The Redwoods Group 2014 Financial Audit

The Redwoods Group, Inc. Audited Consolidated Financial Statements Years ended December 31, 2014 and 2013 with Report of Independent Auditors

The Redwoods Group, Inc. Audited Consolidated Financial Statements Years ended December 31, 2014 and 2013

Contents

Report of Independent Auditors .....................................................................................................................................................................................

1 Audited Consolidated Financial Statements

.....................................................................................................................................................................................

2 Consolidated Balance Sheets Consolidated Statements of Comprehensive Income .....................................................................................................................................................................................

3 Consolidated Statements of Changes in Stockholders' Equity .....................................................................................................................................................................................

4 Consolidated Statements of Cash Flows .....................................................................................................................................................................................

5 Notes .................................................................................................................................................................................... to Consolidated Financial Statements 6 - 19 Supplemental Schedules

.....................................................................................................................................................................................

20 Report of Independent Auditors on Accompanying Information Consolidating ....................................................................................................................................................................................

Balance Sheets 21 - 22 Consolidating Statements of Comprehensive Income .....................................................................................................................................................................................

23

Report of Independent Auditors Board of Directors The Redwoods Group, Inc. We have audited the accompanying consolidated financial statements of The Redwoods Group, Inc. (the "Company") and its subsidiaries which comprise the consolidated balance sheets as of December 31, 2014 and 2013, and the related consolidated statements of comprehensive income, changes in stockholders’ equity and cash flows for years then ended and the related notes to the consolidated financial statements.

Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion.

An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company and its subsidiaries as of December 31, 2014 and 2013 and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Raleigh, North Carolina May 6, 2015

The Redwoods Group, Inc. Consolidated Balance Sheets As of December 31, 2014 2013 Assets Cash and cash equivalents Investments Restricted cash Premiums and commissions receivable Prepaid expenses Deferred income taxes, net Other current assets Total current assets Property and equipment, net Investments - other Property held for investment Deferred income taxes, long-term, net Other long-term assets Total assets

$

$

Liabilities and stockholders' equity Liabilities: Accounts payable Funds held for others Premiums and commissions payable Accrued expenses Notes payable Deferred rent Stock repurchase payable Deferred revenue Total current liabilities Stock repurchase payable Deferred revenue, long-term Deferred compensation Deferred rent Other Total liabilities

$

Stockholders' equity: Common stock; $0.01 par value, 1,000,000 shares authorized and 453,340 and 455,377 shares issued and 437,651 and 439,688 shares outstanding, respectively Treasury stock Additional paid-in capital Retained earnings Accumulated other comprehensive income Total Redwoods Group stockholders' equity Non-controlling interests Total stockholders' equity Total liabilities and stockholders' equity

$

170,998 1,279,418 8,411,268 592,653 410,493 215,806 11,080,636 278,729 376,794 262,741 342,940 227,748 12,569,588

$

208,851 1,279,418 6,685,869 187,765 404,675 6,274 55,103 1,040,056 9,868,011 39,436 201,649 176,966 419,036 10,705,098

$

4,533 (269,215) 1,239,393 432,326 1,407,037 457,453 1,864,490 12,569,588 $

See accompanying notes to consolidated financial statements

2

$

500,938 107,919 3,539,613 7,518,221 315,480 122,969 158,050 12,263,190 368,587 368,497 755,622 664,271 850,562 15,270,729

211,382 3,539,613 5,826,640 209,642 18,592 41,958 1,121,256 10,969,083 41,958 213,438 776,799 419,504 6,233 12,427,015

4,554 (269,215) 1,094,679 1,434,422 5,172 2,269,612 574,102 2,843,714 15,270,729

The Redwoods Group, Inc. Consolidated Statements of Comprehensive Income Years ended December 31, 2014 2013 Revenues Commissions and fees Investment and other income Total revenues

$

Expenses Commission expense Compensation and benefits Operating and administrative Depreciation and amortization Total expenses

11,063,933 $ 1,271,151 12,335,084

11,659,986 533,972 12,193,958

1,533,849 7,297,705 3,937,737 154,904 12,924,195

1,611,696 7,209,757 2,952,692 160,472 11,934,617

Income before income taxes

(589,111)

259,341

Income tax (benefit) expense

(110,168)

101,905

(478,943)

157,436

Net (loss) income Less: Net income attributable to non-controlling interest

29,886

Net (loss) income applicable to The Redwoods Group, Inc.

(508,829)

Other comprehensive income: unrealized holding (losses) gains arising during period, net of tax benefit (expense) of $0 and $2,198, respectively Reclassification to earnings of (gains) losses during the period, net of tax (benefit) expense of $(3,307) and $0, respectively Total comprehensive income

(5,172)

$

(514,001) $

See accompanying notes to consolidated financial statements

3

157,436

(3,438) -

153,998

The Redwoods Group, Inc. Consolidated Statements of Changes in Stockholders' Equity

Balance at January 1, 2013

Common Stock

Treasury Stock

Additional Paid-in Capital

$

$

$

Net income Stock grants, including realized income tax benefits of $6,454 Stock issued Stock redeemed Stock option expense Initial consolidating entries Other comprehensive income

