-----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, QAdBhaCfrpsVVa469XPoi7+y1nTIGSoyjM7GHiiZzbXxy6NOsyGUS90tTqttB/RA MFbdQJRPtBaa162qimMlaQ== 0000017385-99-000006.txt : 19991117 0000017385-99-000006.hdr.sgml : 19991117 ACCESSION NUMBER: 0000017385-99-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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-Q SEC ACT: SEC FILE NUMBER: 000-02047 FILM NUMBER: 99754743 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-Q 1 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 September 30, 1999 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 (14) and low price (13 3/4), the aggregate market value of voting stock held by non-affiliates of the registrant as of September 30, 1999 was approximately $156,341,682. Indicate the number of shares of each of the issuer's class of common stock, as of the latest practicable date: At September 30, 1999 Common Stock, $1.00 Par Value; Issued: 11,536,015 Outstanding: 11,267,869 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 and Exhibits Other Disclosures 15 Officers and Directors 16 Signatures 17 Exhibit 1 (Press Release) 18 - 21 CAPITOL TRANSAMERICA CORPORATION CONSOLIDATED BALANCE SHEETS
September 30, December 31, September 30, 1999 1998 1998 ASSETS Investments: Available-for-sale investment securities, at fair value U.S. Government bonds (amortized cost $42,796, $51,204 and $52,720, respectively) $ 43,558 $ 55,350 $ 57,391 State, municipal and political subdivision bonds (amortized cost $77,683,184, $67,339,664 and $66,286,975, respectively) 81,875,444 74,182,001 72,148,464 Corporate bonds and notes (amortized cost $876,194, $819,678 and $818,920, respectively) 849,020 824,109 808,249 Equity securities: Common stock (cost $124,591,142, $115,583,088 and $118,084,192, respectively) 119,873,972 135,373,036 130,822,167 Nonredeemable preferred stock (cost $5,975,500, $6,769,703 and $6,769,703, respectively) 6,153,673 7,851,215 7,486,878 Investment real estate, at cost, net of depreciation 10,326,864 9,999,919 9,027,774 Short-term investments, at cost which approximates fair value 1,553,764 9,854,962 1,106,541 Total Investments 220,676,295 238,140,592 221,457,464 Cash 858,085 1,544,438 398,876 Accrued investment income 1,917,218 1,678,998 1,755,114 Receivables from agents, insureds and others, less allowance for doubtful accounts of $530,000, $500,000 and $485,000, respectively 16,843,834 17,217,646 19,675,881 Balances due from reinsurers 155,328 913,186 1,045,722 Funds held by ceding reinsurers 35,756 35,756 43,235 Deferred insurance acquisition costs 13,785,484 13,524,777 13,300,265 Prepaid reinsurance premiums 1,151,179 727,074 694,050 Due from securities brokers 3,435,821 1,633,833 3,196,066 Income taxes recoverable- current 1,071,876 141,982 1,662,027 Income taxes recoverable- deferred 1,721,476 - - Other assets 2,373,758 1,801,315 2,042,036 Total Assets $264,026,110 $277,359,597 $265,270,736
CAPITOL TRANSAMERICA CORPORATION CONSOLIDATED BALANCE SHEETS
September 30, December 31, September 30, 1999 1998 1998 LIABILITIES Policy liabilities and accruals: Reserve for losses $ 52,981,090 $ 55,336,376 $ 62,485,472 Reserve for loss adjustment expenses 24,636,275 23,167,674 14,535,800 Unearned premiums 40,912,754 41,541,432 44,444,124 Total Policy Liabilities and Accruals 118,530,119 120,045,482 121,465,396 Accounts payable 4,063,395 3,340,980 2,669,044 Claim drafts outstanding 3,550,135 2,836,566 3,146,577 Due to securities brokers 903,677 231,185 - Balances due to reinsurers 1,318,840 1,038,967 1,610,463 Accrued premium taxes 271,889 237,171 710,914 Income taxes payable - 91,444 - Deferred income taxes - 8,221,829 4,976,548 Total Other Liabilities 10,107,936 15,998,142 13,113,546 Total Liabilities 128,638,055 136,043,624 134,578,942 SHAREHOLDERS' INVESTMENT Common stock, $1.00 par