-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WAjjjT8sQy3Ov+JsreMXxYEfUz6foZVwIo2YEDRWg82ey0iOpzq6GbEEqGvv/bMA 9vf/JqaqoFgBkbo1KBYJWg== 0000017385-98-000001.txt : 19980402 0000017385-98-000001.hdr.sgml : 19980402 ACCESSION NUMBER: 0000017385-98-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980401 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPITOL TRANSAMERICA CORP CENTRAL INDEX KEY: 0000017385 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 391052658 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-02047 FILM NUMBER: 98584568 BUSINESS ADDRESS: STREET 1: P O BOX 5900 CITY: MADISON STATE: WI ZIP: 53705 BUSINESS PHONE: 6082314450 MAIL ADDRESS: STREET 1: P O BOX 5900 CITY: MADISON STATE: WI ZIP: 53705 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 Commission file number: 0-2047 CAPITOL TRANSAMERICA CORPORATION A Wisconsin Corporation 39-1052658 4610 University Avenue Madison, Wisconsin 53705-0900 Registrant's telephone number, including area code (608) 231-4450 Securities registered pursuant to Section 12 (g) of the Act: COMMON STOCK, $1 PAR VALUE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 dur- ing the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing re- quirements for the past 90 days. YES X NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this form 10-K. { } Based on the closing average of the bid (20 1/4) and asked price (20 3/4), the aggregate market value of voting stock held by non-affiliates of the registrant as of March 6, 1998 was approximately $229,406,316. Indicate the number of shares of each of the issuer's class of common stock, as of the latest practicable date: At March 6, 1998 Common Stock, $1.00 Par Value Issued: 11,511,630 Outstanding: 11,190,552 DOCUMENTS INCORPORATED BY REFERENCE Schedule P of the Annual Statements of Capitol Indemnity Corporation and Capitol Specialty Insurance Corporation are incorporated by reference into Part I. Por- tions of the proxy statement for the annual shareholders meeting to be held May 11, 1998 are incorporated by reference into Part III. Total Pages: 37 Form 10-K (Annual Report) Capitol Transamerica Corporation Part I Item 1. Business (a) General Development of Business Capitol Transamerica Corporation (CTC) is a holding company with assets exceeding $286 million. CTC was formed in 1965 and owns 100% of Capitol Indemnity Corporation (CIC), Capitol Specialty Insurance Corporation (CSIC) and Capitol Facilities Corporation (CFC). Both CIC and CSIC are property and casualty insurance companies. The companies write a complete port- folio of fidelity and surety bonds and specialty insurance coverages. CIC operates on an admitted basis in thirty-five states and on an excess/sur- plus lines basis in one state. CFC provides premium financing for the insurance companies. Some of the specialty property and casualty coverages written are: Barber & Beauty Shops, Bowling Alleys, Contractors/Manufacturers, Day Care Centers, Deer Hunters Accident, Detective/Guard Agencies, Equipment Breakdown, Golf Courses, Nurses Professional, Resorts/Campgrounds, Restaurants, Special Events, Clubs, Sportsman's Accident, Tanning/Toning Salons and Taverns. The full line of surety and fidelity bonds includes: Contractor's Perfor- mance and Payment Bonds, License/Permit Bonds, Fiduciary Bonds, Judicial Bonds and Commercial Fidelity Bonds. The results of operations have remained most favorable since 1986 with sub- stantial increases in premium volume, profitability and shareholders' investment. (b) Information about Industry Segments General: The subsidiaries of the Company, through licensed agents, are involved only in the business of underwriting property, casualty, fidelity and surety in- surance on selected risks. The Company conducts business with insurance agents located throughout the United States. As of December 31, 1997 and 1996, no amount due from agents located in any one state exceeded 15% of total balances; no industry segment other than insurance amounted to 10% or more of the Company's gross or net income and no agent had writings in ex- cess of 10% of the Company's gross premiums in 1997, 1996 or 1995. During 1997, 1996 and 1995, direct premiums written in Wisconsin accounted for approximately 17%, 18% and 21%, respectively, of the total direct premiums written by the Company. (c) Narrative Description of Business Competitive Conditions: All business written by the Company is highly competitive in the areas of price, service and agent relationships. The large number of insurers transacting business at rates which are independently regulated by their respective insurance departments compete aggressively for desireable busi- ness. Because of limitations in capacity and other regulatory restrictions, companies the size of CIC are sometimes at a disadvantage when competing with larger insurance companies. CIC is required by the Insurance Commissioner of the State of Wisconsin to maintain a minimum compulsory surplus (surplus as regards policyholders) of 25% of net premiums written during the preceding twelve months. As of December 31, 1997, CIC reported $109.3 million surplus as regards policy- holders, approximately $86.5 million in excess of the required amount. In addition, CIC is required to report a minimum 60% loss and loss expense ratio for the most current three years on certain liability lines as well as a minimum 65% ratio on the workers compensation line. Based upon actual historical experience the ratios are substantially less than the require- ment and had the company not included the excess statutory reserves over statement reserves in reporting to regulatory authorities, surplus would have been $119.6 million at December 31, 1997. Importance and Effect of Licenses: Generally speaking, insurance companies must be licensed in the states in which the insurance is written. Forms and rates for each policy offered are filed with individual state insurance departments. Number of Persons Employed: Capitol Transamerica Corporation and subsidiaries employ 176 people. Information as to Similar Products or Services: Gross premiums written, reinsurance ceded and net premiums written for the past five years are as follows:
1997 Gross Ceded Net Accident and Health $ 5,090,314 $4,817,208 $ 273,106 Burglary and Glass 4,189 - 4,189 Fidelity 1,230,700 22,697 1,208,003 Fire and Allied Lines 424,516 4,296 420,220 Inland Marine 1,076,850 953,052 123,798 Liability 10,967,296 143,567 10,823,729 Commercial Multiple Peril 52,132,045 1,599,619 50,532,426 Workers' Compensation 3,381,685 0 3,381,685 Surety 25,200,251 402,612 24,797,639 $99,507,846 $7,943,051 $91,564,795 1996 Gross Ceded Net Accident and Health $ 238,615 $ - $ 238,615 Burglary and Glass 32,189 - 32,189 Fidelity 1,317,643 25,958 1,291,685 Fire and Allied Lines 698,783 (271) 699,054 Inland Marine 987,201 2,802 984,399 Liability 13,048,828 130,503 12,918,325 Commercial Multiple Peril 48,790,958 1,027,117 47,763,841 Workers' Compensation 2,470,176 17,104 2,453,072 Surety 23,354,994 492,849 22,862,145 $90,939,387 $1,696,062 $89,243,325 1995 Gross Ceded Net Accident and Health $ 222,137 $ - $ 222,137 Burglary and Glass 52,045 - 52,045 Fidelity 1,355,259 66,854 1,288,405 Fire and Allied Lines 593,309 10,561 582,748 Inland Marine 76,325 3,208 73,117 Liability 10,575,070 430,641 10,144,429 Commercial Multiple Peril 41,254,997 1,451,561 39,803,436 Workers' Compensation 1,942,861 74,422 1,868,439 Surety 14,806,489 484,277 14,322,212 $70,878,492 $2,521,524 $68,356,968 1994 Gross Ceded Net Accident and Health $ 223,193 $ - $ 223,193 Burglary and Glass 50,646 - 50,646 Fidelity 1,059,233 90,495 968,738 Fire and Allied Lines 797,229 43,821 753,408 Inland Marine 98,927 3,524 95,403 Liability 9,309,300 307,242 9,002,058 Reinsurance 22,359 - 22,359 Commercial Multiple Peril 37,639,679 994,496 36,645,183 Workers' Compensation 1,623,361 57,099 1,566,262 Surety 7,740,415 415,724 7,324,691 $58,564,342 $1,912,401 $56,651,941 1993 Gross Ceded Net Accident & Health $ 152,602 $ - $ 152,602 Burglary and Glass 101,171 4,798 96,373 Fidelity 975,077 39,716 935,361 Fire and Allied Line 745,596 52,386 693,210 Inland Marine 132,492 5,481 127,011 Liability 7,429,388 279,170 7,150,218 Reinsurance 3,131 - 3,131 Commercial Multiple Peril 30,932,976 1,710,817 29,222,159 Workers' Compensation 2,381,194 29,596 2,351,598 Surety 7,492,901 318,500 7,174,401 $50,346,528 $2,440,464 $47,906,064
(d) Copies of "Schedule P" of the Annual Statements filed with State Regulatory Authorities by CIC and CSIC are incorporated herein by reference and are available upon request. (e) Discussion Topics The following discussion topics, if applicable, have been included in Management's Discussion and Analysis of Financial Condition and Results of Operations and/or the Notes to Consolidated Financial Statements and the accompanying Schedules which appear elsewhere in this Annual Report: (1) Reinsurance transactions which have a material effect on earn- ings or reserves. (2) Significant reserving assumptions including any recent changes. (3) The nature of recent changes in the terms under which reinsur- ance is ceded to other insurers. (4) Changes in the mix of business, including but not limited to changes in the location of business, geographic mix and types of risks assumed. (5) Changes in payment patterns due to portfolio loss transfers, structured settlements and other transactions or circumstances. (6) Unusually large losses or gains. (f) Reconciliation of Loss and Loss Adjustment Expense Reserves:
1997 1996 1995 Balances as of January 1, $ 47,702,363 $ 38,584,084 $ 27,475,323 Reinsurance balances 225,367 (45,321) (12,363) Net reserves 47,927,730 38,538,763 27,462,960 Incurred losses and loss adjustment expenses related to: Current year 43,042,827 36,041,564 27,224,006 Prior years: Direct losses (net of recoveries) 10,725,730 1,516,382 2,610,999 Direct loss adjustment expenses (net of recoveries) 2,141,661 1,901,083 2,810,145 Discontinued assumed reinsurance 5,218,184 1,706,747 1,454,313 Total prior years 18,085,575 5,124,212 6,875,457 Total incurred 61,128,402 41,165,776 34,099,463 Paid losses and loss adjustment expenses related to: Current year 16,327,601 15,487,239 10,632,490 Prior years 21,160,666 16,245,614 12,285,492 Total paid 37,488,267 31,732,853 22,917,982 Other adjustments, net (96,121) (43,956) (105,678) Net balance at December 31 71,471,744 47,927,730 38,538,763 (Less) plus reinsurance balances 594 (225,367) 45,321 Balance at December 31, $ 71,472,338 $ 47,702,363 $ 38,584,084 (g) Loss Reserve Development Consolidated (in millions of dollars) Year ended: 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Reserves for losses and loss adjustment expense $ 15.3 $ 14.2 $ 14.1 $ 14.5 $ 18.1 $ 19.3 $ 27.5 $ 38.5 $ 47.7 $ 71.5 Re-estimated reserves: One year later 14.1 15.3 15.0 19.5 21.2 25.5 33.8 43.4 65.8 Two years later 15.5 16.1 18.3 21.3 23.8 31.2 37.5 57.7 - Three years later 16.1 18.1 19.9 22.7 28.3 33.5 51.4 - - Four years later 17.5 19.2 21.3 25.9 30.7 43.6 - - - Five years later 18.6 20.2 23.8 27.9 38.6 - - - - Six years later 19.6 21.8 25.6 34.7 - - - - - Seven years later 21.1 23.6 31.6 - - - - - - Eight years later 22.8 28.6 - - - - - - - Nine years later 27.9 - - - - - - - - Cumulative deficiency (12.6) (14.4) (17.5) (20.2) (20.5) (24.3) (23.9) (19.2) (18.1) Cumulative deficiency from discontinued reinsurance assumed operations (14.5) (14.0) (13.4) (12.6) (11.4) (10.4) (9.3) (8.4) (6.9) Cumulative redundancy (deficiency) from continuing operations 1.9 (0.4) (4.1) (7.6) (9.1) (13.9) (14.6) (10.8) (11.2) Cumulative amount of liability paid through: One year later 4.6 5.9 5.7 7.6 9.4 9.9 12.2 16.2 21.2 Two years later 8.0 8.7 10.1 12.7 14.1 17.2 21.4 26.6 - Three years later 9.9 12.0 13.4 15.4 18.9 23.6 27.5 - - Four years later 12.3 13.7 15.2 18.7 23.0 27.0 - - - Five years later 13.5 14.6 17.5 21.6 25.0 - - - - Six years later 14.2 15.9 19.7 22.8 - - - - - Seven years later 15.3 17.9 20.6 - - - - - - Eight years later 17.3 18.7 - - - - - - - Nine years later 18.0 - - - - - - - - This table does not present accident or policy year development data, which readers may be more accustomed to analyzing. Conditions and trends that have effected development of the liability in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on this table. There are no specific provisions for the effects of inflation or other factors which may cause a future change in claim costs. The company withdrew from the reinsurance assumed business in 1976; however, it remains involved with treaties that cover certain risks which have had significant development industry-wide over the past several years. Due to the nature of the assumed business, ultimate losses may, and often do, vary from current estimates. See footnote 4(b) of the notes to the consolidated financial statements.
(h) Reconciliation of Statutory to Generally Accepted Accounting Principles (GAAP) reserves:
Balance, December 31, as reported to For the Year Ended December 31, Insurance Commissioner of the 1997 1996 1995 State of Wisconsin: - CIC $ 71,117,787 $ 47,458,573 $ 37,996,923 - CSIC - - - Funds withheld from reinsurers, reclassified to loss reserves on a GAAP basis 447,658 489,808 514,583 Reserve for return of disability premiums, reclassified to loss reserves on a GAAP basis 18,686 14,820 26,625 GAAP adjustment to gross up reserves for the effect of reinsurance 594 (225,367) 52,653 Other, net (112,387) (35,471) (6,700) Balance, December 31, on a GAAP basis $ 71,472,338 $ 47,702,363 $ 38,584,084
Item 2. Properties Capitol Transamerica Corporation leases premises in the Pyare Square building located at 4610 University Avenue, Madison, Wisconsin, 53705, as follows: Approximately 35,518 square feet occupying a portion of the 1st, 2nd, 9th and 10th floors and all of the 11th, 12th, 13th and 14th floors. The term of the lease is from June 1, 1996 through May 31, 1999. The Company also leases approximately 2,000 square feet of storage space from the President of the Company in a personally owned warehouse at terms as favorable as those available from unaffiliated third parties. The Company also leases 200 square feet of office space in Las Vegas, Nevada. the term of the lease is from November 1, 1996 to October 31, 1999. Item 3. Legal Proceedings Capitol Indemnity Corporation (CIC) is a defendant in certain lawsuits involving complaints which demand damages and recoveries for claims and losses allegedly related to risks insured by CIC. In the opinion of management, such lawsuits are routine in that they result from the ordi- nary course of business in the insurance industry. The reserves for losses and loss adjustment expenses include management's estimates of the probable ultimate cost of settling all claims involving lawsuits. Such estimates are continually reviewed and updated. The reserves for losses and loss adjustment expenses at December 31, 1997, are, in the opinion of management, adequate to absorb claims arising from those routine legal proceedings presently in process against the Company. Item 4. Submission of Matters to a Vote of Shareholders No matters were submitted to a vote of shareholders during the Company's fourth fiscal quarter ended December 31, 1997. Item 5. Market Information, Dividends and Other Information On March 6, 1998, the approximate number of registered shareholders was 2,500. CTC is publicly owned and traded on the National Over-the-Counter Market, symbol CATA. The market price of the stock during 1997 was a low of 19 1/4 and a high of 28 1/8 with the equivalent of 1,768,556 shares traded. Quarterly high and low quoted prices are obtained from the National Association of Securities Dealers are illustrated below. The 1996 quotations are adjusted for the December 31, 1996 3 for 2 stock split effected as a 50% dividend.
1997 1996 Quarter High Low Dividends High Low Dividends First 27 3/8 20 1/8 $.17 14 13 $.12 Second 27 1/2 19 1/4 .07 13 11/16 12 .07 Third 27 1/2 25 1/2 .07 15 1/2 12 5/16 .07 Fourth 28 1/8 21 .07 20 15/16 15 1/16 .07 Year 28 1/8 19 1/4 $.38 20 15/16 12 $.33 For the period January 1 through March 6, 1998, the high ask price was 22 1/4 and the low bid price was 20. A regular cash dividend of $.07 per share was paid on March 27, 1998, to shareholders of record on March 13, 1998. Future dividend payments must be authorized by the Board of Directors and will be dependent on operating results, capital requirements and the financial condition of the Company.
Subsidiaries S.E.C. Form 10-K Capitol Indemnity Corporation Copies of the Company's Annual Capitol Specialty Insurance Corporation report filed with the SEC, in- Capitol Facilities Corporation cluding exhibits, are available by written request addressed to: Independent Public Accountants Paul J. Breitnauer Ernst & Young LLP Vice President & Treasurer 111 East Kilbourn Avenue 4610 University Ave. Milwaukee, Wisconsin 53202 Madison, Wisconsin 53705-0900 Transfer Agent and Registrar Annual Meeting Firstar Trust Co. The Company's Annual Meeting Corporate Trust Services will be held Monday, May 11, 615 East Michigan Street 1998, 4:00 PM at the P.O. Box 2077 Marriot Inn - Madison West Milwaukee, Wisconsin 53201 1313 John Q. Hammond Drive Middleton, Wisconsin 53562 Common Stock Listed: OTC Quoted: NASD (CATA) Item 6. FIVE YEAR CONSOLIDATED SUMMARY OF SELECTED FINANCIAL DATA:
1997 1996 1995 1994 1993 Gross Premiums Written $ 99,507,846 $ 90,939,387 $ 70,878,492 $ 58,564,342 $ 50,346,528 Net Premiums Written $ 91,564,795 $ 89,243,325 $ 68,356,968 $ 56,651,941 $ 47,906,064 Premiums Earned $ 87,451,620 $ 77,347,319 $ 63,865,500 $ 52,461,456 $ 43,456,430 Net Investment Income 8,580,713 7,155,382 6,635,123 5,359,606 5,001,715 Realized Investment Gains (Losses) 15,370,384 8,468,911 3,587,323 (106,188) 4,145,701 Other Revenues 36,801 382,130 144,866 118,353 38,609 Total Revenues 111,439,518 93,353,742 74,232,812 57,833,227 52,642,455 Losses and Loss Adjustment Expenses Incurred 61,128,402 41,165,776 34,099,463 27,536,054 20,649,739 Underwriting and Other Expenses 28,587,186 26,680,657 21,497,664 17,883,570 15,963,957 Total Losses Incurred and Expenses 89,715,588 67,846,433 55,597,127 45,419,624 36,613,696 Income from Operations Before Income Taxes 21,723,930 25,507,309 18,635,685 12,413,603 16,028,759 Income Tax Expense 6,532,051 7,158,151 4,705,279 3,166,363 4,344,504 Consolidated Net Income $ 15,191,879 $ 18,349,158 $ 13,930,406 $ 9,247,240 $ 11,684,255 Weighted Average Number of Shares Outstanding - Basic 11,151,428 11,077,501 11,049,660 11,012,621 10,937,043 Weighted Average Number of Shares Outstanding - Diluted 11,285,751 11,315,758 11,190,198 11,184,566 11,086,117 Income Per Share - Basic $ 1.36 $ 1.66 $ 1.26 $ 0.84 $ 1.07 Income Per Share - Diluted $ 1.35 $ 1.62 $ 1.24 $ 0.83 $ 1.05 Total Cash Dividends Per Share $ 0.38 $ 0.33 $ 0.24 $ 0.27 $ 0.23 Consolidated Net Income and Cash Dividends Stated as a Ratio to Beginning Shareholders' Equity 16.7% 23.8% 25.3% 18.6% 25.9% Year End Financial Position: Assets $286,682,275 $228,885,454 $176,730,156 $127,633,195 $117,346,301 Shareholders' Investment 139,342,141 116,581,883 92,653,880 67,979,174 65,648,667 Book Value Per Share $ 12.46 $ 10.50 $ 8.37 $ 6.15 $ 5.97 Shares Outstanding 11,178,882 11,103,297 11,068,161 11,032,433 10,978,988 Insurance Operating Ratios (Statutory Basis): Losses and Loss Adjustment Expenses to Net Premiums Earned 70.1% 53.5% 53.2% 52.3% 47.5% Underwriting Expenses to Net Premiums Written 32.1% 33.5% 32.8% 32.4% 32.2% Combined Ratio 102.2% 87.0% 86.0% 84.7% 79.7% A. M. BEST Rating A+ A+ A+ A+ A+ Superior Superior Superior Superior Superior Prior years' information has been restated to reflect the December 31, 1996 three-for-two stock split effected as a 50% stock dividend, and the December 28, 1995 ten percent stock dividend.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations OVERVIEW Capitol Transamerica Corporation (the "Company") is an insurance holding company operating in 36 states which writes, through its subsidiaries, both property- casualty and fidelity-surety insurance. The property-casualty segment accounts for approximately 70% of the business written while the fidelity-surety segement accounts for approximately 30% of the Company's business. The underwriting cycles of the property-casualty insurance industry have been characterized by peak periods of adequate rates, underwriting profits and lower combined ratios, while the downward side of the cycle is characterized by in- adequate rates, underwriting losses and, as a result, higher combined ratios. The adequacy of premium rates is affected primarily by the severity and frequen- cy of claims which in turn are affected by natural disasters, regulatory measures and court decisions which continue to uphold the "deep pocket" theory in awarding against insurance companies. Unfortunately for the insurance indus- try, the trend of increasing price competition has continued as has the number of significant natural disasters. This combination has resulted in a consider- able reduction in underwriting profitability for the industry as a whole. Inflation also has a significant impact on the insurance industry in general, as well as on the Company. Inflation creates higher claim costs, which are then matched currently against premiums whose rating statistics were developed from data of previous years. In recent inflationary periods, this has led to inade- quate rate structures, since rate regulators are slow to grant rate adjustments at times when the overall economy is in an inflationary cycle. Studies have shown that premium rates trail the claim experience by a period of two years or more. Adequate premium rates continue to be of concern to the Company and the property-casualty insurance industry. OPERATING RESULTS As mentioned in the Overview, the property-casualty insurance industry is in a downward cycle. However, despite a difficult year in which the Company aggessively strengthened its reserves, mangement expects that trend of in- creasing revenues and significant underwriting gains will continue in the future. The expansion of coverages and entry into new geographic regions has contributed to increased revenues, which when combined with prudent under- writing standards should enable the Company to resume its upward trend in profitability for our shareholders. Indeed, when the industry's cycle re- verses, the Company will be in an excellent position to take advantage of premium rate increases. Gross premiums written during 1997 were $99,507,846, compared with $90,939,387 in 1996 and $70,878,492 in 1995. Premiums earned are recognized as net revenues after reduction for reinsurance ceded and after establishment of the provision for the pro rata unearned portion of premiums written. Net premiums earned in 1997 totaled $87,451,620, compared with $77,347,319 and $63,865,500 in 1996 and 1995, respectively. The net unearn- ed premium reserve was $47,411,849, $43,258,833 and $31,555,728 at each year- end.
