-----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, D03nuKXSY1e6a0wEvW0DiG9beI1P8M0qK0aFxMaKv9zHHKNgul02Vd5K8REX949P JyQmiW6S0ehlqgtg08LR+g== 0000897069-01-500627.txt : 20020412 0000897069-01-500627.hdr.sgml : 20020412 ACCESSION NUMBER: 0000897069-01-500627 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011207 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/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-02047 FILM NUMBER: 1808690 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/A 1 slp158.txt FORM 10-Q AMENDMENT - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. FORM 10-Q/A Amendment No. 1 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period ended: September 30, 2001 Commission file number: 0-2047 CAPITOL TRANSAMERICA CORPORATION (CTC) (Exact name of registrant as specified in its charter) A Wisconsin Corporation 39-1052658 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 4610 University Avenue Madison, Wisconsin 53705-0900 ----------------------------- (Address of principal executive offices) (Zip Code) 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 - -------------------------------------------------------------------------------- (Title of Class) 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 registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares of each issuer's class of common stock, as of the latest practicable date: At September 30, 2001 Common Stock, $1.00 Par Value Issued: 11,562,720 Outstanding: 10,952,153 Explanatory Note Capitol Transamerica Corporation (the "Company") is filing this Amendment No. 1 to its Quarterly Report on Form 10-Q for the three month period ended September 30, 2001 to amend and restate Part I of the Quarterly Report for the three month period ended September 30, 2001. In accordance with Rule 12b-12 promulgated under the Securities and Exchange Act of 1934, as amended, the text of the amended items is amended and restated in its entirety as set forth in this Amendment No. 1. Since the Company originally filed its Form 10-Q on November 14, 2001, the Company determined that adjustments to its balance sheet and income statement for the three and nine months ended September 30, 2001 were needed to record an additional $7.6 million, or $5.0 million net of tax, for "other-than-temporary" market value adjustments under FASB 115. Among other effects, shareholders' investment remains at $144.5 million, with accumulated other comprehensive income increasing by $5.0 million and retained earnings decreasing by $5.0 million. Additionally, net income decreased by $5.0 million for the three and nine months ended September 30, 2001 or $0.45 per share and $0.46 per share for the three month and nine months ended September 30, 2001, respectively. 2 Securities and Exchange Commission Washington, D.C. Form 10-Q Part I Financial Information Page Consolidated Financial Statements 4-8 Notes to Consolidated Financial Statements 9-12 Management's Discussion and Analysis of Financial Condition and Results of Operations 13-20 Signature Page 21 3 CAPITOL TRANSAMERICA CORPORATION CONSOLIDATED BALANCE SHEETS
Restated See Note 1 September 30, December 31, September 30, 2001 2000 2000 ----------------- -------------- ----------------- ASSETS Investments: Available-for sale investment securities, at fair value: U.S. Government bonds (amortized cost $24,746, $33,930 and $35,283, respectively) $ 27,000 $ 35,620 $ 36,817 State, municipal and political subdivision bonds (amortized cost $104,411,706, $84,236,165 and $79,613,133, respectively) 110,506,950 89,732,054 83,463,540 Corporate bonds and notes (amortized cost $1,077,802, $1,099,888 and $1,102,199, respectively) 1,063,340 1,074,137 1,075,358 Equity securities: Common stock (cost $98,232,556, $123,504,211 and $123,861,536, respectively) 107,616,300 119,413,538 119,542,064 Non-redeemable preferred stock (cost $5,344,152, $6,470,793 and $6,008,950, respectively) 4,747,040 5,516,567 5,247,359 Investment real estate, at cost, net of depreciation 11,507,370 11,008,554 10,943,776 Short-term investments, at cost which approximates fair value 6,047,556 5,587,306 3,139,868 ------------ ------------ ------------ Total Investments 241,515,556 232,367,776 223,448,782 Cash 3,553,574 3,641,628 1,469,541 Accrued investment income 2,199,188 1,953,466 1,934,712 Receivables from agents, insureds and others, less allowance for doubtful accounts of $530,000 for each period 24,676,337 18,438,610 19,719,340 Balances due from reinsurers 1,257,720 1,794,851 3,472,137 Funds held by ceding reinsurers 47,000 47,000 40,000 Deferred insurance acquisition costs 15,617,147 13,726,372 14,306,963 Prepaid reinsurance premiums 2,436,868 1,714,017 1,679,606 Due from securities brokers 90,009 4,218,650 5,638,921 State income taxes recoverable 169,858 32,263 14,427 Federal income taxes recoverable 6,842,202 35,200 27,885 Deferred income taxes recoverable -- 2,468,713 2,425,751 Other assets 2,496,881 2,819,506 2,959,744 ------------ ------------ ------------ Total Assets $300,902,340 $283,258,052 $277,137,809 ============ ============ ============
4 CAPITOL TRANSAMERICA CORPORATION CONSOLIDATED BALANCE SHEETS