value, authorized 15,000,000 shares, issued 11,536,015, 11,529,376 and 11,526,008, respectively 11,536,015 11,529,376 11,526,008 Paid-in surplus 22,570,682 22,246,366 22,219,099 Accumulated other comprehensive (loss) income, net of deferred taxes of ($129,901), $9,702,829 and $6,565,618, respectively (241,248) 18,019,545 12,745,021 Retained earnings 102,018,165 90,016,245 84,677,582 Shareholders' investment before treasury stock 135,883,614 141,811,532 131,167,710 Treasury stock, 268,146, 307,196 and 305,592 shares, respectively, at cost (495,559) (495,559) (475,916) Total Shareholders' Investment 135,388,055 141,315,973 130,691,794 Total Liabilities and Shareholders' Investment $264,026,110 $277,359,597 $265,270,736 Book Value Per Share $ 12.02 $ 12.59 $ 11.65 Shares Outstanding 11,267,869 11,222,180 11,220,136
CAPITOL TRANSAMERICA CORPORATION CONSOLIDATED STATEMENTS OF INCOME
For the Nine Months For the Three Months Ended September 30, Ended September 30, 1999 1998 1999 1998 REVENUES Premiums earned $ 62,485,746 $ 67,554,605 $ 20,969,513 $ 22,740,074 Net investment income 6,738,773 6,891,630 2,299,894 2,308,857 Realized investment gains 7,796,106 7,569,431 2,535,863 31,528 Other revenues 181,010 75,866 51,940 26,958 Total Revenues 77,201,635 82,091,532 25,857,210 25,107,417 LOSSES INCURRED AND EXPENSES Losses incurred 25,412,081 33,616,060 9,721,718 10,631,024 Loss adjustment expenses incurred 7,747,385 6,345,384 3,649,534 2,385,866 Underwriting, acquisition and insurance expenses 22,487,587 21,517,086 7,425,510 7,246,122 (Increase) decrease in deferred insurance acquisition costs (260,707) 886,676 329,556 497,164 Other expenses 1,005,284 1,071,542 334,568 384,358 Total Losses Incurred and Expenses 56,391,630 63,436,748 21,460,886 21,144,534 Income from operations before income taxes 20,810,005 18,654,784 4,396,324 3,962,883 Income tax expense (benefit) Current 6,555,699 5,768,167 1,597,051 1,437,722 Deferred (110,574) (412,963) (308,160) (281,521) 6,445,125 5,355,204 1,288,891 1,156,201 Net Income $ 14,364,880 $ 13,299,580 $ 3,107,433 $ 2,806,682 INCOME PER SHARE - BASIC $ 1.28 $ 1.19 $ 0.28 $ 0.25 Weighted Average Number of Shares Outstanding - Basic 11,241,710 11,193,710 11,241,710 11,193,710 INCOME PER SHARE - DILUTED $ 1.27 $ 1.18 $ 0.28 $ 0.25 Weighted Average Number of Shares Outstanding - Diluted 11,271,876 11,269,398 11,271,876 11,269,398 CAPITOL TRANSAMERICA CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS INVESTMENT AND COMPREHENSIVE INCOME Accumu- Common lated Common Stock Other Stock Distributable Compre- Compre- (Par Value (Par Value Paid-In hensive hensive Retained Treasury $1.00) $1.00) Surplus Income Income Earnings Stock Balance, January 1, 1997 $ 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 (loss) 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 adjust- ment, 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) Compehensive income (loss) Net income - - - 14,364,880 - 14,364,880 - Other comprehensive loss Unrealized depreciation on available-for sale securities, net of deferred taxes - - - (13,193,324) - - - Less: reclassification adjust- ment, net of tax of $2,728,637, for gain included in net income - - - (5,067,469) - - - Other comprehensive loss - - - (18,260,793) (18,260,793) - - Comprehensive loss - - - (3,895,913) - - - Stock options exercised 6,639 - 33,892 - - - - Purchases and sales of treasury stock, net - - 290,424 - - - - Cash dividends declared - - - - - (2,362,960) - Balance, September 30, 1999 $11,536,015 - $22,570,682 - $ (241,248)$102,018,165 $(495,559) CAPITOL TRANSAMERICA CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS September 30, December 31, September 30, 1999 1998 1998 Cash flows provided by operating activities: Net Income $14,364,880 $ 19,423,913 $ 13,299,580 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 