-

$

4,533

$

1,239,393

(508,829) (113,018) (499,879) 119,630 $

432,326

See accompanying notes to the consolidated financial statements

4

8,610

$

-

1,434,422

153,222 1,195 (21,503) 11,800 -

(269,215) $

$

(272,157) -

-

-

1,549,143 157,436

1,094,679

-

66 1 (88) -

$

118,416 15,401 (52,369) 29,500 -

(269,215)

-

983,731 -

(269,215) -

4,554

Net (loss) income Stock grants, including realized income tax expense of $0 Stock issued Stock redeemed Stock option expense Dividends declared and paid Return of capital Other comprehensive income

-

90 9 (229) -

Balance at December 31, 2013

Balance at December 31, 2014

4,684

Retained Earnings

Accumulated Other Comprehensive Non-controlling Income interests $

-

2,546,168 157,436

(3,438)

574,102 -

5,172

574,102

-

29,886

(478,943)

(6,535) (140,000) -

153,288 1,196 (134,609) 11,800 (506,414) (20,370) (5,172)

(5,172) $

-

Total

-

$

457,453

118,506 15,410 (324,755) 29,500 304,887 (3,438) 2,843,714

$

1,864,490

The Redwoods Group, Inc. Consolidated Statements of Cash Flows Years ended December 31, 2014 2013 Cash flows from operating activities Net (loss) income

$

Adj. to reconcile net income to net cash from operating activities Depreciation and amortization expense Amortization of bond discount Stock grants Stock options Deferred tax effects of unrealized capital gains Gain on sale or disposal of assets, net Net realized gain on investments Net gain from investment in affiliate Services provided to affiliate Net change in operating assets and liabilities: Premiums and commissions receivable Prepaid expenses Other assets Deferred income taxes Accounts payable Premiums and commissions payable Accrued expenses Income taxes payable Deferred revenue Deferred compensation Deferred rent Net cash from operating activities

(478,943) $

157,436

154,904 153,288 11,800 (459,477) (285,861) (8,297) -

160,472 (75) 118,506 29,500 2,198 (8,675) (71,947) (238,595) (24,621)

(893,047) (277,173) 565,058 33,807 (2,531) 859,229 (28,110) (92,989) (599,833) 5,806 (1,342,369)

(382,045) (136,784) (143,548) (27,636) 106,670 502,030 14,454 (114,488) (25,118) 70,744 48,719 37,197

(42,186) 6,644 817,804 782,262

(119,593) 57,115 1,191,968 1,129,490

1,196 (123,986) 1,648,884 (1,262,801) (33,126) 230,167

15,410 (366,710) 310,000 (828,427) (869,727)

Cash flows from investing activities Purchase of property and equipment Proceeds from disposal of property and equipment Proceeds from sale of investments Net cash from investing activities

Cash flows from financing activities Proceeds from issuance of common stock Cost of common stock repurchased Borrowings under line of credit and financing Payment on line of credit and financing Dividends declared and paid Net cash from financing activities Net change in cash and cash equivalents Cash and cash equivalents from initial consolidation of affiliate Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year

$

(329,940) 500,938 170,998 $

296,960 154,228 49,750 500,938

Supplemental disclosures Interest paid Income tax paid

$ $

16,782 375

See accompanying notes to consolidated financial statements

5

$ $

4,913 250,000

The Redwoods Group, Inc. Notes to Consolidated Financial Statements Years ended December 31, 2014 and 2013 Note A - Organization and Significant Accounting Policies Organization The Redwoods Group, Inc. (the "Company") was formed in 1997. The Company is a managing underwriter of property, liability and workers' compensation insurance coverage provided by insurance carriers for the Company's programs for Young Men's Christian Associations ("YMCAs"), Jewish Community Centers ("JCCs"), and not-for-profit camps ("Camps") throughout the United States.

Premiums written under the Company's YMCA, JCC, and Camps programs amounted to $43.9 million and $48.6 million during calendar years 2014 and 2013, respectively. The Company has agreements with insurance carriers through which it provides underwriting, policy administration and claims administration services and receives commissions and fees which are normally paid when policy premiums are collected. The Company's home office is in Morrisville, North Carolina.

The Redwoods Group Foundation (the "Foundation") is sponsored by the Company. The Foundation is a non-profit organization that works to spread preventive safety solutions that protect and save lives. As of December 31, 2014 and 2013, the Company had an intercompany receivable from the Foundation for $0 and $86,250, respectively. The Company reclassified an amount due from the Foundation of $378,393 to a contribution expense during 2014.

On December 31, 2012, the Company purchased 100% of BWS Durham, LLC ("BWS"), a limited liability company, for $500,246. BWS' main asset is an office building in Durham, NC that was rented to a third party for the entirety of 2013 and 2014. During 2014, BWS sold their main asset and filed for dissolution effective December 31, 2014. Refer to Note B for further information.

Effective December 27, 2013, the Company holds a controlling interest (65%) in Redwoods Managers, Inc. ("RMI"). RMI's primary business plan is to invest in program administrators and to help them improve their program management expertise and their operating and risk-bearing results. Refer to Note B. Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with GAAP. Preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The accompanying consolidated financial statements include the accounts of the Company, BWS (to its dissolution on December 31, 2014) and RMI (effective December 31, 2013). Intercompany activity and balances from the effective date each entity qualifies for consolidation have been eliminated in consolidation.