Restated See Note 1 September 30, December 31, September 30, 2001 2000 2000 ----------------- ------------- -------------- LIABILITIES Policy liabilities and accruals: Reserve for losses $ 53,389,524 $ 52,231,685 $ 53,345,849 Reserve for loss adjustment expenses 25,729,154 25,749,288 23,447,613 Unearned premiums 56,232,945 45,587,586 46,348,561 ------------- ------------- ------------- Total Policy Liabilities and Accruals 135,351,623 123,568,559 123,142,023 ------------- ------------- ------------- Accounts payable 3,625,258 4,203,407 3,715,309 Claim drafts outstanding 5,502,873 4,927,097 3,560,375 Balances due to securities brokers 2,887,856 34,125 908,712 Balances due to reinsurers 5,746,897 4,097,368 1,418,708 Deferred income taxes payable 2,384,301 -- -- Accrued premium taxes payable 903,627 727,627 573,524 ------------- ------------- ------------- Total Other Liabilities 21,050,812 13,989,624 10,176,628 ------------- ------------- ------------- Total Liabilities 156,402,435 137,558,183 133,318,651 ------------- ------------- ------------- SHAREHOLDERS' INVESTMENT Common stock ($1.00 par value, authorized 15,000,000 shares, issued 11,562,720, 11,558,767 and 11,558,166 shares, respectively) 11,562,720 11,558,767 11,558,166 Paid-in surplus 22,759,865 22,733,088 22,727,877 Accumulated other comprehensive income (loss) (net of deferred tax expense (benefit) of $5,188,838, $149,425 and ($439,587), respectively) 9,680,830 277,504 (816,376) Retained earnings 105,058,178 114,944,048 113,634,940 ------------- ------------- ------------- Shareholders' Investment Before Treasury Stock 149,061,593 149,513,407 147,104,607 Treasury stock (610,567, 549,867 and 505,967 shares, respectively, at cost) (4,561,688) (3,813,538) (3,285,449) ------------- ------------- ------------- Total Shareholders' Investment 144,499,905 145,699,869 143,819,158 ------------- ------------- ------------- Total Liabilities and Shareholders' Investment $ 300,902,340 $ 283,258,052 $ 277,137,809 ============= ============= ============= Book Value Per Share $ 13.19 $ 13.23 $ 13.01 ============= ============= ============= Shares Outstanding 10,952,153 11,008,900 11,052,199 ============= ============= =============
5 CAPITOL TRANSAMERICA CORPORATION CONSOLIDATED STATEMENTS OF INCOME
For the Nine Months For the Three Months Ended September 30, Ended September 30, -------------------------------- --------------------------------- Restated Restated See Note 1 See Note 1 2001 2000 2001 2000 -------------- -------------- -------------- --------------- REVENUES Premiums earned $ 73,456,508 $ 64,832,530 $ 26,136,208 $ 22,751,882 Net investment income 7,441,841 6,800,513 2,598,722 2,298,110 Realized investment losses (gains) (15,878,304) 7,275,290 (14,130,230) 3,296,312 Other revenues 450,019 253,434 182,435 96,021 ------------ ------------ ------------ ------------ Total Revenues 65,470,064 79,161,767 14,787,135 28,442,325 ------------ ------------ ------------ ------------ LOSSES AND EXPENSES INCURRED Losses incurred 42,237,586 29,794,673 14,143,486 12,667,179 Loss adjustment expenses incurred 8,492,800 7,945,275 2,997,133 3,026,527 Underwriting, acquisition and insurance expenses 28,285,409 24,544,624 9,488,873 8,102,761 Increase in deferred insurance acquisition costs (1,890,775) (1,662,774) (592,861) (246,845) Other expenses 1,469,841 1,077,524 750,784 371,816 ------------ ------------ ------------ ------------ Total Losses and Expenses Incurred 78,594,861 61,699,322 26,787,415 23,921,438 ------------ ------------ ------------ ------------ (Loss) Income Before Income Taxes (13,124,797) 17,462,445 (12,000,280) 4,520,887 ------------ ------------ ------------ ------------ Income tax (benefit) expense: Current (5,411,185) 5,032,432 (4,669,040) 1,240,703 Deferred (186,400) 33,632 (117,610) (43,567) ------------ ------------ ------------ ------------ (5,597,585) 5,066,064 (4,786,650) 1,197,136 ------------ ------------ ------------ ------------ Net (Loss) Income $ (7,527,212) $ 12,396,381 $ (7,213,630) $ 3,323,751 ============ ============ ============ ============ Per Share Data: Cash Dividends Declared $ 0.24 $ 0.21 $ 0.08 $ 0.07 ============ ============ ============ ============ Earnings Per Share - Basic $ (0.69) $ 1.11 $ (0.66) $ 0.30 ============ ============ ============ ============ Earnings Per Share - Diluted $ (0.69) $ 1.11 $ (0.66) $ 0.30 ============ ============ ============ ============
6 CAPITOL TRANSAMERICA CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT AND COMPREHENSIVE INCOME (LOSS)
Accumulated Common Stock Other (Par Value Paid-In Comprehensive Comprehensive Retained Treasury $1.00) Surplus Income (Loss) Income (Loss) Earnings Stock Balance, January 1, 1999 $ 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 dividends paid -- -- -- -- (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 -- -- 14,453,317 -- 14,453,317 -- Other comprehensive income: Unrealized appreciation on available-for-sale securities, net of deferred taxes -- -- 11,913,380 -- -- -- Less: reclassification adjustment, net of tax of $2,546,352, for gain included in net income -- -- (7,673,478) -- -- -- Other comprehensive income -- -- 4,239,902 4,239,902 -- -- Comprehensive income -- -- 18,693,219 -- -- -- Stock options exercised 19,797 138,550 -- -- -- (76,250) Stock-based compensation -- -- -- -- 25,476 -- Purchases and sales of treasury stock, net -- -- -- -- -- (3,215,195) Cash dividends paid -- -- -- -- (3,111,938) -- ------------- ------------- ------------- ------------- ------------- ------------ Balance, December 31, 2000 $ 11,558,767 $ 22,733,088 -- $ 277,504 $ 114,944,048 ($ 3,813,538) Comprehensive (loss) income: Net loss -- -- (7,527,212) -- (7,527,212) -- Other comprehensive income: Unrealized appreciation on available-for-sale securities, net of deferred taxes -- -- (917,572) -- -- -- Less: reclassification adjustment, net of tax benefit of $2,883,803, for loss included in net income -- -- 10,320,898 -- -- -- Other comprehensive income -- -- 9,403,326 9,403,326 -- -- Comprehensive income -- -- 1,876,114 -- -- -- Stock options exercised 3,953 26,777 -- -- -- -- Stock-based compensation -- -- -- -- 271,158 -- Purchases and sales of treasury stock, net -- -- -- -- -- (748,150) Cash dividends paid -- -- -- -- (2,629,816) -- Balance, September 30, 2001 Restated See Note 1 $ 11,562,720 $ 22,759,865 -- $ 9,680,830 $ 105,058,178 ($ 4,561,688) ============= ============= ============= ============= ============= ============