815,254 1,195,955 874,968 Realized investment gains (7,796,106) (13,198,139) (7,569,431) Change in: Deferred insurance acquisition costs (260,707) 662,164 886,676 Unearned premiums (628,678) (5,870,417) (2,967,725) Allowance for doubtful accounts receivable from agents 30,000 60,000 45,000 Accrued investment income (238,220) 28,694 (47,422) Receivables from agents, insureds and others 343,812 3,542,835 1,099,600 Balances due to/from reinsurers 271,121 (191,361) (98,483) Reinsurance recoverable on paid and unpaid losses 766,610 (897,506) (551,424) Funds held by ceding reinsurers - (35,756) (43,235) Income taxes payable (1,021,338) 633,804 (977,685) Deferred income taxes (110,575) (304,896) (412,964) Due to/from securities brokers (1,129,496) (6,721,020) (8,514,438) Prepaid reinsurance premiums (424,105) 16,914 49,938 Other assets (612,445) (5,305) (283,432) Reserve for losses and loss adjustment expenses (886,685) 7,031,712 5,548,934 Accounts payable 1,435,984 371,977 10,053 Accrued premium taxes 34,718 (99,992) 373,751 Net cash provided by operating activities 4,954,024 5,643,576 722,261 Cash flows provided by (used for) investing activities: Proceeds from sales of available-for-sale investments 27,319,608 40,484,195 34,622,530 Purchases of available-for-sale investments (36,970,188) (49,573,482) (39,467,991) Maturities of available-for-sale investments 6,555,425 7,660,719 6,141,837 Purchase of depreciable assets (513,217) (1,080,065) (803,933) Net cash used for investing activities (3,608,372) (2,508,633) 492,443 Cash flows provided by (used for) financing activities: Cash dividends paid (2,362,960) (3,139,786) (2,354,116) Stock options exercised 40,531 150,314 410,381 Net proceeds from sale of treasury stock 290,424 196,419 (74,641) Net cash used for financing activities (2,032,005) (2,793,053) (2,018,376) Net (decrease) increase in cash (686,353) 341,890 (803,672) Cash, beginning of period 1,544,438 1,202,548 1,202,548 Cash, end of period $ 858,085 $ 1,544,438 $ 398,876 Cash paid during the year for: Income taxes $ 8,377,064 $ 8,358,132 $ 6,885,845
CAPITOL TRANSAMERICA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1999 (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, 1998, and the Consolidated Statement of Cash Flows as of December 31, 1998, 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 1998 annual report on Form 10-K. (2) Income Per Share Net income per share is computed by dividing net income by the weighted average number of shares of stock outstanding during the period. In 1997, the Financial Accounting Standards Board issued Statement of Financial Standards No. 128 (SFAS 128), "Earnings per Share," which re- places 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:
September 30, Dec. 31, September 30, 1999 1998 1998 Numerator: Consolidated net income $14,364,880 $19,423,913 $13,299,580 Denominator: Denominator for basic EPS - weighted average shares 11,241,710 11,206,018 11,193,710 Effect of dilutive securities - employee stock options 30,166 74,424 75,688 Denominator for diluted EPS 11,271,876 11,280,442 11,269,398
(3) Income Taxes Deferred income taxes reflect the net tax effects of temporary differ- ences between the carrying amounts of assets and liabilities for finan- cial statement purposes and the amounts used for income taxes. (4) Common Stock Options There were 6,639 options exercised during the nine months ended Sep- tember 30, 1999 and there were 23,488 options exercised during the nine months ended September 30, 1998. For further information regarding stock options, refer to Note 6 of Notes to Consolidated Financial Statements included in the Company's 1998 annual report. (5) Dividends 1999 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. 