10-Q 1 0001.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. FORM 10-Q ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period ended June 30, 2000 Commission file number: 0-2047 CAPITOL TRANSAMERICA CORPORATION (CTC) (Exact name of registrant as specified in its charter) 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, $1.00 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 during the preceding twelve months (or for such shorter period that the regis- trant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Based on the closing average of the high (11 13/16) and low price (11 1/2), the aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2000 was approximately $129,174,726. Indicate the number of shares of each of the issuer's class of common stock, as of the latest practicable date: At June 30, 2000 Common Stock, $1.00 Par Value; Issued: 11,558,166 Outstanding: 11,082,014 Total Pages: 21 Securities and Exchange Commission Washington, D.C. 20549 Form 10-Q Part I Financial Information Page Consolidated Financial Statements 3 - 7 Notes to Consolidated Financial Statements 8 - 9 Management's Discussion and Analysis of Financial Condition and Results of Operations 10 - 12 Condensed Statutory Financial Statements of Insurance Subsidiaries 13 Part II Other Information Other Disclosures 15 Officers and Directors 16 Signatures 17 Exhibit 1 (Press Release) 18 - 21 2 CAPITOL TRANSAMERICA CORPORATION CONSOLIDATED BALANCE SHEETS
June 30, December 31, June 30, 2000 1999 1999 ASSETS Investments: Available-for-sale investment securities, at fair value U.S. Government bonds (amortized cost $36,729, $39,428 and $42,020, respectively) $ 38,158 $ 41,624 $ 45,297 State, municipal and political subdivision bonds (amortized cost $77,472,800, $78,855,846 and $73,514,131, respectively) 80,912,733 82,075,148 78,690,577 Corporate bonds and notes (amortized cost $1,119,485, $1,123,983 and $878,383, respectively) 1,091,332 1,093,715 849,020 Equity securities: Common stock (cost $125,727,134, $125,913,872 and $121,537,302, respectively) 114,456,520 116,656,582 137,043,056 Nonredeemable preferred stock (cost $5,809,582, $5,725,500 and $6,183,941, respectively) 5,006,663 5,695,567 7,520,735 Investment real estate, at cost, net of depreciation 10,800,128 10,540,426 10,282,768 Short-term investments, at cost which approximates fair value 2,398,329 1,982,122 3,950,315 Total Investments 214,703,863 218,085,184 238,381,768 Cash 1,121,753 1,080,435 1,128,175 Accrued investment income 1,834,048 1,927,901 1,663,726 Receivables from agents, insureds and others, (less allowance for doubtful accounts of $530,000 for each period) 20,393,815 14,892,647 19,424,051 Balances due from reinsurers 1,303,352 71,755 2,479,652 Funds held by ceding reinsurers 40,000 40,000 35,756 Federal Income taxes recoverable - 686,240 - Deferred income taxes 4,973,709 4,153,393 - Deferred insurance acquisition costs 14,060,118 12,644,189 14,115,040 Prepaid reinsurance premiums 1,558,020 1,287,627 1,047,296 Due from securities brokers 6,989,479 639,136 4,218,511 Other assets 3,044,207 2,114,074 2,234,599 Total Assets $270,022,364 $257,622,581 $284,728,574
3 CAPITOL TRANSAMERICA CORPORATION CONSOLIDATED BALANCE SHEETS
June 30, December 31, June 30, 2000 1999 1999 LIABILITIES Policy liabilities and accruals: Reserve for losses $ 54,279,583 $ 53,575,780 $ 54,619,303 Reserve for loss adjustment expenses 23,578,052 23,680,412 23,120,951 Unearned premiums 45,540,141 39,454,257 42,363,069 Total Policy Liabilities and Accruals 123,397,776 116,710,449 120,103,323 Accounts payable 3,380,360 3,950,898 3,212,105 Claim drafts outstanding 3,766,846 1,854,701 3,002,366 Due to securities brokers 201,633 - 1,009,992 Balances due to reinsurers 1,642,391 1,541,460 1,513,791 Accrued premium taxes 441,924 338,863 225,008 Federal income taxes payable 343,036 - 1,501,747 State income taxes payable 48,681 - 119,313 Deferred income taxes - - 6,414,103 Total Other Liabilities 9,824,871 7,685,922 16,998,425 Total Liabilities 133,222,647 124,396,371 137,101,748 SHAREHOLDERS' INVESTMENT Common stock, ($1.00 par value, authorized 15,000,000 shares, issued 11,558,166, 11,538,970 and 11,538,322, respectively) 11,558,166 11,538,970 11,538,322 Paid-in surplus 22,727,877 22,594,538 22,589,189 Accumulated other comprehensive income (net of deferred tax (benefit) expense of ($3,031,113), ($2,133,595) and and $7,697,519, respectively) (5,629,211) (3,962,398) 14,295,389 Retained earnings 111,085,182 103,577,193 99,699,485 Shareholders' investment before treasury stock 139,742,014 133,748,303 148,122,385 Treasury stock, (476,152, 271,071 and 268,146 shares, respectively, at cost (2,942,297) (522,093) (495,559) Total Shareholders' Investment 136,799,717 133,226,210 147,626,826 Total Liabilities and Shareholders' Investment $270,022,364 $257,622,581 $284,728,574 Book Value Per Share $ 12.34 $ 11.82 $ 13.10 Shares Outstanding 11,082,014 11,267,899 11,270,176