7 CAPITOL TRANSAMERICA CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS YEAR-TO-DATE
Restated See Note 1 September 30, December 31, September 30, 2001 2000 2000 --------------- ------------- -------------- Cash flows (used for) provided by operating activities: Net (Loss) Income $ (7,527,212) $ 14,453,317 $ 12,396,381 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation 931,435 1,215,024 897,412 Realized investment losses (gains) 15,878,304 (11,805,350) (7,275,290) Change in: Deferred insurance acquisition costs (1,890,775) (1,082,183) (1,662,774) Unearned premiums 10,645,359 6,133,329 6,894,304 Accrued investment income (245,722) (25,565) (6,811) Receivables from agents, insureds and others (6,237,727) (3,545,963) (4,826,693) Balances due to/from reinsurers 885,335 149,564 230,148 Reinsurance recoverable on paid and unpaid losses 1,301,325 683,248 (3,753,282) Funds held by ceding reinsurers -- (7,000) -- Income taxes payable/recoverable (6,944,597) 618,777 643,928 Deferred income taxes (335,825) (598,340) 33,634 Due to/from securities brokers 6,982,372 (3,545,389) (4,091,073) Prepaid reinsurance premiums (722,851) (426,390) (391,979) Other assets 135,346 (707,858) (683,062) Reserve for losses and loss adjustment expenses 1,137,705 724,781 (462,730) Accounts payable (2,373) 3,324,905 1,470,085 Accrued premium taxes 176,000 388,764 234,661 ------------ ------------ ------------ Net cash provided by (used for) operating activities 14,166,099 5,947,671 (353,141) ------------ ------------ ------------ Cash flows provided by (used for) investing activities: Proceeds from sales of available-for-sale securities 29,411,481 26,278,568 17,600,356 Purchases of available-for-sale securities (43,348,161) (26,716,842) (14,617,489) Maturities of available-for-sale securities 3,121,661 4,053,867 3,447,617 Purchases of depreciable assets (363,057) (782,511) (738,782) ------------ ------------ ------------ Net cash (used for) provided by investing activities (11,178,076) 2,833,082 5,691,702 ------------ ------------ ------------ Cash flows (used for) provided by financing activities: Cash dividends paid (2,629,816) (3,111,938) (2,338,634) Stock options exercised 30,730 45,273 76,285 Net cost of purchase of treasury stock (476,991) (3,152,895) (2,687,106) ------------ ------------ ------------ Net cash used for financing activities (3,076,077) (6,219,560) (4,949,455) ------------ ------------ ------------ Net (decrease) increase in cash (88,054) 2,561,193 389,106 Cash, beginning of period 3,641,628 1,080,435 1,080,435 ------------ ------------ ------------ Cash, end of period $ 3,553,574 $ 3,641,628 $ 1,469,541 ============ ============ ============ Cash paid during the period for: Income taxes $ 1,532,546 $ 4,856,364 $ 4,380,677 ============ ============ ============
8 CAPITOL TRANSAMERICA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2001 (1) Basis of Presentation The condensed financial statements included herein of Capitol Transamerica Corporation (the "Company"), other than the Consolidated Balance Sheet at December 31, 2000, and the Consolidated Statement of Shareholders' Investment and Comprehensive Income (Loss) and the Consolidated Statement of Cash Flows as of December 31, 2000, have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 2001 are not necessarily indicative of the results that may be expected for the year ended December 31, 2001. Although the Company believes the disclosures are adequate to make the information presented not misleading, it is suggested that these condensed financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's 2000 annual report on Form 10-K. On July 20, 2001, the Company and Alleghany Corporation, a Delaware corporation ("Alleghany"), announced that they had entered into an Agreement and Plan of Merger (the "Merger Agreement"), dated as of July 20, 2001, providing for the merger (the "Merger") of ABC Acquisition Corp., a Wisconsin corporation and wholly-owned subsidiary of Alleghany, with and into the Company. If the merger is completed, the Company will become a wholly-owned subsidiary of Alleghany and the holders of the common stock of the Company will be entitled to receive $16.50 in cash for each share of common stock. Consummation of the Merger is subject to satisfaction or waiver of conditions set forth in the Merger Agreement, including, without limitation, approval of the Merger at a meeting of the Company's shareholders by holders of two-thirds of the outstanding shares of common stock and certain regulatory approvals. On July 23, 2001, the Company filed a copy of the Merger Agreement with the Securities and Exchange Commission as an exhibit to a Current Report on Form 8-K. The Company is filing this Amendment No. 1 to its Quarterly Report on Form 10-Q for the three month period ended September 30, 2001 to amend and restate Part I of the Quarterly Report for the three month period ended September 30, 2001. In accordance with Rule 12b-12 promulgated under the Securities and Exchange Act of 1934, as amended, the text of the amended items is amended and restated in its entirety as set forth in this Amendment No. 1. Since the Company originally filed its Form 10-Q on November 14, 2001, the Company determined that adjustments to its balance sheet and income statement for the three and nine months ended September 30, 2001 were needed to record an additional $7.6 million, or $5.0 million net of tax, for "other-than-temporary" market value adjustments under FASB 115. Among other effects, shareholders' investment remains at $144.5 million, with accumulated other comprehensive income increasing by $5.0 million and retained earnings decreasing by $5.0 million. Additionally, net income decreased by $5.0 million for the three and nine months ended September 30, 2001 or $0.45 per share and $0.46 per share for the three month and nine months ended September 30, 2001, respectively. 