6

The Redwoods Group, Inc. Notes to Consolidated Financial Statements (Continued) Note A - Organization and Significant Accounting Policies (continued) Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less, including money market funds, to be cash and cash equivalents. The Company maintains certain cash and cash equivalent balances that exceed FDIC insured limits, which management considers to be a normal business risk.

Restricted Cash and Funds Held for Others Restricted cash represents premiums collected by the Company that are not yet due to the insurance carriers. The corresponding liability to the insurance carriers is reported as funds held for others. The Company also maintains certain cash accounts, which consist of insurance carrier funds advanced for the payment of claims, that are not reflected in the accompanying balance sheets. The amount of such balances at December 31, 2014 and 2013 were $6,504,760 and $3,146,094, respectively. The inclusion of such accounts in the balance sheets would result in an increase to restricted cash and a corresponding increase to funds held for others, with no net impact on reported stockholders' equity.

Fair Value of Investments GAAP provides guidance for measuring assets and liabilities at fair value and establishes a threelevel hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1), the next priority to quoted prices for identical assets and liabilities in inactive markets or similar assets and liabilities in active markets (Level 2), and the lowest priority to unobservable inputs (Level 3).

Investments The Company designates investments in debt securities as available-for-sale and, accordingly, reports these investments at fair value with unrealized holding gains and losses reported as other comprehensive income, net of estimated tax. Fair values for the Company's debt securities are based on average bid prices of identical or similar issues with the same life and expected yields (Level 2). Bond premiums or discounts are amortized over the life of the bond using the constant yield method. The Company sold their debt securities during 2014, resulting in a realized gain of $5,172, net of tax. Prior to December 31, 2013, the Company's investment in RMI was accounted for on the equity method. The Company's investment in a residential condominium is reflected at cost and is being depreciated using the straight-line method over an estimated useful life of 27.5 years. BWS held a building which was reflected at cost and was being depreciated using the straight-line method over an estimated useful life of 39 years. BWS sold the building during 2014 and filed for dissolution effective December 31, 2014. This resulted in a realized gain of $280,689, of which, $7,017 was attributable to the non-controlling interest. The Company sold their 9% holdings in an unconsolidated limited liability company real estate venture during 2013, resulting in a realized gain of $71,947. Investments - other at December 31, 2014 and 2013 include an investment RMI has in an insurance broker, which is recorded under the equity method of accounting. See Note B for further information.

7

The Redwoods Group, Inc. Notes to Consolidated Financial Statements (Continued) Note A - Organization and Significant Accounting Policies (continued) Investments (continued) Realized gains and losses on the disposition of investments are determined using the specific identification basis. Realized gains of $285,861 were recognized on the disposition of investments during the year ended December 31, 2014. Realized gains of $71,947 were recognized on the disposition of investments during the year ended December 31, 2013.

Unrealized losses on investments in debt securities, which are deemed other than temporary, are charged to income when such determination is made. All other invested assets are subject to various impairment testing requirements depending on the nature of the investment and accounting method used for the investment. No impairment of invested assets (including other than temporary impairment of debt securities) was recorded during 2014 and 2013.

Premiums and Commissions Receivable The Company bills and collects insurance premiums for the insurance carriers. For the applicable insurance policies, the Company is required to remit premiums to the insurance carriers, net of the Company's commission, regardless of whether or not the Company has collected such premiums when due. Management continually monitors the collectability of receivables, and amounts specifically identified as uncollectible are charged to expense in the year the determination is made. Based upon the Company's past history of negligible uncollectible accounts and management's assessment of its current receivables, no allowance for doubtful accounts has been provided in these financial statements.

Property and Equipment Property and equipment are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of assets, which range from 3 to 7 years.

Commission Revenue and Expense Recognition The Company records commission and fee revenues on policies and commission expense to be paid to agents as of the date that the policies are written. Policy cancellations are not material; therefore, a provision for potential refunds of commissions has not been provided. Premium adjustments, including policy cancellations, are recorded as they occur.

Claim Administration Fees The Company is paid a fee by insurance companies to administer policy claims for the duration of the claims. The Company defers these fee revenues and earns the fees over the period that claims services are expected to be provided, based upon actual historical data.

8

The Redwoods Group, Inc. Notes to Consolidated Financial Statements (Continued) Note A - Organization and Significant Accounting Policies (continued) Income Taxes Current income taxes are based upon the fiscal year's income that is taxable for federal and state tax reporting purposes. Deferred tax assets and liabilities are recognized for the tax consequences attributable to temporary differences between the GAAP carrying value of assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company considers uncertain tax positions during the preparation of its income tax provision and management does not believe any significant income tax uncertainties exist as of December 31, 2014 and 2013. The Company utilized no tax planning strategies in 2014 or 2013.

Stock Grants As discussed in further detail in Note H, the Company issued stock grant agreements to certain management personnel. The fair value of shares granted is determined on the date shares are awarded, and compensation expense is recorded over the requisite vesting period with a corresponding credit to additional paid in capital. Share valuation at the date of grant is estimated based upon the Company's annual financial statements, using industry multiples, and is discounted to reflect the stock's limited marketability.

Stock Options As discussed further in Note I, the Company granted options, exercisable at a future date, to certain management personnel to purchase common stock. The Company accounts for the stock options using the intrinsic value method. The Company records compensation expense that represents the difference between exercise price and the current company stock value multiplied by the number of stock option shares outstanding. Additionally, the Company records a corresponding credit to additional paid in capital.

