·	bodily injury liability coverage, which protects insureds if they are involved in accidents that cause bodily injuries to others, and also provides insureds with a legal defense if they are sued by others for covered damages; and

·	property damage liability coverage, which protects insureds if they are involved in accidents that cause damage to another's property, and also provides insureds with a legal defense if they are sued by others for covered damages.

·	collision coverage, which pays for damages to the insured's vehicle when damaged by a collision with another vehicle or object, regardless of fault;

·	comprehensive coverage, which pays for damages to the insured's vehicle when damaged as a result of causes other than collision, such as vandalism, theft, wind, hail or water; and

·	medical payments coverage, which pays for an insured’s medical or funeral expenses related to an automobile accident.

		Years Ended December 31,
		2005			2004			2003
California			46.3	%		56.1	%		63.5
Florida			15.2			14.3			11.1
Michigan			13.9			10.2			7.4
Texas			3.8			2.4			1.6
South Carolina			3.4			2.5			1.9
Pennsylvania			3.0			2.2			2.2
New Hampshire			2.6			1.8			1.1
Maine			2.4			1.9			1.8
Virginia			1.5			1.6			1.4
Georgia			1.5			1.6			3.2
All other states			6.4			5.4			4.8
			100.0	%		100.0	%		100.0

 

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Major Producers. Our top 10 producers, as measured by premium volume, accounted for 22.4%, 25.5% and 31.7% of our gross written premium for the years ended December 31, 2005, 2004 and 2003, respectively. In 2005, no single producer accounted for 10% or more of our gross written premium. The concentration of our business with our top producers has declined as we have increased our producer base, entered new markets, and encountered increased competition in California, resulting in a decline in production from both large and small producers. We do not have any long-term producer contracts. Nine of our 10 largest producers produce the majority of their business in California.

 

Relationships with Agents and Brokers. We sold our policies through approximately 7,720 agents and brokers with over 10,360 locations as of December 31, 2005. We devote considerable time and resources to developing and maintaining our relationships with these producers, and we endeavor to provide them with responsive services and a stable presence in their markets and competitive compensation programs. 

 

Our marketing department regularly visits and works closely with our agents and brokers in order to keep them up to date on our products and to gather information on industry trends.

 

We provide proprietary software to agents and brokers that permits them to access centralized information about their customers. In addition, we have deployed point-of-sale underwriting and policy issuance software at most of our producers’ locations. Point-of-sale underwriting technology uses Internet connectivity to obtain and verify an applicant’s underwriting and rating information as part of the application process. The producer enters the applicant’s underwriting data into a Company-provided software application, OneStepÒ or OneStep RaptorÔ. Concurrently, these software applications automatically and electronically obtain key underwriting and rating information, such as driving record and claim history, and reconcile it to the application information. In this manner, the producer can provide a final price quote to the applicant at the point of sale. If the applicant chooses to purchase the policy, producers can complete the transaction immediately. The producer can collect the payment, and the insured can leave the producer’s office with their policy and insurance identification card.

 

We employ daily, weekly, monthly and quarterly data analysis to monitor various aspects of a producer's business conduct including adherence to our underwriting policies and procedures and the profitability of the producer's business with us. We evaluate each producer on numerous key factors, including the following:

 

·	loss experience on their business with us;

 

·	violations of our underwriting guidelines;

 

·	claim timing: we terminate relationships with producers we find backdating policies to make them effective prior to the occurrence of a loss; and

 

·	business activity: we measure our producers' business activity to identify and actively manage producers that are not consistently selling our products.

 

Producer Compensation. We have designed our producer compensation programs to be competitive in each market in which we operate. At policy inception or renewal, we pay commissions at a percentage of the full term policy premium. Our producers highly value receiving the full term commission up front. If a policy cancels before its expiration date, the producer is bound contractually to return the unearned commission to us.

 

 For 2005, the only forms of compensation we paid to our producers were new and renewal commissions. In previous years and on a case-by-case basis, we had negotiated profit sharing agreements with some of our larger producers. Such agreements awarded additional compensation to producers which maintained or outperformed specified loss ratio targets and maintained an agreed amount of in-force business. Effective January 1, 2005, we discontinued these profit sharing arrangements and implemented various fixed commission tiers into which producers are placed depending upon our assessment of economies of scale, the producer's level of expertise in placing automobile insurance and the geographic scope of the producer's operations. Within each state, we intended the revised commission structure to produce a commission ratio consistent with the previous structure.

