10-Q 1 doc1.txt -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. FORM 10-Q ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period ended: June 30, 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 ------- ------- Based on the closing average of the high (15.86) and low price (14.91), the aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2001 was approximately $168,471,950. Indicate the number of shares of each issuer's class of common stock, as of the latest practicable date: At June 30, 2001 Common Stock, $1.00 Par Value Issued: 11,560,970 Outstanding: 10,950,403 Total Pages: 38 Securities and Exchange Commission ---------------------------------- Washington, D.C. ---------------- Form 10-Q --------- Part I ------ Financial Information Page --------------------- ---- Consolidated Financial Statements 3-7 Notes to Consolidated Financial Statements 8-10 Management's Discussion and Analysis of Financial Condition and Results of Operations 11-13 Condensed Statutory Financial Statements of Insurance Subsidiaries 14 Part II ------- Other Information ------------------ Other Disclosures 15 Officers and Directors 16 Signatures 17 Exhibit Index 18 2
CAPITOL TRANSAMERICA CORPORATION CONSOLIDATED BALANCE SHEETS June 30, December 31, June 30, 2001 2000 2000 ------------ ------------- ------------ ASSETS Investments: Available-for sale investment securities, at fair value: U.S. Government bonds (amortized cost $27,728, $33,930 and $36,729, respectively) $ 30,007 $ 35,620 $ 38,158 State, municipal and political subdivision bonds (amortized cost $94,845,487, $84,236,165 and $77,472,800, respectively) 99,652,064 89,732,054 80,912,733 Corporate bonds and notes (amortized cost $1,095,190, $1,099,888 and $1,119,485, respectively) 1,071,657 1,074,137 1,091,332 Equity securities: Common stock (cost $112,753,050, $123,504,211 and $125,727,134, respectively) 116,990,647 119,413,538 114,456,520 Non-redeemable preferred stock (cost $5,344,152, $6,470,793 and $5,809,582, respectively) 5,194,659 5,516,567 5,006,663 Investment real estate, at cost, net of depreciation 11,385,595 11,008,554 10,800,128 Short-term investments, at cost which approximates fair value 6,249,395 5,587,306 2,398,329 ------------ ------------- ------------ Total Investments 240,574,024 232,367,776 214,703,863 Cash 4,569,659 3,641,628 1,121,753 Accrued investment income 2,066,163 1,953,466 1,834,048 Receivables from agents, insureds and others, less allowance for doubtful accounts of $530,000 for each period 24,307,358 18,438,610 20,393,815 Balances due from reinsurers 1,638,394 1,794,851 1,303,352 Funds held by ceding reinsurers 47,000 47,000 40,000 Deferred insurance acquisition costs 15,024,286 13,726,372 14,060,118 Prepaid reinsurance premiums 2,304,716 1,714,017 1,558,020 Due from securities brokers 1,198,000 4,218,650 6,989,479 State income taxes recoverable 105,919 32,263 - Federal income taxes recoverable 2,203,577 35,200 - Deferred income taxes - 2,468,713 4,973,709 Other assets 2,503,142 2,819,506 3,044,207 ------------ ------------- ------------ Total Assets $296,542,238 $ 283,258,052 $270,022,364 ============ ============= ============
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CAPITOL TRANSAMERICA CORPORATION CONSOLIDATED BALANCE SHEETS June 30, December 31, June 30, 2001 2000 2000 ------------- -------------- ------------- LIABILITIES Policy liabilities and accruals: Reserve for losses $ 51,659,083 $ 52,231,685 $ 54,279,583 Reserve for loss adjustment expenses 25,741,871 25,749,288 23,578,052 Unearned premiums 53,589,577 45,587,586 45,540,141 ------------- -------------- ------------- Total Policy Liabilities and Accruals 130,990,531 123,568,559 123,397,776 ------------- -------------- ------------- Accounts payable 3,638,222 4,203,407 3,380,360 Claim drafts outstanding 5,987,411 4,927,097 3,766,846 Balances due to securities brokers 401,500 34,125 201,633 Balances due to reinsurers 5,792,798 4,097,368 1,642,391 Accrued premium taxes 717,447 727,627 441,924 State income taxes payable - - 48,681 Federal income taxes payable - - 343,036 Deferred income taxes 418,771 - - ------------- -------------- ------------- Total