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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2004 |
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
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Commission file number: 0-25508
RTW, INC.
(Exact name of registrant as specified in its charter)
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Minnesota |
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41-1440870 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
8500 Normandale Lake Boulevard, Suite 1400
Bloomington, MN 55437
(Address of principal executive offices and zip code)
Registrant’s telephone number, including area code:
(952) 893-0403
Securities registered pursuant to 12(b) of the Act:
None
Securities registered pursuant to 12(g) of the Act: Common
Stock, no par value
Series A Junior Participating Preferred Stock
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Exchange Act
Rule 12b-2) Yes o No þ
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of the
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K: o
As of March 18, 2005, 5,295,000 shares of Common
Stock, no par value, were outstanding. As of June 30, 2004,
assuming as fair value the last sale price of $6.44 per
share on The Nasdaq Stock Market, the aggregate fair value of
shares held by non-affiliates was approximately
$27.0 million.
Documents incorporated by reference:
The Company’s Proxy Statement for its annual meeting of
shareholders to be held on June 15, 2005, a definitive copy
of which will be filed with the Securities and Exchange
Commission within 120 days of December 31, 2004, is
incorporated by reference in Part III of this Report on
Form 10-K.
TABLE OF CONTENTS
1
PART I
Overview
RTW, Inc. (RTW) provides disability management services,
directed today at workers’ compensation to:
(i) employers insured through our wholly-owned insurance
subsidiary, American Compensation Insurance Company (ACIC);
(ii) self-insured employers on a fee-for-service basis;
(iii) state assigned risk plans on a percent of premium
basis; (iv) other insurance companies; and (v) on a
consulting basis to agents and employers, charging hourly fees
through RTW and its division, Absentia. ACIC offers guaranteed
cost workers’ compensation insurance to employers located
primarily in Minnesota, Michigan and Colorado and is licensed in
twenty-three states. Collectively, “we,”
“our” and “us” refer to RTW and ACIC in this
document.
We developed two proprietary systems to manage disability:
(i) ID15®, designed to quickly identify those injured
employees who are likely to become inappropriately dependent on
disability system benefits, including workers’
compensation; and (ii) The RTW Solution®, rapid
intervention in and intensive management of potentially
high-cost injuries, designed to lower employers’ disability
costs and improve productivity by returning injured employees to
work as soon as safely possible. We support these proprietary
management systems with state-of-the-art technology and talented
employees dedicated to our vision of transforming people from
absent or idle to present and productive. During 2004, we
operated primarily in Minnesota, Michigan and Colorado and began
servicing non-insurance customers in California and Indiana.
Our approach to managing disability reduces medical expenses and
wage-replacement costs (including time away from the job). We:
(i) focus our efforts on the 15% of the injured employees
that drive 80% of the system costs; (ii) control costs by
actively managing all participants in the system, including
employers, employees, medical care providers, attorneys and the
legal system; and (iii) return injured employees to work as
soon as safely possible.
Industry
In 2004, our revenues were derived entirely from products and
services related to managing workers’ compensation.
Workers’ compensation benefits are mandated and regulated
at the state level. Every state requires employers to provide
wage-replacement and medical benefits to workplace accident
victims regardless of fault. Virtually all employers in the
United States are required to either: (a) purchase
workers’ compensation insurance from a private insurance
carrier; (b) obtain coverage from a state managed fund; or
(c) if permitted by their state, to be self-insured.
Workers’ compensation laws generally mandate two types of
benefits for injured employees: (i) indemnity payments
including temporary wage-replacement or permanent disability
payments; and (ii) medical benefits that include payment
for expenses related to injury diagnosis, treatment and
rehabilitation, if necessary. On an industry-wide basis,
indemnity payments represent approximately 45% of benefits paid,
while medical benefits account for the remaining 55%.
Estimated workers’ compensation insurance premiums in 2003
total approximately $42.1 billion nationwide. This amount
includes: (i) the traditional or private residual market,
estimated at $31.0 billion, including commercial insurers
and state-operated assigned risk pools established for high-risk
employers; and (ii) state funds, estimated at
$11.1 billion, operated in states to increase competition
and stabilize the market.
Indemnity benefits are established by state legislative action
and rise with wage and state mandated benefit increases.
Indemnity costs have increased consistent with wage inflation
while medical expenses have been increasing at a double-digit
pace across the United States. We believe the most significant
factor affecting cost in the workers’ compensation system
results from incentives for injured employees to remain away
from work continuing to collect indemnity payments and receiving
medical treatment beyond the point that is necessary.
We believe that we are more effective than traditional insurance
companies and third party administrators in controlling medical
and indemnity costs and returning employees to the workplace in
a timely manner. Traditional efforts focus on workplace safety
and medical cost containment and as a result, have reduced some
2
expenses. These efforts have not had a significant effect on the
overall system cost because they have not focused effectively on
controlling wage replacement and lost productivity. Traditional
insurance companies have moved toward a more comprehensive
management approach in recent years including return-to-work
initiatives and, while somewhat successful, they have not
realized the cost reductions and claim closure outcomes that we
have achieved.
Our Management Approach
We developed our approach to managing disability after observing
two important characteristics of the system: (i) 15% of all
injuries result in 80% of the system costs, and
(ii) employees off work for twelve weeks have a 50%
likelihood of never returning to work. We developed ID15®
to identify those claims likely to account for 80% of the system
cost and The RTW Solution® to intervene quickly, reducing
lost time and producing significant cost savings for our
customers. We promptly identify (within 48 hours and with a
95% degree of accuracy after being notified) claims likely to
result in significant expense and act quickly to control these
costs before they are incurred or get out of hand. We intensely
manage all aspects of the system; employers, injured employees,
medical care providers and legal and judicial participants. We
focus on controlling indemnity payments for lost wages by
quickly and safely returning employees to work. As part of this
strategy, we attempt to return employees to their original
position or to place them in transitional, light-duty positions
until they are able to resume their original jobs. By promptly
returning employees to work, we substantially reduce not only
indemnity payments, but also medical expense per injury. We also
use other management techniques to control medical costs
including contracting with provider networks, designating health
care providers, performing medical fee schedule review,
utilization review and doctor peer review.
We deliver our solutions to customers through operating teams.
Each operating team is responsible for managing claims and is
responsible for the loss experience of an employer or group of
employers. Our operating teams include a mix of nurses,
statutory claims administrators, assistant claims administrators
and clerical support that are matched to the needs of the
employer or group of employers. Operating teams meet regularly
to discuss strategies for managing difficult claims and review
strategies and procedures that have been successful in resolving
disputes.
The following summarizes our approach to managing all
participants in the disability system:
Customers. Prior to working with employers that we insure
and customers to whom we provide non-risk services, we fully
explain our methods, processes, guidelines and philosophy
regarding appropriate return to work and train the
employer’s personnel. In addition, as part of our
underwriting process, we may conduct on-site risk assessments
for prospective insured employers. Employers insured by ACIC
agree, as part of the insurance policy, to comply with our early
intervention methods and to provide transitional, light-duty
work for injured employees until such time as they are able to
resume their normal positions. Compliance for insured employers
is mandatory or we cancel their coverage. Our service customers
have ultimate choice, but we encourage them to provide
transitional work to reduce the cost of disability. To ensure
that our early intervention model succeeds, we require the
employer to promptly notify us of a claim’s occurrence
(typically within forty-eight hours of the injury).
Each operating team is responsible for managing its
employers’ workers’ compensation and disability
program(s). The operating team meets with each employer, manages
all reported injuries and actively communicates with the
employer on all open injuries. We may make workplace safety
recommendations through our accident prevention team or retain a
workplace safety-engineering firm to assist employers in
remedying work conditions that create inappropriate risk. In
addition, operating teams may recommend, for policies
underwritten by ACIC, cancellation or non-renewal for employers
that fail to comply with our procedures.
Employees. We identify injuries (and behaviors in injured
employees) that are likely to result in higher costs and act
quickly to control expenses resulting from these injuries.
Within forty-eight hours of being notified of an injury, we
evaluate several factors, including the type of injury, the
presence of lost time, the employee’s injury history and
employee behavioral characteristics to determine whether the
injury is likely to involve significant expense. In cases where
there is high-cost potential, we intervene quickly with the
injured
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employee, assisting the employee in obtaining appropriate
medical care and developing a plan to get the employee back to
work as soon as safely possible. Employers insured by ACIC are
required to provide transitional light-duty jobs for employees
who cannot immediately return to their original positions. If
the employee refuses transitional work, we may terminate
indemnity payments, but are required to continue to provide
appropriate medical benefits. For employers that we service
through Absentia, we educate the employer on the benefit of
return-to-work programs and work closely to find transitional
light-duty opportunities for the employee.
Medical Care Providers. We actively assess, monitor and
manage medical treatment and review medical expenses for each
injury. We contact the employee’s treating physician in
cases that involve time off from work or injuries that could
involve significant expense. In these cases, the physicians are
asked to provide their diagnosis, plan of treatment and assess
the employee’s physical capabilities for transitional,
light-duty work. We contract with and employ consulting
physicians to assess questionable treatment plans for injured
employees. These physicians discuss injured employee treatment
plans with the employee’s medical care providers. The goal
is to ensure both an accurate diagnosis and appropriate
treatment of the injury and understand the nature and extent
that the diagnosis places limits on the employee’s ability
to return to work in either the original job or a transitional,
light-duty position. We also monitor the health care provided to
the injured employee to ensure that the employee receives proper
treatment for the injury and that the employee does not receive
services or procedures that are excessive, unnecessary or
unrelated to the injury. In addition, when we believe the
diagnosis of an injury or the proposed rehabilitation treatment
is inappropriate, we will arrange for a second opinion with an
independent medical examiner.
A medical cost management team reviews all bills submitted by
medical care providers to determine if the amounts charged for
the treatments are appropriate according to statutory and other
negotiated fee schedules, including fee schedules negotiated
through provider organizations.
In many states, including Minnesota, we cannot require that an
injured employee go to a specific physician or seek treatment
from a specific provider. Nevertheless, we attempt to assist the
injured employee in selecting appropriate medical care
providers. In Colorado and Michigan (for the first ten days
after the injury), we can require that injured employees go to a
physician within a designated network of medical care providers.
Legal and Judicial Participants. We seek to limit the
number of disputes with injured employees by intervening early,
educating, assuring appropriate medical management and treating
them with dignity and respect. As part of our process, we
identify injuries that are not work related and deny those
claims. We may also deny indemnity payments for a claim when we
determine that no further payments are appropriate (for example,
when an employee has been offered transitional, light-duty work
and has refused it). In these and other circumstances, the
employee may engage an attorney to represent his or her
interests. Generally, if the parties are unable to resolve the
matter, workers’ compensation law mandates arbitration,
subject to judicial review. For cases that involve adversarial
proceedings, we engage one of several attorneys who are familiar
with our philosophy and actively seek to resolve the dispute
with the employee’s attorney.
Customers
We target two specific groups of customers: (i) employers
seeking workers’ compensation insurance coverage for their
operations in Minnesota, Michigan or Colorado with ACIC; and
(ii) employers in need of non-risk solutions that increase
productivity and reduce the cost of disability and absence. Our
insured customers have a history of workers’ compensation
claim costs higher than average in their industry and typically
operate in manufacturing, retail, wholesale, health care and
hospitality.
ACIC’s average annual premium per policy increased 10.8% to
$94,600 in 2004 from $85,400 in 2003 and $80,400 in 2002. Our
ten largest customers accounted for $5.7 million or 9.1% of
our premiums in force in 2004 compared to $5.7 million or
9.8% in 2003 and $6.2 million or 11.4% in 2002. No single
customer accounted for more than 5% of in force premiums in
2004, 2003 or 2002. We renewed 78.6% of the policies scheduled
to expire in 2004, whereas 66.0% and 46.1% were renewed in 2003
and 2002, respectively. Substantially all of ACIC’s
employers are in Minnesota, Colorado and Michigan. In addition
to these states,
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we are also licensed in Connecticut, Missouri, Massachusetts,
Illinois, Rhode Island, Kansas, Pennsylvania, Tennessee,
Maryland, Arkansas, Iowa, Florida, New Jersey, Georgia, North
Carolina, Texas, Indiana, South Dakota, Wisconsin and Oklahoma.
We are evaluating opportunities to expand our insurance products
on a limited basis beyond the states in which we currently
operate.
We offer disability and absence management services through RTW
and its Absentia division, to a broad array of customers
including self-insured employers, insurance companies,
third-party administrators, agents and brokers, state agencies
and municipalities. We currently offer these services to
employers in Minnesota, Michigan, Colorado, California and
Indiana and expect to further expand these non-risk service
offerings throughout the United States. Our service revenue
increased to $633,000 in 2004 from $109,000 in 2003 and we
increased our customer count from 5 in 2003 to 23 in 2004.
Products
Insurance Products. Our revenue is derived primarily from
workers’ compensation insurance premiums written by ACIC.
We began offering workers’ compensation insurance products
in April 1992 through our ACIC insurance subsidiary.
Substantially all of ACIC’s workers’ compensation
products are guaranteed-cost insurance policies. Under a
guaranteed-cost policy, an employer purchases an insurance
policy underwritten by ACIC and pays a premium based on
projected aggregate annual payroll. We assume responsibility for
the indemnity and medical costs associated with the
employer’s workers’ compensation injuries and work
closely with the employer in managing the employer’s
workers’ compensation program.
In addition to standard guaranteed-cost policies, ACIC offers,
on a limited basis, a deductible guaranteed-cost policy under
which the employer is responsible for all medical and indemnity
expenses up to a specific dollar amount, while we are
responsible for medical and indemnity expenses over that level.
We provide the same comprehensive management services for
deductible guaranteed-cost policies and standard guaranteed-cost
policies.
We determine the premium to be charged an employer based on
several factors, including: (i) the expected dollar loss
per $100 of payroll for the employer’s industry;
(ii) the employer’s experience modifier, a measurement
of the difference between the employer’s past claims
experience and its industry average; (iii) an upward or
downward adjustment to the premium based on our assessment of
the risks associated with providing coverage for the employer;
and (iv) competitive market prices. An employer’s
expected dollar loss and experience modifier are each determined
by an independent rating agency established or adopted by its
state, based on a three-year average of the claims experience of
the employer and its industry.
Service offerings. In 2002, we began a strategic
initiative to offer disability management products and services
directed at workers’ compensation on a fee-for-service
basis in order to diversify our offerings, providing us a
non-risk source of revenue. This strategic initiative extends
our workers’ compensation and disability management
services to self-insured employers and other alternative market
non-risk customers. We charge a fee to these customers based on
the expected number of claims managed or the time committed to
the customer. We grew our services from offering solely
third-party administration in 2003 to providing eight service
offerings in 2004. At December 31, 2004, we had 23
customers totaling more than $5.0 million in annualized
revenues related to this initiative. In 2005, we named this
service Absentia.
Sales and Marketing
We sell our workers’ compensation insurance products to
insured employers through independent insurance agencies and
brokers, including several large national agencies. Agency
commissions averaged 7.1% of gross premiums earned in 2004,
compared to 7.3% in 2003 and 6.9% in 2002. Our ten highest
producing agencies accounted for $26.1 million or 41.6% of
premiums in force in 2004, compared to $22.9 million or
39.3% in 2003 and $19.7 million or 36.3% in 2002. No agency
accounted for more than 7.4% of premiums in force in 2004,
compared to 6.0% in 2003 and 5.3% in 2002. We continually market
our insurance products to agencies in our core regions to keep
them aware of developments in our business. Each region’s
underwriting team is responsible for establishing and
maintaining agency relationships.
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We sell our non-insurance services through sales personnel
employed by us, through our independent agents and brokers and
further leverage our vendor and other key relationships to
introduce us to employers that need the services we offer.
Reinsurance
We purchase reinsurance to protect our insurance results from
potential losses in excess of the level we are willing to
accept. We share the risks and benefits of the insurance we
underwrite with reinsurers through reinsurance agreements. Our
primary reinsurance is excess of loss coverage that limits our
per-occurrence exposure.
Under an “excess of loss” reinsurance policy, we pay a
reinsurer a negotiated percentage of gross premiums earned. In
return, the reinsurer assumes all risks relating to injuries
over a specific dollar amount on a per occurrence basis. In
Minnesota, we are required to purchase excess of loss coverage
for our Minnesota policies from the Minnesota Workers’
Compensation Reinsurance Association (WCRA). In states other
than Minnesota, we purchase excess of loss coverage through
private reinsurers.
The following table summarizes our reinsurance coverage (all
losses ceded on a per occurrence basis):
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Covers Losses Per Occurrence: |
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In Excess of: | |
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Limited to: |
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Minnesota:
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2004
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WCRA |
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$ |
360,000 |
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Statutory limit |
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Various reinsurers |
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$ |
200,000 |
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$360,000 |
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2003
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WCRA |
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$ |
360,000 |
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Statutory limit |
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Various reinsurers |
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$ |
200,000 |
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$360,000 |
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2002
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WCRA |
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$ |
350,000 |
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Statutory limit |
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Other States:
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2004
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Various reinsurers |
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$ |
200,000 |
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$20.0 million excluding acts of terrorism |
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2003
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Various reinsurers |
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$ |
200,000 |
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$20.0 million excluding acts of terrorism |
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2002
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Various reinsurers |
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$ |
300,000 |
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$20.0 million |
We decreased our retention levels in 2004 and 2003 to further
reduce volatility in our operating results.
In 1998, we purchased excess of loss coverage through GE
Reinsurance Corporation that provided reinsurance for claims
occurring on or after July 1, 1998, for policies with
effective dates prior to January 1, 2001, up to $275,000 in
excess of $25,000 in all states except Minnesota. In Minnesota,
the coverage was $255,000 in excess of $25,000 for 1998,
$265,000 in excess of $25,000 for 1999 and $275,000 in excess of
$25,000 for 2000 and 2001. This coverage was purchased to reduce
risk and volatility in our operating performance. Although this
contract was terminated effective December 31, 2000, it
remained effective in 2001 for policies in force at
December 31, 2000 through expiration, not to exceed fifteen
months after December 31, 2000. Policies written or renewed
with effective dates after January 1, 2001 were not covered
under this lower level excess of loss reinsurance policy.
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We annually review the financial stability of our reinsurers.
This review includes a ratings analysis of each reinsurer
participating in an existing reinsurance contract or from whom
we have a recoverable. The following details our reinsurers and
the current A.M. Best rating assigned to each as of
March 15, 2005:
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A.M. Best Rating |
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GE Reinsurance Corporation
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A |
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General Reinsurance Corporation
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A++ |
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Everest Reinsurance Company
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A+ |
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Platinum Underwriters Reinsurance, Inc.
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A |
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Continental Casualty Company
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A |
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SCOR Reinsurance Company
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B++ |
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Transatlantic Reinsurance Company
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A+ |
Based on our review at December 31, 2004, we believe our
reinsurance balances are collectible and expect our reinsurers
to honor their obligations. Further, we are not aware of any
developments with respect to these reinsurers that would result
in uncollectible reinsurance balances. In the event that these
reinsurers are unable to honor their obligations to us due to
insolvency or otherwise, we will be required to pay these
obligations ourselves and the result could have a material
adverse effect on our future results of operations and financial
condition.
Competition
The workers’ compensation industry is highly competitive.
We compete with insurance companies, managed health care
organizations and state sponsored insurance pools for insured
products and with Third Party Administrators and specialized
consulting organizations for fee-for-service business. These
competitors may offer additional products and services to
employers, including other forms of insurance, while we offer
only workers’ compensation insurance products and
disability management services. As a consequence, these
competitors may have certain advantages in pricing their
workers’ compensation products and disability management
services. In addition, certain of these competitors claim to
offer a management approach and competencies similar to that
offered by us. Many of our competitors have greater financial
and operating resources than we have.
Competitive factors in the industry include premium rates, level
of service and ability to reduce claims expense. We believe that
our workers’ compensation insurance products and services
are competitively priced. We also believe that our level of
service and our ability to reduce claims are strong competitive
factors that have enabled us to retain existing customers and
attract new customers.
Insurance companies enter and exit states’ workers’
compensation markets depending on their assessment of current
market conditions. Many insurance companies stopped underwriting
workers’ compensation insurance during the early
1990’s due to rising costs that were not matched by
reductions in statutory benefits or higher premium rates. In the
mid to late 1990’s, we experienced increased market
pressure as new insurance companies and single-line
workers’ compensation insurance companies entered the
market. In 2003, 2002 and 2001, many insurers withdrew from the
markets in which we operate. In 2004, we experienced two things:
(i) large national carriers began retaining workers’
compensation risks that they did not retain in the three
previous years; and (ii) insurers that had not been active
for years and new carriers entered the markets in which we
operate and began writing workers’ compensation insurance.
Premiums rates flattened in 2004 as a result.
Insurance companies compete with us for insured customers that
have lower past claims experience or lower experience
“modifiers.” As a result, we experience increased
competition on our renewing workers’ compensation policies
because we were able to reduce our customers’ experience
modifiers. We expect to continue to experience this competition
for our ACIC customers.
Another competitive factor results from the fact that some
insured employers will not purchase workers’ compensation
products from insurance companies with an A.M. Best (Best)
rating less than “A”. In addition,
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certain insurance companies that write umbrella policies will
not provide coverage to an employer if a portion of the
employer’s underlying insurance policy, such as the
workers’ compensation portion, is written by an insurance
company with a less than “A” rating. We believe that
ACIC’s “B+” Best rating may make it difficult for
us to provide insurance products to certain employers.
ACIC was assigned a rating of “B+” (Very Good, Secure)
on a scale of “A++” (Superior) to “F” (In
Liquidation) on March 9, 2004. This represented an upgrade
from a “B” rating assigned on April 1, 2003 and a
“B-” rating assigned by Best in February 2002. Best
assigns a rating after quantitatively and qualitatively
evaluating financial condition and operating performance.
Data Management
We use several proprietary systems developed by us in our
operations. These systems include:
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System Description |
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Business Use |
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1995
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Policy management system |
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Process insurance applications; issue and endorse policies |
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1996
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Case and claims management and medical fee adjudicating systems |
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Manage claims, audit medical fees, pay claims, provide reports
to policyholders and analyze claims data |
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1999
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Client account management system |
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Billing, cash receipts, collections and agency commission systems |
We continue to maintain and upgrade these systems. We also
utilize third-party software to maintain financial information,
prepare accounting reports and financial statements and pay
vendors. We contract with a third-party provider of payroll
services for payroll, benefits and human resource software
services. We utilize other licensed software from national
vendors to maintain our financial records, file statutory
statements with insurance regulators and perform other general
business.
Employees
We had 134 full-time employees at December 31, 2004.
Approximately 61 worked in our administrative and financial
functions and 73 served on, provided service to or managed
approximately ten operating teams. None of our employees are
subject to collective bargaining agreements. We believe our
relationship with our employees is good.
Regulation
ACIC is regulated by governmental agencies in the states in
which it operates, and is subject to regulation in any state in
which it provides workers’ compensation products. State
regulatory agencies have broad administrative power over all
aspects of ACIC’s workers’ compensation business,
including premium rates, benefit levels, policy forms, dividend
payments, capital adequacy and the amount and type of its
investments. These regulations are primarily intended to protect
covered employees and policyholders rather than the insurance
company. Both the legislation covering insurance companies and
the regulations adopted by state agencies are subject to change.
Workers’ compensation coverage is a creation of state law,
subject to change by state legislature, and is influenced by the
political processes in each state. Several states have mandated
that employers receive coverage only from state operated funds.
New laws affecting the workers’ compensation system in
Minnesota, Colorado and Michigan and any other state where we
may operate, including laws that require all employers to
participate in state sponsored funds or that mandate premium
reductions, could have a material adverse effect on us.
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Trade Names, Trademarks and Service Marks
We use trade names, trademarks and service marks in our
business. We have registered our trade names, trademarks and
service marks with the United States Patent and Trademark Office
in the past and intend to continue to do so in the future. We
believe that the goodwill associated with many of our trade
names, trademarks and service marks, particularly
“ID15,” “The RTW Solution” and
“Absentia” are significant competitive assets in our
business. We also operate our business in several states outside
of Minnesota, using the RTW name in connection with the name of
the State.
Company Information
Our website is http://www.rtwi.com. We make available,
free of charge on or through our website, our annual, quarterly
and current reports and proxy statements, and any amendments to
those filings, as soon as is reasonably possible after they are
filed with the SEC. Information about each beneficial owner and
the RTW Code of Business Ethics and Conduct are also available,
free of charge, through our website. Information contained on
our website is not part of this report.
Executive Officers of the Registrant
The following are our Chairman and executive officers at
March 15, 2005:
| |
|
|
|
|
|
|
| Name |
|
Age | |
|
Position |
| |
|
| |
|
|
|
John O. Goodwyne
|
|
|
66 |
|
|
Chairman of the Board |
|
Jeffrey B. Murphy
|
|
|
43 |
|
|
President, Chief Executive Officer and Director |
|
Alfred L. LaTendresse
|
|
|
56 |
|
|
Executive Vice President, Chief Financial Officer, Treasurer and
Secretary |
|
Keith D. Krueger
|
|
|
46 |
|
|
Vice President — Insured Products and Assistant
Secretary |
|
David M. Dietz
|
|
|
38 |
|
|
Vice President — Absentia |
|
Patricia M. Sheveland
|
|
|
46 |
|
|
Vice President — Case and Claims Management |
John O. Goodwyne became Chairman of the Board in December 2003.
Mr. Goodwyne joined our Board of Directors in December
2001. Since 1974, Mr. Goodwyne has been the owner and
President of J N Johnson Sales & Service
Inc., a local contractor for fire protection systems and
distributor of fire extinguishers. In addition, since 1982, he
has been owner and President of Low Voltage Contractors Inc., a
leading local contractor for installation and service of fire
alarm, security and nurse call systems.
Jeffrey B. Murphy has served as President and Chief Executive
Officer since December 2003. Mr. Murphy was elected to the
Board in March 2004. Mr. Murphy joined us in October 1994
as Controller, was promoted to Chief Financial Officer in
February 2000 and became President and Chief Executive Officer
in December 2003. Mr. Murphy was the Corporate Controller
and held other management positions for Midcontinent Media, Inc.
from 1989 to 1994 and served in various financial audit
positions with Grant Thornton LLP from 1983 to 1989.
Alfred L. LaTendresse rejoined us in December 2001 as Executive
Vice President and further assumed the roles of Chief Financial
Officer, Treasurer and Secretary in December 2003.
Mr. LaTendresse served as Chief Operations Officer and
Chief Financial Officer for Headwater Systems, Inc., a radio
frequency identification technology company, from June 1999 to
December 2001. Mr. LaTendresse initially joined us as Chief
Financial Officer in 1990 and later added the roles of Secretary
and Treasurer. Mr. LaTendresse departed from us in December
1998. Mr. LaTendresse served as a Director for us from July
1993 until January 1995 and from December 2001 to March 2004.
Mr. LaTendresse is a member of the American Institute of
Certified Public Accountants and the Minnesota Society of
Certified Public Accountants.
