RTW Inc. Notes Eighth Consecutive Quarter of Profits

February 13, 2004

Minneapolis-based RTW, Inc., a provider of products and services to cost-effectively manage both insured and self-insured workers’ compensation programs, reported net income for the fourth quarter ended Dec. 31, 2003, of $2.7 million or $0.52 per basic and $0.49 per diluted share. For the year-ended Dec. 31, 2003, the company reported net income of $7.0 million, or $1.37 per basic and $1.32 per diluted share.

Jeffrey Murphy, president and CEO of RTW, said, “We are very pleased to report our eighth consecutive quarter of profitability and are delighted with our financial performance for the year-ended December 31, 2003. We began to position RTW for sustainable profitability in 2002 by improving our case and claims management capabilities and writing business at the right price. We continued that focus in 2003, and the efforts show in our results. Our 2003 performance reflects our continuing commitment to what we do best – aggressively and effectively managing claims to closure. We achieved a 1.4 percent rate increase on policies renewing in 2003, slowing considerably from rate increases in 2002. We expect that Minnesota, Michigan and Colorado will continue to provide us opportunities to write profitable business as we focus on business that is in our niche at rates we believe are appropriate. We expect premium rates to rise slightly in 2004 due to decreased levels of competition and a continuing unfavorably low interest rate investment environment. We did not meet our expectations related to our strategic initiative to extend our workers’ compensation services to self-insured employers and other alternative markets. Our growth in this area has taken longer than anticipated as a limited number of accounts came up for renewal in 2003 in the narrowly focused regions in which we operate. We expect that non-insured products will grow in 2004 as we expand to areas outside the regions in which we currently provide insured services and broaden our product offerings to respond to customers’ needs.”

The fourth quarter results include: (i) a $2.0 million reduction in unpaid claim and claim settlement expenses resulting from favorable development of reserves related to accidents occurring in 2002 and prior years; (ii) a $1.5 million tax benefit from reinstating a portion of our deferred income tax asset; offset by (iii) a $341,000 charge for bonus expense; (iv) $217,000 recorded for severance and moving costs; and (v) $375,000 recorded to expense a contingent commission that will not be received by the company. The full year results include: (i) a $6.7 million reduction in claim and claim settlement expenses; (ii) $685,000 in realized investment gains; and (iii) a tax benefit totaling $2.7 million from reinstating our deferred tax asset; offset by (iv) a $1.5 million charge related to reapportionment of premiums for pools in which the company participates; (v) $941,000 in bonus expense; and (vi) severance, moving costs and the contingent commission reversal recorded in the fourth quarter discussed previously.

Net income for the fourth quarter of 2002 was $8.1 million, or $1.57 per basic and diluted share, and $14.3 million, or $2.78 per basic and diluted share, for the year-ended Dec. 31, 2002. Net income for the fourth quarter of 2002 included: (i) $4.0 million resulting from a reduction in unpaid claim and claim settlement expenses due to favorable development of reserves related to accidents occurring in 2001 and prior years; (ii) $851,000 resulting from a reduction in a second injury fund related to reserves; (iii) $957,000 related to commuting a reinsurance treaty; and (iv) a $3.2 million tax benefit from reinstating a portion of our deferred income tax asset and recognizing an additional federal tax recoverable related to revising our accounting for a reinsurance agreement. The year-end 2002 results include favorable adjustments to unpaid claim and claim settlement expenses, including, $3.0 million from reducing the accrual for the Minnesota Special Compensation Fund and $5.3 million resulting from a reduction in unpaid claim and claim settlement expenses due to favorable development of 2001 and prior accident year reserves. Additionally, the 2002 results reflect: (i) a $3.3 million benefit from the excess of actual income tax refunds over amounts recorded by the company in 2001 due to Federal tax law changes relating to the period of net operating loss carry-back; (ii) an additional refund totaling $475,000 related to revising the accounting for a reinsurance agreement; and (iii) reinstating previously written down deferred tax asset amounts.

Premiums in force at Dec. 31, 2003, increased to $58.1 million from $54.2 million at Dec. 31, 2002. Gross premiums earned increased 3.3 percent to $15.1 million for the fourth quarter of 2003 from $14.6 million for the same period in the prior year and decreased 12.9 percent to $54.4 million for the year-ended Dec. 31, 2003 from $62.5 million for the same period in the prior year. After reflecting premiums ceded under reinsurance treaties, premiums earned decreased by 8.5 percent to $12.6 million for the quarter ended Dec. 31, 2003 from $13.8 million reported in the fourth quarter of 2002 and decreased 23.2 percent to $46.3 million for the year-ended Dec. 31, 2003 from $60.3 million for the same period in 2002. Premiums ceded under excess of loss treaties increased significantly in 2003 due to rate increases for excess of loss reinsurance coverage in the company’s non-Minnesota regions while Minnesota excess cost increased only slightly. Also, the company lowered its retention in all regions in 2003 by purchasing increased excess of loss coverage in order to further reduce volatility in results.

Murphy commented, “We increased premiums in force significantly in the second half of 2003 as we continued to experience reduced competition in our market niche. We expect continued growth in 2004 focusing on profitable business that is in our niche, with premiums in force increasing primarily in Minnesota and Michigan.”

For the fourth quarter of 2003, total revenue was $13.7 million, compared to $14.8 million last year and was $51.6 million for the year-ended Dec. 31, 2003 compared to $67.1 million for the same period in 2002. Included in total revenue for the fourth quarter is investment income of $998,000, compared to $1.1 million for the same period last year and $4.5 million for the year-ended Dec. 31, 2003 compared to $5.1 million for the same period in 2002. Additionally, in 2003, the company recorded net realized investment gains totaling $685,000 compared to $1.7 million recorded in 2002.

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