Other Liabilities 16,956,149 13,989,624 9,824,871 ------------- -------------- ------------- Total Liabilities 147,946,680 137,558,183 133,222,647 ------------- -------------- ------------- SHAREHOLDERS' INVESTMENT Common stock ($1.00 par value, authorized 15,000,000 shares, issued 11,560,970, 11,558,767 and 11,558,166 shares, respectively) 11,560,970 11,558,767 11,558,166 Paid-in surplus 22,744,662 22,733,088 22,727,877 Accumulated other comprehensive income (loss) (net of deferred tax expense (benefit) of $3,105,699, $149,425 and ($3,031,113), respectively) 5,767,728 277,504 (5,629,211) Retained earnings 113,083,886 114,944,048 111,085,182 ------------- -------------- ------------- Shareholders' Investment Before Treasury Stock 153,157,246 149,513,407 139,742,014 Treasury stock (610,567, 549,867 and 476,152 shares, respectively, at cost) (4,561,688) (3,813,538) (2,942,297) ------------- -------------- ------------- Total Shareholders' Investment 148,595,558 145,699,869 136,799,717 ------------- -------------- ------------- Total Liabilities and Shareholders' Investment $296,542,238 $ 283,258,052 $270,022,364 ============= ============== ============= Book Value Per Share $ 13.57 $ 13.23 $ 12.34 ============= ============== ============= Shares Outstanding 10,950,403 11,008,900 11,082,014 ============= ============== =============
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CAPITOL TRANSAMERICA CORPORATION CONSOLIDATED STATEMENTS OF INCOME For the Six Months For the Three Months Ended June 30, Ended June 30, -------------------------- --------------------------- 2001 2000 2001 2000 ------------ ------------ ------------- ------------ REVENUES Premiums earned $47,320,300 $42,080,648 $ 24,477,487 $21,414,099 Net investment income 4,843,119 4,502,403 2,389,338 2,243,802 Realized investment (losses) gains (1,748,074) 3,978,978 74,414 2,932,470 Other revenues 267,584 157,413 141,366 86,009 ------------ ------------ ------------- ------------ Total Revenues 50,682,929 50,719,442 27,082,605 26,676,380 ------------ ------------ ------------- ------------ LOSSES AND EXPENSES INCURRED Losses incurred 28,094,100 17,127,494 18,460,750 11,199,458 Loss adjustment expenses incurred 5,495,667 4,918,748 2,873,243 3,007,547 Underwriting, acquisition and insurance expenses 18,796,536 16,441,863 9,955,057 8,435,991 Increase in deferred insurance acquisition costs (1,297,914) (1,415,929) (988,845) (995,722) Other expenses 719,057 705,708 359,234 361,831 ------------ ------------ ------------- ------------ Total Losses and Expenses Incurred 51,807,446 37,777,884 30,659,439 22,009,105 ------------ ------------ ------------- ------------ (Loss) Income Before Income Taxes (1,124,517) 12,941,558 (3,576,834) 4,667,275 ------------ ------------ ------------- ------------ Income tax (benefit) expense: Current (742,145) 3,791,729 (2,184,731) 1,063,266 Deferred (68,790) 77,199 821,950 212,258 ------------ ------------ ------------- ------------ (810,935) 3,868,928 (1,362,781) 1,275,524 ------------ ------------ ------------- ------------ Net (Loss) Income ($313,582) $ 9,072,630 ($2,214,053) $ 3,391,751 ============ ============ ============= ============ Per Share Data: Cash Dividends Declared $ 0.16 $ 0.14 $ 0.08 $ 0.07 ============ ============ ============= ============ Earnings Per Share - Basic ($0.03) $ 0.81 ($0.20) $ 0.30 ============ ============ ============= ============ Earnings Per Share - Diluted ($0.03) $ 0.81 ($0.20) $ 0.30 ============ ============ ============= ============
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT AND COMPREHENSIVE INCOME (LOSS) Common Accumulated Stock Other (Par Value Paid-In Comprehensive Comprehensive $1.00) Surplus Income (Loss) Income (Loss) ------------ ------------ -------------- --------------- Balance, January 1, 1999 $11,529,376 $ 22,246,366 - $ 18,019,545 Comprehensive income (loss): Net income - - 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 - - Purchases and sales of treasury stock, net - 290,424 - - Cash dividends paid - - - - ------------ ------------ -------------- --------------- Balance, December 31, 1999 $11,538,970 $ 22,594,538 - ($3,962,398) Comprehensive income: Net income - - 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 - - Stock-based compensation - - - - Purchases and sales of treasury stock, net - - - - Cash dividends paid - - - - ------------ ------------ -------------- --------------- Balance, December 31, 2000 $11,558,767 $ 22,733,088 - $ 277,504 Comprehensive (loss) income: Net loss - - (313,582) - -------------- Other comprehensive income: Unrealized appreciation on available-for-sale securities, net of deferred taxes - - 4,353,976 - Less: reclassification adjustment, net of tax of $611,826, for gain included in net income - - 1,136,248 - -------------- Other comprehensive income - - 5,490,224 5,490,224 -------------- Comprehensive income - - 5,176,642 - Stock options exercised 2,203 11,574 - - Stock-based compensation - - - - Purchases and sales of treasury stock, net - - - - Cash dividends paid - - - - ------------ ------------ -------------- --------------- Balance, June 30, 2001 $11,560,970 $ 22,744,662 - $ 5,767,728 ============ ============ ============== =============== Retained Treasury Earnings Stock ------------- ------------ Balance, January 1, 1999 $ 90,016,245 ($495,559) Comprehensive income (loss): Net income 16,712,463 - Other comprehensive loss: Unrealized depreciation on available-for-sale securities, net of deferred taxes - - Less: reclassification adjustment, net of tax of $2,864,435, for gain included in net income - - Other comprehensive loss - - Comprehensive loss - - Stock options exercised - (26,534) Purchases and sales of treasury stock, net - - Cash dividends paid (3,151,515) - ------------- ------------ Balance, December 31, 1999 $103,577,193 ($522,093) Comprehensive income: Net income 14,453,317 - Other comprehensive income: Unrealized appreciation on available-for-sale securities, net of deferred taxes - - Less: reclassification adjustment, net of tax of $2,546,352, for gain included in net income - - Other comprehensive income - - Comprehensive income - - Stock options exercised - (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 $114,944,048 ($3,813,538) Comprehensive (loss) income: Net loss (313,582) - Other comprehensive income: Unrealized appreciation on available-for-sale securities, net of deferred taxes - - Less: reclassification adjustment, net of tax of $611,826, for gain included in net income - - Other comprehensive income - - Comprehensive income - - Stock options exercised - - Stock-based compensation 207,224 - Purchases and sales of treasury stock, net - (748,150) Cash dividends paid (1,753,804) - ------------- ------------ Balance, June 30, 2001 $113,083,886 ($4,561,688) ============= ============
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CAPITOL TRANSAMERICA CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS Year-to-date -------------------------------------------- June 30, December 31, June 30, 2001 2000 2000 ------------- -------------- ------------- Cash flows (used for) provided by operating activities: ------------------------------------------------------- Net Income ($313,582) $ 14,453,317 $ 9,072,630 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation 611,836 1,215,024 583,576 Realized investment gains 1,748,074 (11,805,350) (3,978,978) Change in: Deferred insurance acquisition costs (1,297,914) (1,082,183) (1,415,929) Unearned premiums 8,001,991 6,133,329 6,085,884 Accrued investment income (112,697) (25,565) 93,853 Receivables from agents, insureds and others (5,868,748) (3,545,963) (5,501,169) Balances due to/from reinsurers 471,630 149,564 310,137 Reinsurance recoverable on paid and unpaid losses 1,380,257 683,248 (1,440,802) Funds held by ceding reinsurers - (7,000) - Income taxes payable/recoverable (2,242,033) 618,777 1,077,957 Deferred income taxes (68,790) (598,340) 77,202 Due to/from securities brokers 3,388,025 (3,545,389) (6,148,710) Prepaid reinsurance premiums (590,699) (426,390) (270,393) Other assets 212,529 (707,858) (705,913) Reserve for losses and loss adjustment expenses (580,019) 724,781 601,443 Accounts payable 495,129 3,324,905 1,341,607 Accrued premium taxes (10,180) 