Subsequent Events The Company evaluated subsequent events for disclosure and recognition through May 6, 2015, the date on which these consolidated financial statements were available to be issued, and considered any relevant matters in the preparation of the consolidated financial statements and related notes.

The Company entered into an Agreement and Plan of Merger ("Agreement") on March 27, 2015 with United States Fire Insurance Company, a Delaware corporation, and part of the Crum & Forster family of companies (ultimate parent Fairfax Financial Holdings Limited). Pursuant to the Agreement, all of the outstanding stock of the Company will be transferred and the Company will become part of the Crum & Forster family of companies. This transaction closed on April 10, 2015.

9

The Redwoods Group, Inc. Notes to Consolidated Financial Statements (Continued) Note A - Organization and Significant Accounting Policies (continued) Subsequent Events (continued) On March 20, 2015, the Company distributed property held for investment, with a carrying value of $262,741 at December 31, 2014, to shareholders of the Company. The Company distributed other property and equipment, with a carrying value of $53,630 at December 31, 2014, to the same shareholders. These transactions were treated as compensation expense.

In regards to the Company’s deferred compensation plan (Note F), the Company settled the remaining deferred compensation agreement with a former executive on March 25, 2015 for $176,208.

As disclosed in Note H, the Company had 9,200 stock shares granted but not vested as of December 31, 2014. These stock grants automatically vested on March 27, 2015.

On April 9, 2015, the Company entered into a stock purchase and redemption agreement with a shareholder of the Company to sell the Company’s 65% ownership interest (1,110,000 shares) in Redwoods Managers, Inc. Certain shares were purchased at a price of $285,950. The balance of the shares were redeemed in exchange for prepaid services of $154,622 and $644,584 in cash consideration that would otherwise have been payable as a result of the Agreement.

As discussed in Note I, the Company granted options to certain management personnel to purchase common stock. During the first quarter of 2015, 20,000 shares were exercised at a total purchase price of $333,000.

Note B - Investments As of December 31, 2014 and 2013, the Company owns a residential condominium real estate property in Chapel Hill, North Carolina, which it paid $302,106. The Company rents the property and as such, it is classified as property held for investment. The Company recognized $10,986 in depreciation expense during both 2014 and 2013. The carrying value of the residential condominium is $262,741 and $273,726 as of December 31, 2014 and 2013, respectively.

10

The Redwoods Group, Inc. Notes to Consolidated Financial Statements (Continued) Note B - Investments (continued) The Company did not own any investments in debt securities at December 31, 2014. Amortized cost and fair value of the Company's investment in debt securities at December 31, 2013 are summarized as follows: Gross Gross Amortized Unrealized Unrealized At December 31,2013: Cost Gains Losses Fair Value Available-for-sale: Bonds - Obligations of states, municipalities and political subdivisions $ 99,441 $ 8,478 $ - $ 107,919 Total available-for-sale $ 99,441 $ 8,478 $ - $ 107,919 The bonds were scheduled to mature in 2020, but were sold by the Company during 2014, resulting in a realized gain of $8,752.

RMI Effective October 1, 2009, the Company entered into a joint venture with Risk Specialists Companies, Inc. (a Chartis U.S. company), and William C. Mecklenburg, Jr. (a Company shareholder/executive), to form RMI. The Company owned 31% of RMI's common stock, which it received in exchange for services to be provided to RMI valued at $710,000. On December 27, 2013, RMI repurchased and retired all of the shares owned by Risk Specialists Companies, Inc., which made up 52 percent of RMI's outstanding common stock at that time. The repurchased shares were subsequently retired and, as a result, the Company's 31% ownership increased to 65%, giving the Company control of RMI. The Company did not provide any consideration for the additional ownership. In accordance with equity method accounting guidance, the Company recognized a pre-tax gain of approximately $295,000 in 2013, resulting from the share buyback RMI transacted with Risk Specialists Companies, Inc., which is included in investment and other income on the accompanying consolidated statement of comprehensive income for the year ended December 31, 2013.

The Company consolidated RMI's balance sheet as of December 31, 2013. The Company carried the investment under the equity method prior to December 31, 2013. The Company accounted for this investment on the equity method for the entire year ended December 31, 2013 as there was no significant activity between the transaction date and year-end. The Company’s share of RMI’s net operating losses, which are reported as a reduction in revenue from investment and other income in the accompanying consolidated statements of comprehensive income, amounted to a net loss of $56,968 for the year ended December 31, 2013. The Company consolidated RMI as of and for the year ended December 31, 2014.

11

The Redwoods Group, Inc. Notes to Consolidated Financial Statements (Continued) Note B - Investments (continued) RMI (continued) At December 31, 2014 and 2013, RMI holds a 16% interest in an insurance broker investee which RMI accounts for under the equity method of accounting. That investment, which has a carrying value of $376,794 and $368,497 at December 31, 2014 and 2013, respectively, is included in investments - other in the December 31, 2014 and 2013 consolidated balance sheets.

