The Consolidated Statements of Income data set forth below for each of the three years in the period ended December 31, 2005, and the Consolidated Balance Sheet data at December 31, 2005 and 2004 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, 2002, and the Consolidated Balance Sheet data at December 31, 2003, 2002 and 2001, 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.
Annualized service revenue represents the estimated total value of service contracts that are in place at any point in time.
We developed two proprietary systems to manage disability: (i) ID15®, designed to quickly identify early those injured employees who are likely to become inappropriately dependent on disability system benefits; 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. Our insurance subsidiaries are domiciled in Minnesota and operated primarily in Minnesota, Michigan and Colorado in 2005, 2004 and 2003. Absentia serviced customers in six states in 2004 and expanded to 18 states by December 31, 2005.
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, including state-assigned risk plans; (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. All other service revenue is recognized over the term of the contract. The excess
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, 2005.
Gross premiums earned decreased 5.5% to $59.9 million in 2005 from $63.4 million in 2004 primarily due to a decrease in average premiums in force to $57.9 million for 2005 from $61.5 million in 2004. See further discussion under “Premiums In Force and Gross Premiums Earned”;
Service revenue from our Absentia division grew to $4.4 million in 2005 from $633,000 in 2004;
Income tax expense in 2005 includes adjustments for changes in estimates from prior periods that have affected the year-to-year comparison of income tax expense. Income tax benefit for 2004 includes a $3.6 million benefit resulting from the reversal of the remaining valuation allowance on our income tax asset at December 31, 2004. See further discussion under “Income Taxes.”
We expect to grow 2006 premiums in force opportunistically as we expand to areas outside our traditional markets. We also anticipate that premium rates will decrease slightly in 2006 as the markets in which we operate continue to become more competitive. We will focus on insurance profitability by: (i) writing new business in niches that are less sensitive to soft market pricing; (ii) aggressively managing and closing claims;
(iii) reviewing policy profitability at renewal and removing unprofitable accounts; and (iv) aggressively managing policy acquisition costs.
We expect to increase non-insurance revenue significantly in 2006 as we continue to provide services to employers insured through the Minnesota Assigned Risk Plan and add new customers. General and administrative expenses will increase as we: (i) continue to hire and position for the future; and (ii) grow service revenue.
In the following pages, we take a look at the 2005, 2004 and 2003 operating results for items in our Consolidated Statements of Income and also explain key Consolidated Balance Sheet accounts in greater detail.
Premium rates on renewing policies decreased an average of 2.4% in 2005, compared to increases of 0.9% and 1.4% in 2004 and 2003, respectively. The 2005 decrease reflects heightened price competition due to the soft insurance market cycle in the markets in which we write premiums.
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 2005 in our states other than Minnesota from four reinsurers. The following table summarizes our reinsurance coverage (all losses ceded on a per occurrence basis):
We continue to limit our exposure to large losses by purchasing excess of loss reinsurance for losses in excess of $200,000 in all our regions in 2006. The cost of excess of loss reinsurance has decreased slightly or remained the same for all regions in 2006; however, because of a shift in premiums earned to higher reinsurance cost states, we expect premiums ceded under excess of loss policies to increase as a percent of gross premiums earned in 2006 when compared to the results attained for 2005.
Net Investment Income and Net Realized Investment Gains (Losses): Net investment income includes earnings from our investment portfolio, reduced by expenses incurred in managing the portfolio. Our net
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 net investment income without taking inappropriate credit risk. For further discussion of investments, see the “Investments” section of this Management’s Discussion and Analysis.