4 CAPITOL TRANSAMERICA CORPORATION CONSOLIDATED STATEMENTS OF INCOME
For the Six Months For the Three Months Ended June 30, Ended June 30, 2000 1999 2000 1999 REVENUES Premiums earned $ 42,080,648 $ 41,516,233 $ 21,414,099 $21,004,633 Net investment income 4,502,403 4,438,879 2,243,802 2,293,549 Realized investment gains 3,978,978 5,260,243 2,932,470 2,905,997 Other revenues 157,413 129,070 86,009 50,444 Total Revenues 50,719,442 51,344,425 26,676,380 26,254,623 LOSSES INCURRED AND EXPENSES Losses incurred 17,127,494 15,690,363 11,199,458 5,923,423 Loss adjustment expenses incurred 4,918,748 4,097,851 3,007,547 2,174,552 Underwriting, acquisition and insurance expenses 16,441,863 15,062,077 8,435,991 8,199,296 Increase in deferred insurance acquisition costs (1,415,929) (590,263) (995,722) (261,586) Other expenses 705,708 670,716 361,831 344,318 Total Losses Incurred and Expenses 37,777,884 34,930,744 22,009,105 16,380,003 Income from operations before income taxes 12,941,558 16,413,681 4,667,275 9,874,620 Income tax expense Current 3,791,729 4,958,648 1,063,266 3,134,038 Deferred 77,199 197,586 212,258 8,187 3,868,928 5,156,234 1,275,524 3,142,225 Net Income $ 9,072,630 $ 11,257,447 3,391,751 6,732,395 INCOME PER SHARE-BASIC $ 0.81 $ 1.00 $ 0.30 $ 0.60 Weighted Average Number of Shares Outstanding-Basic 11,224,260 11,230,192 11,224,260 11,230,192 INCOME PER SHARE-DILUTED $ 0.81 $ 1.00 $ 0.30 $ 0.60 Weighted Average Number of Shares Outstanding-Diluted 11,255,407 11,253,441 11,255,407 11,253,441 5 CAPITOL TRANSAMERICA CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT AND COMPREHENSIVE INCOME (LOSS) Common Accumulated Stock Other (Par Value Paid-In Comprehensive Comprehensive Retained Treasury $1.00) Surplus Income (Loss) Income (Loss) Earnings Stock Balance, January 1, 1998 $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 loss Unrealized depreciation on available-for sale securities, net of deferred taxes - - (6,078,237) - - - Less: reclassification adjustment, net of tax of $4,619,349, for gain included in net income - - (8,578,790) - - - Other comprehensive loss - - (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) Comprehensive income (loss) Net income - - 16,712,463 - 16,712,463 - Other comprehensive loss Unrealized depreciation on available-for sale securities, net of deferred taxes - - (16,662,277) - - - Less: reclassification adjustment, net of tax of $2,864,435, for gain included in net income - - (5,319,666) - - - Other comprehensive loss - - (21,981,943) (21,981,943) - - Comprehensive loss - - (5,269,480) - - - Stock options exercised 9,594 57,748 - - - (26,534) Purchases and sales of treasury stock, net - 290,424 - - - - Cash dividend declared - - - - (3,151,515) - Balance, December 31, 1999 $11,538,970 $22,594,538 $ - $(3,962,398) $103,577,193 $ (522,093) Comprehensive income Net income - - 9,072,630 - 9,072,630 - Other comprehensive income Unrealized depreciation on available-for sale securities, net of deferred taxes - - 919,523 - - - Less: reclassification adjustment, net of tax of $1,392,642, for gain included in net income - - (2,586,336) - - - Other comprehensive loss - - (1,666,813) (1,666,813) - - Comprehensive income - - 7,405,817 - - - Stock options exercised 19,196 133,339 - - - (76,250) Purchases and sales of treasury stock, net - - - - - (2,343,954) Cash dividend declared - - - - (1,564,641) - Balance, June 30, 2000 $11,558,166 $22,727,877 $ - $(5,629,211) $111,085,182 $(2,942,297) 6 CAPITOL TRANSAMERICA CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS June 30, December 31, June 30, 2000 1999 1999 Cash flows provided by (used for) operating activities: Net Income $ 9,072,630 $ 16,712,463 $ 11,257,447 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 583,576 1,161,702 534,004 Realized investment gains (3,978,978) (8,184,101) (5,260,243) Change in: Deferred insurance acquisition costs (1,415,929) 880,588 (590,263) Unearned premiums 6,085,884 (2,087,175) 821,637 Allowance for doubtful accounts receivable from agents - 30,000 30,000 Accrued investment income 93,853 (248,903) 15,272 Receivables from agents, insureds and others (5,501,169) 2,294,999 (2,236,405) Balances due to/from reinsurers 310,137 317,498 391,207 Reinsurance recoverable on paid and unpaid losses (1,440,802) 1,026,426 (1,482,849) Funds held by ceding reinsurers - (4,244) - Income taxes payable/recoverable 1,077,957 (635,702) 1,671,598 Deferred income taxes 77,202 (538,796) 197,584 Due to/from securities brokers (6,148,710) 763,512 (1,805,871) Prepaid reinsurance premiums (270,393) (560,553) (320,222) Other assets (705,913) (332,788) (395,392) Reserve for losses and loss adjustment expenses 601,443 (1,247,858) (763,796) Accounts payable 1,341,607 (371,947) 36,925 Accrued premium taxes 103,061 101,692 (12,163) Net cash provided by (used for) operating activities (114,544) 9,076,813 2,088,470 Cash flows provided by (used for) investing activities: Proceeds from sales of available-for-sale investments 12,995,673 29,718,246 20,543,045 Purchases of available-for-sale investments (10,588,065) (44,377,254) (26,506,213) Maturities of available-for-sale investments 2,179,652 8,690,009 5,078,478 Purchase of depreciable assets (599,088) (751,534) (397,605) Net cash privided by (used for) investing activities 3,988,172 (6,720,533) (1,282,295) Cash flows provided by (used for) financing activities: Cash dividends paid (1,564,641) (3,151,515) (1,574,207) Stock options exercised 76,285 40,808 61,345 Net (costs) proceeds from (purchase) sale of treasury stock (2,343,954) 290,424 290,424 Net cash used for financing activities (3,832,310) (2,820,283) (1,222,438) Net increase (decrease) in cash 41,318 (464,003) (416,263) Cash, beginning of period 1,080,435 1,544,438 1,544,438 Cash, end of period $ 1,121,753 $ 1,080,435 $ 1,128,175 Cash paid during the year for: Income taxes $ 3,429,748 $ 8,611,726 $ 4,087,024
7 CAPITOL TRANSAMERICA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000 (1) Basis of Presentation The condensed financial statements included herein of Capitol Transamerica Corporation (the "Company"), other than the Consolidated Balance Sheet as of December 31, 1999, and the Consolidated Statement of Cash Flows as of December 31, 1999, have been prepared by the Compa- ny without audit, pursuant to the rules and regulations of the Securities Exchange Commission. Certain information and footnote dis- closures normally included in financial statements prepared in accor- dance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Although the Company believes the disclosures are adequate to make the information presented not misleading, it is suggested that these con- densed financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's 1999 annual report on Form 10-K. (2) Income Per Share Basic income per share is computed by dividing net income by the weighted-average number of shares of stock outstanding during the period. Diluted income per share is computed by dividing net income by the weighted-average number of shares of common stock equivalents from options outstanding. The following table sets forth the computation of basic and diluted EPS:
June 30, Dec. 31, June 30, 2000 1999 1999 Numerator: Consolidated net income $ 9,072,630 $16,712,463 $11,257,447 Denominator: Denominator for basic EPS - weighted average shares 11,224,260 11,252,358 11,230,192 Effect of dilutive securities - employee stock options 31,147 44,931 23,249 Denominator for diluted EPS - weighted average shares 11,255,407 11,297,289 11,253,441
(3) Comprehensive Income Comprehensive income (loss) is defined as net income plus or minus other comprehensive income (loss), which for the Company, under existing accounting standards, includes unrealized gains and losses, net of income tax effects, on certain investments in debt and equity securities. Comprehensive income (loss) is reported by the Company in the Consolidated Statements of Shareholders' Investment and Comprehensive Income (Loss). (4) Income Taxes Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and the amounts used for income taxes. (5) Common Stock Options There were 19,196 options exercised during the six months ended June 30, 2000 and there were 8,946 options exercised during the six months ended June 30, 1999. For further information regarding stock options, refer to Note 6 of Notes to Consolidated Financial Statements included in the Company's 1999 annual report. (6) Dividends 2000 On May 30, 2000 a cash dividend of $.07 per share was declared to shareholders of record June 16, 2000 and paid June 28, 2000 in the amount of $775,865. On February 18, 2000, a cash dividend of $.07 per share was declared to shareholders of record March 10, 2000 and paid March 23, 2000 in the amount of $788,776. 1999 On October 20, 1999, a cash dividend of $.07 per share was declared to shareholders of record December 9, 1999 and paid December 23, 1999 in the amount of $788,560. 8 On July 23, 1999 a cash dividend of $.07 per share was declared to shareholders of record September 10,1999, and paid September 24, 1999 in the amount of $788,751. On May 13, 1999 a cash dividend of $.07 per share was declared to shareholders of record June 11, 1999, and paid June 25, 1999 in the amount of $788,708. On February 26, 1999 a cash dividend of $.07 per share was declared to shareholders of record March 12, 1999 and paid March 26, 1999 in the amount of $785,999. (7) Investments Fixed maturities and equity securities are classified as available-for- sale and, accordingly, are carried at fair value, with unrealized gains and losses reported as a separate component of shareholders' investment net of taxes. The cost of fixed maturities is adjusted for amortization of premiums and accretion of 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 income to carrying values equal