-----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, AA/5jXtVB5219qSY309FI1YPjO6ac1tZm8/GnZxXUlTZiClFhzLeoZO0mw0DvgIN fY68bHkHRnMrmesHdNSRWQ== 0000017385-99-000002.txt : 19990402 0000017385-99-000002.hdr.sgml : 19990402 ACCESSION NUMBER: 0000017385-99-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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: 99583151 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, 1998 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 (14 1/2) and asked price (19 1/2), the aggregate market value of voting stock held by non-affiliates of the registrant as of March 12, 1999 was approximately $190,885,605. Indicate the number of shares of each of the issuer's class of common stock, as of the latest practicable date: At March 12, 1999 Common Stock, $1.00 Par Value Issued: 11,535,761 Outstanding: 11,228,565 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 17, 1999 are incorporated by reference into Part III. Total Pages: 39 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 $277 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. CIC writes a complete portfolio of fidelity and surety bonds and specialty insurance coverages, while CSIC has been largely inactive due to market conditions. CIC operates on an admitted basis in thirty-six states and on an excess/surplus 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, 1998 and 1997, 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 1998, 1997 or 1996. During 1998, 1997 and 1996, direct premiums written in Wisconsin accounted for approximately 17%, 17% and 18%, respectively, and direct premiums written in Illinois accounted for approximately 14%, 13% and 13%, respectively, of the total direct premiums written by the Company. No other states exceeded 10%. (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, 1998, CIC reported $102.9 million in surplus as regards policyholders, approximately $82.2 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 Company's ratios are substantially less than the requirement and had the company not included the excess statutory reserves over statement reserves in reporting to regulatory authorities, surplus would have been $111.9 million at December 31, 1998. 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 approximately 200 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:
1998 Gross Ceded Net Accident and Health $ 1,884,645 $1,596,313 $ 288,332 Burglary and Glass 4,897 - 4,897 Fidelity 1,172,166 50,915 1,121,251 Fire and Allied Lines 319,109 5,621 313,488 Inland Marine 828,791 714,331 114,460 Liability 9,669,318 136,386 9,532,932 Commercial Multiple Peril 49,502,961 1,914,558 47,588,403 Workers' Compensation 4,059,756 - 4,059,756 Surety 20,487,509 735,055 19,752,454 $87,929,152 $5,153,179 $82,775,973 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 - 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 & Health $ 223,193 $ - $ 223,193 Burglary and Glass 50,646 - 50,646 Fidelity 1,059,233 90,495 968,738 Fire and Allied Line 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
(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:
1998 1997 1996 Balances as of January 1, $ 71,472,338 $ 47,702,363 $ 38,584,084 Reinsurance balances (594) 225,367 (45,321) Net reserves 71,471,744 47,927,730 38,538,763 Incurred losses and loss adjustment expenses related to: Current year 49,862,090 43,042,827 36,041,564 Prior years: Direct losses (net of recoveries) 4,091,923 10,725,730 1,516,382 Direct loss adjustment expenses (net of recoveries) (1,956,631) 2,141,661 1,901,083 Discontinued assumed reinsurance 379,732 5,218,184 1,706,747 Total prior years 2,515,024 18,085,575 5,124,212 Total incurred 52,377,114 61,128,402 41,165,776 Paid losses and loss adjustment expenses related to: Current year 20,035,517 16,327,601 15,487,239 Prior years 26,370,166 21,160,666 16,245,614 Total paid 46,405,683 37,488,267 31,732,853 Other adjustments, net (40,895) (96,121) (43,956) Net balance at December 31 77,402,280 71,471,744 47,927,730 Reinsurance balances 1,101,770 594 (225,367) Balance at December 31, $ 78,504,050 $ 71,472,338 $ 47,702,363 (g) Loss Reserve Development Consolidated (in millions of dollars) Year ended: 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Reserves for losses and loss adjustment expense $ 14.2 $ 14.1 $ 14.5 $ 18.1 $ 19.3 $ 27.5 $ 38.5 $ 47.7 $ 71.5 $ 78.5 Re-estimated reserves: One year later 15.3 15.0 19.5 21.2 25.5 33.8 43.4 65.8 75.1 Two years later 16.1 18.3 21.3 23.8 31.2 37.5 57.7 65.9 - Three years later 18.1 19.9 22.7 28.3 33.5 51.4 56.2 - - Four years later 19.2 21.3 25.9 30.7 43.6 48.2 - - - Five years later 20.2 23.8 27.9 38.6 42.7 - - - - Six years later 21.8 25.6 34.7 38.0 - - - - - Seven years later 23.6 31.6 34.2 - - - - - - Eight years later 28.6 31.7 - - - - - - - Nine years later 29.1 - - - - - - - - Cumulative deficiency (14.9) (17.6) (19.7) (19.9) (23.4) (20.7) (17.7) (18.2) (3.6) Cumulative deficiency from discontinued reinsurance assumed operations (14.4) (13.8) (13.0) (11.8) (10.8) (9.7) (8.8) (7.3) (6.0) Cumulative redundancy (deficiency) from continuing operations (0.5) (3.8) (6.7) (8.1) (12.6) (11.0) (8.9) (10.9) 2.4 Cumulative amount of liability paid through: One year later 5.9 5.7 7.6 9.4 9.9 12.2 16.2 21.2 26.4 Two years later 8.7 10.1 12.7 14.1 17.2 21.4 26.6 34.6 - Three years later 12.0 13.4 15.4 18.9 23.6 27.5 34.2 - - Four years later 13.7 15.2 18.7 23.0 27.0 31.7 - - - Five years later 14.6 17.5 21.6 25.0 28.7 - - - - Six years later 15.9 19.7 22.8 26.5 - - - - - Seven years later 17.9 20.6 23.9 - - - - - - Eight years later 18.7 21.6 - - - - - - - Nine years later 19.6 - - - - - - - - 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 1998 1997 1996 State of Wisconsin: - CIC $ 77,094,939 $ 71,117,787 $ 47,458,573 - CSIC 367,612 - - Funds withheld from reinsurers, reclassified to loss reserves on a GAAP basis 408,516 447,658 489,808 Reserve for return of disability premiums, reclassified to loss reserves on a GAAP basis 24,064 18,686 14,820 GAAP adjustment to gross up reserves for the effect of reinsurance 669,190 594 (225,367) Other, net (60,271) (112,387) (35,471) Balance, December 31, on a GAAP basis $ 78,504,050 $ 71,472,338 $ 47,702,363
Item 2. Properties Capitol Transamerica Corporation leases premises in the Pyare Square building located at 4610 University Avenue, Madison, Wisconsin, 53705, as follows: Approximately 38,098 square feet occupying a portion of the 1st, 2nd, 6th, 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 1,190 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, 1998, 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, 1998. Item 5. Market Information, Dividends and Other Information On March 12, 1999, 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 1998 was a low of 15 and a high of 22 3/4 with the equivalent of 3,996,900 shares traded. Quarterly high and low quoted prices are obtained from the National Association of Securities Dealers are illustrated below.
