The workers’ compensation insurance market has historically fluctuated with periods of low premium rates and excess underwriting capacity resulting from increased competition, followed by periods of high premium rates and shortages of underwriting capacity resulting from decreased competition. These conditions, along with poor customer service and substandard loss control and claims management, have motivated businesses to self-insure against workers’ compensation claims. Large companies generally have the financial strength to meet the significant statutory requirements to self-insure, or to create their own captive insurance companies to insure these claims. Small and mid-sized companies generally lack the financial and administrative resources to do this, and in recent years have resorted to pooling their resources through the formation of self insurance groups as a means to obtain workers’ compensation insurance at acceptable rates and terms.

California has undergone a period of rapid growth in the formation of new self-insured groups. From 1999 until 2005, average workers’ compensation rates increased by nearly 50% after taking into account significant average rate decreases during the last two years. As a result of this overall increase, 26 private self-insured groups have been formed in California since 2001 when California authorized the formation of private self-insured groups.

In contrast to the California market, self-insured groups have existed in New York since the mid-1990s and the market is substantially more mature than the California market, with approximately 64 groups in existence. New York is in the process of reevaluating its regulations relating to the formation of new groups. This has led to a temporary moratorium on the formation of new groups. Following three years of relatively stable rates, the New York Workers’ Compensation Board passed a rate increase in August 2005 averaging five percent across all industry groups. This increase will become effective in October 2005, and manual rates will increase by approximately eight percent on average.

The Company manages groups in New York and California that provide workers’ compensation insurance to nursing homes, hospitals and physician groups. The Company also manages groups that provide workers’ compensation insurance to artisan contractors, including carpenters, masons, plumbers, electricians and those in other skilled trades.

The Company manages a group in New York that provides workers’ compensation insurance to companies engaged in highway-borne transportation, including local package delivery, bulk hauling of industrial commodities, milk hauling and for-hire limousine services. The Company also manages a group in New York that provides workers’ compensation insurance to companies engaged in local and regional retail grocery sales and entities involved primarily in the distribution of food products.

The Company manages a group in California that provides workers’ compensation insurance to new vehicle franchise auto dealerships. In the six months ended June 30, 2005, the Company formed a group in California that provides workers’ compensation insurance to banks. Since June 30, 2005, the Company formed a group in California that provides workers’ compensation insurance to wineries.

The groups the Company manages purchase excess workers’ compensation coverage from U.S. admitted insurers to cover claims that exceed a minimum level established by state law or regulation or by administrative determination. Typically, the Company’s managed groups purchase excess coverage for losses and loss adjustment expenses in excess of $500,000 per occurrence. This “excess coverage” purchased by the groups provides them with benefits for losses in excess of the $500,000 per occurrence liability retained by the groups.

The Company’s managed groups also purchase what is called “catastrophic coverage” for losses and loss adjustment expenses in excess of $1 million per occurrence. The catastrophic coverage purchased by its managed groups are not subject to a per occurrence limit. In addition, each of the Company’s groups also purchases coverage to insure against the risk that a large number of claims will occur and result in losses that are each less than $500,000 and that the aggregate result of such losses could exhaust their resources.

Revenues from fee-based management services for the six months ended June 30, 2005 increased 18%, or $2.5 million, to $16.4 million, from $13.9 million, for the comparable period in 2004.

Net reinsurance premiums increased 43%, or $922.2 million, to $3.0 million, for the six months ended June 30, 2005 from $2.1million for the comparable period in 2004.

Selling, general and administrative expenses increased 42%, or $2.6 million to $8.8 million for the six months ended June 30, 2005 from $6.2 million, for the comparable period in 2004.

Net income increased less than 1%, or $1.8 million, to $2.8 million for the six months ended June 30, 2005 from $2.8 million, for the comparable period in 2004.