9 (2) Earnings Per Share Basic earnings per share is computed by dividing net income by the weighted average number of shares of stock outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents from options outstanding. The following table sets forth the computation of basic and diluted earnings per share (EPS):
September 30, 2001 December 31, September 30, Restated See Note 1 2000 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Numerator: Consolidated net (loss) income $(7,527,212) $14,453,317 $12,396,381 ==================================================================================================================================== Denominator: Basic EPS - weighted average shares of common stock 10,955,851 11,124,074 11,177,654 Effect of dilutive securities - unexercised stock options - 34,388 33,773 - ------------------------------------------------------------------------------------------------------------------------------------ Diluted EPS - weighted average shares of common stock and unexercised stock options 10,955,851 11,158,462 11,211,427 ====================================================================================================================================
The effect of dilutive securities was excluded from the diluted loss per common share computation for the nine months ended September 30, 2001, because the Company had a net loss in this period and their inclusion would have been anti-dilutive. (3) Comprehensive Income (Loss) 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 effect of temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and the corresponding amounts used for income tax reporting. (5) Common Stock Options There were 3,953 options exercised during the nine months ended September 30, 2001 compared to 19,196 options exercised during the nine months ended September 30, 2000. For further information regarding stock options, refer to Note 6 of the Notes to the Consolidated Financial Statements included in the Company's 2000 annual report. (6) Dividends 2001 On September 4, 2001, a cash dividend of $.08 per share was declared to shareholders of record September 11, 2001 and paid September 25, 2001 in the amount of $876,012. On May 30, 2001, a cash dividend of $.08 per share was declared to shareholders of record June 8, 2001 and paid June 28, 2001 in the amount of $875,593. 10 On February 27, 2001, a cash dividend of $.08 per share was declared to shareholders of record March 9, 2001 and paid March 23, 2001 in the amount of $878,211. 2000 On November 21, 2000, a cash dividend of $.07 per share was declared to shareholders of record December 8, 2000 and paid December 20, 2000 in the amount of $773,304. On September 5, 2000, a cash dividend of $.07 per share was declared to shareholders of record September 15, 2000 and paid September 26, 2000 in the amount of $773,993. 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. (7) Investments The Company's fixed maturities and equity securities are classified as available-for-sale and, accordingly, are carried at fair value, with unrealized gains (losses) reported as a separate component of the shareholders' investment, net of taxes. The cost of fixed maturities is adjusted for the 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 Consolidated Statement of Income to carrying values equal to their estimated fair values. Investment real estate is carried at cost, net of accumulated depreciation of $1,971,088, $1,595,693 and $1,488,842 at September 30, 2001, December 31, 2000 and September 30, 2000, respectively. Real estate is depreciated over the useful life of the asset. The cost of investments sold is determined under the specific identification method. (8) Contingent Liabilities The Company is a defendant in certain lawsuits involving complaints which demand damages and recoveries for claims and losses allegedly related to risks insured by the Company. Management's opinion is that such lawsuits are a result of 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. 11 (9) Industry Segment Disclosures 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) reinsurance assumed operations. These segments constitute 100% of the operations of the Company. Data for each segment as required for interim reporting follows in the table below. In analyzing this information, keep the following discussion in mind. The reconciliation items to get to the consolidated GAAP basis come from two sources: investment income on capital and surplus and intercompany eliminations (management fees for intercompany services provided and dividend income on stock held by affiliates). Specifically, revenues are adjusted for investment income from capital and surplus, and intercompany eliminations for management fees from intercompany service agreements and intercompany dividends. Pre-tax profit is adjusted for the net effect of the amounts in revenues along with intercompany eliminations for management fees from expense items (loss adjustment and underwriting expenses).
