Premiums ceded to reinsurers increased to $8,489,000 in 1998 from $342,000 in 1997. This increased cost resulted from (i) reducing our selected Minnesota excess of loss reinsurance coverage levels to $280,000 in 1998 from $1.1 million in 1997; (ii) increased excess of loss premium rates in Minnesota in 1998 from 1997, (iii) increased excess of loss costs resulting from increased premiums earned in non-Minnesota states, and (iv) increased excess of loss costs resulting from further limiting our exposure to $25,000. This increase was offset by recognizing a $2.2 million refund received from the WCRA in 1998 as a reduction of premiums ceded, compared to a refund of $358,000 from the WCRA in 1997.
- We expect continued downward pressure on the amount we charge for our products and services;
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 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" section of this Management's Discussion and Analysis.
- We expect commission expense as a percent of gross premiums earned to increase during 1999 as the non-Minnesota states continue to grow in size relative to Minnesota;
1999 OUTLOOK: Interest expense on the Senior Notes is expected to decrease from $546,000 in 1998 to $266,000 in 1999 as a result of principal payments of $2.5 million made in December 1998.
Our portfolio of fixed maturity securities at December 31, 1998 included tax-exempt municipal securities (52.6%), corporate securities (17.0%), mortgage-backed securities (15.3%), U.S. government securities (11.5%), and asset-backed securities (3.6%). After several years of purchasing solely U.S. government securities, we engaged an investment manager in the second quarter of 1997 to diversify our portfolio to other taxable fixed maturity investments and to maximize our after-tax investment income without taking inappropriate credit risk. During the second quarter of 1998, we transferred our portfolio to a new investment manager and further diversified our portfolio to include investment grade tax-exempt fixed maturity investments. We manage our fixed maturity portfolio conservatively, investing only in investment grade (BBB or better rating from Standard and Poor's) securities of U.S. domiciled issuers. We do not invest in derivative securities. Additionally, in December 1997, we reclassified our entire held-to-maturity portfolio, invested in U.S. government securities with a historical cost, net of amortization, of $53.8 million and a fair value of $54.7 million, to available-for-sale investments. We reclassified these securities to enable us to more actively manage our investment yield and overall portfolio risk.
To the Board of Directors and Shareholders RTW, Inc. Minneapolis, Minnesota
No valuation allowance was provided against the deferred tax assets recorded in 1998 or 1997, as we expect to generate sufficient taxable income in the future to offset reversing temporary differences.
In March 1997, we contributed 13,205 shares to the plan for fiscal 1996 at a fair value of $8.75 per share. In January 1996, we contributed 12,196 shares to the plan for fiscal 1995 at a fair value of $19.33 per share. Compensation expense recognized under the plan for 1996 was $116,000. No expense was recorded in 1998 or 1997.