2006 Outlook: We expect that income from our investment portfolio for 2006 will be affected by the following:
We expect that short-term interest rates on cash and cash equivalents will increase in 2006 as the Federal Reserve Board increases its rates;
Cash flows for 2006 are expected to be affected by decreases in cash flows resulting from claim payments on claims from 2005 and prior years offset by cash flows from our premiums and service revenue;
2006 Outlook: Service revenue will increase significantly in 2006 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. During 2005, we continued to ramp up our servicing of this contract, achieving a full “25%” share in September 2005. The total annual premium in the ARP at December 31, 2005 is approximately $85.1 million, which decreased from $100.7 million at December 31, 2004. We expect the total annual premium in the ARP to continue to decrease slightly during 2006, which will exert downward pressure on our related revenue, offset by being at a full “25%” servicing rate for the entire year; and
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.
The number of estimated ultimate claims by accident year decreased to approximately 9,500 in 2005 from 11,800 in 2004 and 9,600 in 2003, correlating directly to the decrease in gross earned premiums. The gross and net average estimated cost per claim (which includes both claim and claim settlement expenses) totaled approximately $5,200 and $4,400 in 2005 compared to $5,100 and $4,200 in 2004 and $5,000 and $4,200 in 2003, respectively. The 2005 and 2004 increases in gross and net average estimated cost per claim, when compared to the 2003 data, is primarily the result of increases in claim severity, offset by our improved ability to manage cases and claims. 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, 2005, 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:
The average gross and net reserves per claim are less in 2005 than in 2004 and 2003 as the open claims include newly reported claims from the last half of 2005, 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 2004 and 2003 are primarily claims with significant injury characteristics resulting in the increase in outstanding average gross and net reserves per claim.
2005 Compared to 2004: Claim and claim settlement expenses decreased to $30.8 million in 2005 from $35.5 million in 2004. As a percent of premiums earned, claim and claim settlement expenses decreased to 62.3% in 2005 from 66.2% in 2004. These changes are due to the following:
The increase in gross premiums earned as discussed above under “Premiums In Force and Gross Premiums Earned;”
Claim costs continued to reflect increasing medical and indemnity costs in accident year 2004 as compared to accident year 2003 resulting from inflationary pressures.
2006 Outlook: We expect that claim and claim settlement expenses will be affected by the following factors:
Commission expense decreased to 6.7% of gross premiums earned in 2005 from 7.1% in 2004 and 7.3% in 2003. The decreased commission rates are the result of the decrease in our new business in 2005 relative to 2004 and 2003 and the focus on reducing the commissions we pay. In all of our markets, we believe the commission rates we pay are marketplace competitive;
Other policy acquisition costs consist of personnel and overhead costs, various state and regulatory assessments related to second injury funds and mandatory state pools, payroll audit vendor costs and
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;
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 increased to $12.7 million in 2005 from $9.0 million in 2004 and $10.6 million in 2003. As a percent of total revenues, general and administrative expenses increased to 21.5% in 2005 from 15.4% in 2004 and 20.7% in 2003. These changes reflect the following:
Although we have no current plans to open additional offices in 2006, if growth opportunities warrant opening a new office, we will evaluate the opportunity as presented; and
Income Taxes: We incur federal income taxes on our combined service organization (RTW and Absentia) operations and insurance operations (ACIC and BCIC). 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
In assessing our 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. We eliminated the deferred tax valuation allowance and recorded a $4.0 million benefit to income taxes in 2004. Income tax expense for 2005 does not include a benefit from reducing the valuation allowance since it was fully utilized in prior years. We expect our deferred tax assets at December 31, 2005 to be realized as a result of future income and the reversal of existing taxable temporary differences.
2006 Outlook: Income tax expense will vary based on: (i) our results of operations; (ii) the amount of tax-exempt income we earn; and (iii) the growth of our service revenue. The ultimate change is unknown at this time.
Our portfolio of fixed maturity securities at December 31, 2005 included U.S. government securities (51.5%), mortgage-backed securities (20.2%), municipal securities (17.0%), commercial paper (9.5%) and asset-backed securities (1.8%). Our portfolio is managed by an independent investment manager to maximize our after-tax net investment income without taking inappropriate credit risk. In 2005, 2004 and 2003, we sold certain securities within the portfolio to take advantage of favorable interest rates and realized net investment gains totaling $580,000, $705,000 and $685,000, respectively. 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, AA or A1+ at December 31, 2005. We do not invest in derivative securities.