1998 On October 21, 1998 a cash dividend of $.07 per share was declared to shareholders of record December 4, 1998 and paid December 18, 1998 in the amount of $785,669. On July 24, 1998 a cash dividend of $.07 per share was declared to shareholders of record September 11, 1998 and paid September 25, 1998 in the amount of $785,410. On April 29, 1998 a cash dividend of $.07 per share was declared to shareholders of record June 12, 1998 and paid June 26, 1998 in the amount of $785,191. On February 27, 1998 a cash dividend of $.07 per share was declared to shareholders of record March 13, 1998 and paid March 27, 1998 in the amount of $783,327. (6) 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 $1,047,699, $789,597 and $705,748 as of September 30, 1999, December 31, 1998 and September 30, 1998, 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. (7) 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. (8) Industry Segment Disclosures Effective January 1, 1998 the Company adopted the Financial Accounting 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 operations or financial position, but did affect the disclosures of segment inform- ation. 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 as required for interim reporting follows:
Year to Date September 30, December 31, September 30, 1999 1998 1998 Total Revenues: Property & Casualty $ 52,407,467 $ 72,420,673 $ 54,012,830 Fidelity & Surety 14,994,117 23,640,597 18,317,155 Reinsurance Assumed 599,351 824,414 527,477 Totals: $ 68,000,935 $ 96,885,684 $ 72,857,462 Before-tax Profit (Loss): Property & Casualty $ 9,470,258 $ 11,793,098 $ 9,605,930 Fidelity & Surety 1,863,266 2,582,866 626,710 Reinsurance Assumed 342,693 410,173 272,743 Totals: $ 11,676,217 $ 14,786,137 $ 10,505,383 Reconciliation to Consolidated GAAP: Capital and Surplus 7,842,507 12,817,913 8,232,783 Inter-company Adjustments 1,291,281 396,938 (83,382) Consolidated net income before-tax:$ 20,810,005 $ 28,000,988 $ 18,654,784
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. 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 cylcles 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 award- ing against insurance companies. Unfortunately for the insurance industry, the trend of increasing price competition has continued as has the number of signi- ficant natural disasters. This combination has resulted in considerable reduct- ion in underwriting profitability for the industry as a whole. Adequate premium rates continue to be of concern to the Company and the proper- ty-casualty insurance industry as a whole. Mangement 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 Companys' niche market, has presented an unprecedented challenge to manage- ment. The Company has responded to this challenge with increased marketing ef- forts 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 belives that the property- casualty insurance industry is in a downward cycle. The continuing price com- petition as well as a re-underwriting of the Company's book of business has led to a slight decrease in premium writings through the nine months of 1999. While management cannot anticipate when or if the price competition might abate, it is confident that the increased marketing efforts, combined with the implemen- tation of new coverages, will restore premium production to the upward trend seen historically. For the nine months ended September 30, 1999, gross premiums written totaled $65,473,654, down 4.0% over the $68,227,907 written in the first nine months of 1998. The new programs begun by the Company are just beginning to influence premium totals, and as they become fully implemented premium results should be- come much more favorable. 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 totaled $62,485,746, $88,629,476 and $67,554,605 for the respective periods, and net unearned premiums were $40,912,754, $41,541,432 and $44,444,124 at each respective period.