1998 1997 Quarter High Low Dividends High Low Dividends First 22 1/4 19 3/4 $.07 27 3/8 20 1/8 $.17 Second 21 7/16 19 .07 27 1/2 19 1/4 .07 Third 22 3/4 16 3/4 .07 27 1/2 25 1/2 .07 Fourth 20 1/4 15 .07 28 1/8 21 .07 Year 22 3/4 15 $.28 28 1/8 19 1/4 $.38 For the period January 1 through March 12, 1999, the high ask price was 19 1/2 and the low bid price was 14 1/2. A regular cash dividend of $.07 per share was paid on March 26, 1999, to shareholders of record on March 12, 1999. 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 Department will be held Monday, May 17, 1555 N. RiverCenter Drive 1999, 4:00 PM at the Suite 301 Marriot Inn - Madison West Milwaukee, Wisconsin 53212 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:
1998 1997 1996 1995 1994 Gross Premiums Written $ 87,929,152 $ 99,507,846 $ 90,939,387 $ 70,878,492 $ 58,564,342 Net Premiums Written $ 82,775,973 $ 91,564,795 $ 89,243,325 $ 68,356,968 $ 56,651,941 Premiums Earned $ 88,629,476 $ 87,451,620 $ 77,347,319 $ 63,865,500 $ 52,461,456 Net Investment Income 9,119,936 8,580,713 7,155,382 6,635,123 5,359,606 Realized Investment Gains (Losses) 13,198,139 15,370,384 8,468,911 3,587,323 (106,188) Other Revenues 113,005 36,801 382,130 144,866 118,353 Total Revenues 111,060,556 111,439,518 93,353,742 74,232,812 57,833,227 Losses and Loss Adjustment Expenses Incurred 52,377,114 61,128,402 41,165,776 34,099,463 27,536,054 Underwriting and Other Expenses 30,682,454 28,587,186 26,680,657 21,497,664 17,883,570 Total Losses Incurred and Expenses 83,059,568 89,715,588 67,846,433 55,597,127 45,419,624 Income from Operations Before Income Taxes 28,000,988 21,723,930 25,507,309 18,635,685 12,413,603 Income Tax Expense 8,577,075 6,532,051 7,158,151 4,705,279 3,166,363 Consolidated Net Income $ 19,423,913 $ 15,191,879 $ 18,349,158 $ 13,930,406 $ 9,247,240 Weighted Average Number of Shares Outstanding - Basic 11,206,018 11,151,428 11,077,501 11,049,660 11,012,621 Weighted Average Number of Shares Outstanding - Diluted 11,280,442 11,285,751 11,315,758 11,190,198 11,184,566 Income Per Share - Basic $ 1.73 $ 1.36 $ 1.66 $ 1.26 $ 0.84 Income Per Share - Diluted $ 1.72 $ 1.35 $ 1.62 $ 1.24 $ 0.83 Total Cash Dividends Per Share $ 0.28 $ 0.38 $ 0.33 $ 0.24 $ 0.27 Consolidated Net Income and Cash Dividends Stated as a Ratio to Beginning Shareholders' Equity 16.2% 16.7% 23.8% 25.3% 18.6% Year End Financial Position: Assets $277,359,597 $286,682,275 $228,885,454 $176,730,156 $127,633,195 Shareholders' Investment 141,315,973 139,342,141 116,581,883 92,653,880 67,979,174 Book Value Per Share $ 12.59 $ 12.46 $ 10.50 $ 8.37 $ 6.15 Shares Outstanding 11,222,180 11,178,882 11,103,297 11,068,161 11,032,433 Insurance Operating Ratios (Statutory Basis): Losses and Loss Adjustment Expenses to Net Premiums Earned 59.4% 70.1% 53.5% 53.2% 52.3% Underwriting Expenses to Net Premiums Written 35.6% 32.1% 33.5% 32.8% 32.4% Combined Ratio 95.0% 102.2% 87.0% 86.0% 84.7% 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 37 states which writes, through its subsidiaries, both property- casualty and fidelity-surety insurance. The property-casualty segment accounts for approximately 75% of the business written while the fidelity-surety segement accounts for approximately 25% 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. Adequate premium rates continue to be of concern to the Company and the property-casualty insurance industry as a whole. Management feels strongly that rate regulators have been slow to adjust rates in response to increased claim costs from the factors noted above. This, when combined with increased compe- tition in the Company's niche market, has presented an unprecedented challenge to management. The Company has responded to this challenge with increased mar- keting efforts as well as the addition of innovative programs and alliances that should position the Company for continued expansion and profitability. OPERATING RESULTS As mentioned in the Overview, the property-casualty insurance industry is in a downward cycle. However, despite a decrease in premium writings, the Company had a profitable year in 1998. The increased claim activity that the Company experienced in 1997 has stabilized, as indicated by the decrease in the com- bined ratio. The marketing strategy of expansion into new states and the addition of compatible coverages continues to be the focus as the Company approaches the new millenium. Gross premiums written during 1998 were $87,929,152, compared with $99,507,846 in 1997 and $90,939,387 in 1996. 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 1998 totaled $88,629,476, compared with $87,451,620 and $77,347,319 in 1997 and 1996, respectively. The net un- earned premium reserve was $41,541,432, $47,411,849 and $43,258,833 at each yearend.
1998 1997 1996 Gross Premiums Written $87,929,152 $99,507,846 $90,939,387 Reinsurance Ceded 5,153,179 7,943,050 1,696,062 Net Premiums Written $82,775,973 $91,564,796 $89,243,325 Net Premiums Earned $88,629,476 $87,451,620 $77,347,319 Net Unearned Premium Reserve $41,541,432 $47,411,849 $43,258,833 The large increase in ceded premiums in 1997 and 1998 is due to a new reinsur- ance agreement entered into during 1997. CIC assumes and fully cedes certain accident and health premiums while retaining a brokerage fee. Management be- lieves 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): 1998 1997 1996 Losses and Loss Adjustment Expenses 59.4% 70.1% 53.5% Underwriting Expenses 35.6% 32.1% 33.5% Combined Ratios 95.0% 102.2% 87.0% The Companys' combined ratio continues to compare favorably with the industry average, which is projected to be 105% for the year 1998.
REINSURANCE The Company follows the customary practice of reinsuring with other companies, i.e., 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 accretion of discount. Dividends on equity securities are recorded as income on ex-dividend dates.
