13  | 
|                           | Exercised |           |         | (8,000   | )             |   |       | 2.22   |          |  |          |         |   |   |      |      | 
|                           | Canceled  |           |         | (9,052   | )             |   |       | 9.62   |          |  |          | (80,000  | ) |   |      | 2.20  | 
|                           |           |           |         |          |               |   |       |        |          |  |          |         
|Balance, December 31, 2003 |           |           | 275,519 |          |               |   | 5.60  |        |          |  | 259,375  |          |   |   | 2.75 |      
|                           | Granted   |           |         | 209,948  |               |   |       | 6.14   |          |  |          | 79,302   |   |   |      | 6.14  | 
|                           | Exercised |           |         | (43,468  | )             |   |       | 2.22   |          |  |          | (133,500 | ) |   |      | 2.18  | 
|                           | Canceled  |           |         | (38,572  | )             |   |       | 6.21   |          |  |          | (1,875   | ) |   |      | 5.33  | 
|                           |           |           |         |          |               |   |       |        |          |  |          |         
|Balance, December 31, 2004 |           |           | 403,427 |          |               | $ | 6.19  |        |          |  | 203,302  |          |   | $ | 4.42 |      
|                           |           |           |         |          |               |   |       |        |          |  |          |         



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RTW, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                             |              |                     |         |                  |                     |  |           |           |          |   |         |       |  |          |         |         |  |   |       |       | 
|---------------------------- | ------------ | ------------------- | ------- | ---------------- | ------------------- |  | --------- | --------- | -------- | - | ------- | ----- |  | -------- | ------- | ------- |  | - | ----- | ----- | 
|                             |              | Options Outstanding |         |                  |                    
|                             |              |                     |         |                  | Options Exercisable | 
|                             |              |                     |         |                  |                     |  |          
|                             |              |                     |         | Weighted Average |                     |  |           |           | Weighted |  
|                             |              | Number              |         |                  |                     |  |           | Number    |          |   | Average |      
|                             |              | of                  |         |                  | Contractual         |  |           | Exercise  |          |   | of      |       |  | Exercise |        
|Exercise Price Range         |              | Options             |         |                  | Life                |  |           | Price     |          |   | Options |       |  | Price    |        
|                             |              |                     |         |                  |                     |  |           |           |          |   |         |       |  |          |        
|Incentive stock options:     |              |                     |         |                  |                     |  |           |           |          |   |         |       |  |          |         |         |  |   |       |      
|$14.00 - $38.67              |              |                     | 37,429  |                  |                     |  | 3.2 years |           |          | $ | 16.68   |       |  |          | 37,429  |         |  | $ | 16.68 |      
|                             | 8.75 - 10.75 |                     |         | 35,000           |                     |  |           | 5.1 years |          |   |         | 10.54 |  |          |         | 35,000  |  |   |       | 10.54 | 
|                             | 6.00 - 6.18  |                     |         | 182,698          |                     |  |           | 9.1 years |          |   |         | 6.14  |  |          |         | 70,675  |  |   |       | 6.18  | 
|                             | 2.19 - 4.50  |                     |         | 148,300          |                     |  |           | 7.7 years |          |   |         | 2.53  |  |          |         | 140,300 |  |   |       | 2.58  | 
|                             |              |                     |         |                  |                     |  |           |           |          |   |         |       |  |          |        
|$ 2.19 - $38.67              |              |                     | 403,427 |                  |                     |  | 7.7 years |           |          | $ | 6.19    |       |  |          | 283,404 |         |  | $ | 6.32  |      
|                             |              |                     |         |                  |                     |  |           |           |          |   |         |       |  |          |        
|Non-qualified stock options: |              |                     |         |                  |                     |  |           |           |          |   |         |       |  |          |         |         |  |   |       |      
|$31.75                       |              |                     | 5,000   |                  |                     |  | 2.1 years |           |          | $ | 31.75   |       |  |          | 5,000   |         |  | $ | 31.75 |      
|                             | 1.98 - 6.50  |                     |         | 198,302          |                     |  |           | 8.0 years |          |   |         | 3.73  |  |          |         | 133,908 |  |   |       | 3.27  | 
|                             |              |                     |         |                  |                     |  |           |           |          |   |         |       |  |          |        
|$ 1.98 - $31.75              |              |                     | 203,302 |                  |                     |  | 7.9 years |           |          | $ | 4.42    |       |  |          | 138,908 |         |  | $ | 4.30  |      
|                             |              |                     |         |                  |                     |  |           |           |          |   |         |       |  |          |        

Employment Contracts


Combined Retirement Plan




| |                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 401(k) Retirement Component  We sponsor a
    defined contribution retirement component under
    Section 401(k) of the Internal Revenue Code for eligible
    employees. Our contributions are discretionary and are based on
    contributions made by employees. Expense recognized for 2004,
    2003 and 2002 was $221,000, $204,000 and $220,000, respectively.
|
| | Employee Stock Ownership Component  We
    maintain an ESOP for our qualified employees. Our contributions
    are discretionary. We may contribute cash or shares of our
    common stock. No contributions were made or expense recorded in
    2004, 2003 or 2002.                                                                                                

Other Employee Benefit Plans


Note 9  Shareholders Equity




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RTW, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Shareholder Rights Plan


Dividend Restrictions






Statutory Surplus and Statutory Net Income


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RTW, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|     |  |             |        |  |            |   |        | 
|---- |  | ----------- | ------ |  | ---------- | - | ------ | 
|     |  | Statutory   |        |  |           
|     |  | Capital and |        |  | Statutory  |  
|     |  | Surplus     |        |  | Net Income |  
|     |  |             |        |  |            |  
|2004 |  | $           | 38,503 |  |            | $ | 7,540  | 
|2003 |  |             | 33,033 |  |            |   | 6,103  | 
|2002 |  |             |        |  |            |   | 12,064 | 