September 30, December 31, September 30, 1999 1998 1998 Gross Premiums Written $65,473,654 $87,929,152 $68,227,907 Reinsurance Ceded 4,040,692 5,153,179 3,591,089 Net Premiums Written $61,432,962 $82,775,973 $64,636,818 Net Premiums Earned $62,485,746 $88,629,476 $67,554,605 Net Unearned Premium Reserve $40,912,754 $41,541,432 $44,444,124 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 adjust- ment 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: September 30, December 31, September 30, Insurance Operating Ratios (Statutory Basis): 1999 1998 1998 Loss and Loss Adjustment Expenses 53.3% 59.4% 59.4% Underwriting Expenses 37.5% 35.6% 34.4% Combined Ratios 90.8% 95.0% 93.8% The increased claim activity that the Company experienced in 1997 and 1998 has stabilized, as indicated by a decrease in the loss and loss adjustment expense portion of the combined ratio. The underwriting expense portion of the ratio in- creased slightly due mostly to the decrease in the denominator, which is net premiums written. The Company's combined ratio continues to compare very favor- ably with the industry average, which was 105.6% for the six months of 1999.
REINSURANCE The Company follows the customary practice of reinsuring with other companies, e.g., ceding a portion of its exposure on the policies it has written. This pro- gram of reinsurance permits the Company greater diversification of business and the ability to write larger policies while limiting the extent of its maximum net loss. It provides protection for the Company against unusually serious 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 a separate component of shareholders' investment. Interest and Dividend Income: Interest on fixed maturities is recorded as income when earned and is adjusted for any amortization of purchase premium or accre- tion of discount. Dividends on equity securities are recorded as income on ex- dividend dates.
September 30, December 31, September 30, Investments: 1999 1998 1998 Invested Assets $ 220,676,295 $ 238,140,592 $ 221,457,464 Net Investment Income 6,738,773 9,119,936 6,891,630 Percent of Return to Average Carrying Value 4.2% 4.5% 4.6% Realized Gains 7,796,106 13,198,139 7,569,431 Net Change in Unrealized Gains/(Losses) $ (18,260,793) $ (14,657,027) $ (19,931,551)
The $18,260,793 decrease in unrealized gains for the nine months of 1999 was composed of a $1,743,995 decrease in market value over cost of the Company's fixed maturities and a $16,516,798 decrease in market value over cost of the equity portfolio. Net investment income has remained relatively stable over the past few years, and is not expected to fluctuate materially in the near future. The Company invests more heavily in the equity market than many other insurance companies, so the rate of return on invested assets is comparatively low. How- ever, management believes that this is more than offset by the long-term return on equity provided by stock investments. Although the Company has seen a recent downturn in the market value of the Company's investment portfolio, management views the downturn as temporary, and believes the current market conditions pro- vide an even greater opportunity to invest and build shareholder value over the long term. 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 so- cial and economic conditions. The Company's reserve for losses and loss adjust- ment expenses were $77,617,365 as of September 30, 1999 compared with $78,504,050 as of December 31, 1998 and $77,021,272 as of September 30, 1998. The trend of increasing reserves for losses and loss adjustment expenses has subsided, as premium writings are down and loss activity has stabilized. Manage- ment continues to closely monitor the reserve development trends and projec- tions. 