We have developed two proprietary management systems: (i) the RTW SOLUTION®, designed to lower employers’ workers’ compensation costs and return injured employees to work as soon as possible, and (ii) the ID15® system, designed to identify those injured employees who are likely to get stuck in the workers’ compensation system. We combine our management system with insurance products underwritten by our insurance subsidiary to offer services to customers. We currently provide workers’ compensation management services solely to employers insured through our insurance subsidiary. During 2000, we operated in Minnesota, Wisconsin, South Dakota, Colorado, Missouri, Illinois, Kansas, Michigan, Indiana, Massachusetts, Connecticut, New Hampshire, Rhode Island and Maine.
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.
RTW reported increased gross premiums earned of $95.9 million in 2000 compared to $89.2 million in 1999. Total revenues for 2000 were $83.3 million, compared to total revenues of $77.8 million in 1999. Total revenues in 2000 and 1999 were significantly reduced by premiums ceded under an excess of loss reinsurance agreement, effective for claims occurring on or after July 1, 1998, which was entered into during the fourth quarter of 1998. Premiums ceded in 2000 include $13.4 million in premiums ceded under this reinsurance agreement, compared to $13.3 million ceded in 1999.
We reported a net loss of $9.7 million in 2000 compared to net income of $6.2 million in 1999, and basic and diluted net loss per share of $0.89 in 2000 versus basic and diluted net income per share of $0.50 in 1999. The primary factors impacting our 2000 operating results included the following:
successfully priced up or non-renewed 90% of expiring premium exhibiting poor loss characteristics, resulting in $21.3 million of premiums renewed at higher prices as well as $17.6 million in premiums that were not renewed. In 1999, we successfully priced up or non-renewed 67% resulting in $10.9 million of premiums renewed at higher prices and $10.8 million in premiums that did not renew. As a result of this focus in 2000 and 1999, we experienced a decrease in claim frequency;
We expect to operate in an environment of continuing premium rate increases in our markets in 2001 and expect 2001 premiums in force to grow. We will continue to focus on improving profitability in all of our markets by (i) aggressively managing and closing claims, (ii) improving our underwriting, including reviewing policy profitability at renewal and removing unprofitable accounts, and (iii) aggressively managing policy acquisition costs and general and administrative expenses.
Total revenues: Our total revenues include premiums earned, investment income and net realized investment (losses) gains. The following table summarizes the components of our revenues and premiums in force (000’s):
Our premiums in force grew 14.0% to $99.4 million at December 31, 2000 from $87.2 million at December 31, 1999 due to $13.8 million in growth in our Minnesota, Colorado, Michigan and Massachusetts markets offset by a $1.6 million decrease in premiums in force in our Missouri market. We aggressively targeted policies that did not
We experienced a decline in premium rates that we charged policyholders for several years including a 10.2% decline in premium rates on renewing business in 1998 followed by another 6.7% decline in 1999. These declines were due, in part, to the following:
We experienced reduced pricing on renewal policies due, in part, to our success in lowering our policyholders’ loss experience that, in turn, improves their claims history, lowering the premium that they pay for insurance. The improvement that we provide our customers also makes them more desirable to our competition, increasing price competition on these accounts.
Many workers’ compensation insurers have withdrawn from the markets in which we write premiums due to the declines in premium rates in those markets discussed above;
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 ceded Minnesota claims in excess of $310,000, $290,000 and $280,000 per occurrence during 2000, 1999 and 1998, respectively, to the WCRA. In our non-Minnesota states, our per-incident exposure was $300,000 in 2000 and 1999 and $500,000 in 1998. We purchased this non-Minnesota coverage from a single reinsurer.
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 2000 and $740,000 in 1999 resulting in an un-amortized deferred gain of $849,000 at December 31, 2000. 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 remains 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 in 2001 will not be covered under this lower level excess of loss reinsurance policy.
