Workers’ compensation was the fourth-largest property and casualty insurance line in the United States in 2004, according to A.M. Best. Direct premiums written in 2004 for the workers’ compensation insurance industry were approximately $54 billion, and direct premiums written for the property and casualty industry as a whole were approximately $466 billion, according to A.M. Best. Premium volume in the workers’ compensation insurance industry is estimated to have increased 11% since 2003, while the property and casualty industry experienced a 5% increase in net premiums written in 2004 compared to 2003, according to NCCI. According to NCCI, workers’ compensation medical claims costs have risen approximately 137% over the ten-year period ended December 31, 2004 driven primarily by increased utilization and prescription drug costs. According to NCCI, indemnity claim costs, which include wage replacement, have risen 87% for the ten-year period ended December 31, 2004, which is lower than the rate at which medical claim costs have risen. Unfavorable investment conditions have also adversely affected workers’ compensation insurance industry returns on equity. The ratio of investment gain on insurance transactions (including net investment income, realized gains and other income) to premiums for private carriers has declined from a high of 21% in 1998 to a projected rate of 10% in 2004, according to NCCI.

It is believed the challenges faced by the workers’ compensation insurance industry over the past decade have created significant opportunity for workers’ compensation insurers to increase the amount of business that they write. The year 2002 marked the first year in five years that private carriers in the property and casualty insurance industry experienced an increase in annual after-tax returns on surplus, including capital gains, according to NCCI. Workers’ compensation insurance industry calendar year combined ratios declined for the first time in seven years, falling from 122% (with 1.9% attributable to the September 11, 2001 terrorist attacks) to 105% in 2004 as premium rates have increased and claims frequency has declined. In addition, claims frequency has declined. From 1990 through 2003, the cumulative decline in lost-time claims frequency was 42.0%. The NCCI estimates that lost-time claims frequency declined an additional 3.4% in 2004.

The Company’s insurance encompasses a variety of options designed to fit the needs of the policyholders. The most basic insurance policy, accounting for approximately 99.0% of the Company’s gross premiums written for the year ended December 31, 2004 and the three months ended March 31, 2005, is a guaranteed cost contract. Under the Company’s guaranteed cost contracts, policyholders pay premiums based on a percentage of their payroll determined by job classification. The Company’s premium rates for these policies vary depending upon certain factors, including the type of work to be performed by employees and the general business of the policyholder. In return for premium payments, the Company assumes statutorily imposed obligations of the policyholder to provide workers’ compensation benefits to its employees. There are no policy limits on the Company’s liability for workers’ compensation claims as there are for other forms of insurance. The Company conducts a premium audit at the expiration of the policy to verify that the policyholder’s correct payroll expense and job classifications were reported.

A policyholder who desires to assume financial risk in exchange for reduced premiums may elect a deductible that makes the policyholder responsible for the first portion of any claim. The Company also offers loss sensitive plans on a limited basis, including dividend plans. These plans provide for a portion of the premium to be returned to the policyholder in the form of a dividend, based on the policyholder’s losses during the policy period.

General liability insurance is a form of casualty insurance that covers a policyholder’s liability resulting from its act or omission that causes bodily injury or property damage to a third party. With general liability insurance, the amount of a covered loss is the amount of the claim or payment made on the policyholder’s behalf, subject to the deductible, limits of liability and other features of the insurance policy. The Company offers general liability insurance coverage only to its workers’ compensation policyholders in the logging industry on a select basis.

Net premiums written for the three months ended March 31, 2005 were $66.7 million, compared to $64.1 million for the same period in 2004, an increase of 4.1%.

Net premiums earned for the three months ended March 31, 2005 were $61.9 million, compared to $52.3 million for the same period in 2004, an increase of 18.4%.

Net investment income for the three months ended March 31, 2005 was $3.7 million, compared to $2.6 million for the same period in 2004, an increase of 40.8%.

Interest expense for the three months ended March 31, 2005 was $640.0 thousand, compared to $142.0 thousand for the same period in 2004.