1997 1996 1995 Gross Premiums Written $99,507,846 $90,939,387 $70,878,492 Reinsurance Ceded 7,943,050 1,696,062 2,521,524 Net Premiums Written $91,564,796 $89,243,325 $68,356,968 Net Premiums Earned $87,451,620 $77,347,319 $63,865,500 Net Unearned Premium Reserve $47,411,849 $43,258,833 $31,555,728 The large increase in ceded premiums in 1997 is due to a new reinsurance agreement entered into during the year. CIC assumes and fully cedes dental capitation premiums while retaining a brokerage fee. The Company should not incur any net losses from this business. The Company's underwriting results can be measured by reference to the combined loss and expense ratios. This tabulation includes the operating results of the two subsidiary insurance companies on a statutory basis. Losses and loss adjustment expenses are stated as a ratio of net premiums earned, while underwriting expenses are state as a ratio of net premiums written. The combined ratios were as follows: Insurance Operating Ratios (Statutory Basis): 1997 1996 1995 Losses and Loss Adjustment Expenses 70.1% 53.5% 53.2% Underwriting Expenses 32.1% 33.5% 32.8% Combined Ratios 102.2% 87.0% 86.0% In 1997 the Company strengthened IBNR reserves by $14.5 million, which increased the loss ratio by 16.6%. Despite this large adjustment, the Company's combined loss and expense ratio was still slightly below the projected industry average for 1997 of 102.3%, and well below the industry average of 105.5% for the year 1996.
REINSURANCE The Company follows the customary practice of reinsuring with other companies, e.g., ceding a portion of its exposure on the policies it has written. This pro- gram of reinsurance permits the Company greater diversification of business and the ability to write larger policies while limiting the extent of its maximum net loss. It provides protection for the Company against unusually serious occurrences in which a number of claims could produce a large aggregate loss. Management continually monitors the Company's reinsurance program to obtain pro- tection that should be adequate to ensure the availability of funds for losses while maintaining future growth. NET INVESTMENT INCOME AND REALIZED GAINS The Company's fixed maturities and equity securities are classified as available-for-sale and are carried at fair value. The unrealized gains and losses, net of tax, are reported as a separate component of shareholders' investment. Interest and Dividend Income: Interest on fixed maturities is recorded as in- come when earned and is adjusted for any amortization of purchase premium or discount. Dividends on equity securities are recorded as income on ex-dividend dates.
Investments: 1997 1996 1995 Invested Assets $245,644,042 $184,801,846 $149,216,723 Net Investment Income 8,580,713 7,155,382 6,635,123 Percent of Return to Average Carrying Value 4.9% 5.1% 5.7% Realized Gains 15,370,384 8,468,911 3,587,323 Change in Unrealized Gains $ 16,746,287 $ 12,672,783 $ 21,085,956 The net increase in unrealized gains of $16,746,287 for 1997 was comprised of a $123,135 decrease in fixed maturities and an increase of $16,869,422 in equity securities. Net investment income in 1997 amounted to $8,580,713, compared with $7,155,382 and $6,635,123 in 1996 and 1995, respectively. Unrealized gains were $49,509,958, $32,763,674 and $20,090,891 at each respective year end.
INCOME TAXES Income tax expense is based on income reported for financial statement purposes and tax laws and rates in effect for the years presented. Deferred federal in- come taxes arise from timing differences between the recognition of income de- termined for financial reporting purposes and income tax purposes. Such timing differences are related principally to the deferral of policy acquisition costs, the recognition of unearned premiums, and discounting the claims reserves for tax purposes. Deferred taxes are also provided on unrealized gains and losses. LOSS RESERVES Reserves for losses and loss adjustment expenses reflect the Company's best estimate of the liability for the ultimate cost of reported claims and incurred but not reported (IBNR) claims as of the end of each period. The estimates are based on past claim experience and consider current claim trends as well as social and economic conditions. The Company's reserves for losses and loss ad- justment expenses were $71,472,338 at December 31, 1997 compared with $47,702,363 at December 31, 1996. This increase is a combination of giving con- sideration for the increase in premium volume, increased retention on all lines of coverages written and an increase in the IBNR reserves. Management continues to closely monitor the reserve development trends and projections as it attempts to stabilize the loss reserve development which has occurred in recent years. LIQUIDITY AND CAPITAL RESOURCES Liquidity refers to the Company's ability to meet obligations as they become due. The obligations and cash outflow of the Company include claim settlements, acquisition and administrative expenses, investment purchases and dividends to shareholders. In addition to satisfying obligations and cash outflow through premium collections, there is cash inflow obtained from interest and dividend income, maturities and sales of investments. Because cash inflow from premiums is received in advance of cash outflow required to settle claims, the Company accumulates funds which it invests pending liquidity requirements. Therefore, investments represent the majority (85.7% in 1997, 80.7% in 1996 and 84.4% in 1995) of the Company's assets. Cash outflow can be unpredictable for two reasons: first, a large portion of liabilities representing loss reserves have uncertainty regarding settlement dates; and second, there is potential for losses occurring either individually or in the aggregate. As a result, the Com- pany maintains adequate short-term investment programs necessary to ensure the availability of funds. The investment program is structured so that a forced sale liquidation of fixed maturities should not be necessary during the course of ordinary business involvement and activities. The Company has no material capital expenditure commitments. YEAR 2000 A significant issue facing not only the insurance industry but society as a whole is potential problems related to the approaching year 2000. Older computer programs were written using two digits rather than four to define the applicable year. As a result, those computer programs may misinterpret a date, using "00" as the year 1900 rather than year 2000. During 1996 and 1997 the Company incurred approximately $1.8 million of ex- penses in updating its mangement information system to alleviate potential year 2000 problems. This process is substantially completed, with only testing and peripheral adjustments remaining. The additional expense for the testing and adjustments is expected to be approximately $600,000. As a re- sult of these efforts, the Company is confident that the year 2000 will not cause a significant disruption to its business. The Company has also assessed the potential impact of year 200 related problems that may be encountered by our agents and third parties, and determined that any impact would not be material relative to the operations of the Company. However, there can be no guarantee that actual results would not differ materially from those anticipated. Item 8. Financial Statements and Supplementary Data Financial Statements The financial statements filed by CTC in connection with this Annual Report are consolidated financial statements which present all of the operations of the parent company and its subsidiaries. (1) Capitol Transamerica Corporation Consolidated Financial Statements: (2) Report of independent auditors. (3) Consolidated balance sheets - December 31, 1997 and 1996. (4) Consolidated statements of income - for each of the three years in the period ended December 31, 1997. (5) Consolidated statements of shareholders' investment - for each of the three years in the period ended December 31, 1997. (6) Consolidated statements of cash flows - for each of the three years in the period ended December 31, 1997. (7) Notes to consolidated financial statements. Item 9. Disagreements of Accounting and Financial Disclosures None. Item 10. Directors and Executive Officers of CTC (a) Directors
Name (Age) Other Directorships, Business Expire at Date of Original Election Principal Occupation Experience and Miscellaneous Information Annual Mtg. in: Paul J. Breitnauer (58) Vice President and Treasurer of Mr. Breitnauer has been associated with 1999 1986 the Company; Senior Vice Presi- the insurance industry in various dent & Treasurer of CIC, CSIC capacities since 1963. and CFC, wholly-owned subsidi- aries of the Company. Sun Prairie, Wisconsin George A. Fait (71) Chairman of the Board and Mr. Fait is a director of Bank One and 1997 1960 President of the Company and its has been associated with the insur- wholly-owned subsidiaries; Di- ance industry in various capacities rector of Bank One. since 1950. Madison, Wisconsin Larry Burcalow (56) Owner & President Mr. Burcalow has been Owner and President 1999 1997 Yahara Materials, Inc. of Yahara Materials, Inc. for over 30 Waunakee, Wisconsin years. Michael J. Larson (56) Vice President Mr. Larson has been associated with the 1998 1991 American National Bank banking industry in various capacities Madison, Wisconsin since 1965. Reinhart H. Postweiler(68)Retired, formerly with Flad Mr. Postweiler is a Director of Bank One. 1999 1977 Affiliated Corporation; Director He is a member of the Wisconsin Society of of Bank One, Madison, Wisconsin. Professional Engineers and the National Society of Professional Engineers. Kenneth P. Urso (63) Owner & Operator Mr. Urso has been in the insurance 1999 1997 Urso & Associates, LLC business for over 30 years. Madison, Wisconsin None of the above directors are related and there are no arrangements or understandings between directors since each is acting solely in their described capacity. There have been no events during the past five years which are material to the evaluation of the ability and integrity of any director of CTC.