Unpaid claim and claim settlement expenses relate solely to our insurance operations. Our Absentia division and service business does not bear claim risk for its customers and carries no unpaid claim and claim settlement expenses.
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, 2005 represent the estimated total unpaid cost of claim and claim settlement expenses that cover events that occurred in 2005 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.
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, 2005, 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.
The table above represents the development of balance sheet gross reserves for 1995 through 2005. 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.
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 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 difficult and volatile due to our relatively limited historical claim data and small claim population.
Our primary sources of cash from operations are insurance premiums collected, reimbursements under reinsurance contracts, service revenue collected and net 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 2005 and 2004, 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 2006. We further expect that cash and cash equivalents will decrease from levels reported at December 31, 2005 as we take advantage of the anticipated increase in interest rates to purchase fixed maturity 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, commercial paper with maturities of three months or less and overnight repurchase agreements secured by U.S. Treasury or U.S. Government Agency securities.
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 would further reduce our ratio of premium to capital and provide a 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
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 2005 or 2004. We repurchased 18,619 shares in 2003 for approximately $37,000. 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.
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.
In June 2005, the Financial Accounting Standards Board (FASB) finalized FASB Staff Position (FSP) Emerging Issues Task Force (EITF) Issue 03-1-a and issued re-titled FSP Statement of Financial Accounting Standard (SFAS) 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”. The FSP provides guidance on the recognition of impairments deemed other-than-temporary. FSP 115-1 is effective for other-than-temporary impairment analysis conducted in periods beginning after December 15, 2005. We believe that our current policy for other-than-temporary impairments complies with FSP 115-1. Accordingly, the adoption of this standard has not had a material effect on the consolidated financial statements.
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 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. In April 2005, the Securities and Exchange Commission delayed the effective date of implementing SFAS No. 123R until fiscal years beginning after June 15, 2005. We are required to adopt SFAS 123R in the first quarter of 2006. We do not expect the adoption of SFAS No. 123R will have a material effect on our financial statements.
Consolidated Statements of Income - Years Ended December 31, 2005, 2004 and
Consolidated Statements of Cash Flows - Years Ended December 31, 2005, 2004 and
Notes to Consolidated Financial Statements - Years Ended December 31, 2005, 2004 and 2003
We have audited the accompanying consolidated balance sheets of RTW, Inc. (the Company) as of December 31, 2005 and 2004, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2005. 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.
Accounting Principles - We prepare our financial statements in accordance with U.S. generally accepted accounting principles (GAAP).
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 2005, 2004 or 2003.
Effect of Recent Accounting Pronouncements - In June 2005, the Financial Accounting Standards Board (FASB) finalized FASB Staff Position (FSP) Emerging Issues Task Force (EITF) Issue 03-1-a and issued re-titled FSP Statement of Financial Accounting Standard (SFAS) 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”. The FSP provides guidance on the recognition of impairments deemed other-than-temporary. FSP 115-1 is effective for other-than-temporary impairment analysis conducted in periods beginning after December 15, 2005. We believe that our current
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 $114,000, $87,000 and $18,000 of incremental compensation costs in 2006, 2007 and 2008 respectively related to unvested awards outstanding at December 31, 2005.
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:
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 $15.8 million and $16.2 million at December 31, 2005 and 2004, respectively.
Fixed Maturities by Maturity Date - The following table presents the amortized cost and fair value of investments by contractual maturity at December 31, 2005. Actual maturities may differ from those stated as a result of calls and prepayments (000’s):
Net Investment Income - Net investment income includes income from the following sources (000’s):
During 2003, we re-evaluated and lowered our estimate for excess of loss unpaid claim and claim settlement expenses by $15.1 million, which inured 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, 2005 and 2004.