Investments: 1998 1997 1996 Invested Assets $238,140,592 $245,644,042 $184,801,846 Net Investment Income 9,119,936 8,580,713 7,155,382 Percent of Return to Average Carrying Value 4.5% 4.9% 5.1% Realized Gains 13,198,139 15,370,384 8,468,911 Change in Unrealized Gains $(21,787,587) $ 16,746,284 $ 12,672,783 The net decrease in unrealized gains of $21,787,587 for 1998 was comprised of a $2,214,372 increase in fixed maturities and a decrease of $24,001,959 in equity securities. Net investment income in 1998 amounted to $9,119,936, compared with $8,580,713 and $7,155,382 in 1997 and 1996, respectively. Unrealized gains were $27,722,374, $49,509,958 and $32,763,674 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 $78,504,050 at December 31, 1998 compared with $71,472,338 at December 31, 1997. This increase is a combination of giving con- sideration for increases 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 (85.9% in 1998, 85.7% in 1997 and 80.7% in 1996) 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. MARKET RISK Market risk is defined by the Securities Exchange Commission as exposure to ad- verse fluctuations in interest rates and commodity or other price changes. The Company does not invest in derivatives or similar financial instruments which are highly sensitive to market risk and which are the main focus of the new re- quirements. However, the requirements are broad enough in scope to encompass the potential impact of interest rate fluctuations on the Company's fixed in- come portfolio, as well as the potential impact of a severe drop in the stock market on the Company's common stock portfolio. The following table shows the interest rate sensitivity of the Company's fixed income investments (bonds and preferred stock) by presenting the projected im- pact of a parallel rise or decline in interest rates of 100 and 200 basis points. The interest rate fluctuation is assumed to have occurred on January 1, 1999 and remain in effect for the life of the fixed income portfolio. Basis Point Increase/(Decrease)
Current Mkt Portfolio Characteristics (200) (100) Rate 100 200 Market Value ($000's) $90,664 $87,044 $82,913 $70,576 $74,155 Mkt Value/Statement Value (%) 119.7% 114.9% 109.5% 103.7% 97.9% Effective Duration (years) 3 4 4 4 4 The valuation of the Company's common stock portfolio is subject to equity price risk. Based on a similar drop in the Dow Jones industrial average in 1998, a decrease in market prices of 10% would reduce the fair value of the Company's common stock portfolio approximately $16.5 million, from $135.4 million to $118.9 million. The Company's investment portfolio is actively managed to minimize downward price risk.
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. Over the past three years the Company has incurred approximately $2.3 million of expenses in updating its mangement system to alleviate potential year 2000 problems. This process is substantially completed, with only final testing and minor adjustments remaining. The additional expense for the testing and ad- justments is expected to be less than $100,000. As a result of these efforts, the Company is confident that the year 2000 will not cause a significant dis- ruption 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; therefore, the Company has developed a con- tingency plan in the event of a worst-case scenario. 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, 1998 and 1997. (4) Consolidated statements of income - for each of the three years in the period ended December 31, 1998. (5) Consolidated statements of shareholders' investment and compre- hensive income- for each of the three years in the period ended December 31, 1998. (6) Consolidated statements of cash flows - for each of the three years in the period ended December 31, 1998. (7) Notes to consolidated financial statements. Item 9. Disagreements of Accounting and Financial Disclosures None. Item 10. Directors and Executive Officers of CTC Part III (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 (59) 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 (72) Chairman of the Board and Mr. Fait is a director of Bank One and 2000 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 (57) Owner & President Mr. Burcalow has been Owner and President 2001 1997 Yahara Materials, Inc. of Yahara Materials, Inc. for over 30 Waunakee, Wisconsin years. Michael J. Larson (57) Retired, formerly with Mr. Larson has been associated with the 2001 1991 American National Bank banking industry in various capacities Madison, Wisconsin since 1965. Reinhart H. Postweiler(69)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 (64) Owner & Operator Mr. Urso has been in the insurance 2000 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 (72 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 (59 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 (70 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 (60 years of age) Virgiline M. Schulte (70 years Elected in 1986. old) Elected in 1993. Vice President - Agency Vice President- Data Processing Joel G. Fait (40 years of age) Frank S. Zillner (37 years old) Elected in 1993. Elected in 1993. Vice President - Rating Corporate Counsel Vacant Vacant Vice President - P & C Underwriting Vice President-F&S Underwriting Vacant Jess J. Wadle (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 9, 1999 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 9, 1999 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 9, 1999 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 9, 1999, 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, 1998 and 1997. Consolidated statements of income - for each of the three years in the period ended December 31, 1998. Consolidated statements of shareholders' investment and compre- hensive income - for each of the three years in the period end- ed December 31, 1998. Consolidated statements of cash flows - for each of the three years in the period ended December 31, 1998. 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, 1998. (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, 1999 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, 1998 and 1997, and the related consolidated statements of income, shareholders investment and compre- hensive income and cash flows for the three years in the period ended December 31, 1998. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the re- sponsibility 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, 1998 and 1997, and the consolidated re- sults of its operations and its cash flows for each of the three years in the period ended December 31, 1998, 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 19, 1999 CAPITOL TRANSAMERICA CORPORATION CONSOLIDATED BALANCE SHEETS December 31, 1998 and 1997