Item 10. (continued) (b) Executive Officers: Chairman of the Board and President- George A. Fait (71 years of age) Elected in 1960. Chairman of the Board and President - CIC, CSIC and CFC, wholly-owned subsidiary companies. Vice President and Treasurer - Paul J. Breitnauer (58 years of age) Elected Treasurer in 1970 and Vice President in 1982. Senior Vice President and Treasurer - CIC, CSIC and CFC. Secretary - Virgiline M. Schulte (69 years of age) Elected in 1988. Secretary - CIC, CSIC and CFC. (c) Additional Executive Officers - CIC & CSIC - Wholly-Owned Subsidiary Insurance Companies: Vice President - P & C Claims Vice President - Personnel Robert F. Miller (59 years of age) Virgiline M. Schulte (69 years Elected in 1986. old) Elected in 1993. Vice President - Agency Vice President- Data Processing Joel G. Fait (39 years of age) Frank S. Zillner (36 years old) Elected in 1993. Elected in 1993. Vice President - Rating Corporate Counsel Gerald A. Olson (53 years of age) Vacant Elected in 1993. Vice President - P & C Underwriting William B. Hutchison (43 years of age) Elected in 1993. (d) Disclosure of Delinquent Filers The section captioned "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Capitol Transamerica Corporation ("CTC") Proxy Statement dated April 3, 1998 is incorporated herein by reference. Item 11. Executive Compensation and Transactions The sections captioned "Compensation of Directors", "Report on Executive Compensation" and "Executive Compensation Committee Report" in the CTC Proxy Statement dated April 3, 1998 are incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The sections captioned "Principal Shareholders", "Option/SAR Exercised in Last Fiscal Year" and "Compensation Plans" in the CTC Proxy Statement dated April 3, 1998 are incorporated herein by reference. Item 13. Certain Relationships and Related Transactions The section captioned "Compensation Committee Interlocks and Insider Participation" and the three sections referenced in Item 11 above, all included in the CTC Proxy Statement dated April 3, 1998, are in- corporated herein by reference. George Fait and Virgiline Schulte are brother and sister; Joel Fait is George Fait's son and Frank Zillner is his son-in-law; none of the other officers are related and there are no arrangements or understandings between officers since each is acting solely in their described capacity. There have been no events during the past five years which are material to the evaluation or the ability and integrity of any executive officer of the Company or its subsidiaries. Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) 1 and 2. Financial statements and financial statement schedules The following financial statements of Capitol Transamerica Corporation and Subsidiaries are included in Item 8. Consolidated balance sheets - December 31, 1997 and 1996. Consolidated statements of income - for each of the three years in the period ended December 31, 1997. Consolidated statements of shareholders' investment - for each of the three years in the period ended December 31, 1997. Consolidated statements of cash flows - for each of the three years in the period ended December 31, 1997. Notes to consolidated financial statements. The following financial statement schedules of Capitol Transamerica Corporation and Subsidiaries are included in Item 14(d). Schedule I Summary of Investments Other than Investments in Related Parties Schedule II Condensed Financial Information of Registrant - Parent Company Schedule III Supplementary Insurance Information Schedule IV Reinsurance Schedule VI Supplemental Information Concerning Property-Casualty Insurance Operations All other schedules required by Article 7 of Regulation S-K are not required under the related instructions or are inapplicable, and therefore have been omitted. (b) No Reports on Form 8-K were filed during the fourth quarter of the fiscal year ended December 31, 1997. (c) Exhibits None (d) Financial Statement Schedules Reference is made to the financial statement schedules above. SIGNATURES Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, the company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CAPITOL TRANSAMERICA CORPORATION By By George A. Fait Paul J. Breitnauer Chairmant of the Board, Vice President, President and Director Treasurer and Director By By Virgiline M. Schulte Larry Burcalow Secretary Director By By Michael J. Larson Reinhart H. Postweiler Director Director By Kenneth P. Urso Director March 25, 1998 RESPONSIBILITY FOR FINANCIAL REPORTING To The Shareholders and Board of Directors of Capitol Transamerica Corporation: The Company has prepared the consolidated financial statements, related notes, and other financial data appearing in this Annual Report. The statements were developed using generally accepted accounting principles and policies considered appropriate in the circumstances. They reflect, where applicable, management's best estimates and judgements. The financial data also includes disclusures and explanations which are relevant to an understanding of the financial affairs of the Company. To meet management's responsibility for financial reporting, internal control systems and procedures are designed to provide reasonable assurances as to the reliability of the financial records and compliance with corporate policy throughout the organization. Ernst & Young LLP, independent auditors, have audited the financial statements. To express an opinion thereon, they review and evaluate the Company's internal accounting controls and conduct such tests of the accounting records and other auditing procedures as they deem necessary. The Board of Directors oversees the Company's financial reporting through its Audit Committee, which regularly meets with management representatives and jointly with the independent auditors, to review accounting, auditing and financial reporting matters. A policy of busines ethics is communicated annually to the Company's directors, officers and respon- sible employees. The Company monitors compliance with the policy to help assure that operations are conducted in a responsible and professional manner with a committment to the highest standard of business conduct. Paul J. Breitnauer Vice President and Treasurer REPORT OF INDEPENDENT AUDITORS To the Shareholders and Board of Directors of Capitol Transamerica Corporation: We have audited the accompanying consolidated balance sheets of Capitol Trans- america Corporation (the "Company") as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholders equity, and cash flows for the three years in the period ended December 31, 1997. Our audits also in- cluded the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing stan- dards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Capitol Transamerica Corporation at December 31, 1997 and 1996, and the consolidated re- sults of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. Milwaukee, Wisconsin Ernst & Young LLP February 27, 1998 CAPITOL TRANSAMERICA CORPORATION CONSOLIDATED BALANCE SHEETS December 31, 1997 and 1996
1997 1996 Assets Investments (Notes (1)(b) and (2)): Available-for-sale investment securities, at fair value Fixed maturities (amortized cost $69,434,974 and $77,807,048 respectively) $ 74,071,516 $ 82,566,725 Equity securities: Common stock, (cost $101,409,300 and $59,099,459, respectively) 145,208,469 86,569,214 Nonredeemable preferred stock, (cost $5,854,291 and $5,346,938, respectively) 6,928,541 5,881,180 Investment real estate, at cost, net of depreciation 8,122,638 6,721,343 Short-term investments, at cost which approximate fair value (Note(2)(d) 11,312,878 3,063,384 Total Investments 245,644,042 184,801,846 Cash 1,202,548 364,994 Accrued investment income 1,707,692 1,684,940 Receivables from agents, insureds and others, less allowance for doubtful accounts of $440,000 and $380,000, respectively 20,820,481 18,712,387 Balances due from reinsurers 122,916 1,033,058 Funds held by ceding reinsurers - 44,791 Deferred insurance acquisition costs (Note (1)(e)) 14,186,941 12,978,314 Prepaid reinsurance premiums 743,988 704,148 Due from securities brokers - 6,347,754 Income taxes recoverable 684,342 - Other assets 1,569,325 2,213,222 Total Assets $286,682,275 $228,885,454 The accompanying notes to the consolidated financial statements are an integral part of these financial statements. CAPITOL TRANSAMERICA CORPORATION CONSOLIDATED BALANCE SHEETS December 31, 1997 and 1996 1997 1996 Liabilities Policy Liabilities and Accruals (Notes (1)(d), (3) and (4)): Reserve for losses $ 48,570,173 $ 29,811,723 Reserve for loss adjustment expenses 22,902,165 17,890,640 Unearned premiums 47,411,849 43,258,833 Total Policy Liabilities and Accruals 118,884,187 90,961,196 Accounts payable 5,805,568 6,612,383 Dividends payable - 4,526 Due to securities brokers 5,318,372 474,281 Balances