Note 10  Commitments and Contingencies


Operating Leases




|     |  |   |       | 
|---- |  | - | ----- | 
|2005 |  | $ | 1,039 | 
|2006 |  |   | 911   | 
|2007 |  |   | 581   | 







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RTW, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|          |                                       
|--------- | --------------------------------------
|Note 11  | Accumulated Other Comprehensive Income



|                                                          |                                                    |                                           |                                                |      |      |      |       |        |        |        |       |       |       |       | 
|--------------------------------------------------------- | -------------------------------------------------- | ----------------------------------------- | ---------------------------------------------- | ---- | ---- | ---- | ----- | ------ | ------ | ------ | ----- | ----- | ----- | ----- | 
|                                                          |                                                    | 2004                                      |                                                |      | 2003 |      |       | 2002   |       
|                                                          |                                                    |                                           |                                                |      |      |      |       |        |       
|Accumulated other comprehensive income, beginning of year |                                                    | $                                         | 973                                            |      |      | $    | 2,220 |        |        | $      | 882   |      
|Changes in comprehensive income arising during the year:  |                                                    |                                           |                                                |      |      |      |       |        |        |        |       |      
|                                                          | Net unrealized investment (losses) gains           |                                           |                                                | (220 | )    |      |       | (1,234 | )      |        |       | 3,780 |      
|                                                          | Less: Adjustment for net realized investment gains |                                           |                                                | 705  |      |      |       | 685    |        |        |       | 1,721 |      
|                                                          |                                                    |                                           |                                                |      |      |      |       |        |       
|                                                          |                                                    | Change in net unrealized investment gains |                                                |      | (925 | )    |       |        | (1,919 | )      |       |       | 2,059 |      
|                                                          |                                                    | Income tax expense (benefit)              |                                                |      | 330  |      |       |        | (672   | )      |       |       | 721   |      
|                                                          |                                                    |                                           |                                                |      |      |      |       |        |       
|                                                          |                                                    |                                           | Other comprehensive (loss) income for the year |      |      | (595 | )     |        |        | (1,247 | )     |       |       | 1,338 | 
|                                                          |                                                    |                                           |                                                |      |      |      |       |        |       
|Accumulated other comprehensive income, end of year       |                                                    | $                                         | 378                                            |      |      | $    | 973   |        |        | $      | 2,220 |      
|                                                          |                                                    |                                           |                                                |      |      |      |       |        |       



|          |                      
|--------- | ---------------------
|Note 12  | Restructuring Charges





|          |                                
|--------- | -------------------------------
|Note 13  | Termination of Deposit Contract





|          |                                            
|--------- | -------------------------------------------
|Note 14  | Quarterly Results of Operations (Unaudited)



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RTW, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                         |                                     |                                       |        |        |         |   |        |         |        |   |         |        |        |   |        |        |        | 
|------------------------ | ----------------------------------- | ------------------------------------- | ------ | ------ | ------- | - | ------ | ------- | ------ | - | ------- | ------ | ------ | - | ------ | ------ | ------ | 
|                         |                                     | First                                 |        |        | Second  |   |        | Third   |        |   | Fourth  |       
|2004                     |                                     | Quarter                               |        |        | Quarter |   |        | Quarter |        |   | Quarter |       
|                         |                                     |                                       |        |        |         |   |        |         |        |   |         |       
|                         |                                     | (In thousands, except per share data) |       
|Premiums in force        |                                     | $                                     | 59,500 |        |         | $ | 62,400 |         |        | $ | 63,200  |        |        | $ | 62,700 |       
|                         |                                     |                                       |        |        |         |   |        |         |        |   |         |       
|Revenues:                |                                     |                                       |        |        |         |   |        |         |        |   |         |        |        |   |        |       
|                         | Gross premiums earned               |                                       | $      | 14,962 |         |   | $      | 15,376  |        |   | $       | 16,676 |        |   | $      | 16,356 |       
|                         | Premiums ceded                      |                                       |        | (2,320 | )       |   |        | (2,208  | )      |   |         | (2,515 | )      |   |        | (2,645 | )     
|                         |                                     |                                       |        |        |         |   |        |         |        |   |         |       
|                         |                                     | Premiums earned                       |        |        | 12,642  |   |        |         | 13,168 |   |         |        | 14,161 |   |        |        | 13,711 | 
|                         | Investment income                   |                                       |        | 882    |         |   |        | 968     |        |   |         | 970    |        |   |        | 1,017  |       
|                         | Net realized investment gains       |                                       |        | 649    |         |   |        | 58      |        |   |         | (2     | )      |   |        |       |       
|                         | Service revenue                     |                                       |        | 67     |         |   |        | 73      |        |   |         | 143    |        |   |        | 350    |       
|                         |                                     |                                       |        |        |         |   |        |         |        |   |         |       
|                         |                                     | Total revenues                        |        |        | 14,240  |   |        |         | 14,267 |   |         |        | 15,272 |   |        |        | 15,078 | 
|Expenses:                |                                     |                                       |        |        |         |   |        |         |        |   |         |        |        |   |        |       
|                         | Claim and claim settlement expenses |                                       |        | 9,230  |         |   |        | 9,005   |        |   |         | 10,061 |        |   |        | 7,240  |       
|                         | Policy acquisition costs            |                                       |        | 1,410  |         |   |        | 1,959   |        |   |         | 1,531  |        |   |        | 1,145  |       
|                         | General and administrative expenses |                                       |        | 2,192  |         |   |        | 1,932   |        |   |         | 2,226  |        |   |        | 2,854  |       
|                         |                                     |                                       |        |        |         |   |        |         |        |   |         |       
|                         |                                     | Total expenses                        |        |        | 12,832  |   |        |         | 12,896 |   |         |        | 13,818 |   |        |        | 11,239 | 
|                         |                                     |                                       |        |        |         |   |        |         |        |   |         |       
|Income from operations   |                                     | $                                     | 1,408  |        |         | $ | 1,371  |         |        | $ | 1,454   |        |        | $ | 3,839  |       
|                         |                                     |                                       |        |        |         |   |        |         |        |   |         |       
|Net income               |                                     | $                                     | 930    |        |         | $ | 943    |         |        | $ | 1,093   |        |        | $ | 6,975  |       
|                         |                                     |                                       |        |        |         |   |        |         |        |   |         |       
|Basic income per share   |                                     | $                                     | 0.18   |        |         | $ | 0.18   |         |        | $ | 0.21    |        |        | $ | 1.32   |       
|                         |                                     |                                       |        |        |         |   |        |         |        |   |         |       
|Diluted income per share |                                     | $                                     | 0.17   |        |         | $ | 0.17   |         |        | $ | 0.20    |        |        | $ | 1.25   |       
|                         |                                     |                                       |        |        |         |   |        |         |        |   |         |       



