Workers’ compensation is a statutory system under which an employer is required to pay for its employees’ medical, disability, vocational rehabilitation, and death benefits costs for work-related injuries or illnesses. Workers’ compensation was the fifth-largest property and casualty insurance line in the U.S. in 2003, according to A.M. Best. The workers’ compensation industry is estimated to have written over $42 billion in premium for 2003, which accounted for approximately 10% of the estimated $406 billion in net premiums written for the property and casualty industry in 2003, according to NCCI. According to A.M. Best, direct premiums written in 2003 for the workers’ compensation industry was approximately $50 billion, and direct premiums written for the property and casualty industry as a whole was approximately $450 billion. Premium volume in the workers’ compensation industry was up 13% in 2003 from 2002 while the entire property and casualty industry experienced a 10% increase in net premiums written in 2003 compared to 2002, according to NCCI.

California is the largest workers’ compensation insurance market in the United States. In 2003, California accounted for an estimated $15 billion written premium (net of deductible) according to the Workers’ Compensation Insurance Rating Bureau of California (“WCIRB”), or approximately 30% of the entire U.S. workers’ compensation market.

Workers’ compensation rates in California declined approximately 59% from 1993 to 1998, but rose 32% from 1998 to 2001, according to the WCIRB. Lower rates together with increases in medical and indemnity claim costs severely eroded underwriting profitability as accident year combined ratios increased from 84% in 1993 to 182% in 1999, when the ratios began to steadily decrease to 86% in 2003, according to the WCIRB.

The Company also provides workers’ compensation coverage for employers, particularly in the construction industry in California, that are party to collectively bargained workers’ compensation agreements with trade unions, also known as alternative dispute resolution, or ADR, programs. These programs use arbitration instead of litigation to resolve disputes out of court in a negotiated process.

The Company also provides workers’ compensation insurance to other employers who are obligated to pay benefits to employees under state workers’ compensation laws. The Company provides this coverage primarily for customers in the states of California, Hawaii and Alaska. The Company provides coverage under state statutes that prescribe the benefits that employers are required to provide to their employees who may be injured in the course of their employment. The Company’s policies are issued to employers. The policies provide payments to covered, injured employees of the policyholder for, among other things, temporary or permanent disability benefits, death benefits, medical benefits and hospital expenses.

The Company distributes its products primarily by identifying independent brokers with well-established maritime or construction expertise. The Company currently has a network of approximately 67 insurance brokers. The Company does employ sales representatives or use third-party managing general agents. The licensed insurance brokers with whom the Company contracts are compensated by a commission set as a percentage of premiums.

Net investment income was $1.6 million for the nine months ended September 30, 2004 compared to the Company’s predecessor’s $1.7 million for the nine months ended September 30, 2003.

Service income was $3.0 million for the nine months ended September 30, 2004 compared to the predecessor’s $0.7 million for the nine months ended September 30, 2003.

Loss and loss adjustment expenses were $34.8 million for the nine months ended September 30, 2004 compared to the predecessor’s loss and loss adjustment expenses of $25.4 million for the nine months ended September 30, 2003.