due to reinsurers 1,337,564 1,776,524 Accrued premium taxes 337,163 562,573 Income taxes payable - 1,870,252 Deferred income taxes 15,657,280 10,041,836 Total Other Liabilities 28,455,947 21,342,375 Total Liabilities 147,340,134 112,303,571 Commitments and contingent liabilities (Notes (4) and (8)) - - Shareholders' Investment (Notes (6) and (7)) Common stock, $1.00 par value, authorized 15,000,000 shares, issued 11,502,520 and 7,612,711, respectively 11,502,520 7,612,711 Common stock distributable, $1.00 par value, 3,806,355 shares - 3,806,355 Paid-in surplus 21,832,206 21,114,644 Net unrealized appreciation (depreciation) on securities carried at fair value net of deferred taxes of $16,833,386 & $11,139,649, respectively(Notes(1)(b)&(2) 32,676,572 21,624,025 Retained earnings 73,732,118 62,761,654 Shareholders' investment before treasury stock 139,743,416 116,919,389 Treasury stock, 323,638 and 315,769 shares, respectively, at cost (401,275) (337,506) Total Shareholders' Investment 139,342,141 116,581,883 Total Liabilities and Shareholders' Investment $286,682,275 $228,885,454 The accompanying notes to the consolidated financial statements are an integral part of these financial statements. CAPITOL TRANSAMERICA CORPORATION CONSOLIDATED STATEMENTS OF INCOME For The Years Ended December 31, 1997, 1996 and 1995 1997 1996 1995 Revenues: Premiums earned (Note (1)(c)) $ 87,451,620 $ 77,347,319 $ 63,865,500 Net investment income (Note (2)(e)) 8,580,713 7,155,382 6,635,123 Realized investment gains (Notes (1)(b) and (2)) 15,370,384 8,468,911 3,587,323 Other revenues 36,801 382,130 144,866 Total Revenues 111,439,518 93,353,742 74,232,812 Losses and Expenses Incurred (Notes (1)(d), (3) and (4)): Losses incurred 49,055,296 29,694,168 24,620,433 Loss adjustment expenses incurred 12,073,106 11,471,608 9,479,030 Underwriting, acquisition and insurance expenses (Note(10)) 28,458,021 29,136,689 22,218,510 Increase in deferred insurance acquisition costs (1,208,627) (3,749,446) (1,513,479) Other expenses 1,337,792 1,293,414 792,633 Total Losses and Expenses Incurred 89,715,588 67,846,433 55,597,127 Income from operations before income taxes 21,723,930 25,507,309 18,635,685 Income tax expense (Note (5)) 6,532,051 7,158,151 4,705,279 Net Income $ 15,191,879 $ 18,349,158 $ 13,930,406 Income Per Share- basic (Note (1)(g)) $ 1.36 $ 1.66 $ 1.26 Weighted avg. number of shares outstanding-basic (Note (1)(g)) 11,151,428 11,077,501 11,049,660 Income Per Share- diluted (Note (1)(g)) $ 1.35 $ 1.62 $ 1.24 Weighted avg. number of shares outstanding-diluted (Note (1)(g)) 11,285,751 11,315,758 11,190,198 The accompanying notes to the consolidated financial statements are an integral part of these financial statements. CAPITOL TRANSAMERICA CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT For the Years Ended December 31, 1995, 1996 and 1997 Unrealized Common Appreciation Common Stock (Depreciation) Stock Distributable on Securities (Par Value) (Par Value Paid-In Carried at Retained Treasury $1.00) $1.00) Surplus Fair Value Earnings Stock Balance, January 1, 1995 $ 6,877,596 $ - $ 7,931,671 $ (656,743) $54,157,275 $ (330,625) Net income - - - - 13,930,406 - Unrealized appreciation on available-for-sale securities, net of deferred taxes - - - 13,916,731 - - Stock options exercised 21,464 - 88,460 - - 8,918 Stock dividend - 689,545 12,928,969 - (13,618,514) - Cash dividends declared - - - - (3,291,273) - Balance, December 31, 1995 6,899,060 689,545 20,949,100 13,259,988 51,177,894 (321,707) Net income - - - - 18,349,158 - Unrealized depreciation on available-for-sale securities, net of deferred taxes - - - 8,364,037 - - Stock options exercised 24,106 - 165,544 - - (15,799) Stock dividends 689,545 3,116,810 - - (3,806,355) - Cash dividends declared - - - - (2,959,043) - Balance, December 31, 1996 7,612,711 3,806,355 21,114,644 21,624,025 62,761,654 (337,506) Net income - - - - 15,191,879 - Unrealized appreciation on available-for-sale securities, net of deferred taxes - - - 11,052,547 - - Stock options exercised 83,678 - 542,344 - - (63,769) Proceeds from treasury share transactions - - 175,218 - - - Stock dividends 3,806,131 (3,806,355) - - - - Cash dividends declared - - - - (4,221,415) - Balance, December 31, 1997 $11,502,520 $ - $21,832,206 $32,676,572 $73,732,118 $(401,275) The accompanying notes to the consolidated financial statements are an integral part of these financial statements. CAPITOL TRANSAMERICA CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS For the Years Ended December 31, 1996, 1995 and 1994 1997 1996 1995 Cash flows provided by operating activities: Net Income $ 15,191,879 $ 18,349,158 $ 13,930,406 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,018,894 805,784 423,119 Realized investment (gains) losses (15,370,384) (8,468,911) (3,587,323) Change in: Deferred insurance acquisition costs (1,208,627) (3,749,446) (1,513,479) Unearned premiums 4,153,016 11,703,105 4,761,479 Allowance for doubtful accounts receivable from agents 60,000 60,000 65,785 Accrued investment income (22,752) 33,314 (352,131) Receivables from agents, insureds and others (2,168,094) (6,898,262) (2,595,686) Balances due to/from reinsurers (284,774) (136,449) (154,893) Reinsurance recoverable on paid and unpaid losses 755,956 (151,080) (547,078) Funds held by ceding reinsurers 44,791 32,326 60,305 Income taxes payable/receivable (2,554,594) 1,980,343 371,620 Deferred income taxes (78,292) (68,247) (156,647) Due to/from securities brokers 11,191,845 (6,028,431) (145,042) Prepaid reinsurance premiums (39,840) 192,901 (270,011) Other assets 339,684 (123,731) 294,732 Reserves for losses and loss adjustment expenses 23,769,975 9,118,279 11,108,761 Accounts payable (806,814) 2,250,075 448,636 Accrued premium taxes (225,410) 180,029 112,822 Net cash provided by operating activities 33,766,459 19,080,757 22,255,375 Cash flows provided by (used for) investing activities: Proceeds from sales of available-for-sale investments 44,747,214 27,579,131 21,046,919 Purchases of available-for-sale investments (78,773,489) (49,010,584) (47,289,410) Maturities of available-for-sale investments 5,064,056 6,917,920 6,447,108 Purchases of depreciable assets (477,992) (1,279,331) (683,115) Net cash used for investing activities (29,440,211) (15,792,864) (20,478,498) Cash flows provided by (used for) financing activities: Cash dividends paid (4,226,165) (3,699,525) (2,546,264) Stock options exercised 626,022 189,650 109,924 Net proceeds from sale (purchase) of treasury stock 111,449 (15,799) 8,918 Net cash used for financing activities (3,488,694) (3,525,674) (2,427,422) Net (decrease) increase in cash 837,554 (237,781) (650,545) Cash, beginning of year 364,994 602,775 1,253,320 Cash, end of year $ 1,202,548 $ 364,994 $ 602,775 Cash paid during the year for: Income taxes $ 9,164,506 $ 5,292,665 $ 4,497,508 The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Summary of Significant Accounting Policies Capitol Transamerica Corporation (the "Company") is an insurance holding company which writes, through its subsidiaries, commercial insurance coverages in 36 states. The property-casualty insurance coverages represent approximately 70% of the Company's premiums written while fidelity-surety coverages represent approximately 30% of the Company's premiums written. The Company's products are marketed through independent agents located through- out the United States. The consolidated financial statements are presented in accordance with generally accepted accounting principles. The preparation of financial statements of insurance companies requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ significantly from those estimates. (a) Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Capitol Indemnity Corpora- tion ("CIC"), Capitol Specialty Insurance Corporation ("CSIC") and Capitol Facilities Corporation ("CFC"). All significant intercompany accounts and transactions have been eliminated in consolidation. (b) Investments The Company classifies all of its fixed maturities and equity securi- ties as available-for-sale. Accordingly, investments in fixed maturi- ties and equity securities are reported at fair value, with unrealized gains and losses reported in a separate component of shareholders' investment, net of tax effect. The cost of fixed maturities is adjust- ed for amortization of premiums and discounts to maturity. Fixed maturities and equity securities deemed to have declines in value that are other than temporary are written down through the statement of in- come to carrying values equal to their estimated fair values. Investment real estate is carried at cost net of accumulated deprecia- tion of $240,551 and $203,830 as of December 31, 1997 and December 31, 1996, respectively. Cost of investments sold is determined under the specific identifica- tion method. (c) Premiums Premiums