Premiums ceded to reinsurers increased to $18.0 million in 1999 from $8.5 million in 1998. This increased cost resulted from (i) premiums ceded under our new excess of loss reinsurance coverage for losses over $25,000 for all of 1999 compared to ceding such risks only in the second half of 1998; (ii) increased effective excess of loss premium rates in Minnesota in 1999 from 1998 due to premium price changes within that state, (iii) increased excess of loss costs resulting from increased premiums earned in non-Minnesota states, and (iv) the recognition of a refund of $2.2 million from the WCRA recorded in the first quarter of 1998. No comparable refund was received in 1999.
We expect that premiums ceded in 2001 will decrease significantly from premiums ceded in 2000 as our $25,000 to $300,000 excess of loss reinsurance policy runs-off in 2001. Premiums ceded will also decrease in 2001 as a percent of gross premiums earned as the non-Minnesota markets, where we pay smaller reinsurance premiums, continue to grow relative to Minnesota;
Investment income decreased 11.6% to $5.8 million in 2000 from $6.5 million in 1999. Investment income decreased due to (i) reduced funds available for investment and (ii) an increase in the percent of tax-exempt securities held in our portfolio. Funds available for investment decreased to $96.8 million at December 31, 2000 from $108.1 million at December 31, 1999, due to decreased net cash provided by operating activities, resulting primarily from (i) the difference in timing between the receipt of premiums, the payment of premiums ceded under our reinsurance agreements, the payment of claim and claim settlement expenses and the recovery of paid claim and claim settlement expenses under our reinsurance programs, and (ii) net cash provided by investment income. Tax-exempt securities, which earn lower pre-tax rates than taxable securities but are comparable on a tax adjusted basis, increased to 57.5% of our investment portfolio at year-end 2000 compared to 56.3% at year-end 1999. Tax-adjusted investment yields were 6.6% in 2000 and 1999. The investment yields realized in future periods will be affected by yields attained on new investments.
2001 Outlook: Barring significant changes in interest rates or operational cash flows, we expect the 2001 pre-tax yield from our investment portfolio to be affected by the following:
In February 2001, we repositioned our portfolio by selling our tax-exempt securities and repurchasing taxable fixed maturity investments to increase the after-tax yield. We recognized gains totaling $1.1 million as a result of this repositioning. Further recognition of realized gains and losses will depend on sales of our investments, if any, to meet our short-term cash requirements.
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 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 1999. For 1999, our aggressive re-underwriting resulted in $10.9 million of premiums renewed at higher prices as well as $10.8 million in premiums that were not renewed. No such program existed in 1998;
Reduced premiums due to legislative changes in estimated loss costs, increased competition and improving customer loss experience, have continued to place upward pressure on claim and claim settlement expenses as a percentage of premiums earned; and
Claim costs will continue to be affected by (i) increases in medical and indemnity costs resulting from inflationary pressures, (ii) severity experienced in future periods in our policy holder 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 in estimated loss costs;
The ultimate result of the above factors on 2001 claim and claim settlement expenses as a percent of premiums earned, is unknown at this time.
Ceding commissions resulting from unpaid claim and claim settlement liability adjustments from 1992 to 1994
Policy acquisition costs were $14.1 million in 2000 and 1999 and $14.0 million in 1998. As a percent of gross premiums earned, policy acquisition costs decreased to 14.7% in 2000 from 15.8% in 1999 and 15.5% in 1998. The decrease in 2000 reflects the following:
Commission expense decreased to 7.9% of gross premiums earned in 2000 from 8.0% in 1999 and 1998. The decreased commission percent in 2000 is the result of (i) a focus on reducing commissions paid on new business in our non-Minnesota states and (ii) increased renewal premiums on which we pay lower commission rates in all our states. Historically, as we entered new markets, we introduced higher commission rates to attract business from established agents. These rates continued through early 1999, but have been reduced in the current year. We believe the commission rates we pay are marketplace competitive in all our markets;
Other policy acquisition costs decreased to 4.4% of gross premiums earned in 2000 from 5.4% in 1999 and 5.5% in 1998. Other policy acquisition costs decreased in 2000 from levels in 1999 and 1998 as we focused on improving our underwriting organizational structure resulting in (i) decreased personnel and overhead costs and (ii) decreased spending on marketing programs; and
We expect premium tax expense as a percent of gross premiums earned to remain consistent with 2000; and
We expect that other policy acquisition costs will be consistent with 2000 as a percent of gross premiums earned as we continue to improve our underwriting skills, increase premiums in force and generate additional revenues to cover the relatively fixed policy acquisition costs. We also expect that these costs will be offset on a limited basis from increases in operating efficiency and effectiveness during 2001 realized through enhancements to our internal processes and procedures, including changes to our proprietary computer systems.
Our general and administrative expenses decreased to $11.5 million in 2000 from $12.0 million in 1999 and increased slightly from $11.4 million in 1998. As a percent of gross premiums earned, general and administrative expenses decreased to 12.0% in 2000 from 13.5% in 1999 and from 12.6% in 1998. General and administrative expenses continue to be managed aggressively and reduced where appropriate. General and administrative expenses for 1999 include one-time expenses totaling $1.3 million for corporate oversight expenses related to the efforts of the majority shareholders in seeking a buyer for their shares and expenses related to a reorganization effected in the fourth quarter of 1999. General and administrative expenses for 1998 include benefits of $1.1 million recorded in the second quarter of 1998, resulting from the reversal of 1997 accrual for assessments by the Minnesota Insurance Guarantee Association (MIGA), an organization formed to fund Minnesota claims for insolvent insurance companies. MIGA did not assess its members in 2000, 1999 or 1998 for workers’ compensation claim liabilities arising from current or prior insolvencies resulting in the accrual reversals, however, we were assessed $236,000 by non-Minnesota state insurance guarantee associations in 2000. After adjusting for the accrual reversals, general and administrative expenses decreased to 11.8% in 2000 from 12.0% in 1999 and 13.9% in 1998 as a percent of gross premiums earned. These decreases reflect:
The reorganization effected in the fourth quarter of 1999 began earlier in 1999 and resulted in a net reduction of thirty-three positions. This reorganization has reduced costs and centralized and strengthened certain processes late in 1999 and throughout 2000.
2001 Outlook: We expect that general and administrative expenses will be affected by the following:
We have no plans to open additional state offices in 2001 and expect that growth in premiums in force will result in additional revenues to cover the fixed costs in all of our states; and
We paid interest at rates ranging from 8.68% to 9.34% on the outstanding balance of our Term Loan in 2000 compared to 9.50% on the outstanding balance of our Senior Notes during 1999. Interest expense increased to $667,000 in 2000 from $266,000 in 1999 as we increased our Notes Payable by financing the repurchase of shares from a group headed by our majority shareholder and former Chairman, David C. Prosser through an $8.0 million Term Loan and a $2.0 million Revolving Credit Facility with a bank. The Senior Notes were paid in full in December 1999. No amounts were outstanding under the Revolving Credit Facility in 2000.
2001 Outlook: We expect to incur interest charges in 2001 on the outstanding balance of the Term Loan totaling approximately $500,000, decreasing from $667,000 in 2000 as a result of principal payments of $1.0 million in 2000, $1.0 million in January 2001 and an additional $1.0 million through the remainder of 2001 and a decrease in the interest rate to under 9.00%.
Income taxes provided a benefit of $5.7 million in 2000 compared to an expense of $1.9 million in 1999 and a benefit of $4.0 million in 1998. As a percent of (loss) income before income taxes, the income tax (benefit) expense was 37.2% of the loss before income taxes in 2000 compared to 23.8% of income before income taxes in 1999 and 35.8% of the loss before income taxes in 1998. The income tax benefit percent in 2000 has been affected by (i) our loss from operations, (ii) increased taxable net income from the service organization (RTW) which is subject to both federal and state income taxes, and (iii) tax-exempt municipal income.
agreement. We expect this reduction in cash flow will reverse itself in 2001 as we run-off the $25,000 to $300,000 excess of loss reinsurance policy and reimbursements for loss payments to claimants under this contract offset disbursements for premium payments. Our investment portfolio decreased 10.4% or $11.3 million to $96.8 million at December 31, 2000, from $108.1 million at December 31, 1999, as a result of these factors.
Our unpaid claim and claim settlement expenses represent established, reserves for the estimated total unpaid cost of claim and claim settlement expenses, which cover events that occurred in 2000 and prior years. The reserves are primarily undiscounted; however, we discount reserves for selected claims that have fixed and determinable future payments at 8.0%. 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 estimate reserves using established actuarial methods. Both our case and IBNR reserve estimates reflect such variables as past claims experience, current claim trends and prevailing social, economic and legal environments. Due to our commencing operations in 1992, we have limited historical data to estimate our reserves for 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. 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. 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 to operations in the year in which the adjustments are made. See Notes 1 and 5 of Notes to Consolidated Financial Statements. The following two tables reconcile the beginning and ending insurance reserves, displayed individually for each of the last three years.
The following loss reserve development table sets forth the change, over time, of reserves established for claim and claim settlement expenses at the end of the last eight years. The following loss reserve development 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):
Our need for additional capital is primarily the result of regulations that require certain ratios of capital to premiums written. In the future, we expect that our need for additional capital will be primarily related to the growth of our insurance subsidiary and the need to maintain appropriate premium to surplus ratios as defined by state regulatory bodies. As an alternative to raising additional capital, we believe we could secure quota-share or other additional reinsurance that would have the effect of reducing the ratio of premiums to capital and could be used to satisfy state regulatory requirements.
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 substantially in excess of authorized control level risk-based capital.
Information included in this annual report 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. 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 accurately predict claim development; (ii) our ability to manage both our existing claims and new claims in an effective manner; (iii) our experience with claims frequency and severity; (iv) our ability to retain our existing customers at favorable premium rates when their policies renew; (v) competition from traditional workers’ compensation insurance carriers; (vi) our ability to further penetrate our existing markets; (vii) general economic and business conditions; (viii) our ability to maintain our A.M. Best rating; (ix) changes in workers’ compensation regulation by states, including changes in mandated benefits or insurance company regulation; and (x) interest rate changes. This discussion of uncertainties is by no means exhaustive but is designed to highlight important factors that may impact our future performance.
Undesignated stock, no par value; authorized 4,750,000 shares; none issued or outstanding
We benefit from our ability to reduce workers’ compensation costs and provide employers the ability to control their workers’ compensation programs. We are domiciled in Minnesota and were licensed in Minnesota, Colorado, Missouri, Michigan, Massachusetts, Illinois, Kansas, Connecticut, Wisconsin, Rhode Island, Florida, Iowa, Indiana, Arkansas, Pennsylvania, Tennessee, South Dakota, Maryland, Georgia, New Jersey, North Carolina, Texas and Oklahoma at December 31, 2000. We are also licensed to write workers’ compensation insurance coverage for companies covered under the Longshoreman’s Act. We wrote policies primarily in Minnesota, Colorado, Missouri, Illinois, Kansas, Michigan, Massachusetts, Connecticut and Wisconsin during 2000. We operate in a single business segment, workers’ compensation insurance.
Depreciation - We depreciate furniture and equipment on a straight-line basis over the estimated useful lives of the assets (five to ten years). Accumulated depreciation was $5,100,000 at December 31, 2000 and $3,879,000 at December 31, 1999.
We apply SFAS No. 128, “Earnings Per Share”, which requires dual presentation of a basic income (loss) per share (IPS), which excludes dilution, and a diluted IPS, which reflects the potential dilution that could occur if actions taken with respect to dilutive securities resulted in the issuance of common stock. Dilutive securities consist of stock options. Basic IPS is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted IPS is computed by dividing net income (loss) by the weighted average number of common shares and dilutive securities outstanding for the period. Dilutive securities are considered outstanding from the date of grant, after applying the treasury stock method for determining the dilutive effect.
Statutory Deposits - Included in investments are U.S. government securities on deposit with various regulatory authorities, as required by law, with a fair value of $12,223,000 and $3,452,000 at December 31, 2000 and 1999, respectively.