388,764 103,061 ------------- -------------- ------------- Net cash provided by (used for) operating activities 5,224,809 5,947,671 (114,544) ------------- -------------- ------------- Cash flows provided by (used for) investing activities: ------------------------------------------------------ Proceeds from sales of available-for-sale securities 15,521,460 26,278,568 12,995,673 Purchases of available-for-sale securities (18,663,376) (26,716,842) (10,588,065) Maturities of available-for-sale securities 1,380,745 4,053,867 2,179,652 Purchases of depreciable assets (254,654) (782,511) (599,088) ------------- -------------- ------------- Net cash (used for) provided by investing activities (2,015,825) 2,833,082 3,988,172 ------------- -------------- ------------- Cash flows (used for) provided by financing activities: ------------------------------------------------------ Cash dividends paid (1,753,804) (3,111,938) (1,564,641) Stock options exercised 13,777 45,273 76,285 Net cost of purchase of treasury stock (540,926) (3,152,895) (2,343,954) ------------- -------------- ------------- Net cash used for financing activities (2,280,953) (6,219,560) (3,832,310) ------------- -------------- ------------- Net increase in cash 928,031 2,561,193 41,318 Cash, beginning of period 3,641,628 1,080,435 1,080,435 ------------- -------------- ------------- Cash, end of period $ 4,569,659 $ 3,641,628 $ 1,121,753 ============= ============== ============= Cash paid during the period for: Income taxes $ 1,499,021 $ 4,856,364 $ 3,429,748 ============= ============== =============
7 CAPITOL TRANSAMERICA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 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. 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. (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):
June 30, December 31, June 30, 2001 2000 2000 ----------- ------------- ----------- Numerator: ---------- Consolidated net (loss) income ($313,582) $ 14,453,317 $ 9,072,630 =========== ============= =========== Denominator: ------------ Basic EPS - weighted average shares of common stock 10,957,829 11,124,074 11,224,260 Effect of dilutive securities - unexercised stock options - 34,388 31,147 ----------- ------------- ----------- Diluted EPS - weighted average shares of common stock and unexercised stock options 10,957,829 11,158,462 11,255,407 =========== ============= ===========
The effect of dilutive securities was excluded from the diluted loss per common share computation for the six months ended June 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 2,203 options exercised during the six months ended June 30, 2001 compared to 19,196 options exercised during the six months ended June 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. 8 (6) Dividends --------- 2001 ---- 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. 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 $1,845,294, $1,595,693 and $1,378,314 at June 30, 2001, December 31, 2000 and June 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. 9 (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) discontinued 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 ------------------------------------------- June 30, December 31, June 30, 2001 2000 2000 ------------- -------------- ------------ Total Revenues: Property & Casualty $ 39,027,798 $ 75,198,171 $35,528,425 Fidelity & Surety 9,643,259 21,472,270 9,977,597 Discontinued Reinsurance Assumed 181,225 1,008,654 402,468 ------------- -------------- ------------ Subtotal $ 48,852,282 $ 97,679,095 $45,908,490 Reconciliation to Consolidated GAAP: Capital & Surplus 1,905,380 12,036,436 4,852,785 Inter-company adjustments (74,733) (207,069) (41,833) ------------- -------------- ------------ Total Consolidated Revenues $ 50,682,929 $ 109,508,462 $50,719,442 ============= ============== ============ Before-tax (Loss) Profit: Property & Casualty ($816,455) $ 4,627,311 $ 3,900,792 Fidelity & Surety (2,478,114) (548,495) 2,513,113 Discontinued Reinsurance Assumed 75,743 2,374,163 1,239,430 ------------- -------------- ------------ Subtotal ($3,218,826) $ 6,452,979 $ 7,653,335 Reconciliation to Consolidated GAAP: Capital & Surplus 1,905,380 12,036,436 4,852,785 Inter-company adjustments 188,928 828,846 435,438 ------------- -------------- ------------ Consolidated Net (Loss) Income Before Tax ($1,124,518) $ 19,318,261 $12,941,558 ============= ============== ============