to their estimated fair values. Investment real estate is carried at cost net of accumulated deprecia- tion of $1,378,314, $1,173,643 and $962,159 as of June 30, 2000, December 31, 1999 and June 30, 1999, respectively. The real estate is depreciated over the estimated useful life of the asset. Cost of investments sold is determined under the specific identifica- tion method. (8) Contingent Liabilities The Company is a defendant in certain lawsuits involving complaints which demand damages and recoveries for claims and losses alledgedly related to risks insured by the Company. In the opinion of management, such lawsuits are routine in that they result from the ordinary course of business in the insurance industry. The reserve for losses includes management's estimates of the probable ultimate cost of settling all losses involving lawsuits. (9) Industry Segment Disclosures Effective January 1, 1998, the Company adopted the Financial Account- ing Standards Board's Statement of Financial Standards No. 131, "Dis- closures about Segments of an Enterprise and Related Information." The adoption of SFAS No. 131 did not affect results of operation 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) discon- tinued reinsurance assumed operations. These segments constitute 100% of the operations of the Company. Data for each segment for interim reporting follows:
Year to Date June 30, December 31, June 30, 2000 1999 1999 Total Revenues: Property & Casualty $ 35,439,114 $ 69,183,120 $ 35,134,996 Fidelity & Surety 9,964,334 19,587,513 9,889,077 Reinsurance Assumed 390,835 727,895 424,566 Totals: $ 45,794,283 89,498,528 45,448,639 Before-tax Profit (Loss): Property & Casualty $ 3,328,671 $ 16,939,311 $ 9,711,547 Fidelity & Surety 2,332,441 (2,840,387) 244,328 Reinsurance Assumed 1,231,442 292,609 174,292 Totals: $ 6,892,554 $ 14,391,533 $ 10,130,167 Reconcilliation to Consolidated GAAP: Capital and Surplus 4,707,998 9,466,745 5,591,816 Intercompany adjustments 1,341,006 52,419 691,698 Consolidated net income before tax: $ 12,941,558 $ 23,910,697 $ 16,413,681 There has been no material change in the allocation of assets among the segments, and there has been no change in the method of measurement for the results of the segment operations.
9 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 insurance subsidiaries, both property-casualty and fidelity-surety insurance. The property-casualty segement accounts for approximately 75% of the business written while the fidelity-surety segment 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 inade- quate rates, underwriting losses and, as a result, higher combined ratios. The adequacy of premium rates is affected primarily by the severity and frequency 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 industry, the trend of increasing price competition has continued as has the number of significant natural disasters. This combination has resulted in considerable reduction in underwriting profitability for the industry as a whole. Adequate premium rates continue to be of concern to the Company and the property-casulaty 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 competition in the Company's niche market, has presented an unprecedented challenge to management. The Company has responded to this challenge with increased marketing 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 section, management believes the property- casualty insurance industry is in a downward cycle. However, due to a combination or increased marketing efforts and the re-underwriting of the Company's book of business undertaken in 1998 and 1999, the Company's operating results in the first six months of 2000 remain quite favorable. Net income decreased compared to 1999 due to a reduction in capital gains and strengthening of loss reserves. Gross premiums written increased $7.1 million, or 15.9% this year compared with the first six months of 1999, and the Company's combined ratio is at 87.6%, a level typical of Capitol Transamerica's history. Mangement is confident that the return to solid underwriting standards and increased profitability or the Company's core operations will provide a foundation for increasing shareholder value. For the six months ended June 30, 2000, gross premiums written totaled $51,758,281 compared to $44,658,675 for the same period last year. Net premiums followed suit, increasing from $42,017,648 in the first six months of 1999 to $47,896,139 in 2000,an increase of 14.0% Premiuns earned are recognized as net revenues after reduction for reinsurance ceded and after establishment of the provision for the prorata unearned por- tion of premiums written. Net premiums earned totaled $42,080,648 for the first six months of 2000 compared to $82,841,104 for the year 1999 and $41,516,233 for the first six months of 1999. The unearned premium reserve was $43,982,121, $39,454,257, and $42,363,069 at each period end.