Keith D. Krueger joined us in September 1998 as the Director of
Underwriting and Pricing for our Minnesota regional office. He
was promoted to Director of Underwriting Services in our Home
Office in October 1999 and served in this capacity until being
promoted to Vice President — Underwriting and Sales in
9
March 2002 (later renamed Vice President — Insured
Products in December 2003). Mr. Krueger is also the
President of ACIC. Prior to joining RTW, Mr. Krueger was a
Commercial Lines Underwriting Manager for Citizens Security
Mutual Insurance from June 1997 to August 1998. From March 1995
to May 1997, Mr. Krueger was Vice President —
Underwriting and Marketing for American West Insurance. He is a
member of the American Institute for Property and Liability
Underwriters and holds the CPCU designation.
David M. Dietz joined us in July 2002 as the Director of
Self-Insured Services in our Home Office and was promoted to
Vice President — Alternative Products (later renamed
Absentia) in December 2003. Mr. Dietz came to us with
fourteen years of experience in the insurance industry. Prior to
joining RTW, Mr. Dietz served as Senior Vice President,
Marketing and Technical Sales for Benfield Blanch, Inc. from
September 2000 to July 2002. Mr. Dietz also served in
various management roles for EBI Companies, Citizens Management,
Inc., TIG Insurance and Sentry Insurance from 1989 to 2000.
Patricia M. Sheveland was promoted to Vice President —
Case and Claims Management in January 2002. Ms. Sheveland
joined us in April 1990 and has held various management
positions of increasing importance including General Manager of
Operations in the Colorado regional office and Director of
Operations for the Colorado, Michigan and Massachusetts regions.
Prior to joining RTW, Ms. Sheveland worked as an
Occupational Nurse for Kmart Corporation.
The following is a summary of properties leased by us at
December 31, 2004:
| |
|
|
|
|
|
|
|
|
| |
|
Area leased (in | |
|
|
| Location and description |
|
square feet) | |
|
Termination | |
| |
|
| |
|
| |
|
Bloomington, Minnesota; Headquarters and Minnesota office space
|
|
|
26,301 |
|
|
|
September 2007 |
|
|
Denver, Colorado; Colorado office space
|
|
|
7,825 |
|
|
|
April 2005 |
|
|
Detroit, Michigan; Michigan office space
|
|
|
7,118 |
|
|
|
May 2007 |
|
|
Grand Rapids, Michigan; Michigan office space
|
|
|
4,571 |
|
|
|
April 2006 |
|
Subsequent to December 31, 2004 we renewed our Denver
office lease for an additional five years and one month.
|
|
| Item 3. |
Legal Proceedings |
In the ordinary course of administering workers’
compensation management programs, we are routinely involved in
adjudicating claims resulting from workplace injuries. We are
not involved in any legal or administrative claims that we
believe are likely to have a material adverse effect on our
operations or financial condition.
|
|
| Item 4. |
Submission of Matters to a Vote of Security Holders |
None.
PART II
|
|
| Item 5. |
Market for Registrant’s Common Equity and Related
Stockholder Matters |
Quarterly Stock Price Comparison and Dividends
Our shares are traded publicly on The Nasdaq Stock Market under
the symbol RTWI. The table below sets forth the range of high
and low sales prices for our stock for each quarter during the
past two years. We had approximately 2,000 shareholders of
our common stock at the close of trading on March 1, 2005.
10
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
| Fiscal Year: |
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
Quarter | |
| |
|
| |
|
| |
|
| |
|
| |
|
2004
|
|
High |
|
$ |
7.12 |
|
|
$ |
7.01 |
|
|
$ |
7.29 |
|
|
$ |
9.48 |
|
| |
|
Low |
|
|
5.83 |
|
|
|
5.76 |
|
|
|
5.71 |
|
|
|
6.40 |
|
|
2003
|
|
High |
|
$ |
3.01 |
|
|
$ |
4.37 |
|
|
$ |
4.00 |
|
|
$ |
7.60 |
|
| |
|
Low |
|
|
1.79 |
|
|
|
2.38 |
|
|
|
3.45 |
|
|
|
3.78 |
|
We have never paid cash dividends on our common stock. We intend
to retain any and all income for use in our business and do not
anticipate paying cash dividends in the foreseeable future. Any
future determination as to payment of dividends will depend on
our financial condition and results of operations and such other
factors deemed relevant by the Board of Directors.
Recent Sales of Unregistered Equity Securities
We had no unregistered sales of equity securities during the
quarter ended December 31, 2004.
Issuer Repurchases of Equity Securities
We did not repurchase any of our equity securities during the
quarter ended December 31, 2004.
|
|
| Item 6. |
Selected Financial Data |
The Consolidated Statements of Income data set forth below for
each of the three years in the period ended December 31,
2004, and the Consolidated Balance Sheet data at
December 31, 2004 and 2003 are derived from, and are
qualified by reference to, the audited Consolidated Financial
Statements included elsewhere in this Annual Report on
Form 10-K. The Consolidated Statements of Income data set
forth below for the two years in the period ended
December 31, 2001, and the Consolidated Balance Sheet data
at December 31, 2002, 2001 and 2000, are derived from
audited Consolidated Financial Statements not included herein.
The information set forth below should be read in conjunction
with “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and our
consolidated financial statements and related notes included
elsewhere in this Annual Report on Form 10-K.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
|
Total revenues
|
|
$ |
58,857 |
|
|
$ |
51,558 |
|
|
$ |
67,146 |
|
|
$ |
95,723 |
|
|
$ |
83,299 |
|
|
Income (loss) from operations
|
|
|
8,072 |
|
|
|
6,635 |
|
|
|
10,325 |
|
|
|
(15,761 |
) |
|
|
(14,780 |
) |
|
Income (loss) before income taxes
|
|
|
8,072 |
|
|
|
6,587 |
|
|
|
10,162 |
|
|
|
(16,272 |
) |
|
|
(15,447 |
) |
|
Net income (loss)
|
|
|
9,941 |
|
|
|
6,999 |
|
|
|
14,319 |
|
|
|
(25,215 |
) |
|
|
(9,708 |
) |
|
Basic income (loss) per share
|
|
|
1.90 |
|
|
|
1.37 |
|
|
|
2.78 |
|
|
|
(4.89 |
) |
|
|
(1.79 |
) |
|
Diluted income (loss) per share
|
|
|
1.81 |
|
|
|
1.32 |
|
|
|
2.78 |
|
|
|
(4.89 |
) |
|
|
(1.79 |
) |
|
Total assets
|
|
|
220,507 |
|
|
|
202,168 |
|
|
|
223,834 |
|
|
|
218,307 |
|
|
|
194,535 |
|
|
Notes payable
|
|
|
— |
|
|
|
— |
|
|
|
1,250 |
|
|
|
4,500 |
|
|
|
7,000 |
|
|
Total shareholders’ equity
|
|
|
45,531 |
|
|
|
35,587 |
|
|
|
29,810 |
|
|
|
14,222 |
|
|
|
38,736 |
|
|
Other information (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums in force at year end
|
|
|
62,700 |
|
|
|
58,100 |
|
|
|
54,200 |
|
|
|
83,700 |
|
|
|
99,400 |
|
11
|
|
| Item 7. |
Management’s Discussion and Analysis of Financial
Condition and Results of Operations |
RTW, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company — RTW, Inc. (RTW) and its
wholly-owned insurance subsidiary, American Compensation
Insurance Company (ACIC), provide disability management services
to employers. Collectively, “we,” “our” and
“us” refer to these entities in this
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”
We developed two proprietary management systems:
(i) ID15®, designed to identify early on those injured
employees who are likely to become inappropriately dependent on
disability system benefits, including workers’
compensation; and (ii) The RTW Solution®, designed to
lower employers’ disability system costs and return injured
employees to work as soon as reasonably possible. We provide
disability management services, primarily workers’
compensation management services to: (i) employers insured
through our insurance subsidiary; (ii) self-insured
employers on a fee-for-service basis; (iii) the Minnesota
Workers’ Compensation Assigned Risk Plan on a percent of
premium basis; (iv) other insurance companies; and
(v) on a consulting basis to agents and employers, charging
hourly fees. During 2004, we operated primarily in Minnesota,
Michigan and Colorado and began servicing non-insurance
customers in California and Indiana.
On March 9, 2004, our A.M. Best financial rating was
upgraded from “B” (Fair, Vulnerable) to “B+”
(Very Good, Secure) as a result of: (i) our continued
profitable operating performance in 2003; and (ii) improved
capitalization in ACIC as statutory surplus increased to
$33.0 million at December 31, 2003 from
$26.8 million at December 31, 2002 due to our 2003
earnings. Although we believe that our “B+” rating
from A.M. Best may increase the number of employers willing to
do business with ACIC, there are some employers that will only
consider insurers rated “A-” or better.
Additional information about RTW is available on our website at
www.rtwi.com.
Challenges, risks, uncertainties and trends —
We derive our revenue almost entirely from workers’
compensation insurance premiums and investment income, including
gains and losses from sales of securities. A small, but
increasing portion of our revenue is derived from non-insurance
disability management services. We are subject to the
challenges, risks, uncertainties and trends that affect the
workers’ compensation property and casualty insurance and
the disability management services sectors of our economy
including the following:
|
|
|
| |
• |
Workers’ compensation is a state regulated industry.
Workers’ compensation is governed and regulated by state
governmental agencies. We are subject to state regulation in any
state in which we provide workers’ compensation products
and services, now and in the future. State regulatory agencies
have broad administrative power with respect to all aspects of
our business, including premium rates, benefit levels, policy
forms, dividend payments, capital adequacy and the amount and
type of investments. Legislation covering insurance companies
and the regulations adopted by state agencies are subject to
change and any change may adversely affect our operations; |
| |
| |
• |
Workers’ compensation claims and related expenses can be
volatile. Workers’ compensation is a long-tailed
property and casualty insurance line. Claims for a given year
are open on average for twelve to thirteen years and it is not
unusual for workers’ compensation insurers to have some
claims open for thirty or more years. We have operated ACIC
since 1992 and therefore have relatively limited experience
(thirteen years), and accordingly, are subject to volatility.
See further discussion under “Claim and Claim Settlement
Expenses”; |
| |
| |
• |
Workers’ compensation is subject to inflationary
pressures. Worker’s compensation is subject to both
medical and wage inflation. The cost of medical care has
increased in excess of 10% per annum in recent years. This
has resulted in reduced profitability in the workers’
compensation insurance line. |
12
|
|
|
| |
|
New medical procedures could evolve and new legal theories
develop that could cause older claims to re-open and increase
expense. See further discussion under “Claim and Claim
Settlement Expenses”; |
| |
| |
• |
Workers’ compensation pricing is cyclical. In 2004,
we were able to increase premium rates on renewing policies only
by an average of 0.9%, decreasing significantly from recent
years. Rates increased 1.4%, 9.0%, 18.5% and 11.7% in 2003,
2002, 2001 and 2000, respectively. These increases came after
many years of rate decreases that unfavorably affected the
industry in the late 1990’s. If we are unable to maintain
rate increases or decrease our costs, our profit margin will be
adversely affected. See further discussion under “Premiums
in Force and Gross Premiums Earned”; |
| |
| |
• |
Reinsurance costs for workers’ compensation have
increased. Reinsurance costs increased over the prior year
continuing a pattern of cost increases beginning in 2001. These
higher costs, if not recovered through increased rates from our
customers, will adversely affect our profit margin. See further
discussion under “Premiums Ceded”; |
| |
| |
• |
Low interest rates reduce our investment income. Interest
rates for investment-grade instruments are lower than historic
averages. Our investment income is directly affected by the
interest rate at which we invest our free cash flow. The
historical low interest rate environment during the pase several
years contributed to a significant mortgage refinancing boom,
resulting in prepayment of our mortgage-backed investments and
increased our cash on hand in ACIC. We continue to invest these
funds in short-term instruments. An ongoing low interest rate
environment will adversely affect our investment income. See
further discussion under “Investment Income and Net
Realized Investment Gains”; and |
| |
| |
• |
Profitable service revenue growth could be difficult. The
national market for disability management services is highly
competitive and includes national, regional and local providers
of services. We do not have a national presence, limiting our
ability to service national accounts. Any infrastructure changes
to support growth in our non-insurance revenues could be
expensive and diminish our earnings in the short-term. |
Significant Accounting Policies — Our
significant accounting policies are summarized in
Note 1 — “Summary of Significant Accounting
Policies” included in the accompanying Notes to
Consolidated Financial Statements. Our significant accounting
policies include those policies related to our accounting for:
(i) premiums earned; (ii) unpaid claim and claim
settlement expenses, including reserves for incurred but not
reported claims and the related reinsurance recoverables;
(iii) deferred policy acquisition costs; (iv) income
taxes and deferred income taxes; and (v) investments. These
accounting policies are discussed within each section of this
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations”.
Service revenue includes revenues for services that are:
(i) billed as a percent of premium of insurance policies
issued by non-affiliated third-party insurers; (ii) billed
based on the number and type of claims serviced;
(iii) billed on an hourly basis based on direct activity;
or (iv) billed based on contract duration. Service revenue
earned as a percent of premium is recognized over the life of
the underlying insurance policy and the related claims in a
manner consistent with RTW’s Premiums Earned revenue
recognition policy. Service revenue related to claims management
is recognized over the expected duration of the claims
management activity. Service revenue is recognized as services
are performed over the life of the contract. The excess of
billed service revenue over earned amounts is recognized as a
liability and included in “Accrued expenses and other
liabilities” on our Consolidated Balance Sheet.
Off-Balance Sheet Arrangements — We do not have
any off-balance sheet arrangements.
Financial Summary — This financial summary
presents our discussion and analysis of the consolidated
financial condition and results of operations of RTW, Inc. This
review should be read in conjunction with the Consolidated
Financial Statements at December 31, 2004.
13
The following table provides an overview of our key operating
results (000’s, except per share amounts):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Gross premiums earned
|
|
$ |
63,370 |
|
|
$ |
54,431 |
|
|
$ |
62,506 |
|
|
Premiums earned
|
|
|
53,682 |
|
|
|
46,290 |
|
|
|
60,264 |
|
|
Service revenue
|
|
|
633 |
|
|
|
109 |
|
|
|
22 |
|
|
Total revenues
|
|
|
58,857 |
|
|
|
51,558 |
|
|
|
67,146 |
|
|
Claim and claim settlement expenses
|
|
|
35,536 |
|
|
|
27,256 |
|
|
|
40,533 |
|
|
Net income
|
|
|
9,941 |
|
|
|
6,999 |
|
|
|
14,319 |
|
|
Diluted income per share
|
|
$ |
1.81 |
|
|
$ |
1.32 |
|
|
$ |
2.78 |
|
We reported net income of $9.9 million in 2004 compared to
net income of $7.0 million in 2003 and $14.3 million
in 2002. We reported diluted income per share of $1.81 in 2004
compared to diluted income per share of $1.32 in 2003 and $2.78
in 2002. The primary factors affecting our 2004 operating
results included the following:
|
|
|
| |
• |
Gross premiums earned increased 16.4% to $63.4 million in
2004 from $54.4 million in 2003 due primarily to an
increase in average premiums in force to $61.5 million for
2004 from $53.6 million in 2003. See further discussion
under “Premiums In Force and Gross Premiums Earned”; |
| |
| |
• |
Premiums earned increased 16.0% to $53.7 million in 2004
from $46.3 million in 2003. Premiums earned in 2004 reflect
the increase in gross premiums earned from 2003, and an increase
in final audit premiums earned in 2004 compared to 2003, offset
by an increase in premiums ceded as our cost of excess of loss
reinsurance increased in 2004; |
| |
| |
• |
In addition to the factors affecting premiums earned, total
revenues increased as we recorded $705,000 of net realized
investment gains in 2004 compared to $685,000 recorded in 2003; |
| |
| |
• |
Claim and claim settlement expenses increased to 66.2% of
premiums earned for 2004 from 58.8% for 2003. Favorable
development for prior accident years reduced claim and claim
settlement expenses by $7.0 million in 2004 compared to
$6.7 million in 2003. Claim and claim settlement expenses
also increased in 2004 due to the increase in gross premiums
earned in 2004 compared to 2003. See further discussion under
“Claim and Claim Settlement Expenses”; and |
| |
| |
• |
At December 31, 2004, we eliminated the valuation allowance
recorded against our deferred tax asset. This allowance was
originally established at December 31, 2001 at
$14.5 million, and was decreased by $7.9 million in
2002, $3.0 million in 2003 and $4.0 million in 2004.
The $4.0 million and $3.0 million decreases in the
valuation allowance favorably affected our income tax expense in
2004 and 2003, respectively. See further discussion under
“Income Taxes.” |
We expect 2005 premiums in force to remain consistent with 2004.
We also anticipate that premium rates will decrease slightly in
2005 as the markets in which we operate continue to become more
competitive. We expect to increase non-insurance revenue
significantly in 2005. We will focus on profitability by:
(i) increasing our non-insurance revenue significantly;
(ii) aggressively managing and closing claims;
(iii) reviewing policy profitability at renewal and
removing unprofitable accounts; and (iv) aggressively
managing policy acquisition costs and general and administrative
expenses.
In the following pages, we take a look at the 2004, 2003 and
2002 operating results for items in our Consolidated Statements
of Income and also explain key balance sheet accounts in greater
detail.
14
Results of Operations
Total revenues: Our total revenues include premiums
earned, investment income, net realized investment gains and
service revenue. The following table summarizes the components
of our revenues and premiums in force (000’s):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Gross premiums earned
|
|
$ |
63,370 |
|
|
$ |
54,431 |
|
|
$ |
62,506 |
|
|
Premiums ceded
|
|
|
(9,688 |
) |
|
|
(8,141 |
) |
|
|
(2,242 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Premiums earned
|
|
|
53,682 |
|
|
|
46,290 |
|
|
|
60,264 |
|
|
Investment income
|
|
|
3,837 |
|
|
|
4,474 |
|
|
|
5,139 |
|
|
Net realized investment gains:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Realized investment gains
|
|
|
708 |
|
|
|
685 |
|
|
|
1,930 |
|
| |
Realized investment losses
|
|
|
(3 |
) |
|
|
— |
|
|
|
(209 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
Net realized investment gains
|
|
|
705 |
|
|
|
685 |
|
|
|
1,721 |
|
|
Service revenue
|
|
|
633 |
|
|
|
109 |
|
|
|
22 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Total revenues
|
|
$ |
58,857 |
|
|
$ |
51,558 |
|
|
$ |
67,146 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Premiums in force by region at year-end
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Minnesota
|
|
$ |
37,800 |
|
|
$ |
32,000 |
|
|
$ |
23,000 |
|
| |
Colorado
|
|
|
10,600 |
|
|
|
13,000 |
|
|
|
11,800 |
|
| |
Michigan
|
|
|
14,300 |
|
|
|
13,100 |
|
|
|
18,000 |
|
| |
Closed regional offices — Missouri and New England
|
|
|
— |
|
|
|
— |
|
|
|
1,400 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total premiums in force
|
|
$ |
62,700 |
|
|
$ |
58,100 |
|
|
$ |
54,200 |
|
| |
|
|
|
|
|
|
|
|
|
Premiums In Force and Gross Premiums Earned: Premiums on
workers’ compensation insurance policies are our largest
source of revenue. Premiums earned are the gross premiums earned
by us on in force workers’ compensation policies, net of
the effects of ceded premiums under reinsurance agreements.
The premium we charge a policyholder is a function of the
policyholders’ payroll, industry and prior workers’
compensation claims experience. In underwriting a policy, we
receive policyholder payroll estimates for the ensuing year. We
record premiums written on an installment basis matching our
billing to the policyholder and earn premiums on a daily basis
over the life of each insurance policy based on the payroll
estimate. We record the excess of premiums billed over premiums
earned for each policy as unearned premiums on our balance
sheet. When a policy expires, we audit policyholder payrolls for
the policy period and adjust the estimated payroll to its actual
value. The result is a “final audit” adjustment
recorded to premiums earned when the adjustment becomes known.
Final audit premiums recognized during the period include billed
final audit premiums plus (or minus) the change in estimate for
premiums on unexpired and expired unaudited policies.
Our premiums in force increased to $62.7 million at
December 31, 2004 from $58.1 million at
December 31, 2003 and $54.2 million at
December 31, 2002. Premiums in force in our Minnesota and
Michigan regions grew $5.8 million and $1.2 million,
respectively, in 2004. The increases in the Minnesota and
Michigan regions were offset by a $2.4 million decrease in
Colorado. Average premiums in force increased to
$61.5 million in 2004 from $53.6 million in 2003 but
decreased from $65.1 million in 2002. In order to improve
profitability, we aggressively targeted policies that did not
meet our underwriting profit margin standards for non-renewal or
re-underwriting at increased rates at policy expiration in 2004,
2003 and 2002. Our average annual premium per policy increased
to $94,600 in 2004 from $85,400 in 2003 and $80,400 in 2002 as a
result of the re-underwriting in those years.
15
Our gross premiums earned increased 16.5% to $63.4 million
in 2004 from $54.4 million in 2003. This increase resulted
primarily from: (i) the increase in average premiums in
force; and (ii) final audit premiums which increased gross
premiums earned by $1.2 million in 2004 compared to a
$323,000 increase in 2003.
Gross premiums earned decreased 12.9% to $54.4 million in
2003 from $62.5 million in 2002. This decrease resulted
primarily from: (i) the decrease in average premiums in
force; offset by (ii) final audit premiums which increased
gross premiums earned by $323,000 in 2003, compared to a
$1.7 million decrease in 2002.
In 2004, 2003 and 2002, we were able to increase premium rates
on renewing policies an average of 0.9%, 1.4% and 9.0%,
respectively. We have been able to increase premium rates in our
markets due to the following:
|
|
|
| |
• |
Many workers’ compensation insurers have withdrawn from the
markets in which we write premiums as profitability diminished
in the workers’ compensation insurance line; |
| |
| |
• |
Reinsurance rates for workers’ compensation insurers have
increased due to: (i) reductions in reinsurer’s
surplus as a result of the September 11, 2001 terrorist
acts against the United States; (ii) unprofitability
resulting from highly competitive reinsurance pricing in the
late 1990’s; (iii) settlements related to certain
reinsurance treaties written in the late 1990’s;
(iv) five major reinsurers leaving the market in 2003; and
(v) low investment yields. These rate increases have
resulted in increased costs for workers’ compensation
insurers. Insurers, including RTW, have raised premium rates to
offset these increases in reinsurance premiums; and |
| |
| |
• |
A number of workers’ compensation insurers’ financial
ratings decreased due to reserve adjustments recorded in 2004,
2003 and 2002 resulting in a reduced capacity and
creditworthiness of those insurers. |
Premiums Ceded: Reinsurance agreements enable us to share
certain risks with other insurance companies. We purchase
reinsurance to protect us from potential losses in excess of the
level we are willing to accept. We expect the companies to which
we have ceded reinsurance to honor their obligations. In the
event that these companies are unable to honor their obligations
to us, we will be required to pay the underlying obligations
ourselves. We are not aware of any developments with respect to
any of our reinsurers that would result in our current
reinsurance balances becoming uncollectible.
Under our excess of loss reinsurance policies, we pay reinsurers
to limit our per-incident exposure and record this cost to
premiums ceded as a reduction of gross premiums earned. In
Minnesota, we are required to purchase excess of loss coverage
for our Minnesota policies from the Minnesota Workers’
Compensation Reinsurance Association (WCRA). We purchased
reinsurance for 2004 in our states other Minnesota from four
reinsurers. The following table summarizes our reinsurance
coverage (all losses ceded on a per occurrence basis):
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
Covers losses per occurrence: |
| |
|
|
|
|
| |
|
|
|
In excess of: | |
|
Limited to: |
| |
|
|
|
| |
|
|
|
Minnesota:
|
|
|
|
|
|
|
|
|
| |
2004
|
|
WCRA |
|
$ |
360,000 |
|
|
Statutory limit |
| |
|
Various reinsurers |
|
$ |
200,000 |
|
|
$360,000 |
| |
2003
|
|
WCRA |
|
$ |
360,000 |
|
|
Statutory limit |
| |
|
Various reinsurers |
|
$ |
200,000 |
|
|
$360,000 |
| |
2002
|
|
WCRA |
|
$ |
350,000 |
|
|
Statutory limit |
|
Other states:
|
|
|
|
|
|
|
|
|
| |
2004
|
|
Various reinsurers |
|
$ |
200,000 |
|
|
$20.0 million excluding acts of terrorism |
| |
2003
|
|
Various reinsurers |
|
$ |
200,000 |
|
|
$20.0 million excluding acts of terrorism |
| |
2002
|
|
Various reinsurers |
|
$ |
300,000 |
|
|
$20.0 million |
We decreased our retention levels in 2004 and 2003 to further
reduce volatility in our operating results.
16
Premiums ceded to reinsurers increased to $9.7 million in
2004 from $8.1 million in 2003. The increase in premiums
ceded resulted primarily from: (i) our cost for excess of
loss reinsurance coverage increased in all regions in 2004;
(ii) gross premiums earned in 2004 increased from 2003; and
(iii) the 2004 results include a $129,000 decrease in
excess of loss premiums ceded resulting from a change in
estimated reinsurance cost for the WCRA compared to a $92,000
increase in excess of loss premiums ceded in 2003.
Premiums ceded to reinsurers increased to $8.1 million in
2003 from $2.2 million in 2002. The increase in premiums
ceded resulted primarily from: (i) our cost for excess of
loss reinsurance coverage increased substantially in our
non-Minnesota regions in 2003 while our Minnesota cost decreased
only slightly; (ii) we decreased our retention to $200,000
in all our regions in 2003 by purchasing increased excess of
loss coverage in order to further reduce volatility in our
operating results; and (iii) the 2003 results include a
$92,000 increase in excess of loss premiums ceded resulting from
a change in estimated reinsurance cost for the WCRA compared to
a $1.4 million decrease in excess of loss premiums ceded in
2002.
2005 Outlook: The 2005 outlook for premiums in force,
gross premiums earned and premiums ceded include the following
factors:
|
|
|
| |
• |
We expect premium rates to decrease on new and renewal policies
as national and regional carriers focus on writing and retaining
workers’ compensation insurance. We expect to add new
agency relationships in 2005 and terminate some that are not
performing well. We expect premiums in force to decrease
slightly in 2005 with any growth occurring primarily in our
Minnesota and Michigan regions; |
| |
| |
• |
Our 2005 gross premiums earned will move in the same direction
as our premiums in force, lagging slightly as premiums are
earned over the term of the insurance policy; and |
| |
| |
• |
Premiums ceded under excess of loss policies will increase as a
percent of gross premiums earned in 2005 when compared to the
results attained for 2004. We maintained a $200,000 retention in
all our regions in 2005. The cost of excess of loss reinsurance
has increased at all retention levels and for all regions in
2005. |
Investment Income and Net Realized Investment Gains:
Investment income includes earnings from our investment
portfolio and, in 2002 interest on our deposit receivable. Our
net realized investment gains, displayed separately on our
accompanying Consolidated Statements of Income, include gains
and losses from sales of securities.