10 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 81% of the business written while the fidelity-surety segment accounts for approximately 19% 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. OPERATING RESULTS ------------------ Due to a combination of increased marketing efforts and the re-underwriting of the Company's book of business undertaken in 1998 and 1999, the Company's operating results remain favorable. Operating income decreased compared to 2000 due primarily to higher than expected losses on a few specific surety contract bonds coupled with higher than normal storm losses. Had the aforementioned losses not occurred, the combined ratio would have been approximately 88.7%, a level typical of the Company's history. Management believes that the return to solid underwriting standards and continued profitability of the Company's core operations will provide a foundation for increasing shareholder value. Gross premiums written increased 20% over the first half of 2000, going from $51.8 million to $61.9 million. The increase is due to the rate increases mentioned in the Overview along with the Company's concerted efforts to profitably grow its business. Management continually monitors the Company's expansion efforts to ensure that the Company is growing profitably. Net premiums written followed gross premiums written, increasing from $47.9 million to $54.7 million, or 14.3%. Premiums earned are recognized as net revenues after a reduction for reinsurance ceded and after the establishment of the provision for a pro-rata unearned portion of the premiums written. Premiums earned totaled $47.3 million for the first six months of 2001, compared to $88.2 million for calendar year 2000 and $42.1 million for the first six months of 2000. The unearned premium reserve at the end of these same three periods was $53.6 million, $45.6 million and $45.5 million, respectively.
June 30, December 31, June 30, 2001 2000 2000 ----------- ------------- ----------- Gross Premiums Written $61,883,716 $ 102,110,215 $51,758,281 Reinsurance Ceded 7,152,124 8,218,433 3,862,142 ----------- ------------- ----------- Net Premiums Written $54,731,592 $ 93,891,782 $47,896,139 =========== ============= =========== Net Premiums Earned $47,320,300 $ 88,184,842 $42,080,648 =========== ============= =========== Net Unearned Premium Reserve $53,589,577 $ 45,587,586 $45,540,141 =========== ============= ===========
11 The Company's underwriting results can be measured by reference to the combined loss and expense ratios. The following table includes the operating results of the Company's two subsidiary insurance companies on a statutory basis. Losses and loss adjustment expenses are stated as a percentage of net premiums earned, while underwriting expenses are stated as a percentage of net premiums written. The combined ratios are as follows:
June 30, December 31, June 30, Insurance Operating Ratios (Statutory Basis) 2001 2000 2000 -------------------------------------------- --------- ------------- --------- Losses and Loss Adjustment Expenses 71.1% 65.4% 52.6% Underwriting Expenses 34.6% 35.1% 35.0% -------------------------------------------- --------- ------------- --------- Combined Ratio 105.7% 100.5% 87.6% ============================================ ========= ============= =========
The Company's combined ratio consistently compares favorably to the industry average, as indicated by the following chart:
Year-to-date Year-end Year-end Combined Ratio 2001 2000 1999 ---------------------- ------------- --------- --------- Company 105.7% 100.5% 87.6% Industry Average * 106.2% 110.4% 110.2% ---------------------- ------------- --------- ---------
* Year-to-date 2001 industry average is for the 1st quarter, 2001, the most recently available data. 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.