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

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RTW, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                         |                                     |                                       |                |        |         |        |        |         |        |        |         |        |        |        |        |        |        |        | 
|------------------------ | ----------------------------------- | ------------------------------------- | -------------- | ------ | ------- | ------ | ------ | ------- | ------ | ------ | ------- | ------ | ------ | ------ | ------ | ------ | ------ | ------ | 
|                         |                                     | First                                 |                |        | Second  |        |        | Third   |        |        | Fourth  |       
|2003                     |                                     | Quarter                               |                |        | Quarter |        |        | Quarter |        |        | Quarter |       
|                         |                                     |                                       |                |        |         |        |        |         |        |        |         |       
|                         |                                     | (In thousands, except per share data) |               
|Premiums in force        |                                     | $                                     | 48,700         |        |         | $      | 50,300 |         |        | $      | 57,400  |        |        | $      | 58,100 |       
|                         |                                     |                                       |                |        |         |        |        |         |        |        |         |       
|Revenues:                |                                     |                                       |                |        |         |        |        |         |        |        |         |        |        |        |        |       
|                         | Gross premiums earned               |                                       | $              | 13,022 |         |        | $      | 12,566  |        |        | $       | 13,728 |        |        | $      | 15,115 |       
|                         | Premiums ceded                      |                                       |                | (1,900 | )       |        |        | (1,721  | )      |        |         | (2,049 | )      |        |        | (2,471 | )     
|                         |                                     |                                       |                |        |         |        |        |         |        |        |         |       
|                         |                                     | Premiums earned                       |                |        | 11,122  |        |        |         | 10,845 |        |         |        | 11,679 |        |        |        | 12,644 |       
|                         | Investment income                   |                                       |                | 1,242  |         |        |        | 1,167   |        |        |         | 1,067  |        |        |        | 998    |       
|                         | Net realized investment gains       |                                       |                |       |         |        |        |        |        |        |         | 685    |        |        |        |       |       
|                         | Service revenue                     |                                       |                | 28     |         |        |        | 28      |        |        |         | 23     |        |        |        | 30     |       
|                         |                                     |                                       |                |        |         |        |        |         |        |        |         |       
|                         |                                     |                                       | Total revenues |        |         | 12,392 |        |         |        | 12,040 |         |        |        | 13,454 |        |        |        | 13,672 | 
|Expenses:                |                                     |                                       |                |        |         |        |        |         |        |        |         |        |        |        |        |       
|                         | Claim and claim settlement expenses |                                       |                | 8,194  |         |        |        | 5,704   |        |        |         | 6,421  |        |        |        | 6,937  |       
|                         | Policy acquisition costs            |                                       |                | 1,035  |         |        |        | 2,765   |        |        |         | 1,484  |        |        |        | 1,594  |       
|                         | General and administrative expenses |                                       |                | 2,286  |         |        |        | 2,656   |        |        |         | 2,542  |        |        |        | 3,305  |       
|                         |                                     |                                       |                |        |         |        |        |         |        |        |         |       
|                         |                                     | Total expenses                        |                |        | 11,515  |        |        |         | 11,125 |        |         |        | 10,447 |        |        |        | 11,836 |       
|                         |                                     |                                       |                |        |         |        |        |         |        |        |         |       
|Income from operations   |                                     | $                                     | 877            |        |         | $      | 915    |         |        | $      | 3,007   |        |        | $      | 1,836  |       
|                         |                                     |                                       |                |        |         |        |        |         |        |        |         |       
|Net income               |                                     | $                                     | 564            |        |         | $      | 639    |         |        | $      | 3,133   |        |        | $      | 2,663  |       
|                         |                                     |                                       |                |        |         |        |        |         |        |        |         |       
|Basic income per share   |                                     | $                                     | 0.11           |        |         | $      | 0.12   |         |        | $      | 0.61    |        |        | $      | 0.52   |       
|                         |                                     |                                       |                |        |         |        |        |         |        |        |         |       
|Diluted income per share |                                     | $                                     | 0.11           |        |         | $      | 0.12   |         |        | $      | 0.59    |        |        | $      | 0.49   |       
|                         |                                     |                                       |                |        |         |        |        |         |        |        |         |       



|                                                                                                                |  |   |     |  |  |   |        |   |  |   |       |   |  |   |       |  
|--------------------------------------------------------------------------------------------------------------- |  | - | --- |  |  | - | ------ | - |  | - | ----- | - |  | - | ----- | -
|Net realized investment gains                                                                                   |  | $ |    |  |  | $ |       |   |  | $ | 685   |   |  | $ |      |  
|Net changes in estimates for unpaid claim and claim settlement
    expenses on claims reported in prior periods |  |   | 300 |  |  |   | 2,400  |   |  |   | 2,000 |   |  |   | 2,000 |  
|Pool reapportionment charge                                                                                     |  |   |    |  |  |   | (1,451 | ) |  |   |      |   |  |   |      |  
|Bonus expense                                                                                                   |  |   |    |  |  |   | (300   | ) |  |   | (300  | ) |  |   | (341  | )
|Severance and moving costs                                                                                      |  |   |    |  |  |   |       |   |  |   |      |   |  |   | (217  | )
|Commission reversal                                                                                             |  |   |    |  |  |   |       |   |  |   |      |   |  |   | (375  | )
|Change in recorded deferred income tax valuation allowance                                                      |  |   |    |  |  |   |       |   |  |   | 1,200 |   |  |   | 1,860 |  