We currently invest entirely in U.S. domiciled
investment-grade taxable and tax-exempt fixed maturity
investments and classify our investments as available-for-sale.
Our primary investment objective is to maintain a diversified,
high-quality, fixed-investment portfolio structured to maximize
our after-tax investment income without taking inappropriate
credit risk. For further discussion of investments, see the
“Investments” section of this Management’s
Discussion and Analysis.
At December 31, 2003, we were invested entirely in
U.S. domiciled investment-grade taxable fixed maturity
investments. We added U.S. domiciled investment-grade
tax-exempt fixed maturity investments in 2004 to take advantage
of the tax benefits of those securities and interest rate
spreads. We also held significant cash and cash equivalents
totaling $39.4 million and $39.7 million at
December 31, 2004 and 2003, respectively. In order to
reduce the near term interest rate risk on the portfolio, we
built our cash position throughout 2003 by holding cash received
on mortgage-backed security prepayments and through sales of
securities in September 2003 with the expectation that interest
rates would rise in the near term. We intend to hold our
available-for-sale investments to maturity, but may sell them
before maturity in response to tax planning considerations,
changes in interest rates, changes in prepayment risk and
changes in funding sources or terms, or to address liquidity
needs.
Investment income decreased to $3.8 million in 2004 from
$4.5 million in 2003. This decrease in investment income
resulted from the decrease in our average book interest rates
during 2004 and was partially offset by the increase in assets
invested, to $86.9 million in 2004 from $77.1 in 2003.
Interest rates at December 31, 2004 were at approximately
the same levels as December 2003. Approximately
$7.5 million of mortgage-backed securities in our
investment portfolio were repaid earlier than expected due to
consumer
17
mortgage refinancing and normal repayment patterns that occurred
in 2004. An additional $11.3 million of other securities
matured during 2004. The funds that became available could not
be reinvested at comparable rates, causing the book investment
yield to decline from 2003. Our book investment yield, excluding
cash and cash equivalents, declined to 4.0% at December 31,
2004 from 4.6% at December 31, 2003. The investment yields
realized in future periods will be affected by yields attained
on new investments.
Investment income decreased to $4.5 million in 2003 from
$5.1 million in 2002. After excluding $736,000 of interest
earned on our deposit receivable in 2002, for which there was no
equivalent amount earned in 2003, investment income increased
slightly to $4.5 million in 2003 from $4.4 million in
2002. Investment income increased slightly as average invested
assets increased to $96.0 million in 2003 from $77.9 in
2002. This increase in investment income resulting from the
increase in assets invested was offset by a decrease in interest
rates during 2003. Interest rates declined early in the year,
reaching a low point in June 2003 before returning to beginning
of the year levels by December 2003. Approximately
$20.3 million of mortgage-backed securities in our
investment portfolio were repaid earlier than expected due to
the significant consumer mortgage refinancing that occurred in
2003. An additional $5.6 million of other securities
matured during 2003. The funds that became available could not
be reinvested at comparable rates, causing the book investment
yield to decline from 2002. Our book investment yield, excluding
cash and cash equivalents, declined to 4.6% at December 31,
2003 from 4.9% at December 31, 2002.
In 2004 and 2003, we sold certain securities within the
portfolio to take advantage of favorable interest rates and
realized net investment gains totaling $705,000 and $685,000,
respectively. In 2002, we sold certain securities within the
portfolio and realized net investment gains totaling
$1.7 million as we repositioned the portfolio.
2005 Outlook: We expect that income from our investment
portfolio for 2005 will be affected by the following:
|
|
|
| |
• |
Our investment in tax-exempt municipal bonds will reduce
investment income and favorably affect net income as investment
yields will be lower on a pre-tax basis but will be higher on a
tax-adjusted basis; |
| |
| |
• |
We expect interest rates to increase in 2005. The timing of any
such rate increases is unknown at this time. We intend to invest
our excess cash into higher yielding investments in 2005 as
rates increase; |
| |
| |
• |
We expect that short-term interest rates on cash and cash
equivalents will increase in 2005 as the Federal Reserve Board
increases its rates; |
| |
| |
• |
Cash flows for 2005 are expected to be adversely affected by
decreases in cash flows resulting from claim payments on claims
from 2004 and prior years offset by cash flows from our premiums
as we increase our premiums earned in 2005; |
| |
| |
• |
Recognition of realized investment gains and losses will depend
on sales of our investments, if any, to meet our short-term cash
requirements or as we reposition our portfolio to further manage
our portfolio returns; and |
| |
| |
• |
New and renegotiated reinsurance treaties may affect our future
cash flow and future investment income. |
Service Revenue: Service revenue includes revenues for
services that are: (i) billed as a percent of premium of
insurance policies issued by non-affiliated third-party
insurers; (ii) billed based on the number and type of
claims serviced; (iii) billed on an hourly basis based on
direct activity; or (iv) billed based on contract duration.
Our customers include the Minnesota Workers’ Compensation
Assigned Risk Plan (ARP), self-insured employers, other
insurance companies, insurance agents and local governmental
units. Service revenue grew to $633,000 in 2004 from $109,000 in
2003 and $22,000 in 2002.
Service Revenue Outlook: Service revenue will increase
significantly in 2005 due to the following:
|
|
|
| |
• |
In March 2004, we were awarded a three-year contract to service
25% of the ARP. We are paid a fee based on a percent of the
premium we service and began servicing new ARP business on
July 1, 2004 and renewal ARP business on September 1,
2004. We believe the annual premium for the ARP to be |
18
|
|
|
| |
|
in excess of $100 million. We currently expect this
contract to produce service revenue in excess of
$4.0 million during 2005, some of which will be deferred to
future periods; and |
| |
| |
• |
We currently have 23 additional non-insurance customers in
Minnesota, Michigan, California and Indiana that will generate
approximately $1.0 million of annualized service revenue
over the term of their contracts. We continue to market our
alternative products aggressively inside and outside the regions
in which we currently operate. We expect service revenue will
increase as new customers become aware of and purchase these
services. The ultimate effect on service revenue is unknown at
this time. |
Total Expenses: Our expenses include claim and claim
settlement expenses, policy acquisition costs, general and
administrative expenses, interest expense and income taxes.
Claim and Claim Settlement Expenses: Claim expenses refer
to medical and indemnity benefits that we paid or expect to pay
to claimants for events that have occurred. The costs of
investigating, resolving and processing these claims are
referred to as claim settlement expenses. We record these
expenses, net of amounts recoverable under reinsurance
contracts, to claim and claim settlement expenses in the
accompanying Consolidated Statements of Income.
Claim and claim settlement expenses are our largest expense and
result in our largest liability. We establish reserves that
reflect our estimates of the total claim and claim settlement
expenses we will ultimately have to pay under our workers’
compensation insurance policies. These include claims that have
been reported but not yet settled and claims that have been
incurred but not yet reported to us. For further discussion of
reserve determination, see the “Unpaid Claim and Claim
Settlement Expenses” and “Reinsurance
Recoverables” section of this Management’s Discussion
and Analysis.
We experienced an increase in the estimated number of ultimate
claims for 2004 compared to 2003 and 2002. The number of
estimated ultimate claims by accident year increased to
approximately 11,800 in 2004 from 9,600 in 2003 and 11,500 in
2002. The increase in 2004 correlates directly to: (i) the
increase in gross earned premiums; and (ii) the
re-underwriting that we completed with respect to our in force
policies in 2003, 2002 and 2001. The gross and net average
estimated cost per claim (which includes both claim and claim
settlement expenses) totaled approximately $5,100 and $4,200 in
2004 compared to $5,000 and $4,200 in 2003 and $5,500 and $4,900
in 2002, respectively. The 2004 and 2003 decreases in gross and
net average estimated cost per claim, when compared to the 2002
data, is primarily the result of our improved ability to manage
cases and claims offset by increases in severity (i.e., the
average cost of a claim). The trend of increasing severity is
attributable to a combination of factors that include increasing
medical and indemnity costs (reimbursements to injured workers
for lost wages) per claim and a decline in the number of claims
being reported over the last several years. The declining
frequency of claims contributes to the increasing severity trend
because the frequency decline has been concentrated in less
expensive claims (claims involving less time-off from work and
less severe injuries).
At December 31, 2004, the number of claims reported but
unpaid (open claims) and the approximate average gross and net
reserves on the claims occurring in the following accident years
were: 2004 — 1,243 claims, $32,900 average gross
reserve, $24,100 average net reserve; 2003 — 195
claims, $84,300 average gross reserve, $56,200 average net
reserve; and 2002 — 139 claims, $119,400 average gross
reserve, $81,600 average net reserve. The average gross and net
reserves per claim are less in 2004 than in 2003 and 2002 as the
open claims include newly reported claims from the later half of
2004, including many with much lower severity that have not had
time to close, as well as new claims that are incurred but not
yet reported. The remaining open claims from 2003 and 2002 are
primarily claims with significant injury characteristics
resulting in the increase in outstanding average gross and net
reserves per claim.
2004 Compared to 2003: Claim and claim settlement
expenses increased to $35.5 million in 2004 from
$27.3 million in 2003. As a percent of premiums earned,
claim and claim settlement expenses increased to 66.2% in 2004
from 58.9% in 2003. These changes are due to the following:
|
|
|
| |
• |
The increase in gross premiums earned as discussed above under
“Premiums In Force and Gross Premiums Earned;” |
19
|
|
|
| |
• |
The 2004 results include a $7.0 million decrease in prior
years’ reserves for unpaid claim and claim settlement
expenses compared to the 2003 results which include a
$6.7 million decrease in prior years’ reserves. Our
estimate for unpaid claim and claim settlement expenses
decreased in 2004 due to the following: (i) our ability to
manage and close claims has improved over our historical
experience; (ii) the re-underwriting of our book of
business has resulted in claims with profiles different than
experienced historically; and (iii) our estimate of the
liability for unpaid claim and claim settlement expenses is
volatile due to our relatively limited thirteen-year historical
claim data and our small claim population; |
| |
| |
• |
Claim and claim settlement expenses increased in total due to
the overall increase in average premiums in force and increased
as a percent of premiums earned as reinsurance ceded costs
increased as a percent of gross premiums earned in 2004; and |
| |
| |
• |
Claim costs continued to reflect increasing medical and
indemnity costs in accident year 2004 as compared to accident
year 2003 resulting from inflationary pressures. |
2003 Compared to 2002: Claim and claim settlement
expenses decreased significantly to $27.3 million in 2003
from $40.5 million in 2002. As a percent of premiums
earned, claim and claim settlement expenses decreased to 58.9%
in 2003 from 67.3% in 2002. These changes are due to the
following:
|
|
|
| |
• |
The decrease in gross premiums earned as discussed above under
“Premiums In Force and Gross Premiums Earned;” |
| |
| |
• |
The 2003 results include a $6.7 million decrease in prior
years’ reserves for unpaid claim and claim settlement
expenses compared to the 2002 results which include an
$8.4 million decrease in prior years’ reserves. Our
estimate for unpaid claim and claim settlement expenses
decreased in 2003 due to the following: (i) our ability to
manage and close claims has improved over our historical
experience; (ii) the re-underwriting of our book of
business has resulted in claims with profiles different than
experienced historically; (iii) the frequency of claims
reported in 2003 for 2002 and prior years was less than
anticipated when we determined our liability in 2002; and
(iv) our estimate of the liability for unpaid claim and
claim settlement expenses is volatile due to our relatively
limited twelve-year historical claim data and our small claim
population; |
| |
| |
• |
Claim and claims settlement expenses decreased in total due to
the overall decrease in average premiums in force and decreased
as a percent of gross premiums earned as premium rate increases
realized in 2002 and 2003 flow through 2003 premiums
earned; and |
| |
| |
• |
Claim costs continued to reflect increasing medical and
indemnity costs in accident year 2003 as compared to accident
year 2002 resulting from inflationary pressures. |
2005 Outlook: We expect that claim and claim settlement
expenses will be affected by the following factors:
|
|
|
| |
• |
Claim costs will continue to be affected by: (i) increases
in medical and indemnity costs resulting from inflationary
changes; (ii) severity experienced in current and future
periods in our policyholder base; (iii) changes resulting
from increases in operating efficiency and effectiveness
realized through enhancements to our internal processes and
procedures, including changes to our proprietary computer
systems; and (iv) legislative changes that affect benefits
payable under workers’ compensation laws; |
| |
| |
• |
Increases (decreases) in premium rates will have a direct affect
on gross premiums earned without a corresponding affect on claim
and claim settlement expenses, ultimately affecting claim and
claim settlement expense as a percent of premiums earned.
Legislative changes in estimated loss costs, increased
competition and changes in customer loss experience may offset
or eliminate the effect of any rate improvement; and |
| |
| |
• |
Continued application of our claims management technology and
methods to all open claims. |
The ultimate effect of the above factors on claim and claim
settlement expenses as a percent of premiums earned for the
remainder of 2005 is unknown at this time.
20
Policy Acquisition Costs: Policy acquisition costs are
costs directly related to writing an insurance policy and
include commissions, state premium taxes, underwriting personnel
costs and expenses, sales and marketing costs and other
underwriting expenses, less ceding commissions received from our
reinsurers. Ceding commissions are amounts that reinsurers pay
to us for placing reinsurance with them.
The following table summarizes policy acquisition costs
(000’s):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Commission expense
|
|
$ |
4,489 |
|
|
$ |
4,000 |
|
|
$ |
4,321 |
|
|
Premium tax expense
|
|
|
1,147 |
|
|
|
997 |
|
|
|
1,048 |
|
|
Other policy acquisition costs
|
|
|
2,769 |
|
|
|
3,381 |
|
|
|
935 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Direct policy acquisition costs
|
|
|
8,405 |
|
|
|
8,378 |
|
|
|
6,304 |
|
|
Ceding commission on excess of loss reinsurance
|
|
|
(2,360 |
) |
|
|
(1,500 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total policy acquisition costs
|
|
$ |
6,045 |
|
|
$ |
6,878 |
|
|
$ |
6,304 |
|
| |
|
|
|
|
|
|
|
|
|
Under certain of our excess of loss reinsurance policies, the
reinsurer returns a portion of the premiums we cede as ceding
commissions to reimburse us for our cost of placing and managing
policies. Ceding commissions received under excess of loss
reinsurance policies totaled $2.4 million in 2004 compared
to $1.5 million in 2003. These ceding commissions reduced
our policy acquisition costs. No similar ceding commissions
existed in 2002. Excluding the effect of ceding commissions,
policy acquisition costs were $8.4 million in 2004,
$8.4 million in 2003 and $6.3 million in 2002. As a
percent of gross premiums earned, direct policy acquisition
costs were 13.3% in 2004 compared to 15.4% in 2003 and 10.1% in
2002. The decrease in 2004 and increase in 2003 compared to 2002
reflect the following:
|
|
|
| |
• |
Gross premiums earned increased in 2004 compared to 2003 and
2002 resulting in corresponding increases in policy acquisition
costs; |
| |
| |
• |
Commission expense decreased to 7.1% of gross premiums earned in
2004 from 7.3% in 2003 and increased from 6.9% in 2002. This
decrease in commission rates is the result of new business
growth that we experienced in the second half of 2003 on which
we paid higher commission rates and the focus in 2004 on
reducing the commissions we pay. In 2002, our renewal business,
on which we pay lower commission rates, significantly outpaced
our new business. In all of our markets, we believe the
commission rates we pay are marketplace competitive; |
| |
| |
• |
Premium tax expense paid to states was 1.8% of gross premiums
earned in 2004, 1.8% of gross premiums earned in 2003 and 1.7%
in 2002; and |
| |
| |
• |
Other policy acquisition costs consist of various state and
regulatory assessments related to second injury funds and
mandatory state pools, payroll audit vendor costs, and the net
effect of assigned risk plan activity in the states in which we
operate. Other policy acquisition costs were affected by the
following: (i) in 2004, we recorded a $478,000 increase in
other policy acquisition costs reflecting a re-allocation of
2003 mandatory reinsurance pool expenses compared to a
$1.5 million increase recorded in 2003; we were not
assessed any re-allocation in 2002; (ii) in 2002, Michigan
changed the basis of its second injury fund assessment from a
claims based assessment to a premium based assessment, resulting
in an $851,000 benefit in 2002 compared to no benefit received
in 2004 or 2003; (iii) in 2002, we received a $541,000
favorable adjustment from a state data collection agency
resulting from our significant decrease in premiums; and
(iv) a general change related to the increase or decrease
in gross premiums earned. Excluding the mandatory pool
re-allocation, second injury fund assessment changes and refunds
from data collection organizations discussed above, other policy
acquisitions costs were 3.6% in 2004, 3.6% in 2003 and 3.7% in
2002. |
21
2005 Outlook: We expect that policy acquisition costs in
2005 will be affected by the following:
|
|
|
| |
• |
Our commission expense will continue to be affected by how much
new business we write relative to renewal business as we pay
higher commissions on new policies. We had significant new
business growth in the latter half of 2003 and the first half of
2004, which will continue to affect commission expense in 2005.
We expect new business growth in 2005 to decrease from 2004; |
| |
| |
• |
Premium tax accrual rates will return to their normal level of
2.0% in 2005; |
| |
| |
• |
Other underwriting expenses will continue to be affected by pool
reimbursements offset by pool disbursements, the effect of which
is not known at this time. |
General and Administrative Expenses: Our general and
administrative expenses include personnel costs, office rent,
certain state administrative charges based on premiums and other
costs and expenses not specific to claim and claim settlement
expenses or policy acquisition costs.
Our general and administrative expenses decreased to
$9.2 million in 2004 from $10.8 million in 2003 and
$10.0 million in 2002. As a percent of gross premiums
earned, general and administrative expenses decreased to 14.5%
in 2004 from 19.8% in 2003 and 16.0% in 2002. General and
administrative expenses decreased in 2004 from 2003 and 2002 as
follows:
|
|
|
| |
• |
General and administrative expenses decreased in 2004 from 2003
levels. Significant changes include: (i) the reversal of a
previously recorded contingent reinsurance commission resulting
in $375,000 in expense in 2003; (ii) bonus expense of
$1.3 million in 2004 compared to $941,000 in 2003;
(iii) bad debt expense was $400,000 lower in 2004; and
(iv) we operated with fewer average headcount in 2004
compared to 2003; |
| |
| |
• |
General and administrative expenses increased in 2003 from 2002
levels. Significant changes include: (i) the reversal of a
previously recorded contingent reinsurance commission resulting
in $375,000 in expense in 2003; (ii) $217,000 in expenses
related to severance and relocation in 2003;
(iii) increased professional fees; and (iv) costs
associated with investing in the necessary staff and
infrastructure to position us for growth; |
2005 Outlook: We expect that general and administrative
expenses will be affected by the following:
|
|
|
| |
• |
General and administrative expenses, as a percentage of gross
premiums earned, are expected to decrease since we will earn
more premium and service revenue in 2005 and will have more
premium and revenue to cover our relatively fixed costs; |
| |
| |
• |
We will make appropriate investments in infrastructure to
position us for future growth of our service revenue and to
continue to support and enhance our core insurance operations; |
| |
| |
• |
Although we have no current plans to open additional offices in
2005, if service opportunities warrant opening a new office, we
will evaluate the opportunities that present themselves; and |
| |
| |
• |
All expenses will continue to be aggressively managed and
reduced where appropriate. |
Interest Expense: We incurred interest charges on our
Term Loan in 2003 and 2002. The note payable was paid in full in
September 2003. We incurred no interest charges in 2004 and
expect the same in 2005.
Income Taxes: We incur federal income taxes on our
combined service organization (RTW) operations and
insurance (ACIC) operations. We incur state income taxes on
the results of our service organization’s operations and
incur premium taxes in lieu of state income taxes for our
insurance operations. In certain instances, we may incur state
income taxes on our insurance operations. Additionally, certain
provisions of the Internal Revenue Code adversely affect our
taxable income by accelerating recognition and payment of income
taxes. Adjustments to book income generating current tax
liabilities include limitations on the deductibility of unpaid
claim and claim settlement expenses net of reinsurance
recoverables, limitations on the deductibility of unearned
premium reserves and limitations on deductions for bad debt
reserves.
22
In assessing our ability to realize deferred tax assets, we
consider whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized. We consider
recent operating results, the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning
strategies in making this assessment. At December 31, 2001,
we established a $14.5 million valuation
allowance (allowance) against deferred tax assets resulting
in a corresponding increase in income tax expense. This
allowance decreased by $7.9 million to $6.6 million at
December 31, 2002 as a result of the income we earned in
2002 and federal tax refunds totaling $3.8 million
resulting from a change in Federal tax law. This allowance was
further decreased by $3.0 million in 2003 to
$4.0 million as a result of the income we earned in 2003
and our analysis of projected taxable income. At
December 31, 2004, we expect that the recorded deferred tax
assets will be realized as a result of the future income and the
reversal of existing taxable temporary differences. As a result,
we eliminated the deferred tax valuation allowance and recorded
a $4.0 million benefit to income taxes in 2004.
Under the first provision of the Job Creation and Worker
Assistance Act of 2002, signed into law in March 2002, we were
allowed to carry-back our 2001 net operating loss for five
years, to 1996, instead of two years under previous law. We
filed our tax return in September 2002, and received a refund
totaling approximately $3.3 million as a result of this
Federal legislative change from carrying-back our 2001 loss.
The income tax benefit for the year ended December 31, 2004
includes a $4.0 million benefit resulting from reducing the
allowance. Income tax benefit for the year ended
December 31, 2003 included a $3.0 million benefit
resulting from reducing the allowance as we offset current year
earnings by losses carried forward from 2001 and $384,000 in
alternative minimum tax expense. Income tax benefit for the year
ended December 31, 2002 included the following: (i) a
$3.8 million benefit from carrying-back our 2001 loss five
years under the tax law change; (ii) a $4.0 million
benefit resulting from reducing the allowance as we realized
favorable claim reserve development in 2002; and (iii) a
further benefit as we offset current year earnings by losses
carried forward from 2000. After adjusting for the allowance
benefit recorded, income tax expense was $1.7 million for
2004 compared to $2.6 million for 2003 and
$3.8 million for 2002. As a percent of income before income
taxes, the income tax expense before any benefit from reducing
the allowance was 21.1% of the income before income taxes in
2004 compared to 40.2% in 2003 and 36.5% in 2002. The decreased
tax rate in 2004 is the result of the benefit of tax-exempt
investment income realized in 2004 and other permanent book/tax
differences. Further, the income tax expense percentages for
2004, 2003 and 2002 have been affected by: (i) our income
from operations; and (ii) changes in taxable net income
from our insurance subsidiary (ACIC) which is subject to
only federal income taxes.
2005 Outlook: Income tax expense will vary based on:
(i) the income from operations we earn in 2005;
(ii) in which company we earn the income as RTW’s
earnings are subject to state taxes; (iii) the amount of
tax-exempt income we earn in 2005; and (iv) the amount of
permanent book/tax differences realized. The ultimate change is
unknown at this time.
Investments
Our portfolio of fixed maturity securities included
U.S. government securities (48.3%), mortgage-backed
securities (27.8%), municipal securities (21.6%) and
asset-backed securities (2.3%) at December 31, 2004. Our
portfolio is managed by an independent investment manager to
maximize our after-tax investment income without taking
inappropriate credit risk. In 2004 and 2003, we sold certain
securities within the portfolio to take advantage of favorable
interest rates and realized net investment gains totaling
$705,000 and $685,000, respectively. In 2002, we sold certain
securities within the portfolio to reduce risk and realized
investment gains totaling $1.7 million. We conservatively
manage our fixed maturity portfolio, investing only in
investment grade (BBB or better rating from Standard and
Poor’s) securities of U.S. domiciled issuers. All
securities in our portfolio were rated AAA or AA at
December 31, 2004. We do not invest in derivative
securities.
Operating cash flows consist of the deficit or excess of
premiums collected over claim and claim settlement expenses
paid, reduced by payments for reinsurance premiums as well as
other operating expenses paid. Investment cash flows consist of
income on existing investments and proceeds from sales and
maturities
23
of investments. Additionally, as we lowered our reinsurance
retention levels to $25,000 in mid-1998, we decreased our
current period cash flows as a result of “pre-funding”
quarterly reinsurance premiums under that agreement. Our
investment portfolio increased $7.8 million to
$87.0 million at December 31, 2004 from
$79.2 million at December 31, 2003. During 2004,
interest rates declined early in the year, leading to
significant mortgage refinancing by consumers, resulting in
significant prepayment or early redemption of our
mortgage-backed securities. Cash and cash equivalents were
$39.5 million at December 31, 2004 compared to
$39.4 million at December 31, 2003. We expect that
cash will decrease and investments will increase in 2005 and as
we invest available cash into additional fixed-income securities.
We record investments on our balance sheet at fair value, with
the corresponding appreciation or depreciation from amortized
cost recorded in shareholders’ equity as accumulated other
comprehensive income, net of taxes. Because value is based on
the relationship between the portfolio’s stated yields and
prevailing market yields at any given time, interest rate
fluctuations can have a swift and significant impact on the
carrying value of these securities. As a result of classifying
our securities as available-for-sale, and thus carrying them at
fair value, we expect to encounter adjustments in
shareholders’ equity as market interest rates and other
factors change. Prevailing market interest rates increased
slightly since December 31, 2003, and when combined with
the sale of select securities to realize gains, resulted in a
$572,000 net unrealized gain on investments at
December 31, 2004 compared to a $1.5 million net
unrealized gain at December 31, 2003.
Unpaid Claim and Claim Settlement Expenses and Reinsurance
Recoverables
At December 31, 2004, net reserves totaled
$78.4 million and included the liability for unpaid claim
and claim settlement expenses of $156.1 million and
reinsurance recoverables on unpaid claim and claim settlement
expenses of $77.7 million. The net reserve at
December 31, 2003 totaled $78.6 million and included
the liability for unpaid claim and claim settlement expenses
totaling $150.0 million net of reinsurance recoverables on
unpaid claim and claim settlement expenses of $71.5 million.
Accounting for workers’ compensation insurance operations
requires us to estimate the liability for unpaid claim and claim
settlement expenses (reserves) and the related reinsurance
recoverables, (together, the “net reserves”) at each
balance sheet date. Our reserves at December 31, 2004
represent the estimated total unpaid cost of claim and claim
settlement expenses that cover events that occurred in 2004 and
prior years. These reserves reflect our estimates of the total
costs of claims that were reported, but not yet paid, and the
cost of claims incurred but not yet reported (IBNR). For
reported claims, we establish reserves on a “case”
basis. For IBNR claims, we calculate the difference between:
(i) projected ultimate claim and claim settlement expenses
as determined using generally accepted actuarial standards; and
(ii) case reserves and carry the difference as an IBNR
reserve. By using both estimates of reported claims and IBNR
claims, we estimate the ultimate net reserves for unpaid claim
and claim settlement expenses.