June 30, December 31, June 30, Investments 2001 2000 2000 --------------------------------------------------- ------------- -------------- ------------- Invested Assets $240,574,024 $ 232,367,776 $214,703,864 Net Investment Income 4,843,119 9,163,062 4,502,403 Percent of Return to Average Carrying Value 4.2% 4.0% 4.0% Realized (Losses) Gains (1,748,074) 11,805,350 3,978,978 Change in Unrealized Gains (Losses) 5,490,224 4,239,902 (1,666,813) --------------------------------------------------- ------------- -------------- -------------
The net unrealized gain of $5.8 million for the first six months of 2001 consists of a $0.4 million unrealized loss on fixed maturities and a $6.2 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, as evidenced by the recent increases in the Company's unrealized gains. First half, 2001 net investment income increased from $4.5 million to $4.8 million, or 7.6%, over the same period last year. 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. 12 Under FASB Statement 115, the Company absorbed $8.2 million in realized losses in the six months ended June 30, 2001 for "other-than-temporary" market value adjustments for certain securities held in its portfolio. No such adjustments were made during the first half of 2000. Management continues to monitor its investment portfolio for other securities that could potentially fall into this category in the future. 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 $77.4 million at June 30, 2001, compared to $77.9 million at June 30, 2000. These reserves remain relatively constant due to the Company having a high level of loss and loss adjustment expense payments during the first half of 2001 compared to the first half of last year, $42.9 million compared to $36.7 million. 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. 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 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 (81.2%, 82.0% and 79.5% at June 30, 2001, December 31, 2000 and June 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. 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. 13
INSURANCE SUBSIDIARY FINANCIAL STATEMENTS STATUTORY BASIS AS REPORTED TO STATE REGULATORY AUTHORITIES CAPITOL INDEMNITY CORPORATION ----------------------------- June 30, December 31, June 30, BALANCE SHEETS 2001 2000 2000 ------------------------------------------------------ ------------- -------------- ------------- ASSETS Cash and Invested Assets $232,742,823 $ 220,326,616 $203,180,898 Other Assets 31,522,366 24,911,537 31,428,022 ------------------------------------------------------ ------------- -------------- ------------- Total Assets $264,265,189 $ 245,238,153 $234,608,920 ====================================================== ============= ============== ============= LIABILITIES Reserves for Losses and Loss Adjustment Expenses $ 80,768,518 $ 80,127,074 $ 77,492,685 Unearned Premiums 51,284,861 43,873,569 43,982,121 Other Liabilities 13,082,942 13,320,126 16,665,793 ------------------------------------------------------ ------------- -------------- ------------- Total Liabilities 145,136,321 137,320,769 138,140,599 ------------------------------------------------------ ------------- -------------- ------------- SURPLUS AS REGARDS POLICYHOLDERS Shareholders' Equity 119,128,868 107,917,384 96,468,321 ------------------------------------------------------ ------------- -------------- ------------- Total Liabilities and Capital $264,265,189 $ 245,238,153 $234,608,920 ====================================================== ============= ============== ============= STATEMENTS OF INCOME Premiums Earned $ 47,320,300 $ 88,184,842 $ 42,080,648 Underwriting Deductions 52,288,300 90,802,716 39,231,150 ------------------------------------------------------ ------------- -------------- ------------- Net Underwriting Gain (Loss) (4,968,000) (2,617,874) 2,849,498 ------------------------------------------------------ ------------- -------------- ------------- Investment Income Including Sales 2,504,194 20,845,091 8,264,815 Other Income 287,492 396,399 156,818 Dividends to Policyholders 468,582 489,085 - Income Tax Expense (979,435) 5,131,195 3,508,842 ------------------------------------------------------ ------------- -------------- ------------- Net Income ($1,665,461) $ 13,003,336 $ 7,762,289 ====================================================== ============= ============== ============= CAPITOL SPECIALTY INSURANCE CORPORATION --------------------------------------- BALANCE SHEETS -------------- ASSETS Cash and Invested Assets $ 4,213,821 $ 4,474,294 $ 4,325,909 