At the inception of RMI, Mr. Mecklenburg provided 29,138 shares of the Company’s common stock to RMI in exchange for shares of RMI common stock. The Company repurchased 13,449 shares of Company stock from RMI during 2013 and RMI recognized a loss of approximately $91,000 on the sale. As of December 31, 2014 and 2013, RMI owned 15,689 shares of the Company’s common stock. In the accompanying December 31, 2014 and 2013 consolidated balance sheets, in accordance with consolidation accounting guidance, this investment was reclassed to treasury stock. The Company provided services to RMI valued at $26,141 during 2014, which was eliminated during consolidation, and services valued at $24,621 during 2013.

The remaining liability for future services as of December 31, 2014 and 2013 amounts to $167,774 and $453,915, respectively, and was eliminated during consolidation.

RMI has a Management Agreement with the Company whereby Mr. Mecklenburg works full time for RMI as its President and CEO and other Company employees provide services to RMI as requested by RMI. The cost of services provided by Mr. Mecklenburg are reimbursed by RMI and offset against related Company expenses. The Company’s expense reimbursements during 2014 and 2013 amounted to $317,741 and $320,198 respectively. The Company's receivable balances of $50,000 and $32,615 at December 31, 2014 and 2013, respectively, were eliminated during consolidation. The Company also has a Services Agreement with RMI, whereby RMI provides certain consulting and other program business services to the Company. These service fees to RMI for 2014 and 2013 amounted to $52,939 and $228,932, respectively. The Company's payable balance to RMI of $7,535 and $47,075 at December 31, 2014 and 2013, respectively, was eliminated during consolidation.

12

The Redwoods Group, Inc. Notes to Consolidated Financial Statements (Continued) Note B - Investments (continued) BWS On December 31, 2012, the Company purchased BWS for $500,246. The Company purchased 50% of BWS from the Foundation, a related party, and the remaining 50% from a third party.

The entire purchase price was paid to the Foundation to discharge an outstanding note secured by the property. There are no amounts due to or from the Foundation related to this transaction at December 31, 2014 or 2013. The only substantial asset held in BWS is an office building in Durham, NC. BWS collects rental income on the property and therefore the property is listed as property held for investment on the face of the consolidated balance sheet as of December 31, 2013. The amount paid for BWS approximates the fair value of the assets purchased. The primary purpose of the acquisition is to further develop and market the property utilizing the resources of the Company. In 2013, the Company granted a 2.5% profit interest to Carl Webb, a former partner of BWS. BWS sold the building during 2014 and filed for dissolution effective December 31, 2014. This resulted in a realized gain of $280,689, of which, $7,017 was attributable to the non-controlling interest. BWS recognized $12,973 and $15,568 in depreciation expense during 2014 and 2013, respectively.

At December 31, 2013, the carrying value of the building, which is included in property held for investment, is: 2013 Building $ 428,119 Land 69,345 Subtotal 497,464 Accumulated depreciation (15,568) Total $ 481,896 Note C - Property and Equipment Property and equipment as of December 31, 2014 and 2013, consists of the following: Furniture and equipment Computer equipment Vehicles Leasehold improvements Computer software Property and equipment, gross Accumulated depreciation Property and equipment, net

$

$

13

2014 513,735 $ 273,723 182,756 82,179 53,543 1,105,936 (827,207) 278,729 $

2013 513,729 276,858 212,364 82,179 86,051 1,171,181 (802,594) 368,587

The Redwoods Group, Inc. Notes to Consolidated Financial Statements (Continued) Note D - Line-of-Credit In June 2013, the Company renewed a $500,000 working capital line-of-credit bearing interest at the rate of 3.25%, and was scheduled to mature on August 31, 2014. The line-of-credit was renewed during 2014 with a new maturity date of February 28, 2015, and again during 2015 with a new maturity date of February 28, 2016. At December 31, 2014 and 2013, $400,000 and $0 was drawn on the line-of-credit, respectively. The terms of the line-of-credit require that the Company make regular monthly payments of all accrued unpaid interest. The line-of-credit is secured by personal property of the Company.

Note E - 401(k) Defined Contribution Plan The Company maintains a 401(k) defined contribution plan (the "Plan") that covers substantially all employees with more than one month of service. The Company matches 100% of each employee dollar contributed, up to a maximum contribution of 6% of an employee's eligible compensation, so that each employee dollar contributed will be matched with a 50 cent cash contribution and 50 cents worth of Company stock. Shares granted as part of the 401(k) plan vest immediately. During the years ended December 31, 2014 and 2013, 8,694 and 4,016 shares of Company stock were granted as matching contributions, of which 3,149 and 1,987 shares were repurchased by the Company, respectively. The Company's expenses related to the Plan, including the value of the shares granted above, during the years ended December 31, 2014 and 2013 amounted to $238,122 and $218,300, respectively.

Note F - Deferred Compensation The Company has non-qualified deferred compensation agreements with certain executives under which future defined benefits are expected to be funded by individual life insurance policies owned by the Company. The deferred compensation benefits are forfeited if future service requirements are not met. The present value of future benefits, discounted using rates of 4.50% to 4.75%, is recognized over the requisite service periods of the individual executives. During 2014, the Company exchanged the life insurance policies, including the associated cash surrender value, with all but one executive. Two Company executives received their life insurance policies in exchange for releasing the Company from the liability for future deferred compensation benefits. Two Company executives forgave the Company's liability for future benefits; as a result, the Company recognized income of $453,933 during 2014. The life insurance policies for these executives were distributed as part of the dividend described in Note J. The accrued present value of future benefits under these agreements as of December 31, 2014 and 2013 amounted to $176,966 and $776,799, respectively, and is included as deferred compensation on the accompanying consolidated balance sheets. At December 31, 2014 and 2013, the aggregate cash surrender value of life insurance policies on such executives, amounting to $186,468 and $775,487, respectively, is included in other long-term assets on the accompanying consolidated balance sheets.