are recognized as revenue on a pro rata basis over the term of the contracts. (d) Losses and Loss Adjustment Expenses Losses and loss adjustment expenses, less related reinsurance and sub- rogation recoverables, are provided for as claims are incurred. The reserves for losses and loss adjustment expenses include: (1) the accumulation of individual estimates for claims reported on direct business prior to the close of the accounting period; (2) estimates received from other insurers with respect to reinsurance assumed; (3) estimates for incurred but not reported claims based on past experi- ence modified for current trends; and (4) estimates of expenses for investigating and settling claims based on past experience. The lia- bilities recorded are based on estimates resulting from the continu- ing review process. Differences between estimates and ultimate pay- ments are reflected in expense for the period in which the estimates are changed. Management believes that the reserves for losses and loss adjustment expenses are adequate to meet obligations. (e) Deferred Insurance Acquisition Costs Insurance acquisition costs that vary with, and are directly related to, the production of premiums(principally commissions, premium taxes compensation and certain underwriting expenses) are deferred. Deferred insurance acquisition costs are amortized to expense as the related premiums are earned. (f) Income Taxes Deferred income taxes reflect the net tax effects of temporary dif- ferences between the carrying amounts of assets and liabilities for financial statement purposes and the amounts used for income tax reporting. (g) Income Per Share Net income per share is computed by dividing net income by the weight- ed average number of shares of stock outstanding during the year. Wherever applicable, prior years' information has been restated to reflect the December 31, 1996 three-for-two stock split effected as a fifty percent stock dividend. In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share," which replaces the presentation of primary and fully diluted earnings per share (EPS) with a presentation of basic and diluted EPS. The follow- ing table sets forth the computation of basic and diluted EPS:
December 31, 1997 1996 1995 Numerator: Consolidated net income $15,191,879 $18,349,158 $13,930,406 Denominator: Denominator for basic EPS- weighted avg shares 11,151,428 11,077,501 11,049,660 Effect of dilutive securities- employee stock options 134,323 238,257 140,538 Denominator for diluted EPS 11,285,751 11,315,758 11,190,198 Basic EPS $ 1.36 $ 1.66 $ 1.26 Diluted EPS $ 1.35 $ 1.62 $ 1.24 (2)Investments (a) The amortized cost and estimated fair value of fixed maturities and equity securities are as follows: Gross Gross Amortized Unrealized Unrealized Fair Type of investment Cost Gains Losses Value December 31, 1997 Fixed maturities: U.S. Government bonds $ 67,192 $ 4,883 $ - $ 72,075 State, municipal and political subdivision bonds 68,651,060 4,592,852 (4,408) 73,239,504 Corporate bonds and notes 716,722 47,106 (3,891) 759,937 Total fixed maturities $ 69,434,974 $ 4,644,841 (8,299) $ 74,071,516 Equity securities: Common stock $101,409,300 $ 46,194,740 $ (2,395,571) $145,208,469 Non-redeemable preferred stock 5,854,291 1,099,250 (25,000) 6,928,541 Total equity securities $107,263,591 $ 47,293,990 $ (2,420,571) $152,137,010 December 31, 1996 Fixed maturities: U.S. Government bonds $ 578,852 $ 4,543 $ - $ 583,395 State, municipal and political subdivision bonds 75,906,193 4,709,412 (24,724) 80,590,881 Corporate bonds and notes 1,322,003 71,962 (1,516) 1,392,449 Total fixed maturities $ 77,807,048 $ 4,785,917 $ (26,240) $ 82,566,725 Equity securities: Common stock $ 59,099,459 $ 29,169,673 $ (1,699,918) $ 86,569,214 Non-redeemable preferred stock 5,346,938 605,522 (71,280) 5,881,180 Total equity securities $ 64,446,397 $ 29,775,195 $ (1,771,198) $ 92,450,394 (b) The amortized cost and estimated fair value of fixed maturities at December 31, 1997, by contractual maturity, is shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized Fair Cost Value Due in one year or less $ 360,235 $ 365,885 Due after one year through five years 3,846,593 3,985,566 Due after five years through 6,814,096 7,278,822 Due after ten years 58,414,050 62,441,243 Total $69,434,974 $74,071,516 (c) Realized gains (losses) and change in unrealized gains (losses) for the three years ended December 31, 1997, 1996 and 1995, are as follows: 1997 1996 1995 Realized gains (losses): Fixed maturities Gross gains $ 53,584 $ 88,664 $ 33,742 Gross losses (7,250) (36,388) (5,288) Equity securities Gross gains 15,323,242 8,454,726 3,558,869 Gross losses - (22,041) - Other 808 (16,050) - Net realized gains $15,370,384 $ 8,468,911 $ 3,587,323 1997 1996 1995 Change in unrealized gains (losses): Fixed maturities $ (123,135) $(2,416,907) $ 6,492,201 Equity securities 16,869,422 15,089,690 14,593,755 Net change in unrealized gains 16,746,287 12,672,783 21,085,956 Effect of applicable deferred taxes (5,693,740) (4,308,746) (7,169,225) Net increase in unrealized gains $11,052,547 $ 8,364,037 13,916,731 Following is a summary of total unrealized gains (losses) as of December 31, 1997, 1996 and 1995: 1997 1996 1995 Unrealized gains (losses): Fixed maturities Gross unrealized gains $ 4,644,841 $ 4,785,917 $ 7,273,048 Gross unrealized losses (8,299) (26,240) (96,462) Equity securities Gross unrealized gains 47,293,990 29,775,195 15,567,122 Gross unrealized losses (2,420,571) (1,771,198) (2,652,817) Gross unrealized gains (losses) 49,509,961 32,763,674 20,090,891 Effect of applicable deferred taxes (16,833,389) (11,139,649) (6,830,903) Net unrealized gains (losses) $32,676,572 $21,624,025 $13,259,988
(d) The amortized cost of securities on deposit with insurance regulators in accordance with statutory requirements was $3,689,284 on December 31, 1997 and $4,101,301 on December 31, 1996. In connection with the runoff of the reinsurance assumed operations, CIC has established a security trust fund agreement with a bank, consisting of cash and securities in the amount of $832,192 at December 31, 1997 and $831,095 at December 31, 1996. (e) Following is a summary of investment income from each category of investments:
1997 1996 1995 Fixed maturities $ 4,800,978 $ 4,936,902 $ 4,539,757 Equity securities 3,292,615 2,260,094 1,851,937 Investment real estate 2,340,878 1,280,669 751,162 Short-term 149,879 119,542 224,813 Total investment income 10,584,350 8,597,207 7,367,669 Investment expenses - real estate 1,361,092 945,777 549,674 Other investment expenses 401,994 419,201 138,016 Depreciation on real estate 240,551 76,847 44,856 Net investment income $ 8,580,713 $ 7,155,382 $ 6,635,123
1997 1996 1995 Balance as of January 1, $47,702,363 $38,584,084 $27,475,323 Less reinsurance recoverables 225,367 (45,321) (12,363) Net reserves 47,927,730 38,538,763 27,462,960 Incurred losses and loss adjustment expenses related to: Current year 43,042,827 36,041,564 27,224,006 Prior years: Direct losses 10,725,730 1,516,382 2,610,999 Direct loss adjustment expenses 2,141,661 1,901,083 2,810,145 Discontinued assumed reinsurance 5,218,184 1,706,747 1,454,313 Total prior years 18,085,575 5,124,212 6,875,457 Total incurred 61,128,402 41,165,776 34,099,463 Paid losses and loss adjustment expenses related to: Current year 16,237,601 15,487,239 10,632,490 Prior years 21,160,666 16,245,614 12,285,492 Total paid 37,488,267 31,732,853 22,917,982 Other adjustments, net (96,121) (43,956) (105,678) Net balance at December 31, 71,471,744 47,927,730 38,538,763 Plus reinsurance recoverables 594 (225,367) 45,321 Balance at December 31, $71,472,338 $47,702,363 $38,584,084 As explained in Note (1)(d), differences between estimates and ultimate payments are reflected in expense for the period in which the estimates are changed. The Company continually reviews its reserves for losses and loss adjustment expenses and the related reinsurance recoverables. As a result of the variability in these estimates, reserves have differed from actual experience during 1997, 1996 and 1995. The estimates are based on past claim experience and consider current claim trends as well as social and economic conditions. During 1997 it was determined that, due to increased claim de- velopment on all lines of business, a substantial increase in incurred but no reported (IBNR) reserves was necessary. The Company increased IBNR reserves by $10.0 million on direct business and $4.5 million on assumed reinsurance. The Company continues to monitor factors that could affect future claim development. While the Company has recorded its current best estimate of its reserves for losses and loss adjustment expenses, it is reasonably possible these estimates, net of estimated reinsurance recoverables, may increase in the future. See Note 4(b) for discussion of assumed reinsurance.