Nine Months Ended Three Months Ended Restated See Note 1 Restated See Note 1 September 30, 2001 September 30, 2000 September 30, 2001 September 30, 2000 ------------------ ------------------ ------------------ ------------------ Total Revenues: Property & Casualty $ 56,341,311 $ 54,734,118 $ 17,313,513 $ 19,205,693 Fidelity & Surety 13,832,685 15,775,969 4,189,426 5,798,372 Reinsurance Assumed (242,283) 672,095 (423,508) 269,627 ------------ ------------ ------------ ------------ Subtotal $ 69,931,713 $ 71,182,182 $ 21,079,431 $ 25,273,692 Reconciliation to Consolidated GAAP: Capital & Surplus (4,301,995) 8,049,833 (6,207,375) 3,197,048 Inter-company adjustments (159,654) 70,248) (84,921) (28,415) Total Consolidated Revenues $ 65,470,064 $ 79,161,767 $ 14,787,135 $ 28,442,325 ============ ============ ============ ============ Before-tax (Loss) Profit: Property & Casualty ($ 5,424,835) $ 5,534,785 ($ 4,608,380) $ 1,633,993 Fidelity & Surety (3,188,525) 1,728,355 (710,411) (784,758) Reinsurance Assumed (488,150) 1,503,815 (563,893) 264,385 ------------ ------------ ------------ ------------ Subtotal ($ 9,101,510) $ 8,766,955 ($ 5,882,684) $ 1,113,620 Reconciliation to Consolidated GAAP: Capital & Surplus (4,301,995) 8,049,833 (6,207,375) 3,197,048 Inter-company adjustments 278,708 645,657 89,780 210,219 ------------ ------------ ------------ ------------ Consolidated Net (Loss) Income Before Tax ($13,124,797) $ 17,462,445 ($12,000,279) $ 4,520,887 ============ ============ ============ ============
12 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS OVERVIEW Capitol Transamerica Corporation (the "Company") is an insurance holding company, which operates in 37 states and writes, through its subsidiaries, both property-casualty and fidelity-surety insurance. The property-casualty segment accounts for approximately 82% of the business written while the fidelity-surety segment accounts for approximately 18% of the 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, with the down side of the cycles being characterized by inadequate rates, underwriting losses and 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. However, on the positive side, the industry appears to be hardening, with rate increases slowly being implemented. Adequate premium rates continue to be a concern for 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 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. On July 20, 2001, the Company and Alleghany Corporation, a Delaware corporation ("Alleghany"), announced that they had entered into an Agreement and Plan of Merger (the "Merger Agreement"), dated as of July 20, 2001, providing for the merger (the "Merger") of ABC Acquisition Corp., a Wisconsin corporation and wholly-owned subsidiary of Alleghany, with and into the Company. If the merger is completed, the Company will become a wholly-owned subsidiary of Alleghany and the holders of the common stock of the Company will be entitled to receive $16.50 in cash for each share of common stock. Consummation of the Merger is subject to satisfaction or waiver of conditions set forth in the Merger Agreement, including, without limitation, approval of the Merger at a meeting of the Company's shareholders by holders of two-thirds of the outstanding shares of common stock and certain regulatory approvals. On July 23, 2001, the Company filed a copy of the Merger Agreement with the Securities and Exchange Commission as an exhibit to a Current Report on Form 8-K. OPERATING RESULTS Total revenues decreased by approximately $13.7 million for both the nine months and three months ended September 30, 2001 compared to the same periods in 2000. Underwriting income decreased by approximately $8.1 million for the nine months ended September 30, 2001 compared to the same period in 2000 and decreased by approximately $605,000 for the three months ended September 30, 2001 compared to the same period in 2000. These decreases were primarily due to increases in the Company's loss and loss adjustment expenses of $13.0 million and $1.4 million, respectively, for the nine and three month periods ended September 30, 2001. For the nine months ended September 30, 2001, net income decreased to a net loss of approximately $7.5 million compared to net income of approximately $12.4 million for the same period in 2000. For the three months ended September 30, 2001, net income decreased to a net loss of approximately $7.2 million compared to net income of approximately $3.3 million for the same period in 2000. A more detailed analysis of the Company's results of operations follows. 13 Premiums written are earned and recognized as revenues after a reduction for reinsurance ceded and after establishing a provision for the pro rata unearned portion of the premiums written. The following table illustrates the premiums for the nine and three month periods ended September 30, 2001 compared to the same periods in 2000.
Nine Months Ended Three Months Ended -------------------------------------- ------------------------------------- Restated See Note 1 Restated See Note 1 September 30, September 30, September 30, September 30, 2001 2000 2001 2000 - ---------------------------------------------------------------------------------------------------------------------------- Gross Premiums Written $94,473,926 $76,777,047 $32,590,210 $25,018,766 Reinsurance Ceded 11,094,911 5,442,192 3,942,787 1,580,050 - ---------------------------------------------------------------------------------------------------------------------------- Net Premiums Written $83,379,015 $71,334,855 $28,647,423 $23,438,716 ============================================================================================================================ Net Premiums Earned $73,456,508 $64,832,530 $26,136,208 $22,751,882 ============================================================================================================================ Net Unearned Premium Reserve $56,232,945 $46,348,561 $56,232,945 $46,348,561 ============================================================================================================================
In 1998 and 1999, the Company established new underwriting standards. With these new underwriting standards in place, the Company began to increase the gross premiums written in late 1999, throughout 2000 and thus far in 2001. For the nine months ended September 30, 2001, the Company increased its gross premiums written across all of its product lines by 23.0% compared to the same period in 2000. Approximately 8% of this increase is attributable to rate increases with the remainder being due to volume increases. The Company reduced its gross premiums written in the fidelity-surety bond market by approximately 4% due almost entirely to decreases in volume. The Company increased its gross premiums written in the property-casualty market by approximately 30%, of which 10% was due to rate increases with the remainder coming from volume increases. For the three months ended September 30, 2001 compared to the same period in 2000, the Company increased its gross premiums written across all of its lines by approximately 30%, of which approximately 11% is attributable to rate increases with the remainder being due to volume