57



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##### Table of Contents








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure








|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys Chief Executive Officer, Jeffrey B. Murphy,
    and Chief Financial Officer, Alfred L. LaTendresse, have
    reviewed the Companys disclosure controls and procedures
    pursuant to Exchange Act Rule 13a-15(b) as of the end of the
    period covered by this report. Based upon this review, these
    officers believe that the Companys disclosure controls and
    procedures are effective in ensuring that material information
    related to the Company is made known to them by others within
    the Company.





| |                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | There were no significant changes in the Companys internal
    controls or in other factors that could significantly affect
    these controls during the year covered by this report or from
    the end of the reporting period to the date of this Annual
    Report on Form 10-K.






|         |                  
|-------- | -----------------
|Item 9B. | Other Information






PART III







|         |                                                   
|-------- | --------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant










|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation








|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management and Related Stockholder Matters








|         |                                               
|-------- | ----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions








|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accountant Fees and Services



58



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##### Table of Contents






PART IV







|         |                                           
|-------- | ------------------------------------------
|Item 15. | Exhibits and Financial Statement Schedules





| |     |                                                                                                                                           
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Financial Statements. The following consolidated
    financial statements are set forth on pages 30 through 47,
    Item 8 of this Report.



| |                                                                                                   
| | --------------------------------------------------------------------------------------------------
| | Report of Independent Registered Public Accounting Firm                                           
|
| | Consolidated Balance Sheets  December 31, 2004
    and 2003                                      
|
| | Consolidated Statements of Income  Years Ended
    December 31, 2004, 2003 and 2002              
|
| | Consolidated Statements of Shareholders Equity 
    Years Ended December 31, 2004, 2003 and 2002
|
| | Consolidated Statements of Cash Flows  Years Ended
    December 31, 2004, 2003 and 2002          
|
| | Notes to Consolidated Financial Statements  Years
    Ended December 31, 2004, 2003 and 2002     



| |                                                                                  
| | ---------------------------------------------------------------------------------
| | (2) Financial Statement Schedules for the Three Years
    Ended December 31, 2004

|                                                                                                                                   |  |      |     | 
|---------------------------------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                                                   |  | Page |    
|                                                                                                                                   |  |      |    
|Reports of Independent Registered Public Accounting Firm on
    Schedules for the Years Ended December 31, 2004, 2003 and
    2002 |  |      | S-1 | 
|Schedule I  Summary of Investments                                                                                                |  |      | S-2 | 
|Schedule II  Condensed Financial Information
    (Parent Company)                                                                 |  |      | S-3 | 
|Schedule III  Supplemental Information
    Concerning Insurance Operations                                                        |  |      | S-7 | 
|Schedule IV  Reinsurance                                                                                                          |  |      | S-8 | 
|Schedule V  Valuation and Qualifying Accounts                                                                                     |  |      | S-9 | 



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

Listing of Exhibits


| |        |  |  |                                                                                                                                              
| | ------ |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------
| | 3.1    |  |  | Amended Articles of Incorporation(9)                                                                                                         
| | 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 12, 2004(8)                                                     
| | 10.2*  |  |  | Amended RTW, Inc. 1995 Employee Stock Purchase Plan(10)                                                                                      
| | 10.3*  |  |  | Amended RTW, Inc. 1994 Stock Plan(4)                                                                                                         
| | 10.4   |  |  | Contract between RTW and ACIC dated January 1, 1992(5)                                                                                       
| | 10.5   |  |  | Service Agreement between RTW and ACIC dated February 1,
    1992(5)                                                                         
| | 10.6*  |  |  | Description of the 2005 Profit Sharing Program                                                                                               
| | 10.7   |  |  | Reinsurance contract between ACIC and First Excess and
    Reinsurance Corporation (GE Reinsurance Corporation)
    effective July 1, 1998(3)
| | 10.8   |  |  | Endorsement No. 2 to the reinsurance contract between ACIC
    and General Reinsurance Corporation(3)                                        
| | 10.8.1 |  |  | Description of the Reinsurance Agreement for 2002 between ACIC
    and General Reinsurance Corporation effective January 1,
    2002(6)      
| | 10.8.2 |  |  | Description of the Reinsurance Agreement for 2003 between ACIC
    and General Reinsurance Corporation effective January 1,
    2003(7)      

59



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##### Table of Contents



| |        |  |  |                                                                                                                                                      
| | ------ |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.8.3 |  |  | Description of the Reinsurance Agreement for 2004 between ACIC
    and General Reinsurance Corporation effective January 1,
    2004(8)              
| | 10.8.4 |  |  | Description of the Reinsurance Agreement for 2005 between ACIC
    and General Reinsurance Corporation effective January 1,
    2005                 
| | 10.9   |  |  | Minnesota Workers Compensation Reinsurance Association
    reinsurance agreement(7)                                                                 
| | 10.10  |  |  | Election form for the 2005 Minnesota Workers Compensation
    Reinsurance Association reinsurance agreement                                         
| | 10.11  |  |  | Description of the Reinsurance Agreement for 2003 between ACIC
    and Everest Re/Platinum Re effective January 1, 2003(7)                           
| | 10.12  |  |  | Description of the Reinsurance Agreement for 2004 between ACIC
    and various reinsurers effective January 1, 2004(8)                               
| | 10.13  |  |  | Description of the Reinsurance Agreement for 2005 between ACIC
    and various reinsurers effective January 1, 2005                                  
| | 11     |  |  | Statement re: Computation of Income Per Share                                                                                                        
| | 14     |  |  | Code of Ethics(8)                                                                                                                                    
| | 21     |  |  | Subsidiaries of the Registrant: The Company has one wholly-owned
    subsidiary, American Compensation Insurance Company, a Minnesota
    corporation
| | 23     |  |  | Consent of Independent Registered Public Accounting Firm                                                                                             
| | 24     |  |  | Power of Attorney, included in Signature page                                                                                                        
| | 31.1   |  |  | Certification of President and Chief Executive Officer                                                                                               
| | 31.2   |  |  | Certification of Chief Financial Officer                                                                                                             
| | 32     |  |  | Certification Pursuant to 18 U.S.C. § 1350,
    Adopted Pursuant to § 906 of the Sarbanes-Oxley Act of
    2002                                      






|    |                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------
|(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. 33-2002C).                       
|   
|(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 Form 10-Q
    for the quarter ended March 31, 2004.                                