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 (83.6%, 85.9% and 83.5% 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 A significant issue facing not only the insurance industry but society as a whole is potential computer problems related to the approaching year 2000. Older computer programs were written using two digits ragher 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 the year 2000. Over the past three years the Company has incurred approximately $2.8 million of expenses in updating its management system to alleviate potential year 2000 problems. This process has been completed, and as a result of these efforts, the Company is confident that the year 2000 will not cause a significant disrup- tion to its business. The Company has also assessed the potential impact of year 2000 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. How- ever, there can be no guarantee that actual results would not differ materially from those anticipated; therefore, the Company has developed a contingency plan in the event of a worst-case scenario. INSURANCE SUBSIDIARY FINANCIAL STATEMENTS Statutory Basis as Reported to State Regulatory Authorities September 30, 1999, December 31, 1998 and September 30, 1998 CAPITOL INDEMNITY CORPORATION September 30, December 31, September 30, Balance Sheets 1999 1998 1998 ASSETS Cash and Invested Assets $205,922,045 $217,813,120 $204,006,209 Other Assets 21,481,633 19,542,328 24,864,098 Total Assets $227,403,678 $237,355,448 $228,870,307 LIABILITIES Reserve for Losses and Loss Expenses $ 77,294,600 $ 77,094,939 $ 75,965,447 Unearned Premiums 39,761,575 40,814,358 43,750,074 Other Liabilities 18,413,287 16,543,315 20,732,170 Total Liabilities 135,469,462 134,452,612 140,447,691 SURPLUS AS REGARDS POLICYHOLDERS Shareholder's Equity 91,934,216 102,902,836 88,422,616 Total Liabilities and Capital $227,403,678 $237,355,448 $228,870,307 Statements of Income Premiums Earned $ 62,485,746 $ 88,502,969 $ 67,554,605 Underwriting Deductions 56,818,859 82,659,222 62,872,796 Net Underwriting Gain 5,666,887 5,843,747 4,681,809 Investment Income Including Sales 13,178,590 20,967,446 13,466,362 Other Income 179,106 106,675 69,278 Income Tax Expense 5,808,103 7,866,629 5,009,985 Net Income $ 13,216,480 $ 19,051,239 $ 13,207,464 CAPITOL SPECIALTY INSURANCE CORPORATION Balance Sheets ASSETS Cash and Invested Assets $ 4,687,587 $ 5,732,082 $ 5,540,649 Other Assets 239,990 140,872 321,253 Total Assets $ 4,927,577 $ 5,872,954 $ 5,861,902 LIABILITIES Payable to Parent $ - $ - $ 1,200 Other Liabilities 7,710 7,709 8,944 Total Liabilities 7,710 7,709 10,144 SURPLUS AS REGARDS POLICYHOLDERS Shareholder's Equity 4,919,867 5,865,245 5,851,758 Total Liabilities and Capital $ 4,927,577 $ 5,872,954 $ 5,861,902 Statements of Income Underwriting Deductions 6,189 (1,216) 18,871 Net Underwriting (Loss) Gain (6,189) 1,216 (18,871) Investment Income Including Sales 884,191 600,404 558,274 Income Tax Expense 250,674 122,601 118,551 Net Income $ 627,328 $ 479,019 $ 420,852
PART II Other Disclosures Item 1. Legal Proceedings Reference is made to footnote number 7 "Contingent Liabilities" on Page 9 of this report. Item 2. Changes in Securities 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 17, 1999, both of which are dated April 9, 1999 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 Item 7. Forward-looking Statements The Private Securities Litigation Reform Act of 1995 encourages corporations to provide investors with information about the company's anticipated performance and provides protection from liability if future results are not the same as managements ex- pectations. This document contains certain forward-looking state- ments that are based on assumptions which management believes are reasonable, but by their nature, inherently uncertain. Future results could differ materially from those projected. 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 Retired, formerly with Capitol Transamerica Corporation American National Bank Deforest, Wisconsin Madison, Wisconsin Larry Burcalow Reinhart H. Postweiler Owner and President Retired-formerly with Yahara Materials, Inc. Flad Affiliated Corp. 