14

The Redwoods Group, Inc. Notes to Consolidated Financial Statements (Continued) Note G - Income Taxes The significant components of the Company's income tax expense for 2014 and 2013 are as follows: 2014 2013 Current $ (106,624) $ 118,527 Deferred (3,544) (16,622) Total income tax expense $ (110,168) $ 101,905 Actual income tax expense reported during the years ended December 31, 2014 and 2013 differs from that which would result from applying the statutory tax rates to pretax income, primarily due to certain non-deductible expenses and adjustments related to under or over accrual of the prior year income tax provision.

BWS is a limited liability company, which was 97.5% owned by the Company. BWS did not record income taxes separately from the Company since BWS was taxed as a passthrough entity and its taxable income was included proportionally in its members' taxable income. RMI files a separate tax return and is not part of a consolidated federal tax return with the Company.

15

The Redwoods Group, Inc. Notes to Consolidated Financial Statements (Continued) Note G - Income Taxes (continued) The tax effects of temporary differences that give rise to the deferred tax assets and liabilities at December 31, 2014 and 2013 are as follows: 2014 2013 Deferred tax assets: Deferred compensation $ 65,152 $ 302,179 Deferred revenue 79,931 77,454 Accrued expenses 34,110 Stock grant expense 20,946 9,684 Charitable contribution carry-forward 102,528 31,887 Federal tax NOL carry-forward 180,524 214,915 State tax NOL carry-forward 58,737 34,283 Stock options 27,612 23,010 Rent abatement 165,871 163,607 Loss from affiliate 183,632 203,353 Receivable write-off 147,573 Other 3,617 5,333 Total deferred tax assets 1,036,123 1,099,815 Deferred tax liabilities: Gain from affiliate Depreciation Other Total deferred tax liabilities Deferred tax assets, net

$

212,769 58,915 11,006 282,690

212,769 85,012 14,794 312,575

753,433 $

787,240

The federal and state net operating losses are associated with RMI, which as noted above, files separate tax returns. The federal and state net operating losses begin to expire in 2029.

The following table summarizes deferred tax assets and liabilities: Deferred tax assets, current Deferred tax liabilities, current Net current deferred tax assets

$

Deferred tax assets, non-current Deferred tax liabilities, non-current Net non-current deferred tax assets Deferred tax assets, net

$

16

2014 421,499 $ (11,006) 410,493

2013 134,272 (11,303) 122,969

614,624 (271,684) 342,940

965,543 (301,272) 664,271

753,433 $

787,240

The Redwoods Group, Inc. Notes to Consolidated Financial Statements (Continued) Note H - Stock Grants The Company has a stock award plan (the "Award Plan") under which certain management personnel receive stock grant awards subject to shareholder agreements. Up to 125,000 shares have been authorized for awards under the Plan, of which 68,687 shares are available for future grants at December 31, 2014. The shares vest over periods up to three years. The fair value of each stock grant is calculated at the date the grant is awarded, and is recognized as compensation expense using the straight line method over the requisite vesting periods. Compensation expense amounted to $28,877 and $32,455 (net of forfeiture credit of $3,420 and $0) for the years ended December 31, 2014 and 2013, respectively. During the year ended December 31, 2014, the Company did not grant any shares and no shares vested. During the year ended December 31, 2013, the Company granted 7,200 shares with an aggregate grant date fair value of $142,704 and 5,000 shares vested with a value of $99,100.

Shares granted but not vested amounted to 9,200 shares as of December 31, 2014, which will vest in years 2015 to 2016. The remaining cost to be recognized in future years for these nonvested awards amounts to $56,552 as of December 31, 2014. There were 9,700 nonvested granted shares as of December 31, 2013.

Note I - Stock Options On January 3, 2012, the Company granted options to certain management personnel to purchase up to 25,000 shares of common stock at an exercise price of $16.65 per share based on the Company's 2011 stock value determined by the stock valuation formula specified in the stock award plan. The option to purchase shares vests on January 3, 2015, and expires on January 3, 2018. All options were outstanding and not vested at December 31, 2013. During 2014, 5,000 shares were forfeited and thus 20,000 shares were outstanding and not vested at December 31, 2014. The stock valuation at December 31, 2014 was $17.83 per share resulting in compensation expense of $11,800 during 2014 and a deferred tax asset of $27,612 at December 31, 2014. The stock valuation at December 31, 2013 was $19.82 per share resulting in compensation expense of $29,500 during 2013 and a deferred tax asset of $23,010 at December 31, 2013.

Note J - Stockholders' Equity The Company's shareholders are subject to certain rights and limitations, as documented in the underlying shareholder agreements.

