PAULA Financial Reports Net Income for Q2

August 26, 2003

Pasadena, Calif.-based PAULA Financial announced net income for the second quarter of 2003 of $0.02 per share compared to $0.01 per shares for the 2002 period. Total revenue for the second quarter of 2003 was $4.3 million compared to $2.9 million for the 2002 period.

Net income for the first six months of 2003 was $0.07 per share compared to $0.04 per shares for the 2002 period. Total revenue for the first six months of 2003 was $8.9 million compared to $6.2 million for the 2002 period. Cash flows from operations were $2.4 million in the first six months of 2003 compared to $0.4 million in the 2002 period.

Pan American Underwriters (PAU), the Company’s agency subsidiary, continued its pattern of profitability in the second quarter of 2003. Jeff Snider, chairman and CEO, observed, “We are very pleased with the agency’s operating results during the first half of 2003. Results for 2003 are improved over the same 2002 period in spite of the elimination of expense reimbursements previously paid to the Company by its former affiliate, PAULA Insurance Company. Policy persistency remains high and we have generated net new business gains in each month of the 2003 year.

“Uncertainty related to the State Compensation Insurance Fund (SCIF) of California, and its already announced decision to reduce agent commissions effective August 2003, has not been a total surprise. Instability in the California workers’ compensation system is finally burdening the state’s largest underwriter. Slightly more than 50% of the Company’s workers’ compensation commissions (adjusted for the new commission levels) are derived from SCIF. The Company is optimistic that the combination of new business generation and premium rate improvement will offset the impact of the reduction of SCIF commissions as those reductions become effective over the course of the 2004 period.”

For the first six months of 2003, workers’ compensation commissions from all carriers accounted for 41 percent of commission income as compared to 48 percent in the same 2002 period. This change reflects the Company’s successful efforts to diversify its historical revenue mix with new insurance products.

Snider added, “The agency’s largest crop insurance underwriting partner, Rural Communities Insurance Services (RCIS), recently announced its acquisition of the crop insurance assets of Fireman’s Fund. Earlier in 2003, PAU acquired a 100 percent interest in the Roudebush & Avina Insurance Agency (“R&A”) of Modesto, California. R&A produced crop insurance sales primarily for Fireman’s Fund. RCIS has advised the Company of their affirmative interest in supporting the R&A crop portfolio pursuant to their acquisition of the Fireman’s Fund crop insurance program. PAU is one of RCIS’ largest nationwide producers of crop insurance business.”

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