(4) Reinsurance (a)Ceded In 1997 and 1996, the Company generally reinsured losses in excess of $1,000,000 with various other companies through reinsurance ceded con- tracts. In 1995 and prior, the Company reinsured losses in excess of $300,000 and $500,000. These arrangements provide for greater diversifi- cation of business, allow the Company to control exposure to potential losses arising from large risks, and provide additional capacity for growth. Reinsurance ceded contracts do not relieve the Company from its obligations to policyholders. The Company remains liable to its policy- holders for the portion reinsured to the extent that any reinsurer does not meet the obligations assumed under the reinsurance agreements. To minimize its exposure to significant losses from reinsurer insolvencies, the Company evaluates the financial condition of its reinsurers. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policies. (b)Assumed- Discontinued CIC was involved in providing reinsurance coverage by assuming a portion of risks underwritten by other insurance companies and pools. Although CIC withdrew from this reinsurnace business in 1976, its liability re- mains for losses on policies written during the period in which it par- ticipated as a reinsurer. The Company is involved with treaties that cover certain risks which have had significant development industry-wide over the past several years. The reinsurance assumed loss reserves are based on current information available from the ceding companies and are continually reviewed for accuracy and reasonableness. In 1997 the Com- pany determined that additional IBNR reserves of $4.5 million were ne- cessary to accrue for the estimated development on this business. Man- agement is confident that the reserves of $9,320,722 at December 31, 1997 are adequate, but recognizes the uncertainty industry-wide concern- ing these exposures. The Company has provided letters of credit relating to reinsurance assumed of $503,585 at both December 31, 1997 and 1996. (c)Assumed - Active In 1997 the Company entered into a reinsurance program whereby CIC as- sumed and then fully ceded $4.8 million in premiums during the year. The Company received a brokerage fee on this business and is not likely to incur any net losses. Net written and earned premiums and losses and loss adjustment expenses include reinsurance activity as follows:
Written Premiums 1997 1996 1995 Direct $94,690,638 $90,939,387 $70,878,492 Assumed 4,817,208 - - Ceded (7,943,050) (1,696,062) (2,521,524) Net premiums written $91,564,796 $89,243,325 $68,356,968 Earned Premiums 1997 1996 1995 Direct $90,537,623 $79,236,282 $66,117,013 Assumed 4,817,208 - - Ceded (7,903,211) (1,888,963) (2,251,513) Net premiums earned $87,451,620 $77,347,319 $63,865,500 Losses and Loss Adjustment Expenses 1997 1996 1995 Direct $57,314,915 $40,476,441 $33,320,640 Assumed - losses 5,162,726 1,606,731 1,355,570 Assumed - legal and audit 55,458 100,016 98,743 Ceded (1,404,697 (1,017,412) (675,490) Net losses and loss adjustment expenses $41,165,776 $34,099,463 $27,536,054
(5) Income Taxes (a)The Company and its subsidiaries file a consolidated federal income tax return and separate state franchise and premium tax returns as applicable. (b)The components of income tax expense for the years 1997, 1996 and 1995 are as follows:
1997 1996 1995 Current expense: Federal $ 6,055,422 $ 6,683,429 $ 4,393,537 State 554,922 559,972 468,388 Total current expense 6,610,344 7,243,401 4,861,925 Deferred expense(benefit): Deferred insurance acquisition costs 410,933 1,274,812 514,583 Unearned premiums (279,696) (808,929) (305,420) Discount on loss and loss adjustment expense reserves (582,307) (315,137) (285,995) Unpaid commissions 400,699 (211,404) 23,551 Other (27,922) (24,592) (103,365) Total deferred benefit (78,293) (85,250) (156,646) Income tax expense $ 6,532,051 $ 7,158,151 $ 4,705,279 (c)A reconciliation of the effective income tax rate, as reflected in the consolidated statements of income, to the statutory federal income tax rate, is as follows: 1997 1996 1995 Statutory tax rate 35.0% 34.0% 34.0% Municipal bond income, net of proration -6.5% -5.7% -6.9% Dividend received exemption, net of proration -2.0% -1.9% -2.1% State income tax expense, net of federal tax benefit 1.7% 1.5% 1.6% Other, net 1.9% -0.8% -1.4% Effective income tax rate 30.1% 28.1% 25.2% (d)Significant components of the deferred tax liabilities and assets are as follows: December 31, December 31, 1997 1996 Deferred tax liabilities: Deferred insurance acquisition costs $ 4,823,560 $ 4,412,627 Net unrealized gains on investment securities 16,833,386 11,139,649 Other 94,218 101,742 Total deferred tax liabilities 21,751,164 15,654,018 Deferred tax assets: Unearned premium reserve discounting 3,173,414 2,893,719 Loss and loss adjustment expense reserve discounting 2,201,277 1,618,970 Unpaid commissions 355,115 755,815 Salvage and subrogation reserve discounting - 214,478 Other 364,078 129,200 Total deferred tax assets 6,093,884 5,612,182 Net deferred tax (liability) asset $(15,657,280) $(10,041,836)
(6) Common Stock Options The company has elected to follow Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees' (APB 25) and related Interpreta- tions in accounting for its stock options. Under APB 25, since the exer- cise price of the Company's stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recog- nized. Had the company elected the fair value approach required under FASB 123, "Accounting for Stock-Based Compensation," net income and earn- ings per share would not be materially different for the years 1997, 1996 and 1995. The Company's 1993 Stock Option Plan has authorized the grant of options for up to 1,072,500 shares of the Company's common stock. All options granted have a five year term and become fully vested at the end of four years. Stock options available to be granted in the future equal 776,999 shares at December 31, 1997. A summary of the Company's stock activity, and related information for the years ended December 31 follows:
1997 1996 Weighted Average Weighted Average Options Excercise-Price Options Excercise-Price Outstanding, beginning of year 327,123 $ 10.30 238,910 $ 7.30 Granted 5,700 22.44 112,319 14.40 Exercised (83,678) 7.48 (14,106) 5.40 Forfeited (12,034) 10.06 (10,000) 9.50 Outstanding, end of year 237,111 $ 11.80 327,123 $ 10.30 1995 Weighted Average Options Exercise Price Outstanding, beginning of year 175,552 $ 5.30 Granted 118,140 9.20 Exercised (35,416) 3.10 Forfeited (19,366) 8.60 Outstanding, end of year 238,910 7.30 Options currently exercisable at December 31, 1997 were 94,153. The weighted average remaining exercise period for all outstanding options as of December 31, 1997 was 2.9 years. Exercise prices for options outstanding as of December 31, 1997 ranged from $2.42 to $22.44 with 88% of these options having exercise prices between $8.50 and $14.50.
(7) Statutory Reporting (a)The financial statements of the insurance subsidiaries have been prepared in accordance with generally accepted accounting principles, which differ in certain respects from accounting practices prescribed or permitted by insurance regulatory authorities (statutory basis). The statutory capital and surplus and net income of the insurance subsidiaries as reported to state regulatory authorities, were as follows:
Policyholders' Surplus As Of December 31, 1997 1996 1995 Capitol Indemnity Corporation $109,324,111 $86,880,871 $62,618,547 Capitol Specialty Insurance Corporation 6,437,879 6,561,248 5,907,094 Total $115,761,990 $93,442,119 $68,525,641 Net Income for the Year Ended December 31, 1997 1996 1995 Capitol Indemnity Corporation $13,162,055 $13,566,036 $11,762,554 Capitol Specialty Insurance Corporation 297,036 285,640 238,538 Total $13,459,091 $13,851,676 $12,001,092 The 1997 data above for CIC reflects a $3.5 million increase in reinsurance assumed reserves. This increase was in response to an actuarial review of the Company's reserves completed subsequent to issuance of CIC's statutory filings.
(b)CIC is required by the Insurance Commissioner of the State of Wisconsin to maintain a minimum compulsory surplus (surplus as regards policyhold- ers) of 25% of net premiums written during the preceeding twelve months. As of December 31, 1997, the amount of compulsory surplus required to be maintained by CIC was approximately $22,854,463. (c)State insurance regulations limit the transfer of assets, including divi- dends, from insurance subsidiaries to the Company without regulatory approval. (8) Contingent Liabilities CIC is a defendant in certain lawsuits involving complaints which demand damages and recoveries for claims and losses allegedly related to risks in- sured by CIC. In the opinion of management, such lawsuits are routine in that they result from the ordinary course of business in the insurance in- dustry. The reserves for losses and loss adjustment expenses include manage- ment's estimates of the probable ultimate cost of settling all losses in- volving lawsuits. See Notes (1)(d), (3) and (4). (9) Employee Benefit Plans The Company has a defined contribution benefit plan (the Plan) in which all qualified employees are eligible to participate. The Plan incorporates a contributory feature under Section 401(k) of the Internal Revenue Code allowing employees to defer portions of their income through contributions to the Plan. The Company's annual contribution to the Plan is 150% of the first $1,500 of each participant's contribution during the plan year. The Company made contributions of $192,738, $165,397 and $147,872 in 1997, 1996 and 1995, respectively. The Company also has an Employee Stock Ownership Plan in which all quali- fied employees are eligible to participate. The plan provides for discre- tionary employer contributions of shares of Company stock or cash to pur- chase shares of Company stock. The Company made contributions of $100,103, $120,500 and $89,000 in 1997, 1996 and 1995, respectively. (10)Underwriting, Acquisition and Insurance Expenses A summary of underwriting, acquisition and insurance expenses incurred during the years ended December 31, 1997, 1996 and 1995 is as follows:
1997 1996 1995 Net commissions $19,066,258 $20,629,905 $14,791,800 Salaries and other compensation 4,163,019 3,714,706 3,423,152 Other expenses 5,081,803 4,792,078 4,003,558 Total costs 28,311,080 29,136,689 22,218,510 Increase in deferred insurance acquisition costs (1,208,627) (3,749,446) (1,513,479) Total underwriting, acquisition and insurance expenses $27,102,453 $25,387,243 $20,705,031 Substantially all insurance contracts written by CIC are for a term of one year or less and deferred insurance acquisition costs are amortized over the same term. The amount of deferred insurance costs amortized was $26,141,226, $22,801,709 and $18,611,260 in 1997, 1996 and 1995, respectively.