|     |                                                                                                                             
|---- | ----------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to the Companys Registration
    Statement on Form S-8 (Reg. No. 333-114030)
    (March 30, 2004)

60



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##### Table of Contents






SIGNATURES






| |          
| | ---------
| | RTW, INC.



| |    |                      
| | -- | ---------------------
| | By | /s/ Jeffrey B. Murphy

| |                                                
| | -----------------------------------------------
| |                                                
| | Jeffrey B. Murphy                              
| | President, Chief Executive Officer and Director
| | (Principal Executive Officer)                  



Signatures and Power of Attorney




|          |  |                                                        |  |                                                                                                                                     |  |               
|--------- |  | ------------------------------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------- |  | --------------
|Signature |  | Title                                                  |  | Date                                                                                                                               
|          |  |                                                        |  |                                                                                                                                    
|         
|By:       |  | /s/ John O. GoodwyneJohn
    O. Goodwyne               |  | Chairman of the Board                                                                                                               |  | March 30, 2005
|         
|By:       |  | /s/ Jeffrey B. MurphyJeffrey
    B. Murphy             |  | President, Chief Executive Officer
    and Director (Principal Executive
    Officer)                                               |  | March 30, 2005
|         
|By:       |  | /s/ Alfred L.
    LaTendresseAlfred
    L. LaTendresse |  | Executive Vice President,
    Chief Financial Officer, Treasurer
    and Secretary (Principal Financial
    and Accounting Officer) |  | March 30, 2005
|         
|By:       |  | /s/ David C. ProsserDavid
    C. Prosser               |  | Chairman Emeritus of the Board                                                                                                      |  | March 30, 2005
|         
|By:       |  | /s/ Gregory D.
    KoschinskaGregory
    D. Koschinska |  | Director                                                                                                                            |  | March 30, 2005
|         
|By:       |  | /s/ William J. DetersWilliam
    J. Deters             |  | Director                                                                                                                            |  | March 30, 2005
|         
|By:       |  | /s/ John W. ProsserJohn
    W. Prosser                 |  | Director                                                                                                                            |  | March 30, 2005
|         
|By:       |  | /s/ Vina L. MarquartVina
    L. Marquart               |  | Director                                                                                                                            |  | March 30, 2005

61



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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


ON SCHEDULES














| |                           
| | --------------------------
| | /s/ Ernst &
    Young, LLP





S-1



---



##### Table of Contents



SCHEDULE I


RTW, INC.


SUMMARY OF INVESTMENTS


December 31, 2004


|                   |                     |                                                               |                   |   |        |             |  |                |        |        |  |   |        |        | 
|------------------ | ------------------- | ------------------------------------------------------------- | ----------------- | - | ------ | ----------- |  | -------------- | ------ | ------ |  | - | ------ | ------ | 
|                   |                     |                                                               |                   |   |        | Amount at   | 
|                   |                     |                                                               |                   |   |        | which shown | 
|                   |                     | Amortized                                                     |                   |   | Fair   |             |  | in the balance |       
|Type of investment |                     | Cost                                                          |                   |   | Value  |             |  | sheet          |       
|                   |                     |                                                               |                   |   |        |             |  |                |       
|                   |                     | (In thousands)                                                |                  
|Fixed maturities:  |                     |                                                               |                   |   |        |             |  |                |        |        |  |  
|                   | Available-for-sale: |                                                               |                   |   |        |             |  |                |        |        |  |   |       
|                   |                     | Municipal securities                                          |                   | $ | 18,926 |             |  | $              | 18,788 |        |  | $ | 18,788 |       
|                   |                     | Mortgage backed securities                                    |                   |   | 24,006 |             |  |                | 24,203 |        |  |   | 24,203 |       
|                   |                     | Asset backed securities                                       |                   |   | 2,011  |             |  |                | 2,003  |        |  |   | 2,003  |       
|                   |                     | United States government, government agencies and authorities |                   |   | 41,439 |             |  |                | 41,960 |        |  |   | 41,960 |       
|                   |                     |                                                               |                   |   |        |             |  |                |       
|                   |                     |                                                               | Total Investments |   | $      | 86,382      |  |                | $      | 86,954 |  |   | $      | 86,954 | 
|                   |                     |                                                               |                   |   |        |             |  |                |       

S-2



---



##### Table of Contents



SCHEDULE II


RTW, INC.


CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT


BALANCE SHEETS


December 31, 2004 and 2003


|                                         |                   |                |        |       |      |   |        |       | 
|---------------------------------------- | ----------------- | -------------- | ------ | ----- | ---- | - | ------ | ----- | 
|                                         |                   | 2004           |        |       | 2003 |  
|                                         |                   |                |        |       |      |  
|                                         |                   | (In thousands) |       
|ASSETS                                  
|Cash and cash equivalents                |                   | $              | 150    |       |      | $ | 100    |      
|Furniture and equipment, net             |                   |                | 1,228  |       |      |   | 1,242  |      
|Investment in and advances to subsidiary |                   |                | 46,452 |       |      |   | 36,100 |      
|Other assets                             |                   |                | 1,177  |       |      |   | 443    |      
|                                         |                   |                |        |       |      |  
|                                         |                   | $              | 49,007 |       |      | $ | 37,885 |      
|                                         |                   |                |        |       |      |  
|                                        
|LIABILITIES AND SHAREHOLDERS EQUITY    
|Accrued expenses and other liabilities   |                   | $              | 3,476  |       |      | $ | 2,298  |      
|                                         |                   |                |        |       |      |  
|                                         | Total liabilities |                |        | 3,596 |      |   |        | 2,298 | 
|Shareholders equity                     |                   |                | 45,531 |       |      |   | 35,587 |      
|                                         |                   |                |        |       |      |  
|                                         |                   | $              | 49,007 |       |      | $ | 37,885 |      
|                                         |                   |                |        |       |      |  



S-3



---



##### Table of Contents



SCHEDULE II


RTW, INC.


CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT


STATEMENTS OF INCOME


Years Ended December 31, 2004, 2003 and 2002


|                                                 |                                     |                                                                                     |       |        |        |  |       |        |        |  |        |        |        | 
|------------------------------------------------ | ----------------------------------- | ----------------------------------------------------------------------------------- | ----- | ------ | ------ |  | ----- | ------ | ------ |  | ------ | ------ | ------ | 
|                                                 |                                     | 2004                                                                                |       |        | 2003   |  |       | 2002   |       
|                                                 |                                     |                                                                                     |       |        |        |  |       |        |       
|                                                 |                                     | (In thousands)                                                                      |      
|Revenues:                                        |                                     |                                                                                     |       |        |        |  |       |        |        |  |        |       
|                                                 | Intercompany fee income             |                                                                                     | $     | 18,289 |        |  | $     | 16,617 |        |  | $      | 19,998 |       
|                                                 | Service fee revenue                 |                                                                                     |       | 633    |        |  |       | 109    |        |  |        | 22     |       
|                                                 | Investment income                   |                                                                                     |       | 104    |        |  |       | 2      |        |  |        | 41     |       
|                                                 |                                     |                                                                                     |       |        |        |  |       |        |       
|                                                 |                                     | Total revenues                                                                      |       |        | 19,026 |  |       |        | 16,728 |  |        |        | 20,061 | 
|Expenses:                                        |                                     |                                                                                     |       |        |        |  |       |        |        |  |        |       
|                                                 | General and administrative expenses |                                                                                     |       | 15,933 |        |  |       | 15,898 |        |  |        | 16,907 |       
|                                                 |                                     |                                                                                     |       |        |        |  |       |        |       
|                                                 |                                     | Income from operations                                                              |       |        | 3,093  |  |       |        | 830    |  |        |        | 3,154  | 
|                                                 | Interest expense                    |                                                                                     |       |       |        |  |       | 48     |        |  |        | 163    |       
|                                                 |                                     |                                                                                     |       |        |        |  |       |        |       
|                                                 |                                     | Income before income taxes and equity in undistributed net
    income of subsidiary |       |        | 3,093  |  |       |        | 782    |  |        |        | 2,991  | 
|                                                 | Income tax expense                  |                                                                                     |       | 879    |        |  |       | 91     |        |  |        | 1,213  |       
|                                                 |                                     |                                                                                     |       |        |        |  |       |        |       
|                                                 |                                     | Income before equity in undistributed net income of subsidiary                      |       |        | 2,214  |  |       |        | 691    |  |        |        | 1,778  | 
|Equity in undistributed net income of subsidiary |                                     |                                                                                     | 7,727 |        |        |  | 6,308 |        |        |  | 12,541 |       
|                                                 |                                     |                                                                                     |       |        |        |  |       |        |       
|                                                 |                                     | Net income                                                                          |       | $      | 9,941  |  |       | $      | 6,999  |  |        | $      | 14,319 | 
|                                                 |                                     |                                                                                     |       |        |        |  |       |        |       



S-4



---



##### Table of Contents



SCHEDULE II


RTW, INC.


CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT


STATEMENTS OF CASH FLOWS


Years Ended December 31, 2004, 2003 and 2002


|                                                     |                                                                                |                                                                                       |                                      |                                        |                                                     |        |        |        |       |        |        |        |        |         |        |        |  
|---------------------------------------------------- | ------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------- | ------------------------------------ | -------------------------------------- | --------------------------------------------------- | ------ | ------ | ------ | ----- | ------ | ------ | ------ | ------ | ------- | ------ | ------ | -
|                                                     |                                                                                | 2004                                                                                  |                                      |                                        | 2003                                                |        |        | 2002   |      
|                                                     |                                                                                |                                                                                       |                                      |                                        |                                                     |        |        |        |      
|                                                     |                                                                                | (In thousands)                                                                        |                                     
|Cash Flows from Operating Activities:                |                                                                                |                                                                                       |                                      |                                        |                                                     |        |        |        |       |        |        |       
|                                                     | Reconciliation of net income to net cash provided by operating
    activities: |                                                                                       |                                      |                                        |                                                     |        |        |        |       |        |        |        |       
|                                                     |                                                                                | Net income                                                                            |                                      | $                                      | 9,941                                               |        |        | $      | 6,999 |        |        | $      | 14,319 |        
|                                                     |                                                                                | Adjustments to reconcile net income to net cash provided by
    operating activities: |                                      |                                        |                                                     |        |        |        |       |        |        |        |        |        
|                                                     |                                                                                |                                                                                       | Depreciation and amortization        |                                        |                                                     | 458    |        |        |       | 551    |        |        |        | 605     |       
|                                                     |                                                                                |                                                                                       | Equity in net income from subsidiary |                                        |                                                     | (7,727 | )      |        |       | (6,308 | )      |        |        | (12,541 | )     
|                                                     |                                                                                |                                                                                       | Deferred income taxes                |                                        |                                                     | 57     |        |        |       |       |        |        |        | 351     |       
|                                                     |                                                                                |                                                                                       | Changes in assets and liabilities:   |                                        |                                                     |        |        |        |       |        |        |        |        |         |       
|                                                     |                                                                                |                                                                                       |                                      | Accrued expenses and other liabilities |                                                     |        | 1,178  |        |       |        | (539   | )      |        |         | (1,318 | )     
|                                                     |                                                                                |                                                                                       |                                      | Other, net                             |                                                     |        | (1,386 | )      |       |        | (1,271 | )      |        |         | 1,610  |       
|                                                     |                                                                                |                                                                                       |                                      |                                        |                                                     |        |        |        |      
|                                                     |                                                                                |                                                                                       |                                      |                                        | Net cash provided by (used in) operating activities |        |        | 2,521  |       |        |        | (568   | )      |         |        | 3,026  |  
|Cash Flows from Investing Activities:                |                                                                                |                                                                                       |                                      |                                        |                                                     |        |        |        |       |        |        |       
|                                                     | Investment in and advances to subsidiary                                       |                                                                                       |                                      | (2,625                                 | )                                                   |        |        | 1,725  |       |        |        | 892    |       
|                                                     | Purchases of furniture and equipment                                           |                                                                                       |                                      | (444                                   | )                                                   |        |        | (175   | )     |        |        | (630   | )     
|                                                     | Disposals of furniture and equipment                                           |                                                                                       |                                      |                                       |                                                     |        |        | 22     |       |        |        | 270    |       
|                                                     |                                                                                |                                                                                       |                                      |                                        |                                                     |        |        |        |      
|                                                     |                                                                                |                                                                                       |                                      |                                        | Net cash (used in) provided by investing activities |        |        | (3,069 | )     |        |        | 1,572  |        |         |        | 532    |  
|Cash Flows from Financing Activities:                |                                                                                |                                                                                       |                                      |                                        |                                                     |        |        |        |       |        |        |       
|                                                     | Payments on notes payable                                                      |                                                                                       |                                      |                                       |                                                     |        |        | (1,250 | )     |        |        | (3,250 | )     
|                                                     | Stock options exercised                                                        |                                                                                       |                                      | 533                                    |                                                     |        |        | 19     |       |        |        |       |       
|                                                     | Issuance of common stock under ESPP                                            |                                                                                       |                                      | 65                                     |                                                     |        |        | 43     |       |        |        | 10     |       
|                                                     | Retirement of common stock                                                     |                                                                                       |                                      |                                       |                                                     |        |        | (37    | )     |        |        | (79    | )     
|                                                     |                                                                                |                                                                                       |                                      |                                        |                                                     |        |        |        |      
|                                                     |                                                                                |                                                                                       |                                      |                                        | Net cash provided by (used in) financing activities |        |        | 598    |       |        |        | (1,225 | )      |         |        | (3,319 | )
|                                                     |                                                                                |                                                                                       |                                      |                                        |                                                     |        |        |        |      
|Net Increase (Decrease) in Cash and Cash Equivalents |                                                                                |                                                                                       | 50                                   |                                        |                                                     |        | (221   | )      |       |        | (239   | )     
|Cash and Cash Equivalents at Beginning of Year       |                                                                                |                                                                                       | 100                                  |                                        |                                                     |        | 321    |        |       |        | 82     |       
|                                                     |                                                                                |                                                                                       |                                      |                                        |                                                     |        |        |        |      
|Cash and Cash Equivalents at End of Year             |                                                                                | $                                                                                     | 150                                  |                                        |                                                     | $      | 100    |        |       | $      | 321    |       
|                                                     |                                                                                |                                                                                       |                                      |                                        |                                                     |        |        |        |      
|Supplemental Disclosure of Cash Flow Information:    |                                                                                |                                                                                       |                                      |                                        |                                                     |        |        |        |       |        |        |       
|                                                     | Cash paid (received) during the year for:                                      |                                                                                       |                                      |                                        |                                                     |        |        |        |       |        |        |        |       
|                                                     |                                                                                | Interest                                                                              |                                      | $                                      | 0                                                   |        |        | $      | 27    |        |        | $      | 138    |        
|                                                     |                                                                                |                                                                                       |                                      |                                        |                                                     |        |        |        |      
|                                                     |                                                                                | Income tax (refunds) payments                                                         |                                      | $                                      | (357                                                | )      |        | $      | (9    | )      |        | $      | 298    |        
|                                                     |                                                                                |                                                                                       |                                      |                                        |                                                     |        |        |        |      



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SCHEDULE II


RTW, INC.


CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT


NOTES TO CONDENSED FINANCIAL STATEMENTS


Years Ended December 31, 2004, 2003 and 2002


Note 1  Accounting Policies




Note 2  Related Party Transactions








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SCHEDULE III


RTW, INC.