1998 1997 Assets Investments (Notes (1)(b) and (2)): Available-for-sale investment securities, at fair value Fixed maturities (amortized cost $68,210,546 and $69,434,974 respectively) $ 75,061,460 $ 74,071,516 Equity securities: Common stock, (cost $115,583,088 and $101,409,300, respectively) 135,373,036 145,208,469 Nonredeemable preferred stock, (cost $6,769,703 and $5,854,291, respectively) 7,851,215 6,928,541 Investment real estate, at cost, net of depreciation 9,999,919 8,122,638 Short-term investments, at cost which approximate fair value (Note(2)(d) 9,854,962 11,312,878 Total Investments 238,140,592 245,644,042 Cash 1,544,438 1,202,548 Accrued investment income 1,678,998 1,707,692 Receivables from agents, insureds and others, less allowance for doubtful accounts of $500,000 and $440,000, respectively 17,217,646 20,820,481 Balances due from reinsurers 913,186 122,916 Funds held by ceding reinsurers 35,756 - Deferred insurance acquisition costs (Note (1)(e)) 13,524,777 14,186,941 Prepaid reinsurance premiums 727,074 743,988 Due from securities brokers 1,633,833 - Income taxes recoverable 141,982 684,342 Other assets 1,801,315 1,569,325 Total Assets $277,359,597 $286,682,275 The accompanying notes to the consolidated financial statements are an integral part of these financial statements. CAPITOL TRANSAMERICA CORPORATION CONSOLIDATED BALANCE SHEETS December 31, 1998 and 1997 1998 1997 Liabilities Policy Liabilities and Accruals (Notes (1)(d), (3) and (4)): Reserve for losses $ 55,336,376 $ 48,570,173 Reserve for loss adjustment expenses 23,167,674 22,902,165 Unearned premiums 41,541,432 47,411,849 Total Policy Liabilities and Accruals 120,045,482 118,884,187 Accounts payable 3,340,980 2,822,208 Claim drafts outstanding 2,836,566 2,983,360 Due to securities brokers 231,185 5,318,372 Balances due to reinsurers 1,038,967 1,337,564 Accrued premium taxes 237,171 337,163 State income taxes payable 91,444 - Deferred income taxes (Notes (1)(f) and (5)) 8,221,829 15,657,280 Total Other Liabilities 15,998,142 28,455,947 Total Liabilities 136,043,624 147,340,134 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 11,529,376 and 11,502,520, respectively 11,529,376 11,502,520 Paid-in surplus 22,246,366 21,832,206 Accumulated other comprehensive income, net of deferred taxes of $9,702,829 & $16,833,386, respectively(Notes(1)(b)&(2) 18,019,545 32,676,572 Retained earnings 90,016,245 73,732,118 Shareholders' investment before treasury stock 141,811,532 139,743,416 Treasury stock, 307,196 and 323,638 shares, respectively, at cost (495,559) (401,275) Total Shareholders' Investment 141,315,973 139,342,141 Total Liabilities and Shareholders' Investment $277,359,597 $286,682,275 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, 1998, 1997 and 1996 1998 1997 1996 Revenues: Premiums earned (Note (1)(c)) $ 88,629,476 $ 87,451,620 $ 77,347,319 Net investment income (Note (2)(e)) 9,119,936 8,580,713 7,155,382 Realized investment gains (Notes (1)(b) and (2)) 13,198,139 15,370,384 8,468,911 Other revenues 113,005 36,801 382,130 Total Revenues 111,060,556 111,439,518 93,353,742 Losses and Expenses Incurred (Notes (1)(d), (3) and (4)): Losses incurred 43,994,221 49,055,296 29,694,168 Loss adjustment expenses incurred 8,382,893 12,073,106 11,471,608 Underwriting, acquisition and insurance expenses (Note(10)) 28,558,650 28,458,021 29,136,689 Decrease (Increase) in deferred insurance acquisition costs 662,164 (1,208,627) (3,749,446) Other expenses 1,461,640 1,337,792 1,293,414 Total Losses and Expenses Incurred 83,059,568 89,715,588 67,846,433 Income from operations before income taxes 28,000,988 21,723,930 25,507,309 Income tax expense (Note (5)) 8,577,075 6,532,051 7,158,151 Net Income $ 19,423,913 $ 15,191,879 $ 18,349,158 Income Per Share- basic (Note (1)(g)) $ 1.73 $ 1.36 $ 1.66 Weighted avg. number of shares outstanding-basic (Note (1)(g)) 11,206,018 11,151,428 11,077,501 Income Per Share- diluted (Note (1)(g)) $ 1.72 $ 1.35 $ 1.62 Weighted avg. number of shares outstanding-diluted (Note (1)(g)) 11,280,442 11,285,751 11,315,758 The accompanying notes to the consolidated financial statements are an integral part of these financial statements. CAPITOL TRANSAMERICA CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT AND COMPREHENSIVE INCOME For the Years Ended December 31, 1996, 1997 and 1998 Common Common Stock Accumulated Stock Distributable Other (Par Value) (Par Value Paid-In Comprehensive Comprehensive Retained Treasury $1.00) $1.00) Surplus Income Income Earnings Stock Balance, January 1, 1996 $ 6,899,060 $ 689,545 $20,949,100 $ - $13,259,988 $51,177,894 $ (321,707) Comprehensive income Net income - - - 18,349,518 - 18,349,158 - Other comprehensive income Unrealized appreciation on available-for-sale securities, net of deferred taxes - - - 13,953,518 - - - Less: reclassification adjust- ment, net of tax of $2,879,430 for gain included in net income - - (5,589,481) - - - Other comprehensive income - - - 8,364,037 8,364,037 - - Comprehensive income - - - 26,713,195 - - - Stock options exercised 24,106 - 165,544 - - - (15,799) Stock dividend 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) Comprehensive income Net income - - - 15,191,879 - 15,191,879 - Other comprehensive income Unrealized appreciation on available-for-sale securities, net of deferred taxes - - - 21,197,000 - - - Less: reclassification adjust- ment, net of tax of $5,225,931, for gain included in net income - - - (10,144,453) - - - Other comprehensive income - - - 11,052,547 11,052,547 - - Comprehensive income - - - 26,244,426 - - - Stock options exercised 83,678 - 542,344 - - - (63,769) Purchases and sales of treasury stock, net - - 175,218 - - - - Stock dividend 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) Comprehensive income Net income - - - 19,423,913 - 19,423,913 - Other comprehensive income Unrealized depreciation on available-for-sale securities, net of deferred taxes - - - (6,078,237) - - - Less: reclassification adjust- ment, net of tax of $4,619,349, for gain included in net income - - - (8,578,790) - - - Other comprehensive income - - - (14,657,027) (14,657,027) - - Comprehensive income - - - 4,766,886 - - - Stock options exercised 26,856 - 142,409 - - - (18,952) Purchases and sales of treasury stock, net - - 271,751 - - - (75,332) Cash dividends declared - - - - - (3,139,786) - Balance, December 31, 1998 $11,529,376 $ - $22,246,366 $ - $18,019,545 $90,016,245 $ (495,559) 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, 1998, 1997 and 1996 1998 1997 1996 Cash flows provided by operating activities: Net Income $ 19,423,913 $ 15,191,879 $ 18,349,158 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,195,955 1,018,894 805,784 Realized investment gains (13,198,139) (15,370,384) (8,468,911) Change in: Deferred insurance acquisition costs 662,164 (1,208,627) (3,749,446) Unearned premiums (5,870,417) 4,153,016 11,703,105 Allowance for doubtful accounts receivable from agents 60,000 60,000 60,000 Accrued investment income 28,694 (22,752) 33,314 Receivables from agents, insureds and others 3,542,835 (2,168,094) (6,898,262) Balances due to/from reinsurers (191,361) (284,774) (136,449) Reinsurance recoverable on paid and unpaid losses (897,506) 755,956 (151,080) Funds held by ceding reinsurers (35,756) 44,791 32,326 Income taxes payable/receivable 633,804 (2,554,594) 1,980,343 Deferred income taxes (304,896) (78,292) (68,247) Due to/from securities brokers (6,721,020) 11,191,845 (6,028,431) Prepaid reinsurance premiums 16,914 (39,840) 192,901 Other assets (5,305) 339,684 (123,731) Reserves for losses and loss adjustment expenses 7,031,712 23,769,975 9,118,279 Accounts payable 371,977 (806,814) 2,250,075 Accrued premium taxes (99,992) (225,410) 180,029 Net cash provided by operating activities 5,643,576 33,766,459 19,080,757 Cash flows provided by (used for) investing activities: Proceeds from sales of available-for-sale investments 40,484,195 44,747,214 27,579,131 Purchases of available-for-sale investments (49,573,482) (78,773,489) (49,010,584) Maturities of available-for-sale investments 7,660,719 5,064,056 6,917,920 Purchases of depreciable assets (1,080,065) (477,992) (1,279,331) Net cash used for investing activities (2,508,633) (29,440,211) (15,792,864) Cash flows provided by (used for) financing activities: Cash dividends paid (3,139,786) (4,226,165) (3,699,525) Stock options exercised 265,799 626,022 189,650 Net proceeds from sale (purchase) of treasury stock 80,934 111,449 (15,799) Net cash used for financing activities (2,793,053) (3,488,694) (3,525,674) Net (decrease) increase in cash 341,890 837,554 (237,781) Cash, beginning of year 1,202,548 364,994 602,775 Cash, end of year $ 1,544,438 $ 1,202,548 $ 364,994 Cash paid during the year for: Income taxes $ 8,358,132 $ 9,164,506 $ 5,292,665 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 37 states. The property-casualty insurance coverages represent approximately 75% of the Company's premiums written while fidelity-surety coverages represent approximately 25% 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 accretion of discounts to maturi- ty. Fixed maturities and equity securities deemed to have declines in value that are other than temporary are written down through the statement of income to carrying values equal to their estimated fair values. Investment real estate is carried at cost net of accumulated deprecia- tion of $789,597 and $444,381 as of December 31, 1998 and December 31, 1997, respectively. The real estate is depreciated over the esti- mated useful life of the asset. 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. Approximately 17% and 14% of the total premiums written are on risks located in Wisconsin and Illinois, respectively. No other state exceeds 10%. (d) Losses and Loss Adjustment Expenses Losses and loss adjustment expenses, less related reinsurance and sub- rogation recoverable, 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, and differences between estimates and ultimate payments are reflected in expense for the period in which the esti- mates are changed. (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. In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 ("SFAS 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 following table sets forth the computation of basic and diluted EPS:
December 31, 1998 1997 1996 Numerator: Consolidated net income $19,423,913 $15,191,879 $18,349,158 Denominator: Denominator for basic EPS- weighted avg shares 11,206,018 11,151,428 11,077,501 Effect of dilutive securities- employee stock options 74,424 134,323 238,257 Denominator for diluted EPS 11,280,442 11,285,751 11,315,758 Basic EPS $ 1.73 $ 1.36 $ 1.66 Diluted EPS $ 1.72 $ 1.35 $ 1.62 (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, 1998 Fixed maturities: U.S. Government bonds $ 51,204 $ 4,146 $ - $ 55,350 State, municipal and political subdivision bonds 67,339,664 6,845,376 (3,039) 74,182,001 Corporate bonds and notes 819,678 11,211 (6,780) 824,109 Total fixed maturities $ 68,210,546 $ 6,860,733 (9,819) $ 75,061,460 Equity securities: Common stock $115,583,088 $ 30,815,779 $(11,025,831) $135,373,036 Non-redeemable preferred stock 6,769,703 1,357,227 (275,715) 7,851,215 Total equity securities $122,352,791 $ 32,173,006 $(11,301,546) $143,224,251 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 (b) The amortized cost and estimated fair value of fixed maturities at December 31, 1998, 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 $ 245,000 $ 248,802 Due after one year through five years 2,763,848 2,931,642 Due after five years through ten years 7,355,359 7,940,756 Due after ten years 57,846,339 63,940,260 Total $68,210,546 $75,061,460 (c) Realized gains (losses) and change in unrealized gains (losses) for the three years ended December 31, 1998, 1997 and 1996, are as follows: 1998 1997 1996 Realized gains (losses): Fixed maturities Gross gains $ 64,575 $ 53,584 $ 88,664 Gross losses (5,040) (7,250) (36,388) Equity securities Gross gains 13,138,613 15,323,242 8,454,726 Gross losses (9) - (22,041) Other - 808 (16,050) Net realized gains $ 13,198,139 $ 15,370,384 $ 8,468,911 Change in unrealized gains (losses): Fixed maturities $ 2,214,372 $ (123,135) $ (2,416,907) Equity securities (24,001,959) 16,869,422 15,089,690 Net change in unrealized gains (21,787,587 16,746,287 12,672,783 Effect of applicable deferred taxes 7,130,560 (5,693,740) (4,308,746) Net (decrease) increase in unrealized gains $(14,657,027) $ 11,052,547 8,364,037 Following is a summary of total unrealized gains (losses) as of December 31, 1998, 1997 and 1996: 1998 1997 1996 Unrealized gains (losses): Fixed maturities Gross unrealized gains $ 6,860,733 $ 4,644,841 $ 4,785,917 Gross unrealized losses (9,819) (8,299) (26,240) Equity securities Gross unrealized gains 32,173,006 47,293,990 29,775,195 Gross unrealized losses (11,301,546) (2,420,571) (1,771,198) Gross unrealized gains 27,722,374 49,509,961 32,763,674 Effect of applicable deferred taxes (9,702,829) (16,833,389) (11,139,649) Net unrealized gains $18,019,545 $32,676,572 $21,624,025
(d) The amortized cost of securities on deposit with insurance regulators in accordance with statutory requirements was $3,670,000 on December 31, 1998 and $3,689,284 on December 31, 1997. 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 $835,000 at December 31, 1998 and $832,192 at December 31, 1997. (e) Following is a summary of investment income from each category of investments:
1998 1997 1996 Fixed maturities $ 4,619,471 $ 4,800,978 $ 4,936,902 Equity securities 3,907,213 3,292,615 2,260,094 Investment real estate 2,383,255 2,340,878 1,280,669 Short-term 186,341 149,879 119,542 Total investment income 11,096,280 10,584,350 8,597,207 Investment expenses - real estate 1,310,113 1,361,092 945,777 Other investment expenses 321,016 401,994 419,201 Depreciation on real estate 345,215 240,551 76,847 Net investment income $ 9,119,936 $ 8,580,713 $ 7,155,382
1998 1997 1996 Balance as of January 1, $71,472,338 $47,702,363 $38,584,084 Reinsurance balances (594) 225,367 (45,321) Net reserves 71,471,744 47,927,730 38,538,763 Incurred losses and loss adjustment expenses related to: Current year 49,862,090 43,042,827 36,041,564 Prior years: Direct losses (net of ceded) 4,091,923 10,725,730 1,516,382 Direct loss adjustment expenses (net of ceded) (1,956,631) 2,141,661 1,901,083 Discontinued assumed reinsurance 379,732 5,218,184 1,706,747 Total prior years 2,515,024 18,085,575 5,124,212 Total incurred 52,377,114 61,128,402 41,165,776 Paid losses and loss adjustment expenses related to: Current year 20,035,517 16,237,601 15,487,239 Prior years 26,370,166 21,160,666 16,245,614 Total paid 46,405,683 37,488,267 31,732,853 Other adjustments, net (40,895) (96,121) (43,956) Net balance at December 31, 77,402,280 71,471,744 47,927,730 Plus (less) reinsurance balances 1,101,770 594 (225,367) Balance at December 31, $78,504,050 $71,472,338 $47,702,363 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 1998, 1997 and 1996. 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 increased IBNR reserves an additional $5.9 million in 1998. While the Company has recorded its best estimate of its reserves for losses and loss adjustment expenses, it is reasonably possible these estimates, net of estimated rein- surance recoverables, may increase in the future. See Note 4(b) for discussion of assumed reinsurance.