The amount by which estimated net reserves, measured
subsequently by reference to payments and additional estimates,
differ from those originally reported for a period is known as
“development.” Development is unfavorable (deficient)
when losses ultimately settle for more than the levels at which
they were reserved or subsequent estimates indicate a basis for
reserve increases on open claims. Development is favorable
(redundant) when losses ultimately settle for less than the
amount reserved or subsequent estimates indicate a basis for
reducing loss reserves on open claims. Favorable or unfavorable
development of loss reserves is reflected in earnings in the
year recognized.
Both internal and independent external actuaries review our net
reserves for adequacy on a periodic basis. These reviews assume
that past experience, adjusted for the effects of current events
and anticipated trends, is an appropriate basis for predicting
future events. When reviewing net reserves, actuaries analyze
historical data and estimate the effect of various factors on
estimated ultimate reserves including: (i) trends in
general economic conditions, including the effects of medical
and wage inflation; (ii) estimates of trends in claims
frequency and severity; (iii) our and industry historical
loss experience; and (iv) legislative enactments, legal
developments and changes in social and political attitudes.
Variables in the reserve estimation process can be affected by
both internal and external events, including changes in claims
handling procedures, economic inflation, legal trends and
legislative changes. Many of these items are not directly
quantifiable, particularly on
24
a prospective basis. There is no precise method for subsequently
evaluating the effect of any specific factor on the adequacy of
reserves because the eventual redundancy or deficiency is
affected by many factors. Additionally, there may be significant
reporting lags between the occurrence of the loss and the time
it is actually reported to the insurer. Due to our commencing
operations in 1992, we have limited historical data to estimate
our reserves for unpaid claim and claim settlement expenses and
reinsurance recoverables on unpaid claim and claim settlement
expenses and, accordingly, we supplement our experience with
external industry data, as adjusted, to reflect anticipated
differences between our results and the industry.
Estimating the effect that inflation will have on the ultimate
cost of claims is a major risk factor in our workers’
compensation reserve estimates. Future earnings will be affected
by reserve development associated with any changes in our
inflation assumptions. Estimates for the 2004 and 2003 accident
years represent the majority (52.1% of the net reserves) of the
uncertainty because these claims have the lowest proportionate
amount of paid loss as of December 31, 2004. Our reserve
estimates are most sensitive to changes in the assumption about
inflation for the 2004 and 2003 accident years. Each one percent
(1%) increase or decrease in the inflation rate for each of
these accident years would increase or decrease our net loss
reserve estimates at December 31, 2004 by approximately
$380,000.
Our independent actuary provides us with an annual actuarial
opinion regarding the acceptable range for adequate statutory
reserves based on generally accepted actuarial guidelines. We
record our net reserves by considering a range of estimates
bounded by the high and low point of the range. Within that
range, we record our best estimate. At December 31, 2004,
we established recorded reserves in the upper end of the
actuary’s range based on our historical loss reserve
development. The ultimate actual liability may be higher or
lower than reserves recorded.
Our reserves are primarily undiscounted; however, we discounted
reserves for selected claims that have fixed and determinable
future payments at rates ranging from 3.5% to 8.0% in 2004 and
2003. The discount rates are subject to change as market
interest rates change. We use the same rates for U.S. generally
accepted accounting principles as we do for statutory accounting
practices in determining our liability. We also reduce the
unpaid claim and claim settlement expenses for estimated amounts
of subrogation.
We continually monitor loss development trends and data to
establish adequate premium rates and to determine reasonable
reserve estimates. Reserves that are based on estimates are
inherently uncertain and represent a significant risk to the
business. We attempt to mitigate this risk by continually
improving and refining our workers’ compensation claims
processing practices and by continual monitoring through
actuarial estimation methods.
After taking into account all relevant factors, we believe our
reserves for unpaid claim and claim settlement expenses and
reinsurance recoverables on unpaid claim and claim settlement
expenses at December 31, 2004 are adequate to cover the
ultimate net costs of claim and claim settlement expenses at
that date. The ultimate cost of claim and claim settlement
expenses may differ materially from the established reserves,
particularly when claims may not be settled for many years.
Establishing appropriate reserves is an inherently uncertain
process and there can be no certainty that currently established
reserves will prove adequate in light of subsequent actual
experience. See Notes 1 and 5 in the accompanying
Consolidated Financial Statements. The following two tables
reconcile the beginning and ending insurance reserves, displayed
individually for each of the last three years.
25
The following table sets forth reserves on a gross (before
reinsurance) basis (000’s):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Gross Reserves for Claim and Claim Settlement Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Gross reserves for claim and claim settlement expenses,
beginning of year
|
|
$ |
150,044 |
|
|
$ |
181,262 |
|
|
$ |
181,310 |
|
| |
Provision increases (decreases) for claim and claim settlement
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Current year
|
|
|
53,563 |
|
|
|
42,777 |
|
|
|
56,117 |
|
| |
|
Prior years
|
|
|
(4,654 |
) |
|
|
(21,846 |
) |
|
|
3,593 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Total provision
|
|
|
48,909 |
|
|
|
20,931 |
|
|
|
59,710 |
|
| |
Payments for claim and claim settlement expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Current year
|
|
|
12,666 |
|
|
|
11,075 |
|
|
|
13,715 |
|
| |
|
Prior years
|
|
|
30,164 |
|
|
|
41,074 |
|
|
|
46,043 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Total payments
|
|
|
42,830 |
|
|
|
52,149 |
|
|
|
59,758 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Gross reserves for claim and claim settlement expenses, end of
year
|
|
$ |
156,123 |
|
|
$ |
150,044 |
|
|
$ |
181,262 |
|
| |
|
|
|
|
|
|
|
|
|
The following table sets forth reserves on a net (after
reinsurance) basis (000’s):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Net Reserves for Claim and Claim Settlement Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net reserves for claim and claim settlement expenses, beginning
of year
|
|
$ |
78,578 |
|
|
$ |
89,440 |
|
|
$ |
91,195 |
|
| |
Plus: Deferred retrospective reinsurance gain, beginning of year
|
|
|
49 |
|
|
|
49 |
|
|
|
449 |
|
| |
Provision increases (decreases) for claim and claim
settlement expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Current year
|
|
|
42,583 |
|
|
|
33,954 |
|
|
|
49,621 |
|
| |
|
Prior years
|
|
|
(7,047 |
) |
|
|
(6,698 |
) |
|
|
(8,356 |
) |
| |
|
Write-off of reinsurance recoverable
|
|
|
— |
|
|
|
— |
|
|
|
(332 |
) |
| |
|
Amortization of deferred retrospective reinsurance gain
|
|
|
— |
|
|
|
— |
|
|
|
(400 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Total provision
|
|
|
35,536 |
|
|
|
27,256 |
|
|
|
40,533 |
|
| |
Payments for claim and claim settlement expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Current year
|
|
|
12,666 |
|
|
|
10,761 |
|
|
|
13,715 |
|
| |
|
Prior years
|
|
|
23,047 |
|
|
|
27,357 |
|
|
|
28,973 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Total payments
|
|
|
35,713 |
|
|
|
38,118 |
|
|
|
42,688 |
|
| |
Less: Deferred retrospective reinsurance gain, end of year
|
|
|
(49 |
) |
|
|
(49 |
) |
|
|
(49 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
Net reserves for claim and claim settlement expenses, end of year
|
|
$ |
78,401 |
|
|
$ |
78,578 |
|
|
$ |
89,440 |
|
| |
|
|
|
|
|
|
|
|
|
The following gross loss reserve development table sets forth
the change, over time, of gross reserves established for claim
and claim settlement expenses at the end of the last ten years.
The table is cumulative
26
and, therefore, ending balances should not be added since the
amount at the end of each calendar year includes activity for
both current and prior years (000’s):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
|
1999 | |
|
1998 | |
|
1997 | |
|
1996 | |
|
1995 | |
|
1994 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(000’s) | |
|
Loss Reserve Development:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Gross reserves for unpaid claim and claim settlement expenses
|
|
$ |
156,123 |
|
|
$ |
150,044 |
|
|
$ |
181,262 |
|
|
$ |
181,310 |
|
|
$ |
128,841 |
|
|
$ |
99,831 |
|
|
$ |
97,269 |
|
|
$ |
61,069 |
|
|
$ |
49,256 |
|
|
$ |
37,138 |
|
|
$ |
28,165 |
|
| |
Paid (cumulative) as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
One year later
|
|
|
|
|
|
$ |
30,164 |
|
|
$ |
41,072 |
|
|
$ |
46,043 |
|
|
$ |
49,241 |
|
|
$ |
45,933 |
|
|
$ |
37,062 |
|
|
$ |
28,315 |
|
|
$ |
20,529 |
|
|
$ |
10,032 |
|
|
$ |
7,625 |
|
| |
|
Two years later
|
|
|
|
|
|
|
|
|
|
|
61,363 |
|
|
|
17,086 |
|
|
|
74,681 |
|
|
|
67,442 |
|
|
|
56,031 |
|
|
|
42,889 |
|
|
|
29,841 |
|
|
|
15,306 |
|
|
|
10,899 |
|
| |
|
Three years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86,710 |
|
|
|
90,484 |
|
|
|
78,244 |
|
|
|
65,664 |
|
|
|
50,558 |
|
|
|
35,370 |
|
|
|
18,415 |
|
|
|
13,261 |
|
| |
|
Four years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98,689 |
|
|
|
85,754 |
|
|
|
70,631 |
|
|
|
54,835 |
|
|
|
38,880 |
|
|
|
19,964 |
|
|
|
14,449 |
|
| |
|
Five years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89,956 |
|
|
|
73,979 |
|
|
|
57,261 |
|
|
|
41,029 |
|
|
|
21,289 |
|
|
|
15,126 |
|
| |
|
Six years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76,311 |
|
|
|
59,012 |
|
|
|
41,980 |
|
|
|
22,117 |
|
|
|
15,650 |
|
| |
|
Seven years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,352 |
|
|
|
42,728 |
|
|
|
22,702 |
|
|
|
15,952 |
|
| |
|
Eight years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,511 |
|
|
|
23,020 |
|
|
|
16,226 |
|
| |
|
Nine years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,448 |
|
|
|
16,332 |
|
| |
|
Ten years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,621 |
|
| |
Reserves re-estimated as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
End of year
|
|
$ |
156,123 |
|
|
$ |
150,044 |
|
|
$ |
181,262 |
|
|
$ |
181,310 |
|
|
$ |
128,841 |
|
|
$ |
99,831 |
|
|
$ |
97,269 |
|
|
$ |
61,069 |
|
|
$ |
49,256 |
|
|
$ |
37,138 |
|
|
$ |
28,165 |
|
| |
|
One year later
|
|
|
|
|
|
|
145,389 |
|
|
|
159,415 |
|
|
|
183,923 |
|
|
|
160,065 |
|
|
|
118,205 |
|
|
|
85,384 |
|
|
|
72,443 |
|
|
|
44,862 |
|
|
|
26,086 |
|
|
|
23,486 |
|
| |
|
Two years later
|
|
|
|
|
|
|
|
|
|
|
160,147 |
|
|
|
166,738 |
|
|
|
168,222 |
|
|
|
130,120 |
|
|
|
95,696 |
|
|
|
64,499 |
|
|
|
48,233 |
|
|
|
22,295 |
|
|
|
16,774 |
|
| |
|
Three years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
168,892 |
|
|
|
157,251 |
|
|
|
137,002 |
|
|
|
101,893 |
|
|
|
73,031 |
|
|
|
44,587 |
|
|
|
24,111 |
|
|
|
15,776 |
|
| |
|
Four years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
161,905 |
|
|
|
129,819 |
|
|
|
107,522 |
|
|
|
75,554 |
|
|
|
50,552 |
|
|
|
23,054 |
|
|
|
16,545 |
|
| |
|
Five years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
132,813 |
|
|
|
103,064 |
|
|
|
79,398 |
|
|
|
52,063 |
|
|
|
26,485 |
|
|
|
16,274 |
|
| |
|
Six years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105,705 |
|
|
|
76,610 |
|
|
|
54,327 |
|
|
|
27,237 |
|
|
|
18,243 |
|
| |
|
Seven years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,921 |
|
|
|
53,047 |
|
|
|
28,411 |
|
|
|
18,949 |
|
| |
|
Eight years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,250 |
|
|
|
28,533 |
|
|
|
19,485 |
|
| |
|
Nine years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,107 |
|
|
|
19,969 |
|
| |
|
Ten years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,140 |
|
| |
Initial reserves in excess of (less than) re-estimated reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Amount
|
|
|
|
|
|
$ |
4,655 |
|
|
$ |
21,115 |
|
|
$ |
12,418 |
|
|
$ |
(33,064 |
) |
|
$ |
(32,982 |
) |
|
$ |
(8,436 |
) |
|
$ |
(16,852 |
) |
|
$ |
(4,994 |
) |
|
$ |
8,031 |
|
|
$ |
8,025 |
|
| |
|
Percent
|
|
|
|
|
|
|
3.1 |
% |
|
|
11.6 |
% |
|
|
6.8 |
% |
|
|
(25.7 |
)% |
|
|
(33.0 |
)% |
|
|
(8.7 |
)% |
|
|
(27.6 |
)% |
|
|
(10.1 |
)% |
|
|
21.6 |
% |
|
|
28.5 |
% |
The table above represents the development of balance sheet
gross reserves for 1994 through 2004. The upper portion of the
table shows the cumulative amount paid with respect to the
previously recorded reserves as of the end of each succeeding
year. The lower portion of the table shows the re-estimated
amount of the previously recorded gross reserves, based on
experience as of the end of each succeeding year. The estimate
is either increased or decreased as more information becomes
known about the frequency and severity of claims for individual
years.
The “initial reserves in excess of (less than) re-estimated
reserves” rows represent the aggregate change in the
estimates over all prior years. For example, the 1998 reserve
developed an $8.4 million net deficiency over the course of
the succeeding years.
In evaluating this information, it should be noted that each
amount includes the total of all changes in amounts for prior
periods. For example, the amount of redundancy (deficiency) to
losses settled in 2002, but incurred in 1999, is included in the
cumulative redundancy (deficiency) amounts in 1999, 2000 and
2001. This table does not present accident or policy year
development data, which certain readers may be more accustomed
to analyzing. Conditions and trends that have affected
development of the reserves in the past
27
may not necessarily occur in the future. Accordingly, it may not
be appropriate to extrapolate redundancies or deficiencies based
on this table.
The following net loss reserve development table sets forth the
change, over time, of net reserves established for claim and
claim settlement expenses at the end of the last ten years. The
table is cumulative and, therefore, ending balances should not
be added since the amount at the end of each calendar year
includes activity for both current and prior years (000’s):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
|
1999 | |
|
1998 | |
|
1997 | |
|
1996 | |
|
1995 | |
|
1994 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Loss Reserve Development:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Gross reserves for unpaid claim and claim settlement expenses
|
|
$ |
156,123 |
|
|
$ |
150,044 |
|
|
$ |
181,262 |
|
|
$ |
181,310 |
|
|
$ |
128,841 |
|
|
$ |
99,831 |
|
|
$ |
97,269 |
|
|
$ |
61,069 |
|
|
$ |
49,256 |
|
|
$ |
37,138 |
|
|
$ |
28,165 |
|
| |
Reinsurance recoverables
|
|
|
77,722 |
|
|
|
71,466 |
|
|
|
91,822 |
|
|
|
90,115 |
|
|
|
61,845 |
|
|
|
41,179 |
|
|
|
21,403 |
|
|
|
5,374 |
|
|
|
6,183 |
|
|
|
8,312 |
|
|
|
13,902 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net reserves for unpaid claim and claim settlement expenses
|
|
$ |
78,401 |
|
|
$ |
78,578 |
|
|
$ |
89,440 |
|
|
$ |
91,195 |
|
|
$ |
66,996 |
|
|
$ |
58,652 |
|
|
$ |
75,866 |
|
|
$ |
55,695 |
|
|
$ |
43,073 |
|
|
$ |
28,826 |
|
|
$ |
14,263 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Paid (cumulative) as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
One year later
|
|
|
|
|
|
$ |
23,047 |
|
|
$ |
27,357 |
|
|
$ |
30,285 |
|
|
$ |
32,028 |
|
|
$ |
35,932 |
|
|
$ |
34,380 |
|
|
$ |
27,737 |
|
|
$ |
19,439 |
|
|
$ |
8,595 |
|
|
$ |
4,639 |
|
| |
|
Two years later
|
|
|
|
|
|
|
|
|
|
|
40,956 |
|
|
|
43,825 |
|
|
|
43,823 |
|
|
|
48,069 |
|
|
|
49,958 |
|
|
|
42,046 |
|
|
|
28,173 |
|
|
|
12,894 |
|
|
|
6,476 |
|
| |
|
Three years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,871 |
|
|
|
49,531 |
|
|
|
54,360 |
|
|
|
56,376 |
|
|
|
49,671 |
|
|
|
33,438 |
|
|
|
15,521 |
|
|
|
7,863 |
|
| |
|
Four years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,130 |
|
|
|
58,113 |
|
|
|
60,453 |
|
|
|
53,814 |
|
|
|
36,904 |
|
|
|
16,869 |
|
|
|
8,569 |
|
| |
|
Five years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,690 |
|
|
|
63,278 |
|
|
|
56,140 |
|
|
|
38,919 |
|
|
|
18,020 |
|
|
|
9,046 |
|
| |
|
Six years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,347 |
|
|
|
57,903 |
|
|
|
39,770 |
|
|
|
18,714 |
|
|
|
9,396 |
|
| |
|
Seven years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59,219 |
|
|
|
40,530 |
|
|
|
19,200 |
|
|
|
9,564 |
|
| |
|
Eight years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,289 |
|
|
|
19,530 |
|
|
|
9,738 |
|
| |
|
Nine years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,934 |
|
|
|
9,857 |
|
| |
|
Ten years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,122 |
|
| |
Reserves re-estimated as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
End of year
|
|
$ |
78,401 |
|
|
$ |
78,578 |
|
|
$ |
89,440 |
|
|
$ |
91,195 |
|
|
$ |
66,996 |
|
|
$ |
58,652 |
|
|
$ |
75,866 |
|
|
$ |
55,695 |
|
|
$ |
43,073 |
|
|
$ |
28,826 |
|
|
$ |
14,263 |
|
| |
|
One year later
|
|
|
|
|
|
|
71,531 |
|
|
|
82,742 |
|
|
|
82,839 |
|
|
|
74,727 |
|
|
|
74,181 |
|
|
|
67,753 |
|
|
|
66,674 |
|
|
|
39,988 |
|
|
|
20,751 |
|
|
|
12,789 |
|
| |
|
Two years later
|
|
|
|
|
|
|
|
|
|
|
78,482 |
|
|
|
76,545 |
|
|
|
71,202 |
|
|
|
76,502 |
|
|
|
77,205 |
|
|
|
61,075 |
|
|
|
43,484 |
|
|
|
18,469 |
|
|
|
9,318 |
|
| |
|
Three years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,055 |
|
|
|
71,911 |
|
|
|
75,321 |
|
|
|
78,391 |
|
|
|
68,065 |
|
|
|
41,451 |
|
|
|
19,796 |
|
|
|
8,984 |
|
| |
|
Four years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71,177 |
|
|
|
77,443 |
|
|
|
78,772 |
|
|
|
69,474 |
|
|
|
45,959 |
|
|
|
19,389 |
|
|
|
9,669 |
|
| |
|
Five years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,588 |
|
|
|
80,522 |
|
|
|
69,595 |
|
|
|
47,147 |
|
|
|
21,254 |
|
|
|
9,692 |
|
| |
|
Six years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78,878 |
|
|
|
69,926 |
|
|
|
47,126 |
|
|
|
22,568 |
|
|
|
10,330 |
|
| |
|
Seven years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69,095 |
|
|
|
46,969 |
|
|
|
22,388 |
|
|
|
11,675 |
|
| |
|
Eight years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,039 |
|
|
|
22,342 |
|
|
|
11,234 |
|
| |
|
Nine years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,727 |
|
|
|
11,327 |
|
| |
|
Ten years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,574 |
|
| |
Initial reserves in excess of (less than) re-estimated reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Amount
|
|
|
|
|
|
$ |
7,047 |
|
|
$ |
10,958 |
|
|
$ |
14,140 |
|
|
$ |
(4,181 |
) |
|
$ |
(16,936 |
) |
|
$ |
(3,012 |
) |
|
$ |
(13,400 |
) |
|
$ |
(3,966 |
) |
|
$ |
6,099 |
|
|
$ |
2,689 |
|
| |
|
Percent
|
|
|
|
|
|
|
9.0 |
% |
|
|
12.3 |
% |
|
|
15.5 |
% |
|
|
(6.2 |
)% |
|
|
(28.9 |
)% |
|
|
(4.0 |
)% |
|
|
(24.1 |
)% |
|
|
(9.2 |
)% |
|
|
21.2 |
% |
|
|
18.9 |
% |
The table above represents the development of balance sheet net
reserves for 1994 through 2004. The top three rows of the table
reconcile gross reserves to net reserves for unpaid claim and
claim settlement expenses recorded at the balance sheet date for
each of the indicated years.
28
The upper portion of the table shows the cumulative amount paid
with respect to the previously recorded reserves as of the end
of each succeeding year.
The lower portion of the table shows the re-estimated amount of
the previously recorded net reserves, based on experience as of
the end of each succeeding year. The estimate is either
increased or decreased as more information becomes known about
the frequency and severity of claims for individual years. For
example, for the 1998 calendar year valued as of
December 31, 2004, we paid $65.3 million of the
currently estimated $78.9 million of claim and claim
settlement expenses that were incurred through the end of 1998.
Thus, the difference, an estimated $13.6 million of claim
and claim settlement expenses incurred through 1998, remained
unpaid as of December 31, 2004.
The “initial reserves in excess of (less than) re-estimated
reserves” rows represent the aggregate change in the
estimates over all prior years. For example, the 1998 reserve
developed a $3.0 million net deficiency over the course of
the succeeding years. The net amount has been included in income
and the changes have been recorded in the period identified. The
cumulative net deficiencies in 2000 and 1999 are the result of
reserve development inherent in the uncertainty in establishing
reserves and anticipated loss trends. As discussed above, due to
our relatively limited historical claim data and small claim
population, our estimate of the liability for net reserves is
difficult and volatile. As discussed further below, the reserve
redundancy in 2001 is the result of accrual reversals resulting
from changes in methods of assessing second injury funds, lower
frequency in claims reported from the estimate at
December 31, 2001, and reductions in amounts expected to be
incurred for our participation in mandatory state and national
assigned risk pools.
In evaluating this information, it should be noted that each
amount includes the total of all changes in amounts for prior
periods. For example, the amount of redundancy to losses settled
in 2002, but incurred in 1999, will be included in the
cumulative redundancy (deficiency) amounts in 1999, 2000, and
2001. This table does not present accident or policy year
development data, which certain readers may be more accustomed
to analyzing. Conditions and trends that have affected
development of the reserves in the past may not necessarily
occur in the future. Accordingly, it may not be appropriate to
extrapolate redundancies or deficiencies based on this table.
The following table is derived from the net loss reserve
development table and summarizes the effect of reserve
re-estimates, net of reinsurance, on calendar year operations
for the same ten-year period ended December 31, 2004. The
total of each column details the amount of reserve re-estimates
made in the indicated calendar year and shows the accident years
to which the re-estimates are applicable. The amounts in the
total accident year column represent the cumulative reserve
re-estimate (increase) decrease for the indicated accident year
(000’s):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Cumulative | |
| |
|
Effect of Reserve Re-estimates on Calendar Year Operations: | |
|
Re-estimates | |
| |
|
| |
|
for Each | |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
|
1999 | |
|
1998 | |
|
1997 | |
|
1996 | |
|
Pre-1996 | |
|
Accident Year | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Accident Year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
1992
|
|
$ |
25 |
|
|
$ |
(30 |
) |
|
$ |
2 |
|
|
$ |
(6 |
) |
|
$ |
(19 |
) |
|
$ |
38 |
|
|
$ |
(15 |
) |
|
$ |
(37 |
) |
|
$ |
38 |
|
|
$ |
(148 |
) |
|
$ |
(152 |
) |
| |
1993
|
|
|
(98 |
) |
|
|
14 |
|
|
|
261 |
|
|
|
(706 |
) |
|
|
(160 |
) |
|
|
7 |
|
|
|
(96 |
) |
|
|
(42 |
) |
|
|
596 |
|
|
|
145 |
|
|
|
(79 |
) |
| |
1994
|
|
|
(174 |
) |
|
|
(77 |
) |
|
|
178 |
|
|
|
(633 |
) |
|
|
(459 |
) |
|
|
(68 |
) |
|
|
(574 |
) |
|
|
413 |
|
|
|
2,837 |
|
|
|
1,106 |
|
|
|
2,549 |
|
| |
1995
|
|
|
(138 |
) |
|
|
139 |
|
|
|
(261 |
) |
|
|
31 |
|
|
|
(1,227 |
) |
|
|
430 |
|
|
|
(642 |
) |
|
|
1,948 |
|
|
|
4,604 |
|
|
|
|
|
|
|
4,884 |
|
| |
1996
|
|
|
315 |
|
|
|
111 |
|
|
|
(159 |
) |
|
|
126 |
|
|
|
(2,643 |
) |
|
|
1,626 |
|
|
|
(2,169 |
) |
|
|
803 |
|
|
|
|
|
|
|
|
|
|
|
(1,990 |
) |
| |
1997
|
|
|
901 |
|
|
|
(488 |
) |
|
|
(142 |
) |
|
|
(221 |
) |
|
|
(2,482 |
) |
|
|
3,566 |
|
|
|
(7,483 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,349 |
) |
| |
1998
|
|
|
813 |
|
|
|
(1,419 |
) |
|
|
(320 |
) |
|
|
283 |
|
|
|
(2,462 |
) |
|
|
2,514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(591 |
) |
| |
1999
|
|
|
211 |
|
|
|
(372 |
) |
|
|
1,622 |
|
|
|
(1,195 |
) |
|
|
(6,077 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,811 |
) |
| |
2000
|
|
|
(1,121 |
) |
|
|
1,413 |
|
|
|
2,344 |
|
|
|
(5,410 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,774 |
) |
| |
2001
|
|
|
1,756 |
|
|
|
4,003 |
|
|
|
4,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,590 |
|
| |
2002
|
|
|
1,770 |
|
|
|
3,404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,174 |
|
| |
2003
|
|
|
2,787 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,787 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
7,047 |
|
|
$ |
6,698 |
|
|
$ |
8,356 |
|
|
$ |
(7,731 |
) |
|
$ |
(15,529 |
) |
|
$ |
8,113 |
|
|
$ |
(10,979 |
) |
|
$ |
3,085 |
|
|
$ |
8,075 |
|
|
$ |
1,103 |
|
|
$ |
8,238 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
The 2004 results include a $7.0 million decrease in prior
years’ reserves for unpaid claim and claim settlement
expenses. Our estimate for unpaid claim and claim settlement
expenses decreased in 2004 due to the following: (i) our
ability to manage and close claims has improved over our
historical experience; (ii) the re-underwriting of our book
of business has resulted in claims with profiles different than
experienced historically; and (iii) our estimate of the
liability for unpaid claim and claim settlement expenses is
volatile due to our relatively limited thirteen-year historical
claim data and our small claim population.