June 30, December 31, June 30, 2000 1999 1999 Gross Premiums Written $51,758,281 $86,002,801 $44,658,675 Reinsurance Ceded 3,862,142 5,809,425 2,641,027 Net Premiums Written $47,896,139 $80,193,376 $42,017,648 Net Premiums Earned $42,080,648 $82,841,104 $41,516,233 Net Unearned Premium Reserve $43,982,121 $39,454,257 $42,363,069 10 The Company's underwriting results can be measured by reference to the com -bined 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 stated as a ratio of net premiums written. The combined ratios were as follows: June 30, December 31, June 30, Insurance Operating Ratios (Statutory Basis): 2000 1999 1999 Loss and Loss Adjustment Expenses 52.6% 54.9% 47.9% Underwriting Expenses 35.0% 37.0% 36.7% Combined Ratios 87.6% 91.9% 84.6% The Company's combined loss and expense ratios compare very favorably with the industry average, as indicated by the following chart: Year-to date Year-end Year-end 2000 1999 1998 Combined Ratios 87.6% 91.9% 95.0% Industry Average * 107.4% 110.5% 107.4% * The industry number for YTD 2000 is as of March 31, 2000.
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 oc- currences 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 securites are classified as available-for-sale and are carried at fair value. The unrealized gains and losses, net of tax, are reported as "Accumulated Other Comprehensive Income (Loss)" in the equity portion of the balance sheet. Interest and Dividend Income: Interest on fixed maturities is recorded as income 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.
June 30, December 31, June 30, Investments: 2000 1999 1999 Invested Assets $ 214,703,864 $ 218,085,184 $ 238,381,768 Net Investment Income 4,502,403 9,136,244 4,438,879 Percent of Return to Average Carrying Value 4.0% 4.2% 4.2% Realized Gains 3,978,978 8,184,101 5,260,243 Change in Unrealized Gains $ (1,666,813) $ (21,981,943) $ (5,729,466)
The net unrealized loss of $1,666,813 for the first six months of 2000 was comprised of a $144,287 unrealized gain on fixed maturities and a $1,811,100 unrealized loss on the Company's equity portfolio. Management has begun to increase its tax-free bond holdings and de-emphasize the equity portfolio, but is optimistic that the recent downturn in value of its equity investments is temporary and that the current market conditions provide an even greater opportunity to invest and build shareholder value over the long term. Net investment income in the six months of 2000 increased $63,524 over the same period last year, an increase of 1.4%. The Company holds a larger percentage of equity investments than is typical for the property-casualty industry, which leads to a comparatively low rate of return on invested assets. 11 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 loss and loss adjustment expenses reflect the Company's best esti- mate 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 reserve for loss and loss adjustment expenses were $77,857,635 as of June 30, 2000 compared with $77,740,254 as of June 30, 1999. Management continues to closely monitor the reserves for losses and loss adjustment expenses to assure adequate recognition of the ultimate liability for claims and claim expenses. 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 claims 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 (79.5%, 84.7% and 83.7% at each respective period) of the Company's assets. Cash outflow can be unpredictable for two rea- sons: first, a large portion of liabilities representing loss reserves have un- certainty regarding settlement dates; and second, there is potential for losses occurring either individually or in aggregate. As a result, the Company main- tains adequate short-term investment programs necessary to ensure the availa- bility of funds. The investment program is structured so that a forced sale li- quidation of fixed maturities should not be necessary during the course of ordi- nary business involvement and activities. The Company has no material capital expenditure commitments. YEAR 2000 In prior years the Company discussed the nature and progress of its plans to become year 2000 ready. In 1999 the Company completed its remediation and testing of systems. As a result of the planning and implementation efforts, the Company experienced no significant disruption