(4) Reinsurance (a)Ceded From 1996 through 1998, the Company generally reinsured losses in excess of $1,000,000 with various other companies through reinsurance ceded contracts. These arrangements provide for greater diversification of business, allow the Company to control exposure to potential losses aris- ing from large risks, and provide additional capacity for growth. Rein- surance ceded contracts do not relieve the Company from its obligations to policyholders. The Company remains liable to its policyholders for the portion reinsured to the extent that any reinsurer does not meet the obligations assumed under the reinsurance agreements. To minimize its ex- posure 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 lia- bility 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. Management is con- fident that the reserves of $8,917,014 at December 31, 1998 are adequate, but recognizes the uncertainty industry-wide concerning these exposures. The Company has provided letters of credit relating to reinsurance as- sumed of $130,000 and $503,585 at December 31, 1998 and 1997, respec- tively. (c)Assumed - Active In 1997 the Company entered into a reinsurance program whereby CIC as- sumed and then fully ceded certain accident and health exposures. The Company receives a brokerage fee on this business and management be- lieves the Company is not likely to incur any losses on this business. Net written and earned premiums and losses and loss adjustment expenses include reinsurance activity as follows:
Written Premiums 1998 1997 1996 Direct $86,329,672 $94,690,638 $90,939,387 Assumed 1,599,480 4,817,208 - Ceded (5,153,179) (7,943,050) (1,696,062) Net premiums written $82,775,973 $91,564,796 $89,243,325 Earned Premiums 1998 1997 1996 Direct $92,203,082 $90,537,623 $79,236,282 Assumed 1,596,487 4,817,208 - Ceded (5,170,093) (7,903,211) (1,888,963) Net premiums earned $88,629,476 $87,451,620 $77,347,319 Losses and Loss Adjustment Expenses 1998 1997 1996 Direct $53,447,519 $57,314,915 $40,476,441 Assumed - losses 280,900 5,162,726 1,606,731 Assumed - legal and audit 98,832 55,458 100,016 Ceded (1,450,137) (1,404,697 (1,017,412) Net losses and loss adjustment expenses $52,377,114 $61,128,402 $41,165,776
(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 1998, 1997 and 1996 are as follows:
1998 1997 1996 Current expense: Federal $ 8,096,181 $ 6,055,422 $ 6,683,429 State 785,787 554,922 559,972 Total current expense 8,881,968 6,610,344 7,243,401 Deferred expense(benefit): Deferred insurance acquisition costs (231,757) 410,933 1,274,812 Unearned premiums 409,745 (279,696) (808,929) Discount on loss and loss adjustment expense reserves (322,034) (582,307) (315,137) Unpaid commissions (140,748) 400,699 (211,404) Other (20,099) (27,922) (24,592) Total deferred benefit (304,893) (78,293) (85,250) Income tax expense $ 8,577,075 $ 6,532,051 $ 7,158,151 (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: 1998 1997 1996 Statutory tax rate 35.0% 35.0% 35.0% Municipal bond income, net of proration (4.9%) (6.5%) (5.7%) Dividend received exemption, net of proration (1.7%) (2.0%) (1.9%) State income tax expense, net of federal tax benefit 1.7% 1.7% 1.5% Other, net 0.5% 1.9% (0.8%) Effective income tax rate 30.6% 30.1% 28.1% (d)Significant components of the deferred tax liabilities and assets are as follows: December 31, December 31, 1998 1997 Deferred tax liabilities: Deferred insurance acquisition costs $ 4,733,672 $ 4,823,560 Net unrealized gains on investment securities 9,737,421 16,833,386 Other, net 81,512 94,218 Total deferred tax liabilities 14,552,605 21,751,164 Deferred tax assets: Unearned premium reserve discounting 2,857,005 3,173,414 Loss and loss adjustment expense reserve discounting 2,571,677 2,201,277 Unpaid commissions 506,308 355,115 Other 395,786 364,078 Total deferred tax assets 6,330,776 6,093,884 Net deferred tax liability $ (8,221,829) $(15,657,280)
(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 earnings per share would not be materially different for the years 1998, 1997 and 1996. Pro forma disclosure is required and has been determined as if the Company had accounted for its stock options under this method. The fair value for these options was estimated at the date of grant using a Black-Scholes option pri- cing model with the following weighted-average assumptions for 1998, 1997 and 1996, respectively: risk-free interest rates of 4.4%, 6.3% and 6.5%; dividend yields of 1.4%, 1.2% and 2.3%; volatility factors of the expected market price for the Company's common stock of .345, .256 and .229; and a weighted-average expected life of the options of three years. The weighted- average fair value of options granted for the years 1998, 1997 and 1996 was $3.92, $5.20 and $8.44, respectively. The estimated fair value is amortized to expense over the options' vesting period. The Company's pro forma infor- mation follows:
1998 1997 1996 Pro forma net income $19,156,540 $14,871,823 $18,149,961 Pro forma earnings per share: Basic $1.71 $1.33 $1.64 Diluted $1.70 $1.32 $1.60 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 706,330 shares at December 31, 1998. A summary of the Company's stock activity, and related information for the years ended December 31 follows:
1998 1997 1996 Weighted Avg Weighted Avg Weighted Avg Options Exercise Price Options Excercise-Price Options Excercise-Price Outstanding, beginning of year 237,111 $ 11.80 327,123 $ 10.30 238,910 $ 7.30 Granted 97,900 15.75 5,700 22.44 122,319 14.40 Exercised (26,856) 6.30 (83,678) 7.48 (24,106) 5.40 Forfeited (27,231) 15.15 (12,034) 10.06 (10,000) 9.50 Outstanding, end of year 280,924 $ 13.38 237,111 $ 11.80 327,123 $ 10.30 Options currently exercisable at December 31, 1998 were 116,725. The weighted average remaining exercise period for all outstanding options as of December 31, 1998 was 2.9 years. Exercise prices for options outstanding as of December 31, 1998 ranged from $2.42 to $26.00 with 93% of these options having exercise prices between $9.20 and $15.50.