SUPPLEMENTAL INFORMATION CONCERNING INSURANCE OPERATIONS


|     |  |                |       |              |            |   |         |              |  |   |          |  |            |          |                 |                     |            |                      |              |         |             |   |       |            |  |             |        |  |            |   |        |           |  |   |          |  |  |   |        |  |  |   |        |  |  |   |        | 
|---- |  | -------------- | ----- | ------------ | ---------- | - | ------- | ------------ |  | - | -------- |  | ---------- | -------- | --------------- | ------------------- | ---------- | -------------------- | ------------ | ------- | ----------- | - | ----- | ---------- |  | ----------- | ------ |  | ---------- | - | ------ | --------- |  | - | -------- |  |  | - | ------ |  |  | - | ------ |  |  | - | ------ | 
|     |  |                |       | (Column C)   |            |   |         |              |  |   |          |  |            |          |                 |                     |            |                      |              |         |             |   |      
|     |  |                |       | Reserves for |            |   |         |              |  |   |          |  |            |          | Claim and claim |                     |            |                      |              |         |             |   |       |           
|     |  |                |       | Unpaid       |            |   |         |              |  |   |          |  | Investment |          |                 | settlement expenses |            |                      | Amortization |         |             |   |       |            |  |            
|     |  | Deferred       |       |              | Claim and  |   |         | Discount, if |  |   |          |  |            |          | Income and      |                     |            | incurred related to: |              |         | of Deferred |   |       | Paid Claim |  |             |        |  |           
|     |  | Policy         |       |              | Claim      |   |         | Any,         |  |   |          |  |            |          | Net Realized    |                     |            |                      |              |         | Policy      |   |       | and Claim  |  |             | Other  |  |            |  
|     |  | Acquisition    |       |              | Settlement |   |         | Deducted in  |  |   | Unearned |  |            | Earned   |                 |                     | Investment |                      |              | Current |             |   | Prior |            |  | Acquisition |        |  | Settlement |   |        | Operating |  |   | Premiums | 
|Year |  | Costs          |       |              | Expenses   |   |         | Column C     |  |   | Premiums |  |            | Premiums |                 |                     | Gains      |                      |              | Year    |             |   | Years |            |  | Costs       |        |  | Expenses   |   |        | Expenses  |  |   | Written  | 
|     |  |                |       |              |            |   |         |              |  |   |          |  |            |          |                 |                     |            |                      |              |         |             |   |       |            |  |             |        |  |            |   |        |           |  |   |          | 
|     |  | (In thousands) |      
|2004 |  | $              | 1,112 |              |            | $ | 156,123 |              |  | $ | 344      |  |            | $        | 10,497          |                     |            | $                    | 53,682       |         |             | $ | 4,438 |            |  | $           | 42,583 |  |            | $ | (7,047 | )         |  | $ | 6,045    |  |  | $ | 35,713 |  |  | $ | 9,204  |  |  | $ | 54,999 | 
|2003 |  | $              | 926   |              |            | $ | 150,044 |              |  | $ | 505      |  |            | $        | 9,180           |                     |            | $                    | 46,290       |         |             | $ | 5,157 |            |  | $           | 33,954 |  |            | $ | (6,698 | )         |  | $ | 6,878    |  |  | $ | 38,118 |  |  | $ | 10,789 |  |  | $ | 48,340 | 
|2002 |  | $              | 736   |              |            | $ | 181,262 |              |  | $ | 438      |  |            | $        | 7,130           |                     |            | $                    | 60,264       |         |             | $ | 6,816 |            |  | $           | 48,889 |  |            | $ | (8,356 | )         |  | $ | 6,304    |  |  | $ | 42,688 |  |  | $ | 9,984  |  |  | $ | 57,656 | 

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SCHEDULE IV


RTW, INC.


REINSURANCE


Years ended December 31, 2004, 2003 and 2002


|            |                                  |                 |   |          |            |  |            |           |  |     |           |   |        |  |   |        |  |  |  |      |  
|----------- | -------------------------------- | --------------- | - | -------- | ---------- |  | ---------- | --------- |  | --- | --------- | - | ------ |  | - | ------ |  |  |  | ---- | -
|            |                                  | Premiums Earned |   |          |           
|            |                                  |                 |   |          | Percentage | 
|            |                                  |                 |   | Ceded to |            |  | Assumed    |           |  |     | of Amount |  
|            |                                  |                 |   | Other    |            |  | from Other |           |  |     | Assumed   |  
|Description |                                  | Direct          |   |          | Companies  |  |            | Companies |  | Net |           |   | to Net | 
|            |                                  |                 |   |          |            |  |            |           |  |     |           |   |        | 
|            |                                  | (In thousands)  |  
|2004        |                                  |                 |   |          |            |  |            |           |  |     |           |   |        |  |   |        |  |  |  |     
|            | PREMIUMS  Workers Compensation |                 | $ | 63,370   |            |  | $          | 9,688     |  |     | $         |  |        |  | $ | 53,682 |  |  |  | 0.00 | %
|2003        |                                  |                 |   |          |            |  |            |           |  |     |           |   |        |  |   |        |  |  |  |     
|            | PREMIUMS  Workers Compensation |                 | $ | 54,431   |            |  | $          | 8,141     |  |     | $         |  |        |  | $ | 46,290 |  |  |  | 0.00 | %
|2002        |                                  |                 |   |          |            |  |            |           |  |     |           |   |        |  |   |        |  |  |  |     
|            | PREMIUMS  Workers Compensation |                 | $ | 62,506   |            |  | $          | 2,242     |  |     | $         |  |        |  | $ | 60,264 |  |  |  | 0.00 | %

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SCHEDULE V


RTW, INC.


VALUATION AND QUALIFYING ACCOUNTS


Years ended December 31, 2004, 2003 and 2002


|            |                                 |                |   |           |            |  |   |            |  |            |   |            |        |  |   |     |  |  |   |     | 
|----------- | ------------------------------- | -------------- | - | --------- | ---------- |  | - | ---------- |  | ---------- | - | ---------- | ------ |  | - | --- |  |  | - | --- | 
|            |                                 |                |   | Additions |            |  |   |           
|            |                                 |                |   |           |            |  |   |           
|            |                                 | Balance at     |   |           | Charged to |  |   | Charged to |  |            |   | Balance at |       
|            |                                 | beginning      |   |           | costs and  |  |   | other      |  |            |   | end of     |       
|Description |                                 | of period      |   |           | expenses   |  |   | accounts   |  | Write-offs |   |            | period | 
|            |                                 |                |   |           |            |  |   |            |  |            |   |            |        | 
|            |                                 | (In thousands) |  
|2004        |                                 |                |   |           |            |  |   |            |  |            |   |            |        |  |   |     |  |  |   |    
|            | Allowance for Doubtful Accounts |                | $ | 225       |            |  | $ | 108        |  |            | $ |           |        |  | $ | 243 |  |  | $ | 90  | 
|2003        |                                 |                |   |           |            |  |   |            |  |            |   |            |        |  |   |     |  |  |   |    
|            | Allowance for Doubtful Accounts |                | $ | 220       |            |  | $ | 507        |  |            | $ |           |        |  | $ | 502 |  |  | $ | 225 | 
|2002        |                                 |                |   |           |            |  |   |            |  |            |   |            |        |  |   |     |  |  |   |    
|            | Allowance for Doubtful Accounts |                | $ | 436       |            |  | $ | 98         |  |            | $ |           |        |  | $ | 314 |  |  | $ | 220 | 

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