in mission critical inform- ation technology and non-information technology systems and believes those systems successfully responded to the year 2000 date change. The Company expensed approximately $90,000 during 1999 in connection with remediating its systems. The Company is not aware of any material problems resulting from year 2000 issues, either with our products, our internal systems or the products and services of third parties. The Company will continue to monitor its mission critical computer applications and those of its agents and vendors throughout the year 2000 to ensure that any latent year 2000 matters that may arise are addressed promptly. SAFE HARBOR STATEMENT Some of the statements in this report, as well as statements by the Company in periodic press releases and oral statements made by the Company's officials to analysts and shareholders in the course of presentations about the Company, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform act of 1995. Such forward-looking statements involve known and unknown risks, estimates subject to change in circumstances, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially differ- ent from any future results, performance or achievements expressed or implied by the forward-looking statements. 12 INSURANCE SUBSIDIARY FINANCIAL STATEMENTS Statutory Basis as Reported to State Regulatory Authorities June 30, 2000, December 31, 1999 and June 30, 1999 CAPITOL INDEMNITY CORPORATION June 30, December 31, June 30, Balance Sheets 2000 1999 1999 ASSETS Cash and Invested Assets $ 203,180,898 $204,375,352 $220,168,054 Other Assets 31,428,022 16,790,134 24,231,724 Total Assets $ 234,608,920 $221,165,486 $244,399,778 LIABILITIES Reserves for Losses and Loss Expenses $ 77,492,685 $ 77,044,646 $ 74,883,066 Unearned Premiums 43,982,121 38,166,630 41,315,773 Other Liabilities 16,665,793 14,383,974 18,719,403 Total Liabilities 138,140,599 129,595,250 134,918,242 SURPLUS AS REGARDS POLICYHOLDERS Shareholder's Equity 96,468,321 91,570,236 109,481,536 Total Liabilities and Capital $ 234,608,920 $221,165,486 $244,399,778 Statements of Income Premiums Earned $ 42,080,648 $ 82,841,104 $ 41,516,233 Underwriting Deductions 39,231,150 75,368,177 35,678,044 Net Underwriting Gain 2,849,498 7,472,927 5,838,189 Investment Income Including Sales 8,264,815 15,876,984 9,395,688 Other Income 156,818 247,184 128,534 Dividends to Policyholders - 363,074 - Income Tax Expense 3,508,842 6,927,999 4,637,377 Net Income $ 7,762,289 $ 16,306,022 $ 10,725,034 CAPITOL SPECIALTY INSURANCE CORPORATION Balance Sheets ASSETS Cash and Invested Assets $ 4,325,909 $ 4,648,359 $ 5,444,508 Other Assets 213,128 224,846 81,624 Total Assets $ 4,539,037 $ 4,873,205 $ 5,526,132 LIABILITIES Reserves for Losses and Loss Expenses $ - $ - $ - Unearned Premiums - - - Other Liabilities 7,713 7,711 193,046 Total Liabilities 7,713 7,711 193,046 SURPLUS AS REGARDS POLICYHOLDERS Shareholder's Equity 4,531,324 4,865,494 5,333,086 Total Liabilities and Capital $ 4,539,037 $ 4,873,205 $ 5,526,132 Statements of Income Premiums Earned $ - $ - $ - Underwriting Deductions 3,645 6,659 7,040 Net Underwriting (Loss) Gain (3,645) (6,659) (7,040) Investment Income Including Sales 130,373 950,853 813,810 Other Income - - - Income Tax Expense 12,541 255,061 244,097 Net Income $ 114,187 $ 689,133 $ 562,673
13 PART II 14 Other Disclosures Item 1. Legal Proceedings Reference is made to footnote number 8 "Contingent Liabilities" on Page 9 of this report. Item 2. Changes in Securities and Use of Proceeds NONE Item 3. Defaults Upon Senior Securities NONE Item 4. Submission of Matters to a Vote of Security Holders Reference is made to the Notice of Annual Meeting of Shareholders and Proxy Statement for the Annual Meeting of Shareholders which was held May 15, 2000, both of which are dated April 7, 2000 and previously filed with the Securities and Exchange Commission and are incorporated herein as an exhibit by reference. Item 5. Other Information NONE Item 6. Exhibits and Reports on Form 8-K NONE 15 CAPITOL TRANSAMERICA CORPORATION Subsidiaries Capitol Indemnity Corporation Capitol Specialty Insurance Corporation Capitol Facilities Corporation Board of Directors Paul J. Breitnauer Michael J. Larson Vice President and Treasurer Principal Capitol Transamerica Corporation Southwestern