(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, 1998 1997 1996 Capitol Indemnity Corporation $102,902,836 $109,324,111 $86,880,871 Capitol Specialty Insurance Corporation 5,865,245 6,437,879 6,561,248 Total $108,768,081 $115,761,990 $93,442,119 Net Income for the Year Ended December 31, 1998 1997 1996 Capitol Indemnity Corporation $19,051,239 $13,162,055 $13,566,036 Capitol Specialty Insurance Corporation 479,019 297,036 285,640 Total $19,530,258 $13,459,091 $13,851,676
(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, 1998, the amount of compulsory surplus required to be maintained by CIC was $20,662,367. (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 $214,839, $192,738 and $165,397 in 1998, 1997 and 1996, 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 $100,000, $100,103 and $120,500 in 1998, 1997 and 1996, respectively. (10)Underwriting, Acquisition and Insurance Expenses A summary of underwriting, acquisition and insurance expenses incurred during the years ended December 31, 1998, 1997 and 1996 is as follows:
1998 1997 1996 Net commissions $18,459,299 $19,066,258 $20,629,905 Salaries and other compensation 4,710,297 4,163,019 3,714,706 Other expenses 5,389,054 5,228,744 4,792,078 Total costs 28,558,650 28,458,021 29,136,689 Decrease (Increase) in deferred insurance acquisition costs 662,164 (1,208,627) (3,749,446) Total underwriting, acquisition and insurance expenses $29,220,814 $27,249,394 $25,387,243 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 $27,833,262, $26,141,226 and $22,801,709 in 1998, 1997 and 1996, respectively.
(11)Line of Credit The Company has a line of credit of $10,000,000. There were no significant borrowings under the line of credit in 1998, and none were outstanding as of December 31, 1998. (12)Quarterly Results of Operations (Unaudited)
For the Year Ended December 31, 1998 First Second Third Fourth Total Revenues $25,467,589 $31,516,526 $25,107,417 $28,969,024 $111,060,556 Losses incurred and expenses 20,787,325 21,504,889 21,144,534 19,622,820 83,059,568 Net income 3,460,541 7,032,357 2,806,682 6,124,333 19,423,913 Net income per share- basic $ 0.31 $ 0.62 $ 0.25 $ 0.55 $ 1.73 Net income per share- diluted $ 0.31 $ 0.62 $ 0.25 $ 0.54 $ 1.72 Dividends per share $ 0.07 $ 0.07 $ 0.07 $ 0.07 $ 0.28 For the Year Ended December 31, 1997 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- duiluted $ 0.18 $ 0.06 $ 0.35 $ 0.76 $ 1.35 Dividends per share $ 0.17 $ 0.07 $ 0.07 $ 0.07 $ 0.38
(13) Industry Segment Disclosures Effective January 1, 1998 the Company adopted the Financial Accounting Standards Board's Statement of Financial Standard No. 131, "Disclosures a- bout Segments of an Enterprise and Related Information". SFAS No. 131 su- percedes SFAS No. 14, "Financial Reporting for Segments of a Business En- terprise". SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in pub- lished financial reports. It also establishes standards for related dis- closures about products and services, geographic areas, and major custo- mers. The adoption of SFAS No. 131 did not affect results of operations or financial position, but did affect the disclosures of segment information. The Company has three business segments, which are segregated based on the types of products and services provided. The segments are 1) property and casualty, 2) fidelity and surety, and 3) discontinued reinsurance assumed operations.These segments constitute 100% of the operations of the Company. The property and casualty segment provides specialty commercial coverages for beauty and barber shops, bowling alleys, contractors/manufacturers, day care centers, restaurants, detective/guard agencies, golf courses and ta- verns. This segment also provides nurses professional, deerhunters and sportsman's accident and special event coverages. The fidelity and surety segment offers a full range of surety and fidelity bonds, including con- tractor's payment and performance bonds, license/permit bonds, fiduciary and judicial bonds, as well as commercial fidelity bonds. The reinsurance assumed segment was discontinued in 1976, but due to the nature of the coverages the Company continues to experience loss activity related to this business. The Company maintains and monitors its segment information on a statutory basis. Financial data by segment, including a reconciliation to Consolidated GAAP basis, for 1996 through 1998 is as follows:
1998 1997 1996 Revenue, excluding net investment income and realized investment gains: Property and Casualty $ 65,678,284 $ 61,953,576 $ 56,560,140 Fidelity and Surety 22,948,025 25,498,044 20,786,234 Reinsurance Assumed 3,167 - 945 Totals: $ 88,629,476 $ 87,451,620 $ 77,347,319 Losses and loss adjustment expenses: Property and Casualty $ 40,400,269 $ 42,598,229 $ 33,924,353 Fidelity and Surety 11,818,682 13,531,066 5,710,164 Reinsurance Assumed 379,732 5,218,184 1,706,747 Totals: $ 52,598,683 $ 61,347,479 $ 41,341,264 Reconciliation to Consolidated GAAP: Inter-company adjustments (221,569) (219,077) (175,488) Consolidated GAAP: $ 52,377,114 $ 61,128,402 $ 41,165,776 Other underwriting expenses: Property and Casualty $ 20,226,965 $ 18,872,812 $ 19,825,337 Fidelity and Surety 9,239,049 10,524,643 10,046,062 Reinsurance Assumed 34,509 (2,825) 23,954 Totals: $ 29,500,523 $ 29,394,630 $ 29,895,353 Reconciliation to Consolidated GAAP: Decrease (increase) in D.I.A.C. 662,164 (1,208,627) (3,749,446) Inter-company adjustments 519,767 401,183 534,750 Consolidated GAAP: $ 30,682,454 $ 28,587,186 $ 26,680,657 Net investment gain and other income: Property and Casualty $ 6,742,389 $ 7,106,636 $ 4,490,999 Fidelity and Surety 692,572 727,037 295,676 Reinsurance Assumed 821,247 824,387 749,637 Totals: $ 8,256,208 $ 8,658,060 $ 5,536,312 Reconciliation to Consolidated GAAP: Capital and Surplus 13,419,217 14,465,107 9,226,166 Inter-company adjustments 755,655 864,731 1,243,945 Consolidated GAAP: $ 22,431,080 $ 23,987,898 $ 16,006,423 Income tax expense (benefit): Property and Casualty $ 3,652,050 $ 2,552,145 $ 2,499,947 Fidelity and Surety 803,964 630,081 1,818,781 Reinsurance Assumed 128,293 (1,432,002) (337,071) Totals: $ 4,584,307 $ 1,750,224 $ 3,981,657 Reconciliation to Consolidated GAAP: Capital and Surplus 4,091,130 4,623,364 3,039,847 GAAP & inter-company adjustments (98,362) 158,463 136,647 Consolidated GAAP: $ 8,577,075 $ 6,532,051 $ 7,158,151 Net income (loss): Property and Casualty $ 8,141,389 $ 5,037,026 $ 4,801,502 Fidelity and Surety 1,778,902 1,539,291 3,506,903 Reinsurance Assumed 281,880 (2,958,970) (643,048) Totals: $ 10,202,171 $ 3,617,347 $ 7,665,357 Reconciliation to Consolidated GAAP: 9,221,742 11,574,532 10,683,801 Consolidated GAAP: $ 19,423,913 $ 15,191,879 $ 18,349,158 Assets: Property and Casualty $105,614,860 $114,384,689 $ 87,184,725 Fidelity and Surety 20,432,187 22,128,793 16,866,704 Reinsurance Assumed 9,996,577 10,826,652 8,252,142 Totals: $136,043,624 $147,340,134 $112,303,571 Reconciliation to Consolidated GAAP: Capital and Surplus 141,315,973 139,342,141 116,581,883 Consolidated GAAP: $277,359,597 $286,682,275 $228,885,454 The Company operates in 37 states, with all business conducted within the United States. No customer represents greater than 10% of the Company's revenue. There have been no material intersegment transactions.