increases. The Company reduced its gross premiums written in the fidelity-surety bond market by approximately 2% due primarily to decreases in volume. The Company increased its gross premiums written in the property-casualty market by approximately 35%, of which 14% of the increase in premiums was due to rate increases with the remainder coming from volume increases. For the nine months ended September 30, 2001, the fidelity-surety loss and loss adjustment expense ratio was 65.3% of net premiums earned compared to 42.0% for the same period in 2000. This increase is due to two factors. First, the ratio for 2000 was low compared to the Company's history of approximately 55% of net premiums earned, and, second, claims from one specific bonded contractor accounted for approximately 52% of the fidelity-surety losses and loss adjustment expenses for the nine month period ended September 30, 2001. To prevent additional large losses, the Company has stopped writing new bonds with these contractors as well as canceling the agents responsible for the production of this and other unprofitable business. Had the fidelity-surety losses discussed above occurred consistent with the Company's historical claim levels, the Company's fidelity-surety loss and loss adjustment expense ratio for the nine month period ended September 30, 2001 would have been 55% and the overall loss and loss adjustment expense ratio, when taken with the property and casualty losses, would have been approximately 53% for this period. For the three months ended September 30, 2001, the fidelity-surety loss and loss adjustment expense ratio was 48.9% of net premiums earned compared to 72.4% for the same period in 2000. This decrease is due to two factors. First, the 2001 ratio is slightly better than the Company's 55% historical ratio, and, second, the Company had fewer claims relating to the fidelity-surety bond business for the three months ended September 30, 2001 compared to the same period in 2000. For the three months ended September 30, 2000, claims from four specific bonded contractors added approximately 14 $4 million, or 17.6%, to the claims volume. Losses in recent years are due mostly to larger than expected contract bond losses in the Florida and Texas markets. For the nine months ended September 30, 2001, the property-casualty loss and loss adjustment expense ratio was 69.2% of net premiums earned compared to 58.4% of net premiums earned for the same period in 2000. For the three months ended September 30, 2001, the property-casualty loss and loss adjustment expense ratio was 68.7% of net premiums earned compared to 68.2% of net premiums earned for the same period in 2000. These increases were due to the increased frequency of Midwest summer storms and increased severity on large fire losses. The storm losses increased the property-casualty loss and loss adjustment expense ratio from 5.0% of total net premiums earned for the nine month period ended September 30, 2000 to 9.0% of total net premiums earned for the same period in 2001. While the Company cannot control the immediate impact of storm losses, it is looking at the trends of storm losses as well as employing loss control efforts to try to minimize the effects of these types of losses. Large fire losses increased the property-casualty loss and loss adjustment expense ratio from 9.5% of total net premiums earned for the nine month period ended September 30, 2000 to 11.7% of total net premiums earned for the same period in 2001. Specifically, through September 30, 2001, the Company has had 18 fire claims with over $150,000 in incurred claim costs for a total of approximately $8.6 million compared to 17 such cases in 2000 with total incurred claim costs of $6.1 million. The Company is utilizing increased loss control efforts relating to fire losses, especially in the restaurant and tavern markets, where the losses tend to be higher due to arson. Specifically, the Company is focusing its efforts to review hazard reports and current client financial statements. Had the property-casualty losses discussed above occurred consistent with the Company's historical claim levels, the Company's property-casualty loss and loss adjustment expense ratio for both the nine and three month periods ended September 30, 2001 would have been 52.5% and the overall loss and loss adjustment expense ratio would have been 53%. While the terrorist attacks of September 11, 2001 have had, and will continue to have, tragic consequences on society as a whole and will affect the insurance industry for years to come, the Company does not believe it has any insurance losses related to the September 11th attacks because the Company does not write business in New York or Washington, D.C. Operating expenses remained relatively constant for the nine months ended September 30, 2001 compared to the same period in 2000 increasing slightly from a ratio of 36.6% of net earned premium to 37.3% of net earned premium. The increase in operating expenses for the nine months ended September 30, 2001 is due primarily to incurring non-recurring legal fees of approximately $311,000 in 2001 related to the Merger Agreement. There were no such legal fees incurred in 2000, nor does the Company expect to incur such expenses in the future. Likewise, the increase in operating expenses from 35.7% of net earned premium for the three months ended September 30, 2000 to 36.2% of net earned premiums for the same period in 2001 is due primarily to the legal fees described above. The Company's operating results from underwriting operations can be measured by the GAAP combined loss, loss adjustment expense and operating expense ratios. Under GAAP, the loss, loss adjustment expenses and operating expenses are all stated as a ratio of net premiums earned. The combined ratio is useful because it shows the operating profitability of the Company excluding income from investment-related activities. Alternately stated, it shows the profitability of the insurance operations. A combined ratio greater than 100% means the Company's insurance operations are operating at a loss, which is typical on average for the insurance industry in recent years. This, however, does not mean the Company is losing money, because investment income and realized investment gains are also included in the determination of net income. Conversely, if the Company's combined ratio is less than 100%, the insurance operations are operating at a gain. The combined ratio should not be considered in isolation from or as a substitute for net income, cash flows from operating activities or other combined income or cash flow data prepared in 15 accordance with GAAP or as a measure of profitability or liquidity. The following table depicts the Company's combined ratios for the nine and three month periods ended September 30, 2001 compared to the same period in 2000 broken down into its loss and operating expense components on a GAAP basis:
Nine Months Ended Three Months Ended -------------------------------------- ------------------------------------- Restated See Note 1 Restated See Note 1 September 30, September 30, September 30, September 30, 2001 2000 2001 2000 - -------------------------------------------------------------------------------------------------------------------------- Loss & Loss Adjustment Expenses 69.1% 58.2% 65.6% 69.0% Operating Expenses 37.3% 36.6% 36.2% 35.7% - -------------------------------------------------------------------------------------------------------------------------- Combined Ratio 106.4% 94.8% 101.8% 104.7% ==========================================================================================================================
Investment income has been increasing due to the Company concentrating on investing in the fixed maturities market, most notably in tax-exempt municipal bonds. The relationship of the increase in investment in fixed maturities and net investment income is illustrated below:
Nine Months Ended Three Months Ended -------------------------------------- ------------------------------------- Restated See Note 1 Restated See Note 1 September 30, September 30, September 30, September 30, 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------ Fixed Maturities (at amortized cost) $105,514,254 $ 80,750,615 $105,514,254 $ 80,750,615 Net Investment Income $ 7,441,841 $ 6,800,513 $ 2,598,722 $ 2,298,110 - ------------------------------------------------------------------------------------------------------------------------------
The Company sells investments, and, thus, realizes investment gains, when it is advantageous to the Company within the marketplace. The investment gains realized, or market value of the investments sold compared to the Company's cost of those investments, fluctuates with both the market conditions when the investment is sold and the Company's management of its portfolio. Additionally, under FASB Statement 115, the Company recorded $22.3 million and $14.1 million, respectively, in realized losses for the nine and three month periods ended September 30, 2001 for "other-than-temporary" market value adjustments for certain securities held in its portfolio. Management believed it prudent to make these adjustments due to the continued downward trend in the equity markets in general as well as in certain securities in the Company's portfolio during 2001. No such adjustments were made during the first nine months of 2000. Management continues to monitor its investment portfolio for other securities that could potentially fall into this category in the future. Had the FASB 115 losses not occurred, the Company's realized gains would have amounted to $6.5 million for the first nine months of 2001 compared to $7.3 million for the same time period in 2000. The Company's income tax expense has decreased from an expense of $5.1 million for the first nine months of 2000 to a 2001 year-to-date benefit of $5.6 million for two reasons. First, income from underwriting operations has decreased, and, second, the Company's increased investment in municipal bonds has decreased the amount of taxable income. The Company's tax benefit represents 42.6% of the pre-tax net loss for the nine-month period ended September 30, 2001 compared to tax expense of 29.0% of the pre-tax net income reported for the nine-month period ended September 30, 2000. Additionally, the tax benefit for the three-month period ended September 30, 2001 was 39.9% of the pre-tax net loss compared to tax expense of 26.5% of the pre-tax net income for the same period in 2000. The change in the rates for both the nine and three-month periods ended September 30, 2001 are due primarily to increased interest income from tax-exempt municipal bonds, and, to a lesser extent, an adjustment of the 2000 income tax expense. 16 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 program 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 severe occurrences in which a number of claims could produce a large aggregate loss. Management continually monitors the Company's reinsurance program to obtain protection that management believes 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 "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.
Restated See Note 1 September 30, December 31, September 30, Investments 2001 2000 2000 - --------------------------------------------------------------------------------------------------------------------------- Invested Assets $241,515,556 $232,367,776 $223,448,782 Net Investment Income 7,441,841 9,163,062 6,800,513 Percent of Return to Average Carrying Value 4.3% 4.0% 4.0% Realized (Losses) Gains (15,878,304) 11,805,350 7,275,290 Change in Unrealized Gains (Losses) 9,403,326 4,239,902 3,146,022 - ---------------------------------------------------------------------------------------------------------------------------
The net unrealized gain of $9.4 million for the first nine months of 2001 consists of a $0.4 million unrealized gain on fixed maturities and a $9.0 million unrealized gain 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 the value of its equity investments is temporary and that the current market conditions will provide an even greater opportunity to invest and build shareholder value over the long term. For the nine months ended September 30, 2001, net investment income increased from $6.8 million to $7.4 million, or 9.4%, over the same period last year. This increase is due to the increase in its investment in fixed maturities. Additionally, the Company holds a large percentage of equity investments, which results in a comparatively lower rate of return on invested assets than other property-casualty insurance companies. Please see the Operating Results section for a discussion of the losses absorbed in 2001 for "other-than-temporary" investment losses under FASB Statement 115. The terrorist attacks of September 11, 2001 left the financial markets in economic mayhem. The stock markets were closed for a week, and the bond market did not fully recover for over a week. As can be expected in times of a world tragedy, the markets reacted adversely when they started trading and had time to digest the potential impact of these incidents. The Company's equity portfolio felt the effects of the stock market downturn as did the rest of the economic community. The equity portfolio did decline modestly in the last two weeks of September 2001, but the Company believes this decline is normal after an event such as the terrorist attack. The Company continues to 17 monitor its portfolio carefully to determine if an other-than-temporary adjustment is necessary as well as to maximize the total return of its equity portfolio. Also, due to the Company's decision at the beginning of 2001 to increase its fixed income portfolio, increases in unrealized gains of its bond portfolio have been attained. The combination of lowered interest rates by the Federal Reserve Board and the sudden increase in bond purchasing after the terrorist attack by the financial community has resulted in a solid bond market valuation. 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 income taxes arise from timing differences between the recognition of income determined 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 the discounting of claims reserves for tax purposes. Deferred taxes are also provided on unrealized gains and losses. Also of note is that the Company's effective income tax rate tends to be lower than most companies because of the high concentration of investment income related to tax-free municipal bonds. 