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 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: November 13, 1999 EXHIBIT I CAPITOL TRANSAMERICA CORPORATION ANNOUNCES RECORD NINE MONTHS EARNINGS FOR IMMEDIATE RELEASE Contact: Paul J. Breitnauer Phone (608) 231-4450 Madison, Wisconsin, October 26, 1999- George A. Fait, Chairman of Capitol Transamerica Corporation, announced that nine months earnings were $14.4 million or $1.27 per share compared with $13.3 million or $1.18 per share in 1998, an 8.0% increase. Nine months income in 1999 included $5.1 million or $0.45 per share of after-tax realized investment gains versus $4.9 million or $0.44 per share in 1998. Excluding realized gains, net income for the nine months of 1999 was $9.3 million or $0.82 per share compared with $8.4 million or $0.74 per share for the same period last year. Unless otherwise noted, all per share amounts are presented on a diluted basis. Third quarter 1999 earnings were $3.1 million or $0.28 per share compared with 1998 third quarter earnings of $2.8 million or $0.25 per share. Third quarter 1999 earnings had $1.6 million or $0.15 per share of after-tax realized gains whereas the third quarter of 1998 included less than $0.01 per share. Ex- cluding net realized gains, third quarter 1999 and 1998 net income was $0.13 and $0.25 per share, respectively. Continuing price competition as well as the re-underwriting of the Company's book of business has led to a slight decrease in premium writings. Nine months gross premiums written were $65.5 million in 1999 compared with $68.2 million in 1998. Gross premiums for the third quarter were $20.8 million in 1999 compared with $21.8 million last year. Increased marketing efforts com- bined with the implementation of new coverages should restore premium production to the upward trend seen historically. Year-to-date net investment income for 1999 was $6.7 million compared to $6.9 million for the nine months of 1998, and third quarter net investment in- come was unchanged at $2.3 million for both years. Total shareholders' investment increased 3.6% in the last twelve months, rising from $130.7 million at September 30, 1998 to $135.4 million at September 30, 1999. A decrease of $13.0 million in after-tax unrealized gains on the Com- pany's investment portfolio slowed the trend of growing shareholder value; how- ever, the current investment strategy appears to be in the best interest of pro- viding long-term return on equity. The value of invested assets was $220.7 million at September 30, 1999 com- pared with $221.5 million at September 30, 1998. The Company has taken sub- stantial gains on its investment portfolio, with the proceeds being reinvested into securities that will provide maximum value to shareholders. The Company's combined loss, loss expense and general expense ratio has decreased to 90.8% at September 30, 1999 from 93.8% at September 30, 1998, which compares very favorably to the industry average of 105.6% for the six months of 1999. Fait reported that "The Company is pleased to report increased earnings in the first nine months of 1999, despite severe rate competition, over-capitaliza- tion and a planned decrease in premiums written. We made the decision to re-un- derwrite the entire book of business in order to stabilize loss development that we began to experience in 1997 and 1998. This has affected premium production, but we are confident that premiums will rebound as our marketing and product development efforts begin to take effect." 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. Capitol Transamerica Corporation, with 11.3 million shares outstanding, is traded on the National Over-the-Counter Stock Market under the symbol CATA. FINANCIAL HIGHLIGHTS FOLLOW CAPITOL TRANSAMERICA CORPORATION SELECTED FINANCIAL DATA CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share)