SCHEDULE I CAPITOL TRANSAMERICA CORPORATION SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES As of December 31, 1998 (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 $ 51,204 $ 55,350 $ 55,350 State, municipalities, and political subdivisions 67,339,664 74,182,001 74,182,001 All other corporate bonds 819,678 824,109 824,109 Total 68,210,546 75,061,460 75,061,460 Equity securities, available-for-sale: Common stocks: Public utilities 2,065,853 1,858,777 1,858,777 Banks, trusts, and insurance companies 67,411,592 85,409,961 85,409,961 Industrial, miscellaneous, and all other 46,105,643 48,104,298 48,104,298 Nonredeemable preferred stocks 6,769,703 7,851,215 7,851,215 Total 122,352,791 143,224,251 143,224,251 Real estate, net of depreciation 9,999,919 - 9,999,919 Short-term investments 9,854,962 - 9,854,962 Total Investments $210,418,218 218,285,711 $238,140,592 SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT CAPITOL TRANSAMERICA CORPORATION (Parent Company) CONDENSED BALANCE SHEETS December 31, Assets 1998 1997 Investments $10,749,331 $ 9,925,434 Cash 3,171 10,461 Accrued investment income 60,454 45,340 Investment in subsidiaries 129,393,891 128,967,449 Other assets 1,651,444 1,416,571 Total assets $141,858,291 $140,365,255 Liabilities and shareholders' equity Liabilities: Accounts payable $ 33,933 $ 40,717 Income taxes payable 18,338 5,461 Deferred income taxes 490,047 976,936 Total liabilities 542,318 1,023,114 Shareholders' equity: Common stock 11,529,376 11,502,520 Additional paid-in-capital 21,799,397 21,656,988 Unrealized appreciation (depreciation) on available-for- sale securities, net of deferred taxes 910,087 1,896,403 Retained earnings (including undistributed earnings of subsidiaries of $102,271,184 and $81,151,740, respectively)107,572,672 104,687,505 141,811,532 139,743,416 Less treasury stock, at cost (495,559) (401,275) Total shareholders' investment 141,315,973 139,342,141 Total liabilities and shareholders' investment $141,858,291 $140,365,255 December 31, STATEMENTS OF INCOME 1998 1997 1996 Dividends received from subsidiaries $ 5,000,000 $ 4,500,000 $ 4,200,000 Management fees received from subsidiaries 2,031,293 1,768,789 1,515,478 Investment income 350,901 270,678 272,035 Realized investment gains 13 236,914 448,156 Other income 7,100 14,577 646 Total Income 7,389,307 6,790,958 6,436,315 Administrative expenses 1,495,240 1,371,392 1,363,770 Net income before tax and equity in undistributed net income of subsidiaries 5,894,067 5,419,566 5,072,545 Income tax expense 346,794 238,511 220,197 Net income before equity in undistributed net income of subsidiaries 5,547,273 5,181,055 4,852,348 Equity in undistributed net income of subsidiaries, net of dividends paid 13,876,640 10,010,824 13,496,810 Net Income $19,423,913 $15,191,879 $18,349,158 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 1998 1997 1996 Cash flows provided by operating activities: Net income $19,423,913 $15,191,879 $18,349,158 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 850,739 778,343 728,940 Realized investment gains (13) (236,914) (448,156) Change in: Equity in net income of subsidiaries (13,876,640) (10,010,824) (13,496,810) Other assets (21,410) 671,601 (488,710) Other liabilities 6,093 (412,478) (189,618) Net cash provided by operating activitities 6,382,682 5,981,607 4,454,804 Cash flows provided by (used for) investing activities: Proceeds from investments sold/matured 70,022 471,238 1,091,372 Purchases of investments (2,367,149) (2,276,930) - Purchase of depreciable assets (1,079,278) (477,992) (1,279,331) Net cash used for investing activitities (3,376,405) (2,283,684) (187,959) Cash flows provided by (used for) financing activities: Cash dividends paid (3,163,880) (4,281,405) (3,731,375) Capital contribution to subsidiaries - - (700,000) Stock options exercised 169,265 626,022 189,650 Net proceeds from sale (purchase) of treasury stock (18,952) (63,769) (15,799) Net cash used for financing activitities (3,013,567) (3,719,152) (4,257,524) Net decrease) increase in cash (7,290) (21,229) 9,231 Cash, beginning of year 10,461 31,690 22,369 Cash, end of year $ 3,171 $ 10,461 $ 31,690 Cash paid during the year for: Income taxes $ 333,917 $ 175,400 $ 48,761 Interest 4,190 - 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 1998 Property-casualty insurance $13,524,777 $78,504,050 $41,541,432 $ - 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 $ - 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 1998 Property-casualty insurance $88,629,476 $ 9,119,936 $52,377,114 $27,833,262 $ 1,461,640 $87,929,152 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 SCHEDULE IV CAPITOL TRANSAMERICA CORPORATION REINSURANCE For The Years Ended December 31, l998, l997 and l996 Assumed Percentage Gross Ceded to From Assumed of Amount Premiums Other Other From Net Assumed Written Companies Companies Affiliates Amount To Net December 31, 1998 Premiums Written: Accident and Health insurance $ 288,332 $ 1,596,313 $ 270,803 $ 1,325,510 $ 288,332 553.6% Property & casualty and fidelity & surety insurance $86,041,340 $ 3,556,866 $ 3,167 $ - $82,487,641 0.0% Total premiums written $86,329,672 $ 5,153,179 $ 273,970 $ 1,325,510 $82,775,973 1.9% 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 - SCHEDULE VI CAPITOL TRANSAMERICA CORPORATION SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS December 31, l998 As of December 31, BALANCE SHEET DATA: 1998 1997 Deferred insurance acquisition costs $13,524,777 $14,186,941 Outstanding loss and loss adjustment expense reserves 78,504,050 71,472,338 Discount deducted from reserves - - Unearned premiums $41,541,432 $47,411,849 INCOME STATEMENT DATA: Year Ended 1998 1997 1996 Earned premiums $88,629,476 $87,451,620 $77,347,319 Net investment income 9,119,936 8,580,713 7,155,382 Incurred losses and loss adjustment expenses related to: Current year 49,862,090 43,042,827 36,041,564 Prior years 2,515,024 18,085,575 5,124,212 Amortization of deferred policy acquisition costs 27,833,262 26,141,226 22,801,709 Paid claims and claim adjustment expenses 46,405,683 37,488,267 31,732,853 Gross premiums written $87,929,152 $99,507,846 $90,939,387
EX-27 2
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