In 1992, RTW phased out its agreement with this insurance company and began offering workers' compensation management services combined with insurance underwritten by its wholly owned subsidiary American Compensation Insurance Company ("ACIC"). The ability to underwrite insurance allowed the Company to directly benefit from the use of its proprietary methods in reducing workers' compensation costs and afforded RTW more control over its customers' workers' compensation programs. The Company's premiums in force grew to $69.5 million at the end of 1996 from $51.7 million at the end of 1995 and $39.9 million at the end of 1994. RTW currently provides workers' compensation management services solely to employers insured through ACIC.
The Company's expenses are comprised of claim and claim settlement expenses, policy acquisition costs, general and administrative expenses, interest expense and income taxes.
The following table summarizes the components of revenues and premiums in force for 1996, 1995 and 1994: YEAR ENDED DECEMBER 31, 1996 1995 1994 --------- --------- --------- (IN THOUSANDS) Gross premiums earned $ 63,755 $ 47,507 $ 38,099 Premiums ceded to reinsurers: Excess of loss reinsurance (697) (2,099) (2,177) Quota-share reinsurance - - (9,308) --------- --------- --------- Premiums ceded (697) (2,099) (11,485) --------- --------- --------- Premiums earned 63,058 45,408 26,614 Investment income 5,667 4,025 1,627 --------- --------- --------- Total revenues $ 68,725 $ 49,433 $ 28,241 --------- --------- --------- --------- --------- ---------
With respect to the fourth quarter of 1996, see previous discussions in Claim and Claim Settlement Expenses.
The following two tables reconcile the beginning and ending insurance reserves, displayed individually for each of the last three years.
YEAR ENDED DECEMBER 31, 1996 1995 1994 --------- --------- ------- (IN THOUSANDS) GROSS RESERVES FOR CLAIM AND CLAIM SETTLEMENT EXPENSES: Gross reserves for claim and claim settlement expenses, beginning of year $ 37,138 $ 28,165 $ 13,279 Provision increases (decreases) for claim and claim settlement expenses: Current year 49,440 30,137 26,034 Prior years (11,051) (4,701) (196) --------- --------- ------- Total provision 38,389 25,436 25,838 Payments for claim and claim settlement expenses: Current year 16,239 8,860 6,887 Prior years 10,032 7,603 4,065 --------- --------- ------- Total payments 26,271 16,463 10,952 --------- --------- -------- Gross reserves for claim and claim settlement expenses, end of year $ 49,256 $ 37,138 $28,165 --------- --------- ------- --------- --------- -------
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 five 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 the current and prior years.
State insurance regulations limit distributions, including dividends, from ACIC to the Company. The maximum amount of dividends that can be paid by ACIC to the Company in any year is equal to the lesser of: (i) 10% of ACIC's statutory surplus as of the end of the previous fiscal year, or (ii) the statutory net gain from operations (not including realized capital gains) of ACIC in its most recent fiscal year. Based on this limitation, the maximum dividend that ACIC could pay to the Company in 1997, without regulatory approval, is approximately $4.0 million. (See Note 8 of Notes to Consolidated Financial Statements.) ACIC may be subject to more restrictive limitations on dividends as it enters additional states. ACIC has never paid a dividend to the Company and, for the foreseeable future, the Company intends to retain capital in ACIC to enable the Company to expand its operations.
We have audited the accompanying consolidated balance sheets of RTW, Inc. and subsidiary (the "Company") as of December 31, 1996 and 1995 and the related statements of income, shareholders' equity, and cash flows for each of the years in the period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
RTW, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
NET INCOME PER COMMON AND COMMON SHARE EQUIVALENT - Net income per common and common share equivalent is computed by dividing net income by the weighted average common and common share equivalents outstanding during the year. Common share equivalents consist of options and warrants. Stock and stock options issued subsequent to April 1995 have been considered outstanding from the date of grant after applying the treasury stock method for determining the dilutive effect of the stock options. Stock and stock options issued prior to that