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 at 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 adjustment expenses were $79.1 million at September 30, 2001, compared to $76.8 million at September 30, 2000 and $78.0 million at December 31, 2000. These reserves increased slightly due to the Company maintaining its best estimate of reserve levels in response to the Company's increased premium volume and increased losses described in the Operating Results section. Management continues to closely monitor the loss and loss adjustment expense reserves to assure adequate recognition of the ultimate liability for claims and claims expenses. Management recognizes that this is especially important in light of today's climate whereby the Company has had increased premium volume and larger than expected contract bond losses in the Florida and Texas markets as well as increased large fire losses in the restaurant and tavern markets and increased storm losses in the Midwest. LIQUIDITY AND CAPITAL RESOURCES Liquidity refers to the Company's ability to meet obligations as they become due. The obligations and cash outflows of the Company include claim settlements, acquisition and administrative expenses, investment purchases and dividends to shareholders. In addition to satisfying these obligations and cash outflows through premium collections, there are cash inflows obtained from interest and dividend income, and maturities and sales of investments. Because cash inflows from premiums are received in advance of the cash outflows required to settle claims, the Company accumulates funds, which it invests pending liquidity requirements. Therefore, investments represent the majority (80.9%, 82.0% and 80.6% at September 30, 2001, December 31, 2000 and September 30, 2000, respectively) of the Company's assets. Cash outflows can be unpredictable for two reasons: first, a large portion of liabilities representing loss reserves have uncertainty regarding settlement dates; and second, there is a potential for losses occurring either individually or in the aggregate. As a result, the Company maintains adequate short-term investment programs necessary to ensure the availability of funds. The investment programs are structured so that a forced sale liquidation of fixed maturities should not be necessary during the ordinary course of business. The Company has no material capital expenditure requirements. 18 SEGMENT INFORMATION The Company has three business segments, which are segregated based on the types of products and services provided. These segments are (1) property and casualty, (2) fidelity and surety and (3) reinsurance assumed operations. These segments constitute 100% of the operations of the Company. The Company maintains and monitors its segment information on a statutory basis. Financial data by segment, including a reconciliation to consolidated GAAP basis is included in footnote 9 to the Financial Statements for the nine month periods ended September 30, 2001 and 2000 and the year ended December 31, 2000. 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 taverns. This segment also provides nurses professional, deer hunters and sportsmen's accident, and special event coverages. The fidelity and surety segment offers a full range of surety and fidelity bonds, including contractor's payment and performance bonds, license/permit bonds, fiduciary and judicial bonds, as well as commercial fidelity bonds. The reinsurance assumed segment consists of active reinsurance assumed and discontinued reinsurance assumed. The Company's discontinued reinsurance assumed business involved providing reinsurance coverage by assuming a portion of the risks underwritten by other insurance companies and risk pools, including asbestos and environmental risks. Although the Company withdrew from this reinsurance business in 1976, liability remains for losses on policies written during the period in which it participated as a reinsurer. The Operating Results section discussed the premium growth as well as the loss and loss adjustment expenses for the fidelity-surety and property-casualty lines of business. The reinsurance assumed business had a net underwriting loss of $198,000 for the nine months ended September 30, 2001 compared to a net underwriting loss of $862,000 for the same period in 2000. Discontinued reinsurance assumed had an underwriting loss of $279,000 for the nine months ended September 30, 2001, compared to underwriting income of $809,000 for the same period in 2000. Discontinued reinsurance assumed had an underwriting loss of $155,000 for the three months ended September 30, 2001, compared to an underwriting loss of $1,000 for the same period in 2000. For the nine months ended September 30, 2000, the Company decreased IBNR reserves by $1 million after consultation with the independent actuary retained by the Company to assess the adequacy of these reserves. Had the Company not decreased these reserves, the Company would have had an underwriting loss of $191,000, which is consistent with the amount reported in 2001. For the three month period ended September 30, 2001, the Company had one claim that was approximately $100,000 higher than the reserve relating to this claim. Comparatively, for the three month period ended September 30, 2000, the Company's claim activity was within the levels the Company had reserved for such claims. In addition to the discontinued reinsurance assumed, the Company is involved in active reinsurance assumed business, which has a minimal effect on the overall underwriting operations of the Company, contributing underwriting income of $81,000 and $53,000 for the nine months ended September 30, 2001 and September 30, 2000, respectively. The active reinsurance assumed contributed underwriting income of $16,000 and $10,000 for the three months ended September 30, 2001 and September 30, 2000, respectively. Commissions and other underwriting expenses are allocated to the lines of business based on premium volume and weighted average salaries by full-time equivalent employees. Investment income is allocated by line of business and capital and surplus based on a complex formula that incorporates premium volume, reserves and surplus to allocate among the different lines of business as well as to capital and surplus. Income taxes are allocated to the lines of business based on the effective tax rates for the different items affecting income-investment income (dividends, interest and capital gains) and underwriting income. 19 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 circumstances, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. 20 SIGNATURES Pursuant to the requirements of Sections 13 or 15(d) of the Securities and Exchange Act of 1934, the Company has duly caused this amendment to report to be signed on its behalf by the undersigned thereunto duly authorized on the 7th day of December, 2001. CAPITOL TRANSAMERICA CORPORATION /s/ George A. Fait - --------------------------- George A. Fait Chairman of the Board and President /s/ Paul J. Breitnauer - ----------------------------- Paul J. Breitnauer Vice President and Treasurer 21 -----END PRIVACY-ENHANCED MESSAGE-----