Financial Services De Forest, Wisconsin Madison, Wisconsin Larry Burcalow Reinhart H. Postweiler Owner and President Retired-formerly with Yahara Materials, Inc. Flad Affiliated Corporation Middleton, Wisconsin Madison, Wisconsin George A. Fait Kenneth P. Urso Chairman of the Board Owner and Operator and President Urso and Associates, LLC Capitol Transamerica Corporation Middleton, Wisconsin Madison, Wisconsin Officers George A. Fait Virgiline M. Schulte Chairman of the Board and President Secretary Paul J. Breitnauer Jane F. Endres Vice President and Treasurer Assistant Secretary 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the under- signed thereunto duly authorized. CAPITOL TRANSAMERICA CORPORATION George A. Fait Chairman of the Board and President Paul J. Breitnauer Vice President and Treasurer Date: August 11, 2000 17 EXHIBIT I CAPITOL TRANSAMERICA CORPORATION FOR IMMEDIATE RELEASE Contact: Paul Breitnauer Phone (608) 232-0402 CAPITOL TRANSAMERICA CORPORATION REPORTS RECORD PREMIUMS WRITTEN VOLUME Madison, Wisconsin, July 28, 2000- Capitol Transamerica Corporation (NASDAQ: CATA) reported a 15.9% written premium increase from $44.7 million to $51.8 million for the six months ended June 30, 2000 over the 1999 period. Improved marketing efforts, expanded insurance programs, and small rate in- creases in certain business lines were the main reasons for the increase. The $51.8 million written premium level represents a new six-month high for the Company, exceeding the previous mark of $47.4 million by nearly 10%. Gross written premiums for the three months ended June 30, 2000 was $28.4 million, also representing record volume, and $3.1 million or 12.1% higher than that of the second quarter of 1999. Operating earnings (excluding after-tax realized investment gains) for the first six months of 2000 were $6.5 million or $0.58 per share (diluted unless otherwise noted) vs. $7.8 million or $0.70 per share for the same period in 1999. For the second quarter, 2000 operating earnings were $1.5 million or $0.13 per share compared with 1999 figures of $4.8 million or $0.43 per share. Year-to-date earnings for the six months ending June 30, including $2.6 million of after tax realized investment gains, were $9.1 million or $0.81 per share. This compares with earnings of $11.3 million or $1.00 per share, including $3.4 million of after tax realized investment gains, for the same period in 1999. For the quarter ended June 30, earnings were $3.4 million or $0.31 per share compared with second quarter 1999 earnings or $6.7 million or $0.60 per share. Despite higher second quarter claims and claims expenses, the Company's statutory combined loss and expense ratio for the first six months of 2000 was 87.6%. This ratio compares favorably to the industry-wide average, which stood at 107.4% as of March 31, 2000. The Company has consistently been lower than the industry average including combined ratios of 91.9% vs. 110.5% for calendar year 1999 and 95.0% vs. 107.4% for calendar year 1998. With total shareholders' equity of $136.8 million at June 30, book value per share on shares outstanding increased to $12.34 from the December 31, 1999 book value of $11.82. The Company continued its regular dividend payment of $0.07 per outstanding share during the second quarter. 18 Commenting on the results, Chairman George A. Fait stated that "The increase in premiums written this year reflects continued positive news for the Company and its shareholders. The record volume level of over $50 million in written premium through six months brings with it challenges to maintain our historical low loss ratios. With second quarter claims volume being higher than expected, management continues to focus on obtaining positive underwriting results and is vigorously investigating and managing claims activity. With the future benefit of the increasing written premium volume turning into top line earned premium growth as well as our other ongoing profitability efforts, we anticipate significantly improved earnings for the second half of the year and beyond." Capitol Transamerica Corporation is an insurance holding company operating a national insurance business writing specialty lines of commercial property and casualty policies as well as fidelity and surety coverages through its sub- sidiary insurance companies Capitol Indemnity Corporation and Capitol Specialty Insurance Corporation. A third subsidiary, Capitol Facilities Corporation, pro- vides premium financing for the insurance companies. The Capitol Transamerica Group operates in 37 states and is rated A+ (Superior) by A.M. Best Company, Inc., an independent organization that analyzes the insurance industry. The Company's website is www.captrans.com. With 11.1 million shares outstanding, Capitol Transamerica's common stock is traded on the NASDAQ Stock Exchange under the symbol CATA. FINANCIAL HIGHLIGHTS FOLLOW 19 CAPITOL TRANSAMERICA CORPORATION SELECTED FINANCIAL DATA CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share)
Six months ended Three months ended June 30, June 30, 2000 1999 2000 1999 REVENUES Gross premiums written $ 51,578 $ 44,659 $ 28,393 $ 25,323 Net premiums written 47,896 42,018 25,948 24,044 Net premiums earned $ 42,081 $ 41,516 21,414 21,004 EXPENSES Claims and claim expenses 22,046 19,788 14,207 8,098 Other underwriting expenses 15,732 15,143 7,802 8,282 Total Losses and Expenses Incurred 37,778 34,931 22,009 16,380 Underwriting income (loss) 4,303 6,585 (595) 4,624 Investment income 4,503 4,439 2,244 2,294 Realized investment gains 3,979 5,260 2,933 2,906 Other income 157 129 86 50 Income Before Income Tax 12,942 16,413 4,668 9,874 Income tax expense 3,869 5,156 1,276 3,142 NET INCOME $ 9,073 $ 11,257 3,392 6,732 EARNINGS PER SHARE- BASIC $ 0.81 $ 1.00 $ 0.31 $ 0.60 EARNINGS PER SHARE- DILUTED $ 0.81 $ 1.00 $ 0.31 $ 0.60 COMPARATIVE FINANCIAL HIGHLIGHTS- Six Months Ended June 30, 2000 1999 1998 1997 1996 Per Share Information Income per share- diluted $ 0.81 $ 1.00 $ 0.93 $ 0.24 $ 0.67 Consolidated net income $ 9,073 $ 11,257 $ 10,493 $ 2,664 $ 7,432 Weighted average number of shares outstanding -diluted 11,255 11,253 11,243 11,111 11,066 Book value per share $ 12.34 $ 13.10 $ 12.95 $ 11.18 $ 8.89 Shareholders' investment $ 136,800 $ 147,627 $ 145,307 $ 124,692 $ 98,457 Dividends paid $ 1,585 $ 1,583 $ 1,581 $ 2,699 $ 2,222 Company Statistics: Gross premiums written $ 51,758 $ 44,659 $ 46,464 $ 47,449 $ 43,653 Net investment income $ 4,503 $ 4,439 $ 4,583 $ 4,120 $ 3,497 Cash and invested assets $ 215,826 $ 239,510 $ 243,858 $ 208,948 $ 158,308 Total assets $ 270,022 $ 284,729 $ 288,942 $ 252,218 $ 191,135 Insurance Operating Ratios, Statutory Basis: Loss and loss adjustment expenses: 52.6% 47.9% 60.4% 61.9% 50.8% Underwriting expenses 35.0% 36.7% 33.7% 34.8% 32.2% Combined ratios 87.6% 84.6% 94.1% 96.7% 83.0% 20 CAPITOL TRANSAMERICA CORPORATION SELECTED FINANCIAL DATA BALANCE SHEETS (in thousands, except per share) June 30, December 31, June 30, 2000 1999 1999 ASSETS Investments Available-for-sale investments at fair value U.S. Government bonds (cost $37, $39 and $42, respectively) $ 38 $ 42 $ 45 State and municipal bonds (cost $77,473, $78,856 and $73,514, respectively) 80,913 82,075 78,691 Corporate bonds (cost $1,119, $1,124 and $878, respectively) 1,091 1,094 849 Common stock (cost $125,727, $125,914 and $121,537, respectively) 114,457 116,657 137,043 Preferred stock (cost $5,810, $5,726 and $6,184, respectively) 5,007 5,695 7,521 Investment real estate 10,800 10,540 10,283 Short-term investments 2,398 1,982 3,950 Total Investments 214,704 218,085 238,382 Cash 1,122 1,081 1,128 Receivables 35,494 22,299 27,786 Other assets 18,702 16,086 17,433 TOTAL ASSETS $270,022 $257,551 $284,729 LIABILITIES Reserves for losses and loss adjustment expenses $ 77,858 $ 77,256 $ 77,740 Unearned premiums 45,540 39,454 42,363 Other liabilities 9,824 7,614 16,999 TOTAL LIABILITIES $133,222 $124,324 $137,102 SHAREHOLDERS' EQUITY Common stock, $1.00 par value, authorized 15,000 shares, issued 11,558, 11,536 and 11,538, respectively $ 11,558 $ 11,536 $ 11,538 Paid-in surplus 22,728 22,571 22,589 Accumulated other comprehensive (loss) income, net of deferred taxes of ($3,031), ($2,134) and $7,698, respectively (5,629) (3,962) 14,295 Retained earnings 111,085 103,577 99,700 Less treasury stock, 476, 271, and 268 shares, respectively, at cost (2,942) (495) (495) TOTAL SHAREHOLDERS' EQUITY 136,800 133,227 147,627 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $270,022 $257,551 $284,729 SHAREHOLDERS' EQUITY PER SHARE $ 12.34 $ 11.82 $ 13.10 SHARES OUTSTANDING 11,082 11,268 11,270 21