Our estimate for reinsurance recoverables increased in 2005 due to: (i) increasing our large loss development factors based on changes in industry data offset by; (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 2004 due to the following: (i) the frequency of claims reported in 2004 for 2003 and prior years was less than anticipated when we determined our liability in 2003; 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 the growth in our gross premiums earned in 2004 offset by payments and the related recoveries on prior year ceded claim and claim settlement expenses.
Income tax expense for 2005 and 2004 included adjustments for differences between our tax provision computation and final tax expense based on our filed tax returns.
Income taxes receivable were approximately $381,000 and $733,000 at December 31, 2005 and 2004, respectively, and are included in other assets.
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. In 2005, the shares reserved for distribution under the plan were further increased from 150,000 to 200,000 shares. 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 withholdings. The following summarizes shares purchased and purchase prices for each phase in the most recent three years completed through 2005:
Incentive stock options expire ten years from the date of grant and substantially all are subject to continued employment with us. Options are generally subject to vesting provisions that restrict exercise of the option.
The following table summarizes the options outstanding and exercisable under both the 1994 Stock Plan and the 2005 Stock Plan at December 31, 2005:
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 2005, 2004 or 2003.
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, 2005 we repurchased approximately 395,000 shares for $2.8 million. We expect to use repurchased shares for employee stock option and purchase plans and other corporate purposes.
Statutory Surplus and Statutory Net Income - Our insurance subsidiaries are 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. Consolidated statutory capital and
surplus at December 31, 2005 and 2004, and consolidated statutory net income for the years ended December 31, 2005, 2004 and 2003 are as follows (000’s):
Future minimum (base) rental payments required under the leases, as of December 31, 2005, are as follows (000’s):
Litigation: On April 12, 2005, RTW, Inc. commenced a Declaratory Judgment action in the United States District Court for the District of Minnesota against Carolina Casualty Insurance Company. In the lawsuit, RTW is seeking a Court determination that RTW is not liable for any part of a $1.9 million judgment entered against an insured of Carolina Casualty in District Court in Utah. Carolina Casualty counterclaimed against RTW alleging that RTW owes it $1.9 million, plus interest and attorneys fees.
On December 12, 2002, a Colorado employee of a Colorado care company insured by RTW’s subsidiary, American Compensation Insurance Company, was injured in an automobile accident in Utah. The injured employee brought a separate underlying suit against Carolina Casualty’s insured trucking company and driver for damages suffered as a result of the automobile accident.
While the underlying suit was pending, RTW administered and paid the workers’ compensation claim of the insured employee. The total amount paid or accrued for future payment by RTW was $163,586. RTW then sought indemnification from Carolina Casualty under subrogation rights. In August 2004, Carolina Casualty’s insured trucking company admitted full liability for the accident in the underlying suit.
counterclaim alleged required full indemnification by RTW of any amounts that Carolina Casualty pays the injured employee as a result of the liability of Carolina Casualty’s insured.
RTW believes that it has good and meritorious defenses to the indemnification claims of Carolina Casualty. Discovery has been completed and RTW has filed a summary judgment motion for a declaration that it has no liability to Carolina Casualty. In opposing RTW’s motion, Carolina Casualty apparently dropped its claim for indemnification with respect to the $1,250,000 portion of the judgment relating to general damages and requested that judgment be entered finding the claimed indemnity provision otherwise binding and enforceable. A hearing on the summary judgment motion has been scheduled before the Court for April 19, 2006 and a decision is expected sometime within 90 days of that date.
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 other legal or administrative claims that we believe are likely to have a material adverse effect on our financial condition or results of operations.
The following tables present unaudited quarterly income for the eight quarters ended December 31, 2005:
We have reclassified certain first quarter amounts within our Consolidated Statements of Income during the six months ended June 30, 2005 to be consistent with the second quarter presentation. Total expenses, net income and income per share amounts were unchanged.
The following represent pre-tax adjustments recorded during 2005 that affected reported net income: