Our gross premiums earned in 1998 increased 10.4% to $89.9 million from $81.4 million in 1997. This increase resulted from the 4.7% increase in premiums in force to $82.1 million at December 31, 1998, from $78.4 million at December 31, 1997. Additionally, in force premiums grew less rapidly in 1998 than in 1997 resulting in a more stable, higher average in force premium during the year generating increased gross premiums earned. Final audit premiums earned during 1998 decreased to $7.2 million from $7.5 million in 1997.
POLICY ACQUISITION COSTS: Policy acquisition costs are costs directly related to writing an insurance policy and consist of commissions, state premium taxes, underwriting personnel costs and expenses, sales and marketing costs and other underwriting expenses, offset by ceding commissions received from our reinsurers. Ceding commissions are amounts that reinsurers pay to us for placing reinsurance with them. Ceding commissions represent adjustments based on actual claim and claim settlement expenses related to premiums ceded in prior years. Under our
- Commission expense increased to 8.0% of gross premiums earned in 1998 from 7.8% in 1997 and 7.3% in 1996. The increased commission percent is the result of marketing programs initiated in prior years, including volume based incentive programs and higher commissions for new business that increased commission rates to agents resulting in increased average commissions and increased commission expense. Additionally, as we entered new markets, we introduced higher commission rates to attract business from established agents. These rates have continued into current policy periods and will have a greater impact on the commission expense percent as the non-Minnesota states continue to grow relative to Minnesota. In all of our markets, we believe the commission rates we pay are marketplace competitive;
Our unpaid claim and claim settlement expenses represent established, undiscounted reserves for the estimated total unpaid cost of claim and claim settlement expenses, which cover events that occurred in 1998 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 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 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.
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. We will repurchase the shares on the open market or through private transactions depending upon market conditions and availability. Through December 31, 1998 we had repurchased 19,500 shares for approximately $87,000. The repurchased shares will be used for employee stock option and purchase plans and other corporate purposes.
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 manage both our existing claims and our new claims in an effective manner, (ii) competition from traditional workers' compensation insurance carriers, (iii) our ability to further penetrate our existing markets, (iv) changes in workers' compensation regulation by states, including changes in mandated benefits or insurance company regulation, (v) our ability to retain our existing customers at favorable beneficial premium rates when their policies renew (vi) our ability to successfully introduce new products and services, and (vii) our ability to ensure that our operations are not adversely affected by year 2000 compliance including our dependence on outside vendors and customers and their ability to become year 2000 compliant. This discussion of uncertainties is by no means exhaustive but is designed to highlight important factors that may impact our future performance.
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.
The effect of ceded reinsurance on premiums written, premiums earned and claim and claim settlement expenses are as follows (000's):
Our income tax expense (benefit) differs from the federal statutory rate as follows (000's):