The 2003 results include a $6.7 million decrease in prior
years’ reserves for unpaid claim and claim settlement
expenses. Our estimate for unpaid claim and claim settlement
expenses decreased in 2003 due to the following: (i) the
frequency of claims reported in 2003 for 2002 and prior years
was less than anticipated when we determined our liability at
December 31, 2002; and (ii) our estimate of the
liability for unpaid claim and claim settlement expenses is
difficult and volatile due to our relatively limited historical
claim data and small claim population.
The 2002 results include an $8.4 million decrease in prior
years’ reserves for unpaid claim and claim settlement
expenses. Our estimate for unpaid claim and claim settlement
expenses decreased in 2002 due to the following: (i) in
March 2002, the Minnesota State legislature changed the way the
commissioner assessed self-insured employers and insurers for
estimated liabilities and administrative expenses of the
Minnesota Special Compensation Fund. The assessment changed from
being paid by the insurer on indemnity payment basis to an
assessment charged on premium to the policyholder. We decreased
our recorded accrual to reflect this legislative change;
(ii) the frequency of claims reported in 2002 for 2001 and
prior years was less than anticipated when we determined our
liability in 2001; (iii) we overestimated the liability for
our mandatory participation in state and national assigned risk
pool operating results for states in which we operate in 2001
and reversed that excess in 2002; and (iv) our estimate of
the liability for unpaid claim and claim settlement expenses is
difficult and volatile due to our relatively limited historical
claim data and small claim population.
Liquidity and Capital Resources
Liquidity refers to our ability to generate sufficient cash
flows to meet the short- and long-term cash requirements of our
operations. Capital resources represent those funds deployed or
available to be deployed to support our business operations.
Our primary sources of cash from operations are premiums
collected, reimbursements under reinsurance contracts and
investment income. Our primary cash requirements consist of
payments for: (i) claim and claim settlement expenses;
(ii) reinsurance; (iii) policy acquisition costs;
(iv) general and administrative expenses; (v) capital
expenditures; and (vi) income taxes. We generate cash from
or use cash in operations based on timing differences between
the receipt of premiums and the payment of claim and claim
settlement expenses. Selected reinsurance retention levels also
use cash as a result of “pre-funding” premiums under
the policies or provide cash upon reimbursement of claim
payments. In 2004 and 2003, reinsurance reimbursements from our
$25,000 to $300,000 excess of loss reinsurance agreement, which
began in mid 1998 and ran-off in 2001, offset similar payments
to claimants for those years. This trend will continue in 2005.
We further expect that cash and cash equivalents will decrease
from levels reported at December 31, 2004 as we take
advantage of the anticipated increase in interest rates to
purchase investments. Available cash is invested in either
short-term cash and cash equivalents or longer-term
available-for-sale securities pending future payments for such
expenses as medical and indemnity benefits and other operating
expenses. Cash and cash equivalents consist of cash, a money
market fund that invests primarily in short-term
U.S. Government securities and overnight repurchase
agreements secured by U.S. Treasury or U.S. Government
Agency securities.
Cash provided by operating activities was $8.1 million for
2004. This is primarily a result of net income of
$9.9 million, an increase of $6.1 million in unpaid
claim and claim settlement expenses, a $1.0 million
increase in unearned premiums, net of premiums receivable and
depreciation expense of $952,000 offset by an increase in
amounts due from reinsurers of $6.8 million, net realized
investment gains totaling $705,000 and a net reduction in our
deferred tax asset of $2.5 million. Net cash used in
investing activities was $8.9 million due to
$21.6 million in proceeds from sales of securities and
$11.3 million in maturities of investments offset by
30
$41.4 million in purchases of securities and $444,000 in
purchases of fixed assets. Net cash provided by financing
activities was $598,000 due primarily to the exercise of stock
options in 2004.
Our need for additional capital is primarily the result of
regulations that require certain ratios of regulatory or
statutory capital to premiums written in our insurance
subsidiary as defined by state regulatory bodies and insurance
rating agencies. Raising additional permanent capital, while
difficult in the current environment in which we operate, would
further reduce our ratio of premium to capital and provide a
more solid base for the future growth of our insurance
subsidiary. As an alternative to raising additional permanent
capital, certain reinsurance contracts could be used on an
interim basis that would have the effect of reducing the ratio
of premiums to capital and surplus in ACIC to satisfy state
regulatory requirements.
Minnesota state insurance regulations limit distributions,
including dividends, from our insurance subsidiary to us. Under
Minnesota insurance law regulating the payment of dividends, in
any twelve month period, ACIC can pay a dividend to us from its
earned surplus (unassigned surplus) not to exceed the greater of
10% of ACIC’s total surplus or ACIC’s prior
years’ net income reduced for realized capital gains net of
income taxes. At December 31, 2004, ACIC could pay a
dividend to us totaling $3.2 million without the approval
of the Minnesota Department of Commerce (See Note 9 of
Notes to Consolidated Financial Statements). ACIC has never paid
a dividend to us, and we intend to retain capital in the
insurance subsidiary.
On September 15, 1998, our Board of Directors approved a
share repurchase program authorizing us to repurchase, from time
to time, up to $4,000,000 of RTW, Inc. common stock. No shares
were repurchased under this program in 2004. We repurchased
18,619 shares in 2003 for approximately $37,000 and
41,324 shares in 2002 for approximately $78,000. We
repurchased these shares on the open market or through private
transactions based upon market conditions and availability. The
repurchased shares will be used for employee stock option and
purchase plans and other corporate purposes.
At December 31, 2004, investments totaling
$16.2 million were held as statutory deposits and pledged
as collateral. Investments held as statutory deposits and
pledged as collateral do not have an adverse effect on our
liquidity. We believe that cash flow generated by our operations
and our cash and investment balances will be sufficient to fund
continuing operations and capital expenditures for the next
twelve months.
Contractual Obligations
Our contractual obligations consist solely of operating leases
for our facilities. Future minimum (base) rental payments
required under the leases, as of December 31, 2004, are as
follows (000’s):
| |
|
|
|
|
|
2005
|
|
$ |
1,039 |
|
|
2006
|
|
|
911 |
|
|
2007
|
|
|
581 |
|
Letter of Credit
On July 30, 2004, we entered into a Letter of Credit
Reimbursement Agreement (“Agreement”) for
$2.0 million with our primary bank to collateralize a
performance bond required as part of a service contract with the
Minnesota Workers’ Compensation Assigned Risk Plan. The
Agreement is collateralized by the stock of American
Compensation Insurance Company (ACIC), our wholly-owned
insurance company subsidiary, and contains a restrictive
covenant that requires ACIC to maintain at least a B+ rating
from A. M. Best Company.
Interest Rate Risk
Our fixed maturity investments are subject to interest rate
risk. Increases and decreases in prevailing interest rates
generally translate into decreases and increases in the fair
value of these instruments. Also, fair values of interest rate
sensitive instruments may be affected by the credit worthiness
of the issuer, prepayment
31
options, relative values of alternative instruments, the
liquidity of the instrument and other general market conditions.
We regularly evaluate interest rate risk in order to evaluate
the appropriateness of our investments.
An increase of 100 basis points in prevailing interest
rates would reduce the fair value of our interest rate sensitive
instruments by approximately $3.7 million.
The effect of interest rate risk on potential near-term fair
value was determined based on commonly used models. The models
project the impact of interest rate changes on factors such as
duration, prepayments, put options and call options. Fair value
was determined based on the net present value of cash flows or
duration estimates, using a representative set of likely future
interest rate scenarios.
NAIC Risk-Based Capital Standards
The National Association of Insurance Commissioners (NAIC) has
risk-based capital standards to determine the capital
requirements of a property and casualty insurance carrier based
upon the risks inherent in its operations. These standards
require computing a risk-based capital amount that is compared
to a carrier’s actual total adjusted capital. The
computation involves applying factors to various financial data
to address four primary risks: asset risk; insurance
underwriting risk; credit risk; and off-balance sheet risk.
These standards provide for regulatory intervention when the
percent of total adjusted capital to authorized control level
risk-based capital is below certain levels. Based upon the
risk-based capital standards, our percent of total adjusted
capital is in excess of authorized control level risk-based
capital.
Regulation
Our insurance subsidiary is subject to substantial regulation by
governmental agencies in the states in which we operate, and
will be subject to such regulation in any state in which we
provide workers’ compensation products and services in the
future. State regulatory agencies have broad administrative
power with respect to all aspects of our business, including
premium rates, benefit levels, policy forms, dividend payments,
capital adequacy and the amount and type of investments. These
regulations are primarily intended to protect covered employees
and policyholders rather than the insurance company. Both the
legislation covering insurance companies and the regulations
adopted by state agencies are subject to change. At
December 31, 2004, our insurance subsidiary was licensed to
do business in twenty-three states.
Effect of Recent Accounting Pronouncements
In November 2003, FASB issued Emerging Issues Task Force
(“EITF”) 03-1, “The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments”. EITF Issue 03-1 requires that when the
fair value of an investment security is less than its carrying
value, an impairment exists for which the determination must be
made as to whether the impairment is other-than-temporary. EITF
Issue 03-1 applies to all investment securities accounted
for under SFAS No. 115, “Accounting for Certain
Investments in Debt and Equity Securities” and to
investment securities accounted for under the cost method to the
extent an impairment indicator exists. Under the guidance, the
determination of whether an impairment is other-than-temporary
and therefore would result in a recognized loss depends on
market conditions and management’s intent and ability to
hold the securities with unrealized losses for a period
sufficient for recovery of such losses. In September 2004, FASB
approved FASB Staff Position (“FSP”) EITF
Issue 03-1-1, which delays the effective date for
measurement and recognition guidance contained in
paragraphs 10-20 of EITF 03-1 until certain issues are
resolved. The delay of the recognition and measurement
provisions is expected to be superceded concurrently with the
issuance of a FSP, which will provide additional implementation
guidance. We will evaluate the effect this guidance will have on
our financial statements and will adopt the guidance at the time
it is issued. We have previously implemented the disclosure
requirements of EITF 03-1.
In December 2004, the FASB issued Statement of Financial
Accounting Standard (“SFAS”) No. 123R,
“Share-Based Payment,” which is a revision of
SFAS No. 123, “Accounting for Stock-Based
Compensation”. SFAS No. 123R is effective as of
the beginning of the first interim or annual period that begins
after June 15, 2005, and requires companies to measure the
cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the
award. That cost will be recognized over the
32
period during which an employee is required to provide service
in exchange for the award i.e., the requisite service period,
which is usually equal to the vesting period. In accordance with
the transitional guidance given in the statement, compensation
cost is recognized on or after the required effective date for
the portion of outstanding awards for which the requisite
service period has not yet been rendered, based on the
grant-date fair value of those awards calculated under
SFAS No. 123 for either recognition or pro forma
disclosure requirements.
Under the transitional guidance given in
SFAS No. 123R, we may choose one of three transition
methods. We intend to use the modified prospective transitional
method upon adoption. Under the modified prospective method,
there would be no compensation charge for vested awards that are
outstanding on the effective date of SFAS No. 123R.
Unvested awards that are outstanding on the effective date would
be charged to expense over the remaining vesting period.
Accordingly, we anticipate that we will recognize approximately
$101,000 of incremental compensation costs in 2005 related to
unvested outstanding awards.
Forward-Looking Statements
Information included in this Report on Form 10-K which can
be identified by the use of forward-looking terminology such as
“may,” “will,” “expect,”
“anticipate,” “estimate,” or
“continue” or the negative thereof or other variations
thereon or comparable terminology constitutes
“forward-looking information” within the meaning of
the Private Securities Litigation Reform Act of 1995. These
forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual
results, performance or achievements to be materially different
from any future results, performance or achievements expressed
or implied by the forward-looking statements. The following
important factors, among others, in some cases have affected and
in the future could affect our actual results and could cause
our actual financial performance to differ materially from that
expressed in any forward-looking statement: (i) our ability
to retain renewing policies and write new business with a B+
(Very Good, Secure) rating from A.M. Best; (ii) our ability
to extend our workers’ compensation services to
self-insured employers and other alternative markets and to
operate profitably in providing these services; (iii) our
ability to continue to maintain or increase rates on insured
products in the markets in which we remain or alternatively
non-renew or turn away improperly priced business; (iv) the
ability of our reinsurers to honor their obligations to us;
(v) our ability to accurately predict claim development;
(vi) our ability to provide our proprietary products and
services to customers successfully; (vii) our ability to
manage both our existing claims and new claims in an effective
manner; (viii) our experience with claims frequency and
severity; (ix) medical inflation; (x) competition and
the regulatory environment in which we operate;
(xi) general economic and business conditions;
(xii) our ability to obtain and retain reinsurance at a
reasonable cost; (xiii) changes in workers’
compensation regulation by states, including changes in mandated
benefits or insurance company regulation; (xiv) interest
rate changes; and (xv) other factors as noted in our other
filings with the Securities and Exchange Commission. This
discussion of uncertainties is by no means exhaustive but is
designed to highlight important factors that may affect our
future performance.
|
|
| Item 7A. |
Quantitative and Qualitative Disclosures About Market
Risk |
Information with respect to Disclosures about Market Risk is
contained in the Section entitled “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations — Interest Rate Risk” under
Item 7 of this Annual Report on Form 10-K and is
incorporated herein by reference.
33
|
|
| Item 8. |
Financial Statements and Supplementary Data |
INDEX TO FINANCIAL STATEMENTS
| |
|
|
|
|
| Financial Statements |
|
Page | |
| |
|
| |
|
|
|
|
35 |
|
|
|
|
|
36 |
|
|
|
|
|
37 |
|
|
|
|
|
38 |
|
|
|
|
|
39 |
|
|
|
|
|
40 |
|
34
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
RTW, Inc.
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheets of
RTW, Inc. (the Company) as of December 31, 2004 and 2003,
and the related consolidated statements of income,
shareholders’ equity and cash flows for each of the three
years in the period ended December 31, 2004. These
financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Company’s internal control over financial
reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of RTW, Inc. at December 31, 2004 and
2003, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended
December 31, 2004, in conformity with U.S. generally
accepted accounting principles.
February 9, 2005
Minneapolis, Minnesota
35
RTW, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2003
| |
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands, except | |
| |
|
share data) | |
|
ASSETS |
|
Investments at fair value, amortized cost of $86,382 and $77,674
|
|
$ |
86,954 |
|
|
$ |
79,171 |
|
|
Cash and cash equivalents
|
|
|
39,379 |
|
|
|
39,650 |
|
|
Accrued investment income
|
|
|
783 |
|
|
|
769 |
|
|
Premiums receivable, less allowance of $90 and $225
|
|
|
3,792 |
|
|
|
3,482 |
|
|
Reinsurance recoverables:
|
|
|
|
|
|
|
|
|
| |
On unpaid claim and claim settlement expenses
|
|
|
77,722 |
|
|
|
71,466 |
|
| |
On paid claim and claim settlement expenses
|
|
|
1,401 |
|
|
|
854 |
|
|
Deferred policy acquisition costs
|
|
|
1,112 |
|
|
|
926 |
|
|
Furniture and equipment, net
|
|
|
1,228 |
|
|
|
1,242 |
|
|
Other assets
|
|
|
8,136 |
|
|
|
4,608 |
|
| |
|
|
|
|
|
|
| |
|
Total assets
|
|
$ |
220,507 |
|
|
$ |
202,168 |
|
| |
|
|
|
|
|
|
| |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
Unpaid claim and claim settlement expenses
|
|
$ |
156,123 |
|
|
$ |
150,044 |
|
|
Unearned premiums
|
|
|
10,497 |
|
|
|
9,180 |
|
|
Accrued expenses and other liabilities
|
|
|
8,356 |
|
|
|
7,357 |
|
| |
|
|
|
|
|
|
| |
|
Total liabilities
|
|
|
174,976 |
|
|
|
166,581 |
|
|
Commitments and contingencies
|
|
|
— |
|
|
|
— |
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
|
|
| |
Undesignated stock, no par value; authorized
4,750,000 shares; none issued or outstanding
|
|
|
— |
|
|
|
— |
|
| |
Series A Junior Participating Preferred Stock, no par
value; authorized 250,000 shares; none issued or outstanding
|
|
|
— |
|
|
|
— |
|
| |
Common stock, no par value; authorized 12,500,000 shares;
issued and outstanding 5,125,000 and 5,125,000 shares
|
|
|
21,071 |
|
|
|
20,644 |
|
| |
Retained earnings
|
|
|
24,082 |
|
|
|
13,970 |
|
| |
Accumulated other comprehensive income
|
|
|
378 |
|
|
|
973 |
|
| |
|
|
|
|
|
|
| |
|
Total shareholders’ equity
|
|
|
45,531 |
|
|
|
35,587 |
|
| |
|
|
|
|
|
|
| |
|
Total liabilities and shareholders’ equity
|
|
$ |
220,507 |
|
|
$ |
202,168 |
|
| |
|
|
|
|
|
|
See notes to consolidated financial statements.
36
RTW, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2004, 2003 and 2002
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except share | |
| |
|
and per share data) | |
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Gross premiums earned
|
|
$ |
63,370 |
|
|
$ |
54,431 |
|
|
$ |
62,506 |
|
| |
Premiums ceded
|
|
|
(9,688 |
) |
|
|
(8,141 |
) |
|
|
(2,242 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
Premiums earned
|
|
|
53,682 |
|
|
|
46,290 |
|
|
|
60,264 |
|
| |
Investment income
|
|
|
3,837 |
|
|
|
4,474 |
|
|
|
5,139 |
|
| |
Net realized investment gains:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Realized investment gains
|
|
|
708 |
|
|
|
685 |
|
|
|
1,930 |
|
| |
|
Realized investment losses
|
|
|
(3 |
) |
|
|
— |
|
|
|
(209 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Net realized investment gains
|
|
|
705 |
|
|
|
685 |
|
|
|
1,721 |
|
| |
Service revenue
|
|
|
633 |
|
|
|
109 |
|
|
|
22 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total revenues
|
|
|
58,857 |
|
|
|
51,558 |
|
|
|
67,146 |
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Claim and claim settlement expenses
|
|
|
35,536 |
|
|
|
27,256 |
|
|
|
40,533 |
|
| |
Policy acquisition costs
|
|
|
6,045 |
|
|
|
6,878 |
|
|
|
6,304 |
|
| |
General and administrative expenses
|
|
|
9,204 |
|
|
|
10,789 |
|
|
|
9,984 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total expenses
|
|
|
50,785 |
|
|
|
44,923 |
|
|
|
56,821 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Income from operations
|
|
|
8,072 |
|
|
|
6,635 |
|
|
|
10,325 |
|
| |
Interest expense
|
|
|
— |
|
|
|
48 |
|
|
|
163 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Income before income taxes
|
|
|
8,072 |
|
|
|
6,587 |
|
|
|
10,162 |
|
| |
Income tax benefit
|
|
|
(1,869 |
) |
|
|
(412 |
) |
|
|
(4,157 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Net income
|
|
$ |
9,941 |
|
|
$ |
6,999 |
|
|
$ |
14,319 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic income per share
|
|
$ |
1.90 |
|
|
$ |
1.37 |
|
|
$ |
2.78 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Diluted income per share
|
|
$ |
1.81 |
|
|
$ |
1.32 |
|
|
$ |
2.78 |
|
| |
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic shares outstanding
|
|
|
5,233,000 |
|
|
|
5,114,000 |
|
|
|
5,146,000 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Diluted shares outstanding
|
|
|
5,487,000 |
|
|
|
5,296,000 |
|
|
|
5,154,000 |
|
| |
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
37
RTW, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Years Ended December 31, 2004, 2003 and 2002
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Accumulated | |
|
|
| |
|
|
|
Comprehensive | |
|
Retained | |
|
Other | |
|
Total | |
| |
|
Common | |
|
Income | |
|
Earnings | |
|
Comprehensive | |
|
Shareholders’ | |
| |
|
Stock | |
|
(Loss) | |
|
(Deficit) | |
|
Income | |
|
Equity | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Balance at January 1, 2002
|
|
$ |
20,688 |
|
|
|
|
|
|
$ |
(7,348 |
) |
|
$ |
882 |
|
|
$ |
14,222 |
|
| |
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net income
|
|
|
— |
|
|
$ |
14,319 |
|
|
|
14,319 |
|
|
|
— |
|
|
|
14,319 |
|
| |
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Change in unrealized investment gains
|
|
|
— |
|
|
|
1,338 |
|
|
|
— |
|
|
|
1,338 |
|
|
|
1,338 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Comprehensive income
|
|
|
|
|
|
$ |
15,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Retirement of common stock
|
|
|
(79 |
) |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
(79 |
) |
| |
Issuance of shares under ESPP
|
|
|
10 |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
10 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2002
|
|
|
20,619 |
|
|
|
|
|
|
|
6,971 |
|
|
|
2,220 |
|
|
|
29,810 |
|
| |
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net income
|
|
|
— |
|
|
$ |
6,999 |
|
|
|
6,999 |
|
|
|
— |
|
|
|
6,999 |
|
| |
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Change in unrealized investment gains
|
|
|
— |
|
|
|
(1,247 |
) |
|
|
— |
|
|
|
(1,247 |
) |
|
|
(1,247 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Comprehensive income
|
|
|
|
|
|
$ |
5,752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Retirement of common stock
|
|
|
(37 |
) |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
(37 |
) |
| |
Stock options exercised
|
|
|
19 |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
19 |
|
| |
Issuance of shares under ESPP
|
|
|
43 |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
43 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
20,644 |
|
|
|
|
|
|
|
13,970 |
|
|
|
973 |
|
|
|
35,587 |
|
| |
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net income
|
|
|
— |
|
|
$ |
9,941 |
|
|
|
9,941 |
|
|
|
— |
|
|
|
9,941 |
|
| |
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Change in unrealized investment gains
|
|
|
— |
|
|
|
(595 |
) |
|
|
— |
|
|
|
(595 |
) |
|
|
(595 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Comprehensive income
|
|
|
|
|
|
$ |
9,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Stock options exercised
|
|
|
362 |
|
|
|
|
|
|
|
171 |
|
|
|
— |
|
|
|
533 |
|
| |
Issuance of shares under ESPP
|
|
|
65 |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
65 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
$ |
21,071 |
|
|
|
|
|
|
$ |
24,082 |
|
|
$ |
378 |
|
|
$ |
45,531 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
38
RTW, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2004, 2003 and 2002
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income
|
|
$ |
9,941 |
|
|
$ |
6,999 |
|
|
$ |
14,319 |
|
| |
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net realized investment gains
|
|
|
(705 |
) |
|
|
(685 |
) |
|
|
(1,721 |
) |
| |
|
Depreciation and amortization
|
|
|
952 |
|
|
|
1,191 |
|
|
|
963 |
|
| |
|
Deferred income taxes
|
|
|
(2,531 |
) |
|
|
(828 |
) |
|
|
(721 |
) |
| |
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Deposit receivable
|
|
|
— |
|
|
|
— |
|
|
|
17,635 |
|
| |
|
|
Reinsurance recoverables
|
|
|
(6,803 |
) |
|
|
21,611 |
|
|
|
(777 |
) |
| |
|
|
Unpaid claim and claim settlement expenses
|
|
|
6,079 |
|
|
|
(31,218 |
) |
|
|
(48 |
) |
| |
|
|
Unearned premiums, net of premiums receivable
|
|
|
1,007 |
|
|
|
2,105 |
|
|
|
520 |
|
| |
|
|
Other, net
|
|
|
132 |
|
|
|
5,200 |
|
|
|
(4,790 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
Net cash provided by operating activities
|
|
|
8,072 |
|
|
|
4,375 |
|
|
|
25,380 |
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Maturities of investments
|
|
|
11,324 |
|
|
|
5,650 |
|
|
|
— |
|
| |
Purchases of available-for-sale investments
|
|
|
(41,446 |
) |
|
|
(32,903 |
) |
|
|
(64,320 |
) |
| |
Proceeds from sales of available-for-sale investments
|
|
|
21,625 |
|
|
|
27,618 |
|
|
|
75,482 |
|
| |
Purchases of furniture and equipment
|
|
|
(444 |
) |
|
|
(175 |
) |
|
|
(630 |
) |
| |
Disposals of furniture and equipment
|
|
|
— |
|
|
|
22 |
|
|
|
270 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(8,941 |
) |
|
|
212 |
|
|
|
10,802 |
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Payments on notes payable
|
|
|
— |
|
|
|
(1,250 |
) |
|
|
(3,250 |
) |
| |
Stock options exercised
|
|
|
533 |
|
|
|
19 |
|
|
|
— |
|
| |
Issuance of common stock under ESPP
|
|
|
65 |
|
|
|
43 |
|
|
|
10 |
|
| |
Retirement of common stock
|
|
|
— |
|
|
|
(37 |
) |
|
|
(79 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
Net cash provided by (used in) financing activities
|
|
|
598 |
|
|
|
(1,225 |
) |
|
|
(3,319 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(271 |
) |
|
|
3,362 |
|
|
|
32,863 |
|
|
Cash and cash equivalents at beginning of year
|
|
|
39,650 |
|
|
|
36,288 |
|
|
|
3,425 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$ |
39,379 |
|
|
$ |
39,650 |
|
|
$ |
36,288 |
|
| |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cash paid (received) during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Interest
|
|
$ |
— |
|
|
$ |
27 |
|
|
$ |
138 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Income tax payments (refunds)
|
|
$ |
1,033 |
|
|
$ |
115 |
|
|
$ |
(2,976 |
) |
| |
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
39
RTW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004, 2003, and 2002
|
|
| Note 1 — |
Summary of Significant Accounting Policies |
Organization — RTW, Inc. (RTW) provides
disability management services, directed today at workers’
compensation to: (i) employers insured through our
wholly-owned insurance subsidiary, American Compensation
Insurance Company (ACIC); (ii) self-insured employers on a
fee-for-service basis; (iii) state assigned risk plans on a
percent of premium basis; (iv) other insurance companies;
and (v) on a consulting basis to agents and employers,
charging hourly fees through RTW and its division, Absentia.
ACIC offers guaranteed cost workers’ compensation insurance
to employers located primarily in Minnesota, Michigan and
Colorado and is licensed in twenty-three states. Collectively,
“we,” “our” and “us” refer to RTW
and ACIC in these Notes to Consolidated Financial Statements.
We benefit from our ability to reduce workers’ compensation
and disability system costs and provide employers the ability to
control their workers’ compensation and disability
programs. Our insurance subsidiary is domiciled in Minnesota and
is licensed in twenty-three states. We operated primarily in
Minnesota, Michigan and Colorado in 2004 and 2003 and began
servicing non-insurance customers in California and Indiana in
2004. In 2002, we non-renewed all insurance policies in our
Missouri and Massachusetts regions and completed our run-off of
policies in these regions by February 2003. During 2004 and
prior years, we operated in a single business segment,
disability management products and services.