Shares issued under the Company’s stock agreements are eligible to be put back to the Company, at the option of the shareholders, once qualifying time periods have been met per the underlying agreements, with up to 25% of qualified shares eligible for put options in any calendar year during the term of the shareholder's employment. During the year ended December 31, 2014, 3,663 shares were redeemed by shareholders at repurchase values totaling $68,868. During the year ended December 31, 2013, 20,898 shares were redeemed by shareholders at repurchase values totaling $283,638. Included in the 2013 shares redeemed by shareholders, the Company purchased 5,333 shares from a charitable organization, that had received donated shares, at a purchase price of $105,700.

17

The Redwoods Group, Inc. Notes to Consolidated Financial Statements (Continued) Note J - Stockholders' Equity (continued) Employees who leave the Company are required to put 100% of their remaining shares back to the Company. There were 5,103 and 438 shares redeemed at a repurchase value of $65,472 and $8,681 under this arrangement in 2014 and 2013, respectively. In accordance with the terms of these certain share repurchase agreements, the Company will pay proceeds ratably over periods ranging from two to four years. The payable is recorded as stock repurchase proceeds payable on the consolidated balance sheets. Shares repurchased by the Company have been subsequently retired. On October 31, 2014, the Company declared a dividend of $1.06 per share to stockholders of record as of November 10, 2014, totaling $480,625. Of this total, $431,142 was distributed in the form of Company-owned life insurance policies and $49,483 in cash.

As of December 31, 2014, 6,832 shares are eligible to be put to the Company during the year ending December 31, 2015 in accordance with the terms of the underlying stock agreements.

The purchase price, in the event the put options are exercised, is based upon the fair value of the shares as of the calendar year-end immediately preceding the year in which the Company is notified of the intent to exercise the put option. Based on the repurchase value of the shares as of December 31, 2014, such put options have an estimated value of $121,815.

Note K - Lease Commitments The Company leases office space and certain equipment under non-cancelable leases with unrelated parties. The aggregate rent expense for the years ended December 31, 2014 and 2013 was $422,795 and $423,572, respectively. In 2012, the Company signed an office lease agreement for eleven years for which the Company received a one year rent abatement. The Company recognizes rental expense on a straight line basis over the life of the lease, resulting in $370,785 of rental expense related to the office lease for both 2014 and 2013. Deferred rent related to the office lease was $419,036 and $419,504 at December 31, 2014 and 2013, respectively.

The following is a schedule of future minimum lease payments under the Company's noncancelable operating leases: Year ending December 31, 2015 2016 2017 2018 2019 Thereafter Total minimum lease commitments

18

$

$

433,654 445,965 455,935 460,859 474,346 1,551,140 3,821,899

The Redwoods Group, Inc. Notes to Consolidated Financial Statements (Continued) Note L - Risks and Uncertainties The Company is a managing underwriter of property, casualty, liability and workers’ compensation insurance coverage for YMCAs, JCCs, and Camps throughout the United States.

The Company has several insurance carriers that underwrite its insurance policies, although a majority of these policies are underwritten by two carriers. If these two carriers should discontinue providing this insurance coverage, the Company would have some exposure related to finding another primary underwriting company. This risk is mitigated by the fact that the Company’s principal carriers are rated A (excellent) and A+ (superior) by A. M. Best Company.

This risk has been further reduced by limiting the share of risk born by the primary carriers and spreading the excess risk among one or more “A” or better rated reinsurers.

19

Report of Independent Auditors on Accompanying Information Board of Directors The Redwoods Group, Inc. The report on our audit of the consolidated financial statements of The Redwoods Group, Inc. (the "Company") as of December 31, 2014 and 2013, and for the years then ended is presented on page 1 of this document. Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The accompanying consolidating balance sheets of the Company as of December 31, 2014 and 2013, and consolidating statements of comprehensive income for the years then ended are presented for purposes of additional analysis and are not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the consolidated financial statements as a whole.

Raleigh, North Carolina May 6, 2015

The Redwoods Group, Inc. Consolidating Balance Sheets As of Assets:

The Redwoods Group, Inc.

December 31, 2014 Redwoods Managers, Inc. Eliminations

Total

The Redwoods Group, Inc.

Cash and cash equivalents $ 6,157 $ 164,841 $ - $ 170,998 $ 302,040 $ Investments 107,919 Restricted cash 1,279,418 1,279,418 3,539,613 Premiums and commissions receivable 8,411,268 8,411,268 7,518,221 Prepaid expenses 591,723 930 592,653 314,656 Deferred income taxes, net 304,528 105,965 410,493 122,522 Other current assets 223,071 50,285 (57,550) 215,806 190,665 Total current assets 10,816,165 322,021 (57,550) 11,080,636 12,095,636 Property and equipment 278,729 278,729 368,013 Investment in affiliate 848,183 269,215 (1,117,398) 770,627 Investments - other 376,794 376,794 Property held for investment 262,741 262,741 273,726 Deferred income taxes, long-term, net 110,459 232,481 342,940 400,885 Other long-term assets 227,748 117,774 (117,774) 227,748 849,512 Total assets $12,544,025 $ 1,318,285 $(1,292,722) $12,569,588 $14,758,399 $

21

December 31, 2013 Redwoods Managers, BWS Inc. Eliminations 44,669 $ -

154,229 $ -

44,669 -

824 447 72,075 227,575 574 269,215 368,497

481,896

-

Total

- $ 500,938 107,919 3,539,613 (104,690) (104,690) (1,039,842) -

7,518,221 315,480 122,969 158,050 12,263,190 368,587 368,497 755,622

378,655 (115,269) 664,271 429,965 (428,915) 850,562 526,565 $ 1,674,481 $(1,688,716) $15,270,729

The Redwoods Group, Inc. Consolidating Balance Sheets (Continued) As of Liabilities and Stockholder's Equity:

December 31, 2014 Redwoods Managers, Inc. Eliminations

The Redwoods Group, Inc.