Other Assets 135,313 201,378 213,128 ------------------------------------------------------ ------------- -------------- ------------- Total Assets $ 4,349,134 $ 4,675,672 $ 4,539,037 ====================================================== ============= ============== ============= LIABILITIES Liabilities Other Than For Insurance Obligations 7,709 7,709 7,713 ------------------------------------------------------ ------------- -------------- ------------- Total Liabilities 7,709 7,709 7,713 ------------------------------------------------------ ------------- -------------- ------------- SURPLUS AS REGARDS POLICYHOLDERS Shareholders' Equity 4,341,425 4,667,963 4,531,324 ------------------------------------------------------ ------------- -------------- ------------- Total Liabilities and Capital $ 4,349,134 $ 4,675,672 $ 4,539,037 ====================================================== ============= ============== ============= STATEMENTS OF INCOME Underwriting Deductions 3,375 6,278 3,645 ------------------------------------------------------ ------------- -------------- ------------- Net Underwriting Gain (3,375) (6,278) (3,645) ------------------------------------------------------ ------------- -------------- ------------- Investment Income Including Sales 102,213 249,300 130,373 Income Tax Expense 7,761 10,634 12,541 ------------------------------------------------------ ------------- -------------- ------------- Net Income $ 91,077 $ 232,388 $ 114,187 ====================================================== ============= ============== =============
14 PART II ------- OTHER DISCLOSURES ----------------- Item 1. Legal Proceedings Reference is made to footnote number 8 "Contingent Liabilities" on Page 9 of this report. Item 2. Changes in Securities and Use of Proceeds During the quarter ended June 30, 2001, the Company issued an aggregate of approximately 181 shares of its common stock at an aggregate exercise price of approximately $9.69 in connection with the exercise of options issued pursuant to the Company's stock option plan. The shares of common stock were issued pursuant to exemptions from registration under Section 4(2) of the Securities Act of 1933, as amended. 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 held on May 14, 2001, both of which are dated April 6, 2001 and previously filed with the Securities and Exchange Commission and are incorporated herein as an exhibit by reference. At this meeting, Larry Burcalow and Michael J. Larson were nominated and re-elected to terms expiring in 2004. George A. Fait, Kenneth P. Urso, Paul J. Breitnauer and Reinhart H. Postweiler continue as directors through the expiration of their terms. Additionally, Ernst & Young LLP was ratified as the Company's independent auditors for 2001. Item 5. Other Information NONE Item 6. Exhibits and Reports on Form 8-K (a) Exhibits -------- 3.2 - By-Laws of Capitol Transamerica Corporation as Amended 99.1 - Press Release - Capitol Transamerica Corporation Reports Second Quarter (June 30, 2001) Results (b) Reports on Form 8-K ------------------- Reference is made to the Agreement and Plan of Merger with Alleghany Corporation, which was previously filed with the Securities and Exchange Commission on Form 8-K on July 23, 2001 and is incorporated herein by reference. 15 CAPITOL TRANSAMERICA CORPORATION Subsidiaries ------------ Capitol Indemnity Corporation Capitol Specialty Insurance Corporation Capitol Facilities Corporation Board of Directors ------------------ Paul J. Breitnauer Michael J. Larson Vice President and Treasurer Principal Capitol Transamerica Corporation Southwestern Financial Services Madison, Wisconsin Madison, Wisconsin Larry Burcalow Reinhart H. Postweiler Owner and President Retired, formerly with Yahara Materials, Inc. Flad Affiliated Corporation Waunakee, Wisconsin Madison, Wisconsin George A. Fait Kenneth P. Urso Chairman of the Board and President Principal Capitol Transamerica Corporation Urso Ventures Madison, Wisconsin Madison, Wisconsin Officers -------- George A. Fait Virgiline M. Schulte Chairman of the Board and President Secretary Paul J. Breitnauer Jane F. Endres Vice President and Treasurer Assistant Secretary 16 SIGNATURES ---------- Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 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 Date: August 10, 2001 17 Exhibit Index ------------- Exhibit Number Exhibit Description -------------- ------------------- 3.2 By-Laws of Capitol Transamerica Corporation as Amended 99.1 Press Release - Capitol Transamerica Corporation Reports Second Quarter (June 30, 2001) Results 18