The following explains the accounting policies we use to arrive
at some of the more significant amounts in our financial
statements.
Accounting Principles — We prepare our
financial statements in accordance with U.S. generally
accepted accounting principles (GAAP).
Consolidation — Our consolidated financial
statements include the accounts of RTW and ACIC. We eliminate
all inter-company accounts and transactions in consolidation.
Use of Estimates — We make estimates and
assumptions that affect our reported assets and liabilities, our
disclosure of contingent assets and liabilities at the financial
statement date and our recorded revenues and expenses during the
reporting period. Our most significant estimates are those
relating to our reinsurance recoverables on unpaid claim and
claim settlement expenses, unpaid claim and claim settlement
expenses, income taxes, deferred income taxes and an accrual for
premium adjustments. We continually review our estimates and
assumptions and make adjustments as necessary. Our actual
results could vary significantly from the estimates we make.
Investments — We invest entirely in fixed
maturity investments and classify our investments as
available-for-sale.
Available-for-Sale Investments: Our available-for-sale
investments are carried at fair value with changes in unrealized
gains or losses, net of deferred taxes, reported as other
comprehensive income. The fair values of our investments are
determined based upon quoted market prices as obtained through
commercial pricing services or brokers who provide estimated
fair values.
Realized Investment Gains and Losses: Net realized
investment gains and losses are identified separately in our
Consolidated Statements of Income. Cost of investments sold is
determined by the specific identification method.
We continually monitor the difference between investment cost
and fair value for each of our securities. If any security
experiences a decline in value that is determined to be other
than temporary, we reduce the security’s carrying value for
the decline and record a realized loss in the Consolidated
Statements of Income. No securities were reduced for declines in
fair value in 2004, 2003 or 2002.
40
RTW, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Cash and Cash Equivalents — We consider all
highly liquid investments with maturities of three months or
less when purchased to be cash equivalents.
Fair Value of Financial Instruments — A number
of our significant assets and liabilities (including reinsurance
recoverables, deferred policy acquisition costs, furniture and
equipment and unpaid claim and claim settlement expenses) are
not considered financial instruments for disclosure purposes.
Our premiums receivable and other assets and liabilities that
are considered financial instruments are generally of a
short-term nature. The carrying values of these instruments
approximate their fair values. The carrying values and fair
values of investments are disclosed in Note 3.
Deferred Policy Acquisition Costs — The costs
directly related to writing an insurance policy are referred to
as policy acquisition costs and consist of commissions, state
premium taxes and other direct underwriting expenses. Although
these costs arise when we issue a policy, we defer certain
costs, principally commissions and state premium taxes. These
costs are amortized to expense as premium revenue is recognized
and are reported net of ceding commissions in the Consolidated
Statements of Income.
If deferred policy acquisition costs were to exceed the sum of
unearned premiums net of reinsurance and related anticipated
investment income less expected claim and claim settlement
expenses, we would immediately expense the excess costs.
Depreciation — We depreciate furniture and
equipment on a straight-line basis over the estimated useful
life of the asset (five to ten years). Furniture and equipment
are recorded at cost less accumulated depreciation of
$4.7 million and $4.4 million at December 31,
2004 and 2003 respectively.
Income Taxes — We compute all income tax
amounts using the liability method. Under this method, deferred
tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax basis of
assets and liabilities and their reported amounts using
presently enacted tax rates. Deferred tax assets are recognized
for tax credit and net operating loss carry-forwards, reduced by
a valuation allowance which is established when it is “more
likely than not” that some portion or all of the deferred
tax assets will not be realized. The effect on deferred tax
assets and liabilities of a change in tax rates or regulations
is recognized as income in the period that includes the
enactment date.
Unpaid Claim and Claim Settlement Expenses —
Claim expenses refer to amounts that we paid or expect to pay to
claimants for insured events that have occurred. The costs of
investigating, resolving and processing claims are referred to
as claim settlement expenses. We record these expenses, net of
amounts recoverable under reinsurance contracts, as “Claim
and claim settlement expenses” in the Consolidated
Statements of Income.
Our “Unpaid claim and claim settlement expenses”
represent reserves established for the estimated total unpaid
cost of claim and claim settlement expenses for insured events
that occurred on or prior to each balance sheet date. The
reserves are primarily undiscounted; however, we discounted
selected claims that have fixed or determinable future payments
by $344,000 in 2004 and $505,000 in 2003 using discount factors
ranging from 3.5% to 8.0%. These reserves reflect our estimates
of the total cost of claims that were reported, but not yet
paid, and the cost of claims incurred but not yet reported. Our
estimates consider such variables as past loss experience,
current claim trends and prevailing social, economic and legal
environments. We have a limited amount of historical data to use
in estimating our reserves for unpaid claim and claim settlement
expenses because we commenced operations in 1992. As a result,
we supplement our experience with external industry data, as
adjusted to reflect anticipated differences between our results
and the industry. We reduce the unpaid claim and claim
settlement expenses for estimated amounts of subrogation.
We believe our reserves for unpaid claim and claim settlement
expenses are adequate to cover the ultimate costs of claim and
claim settlement expenses. The ultimate cost of claim and claim
settlement expenses may differ from the established reserves,
particularly when claims may not be settled for many years.
41
RTW, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Reserves for unpaid claim and claim settlement expenses and
assumptions used in their development are continually reviewed.
We record adjustments to prior estimates of unpaid claim and
claim settlement expenses, which may be material, in operations
in the year in which the adjustments are made.
Premiums Earned — Premiums on workers’
compensation insurance policies are our largest source of
revenue. The premium we charge a policyholder is a function of
its payroll, industry and prior workers’ compensation
claims experience. In underwriting a policy, we receive
policyholder payroll estimates for the ensuing year. We record
premiums written on an installment basis, matching billing to
the policyholder, and earn premiums on a daily basis over the
life of each insurance policy based on the payroll estimate. We
record the excess of premiums billed over premiums earned for
each policy as unearned premiums on our balance sheet. When a
policy expires, we audit employer payrolls for the policy period
and adjust the estimated payroll and the policyholder’s
premium to its actual value. The result is a “final
audit” adjustment recorded to premiums earned when the
adjustment becomes known. We also estimate the final audit
amount to be billed on unexpired and expired unaudited policies
and record a final audit receivable included in premiums
receivable on the balance sheet. Final audit premiums recognized
during the period include billed final audit premiums plus (or
minus) the change in estimate for final audit premiums on
unexpired and expired unaudited policies.
Stock-Based Compensation — Had we calculated
compensation expense for our option grants under the 1994 Stock
Plan and stock issuances under the Employee Stock Purchase Plan
(ESPP) based on the fair value method described in Statement of
Financial Accounting Standard (SFAS) No. 123,
“Accounting for Stock-Based Compensation,” our net
income and basic and dilutive net income per share would
approximate the following pro forma amounts (in 000’s,
except per share data):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
As reported
|
|
$ |
9,941 |
|
|
$ |
6,999 |
|
|
$ |
14,319 |
|
| |
Pro forma
|
|
|
9,507 |
|
|
|
6,814 |
|
|
|
14,110 |
|
|
Basic income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
As reported
|
|
|
1.90 |
|
|
|
1.37 |
|
|
|
2.78 |
|
| |
Pro forma
|
|
|
1.82 |
|
|
|
1.33 |
|
|
|
2.74 |
|
|
Dilutive income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
As reported
|
|
|
1.81 |
|
|
|
1.32 |
|
|
|
2.78 |
|
| |
Pro forma
|
|
|
1.73 |
|
|
|
1.29 |
|
|
|
2.74 |
|
The weighted average fair value of options granted under the
ESPP and 1994 Stock Plan during 2004, 2003 and 2002 is estimated
at $2.13, $1.48 and $1.48, respectively, on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions: no dividend yield; volatility of 41.0% to 73.8% in
2004, 115.3% to 131.5% in 2003 and 125.6% in 2002; risk-free
interest rates ranging from 1.05% to 7.70%; and an expected life
of 1 to 5 years.
Effect of Recent Accounting Pronouncements — In
November 2003, FASB issued Emerging Issues Task Force
(“EITF”) 03-1, “The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments”. EITF Issue 03-1 requires that when the
fair value of an investment security is less than its carrying
value, an impairment exists for which the determination must be
made as to whether the impairment is other-than-temporary. EITF
Issue 03-1 applies to all investment securities accounted
for under SFAS No. 115, “Accounting for Certain
Investments in Debt and Equity Securities” and to
investment securities accounted for under the cost method to the
extent an impairment indicator exists. Under the guidance, the
determination of whether an impairment is other-than-temporary
and therefore would result in a recognized loss depends on
market conditions and management’s intent and ability to
hold the securities with
42
RTW, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
unrealized losses for a period sufficient for recovery of such
losses. In September 2004, FASB approved FASB Staff Position
(“FSP”) EITF Issue 03-1-1, which delays the
effective date for measurement and recognition guidance
contained in paragraphs 10-20 of EITF 03-1 until
certain issues are resolved. The delay of the recognition and
measurement provisions is expected to be superceded concurrently
with the issuance of a FSP, which will provide additional
implementation guidance. We will evaluate the effect this
guidance will have on our financial statements and will adopt
the guidance at the time it is issued. We have previously
implemented the disclosure requirements of EITF 03-1.
In December 2004, the FASB issued SFAS No. 123R,
“Share-Based Payment,” which is a revision of
SFAS No. 123, “Accounting for Stock-Based
Compensation”. SFAS No. 123R is effective as of
the beginning of the first interim or annual period that begins
after June 15, 2005, and requires companies to measure the
cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the
award. That cost will be recognized over the period during which
an employee is required to provide service in exchange for the
award i.e., the requisite service period, which is usually equal
to the vesting period. In accordance with the transitional
guidance given in the statement, compensation cost is recognized
on or after the required effective date for the portion of
outstanding awards for which the requisite service period has
not yet been rendered, based on the grant-date fair value of
those awards calculated under SFAS No. 123 for either
recognition or pro forma disclosure requirements.
Under the transitional guidance given in
SFAS No. 123R, we may choose one of three transition
methods. We intend to use the modified prospective transitional
method upon adoption. Under the modified prospective method,
there would be no compensation charge for vested awards that are
outstanding on the effective date of SFAS No. 123R.
Unvested awards that are outstanding on the effective date would
be charged to expense over the remaining vesting period.
Accordingly, we anticipate that we will recognize approximately
$101,000 of incremental compensation costs in 2005 related to
unvested outstanding awards.
Note 2 — Income Per Share
Basic income per share (IPS) is computed by dividing net
income by the weighted average number of common shares
outstanding for the period. Diluted IPS is computed by dividing
net income by the weighted average number of common shares and
dilutive securities outstanding for the period. Dilutive
securities consist of stock options. Dilutive securities are
considered outstanding from the date of grant, after applying
the treasury stock method for determining the dilutive effect.
The following is a reconciliation of the numerators and
denominators of basic and diluted income per share:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Net income (000’s)
|
|
$ |
9,941 |
|
|
$ |
6,999 |
|
|
$ |
14,319 |
|
| |
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
5,233,000 |
|
|
|
5,114,000 |
|
|
|
5,146,000 |
|
| |
Effect of dilutive stock options
|
|
|
254,000 |
|
|
|
182,000 |
|
|
|
8,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
5,487,000 |
|
|
|
5,296,000 |
|
|
|
5,154,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
Basic income per share
|
|
$ |
1.90 |
|
|
$ |
1.37 |
|
|
$ |
2.78 |
|
| |
|
|
|
|
|
|
|
|
|
|
Diluted income per share
|
|
$ |
1.81 |
|
|
$ |
1.32 |
|
|
$ |
2.78 |
|
| |
|
|
|
|
|
|
|
|
|
43
RTW, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Note 3 — Investments
Valuation of Investments — The following tables
present amortized cost, gross unrealized gains and losses and
estimated fair values of our available-for-sale securities
(000’s):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Gross | |
|
Gross | |
|
Estimated | |
| |
|
Amortized | |
|
Unrealized | |
|
Unrealized | |
|
Fair | |
| 2004 |
|
Cost | |
|
Gains | |
|
Losses | |
|
Value | |
| |
|
| |
|
| |
|
| |
|
| |
|
U.S. government securities
|
|
$ |
41,439 |
|
|
$ |
654 |
|
|
$ |
(133 |
) |
|
$ |
41,960 |
|
|
Asset-backed securities
|
|
|
2,011 |
|
|
|
11 |
|
|
|
(19 |
) |
|
|
2,003 |
|
|
Mortgage-backed securities
|
|
|
24,006 |
|
|
|
234 |
|
|
|
(37 |
) |
|
|
24,203 |
|
|
Municipal securities
|
|
|
18,926 |
|
|
|
42 |
|
|
|
(180 |
) |
|
|
18,788 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total investments
|
|
$ |
86,382 |
|
|
$ |
941 |
|
|
$ |
(369 |
) |
|
$ |
86,954 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Gross | |
|
Gross | |
|
Estimated | |
| |
|
Amortized | |
|
Unrealized | |
|
Unrealized | |
|
Fair | |
| 2003 |
|
Cost | |
|
Gains | |
|
Losses | |
|
Value | |
| |
|
| |
|
| |
|
| |
|
| |
|
U.S. government securities
|
|
$ |
48,152 |
|
|
$ |
1,158 |
|
|
$ |
(155 |
) |
|
$ |
49,155 |
|
|
Asset-backed securities
|
|
|
1,008 |
|
|
|
3 |
|
|
|
— |
|
|
|
1,011 |
|
|
Mortgage-backed securities
|
|
|
28,514 |
|
|
|
509 |
|
|
|
(18 |
) |
|
|
29,005 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total investments
|
|
$ |
77,674 |
|
|
$ |
1,670 |
|
|
$ |
(173 |
) |
|
$ |
79,171 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
The gross unrealized losses and fair value of our investments
aggregated by the length of time that individual securities have
been in a continuous unrealized loss position are as follows
(000’s):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Less Than | |
|
Greater Than | |
|
|
|
|
| |
|
Twelve Months | |
|
Twelve Months | |
|
|
|
|
| |
|
| |
|
| |
|
|
|
|
| |
|
|
|
Gross | |
|
|
|
Gross | |
|
|
|
Total Gross | |
| |
|
Fair | |
|
Unrealized | |
|
Fair | |
|
Unrealized | |
|
Total Fair | |
|
Unrealized | |
| 2004 |
|
Value | |
|
Losses | |
|
Value | |
|
Losses | |
|
Value | |
|
Losses | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
U.S. government securities
|
|
$ |
40,912 |
|
|
$ |
(118 |
) |
|
$ |
1,048 |
|
|
$ |
(15 |
) |
|
$ |
41,960 |
|
|
$ |
(133 |
) |
|
Mortgage-backed and asset- backed securities
|
|
|
26,206 |
|
|
|
(56 |
) |
|
|
— |
|
|
|
— |
|
|
|
26,206 |
|
|
|
(56 |
) |
|
Municipal securities
|
|
|
18,788 |
|
|
|
(180 |
) |
|
|
— |
|
|
|
— |
|
|
|
18,788 |
|
|
|
(180 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total investments
|
|
$ |
85,906 |
|
|
$ |
(354 |
) |
|
$ |
1,048 |
|
|
$ |
(15 |
) |
|
$ |
86,954 |
|
|
$ |
(369 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Less Than | |
|
Greater Than |
|
|
|
|
| |
|
Twelve Months | |
|
Twelve Months |
|
|
|
|
| |
|
| |
|
|
|
|
|
|
| |
|
|
|
Gross | |
|
|
|
Gross |
|
|
|
Total Gross | |
| |
|
Fair | |
|
Unrealized | |
|
Fair |
|
Unrealized |
|
Total Fair | |
|
Unrealized | |
| 2003 |
|
Value | |
|
Losses | |
|
Value |
|
Losses |
|
Value | |
|
Losses | |
| |
|
| |
|
| |
|
|
|
|
|
| |
|
| |
|
U.S. government securities
|
|
$ |
15,172 |
|
|
$ |
(155 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
15,172 |
|
|
$ |
(155 |
) |
|
Mortgage-backed and asset-backed securities
|
|
|
2,450 |
|
|
|
(18 |
) |
|
|
— |
|
|
|
— |
|
|
|
2,420 |
|
|
|
(18 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total investments
|
|
$ |
17,622 |
|
|
$ |
(173 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
17,622 |
|
|
$ |
(173 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The gross unrealized loss in all cases is the result of a
decline in interest rates and is not the result of deterioration
in the credit quality of the issuers. All issues carry a credit
quality of AAA or AA (Standard & Poors). We have the
ability and intent to hold all of these securities to maturity
or recovery. We consider all relevant facts and circumstances in
evaluating whether the impairment of a security is other than
temporary. Relevant facts and circumstances we consider include:
(i) the length of time the fair value has been below
44
RTW, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
cost; (ii) the financial position and access to capital of
the issuer, including the current and future effect of any
specific events; and (iii) our ability and intent to hold
the security to maturity or until it recovers in value. To the
extent we determine that a security is deemed to be other than
temporarily impaired, the difference between amortized cost and
fair value would be charged to earnings.
Deposits — Included in investments are
U.S. government securities and cash on deposit with various
regulatory authorities, as required by law, with a fair value of
$16.2 million and $21.9 million at December 31,
2004 and 2003, respectively.
Additionally, included in investments are U.S. government
securities pledged as collateral against a letter of credit
provided to an insurer, with a fair value of $1.9 million
and $4.1 million at December 31, 2004 and 2003,
respectively.
Fixed Maturities by Maturity Date — The
following table presents the amortized cost and fair value of
investments by contractual maturity at December 31, 2004.
Actual maturities may differ from those stated as a result of
calls and prepayments (000’s):
| |
|
|
|
|
|
|
|
|
|
|
| |
|
Amortized | |
|
Estimated | |
| |
|
Cost | |
|
Fair Value | |
| |
|
| |
|
| |
|
Maturing In:
|
|
|
|
|
|
|
|
|
| |
One year or less
|
|
$ |
3,453 |
|
|
$ |
3,488 |
|
| |
Over one year through five years
|
|
|
24,957 |
|
|
|
24,836 |
|
| |
Over five years through ten years
|
|
|
23,146 |
|
|
|
23,320 |
|
| |
Over ten years
|
|
|
10,820 |
|
|
|
11,107 |
|
| |
Mortgage-backed securities with various maturities
|
|
|
24,006 |
|
|
|
24,203 |
|
| |
|
|
|
|
|
|
| |
|
Total investments
|
|
$ |
86,382 |
|
|
$ |
86,954 |
|
| |
|
|
|
|
|
|
Investment Income — Investment income includes
income from the following sources (000’s):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Fixed maturity investments
|
|
$ |
3,383 |
|
|
$ |
4,346 |
|
|
$ |
4,221 |
|
|
Interest on deposit receivable
|
|
|
— |
|
|
|
— |
|
|
|
736 |
|
|
Cash and cash equivalents
|
|
|
344 |
|
|
|
128 |
|
|
|
144 |
|
|
Other
|
|
|
110 |
|
|
|
— |
|
|
|
38 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Investment income
|
|
$ |
3,837 |
|
|
$ |
4,474 |
|
|
$ |
5,139 |
|
| |
|
|
|
|
|
|
|
|
|
Note 4 — Reinsurance
Our financial statements reflect the effects of ceded
reinsurance transactions. We purchase reinsurance to protect us
from potential losses in excess of the level we are willing to
accept. Our primary reinsurance is excess of loss coverage that
limits our per-incident exposure.
We report reinsurance related balances on a “gross”
basis on the balance sheet, resulting in reinsurance recoverable
amounts on unpaid and on paid claim and claim settlement
expenses recorded as assets. We estimate amounts recoverable
from reinsurers in a manner consistent with the claim liability
associated with the reinsured policy.
45
RTW, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table summarizes our reinsurance coverage (all
losses ceded on a per occurrence basis):
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
Covers losses per occurrence: |
| |
|
|
|
|
| |
|
|
|
In Excess of: | |
|
Limited to: |
| |
|
|
|
| |
|
|
|
Minnesota:
|
|
|
|
|
|
|
|
|
| |
2004
|
|
WCRA |
|
$ |
360,000 |
|
|
Statutory limit |
| |
|
Various reinsurers |
|
$ |
200,000 |
|
|
$360,000 |
| |
2003
|
|
WCRA |
|
$ |
360,000 |
|
|
Statutory limit |
| |
|
Various reinsurers |
|
$ |
200,000 |
|
|
$360,000 |
| |
2002
|
|
WCRA |
|
$ |
350,000 |
|
|
Statutory limit |
| |
|
Other states:
|
|
|
|
|
|
|
|
|
| |
2004
|
|
Various reinsurers |
|
$ |
200,000 |
|
|
$20.0 million excluding acts of terrorism |
| |
2003
|
|
Various reinsurers |
|
$ |
200,000 |
|
|
$20.0 million excluding acts of terrorism |
| |
2002
|
|
Various reinsurers |
|
$ |
300,000 |
|
|
$20.0 million |
We decreased our retention levels in 2004 and 2003 to further
reduce volatility in our operating results.
For claims occurring after June 30, 1998, we further
limited our per incident exposure by purchasing excess of loss
coverage for losses from $25,000 to the lesser of $300,000 or
the WCRA selected retention level in Minnesota and from $25,000
to $300,000 in other states from a single reinsurer. This
agreement was finalized after its effective date and activity
occurring from July 1, 1998 through September 30, 1998
was recorded on a retrospective basis resulting in the deferral
of a gain totaling $2.0 million at December 31, 1998.
We amortized $400,000 of the deferred gain as a reduction of
claim and claim settlement expenses in each of 2002, 2001 and
2000 and $740,000 in 1999 resulting in an un-amortized deferred
gain of $49,000 at December 31, 2004. The deferred gain is
being amortized into income using the effective interest rate
inherent in the amounts paid to the reinsurer and the estimated
timing and amounts of recoveries from the reinsurer. Activity
occurring on or after October 1, 1998 is recorded
prospectively. This contract was terminated effective
December 31, 2000; however, the policy was effective in
2001 for policies in force at December 31, 2000 through
expiration, not to exceed fifteen months after the effective
termination date. Policies written or renewing after
December 31, 2000 are not covered under this lower level
excess of loss reinsurance policy.
Reinsurance contracts do not relieve us from our obligations to
policyholders. We expect reinsurers to which we have ceded
reinsurance to honor their obligations. Failure of these
reinsurers to honor their obligations could result in losses to
us. We do not anticipate any such losses and accordingly, no
provision for amounts deemed uncollectible are included in our
financial statements. We attempt to minimize our exposure to
significant losses from reinsurer insolvency by monitoring the
financial condition of our reinsurers. The reinsurance
recoverable on unpaid claim and claim settlement expenses
associated with reinsurers are as follows (000’s):
| |
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Excess of loss reinsurance through various reinsurers
|
|
$ |
77,722 |
|
|
$ |
71,466 |
|
46
RTW, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The effect of ceded reinsurance on premiums written and claim
and claim settlement expenses are as follows (000’s):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Premiums written:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Direct
|
|
$ |
64,687 |
|
|
$ |
56,481 |
|
|
$ |
59,898 |
|
| |
Ceded
|
|
|
(9,688 |
) |
|
|
(8,141 |
) |
|
|
(2,242 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
Net premiums written
|
|
$ |
54,999 |
|
|
$ |
45,340 |
|
|
$ |
57,656 |
|
| |
|
|
|
|
|
|
|
|
|
|
Claim and claim settlement expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Direct
|
|
$ |
48,909 |
|
|
$ |
20,931 |
|
|
$ |
59,710 |
|
| |
Ceded
|
|
|
(13,373 |
) |
|
|
6,325 |
|
|
|
(19,177 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
Net claim and claim settlement expenses
|
|
$ |
35,536 |
|
|
$ |
27,256 |
|
|
$ |
40,533 |
|
| |
|
|
|
|
|
|
|
|
|
During 2003, we re-evaluated and lowered our estimate for excess
of loss unpaid claim and claim settlement expenses by
$15.1 million, which inures to the benefit of our
reinsurers. Excluding the effect of this benefit, our ceded
losses to reinsurers would have been $8.8 million.
The reinsurance recoverable on paid claim and claim settlement
expenses consists primarily of receivables from paid claim and
claim settlement expenses that were submitted but not yet
reimbursed by reinsurers at December 31, 2004 and 2003.
Note 5 — Unpaid Claim and Claim Settlement
Expenses
As described in Note 1, we establish unpaid claim and claim
settlement expense reserves on reported and unreported claims
for insured losses. Establishing appropriate reserves is an
inherently uncertain process. Furthermore, estimating ultimate
reserves is difficult due to our relatively limited historical
claim data and small claim population. Estimates are further
complicated by the extended periods of time that elapse between
the date losses occur and the date losses are reported and
ultimately settled. Reserve estimates are regularly reviewed and
updated, using the most current information available. Any
resulting adjustments, which may be material, are reflected in
current operations.
47
RTW, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table represents a reconciliation of beginning and
ending unpaid claim and claim settlement expense reserves for
each of the last three years (000’s):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Balance at January 1
|
|
$ |
150,044 |
|
|
$ |
181,262 |
|
|
$ |
181,310 |
|
| |
Less reinsurance recoverables
|
|
|
(71,466 |
) |
|
|
(91,822 |
) |
|
|
(90,115 |
) |
| |
Plus deferred gain on retrospective reinsurance
|
|
|
49 |
|
|
|
49 |
|
|
|
449 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net balance at January 1
|
|
|
78,627 |
|
|
|
89,489 |
|
|
|
91,644 |
|
|
Incurred related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Current year
|
|
|
42,583 |
|
|
|
33,954 |
|
|
|
49,621 |
|
| |
Prior years
|
|
|
(7,047 |
) |
|
|
(6,698 |
) |
|
|
(8,356 |
) |
| |
Write-off of reinsurance recoverable
|
|
|
— |
|
|
|
— |
|
|
|
(332 |
) |
| |
Amortization of deferred retrospective reinsurance gain
|
|
|
— |
|
|
|
— |
|
|
|
(400 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
Total incurred
|
|
|
35,536 |
|
|
|
27,256 |
|
|
|
40,533 |
|
|
Paid related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Current year
|
|
|
12,666 |
|
|
|
10,761 |
|
|
|
13,715 |
|
| |
Prior years
|
|
|
23,047 |
|
|
|
27,357 |
|
|
|
28,973 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total paid
|
|
|
35,713 |
|
|
|
38,118 |
|
|
|
42,688 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net balance at December 31
|
|
|
78,450 |
|
|
|
78,627 |
|
|
|
89,489 |
|
| |
Plus reinsurance recoverables
|
|
|
77,722 |
|
|
|
71,466 |
|
|
|
91,822 |
|
| |
Plus deferred gain on retrospective reinsurance
|
|
|
(49 |
) |
|
|
(49 |
) |
|
|
(49 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$ |
156,123 |
|
|
$ |
150,044 |
|
|
$ |
181,262 |
|
| |
|
|
|
|
|
|
|
|
|
Changes in estimates of unpaid claim and claim settlement
expenses for prior years decreased the provision for claim and
claim settlement expenses by $7.0 million,
$6.7 million and $8.4 million in 2004, 2003 and 2002,
respectively.