Nine months ended Three months ended September 30, September 30, 1999 1998 1999 1998 REVENUES Gross premiums written $ 65,474 $ 68,228 $ 20,815 $ 21,763 Net premiums written 61,433 64,637 19,415 20,914 Net premiums earned $ 62,486 $ 67,555 $ 20,969 $ 22,740 EXPENSES Claims and claim expenses 33,160 39,962 13,371 13,017 Other underwriting expenses 23,232 23,475 8,090 8,128 Total Losses and Expenses Incurred 56,392 63,437 21,461 21,145 Underwriting income 6,094 4,118 (492) 1,595 Investment income 6,739 6,892 2,300 2,309 Realized investment gains 7,796 7,569 2,536 32 Other income 181 76 52 27 Income Before Income Tax 20,810 18,655 4,396 3,963 Income tax expense 6,445 5,355 1,289 1,156 NET INCOME $ 14,365 $ 13,300 $ 3,107 $ 2,807 EARNINGS PER SHARE- BASIC $ 1.28 $ 1.19 $ 0.28 $ 0.25 EARNINGS PER SHARE- DILUTED $ 1.27 $ 1.18 $ 0.28 $ 0.25 COMPARATIVE FINANCIAL HIGHLIGHTS- Nine Months Ended September 30, 1999 1998 1997 1996 1995 Per Share Information Income per share-diluted $ 1.27 $ 1.18 $ 0.59 $ 1.06 $ 0.89 Consolidated net income $ 14,365 $ 13,300 $ 6,661 $ 11,741 $ 9,763 Weighted average number of shares outstanding- diluted 11,272 11,269 11,280 11,071 11,041 Book value per share $ 12.02 $ 11.65 $ 12.11 $ 9.62 $ 7.87 Shareholders' investment $ 135,388 $ 130,692 $ 135,250 $ 106,575 $ 87,043 Dividends paid $ 2,375 $ 2,372 $ 3,487 $ 2,979 $ 1,871 Shares outstanding 11,268 11,220 11,167 11,079 11,061 Company Statistics: Gross premiums written $ 65,474 $ 68,228 $ 75,017 $ 67,444 $ 52,173 Net investment income $ 6,739 $ 6,892 $ 6,241 $ 5,261 $ 4,781 Invested assets $ 220,676 $ 221,457 $ 226,341 $ 170,914 $ 137,768 Total assets $ 264,026 $ 265,271 $ 274,423 $ 207,856 $ 163,903 Insurance Operating Ratios, Statutory Basis: Loss and loss adjustment expenses: 53.3% 59.4% 68.2% 51.5% 50.5% Underwriting expenses 37.5% 34.4% 33.0% 31.8% 32.9% Combined ratios 90.8% 93.8% 101.2% 83.3% 83.4% 20 CAPITOL TRANSAMERICA CORPORATION SELECTED FINANCIAL DATA BALANCE SHEETS (in thousands, except per share) September 30, December 31, September 30, 1999 1998 1998 ASSETS Investments Available-for-sale investments at fair value U.S. Government bonds (cost $41, $51 and $53, respectively) $ 43 $ 56 $ 57 State and municipal bonds (cost $77,683, $67,340 and $66,287, respectively) 81,875 74,182 72,148 Corporate bonds (cost $876, $820 and $819, respectively) 849 824 808 Common stock (cost $124,591, $115,583 and $118,084, respectively) 119,874 135,373 130,822 Preferred stock (cost $5,976, $6,770 and $6,770, respectively) 6,154 7,851 7,487 Investment real estate 10,327 10,000 9,028 Short-term investments 1,554 9,855 1,107 Total Investments 220,676 238,141 221,457 Cash 858 1,544 399 Due from securities brokers 3,436 1,634 3,196 Receivables 19,988 19,952 24,139 Other assets 19,068 16,089 16,080 TOTAL ASSETS $264,026 $277,360 $265,271 LIABILITIES Reserves for losses and loss adjustment expenses $ 77,617 $ 78,504 $ 77,021 Unearned premiums 40,913 41,542 44,444 Other liabilities 10,108 15,998 13,114 TOTAL LIABILITIES $128,638 $136,044 $134,579 SHAREHOLDERS' EQUITY Common stock, $1.00 par value, authorized 15,000 shares, issued 11,536, 11,529 and 11,526 shares, respectively $ 11,538 $ 11,529 $ 11,523 Paid-in surplus 22,589 22,246 22,202 Accumulated other comprehensive income, net of deferred taxes of ($130), $9,703 and $6,566, respectively (241) 18,020 12,745 Retained earnings 102,018 90,016 84,678 Less treasury stock, 268, 307, and 306 shares, respectively, at cost (496) (495) (476) TOTAL SHAREHOLDERS' EQUITY 135,388 141,316 130,692 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $264,026 $277,360 $265,271 SHAREHOLDERS' EQUITY PER SHARE $ 12.02 $ 12.59 $ 11.65 SHARES OUTSTANDING 11,268 11,222 11,220
EX-27 2
7 9-MOS DEC-31-1999 SEP-30-1999 82,768,022 0 0 126,027,645 0 10,326,864 220,676,295 858,085 155,328 13,785,484 264,026,110 77,617,365 40,912,754 0 0 0 11,536,015 0 0 123,852,040 264,026,110 62,485,746 6,738,773 7,796,106 181,010 33,159,466 (260,707) 22,487,587 20,810,005 6,445,125 14,364,880 0 0 0 14,364,880 1.28 1.27 78,504,050 39,367,681 (6,208,215) 14,827,517 19,218,634 77,617,365 0
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