Liabilities Accounts payable $ 207,033 $ Funds held for others 1,279,418 Premiums and commissions payable 6,685,869 Accrued expenses 185,856 Notes payable 404,675 Deferred rent 56,274 Stock repurchase payable 55,103 Deferred revenue 1,040,056 Total current liabilities 9,914,284 Due to affiliate 117,774 Stock repurchase payable 39,436 Deferred revenue, long-term 201,649 Deferred compensation 176,966 Deferred rent 419,036 Other Total liabilities 10,869,145 Stockholder's equity Common stock Additional paid-in capital Retained earnings Accumulated other comprehensive income Treasury stock Total Redwoods Group stockholder's equity Non-controlling interests Total stockholder's equity Total liabilities and stockholder's equity

4,533 1,239,393 430,954

9,368 $ 1,909 11,277 11,277 1,210,000 654,230 (557,222)

Total

The Redwoods Group, Inc.

(7,550) $ 208,851 $ 256,883 $ 1,279,418 3,539,613

December 31, 2013 Redwoods Managers, BWS Inc. Eliminations - $ -

34,191 $ -

(79,692) $ 211,382 3,539,613

(50,000) (57,550) (117,774) (175,324)

6,685,869 187,765 404,675 6,274 55,103 1,040,056 9,868,011 39,436 201,649 176,966 419,036 10,705,098

5,826,640 207,182 18,592 25,000 41,958 1,116,650 11,032,518 428,915 41,958 213,438 776,799 419,504 6,233 12,919,365

2,460 4,606 7,066 7,066

(1,210,000) (654,230) 558,594

4,533 1,239,393 432,326

4,554 1,094,679 734,629

519,499

5,172 -

-

-

(269,215)

1,839,034 1,839,034

519,499 519,499

1,640,290 1,640,290

(1,729,211) 574,102 (1,155,109)

-

-

(269,215)

1,674,880 1,674,880

1,307,008 1,307,008

(1,574,851) 457,453 (1,117,398)

(269,215) 1,407,037 457,453 1,864,490

$12,544,025 $ 1,318,285 $(1,292,722) $12,569,588 $14,758,399 $

22

34,191 34,191 1,210,000 1,054,230 (623,940)

Total

(25,000) (104,692) (428,915) (533,607)

5,826,640 209,642 18,592 41,958 1,121,256 10,969,083 41,958 213,438 776,799 419,504 6,233 12,427,015

(1,210,000) (1,054,230) 804,234

4,554 1,094,679 1,434,422 5,172 (269,215) 2,269,612 574,102 2,843,714

526,565 $ 1,674,481 $(1,688,716) $15,270,729

The Redwoods Group, Inc. Consolidating Statements of Comprehensive Income For the year ended The Redwoods Group, Inc. Commissions and fees Investment and other income Total revenues

BWS

$ 10,736,848 $ - $ 1,432,684 293,168 12,169,532 293,168

Commission expense Compensation and benefits Operating and administrative Depreciation and amortization Total expenses

1,533,849 7,297,705 3,711,576 141,659 12,684,789

Income before income taxes Income tax benefit (expense) Net (loss) income

(515,257) 150,824 (364,433)

Net income attributable to noncontrolling interests Net (loss) income attributable to The Redwoods Group, Inc. Other comprehensive income: Unrealized holding (losses), net of tax benefit of $0 and $2,198, respectively Reclassification to earnings of (gains), net of tax (benefit) of $(3,307) and $0, respectively Total Comprehensive income

December 31, 2014 Redwoods Managers, Inc. Eliminations

(364,433)

-

$

December 31, 2013 The Redwoods Group, Inc.

Total

BWS

Total

430,085 $ 24,962 455,047

(103,000) $ (479,663) (582,663)

11,063,933 $ 11,659,986 $ 1,271,151 478,705 12,335,084 12,138,691

- $ 55,267 55,267

11,659,986 533,972 12,193,958

18,760 12,973 31,733

347,401 272 347,673

(140,000) (140,000)

1,533,849 7,297,705 3,937,737 154,904 12,924,195

20,445 15,568 36,013

1,611,696 7,209,757 2,952,692 160,472 11,934,617

261,435 261,435

107,374 (40,656) 66,718

(442,663) (442,663)

6,536

23,350

254,899

43,368

-

-

(5,172) (369,605) $ 254,899 $

(442,663)

-

43,368 $

23

(442,663) $

(589,111) 110,168 (478,943) 29,886 (508,829)

(5,172) (514,001) $

1,611,696 7,209,757 2,932,247 144,904 11,898,604 240,087 (101,905) 138,182

19,254 19,254

259,341 (101,905) 157,436

-

-

-

138,182

19,254

157,436

(3,438) 134,744 $

19,254 $

(3,438) 153,998