Our estimate for unpaid claim and claim settlement expenses
decreased in 2004 due to the following: (i) we improved our
effectiveness in managing open claims, closing them earlier than
originally anticipated; and (ii) our estimate of the
liability for unpaid claim and claim settlement expenses is
difficult and volatile due to our relatively limited historical
claim data and small claim population.
Our estimate for reinsurance recoverables increased in 2004 due
to: (i) the growth in our gross premiums earned in 2004;
and (ii) payments and the related recoveries on prior year
ceded claim and claim settlement expenses.
Our estimate for unpaid claim and claim settlement expenses
decreased in 2003 due to the following: (i) the frequency
of claims reported in 2003 for 2002 and prior years was less
than anticipated when we determined our liability in 2002; and
(ii) our estimate of the liability for unpaid claim and
claim settlement expenses is difficult and volatile due to our
relatively limited historical claim data and small claim
population.
Our estimate for reinsurance recoverables decreased in 2003 due
to: (i) re-evaluating and lowering our estimate for gross
unpaid claim and claim settlement expenses by
$15.1 million; and (ii) payments and the related
recoveries on prior year ceded claim and claim settlement
expenses.
We recovered $6.6 million, $14.7 million and
$18.6 million from reinsurers during 2004, 2003 and 2002
respectively.
48
RTW, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Note 6 — Notes Payable
In March 2000, we borrowed $8.0 million under a term loan
agreement to fund the repurchase of common stock from certain of
our shareholders. We paid $1.0 million in principal on the
term loan in 2000, an additional $2.5 million in 2001,
$3.3 million in 2002 and the remaining $1.2 million in
2003. We paid interest at an adjusted LIBOR rate on the term
loan (adjusted LIBOR was 4.66% at December 31, 2002). The
term loan was paid in full in September 2003.
Note 7 — Income Taxes
Income tax benefit consists of the following (000’s):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Federal
|
|
$ |
651 |
|
|
$ |
288 |
|
|
$ |
(3,521 |
) |
| |
State
|
|
|
56 |
|
|
|
128 |
|
|
|
85 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total current tax (benefit) expense
|
|
|
707 |
|
|
|
416 |
|
|
|
(3,436 |
) |
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Federal
|
|
|
(2,576 |
) |
|
|
(828 |
) |
|
|
(721 |
) |
| |
State
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total deferred tax (benefit) expense
|
|
|
(2,576 |
) |
|
|
(828 |
) |
|
|
(721 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
Income tax benefit
|
|
$ |
(1,869 |
) |
|
$ |
(412 |
) |
|
$ |
(4,157 |
) |
| |
|
|
|
|
|
|
|
|
|
Our income tax benefit differs from the federal statutory rate
as follows (000’s):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Federal income tax expense (benefit) at 35%
|
|
$ |
2,825 |
|
|
$ |
2,305 |
|
|
$ |
3,557 |
|
|
Increase (reduction) in income tax expense (benefit)
resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
State income taxes, net of federal income tax benefit
|
|
|
36 |
|
|
|
79 |
|
|
|
242 |
|
| |
Non-deductible investment amortization and tax-exempt investment
income
|
|
|
(116 |
) |
|
|
11 |
|
|
|
18 |
|
| |
Deferred income tax valuation allowance
|
|
|
(4,040 |
) |
|
|
(3,060 |
) |
|
|
(7,927 |
) |
| |
Other
|
|
|
(574 |
) |
|
|
253 |
|
|
|
(47 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
Income tax benefit
|
|
$ |
(1,869 |
) |
|
$ |
(412 |
) |
|
$ |
(4,157 |
) |
| |
|
|
|
|
|
|
|
|
|
Differences between the tax basis of assets and liabilities and
their reported amounts in the Consolidated Financial Statements
that will result in taxable or deductible amounts in future
years are called temporary
49
RTW, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
differences. The tax effects of temporary differences that give
rise to net deferred tax assets, included within other assets,
are as follows (000’s):
| |
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Unpaid claim and claim settlement expenses
|
|
$ |
5,293 |
|
|
$ |
6,455 |
|
|
Accrued second injury funds
|
|
|
74 |
|
|
|
90 |
|
|
Unearned premiums
|
|
|
2,067 |
|
|
|
1,877 |
|
|
Office closure costs
|
|
|
— |
|
|
|
88 |
|
|
Retrospective reinsurance
|
|
|
17 |
|
|
|
17 |
|
|
Other
|
|
|
326 |
|
|
|
642 |
|
| |
|
|
|
|
|
|
| |
Deferred tax assets
|
|
|
7,777 |
|
|
|
9,169 |
|
|
Net unrealized gain on securities
|
|
|
(194 |
) |
|
|
(524 |
) |
|
Deferred policy acquisition costs
|
|
|
(937 |
) |
|
|
(894 |
) |
|
Depreciation
|
|
|
(240 |
) |
|
|
(211 |
) |
| |
|
|
|
|
|
|
| |
Deferred tax liabilities
|
|
|
(1,371 |
) |
|
|
(1,629 |
) |
| |
|
|
|
|
|
|
| |
|
Net deferred tax assets before valuation allowance
|
|
|
6,406 |
|
|
|
7,540 |
|
| |
|
|
Valuation allowance
|
|
|
— |
|
|
|
(4,040 |
) |
| |
|
|
|
|
|
|
| |
|
Net deferred tax asset
|
|
$ |
6,406 |
|
|
$ |
3,500 |
|
| |
|
|
|
|
|
|
In assessing our ability to realize the future benefit of
deferred tax assets, we consider recent operating results, the
scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies. The valuation
allowance decreased to $4.0 million in 2003 based on our
projected taxable income and available tax planning strategies.
In 2004, we eliminated the remaining allowance as we expect the
entire deferred tax asset will be realized as a result of income
and the reversal of existing taxable temporary differences in
the future. Deferred tax assets are included in other assets on
the Consolidated Balance Sheets.
Income taxes receivable were approximately $545,000 and $492,000
at December 31, 2004 and 2003, respectively, and are
included in other assets.
Note 8 — Employee Benefits and Plans
Stock Based Compensation — We account for our
stock-based compensation plans, the RTW, Inc. 1995 Employee
Stock Purchase Plan and Trust (ESPP) and the 1994 Stock Plan,
using Accounting Principles Board Opinion No. 25
(APB 25), “Accounting for Stock Issued to
Employees,” and related Interpretations. Under APB 25,
compensation cost for stock options is measured as the excess,
if any, of the quoted market price of our stock at the date of
the grant over the amount an employee must pay to acquire the
stock.
1995 Employee Stock Purchase Plan — The ESPP
provides employees the opportunity to purchase shares of our
stock at 85% of the fair value based on the lesser of the
beginning or ending share price for each plan year as set forth
in the plan. In 2003, the shares reserved for distribution under
the plan were increased from 100,000 to 150,000 shares. In
2004, the ESPP was amended to allow the issuance of stock within
10 years of any increase in the number of shares authorized
to be issued under the plan. The ESPP terminates in 2013 and
will be carried out in phases, each consisting of one year or a
different period of time approved by the Board of Directors. Any
employee completing two weeks of service prior to commencing a
phase of the plan may participate. Employees may elect to
contribute from $10 to 10% of monthly salary to the plan through
payroll
50
RTW, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
withholdings. The following summarizes shares purchased and
purchase prices for each phase in the most recent three years
completed through 2004:
| |
|
|
|
|
|
|
|
|
| |
|
Shares | |
|
Purchase | |
| Phase: |
|
Purchased | |
|
Price | |
| |
|
| |
|
| |
|
Beginning April 2001, expiring April 2002
|
|
|
5,047 |
|
|
$ |
1.90 |
|
|
Beginning April 2002, expiring April 2003
|
|
|
20,649 |
|
|
|
2.07 |
|
|
Beginning April 2003, expiring April 2004
|
|
|
20,151 |
|
|
|
3.23 |
|
The tenth one-year phase began in April 2004 and expires in
April 2005.
Our liability for employee contributions withheld at
December 31, 2004 and 2003 for the purchase of shares in
April 2005 and April 2004 under the ESPP was $71,000 and
$47,000, respectively.
1994 Stock Plan — The 1994 Stock Plan provides
for awards of incentive stock options (as defined in
section 422 of the Internal Revenue code) and non-qualified
stock options. In July 1998, the Board of Directors increased
the shares reserved for distribution under the plan to
1,000,000. Option price, option term, vesting provisions and
other limits and restrictions are determined at the time of
grant by the Board of Directors or, if established, by a
separate committee. The exercise price for all options granted
was the market price of the common stock at the date of grant.
The ability to award incentive stock options under this Plan
terminated in June 2004.
Options granted, exercised, canceled and outstanding under the
1994 Stock Plan are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Qualified | |
|
Non-Qualified | |
| |
|
| |
|
| |
| |
|
|
|
Weighted | |
|
|
|
Weighted | |
| |
|
|
|
Average | |
|
|
|
Average | |
| |
|
Option | |
|
Exercise | |
|
Option | |
|
Exercise | |
| |
|
Shares | |
|
Price | |
|
Shares | |
|
Price | |
| |
|
| |
|
| |
|
| |
|
| |
|
Balance, January 1, 2002
|
|
|
292,390 |
|
|
$ |
11.83 |
|
|
|
480,726 |
|
|
$ |
8.19 |
|
| |
Granted
|
|
|
25,500 |
|
|
|
2.48 |
|
|
|
112,500 |
|
|
|
2.40 |
|
| |
Canceled
|
|
|
(180,819 |
) |
|
|
12.24 |
|
|
|
(266,351 |
) |
|
|
12.60 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2002
|
|
|
137,071 |
|
|
|
9.54 |
|
|
|
326,875 |
|
|
|
2.60 |
|
| |
Granted
|
|
|
155,500 |
|
|
|
2.19 |
|
|
|
12,500 |
|
|
|
3.13 |
|
| |
Exercised
|
|
|
(8,000 |
) |
|
|
2.22 |
|
|
|
— |
|
|
|
— |
|
| |
Canceled
|
|
|
(9,052 |
) |
|
|
9.62 |
|
|
|
(80,000 |
) |
|
|
2.20 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003
|
|
|
275,519 |
|
|
|
5.60 |
|
|
|
259,375 |
|
|
|
2.75 |
|
| |
Granted
|
|
|
209,948 |
|
|
|
6.14 |
|
|
|
79,302 |
|
|
|
6.14 |
|
| |
Exercised
|
|
|
(43,468 |
) |
|
|
2.22 |
|
|
|
(133,500 |
) |
|
|
2.18 |
|
| |
Canceled
|
|
|
(38,572 |
) |
|
|
6.21 |
|
|
|
(1,875 |
) |
|
|
5.33 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
403,427 |
|
|
$ |
6.19 |
|
|
|
203,302 |
|
|
$ |
4.42 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Incentive stock options expire ten years from the date of grant
and substantially all are subject to continued employment with
us. Each of the non-qualified options expires ten years from the
date of grant with the exception of certain options granted to
the founder of the Company that expire five years from the date
of grant. Options are generally subject to vesting provisions
that restrict exercise of the option.
51
RTW, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table summarizes the options outstanding and
exercisable at December 31, 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Options Outstanding | |
|
|
| |
|
| |
|
Options Exercisable | |
| |
|
|
|
|
|
| |
| |
|
|
|
Weighted Average | |
|
|
|
Weighted | |
| |
|
Number | |
|
| |
|
Number | |
|
Average | |
| |
|
of | |
|
Contractual | |
|
Exercise | |
|
of | |
|
Exercise | |
| Exercise Price Range |
|
Options | |
|
Life | |
|
Price | |
|
Options | |
|
Price | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Incentive stock options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$14.00 - $38.67
|
|
|
37,429 |
|
|
|
3.2 years |
|
|
$ |
16.68 |
|
|
|
37,429 |
|
|
$ |
16.68 |
|
| |
8.75 - 10.75
|
|
|
35,000 |
|
|
|
5.1 years |
|
|
|
10.54 |
|
|
|
35,000 |
|
|
|
10.54 |
|
| |
6.00 - 6.18
|
|
|
182,698 |
|
|
|
9.1 years |
|
|
|
6.14 |
|
|
|
70,675 |
|
|
|
6.18 |
|
| |
2.19 - 4.50
|
|
|
148,300 |
|
|
|
7.7 years |
|
|
|
2.53 |
|
|
|
140,300 |
|
|
|
2.58 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 2.19 - $38.67
|
|
|
403,427 |
|
|
|
7.7 years |
|
|
$ |
6.19 |
|
|
|
283,404 |
|
|
$ |
6.32 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-qualified stock options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$31.75
|
|
|
5,000 |
|
|
|
2.1 years |
|
|
$ |
31.75 |
|
|
|
5,000 |
|
|
$ |
31.75 |
|
| |
1.98 - 6.50
|
|
|
198,302 |
|
|
|
8.0 years |
|
|
|
3.73 |
|
|
|
133,908 |
|
|
|
3.27 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 1.98 - $31.75
|
|
|
203,302 |
|
|
|
7.9 years |
|
|
$ |
4.42 |
|
|
|
138,908 |
|
|
$ |
4.30 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employment Contracts — We entered into an
employment agreement with our President and Chief Executive
Officer, Jeffrey B. Murphy beginning December 17, 2003.
Under this agreement, Mr. Murphy receives a base salary of
$250,000, subject to review annually for increase by our Board
of Directors. In addition to base salary, Mr. Murphy is
eligible for bonuses, expense reimbursements and health, dental,
life and disability insurance consistent with that provided to
other officers and employees. Additionally, Mr. Murphy was
granted 100,000 options at $6.00 per share on
March 12, 2004. Mr. Murphy’s annual base salary
was increased to $275,000 effective April 1, 2005.
Combined Retirement Plan — We combine our
401(k) Retirement Plan and Employee Stock Ownership Plan (ESOP)
into a single KSOP retirement plan. The KSOP retains the
features of each separate component except for eligibility and
vesting provisions. Under the plan, employees become eligible to
participate in the plan on the first day of the month after
beginning employment and attaining age 21.
|
|
| |
401(k) Retirement Component — We sponsor a
defined contribution retirement component under
Section 401(k) of the Internal Revenue Code for eligible
employees. Our contributions are discretionary and are based on
contributions made by employees. Expense recognized for 2004,
2003 and 2002 was $221,000, $204,000 and $220,000, respectively. |
| |
| |
Employee Stock Ownership Component — We
maintain an ESOP for our qualified employees. Our contributions
are discretionary. We may contribute cash or shares of our
common stock. No contributions were made or expense recorded in
2004, 2003 or 2002. |
Other Employee Benefit Plans — We maintained
bonus plans in 2004, 2003 and 2002 under which all employees,
including officers, were eligible for a bonus based on our
operating results. These bonuses aggregated $1,295,000, $941,000
and $864,000 in 2004, 2003 and 2002, respectively.
Note 9 — Shareholders’ Equity
On November 7, 2002 our Board of Directors approved a
one-for-two reverse stock split in order to remedy the minimum
bid requirement for continued listing on the Nasdaq National
Market. The reverse stock split was effective to shareholders of
record on the close of business on November 22, 2002. All
share and per share amounts in these Consolidated Financial
Statements have been adjusted to reflect the effect of the stock
split.
52
RTW, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
On September 15, 1998, our Board of Directors approved a
share repurchase program authorizing the repurchase of up to
$4.0 million of RTW, Inc. common stock. We may repurchase
shares on the open market or through private transactions
depending upon market conditions and availability. Through
December 31, 2004 we repurchased approximately
385,000 shares for $2.7 million. We expect to use
repurchased shares for employee stock option and purchase plans
and other corporate purposes.
Shareholder Rights Plan — In April 1997, we
adopted a shareholder rights plan and declared a dividend of one
right for each outstanding share of common stock to shareholders
of record at the close of business on June 30, 1997. The
rights become exercisable only after any person or group (the
Acquiring Person) becomes the beneficial owner of 15% or more of
the voting power of our common stock. Certain shares held by our
Chairman Emeritus, David C. Prosser, and his wife are excluded
from the computation for determining whether a person is an
Acquiring Person. Each right entitles its registered holder to
purchase from us one one-hundredth share of a new Series A
Junior Participating Preferred Stock, no par value, at a price
of $85 per one one-hundredth share, subject to adjustment.
If any Acquiring Person acquires beneficial ownership of 15% or
more of our voting power, each right will entitle its holder
(other than such Acquiring Person) to purchase, at the then
current purchase price of the right, that number of shares of
our common stock having a market value of two times the purchase
price of the right, subject to certain possible adjustments. In
addition, if we are acquired in a merger or other business
combination transaction, each right will entitle its holder to
purchase, at the then current purchase price of the right, that
number of common shares of the acquiring company having a market
value of two times the purchase price of the right. Following
the acquisition of a beneficial ownership of 15% or more of our
outstanding common stock by any Acquiring Person and prior to an
acquisition by any Acquiring Person of 50% or more of our
outstanding common stock, our Board of Directors may exchange
the outstanding rights (other than rights owned by such
Acquiring Person), in whole or in part, at an exchange ratio of
one share of common stock, or one one-hundredth share of
Preferred Stock (or equivalent securities) per right, subject to
adjustment. We may redeem the rights, in whole, at
$.001 per right, at any time prior to an acquisition by any
Acquiring Person of 15% or more of our outstanding common stock
and prior to the expiration of the rights. The rights expire on
April 17, 2007, unless extended or earlier redeemed by us.
Dividend Restrictions — Dividends are paid as
determined by our Board of Directors. No cash dividends have
ever been paid by us.
Our ability to pay cash dividends to shareholders may depend
upon the amount of dividends received from our insurance
subsidiary. ACIC’s ability to pay dividends is restricted
by law or subject to approval of the insurance regulatory
authorities of Minnesota.
Under Minnesota insurance law regulating the payment of
dividends by ACIC, any such payments must be an amount deemed
prudent by ACIC’s Board of Directors and, unless otherwise
approved by the Commissioner of the Minnesota Department of
Commerce (Commissioner), must be paid solely from the adjusted
earned surplus of ACIC. Adjusted earned surplus means the earned
surplus as determined in accordance with statutory accounting
practices (unassigned funds), less 25% of the amount of such
earned surplus that is attributable to unrealized capital gains.
Further, without approval of the Commissioner, ACIC may not pay
a dividend in any calendar year which, when combined with
dividends paid in the preceding twelve months, exceeds the
greater of: (i) 10% of ACIC’s statutory capital and
surplus at the prior year end; or (ii) 100% of ACIC’s
statutory net gain from operations (not including realized
capital gains) for the prior calendar year. For 2005, dividends
in excess of $3.9 million would require prior consent of
the Commissioner.
Statutory Surplus and Statutory Net Income —
Our insurance subsidiary is required to file financial
statements with state regulatory agencies. The accounting
principles used to prepare the statutory financial statements
follow prescribed accounting practices that differ from GAAP.
Statutory capital and surplus at
53
RTW, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
December 31, 2004 and 2003, and statutory net income for
the years ended December 31, 2004, 2003 and 2002 are as
follows (000’s):
| |
|
|
|
|
|
|
|
|
| |
|
Statutory | |
|
|
| |
|
Capital and | |
|
Statutory | |
| |
|
Surplus | |
|
Net Income | |
| |
|
| |
|
| |
|
2004
|
|
$ |
38,503 |
|
|
$ |
7,540 |
|
|
2003
|
|
|
33,033 |
|
|
|
6,103 |
|
|
2002
|
|
|
|
|
|
|
12,064 |
|
Note 10 — Commitments and Contingencies
Operating Leases — We conduct our operations in
leased office facilities under operating lease agreements. The
agreements provide for monthly base lease payments plus
contingent rentals based on an allocable portion of certain
operating expenses incurred by the lessor.
Future minimum (base) rental payments required under the
leases, as of December 31, 2004, are as follows
(000’s):
| |
|
|
|
|
|
2005
|
|
$ |
1,039 |
|
|
2006
|
|
|
911 |
|
|
2007
|
|
|
581 |
|
Rent expense, including contingent rentals, was
$1.1 million, $1.0 million and $1.3 million for
2004, 2003 and 2002, respectively.
On July 30, 2004, we entered into a Letter of Credit
Reimbursement Agreement (“Agreement”) for
$2.0 million with our primary bank to collateralize a
performance bond required as part of a service contract with the
Minnesota Workers’ Compensation Assigned Risk Plan. The
Agreement is collateralized by the stock of American
Compensation Insurance Company (ACIC), our wholly-owned
insurance company subsidiary, and contains a restrictive
covenant that requires ACIC to maintain at least a B+ rating
from A. M. Best Company.
In the ordinary course of administering our workers’
compensation programs, we are routinely involved in the
adjudication of claims resulting from workplace injuries. We are
not involved in any legal or administrative claims that we
believe are likely to have a material adverse effect on our
financial condition or results of operations.
54
RTW, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
| Note 11 — |
Accumulated Other Comprehensive Income |
Our accumulated other comprehensive income includes only
unrealized gains and losses on investments classified as
available-for-sale. Changes in accumulated other comprehensive
income and other comprehensive income (loss) were as follows
(000’s):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Accumulated other comprehensive income, beginning of year
|
|
$ |
973 |
|
|
$ |
2,220 |
|
|
$ |
882 |
|
|
Changes in comprehensive income arising during the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net unrealized investment (losses) gains
|
|
|
(220 |
) |
|
|
(1,234 |
) |
|
|
3,780 |
|
| |
Less: Adjustment for net realized investment gains
|
|
|
705 |
|
|
|
685 |
|
|
|
1,721 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Change in net unrealized investment gains
|
|
|
(925 |
) |
|
|
(1,919 |
) |
|
|
2,059 |
|
| |
|
Income tax expense (benefit)
|
|
|
330 |
|
|
|
(672 |
) |
|
|
721 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Other comprehensive (loss) income for the year
|
|
|
(595 |
) |
|
|
(1,247 |
) |
|
|
1,338 |
|
| |
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income, end of year
|
|
$ |
378 |
|
|
$ |
973 |
|
|
$ |
2,220 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Note 12 — |
Restructuring Charges |
During 2001, we recorded pre-tax restructuring charges totaling
$2.0 million to general and administrative expenses in the
Consolidated Statement of Income. These charges included costs
associated with our decision to close our Missouri and
Massachusetts regional offices, and our Brainerd, Minnesota and
Overland Park, Kansas satellite offices. The restructuring
charge included $715,000 of severance pay and benefits, of which
$106,000 was paid by December 31, 2001 and the remainder of
which was paid in early 2002. The restructuring charge also
included office and equipment lease costs totaling $684,000 and
furniture and equipment disposals and other costs totaling
$600,000. At December 31, 2003, the remaining accrual
totaled $248,000 and included amounts related to future lease
payments. No accrual remained at December 31, 2004.
|
|
| Note 13 — |
Termination of Deposit Contract |
In June 2001, we entered into an agreement with St. Paul RE
(SPR) effective January 1, 2001. Key provisions of this
agreement included ceding 50% of the subject net earned premium
to SPR in exchange for various levels of paid claim
reimbursement through several loss corridors as defined in the
agreement. In December 2002, we negotiated the termination of
this agreement with SPR. In connection with the termination, we
received $28.8 million in cash in December 2002
representing a return of all deposits made under the agreement
less claim reimbursements for claims paid through December 2002.
In 2002, we recorded a gain on the termination totaling
$1.0 million representing the difference between the
deposit receivable balance and the amount received from SPR.
|
|
| Note 14 — |
Quarterly Results of Operations (Unaudited) |
Quarterly revenues are affected by: (i) premiums in force
at the beginning of the quarter; (ii) new policies written
in the quarter; (iii) final audit premiums recognized
during the quarter; and (iv) our policy renewal rate in the
quarter. Historically, a majority of new policies written and
policy renewals have occurred in the first, second and fourth
quarters.