(11)Line of Credit The Company has a line of credit of $10,000,000. There were no borrowings under the line of credit in 1997. (12)Quarterly Results of Operations (Unaudited)
For the Year Ended December 31, 1997 (Reported) First Second Third Fourth Total Revenues $22,860,193 $26,586,331 $26,904,980 $35,088,014 $111,439,518 Losses incurred and expenses 17,435,851 20,016,573 19,765,370 32,497,794 89,715,588 Net income 3,987,337 4,567,205 4,937,578 1,699,759 15,191,879 Net income per share- basic $ 0.36 $ 0.41 $ 0.44 $ 0.15 $ 1.36 Net income per share- diluted $ 0.35 $ 0.41 $ 0.44 $ 0.15 $ 1.35 Dividends per share $ 0.17 $ 0.07 $ 0.07 $ 0.07 $ 0.38 A year-end analysis of operations determined that a substantial increase in IBNR reservs was necessary in the fourth quarter. It was also determined that there were certain timing differences that were not recorded appropriately throughout the year. As a result, the Company has restated quarterly revenues and losses as follows: For the Year Ended December 31, 1997 (Restated) First Second Third Fourth Total Revenues $22,860,193 $23,561,331 $28,429,980 $36,588,014 $111,439,518 Losses incurred and expenses 20,385,851 22,966,573 22,715,370 23,647,794 89,715,588 Net income 2,040,337 623,705 3,997,078 8,530,759 15,191,879 Net income per share- basic $ 0.18 $ 0.06 $ 0.36 $ 0.76 $ 1.36 Net income per share- diluted $ 0.18 $ 0.06 $ 0.35 $ 0.76 $ 1.35 Dividends per share $ 0.17 $ 0.07 $ 0.07 $ 0.07 $ 0.38 For the Year Ended December 31, 1996 First Second Third Fourth Total Revenues $19,021,237 $21,670,439 $23,340,606 $29,321,460 $93,353,742 Losses incurred and expenses 14,535,158 15,846,535 17,503,741 19,960,999 67,846,433 Net income 3,279,962 4,152,417 4,308,133 6,608,646 18,349,158 Net income per share- basic $ 0.30 $ 0.38 $ 0.39 $ 0.59 $ 1.66 Net income per share- duiluted $ 0.29 $ 0.37 $ 0.38 $ 0.58 $ 1.62 Dividends per share $ 0.07 $ 0.07 $ 0.07 $ 0.07 $ 0.28 SCHEDULE I CAPITOL TRANSAMERICA CORPORATION SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES As of December 31, 1997 (Consolidated)
Amount at Which Shown Fair in Balanc Type of Investment Cost Value Sheet Fixed maturity securities, available-for-sale: Bonds: United Stated Government and government agencies and authorities $ 67,192 $ 72,075 $ 72,075 State, municipalities, and political subdivisions 68,651,060 73,239,504 73,239,504 All other corporate bonds 716,722 759,937 759,937 Total 69,434,974 74,071,516 74,071,516 Equity securities, available-for-sale: Common stocks: Public utilities 2,065,856 1,983,808 1,983,808 Banks, trusts, and insurance companies 59,684,557 96,406,275 96,406,275 Industrial, miscellaneous, and all other 39,658,890 46,818,386 46,818,386 Nonredeemable preferred stocks 5,854,291 6,928,541 6,928,541 Total 107,263,591 152,137,010 152,137,010 Real estate, net of depreciation 8,122,638 8,122,638 Short-term investments 11,312,878 11,312,878 Total Investments $196,134,081 226,208,526 $245,644,042 SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT CAPITOL TRANSAMERICA CORPORATION (Parent Company) CONDENSED BALANCE SHEETS December 31, Assets 1997 1996 Investments $ 9,925,434 $ 7,588,878 Cash 10,461 31,690 Accrued investment income 45,340 54,197 Investment in subsidiaries 128,967,449 107,873,422 Other assets 1,416,571 2,368,988 Total assets $140,365,255 $117,917,084 Liabilities and shareholders' equity Liabilities: Accounts payable $ 40,717 $ 336,381 Dividends payable - 4,526 Income taxes payable 5,461 120,287 Deferred income taxes 976,936 874,007 Total liabilities 1,023,114 1,335,201 Shareholders' equity: Common stock 11,502,520 11,419,066 Additional paid-in-capital 21,656,988 21,114,644 Unrealized appreciation (depreciation) on available-for- sale securities, net of deferred taxes 1,896,403 1,696,601 Retained earnings (including undistributed earnings of subsidiaries of $102,271,184 and $81,151,740, respectively)104,687,505 82,689,078 139,743,416 116,919,389 Less treasury stock, at cost (401,275) (337,506) Total shareholders' equity 139,342,141 116,581,883 Total liabilities and shareholders' equity $140,365,255 $117,917,084 December 31, STATEMENTS OF INCOME 1997 1996 1995 Dividends received from subsidiaries $ 4,500,000 $ 4,200,000 $ 3,000,000 Management fees received from subsidiaries 1,768,789 1,515,478 1,466,553 Investment income 270,678 272,035 253,103 Realized investment gains 236,914 448,156 18,255 Other income 14,577 646 24,138 Total Income 6,790,958 6,436,315 4,762,049 Administrative expenses 1,371,392 1,363,770 1,449,273 Net income before tax and equity in undistributed net income of subsidiaries 5,419,566 5,072,545 3,312,776 Income tax expense 238,511 220,197 26,324 Net income of before equity in undistributed net income of subsidiaries 5,181,055 4,852,348 3,286,452 Equity in undistributed net income of subsidiaries, net of dividends paid 10,010,824 13,496,810 10,643,954 Net Income $15,191,879 $18,349,158 $13,930,406 The accompanying condensed financial information should be read in conjunction with the consolidated financial statements and notes thereto of Capitol Transamerica Corporation. SCHEDULE II (continued) CAPITOL TRANSAMERICA CORPORATION (Parent Company) December 31, STATEMENTS OF CASH FLOWS 1997 1996 1995 Cash flows provided by operating activities: Net income $15,191,879 $18,349,158 $13,930,406 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 778,343 728,940 378,263 Realized investment gains (236,914) (448,156) (18,255) Change in: Equity in net income of subsidiaries (10,010,824) (13,496,810) (10,643,954) Other assets 671,601 (488,710) (74,752) Other liabilities (412,478) (189,618) 273,391 Net cash provided by operating activitities 5,981,607 4,454,804 3,845,099 Cash flows provided by (used for) investing activities: Proceeds from investments sold/matured 471,238 1,091,372 1,070,493 Purchases of investments (2,276,930) - (1,740,750) Purchase of depreciable assets (477,992) (1,279,331) (683,115) Net cash used for investing activitities (2,283,684) (187,959) (1,353,372) Cash flows provided by (used for) financing activities: Cash dividends paid (4,281,405) (3,731,375) (2,568,259) Capital contribution to subsidiaries - (700,000) (20,000) Stock options exercised 626,022 189,650 109,924 Net proceeds from sale (purchase) of treasury stock (63,769) (15,799) 8,918 Net cash used for financing activitities (3,719,152) (4,257,524) (2,469,417) Net increase (decrease) in cash (21,229) 9,231 22,310 Cash, beginning of year 31,690 22,369 59 Cash, end of year $ 10,461 $ 31,690 $ 22,369 Cash paid during the year for: Income taxes $ 175,400 $ 48,761 $ 88,077 Interest - 51,417 - The accompanying condensed financial information should be read in conjunction with the consolidated financial statements and notes thereto of Capitol Transamerica Corporation. SCHEDULE III CAPITOL TRANSAMERICA CORPORATION SUPPLEMENTARY INSURANCE INFORMATION December 31, Deferred Future Policy Policy Benefits, Losses, Other Acquisition Claims, and Unearned Policyholde Segment Costs Loss Expense Premiums Funds 1997 Property-casualty insurance $14,186,941 $71,472,338 $47,411,849 $ - 1996: Property-casualty insurance $12,978,314 $47,702,363 $43,258,833 $ - 1995: Property-casualty insurance $ 9,228,868 $38,584,084 $31,555,728 $ - Year ended December 31 Benefits, Amortization of Net Claims, Losses, Deferred Policy Other Premium Investment and Settlement Acquisition Operating Premiums Sement Revenue Income Expenses Costs Expenses Written 1997 Property-casualty insurance $87,451,620 $ 8,580,713 $61,128,402 $26,141,226 $ 1,337,792 $99,507,846 1996: Property-casualty insurance $77,347,319 $ 7,155,382 $41,165,776 $22,801,709 $ 1,293,414 $90,939,387 1995: Property-casualty insurance $63,865,500 $ 6,635,123 $34,099,463 $18,611,260 $ 792,633 $70,878,492 SCHEDULE IV CAPITOL TRANSAMERICA CORPORATION REINSURANCE For The Years Ended December 31, l997, l996 and l995 Assumed Percentage Gross Ceded to From Assumed of Amount Premiums Other Other From Net Assumed Written Companies Companies Affiliates Amount To Net December 31, 1997 Premiums Written: Accident and Health insurance $ 273,106 $ 4,817,208 $ 2,406,951 $ 2,410,257 $ 273,106 1,763.9% Property & casualty and fidelity & surety insurance 94,417,533 3,125,843 - - 91,291,690 - Total premiums written $94,690,639 $ 7,943,051 $ 2,406,951 $ 2,410,257 $91,564,796 5.3% December 31, 1996 Premiums Written: Accident and Health insurance $ 238,615 $ - $ - $ - $ 238,615 - Property & casualty and fidelity & surety insurance 90,700,772 $ 1,696,062 $ - $ - $89,004,710 - Total premiums written $90,939,387 $ 1,696,062 $ - $ - $89,243,325 - December 31, 1995 Premiums Written: Accident and Health insurance $ 222,137 $ - $ - $ - $ 222,137 - Property & casualty and fidelity & surety insurance 70,656,355 $ 2,521,524 $ - $ - $68,134,831 - Total premiums written $70,878,492 $ 2,521,524 $ - $ - $68,356,968 - SCHEDULE VI CAPITOL TRANSAMERICA CORPORATION SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS December 31, l997 As of December 31, BALANCE SHEET DATA: 1997 1996 Deferred insurance acquisition costs $14,186,941 $12,978,314 Outstanding loss and loss adjustment expense reserves 71,472,338 47,702,363 Discount deducted from reserves - - Unearned premiums $47,411,849 $43,258,833 INCOME STATEMENT DATA: Year Ended 1997 1996 1995 Earned premiums $87,451,620 $77,347,319 $63,865,500 Net investment income 8,580,713 7,155,382 6,635,123 Incurred losses and loss adjustment expenses related to: Current year 43,042,827 36,041,564 27,244,006 Prior years 18,085,575 5,124,212 6,875,457 Amortization of deferred policy acquisition costs 26,141,2269 22,801,709 18,611,260 Paid claims and claim adjustment expenses 99,507,846 31,732,853 22,917,982 Gross premiums written $99,507,846 $90,939,387 $70,878,492
EX-27 2
7 YEAR DEC-31-1997 DEC-31-1997 74071516 0 0 145208469 0 8122638 245644042 1202548 122916 14186941 286682275 48570173 47411849 22902165 0 0 0 0 11502520 128240896 286682275 87451620 8580713 15370384 36801 61128402 27249394 1337792 21723930 6532051 15191879 0 0 0 15191879 1.36 1.35 47702363 43042827 18085575 16327601 21160666 71472338 0
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