Fixed Maturities by Maturity Date - The following table presents the amortized cost and fair value of investments by contractual maturity at December 31, 2000. Actual maturities may differ from those stated as a result of calls and prepayments (000’s):
The reinsurance recoverable on paid claim and claim settlement expenses consists primarily of receivables from paid claim and claim settlement expenses at December 31, 2000 and 1999.
As described in Note 1, we establish unpaid claim and claim settlement expense reserves on reported and unreported claims for insured losses. The establishment of 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, which elapse between the date the loss occurs and the date the loss is 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.
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):
Changes in estimates of unpaid claim and claim settlement expenses for prior years increased the provision for claim and claim settlement expenses by $15,929,000 in 2000, decreased the provision for claim and claim settlement expenses by $8,113,000 in 1999 and increased the provision for claim and claim settlement expenses by $10,979,000 in 1998.
The amended term loan is collateralized by the stock of ACIC and is subject to restrictive financial covenants that require maintaining minimum financial ratios, including (i) debt coverage, (ii) net worth, (iii) statutory surplus, (iv) net earnings, (v) risk based capital, (vii) A.M. Best Rating, and (viii) investment grade ratios. The agreement also restricts dividends, purchases, and redemptions or retirements of common stock.
We paid our outstanding unsecured Senior Notes in full in December 1999. Interest was paid monthly at 9.5% in 1999 and at rates ranging from 9.25% to 9.5% in 1998.
We have net operating loss carry-forwards available totaling approximately $12.2 million, which expire in 2020. No valuation allowance was provided against the deferred tax assets recorded in 2000 or 1999, as we expect to generate sufficient taxable income in the future to offset reversing temporary differences.
Our liability for employee contributions withheld at December 31, 2000 and 1999 for the purchase of shares in April 2001 and April 2000 under the ESPP was $72,000 and $145,000, respectively.
Combined Retirement Plan - In January 1998, we combined our 401(K) Retirement Plan and Employee Stock Ownership Plan (ESOP) into a single retirement plan, the KSOP. 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.
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 expense was recorded in 2000, 1999 or 1998.
On September 15, 1998, our Board of Directors approved a share repurchase program authorizing the repurchase of up to $4,000,000 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, 2000 we had repurchased 659,500 shares for $2,660,000. We will use the repurchased shares for employee stock option and purchase plans and other corporate purposes.
On March 28, 2000, we repurchased 1,418,570 shares from a group consisting of David C. Prosser, RTW’s founder and a director, certain members of his family, and J. Alexander Fjelstad, a former director and former executive of RTW (together, the “Prosser Selling Group”). We paid $5.19 per share, as well as legal and other costs,
totaling approximately $7.7 million to repurchase the shares. After completing the transaction, the combined ownership of Mr. Prosser, members of his family and Mr. Fjelstad was reduced from approximately 52% to 46%.
In connection with the repurchase, Mr. Prosser retired from the Company, resigned as Chairman and was paid $225,000 as a termination benefit. He is expected to remain as a member of our Board of Directors. Additionally, at closing, each member of the Prosser Selling Group entered into a two year standstill and voting agreement under which each agreed, among other things, not to acquire additional securities of RTW and not to initiate or support certain initiatives designed to effect fundamental changes in RTW policy or structure.
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 former Chairman 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.
In March 1998, the National Association of Insurance Commissioners adopted the Codification of Statutory Accounting Principles (the Codification). The Codification is intended to standardize regulatory accounting and
reporting to state insurance departments and is effective January 1, 2001. Statutory accounting principles, however, will continue to be established by individual state laws and permitted practices. The state of Minnesota requires adoption of the Codification for preparing statutory financial statements for financial periods occurring on or after January 1, 2001. We estimate that adoption of the Codification will increase our statutory capital and surplus by approximately $2.9 million on January 1, 2001.
Rent expense, including contingent rentals, was $2,118,000, $2,124,000 and $2,181,000 for 2000, 1999 and 1998, respectively.