 

The ratio of commission expense to gross earned premium, including all profit sharing compensation, of which there was none in 2005, was 14.7%, 15.3% and 15.2% for the years ended December 31, 2005, 2004 and 2003, respectively. The ratio of profit sharing commission expense to gross earned premium was 0.0%, 0.6% and 0.9% for the years ended December 31, 2005, 2004 and 2003, respectively, but this factor was only a minor contributor to the decrease in the overall ratio of commission expense to gross earned premium. The decrease was primarily attributable to a shift in business mix to states other than California where marketplace commissions are lower.

 

Point-of-Sale Underwriting and Policy Issuance. We continue to make significant strides in point-of-sale underwriting. The deployment of our web-based system, OneStep, is completed or in the process of completion in four states. In 14 additional states, we have successfully deployed OneStep Raptor, our client-server point-of-sale

 

 

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quoting and underwriting system. Together, the use of OneStep and OneStep Raptor resulted in point-of-sale underwriting on approximately 99% of new business applications in the fourth quarter. By utilizing point-of-sale underwriting, policy issuance is now immediate in the states in which we have deployed it compared to an average of five days prior to our implementation of point-of-sale underwriting. In addition to reducing uprates, the efficiency gains have helped us to improve policyholder service. During 2005, we also expanded our capabilities for producers to process changes, known as endorsements, to an insured’s policy and now producers in 13 of our 21 states have this capability. 

 

Underwriting and Pricing

 

    We establish policy rates utilizing a variety of factors, including, but not limited to, vehicle type, driver age, driving record, type of coverage, miles driven, financial responsibility, prior insurance coverage and policy limits. We continuously evaluate and modify our rates in order to maintain an acceptable level of underwriting profitability.

 

We have product managers for each state in which we operate or that we are considering entering. Each product manager is responsible for monitoring our competitive position and profitability. They work closely with our pricing actuaries, marketing department and senior staff to develop or alter our product and pricing strategies.

 

Claims Handling

 

The Bristol West Claims Department currently has approximately 530 claims employees and managers located in 15 offices around the country who handle claims. Each claims office has an assigned geographic service area, but has the flexibility to handle claims from other areas as necessitated by workloads and available staff.

 

We respond quickly to reported claims. A toll-free access number allows policyholders to report claims 24 hours a day, seven days a week. Claims representatives endeavor to contact all parties involved in an accident within 24 hours of receipt of loss notification and inspect any damaged property within 72 hours of contact with the owner. Claims managers review all new claims within 24 hours of receipt of notification and provide specific instructions to the adjuster receiving the assignment.

 

We focus on prompt, accurate claims handling. Bristol West staff investigates all claims and handles most vehicle damage appraisals, with a small percentage of inspection appraisals completed by independent appraisers when warranted by the location or when Company appraisers are not available. Twenty-four in-house attorneys in seven offices defend most of the lawsuits brought against our insureds. We maintain a Special Investigation Unit with 37 employees deployed nationwide who control costs through fraud mitigation, form effective relationships with law enforcement agencies and ensure our compliance with applicable anti-fraud regulations. The Special Investigation Unit uses six anti-fraud databases and real time intelligence from law enforcement agencies to identify suspicious losses. We have a Claim Quality and Employee Development (QED) group responsible for auditing and training. The Audit Department conducts comprehensive internal audits of claim handling, focusing on procedures, financial controls, data integrity and regulatory compliance. The Training Department provides both new hire training and advanced training to experienced claims representatives.

 

Technology

 

We have substantially upgraded our information technology capabilities in recent years. Examples include:

 

Data Warehouse. We maintain an extensive proprietary database, which contains statistical records with respect to our insureds, including, among other data, the insured's rating classification, motor vehicle records, years licensed, and loss experience by each rating variable. Analysis of this data enables us to identify trends emerging in our business and to respond with changes to prices, product or underwriting guidelines.

 

Claims Administration. Our in-house claims administration system maintains all notes, diaries and related party information on each claim and provides automated on-line management reports on the number of outstanding claims and service levels. It provides a financial control and automatically generates and maintains loss and loss adjustment expense reserves. The system interfaces with a standardized estimating service and retains pictures of each appraised vehicle.

 

Point-of-Sale Underwriting. We have online point-of-sale application systems, OneStep and OneStep Raptor, and as of December 31, 2005, we were producing more than 99% of our business through these systems. We have an exclusive license to use OneStep in the non-standard automobile insurance industry through December 2009. OneStep and OneStep Raptor use technology to provide fast and accurate quotes by accessing third-party information at the point of sale, including an applicant's driving record, accident history and, where permitted by

 

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law, credit reports. This process reduces the frequency of uprates, which may occur when an application is incomplete or inaccurate. Our point-of-sale application systems permit the producer to print the policy, the identification cards and the policy declaration page as soon as the verifications are complete, usually within minutes.

 

BWProducers.com. This website provides our producers with complete access