55
RTW, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following tables present unaudited quarterly income for the
eight quarters ended December 31, 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
| 2004 |
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
Quarter | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
|
Premiums in force
|
|
$ |
59,500 |
|
|
$ |
62,400 |
|
|
$ |
63,200 |
|
|
$ |
62,700 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Gross premiums earned
|
|
$ |
14,962 |
|
|
$ |
15,376 |
|
|
$ |
16,676 |
|
|
$ |
16,356 |
|
| |
Premiums ceded
|
|
|
(2,320 |
) |
|
|
(2,208 |
) |
|
|
(2,515 |
) |
|
|
(2,645 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Premiums earned
|
|
|
12,642 |
|
|
|
13,168 |
|
|
|
14,161 |
|
|
|
13,711 |
|
| |
Investment income
|
|
|
882 |
|
|
|
968 |
|
|
|
970 |
|
|
|
1,017 |
|
| |
Net realized investment gains
|
|
|
649 |
|
|
|
58 |
|
|
|
(2 |
) |
|
|
— |
|
| |
Service revenue
|
|
|
67 |
|
|
|
73 |
|
|
|
143 |
|
|
|
350 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total revenues
|
|
|
14,240 |
|
|
|
14,267 |
|
|
|
15,272 |
|
|
|
15,078 |
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Claim and claim settlement expenses
|
|
|
9,230 |
|
|
|
9,005 |
|
|
|
10,061 |
|
|
|
7,240 |
|
| |
Policy acquisition costs
|
|
|
1,410 |
|
|
|
1,959 |
|
|
|
1,531 |
|
|
|
1,145 |
|
| |
General and administrative expenses
|
|
|
2,192 |
|
|
|
1,932 |
|
|
|
2,226 |
|
|
|
2,854 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total expenses
|
|
|
12,832 |
|
|
|
12,896 |
|
|
|
13,818 |
|
|
|
11,239 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$ |
1,408 |
|
|
$ |
1,371 |
|
|
$ |
1,454 |
|
|
$ |
3,839 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
930 |
|
|
$ |
943 |
|
|
$ |
1,093 |
|
|
$ |
6,975 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share
|
|
$ |
0.18 |
|
|
$ |
0.18 |
|
|
$ |
0.21 |
|
|
$ |
1.32 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share
|
|
$ |
0.17 |
|
|
$ |
0.17 |
|
|
$ |
0.20 |
|
|
$ |
1.25 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
The following represent pre-tax adjustments recorded during 2004
that affected reported net income:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains
|
|
$ |
649 |
|
|
$ |
58 |
|
|
$ |
(2 |
) |
|
$ |
— |
|
|
Net changes in estimates for unpaid claim and claim settlement
expenses on claims reported in prior periods
|
|
|
300 |
|
|
|
850 |
|
|
|
200 |
|
|
|
3,246 |
|
|
Pool reapportionment charge
|
|
|
— |
|
|
|
(478 |
) |
|
|
— |
|
|
|
— |
|
|
Bonus expense
|
|
|
(100 |
) |
|
|
(150 |
) |
|
|
(200 |
) |
|
|
(845 |
) |
|
Change in recorded deferred income tax valuation allowance
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,040 |
|
56
RTW, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
| 2003 |
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
Quarter | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
|
Premiums in force
|
|
$ |
48,700 |
|
|
$ |
50,300 |
|
|
$ |
57,400 |
|
|
$ |
58,100 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Gross premiums earned
|
|
$ |
13,022 |
|
|
$ |
12,566 |
|
|
$ |
13,728 |
|
|
$ |
15,115 |
|
| |
Premiums ceded
|
|
|
(1,900 |
) |
|
|
(1,721 |
) |
|
|
(2,049 |
) |
|
|
(2,471 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Premiums earned
|
|
|
11,122 |
|
|
|
10,845 |
|
|
|
11,679 |
|
|
|
12,644 |
|
| |
Investment income
|
|
|
1,242 |
|
|
|
1,167 |
|
|
|
1,067 |
|
|
|
998 |
|
| |
Net realized investment gains
|
|
|
— |
|
|
|
— |
|
|
|
685 |
|
|
|
— |
|
| |
Service revenue
|
|
|
28 |
|
|
|
28 |
|
|
|
23 |
|
|
|
30 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Total revenues
|
|
|
12,392 |
|
|
|
12,040 |
|
|
|
13,454 |
|
|
|
13,672 |
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Claim and claim settlement expenses
|
|
|
8,194 |
|
|
|
5,704 |
|
|
|
6,421 |
|
|
|
6,937 |
|
| |
Policy acquisition costs
|
|
|
1,035 |
|
|
|
2,765 |
|
|
|
1,484 |
|
|
|
1,594 |
|
| |
General and administrative expenses
|
|
|
2,286 |
|
|
|
2,656 |
|
|
|
2,542 |
|
|
|
3,305 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total expenses
|
|
|
11,515 |
|
|
|
11,125 |
|
|
|
10,447 |
|
|
|
11,836 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$ |
877 |
|
|
$ |
915 |
|
|
$ |
3,007 |
|
|
$ |
1,836 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
564 |
|
|
$ |
639 |
|
|
$ |
3,133 |
|
|
$ |
2,663 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share
|
|
$ |
0.11 |
|
|
$ |
0.12 |
|
|
$ |
0.61 |
|
|
$ |
0.52 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share
|
|
$ |
0.11 |
|
|
$ |
0.12 |
|
|
$ |
0.59 |
|
|
$ |
0.49 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
The following represent pre-tax adjustments recorded during 2003
that affected reported net income:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
685 |
|
|
$ |
— |
|
|
Net changes in estimates for unpaid claim and claim settlement
expenses on claims reported in prior periods
|
|
|
300 |
|
|
|
2,400 |
|
|
|
2,000 |
|
|
|
2,000 |
|
|
Pool reapportionment charge
|
|
|
— |
|
|
|
(1,451 |
) |
|
|
— |
|
|
|
— |
|
|
Bonus expense
|
|
|
— |
|
|
|
(300 |
) |
|
|
(300 |
) |
|
|
(341 |
) |
|
Severance and moving costs
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(217 |
) |
|
Commission reversal
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(375 |
) |
|
Change in recorded deferred income tax valuation allowance
|
|
|
— |
|
|
|
— |
|
|
|
1,200 |
|
|
|
1,860 |
|
57
|
|
| Item 9. |
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure |
None
|
|
| Item 9A. |
Controls and Procedures |
a) Evaluation of Disclosure Controls and Procedures
|
|
| |
The Company’s Chief Executive Officer, Jeffrey B. Murphy,
and Chief Financial Officer, Alfred L. LaTendresse, have
reviewed the Company’s disclosure controls and procedures
pursuant to Exchange Act Rule 13a-15(b) as of the end of the
period covered by this report. Based upon this review, these
officers believe that the Company’s disclosure controls and
procedures are effective in ensuring that material information
related to the Company is made known to them by others within
the Company. |
b) Changes in Internal Controls
|
|
| |
There were no significant changes in the Company’s internal
controls or in other factors that could significantly affect
these controls during the year covered by this report or from
the end of the reporting period to the date of this Annual
Report on Form 10-K. |
|
|
| Item 9B. |
Other Information |
None
PART III
|
|
| Item 10. |
Directors and Executive Officers of the Registrant |
Information with respect to Directors is contained in the
Section entitled “Election of Directors” in our 2005
Proxy Statement and is incorporated herein by reference.
Information with respect to Executive Officers is included in
PART I of this Annual Report on Form 10-K.
|
|
| Item 11. |
Executive Compensation |
Information required under this item is contained in the Section
entitled “Executive Compensation and Other
Information” in our 2005 Proxy Statement and is
incorporated herein by reference.
|
|
| Item 12. |
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters |
Information required under this item is contained in the Section
entitled “Security Ownership of Principal Shareholders and
Management” in our 2005 Proxy Statement and is incorporated
herein by reference.
|
|
| Item 13. |
Certain Relationships and Related Transactions |
Information required under this item is contained in the Section
entitled “Certain Transactions” in our 2005 Proxy
Statement and is incorporated herein by reference.
|
|
| Item 14. |
Principal Accountant Fees and Services |
Information required under this item is contained in the Section
entitled “Principal Accountant Fees and Services” in
our 2005 Proxy Statement and is incorporated herein by reference.
58
PART IV
|
|
| Item 15. |
Exhibits and Financial Statement Schedules |
(a) Documents filed as Part of this Report
|
|
|
| |
(1) |
Financial Statements. The following consolidated
financial statements are set forth on pages 30 through 47,
Item 8 of this Report. |
|
|
| |
Report of Independent Registered Public Accounting Firm |
| |
| |
Consolidated Balance Sheets — December 31, 2004
and 2003 |
| |
| |
Consolidated Statements of Income — Years Ended
December 31, 2004, 2003 and 2002 |
| |
| |
Consolidated Statements of Shareholders’ Equity —
Years Ended December 31, 2004, 2003 and 2002 |
| |
| |
Consolidated Statements of Cash Flows — Years Ended
December 31, 2004, 2003 and 2002 |
| |
| |
Notes to Consolidated Financial Statements — Years
Ended December 31, 2004, 2003 and 2002 |
|
|
| |
(2) Financial Statement Schedules for the Three Years
Ended December 31, 2004 |
| |
|
|
|
|
| |
|
Page | |
| |
|
| |
|
Reports of Independent Registered Public Accounting Firm on
Schedules for the Years Ended December 31, 2004, 2003 and
2002
|
|
|
S-1 |
|
|
Schedule I — Summary of Investments
|
|
|
S-2 |
|
|
Schedule II — Condensed Financial Information
(Parent Company)
|
|
|
S-3 |
|
|
Schedule III — Supplemental Information
Concerning Insurance Operations
|
|
|
S-7 |
|
|
Schedule IV — Reinsurance
|
|
|
S-8 |
|
|
Schedule V — Valuation and Qualifying Accounts
|
|
|
S-9 |
|
|
|
| |
All other schedules are omitted because they are not applicable
or the required information is presented in the Consolidated
Financial Statements or the notes thereto. |
(c) Listing of Exhibits (* indicates
compensatory plan)
| |
|
|
|
|
| |
3.1 |
|
|
Amended Articles of Incorporation(9) |
| |
3.2 |
|
|
Amended Bylaws(1) |
| |
4.1 |
|
|
Form of Rights Agreement dated April 17, 1997 between RTW,
Inc. and Norwest Bank Minnesota National Association(2) |
| |
10.1* |
|
|
Employment agreement between RTW, Inc. and Jeffrey B. Murphy
dated March 12, 2004(8) |
| |
10.2* |
|
|
Amended RTW, Inc. 1995 Employee Stock Purchase Plan(10) |
| |
10.3* |
|
|
Amended RTW, Inc. 1994 Stock Plan(4) |
| |
10.4 |
|
|
Contract between RTW and ACIC dated January 1, 1992(5) |
| |
10.5 |
|
|
Service Agreement between RTW and ACIC dated February 1,
1992(5) |
| |
10.6* |
|
|
Description of the 2005 Profit Sharing Program |
| |
10.7 |
|
|
Reinsurance contract between ACIC and First Excess and
Reinsurance Corporation (GE Reinsurance Corporation)
effective July 1, 1998(3) |
| |
10.8 |
|
|
Endorsement No. 2 to the reinsurance contract between ACIC
and General Reinsurance Corporation(3) |
| |
10.8.1 |
|
|
Description of the Reinsurance Agreement for 2002 between ACIC
and General Reinsurance Corporation effective January 1,
2002(6) |
| |
10.8.2 |
|
|
Description of the Reinsurance Agreement for 2003 between ACIC
and General Reinsurance Corporation effective January 1,
2003(7) |
59
| |
|
|
|
|
| |
10.8.3 |
|
|
Description of the Reinsurance Agreement for 2004 between ACIC
and General Reinsurance Corporation effective January 1,
2004(8) |
| |
10.8.4 |
|
|
Description of the Reinsurance Agreement for 2005 between ACIC
and General Reinsurance Corporation effective January 1,
2005 |
| |
10.9 |
|
|
Minnesota Workers’ Compensation Reinsurance Association
reinsurance agreement(7) |
| |
10.10 |
|
|
Election form for the 2005 Minnesota Workers’ Compensation
Reinsurance Association reinsurance agreement |
| |
10.11 |
|
|
Description of the Reinsurance Agreement for 2003 between ACIC
and Everest Re/Platinum Re effective January 1, 2003(7) |
| |
10.12 |
|
|
Description of the Reinsurance Agreement for 2004 between ACIC
and various reinsurers effective January 1, 2004(8) |
| |
10.13 |
|
|
Description of the Reinsurance Agreement for 2005 between ACIC
and various reinsurers effective January 1, 2005 |
| |
11 |
|
|
Statement re: Computation of Income Per Share |
| |
14 |
|
|
Code of Ethics(8) |
| |
21 |
|
|
Subsidiaries of the Registrant: The Company has one wholly-owned
subsidiary, American Compensation Insurance Company, a Minnesota
corporation |
| |
23 |
|
|
Consent of Independent Registered Public Accounting Firm |
| |
24 |
|
|
Power of Attorney, included in Signature page |
| |
31.1 |
|
|
Certification of President and Chief Executive Officer |
| |
31.2 |
|
|
Certification of Chief Financial Officer |
| |
32 |
|
|
Certification Pursuant to 18 U.S.C. § 1350,
Adopted Pursuant to § 906 of the Sarbanes-Oxley Act of
2002 |
|
|
| (1) |
Incorporated by reference to the Company’s Registration
Statement on Form S-1 (Reg. No. 33-89164). |
| |
| (2) |
Incorporated by reference to the Company’s Registration
Statement on Form 8-A filed April 25, 1997 (File
No. 0-25508). |
| |
| (3) |
Incorporated by reference to the Company’s 1998 Annual
Report on Form 10-K. |
| |
| (4) |
Incorporated by reference to the Company’s Registration
Statement on Form S-8 (Reg. No. 333-81408). |
| |
| (5) |
Incorporated by reference to the Company’s Registration
Statement on Form SB-2 (Reg. No. 33-2002C). |
| |
| (6) |
Incorporated by reference to the Company’s 2001 Annual
Report on Form 10-K/A. |
| |
| (7) |
Incorporated by reference to the Company’s 2002 Annual
Report on Form 10-K. |
| |
| (8) |
Incorporated by reference to the Company’s 2003 Annual
Report on Form 10-K. |
| |
| (9) |
Incorporated by reference to the Company’s Form 10-Q
for the quarter ended March 31, 2004. |
|
|
| (10) |
Incorporated by reference to the Company’s Registration
Statement on Form S-8 (Reg. No. 333-114030)
(March 30, 2004) |
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
| |
|
| |
Jeffrey B. Murphy |
| |
President, Chief Executive Officer and Director |
| |
(Principal Executive Officer) |
Date: March 30, 2005
Signatures and Power of Attorney
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed by the following persons on
behalf of the Registrant, in the capacities, and on the dates,
indicated. Each person whose signature appears below constitutes
and appoints Jeffrey B. Murphy and Alfred L. LaTendresse as his
true and lawful attorney-in-fact and agents, each acting alone,
with full power of substitutions and re-substitution, for him
and in his name, place, and stead, in any and all capacities, to
sign any or all amendments to this Annual Report on
Form 10-K and to file the same, with the exhibits thereto,
and other documents in connection therewith, with the Securities
and Exchange Commission.
| |
|
|
|
|
|
|
| Signature |
|
Title |
|
Date |
| |
|
|
|
|
| |
|
By:
|
|
/s/ John O. Goodwyne
John
O. Goodwyne |
|
Chairman of the Board |
|
March 30, 2005 |
| |
|
By: |
|
/s/ Jeffrey B. Murphy
Jeffrey
B. Murphy |
|
President, Chief Executive Officer
and Director (Principal Executive
Officer) |
|
March 30, 2005 |
| |
|
By: |
|
/s/ Alfred L.
LaTendresse
Alfred
L. LaTendresse |
|
Executive Vice President,
Chief Financial Officer, Treasurer
and Secretary (Principal Financial
and Accounting Officer) |
|
March 30, 2005 |
| |
|
By: |
|
/s/ David C. Prosser
David
C. Prosser |
|
Chairman Emeritus of the Board |
|
March 30, 2005 |
| |
|
By: |
|
/s/ Gregory D.
Koschinska
Gregory
D. Koschinska |
|
Director |
|
March 30, 2005 |
| |
|
By: |
|
/s/ William J. Deters
William
J. Deters |
|
Director |
|
March 30, 2005 |
| |
|
By: |
|
/s/ John W. Prosser
John
W. Prosser |
|
Director |
|
March 30, 2005 |
| |
|
By: |
|
/s/ Vina L. Marquart
Vina
L. Marquart |
|
Director |
|
March 30, 2005 |
61
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON SCHEDULES
The Board of Directors and Shareholders
RTW, Inc.
Minneapolis, Minnesota
We have audited the consolidated financial statements of RTW,
Inc. as of December 31, 2004 and 2003 and for each of the
three years in the period ended December 31, 2004, and have
issued our report thereon dated February 9, 2005. Our
audits also included the financial statement schedules listed in
Item 15(a)(2) of this Report on Form 10-K. These
schedules are the responsibility of the Company’s
management. Our responsibility is to express an opinion based on
our audits.
In our opinion, the financial statement schedules referred to
above, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
Minneapolis, Minnesota
February 9, 2005
S-1
SCHEDULE I
RTW, INC.
SUMMARY OF INVESTMENTS
December 31, 2004
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Amount at | |
| |
|
|
|
|
|
which shown | |
| |
|
Amortized | |
|
Fair | |
|
in the balance | |
| Type of investment |
|
Cost | |
|
Value | |
|
sheet | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Municipal securities
|
|
$ |
18,926 |
|
|
$ |
18,788 |
|
|
$ |
18,788 |
|
| |
|
Mortgage backed securities
|
|
|
24,006 |
|
|
|
24,203 |
|
|
|
24,203 |
|
| |
|
Asset backed securities
|
|
|
2,011 |
|
|
|
2,003 |
|
|
|
2,003 |
|
| |
|
United States government, government agencies and authorities
|
|
|
41,439 |
|
|
|
41,960 |
|
|
|
41,960 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Total Investments
|
|
$ |
86,382 |
|
|
$ |
86,954 |
|
|
$ |
86,954 |
|
| |
|
|
|
|
|
|
|
|
|
S-2
SCHEDULE II
RTW, INC.
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
BALANCE SHEETS
December 31, 2004 and 2003
| |
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
ASSETS |
|
Cash and cash equivalents
|
|
$ |
150 |
|
|
$ |
100 |
|
|
Furniture and equipment, net
|
|
|
1,228 |
|
|
|
1,242 |
|
|
Investment in and advances to subsidiary
|
|
|
46,452 |
|
|
|
36,100 |
|
|
Other assets
|
|
|
1,177 |
|
|
|
443 |
|
| |
|
|
|
|
|
|
| |
|
$ |
49,007 |
|
|
$ |
37,885 |
|
| |
|
|
|
|
|
|
| |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
Accrued expenses and other liabilities
|
|
$ |
3,476 |
|
|
$ |
2,298 |
|
| |
|
|
|
|
|
|
| |
Total liabilities
|
|
|
3,596 |
|
|
|
2,298 |
|
|
Shareholders’ equity
|
|
|
45,531 |
|
|
|
35,587 |
|
| |
|
|
|
|
|
|
| |
|
$ |
49,007 |
|
|
$ |
37,885 |
|
| |
|
|
|
|
|
|
See notes to condensed financial statements.
S-3
SCHEDULE II
RTW, INC.
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
STATEMENTS OF INCOME
Years Ended December 31, 2004, 2003 and 2002
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Intercompany fee income
|
|
$ |
18,289 |
|
|
$ |
16,617 |
|
|
$ |
19,998 |
|
| |
Service fee revenue
|
|
|
633 |
|
|
|
109 |
|
|
|
22 |
|
| |
Investment income
|
|
|
104 |
|
|
|
2 |
|
|
|
41 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total revenues
|
|
|
19,026 |
|
|
|
16,728 |
|
|
|
20,061 |
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
General and administrative expenses
|
|
|
15,933 |
|
|
|
15,898 |
|
|
|
16,907 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Income from operations
|
|
|
3,093 |
|
|
|
830 |
|
|
|
3,154 |
|
| |
Interest expense
|
|
|
— |
|
|
|
48 |
|
|
|
163 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Income before income taxes and equity in undistributed net
income of subsidiary
|
|
|
3,093 |
|
|
|
782 |
|
|
|
2,991 |
|
| |
Income tax expense
|
|
|
879 |
|
|
|
91 |
|
|
|
1,213 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Income before equity in undistributed net income of subsidiary
|
|
|
2,214 |
|
|
|
691 |
|
|
|
1,778 |
|
|
Equity in undistributed net income of subsidiary
|
|
|
7,727 |
|
|
|
6,308 |
|
|
|
12,541 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Net income
|
|
$ |
9,941 |
|
|
$ |
6,999 |
|
|
$ |
14,319 |
|
| |
|
|
|
|
|
|
|
|
|
See notes to condensed financial statements.
S-4
SCHEDULE II
RTW, INC.
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2004, 2003 and 2002
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Reconciliation of net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net income
|
|
$ |
9,941 |
|
|
$ |
6,999 |
|
|
$ |
14,319 |
|
| |
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Depreciation and amortization
|
|
|
458 |
|
|
|
551 |
|
|
|
605 |
|
| |
|
|
Equity in net income from subsidiary
|
|
|
(7,727 |
) |
|
|
(6,308 |
) |
|
|
(12,541 |
) |
| |
|
|
Deferred income taxes
|
|
|
57 |
|
|
|
— |
|
|
|
351 |
|
| |
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Accrued expenses and other liabilities
|
|
|
1,178 |
|
|
|
(539 |
) |
|
|
(1,318 |
) |
| |
|
|
|
Other, net
|
|
|
(1,386 |
) |
|
|
(1,271 |
) |
|
|
1,610 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
2,521 |
|
|
|
(568 |
) |
|
|
3,026 |
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Investment in and advances to subsidiary
|
|
|
(2,625 |
) |
|
|
1,725 |
|
|
|
892 |
|
| |
Purchases of furniture and equipment
|
|
|
(444 |
) |
|
|
(175 |
) |
|
|
(630 |
) |
| |
Disposals of furniture and equipment
|
|
|
— |
|
|
|
22 |
|
|
|
270 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(3,069 |
) |
|
|
1,572 |
|
|
|
532 |
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Payments on notes payable
|
|
|
— |
|
|
|
(1,250 |
) |
|
|
(3,250 |
) |
| |
Stock options exercised
|
|
|
533 |
|
|
|
19 |
|
|
|
— |
|
| |
Issuance of common stock under ESPP
|
|
|
65 |
|
|
|
43 |
|
|
|
10 |
|
| |
Retirement of common stock
|
|
|
— |
|
|
|
(37 |
) |
|
|
(79 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
598 |
|
|
|
(1,225 |
) |
|
|
(3,319 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents
|
|
|
50 |
|
|
|
(221 |
) |
|
|
(239 |
) |
|
Cash and Cash Equivalents at Beginning of Year
|
|
|
100 |
|
|
|
321 |
|
|
|
82 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Year
|
|
$ |
150 |
|
|
$ |
100 |
|
|
$ |
321 |
|
| |
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cash paid (received) during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Interest
|
|
$ |
0 |
|
|
$ |
27 |
|
|
$ |
138 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Income tax (refunds) payments
|
|
$ |
(357 |
) |
|
$ |
(9 |
) |
|
$ |
298 |
|
| |
|
|
|
|
|
|
|
|
|
See notes to condensed financial statements.
S-5
SCHEDULE II
RTW, INC.
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS
Years Ended December 31, 2004, 2003 and 2002
Note 1 — Accounting Policies
The accompanying condensed financial information should be read
in conjunction with the Consolidated Financial Statements and
notes included in the RTW, Inc. (RTW) 2004 Annual Report on
Form 10-K.
Note 2 — Related Party Transactions
RTW provides American Compensation Insurance Company
(“ACIC”) with management services, including preparing
and submitting filings, maintaining books and records,
collecting premiums, administering and adjudicating claims, and
performing other administrative services. RTW receives 10% of
ACIC’s gross premiums earned each month for these services,
which amounted to $6.3 million, $5.4 million and
$6.4 million for the years ended December 31, 2004,
2003 and 2002, respectively. In addition, RTW receives 15% of
ACIC’s gross premiums earned for claims administration
during the year in which the premiums are earned and a total of
4% of gross premiums earned in subsequent years which amounted
to $12.0 million, $11.2 million and $13.6 million
for the years ended December 31, 2004, 2003 and 2002,
respectively.
RTW files a consolidated federal tax return with ACIC. Taxes are
allocated between the companies based on a tax allocation
agreement under which allocation is made primarily on a separate
return basis for taxes incurred with current credit for any net
operating losses or other items utilized in the consolidated tax
return. This allocation is settled annually after completing and
filing the federal tax return.
Amounts due from ACIC related to the above transactions are
included in the balance sheet account caption “Investment
in and advances to subsidiary” and totaled approximately
$3.9 million and $1.3 million at December 31,
2004 and 2003, respectively.
S-6
SCHEDULE III
RTW, INC.
SUPPLEMENTAL INFORMATION CONCERNING INSURANCE OPERATIONS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
(Column C) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Reserves for | |
|
|
|
|
|
|
|
|
|
Claim and claim | |
|
|
|
|
|
|
|
|
| |
|
|
|
Unpaid | |
|
|
|
|
|
|
|
Investment | |
|
settlement expenses | |
|
Amortization | |
|
|
|
|
|
|
| |
|
Deferred | |
|
Claim and | |
|
Discount, if | |
|
|
|
|
|
Income and | |
|
incurred related to: | |
|
of Deferred | |
|
Paid Claim | |
|
|
|
|
| |
|
Policy | |
|
Claim | |
|
Any, | |
|
|
|
|
|
Net Realized | |
|
| |
|
Policy | |
|
and Claim | |
|
Other | |
|
|
| |
|
Acquisition | |
|
Settlement | |
|
Deducted in | |
|
Unearned | |
|
Earned | |
|
Investment | |
|
Current | |
|
Prior | |
|
Acquisition | |
|
Settlement | |
|
Operating | |
|
Premiums | |
| Year |
|
Costs | |
|
Expenses | |
|
Column C | |
|
Premiums | |
|
Premiums | |
|
Gains | |
|
Year | |
|
Years | |
|
Costs | |
|
Expenses | |
|
Expenses | |
|
Written | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
2004
|
|
$ |
1,112 |
|
|
$ |
156,123 |
|
|
$ |
344 |
|
|
$ |
10,497 |
|
|
$ |
53,682 |
|
|
$ |
4,438 |
|
|
$ |
42,583 |
|
|
$ |
(7,047 |
) |
|
$ |
6,045 |
|
|
$ |
35,713 |
|
|
$ |
9,204 |
|
|
$ |
54,999 |
|
|
2003
|
|
$ |
926 |
|
|
$ |
150,044 |
|
|
$ |
505 |
|
|
$ |
9,180 |
|
|
$ |
46,290 |
|
|
$ |
5,157 |
|
|
$ |
33,954 |
|
|
$ |
(6,698 |
) |
|
$ |
6,878 |
|
|
$ |
38,118 |
|
|
$ |
10,789 |
|
|
$ |
48,340 |
|
|
2002
|
|
$ |
736 |
|
|
$ |
181,262 |
|
|
$ |
438 |
|
|
$ |
7,130 |
|
|
$ |
60,264 |
|
|
$ |
6,816 |
|
|
$ |
48,889 |
|
|
$ |
(8,356 |
) |
|
$ |
6,304 |
|
|
$ |
42,688 |
|
|
$ |
9,984 |
|
|
$ |
57,656 |
|
S-7
SCHEDULE IV
RTW, INC.
REINSURANCE
Years ended December 31, 2004, 2003 and 2002
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Premiums Earned | |
|
|
| |
|
| |
|
Percentage | |
| |
|
|
|
Ceded to | |
|
Assumed |
|
|
|
of Amount | |
| |
|
|
|
Other | |
|
from Other |
|
|
|
Assumed | |
| Description |
|
Direct | |
|
Companies | |
|
Companies |
|
Net | |
|
to Net | |
| |
|
| |
|
| |
|
|
|
| |
|
| |
| |
|
(In thousands) | |
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
PREMIUMS — Workers’ Compensation
|
|
$ |
63,370 |
|
|
$ |
9,688 |
|
|
$ |
— |
|
|
$ |
53,682 |
|
|
|
0.00 |
% |
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
PREMIUMS — Workers’ Compensation
|
|
$ |
54,431 |
|
|
$ |
8,141 |
|
|
$ |
— |
|
|
$ |
46,290 |
|
|
|
0.00 |
% |
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
PREMIUMS — Workers’ Compensation
|
|
$ |
62,506 |
|
|
$ |
2,242 |
|
|
$ |
— |
|
|
$ |
60,264 |
|
|
|
0.00 |
% |
S-8
SCHEDULE V
RTW, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 2004, 2003 and 2002
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Additions |
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
Balance at | |
|
Charged to | |
|
Charged to |
|
|
|
Balance at | |
| |
|
beginning | |
|
costs and | |
|
other |
|
|
|
end of | |
| Description |
|
of period | |
|
expenses | |
|
accounts |
|
Write-offs | |
|
period | |
| |
|
| |
|
| |
|
|
|
| |
|
| |
| |
|
(In thousands) | |
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Allowance for Doubtful Accounts
|
|
$ |
225 |
|
|
$ |
108 |
|
|
$ |
— |
|
|
$ |
243 |
|
|
$ |
90 |
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Allowance for Doubtful Accounts
|
|
$ |
220 |
|
|
$ |
507 |
|
|
$ |
— |
|
|
$ |
502 |
|
|
$ |
225 |
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Allowance for Doubtful Accounts
|
|
$ |
436 |
|
|
$ |
98 |
|
|
$ |
— |
|
|
$ |
314 |
|
|
$ |
220 |
|
S-9