The property and casualty insurance industry provides protection from pre-specified loss events, such as damage to property or liability claims by third parties. Property and casualty insurance can be broadly classified into personal lines, in which insurance is provided to individuals, and commercial lines, in which insurance is provided to business enterprises. In the U.S., personal and commercial insurance products are written in admitted and non-admitted markets.

The property and casualty industry historically has been subject to cyclical fluctuations in pricing and availability of insurance coverage. Markets characterized by excess underwriting capital feature intense price competition, erosion of underwriting discipline and poor operating performance. These market conditions usually lead to a period of diminished underwriting capacity after insurance companies exit unprofitable lines and exhibit greater underwriting discipline, increase premium rates and implement more restrictive policy terms and conditions.

Beginning in 2001, the insurance market in Texas was disrupted by losses related to property mold infestation. At that time, many national insurance carriers elected to exit the personal property insurance business in the region. Furthermore, poor underwriting results, low interest rates and weak investment returns over the past several years caused the carriers who remained in the region to become more risk averse in their underwriting strategy. These factors resulted in higher premium rates, more selectivity in risks insured and a reduction in coverages offered. As a result, the Texas insurance market experienced increased premium rates and policy terms and conditions became more stringent for personal property insurance and other business lines.

In 2003, in response to this rapid increase in the cost of personal property insurance following the mold crisis, the Texas Department of Insurance issued an order requiring insurance company groups in Texas to lower their homeowners rates by an average of 12.5%.

The Company’s personal lines products include homeowners, low-value dwelling, dwelling fire, standard auto, nonstandard auto and umbrella coverages. The Company tailors its personal lines products sold through independent agents to meet the needs of policyholders located in underserved geographic and demographic markets within the Southwestern region.

For its commercial lines products, the Company focuses on specific classes of business in service industries that are generally underserved by the insurance industry, such as garages, family-owned restaurants and artisan contractors. The Company’s commercial lines products currently include commercial package, auto, workers’ compensation, property, casualty, farm and ranch and umbrella coverages.

Through its unaffiliated managing general agencies, or MGAs, the Company currently underwrites programs covering commercial auto, light commercial casualty, prize indemnification, collateral indemnity, employers’ nonsubscriber policies and nonstandard personal auto risks. The Company writes these programs through both its admitted and non-admitted insurance companies.

The Company writes primarily personal and commercial auto insurance policies in Texas on behalf of several national and regional insurance carriers through its wholly-owned subsidiaries and controlled affiliates, then cedes the entire risk under these policies to these carriers in exchange for a fronting fee.

Texas county mutual insurance companies have advantages over other types of insurance companies writing personal and commercial auto policies in the state. Among other benefits, county mutual insurers are granted greater rate flexibility by statute. The Company limits the carriers for whom it provides fronting services to those with A.M. Best ratings of “A- (Excellent)” or better. The Company does not establish any reserves for losses or loss adjustment expenses that might arise as a result of claims made under these policies.

Consolidated net written premiums of $243.9 million for the year ended December 31, 2004, were 11.2% lower than net written premiums of $274.7 million for the year ended December 31, 2003.

Consolidated net insurance premiums earned of $249.2 million for the year ended December 31, 2004, were 8.8% lower than net insurance premiums earned of $273.2 million for the year ended December 31, 2003.

The consolidated net loss ratio of 55.6% for the year ended December 31, 2004, declined 13.0 points from the net loss ratio of 68.6% for the year ended December 31, 2003.

Net realized gains were $1.1 million for the year ended December 31, 2004, and $3.6 million for the year ended December 31, 2003.